Nine Ways to Master Your Money

1. Set S.M.A.R.T. Goals
Saving tends to be easier when you have a certain purpose in mind: Saving for your first house, your retirement at a certain age, a child’s college education, or even a trip around the world. The important thing is for your goals to be specific, measurable, actionable, realistic and time-bound, or SMART.

To develop a sound plan, these goals must have both a time frame and a dollar amount that is MEASURABLE. Once you have listed and quantified your goals, you need to prioritize them. You may find, for example, that saving for a new home is more important than buying a new car.

Whatever your objective, be SPECIFIC. Figure out how many weeks or months there are between now and when you want to reach your target. Divide the estimated cost by the number of weeks or months to make it ACTIONABLE. That’s how much you’ll need to save each week or month to have enough money set aside. Ask yourself, is this REALISTIC? Remember, a goal is a dream with a deadline.

2. Pay Yourself First
Save and invest 5-10% of your gross annual income. Of course, this can be much harder than it sounds. If you’re currently living from paycheck to paycheck without any real opportunity to get ahead, begin by creating a solid spending plan after tracking all monthly expenses.

Once you figure out how you can control your discretionary spending, you can then redirect the money into a savings account. For many people, a good way to start saving regularly is to have a small amount transferred automatically from their paycheck to a savings account or mutual fund. The idea: If you don’t see it, you don’t miss it.

3. Maintain an Emergency Fund
Before you commit your newfound savings to volatile and hard-to-reach investments, make sure you have at least three to six months’ worth of expenses saved in an emergency fund to see yourself through difficult times. Keeping it liquid will ensure that you don’t have to sell investments when their prices are down, and guarantee that you can always get to your money quickly.

If you have trouble deciding how much you need to keep on hand, begin by considering the standard expenses you have in a month, and then estimate all the expenses you might have in the future (possible insurance deductibles and other emergencies). Generally, if you spend a larger portion of your income on discretionary expenses that you could cut easily in a financial crisis, the less money you need to keep on hand in your emergency account. If you have dependents, you’d want to keep more money in your emergency fund to offset the greater risk.

4. Pay off Your Credit Card Debt
If you’re trying to save while carrying a large credit card balance at, say, 19.8%, realize that paying off the debt is a guaranteed return of nearly 20% per year. Once you pay off your credit cards, use them only for convenience, and pay off the balance each month. If you tend to run up credit card charges, get rid of the credit card and go back to using cash, checks and a debit card.

5. Insure Your Family Adequately
A major lawsuit, unexpected illness or accident can be financially devastating if you lack proper insurance. The key to insurance is to cover only financial losses so large that you could not cope with them and remain financially fit (known as the law of large numbers). If someone is dependent on your income, you need adequate life insurance. Long-term disability coverage is important as long as you need employment income. Also, be sure to carry adequate liability coverage on your home and auto policies.

To save on annual premiums, it might be feasible for you to raise your insurance deductible, or eliminate dual coverages. And whenever purchasing insurance – life, home, disability, or auto – be sure to shop around, and buy only from a reputable firm.

6. Buy a Home
According to the US census, since 1968, the median price of new single-family homes has gone up almost tenfold; many houses still appreciate at a rate of 6% to 8% annually. Further, homeownership entitles you to major tax breaks. Interest on first and second home mortgages is fully deductible, meaning Uncle Sam helps subsidize your property investment. Additionally, the equity in your home can be a great source of retirement income.

Through a reverse mortgage, homeowners can access the equity in their home without having to sell, and have the option of receiving monthly income for life (or chosen term) or opening up a credit line against the home’s value.

7. Take Advantage of Tax-deferred Investments
If your employer has a tax-deferred investment plan like a 401(k) or 403(b), use it. Often, employers will match your investment. Even if they don’t, no taxes are due on your contributions or earnings until you retire and begin withdrawing the funds. Tax-deferred savings means that your investments can grow much faster than they would otherwise. The same is true of IRAs, although the maximum amount you can invest annually in an IRA is substantially less than what you can put in a 401(k) or 403(b).

8. Diversify Your Investments
When it comes to managing risk to maximize your return, it pays to diversify. First you need to diversify among the three major asset classes: cash, stocks and bonds. Once you have decided on an allocation strategy among these three investment classes, it is important to diversify within each asset. This means buying multiple stocks within a variety of industries and holding bonds of varying maturities. Simply put, don’t put all your eggs in one basket. Also, don’t make the mistake of putting most or all of your money in “safe” investments like savings accounts, CDs and money market funds. Over the long haul, inflation and taxes will devour the purchasing power of your money in these “safe havens”.

All investments involve some trade-off between risk and return. Diversification reduces unnecessary risk by spreading your money among a variety of investments. Aside from diversification, the single most effective strategy is to invest continuously over time, with a long-term perspective.

9. Write a Will
The simplest way to ensure that your funds, property and personal effects will be distributed according to your wishes is to prepare a will. A will is a legal document that ensures that your assets will be given to family members or other beneficiaries you designate. Having a will is especially important if you have young children because it gives you the opportunity to designate a guardian for them in the event of your death. Although wills are simple to create, about half of all Americans die intestate, or without a will. With no will to indicate your wishes, the court steps in and distributes your property according to the laws of your state. If you have no apparent heirs and die without a will, it’s even possible that the state may claim your estate.

To begin, take an inventory of your assets, outline your objectives and determine to which friends and family you wish to pass your belongings to. Then, when drafting a will, be sure to include the following: name a guardian for your children, name an executor, specify an alternate beneficiary and use a residuary clause which typically reads “I give the remainder of my estate to …” Once your will is drafted, you won’t have to think about it again unless your wishes or your financial situation changes substantially.

Revised January 2016

Resist the Urge to Tap Retirement Plans Early

Most people admit they’re probably setting aside too little. Retirement accounts must compete with daily expenses, saving up for a home, college and unexpected emergencies for every precious dollar.

If taking money out of your IRA, 401(k) or other tax-sheltered plan is your best or only option, you should be aware of the possible impacts on your taxes and long-term savings objectives before raiding your nest egg:

401(k) loans. Many 401(k) plans allow participants to borrow from their account to buy a home, pay for education, medical expenses or other special circumstances. Generally, you may be allowed to borrow up to half your vested balance up to a maximum of $50,000 – or a reduced amount if you have other outstanding plan loans.

Loans usually must be repaid within five years, although you may have longer if you’re using the loan to purchase your primary residence.

Potential drawbacks to 401(k) loans include:

If you leave your job, even involuntarily, you must pay off the loan immediately (usually within 30 to 90 days) or you’ll owe income tax on the remainder – as well as a 10 percent early distribution penalty if you’re under age 59 ½.

Loans cannot be rolled over into a new account.

Some plans don’t allow new contributions until outstanding loans are repaid.

Many people, faced with a monthly loan payment, reduce their 401(k) contributions, thereby significantly reducing their potential long-term account balance and earnings.

Your account value will be lower while repaying your loan, which means you’ll miss out on market upswings.

401(k) and IRA withdrawals. Many 401(k) plans allow hardship withdrawals to pay for certain medical or higher education expenses, funerals, buying or repairing your home or to prevent eviction or foreclosure. You’ll owe income tax on the withdrawal – plus an additional 10 percent penalty if you’re younger than 59 ½, in most cases.

Traditional IRAs allow withdrawals at any time for any reason. However, you’ll pay income tax on the withdrawal – plus the 10 percent penalty as well, with certain exceptions. With Roth IRAs, you can withdraw contributions at any time, since they’ve already been taxed. However, to withdraw earnings without penalty you must be at least 59 ½ and the funds must have been in the account for at least five years.

To learn more about how the IRS treats 401(k) and IRA loans and withdrawals, visit www.irs.gov.

Further financial implications. With 401(k) and traditional IRA withdrawals, the money is added to your taxable income, which could bump you into a higher tax bracket or even jeopardize certain tax credits, deductions and exemptions that are tied to your adjusted gross income. All told, you could end up paying half or more of your withdrawal in taxes, penalties and lost or reduced tax benefits.

Losing compound earnings. Finally, if you borrow or withdraw your retirement savings, you’ll sacrifice the power of compounding, where interest earned on your savings is reinvested and in turn generates more earnings. You’ll forfeit any gains those funds would have earned for you, which over a couple of decades could add up to tens or hundreds of thousands of dollars in lost income.

Bottom line: Carefully consider the potential downsides before tapping your retirement savings for anything other than retirement itself. If that’s your only recourse, consult a financial professional about the tax implications.

By Jason Alderman

Women and Personal Finances

By many measures, women’s lives have changed substantially in recent decades. According to a comprehensive government report called “Women in America” (www.whitehouse.gov/data-on-women), although certain social and economic situations for women have improved, when it comes to personal finances, many women still face challenging hurdles.

Key report findings include:

  • Women live longer than men but are much more likely to experience critical health problems that hamper their ability to work – and to pass up needed care due to cost.
  • Although the earnings gap between women and men continues to narrow, it’s still significant: Among full-time workers, women’s weekly earnings as a percentage of men’s have increased from 62 percent in 1979 to 80 percent in 2009.
  • More women than men now graduate high school and college, but far fewer earn degrees in engineering, computer sciences and other higher-paying fields.
  • Women increasingly marry later, have fewer children or remain childless, yet still are more likely to live in poverty, particularly single-mother families.
  • Women are less likely than men to work outside the home (61 percent vs. 75 percent in 2009) and are much more likely to work part-time and to take time off to raise children or care for aging relatives.

In a nutshell: Women generally earn less and live longer than men, so at retirement they often have less in savings, receive smaller retirement and Social Security benefits and must spread out their money longer. Clearly, women need to take charge of their financial wellbeing. Here are a few places to start:

Develop a budget to track income and expenses. Either download a budget spreadsheet template or investigate software packages and online account management services like Quicken (www.quicken.com), Mint.com (www.mint.com), Yodlee (www.yodlee.com) and Mvlopes (www.mvlopes.com).

Plan for retirement. Time is your biggest ally when it comes to retirement savings, so get cracking. Start estimating your retirement needs:

  • Social Security’s Retirement Estimator (www.ssa.gov/estimator), which automatically enters your earnings information from its records to estimate your projected Social Security benefits under different scenarios, such as age at retirement, future earnings projections, etc.
  • Check whether your 401(k) plan administrator’s website has a calculator to estimate how much you will accumulate under various contribution and investment scenarios. If not, try the retirement calculators at Bankrate.com and AARP to determine your current financial status and what you’ll need to save to meet your retirement needs.

Do your research. Many helpful personal financial education and management tools are available online, including:

  • The National Foundation of Credit Counseling’s MyMoneyCheckUp™ program offers a step-by-step assessment of your overall financial health and behavior in four personal finance areas: budgeting and credit management, saving and investing, planning for retirement and managing home equity (www.mymoneycheckup.org).
  • Social Security’s Website for Women provides information on retirement, disability and other issues. You can also order or download their informative, free publication, “What Every Woman Should Know” (www.ssa.gov/women).
  • The Women’s Savings Initiative, a program jointly developed by Heinz Family Philanthropies, the Women’s Institute for a Secure Retirement (WISER) and Visa Inc. (www.practicalmoneyskills.com/womensave). This free program features an audio- and e-book called “What Women Need to Know About Retirement,” which you can order on CD or download as a PDF or audio file from Practical Money Skills for Life, a free personal financial management program run by Visa (www.practicalmoneyskills.com/resources).

By Jason Alderman

How to Turn Monetary Gifts into Teachable Moments

Children and teenagers who received monetary gifts for the holidays are often excited to choose what to buy. While they should be allowed to spend some of the money or gift cards, as a parent, you could also use these windfall gains as an opportunity to teach and practice important personal finance lessons.

Here are a few ideas to start with, although you can alter the message or subject matter to match your child’s experience and ability to understand the topic.

Create money goals together. Planning how your child will save or spend monetary gifts is a valuable skill and practice no matter their age. (If you don’t have a personal plan, this is a great opportunity to set an example by developing your financial path as well.)

You can start by drawing three columns – spending, saving and giving – and having them write a few goals for each. Explain the difference and importance of long- and short-term goals, and the value of having an emergency fund (for kids this could help pay for a car repair or bike tire).

Set priorities and discuss the big picture. Have them add up all they received and divide it into each column. Offer guidance to help them determine how much to put into saving and charity, taking the time to explain your reasoning.

They’ll likely find that there isn’t enough money to make a significant impact on all their goals and they’ll need to prioritize based on how important each goal is to them. Share your own experiences and how sometimes it’s better to save for a bigger and better purchase later. You could also have them calculate how expected earnings from allowance, working or upcoming holidays or birthdays could help them achieve their unrealized goals.

Decide where to store the savings. If they don’t already have one, it might be a good time to open a bank account with your children. Go over the differences between a checking and savings account and how they can store the money they received and earn. Your kids can then decide how to split their funds between checking and savings based on their goals.

Gift cards can pose a challenge, particularly if they’re store-specific cards. Children who receive them can’t deposit them at the bank, and they should take this into account as they determine which priorities they can meet and which may need to wait.

However, there are online marketplaces where they can buy and sell gift cards. How much they’ll pay and receive depends on the marketplace and the store – an example of supply and demand in action.

Comparison shop before making a purchase. No doubt children are going to want to spend some of the money right away. It offers an excellent opportunity to discuss the importance of comparison shopping.

Comparing prices at various retailers can help them find a good deal, and they should also consider several alternative but similar purchases. Being able to figure out what best fits one’s needs, wants and budget is an important skill at any age.

Discuss the time value of money and importance of saving wisely. Older children might be ready to learn about the time value of money, the idea that a dollar today is worth more than a dollar in the future.

You could discuss how inflation can decrease the purchasing power of money over time. Older children might be able to think of examples, and you can reinforce the point with images of old advertisements for 5 cent soda or gum.

The next step might be to discuss the importance of saving and investing and how compound interest could potentially offset or supersede the effects of inflation. Perhaps conclude by touching on opportunity costs, the trade-offs that come from every decision.

Bottom line: You can’t force behaviors, but you can use teaching moments to explain and practice valuable money management skills. The holidays are a great opportunity as many children receive gift cards or money, and these lessons can continue throughout the year. Try to reflect the skills and practices you’re teaching in your day to day life as well. Children can pick up on the non-verbal lessons you demonstrate as much as the explicit lessons you sit down and teach.

 

By Nathaniel Sillin

Resolve to Replace Your Bad Financial Habits

Most people have at least one bad financial habit. Whether it’s impulse shopping, forgetting to pay bills on time or putting off building that emergency fund, balancing what you want to do and what you “should” do is never easy. The new year is the perfect time to identify potential financial weak points and replace bad habits with productive ones.

Start by identifying your bad habits. Sometimes a bad financial habit is easy to identify. For example, there might be a growing stack of bills in the kitchen that you willfully ignore. Others may be subtler, or perhaps they’ve become so ingrained that you do them without thinking twice.

Not sure where to start? Looking through your previous months’ expenses can help you identify expensive trends or one-off purchases that are part of a larger theme. Online or paper bank statements can make this particularly simple. If you have a budget, you likely already compare projected spending with actual spending on a monthly basis, if not, this might be a good time to start.

You might recognize a few of these common bad financial habits in your life:

  • Paying bills after the due date.
  • Paying only the minimum required on bills.
  • Ignoring bills and letting them go to collections.
  • Putting off saving for retirement or for a rainy day.
  • Impulse shopping or “retail therapy.”
  • Not keeping track of how much debt you have.
  • Taking on debt to pay for something you don’t currently need.

Ultimately, all of these lead to spending more than you earn and in some cases, bad habits can have a cascading effect.

Try to figure out what’s driving your behavior. You might need to figure out what triggers your behavior and the reward you perceive afterward before you can change a habit. However, triggers and rewards aren’t always obvious.

For example, you might buy big-ticket items when they’re on sale because you want to feel like you’re accomplishing something by “saving” so much. Perhaps you could foster a similar feeling of accomplishment by investing the money in a tax-deferred retirement account and calculating how much it’ll be worth after years of compound interest.

Aim for these healthy financial habits. What habits should you try to adopt? Budgeting is certainly a worthy activity, but also consider the following mix of behaviors and specific objectives that can help keep your finances in order.

  • Pay bills on time. In addition to avoiding late-payment fees, making on-time payments is one of the most important factors in determining your credit score.
  • Make paying down debt a priority. Rather than accruing interest, make a point to pay down debts as quickly as possible.
  • Build and maintain an emergency fund. Having three to six months’ worth of living expenses in savings can help cushion the blow from a financial or personal setback. You could start with a goal to put $1,000 aside and then build towards the full emergency fund.
  • Save for retirement. You can put aside a percentage of your income for retirement and invest the money within a tax-advantage account, such as a 401(k) or IRA. Find a comfortable contribution amount to start with, and then try to increase it at least once during the year.
  • Plan your large purchases. To help prevent impulse shopping from draining your budget, resolve to wait at least one day before buying anything that costs over $100 (or whatever amount makes sense for your budget). If you know there’s a large purchase coming up, start saving early by setting a little money aside from each paycheck.

You might consider asking others for input during this process. Especially if you’re having trouble identifying a bad habit or finding the motivation to change, sometimes an outside perspective can help.

Bottom line: Make a resolution to replace your bad financial habits with healthy ones this year. Start by identifying the habits you want to change and trying to figure out the trigger and reward that surround the behavior. Then, try to replace that behavior with something positive. After identifying and trying to change your personal financial habits, you might want to consider the financial practices you share with a spouse or significant other.

 

By Nathaniel Sillin

Health and Wealth in One – How to Make Money While Working Out

 

The end of the year is a perennial period of self-reflection, and you may enjoy partaking in setting a few New Year’s resolutions. Unfortunately, you also may (more than once) enthusiastically start a year with shiny optimism only to find yourself falling short a few weeks later. You are not alone.

Resolutions related to finances and health, two important components of everyone’s life, are especially common. Here are a few ways that you could tie physical activities to achieving your financial goals. Hopefully being able to tackle both resolutions at once can help keep you motivated for the entire year.

Compete with yourself, or others. If you’re up for a little friendly competition, consider creating or joining a challenge and putting money on the line.

There’s an online app that you can use to place a wager on how often you’ll work out. At the end of the week, you have to pay your preselected amount for each workout you miss. But if you complete your workouts for the week, you collect a portion of the amount paid out by everyone else.

Some people make an arrangement with a friend where you each agree to work out X times a week and to pay the other person $5 or $10 for each workout missed. Or, you could opt to make a donation to a charity of your friend’s choice rather than pay each other. The goal is to provide accountability, and the financial aspect can add a sense of urgency and be a great motivational tool.

Connect an activity tracker to rewards programs. Several services give you points each time you work out and let you redeem the points for cash, gift cards or other prizes. The real trick is to use multiple programs and maximize your rewards from every workout. Some employers also provide bonus points to employees that use these programs or have similar rewards programs of their own.

Make working out your work. If you’re looking to make a serious lifestyle change, and potentially some serious money, consider becoming a personal trainer or fitness instructor. While the certification process can be expensive and time-consuming, afterward you’ll be able to charge clients for classes or one-on-one training.

Or, you could try to find flexible and active work that suits your interests and experience. Gardener, referee or dog walker could be good fits to supplement your income.

Keep exercise-related expenses down. It can be tempting to buy new workout equipment or sign up for a gym when you’re excited about a New Year’s resolution. However, there are many ways to get fit without expensive equipment or a large gym.

For example, you can find videos of free instructor-led workouts or yoga sequences online or try an app that creates and leads you through workouts. If you want to take up an activity that requires facilities, look for inexpensive options at local community centers.

Raise money for a charity with every step. You may not have a strong desire to earn money but are still looking for a little extra motivation to work out. Similar to the programs that reward you with points, there are apps like Charity Miles that you can use to raise money for your favorite charities while exercising.

You could also sign up for a charity walk, run or ride and know that when you cross the finish line you’ll be helping a good cause.

Bottom line: By keeping costs down and looking for ways to make money while staying active you can make your budget (and body) more flexible. This approach could help you stay motivated for longer, and you can use the extra money to pursue your other goals for the year.

Perhaps you’re trying to save for a down payment or vacation, focused on building your retirement savings or looking to make a significant impact in your community by donating to non-profit organizations. Every extra dollar can bring you one step closer to achieving that goal.

By Nathaniel Sillin