Your Tax Refund – Why Is It So Small?


This time of year, W-2 forms are coming in, shoe-boxes are coming out and kitchen tables are disappearing under a pile of documents.  It’s tax time, and the most common set of questions we hear revolve around the same issue: Why is my refund so small? How can I make it bigger? While we are not tax professionals, here are some observations we’ve had while serving our members over the years. You may want to discuss them in further detail with your tax advisor. 

Question:  Why is my refund so small?

Answer: There’s no secret to withholding. You tell the IRS factors about your life, your employer holds money back to “guess” at how much you’ll pay in income taxes, and then whatever has been withheld is paid to the IRS for covering your annual income tax burden. If, in fact, you’ve withheld more during the year than you need to pay, the IRS will pay you back any extra income you’ve withheld.

If your tax refund is smaller than you expect, then you didn’t withhold enough money to cover your tax bill. If the amount is surprising because it doesn’t look like last year’s refund, then you probably had something different happen this year. Did you pick up extra income? Did a child move out? Did you stop paying the interest on your mortgage or student loans? Knowing this, if you’re looking for a reason why your refund was smaller, start with the changes in your life.

If you still can’t figure it out, look at how much you made this year as well as your total withholding.  If you made significantly more than last year while withholding the same amount, that could be the reason.  If you want better, more specific answers, take your information to a tax preparation professional. 

Question:  So, should I withhold more?

Answer:  We hear this one a lot. Many of our members were raised on “the IRS savings plan,” particularly if they came from poorer or lower middle-class backgrounds. Families that had trouble getting ahead would plan on tax refunds for a once-a-year spending spree. Now, as the children of those families have grown up, they want to have that type of spree as well.

It’s not a good idea to withhold more money so you can have a bigger refund. In fact, it’s about the worst investment you can make, because you get paid no interest on it. Your money will even lose value due to inflation while the government holds it, so it’s like you paid someone for the privilege of not accessing your money while it earned zero interest. Imagine a free checking and savings account, except the exact opposite in every way: It’s not free, you can’t access it like a checking account, and you don’t earn interest on it like a savings account. It’s a free checking and savings account you set up for someone else. 

Question:  How can I get more money back?

Answer:  The obvious way to get more money back is to find more deductions or withhold more during the year. However, there are other ways to make tax time more profitable. 

Imagine that, instead of withholding an extra $100 every month, you invested it in a savings certificate, money market, or Christmas club account.  Over the course of the year, you’d accumulate $1,200 in principle, just like you’d have an extra $1,200 coming from the IRS. In other words, this method is just as good as the IRS savings plan: If something crazy happens on your tax return or you have some money to avoid a big tax bill, you can have a big annual spending spree.

But it’s better than withholding for a variety of reasons. First, you can access it if you’re putting that money into a money market or other savings program. (Try the high yields on our Kasasa Cash Rewards Checking account with a Saver attached.)  Second, your money will be protected from inflation, and then it will grow. Earnings on different programs vary based upon what you choose to invest in, along with other factors. But even earning a couple of percentage points above inflation could lead to another $100 in your pocket on top of the principle, and save you $100 that you would have lost to inflation. $200 isn’t chump change, particularly on a modest investment, and it could even be more depending upon how much you invest and the program you choose.  Even if you don’t earn much, though, it’s still better than giving that money away.


Even better, you can use that money to double dip.  If you withhold that extra $100 every month, then deposit it into one of our tax-exempt college or retirement savings funds, you can have a big payday while building deductions for next year, so you’ll get even more back.  Obviously, your specific situation will vary and there are limits to how much you can put into each of your tax-exempt accounts, but if you’re interested in starting the snowball effect of compound interest, tax deductions and long-term savings, give Destinations Credit Union a call at 410-663-2500 and we’ll get you set up in no time.  

Investing In New Media


It sounds like free money:  Everywhere you look, people are glued to their mobile phones, whether they’re in line at the post office, watching TV in their living rooms or cutting you off during the morning commute. All you have to do is throw some money at the stock offerings for Facebook or Twitter and wait for the cash to start rolling in, right? But, if you’ve checked recently, Twitter’s stock has plummeted, they’re laying off workers and investors are panicking. Facebook had the same growing pains, and anyone old enough to remember Y2K also knows the names etched on the gravestones in the social media graveyard: Friendster, Myspace, Google Buzz, etc.

How can you protect yourself from disaster without missing out on what appears to be the wave of the future? You don’t want to end up kicking yourself because you missed out, just like you don’t want to kick yourself for buying too much. Below are some tips for investing in emerging technologies without losing your shirt. 

1. Understand the product.  You’d never buy Coca-Cola stock if you didn’t know what a soft drink is, so don’t buy stock in social media unless you understand their business. Social media sites are in the business of selling data to advertisers.They make their money by developing sophisticated algorithms that claim to understand you very well, so advertisers don’t have to spend big money to broadly distribute their message. What this means is that users are the product and advertisers are the customers. 

Facebook and Twitter have very different ways of displaying content to users, and therefore have different pitches when they talk to advertisers. The best example of the difference between the social media giants is from summer 2014: Facebook was filled with Ice Bucket Challenge videos while Twitter was full of unrest in Ferguson, Missouri. At the time, this was seen as an indictment 

of Facebook: Its vaunted algorithm was weighted too heavily to favor users’ immediate network and content that utilized Facebook add-ons like its video player.  Twitter was correctly identified as the better medium for serious news. In retrospect, the seriousness of Twitter is its problem – users go to Twitter for news, revealing less of themselves and making themselves less easy to target for ads. 
2. Understand the market.  Facebook is preferred by Baby Boomers, while Twitter is preferred by millennials, mostly because Boomers (their parents) are on Facebook. As of right now, Boomers are a more lucrative market because they have higher incomes and net worth. However, over the next five years, Millennials are expected to comprise more than half of all workers in the country and have an even larger share of personal spending. Boomers will be retiring as millennials are buying houses, minivans, golf clubs and all of those markers of suburban middle age. They can’t just buy coffee, cellphones and tattoos forever.
If you’re buying Twitter stock, you’re planning on holding it until the millennials come of age, and therefore you’re betting on Twitter figuring it out over the long term. If you’re buying Facebook, you’re planning on selling sometime before the Boomers disappear from the workforce. Remember, all of those headlines about Boomers spending more in retirement are looking at Boomers at the beginning of retirement – when time seems ample, energy seems infinite, and all of those hobbies put off for decades need new supplies.  Even America’s most mercurial and surprising generation will eventually succumb to the comforts of retirement. 
3.  Understand the risk.  There’s never been a guaranteed safe play in the history of tech stocks. It’s doubly so for social media. Bear in mind that Facebook and Twitter compete directly with Google, Microsoft and increasingly with Apple for generating data to sell to advertisers. Of those companies, Google has always been tethered to the massive losses from YouTube, Microsoft took a major hit with its antitrust suit, and Apple nearly went belly up during Steve Jobs’ absence. It’s easy to read that last sentence as a list of great businesses beating the odds and overcoming adversity, but it ignores all of the companies that failed to do so.  Buying Facebook or Twitter is going to be risky.
There are lots of ways to combine those three ideas to better protect yourself. If you want to offset risk, there isn’t much of a better investment than the savings products we have at Destinations Credit Union. Take a look at the Kasasa Saver account you can pair with Kasasa Cash Rewards Checking! By stocking up on our certificates or a High Yield Account, you can use low-risk investments to protect yourself, while still getting a higher return than one of those corporate banks can offer. Check out our rates.

If you’re worried about the time involved in your investment, our savings products can help there, too. If you’re buying Twitter now, you’re making a deal with yourself that you won’t sell it too soon and miss out on profits. But what if you need the money soon? Our Kasasa and High Yield accounts have no penalty for withdrawing your cash if you need it, helping put your mind at ease.

Whatever your plan for investing, we can help you fill out your portfolio to help you reach your goals. Just give us a call and let us know what you want to do. We’ll sort out the rest.
Sources:

http://www.americanpressinstitute.org/publications/reports/survey-research/millennials-social-media/ 

Investing: Zagging


When you talk to your friends and neighbors about investment strategies, you probably hear a lot of the same ideas. People tend to invest some amount in blue chip companies, their employer, mutual funds, 401(k)s, IRAs, 529s, and money market accounts. As you look around, you might notice that everyone looks kind of similar. They may be wearing the same casual clothes you made fun of your parents for wearing a few years ago. And you may begin wondering if investment strategies are like Old Navy cargo shorts … something we all do without thinking about it.
It’s fun to imagine a backyard barbecue for money managers – well, it’s more fun than attending a backyard barbecue for money managers, anyway – and wonder if they have the same investment conversations we do.  Do they all do things basically the same way?  Is the distinction between these professionals as simple as how they slice the pie?

In contrast, whenever one of our friends makes a great investment, they hold court at the cookout. They tell us about the detective work they did or their amazing insider info, and we eagerly gobble it all up. The same thing happens with the pros.  When one investor makes a counterintuitive trade that pays off, they become famous and charge a fortune in fees for their new fund.  The easy lesson is that when everyone else is zigging, it’s time for you to zag. Unfortunately, when everyone else zigs, they probably have a good reason for it, and zagging is a bad idea. 

The kinds of high-risk investments that sound cool at a barbecue can bring a great return, but they rarely pay off. It might not feel like it, but there are actually many more people at the barbecue who lost money zagging than there are people who made money. They’re just not going to gather everyone around to tell them about it.  In fact, 8 of 10 fund managers failed to beat the market average last year, according to CNN.

Think about it this way: If you have 100 investors and 90 take the well-trodden path full of CDs and index funds, 10 others are taking odd risks and following their gut.  If 90 percent of those people lose their money, that’s 9 out of the 10 idiosyncratic investors who lost money. If you do that again next year, that person needs to try something new again and has, once again, a 10 percent chance of success.  


Then, imagine the same scenario the following year.  The likelihood that this person can make big money three years in a row in this scenario is one in a thousand.  If you expand it to five years in a row, the odds drop to one in a million.  If it seems like there are too many investment experts living off a vast fortune for the odds to be so low, remember that the United States is a country in which being one in a million means there are 300 people exactly like you.  

That diverse and boring portfolio is your best bet for bringing in the steady return you want. So, while it might be as boring as cargo shorts, remember that no one likes the neighborhood dad who always shows up to a casual barbecue wearing a fancy jacket and trousers either.
Sources: 

High Yield Investment Fraud


Whenever the stock market takes a hit, unscrupulous individuals will try to find a way to use the misfortune of worried investors to make a quick profit.  In light of this year’s problems on Wall Street, it’s no surprise that old scams are coming back, and like all of the classic scams, this one is based on the oldest premise there is:  make a lot of money, really fast, with no work.

High yield investment fraud is most commonly found on the Internet, where it’s much easier to put together a website that appears trustworthy and professional than it is to create the same appearance in person.  Such sites claim to provide amazing returns, sometimes as much as 40 or 50% per month, and are supported by dubious charts and testimonials from people who may not actually exist. Between a quality website, impressive charts, and some meaningless investment buzzwords describing a “magic pill” of an investing philosophy, unwary consumers can be easily fooled into forking over a chunk of their savings to an investment broker who is not licensed by the SEC and makes claims the SEC would call illegal.

The clearest warning signs of these scams are easy to remember, just like avoiding them should be simple to do: don’t trust anyone who offers to-good-to-be-true returns, dismiss cutting-edge investment opportunities if they come from anyone but an investment professional with whom you’ve worked before, and ignore any evidence of success that can’t be verified by an outside party.
Big returns are appealing.  You want to retire someday, send your kids to college, or start a business to get away from the morning commute, and the more money your investments make, the quicker you can do so.  But it’s important to trust the process.  Return on investment is tied to the risk involved in spending money on that investment.  The stock market offers better returns than treasury notes because it’s far riskier to bet on United Airlines than on the United States.  High-yield investment scams are successful because we want to believe that someone can beat the market so well and that we can have returns that are better than the stock market with risks that are lower than treasury bonds.  It just doesn’t happen that way.
At Destinations Credit Union, we believe we’ve created a nice sweet spot with our savings products. No matter what your preferences are, we can fit into your investment portfolio. In times that the market does well, the money you have with us will keep you moving towards retirement, but when the market slows down, you don’t have to worry about losing your financial security because the money your entrust us with is safe.
To put it another way, the U.S. economy has traditionally done three things very well:  lower prices, create jobs, and price risk.  The last recession was caused by doing a poor job of pricing risk, and that hurt our ability to do the other two.  But that’s exactly the point.  As an economy, we are so good at pricing risk that when we screw it up, it’s an enormous, world-altering event.  If you find someone who can price risk so much differently than every other investment professional in the world, you need to also be ready to bet that the economy is going to take a radical shift in an entirely new direction, because that’s what happens when we do a bad job pricing risk.
Finally, if you want to avoid all kinds of investment scams – and the SEC, FTC, and USA.gov all have many pages listing the variety and creativity of these scams – the best thing to do is remember why you bank with us.  We’re part of your community, not a giant multinational corporation.  We share our revenue with our members, not shareholders who may not even be connected to our local community. Our kids go to school with your kids and you can always come in to talk to us for helpful advice. 

Sources: 
http://investor.gov/investing-basics/avoiding-fraud/types-fraud/high-yield-investment-programs
http://www.investopedia.com/terms/h/high-yield-investment-program.asp\\
http://www.ncpw.gov/blog/dont-get-scammed-investment-fraud-internet

http://www.dfr.vermont.gov/securities/top-ten-investor-scams

New School Year’s Resolutions


Ah, autumn.  That wonderful time of year when the leaves change color, football takes over the television for five uninterrupted months and students head back to school. Alright, it’s not actually autumn, it’s August. It’s still summer outside, and more of the country is watching grass turn brown than observing the leaves transitioning to orange. School is starting, though, and you’ve probably already gone through a lot of the rituals that accompany a new school year, so you may be in a back-to-school mood. 
Here’s a tradition you might not have tried: Have you made a new school year’s resolution?
We’re not talking about those promises you make to yourself every year about doing homework on Friday nights or not wearing sweatpants to class.  Have you made a resolution for this year that you actually intend to keep?  Now is the perfect time to make a change, while you’ve got a new planner just waiting to have milestones and goals written into it.  We’ve got some tips to aid you in keeping your resolution this school year.
 
First, set a clear goal.  Goals are only as useful as they are attainable, and goals are only attainable if they’re clearly articulated.  For example, “I want to eat better” is an admirable goal, but it’s difficult to figure out if you’ve actually done it or how that affects your decisions. Eating two cookies is better than three, for example, but would you have eaten three cookies before?
That’s why it’s important to be specific. Instead of saying, “I want to be better with money so I won’t need to eat toast sandwiches at the end of the month,” try making a resolution like “I won’t date freshmen” or “I will set a budget every month.”  You can tell if you’ve set a budget even if you don’t always do a good job of following it.  Having a tangible goal gives you freedom as well.  Are you being good with your money if you buy a latte every once in a while?  Who can tell?  But if you have a budget, you can clearly see when you can afford a latte, and what else you might have to give up to get it. 
You also need to keep the goal simple enough so it is achievable.  “I’m going to work out for two hours every day” sounds great … for about a week.  Then it sounds like a hassle.  What do you do for two hours every day that you’re willing to give up?  Sleep? Homework? Xbox?  An easy to achieve resolution might be something like “I will spend Monday afternoons cleaning,” or “I’ll save $1,000 to put a down payment on a car within a year.”  Saving $1,000 might sound harder than working out, but it’s really not.  Put $85 per month away for a year or $43 per month for two years.  Even if you make minimum wage, $43 is only about one day’s salary each month.
It’s easy to fool yourself into believing you’re living up to your resolutions, which is why you need someone to keep you accountable and help you out when you need it.  That’s a place where Destinations Credit Union can really help.  We’ve got internal experts in budgeting and financial counseling partners who’d love to talk to you, and we offer great rates on Kasasa Cash Rewards Checking, Savings Certificates, Holiday Club accounts, and all sorts of savings plans to make saving for that down payment even easier.  We also have tools, such as MoneyDesktop and simple budgeting software.