Budgeting Basics by Ian Filippini

Ian Filippini

Ian Filippini

Let’s face it: Nothing in life ever goes exactly as planned. And that goes double for money matters. How many times has this happened to you? Just when you think you finally have some breathing room in your budget, an unexpected expense comes along and wipes it out.

One way to prepare for the unexpected is through budgeting. In technical terms, budgeting is the systematic allocation of one’s limited resources (income and liquid assets) toward a potentially unlimited number of needs and wants (expenses). To put it simply, budgeting is merely balancing your outgo versus your income.

Unfortunately, the word “budget” -sort of like “diet” or “economize” — has negative connotations. Although sometimes tedious and difficult to stick with, smart budgeting can help you better control how your income is being spent – leaving you with more money to invest or put away for those inevitable rainy days. A budget is a financial plan for spending; not a bookkeeping chore of keeping track of every penny.

The Budgeting Process

Budgeting is essentially a management process that follows these steps:

1. Establishing your goals.

2. Estimating your monthly household income.

3. Estimating your monthly expenses.

4. Balancing the budget.

5. Putting your plan into action.

6. Adjusting the budget as necessary.

Step One: Establishing Your Goals

First, review your family situation (marital status, dependents, family additions or departures). This review will set the table for establishing your short-, intermediate-, and long-term goals. Short-term goals may be purchasing a new car, taking a vacation or building a new home theater. Intermediate-term goals might include changing careers, sending a child or children to college, or saving for a house downpayment. Longer-range goals include accumulating a retirement portfolio, buying a vacation home, and leaving a financial legacy to your heirs. Each of these takes money – and planning, including budgeting.

Step Two: Estimate Your Income

Whether your household income is regular, such as a paycheck every two weeks, or irregular, such as that received by a farmer or other person in business for him or herself, helps determine how a budget is established and followed. Whether expenses are regular or irregular also makes a difference in the budget.

Add together all your income sources including take-home pay, interest, dividends, bonuses, pensions, alimony and child support, etc. If you’re self-employed, determine just how much you have available for living expenses by examining personal and family goals, business goals, and living and business expenses. If your income fluctuates, underestimate your income and overestimate expenses. Avoid relying heavily on bonuses or overtime pay.

Step Three: Estimate Your Expenses

Your expenses will likely fall into four categories: 1) fixed expenses, such as rent or mortgage, car payment, utilities, telephone, cable, and the like; 2) periodic expenses such as annual homeowners insurance, car insurance and maintenance; 3) flexible expenses including food and clothing, entertainment, travel, and other leisure activities; and 4) emergency expenses such as car accidents, home repairs, medical expenses, and so on.

Are you planning a major change during the coming year such as a move, changing jobs, buying a house, getting married, having a child, entering the job market or buying a new roomful of furniture? Be sure to account for these changes, because every major life event affects your budget.

Step Four: Balance Your Budget

Subtract fixed expenses, including an amount for investing and saving, from your expected income. Then, subtract the total amount of flexible expenses from what is left of income. If you need to cut back on your expenses, start first with the flexible expenses, then move to irregular expenses, and finally, to fixed expenses. If you have a surplus after subtracting expenses from income, consider adding more to your goal-related savings and investing.

Step Five: Put Your Plan into Action

This is probably the most difficult part of using a budget. Keep records of actual spending and compare them with your budget plan at the end of the month. By keeping records, you can better understand exactly where your money goes each month, discover if you’ve over- or underestimated certain expenses, and identify areas you might be able to cut back (like those daily $3 gourmet coffee drinks!).

Step Six: Adjust Your Budget

Adjust budget plan figures if necessary, based on the recordkeeping in Step 5. It may take several months of adjusting and re-adjusting before your plan works smoothly.

The real payoff of working with a budget plan and keeping records will come when you use your past year’s budget and records to plan for the future. Budget records can help you pinpoint spending leaks or spot potential trouble before it occurs.

Filippini wealth management westlake

For additional information or queries please visit us at : http://www.filippiniusa.com

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Implementing a Cafeteria Plan in Your Business-Ian Filippini

Internal Revenue Code 125 allows an employer to implement an employee benefit plan, which allows employees to select the benefit programs they prefer.
The plan offers two or more options and the employee chooses the option most appropriate for him or her from the “menu” of benefits available. It’s sort of like ordering lunch from the local deli – which is why the plan is referred to as a “cafeteria plan”!
Cafeteria plans, along with 401(k)s, are among the most popular employee benefit plans of the past decade. The tax benefits to the employer and employees far exceed the minimal required government reporting.
Cafeteria Plan Benefit Options
In general, the IRS allows the following benefits to be present in a Section 125 plan:
Group-term life insurance (up to $50,000; amounts above that level of death benefit may be subject to Social Security and Medicare taxation)
Accident and health plans
Long- and short-term disability benefits
Flexible spending accounts to save for health, medical, and childcare expenses
CODA [401(k) plans]
Dependent group life, accident, and health insurance coverages
Employee Tax Aspects
The plan essentially allows expenses that normally would be paid by the employee on an after-tax basis to be paid via salary reductions on a pretax basis. This allocated income will not be subjected to FICA or income taxes. The result is that taxable dollars have been converted to nontaxable dollars – thereby increasing the employee’s take-home pay.
Employer Tax Aspects
Generally, employer contributions to a plan are income tax deductible. In addition, contributions on behalf of the employees, if such contributions are not included in the employee’s income, are not subject to FICA (Social Security) or FUTA (Federal Unemployment Tax Act). This can result in significant savings to the company’s bottom line.
The employer must file an annual information return (IRS Form 5500) stating plan participation, cost and business type.
An important point for the employee to remember is that there can be no claim of any unused benefits or contributions from one plan year to the next. This is known as the “use it or lose it” rule.
Many employees steer clear of these plans because of this rule. You have to decide up front how much to put in the plan and if you don’t spend it all within a year, you forfeit the leftover amount.
Sounds risky – at least until you consider that the tax breaks are so powerful that even if you wind up forfeiting 20% of what you put into a plan, you’ll still come out ahead.
For example, let’s say you set aside $5,000 for
medical expenses in 2007 and wind up spending just $4,000. At face value, you’ve lost $1,000. But consider: If you’re in the 25% federal tax bracket and face a 5% state income tax as well as the 7.65% Social Security and Medicare tax, the $5,000 you put in the plan will save you more than $1,800 in taxes, leaving you $800 ahead. Put another way, you’d have to earn almost $6,300 to have $4,000 left over to pay those bills. Even if you forfeit $1,000, you still come out ahead. That’s why it’s wise to be aggressive in using flexible spending accounts.

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For more information please visit http://www.filippiniusa.com
Ian Filippini

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The Role of Life Insurance in an Estate Plan -by Ian FIlippini

Life insurance can play an important role in your estate plan. It is often necessary to support your family after your death or to provide liquidity. Not only do you need to determine the type and amount of coverage you need, but also who should own insurance on your life to best meet your estate planning goals.

Avoid Liquidity Problems

Estates are often cash poor, and your estate may be composed primarily of illiquid assets such as closely held business interests, real estate or collectibles. If your heirs need cash to pay estate taxes or to support themselves, these assets can be hard to sell. For that matter, you may not want these assets sold. Insurance can be the best solution for liquidity problems.

Even if your estate is of substantial value, you may want to purchase insurance simply to avoid the unnecessary sale of assets to pay expenses or taxes. Sometimes second-to-die insurance makes the most sense. Of course, your situation is unique, so please get professional advice before purchasing life insurance.

Choose the Best Owner

If you own life insurance policies at your death and you die while the estate tax is in effect, the proceeds will be included in your taxable estate. Ownership is usually determined by several factors, including who has the right to name the beneficiaries of the proceeds. The way around this problem? Don’t own the policies when you die. But don’t automatically rule out your ownership either.

Determining who should own insurance on your life is a complex task because there are many possible owners: you or your spouse, your children, your business, an irrevocable life insurance trust (ILIT), a family limited partnership (FLP) or limited liability company (LLC). Generally, to reap maximum tax benefits, you must sacrifice some control and flexibility as well as some ease and cost of administration.

To choose the best owner, you must consider why you want the insurance: to replace income, to provide liquidity, or to transfer wealth to your heirs. You must also determine the importance to you of tax implications, control, flexibility, and ease and cost of administration. Let’s take a closer look at each type of owner:

You or your spouse. Ownership by you or your spouse generally works best when your combined assets, including insurance, do not place either of your estates into a taxable situation. There are several non-tax benefits to your ownership, primarily relating to flexibility and control. The biggest drawback to ownership by you or your spouse is that on the death of the surviving spouse (assuming the proceeds were initially paid to the spouse), the insurance proceeds could be subject to federal estate taxes, depending on when the surviving spouse dies.

Your children. Ownership by your children works best when your primary goal is to pass wealth to them. On the plus side, proceeds are not subject to estate tax on your or your spouse’s death, and your children receive all of the proceeds tax free. There also are disadvantages. The policy proceeds are paid to your children outright. This may not be in accordance with your general estate plan objectives and may be especially problematic if a child is not financially responsible or has creditor problems.

Your business. Company ownership or sponsorship of insurance on your life can work well when you have cash flow concerns related to paying premiums. Company sponsorship can allow premiums to be paid in part or in whole by the company under a split-dollar arrangement. But if you are the controlling shareholder of the company and the proceeds are payable to a beneficiary other than the company, the proceeds could be included in your estate for estate tax purposes.

An ILIT. A properly structured ILIT could save you estate taxes on any insurance proceeds. Thus, a $2 million life insurance policy owned by an ILIT could reduce your estate taxes by hundreds of thousands of dollars in 2006. How does this work? The trust owns the policies and pays the premiums. When you die, the proceeds pass into the trust and are not included in your estate. The trust can be structured to provide benefits to your surviving spouse and/or other beneficiaries. ILITs have some inherent disadvantages as well, foremost among them that you lose control over the insurance policy after the ILIT has been set up.

Planning Tip


Second-to-die life insurance can be a useful tool for providing liquidity to pay estate taxes. This type of policy pays off when the surviving spouse dies. Because a properly structured estate plan can defer all estate taxes on the first spouse’s death, some families find they don’t need any life insurance then. But significant estate taxes may be due on the second spouse’s death, and a second-to-die policy can be the perfect vehicle for offsetting the taxes. It also has other advantages over insurance on a single life. First, premiums and estate administrative costs are lower. Second, uninsurable parties can be covered. But a second-to-die policy might not fit in your current irrevocable life insurance trust (ILIT), which is probably designed for a single life policy. Make sure the proceeds are not taxed in either your estate or your spouse’s by setting up a new ILIT as policy owner and beneficiary.

Filippini wealth management westlake

For more information please visit at http://www.filippiniusa.com


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Planning for The “Golden Years”-by Ian Filippini

Montecito-17 Dec 2010-There’s a saying that if you have your health, you have everything. Well, that’s not exactly true – without adequate resources, you could enjoy a long, healthy retirement at a far lower standard of living than you’d prefer!

When preparing for retirement, it’s vital to keep in mind the importance of money to your quality of life during your “golden years.” And with retirements now stretching as long as 20 to 30 years – and beyond – ensuring your retirement dollars outlive you is a paramount concern.

Failing to Plan, or Planning to Fail?

It’s been said that he who fails to plan, plans to fail. And nowhere is that concept illustrated more starkly than with retirement planning. A sound financial plan can be the difference between the retirement of your dreams and the nightmare of discovering you have too little money, too late to change financial course.

A disciplined retirement preparation plan, diligently followed, will help you develop realistic objectives … assess progress toward your goals … and make periodic adjustments to keep you on track.

How Much Retirement Income Will YOU Need?

Government research has determined that most Americans need between 60 and 80 percent of their pre-retirement income in order to maintain their standard of living during retirement. However, many financial experts have raised this figure to between 80 and 100 percent of pre-retirement income, citing skyrocketing healthcare costs, lengthening life spans, and the ever-present threat of inflation – which can rob a retirement portfolio of purchasing power over time.

Of course, how much you will need in retirement will be a function of your goals, time horizon, and spending habits. Those who want to purchase a second home and travel frequently will obviously need more than those who prefer to stay at home in their paid-off house. Consider these factors when estimating your future retirement income needs:

  1. Your support of children who will be self-sufficient by the time you retire
  2. Your current work-related expenses that will be dramatically reduced in retirement, such as commuting costs, daily meal expenses, dry cleaning bills, etc.
  3. Whether your mortgage will be paid off prior to or early in retirement
  4. Whether you will need to continue your monthly savings amount or begin to spend that amount for necessities
  5. Your tax bill in retirement

Sources of Retirement Income

Once you have estimated your target retirement income, you can begin evaluating your potential sources of regular income. In general, your income sources will fall into one of these three categories:

1) Government sources. The Social Security system was inaugurated during the Great Depression to augment retirees’ incomes. Most experts feel that the system will remain solvent throughout much of the 21st century. Even so, a rising retirement age and cuts in benefits could reduce your monthly Social Security check. Benefits are based on the amount you earned during your working years.

2) Employer-sponsored plans. Many employers offer company-sponsored retirement plans, which generally fall into two categories. Defined benefit plans, which are normally funded by the employer and guarantee a retirement benefit based on a formula comprising number of years on the job and employment earnings. For example, a traditional pension is a defined benefit plan. Defined contribution plans, on the other hand – such as 401(k), 403(b), and 457 – rely on funding from employees, matching funds from the employer, or a combination of the two. The employee owns an account balance (subject to company rules regarding vesting) of contributions and earnings. Upon changing jobs, an employee may be able to roll over assets into the new employer’s plan or into an IRA. At retirement, the employee decides how to withdraw the balance he or she has accumulated.

3) Personal savings. This is perhaps the most overlooked aspect of retirement planning. Personal savings include, but aren’t limited to, balances in savings accounts, directly held assets, home equity, shares in a partnership or business, and even collectibles such as artwork and coins.

How to Get – And Stay – On Course

How can you determine whether you’re on track to reach your retirement goals, and to make adjustments if necessary? We can help you develop a sound financial plan based on your specific situation, monitor it regularly to ensure you’re making progress toward your objectives, and recommend occasional adjustments to help you stay on course.


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For more information visit at http://www.filippiniusa.com


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Year-End Financial Planning: A Checklist-by Ian Filippini

The best financial decisions are made with the benefit of time, thoughtful consideration, and trusted professional advice. As tax time approaches, take the time to prepare for sound long-term financial decisions and minimize expenses, taxes, and the headache of organizing your finances at the last minute.

Organize Your Tax Records Early

In preparing for this year’s tax filing, begin to organize tax records including year-end investment statements, capital gains and losses from asset sales, transaction records from real estate transactions, interest and dividend records for the year (1099s), payroll and withholding statements (W-2s), records corresponding with deductible expenses such as property taxes and insurance, business income and expense records, etc. Some of these will not come until January or February of the following year.

Review Your Insurance Coverages

At least once each year, gather your insurance records together and review the adequacy of your insurance policies. Be sure to evaluate all coverages, including life insurance, disability income insurance, homeowners insurance, auto insurance, liability insurance, renters insurance, long-term-care insurance, etc.

Store Your Documents Safely

All your hard-to-replace legal and financial documents should be stored in a safe and fireproof location. Consider renting a safe-deposit box at your local bank or credit union, or purchase a fireproof lockbox from your local office supplies outlet. Documents you should store include wills, trusts, powers of attorney, titles of ownership (your home, cars, etc.), Social Security cards, birth certificates, photographic negatives, list of personal possessions, and so forth.

Review Your Estate Plan

Does your will still fairly reflect your personal wishes for the distribution of your assets? Have the personal or financial circumstances or your beneficiaries significantly changed over the past year? Have you considered a gifting program to move assets from your estate to those you wish to enrich? Have you reviewed your estate plan in light of changing estate tax laws or changes in your personal financial position?

Prepare to Minimize Your Income Tax Liability

Consider estimating your federal and state income tax liabilities periodically to ensure proper withholding levels and quarterly estimated tax payments. This will prove especially important if you sell significant assets during the year or experience large swings in your income level. Consider maximizing your deductible expenses and savings such as qualified retirement plans, charitable giving, deductible expenses, etc. Be careful to meet all IRS dates and deadlines for withholdings and filings.

Review and Improve Your Balance Sheet

The one true path to financial independence over the long term is increasing your long-term saving and decreasing your debt. If you are not maximizing your tax-deductible employer sponsored retirement plans and your individual tax-advantaged saving plans, evaluate your monthly cash flows with an eye toward increasing your monthly saving. The other side of your balance sheet, the liabilities side, is equally important in maintaining a healthy personal financial position. Every effort should be made to eliminate completely the need for short-term debt (credit cards and debit balances) and to efficiently manage your long-term debt (mortgages).

Simplify Your Financial Holdings

Simplifying your financial holdings can eliminate much of the drudgery of financial recordkeeping. If you have credit cards you don’t use, cancel them and eliminate the extra statements. Consider consolidating your credit lines to the greatest extent possible. Review your investment holdings for non-performing assets or redundant accounts and consolidate your investments.

To Sum Up…

Although you may be able to think of more exciting ways to spend your time, organizing your financial records and planning your financial future will pay huge dividends in the long run. Do what you can on your own and seek professional advice from a trusted advisor where additional planning needs to be done.

For more information please visit at http://www.filippiniusa.com

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Mutual Funds: From Mystery to Mainstay-By Ian Filippini

With more than 10,000 mutual funds now available, and most working Americans contributing to them via their employer-sponsored plans, mutual funds are no longer the mystery they once were. Instead, they’re the mainstay of many family’s investment portfolios.

But if you’re new to investing, you may have some questions. What is a mutual fund? And how do they work? This article is designed to answer these and other important questions.

Designed for the Smaller-Net-Worth Investor

So you want to invest in, say, the stock or bond market. But you don’t have enough cash to diversify your investments. Mutual funds may be the answer.

At its most basic, a mutual fund is a financial intermediary that manages a pool of money from investors who share the same investment objectives. By pooling their money together, the investors can purchase stocks, bonds, cash, and other assets as far lower trading costs than they could on their own. What’s more, rather than trying to manage their assets themselves – a daunting challenge even for experienced investors – a mutual fund is overseen by professional asset managers. These experienced managers are responsible for identifying and investing in the securities they believe will best help the fund pursue its investment objective.

A Range of Investment Objectives

When you invest in a mutual fund, you are essentially buying shares in the pooled assets and you become a shareholder in the fund.

One of the reasons for the popularity of mutual funds is that not only are they extremely cost efficient and easy to invest in, but you can choose from a wide range of investment options. Some mutual funds, such as money market funds and short-term bond funds, are quite conservative and offer a degree of stability and preservation of your principal. Others, such as aggressive growth funds, pursue above-average returns, generally with the volatility and risk that go along with them. And there are options all along the risk/reward spectrum.

The Added Benefit of Diversification

Earlier in this article, the topic of diversification was mentioned. Diversification is the concept of spreading out your money across many different types of investments to reduce the affect of any one investment on your overall returns. When growth stocks are declining, value stocks may be rising. When U.S. stocks are appreciating, international stocks may be falling. Diversifying your investment holdings across asset classes (stocks, bonds, and cash), sectors and industries, and geographic regions can significantly reduce your risk. However diversification does not protect against risk.

The most basic level of diversification is to buy multiple stocks rather than just one stock. A stock mutual funds generally holds many stocks, often between 50 and 100 but frequently many more. Achieving a similarly diversified portfolio on your own by purchasing individual stocks would not only be exponentially more difficult, but also more expensive as the trading costs for buying and selling stocks can quickly eat away a smaller portfolio’s value.

Reading A Mutual Fund Prospectus

Before investing in any mutual fund, you should read its prospectus. This is a legally mandated document that provides specific information about the fund’s investment objectives, managers, the types of securities it may buy, fees and costs, and other pertinent information. Recent legislation mandates that a prospectus must be written in clear, common-sense language that the general public can easily understand.

A mutual fund prospectus should outline these six factors that allow you to evaluate the fund and its potential place in your plan.

1. Investment objective. Is the fund seeking to make money over the long term or to provide investors with cash each month? You’ll find the answers in this section of the prospectus.

2. Strategy. This section should spell out the types of stocks, bonds or other securities in which the fund plans to invest. It may look for small, fast-growing firms or large, well-established companies. If it’s a bond fund, it may hold corporate bonds or foreign debt. This section may also mention any restrictions on securities in which the fund can invest.

3. Risks. The prospectus should explain the risks associated with the fund. For instance, a fund that invests in emerging markets will be riskier than one investing in the United States or other developed countries. A bond fund should also discuss the credit quality of the bonds it holds and how a change in interest rates may affect those holdings.

4. Expenses. Different funds have different sales charges and other fees. The prospectus will spell out those fees so you can compare them with the fees of other funds. It should also explain the percentage of the fund’s return that is deducted each year to pay for management fees and operation costs.

5. Past performance. Although you shouldn’t judge a fund solely by its past performance, this can show how consistently the fund has performed and give some indication of how it may fare in the future. This section of the prospectus will also show you the fund’s income distributions and its total return.

6. Management. This section may do nothing more than list the fund manager or managers, or it may give specific information about the management team’s experience. If the prospectus doesn’t contain enough detail, you may be able to find this information in the fund’s annual report.

Mutual funds provide investors with a convenient, effective tool for investing in the stock, bond, and cash-equivalent markets. Let us show you how they can apply in your specific situation.

For more information visit at http://www.filippiniusa.com

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How Capital Gains from the Sale of a Home Are Taxed-By Ian Filippini

For most of us, our home represents our largest asset. Over time, the management of this asset can make a big difference in our overall financial outlook. One of the largest planning opportunities home ownership brings is the favorable tax treatment afforded the sale of a primary residence.

The gain on the sale of a home is considered a gain on the sale of a capital asset. Any taxable profit you make is subject to a maximum long-term capital gain rate of 15% (down to 5% for taxpayers in the 10-15% federal income tax bracket) if you owned the house for more than 12 months. Gain on the sale of a home may be taxable only if they exceed $250,000 for single filers ($500,000 for joint filers) if certain conditions discussed below are met.

Determining Your Net Gain

To determine your profit (gain), you subtract your basis from the sale price minus all costs and commissions. For instance, if you sell a house for $250,000, and must pay your broker 6% of the sale price — or $15,000 — your sale price for determining capital gain tax is $235,000 ($250,000 minus $15,000).

Say you bought that house 20 years ago for $35,000. You have since redone the kitchen and bathrooms, put in new windows, added a bedroom, and a new roof. Your basis in the house is $35,000 plus the cost of all of the capital improvements you have made, providing you have documentation verifying the costs. Let’s assume the total cost of those improvements over the 20 years you owned the home is $40,000. In such a case, your basis would be $75,000. Your capital gain would be $235,000 minus $75,000, or $160,000. If you are in the 28% federal tax bracket or higher, your capital gain tax on your home sale would be $24,000 unless you use the principal residence exclusion.

The Primary Residence Exclusion

Here’s where the favorable tax treatment of capital gains from a residence come in. A $250,000 exclusion for single filers ($500,000 for joint filers) is now available to all taxpayers. You can claim the exclusion once every two years. To be eligible, you must have owned the residence and occupied it as a principal residence for at least two of the five years prior to the sale or exchange. If you fail to meet these requirements due to health reasons, a change in place of employment, or other unforeseen circumstances, you can exclude the fraction of the $250,000 ($500,000 if married filing a joint return) equal to the fraction of two years that these requirements are met. For example, let’s say you were forced to move for employment reasons after only living in a home for 12 months. Without the qualified exclusion, your full tax would have been $20,000. Instead, you would pay just half, since you lived in the home 12 of the 24 months required, or 0.5 of the period. The tax of $20,000 multiplied by 0.5 would yield a tax bill of just $10,000.

For many Americans at or nearing retirement age, their home represents a terrific opportunity to “cash out,” pad their retirement portfolio with tax-free gains, and help ensure their “golden years” truly live up to the name. Feel free to ask us for guidance in making this important decision.

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