Our Blog

DWM is committed to learning for its team, clients and friends. In this changing world, it’s extremely important to stay current in all areas impacting your financial future.

We encourage all of team members to “drill down” on current topics important to you and contribute to our weekly blogs.  Questions from our clients and their families are often featured in our blogs.  

Financial literacy for clients and their families is very important to us.  We generally hold an annual wealth management seminar for all of our clients.  We encourage regular, at least semi-annual, meetings in person with our clients to review family updates, progress on financial goals, asset allocation and performance of investments.  We’re happy to assist younger members of the family as part of our total wealth management program.

Here’s our latest blog:

 

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Let’s All Work to Grow Human Capital!

Written by Les Detterbeck.

lets grow human capitalYour biggest financial asset may be your human capital.  Yes, perhaps even more important than your investment portfolio, house, real estate and other assets.  Simply put, human capital refers to the abilities and qualities of people that make them productive.  There are many factors that contribute to human capital.  Knowledge is the most important, but discipline, punctuality, willingness to work hard, personal values and the state of one’s health are among the other factors.

Generally, younger people will have more human capital than financial capital.  In an economic sense, their human capital is the net present value of their lifetime earnings.  In a larger sense, human capital is our ability to add value to others and improve their lives and, by doing so, improve our own.  Decisions young people make early on regarding their education, their careers, their job choices, life partner choice, etc. will all have huge impacts on their eventual financial capital and human capital. Key questions they should answer include “What is your passion?” “When are you at your best?” and “What allows you to engage your human capital at the highest level?”   

Historically, the cross-over point where financial capital starts to exceed human capital occurs when one is in their 50s.  However, with people living longer or pursuing “encore” careers, human capital may remain a significant personal asset for octogenarians and beyond.  A perfect example is 86 year old Warren Buffet who is committed to growing human capital:  “Investing in yourself is the best thing you can do.  Anything that improves your own talents cannot be taxed or taken away from you.”  Regardless of your age, human capital is like a garden, you need to continually give it your time and effort in order for it to grow.

For decades after WWII, the G.I. bill and the American economy pushed workers to build skills and maximize their economic potential.  This was arguably the greatest period of shared prosperity in the history of capitalism.  Last week’s Economist featured an article about University of Chicago Nobel Prize winner Gary Becker’s concept of human capital. Dr. Becker found that 25% of the rise in per-person incomes from 1929 to 1982 in the U.S. was because of increases in schooling.  Other components included on-the-job training and better health.  Dr. Becker was fond of pointing to Asian economics, such as South Korea and Taiwan, with few natural resources, who have invested in human capital by building up their education systems.  There is no debate that well-educated populations have greater incomes and broader social gains. There is a debate over whether the government should supply the education or students should bear the cost; yet both will receive the rewards.

Dr. Becker also wrote about “good inequality” and “bad inequality.”  Higher earnings for doctors, scientists and computer programmers, for example, help motivate students to push harder and achieve top paying jobs.  On the other hand, Dr. Becker wrote, when inequality becomes too extreme, the schooling and even the health of children from poor families suffers, with parents unable to adequately provide for them.  Inequality of this sort “depresses human capital, leaving society worse off.”

Certainly, many, if not most, of our DWM blog readers are committed to increasing and using their human capital to benefit themselves and others.  But, there are many Americans who do not or cannot.  Some are in occupations that have been hit hard by technological changes, others are in declining industries, others have limited education, and others have little opportunity.  As a result, there are lots of unhappy people due to this huge current gap between full human capital and employed human capital.  Can you imagine our country where the vast majority of our 323 million people were increasing their human capital and using it to benefit themselves and society?  Can you imagine an annual economic growth rate of GDP of 5-10%, like it was in the 60s and 70s, compared to the 2% it is currently?  Can you imagine hundreds of millions of Americans happy with their shared prosperity and with optimism for the future? 

Let’s make growing human capital a lifetime commitment. And, let’s also commit to using our human capital to help others grow theirs.  It’s up to each of us. Mahatma Gandhi put it so well: “You must be the change you wish to see in the world.”

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Next on the Agenda: Income Tax

Written by Les Detterbeck.

TAX REFORM 3Washington is moving on to tax reform. Earlier this week, the Senate Republicans made it clear that they want to focus on tax overhaul and critical fiscal legislation.  Republicans and Democrats have already outlined their plans.  Income taxes have always been a very important and often contentious subject. Before we review the key issues, let’s step back and review tax policy generally.

I remember my first tax class in Champaign, Illinois over 50 years ago.  We learned that income tax policy was more than simply raising money.  Taxes have always been an instrument of economic and social policy for the government, as well.

Income taxes became a permanent part of life in America with the passage of the 16th Amendment in 1913.  The first tax amount was 1% on net personal incomes above $3,000 with a surtax of 6% on incomes above $500,000 (that’s about $9 million of income in today’s dollars).  By 1918, at the end of WWI, the top rate was 77% (for incomes over $1 million).  During the Great Depression, the top marginal tax rate was 63% and rose to 94% during WWII.  The top rate was lowered to 50% in 1982 and eventually 28% in 1988.  It slowly increased to 40% in 2000, was reduced again from 2003 to 2012 and now is back at 40%. Corporate tax rates are 35% nominally, though the effective rate for corporations is between 20% and 25%.

Changes in the tax structure can influence economic activity.  For example, take the deduction for home mortgage interest.  If that deduction were eliminated, the housing market would most likely feel a big hit and economic growth, at least temporarily, would likely decline.  In addition, an argument is often made that tax cuts raise growth.  Evidence shows it’s not that simple.  Tax cuts can improve incentives to work, save and invest for workers, however, they may subsidize old capital that may undermine incentives for new activity and growth.  And, if tax cuts are not accompanied by spending cuts or increased economic growth, then the result is larger federal budget deficits.

Our income tax system is a “progressive” system.  That means that the tax rate goes up as the taxable amount increases.  It is based on a household’s ability to pay.  It is, in part, a redistribution of wealth as it increases the tax burden on higher income families and reduces it on lower income families.  In theory, a progressive tax promotes the greater social good and more overall happiness.  Critics would say that those who earn more are penalized by a progressive tax.

So, with that background, let’s look at some of the key issues.

The Republicans and the White House outlined their principles last Thursday:

  • Make taxes simpler, fairer, and lower for American families
  • Reduce tax rates for all American businesses
  • Encourage companies to bring back profits held abroad
  • Allow “unprecedented” capital expensing
  • Tax cuts would be short-term and expire in 10 years (and could be passed through “reconciliation” procedures by a simple majority)
  • The earlier proposed border adjustment tax on imports has been removed

Also this week, Senate Democrats indicated an interest in working with Republicans if three key conditions are met:

  • No cuts for the top 1% of households
  • No deficit-financed tax cuts
  • No use of fast-track procedures known as reconciliation

The last big tax reform was 1986.  It was a bipartisan bill with sweeping changes.  Its goals were to simplify the tax code, broaden the tax base and eliminate many tax shelters.  It was designed to be tax-revenue neutral.  The tax cuts for individuals were offset by eliminating $60 billion annually in tax loopholes and shifting $24 billion of the tax burden from individuals to corporations.  It needed bipartisan support because these were permanent changes requiring a 60% majority vote.

With all that in mind, sit back, relax and follow what comes out of Washington in the next few months. It will be interesting to watch how everything plays out for tax reform, the next very important piece of proposed legislation.

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Some Cures for Procrastination

Written by Les Detterbeck.

procras cartoonWhile most of us are having a super summer, maybe traveling a little bit, maybe kicking back a little, 60 psychologists were in Chicago last week attending the 10th Procrastination Conference. Their goal:  to better understand who procrastinates and discuss how the dreaded loop of perpetual delay can be altered.

Amazing.  20% of people are true procrastinators.  It seems of all countries surveyed, including the U.S., to Poland, Britain, Germany, Japan, Saudi Arabia, Turkey, and Peru, all have about 1 in 5 residents who are chronic procrastinators, or “procs.”  They delay in completing a task to the point of experiencing subjective discomfort, such as anxiety or discomfort.  A proc is usually consistent; procrastinating in multiple areas of her or his life- work, personal, financial and social.  Procs often lose jobs, have broken marriages, suffer deflated dreams, have self-esteem issues and are in financial disarray. Procrastination can be a real problem.

Hopefully, though, we have none or only few chronic procs in our readership.  However, for those who are in the other 80% who “on occasion” delay making decisions until it is too late, find themselves saying “I’ll do it tomorrow,” putting things off until the last minute or simply neglecting important items, here are some ideas on ways to get more things done.

  • Begin by forgiving yourself for being a part-time procrastinator.
  • Break down tasks into smaller pieces.  For example, “select your blog topic,” as opposed to “write the blog.”
  • Consider using the Pomodoro technique.  Plan your day in 25 minute intervals with a 5 minute break after each.  Complete small tasks throughout the day which will produce a huge cumulative effect and a wonderful feeling of accomplishment.
  • Adopt the “Seven Minute Rule.”  If you have a task that requires seven minutes or less, just get it done now.  No need to put it on a to-do list or waste energy thinking about it over and over again, just knock it out.
  • Minimize distractions.  One key area is emails.  Consider being email free for 15-25 minutes at a stretch to be able to concentrate and complete a project rather than getting sidetracked every other minute.
  • Deal with problems now.  Remember the following saying:  “If you have to swallow a toad, it’s best not to look at it too long.”
  • Seek external help for your goals.

It’s no surprise that many people procrastinate on getting their financial matters in order.  Making decisions for what happens to your estate when you die isn’t all that much fun.  Reviewing insurance coverage for when your house is destroyed or your dog bites your neighbor isn’t extremely enjoyable.  Income tax planning isn’t a bowl of cherries.  Planning for retirement and making choices about needs, wants and wishes is not like having a birthday party.  Trying to make investment decisions by yourself with so much information available and so many  conflicting, self-proclaimed “experts” is difficult and frustrating.

However, all of these items are very important and do need to be put in order. Wealth management is one of those key areas where seeking external help can break your procrastination and help you reach your goals.  Consider working with a full-service fee-only fiduciary like DWM.  Not only will you get an experienced, competent team to guide you and provide information and choices so you can make decisions on all aspects of your finances.  In addition, with firms like DWM, who have a proprietary and prudent process in place, you receive regular, consistent follow-up on all investment, financial planning, insurance, income taxes and estate planning matters for years to come.

So, don’t procrastinate.  Consider some of these ideas for getting more things done. And, if you need external help on your finances in order, please give us a call.

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