Kurt's Thoughts

I’m still baffled by the number of people that choose not to itemize or hire an accountant to do their taxes come April 15th every year.

Every customer I go to, I run into at least one IT guy that still does their own taxes using some crappy tool like TurboTax and hasn’t figured out the "mystical secret" of having someone do your taxes.  Ususally they come up with some lame excuse about "how they don’t have any deductions" or "how they’re afraid of getting audited" or some nonsense like that.

I suppose it has something to do with the lack of good parenting in America amongst today’s computer professionals.  A lot of folks that have shaped their careers around IT, never seemed to get much instruction around how to manage money or how to build wealth from their parents.  I should know:  I don’t think I was given all that much guidance by my parents… but at least my father was good enough to teach me that you must max out your 401k in order to have any shot at all at retiring at 55.

There are 5 ‘financial secrets’ for the working IT guy that I’ve learned in my short time on earth that I’ve found invaluable:

1)  BUY A HOME
Buy a home – any home – as soon as possible.  Buying a house or condo allows you to borrow money at the cheapest rates available today while getting a tax write-off of the interest associated with that loan.  Additionally, with a home you can develop and store equity to develop your credit and potentially take out another loan if the need arises.  Homes also can appreciate in value allowing you to make money on the value of your property.
This little bit was something my father taught me:  Renting is for fools.  Renting simply gives your money away to someone else.  There is virtually no reason to ever rent unless it is unfeasible to commute between a new home and your workplace because unless you’re paying virtually nothing to your landlord, renting is almost always a bad deal.  The flip side of this of course is that if you can get someone to rent a property of yours at a profit – that’s easy money.  This is why trailer parks – which have no electrical or plumbing to maintain – are some of the most lucrative investment properties available.
(Advice impact on my life:  4/5)

2)  GET A RAISE THAT MEETS INFLATION
Ever notice that it gets harder and harder every year to pay the electrical bills or find enough money for insurance & car repairs?  Inflation is 4% every year, meaning the cost of living goes up by 4%, so if you’re not getting a 4% raise in compensation from your employer – either through salary or through other things like stock grants or profit sharing – you’re effectively getting paid less than last year because of the devaluation of the dollar. 
A friend of mine that’s "very financially independent" said that if you were to go 12 years without any adjustment in compensation, you’d be effectively making 50% less than you were when you started on the basis of how much the cost of living is.  So the frame of mind that you need to be in when evaluating whether or not your doing well in your career as far as compensation goes is, "How well am I keeping up with inflation?"  And if you’re not, you need to seriously assess whether or not you want to be in your job 1 or 2 years from now.
(Advice impact on my life:  2/5)

3)  HIRE AN ACCOUNTANT
You should never use TurboTax.  Unless you’re working at McDonalds or some other minimum wage stint in which accounting fees of $150-$200 might actually be "real money" to you, hiring an accountant is the smartest way to file your taxes.  Accountants know what you can and can not itemize (in terms of past expenses) and if you have the right accountant, they’ll do the itemization for you on the basis of some Q&A with you.  Itemizing your year end expenses can save you hundreds if not thousands of dollars on your taxes.
I used TurboTax between 1994-1997.  In 1998, at the stringent urging of several my wealthier friends, I hired an accountant who did my taxes and discovered that I was eligible for $3000 in refunds that year.  I’d almost never gotten a refund before up until that point.  And then she refiled my past 4 tax returns and itemized my expenses on the basis of my credit card bills, checking account records, and an interview with myself on what I’d used certain major expenses on.
I bought a Porsche Boxster with the tax refund I got from those 4 years.  That’s right.  I bought a car.  With CASH.
(Advice impact on my life:  3/5)

4)  GET A FINANCIAL ADVISOR
Face it:  There are financial wizards much, much smarter than any of us day laborers investing in Wall Street, analyzing the stock market and watching for trends and market movement.  The flip side of this realization is that YOU & I CAN’T BEAT THESE PEOPLE.  They will always be ahead of you in knowledge and quicker to buy or sell and in the long run, you can’t make as much money as they do.
So like they say – if you can’t beat them, join them.  Hire someone to manage your money for you.  Let them watch the trends and help you make decisions based on their observations.  They’ll also provide balance to your portfolio, and a good advisor will provide balance across at least 3 categories:  Risk, Geography, Taxation.  These complex models are beyond the comprehension of most investors and to make matters more complicated, no one actually knows what companies to make these investments in once they’ve been evaluated.
Yes, they’re going to take a percentage annually, but if they make 5%-10% more than what you usually make annually, why do you care?  And the security you’ll have in them calculating the projections on when you can retire at a safe age will provide you with a confidence that you simply can’t have any other way.
Now obviously the concern people have is, "How do I know that the financial advisor will make more money for me than I would normally?" and natually the answer lies in getting a good recommendation by someone that already has an established relationship with one.  But I’ll tell you this:  A good financial advisor should be able to virtually guarantee you 10% based on the configuration of your portfolio however will likely average 20%-30% gains on your investments every year. 
(Advice impact on my life:  5/5)

5)  RETIREMENT
This was one of the first rules my father taught me.  Use Roth, max out your 401k, diversify. 
– USE ROTH:  The Roth IRA allows $4,000 of after tax income to be deposited yearly into a retirement account that is grown through investments.  The key is that unlike typical retirement accounts, any growth in this IRA is sheltered from future taxes.  A Roth 401K is the same thing except that it’s only available through your employer if they’ve taken the time to set it up, and it has a limit of $15,000 of annual after tax income investment.
Obviously, if the gains on the investment you’re making is sheltered from taxes, you’re gonna want to max out the investment you can make in these accounts.
– 401K MAXIMIZATION:  Your 401k usually has an upward limit to how much you can invest in it – often 10%-15% annually.  Do the math (or ask your financial advisor to do it for you):  This is not enough investment to adequately allow anyone to retire at 55 at the same standard of living.  So at the very least you need to max out your 401k contributions through your employer.  At best, you need to make other retirement investments elsewhere that are sheltered from future gains taxes.
– DIVERSIFY:  I’ll admit it – I didn’t believe in this until I actually saw it.  Diversifying your investments is absolutely critical to ensuring that your nest egg is safe and continues to grow.  In a nutshell, it is possible even in the WORST circumstances to make money (think 9-11 or the Internet bubble) if your portfolio is well-balanced and correctly managed to account for disasters.  Our financial advisor has a very specific model of investing that balances not just risk across investment but also 2 other dimensions to ensure that our portfolio makes money in most market conditions.
(Advice impact on my life:  4/5)

Oh & one last thing.  Cars.  Bad investments.  Seriously.  If you have cash to burn, yeah, go get something flashy and get it out of your system but be aware that the Audi you buy for $50K could have been worth a Ferrari for $230k in 8 years.