Archive for the ‘Wealth’ Category
The deadline is quickly approaching for those of us in the United States. In preparing my taxes this year, I realized a curious little truth. There are two sets of tax rules in this country. One for the educated and another totally different set for the uneducated.
This has nothing to do with one’s actual level of schooling. It has everything to do with one’s actual understanding of the tax codes themselves. They are arcane at times, stupefying at others, but those who take the time to understand them stand to make a solid bounty every year.
This is not about trying to get out of paying one’s dues and evading fees. It is simply about being smart and not overpaying where you don’t need to.
Let me give you a personal example. I am happily employed with a great career as a Product Planning Manager at a large software company. As part of this job I incur a large tax burden – as would anyone in a professional career. I made donations to charity and have a few deductions – but nothing too extreme. However, I also pursue a passion outside of my day-job, in the form of yoga. Last year I took the step forward and actually started teaching.
As part of my journey to start teaching yoga, I applies for a business license (very easy to do) and this year I filed my taxes not only for my day-job, but also for my yoga business.
Since I am now in the business of yoga, that opens a number of doors in terms of tax savings. I am able to write-off all the yoga trainings I attend (many thousands of dollars worth in the past year), my yoga clothing, travel and meals related to my training and other books and supplies for this business. I can even write-off auto mileage incurred while traveling to teach or attend workshops and classes.
The simple fact that I took the step forward and turned what was a serious hobby into a real business with the intent to make a profit (I do get paid for teaching!) opened the doors to a huge bounty of write-offs – saving me many thousands of dollars in taxes.
You might be thinking that I probably didn’t enough from teaching yoga to exceed all those expenses. Here is where it gets interesting. You see, even though my expenses were far more than what I made as a yoga teacher this year, I am able to write off those expenses from the income from my day job! This is a really big deal – and something I would guess that most of the American public is completely unaware of.
The same could hold true if you choose to become a “professional” blogger, writer, teacher, fitness instructor, etc…..with a business license and an intent to earn a profit – you open the door to a host of tax savings by offsetting income you make through another career.
If you haven’t taken the time to study the tax code – it is well worth it: www.irs.gov.
It is oh so simple but oh so good. Anywould would LOVE this. Adults, kids, people who don’t like to eat fruits and veggies, health freaks, EVERYBODY.
It looks good and tastes better. I am drinking this right now before heading to work (after teaching morning yoga practice). You don’t even need a great blender (like a Vita-Mix) to do it (though I think everything tastes better in a Vita-Mix!).
Recipe = 1/2 pint of organic strawberries + 3 medium sized organic bananas + 12-16 ounces water
Makes 3 tall glasses of smoothie goodness. About 350 calories or less. Plenty of fiber, vitamin C and other natural antioxidants. More potassium than you could ever hope for.
Small changes made consistently can transform your life.
We tend to think in terms of big things. Big breaks at works, losing massive amounts of weight, gaining a lot of strength, making a lot of money – we are great at thinking big and stretching ourselves to do a lot to get a lot in a short period of time. Unfortunately, consistency is often underrated.
We forget that sometimes making just incremental improvements on a regular basis will result in utter and complete transformation of our current situation. For example:
Many people want to want to be a millionaire, and will spend a lot of time thinking about ways to get rich quick, but few will setup up a regular direct investment program that puts some percentage (however small!) of their paycheck into a savings account.
It is in our best interests as a society to want others to succeed. If other people succeed, we really are better off. Think about it. If your friends and other members of your community have better jobs, better education, better access to services and better/adequate pay, they would be able to contribute even more back to their communities – wherein they and everyone else (including you) would benefit.
However, we don’t naturally act like this is real life. The Ultimatum Game was an experiment that studied the willingness of people to contribute to a common pool of money over time, in return for everybody getting a specific and favorable payout.
Everyone contributes and everyone benefits.
In reality what happens is that people begin to realize that even when they don’t contribute they still reap the rewards. A classic example of this is the effort people make to evade taxes, while still benefiting from public services and infrastructure that other people’s tax dollars provide.
As a result of this, people feel cheated because some members of their community are getting more than their fair share. They then stop contributing to the overall pool even though they would be better off by doing so.
Primates have been found to do the same thing. A story from a recent book I read, The Wisdom of Crowds, pointed out a study conducted with Chimps. The researchers had chimps trade pebbles for small pieces of cucumber. One pebble = one cucumber. After some time, the rules changed and some chimps were given a grape (a much tastier snack!) instead of the cucumber. The other Chimps, upon seeing this…would react in disgust, either throwing away their cucumbers or in some cases even refusing to turn in their pebbles at all.
They would forgo a modest payoff just because someone else got something better.
Think of how this unconscious pattern plays out in your own life and in your own community. Think about the improvements we could make in the world by letting go of greed and jealously and really acting in our own best interests – which often are in the best interests of the community as a whole – and not getting sucked into the Ultimatum Game.
If you have watched the news at all lately (which I’ve actually been great at avoiding!), you’ve noticed that the financial markets have teetered off of their precipice and fallen into the dark abyss. I wrote a little about this in an earlier post.
The Dow today was down 700 points at one point after the $700 billion governmental bailout package was shot down by the House. Chances are that the planned re-vote will also fail.
What do you do in situations like this? Well, I have a philosophy around how to deal with these type of situations. It’s based on over 10 years of active investing and general interest in how financial markets work.
The first thing you do in a situation like this…is DO NOTHING. A common reaction is to immediately sell to avoid further losses. Getting rid of the assets gives a false sense of calm since the loss is no longer visible when you check your brokerage account and look at the performance of the individual assets you still own!
Another common reaction is to buy or dollar-cost-average. That is to say, assume that the market can’t go down any more and buy low with assumption the coming gains will offset your loss. Again, this strategy rarely works.
In situations where there is massive panic and market reaction, I DO NOTHING. I do not buy or sell. I sit with what I have.
What I do DO, is I plan. I think about what kind of assets I have. What industries am I invested in? How much money do I have in commodities like Gold and Oil-related assets/industries? How much cash do I have? Where is my cash invested? Is my cash in a money market? If so, is the money market “safe” (i.e. investing in assets that are not exposed to the financial turmoil under way)? How much exposure do I have in US vs Global markets? Is my money in FDIC insured accounts/assets?
I plan like crazy.
Planning gets you out of your emotions and gives you a way to logically think about where you are at financially. You then are in a much better position to make prudent decisions with your money once the markets have had a chance to digest all the news that is current hitting the airwaves.
Normally, markets over-react to news (both on the upside and downside). Right now, I am guessing that we haven’t seen the end of the decline. However, I would also guess that we will see some degree of recover after the markets have settled. I don’t know when this will happen, but for now I am waiting this out. Once the news stops trumpeting impending market doom as the big front-page headline, I’ll adjust and take any required action on my portfolio.
If you’ve taken a look at the news over the past few days, you’ve noticed that the US financial markets have been in a bit of a tailspin. I can’t say I’m surprised at any of this, the writing has been on the wall for a long time coming.
I worked at Merrill Lynch (just for a summer) about 10 years ago, and the thought of that company EVER getting bought or going out of business was the furthest thing from my imagination then. I also had an offer to work for Lehman Brothers before coming to Microsoft that I almost accepted. Now, that company filed for bankruptcy as well. A few years ago the thought of that happening would have been unfathomable.
The financial markets are reeling. Even those who didn’t invest directly in those companies shares are affected, since even index mutual funds have a fair exposure to the financial services industry. With almost half of all American adults invested in the stock market in some way, this means that a lot of people are losing money.
What to do at times like this?
I am no financial expert, but I tend to approach situations like this the same way I approach other situations filled with stress and fear in my life.
First of all, I think about what my long term vision is. In the case of finances, I am looking to grow my assets over the long term. I’m not looking to try to get rich quick through my investments or take excessive risk. I take enough risk in my job every day, and prefer to place my energy there. I expect my “day-job” to be the source of my real wealth over the long-term, not short-term portfolio gains.
Next, I think about the things that I can control, and don’t worry about the things that I can’t control or have already happened. If I have assets that have already lost tons of value, I don’t worry about the loss, but instead think about what I can do right now, which is either do nothing or sell to prevent future losses. Generally, if I don’t think an asset that I own is compelling enough to buy right now, I sell it.
Lastly, I think about how I can better set things up so that a dire situation doesn’t happen again in the future. In the case of finances, proper asset allocation would ensure that you are not overexposed to any single asset class. At the end of the day, I have my own opinions about where the US financial markets are headed over the next 3-5 years, and it is NOT a positive outlook. I’ve focused on investing in fixed income assets (for the first time ever!), commodities (gold), the energy sector and funds that are global in nature. This has been my strategy for the past few years, and it has served me well.
So this is what I do, what is your approach to finances at a time like this?