Tag: Personal Finance

Categories
News News Feature

On Bond Durations

(Credit: Austin Distel via Unsplash)

Bonds have had a challenging year, and many people are wondering whether to extend their average bond maturity/duration now that yields have risen. This might be tempting, but there are a few reasons that it might be best to stay the course rather than make dramatic changes in your bond allocations:  

• Stocks and bonds are more correlated than ever, so if we experience another year like 2022 when stocks and bonds are down meaningfully in the same year you would probably want to have the protection of a relatively short/low duration bond portfolio. If you’re unfamiliar with the term “duration,” it essentially means the average amount of time until you get your payments for a bond. For example, bonds with longer maturity have longer duration than bonds with shorter maturities, and bonds with higher coupon payments have lower duration than bonds of similar maturity with lower coupon payments.

• We are benefiting from higher yields already. Yield calculations can be confusing and there are many different ways to look at yields, but everything comes back to the coupon payments from individual bonds or the distributions from bond mutual funds. Regardless of when you bought in, the price of the bond/fund, or whether you have a loss or gain, those payments represent the income on your bonds. These distributions are starting to creep up in many bond mutual funds and this trend is likely to continue as long as yields remain elevated. This means that even without trading in your current portfolio for longer bonds, you’ll still get exposure to those higher yields.

• In fact, the yield curve is inverted currently, meaning that longer bonds actually yield less than shorter duration bonds. While there’s more opportunity for price appreciation if you buy longer bonds, there’s also more risk if there is a downturn in the bond market, and you simply aren’t getting paid to go out long on the yield curve right now. The highest yields are in the two- to three-year range and bonds 10 years and beyond yield meaningfully less.

Looking at history, longer bonds almost always outperform shorter duration bonds, so you might be surprised that we don’t suggest a very long duration in our bond portfolios. At my firm, we believe in taking risks in stocks and keeping the risk on the bond side relatively low. In fact, we believe our bond portfolio is the security that allows for the risk we take in the stock market. It’s possible that longer bonds could dramatically outperform shorter bonds in the near term, but it’s also possible the worst isn’t over for bonds in 2022. 

Nobody knows exactly what the Fed will do in the coming months or the impact those actions will have on the markets, but there is still hope. It’s remarkable that even in one of the worst years ever for bonds they still are providing support to portfolios in a year where stocks are mostly down even more. As always, we believe a measured, consistent, short- to intermediate-bond approach will probably serve you well in bad times for bonds as well as the good years that are inevitably on the horizon. 

Gene Gard is Chief Investment Officer at Telarray, a Memphis-based wealth management firm that helps families navigate investment, tax, estate, and retirement decisions. Ask him your questions or schedule an objective, no-pressure portfolio review at letstalk@telarrayadvisors.com. Sign up for the next free online seminar on the Events tab at telarrayadvisors.com. 

Categories
News News Feature

What’s Up with Bonds?

Bonds and stocks are uncorrelated, not negatively correlated. (Photo: Mathieu Stern | Unsplash)

What’s going on with bonds right now? Though 2022 has been a challenging year for fixed income, you might be surprised to learn that the death of bonds has been greatly exaggerated.

For context, bonds historically return less than stocks in the long run. From 1926 until the end of 2021, a large cap U.S. stock index returned over 10 percent a year, while a 5-year government bond index returned about 5 percent. Compounded over time, that is a massive difference.

Why would anyone want bonds then? They have two advantages over a 100 percent stock portfolio that you should care about — they are somewhat uncorrelated to stocks, and they tend to have less volatility.

Two things that are uncorrelated don’t automatically move in opposite directions — that would be negative correlation. With completely uncorrelated assets, the movement of one has no impact on the movement of the other one. This is something very desirable, since you don’t want everything in your portfolio going down at the same time.

Less volatility is also very much a good thing, meaning generally that bonds tend not to fluctuate up and down as much as stocks. This year is a great example — the Bloomberg U.S. Aggregate Bond index is down about 10 percent at the time of this writing. That’s one of the worst years on record for bonds, but it would only be a middlingly bad year for stocks. But isn’t this year a bad year for stocks, too? Let’s look at the big picture.

For a retiree, one of the worst things that can happen is a large portfolio drawdown in the years just before and after retirement. A crash just before retirement might force a delay to retirement plans. Worse, a crash just after retirement could dramatically change retirement lifestyle as assets are spent down while their prices are depressed.

We tend to allocate more to bonds around retirement because our best hope for bonds is that in a stock market downturn bonds will likely either go down less or even go up some.

You might be surprised to learn that is working, even this year. Looking at our portfolios and also target date portfolios from several major fund families, allocations with more bonds are performing better than allocations with more stocks. In other words, bonds are mostly down, but stocks are mostly down more. Bonds aren’t experiencing tremendous outperformance — it would be nice if they were actually up this year — but if you had a crystal ball and allocated more to bonds at the beginning of 2022 you would likely be better off than being 100 percent stocks at this moment.

Of course, we have no idea what direction bonds (or stocks) will go from here, at least in the short term. In the long term, we are optimistic to see returns of stocks and bonds in line with historical experience. We are also optimistic that in the event of a more intense stock market correction, bonds will likely perform even better in the likely flight to safety reaction of market participants.

As bond prices have fallen, bond yields have risen to a more attractive level, which is another silver lining in this challenging year. One of the biggest complaints is that bonds have had “no yield” for quite some time. With bond yields higher and inflation on the way down, we could be set up for a period where bonds provide a meaningful source of real return in addition to their ability to dampen stock market declines.

In short, 2022 has been a challenging year for bonds and stocks, but bonds continue to fulfill a very important role in investment portfolios.

Gene Gard is Chief Investment Officer at Telarray, a Memphis-based wealth management firm that helps families navigate investment, tax, estate, and retirement decisions. Ask him your questions or schedule an objective, no-pressure portfolio review at letstalk@telarrayadvisors.com. Sign up for the next free online seminar on the Events tab at telarrayadvisors.com.

Categories
News News Feature

The Amazon Challenge

Unbox your Amazon order history. (Photo: Sean Robbins | Unsplash)

One of my favorite financial writers, Jacob Lund Fisker, had an interesting process to determine what sort of things to own. He was on the early crest of what we might now call minimalism (though he disputes that characterization) and even today focuses on owning things he uses hourly or at least daily. He has particular contempt for things owned more than six months without being used (get rid of it), things idle for more than a year (get rid of it!), and my favorite category, “I didn’t even know I owned this” (he recommends “get rid of it!!!” with three exclamation points).

I noticed recently that amazon.com order history is very detailed, can be easily extracted, and never is purged. There is nothing special about Amazon orders, or online vs. in-person buying in general, except it is rare to have such comprehensive buying info all in one place. I have Amazon purchases I can review going back to the year 2000 — a unique time capsule. Just like the addresses in my Amazon address book, it is a diary of my life and where I have been over the years. Here are some thoughts on what I see in my data from a financial perspective.

One large category is consumables like food and furnace filters, which mostly can be ignored. However, I have learned that it’s worth checking the price at local grocery stores since sometimes the cost of shipping baked in can have a big impact on the final price.

I wish I had all the money back that I spent on DVDs and CDs, since they have no place in my life anymore. I also wish I had the money back that I spent on most books — I love reading, but I could have borrowed most of these from a library (you can get anything via interlibrary loan!). Afterward, I could have bought only the ones that proved meaningful to me, as the vast majority sit idle or have been donated over the years.

One of the most satisfying categories is DIY supplies (sometimes expensive) that solved important problems and saved significant money, like a new starter for my 1999 Accord or a new faucet cartridge that saved a visit from the plumber.

My favorite category, just like Fisker, is things bought years ago and still used frequently, like the flip-flops I see sitting in the corner I bought in 2013 or my wife’s sunglasses from 2014 she still wears daily. Things in this category are shockingly few and far between. I’m actually going through the thousands of things I have bought to see how many are still in service by vintage year. Maybe we’ll have a follow-up article with some of that data — I’d like to learn how to buy more of this stuff and less of everything else.

A sad category includes the things used once or even never. Usually these are very specialized solutions that either did not work or proved to be too unrealistic or cumbersome. Sometimes they are simply impulse purchases that probably would never have been ordered if I forced myself to keep them in the cart for a week.

Even worse, there are problems that could have been solved with items on hand. For example, I have approximately a zillion HDMI cables at the bottom of a tangled bin somewhere, but I’ve continued to buy them over the years because it’s easier than tracking one down. This is probably an example of one of the worst aspects of consumerism.

My Amazon safari was eye-opening, and everyone’s experience is likely to be different. All spending decisions are based on trade-offs — spending vs. saving, time vs. money, money vs. emotions, consumption vs. conservation, and so on. Seeing the good purchases I have made was rewarding and seeing the countless purchases I have no use for today — or maybe never did — will hopefully help guide me in the right spending direction going forward.

You should take a look yourself if you use Amazon frequently — you too might find it a fun journey down memory lane as well as a sobering reflection of your own financial history!

Gene Gard is Chief Investment Officer at Telarray, a Memphis-based wealth management firm that helps families navigate investment, tax, estate, and retirement decisions. Ask him your questions or schedule an objective, no-pressure portfolio review at letstalk@telarrayadvisors.com. Sign up for the next free online seminar on the Events tab at telarrayadvisors.com.

Categories
News News Feature Uncategorized

Credit Cards: Is Paying It Off Enough?

photo: Nathan Dumlao on Unsplash

I think we can all agree that large revolving credit card balances are bad, but what about no balance? 

The modern, “responsible” credit card approach seems to be a win for all parties. The card issuer gets the swipe fee every time a card is used. The merchant pays the swipe fee, in exchange for convenience, time saving, and access to a broader audience of buyers. The card user wins by paying off the card every month and accruing valuable rewards or cash back while paying no interest. Where is the problem?

There’s not a problem, if you’re completely content with your level of spending over time. However, most people seem to think they spend a little (or a lot) too much, regardless of income or assets. Even those who think their spending is fine often think their spouse or significant other could tighten up their spending a little bit. But how does this relate to “responsible” credit card use? 

The bottom line is that countless studies have shown that using a credit card causes you to spend more, period. There is evidence that credit card holders spend more at department stores. Credit card users leave bigger tips. A study showed that those required to return with a credit card were willing to pay more than double for playoff tickets compared to bidders who were told they had to come back and pay cash. Another study showed that cards create identifiable “purchase cravings” on MRI scans that cash does not. One study even showed that simply the presence of credit card paraphernalia on a desk caused subjects to spend more money than the control group.

Why is this? The best way I can explain it is that having a line of credit untethered to nothing but a sky-high irrelevant credit limit means that there’s no natural scarcity reaction when presented with purchases. If you have $100 in your pocket, you better make sure your restaurant tab, tax, and intended tip is less than $100. With a card, it doesn’t really matter if it’s $82 or $120 or $350, especially if you know you’ll be able to pay the bill off in full at the end of the month.  

These little differences add up. Over time, even if a credit card causes you to spend a few percent more than you otherwise would, that extra spending will far exceed any benefit from even the best rewards cards.

Moving fully to cash is not practical for many people, and credit card rewards can have tremendous value — if they don’t lead to additional unnecessary spending. Normally an abundance mindset is a good thing, but in the case of credit card spending, a little scarcity could lead to broader abundance in your financial life. Ironically, card users with a balance close to their limit probably have more cash-like buying habits than someone who pays their card off every month.

Try actually using cash only for a month, and you might be surprised to see a stark difference in spending compared to your last card statement. Consider purposefully lowering the limit on your day-to-day card to a level you’ll have to think about before you swipe. Most importantly, remember that while credit card rewards can be meaningful over time, the low single-digit percent reward can’t make up for spending even slightly more than necessary.  

Credit cards can have a role in the path to your secure financial future, but keep in mind the obvious risks as well as the subconscious ones! 
Gene Gard is Chief Investment Officer at Telarray, a Memphis-based wealth management firm that helps families navigate investment, tax, estate, and retirement decisions. Ask him your questions or schedule an objective, no-pressure portfolio review at letstalk@telarrayadvisors.com. Sign up for the next free online seminar on the Events tab at telarrayadvisors.com.

Categories
News News Feature

Spending Tips: Restart Your Mindset

Adeniji Abdullahi A | Unsplash

There are many well-documented systems to budget and pay down debt. If common approaches don’t resonate with you, here are a few tips that might be helpful when coming up with a plan for you.

Paying bills, paying off your credit card each month, and keeping your bank accounts in the black are necessary but not sufficient to properly manage your finances as your income rises. A sense of abundance is usually good, but most people need a slight sense of scarcity in their personal accounts to effectively manage spending. Consider keeping a checking account as your “operating account” with a balance low enough that you have to at least momentarily consider each purchase.

To create abundance, consider green-lighting certain spending guilt-free. Examples include a healthier lunch spot you like, unavoidable bills like utilities, and consumables like household staples, toiletries, or makeup that you actually have used up. Some families find that rather than attacking their grocery budget, green-lighting grocery store spending itself can be helpful compared to expensive dining out, takeout, and delivery.

Manage your credit cards. Studies have shown that you spend more with credit cards compared to non-credit alternatives even if you pay off your cards each month. Try it for yourself — use a debit card with a balance low enough that you have to pay attention for a month and see how much less you spend.

No-spend periods are an interesting way to reset your spending mindset. When I ran my transactions for last year there was only one day without a card swipe or online charge — December 25th. Can you go a day, a week, or a month with no discretionary spending? You can easily find online groups attempting to make it a year or more. While they seem extreme, even a brief no-spend can be a good way to reset your mindset.

Closets can easily get out of control. Try moving things to one side of the closet or front of the drawer after each wear. In a few months you’ll clearly see what gets worn and what doesn’t. Do a purge to a reasonable wardrobe footprint with items you actually use and then consider a net-zero approach — old clothes have to go for each new clothing item brought in. Consider a no-buy period for clothes if the size of the wardrobe is an issue for you.

Amazon allows you to see all purchases since 1995. Look back to when you started using Amazon in earnest and scroll through the purchases from years ago. How much of the stuff is still in use today? How much was worth the money? How much would you buy over again today? What will your future self think about this year’s purchase history?

Are you in the warehousing business? We laugh about Saudi princes who have warehouses full of sports cars, but many of us do the same thing on a smaller scale. Do you pay for a storage unit? Do you have bedrooms, garages, or outbuildings full of stuff? How much of your belongings have been touched in the last year? Is your big house for you or for your seldom-used belongings?

The best budget system is worthless if you don’t use it. Those who have successfully attacked their spending tend to make a written plan and stick to it. Hopefully these tips can be useful as you craft the path to your secure financial future.

Gene Gard is Chief Investment Officer at Telarray, a Memphis-based wealth management firm that helps families navigate investment, tax, estate, and retirement decisions. Ask him your questions or schedule an objective, no-pressure portfolio review at letstalk@telarrayadvisors.com. Sign up for the next free online seminar on the Events tab at telarrayadvisors.com.

Categories
News News Feature

Gas Prices: It’s Always Supply and Demand

Photo: 123elis | Dreamstime.com

News is still moving very quickly regarding the global impact of conflict in Ukraine. The inevitable impact to energy markets is still coming into focus, but some common misconceptions about supply and demand implications of oil are worth discussing now.

Russia is said to represent approximately 10 percent of world daily oil production, which after domestic use means they export somewhere in the mid-single-digits of net world oil exports. For our purposes we will call it 5 percent. If we suddenly removed 5 percent of daily oil production from the world market, what impact would that have on oil prices? The answer is not straightforward; to figure it out we have to consider what economists call elasticity of demand.

A perfectly elastic good would mean that demand is infinite at one price and zero at a slightly higher price. An example would be a store selling one-dollar bills. Priced at $1, the store would just be a complicated ATM. Price them at 99 cents and I’d borrow money to buy as many as possible. Price them at $1.01 and I wouldn’t buy a single one. That’s a perfectly elastic good.

On the other end of the spectrum would be a perfectly inelastic good. The most common example is a lifesaving medicine. If 100 people a year need it and 100 doses are produced each year, the price might be $100. If only 99 doses were produced, the price wouldn’t rise to $101 — in fact, there’s no theoretical maximum price. Hopefully there would be a fair way to allocate this medicine, but someone is going to be very disappointed no matter what. They don’t call economics “the dismal science” for nothing!

Oil demand is relatively inelastic. If oil production representing 5 percent of daily demand suddenly went away, prices would start rising and continue to rise until we felt enough pain to reduce worldwide oil consumption by 5 percent — that could be at $5/gallon of gas, $10/gallon, or more. There’s no way of knowing for sure.

Is there any way around this? Regulations or voluntary measures to cap oil prices sound great, but just like rent controls in NYC, price control comes with a cost. At a lower price, demand would greatly exceed supply, so any sort of meaningful oil price controls would have to be combined with extreme shortages or extremely unpleasant rationing. Consumption would have to fall somehow — the world can’t consume more oil than is produced forever (though production would certainly ramp up elsewhere over time).

The fact that the U.S. produces a lot of oil so we don’t “need” Russian oil and don’t import much today doesn’t mean prices necessarily stay low in America. If oil was $25/barrel in the U.S. and $200/barrel in Europe, Europeans would buy U.S. oil and ship it to Europe as fast as they could sail tankers, eventually finding a new equilibrium price somewhere between the two. Could we put some sort of export control in place to prevent this? Possibly, but the ripple effects from such a move would likely be extremely chaotic, ineffective, and even counterproductive.

There are powerful forces pushing prices higher aside from simple corporate greed. Oil companies aren’t blameless, but oil markets are more complicated than they might seem on the surface. If you’re convinced the oil companies are getting away with something here, why not put everything you have in oil stocks? That’s obviously not a good idea — returns on oil stocks are likely not going to feel like a windfall from here when prices inevitably come back down. In the end, even oil company executives would agree that a peaceful end to hostilities in Ukraine and a normalization of prices, trade, and economic activity is the best outcome for all, an outcome we all hope can be realized very soon.

Gene Gard CFA, CFP®, CFT-I™ is Chief Investment Officer at Telarray, a Memphis-based wealth management firm that helps families navigate investment, tax, estate, and retirement decisions. Ask him your question at ggard@telarrayadvisors.com or sign up for the next free online seminar on the Events tab at telarrayadvisors.com.

Categories
News News Feature

Bonds in Bad Times

Photo: Andrew Neel | Unsplash

We have been closely following the conflict in Ukraine. While the situation is evolving rapidly, it appears for the moment that Russia remains steadfast in its desire to prosecute this ill-advised offensive while Ukraine remains steadfast in its desire to defend the country. If recent decades of history are any guide, the Russians will be unsuccessful attempting a long-term occupation, but in the meantime, they can inflict a great deal of damage.

Bonds are getting a lot of negative press these days, and some of that negative press is rightfully earned. Bond yields are as low as they’ve been at any time going back at least to the early 1960s. More importantly, given the relatively high inflation we’re experiencing, most bonds are currently experiencing negative real returns. This means that the purchasing power of money invested in bonds could decline, at least slightly, as time goes on.

So why in the world would somebody own bonds? The answer is that 100 percent of every investment portfolio in the world has to be invested — in something. Most people should not — or cannot — invest their portfolio 100 percent in stocks, even if stocks are likely to beat bonds (and most other asset classes) in the long run. Even if an investor does have an iron constitution and can handle the volatility of an all-equity portfolio, there can still be problems around retirement known as sequence of returns risk, where a big stock drawdown can mean investors must sell their equities while markets are depressed. This can impair retirement plans even if the market has an attractive return over the full retirement period.

Every dollar not invested in stocks has to go somewhere else. You can’t just stick money in cash and say it’s “off the table.” That capital is still acting as a drag on your portfolio in most markets and therefore must be included in your returns. Diversifiers such as real estate, gold, or other commodities may be part of the answer, but they are likely to have no real return greater than inflation in the long run.

Even today, bonds are not hopeless. Bonds can perform entirely adequately in environments of rising interest rates and bond yields, such as the period from 1962 to 1982. The performance is not stellar, but bonds do what they need to do, which is mitigate the volatility of equities, especially in big equity drawdowns.

When you watched the news of the invasion in Ukraine last week, did you worry about your stock portfolio? Did you wish you had more bonds in your portfolio? Did you even momentarily think about going to all cash? If so, then you should seriously consider a little more defense (aka more bonds) in your portfolio. The time you need to decide on a less risky portfolio is before the bad news comes out, not after. Bonds have an important portfolio role in bad times, which is why it’s a good idea to get them in place when things are good.

Gene Gard is Chief Investment Officer at Telarray, a Memphis-based wealth management firm that helps families navigate investment, tax, estate, and retirement decisions. Ask him your question at ggard@telarrayadvisors.com or sign up for the next free online seminar on the Events tab at telarrayadvisors.com.

Categories
News News Feature

What, Me Worry? Understanding Debt and Inflation

Photo: @ Gilly | Unsplash

The Senate recently passed a $1 trillion infrastructure bill that seems likely to eventually become law. How much debt does that mean, and should we worry about it?

Since the beginning of 2020, the total public debt has gone from around $23 trillion to about $28 trillion. Keep in mind that overall U.S. GDP is just over $20 trillion on average, so we could apply the entire output of the U.S. economy for a year and a half and just barely pay off the debt. Another way to look at it is that the government spent all the taxes taken in since the beginning of the lockdown and then an additional 25 percent of the entire country’s total income. These are big numbers!

Is this a problem? Is it going to inevitably lead to inflation? The answers might surprise you.

Conventional wisdom, as well as recent feedback at the grocery store and gas pump, suggests inflation has definitely arrived. However, there are a number of strongly deflationary pressures at work, too, and there’s a good chance over the next 10 years the Fed could have a hard time keeping inflation above or even near their target of 2 percent annual inflation.

For one thing, population growth is slowing down. Population growth was close to 1.4 percent a year as recently as the 1990s and now sits at 0.35 percent. Absent big changes in immigration policy (unlikely) or big changes in birth rates for Americans already here (even more unlikely), America will start seeing population decline soon. Japan has been losing population on average for more than 10 years, and this is one reason Japan has frequently experienced years of falling consumer prices in the last few decades. The number of consumers is not growing and the population is aging, leading to more retirees and fewer workers.

Another strong deflationary factor is the rise of technology. Much recent inflationary pressure is likely transient, in things like used car prices, airfare, and hotel rates. At the same time, lots of stuff is getting cheaper, like televisions and computing power. And while smartphones may not seem cheap, the idea of a device in your pocket that can make calls, send messages, and listen to or watch almost any media created in all of human history is a pretty nifty innovation and means you don’t have to buy as many products you might previously have bought. In the 1990s, one CD cost around $15 — now you can have access to almost all the music in the world for about half that per month.

Nobody is exactly sure what the future holds, and everyone loves to second-guess our elected and appointed officials. However, the employees and appointees at the Fed are not stupid. If inflation were the only thing we have to fear, the Fed wouldn’t continually try to push inflation up to a higher long-term average target. I believe they’re preemptively erring on the side of inflation to prevent disinflationary pressures from taking root too strongly. Deflation sounds nice as a consumer, but its effect on the economy is much worse than mild to moderate inflation. By the way, debt itself is deflationary too (for one reason, money that could be spent goes to pay off bonds instead), and there’s plenty of debt in the system.

In the end, it’s not too useful to speculate as to whether inflationary or deflationary pressures will win. Probably both will happen at some point; it’s just a matter of time.

The important thing for investors to remember is to stay diversified. Exposure to U.S. investments and the dollar could continue to outperform for years into the future. On the other hand, if our outsized stimulus spending starts to catch up with us, then exposure to non-U.S. developed markets and even emerging and frontier markets (and currencies) will play an extremely important role going forward.

We’re all feeling the pressure from inflation in the short term, but there’s no guarantee it will persist. We might even miss it if it goes away.
Have a question or topic you’d like to see covered in this column? Contact the author at ggard@telarrayadvisors.com. Gene Gard is Co-Chief-Investment Officer at Telarray, a Memphis-based wealth management firm that helps families navigate investment, tax, estate, and retirement decisions. 

Categories
News

The Surprising Benefits of a Health Savings Account

Photo: Bermix Studio | Unsplash

Q: What exactly are Health Savings Accounts (HSAs)? Should I pick a healthcare plan that allows me to invest in an HSA?

A: It’s hard to know for sure without knowing all your details, but you might be surprised to hear that HSAs are among the best long-term savings vehicles available in the United States. This is true even if you don’t spend a dime of the money on actual healthcare for years — or possibly even ever. Ironically, it’s especially a great deal if you’re young and healthy with few healthcare costs.

Many of us remember the Flexible Spending Accounts (FSAs) popular in the past, where you might get $600 a year and the money was use-it-or-lose-it by the end of each year. That is totally different from an HSA. In fact, it’s probably best if you never use the debit card from your HSA account, or at least save it for emergencies only.

HSAs are like a turbocharged IRA, not an account to use for today’s medical bills if you can help it. They are potentially a triple tax-free opportunity. This means:

• Contributions to the account are generally income tax-deductible, just like a traditional IRA. In many plans, you even save the payroll tax if contributions come out of your paycheck — and no IRA can do that. Just like an IRA, you get the money saved in your HSA; plus, you get a percentage of it back on your taxes at the end of the year.

• You can invest the money in your HSA. Prominent custodians have all kinds of options for investments that can almost certainly be a part of whatever overall investment plan you or your advisor have developed. The money grows tax-free, just like in a traditional IRA, Roth, or 401k plan. This means when you buy and sell securities in this account to rebalance or change investments, you don’t pay capital gains taxes on realized appreciation within the account. Dividends are not taxed as they are received.

• If you take the money out and use it for qualified medical expenses, you don’t pay any tax then, either. So in that way, an HSA works like a Roth IRA in the end. And, if you wait until you’re 65, you can pull the money out for any reason, and it’s simply taxed as ordinary income. So in one of the worst-case scenarios, the account ends up working very much like a traditional IRA. But if you play your cards right, you’ll never get taxed on this income, either, because you can withdraw the money at any time for authorized healthcare expenses, even including things like long-term care insurance premiums. You can even save healthcare receipts in case you need money in the future — there’s no requirement to reimburse your medical expenses in the same year they’re incurred.

What’s the downside to an HSA? If you suddenly need money and simply must tap into your HSA for non-healthcare expenses, you’ll pay ordinary income tax rates plus a 20 percent penalty on those withdrawals. That’s even worse than the 10 percent early withdrawal penalty for IRAs, so HSAs aren’t a great substitute for an emergency fund. Also, HSAs are not good vehicles to transfer wealth to the next generation, which may be a consideration when spending down assets in the future.

HSAs can definitely serve as a healthcare emergency fund, though, and these accounts combine some of the best features of traditional IRAs and Roth IRAs along with other special benefits.

If you don’t have an HSA, talk to your financial advisor to see if one could be right for you. If you do have an HSA, don’t swipe that card if you can help it!

Have a question or topic you’d like to see covered in this column? Contact the author at ggard@telarrayadvisors.com. Gene Gard is Co-Chief-Investment Officer at Telarray, a Memphis-based wealth management firm that helps families navigate investment, tax, estate, and retirement decisions.

Categories
News News Blog

PayPal Brings Crypto to the Masses

Photo by Bitcoin BCH

Last month, PayPal announced that its users would be able to buy, sell, and hold four prominent cryptocurrencies – Bitcoin, Ethereum, Bitcoin Cash, and Litecoin – via Paypal.com. Through its website, users will be able to buy and manage their cryptocurrency in one place.

Globally cryptocurrency has quickly been growing in popularity as an alternative form of currency since its inception in 2009. Cryptocurrency, as the name implies, is a digital form of currency that is meant to take the place of, and function as, a real form of currency. Unlike traditional forms of currency, nothing physical exchanges hands, and its value is not backed by a bank in the same way most modern currencies are. Instead, users hold their “currency” in digital wallets and make all their transactions digitally, with the vast majority of cryptocurrency being backed by their communities.

The “currency” in cryptocurrency, usually referred to as tokens, is a unique string of numbers and letters that is tied to the specific cryptocurrency being used. While in a traditional transaction users would exchange money, cryptocurrency users exchange tokens. When users trade tokens, the transaction is sent to a continuously growing list of transactions called a blockchain. The transactions added to the blockchain are then verified by users through a process called mining. Users’ work for mining does not go unrewarded and the “miners” are rewarded in tokens for each successful transaction that they verify.

Buying is as simple as a few button clicks.

Due to the various steps and knowledge needed to jump into the cryptocurrency world crypto had long been pursued by few. As the popularity of cryptocurrency began to grow in early 2018 websites began popping up advertising easy ways to buy and sell crypto but PayPal is one of the largest and most recognizable names to join the cryptocurrency wave.

I tested out PayPal’s new crypto service, throwing in $10 for the opportunity to play around with buying and selling. For someone that has never bought cryptocurrency, the entire process was quick and easy. Within minutes I was the proud owner of $10 worth of Bitcoin and Ethereum.

The Crypto screen gives an accurate representation of the market trends for PayPal crypto partners.

After setting up my account, I was presented with a screen showing my present balance, as well as guides explaining the ins and outs of crypto. For someone less familiar with the technical aspects, the guides were helpful and gave me a better understanding of where my $10 had gone. They also assured me that the prices would rise and fall naturally depending on the current exchange rate of my specific currency.

The move to PayPal has made breaking into the cryptocurrency sphere a reality for the average person. It’s cool and an easy process, and PayPal recommends investing just a dollar to play around with it before making more rash decisions. Though it may not be the most feasible way to diversify your assets, PayPal’s expansion into the crypto market is a great way for the average person to jump into the world of cryptocurrency.