Plan Well, Retire Well Saving and investing your money Sun, 15 May 2005 13:02:08 -0500 Tax Rates: How Will the Tax Cuts and Jobs Act of 2018 Affect You, Part 2 Tue, 20 Feb 2018 16:09:00 +0000 How much income tax you owe is depends on two things: 1) how much taxable income you have and 2) the tax rate applied to that income.

Taxes = Taxable Income x Tax Rate

Last month, I showed you how the new tax law will impact the calculation of your taxable income, as a result of numerous changes to deductions, exemptions, etc. But that is only half of the equation: we also have to look at the tax rates applied to that income. That's why this month, we're talking about those tax rates, most of which were reduced by the Tax Cuts and Jobs Act of 2018.

For most of us, the formula above is an oversimplification because we don't have just one tax rate. The United States has a progressive tax system. Progressive means that, as your income goes up, the rate of tax you pay also goes up. But you only pay the higher tax rate on the additional income, not all of it, so that higher rate is called your marginal tax rate because you pay that rate only on the highest portion of your income.

The graphic at the top of this post illustrates how marginal tax brackets work. Taxable income amounts for single filers are on the left side, and married filing jointly incomes are on the right. When your income fills up the first bucket, the additional income flows into the next bucket and gets taxed at the higher rate. So someone with a high income would have income in the lavender bucket taxed at 10%, income in the blue bucket taxed at 12%, income in the green bucket taxed as 22%, and so on.

Now look at the chart below, for single filers. Consider the example of Josie, a single woman with no children and who does not own a home. She earns $57,000 in 2018. She will subtract the new standard deduction amount of $12,000, plus $1000 for student loan interest. (For a comparison of these items under the old and new tax law, see last month's post.) That leaves her with $44,000 of taxable income. The first $9525 will be taxed at 10%. The next $29,175 of her income – the income between $9525 and $38,700 – will be taxed at 12%. And the last $5300 of her income – the amount over $38,700 – will be taxed at 22%. Her total tax will be $5620. Her marginal tax bracket is 22%, but she only paid that rate on the last $5300 of her income, not the entire $44,000.

Single filer


Josie's income

2018 tax rate

Tax owed on that portion of your income

$0 to $9,525






Over $9,525 but not over $38,700






Over $38,700 but not over $82,500






Over $82,500 but not over $157,500






Over $157,500 but not over $200,000






Over $200,000 but not over $500,000






Over $500,000









Let's look at how much tax Josie might have paid in 2017 -under the old law – if her income and situation was the same.

Most of the 2017 tax rates were higher than the new rates for 2018 except for the 10% and 35% brackets. But the amount of income covered by each bracket has changed, too.

To determine how much tax Josie would have owed under the old rules, we first have to calculate her taxable income. From her $57,000 of income, she would subtract a standard deduction of $6350 plus an exemption of $4050, and her student loan interest deduction of $1000. That gives her taxable income of $45,600 – a little more than under the new law. That extra taxable income, plus the higher tax rates for 2017, mean that the new tax law saved Josie $1,360.

Single filer


Josie's income

2017 tax rate

Tax owed on that portion of your income

$0 to $9,525






Over $9,525 but not over $37,950






Over $37,950 but not over $91,900






Over $91,900 but not over $191,650






Over $191,650 but not over $416,700






Over $416,700 but not over $418,400






Over $418,401









Now you can see why it's so difficult to say who will pay less income tax and who will pay more under the new tax law. It all depends on the details: how you are affected by all of the individual changes I discussed last month, plus where your income falls in the new tax brackets.

Since this post is already lengthy, I will postpone talking about a few more aspects of the tax bill until next month. If you have questions about changes to the kiddie tax, ABLE accounts, estate and gift tax, recharacterizing IRA contributions, 529 plans, and how inflation will be calculated in the future, please check back around March 22.

Utilizing the Library to Keep Costs Down Wed, 14 Feb 2018 11:22:00 +0000 For many people it may be obvious that by using your local library, you would save money, but many people don't even utilize their library! According to a 2016 Study on Libraries by the Pew Research Center, "just under half of all those age 16 and older (48 percent) say they have visited a public library…in person in the prior year." That means that 52 percent of us haven't stepped into a library in the past year. Libraries have a lot of options now a days, and you'd be surprised by what you'll find!


Obviously, the library has books, but if you're looking for a way to keep costs down, but still get some entertainment – borrowing books may be the way to go. Recently I've been reading a recently released three-book series. While in the past, I probably would have ordered all three books online or through my kindle, instead I checked them out from the library, and saved $50!

This doesn't even include children's books, which can run you anywhere from $5 to $10 for each new book. By checking out 3-5 books each time we visit with my son, we've easily saved over $200 this year so far.


As an Extension Educator, I spend a lot of time in libraries putting on education programs in personal finance. Libraries are the place to be if you want to learn more about a topic from an educator or find a new hobby. According to a 2017 PEW Research study, it found that "65% of Americans think libraries help them grow as people." Libraries are the hub where they can bring a new topic or idea to light with an educational program.


Libraries have tons of free or low cost options, including but not limited to – movies, television shows, music, and magazine rentals. Occasionally a library may offer a free movie event or fun workshop. Libraries have expanded their rentals to outside of books; you just have to get a library card to gain access!

For our household, having the library helps to reduce costs on items we want. Reading, education and entertainment are all important, but by utilizing the library, we can save money in our budget.

Not sure what your library offers? Find out on their website or drop in and ask a librarian. Alternatively, get on their email list and see what events they are doing.

Singing the Credit Card Blues Mon, 05 Feb 2018 09:58:00 +0000 Now is when the holiday bills arrive and our budgets feel stretched! It's easy to feel overwhelmed by debt payments and end up avoiding them. But when you don't take control of your debt payments, the interest charges pile up – and grow and grow! Let's consider strategies to help take control of credit card bills.

First, get organized. Make a list of each credit card or other debt with 1) the total amount owed, 2) the annual percentage rate (APR) you're being charged, and 3) the required minimum monthly payment.

Be sure to note the current interest rate you're being charged. Sometimes the interest rate changes and we don't notice the change.

Add up all the minimum monthly payments. It's important to at least pay all the minimum monthly payments to avoid late fees and, ultimately, trouble from debt collectors. Paying the minimum monthly payments on time helps your credit history too.

Second, use a strategy called PowerPay to reduce your credit balances more quickly. For example Jeremy has three credit cards with balances, and the total of the minimum payments for these cards ($25 + $50 + $75) is $150 each month. Jeremy can afford to pay only the minimum payment amount for the three cards now.

Using the PowerPay technique, when one of these balances is completely paid Jeremy will continue to pay $150 towards his debt. However, the money that would have gone towards the paid balance, Jeremy now adds to one of his other payments. Each month Jeremy continues to pay a total of $150 until all three of the credit card balances are paid off.

You can use the online calculator,, to see what an amazing difference this can have on how long it takes to clear the credit card balances and how much interest charges it can save. This free website is from Utah State University Cooperative Extension.

On the PowerPay website, enter all the debts you owe. Then, the fun of using a calculator begins! You can easily calculate different scenarios. For example, what happens if you put just $20 more a month towards paying off your debt?

Or, what happens if you pay off the debt with the highest interest rate first versus paying off smaller debts first to simplify bill paying? You can see the time and dollar cost of one approach versus the other by using the calculator. With this information, you can make a plan.

Once you have a plan on how to approach paying the bills, a little extra money would help pay them off quickly. Here are a few creative ideas to "find" money that you can add to your monthly payments.

  • Do you have any unspent gift or prepaid cards laying around! You may have recently received gift cards as a gift, or you may have loyalty or other prepaid cards stashed away. If so, here's some unexpected cash. Perhaps you can use these cards to buy something you need (instead of using your earnings) and then put the extra earnings to pay down the balance on your credit cards.
  • Another idea is to have a "spend nothing week." Try to go all week without spending any money and put the money you would've spent towards paying off your debts.
  • Reduce your spending at the grocery store or at restaurants by using up food in your cupboards or freezer.
  • Do you have a jar of coins? Money under the sofa cushions? Convert the change to cash and pay down that debt.
  • Spring clean your closets early and find clothes or other items that you can sell.
  • Receiving a tax refund? Pay down that debt!

The more quickly you pay down your debt, the less money you will lose in interest charges paid to credit card companies or other lenders.

What other strategies can you think of to find extra money to reduce your debt? I'd love to hear your ideas in the comment box!

Lost my Wedding Ring! How insurance saved the day! Tue, 30 Jan 2018 09:01:00 +0000 Last August, I lost something very important to me – my wedding ring! I took it off to wash the dishes and when I went to find it the next morning, it was gone. I searched my trash can, recycle bins as well as all through the house. At first, I was really upset until I remember that we had insured it!

Insuring personal property isn't hard, but you have to remember to do it. Sometimes it's referred to as "scheduled personal property" by insurance companies. If you're not sure, ask, your insurance agent will know be able to help you right away.

What types of things can I insure?

The most common form of scheduled personal property is jewelry, but things like guns, artwork and collectors toys/cards can also be insured. You'll have to show what your item is worth either with a receipt or with an appraisal. By having an appraisal or receipt, you'll make sure the full value of the item is replaced.

How easy to insure personal property?

Fairly easily. Just by having the receipt or appraisal, you'll be able to add the item as a scheduled personal property item to your policy. Just call and tell your insurance agent that you need to have a valuable added to the policy. They should be able to get it added the same day in most cases. Also, be aware you may have to submit a picture of the item, so go ahead and send that with the receipt/appraisal.

You will most likely have a small increase in your monthly payment, depending on how much your scheduled personal property is, but it will be miniscule in relationship to the cost of the item.

But why won't my home or renter's insurance take care of that item?

Homeowners and renters insurance have limits on certain items, especially when it comes to important personal items such as jewelry, guns, ect. Most policies only cover up to $1,000 on items total. For example if your house burnt down, you may get $1,000 to cover ALL of your jewelry. It may not be enough there to replace all of the items that were destroyed.

**All insurance policies are different, if you're unsure of your limits, ask!**

After we lost my ring, we filed a claim and we were able to purchase a new ring in no time. While I was devastated my original ring was gone, I was glad I was able to use our scheduled personal property insurance to get a new ring. Here's hoping we never have to use it again, but if we do, we have it insured!

How will the Tax Cuts and Jobs Act of 2017 affect you? Check this head-to-head, line-by-line comparison of your 2017 and 2018 tax returns Mon, 22 Jan 2018 13:33:00 +0000 As you're filling out your 2017 tax return, take the opportunity to think about how the new tax law will impact you for 2018 and beyond. To help, I've put together a list of the changes, organized by line number on the 1040 and Schedule A (Itemized Deductions). If you file the 1040A or 1040 EZ, your lines numbers will be different.

There's been a lot in the news about the changes, but it may be hard for you to get your head around. I hope that organizing the information this way will make it easier for you to see how you will be affected.

As you see the large number of changes, you can understand why it has been hard for anyone to come up with a rule of thumb about how the law will affect different groups of people. To estimate your bottom line - how all of these changes together will impact you - try an online calculator. There are many available online.

  • The Tax Policy Center's calculator let's you use a pre-defined, typical household's scenario, or enter your own information. Entering your own info will likely yield the most accurate result, especially if your income is from sources that are taxed differently (i.e., long term capital gains, Social Security benefits, business income). Of the calculators I tried, I preferred this one because it lets you  be more specific about my income sources. Below the boxes that show how much you're expected to owe, click "See Detailed Breakdown" to see exactly how your estimate was calculated.
  • Several websites use the Trump Tax Calculator created by Marketwatch. This quick-and-dirty calculator only asks for a few pieces of information. One thing I liked about it was that, it shows your income split across the different tax brackets, so you can see what tax bracket you are in and how your tax is calculated.

The new tax law includes two types of changes:

  • Temporary changes that will expire: Most of these changes are in effect from 2018 through 2025. Barring additional legislation, they will revert to the old (2017) rules beginning in 2026. 
    • There are a few exceptions to the effective dates; those dates are in bold in the tables below.
    • Expiration dates refer to calendar year taxpayers. Some taxpayers may use a fiscal year that ends on a different date.
  • Permanent changes: This includes new laws and the repeal of prior laws. These will be permanent, at least until additional legislation changes them.

In the tables below, for each change I've listed either the expiration date or noted that this is a permanent repeal or new rule.

After looking at this, please let me know if you have questions or comments. I will try to address those in a future post. Also, please let me know if you see anything that doesn't seem right. There is so much detail in this new law, it's possible that I got something wrong. There are some changes that I purposely did not include, since they didn't fit neatly into these line items.

You're probably wondering why I haven't talked about the new tax rates here. That will come in my next post. First, I'll show you how tax brackets work. Then I'll show you the new tax rates, and you'll understand their impact better. I'll also address some of the other changes that I didn't include here.

Form 1040 for 2017



Line 6 – Exemptions

This is a list of everyone "covered" by your tax return: you, your spouse, and dependents. On line 42, you get an exemption of $4050 for each person. An exemption reduces your taxable income.

There will be no exemptions. You will probably still be asked to list everyone covered by your tax return, but there will be no exemptions on Line 42. Instead, there will be a larger standard deduction. If you have a large family, this will could mean an increase in your taxable income and your taxes. (12/31/2025)

Line 11 – Alimony received

Alimony is taxable income for the recipient and a deduction for the payor. The recipient can count alimony as "earned income" for the purpose of determining whether you can contribute to an IRA.

alimony will not be counted as ether income or a deduction for divorces or separation agreements executed after Dec. 31, 2018, and for earlier agreements that are modified after Dec. 31, 2018 and which state that the new rules apply. This means less taxable income for the recipient. It also raises the question of whether the recipient can still count this income to determine eligibility to contribute to an IRA. (repealed)

Line 12 – Business income or loss

Many taxpayers have business whose income "flows through" to the individual taxpayer and is reported either on Line 12 for sole proprietors or Line 17 for partnerships and S corporations.

Individual taxpayers reporting income from partnerships, S corporation, or sole proprietorships may be able to deduct 20% of their qualified business income (QBI). For tax filers whose income exceeds $315,000 for married filing jointly and $157,500 for others, limitations will apply for those involved in certain trades or businesses. The deduction will not reduce AGI. (12/31/2025)

Line 17 – Rental real estate, royalties, partnerships, S corporations, trusts, etc.

See Line 12.

See Line 12.

Line 26 – Moving expenses

Moving expenses associated with a job change at least 50 miles away can be deducted.

Only active duty members of the armed services can take the deduction. (12/31/2025)

Line 31 – Alimony paid

See Line 31

See Line 31

Line 35 – Domestic production activities

This deduction is a tax incentive for businesses that produce most of their goods or work in the U.S. rather than having it done overseas.

Repealed for most taxpayers beginning in 2018. (repealed)

Line 40 – Standard or itemized deduction

Every filer can claim the standard deduction, unless they are claimed as a dependent on someone else's tax return. The amount is based on your filing status: $6350 for single persons and married individuals filing separately, $12,700 for married persons filing jointly, and $9350 for heads of household. If your itemized deductions (listed on Schedule A) are larger, you claim that amount instead.

Standard deduction amounts increase to $12,000 for single and married filing separately, $24,000 for married filing jointly, and $18,000 for head of household. If your itemized deductions (listed on Schedule A) are larger, you claim that amount instead. See Schedule A, below, for changes in what expenses can be itemized. (12/31/2025)

Line 42 – Exemptions

You get an exemption of $4050 for each person listed on line 6.

There are no exemptions beginning in 2018. (12/31/2025)

Line 45 – Alternative minimum tax (AMT)

AMT is a second way of calculating your income tax. If the AMT calculation shows that you owe more tax than the regular calculation, you must pay the additional amount. AMT was originally designed to make sure that higher income filers didn't avoid paying income tax.

More income will be exempt from the AMT calculation, so fewer people will pay AMT. (12/31/2025)

Line 52 – Child tax credit

A credit of $1000 per qualifying child is applied to any tax owed. The credit is not refundable, although there is a separate refundable credit that can be claimed if you aren't eligible for the entire Child Tax Credit. There are income limits. For married taxpayers filing a joint return, the credit is phased out beginning at $110,000, at $55,000 for married taxpayers filing a separate return, and at $75,000 for all other taxpayers.

The credit is increased to $2000 per qualifying child, of which $1400 is refundable. The credit is phased out for filers with income of $400,000 for married filing jointly and $200,000 for all others. There is also a new $500 nonrefundable credit for other qualifying dependents. (12/31/2025)

Line 61 – Healthcare responsibility

If you and your family did not have health insurance for all of 2017, you may have to make a "shared responsibility payment."

This penalty is suspended beginning in 2019. (repealed)

Line 62 – Taxes

Tax is calculated based on the type and amount of income (i.e., ordinary income, including wages and interest, and long term capital gain income or qualified dividends).

Tax brackets for ordinary income have been decreased for most – but not all – tax brackets. (12/31/2025)

Line 67 – Additional Child tax credit

See Line 52.

See Line 52.

Schedule A



Line 4 – Medical & dental expenses

Expenses over 10% of adjusted gross income are deductible. If the taxpayer or spouse was born before Jan. 2, 1952, they can deduct any expenses over 7.5% of AGI.

Expenses over 7.5% are deductible in 2018 (12/31/2018)

Beginning in 2019, the threshold reverts to 10%.

Line 9 – Property taxes & either state income tax or sales tax

Deduct state and local taxes you paid, including:

  • Income taxes withheld or paid in 2017, or sales taxes.
  • Real estate (property) taxes
  • Personal property taxes

The total deduction for state/local income taxes and property taxes COMBINED is limited to $10,000. (12/31/2025)

Line 15 – Mortgage & investment interest

For mortgages on your first or second homes:

  • Deduct mortgage interest on up to $1 million of loans used to buy, build, or improve your home.
  • Deduct interest on mortgages up o$100,000 that were not used to buy, build or improve.

For new mortgages taken after Dec. 15, 2017, interest can only be deducted on the 1st $750,000 of acquisition debt. No deduction will be allowed for home equity loans regardless of when the loan was obtained, unless it was used to add onto a house. (12/31/2025)

Line 19 – Gifts to charity

For cash contributions, the deduction is limited to 50% of adjusted gross income.

The limit on annual deduction for cash contributions increases to 60% of AGI. (12/31/2025)

No deduction is allowed for amounts paid to a higher education institution in exchange for the right to purchase tickets or seats at athletic events.

Line 20 – Casualty & theft losses

In addition to existing limitations, a loss can only be claimed if it is in a Federal disaster area. (12/31/2025)

Line 27 – Job expenses, miscellaneous deductions

Miscellaneous deductions can be claimed to the extend they exceed 2% of AGI. Some of the more common ones are:

  • Certain unreimbursed employee expenses, including home office
  • Tax preparation & advice
  • Investment fees & expenses
  • Uniforms
  • Union dues

Not allowed beginning in 2018. (12/31/2025)

Line 28 – Other miscellaneous deductions

A very few specific deductions are allowed here. Gambling losses can be deducted but only to the extent of any winnings reported on Form 1040, Line 21.

Gambling losses include expenses associated with that gaming activity. (12/31/2025)

Line 20 – Total

The itemized deduction is limited for certain high income taxpayers.

The limit for high income taxpayers is suspended. (12/31/2025)

Correction: The effective date of the repeal of the Domestic Production Activities Deduction is tax years beginning after Dec. 31, 2017 for all entities. I previously said that the effective date for C corporations was later; that was incorrect.
Invest in Your Future! Fri, 05 Jan 2018 10:55:00 +0000 Happy New Year 2018! The New Year offers opportunities for a fresh start and new resolutions. As you reflect on possibilities, I encourage you to include investing in your personal finance as a high priority for 2018. We choose to do many things with our time and energy, and it's easy to let our finances become "another day" activity; however, time spent today will reap many benefits in the future. If you don't invest in your personal financial situation, no one else will!

Commit to spending one to two extra hours a month to moving your finances forward. These hours can be spent learning about a financial topic, making phone calls to compare insurance policies, or checking your credit report for accuracy – the list goes on. Today, let's talk about investing your money wisely.

Once you have money set aside in savings to cover unexpected expenses, consider investing. Investing money is best for long-term goals; those goals that are 10 years or further away. When you are planning for long-term goals, one of the most significant risks that you need to manage is the cost of inflation. The current inflation rate for the United States is 2.2% for the last 12 months, according to the U.S. Labor Department. While this is a relatively low inflation rate historically, it still has a significant impact on savings.

For example, if you have saved $2000 today and receive no return on the money, in 20 years this would only buy approximately $1300 of goods, assuming a constant inflation rate in the future. The main take-away message here is that your savings for the long-term must earn a return rate (in interest, dividends, or increased value) greater than inflation in order for your investments to truly make money for you. This return can be over time, not necessarily each year.

Given that it's difficult to find a savings account paying even 1% interest currently, we need to look beyond savings and money market accounts to find a way for our investments to grow. Savings tools, like savings accounts and certificate of deposits, are good financial tools for our emergency savings and for intermediate-term goals that will occur in 2-10 years. While the return (in interest payments) is low, the money is very safe and we can access it when needed easily.

To earn a higher rate of return, we need to use investment options that have a higher risk, meaning the investment value may go down or up over time and we may lose the dollars we invest. However, by considering historical data, and by using common investment strategies such as diversifying our dollars and planning for the long-term, our investments can grow 5 – 10% on average over many years.

To read more about how to diversify your dollars, I highly suggest my colleague, Karen Chan's, recent blog post, "Investing 101: Mutual Funds can Make Investing Simple."

Planning for the long-term is important. While different investing philosophies exist, many experts believe that investing for the long-term is a very important principle; this means leaving your money in investments and not paying high costs to jump in and out of investments. Too often people buy investments when they're popular and costs are high (for example, purchasing Bitcoins as the prices soared recently) and then selling as the price dropped.

When investing, keep these words in mind:

  • If it sounds too good to be true, it probably is.
  • The higher the potential gain, the higher the risk.

If you choose to invest in speculative investment choices, like Bitcoins, be sure you only invest what you can afford to lose. I recommend reading "Don't Fall for Cryptocurrency-Related Stock Scams."

Other investment options such as many mutual funds and employer-sponsored retirement plans offer lower potential gains, but significantly lower risk. In the long-term, these diversified investment choices will likely provide a return higher than inflation with only a moderate risk.

Before making investment choices, do your research. Read about investing strategies, talk to investment professionals, and plan for the long-term. You can learn more about choosing a financial professional to work with at U of I Extension's website, Choosing a Financial Professional.

Make 2018 the year you invest in your finances.

Investing 101: Mutual funds can make investing simple Tue, 19 Dec 2017 15:11:00 +0000 You don't have to have a lot of money to get started investing. You don't even have to buy stocks and bonds to be an investor. And you can reduce the risks associated with owning individual stocks and bonds. It almost sounds too good to be true, doesn't it? But a thing called mutual funds can do all that.

This is the third post in a series about the basics of investing, where we'll learn how mutual funds – especially certain types – can make investing easier, especially if you don't have a lot of money. This builds on what we learned in previous posts by following the experience of two investors, Aunt Jane and George: the basic characteristics of stocks and bonds, and the kinds of risk that bondholders and stockholders face.

To find all the posts in this series, click on "investing" under the list of categories on the right side of the screen.


George has always heard that investors shouldn't put all their eggs in one basket. If he invests all his money to buy stock (or a partnership) in a single business such as his friend's company, Freddie's Finest Furniture, he figures all his eggs are in one basket. Maybe he should diversify. But how? Does diversification mean he has to buy stock in a whole bunch of different companies? How does he choose them? And later on, how does he decide when to sell or when to buy more? It sounds intimidating.

Aunt Jane is thinking the same thing. Even though she's less likely to lose all of her money with bonds (loans) than with stocks, maybe she should diversify, too.

Mutual funds provide diversification

Investing in mutual funds is an easy way to achieve diversification. Mutual funds pool the money of many different investors, each of whom owns a portion of the fund. The fund's value is determined by the value of the investments inside of it – the prices of the stocks, bonds, etc. that it holds. You buy shares of the mutual fund, and indirectly own shares of whatever is inside the fund. Almost all mutual funds are "open-ended" meaning that you can buy shares from them at any time, and sell shares back to the fund at any time. You don't have to find someone else to buy your shares.

Each mutual fund invests in a certain type of asset or range of assets. One might invest only in US large company stocks, others only in US government bonds or stocks of European companies, while yet another can own both US stocks and US bonds. Most mutual funds own stock in many different companies in different industries, although some mutual funds target a particular industry or sector such as banking/finance or automotive.

By owning a mutual fund instead of individual stocks, George will have diversification through that single investment. He has delegated the responsibility for picking and choosing the companies in which to invest.

Diversified mutual funds reduce risk

Diversification reduces business risk. One company or an entire industry might do badly, but because it only represents a portion of your investment, the impact is much less than if all your money were invested there.

As a result, it's less likely that George will lose most or all of his money, compared to having all his money invested in a single company like Freddie's Finest Furniture, or a single industry.

George will still face market risk, the risk that the entire stock market drops.

Index mutual funds usually beat the average actively-managed mutual fund

I often joke that with investing, being average is a good thing. What I mean is this: if your investments consistently do as well as the stock market as a whole, you will have done better than most "active" fund managers – the ones who purposely pick and choose which companies to buy or sell based on how well they think the companies will do in the future. I know, it's hard to get your head around the idea that being average is a good goal. But the research is clear; in most asset classes, the vast majority of active fund managers underperform the market. Being consistently average will probably produce better results.

What's the alternative? Index mutual funds shoot for average. They each follow a particular index, which tracks and measures the performance of entire asset classes, such as the entire US bond market, the entire US stock market or a portion of it such as small company stocks or large company stocks. The Standard & Poor's 500 is probably the most well-known index. It tracks the performance of large US companies. There are also indexes that track stocks of the developed countries and developing nations, and their bonds. The index mutual fund's goal is to replicate its index's performance, not beat it.

Even more simple: Target date retirement funds

Target date retirement funds are another way to simplify investing. Instead of choosing three or four (or more!) mutual funds to cover different asset classes and having to monitor whether one of them becomes too large a portion of your portfolio, you can own just one target date fund.

George should choose a fund based on the approximate time he'll retire, such as 2030, 2035, or 2040. As he approaches and passes that date, the fund will gradually shift its allocation between stocks, bonds, and cash to be appropriate for someone his age.

Most target date retirement funds are funds-of-funds, meaning they own shares of other mutual funds that represent the different asset classes. Most target date funds have actively-managed funds inside of them, but at least one company uses index funds.

Get started investing with a small amount of money

Mutual funds each have a minimum initial investment, usually $1000 or more.

If your employer has a 401(k) plan, you can get around those minimums for the funds in your plan. You can start with whatever amount you decide to have deducted from your paycheck. If you open an IRA account, you may be able to start with a lower initial investment if you agree to make additional, regular contributions.

There isn't a minimum to start investing in an exchange traded fund (ETF). These are similar to mutual funds, but you buy and sell them like stocks. That means you can buy just one share at a time. Depending on the ETF and which brokerage or mutual fund company you buy it through, you may pay a brokerage fee for each purchase, which could increase your investment costs especially if you make small, frequent purchases. On the other hand, the expense ratio - the annual cost of owning a fund - is often lower for ETFs than for mutual funds.

If you have put off signing up for your employer's retirement plan or setting up an IRA because you weren't comfortable making the choices required, perhaps the ideas in this post will help you move forward. And with the New Year just around the corner, it's a great time to get started on a new goal like investing or saving for retirement.