Q: My husband and I disagree about how many allowances to take when filling out his new-hire paperwork. Is it better to take as few or as many as possible? - Carol

A: Carol, this is a great question! The IRS lists a variety of allowances on the W-4 and I-9 forms for things like the number of dependents you can claim, being the sole working adult in the household, and having over $2000 in child care expenses, among others. As long as you’re not claiming any allowances to which you are not legally entitled, I am a strong proponent of claiming as many as you possibly can.

In its simplest description, these allowances tell the government how much money they should be taking out of your paycheck for taxes. The fewer you claim, the more money they take. And while you may get some of that back later in a tax refund (two allowances is considered the refund “break even” point), it won’t change the fact that you have been letting the government use money that was rightfully yours all year long, and without paying you any interest on those funds. The tax “refund” then is simply them returning money to you that you should have been getting months earlier in your paycheck.

By taking more allowances, not only is your paycheck bigger each week, but you’re also getting an interest-free loan from the government, and getting to invest it yourself at whatever rate you can get at a bank or in the stock market. It may increase the chances of you having to pay some of it back with your tax return, but you still get to keep all the interest, returns, dividends, etc. that you earned with it over the last 12 months.

Presented the option of giving a 12-month, interest-free loan TO the government, or getting a 12-month, interest-free loan FROM the government, I’d choose the latter any day.

 

 

Q: I’m considering “socially responsible” investing, but I’m worried about lower returns. Are there any SRI’s out there that are worth making the change? - Andrew

Andrew, I’m going to be a little biased because I’ve been investing solely in a socially-responsible mutual fund family through a local firm for many years. While I probably shouldn’t recommend a particular firm or fund, I can tell you that there is more to consider than just returns.

First, think about what types of social responsibility matter to you. I don’t know how many such funds exist in the market overall, but nearly every major company has a stable of them, and 39 more funds were added to the market just in 2017. There are funds that screen out vices, such as gambling, tobacco, pornography, weapons, etc. There are funds that invest heavily in green technology. There are funds that specialize in companies with a strong female presence in the Board room or C-Suite. Etc, etc, etc.

Second, look at historical performance. Any company that offers socially responsible funds (Praxis, American, Schwab, Fidelity, etc.) takes time to find the right companies in the right industries in the right geographic areas doing the right things to get you the return that you want. Otherwise, their funds wouldn’t provide the return that the public demands, and no one would invest in them. But the funds need time to demonstrate representative performance. For me, if a company hasn’t been tweaking their portfolio of SRI’s for at least ten years, you don’t know what you’re getting. If they have been, they’re probably good enough at it by now that you may not have to sacrifice returns at all in order to get the investment return that you want.

Finally, once you’ve narrowed the list down, call the fund itself. Fund managers should be happy to send you information about the companies included in their funds, the social screens that they use, and the rationale for including or excluding a particular firm or aspect of economic or social activity.

In the end, yes, I do strongly recommend the socially responsible route in your investment strategy. It’s easy to SAY that something is important to you, but until you put your money where your mouth is, your statement rings hollow.

 

— Eric Litwiler has spent the last seven years of his professional career helping people achieve their financial goals through the use of budgets, retirement vehicles, and estate planning options.  He is a firm believer in the importance of using Earthly riches to fulfill a mission of Christian stewardship.  Eric is not a licensed financial planner. If YOU have a question for Ask Eric, tweet it to @AskEricKSUN, send an e-mail to AskEric@mail.com, or like “AskEric” on Facebook.