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Preparing Your Finances and Budget for a Post-COVID Landscape

Preparing Your Finances and Budget for a Post-COVID Landscape

We have all heard the overused phrase “new normal” too often. Pundits and media types love to tell us that this is a different time, situation, or environment than we have ever seen before. I tend to look skeptically at these prognostications because history has a way of repeating itself. All of that said, we are all finding our footing in the soon-to-be post-Covid lockdown period. It will feel strange to eat in a restaurant or shop in a store without wearing a mask. This will not, however, be a new normal as much as a move toward “back to normal,” not only in our personal and social lives but also in our financial lives. 

Savings Rates on the Rise

We all were forced to adjust our lives and adapt to a Covid world. We all stayed at home more and limited our exposure to populated situations. A silver lining emerged from this very difficult period in our lives by way of our personal savings rates. Personal savings rates in the United States skyrocketed in 2020. The savings rate in 2020 was almost double that of 2019 and more than doubled the respective rates of 2016 and 2017. This was the direct result of our travel and discretionary spending being greatly restricted; therefore, most people changed their spending habits without necessarily trying to change their spending habits. We didn’t intentionally tighten our budgets. More so, our budgets were tightened for us. For this reason, we need to be cognizant of how our budgets are likely to change again in the post-Covid world. 

In the chart above, 2020 became one of only two years since 2000 that Americans’ personal savings rate eclipsed 10%. Click here for the interactive chart. Source: Statista.com

Pitfalls on the Move Back To Normal

Our economy is emerging from the past 15 months and the US consumer appears ready to spend again. The travel statistics in the U.S., while still low, are strongly rebounding, with nearly nine in 10 Americans preparing to travel in the next six months. Bars and restaurants are also seeing foot traffic slowing moving back to pre-Covid levels. All of this means one thing for our finances – plan or deal with the consequences. We will likely experience myriad influences over the coming months, including the lack of a spending budget and the desire to do everything we couldn’t during Covid – all at once. These can cause major problems to our monthly budget. We should anticipate an increase in our discretionary spending and plan for it. Make a conscious decision to set a monthly budget for spending on dining out, entertainment, and travel.

We should also be aware of the desire to make up for the lost time. For many of us, we haven’t seen a concert, attended a live event, or traveled on vacation in roughly a year and a half. We should fight the urge to make up for that in the next six months. Spread out those more costly, splurge-type purchases over the next year or two. It is important to establish a dedicated travel line item into our budget. This will make it much easier to control those costs. 

Assess Your Financial Situation 

Your financial life is in a different place than it was at the beginning of 2020. Many people have experienced a job change or an increased balance in their cash reserves. Now is the time to re-examine your financial goals and meet with your financial advisor. You may have a former 401k to roll over or room in your existing employer-sponsored retirement plan for additional contributions. The investment markets are in a significantly different place than they were 15 months ago, as well. Have you rebalanced your investment allocation since the pandemic started? Investors should determine if their risk profile has changed. Life events that are the size, depth, and breadth of Covid-19 change us individually and can easily have an impact on our view of risk. For all of these reasons and many more, you should book an appointment with your financial advisor and update your financial plan. If you do not have a financial plan, feel free to reach out to Walkner Condon.

Nate Condon, Financial Advisor

What to Know about the 2021 Advance Child Tax Credit Payments

What to Know about the 2021 Advance Child Tax Credit Payments

In March of 2021, President Biden signed into law the American Rescue Plan which was intended to help ease the economic burden faced by many families due to the Coronavirus pandemic that has affected the world over the last 16 months. This bill had numerous additional benefits included in it, and one of them may impact you or someone you love. It is the Advance Child Tax Credit payments that are scheduled to begin on July 1, 2021. We want to make sure that you know where to go to find out if you qualify and what you would need to do in order to receive your payments.

How Do I Receive the Advance Child Tax Credit Payment?

First off, this child tax credit payment is actually an advance of a portion of your 2021 child tax credit. In order to qualify for the payment, you MUST have filed your 2020 tax return by May 17 of this year. The IRS is currently setting up two portals, both of which will be live by July 1, that qualified individuals can use to manage their child tax credit and update information pertaining to their situation. The second portal is specifically for non-filers or people whose situations – number of dependents, income, etc. – have changed. You will have two options for how to receive this money. As one of the options, you can take monthly payments from July through December of 2021 and receive the rest of the amount you qualify for when you file your return in 2022. The other option allows you to take a lump sum for the total amount in 2022 when you file your return.

What is the Amount of the Child Tax Credit?

The amount of the tax credit per child is based on your AGI from your 2020 tax return, so it is important that you go to the IRS portal to calculate what your advanced tax credit is going to be as well as determine how you would like to receive your money. In order to receive the lump-sum payment, you will need to opt out of the default monthly payment option. The credit will increase the amount of child tax credit from $2,000 to $3,600 for children under six years old. For children 6-17 years old, families will receive $3,000 per child. You can also claim $500 for children who are 17 or 18 years old and full-time college students between the ages of 19-24. There is a requirement that the children be related to you and reside with you for at least six months out of the year.

Are There Income Requirements? 

As far as income eligibility is concerned, married couples filing jointly will be eligible for the full credit if their AGI is below $400,000 and single filers below $200,000. The larger tax credit will begin to phase out if your AGI is above $150,000 for married couples and $75,000 for single filers. The phase-out for heads of household filers is $112,500. The amount will be reduced by $50 for every $1,000 over that threshold. In order to calculate what you are eligible for, visit the Kiplinger 2021 Child Tax Credit Calculator.

Jonathon Jordan, CFP®

A Big Problem with using Cryptocurrency as a Payment Tool

A Big Problem with using Cryptocurrency as a Payment Tool

So you got a little adventurous a few years back and decided you wanted to make the leap and buy some cryptocurrency. Whether it’s ether, bitcoin, or any other variety of cryptocurrency, eventually you may decide that you would like to use some of that newfound wealth (presuming that it, in all likelihood, has increased in value) to send a payment in your cryptocurrency of choice to a vendor, like maybe to buy that NBA Top Shot NFT or even to show off your trading prowess by buying a Tesla with bitcoin

You agree to buy something and send out your payment for that digital artwork that you just had to have. If it’s bitcoin, it probably takes around ten minutes for the transaction to actually clear (far longer than a U.S. dollar-based credit or debit card transaction of course, at a far higher environmental cost). 

Let’s say this was a transaction in the equivalent of $5,000 in USD. Here’s the problem – unlike sending a stable currency like the U.S. dollar (which triggers no capital gain or loss), this will trigger taxation on the cryptocurrency transaction. In a very simple example, if you originally bought $500 USD in bitcoin in 2015 and you sent out the $5,000 USD to buy your artwork, you will have to recognize a $4,500 capital gain from the transaction despite never converting the cryptocurrency to USD.

In another example, you saw a cute cat meme that became the avatar for the newest coin that you couldn’t pass up, kittycrypto. You decided your dogecoin was no longer the “in” currency to have and therefore, you exchanged your $10,000 USD equivalent of doge, which you bought for $6,000 USD three months ago, into kittycrypto. Unknowingly, you have again triggered taxation, and this time it was held less than 12 months; it is now a short-term gain taxed at ordinary income tax rates. 

For those that may think these are merely examples, the Oakland Athletics have recently become the first team to accept Dogecoin for tickets. This is not the first time they have dabbled in accepting alternative currencies to USD, but as in my example above, be sure to track your transactions since it may involve a capital gain or loss. 

As the utilization rate of cryptocurrency continues to escalate, unanticipated taxation may be triggered with transactions. Because we are not used to looking at the cost basis of our U.S. dollars when we make daily transactions, this certainly isn’t top of mind for people and should be treated with a critical eye and solid accounting. If you are also getting the feeling that using cryptocurrencies for everyday transactions is fraught with peril, also consider the Bloomberg Opinion article linked above, “One Bitcoin transaction would generate the CO2 equivalent to 706,765 swipes of a Visa credit card.” Maybe next time you should just use the plastic.

Clint Walkner

For more information on cryptocurrencies, see:

A (Somewhat) Plain English Introduction to Cryptocurrency and Blockchain (blog)

Welcome to NFTs: An Intro to Non-Fungible Tokens, NBA Top Shot & Digital Collectibles (podcast)

Please note that this is not an offer or endorsement to purchase cryptocurrencies or NFTs, nor does Clint Walkner offer tax advice and is not a CPA or tax professional.

A (Somewhat) Plain English Introduction to Cryptocurrency and Blockchain

A (Somewhat) Plain English Introduction to Cryptocurrency and Blockchain

If recently you have begun to feel like finance has entered some bizarro world, you’re not alone. After passing through my 20th anniversary of being a “financial advisor” (with many different titles along the way), few, if any, times in recent history have we seen such rapid adoption of a new financial instrument like cryptocurrencies. Conceptually, it should make some sense – blockchain technologies offer the ability to create a permanent log of data, making it a (presumably) secure transaction. 

Cryptocurrency & The Blockchain

Cryptocurrencies have their place inside of the blockchain, offering a mode of payment to facilitate these transactions. The appeal of these is to cut out the middleman, which in most cases is a payment processor, and allows transactions to be conducted between people or entities more seamlessly. By cutting out the processor, fees are reduced, and in some more nefarious cases, the transaction could be obfuscated for illegal activities. The ultimate goal for many is to achieve decentralized finance, or DeFi, where transactions can occur outside of common fiat currencies, securely and easily. If implemented in a utopian way, we could see cross-border payments seamlessly sent without high wire fees or excessive governmental scrutiny, which would also provide a way for unbanked individuals to have access to financial systems to facilitate transactions. Think about this – if you lived in Venezuela and endured their famous 10 million percent inflation rate, cryptocurrency doesn’t sound half bad!

For those that have looked into cryptocurrencies, there are scores of coins, each relying on its own blockchain technology or an iteration of a previous one by the process of “forking.” Taking this one step further, many applications have been built off this technology, known as “dapps”, or decentralized applications. This utilizes smart contracts, which are executed automatically when an event occurs. In a simple form, think of a bet you make with a friend on whether or not the Packers win. The dapp checks with a data set to confirm a victory, and the crypto payment is made from one account (known as a wallet) from the always gullible Bears fan. The record of this transaction is stored on the blockchain to assure data integrity. 

Understanding the Craze 

While there are many out there that believe in the mission of cryptocurrencies, there is no doubt that the headlines have not come from the reliability and stability of the currencies, which have been traditionally lauded for transparency, reliability, and stability. It is obviously due to the returns, which have led to an estimated 100,000 people with more than $1 million dollars in equivalent bitcoins. This has obviously created a media frenzy as well, breathlessly writing stories around new wealth created and lost. Additionally, there are so many online communities fulminating about cryptocurrencies you can find a top 50 crypto memes page focused on all the absurdities around the community. FOMO, indeed. (Fear Of Missing Out, for those uninitiated!)

A Cryptic Crypto Conclusion

So are cryptocurrencies actually a thing? The answer is likely yes; however, it is puzzling as to why all of this is so popular in the first place. The goal of most currencies is to provide a stable source of value so that transactions can occur seamlessly, transparently and easily. In the end, when you hand over U.S. dollars for a transaction, do you look at the exchange rate that day and how that may impact your transaction? Of course not. Add into the mix a troublesome past with hackers, a fairly dismal environmental record, and low transactions per second compared with traditional payment processors such as Visa, and you can see why they are some skeptics out there.

Perhaps we need to reframe our expectations a bit as to how we treat cryptos. Right now it appears to be mostly just a speculative investment more akin to a microcap stock rather than an actual currency. As the market matures and the value becomes more stable, we could see cryptocurrencies becoming utilized for the very reasons they appear to be designed for – adding a decentralized, secure process to send something of value from one person to another. Until then (if it ever happens), we will see whether this is a spectacular speculative bubble or literally one of the things that changes finance forever.

– Clint Walkner

Learn More

Do you want to learn more? Check out our recent podcast episode on non-fungible tokens (NFTs), which have quickly introduced the world to digital artwork, sports highlights, and even tweets that involve the blockchain and digital ownership of these works.

Clint discusses the basic framework behind NFTs, which include NBA Top Shot. 

Will inflation return in 2021?

Will inflation return in 2021?

Perhaps no financial subject causes the worry that the dreaded specter of inflation does. There are valid historical reasons for this: one can simply point to crises in South America, the 1970s in the United States, or even World War II for examples of the ill effects of inflation. Perhaps because of its power to haunt us, inflation frequently becomes a topic of concern and financial journalism whenever an economic crisis rears its head: in fact, The Economist cover on Dec. 10 of 2020 was already asking “Will Inflation Return?” And so we imagine, given the worries from financial journalism about increased aid to those suffering from the economic effects of COVID-19, along with the general (though rather incorrect) assumptions about Democrats being the party of increasing deficits, 2021 will feature a great deal of talk about inflation.

In fact, The Economist cover became a semi-internet event as the wags of Twitter were quick to point out that The Economist has been writing stories about inflation repeatedly over the past 30 years and inflation has not been a problem in that time. However, such pithy dismissals ignore the real concerns of inflation over the longer term. Indeed, while we don’t foresee inflation being a problem in the near term, there is concern as time goes on the deficit spending of the present could cause future inflation. Consequently, this piece will explain inflation, what factors are shaping and will shape the conversation around inflation in 2021, and then what will shape inflation in the longer term.

What is Inflation?

Inflation is simply the fact that one dollar will generally purchase less in the future than it does right now. This is reflected in the fact that a candy bar costs about $1.50, whereas when I was a kid a Hershey’s candy bar could be bought for about 50 cents. In inflation terms, we could reverse this to better understand the phenomenon, however: when I was a kid, you could buy two candy bars for a dollar, and now you can only buy 2/3 of a candy bar. On the surface, this seems terrible—especially, if like me, you enjoy a chocolate bar and a glass of milk before bed—this habit of mine is costing me more than two times as much! (Of course, my allowance is greater than it was when candy bars were 50 cents, and most of us on salary see our salary increase over time in line with inflation).

What many people don’t realize is that inflation is built into the system—currently, the United States targets about 2% inflation annually (editor’s note: how is inflation measured? That’s a trickier topic and beyond the purview of this article, but it goes beyond candy bars). You may be asking yourself: if inflation is so bad, why do we have any inflation at all? Because the alternatives (deflation) are much worse. 

A dollar being worth less today than it was yesterday means I’m going to take my money that I’m not using and either spend it or invest it (whereas if my money were worth more tomorrow than it is today—my best risk-free investment would be keeping it under my mattress, which is great for me—spending less on chocolate, eating better—but bad for everyone. For example, our friends and the employees at Madison Chocolate Company who manufacture chocolate would not be helped if I eliminate it from my diet). 

And this raises the question of what causes inflation—like everything else in the economic world, the answer is supply and demand. Supply is pretty simply the amount of money printed by the government. On the other hand, monetary demand is one of the thornier problems of economic theory to calculate, because people demand money in a couple of ways—to spend (what is called transactions demand for money), to save, and to invest (portfolio demand for money). If there is more money in circulation (an increase in supply from the government spending more money or printing more money) and the demand for the money stays about the same (people are spending, saving, and investing in normal terms), the money will be less valuable overall and over time. But what we saw in 2020 was not normal, as people were forced not to spend (fear of going to restaurants, unable to travel, etc.) and also chose to save more (worried about losing their job, income, etc.). This meant more savings and less spending. Like my chocolate bar money, this is good behavior personally and bad behavior in big picture terms.

What about 2021 is Causing People to Worry About Inflation?

Two things happened in 2020 that have caused people to worry about inflation. The first is that as a response to the COVID-19 pandemic the demand for savings (M2) increased—people saved more, put less money to “work,” and that meant less money being spent (what economists partially measure as the velocity of money). As a result, the United States government did a variety of things to keep money moving through the economy rather than sitting in savings accounts being saved for the future (remember: less chocolate is good for me, bad for the economy). They increased government spending (the government helped buy things to make up for the fact other people weren’t) and they lowered interest rates. Lowering interest rates means more money will be spent because the incentive to save money is lowered (why am I keeping this money in the bank earning nothing?) and the risk for borrowers is lowered (if I can borrow money at about the long-term inflation rate, it makes sense for me, because my investment doesn’t need to be as successful for this to be a good idea). Likewise, by pumping more money into the economy (either by buying stuff directly or through transfer payments), savers will naturally meet their savings goals and have a surplus to spend (this is the theory anyhow). 

Via transfer payments and deficit spending then, the government increased the supply of money. As we’ve seen that will lead to inflation. However, not all of the money made it into the economy—a great deal was saved. That means while there is a lot more money being printed, we aren’t necessarily more money chasing goods and services; therefore, inflation has—overall—been contained.

Short-Term versus Long-Term Inflation

We could see inflation in 2021—say there is a magical virus cure and suddenly, we’re back drinking and eating out and flying around the world all of the time (I’m thinking of 2019 when the Sunday after the negative 40-degree cold snap led to bars and restaurants closing voluntarily, and suddenly, people were all about). We spend all of our savings immediately and all of that extra money printed in the last few years comes flooding back into circulation. However, that seems unlikely—even though we may want to vacation all of the time, some of us have limits on vacation days and so we can’t go around booking trips for months straight. Likewise, with regards to bars and restaurants—hangovers, diets, gout, etc. mean we can’t go around drinking and eating as much as we want—though we’ll likely increase our consumption at bars and restaurants. There is also a natural inclination not to spend savings once developed (humans being creatures of habit), and so we’ll see these savings reduced gradually over time. Finally, many Americans used this money to pay off spending in the past (credit card debts, for example).

As the glut of extra printed money comes back into the economy, the question of longer-term inflation becomes a worry: Are we printing too much money? Economists analyze this in terms of the relationship between Gross Domestic Product (demand) and the amount of money in supply: essentially, if there is more money in circulation than growth of productivity or more money chasing the same quantity of goods and services, you end up with inflation.

Ultimately then, the goal of policymakers is to ensure that the money moves from being saved to being spent at a controlled rate. This means the following will shape predictions of long-term inflation: one, will the US be able to effectively decrease money in circulation by increasing interest rates and encouraging people to put money in the bank (how much am I reducing my savings by)? Two, will the money pumped into the economy have the effect of stimulating the economy and lead to economic growth increasing demand (meaning that the growth of GDP will more or less keep pace with the increase of the monetary supply)? Three, will the United States reduce spending and lower the supply of money from that perspective as well to ensure that there is less money in circulation? 

These are three long-term questions that policymakers, government officials, and the Federal Reserve will need to manage in order to make sure I can keep buying the right amount of candy bars for my health and the economy’s health. 

Keith Poniewaz, PhD

INVESTMENT & OUTLOOK GUIDE

This piece was part of Walkner Condon’s 2020 Review & 2021 Investment Outlook Guide, a comprehensive interactive PDF covering a wide range of subjects and trends, including the S&P 500, electric cars, and more. To read the full guide, please click the button below.