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Budget or Financial Plan

Why you need both a budget and a financial plan

Budget or Financial Plan

You Need Both a Budget and a Financial Plan

Budget or financial plan: it’s not “or,” it’s both.

Most of us know what a budget is, whether we follow one or not. Is a budget different in any material way from a financial plan? The answer, of course, is yes.

The term “financial plan” may be a bit confusing because many individuals and families have never actually established, or initiated, one. To add to the confusion, there are many misconceptions about what a true financial plan is or isn’t.

For example, while there might be some overlap between a budget and a financial plan, it’s important to know that the two are distinctively different. Your budget helps you keep tabs on your monthly spending habits to understand the full picture of your expenses and how much room, if any, you have left over at the end of the month: “room” here meaning available dollars for saving and investing. Your budget is a monthly liability versus asset reckoning.

Budget or Financial Plan?

Your financial plan, on the other hand, is a roadmap to your financial future; it tells you exactly what you need to do with your money every month to maintain your lifestyle and at the same time save for the future. It can contain implications of immediacy, but by its nature it is long-term in concept and creation.

The financial plan is not, though, a set-it-and-forget-it exercise. It’s also not a quick fix for your finances. Nor is it something only for the older or wealthy. It’s not synonymous with a wealth management plan, but they both strive to do accomplish the same results.

In this article, you’ll learn what a financial plan is, what it can do for you and why you’ll need one to achieve a comfortable financial future. And your budget informs nearly everything the plan is about.

The goal of any financial plan is to align your monthly budget—altered where necessary—with your long-term financial goals, and most of these have to do with how much money you’ll have for retirement.

Budget or Financial Plan?

Your budget is today and tomorrow and next week. Your financial plan is three, five, maybe thirty years down the road.

In other words, think of the financial plan as an instrument that may (or may not) allow you to maintain your current way of life while saving to maintain as much of it as possible when you no longer receive work-related income. Since this may be an awfully big goal, your financial plan needs to address financial strategy and tactics, and much of the latter will need to confront how you invest your money.

While a good financial plan encompasses much more than investing, investing remains the foundation of any plan, and this is essential to building your wealth over time. For this reason, it’s the most commonly recognized part of a financial plan. Investing, and investing wisely, are what will help you achieve your financial goals later in life. Remember, the financial plan will help get you to as close a satisfying retirement as possible.

Budget or Financial Plan?

To do this, the sound financial plan will always begin with a highly detailed inventory of your current financial position, and it will bring into play the all-important budget we’ve been discussing. It’s safe to say that your budget lies at or near the center of your financial plan—it informs what will become your financial plan. And if your budget changes—for example, you get a raise at work—at the next review of your financial plan, this new and highly important information will be incorporated into the next iteration of the financial plan.

Resistance to a financial plan often has to do with the sacrifices we may need to make now. Will I still be able to dine out three times a week? What about other areas of entertainment? Movies? Concerts? Can I maintain my current lifestyle?

Again, it depends. If your income is sufficient to support these and still save thoroughly for retirement, then perhaps you can continue living the way you do now. But what if you can? Wouldn’t it make sense to cut back on some of your expenses so you could increase your retirement savings dollars? Would you rather retire with, say, $150,000 more in your 401(k) by skipping a few nights out for dinner? And, understand this: over even short amounts of time these “sacrifices” can make a big difference in your retirement income.

Budget or Financial Plan?

Here’s what the prudent individual will do. Create a monthly budget that you can adhere to, one you can stick with for one year. Then, build your financial plan around that budget. Save as much as you can; sacrifice where sacrifice does not hurt you in any serious way. Then, create a new budget at the end of year one and ask your advisor if any changes need to be made to your financial plan because of any significant budget changes.

In the long run, these actions make a difference. These actions will enhance your retirement years, which is the goal of us all: to be able to stop working without too much sacrifice in what we enjoy doing. So, build your budget, see a planner, and be smart about retirement.







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The Alternative Minimum Income Tax (AMT)

The Alternative Minimum Income Tax


picture represents the alternative minimum income tax

The Alternative Minimum Income Tax

Simply put, the Alternative Minimum Income Tax (AMT) is a tax on the wealthy. Or maybe not. It’s a tax on individuals whose income tax liability benefits from certain deductions and exclusions unavailable to those with lesser incomes. The AMT, which used to be called the tax on the rich, traces its beginnings to the late 1960s.

Then, a congressional report was released that showed quite a few high-income earners paid little or no taxes, and they did so because of their ability to use the tax code for deductions others could not access—much of this having to do with the capital gains tax. Public outcry was loud and angry. How could this be, many wondered? What happened was simply that certain high-income earners used tax laws to reduce or eliminate their taxes—and who’s to blame them. If tax loopholes exist, they tend to exist to be exploited. That’s the way these things work.

But it wasn’t until a decade later, in 1979, that Congress addressed this issue: lawmakers effectively lowered the barriers for AMT coverage. The AMT was established as a parallel tax to ordinary income taxes. You calculated your tax under standard rules. Then you calculated your tax under the AMT; you paid the higher of the two which, for high earners, was inevitably the AMT. It was a tax that had the weight of this following saying: “you can run but you can’t hide.”

The AMT was a stopgap tax that kept the wealthy from under-paying on their taxes, and there was, and is, no way around it. But it’s not what it used to be.

Currently, there are seven federal income tax rates, the high being 39.6 percent. With the AMT, there are two rates: 26 percent and 28 percent. The two tax computations—regular and AMT—run parallel to each other; in a sense they complement each other. An individual who might be subject to the AMT must first run his or her tax according to the regular tax structure, with all seven brackets. Then, that person runs his or her AMT (jointly if that is the filing status). The higher of the two taxable amounts is what must be paid.

The AMT also contains exemption amounts, which are higher than the standard deductions under “normal” tax rules.

Over the years, especially the last 2-3 years, the amount of income that can be preserved under the AMT has grown. The AMT calculation and brackets are always going to be subject to the prevailing politics of the day. This is for certain: they will increase; they will decrease.

Currently, the AMT takes away certain income tax breaks available under existing law. The following deductions have vanished:

  • Various itemized deductions;
  • All dependent exemptions;
  • Normal or regular income exemptions;
  • State and local income taxes; and
  • Home equity deductions.

One of the problems with the AMT is that it was never indexed for inflation. So as incomes have naturally risen along with the Consumer Price Index, more and more individuals are subject to the AMT.

Multiple factors go into determining if you are subject to the AMT. It’s hard to determine whether you’re subject to it or not, at least without using an accountant or a sophisticated tax preparation software.

Beginning in 2018 the AMT does adjust for inflation. You are subject to the tax, if married and filing jointly, if your income is above $109,400.

To try and avoid the AMT you should do at least two things: increase your savings into any tax-advantaged vehicles available and increase charitable giving. This may not relieve you from the AMT, but then again it may. Stay focused on the AMT. Know where the exemption levels lie and do your best during the tax year to avoid the AMT altogether.