Waukesha State Bank Blog
This commentary was written and prepared by Waukesha State Bank. Content in this blog is for general information only and not intended to provide specific advice or recommendations for any individual. Please visit with one of our bankers to discuss your individual needs.
It was supposed to be a tax bill that would substantially simplify tax returns and provide tax relief across the board, benefiting in some way all taxpayers. While it didn’t quite get there as far as tax simplification, the Tax Cut and Jobs Act that was just passed by Congress does cut taxes for the vast majority of Americans. Just how much any particular tax payer benefits depends on a number of factors, including the amount of taxable earnings and itemized deductions, marital status, family status and the state of residency. For many Americans, the tax bill gives and takes through various provisions that, on a net-basis, results in less taxes owed. Here are some of the key provisions and the way they help or hurt taxpayers.
Lower Tax Brackets
Original versions of the bill sought to simplify taxes by reducing the number of tax brackets from seven to three or four. That was lost along the way to producing the final tax bill which keeps the number at seven, but many of the marginal tax rates have been adjusted downward. The top rate dropped from 39.6 percent to 37 percent and most income levels will be taxed at lower rates. The downside is that the tax brackets are now linked to an inflation index, which will push many taxpayers into higher brackets over time.
Double the Standard Deduction
Perhaps the bigger news is the doubling of the standard deduction from $12,000 to $24,000 for married couples ($6,000 to $12,000 for single filers). That is significant for taxpayers who don’t itemize or whose itemized deductions don’t exceed the lower threshold. These taxpayers are the most likely to realize a tax reduction.
For those who do itemize, the tax reduction could be much less and some could end up owing more in taxes.
Lower Mortgage Interest Deduction Cap
Under current tax law, the mortgage deduction is capped at $1 million of mortgage indebtedness. The new tax bill lowers the cap to $750,000 so, although it will affect more homeowners, it won’t impact most. Homes purchased before December 15, 2017 will be grandfathered for the $1 million cap. In addition, the tax deduction for interest on home equity loans has been eliminated except in cases where the proceeds have been used for significant home improvements.
SALT Deduction Remains with a Cap
The provision that caused most of the controversy was the elimination of the tax deduction for state and local taxes. Originally, the provision was to be eliminated altogether, but the final bill keeps it with a cap of $10,000 of state and local income, sales and property taxes.
Personal Exemption Gone
Everyone loves the personal exemption – the amount each individual is able to use to reduce their taxable income. Families especially loved it because the exemption was available for each dependent. The new tax bill eliminates the personal exemption. With the doubling of the standard deduction and the larger child tax credit, most taxpayers will still come out on top.
Child Tax Credit Doubles and Access Expands
The child tax credit has been increased from $1,000 to $2,000. More families will qualify for the credit because the phase out has also been increased for married couples from $110,000 to $400,000. The first $1,400 is refundable for people who owe zero taxes.
Alternative Minimum Tax Still Here
One way the original tax bill was supposed to simplify taxes was by eliminating the alternative minimum tax. The final version keeps AMT, but it increases the threshold from $86,200 to $109,400 so AMT will impact fewer taxpayers.
No More Marriage Penalty
Under the new law, married taxpayers will pay taxes at the same tax rate as individual filers. For example, if two individuals each earned $150,000 under the old law they would be in the 28 percent bracket. If they got married, their $300,000 combined income would boost them into the 33 percent bracket. Under the new law, the couple would be in the 24 percent bracket – same as an individual earning $150,000.
Larger Medical Deduction
For taxpayers who do itemize, more medical expenses will be deductible. The new tax bill lowers the adjusted gross income (AGI) floor for medical deductions to 7.5 percent from 10 percent and it will be retroactive to the 2017 tax year. For example, a married couple with $100,000 AGI can start deducting medical expenses above $7,500 instead of $10,000.
You Lose Some Deductions
The tax bill eliminates several deductions, including just about everything that was categorized as “miscellaneous deductions,” which included items such as unreimbursed employee expenses and tax preparation fees. You’ll still be able to deduct charitable contributions and student loan interest.
Larger Estate Tax Exemption
The bill’s authors originally wanted to eliminate the estate tax altogether, but the final bill only included an increase in the amount that would be exempt from estate taxes. The new exemption is doubled to $22.4 million for married couples ($11.2 million for individuals).
There is a lot to absorb from the new tax bill. Be sure to meet with a tax professional to ensure you understand how the new tax law will impact your specific tax situation.
New Year, New Me, right? We’re two months into the new year, and you may have dropped your New Year’s Resolution to become financially fit. Don’t despair. It’s still early in the new year and a great time to clean up your financials, adopt better spending habits, and start saving more. Here are a few tips to keep in mind:
Make a budget and stick with it
This almost cliché financial advice is repeated so often for one important reason: it works. Start by tracking your spending, once you’ve tracked how much money you spend over the course of a few weeks, you can look for trends in what you’re spending. These trends help you start planning on how much income goes towards necessities (like rent/mortgage, utilities, groceries), and see areas where you can cut back (rarely-used subscription services, eating out less) and start putting away a portion of your income towards a savings goal. The most important part of a budget is sticking with it, once you start tracking your spending you should make sure to take time every day or every few days to log your spending and compare that to your planned spending.
Deal with any debt
Debt is an extremely stressful thing to deal with but the new year is a time to get a handle on any debt that may have piled up around the holidays. Debt should be something factored into your budget like your electric bill and tracked. Although it may be daunting, contact your creditors to discuss your situation, they may be willing to work with you to put together a repayment plan. If you're carrying debt on multiple credit cards, talk to your local bank about the possibility of consolidating that debt into a single payment so you can close the extra card accounts. No matter what you do, addressing debt instead of ignoring it will help you get a handle on it and make positive progress.
Many times people will stick with whatever they find first, be it their internet provider, car insurance, or brand of soup, but that may not be the best deal, especially a few years down the line. There’s nothing wrong with being loyal to a company but just because they’ve been your cable provider for a few years isn’t necessarily a good reason to stay with them and doesn’t ensure that you are getting the best value for what you are paying. Look around to see what other companies are charging for similar services, you may find that your current company is priced competitively or you may find that you can get a better deal elsewhere. One thing to beware of is a cheaper product or service that is cheaper for a reason, make sure you are still getting a similar quality or ask yourself if you are ok with a downgrade.
Making a commitment to financial health and wellness can be a great way to start the New Year on good footing that can last throughout the year and your life.
In simple terms, a home equity line of credit works a little like a credit card - a credit card secured by your home. Lenders approve you for a specific amount of credit, but you are not required to borrow up to the limit of your credit line.
How a Line of Credit Works
Here's an example. Say you are approved for a home equity line secured by the equity in your home. Most lenders will limit how much you can borrow, using a percentage of your home's value as a guideline.
In this example, we will assume you have been approved for a $30,000 credit line.
You can draw funds at your discretion in any frequency or amount during the term of your loan up to the $30,000 limit. In addition, your account may automatically renew from year to year after the initial term. You are charged interest only on the amount you have drawn and payments may be calculated using an “interest only” method or figured using a percentage of your outstanding balance. As you pay down your balance, those funds become available to borrow again and again.
With a home equity loan you receive the entire loan amount up front. If you borrow $30,000, you receive a check for $30,000, and you start making payments on that $30,000 loan immediately based on a predetermined repayment period.
Here is a quick breakdown of the differences between home equity loans and home equity lines of credit:
|Home Equity Loan
||Home Equity Line of Credit|
|Receipt of Funds||Received up front in one lump
sum, typically by check or direct deposit to an account.
|Funds can be accessed at any time by check, by debit card, or by an in-person withdrawal or online transfer.|
|Interest Rate||Typically fixed and applied to
entire loan amount.
|Usually variable; applied only to the outstanding principal balance|
|Repayment||Usually installments over a
defined repayment term.
|Can vary depending on repayment method and interest rates.|
Home equity lines of credit generally use variable interest rates instead of fixed interest rates. The rate will vary based on a common index like the prime rate. Typically the interest rate is calculated by adding a percentage, called the margin, to the index; for example, your interest may be calculated using "prime rate plus 1%." In that example, if the prime rate is 5%, your interest rate will be 6%. The rate will change based on changes in the index and will impact your payment amount and/or repayment period.
A home equity loan usually has an interest rate that is fixed for a defined term which may be all or part of the repayment period. You have confidence in knowing your interest rate and payment amount will not change for a predetermined period of time.
Which is Right for You: Loan or Line?
Home Equity Loan
- Home equity loans are often used for one-time expenses (home improvements, major purchases, etc).
- Home equity loans often come with fixed interest rates and fixed monthly payments, making budgeting simple.
- Home equity loans will generally require higher monthly payments.
- Payments include interest and principal (using a standard amortization schedule).
- No additional funds are available; to access more cash, you will need to refinance or take out another loan.
Home Equity Line of Credit
- Home equity lines are often used for recurring and unexpected cash needs.
- Home equity lines often come with variable interest rates; your rate can rise or fall based on changes to the prime rate.
- Payment amounts will also vary based on how much money has been borrowed at any given time.
- Payments are often interest-only, but can include principal. During the term of the loan, you will make lower monthly payments but will owe the entire principal balance when the loan term ends.
- Funds can be accessed at any time, and if you pay down the balance, you can draw against that money again and again during the term of the loan.
Need a simple way to decide between a home equity loan and a home equity line of credit?
If you need a lump sum at one time, and want the stability of a fixed interest rate and fixed monthly payments, choose a home equity loan.
If you want greater flexibility and the ability to choose when and how much you will borrow, and are willing to accept the potential for changing interest rates and payment amounts, choose a home equity line of credit.
To speak to a lender about whether a home equity loan or a home equity line of credit is the best choice for your individual needs and goals, simply call our Customer Service Center at (262) 549-8500, click here to schedule an appointment or stop into any of our convenient locations .
Credit cards provide a lot of convenience when you’re traveling. They can be used across the globe, and you can use online tools to track spending and more while you’re away. There are a few considerations for traveling with your credit cards though, especially if you’re traveling abroad. Here are some things to keep in mind.
- Bring copies of the front and back of your cards and keep the copies in a separate place from the cards themselves. A hotel safe can be a good place to store them. If your cards are stolen, you’ll have all of the information you need to contact the company.
- Always carry a back-up card. If something happens to your primary card, you’ll be glad you have a secondary one.
- Carry some cash. Cards don’t always work, especially abroad where card readers are increasingly incompatible with U.S.-issued cards.
- Save your receipts. It can be hard to track your expenditures during a whirlwind trip, so use receipts during vacation and then again to verify the transactions on your statement.
- Check your card’s travel discounts. Many cards, even some that aren’t specifically travel-related, offer benefits on particular airlines, hotel chains, and more.
- Check your card's benefits relative to travel discounts, travel assistance services and other travel benefits.
- If you’re traveling outside of the country, be sure to notify your credit card company in advance. If the company doesn’t know that you’ll be traveling, they may block your transactions. Then you’ll have to call them, which can prove difficult depending where you are.
- Likewise, investigate potential card fees for foreign transactions before your trip. Some companies charge for specific types of transactions, so you’ll want to know what you’ll actually be spending.
- Ask if your transaction will be processed in U.S. dollars or the local currency. If the merchant plans to charge you in U.S. dollars, they may be providing you with currency conversion for a fee. While it may be nice to know your exact purchase amount in U.S. dollars, you may end up paying more than you have to. Ask what the currency conversion fee is and know that you can decline that service.
By planning ahead, you can make your trip as hassle free as possible.
Nearly half of the energy costs in a typical home come from heating and cooling, according to the U.S. Department of Energy, so when the temperature goes up, so do your cooling costs. Here are a few tips on how to stretch your household budget this summer and still keep your chill.
Consider upgrading your old air conditioner. If you have an old window unit air conditioner with an EER energy efficiency of 5, you can cut costs in half by replacing it with a new one with an EER of 10. So do a simple calculation: If your average annual bill is $260, your bill would become $130. Depending on the size of the unit and room (window units range from $100 to $500), your annual savings will pay for the unit in just a few years. Air conditioners also function more efficiently and cheaply (and last longer) when you replace or clean their filters on a regular basis. Read your owner’s manual to find out how often you should replace or clean filters.
Use ceiling fans. Overhead fans get air circulating, which means you might be able to delay turning on the air conditioning-especially if you can also leave windows open on cool summer evenings. Make sure you have the blades spinning in the right direction, though! In the summer, the preferred direction for a ceiling fan to spin in is counterclockwise as you look up at the fan blades. You will feel a cool downward airflow as you stand directly under the fan. In the winter, the preferred direction for a ceiling fan to spin in is a clockwise direction. Check your owner's manual for how to switch the direction on your fans.
Take time to unplug. Even when they're not in use, electronics such as television sets, DVD players, computers and phone chargers can suck power out of outlets. Either unplug them when you're done using them or use a Smart Strip (which cuts power when it's not needed). One exception to this tip: overhead fans, especially at night, will cool air more cheaply than turning down the thermostat.
Invest in a programmable thermostat. Programming your thermostat is one of the easiest, most cost-effective ways you can cut your energy bills this summer. Installing a programmable thermostat prevents your home from going through large temperature swings and can save you up to 10 percent on your cooling bills. A homeowner can save as much as $150 on air conditioning bills by setting a thermostat.
What is your home worth? Ultimately, your home is worth what someone else is willing to pay you for it.
The problem is you won't know that amount until you sell. So, what if you need to estimate the value of your home to determine what you will list it for or to get a sense of how much you can borrow with a home equity loan or home equity line of credit? Here are a few ways you can develop a fairly accurate ballpark figure.
Use Online Tools
Just keep in mind that some sites use results provided by other sites. If the information you receive from several online value sites seems uncannily similar, it could be due to the fact those sites all pull information from the same database.
You can also see what homes are listing for by checking your real estate agent's site. Some will also show prices for homes recently sold, and in many areas your local government website may list recent transactions including price, square footage, number of bathrooms, the age of the home - everything you need to make apples to apples comparisons. Similarity is important, because comparing similar homes is the best way to accurately estimate your home's value.
Just keep in mind that online tools may only be directionally-accurate, especially in rural areas or in areas where few homes sell on a regular basis. If you live in metropolitan Milwaukee, sites like zillow.com are likely to be fairly accurate; if you live in a smaller rural town, online tools may provide limited value.
Ask an Agent
Experienced real estate agents can quickly ballpark a home's value; they do it every day. A local real estate agent would be more than happy to give you an estimate of the value of your home even if you don't plan to sell right away. If you can, get two or three agents to provide a ballpark figure; compare the results you get to determine an average amount.
And while you're at it, ask the agent(s) to provide comparables. Using comparables is a great way to estimate the value of homes as well as other items. A comparable is a home that recently sold that is very similar to your home: Square footage, age, number of rooms/bathrooms, size of lot, etc. If you provide the agent with the specs for your home, he or she can quickly "pull comparables" for recently sold homes.
Go to Open Houses
Asking others for help is great, but sometimes doing your own Sherlock Holmes impression is useful, too. Open Houses are a great source of information: You can check out comparable homes to your heart's content and get a great sense of how your house compares to others currently for sale.
And while you're there, talk to the agents showing the homes. Agents hold Open Houses for two main purposes: To show the home being listed but also to meet other potential clients. As mentioned, a good agent will be more than happy to share their knowledge with you.
Get a Formal Appraisal
Another option is to pay for a professional appraisal of your home. A home appraisal is the expert determination of value by a certified and licensed professional. Keep in mind that an appraisal is still just an estimate. The appraiser, using a variety of tools and approaches, estimates what the home is worth. An appraisal value is not a guarantee of what the home will sell for.
But it is a widely used and relied upon tool. Mortgage and home equity lenders use appraisals to protect themselves from lending too much on a particular property. After all, you may agree to pay too much for a home; while the home is worth that much to you, it may not be worth that much to other buyers. Lenders will typically only lend up to a certain percentage of the appraisal value even if the home is being purchased for significantly more.
A formal, professional appraisal is the most accurate estimate of home value you can receive. The appraiser will evaluate the specifications and condition of your home, compare your home to comparables, and assess local market trends and conditions. The result is his or her best estimate of the value of your home.
Quick note: Keep in mind, a home appraisal is not the same as a home inspection. A home inspector looks for maintenance, mechanical, and other problems in the home. Appraisers may note obvious problems, but they do not test plumbing, electrical, heating and cooling, and other systems. An appraiser estimates value; an inspector evaluates the condition of a property.
Do you have a dependent* child/children? If so, you are likely eligible for a $100 (per child) sales tax rebate.
Recently, a law was passed in Wisconsin to return some of the state budget surplus of almost $400 million to taxpayers in the form of a Child Sales Tax Rebate. If you're eligible, you can claim the rebate between May 15 and July 2, 2018.
What is the Child Sales Tax Rebate?
It's a $100 rebate for sales and use tax paid on purchases made for raising a dependent child in 2017. You may claim $100 for each qualified child.
Who can claim the Child Sales Tax Rebate?
If you have a qualified child, you're likely eligible. A child may only be claimed by one individual.
A qualified child must be:
- Under ag e 18 on December 31, 2017
- A dependent of the claimant for tax year 2017
- A Wisconsin resident on December 31, 2017
- A United States ci tizen
How do I claim my $100 (per child) Child Sales Tax Rebate?
The fastest and most convenient way is to go to https://childtaxrebate.wi.gov where you will find more details, frequently asked questions and information. You can apply for the Child Sales Tax Rebate online 24/7, May 15 - July 2, 2018.
If you don't have internet access, you may file a claim by phone at (608) 266-KIDS, Monday - Friday from 7:45 AM - 4:30 PM. Please bear in mind that going online will be faster and more convenient.
What you need to file your claim:
- Your Socia l Security number and Wisconsin residency for tax year 2017
- Your qualified child's Social Security number and date of birth
- Bank routing number and account number for direct deposit
- If you are a nonresident or part-year resident that moved out of Wisconsin in 2017, you must submit receipts showing at least $100 of Wisconsin sales/use tax paid in 2017 for each child and proof that each child was a Wisconsin resident on December 31, 2017
SALES TAX HOLIDAY
In addition to the Child Sales Tax Rebate, the bill passed also included a sales tax holiday. Under the sales tax holiday, retailers are not required to collect sales taxes on qualifying purchases made from August 1, 2018 through August 5, 2018. Qualifying purchases are limited to the following items:
- Clothing with a price up to $75 per item.
- Computer purchased for the consumer's personal use, up to $750
- School computer supplies purchased for the consumer's personal use, up to $250 per item
- School supplies with a price up to $ 75 per item
More information is available on this sales tax holiday from the Wisconsin Department of Revenue at www.revenue.wi.gov/Pages/Individuals/SalesTaxHoliday.aspx .
*Dependent is determined using guidance described in IRS Publication 501, regardless of whether the claimant files a 2017 federal income tax return.
If you've been keeping up with news stories about the economy lately, you may have heard that "the Fed" has been raising rates, and is likely to do so more often in the future. What does this mean, and how will it impact you? Do you know what the Fed is and how it influences your money? Learning a bit more about how the central bank of the United States works and how it can impact your finances can help you make long-term plans for big financial decisions.
What is "the Fed"?
The Federal Reserve is the central bank of the United States. It is owned by private banks and operates independently of the U.S. government; it is not a government agency, though its Board of Governors are appointed by the President. The Fed has three mandates: maximize employment, stabilize prices and moderate long-term interest rates.
What does it do?
The main way the Fed accomplishes its three mandates is by raising or lowering the Federal Funds Interest Rate (the basis for most other interest rates). In general, when the Fed lowers interest rates, the goal is to stimulate the economy. Conversely, they usually raise rates when they want to slow down the economy and/or control inflation.
Does the Fed Funds rate impact me?
Yes. Even though consumers do not directly borrow money from the Fed, the banks that provide their car loans and mortgages do. Since the Fed Funds rate is the basis for other rates (by being the cost of what your bank must pay in order to get money) raising and lowering it affects the rates you, the consumer, can get from your bank. So, if you're in the market to buy a house and you hear that the Fed may be raising interest rates soon, you know to act quickly so you can secure a lower interest rate for your mortgage.
So are high rates bad?
No. While low interest rates on large purchases like homes are good for consumers, extended low interest rates (like we've seen over the past 10 years) means that the economy isn't growing very fast and consumers aren't earning much on their savings. When the Fed Funds rate goes up, depositors see increased interest rates on their savings accounts and CDs, so higher rates are a bonus for savers. It's also important to note the Fed raises rates a little at a time (usually only 0.25%) and the higher rates only affect new loans and loans with adjustable rate terms. Higher rates also mean the FOMC sees signs that the economy is getting stronger, which is good for everyone.
By keeping these basic concepts in mind, consumers can create a better financial plan for themselves. Be sure to speak with your friendly Waukesha State Bank banker if you want to learn more about the Fed. They'll be able to offer specific advice according to your accounts and circumstances.
No matter how careful you are, anyone can become a victim of financial fraud. However, older adults are particularly at risk. Those who commit elder fraud range from loved ones—family members, friends, or caregivers—to complete strangers. In its financial form, elder abuse is the exploitation of senior citizens to gain access to their property, investments, cash, or real estate.
Learn about common elder abuse scams and red flags below. You could prevent a loved one from becoming a victim.
Grandma Scams – "Hi Grandma! It's your favorite grandkid calling, and I need your help." Many seniors find it difficult to resist pleas like this and are more than willing to immediately wire money to their "grandchild" in need. The most important thing to do in this scenario is to verify the caller. Most scammers will plead with their "grandparent" not to tell anyone, but if you receive a call like this the fastest way to determine if the request is real is to contact another family member. Do not wire money or provide a credit card number until you've verified the identity of the caller.
"Free" Prize or Cruise Calls – Scammers call to inform an elderly consumer that they've won a sweepstakes prize or free cruise-they just need to send a "processing fee" or "cover shipping costs" to collect their winnings or tickets. Sometimes, these callers go straight to asking for credit card or bank account numbers. The best way to avoid this scam is to simply hang up. It is illegal to charge a fee to enter a sweepstakes. If the caller says you've won a cruise, ask what cruise line is involved and then verify the contest.
Fake Charities – This type of scam is especially popular after a well-publicized natural disaster. The scammer solicits "donations" and sometimes provides official-looking documents to prove the charity exists. When donating money, it's best to go through a well-known company and verify the organization or charity through the Better Business Bureau.
Red Flags for Abuse
Isolation – The number one tactic used by perpetrators is to separate the victim from family and/or friends who would stop the abuse. Watch for victims to stop attending social events or even disconnect their phone line.
Changes in spending habits – Drastic changes in account balances or unusually flamboyant purchases like cars and real estate are a sign that the senior citizen is not the person in charge of their finances. Keep a close eye on lavish "gifts" to new friends or acquaintances.
Unfamiliar names on joint accounts – Sometimes perpetrators convince their victims that they will help them organize their finances by creating a joint account. In reality, this gives the perpetrator unlimited access to the victim's funds. If a senior citizen wants another person to manage their finances, they should use a Power of Attorney (POA) account instead, which puts a legal obligation on the co-signer to protect the elderly person's interests.
If you notice these warning signs, what should you do about it? Visit ReportElderAbuseWI.org for more information about elder abuse and how to report it. You can also visit our Security Resources page to learn more about other scams and ways to protect yourself.
In preparing your child for college, you’ve taught them everything you know about life. But, if they can’t manage their finances while in college, your troubles are just beginning.
Sending a child off to college has to be one of the most momentous occasions a parent can experience. However, getting a monthly call from your college student asking for more money can get old really fast. We hope that we’ve instilled our children with good values and common sense by the time they leave for college, but that doesn’t always translate to sound money habits which are often formed over years of trial and error. Although managing finances through college life is not rocket science, it can present a challenge for young students who have never had to balance a checkbook. Parents can shorten the learning curve and equip their students to better navigate college life by teaching them some fundamental principles of personal finances.
Create a Spending Plan
It’s difficult to imagine any parent sending their child off to college without a budget. Money is always tight when it comes to paying for college, so there is little margin for error. Your goal as a parent is to stave off the monthly call and instill in your student the virtues of living under his or her means. It’s a tall order, but, it‘s achievable when all parties can adhere to a strict spending plan. College expenses are fairly straightforward. Tuition and rent are locked in. So, the variables are food, personal needs, transportation and fun.
Food: If food expenses are covered under a boarding arrangement, such as dorm dining, you still have to account for any off-board dining, such as fast food meals and late night munchies. Regardless, you will need to establish a fixed food budget that allows your student to eat more than Top Ramen every day. The food budget should be broken down into a weekly, if not daily, allowance. If he is budgeted for $10 per day and spends $15, he will need to get creative to spend only $10 the next day. Perhaps the budget should allow for one or two fast food purchases a week when the schedule gets too busy for cooking dinner or preparing a lunch.
Personal needs: Should absolutely be fixed. You can be sure that students know how to stretch their personal hygiene supplies, so they should never run low.
Transportation: If your student has a car for transportation, you will need to budget for fuel and maintenance. Hopefully he is driving a well-maintained car that won’t be in need of constant repair. If no car, then public transportation costs need to be included. This should be a fixed expense with very little wiggle room.
Fun: This is the big X-factor for college students. Many parents don’t budget for this; either because they assume their students are at school to work, and they should find free fun; or they put the burden of funding fun on the student through earnings from a summer job. It’s important to note, however, that any budget shortfalls are likely to occur as a result of overindulgence in fun. Parents and their students should agree on how much money should be spent on fun, regardless of who pays for it.
Many students have experience managing a checkbook before they leave for college. Of course, today a checkbook is really an online account that doesn’t require all the balancing and reconciling of the old days. Online accounts make it a lot easier for students to watch their cash flow and keeps things balanced; however, cash flow still needs to be managed to ensure there’s enough on hand to cover every expense.
The challenge for students is that there are sometimes multiple sources of income that need to be directed to multiple categories of expenses. For instance, they might receive a portion from their parents that are to be used for room and board. They also might receive a portion from financial aid or student loans that should be directed at tuition and books. They also might have their own source of income that they use for fun and extras.
To prevent comingling funds, which could lead to confusion and the inadvertent misdirection of funds, you should consider having your student use the bucket approach to cash flow management. For a college student, this might consist of managing funds from three separate accounts - one for tuition, books and school fees; one for room and board; and one for personal expenses. Each account has a fixed budget or spending target that can be easily tracked through separate online accounts. If one of the accounts has a surplus over the spending target, the funds can be transferred to another account to cover expenses, or transferred to a savings account.
Managing Credit Cards
Parents should be aware that, at some point, their students will be approached by a credit card issuer with an offer for a student credit card. They’re usually seen on campus during school events handing out applications. Parents who have experienced this will tell you that students and credit generally don’t mix. Although it’s probably a good idea for a college student to have a credit card that can be used in emergencies, you may want to consider setting up an authorized user account under your credit card account. That way you can keep track of the account and establish strict rules for its use. Some credit card issuers will report payments made on the account to the credit bureau, so your student can start building a credit history.
Preparing your children for launch is an 18-year endeavor which ultimately comes down to equipping them with the right tools and values to begin managing their own affairs. Teaching your college-bound student how to effectively manage his or her personal finances may be one of the last important life lessons they learn from you. And, whether they tell you or not, your student is concerned about his or her ability to get it right. It’s probably one of the most teachable moments you’ll ever have as a parent, so be sure to take full advantage of the opportunity.
During the holiday season, it seems that no matter how early those store decorations go up, we feel as though we’re suddenly caught off guard. Our holiday shopping turns into a sprint, and then quickly deteriorates into a spending frenzy. “The heck with the budget – full speed ahead! Cha-a-a-r-r-r-ge it!” But then the monthly statements start pouring in, and we are reminded of our credit card misdeeds. And, then we groan, “I’ll never do that again.” Okay, this is your chance to avoid the holiday shopping aftermath and keep your credit score from taking a January dip.
- Start with a clean slate: Hopefully you have managed to pay off your balances so that when you’re ready to hit the malls your limits are intact. It’s important to avoid hitting or going over your credit card limits.
- Fix your budget: Of course, this should have been done well in advance of the holidays so that you have been able to meet your living needs while setting aside savings. For many of us, holiday shopping requires that we tighten our belt for a few months. Look for non-essential budget items and cut them out until after January.
- Set a spending limit: How many times have you set a holiday spending limit only to blow through it? Do it for real this time. Set it and follow it. Don’t forget to include all of the holiday trimmings in your limit, such as drinks, meals, holiday travel, service tips (hair salon, paper boy, etc), and last minute gifts.
- Make a list: Don’t make your gift list until you have set your spending limit. It will help you prioritize your gift giving and allocate amounts to be spent. It’s supposed to also keep you from impulse shopping. If it’s not on your list, just say no.
- Spurn new offers: 'Tis the season for credit card offers. Good ones can lower your costs, but be careful about adding new credit cards just to increase your spending power (remember your spending limit). And, retail credit card offers should be avoided at all costs – they do little to increase your spending power and they can wreak havoc on your credit score.
- Spread it around: If you have more than one credit card, it would be important to spread your spending among them so as to avoid hitting the credit limit thresholds. If possible, you want to keep your balances below 30% of the credit limit on each card. Even if you intend the pay the balances in full, a maxed-out card can cause a temporary hit to your credit score.
- Reward yourself: This is the time to optimize your rewards and cash back strategy. Focus on opportunities to earn maximum cash back. Use your rewards points to purchase gifts when you can (they’re great for gift cards). And, check out your credit card’s online shopping mall for additional discounts.
- Be on fraud alert: Identity thieves and credit card fraudsters are out in full force this season, and it can’t be stressed enough to be on alert. Limit your online purchases to familiar shopping sites and never lose sight of your card at stores or restaurants.
- Be of good cheer: Studies show that people spend more and shop more impulsively when they are feeling in the dumps. Avoid using shopping as a means to lift your spirits. Get in good spirits before you go shopping.
- Pay it all off: This is the biggie. After you have run up your balances, you need to pay them off. For most people, the debt they run up during the holidays sets the tone for the next year. At the very, very least, make sure you pay down your balances to below 25% of the credit limit for each card.
What habits will your children learn about money? It starts with your own values, beliefs and habits. No matter what you tell them, your kids will always do as you do, not what you say.
Somewhere between the cradle and the college dorm, our children have been instilled with the values about money that they will carry with them well into adulthood. That can be a good thing, or it can be a really bad thing depending on what values were learned and how they were communicated by their parents. Undoubtedly, the issue of kids and money can be perplexing for parents who have all of the best intentions, but often find themselves on the defensive in issues about money. That may be because money is often discussed as the means to an end, or even an end, without an understanding of the underlying values of money and it works. Unlike the birds-and-the-bees discussion, the concept of money has to be demonstrated and reinforced through daily interaction.
Starting from the moment your toddler points to a toy and says, “I want!” money concepts should be taught throughout the course of your children’s young lives. More importantly, parents need to be mindful of their own money habits and how they will be emulated by their kids. More than any other aspect of life, money habits are transferred, inadvertently, when parents operate by the “do as I say, not as I do” form of parenting. Children, even at a young age, are extremely observant and impressionable when it comes to the actions of parents; and they’re more likely to emulate their parents than they are to heed their words of wisdom. Parents should be the first to know that “actions speak louder than words” and guard against transferring these bad habits to their children:
Money does Grow on Trees
No matter how many times they are told otherwise, kids do get the impression that money grows on trees when they see their parents whipping it out every time they ask for it. And, many times, kids don’t even have to ask for it. Money is often dispensed as a way to stop a tantrum in a store or as consolation to a disappointed teen. Each time parents go for the wallet, it perpetuates the money tree myth. Refraining from giving your children money is not about “tough love”; it’s all about letting them know that money is earned.
Money as a Reward for Good Behavior
When parents offer money as a reward for good behavior, kids might think they are “earning” it, and the parents might think it will lead to better behavior. Both the kids and the parents would be wrong. Rewarding good or even expected behavior with money can lead to a warped sense of entitlement for doing what is expected, which can get very expensive. If it will cost parents money to get better behavior from their children, who’s really in control? If, by good behavior you mean completing assigned chores on time or when asked, then that should be rewarded.
Money as a Substitute for Love
Due to the demands of life, it’s sometimes difficult for parents to give their time and attention to their children when they need it. It’s not unusual for parents to offer money as a way to placate their children or buy their happiness. However, when this “act of love” becomes routine, it could lead to resentment when the money stops. Children, who become accustomed to money as a replacement for love, may carry those expectations into adulthood, which could lead to similar habits when they become parents.
Money can Buy Happiness
We’ve all experienced that momentary sensation of pleasure when we get a nice bonus or when we splurge on something we’ve always wanted. But, if you’re honest about it, you’ll admit that the sensation was just momentary and nothing that would make us feel much differently about where we are in life. Even if you were able to string together a hundred of those moments, it wouldn’t necessarily make us any happier, because we would need more moments to keeps that feeling. When kids see their parents trying to buy happiness, it becomes a pattern that is easily mimicked, starting at a very young age. If parents can’t learn to appreciate the lifestyle they have by pursuing more, their kids are likely to follow course with no guarantee of increased happiness.
Not having Serious Goals
As young tots, children probably don’t have any sense of whether their parents have financial goals. Yet, at some point, we would like our children to understand the concept of setting goals and working to achieve them. Parents who do set financial goals, and back them up with actions, find it easier to transfer the concept to their children, largely because they actually believe in it. If we ask our child to set a goal and save his or her money to obtain it, they are much more likely to be successful when their parents talk about their own financial goals, and the importance of achieving them. When kids can see that their parents are serious about goals, planning and saving, they will find it a lot easier to emulate them than if they simply told the kids what they should do. It’s called “walking the talk.”
Watch Me and Learn
It’s scary to some parents just how smart and observant their children are – literal sponges that will soak up even the slightest detail in how we live our lives. Teaching children about money and imparting healthy habits about it starts with the parents own values, beliefs and habits. When raising children to meet the expectations we have for them, we first must be able to meet our own expectations for ourselves, because that is how our children will see us.
Putting off, or not making a contribution to an IRA can be easy. There may be other uses for the funds that seem more urgent - a vacation, a down payment on a new car, new furniture or maybe just leaving the funds in a regular account to build some liquidity.
However, making that $5,500 contribution, and even making it now instead of next April, can make a large difference when you retire. Many of the benefits of IRAs are obvious - tax deferred earnings, potentially a tax deduction with a regular IRA and the permanent tax-free nature of a Roth IRA.
Two of the not-so-obvious benefits should not be overlooked:
- Making IRA contributions forces you to save. Saving more automatically increases the amount you accumulate. Once this saving becomes a habit, you may not even notice you are doing it.
- By contributing early and often, your IRA balance has the opportunity to grow even more.
The cost of missing one IRA contribution
The tax deferred compounding within an IRA allows your money to grow faster since you do not have to pay any taxes while the funds are in the IRA. Roth IRAs provide an even better result since distributions are not subject to tax - ever. Consider what missing just one $5,500 contribution can mean. Of course, what you earn on your IRA is unknown and if it is a regular IRA your tax bracket when you take funds out is unknown, but the cost of delaying just one year can be significant.
|Starting Age||Accumulated Value At Age 65
and Earning 6%
|Accumulated Value At Age 65
and Earning 8%
|30 (35 contributions)||$612,891||$947,742|
|31 (34 contributions)||$573,011||$872,447|
|35 (30 contributions)||$434,820||$623,058|
|36 (29 contributions)||$405,019||$571,813|
|40 (25 contributions)||$301,755||$402,083|
|41 (24 contributions)||$279,486||$367,206|
|45 (20 contributions)||$202,321||$251,691|
|46 (19 contributions)||$185,680||$227,326|
Everyone's situation is different, there are no guarantees on what you can earn on funds within an IRA and your tax situation may suggest that consulting a qualified tax professional is advisable. However, just looking at this chart should demonstrate that consistently making IRA contributions makes sense. Furthermore, these numbers assume you only make contributions of $5,500 each year. The current tax laws provide for ability to make additional contributions beginning at age 50.
The cost of delaying to start contributing to your IRA can be significant. If you are age 30 and start contribution in 2018 instead of 2019 (and you earn 6% on your funds), you will have $39,880 more ($612,891 instead of $573,011) at age 65. Take advantage of the tax deferred compounding within the IRA and the higher limits to prepare for a financially secure retirement.
Searching for a Business Banking Relationship?
The Seven Questions a Business Banker is Never Asked…
The last time you ordered a meal through a drive-through window, did you peek in the bag to see if the order was correct? If something as basic as ordering a drive-through dinner frequently results in mixed outcomes, how much more likely are you to have significant frustrations from something much more complicated like establishing a business banking relationship?
One method to help avoid future complications is to understand a prospective bank’s service model through a series of focused questions. These questions can help you uncover what you and your management team can expect from a bank—and your banker—before selecting a new financial institution.
The business bankers at Waukesha State Bank have noted, through hundreds of customer interactions, that prospective clients tend to focus on three elements: interest rate, loan structure and loan covenants.
The implicit assumption is that every facet of banking is the same beyond that. However, banking models vary greatly from institution to institution. For example, almost universally, the regional and national banks have sought internal efficiency by centralizing key processes such as loan underwriting, approval, servicing, and documentation. This efficiency generally comes at the expense of less customization, less personal attention, and generally slower response times after the initial closing. However, these perceived “costs” don’t make that model wrong for companies that want the lowest possible interest rate and the fewest bank interactions. It really just depends on your situation and your expectations.
At Waukesha State Bank, our goal is to build a long-standing relationship with our customers. If you value the same, below are a few questions you should consider when interviewing a prospective bank:
- “Tell me about your decision making process. Where exactly, and by whom, are the decisions in the approval chain made? Who will structure my loan request, where will this occur, and how long will this process take? Can I customize my request?”
Usually, it’s better if your business is physically near wherever the loan decisions are made. In today’s banking climate, for loans of less than $1 million, your loan proposal may be a one-size-fits-all approach drafted by a processing center in a distant city. This means there is little chance you can customize the loan to your specific circumstances. For loans larger than $1 million, the approval process is likely to be multi-tiered and require a chain of approvals from people in many different states. So, while perhaps the first decision maker on that chain is local the rest are not. If your business encounters a rough patch or needs a rapid answer, this approval model may not work well.
- “Tell me about the strengths and weaknesses of my loan request? In terms of the weaknesses, tell me why you find those weaknesses acceptable and how will you will address these soft spots when my loan request is presented to your decision makers.”
It’s rare to get a loan request that doesn’t have any weaknesses. This probing question will help you determine how well this banker knows your business, your industry, and you. Also, any knowledgeable banker will know what proposed terms are likely to be changed during the underwriting and approval process. As such, the loan officer should articulately discuss where this might occur and why. This can help guard against over-promising.
- “Beyond providing credit and an attractive interest rate, tell me why I should bank with you?”
For most small businesses, a tenured business banker should be able to provide fresh insight into their business and act as a sounding board. This question is useful to determine if your service expectations and communication style match those of the bank. Again, service models vary. Some banks employ a pure sales model in which your loan officer will move on after loan closing leaving you with a rotating series of new college graduates to look after you. Other banks employ a hunter/skinner model in which the banker will be with you for the life of the relationship and know your business intimately. Again, it boils down to your expectations: Which do you prefer?
- “I keep hearing banks are moving upstream to larger customers or even shedding whole lines of business and customers. Tell me why you want me as a customer.”
This question can demonstrate how well you and your company fits with the bank. You should be able to determine whether you’re going to be a small fish in a big pond (or vice versa), as well as gain additional insight into the bank’s management metrics. Also, banks jump in and out of markets. You don’t want to find out in five years that your bank abandoned a market it was aggressively pursuing when you first met them.
- “In my business, like yours, customer service is important. Please tell me where my loan will be serviced, who will service it, who I will contact regarding servicing issues, and then the process of addressing servicing issues.”
If you don’t enjoy hanging out on the phone for 30 minutes when there are even minor servicing issues, you may want to dig into the loan servicing process. Listen for the names of people to contact rather than 1-800 numbers, centers, or other cities.
- “Unfortunately, business is fraught with peril: recessions, slow spells, etc. In the unfortunate case where my business has a loss, breaks a covenant, or needs to discuss its obligations, who will I discuss this with and describe the general process?”
Remember the Great Recession? This is probably the toughest question, but it’s worth asking. You’re trying to determine if this is a bank that will want to exit your business at the first sign of trouble, or if they will stick with you—and for how long: one quarter, two quarters, a year or two? You’re going to need to drill deep with this question, as your banker may avoid a direct answer if he or she is not comfortable with the bank’s service model.
- “Tell me, what is your personal value-proposition as a banker?”
This is a question that will help you determine how deeply committed your prospective banker is to you and your business. You’d hope that no matter what career we are in that we would all have a ready-answer to this question! Also, consider the longevity of your banker (ask them or look them up on LinkedIn). Do they move every three years, have they been in this line of work for some period of time, do they have a specialty, etc.?