Benefits of multiple income streams

Having multiple income streams is helpful for several reasons:


Diversification of income:

When you rely on a single income stream, you are putting all your eggs in one basket. If that income source is disrupted for any reason, such as a job loss, a market downturn, or a recession, you could be left without any means of support. By having multiple income streams, you spread out your risk and decrease your dependence on any one source of income.


Increased earning potential:

By having multiple income streams, you have the potential to earn more money than you would with just one income source. This is especially true if you can create passive income streams that continue to generate income even when you’re not actively working.


Flexibility and independence:

Having multiple income streams gives you more flexibility and control over your financial life. You can choose which income streams to focus on and how much time and energy to devote to each one. This can give you greater independence and a sense of control over your financial future.


Protection against unexpected expenses:

Multiple income streams can also provide a buffer against unexpected expenses or emergencies. If one income source is disrupted or reduced, you can rely on other income streams to help cover your expenses and maintain your standard of living.

Overall, having multiple income streams can help you achieve greater financial stability, independence, and security, and it can also provide a pathway to higher earnings and greater wealth over time.

Considerations for higher interest rates

Now that the Federal Reserve raised interest rates seven times in 2022, there are some factors that you should consider in your financial planning.  When it comes to interest, it makes a difference whether you are a borrower or a lender.  We’ll talk about the factors as a lender, or saver, in today’s post.  Stay tuned for our next post on considerations as a borrower.


After a decade of extremely low interest rates, we finally have interest rates that can help savers.  Here are a few areas where some adjustments to your plan may be in order.


Is your money working for you?

Did you know that, as of February 2023, you can get 3.75% APY on your savings account at a large national bank and even higher if you go with some regional banks?  That means you can earn $375 on $10,000 of your emergency fund just by having it in one of these accounts.  On the other hand, many of the large national banks are still only paying .01% on their savings and money market account.  So, you can earn .01% or you can earn 375 times that amount by looking around for better interest rates.


Reconsider your accelerated mortgage payments

Have you been making additional principal payments on your mortgage to pay it off more quickly?  If your mortgage interest rate is at 3.25% and you are earning 3.75% on your funds in the bank, you may want to take the extra funds that you’ve been dedicating to mortgage payments and earn more on those funds in the bank.


How about your tax return?

For at least a decade, interest rates were close to zero.  Aside from avoiding giving your hard-earned money to the government any sooner than you needed to, there was little reason to ensure that you weren’t withholding too much from your paycheck in income taxes – unless you were actually investing.  Now that we have reasonable interest rates, you could be earning interest on those dollars.  The government doesn’t pay you interest on those dollars unless they unnecessarily delay your tax refund after you’ve filed your tax return.  So, now it has become a question of whether you earn interest on those dollars or the government earns interest on your dollars.  The caveat here is that you would need to put those extra dollars where you’ll actually earn the interest income rather than spending the extra dollars.


Note on on blog posts and newsletters:  When we work together, we examine your particular financial picture and your particular goals.  Blog posts and newsletter articles are not individualized advice.  They are intended to be thought-provoking and to surface discussion topics for your financial planning.  If you have questions about your financial plan, feel free to schedule a meeting.  Your first meeting is complimentary.

Myth: It’s always better to pay down debt as fast as possible

This post is part of our financial myths series


You may have heard that it’s always better to pay down debt as fast as possible. There are two huge flaws with this advice.

Here are some factors to consider.


What do interest rates look like?


What if you were able to take out a loan at 2.5%? And, what if at the same time you were able to generate 5% on your investment portfolio? Does it make sense for you to take funds that could be in your investment portfolio and earning 5% to pay off the loan at 2.5%? Possibly not.

Considering things like mortgage interest deductions and barring any additional costs of carrying the loan, you will come out financially ahead by taking your time to pay down that 2.5% loan.


Money is extremely personal


Money and finances are extremely personal matters. Your money story and your history with money is different than anybody else’s. For some people, having any kind of debt induces anxiety. It doesn’t matter if they could pay off their debt 10 times over and there is little or no chance of having their home foreclosed upon, their car repossessed or having levies on their income, they just don’t like having debt. In these cases, it really may be the best thing for these people to pay down their debt as fast as possible. It’s very hard to put a price on personal contentment-or determine the cost of personal anxiety.


Risk tolerance


For some folks, there is a great deal of uncertainty about their financial situation. For instance, their income might be very variable – changing from month to month and year to year. Those folks are already tolerating risk in their variable income. They may not want to take on the additional responsibility of those principal and interest payments. In those cases, it might be helpful to pay down debt when the cash is flowing. That can help reduce fixed payments and make life a little easier during those low-income periods of time.

The same thing goes for those who are getting ready for retirement. If cash and income needs during retirement will be met easily, then it may make more sense to look at this question with strictly black-and-white benefit and cost numbers. In other words, if the return on investments is significantly higher than the cost of interest on the loan, it may make sense to pay off the loan slowly. Use those funds to get the higher return on investment. Use part of that return to pay the interest, and you still come out ahead.  On the other hand, if there is uncertainty about steady income during retirement, and especially if we are talking about the family home, you may want to have any indebtedness on the home paid off prior to retirement. Yes, there will still be ongoing expenses related to owning the home like upkeep and property taxes, but at least the monthly mortgage payments could be eliminated.

For the most part, we are talking about debt with fixed interest rates. There is additional risk if the interest rates are variable. Variable mortgage rates, credit card debt and lines of credit often come with variable interest rates. This means that while you may have felt that a monthly payment was reasonable when you took on the loan, and increased payment due to higher interest rates could be crippling. In those cases, the simple financial calculation showing costs and benefits needs to be balanced with the additional risk.


Using leverage


Remember, this is intended to be educational – not advice. In direct contrast to the notion that you should always pay down debt as quickly as possible, many successful investors actually take on debt just to build their investment portfolios. In other words, if they believe that they can get a better return on their investments than the cost of borrowing money to make those investments, they choose to incur the debt. They may do this even if they had cash readily available to make those investments. Because on the spreadsheet, with just black and white numbers, it shows a positive return. Again, this is just for educational purposes, not advice. These investors are taking on a serious amount of risk. They could lose their own money as well as borrowed money which they still have to pay back – with interest. But again, this strategy flies in the face of the notion that one should reduce their debt as quickly as possible.

I think the most important factor here is that money is very personal. Everyone handles money differently. Money affects different people differently psychologically. Some people get anxious having any kind of debt, while others look at it strictly as a tool to grow their wealth.

I think this is a prime example of making sure you are making informed decisions. Calculate the actual financial cost of carrying the debt versus any potential gain on the use of those funds. But ultimately, it comes down to how much risk you can tolerate and how comfortable you are holding that debt.

Myth: It’s always better to buy than rent

This post is part of our financial myths series


You may have heard that it’s always better to buy than rent. I would imagine that the thought behind this is that you are building equity when you buy. When you rent you’re just “throwing money away”.  Or when you rent you’re “paying someone else’s mortgage”.


Here are some factors to consider


What if you don’t know how long you’ll be staying in your present location? Try adding up closing costs for a new home and mortgage, possibly personal mortgage insurance, property taxes, as well as mortgage interest. Throw in the cost of any repairs or renovations. And now imagine having to pick up and move only two years later. Doing that over and over again is going to get mighty expensive.

An important consideration in the rent versus buy question is how long you think you will be staying in your home. When you spread all those costs over 10 years it’s not so bad. However, when you spread those costs over only two years it’s a different story.


Is an appropriate home available?


Rushing into the purchase of a home when there are no appropriate homes available is setting yourself up for grief. We are talking about what may be the largest purchase of your life. While your relocation may have been unplanned or even forced, that does not mean that you have to rush into purchasing a home. Renting in your new area for a period of time before settling on a particular neighborhood might be the best way to go. You’ll have the opportunity to learn more about your neighborhood, other nearby neighborhoods, and other pros and cons that are not easily observable when you’re just searching for a house.


What do interest rates look like?


If you just happen to be looking for a new home at a time when interest rates are sky high, it might make sense to rent for a period of time. Yes, if you purchase you can refinance in the future. But refinancing has its own costs. This goes back to how long you will be spreading those closing costs. Spreading the closing costs from purchasing your home over only a couple of years before refinancing means it was a very expensive couple of years. 


What homes are available for purchase?


What does the current inventory of available homes look like? Is there a home that fits your family’s current needs and future needs available right now at a reasonable price? Moving is expensive – both financially and emotionally. If you have young children, would you be willing to uproot them from their school when you find a better or more appropriate home in just a few years?


Real estate values don’t always go up


Barring any extenuating circumstances, real estate values generally go up over the long haul assuming that maintenance and upkeep are being done consistently. However, sometimes there are circumstances that are beyond your control. If you are the only ones keeping up your home in your neighborhood, your property value will probably decline in spite of your efforts. If a large industrial complex is built near your home, you may also find that your property value declines.  Sometimes regional economics are just not in your favor and property values decline.  Can you financially withstand a significant drop in property value?  If not, this may not be the right time in your financial journey to purchase a home.


Will you be house poor?


Do you have the financial resources to support the true cost of owning a home? While it may be true that you may be able to count on future raises and promotions which will free up some cash flow, that will take time. If your finances are very tight due to mortgage payments, property taxes, utilities, maintenance and upkeep, you could be very uncomfortable. In addition to these ongoing expenses, you would like to furnish your home. And, if all of your financial resources are going just to support your home you may become burnt out and resent owning that home.


A homeowner is taking on risk


When you own a home you are taking on risk. There is the risk that the market declines and you ultimately owe more on your mortgage then you can get by him selling your home. There’s the risk of damage to the physical house. Yes, there’s insurance.  But there’s also premiums, deductible and the hassle of dealing with repairs and replacements.

When you rent, you don’t have to take on the risk of the property value declining. If the neighborhood starts to change you can easily pick up and go elsewhere. If your career takes you to a different part of the world you can easily pick up and move.  And rather than being responsible for the entire structure, you’re only responsible for your own belongings (yes, you will need renter’s insurance).

There are many factors to consider when it comes to this question. As usual, the answer to this financial question is “it depends”. Regardless of your situation, you should never feel shamed into choosing to rent or to buy. It is a personal decision.  And making a decision based on “rules of thumb” or peer pressure could cause a lot of regret for you.  After all, those folks applying the peer pressure probably won’t be around to help if something goes wrong.

Myth: It’s always better to defer taxes

This post is part of our Financial Myths series


You may have heard that it’s always better to defer taxes.  And, on the surface, it seems reasonable.  Why should you give the government your money before you absolutely must?  You could be using that money.  And what about this tax drag you’ve heard about?  We want to avoid that, right?


Here are some factors to consider.


In a world of certainty, where you know that you could either pay $2500 in taxes today or you’ll have to pay the same amount in 10 years, it makes sense to defer the payment, especially if you have more productive uses for those funds.  But we don’t live in a world of certainty.  And, not only could things change before that tax comes due, for many households, it already doesn’t make sense to defer the taxes.


Lower tax bracket in retirement?


I suspect that this piece of wisdom came about when it was very likely that you would be in a lower tax bracket in retirement than during your working years.  Back then, there were so many tax brackets that it was likely that even a small decrease in income would put you in a lower marginal tax bracket.  In 1986 there were 15 U.S. federal income tax brackets.  Today, there are only 7 U.S. federal income tax brackets (if we don’t count estates and trusts).  Today, you could have a much larger decrease in income and remain in the same tax bracket.  So, it is quite possible that you won’t be in a lower tax bracket in retirement.


What about the tax brackets themselves?


And, tax brackets shift and change over time.  In fact, when considering U.S. Federal Income tax brackets, we are currently near historic lows.  Revisiting 1986 again, the top of the 25% tax bracket for Married Filing Jointly couples was $32,270.  In today’s dollars, that would be $87,387.  That means that a couple with more than $87,387 in taxable income would be in a marginal tax bracket of 25% or higher.  The highest tax bracket in 1986 was 50%!  Today, a Married Filing Jointly couple with $87,387 in taxable income would be in the 12% tax bracket and the highest federal income tax bracket is 37%.  And, in case you were thinking that I just chose an example of crazy high tax rates, in the late 1960s and 1970s, there were 25 tax brackets topping out at 70% and before that they topped out at 91%!  Therefore, you should consider the possibility that federal income tax rates rise again in the future.


What about “tax drag”?


Tax drag is how we describe the effect on your investments when your portfolio loses a percentage of its value each year to taxes – which then reduces the funds you have available to put to work for you for the subsequent years.  In a tax advantaged account where you defer the taxes until you withdraw the funds (presumably in retirement), you don’t have tax drag.  But, how much would your tax drag actually be in practice?  You don’t pay taxes on the value of your whole portfolio every year.  You only pay taxes on the income you actually realized – so for most people, only on the capital gains from selling an investment or perhaps distributions from stocks and funds and maybe interest.  You don’t pay income taxes on the rest of your portfolio that didn’t trade during the year.  If you are actively trading your retirement account, then, yes, you could generate significant taxable gains.  But if you aren’t actively trading, then the tax drag may have been minimal to start with.  And, the taxes paid on long term capital gains that you might generate from trading are relatively low – likely only 15% as compared to as much 24% or 32% on ordinary income in a regular taxable account.

Losing the benefit of capital gains tax rates


Which brings us to another factor to think about.  When you withdraw funds from a traditional IRA or qualified traditional 401k, 403b, or other traditional employer sponsored retirement account, you will be paying taxes at ordinary income tax rates regardless of the source of those funds.  In other words, if you contributed and deferred the taxes on $50,000 over your working years but due to market gains your retirement account is now worth $75,000, all of your withdrawals will be taxed as ordinary income – even though 1/3 of the amount was really capital gain. If those investments were in a regular taxable investment account the capital gain portion of the income would be taxed at the favorable capital gains rates.


Remember those REQUIRED minimum distributions


And the last thing I would like you to consider today is that you will be required to take distributions from your qualified retirement accounts in the future.  That means that you may be forced to take income, whether you need it or not, that pushes you into a higher tax bracket.  But, distributions from regular taxable investment accounts and Roth retirement accounts are not required.  To compound the tax effect due to forced distributions, your Medicare Part B premium is based on your taxable income and the percentage of your Social Security income subject to income tax is also based on your income.  So, not only could you be in a higher tax bracket due to the required distribution, you could also end up paying more for Medicare and subjecting more of your Social Security to taxes.


There’s the myth broken down.  Like most rules of thumb, it may apply to some people some of the time, but there are always exceptions.  In this case, the idea is outdated at best, and flat-out poor advice for many households


Retirement Planning Changes – Lot’s of Good News!

As part of the 2023 Consolidated Appropriations Act, the SECURE (Setting Every Community Up for Retirement Enhancement) Act 2.0 was signed into law on December 29, 2022.  The purpose of the act is to provide incentives for retirement savings.  It includes dozens of new provisions impacting businesses and individual retirement savers.

A great feature of many of these provisions is the increased flexibility with retirement funds.  One of our primary purposes in financial planning is to ensure that you have options in the future.  Many of these provisions make it easier to keep your options open.


RMDs Delayed until age 75

Required Minimum Distributions, RMDs, the distributions that you are required to take from qualified retirement plans when you reach the specified age, are now delayed until age 75 if you were born in 1960 or later.   Previously, under the first SECURE Act, RMDs were required at age 72. This delay allows your qualified retirement funds to potentially (hopefully) grow for a longer period of time without the headwinds of an annual income tax bill on those funds.


New Roth options

Roth contributions to retirement accounts are after-tax contributions, meaning that you do not take a tax deduction for them in the year that you contribute the funds.  However, the funds that you withdraw from your Roth account in retirement are not taxable (subject to some qualifying rules).  This means that the growth in those accounts is never subject to federal income tax*.

There are a few ways to make Roth contributions to your retirement savings including Roth IRAs, Roth 401k and Roth 457 accounts as examples.  However, not all employer plans include Roth accounts.  And, many people cannot contribute directly to Roth IRA accounts because their income is over the limit.  Plus, the limit for IRA contributions is pretty low to be the sole source of retirement savings.

SECURE Act 2.0 opens up additional options for retirement savers to build Roth accounts.  First, the act allows employer matching contributions to retirement plans to be designated to Roth accounts.  Prior to the SECURE Act 2.0 all employer contributions were required to be pre-tax contributions. And, for those who have SEP-IRAs or SIMPLE IRAs, Roth contributions are now permitted to these accounts as well.

One of the strange features of qualified employer plans that included a Roth component prior to SECURE Act 2.0 is that RMDs were required from the Roth component of those plans even though RMDs were not required from Roth IRAs.  One of the provisions of the new act eliminates the requirement to take RMDs from your employer plan Roth accounts.


Not all provisions of the act are effective right away.  And, these changes came about quickly so plan providers and custodians will need some time to set up their systems to accommodate these changes.  Also, these new provisions allow for this increased flexibility – they do not require that employers offer these new features.  As an example, even before the first SECURE act, relatively few employers offered Roth components in their 401k plans despite the fact that they were legally permitted.


Usual Caveats

While we appreciate the increased flexibility the SECURE Act 2.0 provides, there are still the usual caveats.  Everyone’s situation is unique and should be evaluated individually.  Just like this tax law introduced changes, a future tax law could introduce other changes.  Any tax law changes mean that your plan should be revisited.

*According to the current tax treatment of qualified withdrawals from Roth accounts.


Complete the FAFSA – Even if you won’t get aid

Every year people ask if they should complete the FAFSA (Free Application for Federal Student Aid) if they know they won’t qualify for financial aid.  The answer is Yes!

In general, completing the FAFSA isn’t difficult or time consuming.  You might find that the toughest part is coordinating a time with your student to get it done.

4 Reasons to complete the FAFSA when you don’t think you’ll qualify for aid:


Establish a baseline

First, complete the FAFSA so you establish a baseline.  While no one wants to think about it, bad things happen to good people.  Anything from losing a job, to an illness or death in family can strike a family and drastically change their financial circumstances.  If you need to go back to a school and ask for reconsideration due to a change in circumstances, it helps to have a baseline.

Keep your options open

The FAFSA is also the application for federal direct student loans.  While subsidized federal loans are need-based, unsubsidized loans are not based on need.  Federal student loans are also not based on credit history, they have a fixed rate, repayment is deferred until 6 months after the student leaves full-time student status and there are some protections available on federal student loans that aren’t usually available on private loans.  Completing the FAFSA gives the option but not the obligation to take a federal student loan.

Might be required for merit awards

Some schools will not consider a student for any financial awards – even merit awards – without the FAFSA.

You could be surprised

Submitting the FAFSA results in the calculation of an Expected Family Contribution.  Even with significant assets, some families will qualify for financial aid depending on the school, the size of the family and other factors.


What’s next for you?

So, your son or daughter has finished up their applications.  You have the list of schools divided up into top choices, middle choices and safety schools.  You’re making plans for the holidays and soon you’ll be making plans for graduation. 

Looking back, you’ve attended countless games, recitals and performances and scheduled around practices and rehearsals for years.  You’ve helped them study, driven to innumerable places, and navigated so many moody nights and thorny social issues.  And soon, they’re off to college.

So, let me ask you this – what’s next for you?

For most parents, their children become their purpose.  Your focus is almost solely on raising compassionate, well-adjusted, contributing members of society.  And, if you’re staring at the college process right now, there’s a good chance that you’ve done a good job at doing what you set out to do.  But, if you’re going through the college process right now, life is soon going to be different than it has been for the last 18 or so years.  This is why I ask, what’s next for you?

Life does not end when you send your kids off to school.  It’s simply time to move on to the next stage in your life – just like the kids are doing.  That’s not to say you won’t worry and that they won’t call home when they have something to celebrate or they’re encountering new life lessons.  But they’re also finding new freedom and you can do the same.

Try this – and if you do this all the way – it can be a challenge.

Picture a vacation where you spend an entire week doing just what you love to do.  Not with the kids and don’t put any financial constraints on it – just you doing what you love to do. Think about doing what you love without stopping to drive someone somewhere, or to attend a game or a conference or an open house.  And without being required to go to work at your current job.  What would that look like?  What would you be doing each day?  Where would you be?  Would it make a difference what time of year it was?  What if it was longer than a week?  Would it still look the same?

When you are caught up in the day to day life of raising a family, many decisions are put on autopilot.  There are just so many choices to be made that you need autopilot just to keep your sanity.  But, in doing that, you keep going to work to get the paycheck to do the other things that are also on autopilot.  You get in a mode of believing that you must do A so that you can do B so that you can get to C on time.  And let’s face it – routines are a big part of what gets us through everyday life. 

But now the routine is being upended anyway.  Let’s step back and look at what comes next because you want to make it happen – not because it happens to you.  Don’t worry about what the standard path is.  No one says you must follow standard path – except maybe you.  Most people continue on the path that they’re on because it’s easier to just keep going.  That doesn’t mean it’s the only path or the best path – it just means that they have a lot of company. 

I’m not saying that you can definitely go out tomorrow and live the exact life you pictured for your vacation.  But, imagine that you go out tomorrow and have a new purpose.  Your new purpose is building that life that you pictured. Rather than simply going to work each day so that you can get to the day that you retire, you start each day with a purpose that is specific to you.  Imagine how much easier it is to greet each day knowing that you’re not just working, you’re working toward YOUR goals. Imagine knowing that the energy you expend each day is getting you closer to where YOU want to be.  The time is going to pass anyway – spend it building the life you envision.

Once you have had the courage to design your ideal life, call me.  Let’s talk about what’s possible – without the constraints that you put on yourself.  Let’s see what steps you can take once you give yourself permission to build your ideal life.


P.S. You’ll be setting a great role model for your kids too.