Posts in category: Advisory

Thanks to the Great Resignation trend over the past year, there is a high availability of jobs. Therefore, now is a good time for retirees who would like to go back to work to ease into the job market. However, if you’ve already begun drawing Social Security benefits, you should understand how earning income will affect those payouts. 

First of all, you have two options if you’d like to stop receiving Social Security. One option is available only if you’ve been drawing benefits for a year or less. In this case, you may cancel your application; but be aware that you must repay all the benefits that you and your family have received to date. That includes spousal benefits and even Medicare premiums that were deducted from your payout. You will still be able to reapply for Social Security later. The second option is available only if you have reached full retirement age but have not yet turned 70 years old. In this case, you may request to have your Social Security payouts suspended. 

There are two benefits associated with these strategies: 1) foregoing Social Security income will likely reduce your tax bill, and 2) your Social Security benefits will start accruing again based on the delay and calculations that include your new wages. 

Alternatively, you may choose to continue receiving Social Security while you work, which could be important if your spouse is receiving benefits based on your earnings record. Under this scenario, a portion of your benefit may be withheld or even subjected to higher taxes. It all depends on how much you earn. If your annual income is $19,560 or less (2022), it won’t impact your Social Security benefits. 

Note that only wages from a job or self-employment count toward your Social Security income limit for withholding purposes. Distributions you receive from pensions, annuities, investment income, interest, veterans benefits, or other government or military retirement benefits are not considered earned income. 

Once your income totals more than $19,560, the impact depends on your age. If you have not yet reached “full retirement age,” Social Security will withhold $1 in benefits for every $2 you earn over the limit. 

During the year you reach full retirement age, your annual total earnings limit increases to $51,960 (2022) and the subsequent benefit reduction drops to $1 for every $3 you earn over that amount. They count only how much you've earned up to the month before your birthday – not what you end up earning in a whole year. Once you've reached full retirement age, it doesn't matter much how you earn, there will no longer be any withholding of benefits. 

Better yet, starting in January of the year after you turn full retirement age, regardless of whether you continue working or not, your Social Security benefit will increase to reflect any previously withheld benefits due to your income exceeding the limit. And if the years you subsequently worked rank among your 35 highest-earning years, your payout will increase even more to reflect a higher benefit calculation (since you paid FICA taxes on that income). 

Tax Considerations 

In the case of all beneficiaries, at least 15 percent of Social Security income is exempt from federal income taxes. Be aware, though, that for tax purposes, your reportable income includes half of your Social Security benefit plus all other forms of income, such as a job, pension, or investment income. If your total annual income is between $25,000 and $34,000, then as much as 50 percent of your Social Security benefit is taxable. If you earn more than $34,000 in a year, then up to 85 percent of your Social Security benefit is subject to taxes. 

This is a general overview of what happens to your Social Security benefits when mixed with earned income. There are additional details, so it’s a good idea to work with a Social Security expert to decide if you should cancel or suspend payouts and to understand how your income and tax situation may be impacted by going back to work. 

With that said, if your portfolio has taken a beating this year, you might want to stop investment distributions for now and give it time to grow. Fortunately, the United States is currently enjoying a robust job market in which highly experienced candidates can negotiate a flexible work schedule, job site, and higher salary, so it may be worth it to go back to work for another year or two to help secure your long-term retirement plans.

Depreciation is the accounting concept that evaluates an asset's useful life. As the Internal Revenue Service (IRS) explains, depreciable property ‚Äì which could include equipment, structures, means of transportation, fixtures, etc. ‚Äì is examined to see how many years the purchase price can be averaged and ‚Äúdeducted from taxable income.‚Äù This is in contrast to “full expensing,” which allows companies to write off investments straight away. For dual-use property (personal and commercial), only the portion of property that's used for business may be depreciated. Property eligible for depreciation must (1) be owned by the business, (2) be used for business purposes/income-producing activity, and (3) have a determinable useful life.¬†

1. Straight Line Depreciation Method

This method of depreciation determines a constant amount to expense annually over the useful life of the property. It's calculated as follows, with the following example circumstances assumed:

 Machinery costing $50,000 with a life of 12 years and $2,500 in salvage value.

Annual Depreciation = (Cost – Salvage Value) / Useful life

= ($50,000 – $2,500) / 12

= $47,500 / 12

= $3,958.33

Considerations

When implementing this method of depreciation, if the asset's useful life and salvage value is assumed incorrectly, it could skew results. For assets that become outdated prematurely and/or require higher maintenance costs toward the end of their useful life, this method can lead to improper results. 

2. Double Declining Balance Depreciation Method

This method, generally speaking, is double that of the straight-line rate.

Annual Depreciation Rate = (100% / Useful life of asset) x 2

Annual Depreciation Rate = (100% / 10) x 2 = 20%

Let's assume that property, plant, and equipment (PP&E) cost $75,000, will produce for 10 years, and have a salvage value of $6,000.

From there, we work to establish the Periodic Depreciation Expense (PDE)

PDE = Beginning Book Value x Rate of Depreciation

Using the formula for PDE, we get: $75,000 x 0.20 (20 percent) = $ 15,000 for the first year's depreciation expense.

Then, the first year's depreciation expense is subtracted from the item's beginning book value. Ending Book Value = $75,000 – $15,000 = $60,000

To determine each subsequent year's ending book value, the calculation begins with last year's ending book value minus the newly calculated annual depreciation expense.

Year 2 Calculation for Ending Book Value: $60,000 Р($60,000 x 0.20 = $12,000) = $48,000 

Considerations

This method expenses a greater proportion in the earlier years compared to the later years. This is useful for assets that produce more for a business in their earlier years compared to later years. This method can help businesses depreciate items that lose value quickly, such as electronics, and similar items that become obsolete due to improving technology. It's not necessarily double or 200 percent of the straight-line rate. It could be more or less than double the straight-line rate. However, the double depreciation rate does remain constant over the depreciation process. 

3. Units of Production Depreciation Method

This method takes either the amount of discrete time utilized for production or the tally of items to be manufactured with the production equipment subject to depreciation. It's calculated as follows:

Depreciation Expense = [(Cost – Salvage value) / (Life in Number of Units)] x Number of Units Produced During Accounting Time Frame.

Let's assume a piece of equipment costs $100,000, has a projected lifetime production ability of 150 million widgets, and will salvage for $10,000. It's projected to create an output of 25 million widgets within the accounting year.

Depreciation Expense = [($100,000 – $10,000) / 150 million] x 25 million

= ($90,000 / 150 million) x 25 million

 = 0.0006 (unit) x 25 million

 = $15,000

Considerations

This method can help businesses, such as manufacturers, that produce discrete items that can be counted and expensed per piece. Depreciation starts when the manufacturer begins to make items and stops when the unit has produced all of its life's items within a pre-defined time frame. 

4. Sum-of-the-Years Digits Depreciation Method

This type of depreciation is calculated as follows:

Remaining Life (RL) of an asset is divided by the sum of the years' digits (SYD) x Depreciation Base. The Depreciation Base = Cost – Salvage Value

Assuming there are equipment costs of $50,000, with a useful life of 12 years and a salvage value of $3,500. Depreciation Base = $50,000 – $3,500 = $46,500

RL = the remaining life of the asset. When the item starts running, it will have 12 years of remaining life. One year later, or 12 months after usage began, the asset will have 11 years remaining, and so on. For an item with 12 years of useful life, it will be “the sum of the years” or 1+2+3+4+5+6+7+8+9+10+11+12.

The first year of use or the item's Remaining Life will be 12 / 78 = 0.1538. Then 0.1538 x $46,500 = $7,153.85.

Year 2 would be calculated as 11 / 78 = 0.1410. Then 0.1410 X $46,500 = $6,557.69.

Considerations

This method is another way to speed up the percentage of depreciation sooner, instead of toward the end of the asset's useful life. The longer the asset is used, the less utility the asset provides to the business. Therefore, it helps businesses take advantage of depreciation sooner. It's a trade-off for items that require more maintenance as time goes on, as the item's value drops inversely.

Conclusion

Depending on the type of business and what it produces or provides as a service, understanding how depreciation works can give an accurate picture of a company's finances and help with navigating tax laws efficiently.

We’re all feeling the pain at the pump. Unless you decide to walk, bike, or take public transportation, you might feel stuck. But all is not lost. Here are some fuel-efficient driving techniques that can help you save hundreds of dollars in fuel each year.

Don’t Drive Too Fast

Of course, when you're on the highway, you must maintain a certain speed. However, cars, vans, and pickups are typically the most fuel-efficient when driving between 50 and 80 mph. If you go any faster, you'll use more gas. Consider this: When you're driving roughly 75 miles per hour, you use 20 percent more fuel than you would if you were going around 60 mph. On a 15-mile trip, if you're driving faster, you'll only save two minutes. Only you know if shaving two minutes and gulping extra gas from your tank is worth it.

Maintain a Steady Speed

When you drive in bursts, slowing down and then accelerating your fuel consumption increases. Specifically, tests have shown that varying your speed up and down between 75 and 85 mph every 18 seconds can bump up fuel usage by 20 percent. If your car has cruise control, use that. A word from the wise: Slow and steady wins the race.

Accelerate Gently

The heavier your foot is when putting the pedal to the metal, the more gas you use. Here’s how to accelerate and save gas: From a stop, take five seconds to get to 12 mph. You’ll speed on up after that, but the point is to pay attention to when you’re just starting and ease into your journey.

Coast to Decelerate

If you tend to have a heavy brake foot, you’re thwarting your forward momentum. Granted, you want to control your car if you’re in rain or snow. But here’s the trick: Look ahead to see what traffic is like and, if you have some room when you’re headed down that hill, take your foot off the gas and the brake, and enjoy the ride – you’ll conserve fuel and save money.

Try Not to Idle

Except when you're in traffic if you're stopped longer than a minute, turn off your engine. The average vehicle with a three-liter engine drinks in over a cup of fuel for every 10 minutes it idles. Ouch!

Measure Tire Pressure

Do this every month. If your tires are under-inflated by 56 kilopascals (aka 8 pounds per square inch), fuel consumption rises by up to 4 percent. If you don’t know the right tire pressure for your car, check the label on the edge of your driver’s side door. If your tires are low, it also can reduce their life. Make it a habit to check your tires.

Use Credit Cards with Gas Rewards

These cards are usually issued in partnership with a bank and offer a discount on gas, like saving five or six cents off a gallon. Yes, mere pennies; but when you add them up, it makes a difference. A few of the top cards to check out are Citi Custom Cash^SM Card, Blue Cash Preferred^® Card from American Express, and Discover it^® Cash Back. Here are a few more. Another smart way to save is to get an app like GasBuddy that shows you the cheapest gas near you.

No one knows when gas prices will go down. In the meantime, the only thing you can do is try to work around the situation as best you can. The good news is that nothing lasts forever.

Sources

https://www.nrcan.gc.ca/energy-efficiency/transportation-alternative-fuels/personal-vehicles/fuel-efficient-driving-techniques/21038

https://money.com/people-combatting-high-gas-prices/

The Congress at Work series of articles is designed to give you a glimpse of various types of legislation currently under consideration. While either the Senate or the House of Representatives may initiate a bill proposal, be aware that many bills never become law They may never make it out of committee, be blocked by a Senate filibuster, be delayed, lack sufficient votes, never be agreed upon by the two houses, or be vetoed by the president. 

Supply Chain Security Training Act of 2021 (S 2201) – This legislation is designed to identify supply chain risks and develop a government program to train federal officials with supply chain risk management responsibilities to prepare for and mitigate those risks. The training program would cover the complete acquisition life cycle, including funding for data access and processing as well as appropriate technology and communication vehicles. The bill was introduced by Sen. Gary Peters (D-MI) on June 23, 2021. It passed in the Senate on Jan. 11 and in the House on May 10. It was signed into law by the president on June 16. 

Bridging the Gap for New Americans Act (S 3157) – Introduced by Sen. Amy Klobuchar (D-MI) on Nov. 3, 2021, this bill passed in the Senate on June 23, 2022, and is in the House for consideration. The bipartisan bill would authorize a study on employment opportunities for naturalized and lawfully present non-U.S. citizens who hold professional credentials from non-U.S. countries. For example, the opportunity to employ doctors with medical degrees to help meet U.S. demand in the growing shortage of physicians. The Department of Labor would identify and recommend how to address factors that affect their qualifications for U.S. jobs in various fields of expertise. 

State and Local Government Cybersecurity Act of 2021 (S 2520) – This legislation expands the responsibilities of the Department of Homeland Security (DHS) for mitigating cybersecurity threats, risks, and vulnerabilities with more proactive and defensive measures. The Act was introduced by Sen. Gary Peters (D-MI) on July 28, 2021. It passed in the Senate on Jan. 11 and in the House on May 17. It was signed into law on June 21. 

South Florida Clean Coastal Waters Act of 2021 (S 66) – An algal bloom is rapidly growing algae that can produce toxic conditions harmful to humans, animals, aquatic ecosystems, and the economy. They are most prevalent in South Florida. This bill, introduced by Sen. Marco Rubio (R-FL) on Jan. 27, 2021, directs the Inter-Agency Task Force on Harmful Algal Blooms and Hypoxia to develop a plan to address how to reduce and control the effects of the blooms throughout the South Florida ecosystem. This legislation was passed in the Senate on March 8 and in the House on May 11. President Biden signed the bill into law on June 16. 

Active Shooter Alert Act of 2022 (HR 6538) – Introduced by Rep. David Cicilline (D-RI) on Feb. 1, this bill would direct the Department of Justice to set up a national alarm system specifically to warn citizens of an active shooter event. The DOJ would also work with state, tribal, and local governments to coordinate networks and establish procedures for how to respond to active shooters. The bill passed in the House on July 13. It is presently under consideration in the Senate, where it faces opposition because many believe it duplicates the existing Integrated Public Alert and Warning System (IPAWS). The premise is that a separate system for active shooter events would risk desensitizing citizens with false alarms.

Advanced Air Mobility Coordination and Leadership Act (S 516) – This bill was introduced by Sen. Jerry Moran (R-KS) on March 11, 2021. It passed in the Senate on March 23, 2022, and in the House on June 14, but the House made changes and returned it to the Senate. The purpose of this legislation is to establish an Advanced Air Mobility (AAM) interagency task force to plan and coordinate efforts for urban-based cargo and passenger aircraft (e.g., drones, air taxis, air ambulances) in the United States. The program would address matters related to safety, infrastructure, physical security, cybersecurity, and federal investment in order to integrate these new aircraft into existing airspace operations. 

Women’s Health Protection Act of 2022 (HR 8296) – Introduced by Rep. Judy Chu (D-CA) on July 7, this bill passed the House on July 15 and is currently with the Senate. The bill would prohibit state governments from restricting access to abortion services (via drug prescription, telemedicine, or immediate action) in situations where the provider determines that birth would endanger the mother's life.

Imagine selling slices of a large pizza. You can cut it into four even slices and charge $2 a slice. Or, you can cut it into eight even slices and charge $1 per slice. Either way, the total value of the pizza will still be $8. 

That’s what happens when a stock splits. Let’s say a stock’s market price is $100. With a 2-for-1 split, each current owner receives one additional share for each share he owns. Now, each share is worth $50. If you had one share to start, you now have two, but the total value of the investment remains $100. 

A stock split differs from when a company decides to issue new shares, wherein new shares flooding the market can dilute the value of existing shares. With a stock split, the value of existing shares does not decrease. The total market value of a shareholder's holdings will remain the same. 

There are different forms of stock splits, such as the 2-for-1, 3-for-1, or 3-for-2 stock split. They all work the same way: You get two shares for each one you hold, or three shares for each one you hold, or three shares for every two shares you own. 

Another, less common form is called the reverse stock split. This is when a company decides to reduce the number of outstanding shares, which in turn will increase the stock price of shares held by stockholders. This strategy is generally used to boost the price of a stock that has lost value over time. 

It is important to recognize that the stock split is a simple strategy designed to affect the stock price. It in no way changes the company’s market capitalization (i.e., the total value of all outstanding shares) or other fundamental metrics. In order to issue a stock split, both company management and the board of directors must approve. Furthermore, the company must publicly announce its intention to conduct a stock split within days or weeks of implementation. 

The timing of the announcement is important because some investors try to take advantage of a stock split, believing that the value of the stock will increase as a result. This has more to do with market sentiment than any change in company fundamentals. 

For example, in many cases, after a company performed a stock split, its stock value returned to its pre-split price within a year. This is not necessarily because the company has improved fundamentals, but rather because the investor market simply believes that stock is worth that price — it’s a form of confirmation bias. However, in recent years it is not as common for split stocks to climb back to their original price as it was in the past. 

Why Conduct a Stock Split?

Again, the reason for a stock split is largely driven by market sentiment. For example, some investors may not have a lot of discretionary income to invest, so they look for a lower-priced stock. While they might not consider a stock valued at $100 per share, they may be interested in the company at $50 a share. In fact, following a recent stock split, investors may see it as getting a bargain price for that stock. As such, they might buy two shares. Now they've spent $100 on two shares whereas they were reluctant to buy one share for $100. The value is the same, but psychologically, that stock now seems like a great buy. This is referred to as unit bias. Psychologically, most people perceive lower per share prices to mean that a stock is “cheaper” and therefore may have more room to make gains.¬†

In addition, now they can further diversify their portfolio with different stocks, whereas before those high-priced shares may have dominated their portfolios, exposing them to greater market risk. 

A stock split also allows current shareholders to increase their holdings at half price. While the value hasn't changed when they make the buy, if the stock increases in the future their portfolio will increase in value because they have more shares of that stock. For example, let's say you have 10 shares of a stock priced at $10, for a total value of $100. The stock splits 2-for-1, so now you have 20 shares priced at $5, still valued at $100. In a few years, the stock price grows to $20 per share. Had the stock not split, your total value would grow to $200. But because you now own 20 shares, the total value of those shares would grow to $400. 

The true value of a stock split comes from holding those shares until the price increases substantially. 

Mutual Fund Split

Some mutual funds also engage in the split strategy, but instead of splitting an individual stock, the fund company issues additional shares of the fund at a reduced price. In all other ways, a mutual fund share split works like an individual stock split. 

If you’d like to learn the history of a company’s stock splits, consider the following resources:

• Click on the investor relations tab on the company website, which often provides a history of the company, including dates of past stock split activity.
• Search by the ticker symbol at stocksplithistory.com or Morningstar.com.
• Search by the stock symbol at Yahoofinance.com. On the stock's performance chart, look for the Events tab and check the Stock Splits option. You may need to reduce the historical time frame to see splits marked clearly.
• Search for stock split history on the website of your online broker. Many outfits offer these types of research tools.

Whether it's tariffs, trade wars, or post-pandemic inflation caused by kink-ridden supply chains and what many experts believe to be excess money printing, inflation is an insidious drag on businesses' operations. When it comes to energy's contribution to inflation, the U.S. Energy Information Administration (EIA) reports that crude and natural gas prices in 2022 have increased on an annualized and weekly basis. Looking at the snapshot of 7/21/2022, WTI crude on the futures market was $96.35 a barrel. This was up more than $26 compared to 12 months ago, and $0.57 higher than a week earlier. For the same time frame, natural gas futures were $7.932/MMBtu, an increase of $3.973 from 12 months ago and an increase of $1.332 from a week earlier.

When it comes to businesses using any type of commodity, they're faced with the question of how to raise retail prices when their prices increase. Many business owners are hesitant to increase prices on their goods and services as they fear it will drive away customers. But in light of increasing input prices, not implementing price increases correctly will impact a business's earnings and profitability.

As McKinsey & Company explains, there are many considerations for why businesses have had trouble with mitigating costs in light of rising input costs. It's important to monitor raw material costs with a fine-tooth comb. Businesses that bury costs of commodities, labor, or tariffs under general accounting categories hide spikes in input costs due to factoring in ancillary costs. If volatile input or uncontrollable factors, however, like tariffs can be monitored independently and in real time, businesses are more likely to be able to increase prices – and do so more gradually. With this in mind, McKinsey & Company highlights four practices that businesses can implement to combat pressure from input costs and pushback from customers who question the reason for price increases.

1. Create a Database of Dynamic Costs

By looking at historical records going back as far as 36 months, businesses can determine trends and keep track of increases or decreases in input materials to share with the sales and customer service departments, who can then communicate with customers. Along with looking at how contracts are written and if there are escalator clauses that permit conditions to adjust for increases in input materials, taking steps to accurately measure the impact of raw material costs can be helpful for price increase considerations.

A business could look at costs by department. If a plating department at a manufacturing company plates 50,000 pieces of metal a month, incurs $200,000 of direct material costs, and has $50,000 in labor and overhead costs, that can be broken down into a per unit cost of $4 for materials and $1 of labor and overhead costs. If the per unit cost of materials fluctuates, investigation can occur through the supply chain from the supplier to the price of futures contracts to see if prices can be negotiated or must be increased for customers.

2. Mind the Economy

Businesses are advised to keep an eye on current economic conditions. This is how companies can set a dynamic pricing strategy. Building on the first step, it's advised to index prices to those of commodities to reduce the lag time between when companies experience changes in costs for their input materials and when retail prices reflect the true cost to the company. Be it fuel, wood, coffee, or metals, understanding how the price of commodities fluctuates in real-time is essential to determine when and how to adjust prices for retail customers. It can also help businesses determine how competitors are adjusting their pricing to customers, how far prices could increase, and how to augment the delivery of goods or services to stay competitive and profitable. 

In addition to escalation clauses, companies adapting to changing input material prices could consider introducing shorter-term contracts, looking for more competitive suppliers, and/or substituting different but equal quality/performance materials.

3. Coaching Staff to Educate and Explain Price Fluctuations

Continual evaluations for sales teams are imperative. Supervisors must see what accounts have (and have not) been informed of price increases. They should focus on what accounts have accepted price increases (and what level of price increases have been accepted). They also should look at what accounts are likely to accept price increases and what accounts are not likely to accept price increases. Businesses also must factor in the business cycle for the sales process and how each account is performing relative to its price increase targets due to cyclical increases in input commodity prices and interest rates for financing availability. Ongoing coaching should be implemented to identify major issues and ways to resolve them. Anticipating and preparing sales representatives for customer questions through role-playing can help better prepare employees to explain why price increases are a part of doing business.

4. Managing Performance

Businesses must play the long game after products or services have been priced accordingly to commodity and input prices. Since inflation follows the economic cycle, upside and downside pricing dynamics can catch companies off guard. Consistently updated product or service pricing systems and prepared sales teams can lead to more profitable margins and hopefully the ability to weather volatile and long-term price spikes.

Much like the price of commodities and labor fluctuate based on dynamic market conditions, finding ways to adapt one's business practices can increase the chances of surviving and thriving in a challenging economy.

Sources

https://www.bls.gov/news.release/ppi.nr0.htm

https://www.eia.gov/

https://www.mckinsey.com/business-functions/growth-marketing-and-sales/our-insights/defying-cost-volatility-a-strategic-pricing-response

Starting June 1, the Fed began reducing its balance sheet holdings of U.S. Treasuries by $30 billion a month for three months. Thereafter, it will double its reduction of U.S. Treasuries by $60 billion per month beginning in the fourth month. For its mortgage-backed securities, the first three months will see $17.5 billion roll off its balance sheet. Starting in the fourth month of the program, this cap will increase to $35 billion per month. As its dual mandate is to both maintain employment and a stable rate of inflation, this is another way the Fed is implementing its monetary policy to put the brakes on inflation and reign in out-of-control demand with limited supply. How will the Fed’s unwinding of its balance sheet impact markets for the rest of 2022?

As compared to quantitative easing (QE), where the Fed bought U.S. Treasuries and mortgage-backed securities to foster more demand for U.S. Treasuries and lower bond yields, quantitative tightening (QT) is the opposite. According to the Federal Reserve Bank of St. Louis, QT is the reverse type of policy that aims to unwind holdings on the Fed's balance sheet. To tame inflation, QT removes liquidity from economic institutions and raises rates for long-dated assets.

In response to the COVID-19 pandemic, the Fed bought U.S. Treasury securities and agency mortgage-back securities (MBS) again in March 2020 to provide stability by maintaining a source of easily accessible credit for consumers and business owners. The Fed bought $80 billion of Treasury securities and $40 billion of MBS per month. The Fed's balance sheet grew from $3.9 trillion (March 2020) to $8.5 trillion (May 2022). Looking at it from a percentage of GDP, it increased from 18 percent to 35 percent. When QT is in full force, it is expected to lower the Fed's balance sheet by at least $1.1 trillion annualized. Over a three-year timeframe, it is expected to remove about $3 trillion over 36 months.

When it comes to the process of QT, it is important to understand how it works and impacts the overall market dynamics. When U.S. Treasuries and mortgage-backed securities mature, the respective issuing agency pays them off and the Fed receives payment. Unlike QE where the proceeds were reinvested, the proceeds will not be reinvested during QT and the Fed's balance sheet will fall in size. 

When it comes to global central banks implementing their own versions of QT, it is estimated that as much as $2 trillion will be removed from markets over the next 12 months. Looking at the Fed alone, it is aiming to reduce $1 trillion or 11 percent of its holdings from the balance sheet over the next year. If QT continues through 2024, its holdings will drop from 37 percent of GDP to 20 percent. With the Fed's balance sheet containing almost $9 trillion and inflation being 8.5 percent of the current CPI reading, this pace is higher because the last time it conducted QT, the Fed’s balance sheet held $4.5 trillion in assets with a CPI of 2.75 percent.

Looking at potential scenarios of QT outcomes, the Fed has published three respective impacts on the Fed's policy rate. The Baseline scenario, or following what began on June 1, would lead to what's effectively a policy rate increase of 56 basis points. This is compared to a “no-runoff scenario,” leaving the Fed's balance sheet with another $2.1 trillion in Q3 of 2024, whereby there is no QT in place. Looking at the full-runoff scenario, it would let $0.8 trillion roll off the Fed's balance sheet by Q3 of 2024, necessitating a nine-basis point drop in the policy rate to offset the balance sheet's negative impact on the macroeconomy.

When the pandemic struck in March 2020, the Fed Funds rate was cut to between 0 percent and 0.25 percent. On Jan 26, 2022, the FOMC maintained its target range for the federal funds rate at 0 percent to 0.25 percent. Fast forward to June 15, 2022: The FOMC raised its target range for the federal funds rate to between 1.5 percent and 1.75 percent. Depending on the evolving economic data surrounding inflation, the Fed appears willing to further adjust its target range. It is important to explore how the federal funds rate has led the market to interpret asset purchasing or unwinding actions by the Fed.

During 2017 and 2018, the FOMC increased the federal funds rate by 175 basis points, bringing it to approximately 2.25 percent. St. Louis Fed President Jim Bullard argued that once the federal funds rate is north of zero, be it QE or QT, how the balance sheet grows or shrinks has little say on how the Fed will steer its monetary policy.

While the economy is in uncharted territory due to its emergence from the COVID-19 pandemic and evolving monetary policy, only time will tell how much of an effect QT will have on the U.S. and global markets.

Oftentimes, the first house a person buys is an affordable condominium, townhouse, or older single-family dwelling also referred to as a “starter home.” It might be small and lack features they dream about such as new appliances in the kitchen or dual sinks in the bath, to a large yard or a garage.¬†

However, the key to a starter home is not to acquire your dream house, it is to build equity that you can eventually deploy to buy your dream home. It’s important not to wait until you have enough money for the ideal property. Start as early as you can and buy something affordable to get your foot in the door of homeownership. 

Interest Rates and Maintenance Expenses

Buying a home when mortgage interest rates are low offers a key advantage for building wealth because it reduces your loan payment, thereby freeing up more discretionary income to put toward other investments, home upgrades, or paying down the mortgage balance. 

When deciding your price range for purchasing a home, it’s also important to budget common maintenance costs, such as utilities, repairs, and upgrades, as well as homeowner's insurance and property taxes. These costs can be substantial, yet many new homebuyers do not account for them in their budget. They only take into consideration whether or not they can afford the monthly mortgage. It is always a good idea to have a lower payment that you can well afford in order to avoid relying on savings or credit to pay for maintenance expenses as they arise. And remember, maintenance of your property is critical because it can help improve the sale price when you move, which is key to building wealth. 

Building Home Equity

The next step to building wealth through homeownership is to sell for a substantial profit. Home equity, which is the market price for which you can sell the home minus your remaining mortgage balance, is achieved in two ways. One way to build equity relies on the real estate market. Over time, houses generally increase in price, so most people are able to sell their home for more than they paid for it. How quickly home prices rise depends on the overall economy and your home’s particular appeal. That’s why it’s important to make an attractive location one of your top requirements. For example, even if you don't have children or want children, buying a home in a sought-after school district will likely increase the value of your home faster. Other location features include easy access to shopping districts, major highways, and even an airport. 

The second way to build equity is through the monthly payments you make on the mortgage, which reduce the balance owed. If you can afford it, adding more to your monthly payment and directing the excess toward your principal balance helps build home equity faster. Another payment option that can help build equity faster is to apply for a shorter-term loan than the standard 30-year mortgage. For example, a 15-year term mortgage features a lower interest rate and the borrower pays off the loan in half the time. Note that monthly payments will be higher, but a homeowner can save thousands of dollars in interest with a shorter-term loan. 

Transaction Costs

The garden-variety advice is to remain in your home for at least five years. That’s because selling your home and buying a new one involves substantial transaction expenses, from closing costs to initiating a new loan, as well as paying commission fees to both the seller’s and buyer’s real estate agents (usually three percent each). Therefore, you need to have lived in the property long enough to build equity through payments and market appreciation to offset these expenses and still make a profit. 

Sales Tax

Be aware that it is advantageous to live in your primary residence for at least two years before selling. Otherwise, your sales profit could be subject to capital gains taxes on the first $250,000 for single tax filers, and as much as $500,000 for married filing jointly. The tax rate is the same as your ordinary income tax rate if you owned the property for less than one year; after that, the capital gains rate is based on your tax bracket (15 percent or 20 percent). 

Trade Up, Then Down

Over many decades, you can build wealth by buying a home and then periodically “trading up” once you attain substantial equity. The tactic of trading up means you invest your profits in a more expensive home and then begin building equity again. One way to save for retirement is to keep trading up until you retire, then downsize to a less expensive home with lower maintenance expenses. At that point, you can redeploy the profit derived from the home equity you have accumulated into a stream of retirement income. 

Today’s Market

In recent years, high prices and low inventory in the residential real estate market have made it harder for young adults to buy a starter home. For those currently shut out of the market, keep saving until the market stabilizes, because the higher your down payment, the lower your monthly payments will be – and the more equity you’ll have in your home. You can still build wealth through homeownership, even if you start late.

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