It sometimes seems as if the wealthy simply appear into the world that way. Yes, some are born into money, but that isn’t the case across the board. Many of my wealthy clients have had to work their way up the scale — and to do so, they’ve had to adopt a different set of habits from most other people.

We can learn a lot from them, these among our ranks who had to create the wealth they now enjoy. More precisely, it’s the habits that got them to where they are that we need to focus on and learn from.

So, as I’ve watched clients go from one end of the scale to another, over the years, here are five habits I’ve seen them all carry…

1. Putting off today what you can have tomorrow
The wealthy usually carry a willingness to live beneath their means for as long as it takes to reach their financial goals. While their peers are showing a tendency toward embracing the good life at the first sign of prosperity, the would-be wealthy take a pass on all of that.

While others are saving 6-10% of their annual incomes — usually for retirement — people who want to be wealthy often save 20, 30, 40 or even 50% or more of their incomes.

Imagine how much money you’d have saved in 10 years if you saved half of your income during that time? The fact that no one ever sees this happen is one of the reasons that people believe that the wealthy some how “come into money.”

2. Spending well
The self-made wealthy learn early in life that you never pay full price. The combination of this habit with delayed gratification is a powerful force when it comes to growing wealth. Not only do you spend as little money as possible, but you buy at a discount when you do.

While most people are buying the most expensive house they can afford, the rich-in-progress buy beneath their means, and buy the cheapest house in the neighborhood to boot. They first ask themselves, “how much house can we truly afford right now?” The same is true of buying cars, if one wants to be rich someday, he buys a conservative car — and buys it used.

3. Fleeing from consumer debt
Debt represents a reduction of future cash flow and the wealthy will avoid it. By paying cash on the barrel, there are no strings attached to what you buy that might compromise your ability to continue saving money at a high rate.

Notice how the drive to save large amounts of money causes frugal spending habits, which then enable the ability to make purchases without using debt; the three habits combine to form a pattern that brings the aspiring rich to the point of great wealth earlier than an outsider might expect.

4. Seeking low risk/high yield investments
If you want to be rich, the first rule of investing is to not lose money! If you have a small amount of money to invest you might be tempted to put it all into high-risk growth stocks in the hope that a big run-up in value will make you rich. But if you have — or hope to have — a large portfolio to invest, you might not take that kind of risk. Your investments will be in assets that are unlikely to collapse in price, reasonably likely to grow in value over time, and able to provide a steady cash flow while you wait for them to grow.

For the rising rich, a perfect investment asset might be an undervalued (and therefore very likely to grow) blue chip stock (not likely to collapse) with a history of above-average dividend yields (steady cash flow). He doesn’t need for his investments to make him rich — he’s already on his way there, and just wants to further grow his wealth, steadily and predictably.

5. Proper career focus
My wealthiest clients have the ability to center on the most profitable ventures and to let go of nearly everything else. They often do this by delegating non-profitable activities to others or maybe even to make them somehow go away.

This is easier to do when you have money to pay others to handle them for you, or when your finances are relatively uncomplicated. If, for example, the rich person has a business, he might pay someone to handle specific aspects of the operation that are necessary but produce little or no revenue. That frees him to concentrate all of his efforts on generating more income for his business. As a result, his business and his income grow much more quickly, making him wealthier still.

One thing I’ve seen in my clients with means: Becoming wealthy’s really a lifestyle as much as anything else. Once you adopt it — by living beneath your means, staying out of debt, and saving large amounts of money constantly, you have capital to invest (conservatively) and to pay others to free you up to make even more money. It’s not so hard to see why the wealth of the self-made rich seems to spring out one day as if there’s a winning lottery ticket in the mix.

But that’s simply not the case, and my self-made wealthy clients know this.

Financial Planners Virginia
Financial Advisor Richmond
Financial Planner Richmond

The Best Reasons To Give To Charity

We’re into the final quarter of 2012, and since this is the biggest quarter of the year for giving, I’d like to take the opportunity as your “financial coach” to make a few points about giving to charity.

Why *do* you give to charity? Is it for the tax deductions … or for a different reason?

Now, as a tax professional, I’ve got no problem helping my clients use all available deductions to their utmost, ethical advantage. But I love it when I see my clients and friends make giving decisions which seem to run counter to immediate, short-term self-interest in their giving.

And, I believe it’s actually “enlightened” self-interest in the long run. And not just in our sense of feeling good.

I see the balance sheets of folks from every walk of life, and over the years I’ve noticed an interesting phenomenon: individuals and families who make giving a priority, even when they aren’t “wealthy”, seem to do better in the long run. And I mean financially — not just in their state of mind.

(Though, there are great “state of mind” reasons for giving. Have you seen, as I have, that those who freely give seem to be more pleasant company?)

I make it a point to seek to observe how money works. And, for some reason — money gets attracted to those who aren’t in hot, desperate pursuit of it. It’s almost like in romance–potential lovers are usually turned off by the overly-aggressive seeker.

So, because of the looming fiscal realities in Washington, and the charitable deduction rate goes down from the current 35% of what you donate, may I suggest that you consider increasing your giving? You might be surprised by what happens in your heart.

Financial Advisor Richmond
Financial Planner Richmond
Financial Planners Virginia

I’ve recommended before that couples who are ultimately planning on one person staying home with children, start running their finances and their budget that way from the beginning. That’s simply the best way to be prepared for what is to come.

I’ve also pointed out that one of the best times to save is before having children. But with marriage happening later and later in our culture (and the transition into parenthood for those marriages therefore happening perhaps a bit more quickly than it otherwise might), this important savings period has been crunched. So here’s some quick advice for those who are single: realize that you are saving now for your future family’s financial life.

That aside, here is some advice for those who are starting down this road toward a single income for their family, or even for those who already find themselves walking it out…

Take A Trial Run
I recommend that couples contemplating a stay-at-home arrangement first take a period of living as if they had only one income for at least three months before one of them quits a full-time job. They may find that even though their expenses will be cut for needs such as day care, transportation and clothing, they may find it hard to continue to dine out frequently or splurge in other ways. If that’s you, it’s a good idea to bolster an emergency fund to cover unexpected things that come up, such as household repairs.

It’s even better if this “trial run” can begin at the start of a marriage, which should allow for a fantastic period of saving before having children.

Life Insurance for Two
Couples should buy life insurance on both partners, not just on the working spouse. If the stay-at-home parent dies, the surviving spouse can use the benefits to pay for outside child care, live-in nannies, housekeepers and other functions that had formerly been handled by the stay-at-home parent.

I see clients using this advice, and then dropping the insurance as their youngest was heading to college — and that’s smart.

Using Home-Based Deductions Rightly
If the stay-at-home parent or both parents operate a home-based business, both should be listed on IRS Schedule C and all related business documents when they file taxes.

I’ve reviewed past returns (which we do for free, for non-clients — our clients, of course, already being well taken care of!) where only the information of the spouse who actually filed the taxes was submitted, in effect denying the other spouse from accumulating Social Security benefits.

Lastly, a word about what’s most important: YOU. Stay-at-home parents should make sure they are well on their way to funding their own retirement before paying for a child’s college education. The best thing you can do for your kids is to take care of yourself first. If your children have to take out student loans, despite all the bad publicity, they do have 40 years to pay those loans back — and at favorable interest rates, at that.

Financial Advisor Richmond
Financial Planner Richmond
Financial Planning Virginia

When I started university, I was a little nervous about what was about to transpire. Honestly, I thought I might be biting off more than I could chew. I should have known that I had little to worry about. But there are a few things I wish I had known — or at least thought about — before entering college…

Who is paying for college? Many have their undergraduate education paid for by parents, scholarships, and/or loans in their name or their parents'. If your parents are paying for your education, be careful not to fail any courses. If you fail a class required for your degree, you will have to take that class again, paying for it twice. It’s not worth it, particularly since it’s usually difficult to outright fail a class. Paying for college yourself supposedly gives you ownership of your academic decisions while in school, but if you’re in a situation where you don’t have to worry about affording your own tuition, then consider yourself lucky.

Work shouldn’t interfere with studies. I am quite grateful I didn’t have to pay for all of my undergraduate education. It allowed me to focus on my education and extracurricular resume-building activities in my field rather than focusing on earning income to afford tuition. I did find a few jobs, however. I stayed on campus for winter and summer sessions to take more classes, but with a lighter load during these in-between semesters, I held various part-time jobs, and these jobs provided me with a little extra cash. I probably spent it just as fast as I was earning it, however.

Open a Roth IRA. These retirement accounts were brought into existence about 16 years ago. If I had had a way that I could put money away for retirement in a tax-advantaged account while I was in such a low tax bracket, I might have taken advantage of the opportunity. Then again, I might not have. It’s hard to imagine retirement before you’ve officially begun a career, but it’s harder to argue with long-term investing in the stock market–even in these times of economic uncertainty.

Like many, I played the “stock market game” in elementary school. By the time I entered college, I probably knew only a little more about investing, but my interests lay elsewhere so I did not particularly think about having a secure financial future. I’m not going to go on and on about the power of compound interest here, but suffice to say–it’s incredible when you start in college.

Avoid credit cards. The credit card companies are (still) vultures on college campuses. The companies set tables outside the dorms with applications and free tee-shirts, enticing sub-fashionable freshmen (like myself, at the time) to sign up. Although I escaped relatively unscathed, having a credit card without a job is asking for trouble.

One particularly sneaky aspect of college-geared credit cards is the introductory offer. Even with the recently-passed CARD Act, the fine print on these deals are heavily weighted AGAINST the college student, and (of course) in favor of the banks.

Further, here are some other goodies for the financially-savvy student:
* Use credit cards sparingly
* Pay all credit card balances in full
* Get the best deal on a checking account
* Start saving
* Keep track of your spending
* Set a limit on entertainment
* Shop at second-hand stores
* Keep an eye out for free money
* Get a part-time job with tips
* Walk or ride a bike — don’t drive
* Look for student discounts
* Don’t eat out all the time

Had I known what I know now about compounding interest and the tendency for the stock market to increase over time, not just theoretically but from experience, I’d be in an even better financial position right now.

And it’s not about having more money, it’s about having more options for doing the things we like to do.

Financial Advisor Richmond
Financial Planner Richmond
Financial Planners Virginia

Believe it or not, now is the time to start making sure that you’ll be ready for a few months from now, when tax time is upon us!

Generally speaking, you should keep any and all documents that may have an impact on your federal tax return. Individual taxpayers should usually keep the following records supporting items on their tax returns for at least three years:

• Bills, Credit card and other receipts
• Invoices, Mileage logs
• Canceled, imaged or substitute checks or any other proof of payment
• Any other records to support deductions or credits you claim on your return.

You should normally keep records relating to property until at least three years after you sell or otherwise dispose of the property. Examples include…

*A home purchase or improvement
*Stocks and other investments
*IRA transactions
*Rental property records

If you are a small business owner, you must keep all your employment tax records for at least four years after the tax becomes due or is paid, whichever is later. Examples of important documents business owners should keep include:

• Gross receipts: Cash register tapes, bank deposit slips, receipt books, invoices, credit card charge slips and Forms 1099-MISC
• Proof of purchases: Canceled checks, cash register tape receipts, credit card sales slips and invoices
• Expense documents: Canceled checks, cash register tapes, account statements, credit card sales slips, invoices and petty cash slips for small cash payments
• Documents to verify your assets: Purchase and sales invoices, real estate closing statements and canceled checks

Here’s the best part of all of this: By pulling together this information NOW, we can really work our “magic” and ensure that we aren’t simply playing catch-up for you after the fact. That’s what tax planning is all about.

Financial Advisor Richmond
Financial Planner Richmond
Financial Planners Virginia

As I took a look at the different return data on the Tax History Project’s site, mentioned above, I noticed that candidates for the presidential office tend to make some tax decisions that are fairly infrequent compared to the general population. I found this to be interesting … so here are the three main points of difference:

Campaign Donations.
You know that little box at the top which offers you a chance to donate additional money to the Treasury ($3) for use in the campaign? Well, this is the only way (that I know of) for a taxpayer to tell the Treasury where to spend some of their dollars. By checking the box, $3 of a person’s income tax towards the Presidential Election Campaign Fund, which is the source of the public funding for presidential candidates.
Obama opted yes,
Biden opted yes,
Romney opted yes (so far, based on his preliminary return),
Ryan opted no.
Checking the yes box is pretty rare. The Federal Election Commission notes, “participation in the tax checkoff program has declined each year, from a high of 28.7% for 1980 returns, to 6.6% for returns filed with the Internal Revenue Service (IRS) in 2010.” How much money does the check-box allocate? The IRS reports that Presidential Election Campaign Fund received “contributions of $40.8 million in Fiscal Year 2010 and $39.6 million in Fiscal Year 2011.” (Source: 2011 IRS Data Book.)

Applying Refunds To Next Year’s Taxes. Persons running for the Oval Office tend to forgo getting an immediate refund and instead prefer to apply the refund as a payment towards next year’s taxes.
Obama applied all his 2011 refund towards his 2012 taxes,
Biden had a small tax amount due, so he had no refund to apply to next year,
Romney plans to rollover all his refund (based on his preliminary return),
Ryan applied most of his refund to next year’s estimates.
I don’t see this terribly much. Typically I find that only some self-employed, retirees, and other persons who routinely pay estimated taxes are more willing to let their refund “roll over” as a payment towards next year’s taxes. Last time we had clear data (in 2009) this was only done in about 3% of all tax returns.

The “Dreaded” Alternative Minimum Tax. Presidential candidates often have incomes and deductions that trigger the AMT. Every taxpayer is required to pay the higher of the alternative minimum tax or the regular income tax, and for most people the regular income tax calculations do come out higher than the AMT. We do what we can around here to try to avoid it for our clients, when possible. But here’s what our presidential friends did:
Obama paid 12,491 of AMT in 2011
Biden paid 6,805 of AMT in 2011
Romney estimates his AMT bill will be 224,425 for 2011
Ryan paid 11,684 of AMT in 2011

Kinda interesting … right?

Financial Advisor Richmond
Financial Planner Richmond
Financial Planners Virginia

Can you believe that the school season is already starting in some areas? This summer has absolutely FLOWN by — and we’re eagerly eyeing the resolution of the upcoming elections, and Congressional action on a whole slew of tax-related items.

Because if they don’t do something about the tax rates, we’re all staring at a huge rate increase, and a variety of tax credits going bye-bye on January 1, 2013. On top of this, with the economy still sputtering, continued chaos in the Middle East … well, it can be a little hairy out there.

Which is why it’s so important for you to maintain your peace in the midst of it all.

Look — it’s no mystery, probably, why I choose to write so often about maintaining the proper perspective. We see clients in here regularly (yes, even outside of “tax season”–more about that in a moment), and you probably wouldn’t believe how often we have the same kinds of conversations. Finances touch a deep place of security (and fear) for so many, NO MATTER how much is in the bank accounts.

From the very well-off, to those deep in debt … everyone can pick and choose their poison these days, when it comes to fear.

I often play the role of counselor, in addition to helping folks navigate their way through this stuff. Because families and business owners make rash decisions in times of perceived crisis–and they often have unforeseen tax and wealth complications from those decisions down the road.

Which is why it’s critical that we take a look at how things are set up for you and your family for the rest of 2012. Midyear is the perfect time to take a clear-eyed look at things, and plan for the best outcome for your family or business.

And so we’re going to make it easy for you. We’ll encourage you, give you good options…and point you into the best direction for your long-term wealth preservation and growth.

Financial Advisor Richmond
Financial Planner Richmond
Financial Planners Virginia

I wrote last week about the different life stages we go through, and how it affects our finances. It’s based on the work of Nobel-Prize-winning MIT Professor, Franco Modigliani, who separated our financial life into four distinct phases:

1. Before having children there is often a surplus of income.
2. While raising and educating children, there is often a deficit when the family is spending more than they are earning.
3. When children go out on their own, families often have a surplus again.
4. In retirement, the surplus is small if it is there at all.

I offered a couple of conclusions from this, last week, and (based on feedback, as well as the fact that I still had more in me on the subject) I’m continuing it this week.

What I advised last week:
1) When you are starting out, don’t try to duplicate your parents’ lifestyle.
2) Encourage your children to save as much money as they can in their 20′s.

A few more important financial thoughts — ones which can help create a generational legacy, even change an entire family line…

3) Avoid debt while raising a family.
Expenses multiply once children arrive. The one-bedroom apartment is replaced by a four-bedroom home with a mortgage. If expenses for food, clothing, medical, dental, clubs, camps and lessons aren’t enough, children have their own set of endless desires.

The average cost of raising a child to age 18 in 2012 dollars, totals about $300,000. After a third of a million dollars in payments, the balloon payment comes at the end when college expenses are often financed through student loans and additional mortgages. During these years, many couples wish they hadn’t spent their pre-child surplus!

Families find it challenging to live within their means during this phase of life. But you can live more simply in order to live debt free. Truly — run the numbers on it, and it’s clear — the difference between middle income and multi-millionaire in the long run is a few hundred dollars a month in saving and investing.

4) Stop telling yourself you will get your finances in order later.
The average American family runs their financial affairs in such a way that if they were a publicly-traded company, their stock price would plummet, the business would go bankrupt and the people in the accounting department would be taken away in handcuffs.

You can’t postpone financial faithfulness any more than you can postpone marital faithfulness! Your habits set your financial DNA, and habits are simply habit-forming.

Many people mistakenly believe that life comes in three stages: learning, working and recreation. They think that until they are toward the middle or end of the working stage of life, they don’t need to worry about finances.

Everyone in America can save something. Whatever you save, the magic of compound interest produces incredible results. It is far preferable to know what you need to save than to arrive at retirement unprepared.

5) Get a retirement checkup before you turn 50.
For most families, expenses drop significantly after children leave home. Although starting younger is obviously more ideal, these are the years when many families realize time is running out to prepare for their retirement and they seek professional financial advice.

So the good news is that this period provides a second chance to save and secure a financially comfortable retirement. If you are in this stage of life, you need to know exactly how much you must save to achieve a comfortable retirement. You don’t have the luxury of guessing at the appropriate savings rate.

The lessons to learn from Modigliani’s work are simple: “Before the children arrive, squirrel it away. Don’t eat more nuts than you can afford in the winter … and when spring arrives (when the children go out on their own) you get one last chance to save for that big nut!”

Financial Advisor Richmond
Financial Planner Richmond
Financial Planners Virginia

The good professor separated the life cycle into four distinct phases:

1. Before having children there is often a surplus of income.
2. While raising and educating children, there is often a deficit when the family is spending more than they are earning.
3. When children go out on their own, families often have a surplus again.
4. In retirement, the surplus is small if it is there at all.

So, conclusion follows: Saving during the two surplus periods of life is crucial to financial well-being later in life. Before the children arrive, squirrel away some money. And when the children leave home, you typically get one last chance to save for retirement or family legacy.

There are a bunch of financial “life lessons” to be gleaned from this research, and in my opinion, it can relieve people to understand where they are in the context of their life cycles, even if it doesn’t go exactly according to the above breakdown, in your family’s particular case.

I’ll start with a few lessons this week, and will add some more next week.

1) When you are starting out, don’t try to duplicate your parents’ lifestyle.
Most of today’s college graduates are ill-prepared for the real world of financial responsibility. They never saw how their parents lived when they were first married and struggling. As a result, they can base their after-school expectations on an upper-middle-class lifestyle. My suggestion for parents? Repeatedly emphasize, and show, that success is earned from the bottom up.

So, for example, if you are a young adult, you can’t afford more house than your budget will allow. If you spend 50% of your lifestyle expenses on housing, you will not be able to live proportionally on the rest of your income. Too much house is one of the most common mistakes young people make.

It is almost as though we can’t feel successful without immediately enjoying the lifestyle of our parents at the height of their careers! So, help your children decide how much house is enough, and help them to calculate what they can buy for 30% of their standard of living.

2) Encourage your children to save as much money as they can in their 20′s.
Early in your career, when the cost of basic needs is small, income often easily covers expenses, allowing the surplus to be used for savings, investment or added consumption.

Many young people assume they are doing so well financially that they can simply spend their extra money on more stuff. They don’t realize that these years of plenty won’t last.

During this period, save and invest up to 50% of your disposable income for future expenses. Fully fund Roth accounts, and fund 401(k) plans to take advantage of any employer match. Save 10% of your take-home pay for future large expenses. Put an additional 5 to 10% into long-term taxable savings.

This advice is especially important for those who delay marriage until they are in their 30s. Don’t waste a decade of prime saving and investing. You owe it to yourself and your future family to store up those nuts now.

Financial Advisor Richmond
Financial Planner Richmond
Financial Planners Virginia

A thoughtful estate plan can make your heirs’ lives easier. But it is your parents’ estate planning that will make your life easier.

Not every family has fostered the ability to speak openly in love–I’ve written about that necessity in the past. But if you have begun that process, here is an outline of what grown children need to know about their parents’ business. In fact, adults of any age should update their estate plan every year.

And, as a parent, if you are willing to share some of this information with your children–especially if one of them is also the executor of the estate–they’ll appreciate having the facts and be more prepared emotionally when the time comes. They will know your wishes ultimately anyway, and good communication will lessen any surprises ahead of time. They will benefit from knowing the answers to the following questions:

Do you have enough saved for a comfortable retirement? Many financial planners use a safe withdrawal rate by age to make sure their clients will still have enough money toward the end of their retirement. But this isn’t always the case, and it’s worth looking into.

If your spending is under this withdrawal rate, you have more than enough and probably can leave a legacy to your heirs. But if you are over this rate, you may run out of money and have to compromise your standard of living abruptly. It may be uncomfortable, even embarrassing, for parents to share their finances with their children, but grown children often want to know how their parents are doing.

Where are the important documents? The five documents your children should be able to retrieve quickly are a will, a living will, a power of attorney, a directory of basic information and the latest end-of-year financial statements.

The directory of information should list the assets of your estate along with account or policy numbers and contact phone numbers. It also helps to indicate your intentions for the distribution of each asset, which will help confirm you have the correct titling and beneficiary designations on every portion of your estate.

You may have structured your will to divide your estate equally among your children. But if you have tried to make it easy for one child to access your bank accounts by adding his or her name, you have overridden your estate plan and left that child joint tenancy with complete rights of survivorship. This can be a problem.

Titling and beneficiary designations are legal estate planning actions. It’s best to review them with your legal advisor. Various types of assets are best designated differently in the estate plan. This is not the occasion for do-it-yourself thrift. It is a rare family that has compiled and reviewed a complete list of estate assets: bank accounts, investment accounts, retirement account, real estate holding, life insurance, health savings accounts and so on.

Are there any special bequeaths? Any promises you want kept should be documented. Your good intentions won’t matter if you aren’t around to implement them. If you have promised money to a charity and want that obligation kept, document it. If you have promised to loan a child money, document it. If you have promised to help fund your grandchildren’s college education, document that. Without documentation, none of these promises can be kept if you aren’t around to make the decisions.

Are there plans to remarry? If parents have remarried, intergenerational estate planning is even more critical. Prenuptial agreements and careful estate planning are required in the case of second marriages to avoid disinheriting children or grandchildren from the first marriage. The default is rarely a good option.

Do you have any prepaid funeral arrangements? Do you want to be buried or cremated? Do you have any preferences for a memorial service? Although it may seem macabre to plan your own funeral, a memorial service takes time and thought. It will be that much more special and comforting to your family when it is filled with your favorite music and readings.

Encourage your children’s interest in your estate planning. Most of the time, their intentions are honorable. They may simply want to understand your values and therefore your wishes.

Financial Advisor Richmond
Financial Planner Richmond
Financial Planners Virginia