January, 2023 | Live a Life By Design

How Successful People Gain and Retain Their Wealth

Posted on January 27, 2023January 27, 2023 by Jimmy J. Williams, CPA/PFS, CFP®

There is a TV show that I witnessed a couple of times that is titled, How Winning the Lottery Ruined my Life, or something to that effect. While watching the “lucky” family discuss their travails and trials of winning such a large sum of money when they previously were considered poor or bankrupt was interesting to me. The reason for suffering from winning such large amounts of money is that the person was attempting to apply their current capabilities and philosophy of life to a much larger asset base.

Having served as an advisor to wealthy individuals for many years, it gave me perspective to understand the devastation of which the lottery winner spoke. We all experience a stage in life that we are most comfortable. This level of living has given us the lifestyle we feel is good, or good enough, to provide us some comforts of life. The challenge is to understand that, as people, we must grow our philosophy toward money and wealth as we grow our lifestyle or trouble is on the horizon.

In simple terms, the person who has dominion over a few things must grow in mindset, knowledge and understanding about wealth to retain dominion over significantly more assets. The Bible tells us that the person who has much wealth, much is expected. That is a tremendous philosophical point about wealth. Another statement I often use is that self-preservation leads to mediocrity while charity leads to wealth. By giving away, in a reasonable and responsible manner, the assets you currently possess, you will receive greater assets from the marketplace.

To help you think like a wealthier individual, you should learn from those that possess great wealth. Read biographies of Cornelius Vanderbilt, Andrew Carnegie and John D. Rockefeller. What inspiration these men’s stories give me as I realize their generosity in developing the modern culture you and I benefit from. Libraries, hospitals and universities all over our great country bear their names as a testament to the great blessing we possess of being American citizens.

One of the common themes I discerned from reading their biographies is that they thought differently than most people. Their time was sacred and they didn’t waste it on trivial matters. Most of them created, for themselves, an approach to capturing the best information to make critical decisions that contained considerable risk. To accurately describe their approach to managing their time, they eliminated, delegated or elevated activities which became their goals for success.

Many menial tasks that would arise during the day would be disregarded unless they had some relationship to the important goals set by the entrepreneur. Business studies of behaviors inform us that most people major in minor things to the detriment of the business production they are seeking. In simple terms, I call this “busy work”. This type of activity has no sustained value or progress contribution toward your big goals for which you are seeking to attain. According to Gallup, a considerable number of employees polled report they are simply disengaged from the act of contributing their skills to their employer at some point during each day. That is startling when you realize these employers are paying significant amounts of money for training, retention and benefits for these “less than productive” employees.

Another strategy used by wealthy individuals is that they delegate tasks to others more capable or experienced in certain functions. For example, many didn’t write or type their own letters but utilized a personal assistant. Most of them didn’t drive themselves to destinations but used the skills of drivers and focused on their important tasks during the drive time. Delegation is not restricted to business professionals. Many of us delegate our lawn work and flower beds to companies that specialize in such services. Cleaning our homes and performing laundry are delegated activities for which others are most helpful. You should be focusing on those activities that create and retain your most passionate areas of life.

Lastly, the wealthy are excellent at scaling their process for producing wealth. They create a unique process and elevate it to capture market share or other investors. By concentrating on your unique abilities to create value for others, you will quickly realize that a “better mousetrap” is in your possession.

Each day, plan your activities and review them to note what should be eliminated, delegated or elevated to give you the greatest opportunity to serve others and grow your wealth in life.

The world needs you to show up everyday to contribute your talents to helping others. It is only when we all find our purpose in this world and implement a means to using that purpose to help others that we truly are wealthy. Mark Twain, one of my favorite authors, stated it well when he said, “The two most important days in your life are the day you are born and the day you find out why.”

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Tax Credits for Homeowners

Posted on January 19, 2023January 19, 2023 by Jimmy J. Williams, CPA/PFS, CFP®

Home ownership avails tax deductions such mortgage interest and ad valorem taxes for those individuals that itemize on their personal income tax return. Deductions are good since they reduce your taxable income; however, tax credits are much better since they reduce the tax itself dollar-for-dollar. One of my mantras when helping our clients with tax planning is “deduction is good, but credits are great!”

Recent legislation passed by Congress and signed into law by President Biden is the Inflation Reduction Act. There has been significant debate as to the title of the law as being misleading. Let us leave the politics to the politicians and we will focus on the important matter of the impact this law has on your 2023 federal income tax return.

Claiming credits against your federal income tax takes a little work to understand and navigate the maze of qualifications to claim the credit. In claiming the Energy Efficient Home Improvement Credit, a taxpayer must provide certain manufacturer certifications and an inspector’s report as to the sufficiency of the improvement to meet the criteria in the law. Further, if you built your home after December 31, 2022, and before January 1, 2033, you may claim a credit against your federal income tax of 30% of the costs paid for such improvements as exterior windows and skylights, exterior doors, and other qualifying energy property.

Overall, the annual limit for such tax credits is $3,200 with no lifetime limit. In that regard, you may make improvements that qualify for the credit on an annual basis as you convert your residence to a more energy efficient dwelling.

Other limitations apply when claiming tax credits. Some credits are refundable and others are nonrefundable. The difference in the credits’ refund status is critical. Refundable credits allow for the refund to be paid the taxpayer even if it exceeds your total tax liability. For example, let us assume your total federal income tax on your 2023 return is $2,500 and you could claim a refundable credit of $4,000. The IRS would send you a check for $1,500. Sounds good, right?

Assume the same tax liability of $2,500 and you claimed a $4,000 nonrefundable credit. The IRS would allow you use $2,500 of the credit to offset your tax and carryover to tax year 2024 the remaining $1,500 to considered in the following year’s calculation of tax.

An additional residential credit provided for in the Inflation Reduction Act is the Residential Clean Energy Credit. Like the previously mentioned credit, the qualified energy property improvements must be installed on a taxpayer’s residence before January 1, 2035. The credit is equal to 30% of the cost of eligible property placed in service in 2022 through 2032; 26% for tax year 2033; and 22% for 2034. Limitations are placed on the credit by kilowatt capacity of the installed property. For example, the credit is $500 for each 0.5 kilowatt of capacity of qualified fuel cell property expenditures for each tax year.

To qualify for the Residential Clean Energy Credit, you may install solar water heating systems, solar electric systems, fuel cell property, small wind energy property, geothermal heat pump property and, for years beginning in 2022, battery storage technology. Each of the eligible property improvements requires certain criteria be met through certifications provided by manufacturers of the products.

Tax laws are complicated. To properly take advantage of opportunities to lower your family’s income tax burden, seek a complimentary consultation from a CERTIFIED FINANCIAL PLANNER™ professional. Judge Learned Hand said it best, “Any one may so arrange his affairs that his taxes shall be as low as possible; he is not bound to choose that pattern which will best pay the Treasury; there is not even a patriotic duty to increase one’s taxes.”

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To retire, overcome these three challenges

Posted on January 13, 2023January 13, 2023 by Jimmy J. Williams, CPA/PFS, CFP®

Retirement planning of itself has many challenges for individuals. It is an area of life that has many concerns and questions because of the unknowns in the future. It is as the Boy Scouts would say, you must be prepared for anything. To help you accomplish your goal of retiring with a worry-free lifestyle, we believe you should overcome three challenges in the planning process, as well as the remainder of your life. The first of these challenges is longevity.

Longevity

Longevity is that period of time for which you may outlive your sustained investments. Too often, we are asked by our clients, “How long do you think I will live, and how much money do I need to live comfortably?” This is a question, of course, that we cannot answer with any certainty. No one knows what tomorrow may bring. However, it is critical that you provide a savings plan for your future with the hope of reaching the longevity goal you establish for yourself. It is not an answer any of us know with a degree of certainty. For example, I have a friend who is dying from cancer at the age of 45. However, my grandmother lived to the age of 100 years and 10 months. Why this happens, we don’t know. However, we must be prepared for either event.

Inflation

The other challenge to overcome in retirement planning is inflation. It is critical to understand that inflation cycles throughout the economies through the decades of life. No one knows what the next cycle of inflation may entail. However, let’s review what has happened in the past. Over the past two and a half years, our inflation in the United States has increased to a height of 9.1%. It is critical to understand that the cost of buying goods for your everyday living has increased by 9.1%, and certain sectors of the market increased much more. Food and fuel have increased far more than 9.1% over the past two and a half years. It is critical that you understand this large increase takes a tremendous toll on the investments you may have saved with a planned distribution rate of a much lower amount than the inflation factor.

One of the challenges you experience with inflation is that you do not know the length of time or term the inflationary period will be. The height of inflation and the term of which it lasts, both play a role in the use of your retirement funds.

Taxation

The third challenge, as mentioned in the previous paragraph, is taxation. It is true that as Americans, we are taxed on many things, from income, the purchases we buy, and the real estate we own. Taxation impacts literally every aspect of our lives in the United States. However, there are areas that you can control in your cash flow to assist your savings for retirement in lasting longer.

The timing of certain events with your retirement savings can help mitigate the tax burden you are impacted with on an annual basis. It is also a measure of how you invest that you will be taxed. For example, shouldn’t most of your retirement savings be in a qualified plan, such as your 401(k), or an IRA? These types of savings require taxation on the first dollar to be distributed from the respective plan.

However, for most of the wealthy, additional investments are made in those types of companies, or assets, that grow in value. This growth in value is not taxed until such a time as you wish for it to be taxed. For example, you must sell or liquidate the investment for a taxable event to occur. Once you decided and have liquidated the investment, capital gains at a much lower rate that ordinary income tax rates will be attached to the event. If you were invested primarily in growth-type companies and/or assets, your maximum rate on those capital gains in today’s law is 20%. This is a much lower rate than the 37% maximum ordinary income tax rates.

The wealthy in the United States pay an effective lower rate of tax than most Americans that are wage earners. This seems to be an abnormality. However, it is due to the impact and control these wealthy individuals exert over their investments and the realization of gains on a basis for which they control. For example, if you had property that you invested a very small amount in, and sold for a much larger amount, two to three times what you paid for it, the capital gains would then be applied to that portion you sold. Twenty percent tax rates on capital gains has been the effective rate on capital gains for many years now. It allows the planning for such events to have a little more certainty.

For you to be successful in retirement, it is vital that you overcome the challenge of longevity, inflation, and taxation. If you desire some guidance and seek some form of assistance, contact your local CERTIFIED FINANCIAL PLANNER™ professional for a complimentary consultation. You will be glad you did. See on the jogging trail!

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Controlling Your Debt

Posted on January 5, 2023January 5, 2023 by Jimmy J. Williams, CPA/PFS, CFP®

A new year always suggests the opportunities to create the world we truly wish to live in and the strategies we must implement to achieve success. Too many of us write down meaningless resolutions on January 1 that have no measurable qualities to denote actual commitment from the writer. This year will be different for you. As Jim Rohn often said, “We all face the same environmental disturbances and life challenges. We can either let the wind blow us where it goes, or we can reset our sail to go in the direction we desire.”

After Christmas, the reality of the expenditures we made comes to our attention. Credit cards that were used to make purchases are now due. Our economy is subjected to the highest inflation we have experienced in 40 years. You will note the impact of this inflation in your gasoline, food, clothing, medical and other items you purchase for everyday living. To counter the increasing inflation impact, the Federal Reserve Board of Governors continues to raise the rate it loans monies to participating banks. This process creates an impact on the economy to discourage the use of credit which will slow the demand of cash in the country.

One of the most noticeable areas of your life in which the Fed’s interest rate raises appear is your credit card bill. When opening your card statement, you will notice the increased interest rate for any balances not paid in full by the due date of the statement. Compare the interest rate from a year earlier to the one you received this month. Most likely the rate will have increased significantly.

The key habit to build into your lifestyle is to pay the monthly balance owed on your card in full each month. Two benefits will result from this habit. First, you will notice your credit score may rise due to the excellent payment record and management of your credit line. Second, you will maintain better control of your monthly budget since you will need the cash to pay off your card balance each month.

One group of professionals that track credit card usage is the American Bankers Association. According to the data collected by the association, 40% of all Americans utilized a credit card and maintained a balance on the account at some date within the second quarter of 2022. Experian, one of the major credit monitoring agencies in the United States, reported that the average balance, reported by credit card issuers, owed by Americans in the third quarter of 2022 was approximately $6,004. In most instances, the reasons for using a credit card are to bridge cash flow needs during the month. However, it is highly recommended that credit cards are not used for purposes of increasing one’s lifestyle.

To control your life, you must take command of the variables that impact you. Your credit should be reviewed annually and loans with the highest interest rate should be liquidated first. Continue this process until all debt is paid in full.

A funny, but true, story that happened to me last summer related to the purchase of an automobile for our daughter. Based on our excellent credit score, our family has not paid interest on a vehicle in more than 20 years. Knowing that our credit score was higher this year than the last vehicle we purchased, I confidently walked into the dealership in her city and introduced myself. Our daughter had researched the type of vehicle she wanted, and the dealership possessed a similar one in its inventory.

We informed the salesman of the amenities she desired on the vehicle and was informed one that she wanted was being shipped to the dealership within a couple of weeks. Remember, this is still a supply chain issue in the U.S., and I informed my daughter to give them a month before expecting delivery. We negotiated the price; I shook hands with the salesman and ask him to write the purchase contract. What happened next completely caught me by surprise!

I had researched the financing options with the manufacturer and noted that there were no zero-interest financing available due to the economy and the demand for vehicles. To counter this economic impact, we were going to write a check for the automobile. As I began to write the check, the salesman noted that I was writing it for the total agreed sales price. He said, “you can’t write a check for the sales price, or we will have to raise the price $1,000.”

Imagine the shock on my face that we would be charged an additional amount for paying the car in full instead of financing the vehicle! I understood what the gentleman was explaining and thought that the dealership would be grateful to work with someone who has such stellar credit and pays up front for their vehicles. Alas, these are different times.

The moral of this story is “cash isn’t always king” and “supply and demand” play a heavy role in the operations of businesses.

Review your current debt and find a means of paying off the largest interest rate loans. If your credit card is carrying a balance, I would recommend you start by paying the largest amounts available on the balance. To assist you with your family’s cash flow planning and other future needs, consult your local Certified Financial Planner™ professional. Hope you enjoy a successful and prosperous New Year!