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

Balancing Your Investment Choices with Asset Allocation

A chocolate cake. Pasta. A pancake. They’re all very different, but they generally involve flour, eggs, and perhaps a liquid. Depending on how much of each ingredient you use, you can get very different outcomes. The same is true of your investments. Balancing a portfolio means combining various types of investments using a recipe that’s appropriate for you.

Getting An Appropriate Mix

The combination of investments you choose can be as important as your specific investments. The mix of various asset classes, such as stocks, bonds, and cash alternatives, accounts for most of the ups and downs of a portfolio’s returns.

There’s another reason to think about the mix of investments in your portfolio. Each type of investment has specific strengths and weaknesses that enable it to play a specific role in your overall investing strategy. Some investments may be chosen for their growth potential. Others may provide regular income. Still others may offer safety or simply serve as a temporary place to park your money. And some investments even try to fill more than one role. Because you probably have multiple needs and desires, you need some combination of investment types.

Balancing how much of each you should include is one of your most important tasks as an investor. That balance between growth, income, and safety is called your asset allocation, and it can help you manage the level and type of risks you face.

Balancing Risk and Return

Ideally, you should strive for an overall combination of investments that minimizes the risk you take in trying to achieve a targeted rate of return. This often means balancing more conservative investments against others that are designed to provide a higher return but that also involve more risk. For example, let’s say you want to get a 7.5% return on your money. Your financial professional tells you that in the past, stock market returns have averaged about 10% annually, and bonds roughly 5%. One way to try to achieve your 7.5% return would be by choosing a 50-50 mix of stocks and bonds. It might not work out that way, of course. This is only a hypothetical illustration, not a real portfolio, and there’s no guarantee that either stocks or bonds will perform as they have in the past. But asset allocation gives you a place to start.

Someone living on a fixed income, whose priority is having a regular stream of money coming in, will probably need a very different asset allocation than a young, well-to-do working professional whose priority is saving for a retirement that’s 30 years away. Many publications feature model investment portfolios that recommend generic asset allocations based on an investor’s age. These can help jump-start your thinking about how to divide up your investments. However, because they’re based on averages and hypothetical situations, they shouldn’t be seen as definitive. Your asset allocation is–or should be–as unique as you are. Even if two people are the same age and have similar incomes, they may have very different needs and goals. You should make sure your asset allocation is tailored to your individual circumstances.

Many Ways to Diversify

When financial professionals refer to asset allocation, they’re usually talking about overall classes: stocks, bonds, and cash or cash alternatives. However, there are others that also can be used to complement the major asset classes once you’ve got those basics covered. They include real estate and alternative investments such as hedge funds, private equity, metals, or collectibles. Because their returns don’t necessarily correlate closely with returns from major asset classes, they can provide additional diversification and balance in a portfolio

Even within an asset class, consider how your assets are allocated. For example, if you’re investing in stocks, you could allocate a certain amount to large-cap stocks and a different percentage to stocks of smaller companies. Or you might allocate based on geography, putting some money in U.S. stocks and some in foreign companies. Bond investments might be allocated by various maturities, with some money in bonds that mature quickly and some in longer-term bonds. Or you might favor tax-free bonds over taxable ones, depending on your tax status and the type of account in which the bonds are held.

Asset Allocation Strategies

There are various approaches to calculating an asset allocation that makes sense for you.

The most popular approach is to look at what you’re investing for and how long you have to reach each goal. Those goals get balanced against your need for money to live on. The more secure your immediate income and the longer you have to pursue your investing goals, the more aggressively you might be able to invest for them. Your asset allocation might have a greater percentage of stocks than either bonds or cash, for example. Or you might be in the opposite situation. If you’re stretched financially and would have to tap your investments in an emergency, you’ll need to balance that fact against your longer-term goals. In addition to establishing an emergency fund, you may need to invest more conservatively than you might otherwise want to.

Some investors believe in shifting their assets among asset classes based on which types of investments they expect will do well or poorly in the near term. However, this approach, called “market timing,” is extremely difficult even for experienced investors. If you’re determined to try this, you should probably get some expert advice–and recognize that no one really knows where markets are headed.

Some people try to match market returns with an overall “core” strategy for most of their portfolio. They then put a smaller portion in very targeted investments that may behave very differently from those in the core and provide greater overall diversification. These often are asset classes that an investor thinks could benefit from more active management.

Just as you allocate your assets in an overall portfolio, you can also allocate assets for a specific goal. For example, you might have one asset allocation for retirement savings and another for college tuition bills. A retired professional with a conservative overall portfolio might still be comfortable investing more aggressively with money intended to be a grandchild’s inheritance. Someone who has taken the risk of starting a business might decide to be more conservative with his or her personal portfolio.

Things to Think About

• Don’t forget about the impact of inflation on your savings. As time goes by, your money will probably buy less and less unless your portfolio at least keeps pace with the inflation rate. Even if you think of yourself as a conservative investor, your asset allocation should take long-term inflation into account.

• Your asset allocation should balance your financial goals with your emotional needs. If the way your money is invested keeps you awake worrying at night, you may need to rethink your investing goals and whether the strategy you’re pursuing is worth the lost sleep.

• Your tax status might affect your asset allocation, though your decisions shouldn’t be based solely on tax concerns.

Even if your asset allocation was right for you when you chose it, it may not be appropriate for you now. It should change as your circumstances do and as new ways to invest are introduced. A piece of clothing you wore 10 years ago may not fit now; you just might need to update your asset allocation, too.

Prepared by Broadridge Investor Communication Solutions, Inc. Copyright 2016

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* Non-deposit investment products and services are offered through CUSO Financial Services, L.P. (“CFS”), a registered broker-dealer (Member FINRA/SIPC) and SEC Registered Investment Advisor. Products offered through CFS: are not NCUA/NCUSIF or otherwise federally insured, are not guarantees or obligations of the credit union, and may involve investment risk including possible loss of principal. Investment Representatives are registered through CFS. NASA Federal Credit Union has contracted with CFS to make non-deposit investment products and services available to credit union members.

 

CUSO Financial Services, L.P. and its representatives do not provide tax advice. For such advice, please contact a tax professional.

Fake iTunes Invoices Attempt to Trick Users by Claiming Ridiculous Charges Made to Accounts

Phishers are getting better and better. Recently a very good replica of an iTunes invoice has been spotted around that attempts to trick people into clicking a link that is either malicious or requests personal information that can be used to steal identities.

The email message that is being sent claims that the users have been overcharged for a recent download. In some cases, it is $25 for a song that is typically only $1.99 or $45 for the Netflix app, which is actually free.Instead of panicking, take a bit of time and think it through. Instead of clicking links or attachments, go directly to your iTunes account using a previously bookmarked link or by hand typing in the URL into the address bar of your browser. There should be a record of your purchases in your account and you can see if there are any unauthorized ones from there. If so, contact your payment card issuer and Apple to get it resolved. If not, you can be certain that the email message is indeed an attempt to phish for information or to do something malicious.

Avoid clicking any links or attachments that arrive in email messages unexpectedly. This applies even if you recognize the sender. It is not difficult to spoof the name in the “from” line of an email, so don’t get fooled by it. Instead, if you aren’t sure of the authenticity of the email, contact the sender by phone, text, or by creating a completely new email message. In other words, don’t just hit the reply button.

Take some time to ensure that you do have anti-malware and anti-virus software installed and updated on your devices. This goes for all products including Apple products. Despite some beliefs, they are not immune to these things anymore and in fact one study released by Marble Labs from 2014 have shown they are becoming as vulnerable to malware as devices running on other operating systems. The FBI has also warned of a significant rise in mobile malware on all types of devices as their use for tasks such as performing banking transactions increases.

Don’t be fooled by phishing. Take some time to read the messages, think about whether it is reasonable for them to be true and act accordingly. Phishers count on the panic affect; so don’t give in to fear.

© Copyright 2017 Stickley on Security

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