Monday, February 27, 2017

Countdown to Financial Fitness: Winning the Lottery

Countdown to Financial Fitness: Winning the Lottery: I read a story last week about a British woman who won the Euromillions lottery at age 17 and now wants to sue Camelot, the U.K.'s nati...

Winning the Lottery

I read a story last week about a British woman who won the Euromillions lottery at age 17 and now wants to sue Camelot, the U.K.'s national lottery, for ruining her life. Many readers were probably thinking, I'd love to have the opportunity to ruin my life by winning millions...

But many people who suddenly come into a huge fortune find themselves more unhappy than they were before the money.

According to a recent article in Fortune magazine, the Certified Financial Planner Board of Standards says nearly a third of lottery winners end up declaring bankruptcy. Bankruptcy also plagues many pro-athletes who grew up poor and then suddenly signed contracts for multi-million-dollar salaries.

Before you get your hands on a fortune, it's important to understand how to manage it. Or at least enlist advice from someone you trust. Preferably someone who doesn't have a stake in it.

It's almost impossible to keep a huge windfall a secret. Relatives and old friends you haven't seen in years—people who never gave you the time of day before—suddenly become your best friends. Everyone has their hand out. Sob stories. Guilt trips. Debts you'd forgotten about. Childhood promises. Investment proposals. "Expert" advice.

And then there are all those shiny objects. The sports car or yacht you've always dreamed about but knew you could never afford. Real jewelry. Designer clothes. Maybe a better place to live. Luxury travel. And of course, the opportunity to play Santa Claus for your family and friends.

You tell off your boss and quit your job.

But no matter how huge the windfall, it's not a bottomless pit. Up to 45% of your winnings may go to federal and state income taxes. And if you start doling out gifts exceeding $10,000 in value, you pay gift tax. That new mansion has to be maintained, and you may have to hire people to run it. The new sports car comes with expensive insurance.

Still, even after you pay the taxes on a multi-million-dollar jackpot, a lot of money is left. A lot of potential for improving one's life.

Some lottery commissions give winners the option of having the winnings annuitized over 20 or more years. You end up keeping more of the money, with a lower tax bill. While most winners opt for the bird-in-the-hand lump sum, I believe I'd take the deferred pay-out. That way, if I went crazy and blew through my winnings the first year, I'd have another installment to look forward to the following year. Surely after a few years, I'd grow accustomed to the income and learn to manage it sensibly.

I wouldn't make any sudden changes—quitting the job, moving, buying a business—unless plans were already in the works. I'd pay off any debts and fully fund my retirement account. I'd set aside a million or so for an emergency fund / long-term care plan. If I had kids or grandkids, I'd take care of their college funds.

I'd give a lot to charity. Besides supporting causes I believe in, the donation would lower my income tax bill and would not be subject to gift tax.

And of course, I'd have some fun. Take more trips. Buy presents. And invest most of the windfall—after carefully researching opportunities. I'd still stick to no-load, low-fee products I can understand. I still wouldn't pay more than necessary for purchases. I'd still recycle and conserve electricity and water.

Money doesn't guarantee happiness. But when used responsibly, it can make life easier.

What would you do if you suddenly received a huge sum of money? I'd love to hear your comments.

Monday, February 13, 2017

Countdown to Financial Fitness: Are You a Saver or a Spender?

Countdown to Financial Fitness: Are You a Saver or a Spender?: Tomorrow is Valentine's Day, a popular time for couples in love to get married or engaged. But before your head gives in to the whims o...

Are You a Saver or a Spender?

Tomorrow is Valentine's Day, a popular time for couples in love to get married or engaged. But before your head gives in to the whims of your heart, find out if your attitudes about money are compatible. Finances are one of the major causes of friction in a relationship.

Some people are savers, some are spenders. Savers plan for the future and weigh the value and need for each purchase, trying to never pay more than necessary for anything. Spenders want instant gratification, without a lot of regard for how much something costs or how well it fits into the budget. (Budget? What's that?)

If your partnership consists of a spender and a saver, your habits may grate each other's nerves, perhaps to the point where the relationship doesn't survive. You will have to bite your tongue to refrain from making snide remarks and assigning derogatory nicknames. To the spender, the saver is stingy, penny-pinching, tight-fisted, nit-picky. To the saver, the spender is wasteful, frivolous, gluttonous, irresponsible. But no amount of nagging and needling will change a person who is not ready to change and has not asked for your help. You'll have to cope with the attitude differences if the relationship is to work.

If one spouse is a spender and the other a saver, each needs the respect and support of the other, and the freedom to operate without being judged, to feel in control. To ensure the bills get paid and agreed-upon financial goals are met, why not designate a separate, joint account for these functions, which each person agrees not to raid? Each person should also have his or her own funds—a bank account, credit card, prepaid debit card, whatever works best for your situation—to spend from and direct without oversight from the other.

Disagreement over money is one of the leading reasons for divorce. Not having enough of it is certainly stressful, but even if there's plenty, problems can arise if the couple can't agree on how that money should be managed.

Divorce is expensive, not to mention emotionally devastating. Don't ignore the red flags.

Are you a spender or a saver? And what about your significant other? I would love to hear your comments.

Monday, February 6, 2017

Countdown to Financial Fitness: Rapid Refund Ripoffs

Countdown to Financial Fitness: Rapid Refund Ripoffs: Back in the early nineties, I took a tax preparation course and then worked a season as an income tax preparer for a major tax preparation ...

Rapid Refund Ripoffs

Back in the early nineties, I took a tax preparation course and then worked a season as an income tax preparer for a major tax preparation firm. As soon as the W-2s were distributed, customers stormed our doors, anxious to file their tax returns and take advantage of their "Rapid Refund."

These poor souls paid tax preparation fees, processing fees, and interest in excess of 60% for the privilege of receiving their own money within a few days instead of waiting a couple of weeks for the IRS to process their returns and issue their refunds. Because the fees and interest were deducted from the anticipated tax refund, they didn't think about what this expedited service was costing them.

In addition to a full or partial refund of withholding, many of these taxpayers were eligible for the earned income credit, a government subsidy available to low-income workers with dependent children. Workers in this income category were least able to afford exorbitant convenience charges, siphoning away money that could have been better used to pay a utility bill or buy groceries.

Since the nineties, there has been a lot of criticism of these "rapid refunds" or, more accurately, "refund anticipation loans," which have been compared to usurious pay-day loans. Increased regulations now require tax preparation firms to be more transparent when disclosing the true costs of this loan product. Nevertheless, every year about this time I see ads for "Express Refund" and "Refund Advance" so customers must still be biting.

It's a choice. Everyone's situation is different.

But there are ways you can avoid unnecessary expenses and keep more of your hard-earned money in your pocket.

First of all, if your 2016 adjusted gross income was less than $64,000, you are eligible to file your return electronically with the IRS at no charge. Eliminate the middle man. The software is easy to use, but if you need help, the AARP and other organizations offer free tax preparation assistance. Check your local library for available services. Even if you don't meet the income eligibility requirements for free electronic filing with the IRS, you can still take advantage of free tax assistance from various volunteer groups if you plan to prepare your own return.

You'll find tax preparation fees at a professional firm much more reasonable if you opt for normal delivery and don't tack on the refund anticipation loan. It might seem painful to pay your preparation fee up front rather than have it deducted from your refund, but when you do receive your refund, it will be much larger. You've been managing all year without that money; surely you can hold on a few weeks longer.

And finally, if you're used to receiving big tax refunds every year, you are overpaying Uncle Sam. Instead of struggling to make ends meet each month, you could have extra funds in your pocket all along, simply by completing a new W-4 form with your employer to decrease the amount of tax withheld each pay period. Even if you live within your net income and look forward to a big refund each spring as a splurge, you'd be better off setting the extra money aside—perhaps via automatic transfer to a savings or investment account—on a regular basis. Why give the government an interest-free loan when you could be earning interest on the money?

What tips do you have for saving on tax preparation and filing? I'd love to hear your comments.