How to Build an Effective Emergency Fund – Prudent Money Show – March 9, 2017

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How to Build an Effective Emergency Fund

Part 2 of a 2 part series  – Bob explains in detail how to create an emergency fund that fits your financial life.

Passive Investing – Another Reason Why the 401 K Plan Is Not for Everyone

Passive Investing – Another Reason Why the 401 K Plan Is Not for Everyone

The Financial Services Industry (Pop Culture Finance) desperately wants you to believe that passive investing is better than active investing and 401 K providers are drinking the Kool-Aid.

As a review, there are two different types of mutual funds. A mutual fund is either a passive fund or an actively managed fund. Index mutual funds are the vehicle of choice for passive investing. They mimic different stock and bond indexes and are very low cost. They are low cost because there is no management involved. Actively managed funds are as the name implies. They are actively managed and have higher costs.

The reality is that index mutual funds out perform actively managed funds the majority of the time. So, why invest with an actively managed mutual fund when you can invest in an index fund that year in and year out will capture 99% of the gains of the market?

The trend of the 401 K market place is to dump actively managed funds and just provide index funds and target date funds. The concern is that the company will be held liable for high cost actively managed funds that don’t perform. They know that index funds will perform and they are low cost. That is a win/win for the employee -right? Well, not for everyone.

Conservative Investors Get the Bad End of that Deal

There are two types of actively managed funds. First, there are actively managed funds that try to beat the market and then there are actively managed funds that truly manage for growth and risk. They are conservatively based funds.

For those that think passive is the way to go, I agree with the notion that it makes no sense to invest into an actively managed fund that is trying to beat the market. It makes no sense for an investor to risk the performance of an actively managed fund when they can simply track the market with an index fund.  For investors who want market type returns, index funds are the way to go.

I disagree with the notion that passive investing with index funds are for everyone. If 401 K plans convert their investment options to mainly index funds, what is the conservative investor going to do?

Conservative investors don’t want to take 100% market risk with their stock market investments. Conservative investors are not concerned with the cost of a mutual fund. They want less exposure to risk and grow their investments conservatively. Index funds that you will find in a 401 K plan can’t do that. During the financial crisis, most traditional index funds lost 40 to 50% where as conservative actively managed funds lost 10 to 15% and made their losses back much quicker.

So, what is a conservative investor going to do? Without options that fit conservative risk levels and especially for the company that doesn’t provide a matching contribution, it might be another reason why 401 K plans might not be a good fit at least for the conservative investor.

Has The Government Takeover of Your Retirement Account Already Started?

Has The Government Takeover of Your Retirement Account Already Started?
This is the title of one of the latest gloom and doom email campaigns.  I had a client send this to me and thought I would comment on it.  The email is short and sweet claiming that the government has already started the process of confiscating retirement accounts.  Here is a portion of that email:
It’s happening now, as you read this, in California, Connecticut, Illinois, Massachusetts and many other states.
These states are forcing millions of Americans into government-designed retirement plans (yes, the same government that’s in the process of destroying your Social Security safety net).
Meanwhile, Forbes reports that Richard Cordray, director of the federal government’s Consumer Financial Protection Board, has been discussing whether, due to the “mismanagement” of our individual IRA and 401(k) accounts, his agency might legally step in.
As reported on Forbes.com, “Cordray’s agency is already moving toward regulating 401(k)s and IRAs.”\
Can You Stop This Government IRA and 401(k) Seizure?
Yes, you can, but you need to move fast to get your IRA or 401(k) out of the reach of greedy state AND federal government agencies.
 
 
Richard Cordray was an Obama appointee and very controversial.  In fact, Trump is rumored to be firing him as he guts that agency.  In regards to his quote, I went on Forbes.com and couldn’t find any article dating back to 2011.  He appears to be quite the socialist so I am sure that they would love to nationalize retirement savings.  Now whether he said it or not is another issue.
There has been a small group of people trying to gain support for nationalizing retirement accounts by the government. Dr. Tereasa Ghillarducci has been heading up a movement for almost 10 years to nationalize retirement plans.  Her message is getting the attention of a handful of extremist politicians.  However, that is it.  She certainly isn’t gaining ground on the idea.
They claim that Gold in your IRA would make you exempt from a confiscation.  That is the furthest from the truth.  If the government were going to confiscate retirement plans there would be no assets out of reach.  The reality is  two fold.  First, there is no question that the government would love to get their hands on the trillions of dollars of retirement money.  It certainly would solve a lot of problems although it would create new ones. However, the likelihood of that happening is so small.  Second, these gloom and doom marketers are just trying to scare you into buying gold.  If this were truly happening it would be front page news.

Will We Really Save Money with President Trump’s Tax Proposal?

Will We Really Save Money with President Trump’s Tax Proposal?

President Trump is aggressively tackling many big projects. He wants to increase defense spending by 54 billion, he wants to aggressively cut taxes, and he wants to spend billions on infrastructure spending. He wants to do all of that without raising the deficit. Say what?

So, is he really going to significantly cut taxes? If you haven’t figured it out by now, President Trump is a master at the optics. He wants to control what people see and believe. He will say things over and over until people accept it. His tax proposal might be more like watch the right hand, keep your eye on the right hand, and don’t pay attention to what the left hand is doing.

If you reduce the tax brackets while taking away current tax deductions, do you really get a tax break?

The nonpartisan Joint Committee on Taxation, the official scorekeeper for Congress, wrote an article that details out what might be going away.

Some of the current tax breaks they mentioned:

HEALTH INSURANCE BENEFITS

Think of all of those people that get health insurance benefits from their employer. The value of those insurance policies is exempt from taxation. It would save tax payers $155 billion in 2016. They say that tax deduction is in danger of getting eliminated.

STATE AND LOCAL INCOME, SALES, and PERSONAL PROPERTY TAXES

Roughly 443 million families deduct state and local income, sales, and personal property taxes from their taxable income. It saved $70 billion for tax payers in 2016. They say that is in danger of getting eliminated.

MORTGAGE INTEREST DEDUCTIONS

Nearly 34 million families claimed the mortgage interest deduction in 2016 saving an estimated $65 billion.  This probably won’t go away.  However, they say it could be modified.

PROPERTY TAXES

Nearly 35 million families deducted their taxes on their home or other real estate from their federal taxable income in 2016. They saved a total of $33 billion.

This would hurt in States like Texas where property taxes are so high versus having a state income tax.  It is estimated that deduction is going away as well.

So the optics would be focused on the lowering of the tax rates.  On the surface that looks good. The question is how much will the elimination of some of the more popular tax deductions offset that saving?  The bigger question with almost 20 trillion dollars in debt and the fact we are borrowing almost ½ of every dollar we spend…..can we afford reductions in the tax code?

NASFAA’s 2016 Higher Education Tax Benefit Guide Can Help During Tax Season


Don’t Get Ripped Off at These 24-Hour Emergency Room Facilities

I wanted to share this Ask Bob email so that you are aware.

Bob,

Just wanted you to know my daughter who went to Elite Care got billed over $3,000 for a pretty standard exam. She knows now if she can’t wait to go to a Urgent Care , etc.,  to just go to the Emergency Room since it would have been less expensive. They suckered her in by saying her insurance was accepted and would cover it. Wrong! At least she has met her deductible early in the year. I know it is not but it almost feels like fraud.

If you have an urgent need, urgent care places are much better than these stand alone 24-hour emergency rooms. There is a reason that these are on every corner. They are obviously big money makers. Of course, that is at the consumer’s expense.

 If that is the only option, make sure you get an estimate of the cost up-front. If the staff tells you that insurance will pick up the cost, quiz them and get specifics. In fact, I would get it in writing.

I learned my lesson the hard way two summers ago. I had to take my son for a separated shoulder. It was July 3rd , late in the afternoon, and I didn’t think it could wait. Twenty minute visit and one x-ray created a bill for $1,900.

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