AND NEITHER WILL YOU.
What can a Certified Financial Planner do for you that you can't do yourself?
A Certified Financial Planner will help you invest your money in such a way so as to minimize the risk of you losing your money, while at the same time helping you grow your money so that it doesn't lose value as a result of inflation.
Because stocks, bonds, real estate and commodities (which are referred to as asset classes) don't all go up in value or down in value at the same time, a Certified Financial Planner will help you invest your money across all these asset classes.
The idea is that even if one asset class goes down, others will maintain their value or increase in value.
As a result, your investment account will remain on the plus side overall.
For managing your investment account or providing investment advice, a Certified Financial Planner will charge you either a flat fee, a percentage of assets under management, or earn money directly from the commissions on the stocks and bonds he or she invests your money in.
What a Certified Financial Planner can't do
Every once in a way, comes a system shock that a Certified Financial Planner won't be able to protect you from. The stock and real estate bubbles of the last decade are an example.
When a big system shock happens, and it has happened several times through history (you should read about the South Sea bubble and Tulip Mania when you have the time), the value of most or all capital assets will plunge.
Most will recover over time. How long a period of time will depend on the magnitude and length of the run-up.
But some investments will go to $0.
These will include companies that were a good idea on paper but had no revenue. Like the many dot.bombs of the turn of the century.
But they could also include solid companies which made the wrong decisions at the wrong time and couldn't extricate themselves successfully.
Lehman Brothers is a classic example. A Wall Street stalwart, it nevertheless collapsed in the CDO debacle of this decade and its stock became worthless in 2008. Ouch!
So what's an investor to do?
Ask about Index Funds -- which are baskets of stocks or bonds. They offer far more safety than individual stocks and bonds.
While Index Funds do not protect you from market risk or macroeconomic risk, they will protect you from individual stock risk. Your money cannot go to $0 as in the Lehman example above.
Not surprisingly, professional investors like Warren Buffett of Berkshire Hathaway and Jack Bogle of the investment management company Vanguard advise investors who don't have time to pay attention to their investments to stick with Index Funds.
Most of us fall in this category.
But back to sharing with you the 4 lessons I didn't learn from a Certified Financial Planner.
These lessons are intended to save you from some of the mistakes I made as a new immigrant to the US.
The information will also apply to anyone who is just out of college and starting their financial life.
Feel free to pass it on to whoever you think might benefit from it.
Members of community associations like Kannada Koota of Northern California, Northern California Mangalorean Association and other such community associations come to mind. New immigrants to the Bay Area might be expected to join these associations.
Moving on to Lesson No.1 that I didn't learn from a Certified Financial Planner...
Fill your W4 incorrectly and it could be a ticking time bomb
When you go to work for a company, the payroll department gives you a form to fill called a W4.
The W4 is published by the IRS and it is used to determine how much federal and state tax should be taken out of your fortnightly or monthly paycheck.
If you fill this incorrectly, it will explode on you come tax time.
How so?
Simply, you may put too many deductions on it for your income, your tax bracket and your tax status.
If you do that, the payroll department will deduct less tax from your paycheck than required.
And you will underpay your taxes throughout the year.
Then when April 15 rolls around, your tax return will indicate you owe the IRS a chunk of money - with penalties. Ouch.
It happened to me.
In my fresh-off-the-plane-from-India days, I found myself owing $4000 to the IRS at tax-time because of an improperly filled W4.
So how does one go about understanding how to fill the W4 correctly?
I would advise you to spend some time understanding the tax code through J K Lasser's books or Fairmark.com.
You can also ask someone you trust.
But one way or another, get your W4 right.....to avoid any nasty surprises come April 15.
On to Lesson No. 2 learned through the school of hard knocks rather than from a Certified Financial Planner...
When you owe back-taxes to the IRS, the IRS installment plan may not be the smartest decision
If you have no liquid cash, your first instinct might be to use the IRS installment plan to pay your back taxes.
This may not be the smartest decision.
Because the IRS will charge you interest on the unpaid taxes.
Whereas if you can open a 0% APR credit card, you can pay off the IRS balance effectively avoiding these interest charges.
So if you are good with managing credit, check your mail for 0% credit card offers if you are ever in the situation of owing the IRS and don't have the cash to pay it off.
On to Lesson No 3....
"No Credit" is worse than "Bad Credit"
This was a real shocker for me.
Here I was, paying everything with cash or a debit card in my first couple of years in the US and feeling quite superior as a result of it - only to pay the price of being declined by every single company for an auto loan when I needed to buy a car.
Here's why.
Companies that provide auto loans need to run a credit check to approve you for an auto loan.
Since I hadn't made purchases of any kind with credit and in fact, didn't possess a credit card, I had no credit history for them to go on.
And so I was DECLINED. With a capital D.
I can't tell you how mad that made me.
Especially when the memory was still warm in my mind of being back in India and being invited by Diners Club to take out one of their credit cards -which, in those days had the exclusivity of receiving an invitation for the American Express Black.
Anyhow, long story short, I had to take out a secured credit card for a year to build up a credit history.
And then only did I become eligible for an unsecured credit card and for the car loan.
A humiliating, but educative experience.
Bottomline - "No Credit" is worse than "Bad credit".
So build up your credit history without delay. Make some purchases on credit.
Then you won't be denied an auto loan or a housing loan - when you need it.
And my final lesson for you today is....
Watch out for taxes on "phantom income" with ESPP sales
Yes, strange as it sounds, this can happen with ESPP sales.
You could buy shares under your company's Employee Stock Purchase Plan and sell the shares for a loss.
And then have to pay taxes on the "phantom income" generated by the sale.
Ouch. How could that be?
Your company would have granted you the shares at a discount to market price. A 15% discount is typical.
It is this 15% discount that becomes taxable if you sell the shares before 2 years have elapsed.
Like your salary, bonus and time-off which are all considered part of your income, so too the espp discount.
Keep this in mind when you make an ESPP sale.
So you are not taken aback by the "phantom income" from the discount that shows up on your W2. Like I was the first time it happened.
Note - you will need to separately report the loss on Schedule D of your tax return based on the 1099-B you receive from the broker who executed the sale.
Sounds confusing? Don't worry - there's a wealth of information available online on ESPP sales.
Visit Fairmark.com, Investopedia, Motley Fool, Turbo Tax or your broker's website and you will find this information.
These are 4 money lessons I learned the hard way.
But hopefully you will never have to.
Especially if you have a good memory for what you read and hear like my friend Sharon does.
Wishing you a Happy and Successful 2011.
What can a Certified Financial Planner do for you that you can't do yourself?
A Certified Financial Planner will help you invest your money in such a way so as to minimize the risk of you losing your money, while at the same time helping you grow your money so that it doesn't lose value as a result of inflation.
Because stocks, bonds, real estate and commodities (which are referred to as asset classes) don't all go up in value or down in value at the same time, a Certified Financial Planner will help you invest your money across all these asset classes.
The idea is that even if one asset class goes down, others will maintain their value or increase in value.
As a result, your investment account will remain on the plus side overall.
For managing your investment account or providing investment advice, a Certified Financial Planner will charge you either a flat fee, a percentage of assets under management, or earn money directly from the commissions on the stocks and bonds he or she invests your money in.
What a Certified Financial Planner can't do
Every once in a way, comes a system shock that a Certified Financial Planner won't be able to protect you from. The stock and real estate bubbles of the last decade are an example.
When a big system shock happens, and it has happened several times through history (you should read about the South Sea bubble and Tulip Mania when you have the time), the value of most or all capital assets will plunge.
Most will recover over time. How long a period of time will depend on the magnitude and length of the run-up.
But some investments will go to $0.
These will include companies that were a good idea on paper but had no revenue. Like the many dot.bombs of the turn of the century.
But they could also include solid companies which made the wrong decisions at the wrong time and couldn't extricate themselves successfully.
Lehman Brothers is a classic example. A Wall Street stalwart, it nevertheless collapsed in the CDO debacle of this decade and its stock became worthless in 2008. Ouch!
So what's an investor to do?
Ask about Index Funds -- which are baskets of stocks or bonds. They offer far more safety than individual stocks and bonds.
While Index Funds do not protect you from market risk or macroeconomic risk, they will protect you from individual stock risk. Your money cannot go to $0 as in the Lehman example above.
Not surprisingly, professional investors like Warren Buffett of Berkshire Hathaway and Jack Bogle of the investment management company Vanguard advise investors who don't have time to pay attention to their investments to stick with Index Funds.
Most of us fall in this category.
But back to sharing with you the 4 lessons I didn't learn from a Certified Financial Planner.
These lessons are intended to save you from some of the mistakes I made as a new immigrant to the US.
The information will also apply to anyone who is just out of college and starting their financial life.
Feel free to pass it on to whoever you think might benefit from it.
Members of community associations like Kannada Koota of Northern California, Northern California Mangalorean Association and other such community associations come to mind. New immigrants to the Bay Area might be expected to join these associations.
Moving on to Lesson No.1 that I didn't learn from a Certified Financial Planner...
Fill your W4 incorrectly and it could be a ticking time bomb
When you go to work for a company, the payroll department gives you a form to fill called a W4.
The W4 is published by the IRS and it is used to determine how much federal and state tax should be taken out of your fortnightly or monthly paycheck.
If you fill this incorrectly, it will explode on you come tax time.
How so?
Simply, you may put too many deductions on it for your income, your tax bracket and your tax status.
If you do that, the payroll department will deduct less tax from your paycheck than required.
And you will underpay your taxes throughout the year.
Then when April 15 rolls around, your tax return will indicate you owe the IRS a chunk of money - with penalties. Ouch.
It happened to me.
In my fresh-off-the-plane-from-India days, I found myself owing $4000 to the IRS at tax-time because of an improperly filled W4.
So how does one go about understanding how to fill the W4 correctly?
I would advise you to spend some time understanding the tax code through J K Lasser's books or Fairmark.com.
You can also ask someone you trust.
But one way or another, get your W4 right.....to avoid any nasty surprises come April 15.
On to Lesson No. 2 learned through the school of hard knocks rather than from a Certified Financial Planner...
When you owe back-taxes to the IRS, the IRS installment plan may not be the smartest decision
If you have no liquid cash, your first instinct might be to use the IRS installment plan to pay your back taxes.
This may not be the smartest decision.
Because the IRS will charge you interest on the unpaid taxes.
Whereas if you can open a 0% APR credit card, you can pay off the IRS balance effectively avoiding these interest charges.
So if you are good with managing credit, check your mail for 0% credit card offers if you are ever in the situation of owing the IRS and don't have the cash to pay it off.
On to Lesson No 3....
"No Credit" is worse than "Bad Credit"
This was a real shocker for me.
Here I was, paying everything with cash or a debit card in my first couple of years in the US and feeling quite superior as a result of it - only to pay the price of being declined by every single company for an auto loan when I needed to buy a car.
Here's why.
Companies that provide auto loans need to run a credit check to approve you for an auto loan.
Since I hadn't made purchases of any kind with credit and in fact, didn't possess a credit card, I had no credit history for them to go on.
And so I was DECLINED. With a capital D.
I can't tell you how mad that made me.
Especially when the memory was still warm in my mind of being back in India and being invited by Diners Club to take out one of their credit cards -which, in those days had the exclusivity of receiving an invitation for the American Express Black.
Anyhow, long story short, I had to take out a secured credit card for a year to build up a credit history.
And then only did I become eligible for an unsecured credit card and for the car loan.
A humiliating, but educative experience.
Bottomline - "No Credit" is worse than "Bad credit".
So build up your credit history without delay. Make some purchases on credit.
Then you won't be denied an auto loan or a housing loan - when you need it.
And my final lesson for you today is....
Watch out for taxes on "phantom income" with ESPP sales
Yes, strange as it sounds, this can happen with ESPP sales.
You could buy shares under your company's Employee Stock Purchase Plan and sell the shares for a loss.
And then have to pay taxes on the "phantom income" generated by the sale.
Ouch. How could that be?
Your company would have granted you the shares at a discount to market price. A 15% discount is typical.
It is this 15% discount that becomes taxable if you sell the shares before 2 years have elapsed.
Like your salary, bonus and time-off which are all considered part of your income, so too the espp discount.
Keep this in mind when you make an ESPP sale.
So you are not taken aback by the "phantom income" from the discount that shows up on your W2. Like I was the first time it happened.
Note - you will need to separately report the loss on Schedule D of your tax return based on the 1099-B you receive from the broker who executed the sale.
Sounds confusing? Don't worry - there's a wealth of information available online on ESPP sales.
Visit Fairmark.com, Investopedia, Motley Fool, Turbo Tax or your broker's website and you will find this information.
These are 4 money lessons I learned the hard way.
But hopefully you will never have to.
Especially if you have a good memory for what you read and hear like my friend Sharon does.
Wishing you a Happy and Successful 2011.
No comments:
Post a Comment