Archives for April 7, 2018

Though Americans are slowly but surely ramping up their savings game, most are still falling short in that arena. An estimated 57% of U.S. adults have less than $1,000 available in savings, while 39% have absolutely no savings at all. Clearly, this means most of us need to do better. With that in mind, here are a few key habits that can lead you to healthier finances.

1. Following a budget

Most Americans don’t follow a budget despite the fact that it’s one of the most effective money management tools. If you’re eager to get a better handle on your finances, then it’s crucial that you understand where your income is going month after month. To create a budget, simply list your existing monthly expenses, factor in one-time expenses (like your insurance payment that comes due once a year), and compare what you spend to what you earn. If you’re living paycheck to paycheck, which is the case for most Americans, then you’ll need to examine your various spending categories and decide which ones to cut back on.

2. Automating savings

It’s hard to spend money you don’t gain access to. If you haven’t been the best saver in the past, one solution is to set up an automatic savings plan, whether by having money from each paycheck filter directly into the bank or into your company’s 401(k). This way, you’ll be assured that at least some portion of your income is being saved, thereby eliminating the option to spend it frivolously.

3. Avoiding impulse purchases

If there’s one thing that can really derail your savings efforts, it’s an impulse purchase. And if you’ve fallen victim to such purchases in the past, you’re certainly not alone. It’s estimated that five out of six Americans make impulse purchases, and 20% who have gone this route admit to spending $1,000 or more on a whim. To avoid wasting money, institute the 24-hour rule for nonessential or unusual purchases: When you get the urge to buy something, commit to waiting 24 hours before moving forward. Chances are, you’ll come to your senses within that time frame and realize you’re better off banking that money than purchasing an item you don’t really need.

4. Paying bills right away

Not only can paying your bills on time help you avoid late fees, but it can also play a huge role in helping you build and maintain good credit. Therefore, it’s wise to get into the habit of paying your bills as soon as you receive them. Better yet, sign up for autopay options whenever they’re available to eliminate the possibility of being late.

5. Reviewing your credit report every four months

In a study last year, 16% of Americans admitted to never checking their credit reports. If you’re one of them, then it’s time to change your ways. That’s because an estimated 20% of credit reports contain errors, and if you don’t take steps to correct a mistake on your record, it could end up dragging down your score, making it more expensive to borrow in the future. You’re entitled to a free copy of your credit report every year from each of the three major bureaus: Equifax, Experian, and TransUnion. As such, it pays to request one online every four months, review it thoroughly, and report any errors you spot. This will also help you avoid falling victim to identity theft.

6. Studying your bills for errors

How often do you pay your credit card bill without reviewing your statement line by line? Many of us don’t take the time to thoroughly study our bills, but by not doing so, we risk paying for charges that aren’t actually valid. Pledge to never pay a bill before reading it from beginning to end — you’ll reduce your chances of overpaying.

If you’re serious about saving money and improving your financial picture, then you’ll need to adopt these smart habits. The good news? All these suggestions are easy to incorporate into your life, and once you do, you’ll be happier for it.

Just as we all enjoy a day to ourselves; be it for shopping or a day at the spa – everyone should have a Personal Finance Day.

What is a personal finance day?

A Personal Finance day is a day set aside each month to sort out your personal finance needs. This will help you better manage your finances and help you ascertain your budgeting goals, expenses and savings for the month ahead. Eventually this practice will become a habit, which will make your life much easier, – says Ester Ochse, FNB Financial Advisory Product Specialist.”

She adds that, “This day should be circled in your calendar and should be adhered to diligently to ensure that you better manage your finances for the month. It’s not difficult; it just needs commitment and dedication to ensure that you meet your financial objectives and goals every month.”

Ochse says that “It’s never too late to get started with your finances. Decide on a date each month and stick to it. Sort, label and categorise your excel budget sheets according to your finances, personal or business expenses, savings and entertainment. Ensure that you keep your monthly bills, invoices and receipts in a personal finance box. Alternatively; you can access all your expenses and payments via your online statements.”

Managing your finances can be tedious for some; but it also gives you the opportunity to tap into your creative side. Draw up a personal finance journal which will help make budgeting a fun and easy process. Use colour pens, markers, sticky notes, creative icons to make it even more fun.”

Managing your finances is the first step to financial wellness and success. It also helps determine whether you have enough money for your retirement; your child’s school excursion or even that mid-term holiday break to Cape Town.

We live in a changing economy where the cost of living continues to rise. The bottom line is that we need to manage our finances now. Being over budget or left with no money can put a huge strain on our pockets which could impact on our health,” concludes Ochse.

Talk to your old man or your grandma and they’ll nag you to the ends of the Earth about preparing for retirement. But while these money-saving tips seem smart on the surface, John Deglow, CFP, AIF, at Unified Trust Company, says the reality is many retirees live well below their means and this figure greatly overestimates the income they’ll actually need once they put in their notice.

As an example, a couple might make $100,000 a year after taxes, but once the kids have flown the coop and the mortgage has been paid off, they actually spend $50,000 annually on expenses. So why would they suddenly need $80,000 to make ends meet when they’re job-less? “A better assumption might be that you would need 80 percent of your current expenses—not income—during retirement,” he says. Even so, make sure to book a one-on-one with a trusted financial professional who can help you better understand the effects of inflation and accommodate other issues unique to your situation, he adds. Here are 12 more common money mistakes people make in early retirement.

Make a pro/con list of major expenditures

When it comes to signing on a dotted line, you shouldn’t have any doubts, says David Rosen, licensed associate real estate broker. “Often, people advise making a list of pro’s and con’s to decide which home to purchase,” he says. “However, if you feel uneasy about an investment or a savings platform, then you are right. Just don’t do it. That list is there to trick your intuition, but your intuition is keenly aware of what’s likely to be a poor investment.”

Want to buy a home? Follow this 10-step plan to buying your first house in five years.

You should prepay or make additional payments on a home mortgage

Debt might always have a negative connotation, but Jeffrey Sklar, managing partner of Sklar, Heyman, Hirshfield & Kantor LLP, says pre-paying and making additional mortgage payments aren’t smart money-saving tips. How come? Your cash could be put to better use and make you more money. “Most folks don’t analyze if there is tax benefit to the interest deduction, as well as opportunity cost in taking the funds from a potential investment with a better rate of return,” he explains.

Skip your latte

If your addiction to Starbucks is nearly as committed as your marriage, your friends might raise an eyebrow when you talk about your daily visit. Sure, it’s pricey, but financial expert E. Matthew Buckley says skipping your morning latte fix won’t make a huge difference in your savings picture, though it will impact your level of happiness and concentration. “Life is too short to skip the things you enjoy. This type of money-saving tip is very tactical and amounts to nothing more than running around in front of a steamroller to pick up dimes,” he shares. Instead, talk with a professional who can help you come up with a savings plan that leaves room for your caffeine fix. You should also steal these secrets from people who are natural-born savers.

Save 10 percent of your income for retirement

We hate to break it to you, but for most, this figure is far too low, according to Deglow. How come? Between modest incomes at first jobs and student loan payments, most people aren’t able to save 10 percent of their income until they’re further along in their career. And once they reach the point where they’re able to tuck away cash, it could be too late to only set aside 10 percent. To determine the smartest percentage for your lifestyle, chat with a professional who can map out a detailed plan with money-saving tips to prep you—and your bank account—for your golden years.

Over withhold on taxes from your wages to ensure a tax refund

Depending on your tax bracket and incoming earning, your tax refund in April might feel like the only way you can save money. But this is a dangerous way to save, since it doesn’t directly benefit you in the way the dollars could if you invested them instead, Sklar says. As he explains, “Every taxpayer is better off investing their funds than providing the government an interest-free loan in the form of overpaying their taxes. It’s much better to have the extra money go directly into an investment each pay period.”

You need life insurance equal to seven times your annual salary

There’s a lot wrong with this statement, according to Deglow. First and foremost, he notes, not everyone needs life insurance. “If there isn’t anyone who would become financially compromised should you pass prematurely and you have enough assets to pay off your liabilities, life insurance may not be a necessity,” he explains. However, if you do have a spouse and/or children, you need to crunch the numbers to fully understand how much you’re setting aside. As an example, Deglow explains someone who brings in $100K a year and opts for a $700K life insurance benefit, might be shortchanging their family. “Withdrawing 4 percent of $700,000 would provide only $28,000 annually for your family. A more aggressive withdrawal rate of 6 percent provides $42,000, again much less than the family was accustomed to,” he shares. And to make it more complicated, he notes this doesn’t address other liabilities, such as mortgages, credit cards, student loans, and more. His advice? Your life insurance should be as much as 20 times more than your income. If that number seems daunting, you need these 56 almost effortless tips to save more money every day.

You really don’t need an estate plan unless you are elderly or particularly wealthy

If the thought of an estate plan hasn’t crossed your mind, consider this your not-so-gentle nudge to do so. While Deglow acknowledges it might not be a super-happy topic to address, the truth is no one know when his or her last day will be, and it’s important to plan for what will happen to your assets. And even if those earnings or ownerships are minimal? It’s still your responsibility. “Regardless of income or wealth, families should plan for guardianship of their children, list beneficiaries, and create other documents addressing Powers of Attorney, naming an Executor, and establishing a living will. Essentially, everyone should leave instructions for what they want to happen, so that those decisions don’t fall on family members who are likely already going through a difficult time,” he says. “If you pass without an estate plan, your state has a default plan for you, which may or may not follow your wishes.”

Be a bad tipper

Less practical and more karmic, Rosen says being a Grinch with tipping isn’t a way to get ahead on your savings goals. “The opportunity costs of being known as ‘cheap’ as opposed to ‘generous’ are great! However, the amount of money you save by skimming a few bucks here and there are not life-changing,” he shares. Don’t miss these creative ways to save money you never thought of before.

Prepay your taxes

Much like your mortgage, if you use your extra cash to prepay your taxes, Rosen says there are better uses for the extra dollars. While some do this in an effort to avoid paying them late—which carries a steep penalty—he notes a better money-saving tip is to place the funds in a low-risk cash flow investment. “You will come out ahead, and it’s probably a better investment. The government is going to stay in business with you paying on time, there is no benefit to you to pay them in advance,” he explains.

Many of us can recall stories of parents and grandparents who spent 40-year careers working for a phone company or bank and retiring at age 60 with a defined benefit (DB) pension that supported them in their retirement with a monthly check for the rest of their lives. This predictable stream of retirement income, combined with Social Security or other personal savings or earnings, simplified planning for those who retired a generation ago, when the average lifespan was in the mid-70s.

Today, there are two major factors that have caused many more workers to lose that retirement security.

First, employers have shifted from DB plans to defined contribution (DC) plans (e.g., a 401(k)), with just 2% of private sector workers enrolled in DB plans today, according to the Employee Benefit Research Institute. Unlike DB plans, DC plans require workers to assume all the responsibilities for deciding whether and how much to save without any predictable stream of income at retirement.

And, second, we are living much longer, making it necessary for retirement savings to last longer than ever before. According to the U.S. Social Security Administration, a man turning 65 today can expect to live, on average, until age 84, with one-quarter of those turning 65 today expected to live until age 90 and 10% projected to live past age 95.

The problem with relying on a DC plan as a core or primary retirement plan is that it was never designed to provide retirement security. Such plans were originally intended as tax-advantaged supplemental retirement savings plans that would enhance benefits already provided by traditional DB plans. Today’s core DC plans are primarily focused on wealth accumulation and preservation but fail to offer workers options to help them manage their incomes to last a lifetime.

Longer lifespans require revisiting lifetime income strategies

The World Economic Forum (WEF) recently issued a report “We’ll Live to 100 – How Can We Afford it?” This report title succinctly captures the demographic and economic challenges for future generations of retirees. On average today’s 20-year-olds are projected to live to be 100 and today’s 10-year-olds are expected to live to be 103. According to TIAA, more than 800,000 Americans aged 65 or older retired in the last quarter of 2016, 10,000 baby boomers retire each day, and the number of retirees is expected to grow by 60% between 2014 and 2040. Life expectancy has steadily increased during the past century.

These are significant challenges that will require new thinking about retirement planning. How closely does living longer align with the realities of aging, workforce participation, and lifetime earnings? Is it possible to have sufficient income in retirement if you are working, at most, 45 years out of those 100 years? For policy makers, it’s time to consider what an increasingly older population means for the sustainability of our retirement system. This must include the consideration of lifetime income strategies in today’s DC plans.

Retirement security is more than your 401(k) balance

Your retirement savings account balance is only one of many factors that determines if you will save enough to meet your needs in retirement. Age, lifestyle, health, and cost of living all play a role. Yet, the focus of today’s core DC plan has been wealth accumulation and preservation. This is appropriate for a supplemental savings plans, but not for what DC plans have become, which is the primary vehicle for retirement savings. The goal of wealth accumulation only makes sense when the funds are intended to pay for what you want in retirement after your basic needs are met.

If the goal of a retirement plan is to generate enough income in retirement to maintain a certain standard of living, or at least meet basic needs in retirement, retirement savings plans should address the risk that someone may not replace an adequate percentage of preretirement income. If retirement security is the goal, how much you have saved is less important than how much income you can generate from those assets in retirement.

Effectively managing income in retirement is critical

Unfortunately, many people don’t realize early enough how much money they need for retirement. They underestimate how much annual income is necessary, or fail to consider common but unexpected health care or family expenses that seriously impact what retirement looks like. A recent MetLife study found that 20% of retirees taking a lump sum spent all of their retirement savings in just 5-1/2 years. Others struggle with transitioning from saving to spending and end up living a lower quality of life than necessary because they are not comfortable spending the money they have saved. Detailed planning and regular reviews are critical to maintaining that necessary balance during retirement.

Expanded options for lifetime income are needed

To provide retirement security, employers need to offer options other than lump-sum distributions when a worker retires. While financial education initiatives can have a positive impact on participant savings rates, it may not be enough. It is unrealistic to expect people to learn and apply the evolving, nuanced financial expertise required to know how to manage their money through their retirement to last a lifetime.

Most large employees still do not offer, and are not likely to offer, options that help those saving for retirement convert their savings plan account balances into lifetime income, according to a recent survey by Aon Hewitt. Changing behaviors, such as how today’s younger workers change jobs more frequently than their parents and grandparents, underscore the need for reframing how we structure ways to save for retirement.

In 2016, the U.S. Government Accountability Office (GAO) recommended that the U.S. Department of Labor (DOL) provide more effective guidance about lifetime income options to encourage policy makers and retirement plan sponsors to focus on retirement security. The DOL acknowledges that lifetime income is an important public policy issue. And Congress recently introduced a proposal to reduce regulatory burdens and help encourage more employers to offer lifetime income solutions in their retirement plans.

The easier policy makers make it for retirement plan sponsors to offer effective income distribution strategies, such as lifetime income solutions and/or structured withdrawal options, the more time and resources the financial industry will commit to developing new solutions. This is an important step in achieving widespread adoption by employers, and ultimately, improving retirement security for recent and future retirees.