Dollar Cost Averaging - Creating Good Money Behavior

The increase in volatility to start 2018, coupled with the almost 9-year bull market run has caused many sophisticated investors to question when to buy and when to sell. So, it’s important to remember that there is a very simple investment strategy that doesn’t require you to stare at trading screens all day – Dollar-Cost-Averaging.

It isn’t new and exciting, but many a successful investor has proven its worth. The principle behind it is this: You put the same amount of money into the same investment on the same day each month. Those months when the investment’s price goes up, your set amount does not buy as many shares. But when the investment‘s price dips, you get to buy more shares at a cheaper price.

Guess what? When the price goes back up, all those shares you bought cheaply make you some money. Those shares you bought when the price was high look good, too.

There are a few reasons to invest this way:

Celebrate Twice

First, it takes the guesswork out of trying to predict what the stock market is going to do. It’s easy to lose money seeking to time the market. Even professional investors can be pretty bad at it. As long as you feel good about the investment you buy, you know that the fundamentals are right, and your situation has not changed, you shouldn’t care what the stock market is doing day to day.

In fact, maybe you should celebrate when the market dips and you buy because you get to buy more shares that you think have great long-term prospects.

And you celebrate again when the market rallies because all your shares are more highly valued. You win either way. Also, you won’t have to put so much time and energy into investing. You can focus on your career and family rather than obsess over your portfolio.

Disciplined Approach

Next, Dollar-Cost-Averaging creates a disciplined approach to building wealth. You are now on a path to save and invest regularly, building wealth one month at a time. Yes, we have all read about those hot stocks that made someone rich overnight. But for most of us, it’s going to take a working lifetime to accumulate our wealth.

It Doesn’t Take Much to Start

You can do this for as little as $100 per month and many platforms don’t even have a minimum. You don’t need thousands of dollars to get started or to continue your dollar cost averaging plan. So, no excuses.

Some Things to Think About

·       Start with a monthly amount that won’t break your bank. This is money you won’t miss on a monthly basis.

·       Commit to a Dollar-Cost-Averaging program of at least 12 months. It takes time to build wealth and see the results of your efforts.

·       Don’t wait for the price to go up or down. The key is consistency. Don’t vary the amount based on how much is in your savings account that day, either. Set it up for the same day, same amount, same investment.

·       Don’t stop it when the market retreats. If you still believe in your investment, keep investing. Remember, in a down market you are buying more shares for less money.

Final Thoughts

The Dollar-Cost-Averaging approach is about building wealth steadily, consistently and with discipline over time. It’s about creating and strengthening good money behavior. When you do this for 10 years and see your accumulated balance, you won’t care that you didn’t invest exactly on the best day in the market in 2018.

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How to Avoid Scams at Tax Time

Here’s what to know and how to protect yourself.

Identity thieves often swipe your bank or credit card account numbers, birth date information or Social Security Number (SSN) to steal from your accounts, open a new and phony account or make illegal purchases. Some 15.4 million consumers were victims of identity theft or fraud last year, according to a new report from Javelin Strategy & Research.

All sorts of nefarious schemers can come after you via the phone or email. Your tax return offers a trove of your personal information, and this time of year scammers also prey on your apprehension about paying taxes.

The Internal Revenue Service recently published its latest list of scam warnings, freely admitting, “It’s true: Tax scams proliferate during the income tax filing season.”  

Among IRS tips:

• Beware of unexpected communication at the start of tax season that claims to come from the IRS.
• Don’t fall for phone and phishing email scams that use the IRS as a lure. The fake messages typically probe you for personal information thieves often pose as the IRS offering a bogus refund or warning you to pay past-due taxes – sometimes, with phone scams, threatening you with immediate arrest if you hang up.
• The IRS sends letters by postal mail and initiates no contact with taxpayers by email to request personal or financial information. This means any e-communication, such as text messages and messages over social media.
• The IRS doesn’t ask for personal identification numbers (PINs), passwords or similar confidential information for your credit card, bank or other accounts.
• If you get an unexpected email, open no attachments and do not click links in the message. Forward the email to phishing@irs.gov. See more about reporting phishing scams involving the IRS at the agency’s website.

(Note: Only IRS.gov is the website of the U.S. government's Internal Revenue Service.)

Source: Federal Trade Commission, Consumer Sentinel Network.

To protect against scams and identity theft:

• Don’t carry your Social Security card or any documents that include your SSN or Individual Taxpayer Identification Number (ITIN). Don’t keep forms containing that information in your car, either.
• Don’t give any business your SSN or ITIN just because someone who claims to represent the company asks. Give such information only when required and when positive who you’re talking to.
• Check your credit report every 12 months. Stay aware of your credit status and learn quickly about any illegal use of your credit or accounts.
• Secure personal information in your home.
• Protect your personal computers with firewalls and anti-spam and anti-virus software, updating security patches and changing passwords for your home Internet accounts.
• Give no personal information over the phone, through the mail or on the Internet unless you initiated the contact and are sure of the recipient.
• Choose a tax preparer carefully. Most preparers provide excellent service a relative few are unscrupulous. The IRS recommends watching for preparers who try to manipulate or change your income figures or makeup deductions to qualify you for tax credits and unusually large refunds.

Tax season brings enough to worry about. Cross identity theft off your list.

When planning for retirement, most Americans think mainly about using tax-advantaged savings vehicles like 401(k) or individual retirement accounts, while failing to consider the triple tax advantages associated with saving for future health care costs using a health savings account, or HSA.

First established under the Medicare Modernization Act of 2003, HSAs are tax-exempt savings plans that must be paired with a high-deductible health insurance plan that meets certain criteria. An HSA owner can make tax-deductible (or pre-tax, if through an employer) contributions to the account, which can in turn be spent tax-free on qualified health care expenses, including on certain health insurance, Medicare, and long-term care insurance premiums. Moreover, any interest or other capital earnings from the account accrue tax-free as well. Thus, unlike any other tax-advantaged savings plan, the HSA offers triple tax benefits: tax-free contributions, tax-free earnings, and tax-free distributions.

Any taxpayer who is not enrolled in another health insurance plan is eligible to open a health savings account. Thus, HSAs are often used by self-employed individuals, small business owners, or those who otherwise lack access to a government or an employer-sponsored plan. Increasingly, however, high-deductible plans coupled with an HSA are being offered to employees as employers seek to shift their health care costs away from the company and onto workers. 

Yet even if the plan is offered through an employer and the company makes contributions to employee HSA accounts, all the funds in an HSA are held by the account owner, not the employer, and any unused balances in a worker’s account go with the employee when he or she leaves the company. The accounts are managed by a trustee or custodian, such as a bank, insurance company, or brokerage firm. Individuals looking to use all or a portion of the funds for retirement should consider opening an HSA with a financial institution that offers mutual funds or other long-term investment options.

While HSAs are similar in some ways to health care flexible spending accounts (FSAs), the maximum amount that can be carried over each year in an FSA is $500, whereas in an HSA there are no limits on the amounts that can be carried over, or on when the funds are used. Thus, HSAs are highly attractive vehicles for saving for medical expenses in retirement, when most people’s health care expenses are highest.

There are, of course, a number of restrictions associated with HSAs. The IRS stipulates that for 2018, the annual deductible of an HSA-compatible health plan cannot be less than $1,350 for self-only coverage or $2,700 for family coverage and that the annual out-of-pocket expenses (deductibles, co-payments, and other amounts; but not premiums) may not exceed $6,650 for self-only coverage or $13,300 for family coverage. The HSA contribution limits in 2018 are $3,450 for an individual and $6,900 for family coverage. Individuals over age 55 can put in an extra $1,000 per year in catch-up contributions.

Contributions to an HSA can be made only up until the account owner becomes eligible for Medicare, usually at age 65. However, an individual can continue to contribute after reaching age 65 if he or she has not yet signed up for Medicare. Conversely, an individual can no longer contribute if he or she qualifies for Medicare before reaching age 65.

Especially for higher-income savers who are generally healthy and do not need to draw down the funds to pay for medical expenses, HSAs are a potentially effective vehicle for saving for retirement. According to a study by the Employee Benefit Research Institute (EBRI), savers who contribute the maximum allowable amount in an HSA over 40 years and take no distributions over that period could accumulate up to $360,000 if the rate of return was 2.5%, $600,000 if the rate of return was 5%, and nearly $1.1 million if the rate of return was 7.5%.

Until the account owner turns 65 or becomes eligible for Medicare, the funds in an HSA can only be used to pay for qualified medical expenses. Withdrawals used for nonqualified medical expenses prior to this point are subject to income taxes and a 20% penalty. However, after age 65 or Medicare eligibility, withdrawals for non-medical expenses are not subject to the 20% penalty, though they are subject to income taxes as they would be from a traditional IRA. Thus, an HSA can be used as a back-up retirement plan—and one that has a number of added advantages, including no minimum distribution requirements and no income limits on contributions.

Another attractive feature of the HSA is that the tax-free distributions do not have to be taken in the year the qualifying expense is incurred. For example, the account owner could keep a list and receipts of the qualified health care expenditures he or she incurred while contributing to an HSA, but which were paid for at the time with after-tax dollars. The individual could then withdraw funds from the account for another reason, while reporting an equal amount of health care expenditures from prior years his or her tax return for the year in which the withdrawal was made.

In addition, an HSA owner between the ages of 59½ and 65 who also has IRA or 401(k) assets can take distributions from these retirement accounts and deposit the funds directly into an HSA. While the individual will owe tax on the distribution, he or she can reduce the tax owed by taking a deduction on the contribution to the HSA. This strategy provides a tax-efficient way to give the owner more funds that can be spent tax-free on medical expenses in retirement.