Aloha, Kālā Capital Fam!
Ethan and his wife, Marissa, have just given birth to our newest member of Kala Capital, Velzy, so he is currently on paternity leave and I have taken the helm of writing the weekly blog posts!
My name is Chris and I am the CFO at KCP. In my off hours, when I’m not crunching numbers or analyzing our investment portfolios and the financial markets, you can find me playing, studying, and loving the game of chess. One particular game stood out to me: my first win against a master. Albeit a casual game after I already got stomped by him twice, I didn’t back down from the challenge. It’s worth noting that due to the difference in skill level, the statistical probability of me winning was less than 1%. But it didn’t deter me from trying my best, taking advantage of my opportunities, and making every move count. It was an exciting game and my opponent had chances to rip me apart, but I ultimately saw my opportunity, took it, and won the game!
Just like in chess, managing your money requires understanding the rules, learning from past mistakes, and utilizing all the tools at your disposal to maximize your chances of achieving your desired outcome. With the end of the year approaching, now is the perfect time to put these financial strategies into action. So, let's dive into four last-minute money moves to consider before the year comes to a close.
1. Maximize Retirement Contributions
In chess, you want to be thinking multiple moves ahead, preparing for the countless variables your opponent could attack with, and working towards a specific goal– winning. Personal finance is no different. One critical money move to consider as the year ends is maximizing contributions to retirement accounts such as your 401(k) or IRA. These accounts come with annual contribution limits, and if you haven't maxed them out yet, now is the time.
For 2023, the contribution limit for a 401(k) is $22,500, with an additional $7,500 catch-up contribution if you're 50 or older. Traditional and Roth IRAs have a combined annual limit of $6,500, or $7,500 for those aged 50 and above. A common misconception is that you can only contribute to one of these retirement accounts per year, when in fact you can contribute to both. That means you can add up to $29,000/year (or $37,500 if you are at least 50)! Contributing the maximum amount not only helps secure your financial future but can also provide potential tax benefits.
2. Be Purposeful with End-of-Year Bonuses or Excess Cash
Just as in chess, you must seize opportunities when they arise, financial opportunities should not be missed. If you're fortunate enough to receive an end-of-year bonus or find yourself with extra cash, be strategic and purposeful about how you use it. You never know what the future will hold and building a financial safety net can give incredible confidence and peace of mind. Instead of splurging on impulse purchases, consider bolstering your financial goals.
You might allocate a portion to pay down debt, fund your emergency savings, or invest amongst your various investment accounts. Being purposeful with your bonus can set you up for a stronger financial position in the year ahead.
3. Putting Children on Payroll for Tax Benefits
In chess, players utilize all their pieces on the board to gain an advantage. Similarly, in personal finance, you can leverage all available strategies. If you're a business owner or self-employed, consider paying your children work they have done to help you in your business. This move can provide significant tax benefits, reduce your taxable income, and teach your children valuable financial lessons.
By paying your children for legitimate work within your business, you can shift income from your higher tax bracket to their lower one (possibly 0%). It's a win-win situation, providing you with potential tax savings while introducing your children to the concepts of income, savings, responsibility, and most importantly, the value of their hard work.
4. Review Your Business Expenses
Most people believe that to get better at chess, you need to play more. But the most underrated part of improvement is to analyze the way you play the game. You are in control of your destiny, win or lose. Similarly, in personal finance, examining the way you spend your money is the underrated game-changer. Whether you have a traditional job or you are self-employed, now is an excellent time to review your expenses to identify areas of improvement or tax saving opportunities.
If you run a business, this could mean identifying business-related expenses that can be written off, such as office supplies, equipment, mileage, and home office expenses. By optimizing your deductions, you can reduce your taxable income and potentially lower your tax bill. Meeting with a tax professional for this is highly advisable!
If you are not self-employed, then this would mean thoughtfully analyzing where you spent money throughout the year. Have you spent your money in alignment with your priorities? What will you continue to do in the new year and what needs changing?
In both chess and personal finance, success hinges on understanding the rules, making strategic moves, and seizing opportunities. As we approach the year's end, remember that the decisions you make now can have a lasting impact on your financial well-being.
Whether you're maximizing retirement contributions, optimizing business expenses, purposefully using bonuses, or investing in your children's future, each move brings you one step closer to financial success. So, take a page from the chessboard, strategize wisely, and make your financial endgame a victorious one.
P.S. Just like in chess, it's not only about the moves you make but how you play the game: your mindset is key! If you have any financial questions or need guidance, we're here to help you navigate your financial journey. Let's make the right moves together!