Welcome to 2018! While we don’t necessarily subscribe to new year resolutions, we do believe in new beginnings. If 2018 is the year you’ve declared you will get your financial house in order, we are here for it. If your house is already pretty clean, we applaud you sis. There is always room for improvement and growth though. And lastly, if you don’t have finances on your list for 2018, let’s provide you with some inspiration. Black women still persist at having the least amount of wealth in America, despite the deep educational and professional gains. There are some explanations for this. Black women are more likely to be a single head of household, the pay gap is wider than that of white women, and they are often the provider for extended family members such as parents and grandparents. Contrary to popular belief, you don’t need to make tons of money to create wealth.
The Financial Outlook 2018 and What You Need to Know
Unemployment is expected to decline this year. Hopefully, this will have a positive impact on the black community, as it has experienced the highest unemployment rates despite the economic rebound. This is good news if you’ve been on the hunt for a job or a new gig altogether. More good news is that many companies are taking the wage gap seriously by enacting policies that will help with keeping pay equal between men and women. The state of California went so far as to pass a law that makes it illegal for a potential employer to ask your current salary. Not surprising for California since they have laws that tend to favor employees.
Inflation is expected to be 1.9 percent compared to 2.1 in 2016 and 1.7 in 2017. The cost of goods go up every year. The inflation rate is an indicator of how much prices will go up. Here’s the gotcha, the Fed doesn’t include the price of gas and food in the inflation rate because of their volatility. Meaning that 1.9 percent is actually higher when you include these basic household costs. Budgeting will be extremely important if you’re looking to increase your wealth and/or pay down debt in 2018. This also means that interest rates are expected to rise as well. Need a mortgage or school loan? Expect to pay more for the dollars you borrow, so plan accordingly.
Unless you turned off your TV, phone, internet and avoided all print publications you know that a new federal tax policy is taking effect over the next two years (2018 and 2019). While the Republicans say it will help the middle class, the Democrats decry it as a burden. The Joint Committee on Taxation estimates tax reform will add $1.46 trillion to the deficit. First, yes, the wealthy and large corporations are getting tax cuts. The theory behind this is trickle-down economics introduced by Ronald Regan in the 80’s, no matter what fancy new term they use. The idea is if they have to pay fewer taxes the wealthy will spend more and corporations will hire more. The math sort of works, but it relies solely on those two entities choosing to spend more.
How will tax reform potentially impact your wallet this year?
- There are still seven tax brackets, but the rates have been lowered (+)
- The personal exemption is no more, this lowers your taxable income (-)
- Personal deductions are capped at $10,000, it was previously unlimited (-)
- The Child Care credit has been expanded to those making six figures (+)
- A non-child tax credit up to $500 has been added for those caring for family members (+)
- The Alternative Minimum Tax will hit fewer people this year as the limit has been raised (+)
- Mortgage interest deduction has been lowered for new homes bought in 2018 and beyond (-)
- Teachers can still deduct classroom supplies, this hasn’t changed, but there was misinformation out there (+)
- Tax deductions for alimony payments, tax preparation services, and moving expenses are nixed (-)
- The individual health insurance mandate is gone. However, this will result in 13 million fewer people with health insurance by 2020 (+/-)
- Estate tax has been nearly eliminated for most, this really benefits the wealthy (+)
There are some other tax reforms that benefit corporations. Overall, the lower end of the middle class will not likely benefit from this reform. The upper part of the middle class will likely come out neutral or slightly negative.
The stock market is expected to be up this year. If you’re not an institutional investor (e.g. Morgan Stanley) or wealthy, this doesn’t do much good for the average investor. The good news is it will drive up the value of IRAs and 401k’s. But if you know how these systems work, you know that your plan holder will make the majority of the gains off of your funds. Why? Because they are making money off of the money you give them to invest for you. If 100 people at your company invest $5,000 per year each, the plan administrator holds $500,000. That money doesn’t just sit there. They borrow your funds for investment and they make way better returns on that $500,000 than you are making on your $5,000. That’s really how these institutions make their money, it’s not the fees. Nevertheless, this is still the best way for the middle class to plan for retirement. Keep in mind that wealth is largely created through entrepreneurship and directed investments such as a self-directed IRA or other types of business ventures. The takeaway for you here is to contribute the maximum amount to your employer-sponsored plan and work with a certified financial planner, CFP, to create a plan to exponentially grow your wealth in other ways.
Lastly, the Republicans failed to repeal the Affordable Care Act (ACA) otherwise known as Obama Care. They also did nothing to fill the holes or fix ACA. Instead, they have opted to further cripple it by reducing its marketing spend to discourage people from enrolling and removing the individual mandate. These moves ensure that the already high price of the plan will continue to rise leaving even more people uninsured. The cost of health care and insurance rises every year, prior to the ACA. This will not change. ACA was based on the premise that if people enrolled and used the plan that this would drive the cost down for everyone. When that didn’t happen many called for its repeal and replacement rather than repair. As a result, if you aren’t on an employer-sponsored plan be prepared for your health insurance costs to be unbearably high.
What You Need to Get Your Financial House in Order
The economy is still in turnaround despite some changes by the current administration. Knowing what to prepare for is the first step. The next step is gathering the tools you need to get your financial house in order. The number one challenge people have to creating wealth is debt. Remember that being wealthy and rich are two different things. We focus on wealth which is what remains after all obligations have been met. Assets such as real property, retirement accounts, rental property, etc. are important to wealth creation. In preparation for successful planning you have to do some basics first.
- Know your credit score and fix any misinformation
- Make a list of your assets and their values (house, car, retirement accounts, jewelry, cash in checking and savings, stocks)
- Gather your debts, their values and interest rates (credit cards, mortgage, students loans)
- Determine your net worth: assets minus debt
- Get your mind right – your mindset about money will be everything in this process
- Invest in money management software such as Quicken or a free service such as Mint.com to keep track of your money
- Check your tax withholding for your paycheck, retirement contribution percentage and investments – you may need to adjust these at some points
- Pull out those life-planning documents such as life insurance, wills, and trusts
Consider all of this information your health check. You should perform a comprehensive health check every quarter. This basic information will give you a snapshot of where you are today. Hopefully, there are no surprises but if there are, you now know and can address the issue. The last item on the list may have you stumped. When you saw wills and trusts and your first thought was that’s for rich people you’re wrong. Estate planning is a basic wealth protection tool. It’s easily overlooked. Prince is a great example of how not making your wishes known can result in calamity for those left behind. Single and no children? It doesn’t matter. Without any instruction from you your entire estate will go into probate. You want to make sure you have listed beneficiaries for your retirement accounts, cash, and real property. Include with that a living will that lays out your wishes in case a catastrophic injury or illness leaves you unable to make decisions for yourself. By the way, there are cheap and free online services that can help you get this done. You don’t need an expensive attorney.
Start Building Your Financial House Right Now
You’ve done your health check and identified the holes in your house that need plugging. Write down three financial goals for the year and be specific. Seeing your goals in writing is important. Post them somewhere you will see them every day. If you can afford it, enlist the help of a certified financial planner who can give you some advice, especially when it comes to estate planning and wealth protection. Sit down with your money management tool of choice and get started. Setting up a program will take some time at first, but once all of the information is input it will require little effort to look at your financials once a week. Yes, look at your financials once a week and do a deep dive every quarter. You should know where your money is at all times. Here are some helpful tips to get you started:
- To pay down debt employ the stacking method. List all of your debt. Pay the minimum amounts on all but one where you will pay the max you can afford. Once that debt is paid off, roll that amount into the next debt plus the minimum. If you have a $2,000 credit card balance and you pay $200 per month where the minimum is $50, once that balance is paid off apply the $200 to the next debt on the list. This accomplishes two things. First, you get a quick win by paying the lowest balance off first. This will encourage you to continue on this journey. Second, by employing the stacking method you’re addressing one hurdle at a time instead of spreading your resources too thin.
- Change your mindset. We’re saying this again because it’s important. Once you see yourself as a wealthy person your brain will make micro-decisions that will drive you toward your financial goals. Set your wealth thermostat to super hot!
- Set aside money for fun in your budget. All work and no fun makes anybody a dull person. Getting your financial house in order doesn’t have to be all toil. Be sure to include a line item for movies, outings, vacations, etc. in your budget.
- Get help! Can you use a notebook and paper to do all of this? Sure. But there are free tools out there that can do a better job and just require an investment of your time. Can’t afford to visit a financial planner regularly? Look for free or sliding-scale providers. They really make their money on products they sell you, not the advice.
Building wealth can be a daunting aspiration. That is because we tend to look at it as monolithic experience. Meaning, if we don’t have a windfall of money, we can feel as if our day-to-day work will never get us there. Anyone can create wealth, even someone making $50,000 a year. But it takes effort and discipline. It may also take starting a side business or a company. Black women are the fastest growing demographic of entrepreneurs. Regardless, as black women, we need to close the wealth gap and this is a great place to start.
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