Budget Check Up: Tax Time Is the Right Time

Every year, about 150 million households file their federal tax returns. For many, the process involves digging through shoe boxes or manila folders full of receipts; gathering mortgage, retirement, and investment account statements; and relying on computer software to take advantage of every tax break the code permits.

It seems a shame not to make the most of all that effort.

Tax preparation may be the only time of year many households gather all their financial information in one place. That makes it a perfect time to take a critical look at how much money is coming in and where it’s all going. In other words, this is a great time to give the household budget a checkup.

Six-Step Process

A thorough budget checkup involves six steps.

1. Creating Some Categories. Start by dividing expenses into useful categories. Some possibilities: home, auto, food, household, debt, clothes, pets, entertainment, and charity. Don’t forget savings and investments. It may also be helpful to create subcategories. Housing, for example, can be divided into mortgage, taxes, insurance, utilities, and maintenance.

2. Following the Money. Go through all the receipts and statements gathered to prepare taxes and get a better understanding of where the money went last year. Track everything. Be as specific as possible, and don’t forget to account for the cost of a latte on the way to the office each day.

3. Projecting Expenses Forward. Knowing how much was spent per budget category can provide a useful template for projecting future expenses. Go through each category. Are expenses likely to rise in the coming year? If so, by how much? The results of this projection will form the basis of a budget for the coming year.

4. Determining Expected Income. Add together all sources of income. Make sure to use net income.

5. Doing the Math. It’s time for the moment of truth. Subtract projected expenses from expected income. If expenses exceed income, it may be necessary to consider changes. Prioritize categories and look to reduce those with the lowest importance until the budget is balanced.

6. Sticking to It. If it’s not in the budget, don’t spend it. If it’s an emergency, make adjustments elsewhere.

Tax time can provide an excellent opportunity. You have a chance to give your household budget a thorough checkup. In taking control of your money, you may find you are able to devote more of it to the pursuit of your financial goals.

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Critical Estate Documents

Note: Power of attorney laws can vary from state to state. An estate strategy that includes trusts may involve a complex web of tax rules and regulations. Consider working with a knowledgeable estate management professional before implementing such strategies.

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Life and Death of a Twenty Dollar Bill

Every year, the government prints millions of notes a day. Here's a quick look at what goes into creating a $20 bill and what determines when a bill's lifespan ends.

Paper

A $20 bill starts out life as part of a large sheet of paper. While most paper is made primarily from wood pulp, the paper used by the U.S. Bureau of Engraving and Printing doesn't contain any wood at all. Currency paper is composed of a special blend of 75% cotton and 25% linen. It's made with special watermarks and has blue and red fibers embedded in it along with a special security thread.2

Each blank sheet is tracked from the time it leaves the mill until it is printed, and the entire shipment is continuously reconciled to make certain all are accounted for.

Printing

These blank sheets of cotton and linen paper get printed four times. Background images and colors are printed—both sides at once—using offset presses that are over 50 feet long and weigh over 70 tons. After drying for 72 hours, the portraits, vignettes, scrollwork, numerals, and letters are printed on the back using Intaglio presses that are a mere 40 feet long and weigh only 50 tons. After drying for another 72 hours—in special guarded cages—more portraits, vignettes, scrollwork, numerals, and letters are printed on the front using the Intaglio presses. Finally, the serial numbers, Federal Reserve seal, Treasury Department seal, and Federal Reserve identification numbers are printed using a letterpress.

Cutting and Wrapping

Once dry, these printed sheets are gathered in stacks of 100 to be cut by a specially designed guillotine cutter. Each new stack of 100 $20 bills is wrapped with a special paper band. Ten of these 100-note stacks are gathered, machine counted, and shrink-wrapped into a bundle. Then, four of these shrink-wrapped bundles are collated together, given a special barcode label, and shrink wrapped again to create a brick of 4,000 bills, worth $80,000.

Distribution and Circulation

The Treasury Department ships these newly printed $20 bills to the Federal Reserve Banks, who in turn pay them out to banks and savings and loans—primarily in exchange for old, worn-out bills. The new bills are handed out to customers of these institutions as they withdraw cash, either through tellers or through automated teller machines.

An average $20 bill will change hands often, but even the U.S. Bureau of Engraving and Printing isn't sure how many times a bill will move from one pocket to the next. Contrary to popular belief, the government doesn't have any way to track individual bills.

There is a polyester security thread embedded in the paper that runs vertically up one side of each bill. If you look closely, the initials USA TWENTY along with the bill's denomination and a small flag are visible along the thread from both sides of the bill. This thread makes currency more difficult to counterfeit, but cannot be tracked electronically.

Withdrawal

Banks gather worn out and damaged currency, sending it to the Federal Reserve in exchange for new bills. The Federal Reserve then sorts through these bills to determine which are still usable and which are not. Those bills deemed usable are stored until they can go out again through the commercial banking system. Those deemed no longer usable are cut into confetti-like shreds. Most are then disposed of; a small portion is sold in five-pound bags through the Treasury's website.

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Don't Let Your Guard Down

By Ryan O’Donnell, CFP® and Mike O’Donnell, CFP®

Key Takeaways

• Recency bias is the tendency to place too much emphasis on experiences that are freshest in your memory—even if they are not the most relevant or reliable.

• Since stocks are a leading indicator of the economy, markets typically bottom out and start to rebound months before the end of a recession.

• Ask your advisor to help you rebalance your portfolio as needed, especially if your life circumstances have changed.

Even after Fed Chairman Powell spooked the markets with his promise to continue raising interest rates for the foreseeable future, the major indices are still about 10% higher than they were in mid-June. Powell’s comments should not have surprised anyone since he has told us again and again and again that the Fed plans to continue raising rates by 50 to 75 basis points every few months into early 2023 until it sees this latest wave of inflation start to diminish.

So why were investors then so spooked by Powell’s hawkish comments? Because they let their guard down and thought that a slight improvement in the inflation rate this month might get the Fed to relax its rate hiking mandate. In behavioral finance we call that “Recency Bias” -- the tendency to place too much emphasis on experiences that are freshest in your memory—even if they are not the most relevant or reliable. The recent “less bad” inflation numbers on top of a mini rally in stocks since mid-June, had many thinking the worst was over.

It's not.

As most of our clients know, wishful thinking is not a strategy. Fed rate hikes (and cuts) are not a switch that can be flipped on and off. It takes a while for these policy changes to work their way through the system and that’s what we’re seeing in the form of volatility and uncertainty. NOTE: Our clients already have this volatility priced into their plans and they’ll come out of this downturn even stronger than before.

But what about a recession?

People keep asking us if we’re heading toward a recession, or perhaps already in one. As a long-term investor, it really shouldn’t matter. Much of the Fed’s concern about an overheated economy has to do with a stronger than expected labor market and a rebound in consumer confidence. You heard that right. Too many people working and consumers feeling better about things. That doesn’t sound like we’re on the brink of a real recession, let alone a Great Depression, does it?

Chances are, we’re already in a recession. But by the time it’s officially declared a “recession,” we’ll likely be out of it. But even if we’re not, don’t do anything rash with your financial plan. Markets often hold up quite well during recessionary periods and you don’t want to miss out on the eventual recovery.

Since stocks are a leading indicator of the economy, markets typically bottom out and start to rebound months before the end of a recession as the chart below shows. Just don’t sit on the sidelines waiting for the market to issue you an all-clear signal that it’s safe to get back in. By that time, it’s too late.

What’s more, the S&P 500 has actually posted positive returns in seven of the thirteen recession years since World War II, and the average decline in those recession years is only 1%. In fact, the market has been positive all but three times in the year following recessions, with an average gain of nearly 17%.

No one knows for sure whether the recent rally in stocks will last. But you might as well stay fully invested because no other asset class consistently helps you keep pace with inflation better than stocks. Stick with your plan and ask your trusted advisor to help you rebalance your portfolio as needed, especially if your life circumstances have changed recently.

So, when do we get a break from inflation, and hopefully end Fed rate hikes?

Consumers have also been making up for lost time in their spending on services, dining out and traveling, as Covid-19 restrictions subside.

As the Wall Street Journal reported recently, supply-chain disruptions are starting to ease but have also contributed to inflation. “Russia’s invasion of Ukraine, for instance, contributed to a run-up in wheat and corn prices that is making groceries more expensive. Energy prices have gone up sharply, though they have cooled recently. Truck drivers, seaport slots and warehouse spaces are all in short supply, leading to costly delays and rising shipping rates for goods,” the Journal added.

Also, since there are far fewer workers in the labor force than there would normally be, employees have the leverage to demand raises which typically get passed on to consumers in the form of higher prices.

Since the Fed considers inflation “Enemy No. 1,” it is aggressively raising rates to make borrowing more expensive and hopefully slow down the economy. These factors among others are driving up costs. Many economists believe inflation should start easing later this year or in the first half of 2023. Again, it will take some time for these shocks to work their way through the system.

But, when they do, we don’t want you to miss out on the next wave of prosperity. As the old saying goes: “Good luck happens when preparation meets opportunity.”

Conclusion

Remember, stocks are not valued based on what's happening today; they are valued based on what the market thinks their future cash flows will be. Investing is a long-term game. Always keep your guard and your eyes wide open.

We’re happy to discuss any questions you may have about your portfolio or retirement plan. Please don’t hesitate to reach out.

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Your Emergency Fund: How Much Is Enough?

Have you ever had one of those months? The water heater stops heating, the dishwasher stops washing, and your family ends up on a first-name basis with the nurse at urgent care. Then, as you're driving to work, you see smoke coming from under your hood.

Bad things happen to the best of us, and sometimes it seems like they come in waves. That's when an emergency cash fund can come in handy.

One survey found that nearly 25% of Americans have no emergency savings. Another survey found that 40% of Americans said they wouldn't be able to comfortably handle an unexpected $1,000 expense.

How Much Money?

How large should an emergency fund be? There is no “one-size-fits-all” answer. The ideal amount may depend on your financial situation and lifestyle. For example, if you own a home or have dependents, you may be more likely to face financial emergencies. And if a job loss affects your income, you may need emergency funds for months.

Coming Up with Cash

If saving several months of income seems unreasonable, don't despair. Start with a more modest goal, such as saving $1,000, and build your savings a bit at a time. Consider setting up automatic monthly transfers into the fund.

Once your savings begin to build, you may be tempted to use the money in the account for something other than an emergency. Try to avoid that. Instead, budget and prepare separately for bigger expenses you know are coming.

Where Do I Put It?

Many people open traditional savings accounts to hold emergency funds. They typically offer modest rates of return.

The Federal Deposit Insurance Corporation (FDIC) insures bank accounts for up to $250,000 per depositor, per institution, in principal and interest.

Others turn to money market accounts or money market funds in emergencies. While money market accounts are savings accounts, money market funds are considered low-risk securities. Money market funds are not backed by any government institution, which means they can lose money. Depending on your particular goals and the amount you have saved, some combination of lower-risk investments may be your best choice.

Money held in money market funds is not insured or guaranteed by the FDIC or any other government agency. Money market funds seek to preserve the value of your investment at $1.00 a share. However, it is possible to lose money by investing in a money market fund.

Money market mutual funds are sold by prospectus. Please consider the charges, risks, expenses, and investment objectives carefully before investing. A prospectus containing this and other information about the investment company can be obtained from your financial professional. Read it carefully before you invest or send money.

The only thing you can know about unexpected expenses is that they're coming. Having an emergency fund may help to alleviate stress and worry that can come with them. If you lack emergency savings now, consider taking steps to create a cushion for the future.

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