Category Archives: Finance

Saving Money Is Important

If you don’t earn much and you can barely pay your bills, the idea of saving money might seem laughable. When you only have $5 left at the end of the month, why even bother to try saving? Because everyone has to start somewhere, and if you work at it, your financial situation is likely to improve over time. Saving money is worth the effort. It gives you peace of mind, it gives you options, and the more you save, the easier it becomes to accumulate additional savings.

Peace of Mind

Who hasn’t lain awake at 3:00 a.m. wondering how they were going to afford something they needed? If money is really tight, you might be wondering how you’re going to pay the rent next week. If you’re a little further up the financial ladder, you might worried about how many months you could pay the bills for if you lost your job. Later in life, the money thoughts that keep you up at night might center around paying for your kids to go to college or having enough money to retire. (Get help with college savings by reading Stop Procrastinating! Enroll In A College Savings Plan.)

As you accumulate savings, your financial worries should diminish, as long as you’re living within your means and not always looking for new things to worry about. If you already have next month’s rent taken care of by the first week of the current month, if you know you can get by without work for three to six months, if you have savings accounts for your children’s education and your own retirement that you’re regularly funding, you’ll sleep better at night. The reduced stress from having money in the bank frees up your energy for more enjoyable thoughts and activities.

Expanded Options

The more money you have saved, the more you control your own destiny. If your job has you on the verge of a nervous breakdown, you can quit even if you don’t have a new job lined up yet and take time off to restore your sanity before you look for new employment. If you’re tired of living in an unsafe neighborhood, you can move to a safer area because you’ll have enough for a deposit on a better apartment or a down payment on a nicer home. (Is buying a home in your future plans? Read How To Buy Your First Home: A Step-By-Step Tutorial.)

If you get sick and need expensive healthcare that your insurance doesn’t cover, you’ll have a way to pay for it even though you can’t work while you’re getting treatment. And knowing that you have options because of the money you’ve socked away can give you even more peace of mind.

No, money doesn’t solve every problem. It you are laid off, it might take as long as two years to find a new job. Some illnesses won’t go away no matter how many procedures you can afford, and random crime can happen even in a supposedly secure gated community. But with more money in the bank to deal with issues like these, you give yourself better odds of coming out on top.

Money Working for You

Most of us put in hundreds of hours of work each year to earn most of our money. But when you have savings and stash your funds in the right places, your money starts to work for you. Over time, you’ll need to work less and less as your money works more and more, and eventually, you might be able to stop working altogether.

What does it mean to have your money working for you? When you’re first starting to save, you’ll want to put your money somewhere safe, where you can access it right away for unforeseen expenses. That means an online savings account, where you might earn 1% interest annually and not even keep up with inflation, which tends to run around 2% to 3% per year. You’ll even have to pay taxes on your meager 1% earnings. Anything is better than earning 0%, though, or not having savings and going into credit card debt, which will cost you 10% to 30% in interest per year. (For related reading, see Why You Absolutely Need An Emergency Fund and How To Use Your Roth IRA As An Emergency Fund.)

Once you’ve saved three to six months’ worth of expenses in your emergency fund, you can start saving money in a tax-advantaged retirement account. That’s where the magic starts to happen. These accounts, such as a Roth IRA or 401(k), allow you to invest in the stock market. If you do it right, you’ll earn about 8% per year on average over the long run. You won’t pay any taxes on those investment gains along the way, which will help your money grow even faster. With a Roth IRA, you contribute after-tax dollars, and everything that’s in the account after that is yours to keep. With a 401(k), you get to contribute before-tax dollars, giving you more money to invest up front; you’ll pay taxes when you withdraw the money in retirement. (If you’re not sure whether it’s better to pay taxes now or later, you can hedge your bets and contribute to both your employer-sponsored retirement plan and a Roth IRA.) The third choice, a traditional IRA, allows you to contribute before-tax dollars as you do with a 401(k).

If you have a high income and low expenses, you might accumulate enough to retire in 10 years. For most people, it takes closer to 40 years. But at some point, if you save and invest regularly, you should be able to live off the income generated by your investments – the saved money that’s working for you. The earlier you start, the more time a small amount of money has to grow large through the miracle of compounding.

Retirement Income or Savings

Although many Americans worry about retirement and are doing everything they can to save for it, they commonly look at their retirement plan balances as means of measuring their progress. But the ultimate end of retirement savings is to generate income, so projecting your future cash flow can provide a more realistic indicator of financial preparedness. The key is to remember that there is a statistically a real chance that you could live well into your nineties.

Analyzing Desired Cash Flow

The first step to projecting your cash flow during retirement is to look at your current budget. If you are able to save at least 10% of your income now, then your retirement income will probably only need to be 90% of your current income level at most, with adjustments for inflation. But the amount of income that you will need after you stop working is not likely to be substantially less than what you need now. If you make $75,000 now and plan to retire in 10 years when you are 70 years old, then you will probably need to receive at least $65,000 a year after you retire unless your expenses are going to be a lot lower than they are now. If you plan on staying in your current residence and will have it paid off by retirement, then you can obviously reduce your monthly expenditures by the amount of principal and interest (but not insurance and taxes) that you are currently paying each month. (For more, see: Will Your Retirement Income Be Enough?)

Translating your nest egg into monthly income requires the quantification of several variables and the ability to perform some time-value of money (TVM) calculations. There are several TVM calculators available online at websites such as Bankrate.com, and these tools can help you to see how long you can realistically make your money last with a given set of assumptions. If you have $250,000 saved up and need to make your money last for 30 years, then you will need to allocate a significant percentage of your portfolio to equities. However, you may want to take a more conservative overall position in your portfolio during the first few years of retirement, because your draw down risk (the chance that you will significantly decrease the earning power of your portfolio from initial market losses) is the greatest during your early retirement years.

For example, if you have $500,000 in your 401(k) plan and your plan balance drops by $150,000 the year after you retire because of a market correction, then you have lost $150,000 of principal that you could have used to generate investment income for the rest of your life. Therefore, a more stable allocation at the beginning can help you to avoid large initial losses that can permanently cripple your portfolio. But if the numbers that you run show that you’re not going to have remotely the amount of income that you want to have when you retire, then you will need to start considering some major changes such as delaying your retirement or downscaling your future lifestyle. (For more, see: Protect Retirement Money from Market Volatility.)

Delaying your Social Security benefits can also increase your income in your later years if you are able to afford this option, but you may be better off taking it earlier and then socking that money away in a Roth IRA or other retirement vehicle while you continue to work. There is no one right answer to solving the retirement income equation, but some options are almost always going to be better than others. You may want to take a look at a longevity insurance policy that will provide a substantial guaranteed monthly payout after age 85 if you think that there is a good chance that you will make it into your nineties. This type of policy can allow you to map out the rest of your retirement plan with more precision, as you will usually only have to make the rest of your savings last until this payout kicks in.

Get Professional Help

Cash flow analysis is where a financial planner can really be of service. A comprehensive financial plan can show how long your money will last at a given rate of dispersion in your tax bracket. It can also incorporate other variables such as market performance and your estimated Social Security benefits. Perhaps most importantly, it can also show you what will happen with your finances if you live to be 95. About one in five Americans will. And a financial planner who also manages assets can help you to determine the correct mix of assets during each stage of your retirement so that you can get the most from your money over time.

Know Steps To $1 Million

Let’s face it: we all don’t make millions of dollars a year, and the odds are that most of us won’t receive a large windfall inheritance either. However, that doesn’t mean that we can’t build sizeable wealth — it’ll just take some time. If you’re young, time is on your side and retiring a millionaire is achievable. Read on for some tips on how to increase your savings and work toward this goal.

Stop Senseless Spending
Unfortunately, people have a habit of spending their hard-earned cash on goods and services that they don’t need. Even relatively small expenses, such as indulging in a gourmet coffee from a premium coffee shop every morning, can really add up— and decrease the amount of money you can save. Larger expenses on luxury items also prevent many people from putting money into savings each month.

That said, it’s important to realize that it’s usually not just one item or one habit that must be cut out in order to accumulate sizable wealth (although it may be). Usually, in order to become wealthy one must adopt a disciplined lifestyle and budget. This means that people who are looking to build their nest eggs need to make sacrifices somewhere; this may mean eating out less frequently, using public transportation to get to work and/or cutting back on extra, unnecessary expenses. (To learn more, read The Disposable Society: An Expensive Place To Live.)

This doesn’t mean that you shouldn’t go out and have fun, but you should try to do things in moderation – and set a budget if you hope to save money. Fortunately, particularly if you start young, saving up a sizeable nest egg only requires a few minor (and relatively painless) adjustments to your spending habits.

Fund Retirement Plans ASAP
When individuals earn money, their first responsibility is to pay current expenses such as the rent or mortgage, food and other necessities. Once these expenses have been covered, the next step should be to fund a retirement plan or some other tax-advantaged vehicle.

Unfortunately, retirement planning is an afterthought for many young people. Here’s why it shouldn’t be: funding a 401(k) and/or an IRA early on in life means you can contribute less money overall and actually end up with significantly more in the end than someone who put in much more money but started later. (To see how this works, check out Why is retirement easier to afford if you start early?)

How much difference will funding a vehicle such as a Roth IRA early on in life make?

If you’re 23 years old and deposit $3,000 per year (that’s only $250 each month!) in a Roth IRA earning an 8% average annual return, you will have saved $985,749 by the time you are 65 years old due to the power of compounding. If you make a few extra contributions, it’s clear that a $1 million goal is well within reach. Also keep in mind that most of your earnings are in interest— your $3,000 contributions alone only add up to $126,000.

Now, suppose that you wait an additional 10 years to start contributing. By this time, you have a better job that when you were younger, you earn more and you know you’ve lost some time —so you contribute $5,000 per year. You get the same 8% return and have the same goal to retire at 65. But by starting to save later, your compounded earnings won’t have as much time to grow. In this scenario, when you reach age 65, you will have saved $724,753. That’s still a sizeable fund, but you had to contribute $160,000 just to get there – and it’s nowhere near the $985,749 you could’ve had for paying much less.

 

Improve Tax Awareness
Sometimes, individuals think that doing their own taxes will save them money. In some cases, they might be right. However, in other cases it may actually end up costing them money because they fail to take advantage of the many deductions available to them.

Try to become more educated as far as what types of items are deductible. You should also understand when it makes sense to move away from the standard deduction and start itemizing your return. (To learn everything you need to know about filing your tax return, check out our Guide to Tax Planning 2016.)

However, if you’re not willing or able to become educated about filing your own income taxes, it may actually pay to hire some help, particularly if you are self-employed, own a business or have other circumstances that complicate your tax return.

Own Your Home

Many of us rent a home or an apartment because we cannot afford to purchase a home, or because we aren’t sure where we want to live for the long term. And that’s fine. However, renting is often not a good long-term investment because buying a home is a good way to build equity.

Unless you intend to move in a short period of time, it generally makes sense to consider putting a down payment on a home. (At least this way, over time, you can build up some equity and the foundation for a nest egg.) (For more insight on weighing this decision, read To Rent Or Buy? The Financial Issues.)

Avoid Luxury Wheels
There’s nothing wrong with purchasing a luxury vehicle. However, individuals who spend an inordinate amount of their incomes on a vehicle are doing themselves a disservice —especially since this asset depreciates in value so rapidly.

How rapidly does a car depreciate?

Obviously, this depends on the make, model, year and demand for the vehicle, but a general rule is that a new car loses 15-20% of its value per year. So, a two-year old car will be worth 80-85% of its purchase price; a three-year old car will be worth 80-85% of its two-year-old value.

In short, especially when you are young, consider buying something practical and dependable that has low monthly payments — or that you can pay for in cash. In the long run, this will mean you’ll have more money to put toward your savings —an asset that will appreciate, rather than depreciate like your car.

Don’t Sell Yourself Short
Some individuals are extremely loyal to their employers and will stay with them for years without seeing their incomes take a jump. This can be a mistake, as increasing your income is an excellent way to boost your rate of saving.

Always keep your eye out for other opportunities and try not to sell yourself short. Work hard and find an employer who will compensate you for your work ethic, skills and experience.

Know About Financial Planning Checklist

While everybody’s financial situation is different, there are some options and strategies that can be used by all to get on the right financial path.

Financial Fundamentals

Develop a budget and stick with it: When making a budget it is important to develop a realistic one and stick with it. You need to decide how much you can afford to spend and what you should be saving each month. To be financially independent, it is important to start making wise choices early on in order to develop a habit of staying within your budget.

Figure out your credit score: Do you know what your credit score is and how much it can affect you in various areas of your life? How do you build credit in a responsible way to make sure there are no surprises down the road? There are ways for you to check your credit score. Visit one of the three reporting agencies for more information.

Money Saving Tips

Employee benefits: What benefits do you currently have and what benefits are offered at your job? Are you contributing enough to your retirement plan to get the full employer match? What other savings can you get by participating in the other benefits offered to you? Speak to your human resources department to make sure you understand all the benefits available to you.

Emergency fund: Do you currently have an emergency fund? Have you thought about what would happen if your car broke down tomorrow? What if it was something bigger? Most financial professionals recommend three to six months of your monthly expenses to be saved in a liquid account that you can access when you need it.

Pay back loans: When creating a budget, make sure you include any loans that you currently have. When looking at the amount to pay each month try to allocate a slightly higher amount than the required minimum payments. This could possibly save you money by lowering the amount of interest you could be paying.

Set up a savings account(s): Do you have a large purchase in your future? Think about setting up a separate savings account to start saving for any dreams or goals you might have. This helps to separate your money so you can see the progress you are making towards your purchase without tapping into your emergency fund. This can be beneficial if you are looking at purchasing a house as you will most likely need a down payment. (For related reading, see: 10 Ways to Effectively Save for the Future.)

Establish relationships with various insurance and financial professionals: In your 20s it is important to start developing these relationships because you will need various types of insurance and guidance to help you manage the risk that will be encountering on your own. Insurance professionals will ensure you and your possessions are covered, while a financial professional will help you with various financial strategies to help you achieve financial independence.

Set Long-Term Financial Goals

Start saving for retirement: Retirement might seem like a long way away, but it is never too early to start looking at the various retirement options you have. Taking part in the retirement options you have at work are a great start but for some people, it might make sense to look at alternative investments outside of work, such as a traditional IRA. If you qualify based on your income, a Roth IRA can be a great way to start saving for retirement outside of the workplace because it offers tax-free withdrawals during retirement.* You should talk to your financial professional about the different options that are available.

Develop goals and write them down: In your 20s everything can be changing so fast that you don’t know where to start. A great thing to do is sit down and start coming up with some goals. Break these down into short, mid and long-term goals. This helps by giving you some direction in your life. Focus on your goals and make sure what you are doing every day is keeping you on the right track to achieve them. (For more, see: Want to Be Financially Fit in 2017? Use These Tips.)

Guidelines to Achieve Success

Consider saving 30% of your income: This might seem like a lot starting out, but it is important to save for the various aspects of your life. Consider saving 10% for retirement, 10% towards your emergency fund and 10% towards any large purchases you might have coming up.

Have an emergency fund: It is extremely important to set up your emergency fund and not touch it unless needed for an emergency. This fund will help give you the peace of mind that if something were to happen, you can take care of yourself. Try to get six months of your living expenses saved up.

Minimize credit card debt: Credit cards can have high interest rates that can really cost you a lot of money in the long term. Try to pay off your credit cards every month or, if you have to carry a balance, try to keep it under your credit limit.

Buying a vehicle: When buying a car consider putting down a significant down payment. When financing the car consider doing so for no more than four years and spending no more than 10% of your gross income on car payments. If you are buying a new car, consider driving it for 10 years to maximize the car’s value and to limit the loss due to depreciation.

Buying a home: Like buying a car, put down at least 20% as a down payment on a new home. This will help you to lower the monthly mortgage cost, help your chances of getting a favorable loan and also make sure you don’t spend more on your home than you can afford. Some financial professionals will advise you to keep the total cost of your home under two or three year’s worth of annual income.

Achieving Financial Security

When it’s time for you to retire, will you be able to afford it? Almost all of the research conducted on the subject, over the last few years, shows that most individuals are unable to demonstrate financial readiness for their retirement years. This only serves to underline the fact that saving for retirement is a challenging process that requires careful planning and follow-through. Here we review some helpful tips that should help you on your way to a comfortable retirement.

1. Start as Soon as You Can

It is obvious that it is better to start saving at an early age, but it is never too late to start – even if you are already close to your retirement years – because every penny saved helps to cover your expenses.

If you save $200 every month for 40 years at a 5% interest rate, you will have saved significantly more than an individual who saves at the same rate for 10 years. However, the amount saved over the shorter period can go a long way in helping to cover expenses during retirement. Also, keep in mind that other areas of financial planning, such as asset allocation, will become increasingly important as you get closer to retirement. This is because your risk tolerance generally decreases as the number of years in which you can recuperate any losses goes down.

Saving on a regular basis can be a challenge, especially when you consider the many regular expenses we all face, not to mention the enticing consumer goods that tempt us to spend our disposable cash. You can guard amounts you want to add to your nest eggfrom this temptation by treating your retirement savings as a recurring expense, similar to paying rent, mortgage or a car loan. This is even easier if the amount is debited from your paycheck by your employer. (Note: If the amount is deducted from your paycheck on a pre-tax basis, it helps to reduce the amount of income taxes owed on your salary.)

Alternatively (or in addition), you may have your salary direct-deposited to a checking or savings account, and have the designated savings amount scheduled for automatic debit to be credited to a retirement savings account on the same day the salary is credited.

3. Save as Much as You Can in a Tax-Deferred Account

Contributing amounts earmarked for your retirement to a tax-deferred retirement account deters you from spending those amounts on impulse, because you are likely to face tax consequences and penalties. For instance, any amount distributed from a retirement account may be subject to income taxes the year in which the distribution occurs, and if you are under age 59-1/2 when the distribution occurs, the amount could be subject to a 10% early-distribution penalty (excise tax).

If you have enough income, consider whether you can increase the amount you save in tax-deferred accounts. For instance, in addition to saving in an employer-sponsored retirement plan, think about whether you can also afford to contribute to an individual retirement account (IRA), and whether the IRA should be a Roth IRA or a Traditional IRA.

4. Diversify Your Portfolio

The old adage that tells us that we shouldn’t put all of our eggs in one basket holds true for retirement assets. Putting all your savings into one form of investment increases the risk of losing all your investments, and it may limit your return on investment (ROI). As such, asset allocation is a key part of managing your retirement assets. Proper asset allocation considers factors such as the following:

  • Your age – This is usually reflected in the aggressiveness of your portfolio, which will likely take more risks when you’re younger, and less the closer you get to retirement age.
  • Your risk tolerance – This helps to ensure that, should any losses occur, they occur at a time when the losses can still be recuperated.
  • Whether you need to have your assets grow or produce income.

5. Consider All of Your Potential Expenses in Your Financial Plan

When planning for retirement, some of us make the mistake of not considering expenses for medical and dental costs, long-term care and income taxes. When deciding how much you need to save for retirement, make a list of all the expenses you may incur during your retirement years. This will help you to make realistic projections and plan accordingly.

6. Budget

Saving a lot of money is great, but the benefits are eroded or even nullified if it means you have to use high-interest loans to pay your living expenses. Therefore, preparing and working within a budget is essential. Your retirement savings should be counted among your budgeted recurring expenses in order to ensure that your disposable income is calculated accurately.

7. Periodically Reassess Your Portfolio

As you get closer to retirement and your financial needs, expenses and risk tolerance change, strategic asset allocation must be performed on your portfolio to allow for any necessary adjustments. This will help you ensure that your retirement planning is on target.

8. Reassess Your Expenses and Make Changes Where Possible

If your lifestyle, income and/or fiscal responsibilities have changed, it may be a good idea to reassess your financial profile and make adjustments where possible, so as to change the amounts you add to your retirement nest egg. For instance, you may have finished paying off your mortgage or the loan for your car, or the number of individuals for which you are financially responsible may have changed. A reassessment of your income, expenses and financial obligations will help to determine if you need to increase or decrease the amount you save on a regular basis.

9. Consider Your Spouse

If you are married, consider whether your spouse is also saving and whether certain expenses can be shared during your retirement years. If your spouse hasn’t been saving, you need to determine whether your retirement savings can cover not only your expenses, but those of your spouse as well.

10. Work with an Experienced Financial Planner

Unless you are experienced in the field of financial planning and portfolio management, engaging the services of an experienced and qualified financial planner will be necessary. Choosing the one who is right for you will be one of the most important decisions you make