The Tax Man Cometh
With the onset of the new year, it's time to start thinking about paying Uncle Sam for last year's earnings and making any tax strategy adjustments going forward. Unfortunately, for many high earners who are subject to AMT, there are fewer deductions and increasingly higher tax obligations. One great idea that I've come across from talking with accountants is investments in oil and gas which can be done in various forms with varying tax deduction benefits. Basically, this form of investment enables the investor to deduct costs associated with drilling for oil and gas and it's a tax deduction kindly provided by Uncle Sam that has no upper income threshold, hence the appeal for those who are subject to AMT. This article on Investopedia provides a great overview on this form of investment and I think it's worth a read to get a jump start on thinking about improving your tax situation in the new year!
Know Your Worth
Just as businesses need to establish financial metrics and measurable goals to be successful, I believe that individuals need to take a similar approach to managing their personal finances. And that means starting from an important high level metric - your net worth.
Simply put, your net worth is the total sum of your assets (all your cash and cash equivalents, investments in stocks and bonds, real estate, businesses, etc.) less your total outstanding liabilities (any personal or business loans, mortgages, etc.). Another simple way to think about this is the total amount of cash you would have on hand after you've sold everything of value you own and paid off all your debts.
Knowing this number and basing your personal financial goals on it is the first key step to good fiscal management and successful investing and it is applicable at all life stages. For instance, as a student and new grad I quickly established a goal and an aggressive but achievable time frame for taking my net worth from negative (due to my student loans) to zero. This then drove my monthly budgeting since I now had a clear sense of exactly what I needed to save after living expenses to make sure I hit that goal by the specified date. Once I started working, the goal changed to a number that I felt would provide me with a sufficiently comfortable retirement and that has become yet another target that I can work towards with my savings and investments.
With the tools available today such as Quicken (my personal choice), or even online tools like Mint, tracking your net worth in real time is a much easier task than it has been in the past. And with these tools, you will be able to add much greater levels of sophistication to managing other related aspects of your personal finances - from cash flow to asset allocation, to basic monthly budgeting.
For those who prefer spreadsheets or wish to save some money, you can download a simple Excel calculator developed by PraxisTemplates below for free to get started with estimating your net worth.