All posts by Financial Independence Hub

6 Tax mistakes every family needs to avoid

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Photo Credit: Kelly Sikkema, Unsplash

By Sia Hasan

Special to the Financial Independence Hub

No one looks forward to filing their taxes each year. The process is time-consuming and stressful no matter how many times you’ve done it in the past. Unfortunately, even the most experienced workers make mistakes when filing their returns and those mistakes can really add up.

The last thing anyone wants to deal with is a formal audit by the IRS [or, in Canada, the CRA] and the more mistakes you make, the more likely that audit is. Believe it or not, it’s possible to avoid the most common mistakes year after year. You just need to know what they are in the first place.

Ignoring late or missing W2s

Your employer is required to send out a W2 at the end of the year [the equivalent of a T-4 in Canada.] This is your wage statement that shows your rate of pay, the amount you earned and the amount of money withheld for taxes from your paychecks. While it’s possible to file without the W2, it’s incredibly difficult and often leads to errors when reporting your income. Instead of ignoring a late, missing or lost W2, get another one reissued. Speak with your company’s HR department and get them to print a new one for you. If they can’t, they’ll be able to request a new copy from the business’s accounting department.

Not paying attention to Deadlines

It’s easy to lose track of time when you’re juggling the responsibilities of busy work and social schedules on top of filing a tax return. Unfortunately, filing late can end up earning you a hefty fine and penalty from the IRS [and the CRA]. If you’re having trouble keeping track of tax deadlines, start filling out your return as early as you can. You should be able to complete the return as soon as you receive your wage statements from your employer and any additional income statements for investments or gambling earnings. You can also set reminders on your phone to help you stay on schedule.

Forgetting to double-check your Return

There’s a lot of data entry involved with tax returns. Each number and piece of information you enter needs to be correct. If there are errors, you could end up dealing with a delay or hard inquiries from the IRS. Continue Reading…

Don’t be smug about Markets

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By John DeGoey, CFP, CIM

Special to the Financial Independence Hub

Many American commentators are gleefully noting that the pandemic-induced bear market for the S&P 500 is now officially on record as the shortest bear market in history.  The stark reality of a pandemic-induced economic slowdown has been countered with a federal reserve-induced monetary stimulus the likes of which has never been seen before.  The first two thirds of 2020 have been remarkable because those nearly eight months have featured not only unprecedented bad economic news, but also a swift and equally unprecedented policy response to counteract it.  As I write this in the second half of August, the American stock market is now slightly higher than where it was to start the year and the Canadian market is slightly lower.

The bear market lasted just over a month.  Using simple math, we experienced a drop of about 1/3 followed immediately by a rise of about 1/2.  Think of it this way.  Say we’re starting with a market level at 300.  A drop of 1/3 brings you down to 200, but a subsequent rise of 1/2 gets you back to 300.   In the half year between February 19 and August 19, we’re right back where we started.  Now what?

“Don’t fight the fad” never so apt?

The easy narrative is that the storm has passed and the crisis has been averted (or, at a minimum, was extremely short-lived).  I have had many experienced people remind me that the phrase “don’t fight the fed” has never been more apt.  Looking back over the landscape from late March to the present, I grudgingly agree that that has been the case.  By making traditional income investments look extremely undesirable, people have opted to buy stocks pretty much by default.  You may have heard the acronym TINA.  It stands for “There Is No Alternative.”  That’s what central banks around the world have done. They have quite literally taken away all plausible alternatives for retail investors seeking a return on their capital investments. Continue Reading…

Understanding the Chargeback Process to ward off Credit-card Fraud

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By Gary Bordeaux

Special to the Financial Independence Hub

Proper accounting and cash flow management is critical for both big and small business owners. This seems obvious enough, but when we move from accounts receivable into the world of refunds and chargebacks, the water can begin to get muddy, and it can be more difficult to keep track of where you stand. The first action to take towards fixing and preventing the problems this can cause is to understand what chargebacks are, and what to expect when you are presented with one.

The two types of Chargebacks

If you’re a new entrepreneur, you may be asking “what is a chargeback?” A chargeback is a form of fraud dispute that comes in two basic methods. First, a chargeback can be a transaction that is reversed due to activity that may be fraudulent designed to protect a consumer a business or both. In the second type of chargeback, the credit card company demands a vendor replace or make good a loss incurred by the consumer due to a fraudulent charge.

It’s important to mention early that a refund is very different from a chargeback. A refund is instigated by one or both parties, and usually involves the re-exchange of an item for its purchasing price or value. Chargebacks are inherently fraud mitigation processes that may have additional fees that must be paid by the party deemed at fault, usually the retailer.

Who is involved and what is the process?

The key players in the chargeback process begin with the customer, who usually is the one to dispute a charge. They file a complaint with their credit card’s issuing bank, which may be their local branch or a national finance company that has provided them with their card. The issuing bank takes the concern up with their issuing bank processor, which will verify the account balances of the customer and then approve or reject transactions that have come through any of the four major card networks (MasterCard, Visa, Discover, or American Express).

The card networks are responsible for settlement. Their next step is working with an acquiring bank (or acquirer) that accepts funds for the retailer from the buyer. They are responsible for the settling of additional fees like processing, interchange, or network fees. Their merchant account processor does just what their name implies: process payments for the merchant. These go into the merchant commercial bank account, which is simply the retailers’ account; the destination for funds. But this is where funds can be pulled for chargebacks and given back to the customer.

Reason Codes

When dealing with Chargebacks, it’s important for a business to be familiar with reason codes. Reason codes are the shorthand for the card networks, and signify why a charge has been disputed, resulting in a chargeback. Continue Reading…

Determining your Financial Independence number

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By Mark Seed, MyOwnAdvisor

Special to the Financial Independence Hub

Passionate readers of this site have long understood I’ve never been fully convinced about the “retire early” element in the Financial Independence Retire Early (FIRE) movement.

I mean really, what 30- or 40-something is never going to work for any money ever again??

(Answer = you know it.)

Surely some of them will hustle a blog, a course, a book, a podcast or other at some point. The list goes on.

Such FIRE-seekers and very early retirees are not likely misleading people on purpose: some are just simply entrepreneurs …

Forget “RE”, “FI” is the worthy goal

While I couldn’t care less about the retire early part of FIRE, I am working towards the FI part and have been doing so for at least a decade now.

I think most people should absolutely strive for FI instead of early retirement. (See this 2019 blog, Strive for Financial Independence, not Early Retirement).

How much do you need to save for any comfortable retirement?

“It depends.”

According to Fidelity, to be on track for a healthy retirement:

  • You should have x1 your annual salary saved up for retirement by age 30.
  • You should have x3 your annual salary saved up for retirement by age 40.
  • You should have x6 your annual salary saved up for retirement by age 50.
  • You should have x8 your annual salary saved up for retirement by age 60.
  • You should have x10 your annual salary saved up for retirement by age 67.

As a 40-something, according to the pros we should have at least x3-x6 of our annual savings in the bank.

I’m glad I don’t listen to Fidelity. We’re beyond that milestone and we’ll be better off financially (sooner) because of it.

Here in Canada, MoneySense did some similar work on this a while back:

 

MoneySense - how much is enough

Do you really need this much? $1 million or $1.5 million? More?

“It depends.”

I can’t tell you unfortunately: since that answer comes with a complex set of income needs and wants and everyone’s spending goals are very, very different.

I can say with a rather firm set of certainty that if any Canadian or U.S. citizen that amasses this much portfolio value by age 65 and has modest spending needs they will be far better off financially than most.

Our FI number

For years, I’ve pegged our FI number to be around the $1 million portfolio value mark not including any home equity (and our soon-to-be debt-free home: we have to live somewhere!), excluding our workplace pensions, and excluding any future government pensions such as Canada Pension Plan or Old Age Security.

I largely arrived at this number by using a rather standard FI formula.

Financial Independence means:

  1. earning enough passive income from my assets such that my asset-producing passive income is > general expenses, and/or
  2. amassing a portfolio value such that reasonable withdrawals will be > general expenses for many decades on end.

What are reasonable withdrawals???

You could argue the birth of any reasonable and therefore any safe portfolio withdrawal formula was originated by U.S. financial advisor William Bengen.

4% rule

You can read about his genesis for the 4% rule and why it still makes sense by reading this blog from earlier this year: Why the 4% Rule is (still) a decent rule of thumb.

Following Bengen and largely reinforcing his work, three professors at Trinity University published a paper about safe retirement withdrawal rates.

Those professors looked at stock and bond data from the mid-1920s through to the mid-1970s and their conclusion was that essentially over any 30-year investment period in that range, a retiree could safely withdraw 4% of their total assets per year without much fear (meaning barely any fear) of running out of money. Only in a handful of cases, the very worst cases in any 30-year period, would the portfolio go to absolute zero.

So, let’s look at that context when it comes to our goals:

If we managed to enter retirement with our desired $1 million goal of invested assets (along with no debt of course), then we could reasonably expect to assume we could withdraw $40,000 per year for our living expenses from that portfolio with very little fear of running out of money.

Henceforth, the study by those three professors from Trinity University, The Trinity Study, have set the framework for a gazillion FI number crunching exercises to this day and likely the same number into the future …

Determining your FI number 

Here are some options to crunch your math. Continue Reading…

There Is no greater virus than Fear

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Akaisha feeling the wide-openness!

By Akaisha Kaderli, RetireEarlyLifestyle.com

Special to the Financial Independence Hub

We have a choice; living a life of fear, or one of hope and optimism.

Fear

Dwelling on fears clouds the mind.

It creates anxiety, emotional contraction, judgment of others and it becomes difficult to make a clear decision about anything. Moving forward becomes arduous because there is so much doubt. Fear sees limitation, lack of options, and darkness of mind: it’s called depression.

When we are in the middle of it, fear seems very real. What I’m talking about is not the kind of fear when someone has a knife to your throat, threatens your family, or if a wild bear is chasing you. I’m talking about the fear we manufacture in our minds in response to something that we have little control over.

Optimism

When we consider our abilities, good fortunes, and the possibilities of the future, we are able to see windows instead of walls. It’s the place where we have ideas, dreams, solutions to existing problems, and create new inventions.

Yes, currently we are in the middle of some fear-full stuff that is going on. And how you choose to see it makes all the difference.

There will be hundreds if not thousands of new businesses and inventions born out of this present crisis. Perhaps the next Amazon, eBay or Genentech will be leading us into the future. Human beings are very creative. Remember the saying “Necessity is the Mother of invention”?

This is how society, the human race and free enterprise has propelled us forward through the previous decades and centuries. Even Winston Churchill said “The empires of the future are the empires of the mind.”

A little perspective

Few of us were around in 1918 when the Spanish Flu broke out: specifically called the H1N1 virus. About one third of the global population was infected with approximately 675,000 deaths in the US. At that time the US population was 103 million making the US death rate 0.0066.

Extrapolating this out using today’s population numbers of 331 Million would mean we would have 2,185,000 deaths caused by this pandemic.

This is a big difference from the roughly 140,000 deaths today and back then during the Spanish Flu, no businesses or schools were closed.

More recently

We had the Hong Kong flu, H3N2, in 1968. Many of you were around, including us, through this period. As the name indicates this virus also originated in China and lasted into 1970. Continue Reading…