What the Fed’s rate hike means to you

Janet Yellen and the Fed finally raised the short term interest rate.  Headlines touted the “historic” nature of the move since the Fed has not raised its benchmark interest rate in seven years. While it’s true that the Fed has never held rates so low for so long, the seemingly endless speculation of “will they or won’t they” left the actual event feeling a bit anti-climactic.  Economists were quick to point out, too, that this initial rate hike is not nearly as important as the overall pace of rate subsequent hikes, how fast and how far, in determining its ultimate effects. The stock market took this mostly in stride.  The sense of relief on Wall Street was palpable.  Stocks rallied in the days leading up to the decision and surged again after the announcement, but don’t expect any more big moves from the market.  Since the lead up was so prolonged, stocks had already “priced in” the Fed’s announcement and there isn’t much more opportunity to be squeezed out of it.  Stocks have been unable to sustain any upward momentum all year and we expect that weakness to continue. As for bonds, when interest rates rise, prices fall.  The Fed’s policy has a more direct impact on short-term government debt because those yields are highly sensitive to changes in the fed-fund rate. But, just like with stocks, most of the adjustment in prices has happened already so if you are in short term debt securities you shouldn’t see much of a change.  The Fed’s impact on long-term bonds is more indirect. The value of those bonds are influenced by a broad basket of factors, including the global growth and inflation outlook, so here again we see little change in long-term bond prices unless the Fed quickens the pace of rate hikes. As for borrowing, there already is a large gap between the Fed rate and what most people pay on… | Read More »

How to assess the impact of taxes on your paycheck

In order to make the best decisions about finances, it is imperative that any investor understand the impact of taxes on his or her income because the amount you make in the workplace is certainly different than the amount you take home. Let’s say your annual wages or salary is $80,000.  You don’t get to bring home that much and spend as you please. First the government wants their share.  Social security (often shown as FICA or OASDI) takes 6.2%, and then Medicare takes 1.45%. (And, by the way, your employer has matched that percent as well for Social Security and Medicare and it is not income to you). Now pay in your amounts to Federal Income tax (effective rate of 12%), and Wisconsin income tax (effective rate of 3%).  Calculating all that out, you have $80,000 minus $4,960 minus $1,160 minus $9,600 minus $2,400 to have $61,880 remaining.  Now subtract your 10% retirement plan contribution of $8,000. Don’t forget your share of your employer’s healthcare cost at $300 per month for $3,600 per year.  Essentially you are taking home about $50,280 per year to spend on your housing, utilities, clothing, transportation, gifts and entertainment. Even at the $61,880 each year it can be difficult for a family to make ends meet. There is always an interesting study that comes out that shows “Tax Freedom Day”. This is the day when the nation as a whole has earned enough money to pay its total tax bill for the year.  Tax Freedom Day takes all federal, state, and local taxes and divides them by the nation’s income.   This is considered about how long into a year you have worked to pay for federal, state, and local income taxes, sales taxes, real estate taxes, and all other taxes hidden in costs of items purchased. For 2015 that date was April 24th.  That means that if all your pay was going toward taxes,… | Read More »