New Resolutions for 2014: Keep It Simple!

Take baby steps with your New Year's resolutions,
and you'll be more likely to see success.

Happy New Year 2014!

'Tis the season for New Year's resolutions!

But first, how did you do with your 2013 resolutions? Oh, you didn't lose weight, exercise more often, spend more time with family and friends, save more money, go to church more often, get organized and become a perfect person? Join the crowd!

Baby Steps for the New Year

Let's keep it simple and take baby steps in 2014:

1. Identify one way you know you spend too much money and eliminate it or cut it back. Are you forgetting to use restaurant coupons, clicking on Amazon too frequently, or buying clothes you rarely wear or stuff you rarely use? Pick one bad habit and kick it.
2. Increase your 401(k) or retirement plan contribution by 1%. Better yet, increase it by more than that, but make the increase at least 1%. Pledge to do this every year and your retirement goals will become much more achievable.
3. Save mother earth and your green cash by doing at least one environmentally friendly thing. Reduce, reuse, recycle. Install a timer thermostat, check the setting on your water heater, or weather strip a door or window. Reduce your driving and let up on the lead foot. Don't let the water run and be prudent with your landscape watering. Take care of your trees and plant a new one. Start a compost pile. Pick one thing and do it.
4. Take control of your "daily money management" by exploring technology to simplify it and help you track your spending. Use Quicken or Mint.com to see where your money goes, use your bank's online bill pay to save postage, and automate as many routine transactions as possible. Start using a password management program. Pledge to check and compare your income and expenses once a month.
5. Increase your financial peace of mind. Recognize the difference between what you can control and what you cannot control and don't worry about the latter. Concentrate on what you can control: maximize your income and minimize your income taxes and expenses. Have realistic expectations. Take a baby step (or more than one) towards financial peace of mind.

Live a Life of Gratitude

In closing, live a life of gratitude in 2014. No matter how bad or difficult you think things may be, there are many people who are not as fortunate as you. Ironically, in many cases, people who live in poverty are happier than people who live in abundance. They don't have much, but they are thankful for what they have and don't worry about what they don't have.

Keep it simple in 2014, take baby steps, and have a happy New Year!
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Retirement Saving Starts with Your Teen

Is your teenager thinking about retirement? Have you ever wondered how to teach your teen about investing?
Whether it's your child or grandchild, a Roth IRA is a great way to start a teen's retirement savings and teach them about investing.

The Advantage of a Roth IRA 

Why a Roth IRA? Teenagers are in a very low tax bracket, so a traditional IRA (where contributions are tax deductible) will be of little value. A Roth IRA does not offer a current tax deduction, but withdrawals in retirement are tax-free, there is no required minimum distribution at age 70½, and there are special provisions for early withdrawals if needed.

You can contribute 100% of your teen's W-2 income to a Roth IRA, up to $5,000 for 2012 or $5,500 for 2013. You can contribute up to $400 of "self-employed" income (such as what they earn from baby-sitting or lawn mowing) to be reported on Schedule C of their tax return; in addition, you'll avoid paying any FICA payroll tax on up to $400 of that income. So, you can even start a Roth IRA for a 12-year-old who does some baby-sitting or lawn mowing. For example, if your 15-year-old makes $1,200 working at a fast food joint or retail store, you can contribute up to $1,200 to a Roth IRA.

"A teen's Roth IRA is typically funded by a parent or grandparent."
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You can continue funding a child's or grandchild's Roth IRA into their early 20s, as they start their first job out of college. The ability to contribute to a Roth IRA is phased out for those who make over roughly $100,000 (which would likely only apply to professional athletes or rock stars). If you fund a Roth IRA from age 15 to age 30 or so, your teen can be well on their way to retirement.

Start Teaching Your Teen About Investing 

The Roth IRA is a great way for your teen to learn about investments and see how the contributions make their Roth IRA account grow.

You can still open a Roth IRA for 2012 income. The deadline is the date you file their 2012 income tax return, prior to or on April 15, 2013.

Your teen may not thank you for many years, but isn't that typical?

About Bruce J. Berno, CFP^®
Bruce J. Berno, CFP^® is the founder of Berno Financial Management, Inc. a fee-only comprehensive personal financial planning and investment advisory firm headquartered in Cincinnati, Ohio. Since 1993, Berno Financial Management has been helping individuals and families achieve financial peace of mind. For more information about Berno Financial Management, visit http://www.bernofinmgt.com.

Inflation: What Difference Does a Few Pounds Make?

Inflation is a major threat to retirees and a risk to long-term investors of any age. What difference does inflation make?

• A 3% inflation rate will cause prices to double in 24 years or by the time a 65-year-old reaches age 89.
• A 4% inflation rate will cause prices to double in 18 years or by the time a 65-year-old reaches age 83.
  

Put another way, inflation will cut your standard in living in half over either of those time periods. Ouch!

On a more personal level, gaining three pounds a year may not seem like much, but 10 years later you are 30 pounds heavier. Has anyone read that America has an obesity problem?

Who hasn't had grandpa tell them that when he was growing up, movies were a quarter and a candy bar was a nickel? Who remembers buying a Volkswagen Beetle for $3,000?

Since 1913, inflation has averaged just over 3%. At its ugliest, it ranged from 10% to 13% a year in 1979, 1980 and 1981.

Understand and remember the importance of inflation. It is significant in the long run. Like 30 pounds ago!

About Bruce J. Berno, CFP^®
Bruce J. Berno, CFP^®is the founder of Berno Financial Management, Inc. a fee-only comprehensive personal financial planning and investment advisory firm headquartered in Cincinnati, Ohio. Since 1993, Berno Financial Management has been helping individuals and families achieve financial peace of mind. For more information about Berno Financial Management, visit http://www.bernofinmgt.com.

Six Early New Year's Resolutions

In the spirit of the holiday season, here is a list of early New Year's resolutions and fun things to do in 2012!

1. Remember, cash flow (income versus expenses) is the key to long-term financial success. If you are gainfully employed, you should be saving 15% to 25% of your income. If you are retired or not fully employed and are drawing on your investment portfolio, your total annual withdrawals should be 3% to 5% of your portfolio value or less. If your savings rate is low or withdrawal rate high, take steps to increase your employment income or reduce your expenses.
2. Insurance is the foundation of sound financial planning. Home and auto insurance, umbrella liability coverage, health insurance, life insurance, disability and long-term-care insurance all require regular review and updating. Consider funding a Health Savings Account (HSA). If you own or are considering long-term-care insurance, pay particular attention to and understand the inflation protection options.
3. In 2011, we've seen renewed volatility in stock market prices. Investors are still bruised from the 2008 global financial crises and pessimism is pervasive. Remember that the stock market is a leading indicator and will turn up before business, consumer and investor attitudes improve. Bond interest rates remain low and pose a challenge for achieving reasonable long-term returns. Broad diversification will be well rewarded and realistic expectations for long-term returns (mid to high single digits) are a must.
4. Are there any family or personal changes that might prompt a review of your beneficiary designations on life insurance policies (both employer provided and individually owned), IRA accounts and employer retirement plans? Were there any changes in employer plans wherein correct beneficiary designations should be confirmed? How about a power of attorney, will or trust documents? Are there changes of address or telephone numbers for people listed in your healthcare power of attorney document?
5. Do your children or grandchildren have employment income that could be used for a Roth or traditional IRA contribution? If applicable, have you funded 529 college savings plans for the calendar year for your children or grandchildren?
6. Do your family members know where to locate important personal financial papers and how to contact your professional advisors in case of an emergency?

Have a safe and happy holiday season. Take good care of yourself. Best wishes for a healthy and prosperous New Year in 2012!

About Bruce J. Berno, CFP^®

Bruce J. Berno, CFP^® is the founder of Berno Financial Management, Inc. a fee-only comprehensive personal financial planning and investment advisory firm headquartered in Cincinnati, Ohio. Since 1993, Berno Financial Management has been helping individuals and families achieve financial peace of mind. For more information about Berno Financial Management, visit http://www.bernofinmgt.com/.

Where Does Your Money Go?

Are you saving more money than you want to or planned? Probably not. Does it seem that even when your income goes up you can’t save more money?

Where does your money go? How much money are you saving? If you have a hard time answering these questions―and most people do―there are some easy solutions.

First, try a manual or “back of the envelope” approach. Start by identifying your annual income from your W-2 tax wage statement or year-end payroll stub. Then identify how much you contributed to investment accounts like your 401(k), IRA or 529 college savings plans. Next, calculate how much cash you accumulated or depleted by comparing your bank account balances from the beginning of the year to your balances at the end of the year. If your bank account balances were higher at the end of the year than at the beginning, you accumulated cash. If they were lower, you depleted some cash.

To calculate the percentage of your income that you saved, divide the amount you contributed to investment accounts plus any cash that you accumulated minus any cash that you depleted by your annual income total. For example, if your annual income was $100,000 and you contributed $15,000 to your 401(k) and accumulated $5,000 in your bank accounts, you invested or saved $20,000 or 20% of your income. That is very good and you may be able to stop here, unless you want to learn more about where you are spending your money so that you can try to save even more.

If your income was $50,000 and you contributed $1,500 to your 401(k) and $500 to a 529 college savings plan and your bank balances remained about the same, then you saved 4% of your income. Obviously, the higher your income, the greater percentage you should be able to save. However, it doesn’t always work out that way, as people tend to ratchet up their lifestyle spending as their income increases. As a general rule, you should try to save 10% to 25% of your income. Saving 5% is better than nothing, but it’s probably not enough to accumulate a retirement nest egg in the long run.

What technological resources are available to help you boost your savings? You have a wide range of options to choose from. Your bank website may have a resource to help classify and summarize expenses. Your credit card company may provide an annual statement that shows you how much you spent in certain categories. Check out the “restaurant” or “entertainment” categories and you may be shocked how the discretionary expenses add up. 

Two popular software packages that can help you track your spending and saving are Quicken and Mint.com. Quicken is a PC-based software and Mint.com is web-based. They are both owned by the same parent company, Intuit.

Mint.com is free and automatically collects your transactions from your bank and credit card accounts. It assigns an expense category based on the merchant code that is tracked when you swipe your credit card or debit card. For example, if you swipe your card at Kroger’s it will be classified as groceries and if you fill up your tank at Speedway it will show as gasoline. You can manually edit any entries in Mint.com and you do have to manually categorize any checks your write and any cash transactions.

Quicken is similar to Mint.com, but you have to manually download your transactions. Credit card transactions are automatically categorized, just as they are with Mint.com. Quicken has a much wider range of reporting capabilities and more flexibility in choosing historic time periods for reporting. Quicken also has an “Easy Answer” function to answer the questions “How much did I pay to…”  or “How much did I spend on…” for a wide range of time periods that you can select. Quicken also offers bill pay and check writing capability to further simplify your cash management. Different versions of Quicken are available that cost between $60 and $90 before rebates and discounts.  

Whether you use manual or software methods to track your income, expenses and savings, the process is enlightening and well worth your effort!

About Bruce J. Berno, CFP^®

Bruce J. Berno, CFP^® is the founder of Berno Financial Management, Inc. a fee-only comprehensive personal financial planning and investment advisory firm headquartered in Cincinnati, Ohio. Since 1993, Berno Financial Management has been helping individuals and families achieve financial peace of mind. For more information about Berno Financial Management, visit http://www.bernofinmgt.com/.