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How Owning or Selling a Home Affects Your Taxes

Owning a home is exciting, challenging and the biggest investment of many people’s lives. It’s also a good way to reduce your tax bill.

Home-related tax breaks begin as soon as you close on your new abode and last throughout your time in the house. But to maximize them, you need to follow some rules.

A home isn’t just a house

American homeowners own a variety of types of homes — and the federal Internal Revenue Code recognizes this.

When it comes to tax breaks, your home can be a house, a condominium, a co-op apartment, a mobile home or even a recreational vehicle or boat. As long as it has sleeping, cooking and bathroom facilities, the IRS will allow you to claim several home-related expenses.

Itemizing deductions is the key to saving

Once you own a home, you’ll probably have to change your tax-filing habits. Taking full tax advantage of a property requires most people to itemize instead of using the standard deduction. This means filling out the longer Form 1040 and accompanying Schedule A, where you detail your home-related tax-deductible expenses. Most homeowners find itemizing worth the effort, and plenty of tax software takes the pain out of the process.

» MORE: Itemizing vs. standard deduction

There are two key sections of Schedule A that deal with home deductions:

Mortgage and home-related interest

Many homeowners’ biggest tax break comes via their monthly mortgage payment, a large part of which goes toward loan interest. As long as your home loan is $1 million or less, all of that interest paid is tax deductible. And if you paid discount points to get a lower loan rate, you usually can deduct those points from your taxes, too.

If you’ve taken out a home equity loan or line of credit, you can generally deduct the interest you paid on that debt. It doesn’t matter if you used the funds on your residence, as long as you received $100,000 or less.

Private mortgage insurance — which you’re likely paying if you didn’t make a 20% down payment — is treated as mortgage interest and thus is deductible, at least for the 2016 tax year. The catch is you can’t deduct it if you have an income greater than $109,000.

Property taxes

In most cases, another portion of your monthly mortgage payment covers your annual property taxes. (Your lender then pays your tax bill.) In others, homeowners pay them directly. Either way, you can deduct these payments as long as you own your residence.

If this is your first year in the house, double check the settlement sheet you received at closing. You probably split the year’s real estate taxes with the seller based on the date of sale. The share you paid will appear on this closing document and it’s fully tax deductible.

» MORE: Try this federal tax calculator

No tax on the sale of your home (up to a point)

All those years you spend in your home can provide substantial tax savings. The best tax break, however, is likely to come when you sell.

When single taxpayers sell a primary residence, they can pocket up to $250,000 in profit and not owe any capital gains taxes. The allowance doubles for married couples who file a joint return.

Note that this tax-exclusion amount is based on your profit, not your sales price. You could sell your home for $1 million and still not owe Uncle Sam as long as your profit is no more than $250,000 or, if married, $500,000.

How to figure out your home’s basis

Profit from a home sale is calculated as it is with any other capital asset you sell: Subtract your home’s adjusted basis from the price you got.

For most homeowners, the basis equals the original purchase price plus the value of all capital improvements made to the property. These improvements must add to your home’s value and don’t include routine maintenance and repairs.

Keep track of upgrades to your property. The greater your home’s basis, the lower your sale profit, ideally to a tax-free level. (And even if you do make some taxable profit on your home sale, at least it will be taxed at the lower long-term capital gains tax rate.)

Qualifying for a tax-free home sale

With such a great tax savings, you might be tempted to become a serial home seller. That could work, but you must meet some requirements in order to qualify for the tax-free home-sale profit.

  1. The property must be your principal residence. This is the place where you live and literally call home.
  2. You must own the property for at least two years before you sell it.
  3. You must have lived in the property for two of the five years before you sell. The good news here is that the residency doesn’t have to be continuous. You could have lived in the house for a year, then taken an out-of-town job posting for three years, before coming back to the home for another year and then selling.
  4. You can’t have sold a home and avoided the tax on your profit within the two prior years.

Most folks meet these requirements. So in addition to packing your personal belongings onto a moving van, you pack away a nice tax-free check into your bank account.

Money Orders Defined: Cost, Best Uses, Where to Buy

Money orders have been around for over a century and are still a reliable way to send funds.  Here’s what a money order is and how to use it.

What is a money order?

A money order is a form of prepaid payment that’s a safe alternative to cash or checks. You specify who will receive the money order, and both you and that person must sign it for it to be valid. Unlike with a personal check, the money is guaranteed by a third party, such as the post office, Wal-Mart or Western Union. The cost usually ranges from under a dollar to several bucks, which can be a bargain compared with some other ways to send money, especially internationally.

People also use: • Certified checks • Cashier’s checks

 

When do I need a money order?

There are times when using cash or personal checks can put you at risk, or they aren’t accepted for payment. Examples:

  • You don’t have a checking account and need to pay bills. Since money orders require you to pay in advance, the money isn’t tied to any bank account and can be easily sent to other people. If you want to store your money and pay for more than just bills, a better solution is a prepaid debit card.
  • You’re worried about bouncing a check. Because money orders are prepaid, they can’t be rejected for insufficient funds and aren’t subject to the fees that come with bouncing a check.
  • You’re mailing money. A money order helps ensure that only the recipient can use it.
  • You need to send a payment more securely. Unlike checks, money orders don’t include your bank account number.
  • You’re sending money internationally. Not all money orders work abroad, but U.S. Postal Service money orders can be sent to 28 countries. It’s an alternative to a wire transfer, which is faster but usually more expensive.

» MORE: Best ways to wire money internationally

NerdWallet is a free tool to find you the best credit cards, cd rates, savings, checking accounts, scholarships, healthcare and airlines. Start here to maximize your rewards or minimize your interest rates. Bev O'Shea Get Your Free Credit Score Get your free score every week.Set goals and see your progress.Signing up won't affect your score. Get your credit score Where do I get a money order?
  • Wal-Mart: The big-box store offers fairly cheap money orders: 70 cents for up to $1,000.
  • Banks and credit unions: Financial institutions sell money orders for around $5 each, with values typically up to $1,000. They often waive fees for customers with premium accounts.
  • Money transfer agents: You can buy money orders from companies such as Western Union and MoneyGram at convenience stores, drugstores, supermarkets, check-cashing outlets and elsewhere. Western Union money orders, as an example, generally cost from 99 cents to $1.50; charges vary by location. The maximum value is usually $1,000.
  • U.S. Postal Service: Money orders at your local post office are $1.20 for orders up to $500; $1.60 for amounts over $500 up to $1,000. There’s one exception: Military money orders, issued by postal military facilities, are 40 cents. An international money order with a value of up to $700 costs $8.25.

You can typically pay for a money order with cash or a debit card, but there may be other options depending on the place. Just steer clear of using a credit card, because your issuer might consider it a cash advance and charge you extra.

Tips when sending money orders
  • Keep the receipt as proof of payment. The receipt will be a carbon copy of the money order or a paper slip recording the information entered on the money order.
  • Track your money order. Your receipt will also have a tracking number that you can use to verify that the money order got to the intended recipient. If any problems arise, contact the place where you bought the money order to get help.
  • If the money order is lost or stolen, or if you filled in the wrong information, you may be able to cancel it and get a replacement or refund. You’ll need to bring your receipt and the money order itself, if you have it, to the place where it was purchased. But it could cost a fee. For example, Western Union charges $15 to replace a money order.
Where can I cash a money order?

Your best bet is to cash a money order at the place that issued it, whether that’s a bank, post office or other location. Check-cashing locations, convenience stores and grocery stores can be alternatives, but watch out for fees. Wherever you go, you’ll probably need to show identification.

If you don’t need the money right away and you have a bank account, consider depositing it. Banks accept U.S. Postal Service money orders as they would regular checks at branches, ATMs or even on a banking app with a mobile check deposit function. Don’t forget to sign the back of the money order before depositing.

Knowing your way around money orders can help you send a payment more safely than cash or a check and avoid any unnecessary fees in the process.

Margarette Burnette is a staff writer at NerdWallet, a personal finance website. Email: mburnette@nerdwallet.com. Twitter: @margarette.

Updated Feb. 27, 2017.

Short-Term vs. Long-Term Capital Gains Taxes

When you turn a profit on the sale of assets, such as stocks, bonds, mutual funds or real estate, it’s called a capital gain. It’s generally considered taxable income.

In most cases, however, the tax rate on capital gains is lower than the rate on your regular income. In some cases, you might not owe any taxes on your capital gains. The exact capital gains tax rate you’ll pay depends primarily on two things: how long you hold the asset before selling, and your income.

Two types of capital gains

The tax code divides capital gains into two types: long-term and short-term. When you make a profit on the sale of an asset you’ve held for one year or less, that’s defined as a short-term gain. A long-term capital gain comes from a profitable sale of an asset that you’ve held for more than one year.

In this case, tax law rewards patient investors. The tax rate on a long-term gain is lower than what you pay on your ordinary income, such as wages. Short-term gains, on the other hand, are taxed at your ordinary tax rate. (Not sure about your tax rate? Review this rundown on federal tax brackets.)

To ensure your gain is the long-term type, pay close attention to the calendar when selling your assets. The holding period for a long-term capital gain is at least one year and a day. To reach that mark, begin counting on the date after the day you acquired the asset.

For example, if you bought stock on Jan. 10, 2017, and sell on the 10th day of the following January, your one-year ownership of the stock would mean your profit would be taxed at the higher short-term rate.

If you instead sell on Jan. 11, 2018 — 366 days since your purchase, since the day you dispose of the property is part of your holding period — it will net you the lower long-term capital gains tax rate.

How income affects capital gains taxes

Capital gains tax rates, like income tax rates, are progressive. That means higher earners generally pay a higher capital gains tax rate.

When a gain is short-term, it is taxed at the exact same rate as your ordinary income. A long-term gain, however, can be taxed at 15%, 20% or not taxed at all depending on your regular income tax bracket.

The 20% capital gains tax rate applies to taxpayers whose earnings put them in the highest federal income tax bracket (39.6%). You’ll pay a 15% long-term capital gains tax rate if you’re in the next four lower tax brackets: 35%, 33%, 28% and 25%.

And if your income falls into the two lowest tax brackets — 10% and 15% — some or all of your capital gains may not be taxed at all.

Other capital gains tax rates

The capital gains tax rates described above apply in most scenarios, but there are a few other rates for special investment situations:

  • You’ll face a capital gains rate of 25% when you make a profit on the sale of any real estate for which you have claimed a depreciation allowance.
  • The taxable part of a gain from selling certain small-business stock is taxed at a maximum 28% rate.
  • If you sell a collectible, such as rare coins or art, your profit is taxed at 28%.
Additional cautions for the wealthy

Also be aware of the Net Investment Income Tax, or NIIT.

Technically, this is not a capital gains tax, but if your profit on asset sales is substantial, you could find yourself facing this surtax.

The NIIT is an additional 3.8% tax that applies to individuals, estates and trusts with net investment income that exceeds certain thresholds. It was created to help pay for the Affordable Care Act.

The calculations can get tricky, so it’s best to use a tax software program or consult a tax professional if you’re confronted with this tax. But note that the NIIT typically kicks in when an individual taxpayer’s modified adjusted gross income (which is your adjusted gross income with some tax breaks added back) is more than:

  • $250,000 for married filing jointly or a qualifying widow/widower with a dependent child
  • $125,000 for spouses filing separately
  • $200,000 for all other filing statuses
Only sales count

Finally, note that increases in the value of assets you still hold do not trigger any capital gains taxes. Capital gains taxes apply only when you have an actual profit from the sale of an asset.

So don’t worry about owing taxes immediately as you watch your portfolio increase in value. Just make sure that when you do cash in some of those holdings, you do so in a way that guarantees the lowest possible capital gains tax rate. You can learn more about current rates in this roundup of capital gains tax rates.

11 Ways to Get the Lowest Mortgage Refinance Rate

In the hunt for the lowest mortgage refinance rate, there are some things you can control and some you can’t. Rates moving up just when you’re about to refi? Can’t control that.

But there are at least 11 things you can do to get the best mortgage refinance rate.

Get the credit you deserve

The best way to earn the lowest rate on a mortgage refinance is to knock out the dents in your credit score and polish it up. Some steps can be as simple as making timely payments on your existing debt and perhaps paying down some balances. Other moves, like these three, take a bit more effort:

1. Look for errors in your credit report

“The other day, I ran credit for someone who had a state tax lien and a charge-off,” says Mary Anne Daly, senior mortgage advisor for Sindeo. “They said, ‘This isn’t mine. I don’t know anything about this.'” Daly says credit report errors happen more often than you might imagine.

Daly also cites clients who had a 623 credit score. Their credit report had mistakes, and the customers wondered if the improvement in their score would be worth all the effort to correct them. By wiping the errors from their history, their credit score improved to 660, and the borrowers saved $95 a month on their home loan.

2. Keep credit card balances below 25% of your available credit

Daly also says to consider asking your credit card providers to increase your available credit. Using a smaller percentage of your available credit lowers your credit utilization ratio and can earn you a better interest rate.

3. Don’t quit using consumer credit

Paying off consumer credit can be liberating, but continue making small purchases on your credit cards from time to time. Even if you pay the balances off each month, it shows you manage debt responsibly, which can actually improve your credit score, she adds.

Choosing the right refi loan

Another way to get the best refinance rate is to select the right loan product:

4. Be wary of “no-cost loans”

“That always tickles me,” Daly says of such loan gimmicks. “There are no free lunches.” All lenders will charge fees, whether they are paid upfront, rolled into the loan balance or built into the loan’s interest rate.

In fact, Joe Burke, a loan officer with Guaranteed Rate in Chicago, says paying closing costs out of pocket can lower your interest rate.

5. Resist the urge to take cash out

A cash-out refinance will raise your interest rate, Daly says.

6. Consider a shorter loan term

Burke notes that expanding your loan term may not be in your best interest.

“If you’ve already paid seven years into a 30-year fixed, for instance, putting you into a new 30-year fixed may not be the best financial decision,” he says.

Moving from a 30-year mortgage to a 20-year or even a 15-year term can earn you a lower mortgage interest rate.

“A lot of people don’t know that,” Daly adds. She tells of customers who were considering several options on a mortgage. They had 10 years left on their loan, and they thought it wouldn’t make sense to refinance. Daly showed them that refinancing to a 10-year loan term with a lower mortgage rate would save $45,000 in interest, without significantly changing their monthly payments.

“They were just thrilled,” Daly says, “paying a little bit more [each month] but saving all of that money.”

» MORE: Calculate your refinance savings

Time is money

And there are occasions when saving money can be a matter of good timing:

7. Huddle with your loan officer about when to lock in your refi rate

“Sometimes, believe it or not, we have a little bit of a crystal ball” about how mortgage rates may behave in the very short term, Daly says. That can be tied to major economic news, policy announcements or government reports.

8. Respond quickly to document and information requests

Quick answers can save you the cost of paying for an extended rate lock period if the paperwork process bogs down. It might even be a good idea to stay available and in town during a refi, Daly adds.

9. Consider the future

“One of the questions that we’re always asking people is, ‘How long do you plan on staying in the home?’” Burke says. “I think that’s a very important question that a lot of people don’t ask.”

For example, if you know you are going to be selling your home in five to 10 years, an adjustable rate mortgage, with an introductory rate lower than that of a fixed-rate loan, may be the right choice, Daly adds.

You have to apply yourself

And finally, snagging the best refinance rate takes finding the right lender and the right mortgage professional:

10. Shop rates —  and know what they mean

Advertised rates that seem unusually low may have discount points built in — that’s when you pay upfront to get a lower interest rate. For the lender, factoring in discount points may be a ploy to drive business, but for borrowers, the points can be a part of a loan strategy.

“Most of the time, we find that the buy-down doesn’t make sense,” Daly says. To see if discount points work in your situation, consider your monthly payment savings against how long it will take to recoup the fees — and how long you expect to stay in a home.

Burke says borrowers often fixate on a low rate but miss important details in loan terms disclosed in the fine print.

“Looking at APR is absolutely one of the best ways to go,” he says. The stated annual percentage rate of a loan includes the interest rate you’ll pay on the loan, plus all fees. You’ll have to complete an application with each lender you’re considering to get all the information that impacts your offered APR.

11. Find a savvy mortgage pro

That means “making sure you’re working with somebody that’s reputable and isn’t just hanging teaser rates out there for you,” Burke says.

And you want a knowledgeable loan professional who’s willing to help you find your best rate. As an example, Daly points to government-backed loan programs that are offered in some regions.

“The mortgage professional has to know to look for that,” she adds. Daly says she’s had clients who would have ended up with a higher mortgage interest rate if their loans hadn’t been flagged as being in an eligible area for one of these programs.

Hal Bundrick is a staff writer at NerdWallet, a personal finance website. Email: hal@nerdwallet.com. Twitter: @halmbundrick.

Why Your Tax Refund Is Ideal for Paying Credit Card Debt

If you’ve ever promised to pay off your credit card debt “when you have more money,” now’s your chance. The Internal Revenue Service estimates that 70% of taxpayers will get refunds this year. Last year, the average refund was $2,860, according to the IRS.

If you’re in the red, using the bulk of your tax refund to pay down your high-interest credit card debt can give you some fast financial relief, with almost no effort on your part. Maybe that’s why the idea is so popular: In a 2016 National Retail Federation survey, about 39% of American adults said they planned to use their refund to pay down debt.

To be sure, simply paying off credit card debt doesn’t address the underlying causes of that debt, so it might not keep you from winding up in the same position down the road. It also isn’t necessarily everyone’s No. 1 priority. You may want to spend your refund elsewhere if:

  • You don’t have an emergency fund. Sock away at least $500 in your bank account before tackling your credit card debt.
  • Your debt is out of control. If your debt is more than half your annual income and you see no way to pay it off within five years, bankruptcy might be your best option.
  • Your credit card debt is interest-free. If you have debt on a 0% APR credit card, you’ll save more money by tackling higher-interest debts first. Just be sure to pay down your balance before the 0% period ends.

But if your credit card debt is gnawing away at your monthly budget, here’s why tackling it now is your best call.

You’ll save money on interest

When you have a mountain of credit card debt, interest charges slowly drain you of cash.

Credit card issuers charged an average annual percentage rate of 13.61% on accounts that incurred interest last quarter, according to the Federal Reserve. At that rate, if you carried an average balance of $5,000 for a full year, you’d pay almost $700 in interest. And since credit cards are open-ended lines of credit, you can carry that debt virtually forever, as long as you keep making the minimum payments. You don’t want to let that happen.

The easiest way to lower interest costs is to transfer your credit card debt to a 0% APR credit card, and doing so is a smart idea. But these cards often aren’t available when you need them most. If your credit is so-so and your debt-to-income ratio is high, you might not be able to qualify for one.

If getting a 0% APR card isn’t an option, paying down your debt more quickly might be your best bet for saving on interest. Your tax refund can help you do just that.

It could boost your credit

If your credit is a little “meh” lately, it might be due in part to all the credit card debt you’re carrying.

“Amounts owed” — that is, how high your balances are — accounts for 30% of your FICO score and is a “highly influential” factor in your VantageScore. Credit utilization ratio, or the percentage of available credit you’re using, is a major factor in amounts owed. As a rule of thumb, it’s a good idea to keep your balances below 30% of your credit limit at all times. The lower you can keep your balances, the better.

Applying your refund to your credit card debt can help you reduce both your overall debt and your credit utilization ratio quickly. This can help your credit score, making it easier to qualify for more affordable credit products and even potentially helping you save on car insurance.

» MORE: Check your credit score for free

It’s a painless path to a fresh start

Sometimes, the most difficult thing about paying down debt is the “paying” part.

Because of a psychological effect called loss aversion, losses can loom larger in our minds than gains. That’s why it’s painful to see money leave your bank account — even if you know those extra payments are helping you save on interest.

When you pay down your credit card debt with your tax refund check, though, you get to pay down that credit card debt with “found money,” instead dipping into your savings. That makes it a little less painful.

It also gives you a chance to build new credit card habits that can make paying a little less daunting. You might decide to make payments on your credit card balance once a week, for example, so it’s more manageable. Or you could start a new budget to keep your spending down. Wiping out your credit card debt with a tax refund may be a quick fix, but changing these fundamental spending habits can help you save for years to come.

Claire Tsosie is a staff writer at NerdWallet, a personal finance website. Email: claire@nerdwallet.com. Twitter: @ideclaire7.

A Financial Advisor’s Top 10 Investment Lessons Learned

By Mike Eklund

Learn more about Mike at NerdWallet’s Ask an Advisor.

Have you made investing decisions you regret?

I know I have. I recently turned 40 and thought it was a good time to reflect on my own investing mistakes and lessons learned from my 17-plus years of experience.

1. Don’t follow the herd

I started investing in June 1999, right near the top of the technology bubble, and made the same mistakes as many others by buying hot tech stocks. Everyone was making money; why not just invest in a handful of technology stocks and watch them go up 20% to 30% per year?

Obviously, this did not happen for me — or many others — as the Nasdaq 100 dropped almost 80% from peak to trough.

Lesson learned: Following the crowd is not a recipe for investment success. It’s OK to be different.

2. The best investment may be the one you don’t make

My decision to not invest in a Myrtle Beach, South Carolina, condo in the mid-2000s was a smart decision. Many “experts” were saying real estate never loses money, but I couldn’t get the numbers to work.

Twelve years later, those same condos sell for 25% less than their long-ago sale price, not even mentioning the ongoing property taxes and maintenance costs. Many investors struggle with the fear of missing out, but resist the temptation.

Lesson learned: Sometimes saying no is the best decision.

3. Invest in your own human capital

In 2003, I decided to go back to school and get my MBA from the Kellogg School of Management. This investment took time and money, but the result was additional knowledge, a lifelong network and a higher-paying job with greater earnings potential. A lot of people try to find the perfect investment, but sometimes the best investment is themselves.

Lesson learned: Making yourself more marketable and attractive to employers through personal development will only help you in the long term through increased earnings and job security.

4. Avoid large holdings of your company stock

Before the financial crisis, I worked for a financial services firm in New York that compensated employees via stock options and employer stock in their 401(k). Financial stocks in the mid-2000s were a lot like technology stocks in the late 1990s; they only went up. Then the financial crisis occurred, and the stock price declined over 90%. In addition, there were massive layoffs at the firm. Fortunately, I survived the layoffs, but many employees lost their jobs and a significant part of their nest eggs.

Lesson learned: Limit your employer’s stock to no more than 5% to 10% of your portfolio.

5. Don’t try to time the market

It’s really hard to time the stock market. Every day you’ll hear or read about one person saying to buy stocks and another urging you to sell stocks. I’ve found the easiest way to invest is to make scheduled monthly contributions to your various accounts — 401(k), IRA accounts, 529 plans or investment accounts.

This is called dollar cost averaging. The benefit is that if stocks drop, you’ll buy more shares because they’re less expensive, and if stocks rise you’ll buy fewer because they’re pricier.

Lesson learned: Take the emotion out of investing by setting up an automated investing schedule.

6. Avoid the noise

Early in my career, I’d watch popular cable business news programs that would provide “stock tips.” I learned pretty quickly that their goal was to make money selling advertisements, not to boost my long-term portfolio wealth. I’ve stopped watching these kinds of shows and focus on things I can control, such as my savings, life insurance, taxes, estate planning, and so on.

Lesson learned: Don’t get caught up in the short-term noise; focus on the things you can control.

7. Equities are for growth, and bonds help you sleep at night

I started my investing career in 1999, and during the first 10 years I witnessed two of the worst stock market crashes in history with a peak-to-trough decline of over 50% each time. Take your portfolio and divide it by two, and how does that make you feel?

How did high-quality bonds do during this time? They increased in price or stayed flat, which allowed me to rebalance my portfolio. They also helped me sleep better at night.

Lesson learned: A diversified mix of stocks and bonds gives you a better chance of sticking with your investment plan than a 100% stock portfolio. Stocks may provide a greater long-term return, but if you sell at the bottom it doesn’t matter.

8. Implement a disciplined investment strategy and stick with it

There are many investment strategies, and there are times when one strategy will work better than others, but over the long term the returns shouldn’t be materially different. The problem is most people jump to what has done well lately when they should be doing the opposite.

Lesson learned: Implement and follow an investment strategy and stick with it in good times and bad. If you don’t have a strategy, implement one or have a financial planner help you.

9. Control your behavior

Controlling costs is the current fad, which is a good thing for investors, but investors controlling themselves is much more important. Right now that’s easy to say, because the U.S. stock market has done very well the past seven years, but how you feel and act when the market drops 50% will have a big impact on your long-term investing results. Buying high and selling low is not a recipe for investing success.

Lesson learned: If you can avoid pouring too much money into equities when the market is riding high (March 2009) or too little when it’s sinking low (October 2007), you’ll be better off. Studies by Vanguard, Morningstar and Dalbar show the average investor trails the market by 1.5% to 3% per year due to poor decisions caused by wanting to jump on the latest fad.

10. Time is your best friend

I’ve invested for over 17 years and remain amazed by the power of compound interest. I’ve invested through Y2K, 9/11, the ’01-’03 recession, SARS, a real estate bubble, the great financial crisis, Greece’s potential exit from the eurozone, the debt ceiling debate, ebola and four presidents. The global equity markets have marched on.

For example, a portfolio of $500,000 17 years ago with a 5% annualized return would have grown to over $1.1 million assuming no contributions or withdrawals.

Lesson learned: Implement a disciplined investment strategy, be patient, focus on what you can control (savings, taxes, and so on) and avoid a big mistake. If you can’t do this, hire a fee-only financial planner to help you stay on track.

Mike Eklund is a financial planner at Financial Symmetry in Raleigh, North Carolina.

Retirement Can Be a Drag. Here’s How to Fix That

We spend decades dreaming of the day when life won’t be dictated by alarm clocks, commute times, meeting schedules and office politics.

Then reality sets in: Retirement can be kind of a drag. And there may be 20-plus years of it ahead of you.

While traditional retirement planning covers financial essentials — expected returns, inflation, withdrawal rates, portfolio rebalancing, tax planning — most plans won’t prepare you for the emotional challenges of post-work life.

What’s missing from retirement? Work

You may dread the drudgery of employment, but there’s something to be said for the structure it provides.

Work is where many people derive their sense of purpose. It can also provide framework for your days (projects, meetings, deadlines) and a sense of community (thanks to water coolers, slow elevators and happy hours).

Then one day you wake up and it’s all gone.

“I’ve had a number of clients who retire and feel a little adrift at sea, and it happens to people regardless of means,” says Lisa Kirchenbauer, president of Omega Wealth Management in Arlington, Virginia.

A good predictor of retirement dissatisfaction, she says, is if a person views retirement as an escape hatch. “It’s better to be retiring to something and not from something,” Kirchenbauer says. “Being intentional and having a game plan in place helps with the mental transition into retirement.”

Here are steps you can take to help protect your golden years from being tarnished by dissatisfaction.

Find a reason to set your alarm

After you’ve taken those cruises, spoiled the grandkids, organized the sock drawer and descaled the coffee maker, what’s going to inspire you to get out of bed each morning in the decades ahead?

People who have pursuits outside of their professional life tend to fare better in retirement. If you’re not interested in taking up a new hobby, consider ways to use the professional expertise you’ve cultivated over the years. It’s even better for the psyche to apply your talents to serve a cause that you care about.

Don’t wait until you retire to explore new pursuits. Test-drive volunteer opportunities in your community before retirement to plant seeds for future endeavors.

Pretend you’re still living off a paycheck

The transition from building savings to drawing from savings can be stressful. Instead of receiving a regular paycheck, you’re sitting on one giant paycheck — a pile of money you’ve amassed by saving diligently in your 401(k)s and IRAs — that’s supposed to sustain you for the rest of your life.

“Psychologically it feels scary, even though you logically know that you’ve saved so you can live off your investments,” Kirchenbauer says.

Planning can help you transition to spend-down mode. Start by creating a post-retirement budget around anticipated expenses (including quarterly taxes, health care and potential emergencies). Also think about which accounts you’ll draw from (Roth or traditional IRA, taxable brokerage account, cash savings?) in order to minimize the tax hit when you start taking income from your investments.

Kirchenbauer recommends simulating a paycheck-based cash-flow system in retirement by setting up monthly transfers from an IRA (or other retirement account) into a checking account. This also helps prevent a retirement rookie error: blowing through your cash too quickly during the initial stages of retirement.

Discuss the transition with loved ones

Retirement can be a major relationship disruptor. All that “me time” you and your partner had when one or both of you were at work is now potentially “we time.”

Kirchenbauer says it’s important to have a series of conversations with your spouse about whether you will retire at the same time. Retirement can be especially stressful if one partner retires before the other.

Expect that there will be an adjustment period, and perhaps spats over household duties (“You were home all day; why didn’t you mow the lawn?”) and scheduling conflicts (“I can’t take that week off work for a road trip”). But if you’re prepared to be flexible, respectful and understanding of the other person’s perspective, you can achieve peaceful coexistence in retirement.

More about mastering retirement

Dayana Yochim is a staff writer at NerdWallet, a personal finance website: Email: dyochim@nerdwallet.com. Twitter: @DayanaYochim.

This article was written by NerdWallet and was originally published by The Associated Press.

Say Goodbye to Money Stress

By Kurt Smith, Psy.D.

Learn more about Kurt on NerdWallet’s Ask an Advisor

Money-related stress doesn’t discriminate. Whether individuals are financially well off or not, most still worry about their finances: A 2016 survey by the American Psychological Association found that 61% of Americans were either somewhat or very stressed about money.

Many of us get sucked into the mindset that if we just had more money, we wouldn’t worry so much — but that wouldn’t necessarily be the case. So how can you have less money stress within your current financial situation? Here are five ways.

1. Monitor your accounts less often

Logging into your checking or savings account every day isn’t necessary or healthy. Getting a text message every time there’s a change in your account isn’t either — it just adds unnecessary stress. It’s important to keep tabs on your financial situation, but doing so a little less often can make you much happier.

2. Focus on your needs

We may believe we need the newest smartphone or a new vehicle, but these are truly luxury items we could live without. And when we pause and think about our true needs — food, shelter, water, clothing, love — and how abundantly they’re already met, we realize how commercialized our thinking can be. It can feel good to discover how much you can live without.

3. Set spending limits

It might sound counterintuitive, but having appropriate boundaries can actually be freeing. Try designating an amount to spend each month on discretionary purchases such as eating out and entertainment. You can then spend guilt-free within your boundaries. When the allotted money runs out, you’ll know you have to wait until next month to spend more. This simple step can help you live within your means and take away the stress of wondering what you can afford.

4. Remember, money is a tool

Money is understandably an emotional issue, but it’s useful to remember that at its core, money is a tool used to purchase goods or services. Assuming one already lives reasonably comfortably, more money doesn’t truly provide more security or comfort, as we sometimes want to believe. When we accept that it essentially allows us to trade with others, we can let go of the emotions we’ve attached to it and think of it just as a means of exchange.

5. Find other sources of joy

No matter how much money you have, it won’t necessarily bring you happiness or change the overall quality of your life. Some of the most joyful people have very little money, and some of the wealthiest people are still very unhappy. Try finding joy and happiness in the life you live right now. What blessings do you already have? What are you grateful for that money didn’t provide? The sooner you can find contentment in the life you already live, the quicker you’ll be able to experience lasting happiness and joy.

Don’t let money dominate your thoughts or raise your stress level. Instead, create a lifestyle that helps you live within your means and recognizes that money alone won’t provide happiness.

Kurt Smith, Psy. D., is a financial and relationship counselor at Guy Stuff Counseling and Coaching.

5 Essential Investing Moves for Millennials

If you believe recent reports from the web, you probably think millennials are financial floozies, trading their retirement money for venti lattes.

The reality is probably not that bad, but also not as click-worthy: Research from the Transamerica Center for Retirement Studies indicates that nearly three-quarters of millennials are saving for retirement and that we started doing so at an earlier age than previous generations. Wells Fargo data show that of those who are saving, half are putting away 6% of their income or more.

What we’re not so hot at, according to many of these same surveys, is investing. Many of us are frightened or confused by the topic and even inclined to put our money in a sock and call it a day. That’s a problem, because investing the money you save is nearly as important as saving it in the first place.

Here are five crucial moves millennials can make to overcome their investing anxieties.

1. Get an education

At least this one will be free. Investing is understandably scary. Until you learn what you’re doing, it feels an awful lot like gambling in Vegas without the free drinks.

There are plenty of resources to guide you through the basics; you just have to put in the time. Khan Academy is a good place to start, as is NerdWallet’s guide on how to invest in stocks. Morningstar has a good, if slightly dated, investing classroom, and online brokers often have a ton of beginner-focused educational materials on their websites.

2. Say hello to risk

Risk is kind of like that friend who regularly cancels plans but always comes through in a pinch. There might be heartache in the day-to-day, but in the long run, you’ll be glad you stuck it out.

In investing, more risk means the potential for more reward. Investments that require you to take on risk, like stocks, have to offer you a premium for doing so. Could you lose money and never collect that premium? Sure, but that’s unlikely when you’re in it for the long-term.

History illustrates this: A portfolio of 100% stocks had an average annual return of 10.1% between 1926 and 2015, according to a study by Vanguard. A portfolio of 100% bonds returned roughly half that, averaging 5.4%. To put that into real-money terms, if you invested $5,000 for 50 years at a 10.1% return, you’d have $614,000. At a 5.4% return, you’d have just $69,000.

But a 2015 study from BlackRock found that millennials might have as much as 70% of their money in cash, meaning a savings account, a pillowcase, old sneakers. At today’s historically low interest rates, it’s all roughly the same. That $5,000 becomes just $8,000 at a 1% return; in your shoe, it stays $5,000. Factor in inflation — a force that millennials may soon notice for the first time in their adult lives — and you’re actually losing money.

3. Take that risk through index funds

That 70% would be a reasonable stock allocation for your retirement portfolio — and even that might be on the low side. At this age, you should have most of your long-term savings invested in stocks. The best way to do that is not by dumping your money into Apple stock, but with low-cost index and exchange-traded funds.

Those funds pool investor money to buy many different investments in one swoop. You can buy a couple of funds that hold the stock of U.S. companies, one that holds international companies and one that holds emerging-markets companies and you’ll be reasonably diversified.

You can learn more about building a diversified portfolio in NerdWallet’s piece on investing in your 20s.

4. Put a lid on fees

You can’t control the ups and downs of the stock market. What you can mostly control are investing costs — fees charged by your index funds (called expense ratios), administrative fees in your 401(k) and transaction fees incurred when you buy and sell investments.

Every dollar that goes to these costs is a dollar that reduces your returns. Keep transaction costs down by limiting unnecessary trading and using commission-free and no-transaction-fee funds. Most brokers will have a list of both types of funds. If an index fund’s expense ratio is more than 0.25%, you can likely do better with another.

5. Use a Roth IRA or a Roth 401(k)

Contributions to a traditional 401(k) or IRA are made with pre-tax dollars; you pay taxes when you take distributions in retirement. But you can also pay taxes now and spare your future self the burden by choosing a Roth IRA (check Roth IRA contribution limits to gauge your eligibility) or the Roth version of your 401(k), if your employer offers that option.

Why choose a Roth? If your income is lower now than it will be later — a likely scenario for many young professionals — you’re locking in at lower tax rate. And because you’re not getting a tax benefit now, you get to pull out the money — both your contributions and investment growth — tax free in retirement. To see how valuable that is, use a Roth IRA calculator.

If you have more questions about Roths, see our complete Roth IRA guide.

Arielle O’Shea is a staff writer at NerdWallet, a personal finance website. Email: aoshea@nerdwallet.com. Twitter: @arioshea.

This article was written by NerdWallet and was originally published by Forbes.

 

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