Archives for November 21, 2018

Have you ever stood at an ice cream counter and felt torn between the prospect of vanilla versus chocolate, all the while holding up the line while you contemplate your choices? Some of us are naturally better at making decisions than others, but while relatively inconsequential choices, like the outfit we’ll wear or the restaurant we’ll dine at, ultimately won’t wreak much havoc on our minds, it turns out financial decisions — you know, the important ones that could impact our future — might actually have the ability to hurt our brains.

Financial decisions require more concentration than regular, run-of-the-mill choices, and as such, they have the ability to actually impact brain function, according to research released by Northwestern Mutual. The problem, of course, is that the associated stress can lead to poor decision making, which is why the point of the aforementioned study is to highlight the benefits of seeking the help of a financial professional for such high-impact choices. Specifically, when people get assistance with financial decisions, their brains are able to better relax, concentrate, and take more reasonable action.

The thing about financial advice is that it’s not a one-size-fits-all sort of deal. But there are some universal pieces of financial guidance that can serve you well regardless of your personal circumstances. Here are a few tidbits that might help guide some of the financial choices you’ll eventually have to make — and spare you the brain drain in the process.

1. Always aim to save 20% of each paycheck

A commonly challenging conundrum is the decision to spend more money now and have less later in life or do the opposite. The answer might boil down to a reasonable middle ground: socking away 20% of your earnings but spending the rest.

Let’s face it: Your retirement isn’t going to pay for itself, and your Social Security benefits will only pick up a portion of your overall living tab during your golden years. So rather than strain your brain to determine how much you should be saving, aim to set aside 20% of your earnings consistently, and know that in doing so, you’ll be setting yourself up for a comfortable retirement.

2. Don’t take on too much housing debt

One of the biggest financial decisions you might ever have to make is whether to buy a home and how much you should spend on that home. So here’s something that will make that choice easier: Under no circumstances should you take on a mortgage whose monthly payment, combined with your insurance and property tax costs, exceeds 30% of your take-home pay.

It doesn’t matter how much of a mortgage you ultimately get approved for. Housing is the typical American’s greatest monthly expense, and by sticking to that 30% threshold, you’ll be keeping your spending at a reasonable level, thereby giving you ample room in your budget to not fall behind on other bills and obligations.

3. Stock investments tend to pay off in the long run

You’ve probably heard that rather than store all of your accumulated savings in your sock drawer or even the bank, you should invest your money for added growth. Where to invest, however, is a question that can cause many an inexperienced soul to lose sleep. So rather than rack your brain for an answer, here’s a good one: As long as you’re dealing with money you don’t expect to need or use for the next 7 to 10 years, investing in stocks is a solid bet.

The stock market, despite numerous bouts of volatility in its lengthy history, has a tendency to come out ahead in the long run. In fact, in the past 100 years, it’s averaged a roughly 9% average annual return despite a series of corrections and recessions that caused its value to plummet temporarily along the way. This means that if you were to invest $20,000 in stocks today, do nothing, and access your portfolio 20 years later, there’s a good chance you’d be looking at $112,000, assuming the 9% average annual return we just talked about.

Of course, buying stocks isn’t something you should do blindly, but if you familiarize yourself with how to navigate the process, a little effort might go a long way. And if you’re really uncomfortable with the idea of choosing individual companies to invest in, load up on index funds instead. These funds track existing indexes to give you broad exposure to the stock market, and while you’ll still need to read up on their performance, it’s not as cumbersome a process as researching corporations one by one.

Financial decisions don’t have to be painful to navigate. Follow these basic rules, and your brain will thank you for taking a load off.

WHEN IT COMES TO expensive habits worth quitting, smoking should be one of the first on the chopping block. Not only is regular tobacco use bad for your health, it can burn up your finances, too.

“We don’t realize how much far beyond that cost of a pack we’re putting into (smoking),” says Jennifer Folkenroth, national senior director for tobacco control at the American Lung Association. “The reality is, as a smoker, we might not be able to pay our rent on the first of the month, but we will always find the money to buy that pack of cigarettes.”

In addition to the price of a pack of cigarettes, which can run anywhere between $5 to $14, depending on the state, or the cost of an e-cigarette, which can sell for about $15 for prefilled cartridges, there are other surprising costs to smoking as well.

For example, smokers, on average, earn less at their jobs than nonsmokers, according to “Even One Is Too Much: The Economic Consequences of Being a Smoker,” a working paper from the Federal Reserve Bank of Atlanta, which examines this trend and builds on previous research. “On average, smokers’ wages are approximately 80 percent of the wages of nonsmokers,” according to the paper.

Controlling for other characteristics, such as age, education and gender, if you made the decision before age 24 to start smoking, “being a smoker means you will earn less than if you had decided to not become a smoker,” says Julie Hotchkiss, co-author of the paper and research economist and senior adviser at the Federal Reserve Bank of Atlanta. “Just being a smoker, just that decision to become a smoker, is what triggers the wage penalty,” Hotchkiss says.

These lower earnings may be the result of the kinds of qualities smokers do or don’t bring to the job, Hotchkiss says. The choice to smoke itself may correlated with other decisions that affect wages such as attaining a higher education. It’s notable, Hotchkiss says, that this smoking penalty doesn’t vary by how much you smoke. Smokers of one cigarette per day will experience a wage penalty, just like smokers of an entire pack per day do. “It is simply being a smoker that dooms one to less earnings,” she says.

Another potentially overlooked cost for smokers: increased insurance premiums. Individuals who need to find health, life, long-term care or disability insurance on the private market will find that cigarette use increases their monthly premiums.

“When we’re dealing with fully underwritten products, (smoking) is not going to exclude you from getting coverage, but it’s definitely going to make it more expensive,” says Nicholas Mancuso, insurance sales manager at Policygenius, an online insurance sales company. Smoking can increase disability insurance, on average, by 25 percent and more than double the cost of term life insurance, Mancuso says.

And it makes sense: Smokers are more likely to need to tap into their insurance policies since they have an increased risk of developing certain illnesses, becoming disabled and dying prematurely.

Of course, the most severe financial toll from using tobacco arises when smokers contract a smoking-related illness, such as heart disease or various types of cancer, which may require years of pricey medical care or prevent smokers from working in their previous profession. “That’s where the curve becomes extraordinarily steep in terms of cost,” says Dr. J. Taylor Hays, medical director of the Mayo Clinic’s Nicotine Dependence Center in Rochester, Minnesota. Depending on the length and severity of the disease, this is where costs can easily run to the tens of thousands of dollars.

Overall, the total economic costs of smoking in the U.S. from 2009 to 2012 were between $289 and $333 billion per year, according to the Surgeon General’s “The Health Consequences of Smoking – 50 Years of Progress” report. That includes $133 billion to $176 billion in direct medical care costs.

If you want to dodge the excess costs associated with smoking, experts say, the best way is to quit your tobacco habit through support and effective medications. You’ll cease spending on cigarettes, stop destroying furniture with cigarette burns and lessen other related costs. In addition, former smokers have slightly higher average wages than never-smokers, according to Hotchkiss’s working paper, perhaps because the strength it takes to quit smoking is related to traits valued by employers, she says.

Quitting can also help you earn a better rate on your individual insurance policies. You may have to wait two years or so after quitting before you can adjust an individual policy to a nonsmoking rate, but you’ll see cost savings once you do. “If the price is a bothersome thing, look at it as motivation to quit,” Mancuso says.

If you read a lot about how to save money, you may believe that the biggest scourge threatening your financial goals are subscription boxes, latte consumption and envy of the Joneses. Having worked within personal finance with people with modest incomes for nearly 20 years, I have learned that there are even bigger threats looking to sabotage your goals.

It is possible to build wealth with a modest income but it takes a bit more planning and time than a high-income earner. Lower earners need to be as efficient as possible, use a bit of creativity, and avoid these 10 common mistakes to become wealthy.

High-income earners make these mistakes also — and they should be avoided by all.

1. Not optimizing your tax return

One of the biggest mistakes people with modest incomes make is not creating an income tax plan and tax budget.

The common misconception is that tax planning is only for the “wealthy”. However tax planning when you have a modest income is critical. Even if you are in one of the lowest income tax brackets, income taxes can consume 10%, 15% or even more of your income.

For many families, income taxes are their third or fourth largest household expenses. One of easiest ways to free up money is to create a tax plan.

The IRS offers several tax incentives for individuals and families with modest income, such as the retirement savers credit, the premium tax credit, the child tax credit and the earned-income tax credit. Several of these tax credits are refundable. A refundable tax credit can represent free money from the government.

Note: When you qualify for a refundable tax credit, should you manage to reduce your tax bill to zero through other means, then the government could potentially pay you extra money.

Additionally, lowering your taxable income may also help with reducing the amount of income-sensitive student loan repayments, potentially help with college financial aid for you and your dependents and may reduce the amount of self-employment taxes you may pay.

Should you qualify for several income-sensitive programs, the cumulative effect could be much larger than you may think. The problem is too many people with modest incomes either put off doing tax planning or wait until tax season (mid-January to April 15) to review their taxes.

Unfortunately, very little can be done after Dec. 31 to reduce taxable income. Engaging in tax planning throughout the year will help you budget for any tax planning measures that are necessary, and strategically time purchases and deductions.

Tax planning does not need to be overly complicated. You can create a tax plan using free online tools. Simply print out a list of any income sensitive tax incentives you hope to use and compare your anticipated income for the year with the requirements for the program.

2. Paying down debt too aggressively

We have all seen the articles online: debt is bad and loan interest destroys your financial dreams.

Paying off debt is an important goal. However individuals and families with modest incomes need to be careful not to pay off debt too aggressively. Many financial gurus such as Dave Ramsey or Suze Orman would encourage you to prioritize paying down debt before saving for retirement.

While their hearts are in the right place (they don’t want their audience to become slaves to debt), the math does not always favor aggressive debt pay down. Contributions to retirement accounts could be eligible for employer matching, retirement savers credits, and lower out-of-pocket health insurance costs.

Recently, I worked with a family who was paying an extra $10,000 a year on their mortgage and neglecting their 401(k). Creating a tax plan revealed that contributing $10,000 to their 401(k) would save them over $7,500 in income taxes and health insurance costs. Now they are funding the 401(k) and using the $7,500 to pay down the mortgage and will be able to retire much sooner.

Paying down debt too aggressively may lead to more debt. Many savers with modest incomes get trapped into the yo-yo diet version of debt pay down. They pay debt too aggressively, saving too little to for emergencies and they are ultimately forced back into debt at the first hiccup.

Many individuals and families would be better served by paying off debt a bit slower. Try to get the lowest payments and interest rate possible. Each month allocate some money to paying down debt and some money toward building emergency funds. As the debt balance declines and your cash reserves grow, then increase the amount you pay on the debt.

3. Ignoring estate planning

It seems like we are constantly seeing some celebrity in the news who passed away and didn’t have proper estate planning documents. When you see a celebrity estate such as Prince or Stan Lee in the news it’s easy to question why they didn’t have proper documents.

However, everyday people with modest means have similar experiences, it’s just not deemed newsworthy. The reality is death, disability, and dementia complicate not only finances but the family dynamic.

For 20 years I have seen clients parade their adult children through the office, all of whom insist they have no interest in their parents’ finances. The overwhelming majority of people insist their estates will be handled without issues because everyone is in consensus and nothing will go wrong.

Without fail, these families end up having the biggest disasters because the combination of confidence and complacency lead to a failure to plan. Even well-intended families can be ripped apart when forced to interpret vague or nonexistent instructions about how to care for a disabled loved one or distribute an estate.

Do yourself and your family a favor and reach out to a competent estate planning attorney and discuss a living trust and any ancillary documents. Trusts are typically more money than a will, however, even if you don’t anticipate probate being costly, they are often worth every penny.

Not engaging in asset protection

When you visit the estate planning lawyer, you should talk with them about asset protection.

If you have a side hustle, small business, or own rentals, you should talk to a competent professional about asset protection and business structure.

Having the right business structure could protect your personal life savings from lawsuits and potential creditors of the business.

Over and above potentially shielding your personal assets, setting up proper business documents for your could have substantial financial benefits. Setting up a suitable business entity for your ventures can assist with building business credit and may even help with tax planning.

Building corporate credit may help remove business loans from your personal credit, improving your own credit score. Additionally, if your business relies heavily on credit, having established corporate credit helps ensure the company does not get shut down if key founder dies.

5. Buying too little or too much insurance

Often people have either too much insurance or too little.

Any type of insurance, such as life insurance, disability insurance, property and casually, liability insurance is a rainy-day precaution. Effectively, it’s a waste of money until it’s needed. Yet everyone wants to view it through economic lenses.

Higher-income earners and those with more modest incomes often have many different risks, and various capacities for dealing with those risks. As such, they will need to think about insurances differently.

An event that would cause a financial inconvenience for one type of professional may be economically devastating for another. Recently, a colleague of one of my clients was vacationing with his family. He tripped and broke his leg. He is a truck driver and has been out of work for over four weeks. Since the injury wasn’t work related, he was not covered by employer-sponsored disability.

The same injury that puts a truck driver out of work and exhausts his emergency savings would have minimal impact on an IT professional, programmer, or someone who works at a desk.

It is imperative that individuals with modest incomes review what risks they may face and ensure they maintain adequate insurance.

Each year you should consider all your insurance policies, check the limits and deductibles and ensure they are within what you can handle financially. Be sure to cross-shop your insurance with various insurers to make sure you are not overpaying for coverage.

Having more insurance than you need can be costly. With that said, not having insurance when you need it can be even more devastating.

6. Taking advice from the wrong people

Everyone has their own way of managing finances and will have an opinion on how you should manage yours. Usually the advice is to do it just like them. Social media and the internet have afforded these opinionated people not only the ability to share these opinions with the world but also get paid to do so.

The upside is people now have access to all kinds of financial information; however, it also leads to a lot of noise. The noise makes it difficult to ascertain ulterior motives, as well as the accuracy and relevance of the opinions.

We are now living in the era of fake news, fake followings and fake experts. Recently, Drew Cloud, the media’s darling student loan expert, turned out to be a concoction of a student loan servicing company. Corporations pay “influencers” to promote their products, and there is a whole cottage industry of people who sell fake reviews and social media followings.

Consumers of financial advice need to be hypervigilant about who they turn to for information. Make sure anyone you are considering listening to is who they claim to be.

7. Making decisions based on other people’s goals

Everyone wants to know they’re making the right decisions with their finances. They often turn to friends, family, co-workers, or neighbors for advice. However, there is no one size fits all silver bullet financial plan.

Everyone has different financial goals and resources. Using someone else’s financial plan could be the lead to ruin. A plan needs to be customized to consider your health, your goals, and any risks that you face.

Your neighbor with no kids and a sizable pension may be able to be much more nonchalant about market risks than someone who has a family to support and is responsible for producing their own retirement income.

8. Failure to develop a backup plan

No matter how well you plan, life has a way of tossing us curveballs.

A high-income earner with a high savings rate who has been saving for a few years likely has the safety net of being able to take a lower paying job if the economy cools. Modest income workers tend to be more at risk when it comes to changes in the labor market.

Business may cut back on hours or overtime, or even lay off people in response to a recession. Those with more modest incomes may not have the same ability to discount labor to remain in the workforce and be successful.

The best course of action is to develop a backup plan. Keep your resume updated and work on professional development. Investing in yourself is one of the best investments you can make. It increases your income in good times and helps provide security in bad times.

The best time to pursue any certifications or additional training you may need to re-enter the labor market is before you are forced to.

I call these having a margin of safety and career insurance.

9. Allowing family to derail your plans

It is possible to save for retirement on modest incomes and even retire young enough to enjoy retirement. However, the family can be an impediment to reaching your financial goals.

The best financial help you can provide your loved ones is to encourage them to have a healthy relationship with money and develop a financial disaster preparedness plan.

During the financial crisis we learned it wasn’t the market downturn that caused so much devastation. Instead, it was the collateral damage.

The stock market was in free fall, banks were cutting lines of credit or refusing to lend, and businesses were cutting back on spending. The labor market was poor, and many adult children or grandchildren were turning to their parents and grandparents for financial support.

Encouraging your family to develop a financial disaster preparedness plan can help eliminate the need to liquidate your investment at an inopportune time.

Teach your children about money and saving, encourage adult children to maintain an emergency fund, save, and to get proper legal documents including prenuptial or postnuptial documents.

10. Being overconfident

A little bit of worrying is actually good for your finances. When you are overconfident, you often ignore precautions.

Preparing for every situation is impossible. However, you can and should make the most of what could go wrong. The best planning starts with asking what could go wrong with the plan and developing safety nets to ensure you are protected.

Ask yourself, what would happen if you were injured and couldn’t work? How would death or disability impact the household income? What would happen if your hours were cut or you were laid off? If you had to enter the labor market, what would you need? Are your certifications current, and reflect what employers today would be looking for?

Should the market decline, how it would affect your short-term goals? How would it change your long-term goals?

Having answers to what could go wrong is not about working until age 70, as Suze Orman may suggest. Instead, being prepared allows you to retire sooner and provides you with sleep insurance that you know if something goes wrong you will have a plan to deal with it.

Making modest money work for you

It is possible to pursue your financial goals on modest income. However, there is less margin for error.

Making modest money work requires planning ahead for contingencies, focusing on opportunities to free up extra money, and making sure you’re not led astray by the new hottest financial Pied Piper.

Focus on your goals and what you need to do to achieve them, and don’t worry if the path to your financial goals is different than others.

That plate of turkey, mashed potatoes, stuffing, green-bean casserole, cranberry sauce and pumpkin pie doesn’t come cheap.

More than one in four hosts say that Thanksgiving represents a financial strain, according to a survey by LendingTree TREE, -1.09% . That shouldn’t come as a surprise given how expensive hosting a feast for the annual holiday can be.

On average, Americans said they expect to spend $334 to host 11 people this year, including $251 on food and $83 for housewares. Given that the average consumer is expected to spend more than $1,000 during the holiday season on gifts, décor and food, Thanksgiving can be a budget-buster.

Here are some tips from savings experts on how to make the holiday less of a financial strain:

Create a menu — and stick to it

Create a menu so you don’t overshop. Check out promotional giveaways at grocery stores, said Mark Hamrick, senior economic analyst at personal-finance website Bankrate. Some stores, including ShopRite, gift shoppers a free turkey if they spend enough money by a certain date.

Consider making as many dishes from scratch as possible. While premade sides like mashed potatoes or green bean casserole can be time savers, they can quickly blow past one’s budget. Canned pumpkin is cheaper than fresh, and it can be just as tasty when used for a pie.

Avoid the name brands

Supermarket circulars will promise discounts on popular ingredients like cranberries or sweet potatoes, and that will include name brands. Don’t be afraid of going generic. “It’s likely the store brand is cheaper,” said Jen Smith, personal-finance expert at the savings website The Penny Hoarder.

Skip the whole turkey

Turkey, the centerpiece on most Thanksgiving tables, accounts for nearly half of the average family’s food-related costs on Thanksgiving, according to the American Farm Bureau Federation. The average price of a turkey fell 3% from last year to roughly $1.36 per pound for a 16-pound bird.

“If you are having a smaller gathering of, say, six or fewer people, you are probably better off buying turkey breasts or legs instead of a whole turkey,” said Jon Lal, founder and CEO of coupons and cash-back website BeFrugal. (The average turkey costs around $21.71.)

Another option for people who need to save a few bucks: Cook a whole chicken instead. In New York, a whole chicken costs as little as 99 cents per pound, while a whole turkey may cost double that, according to prices available on Instacart.

Don’t cook too much

Along similar lines, Thanksgiving hosts shouldn’t go into the holiday with leftovers in mind. While leftovers help to spread out the cost of the Thanksgiving meal, they also run the risk of going to waste if they’re not eaten in time. One solution: Limit the number of sides and desserts.

“You don’t have to have the entire gamut to have a lavish Thanksgiving,” Smith said.

Consider making it a potluck

This is especially true for the perennial host. “If you are not taking turns hosting, and find yourself always hosting Thanksgiving dinner, a potluck might be a good way to share the hosting responsibility,” Lal said.

Make it a family affair, even among friends. Splitting up the food means that guests can spend as little or as much as they can afford. The potluck does not need to be limited to food. Beverages, paper plates and decorations can also split up among guests.