The 8th Wonder of the World You Need to Know About

Why should you be investing today? Some people are steering away from investing during this pandemic, what with the foreboding headlines and uncertain future. However, investing remains an important way to accumulate wealth in this economic climate.

Saving vs. Trading vs. Investing

Many people confuse the terms saving, trading, and investing. What’s the difference?

Saving is when you put away money securely in a savings account, checking account, certificate of deposit (CD), or money market. Savings typically have easy access, a relatively low and stable interest rate, and an FDIC guarantee. We recommend maintaining emergency savings account with enough funds to get by for six to 12 months. For many people, this is anywhere between $25,000 and $50,000.

Trading is when you buy and sell stocks, bonds, or other financial products. You can make a quick buck, but there’s no opportunity for long-term growth and stability.

Investing is about financial growth over time. Whether you invest in your own business or purchase a share in a Fortune 500 company, you essentially own a slice of that operation. This proposition comes with more risk, but it also has a higher potential for return.

Once you have adequate savings in place, we recommend investing to help you accumulate wealth and prepare for retirement. Ideally, you should work toward having eight to 10 times more money in investments than you do in savings.

Think of investing as a garden. If you plant a tomato seed today, you won’t have a tomato plant tomorrow. There is no instant gratification the way there is in trading. It takes time, patience, and regular attention to build a successful investment portfolio, but if you’re consistent, the results can be amazing.

Investing requires an understanding of opportunity cost as well. This economic concept states that there’s an infinite number of ways you can spend every dollar you earn. Once you decide how to spend it, you can’t spend it any other way. Therefore, you need to earn another dollar to buy the next thing on your list. Thinking about the opportunity cost of every dollar you spend can help guide your investments.

What Makes Investing So Powerful?

Far too many people focus more heavily on saving than investing, but this is a mistake. Why is investing so important?

• Investing offers healthy returns. The historical average gain of long-term investments is 8 to 10 percent compared to 1 or 2 percent for savings.
• Compound interest can build incredible wealth. Dubbed the Eighth Wonder of the World, compound interest means your investment grows each year—not just on the original amount, but on the original amount plus the growth it made that year.
• Investing provides multiple aspects of growth. Dividends, interest, and capital gains are all possible ways to make money from investments.

Successful investing often requires help from a financial planner. Reach out to Nelson Financial Planning at 407-629-6477 or schedule your free initial consultation online to start putting your money to work for you!

Habits That Destroy Your Retirement

A whopping 39 percent of Americans have nothing saved for a rainy day, let alone retirement. This is a scary statistic! If COVID-19 has taught us anything this past year, it’s that having an emergency fund is critical to weather unexpected financial storms.

We all have habits that undermine our ability to save money. Consider what these habits are and how to prevent them from destroying your retirement.

Spending Now Rather Than Saving for Later

With our culture of instant gratification, it’s easy to focus on the present and neglect potential needs for the future. The best way to avoid this habit is to stick to a budget. If you don’t already have one, there are plenty of resources available to help you create one.

By keeping track of how much money is coming in, and what expenses are going out, you can calculate the amount you have left over to spend on “extras” each month. Just remember to allocate at least 10 percent to saving and investing!

Underestimating the Amount You’ll Need for Retirement

As you project what your budget after retirement may look like, don’t forget to include these three factors:

• Taxes: As a W2 employee, your employer automatically takes taxes out of your paycheck. Once retired, you have to plan for those withholdings yourself.
• Health insurance: Under your employer’s group plan, health insurance is quite affordable—and automatically deducted from your paycheck. Once you retire, you become responsible for your own health insurance. If you stop working early and aren’t yet eligible for Medicare, your premiums may be quite costly.
• Free time expense: With more time on your hands after retirement, you may end up spending more money each week, whether it’s on golfing, traveling, or pursuing hobbies.

Only Investing in the Best-Performing Funds

Chances are, if you only invest in funds that have earned a Morningstar rating of Gold or Silver, you’re already late to the game. Funds that are top-rated today may not sustain that excellent track record because the Morningstar system only looks at short-term performance.

If you constantly chase returns based on one- to three-year performance, your portfolio will end up under-performing in the long-term. You’ll achieve more sustainable returns if you look at a fund’s 10- or 15-year track record before deciding whether to invest in it.

Misunderstanding What Diversification Is

Diversification is about more than just owning multiple funds. It’s important to consider the balance between stocks and bonds, your investments in large companies vs. small companies, and how much money you have in domestic vs. international funds. As a rule of thumb, you should always keep your top 10 holdings below about 20 percent of the portfolio’s total value to ensure adequate diversification.

For more on how to prevent bad habits from destroying your retirement, please contact Nelson Financial Planning. Our goal is to help you change your life through a successful financial plan that provides peace of mind for the future.

Unemployment Has Changed Forever

The latest stimulus package, known as the American Rescue Plan Act of 2021 (ARPA), injected $1.9 trillion into the US economy. This relief spending has been divided into various categories, including $410 billion for stimulus checks, $360 billion for state and local governments, $130 billion to help schools safely reopen, and $122 billion for COVID-19 testing, tracing, and vaccine distribution.

Another big chunk of the $1.9 trillion stimulus package—$250 billion, to be exact—is allocated for unemployment benefits. The CARES Act, which passed in March 2020, expanded unemployment benefits through December 31, 2020. Now, those expanded benefits extend through September 6, 2021. Here’s what you need to know.

Supplemental Unemployment Benefits

The ARPA adds an extra $300 per week to the baseline employment benefits received from the state for 53 weeks, up from 24 weeks. In Florida, unemployment pays just under $300 per week. With the federal supplement, unemployed Floridians can earn nearly $600 per week. The biggest problem with this is that it incentivizes workers who make roughly $12 to $15 per hour to accept unemployment instead of looking for a job.

Tax-Exempt Unemployment Benefits

The first $10,200 per person of unemployment benefits received in 2020 is exempt from income taxes—assuming your income is less than  $150,000. This gives low- to moderate-wage workers yet another reason to remain unemployed, which could really hamper our country’s economic recovery.

The real kicker is that the government added this significant taxation provision in the middle of tax season! It affects a source of income that millions of Americans received last year, many for the first time ever. A significant portion of these people have already filed their income tax returns and paid taxes on the unemployment benefits they received in 2020.

Now, the only option is to wait, but the IRS has not provided instructions on how to proceed. In fact, the only guidance taxpayers have received so far is not to amend their returns just yet.

Other Tax Changes

In addition to newly tax-exempt unemployment benefits, the ARPA has allocated $143 billion toward three expanded tax credits for 2020:

The child tax credit has increased to $3,000 for children age 6 and older, and $3,600 for younger children, regardless of earned income.

The child and dependent care tax credit increased to $8,000 for one child and $16,000 for multiple kids.

The earned income tax credit was expanded for low- to moderate-income workers with qualifying children.

These tax credits are fully refundable, meaning that even qualified individuals who don’t owe taxes get money back when they file their return.

For answers to your remaining questions about tax-exempt unemployment benefits and other tax implications for 2020, please reach out to Nelson Financial Planning. Our team can fill you in on all the rules so you know what benefits apply to you. Contact us today at 407-629-6477 to schedule your free initial consultation.

The Biggest Lessons to Learn from 2020

It’s good to see 2020 in the rearview mirror, but investors can learn a lot from this tumultuous year. Here are some of the biggest takeaways. 

Fearless Forecast from 2020 

For the past three decades, Nelson Financial Planning has offered an annual “Fearless Forecast.” This tongue-in-cheek exercise goes out on the proverbial limb to predict the market’s future. 

As we started 2020: 

• Unemployment was at 3.5 percent. 
• Economic growth was humming along at 2 to 3 percent. 
• The Dow closed out 2019 at 28,538 points. (Our Fearless Forecast for 2019 predicted closing at 28,400 points.) 

Here’s how things unfolded: 

• Unemployment rose to 7.9 percent. 
• The economy shrank by 3.6 percent. 
• The Dow closed out 2020 at just over 30,600. (Our Fearless Forecast for 2020 predicted closing at 31,600 points.) 

Key Takeaways from 2020 

Investors can apply four big things from 2020 going forward: 

• Markets don’t perfectly reflect the economy. Fear over the pandemic caused the market to plummet about 35 percent in March 2020. The lockdowns obviously had a dramatic economic impact, and the market reflected that in this instance. However, remember that the market indicates what the future may hold rather than serving as a template for what’s happening today. 
• It pays not to time the market. If you pulled out at the beginning of the pandemic, you missed a tremendous opportunity. After all, the market rose 15 or 16 percent from its low point in March until closing in December. 
• Forecasts are just forecasts. No one can predict the future. That’s why forecasters constantly change their predictions. Ignore them as best you can. 
• Embrace new trends, but balance your portfolio. Big tech companies drove around 30 percent of the market performance in 2020. Moreover, technology dominated our personal lives. Remember how Zoom became a household name when everyone shifted to remote work environments and videoconferencing? Big drivers are important, but don’t neglect the opportunity to diversify your investments. Even consider those from overseas as international markets recover faster than the US. 

Fearless Forecast for 2021 

Here are our predictions for this year: 

• We estimate economic growth of 3 percent, maybe a little higher. We expect 2021 to be a comeback year, but we believe the money injected into the market may have stolen some of the recovery we might have otherwise seen in 2021. 
• Low interest rates are here to stay. The Federal Reserve is doing everything it can to hold interest rates near 0 percent until 2023. 
• We predict the Dow will close out 2021 at 32,250, or 5 to 6 percent higher than it closed in 2020. 

If you’re ready to accumulate more wealth in 2021 and beyond, turn to Nelson Financial Planning for help. We have over 35 years of financial planning experience to provide superior investment results and peace of mind for the future through a successful and cost-effective financial plan. Call 407-629-6477 or schedule a free initial consultation online.