Archives for December 23, 2018

Using credit cards wisely is more than just avoiding debt.

You need to protect your credit from identity thieves and make sure you’re getting the most from a card’s rewards program.

To help with that, consider these four savvy credit moves.

Freeze your credit reports: A freeze is the best way to prevent identity thieves from opening credit accounts in your name.

Thanks to a federal law that took effect Sept. 21, placing and lifting a freeze on your credit reports is now free. (Previously, consumers in most states paid fees.)

When you request a freeze with each of the three major credit agencies — Equifax, Experian and TransUnion — by phone or online, they must place the freeze within one business day.

And if you ask them to lift a freeze, they must act within an hour. For instructions on freezing your credit, visit kiplinger.com/links/freeze.

Run a credit checkup: If you haven’t checked your credit reports in the past 12 months, visit www.annualcreditreport.com to get a free copy from Equifax, Experian and TransUnion.

Review each for errors or signs of identity theft, such as an incorrect address or a credit account that you never opened.

If you spot an error, contact any lender involved to resolve the issue and file a dispute with each credit agency that’s reporting the mistake. Identity-theft victims can follow the steps at IdentityTheft.gov to have fraudulent information blocked from their credit reports.

Keep tabs on your credit reports by signing up for a credit monitoring service, which scans your reports and notifies you of significant changes.

You can cover all three credit agencies by enrolling in free monitoring at CreditKarma.com, which tracks your Equifax and TransUnion reports, and at FreeCreditScore.com, which monitors your Experian report.

Each service also offers free credit score updates and access to information in your credit reports from the corresponding agencies.

Redeem your credit card rewards: Looking for some extra green for holiday gifts or travel? Check the balance of cash back, points or miles you’ve earned with your rewards credit cards.

You may be able to redeem cash back as a statement credit, a deposit into your bank account or a check. Points or miles are often exchangeable for travel bookings, cash, gift cards or merchandise.

Sign up for a premium credit card: If you’ve been eyeing a premium credit card that’s packed with perks, now is a good time to apply.

These cards often provide a yearly credit toward airline incidental fees, such as for checked baggage or in-flight meals.

If the credit is provided on a calendar-year basis (rather than on your cardmember anniversary), you can claim your 2018 reimbursement for any airline fees you rack up before the end of this year.

Early retirement is a dream for many, but even if you think it’s a possibility for you, that doesn’t mean it’s your best option. In fact, financially speaking, you may be better off not retiring early. Here’s a few reasons waiting to retire may actually be the smart move.

1. You will boost your Social Security payments if you retire on time or later.

Your Social Security benefits are based on your average monthly income during the 35 most prosperous years of your life. If you haven’t worked for 35 years, zeros will be added to the calculation, weighing down your average.

Delaying your retirement may give you an opportunity to boost your Social Security payments if you’re making more money now than you were in the early days of your career.

Waiting to retire may also make it possible to delay Social Security benefits, which will also increase your checks over all. You can begin taking Social Security as soon as you turn 62, but you won’t be entitled to your full benefit if you start this early. The Social Security Administration defines full retirement age as 66 or 67, depending on the year you were born. If you begin taking benefits before your FRA, you will receive a reduced amount per check to account for the extra months that you are receiving benefits. Those who start at 62 will receive 75% of their scheduled benefit per check if their full retirement age is 66 or 70% if their full retirement age is 67.

Conversely, if you wait past your full retirement age to sign up, you’ll increase your benefits. Think of it as a bonus for being patient. This maxes out at age 70, when you get either 124% or 132% of your full benefit, depending on if your full retirement age is 67 or 66. If you expect to live a reasonably long life, you’re better off delaying your benefits because you’ll receive more over your lifetime.

2. Your retirement savings will have more time to grow exponentially.

When you put money into a retirement account, it will grow exponentially, assuming you made smart investments. The longer you leave the money in your account, the larger your nest egg will become, thanks to compound interest on your savings, or compound growth if your savings are invested in the stock market.

To give you an example of how this works, consider a one-time $10,000 investment to your 401(k) made when you were 25. If you’re planning to retire at age 50, that $10,000 will have grown into $73,645, assuming an 8% rate of return. But if you delay your retirement until age 65, that $10,000 investment will be worth $244,000.

Waiting to retire may also help you to delay paying taxes on your earnings. The government requires people who are age 70 1/2 and older to take required minimum distributions (RMDs) from all their retirement accounts except Roth IRAs, in order for the IRS to get tax revenue from these earnings. But if you continue to work past this point, you’re not required to take any RMDs from your current 401(k) until you retire. This gives your savings more time to grow.

3. You won’t need to save as much money in total.

By definition, longer retirements are more expensive than shorter ones. This means that in order to retire early, you’ll have to contribute a larger portion of your income to retirement savings every year. If you make far more money than you need, this may not be an issue, but for most it means accepting a lower standard of living for the present.

If your living expenses amount to $40,000 per year and you delay your retirement by one year, that’s $40,000 less you need to put away for retirement. Take some time to figure out how much you think you’ll need for retirement and then play around with the numbers to figure out how much delaying retirement will save you.

Early retirement isn’t right for everyone. If it’s not an option for you or you’re concerned that it might strain your savings, don’t be afraid to delay your retirement. Even a single extra year in the workforce can make a big difference.

So you want to be wealthy? Welcome to the club. Now, how to get on the road to riches — especially if you’re living paycheck to paycheck.

It’s not complicated to find a path to wealth, and nearly anyone can do it over time, with dedication and discipline. Here’s the task: Spend less than you earn and invest the difference. This means saving some money and using it to buy assets — such as stocks — that produce a good rate of return.

Saving money is essential to building wealth

No matter who you are or how much money you make, you won’t become wealthy if you spend all the money you make. It’s as simple as that. Consider lottery winners and professional athletes, actors, and musicians, many of whom have become briefly wealthy only to squander their riches and be left in debt.

You can’t get wealthy if you spend all you earn because you need money invested to be wealthy. To be wealthy, you need enough money invested to live the way you want without working. Ideally, you’ll save and invest enough money that you can live comfortably off the interest from your investments and the initial amount you invested won’t ever decline. You’re wealthy then because you can enjoy your life, not worry about working, and still leave a legacy to your kids.

This would mean having so much saved that returns produced by your investments give you enough money to meet spending needs for a very comfortable life. If you can do that, then you’re wealthy. But, of course, your investment account balance needs to be big to do that. So you need to spend less than you earn, save money, then invest it so your account can grow to the size you need.

Investing as much as you can helps build wealth more quickly

Simply spending less than you earn and saving the difference in a bank account or savings account could eventually help you become wealthy because your bank account balance would slowly grow and might some day get to the point where you can live off the interest. But, if you just save and don’t invest, it’s going to take a really long time to get to that point — and you may never be able to save enough to get there.

When you invest, on the other hand, your saved money works for you and helps you build the big investment account balance you need to get wealthy.

Say you have $100 invested and earn 10% annual returns. You’d have $110 at the end of year one. Next year, you have $110 invested so you earn 10% on that $110. So your investments won’t just earn you $10, they’ll earn you $11. And the next year, you’ll have $121 invested, which will earn you $12.10.

This keeps happening over and over when you’ve invested your money. And the bigger the amount you have invested — and the greater the returns your investments earn — the more compound interest helps you. So if you want to build wealth and get to the point where you have a huge investment account, the goal is to invest as much as you can, as quickly as you can.

How can you spend less than you earn?

Once you’ve committed to spending less than you earn so you have money to invest, the trick is to actually follow through. To do this, you have two choices: increase your income or reduce what you spend.

And you can work on doing both simultaneously. Some tips to help include:

• Negotiate for regular raises — and save them right away. If your income increases, invest the added money right away before you ever get used to living on it.
• Focus on cutting the big stuff. If you have an expensive car, or your rent or mortgage payment takes up too high a percentage of your income, it’s going to be very hard to cut enough to save a meaningful amount. Consider downsizing or getting a roommate, and commit to purchasing inexpensive used cars instead of costlier new models. Audit your subscriptions and cut the cable cord if you haven’t already. Cut out bad spending habits and things you spend money on, that aren’t necessary.
• Live on a budget. You need to know where your money is going and cap spending in problem areas. To make a viable budget, track spending first. Then decide where you’re spending too much and work with the numbers so you can budget to save at least 10% and ideally closer to 20% of your income.

By following these tips, you’ll have money to invest instead of spending everything you earn.

How to invest your savings

Once you’ve started to save, decide where to put the money so you can grow that big investment account balance.

If you’re saving for something like retirement and won’t need the funds for at least five years or so, the money should be in the stock market. Historically, investing in the market has always been the best way to earn the returns you need to build wealth.

You can research how to pick individual stocks to get your money in the market, or you can build a simple portfolio of ETFs if you want a more hands-off approach. The key is to diversify your investments and not put all your money into one stock or one industry, because that increases your risk of losing big if the company or industry doesn’t perform well.

You can start working on becoming wealthy today

Now you know the secret to becoming wealthy. You can start working on the process today. Just make your budget, start spending less than you earn, and begin investing the difference. You’ll be well on your way to financial success.

With retirement becoming increasingly expensive, saving independently is all the more crucial — especially since Social Security by itself won’t be enough to pay for retirement. Thankfully, there’s some good news in this regard: 401(k) contribution limits are increasing in 2019, which means workers will have a greater opportunity to pad their nest eggs.

Currently, workers under 50 can contribute up to $18,500 a year to a 401(k), while workers 50 and over can contribute up to $24,500. Once 2019 kicks off, these figures will rise to $19,000 and $25,000, respectively. This means that no matter your age, you’ll have an opportunity to sock away an extra $500 next year in your 401(k), and if you save in a traditional 401(k) rather than a Roth, you’ll also knock $500 off your taxable income in the process.

If your goal is to max out your 401(k) in 2019, make sure to take the appropriate steps to defer that additional $500 (it’s probably just a form or request to your payroll or HR department). That said, if you do take advantage of these increased limits, you’ll probably be in the minority, since the average American isn’t apt to even notice the change.

Americans need to do better on savings

Most workers are advised to sock away anywhere from 15% to 20% of their earnings for retirement, and if you have access to a 401(k), you have a solid opportunity to do just that. Most Americans who have 401(k)s, however, don’t come close to maxing out. The average contribution rate for 401(k) plans was 6.8% of salary in 2017 — the same as it was a year before, according to Vanguard. Since the average U.S. worker today earns roughly $46,641 a year, that translates to an annual contribution of $3,172, not including employer matching dollars. And that’s nowhere close to the $19,000 workers that will have the option to contribute next year.

Ramping up your savings game

If you’re an average earner, maxing out a 401(k) plan may not be in the cards for you — at least not right away. After all, to put away $19,000 a year (assuming you’re under 50) would mean to give up over 40% of your income if you earn what the typical American does. That said, there are several steps you can take to do better.

First, look at your budget (or create one if you don’t have one yet) and find some corners to cut. That could mean canceling your rarely used gym membership, dining out less frequently, or unloading a car if you can get along by taking the bus. Next, think about getting a side hustle. Of the millions of Americans who hold down a second job, 14% do so for the express purpose of boosting their retirement savings rates. Lastly, if you’re getting a raise next year, send it directly into your 401(k). This way, you’ll remove the temptation to spend that money elsewhere — and chances are, you won’t even miss it.

The more you’re able to save in your 401(k), the more financial security you buy yourself in retirement. Even if maxing out at $19,000 or $25,000 isn’t an option next year, it never hurts to do a little bit better than you did the year before. In fact, if you were to save an extra $500 a year over the next 20 years, you’d add about $20,500 to your nest egg on top of the amount you were already saving, assuming your investments generate an average annual 7% return. Therefore, while a small increase like $500 may not seem like much at first, it could work wonders for your retirement in the long run.