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This week I am sharing 3 topics I have been reading about that are relevant to busy corporate executives looking to learn more about managing their personal finances.
There is something for everyone as the topics range from taxes to household finances to investments. So, pick one or skim through them all, I expect you will find something useful. The three topics are:
The Sneaky Tax Nobody Really Talks About - The Net Investment Income Tax (NIIT) is a 3.8% tax added onto to taxable investment income. Read below for some simple tactics to minimize this sneaky incremental tax.
Should You Appoint a CFO and COO of Your Household - An effective way to assign responsibility for your household may be to take a page from the corporate playbook and appoint a CFO and COO. Read below to see if this concept may help your household run more efficiently with less stress.
Stocks are at their Most Expensive in 20 Years - By one measure, the extra reward for owning stocks over bonds is at the lowest level in 20 years. Read below to see what it means. Spoiler: If you already have a diversified portfolio with investments spread across several asset classes, sectors and geographies, this should not impact you - but it is interesting (for some people.. ;).
1.) The Sneaky Tax Nobody Really Talks About
The Net Investment Income Tax (NIIT) is a 3.8% tax that is applied to investment income (capital gains, dividends and interest) for Married Couples with $250,000 of adjusted gross income ($200,000 for Single Filers.)
The tax is impacting more Americans as the combination of higher inflation and higher interest rates pushes more families above these thresholds. Inflation is up over 30% since the NIIT was implemented in 2013. And, Interest rates have increased significantly - 10 Year Treasury was 1.85% in 2013 vs. ~4.20% today - leading to more investment income for some families.
While the 3.8% tax on investment income may not amount to a significant tax liability, it should be considered in some key personal finance decisions. Here are 3:
Tax-Exempt Municipal Bonds vs Taxable Bonds - Tax Exempt Municipal Bonds become more attractive for investors in the top income tax brackets. The incremental 3.8% tax should make the tax benefit of holding municipal bonds more attractive from a tax perspective.
Tax Loss Harvesting - Realizing investment losses to offset investment gains is more beneficial if you are subject to the NIIT.
Hold High Yielding Investments in Tax Advantaged Accounts - If you hold securities that generate taxable income such as high yield bonds, real estate or actively managed funds, it makes tax sense to hold those in tax advantaged accounts (IRA and 401(k)) to protect that income from the NIIT.
Further Reading:
2.) Should you Appoint a CFO and COO in Your Household
It is no secret that managing a household is a ton of work and making sure everything gets done is a project management job by itself - not to mention all the actual "doing." Traditional gender roles may have provided a template for organizing these tasks amongst partners, but with the increase in dual income households and women earning a larger portion of household income, household roles should reflect these current economic realities.
A WSJ article profiles couples that have taken a page from the corporate playbook to better organize their household finances and day-to-day operations by adopting CFO and COO roles. The CFO role may consist of tracking the family budget, managing investments, and analyzing any big financial decisions around insurance, car purchases and college savings. The COO role may consist of managing the calendar, children after-school activities and any home improvement projects.
Of course, it is key to work as a team by making decisions together and not in silos. It may even make sense to switch roles periodically to "cross-train." It is also important to show gratitude for your partner as both roles can be difficult and stressful especially if a partner feels isolated.
A quote from one of the below linked articles: “At the core, there does need to be this established level of agreement between couples about ‘How are we going to get through daily life and accomplish all the tasks it takes to get to the finish line successfully every day?’” said Megan Ford, financial therapist and clinic director at the University of Georgia.
Further Reading:
3) Stocks are at their Most Expensive in 20 Years
"The extra reward for holding stocks instead of bonds has fallen to it lowest level in 20 years..." WSJ
Theoretically, stocks should generate a higher return than bonds over the long-term because stocks are more risky than bonds. As interest rates AND stock valuations have increased recently, the incremental return from stocks over bonds has dropped to its lowest level in 20 years.
According to the article, the consensus amongst investors is that the relationship between stock and bond returns should revert to the historical average over time. Of course, there are multiple paths back to the average including stock earnings decreasing (bad for stocks), stock earnings increasing (good for stocks), interest rates decreasing (good for bonds) or some combination of the last two.
Yes, it is interesting when markets are pushed to extremes by certain measurements, but it should not impact how you invest. A diversified portfolio that spreads your risk and return prospects across different asset classes, sectors and geographies is the tried and true (and yes, maybe boring) way to grow your savings.
Further Reading:
Quick Housekeeping
Walmart Open Trading Window - The open window for Walmart insiders to transact in Walmart shares opens on Friday August 18th - following the Q2 earnings release on Thursday August 17th.
Trading During Closed Windows? - I'll cover this topic in the future, but remember that 10b5-1 plans allow you to transact in company stock during closed windows. Human Resources can point you in the right direction.
Retail Week - This is a big week for retailers as Home Depot (8/15), Target (8/16), TJX (8/16), Walmart (8/17) and Ross Stores (8/17) are all reporting earnings.
Taurus Financial Planning is a Fee-Only Wealth Management firm based in Bentonville, AR. The firm offers comprehensive financial planning, tax planning and investment management to corporate executives across the country.
Taurus Financial Planning is a Registered Investment Advisor with the State of Arkansas. This information is provided as a guide to assist you in your financial planning. The specific examples are provided for illustration purposes only and are not representative of specific investments or guarantees of future returns. Please consult with a professional for specific questions regarding your particular situation. If there is any error or inconsistency between this document and the official company plan documents, your company plan documents will govern.
This publication is for informational purposes only and is not intended as tax, accounting or legal advice or as an offer or solicitation of an offer to buy or sell or as an endorsement of any company security fund or other securities or non securities offering. This publication should not be relied upon as the sole factor in an investment making decision. Past performance is no indication of future results. Investment in securities involves significant risk and has the potential for partial or complete loss of funds invested. It should not be assumed that any recommendations made by the Author, in the future, will be profitable or equal the performance noted in this publication.
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