Emergency funds: Why they’re worth it

Emergency funds can be a lifesaver. Do you have extra funds saved for unexpected times? If not, it’s time to consider how much you’ll need if you fall on hard times.

Emergency funds can be helpful for everyone. Any unexpected hit to your finances, and unanticipated illness or a natural disaster might all be reasons you may need money right away.

What is an emergency fund?

An emergency fund is designed to keep your life intact during temporary setbacks and to help you avoid unnecessary debt. That means things like car insurance premiums and regular home maintenance (and other anticipated bills) should not be considered emergencies. The same is true of credit card bills for vacations.

How much emergency savings is enough?

In general, your emergency fund should cover three to six months of expenses. How much you’ll need will vary based on your financial situation, including the vulnerability of your income.

For example, a one-earner household is more vulnerable than a two-earner household when it comes to paychecks. So the one-earner family should generally set aside more for emergencies. Or if you don’t have disability insurance, you might consider setting aside a bigger balance in an emergency account.

Check with your employer about benefits

Some companies provide payment for accrued vacation and/or sick leave to laid off employees. If your company provides such benefits and you maintain significant balances in these accounts, you may not need as much in an emergency fund (at least to help you weather an unexpected layoff).

Here are a few items to consider as you plan your emergency fund:

  • Consider your ongoing debt payments. Putting excess cash toward high-interest credit card balances might make more sense than funding a savings account that earns four percent interest. The best option is to put money toward both your debt and your savings.
  • Determine what can be reduced and postponed. These may be items like retirement plan contributions, vacations and entertainment. Ask yourself, “How much will I need to cover my minimum monthly expenses without resorting to credit cards or lines of credit?”
  • Don’t wait to start saving. You can start small and increase contributions as you receive pay increases or windfalls. The money should be liquid — easy to get at — so don’t put it in investments with withdrawal penalties. A savings or money market account is a great place to set aside cash for a rainy day.

 

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Do you have a household employee? Don’t ignore the nanny tax

It’s simple enough to overlook this tax related to household employees. But you could be in trouble if you do. Here’s why you’d better pay attention to the nanny tax.

As you review your filing requirements for 2018, make sure you don’t overlook the nanny tax related to household employees. If you have a housekeeper or any other household employee, you could be liable to pay state and federal payroll taxes.

How to know if you must pay the nanny tax

First, you’ll need to determine whether you have a household employee. Generally, this is someone you hire to work in or around your house. It could be a babysitter, nurse, gardener, etc. It doesn’t matter whether they work part-time or full-time, or whether you pay them hourly, weekly, or by the job.

But not everyone who works around your house is an employee. For example, if a lawn service sends someone to cut your grass each week, that person is not your employee.

As a general rule, workers who bring their own tools, do work for multiple customers and/or control when and how they do the work are not your household employees.

Your responsibilities

If you have a household employee, you’ll generally be responsible for 2017 payroll taxes if you paid that individual more than $2,000 last year. However, federal unemployment tax kicks in if you pay more than $1,000 to all domestic employees in any quarter.

It’s not always easy to tell whether you have a household employee, or whether exceptions apply. If in doubt, don’t hesitate to call our office.

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Don’t say yes to a reverse mortgage until you read this!

You’ve likely heard the good and the bad about reverse mortgages. But what’s real? Before you consider this strategy, consider a few key components.

There’s no doubt you’ve seen TV advertisements telling seniors that their lives could improve if they use reverse mortgages to harvest the equity in their homes. They go on to tell you that you can free up money to take an expensive trip, remodel your home or just have fun. It sounds appealing — but is it worth it?

What is a reverse mortgage?

As the name implies, a reverse mortgage is the opposite of a traditional mortgage. With a traditional mortgage, you borrow a sum of money to purchase a home and then pay off the debt over time.

With a reverse mortgage, you receive loan proceeds (as a lump-sum payout, an annuity, a line of credit or a combination of all three) but make no payments as long as you reside in the property. The loan, with any accrued interest, comes due when you move out or pass away. To qualify for a reverse mortgage you need to be 62 or older, own your residence and generally have significant equity in your home.

Unfortunately, reports of abuse regarding aggressive and predatory sales practices are common. Here are a few items to analyze if you’re thinking about a reverse mortgage:

  • Determine if a reverse mortgage is logical for your situation. Evaluate alternatives. Conventional solutions such as a home-equity loan might be a better answer.
  • Consider the financial ramifications. Reverse mortgages can be expensive. Upfront fees are significant. If you stay in your home just a few years, the effective interest rate can be very high.
  • Be wary of bundled sales pitches. Commission-driven salesmen can push life insurance or various annuity products along with a reverse mortgage. You could end up with products you don’t need.

If you are considering a reverse mortgage, call us. We can help you determine potential tax issues, plus other alternatives.

 

 

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