Monday, March 28, 2016

Countdown to Financial Fitness: Setting Savings Priorities

Countdown to Financial Fitness: Setting Savings Priorities: When I was in my early twenties and got my first "grown-up" job, working for the State of Texas, I complained to my father ab...

Setting Savings Priorities

When I was in my early twenties and got my first "grown-up" job, working for the State of Texas, I complained to my father about a deduction from my pay check for "retirement fund." What a waste of money for something so far off. To me, forty was old. I might not even live long enough to see retirement.

My father laughed. "Believe it or not," he said. "You're going to retire some day. It's never too early to start saving for it."

I was always a saver. But I liked to focus on more immediate goals.

I only worked for the State of Texas for two years, and when I quit, because I wasn't vested yet in the retirement plan, they returned all my contributions to me with my final pay check. I spent the money on graduate school.

Fortunately, when I was in my thirties and working steadily again, I began contributing to an Individual Retirement Account (IRA), and once my company offered a 401k plan, I contributed to that as well.

When you're young, there are so many things to save for. How do you set your priorities? You want to buy your first home. Maybe start your own business. Send the kids to college. And oh, yeah, there's saving for retirement. Some day, but it's a long way off. Plenty of time. These other expenditures come first. Don't they?

But the earlier you start saving for retirement, the less painful it has to be. Your money will start growing, working for you behind the scenes. You've probably seen those pyramids that show how a 25-year-old who saves $2000 a year until he retires at 65 will have twice as much money in his account as the person who doesn't start until age 35. Even if the person who started at 25 stops contributing earlier, he'll still end up with a bigger balance. Even if the older guy increases his contributions. It doesn't even matter much how the money is invested, as long as it stays invested (unless, perhaps, you do something reckless like put it all in your company's stock, and then the company goes bankrupt).

But what about your children's college educations? Student loan debt can be crippling.

True. But maybe your children will qualify for scholarships. Or they can work part-time while they go to school. They might not even want to go to college.

Or maybe they'll have to take on some debt. At least they can get a loan for education. You won't have the option of financing your retirement. There are no "retirement scholarships." You might not be healthy enough to hold a part-time job, and you might not have the ability to delay your retirement. Fine, maybe those kids you paid to educate will take care of you in your golden years.

But do you really want to be a burden to your children? The best gift you can give them is to provide for your own financial future, so they don't have to.

Sure those other savings goals are important. Just don't postpone saving for retirement. Even if you can only spare a few dollars a month—the cost of a meal out—even if you can only put aside what your company will match, your efforts will make a big difference later.

Wednesday, March 23, 2016

Countdown to Financial Fitness: The Advantages of Credit Cards

Countdown to Financial Fitness: The Advantages of Credit Cards: Many financial consultants will tell you to cut up your credit cards, or to never apply for one at all. They tout the benefits of opera...

The Advantages of Credit Cards

Many financial consultants will tell you to cut up your credit cards, or to never apply for one at all. They tout the benefits of operating on a cash basis, or just using a debit card. The rationale is that you can't spend more money than you have, like you can with a credit card.

But used wisely, credit cards are a secure alternative to carrying a lot of cash. It's much easier to rent a car or reserve a hotel room if you have a credit card. A credit card can save your life in an emergency, if your car breaks down or you have to buy a last-minute plane ticket home.

Credit cards give you more leverage and protection than you get when you pay with cash or a debit card. You have the option of disputing a charge and having it reversed if the product you purchased is not what the vendor promised. And there is less hassle getting a refund if that airline or cruise line goes bankrupt or discontinues service to your vacation destination.

I like to use credit cards for basic living expenses, such as groceries, gasoline, and even some utilities. I pay by credit card whenever one is accepted without an additional fee for the convenience. Many credit cards offer rewards such as gift cards, frequent flyer miles, or even cash back. So the more you use the card, the faster you earn the rewards. And using credit cards for most, if not all, your daily living expenses helps you keep better track of where your money is going. Cash tends to get frittered away.

The secret to effective credit card use is to remit the balance in full every month, on time, so you never pay one penny of interest. If you have to make a large purchase that you can't pay for when the bill comes, stop using that card until you can reduce the balance to zero again. As long as you carry a balance, you'll be accruing interest on every new purchase, so it no longer makes economic sense to charge daily living expenses in order to build up rewards.

A credit card is a convenient form of payment, and a side benefit is that you get to use other people's money for a short while. If you think of a credit card as a magic plastic wand that enables you to buy things you cannot otherwise afford, perhaps cutting yours up is a good idea.

What are your thoughts on cash/debit vs. credit cards? I would love to hear your comments. 

Thursday, March 17, 2016

Countdown to Financial Fitness: How Much to Save for Retirement?

Countdown to Financial Fitness: How Much to Save for Retirement?: How much do you need to save for retirement? Will a million dollars be enough? Two million? Five million? If only you could look into a...

How Much to Save for Retirement?

How much do you need to save for retirement? Will a million dollars be enough? Two million? Five million?

If only you could look into a crystal ball and find out exactly how long you're going to live...

My philosophy has always been to save as much as I can. Max out the 401k contributions, max out the Roth IRA contributions, take advantage of the catch-up contributions. Build a diversified portfolio of after-tax investments as well.

I've looked at a number of retirement planning calculators, but there are always so many variables, so many unknowns. How long will you be in retirement? (i.e., when are you going to die?) What will be the rate of inflation? What return can you expect on your investments?

One myth starting to be dispelled is that you will need less income in retirement than when you were working. No more commuting. Fewer lunches out, no more business suits. No more 401K contributions. The kids should be on their own, and maybe you'll downsize to a smaller home. You'll qualify for senior discounts.

But with more leisure time on your hands, maybe you'll dine out more and attend more cultural events. You will like more "creature comforts." What if you take up expensive hobbies like golf or world travel? Maybe you'll need more help around the yard or the house. And don't forget skyrocketing health care costs. It's possible your monthly expenses could go up instead of down after you retire.

My goal has been to postpone withdrawing money from my retirement accounts as long as possible, preferably until I reach age 70 and a half, and the IRS makes me. But making that transition from building a retirement a fund to drawing it down will be scary. What if I run out? What if I outlive my money?

I recently attended a retirement planning seminar where the facilitator finally gave me a formula that made some sense:
  •  Estimate your monthly expenses by using your current expenses as a starting point.
  • Add up your expected fixed income, such as Social Security, pensions, annuities.
  • If your estimated monthly expenses exceed your anticipated monthly income, multiply the shortfall by 12 to annualize it.
  •  Multiply that number by 25.
For example, if I estimate I will need an extra $2000 a month beyond my projected retirement income, I will need to withdraw $24,000 a year from other savings, which means I must accumulate at least $600,000 before I retire. This is known as the Rule of 25, also known by its inverse, the Rule of 4%. The Rule of 4% states that, on average, your nest egg should last through retirement if you keep your withdrawal rate at or below 4%.

Just an estimate, I know. Maybe it won't be enough. So many variables. But it's a start. It helps to have a goal and then try to exceed it.

How are you planning for retirement? I would love to hear your comments.

Sharon Marchisello is the author of Live Cheaply, Be Happy, Grow Wealthy

Thursday, March 10, 2016

Countdown to Financial Fitness: Countdown to Financial Fitness: Phone Scams

Countdown to Financial Fitness: Countdown to Financial Fitness: Phone Scams: Countdown to Financial Fitness: Phone Scams : The other day I got a phone call from a number I didn't recognize; caller ID said "UN...

Are You Getting an Income Tax Refund?

Most people who expect income tax refunds have filed their returns by now. In fact, most have already received those refunds and blown the money.

But is that the best strategy?

An income tax refund can be a windfall. An opportunity to build an emergency fund, or pay off a large debt. If you haven't contributed to a retirement account yet this year, why not use that money to start? Or maybe there's a major purchase or repair you've been putting off.

If your finances are in good shape, use that windfall to treat yourself to a nice vacation or buy a new toy you have been drooling over. Or share some of the money with your favorite charity.

When you know you're getting a refund, file your return as soon as you have all the necessary supporting documents. Get your money back as quickly as possible. Because after all, it has always been your money.

The government has been using your money, interest free, all year.

If you received a big refund this year, ask yourself why? Maybe your financial situation changed a lot last year, so it was hard to predict how much income tax you would owe. But if you get a big refund every year, on purpose, maybe it's time to adjust your withholding, or your estimated tax payments, so you have access to your hard-earned money sooner. All year, so you can put it to work for you.

No one enjoys writing a check to the IRS. And you certainly don't want to owe enough to trigger a penalty. But technically, owing the IRS at tax time is the best strategy, because you are the one who has been able to use their money all year, interest free.

Some people argue that withholding enough to get a big refund every spring is like a forced savings plan. Or they are afraid they might not have enough extra cash in the bank to write that check to Uncle Sam at tax time. But why not start planning now? Put a little aside each month, in a hands-off, interest-bearing savings account or other low-risk investment. Then use those funds to cover your tax liability once April 1 rolls around next year. Anything left in the account is yours to keep, or to start growing for the next year.

Are you getting a tax refund this year? I would love to hear your comments.