Archives for March 27, 2019

Millennials face a nasty set of obstacles on their path to financial security. From student loans and stalled wage growth to nosebleed housing costs and care for aging parents, it’s a tough time to be navigating the early years of adulthood.

An anonymous youngster with the troubling “ShortenedLife” nametag knows this all too well, so he made the very millennial decision to ask Reddit’s “Personal Finance” discussion group for tips on how to run a budget that leaves him broke at the end of each month despite his $61,000 salary.

One initial response: Cry me a river. But there’s more to the story.

“I’m currently 24, graduated with a BFA about 2 years ago and now I am currently in a toxic salary paying job and feel seriously stuck and moderately depressed about my life,” he wrote in a post that struck a chord in the community. “By stuck, I mean I feel like my financial situation is significantly preventing me from taking risks, or switching careers, or pursuing my career in a different state.”

ShortenedLife says his after-tax income comes to about $3,550 a month. That’s well above the average income for 24-year-olds, and to his credit, he does manage to contribute 6% to his 401(k), but at the end of the month, he says he’s in the red.

Here’s an overview of his expenses:

As you can see, bogged down by a suffocating student loan of $215,000 along with other fixed costs, he ends up paying out $3,760, putting him firmly in the red. He says he picks up side gigs as a 3-D artist to cover his costs.

“I guess I’m frustrated because I feel like I am always working, day and night and at the end of the month I have absolutely no money left,” he said.

Where’s the fat to trim?

Popular suggestions range from getting a roommate to cutting the monthly car/insurance payment. Others say there are cheaper internet plans and, since ShortenedLife lives in the Midwest, housing should much more affordable.

One even brought up the idea of taking a break from the counselor, but ShortenedLife was quick to explain how essential that’s become for him.

“About 6 months ago, I had a breakdown. I‘d been working 16-hour days for a solid month no break,” he said. “Since it was salary I wasn’t getting anything in return… financially it’s been the same situation. I felt used and unmotivated to continue with my life. I took steps to get a counselor hoping that will help.”

Aside from the practical advice, there were many others who offered up perspective of having lived through the tricky, post-college years.

“You’re 24. It will get better. You’re job just sucks right now but that’s the story when you are that young. Every employer wants blood from you because ‘you are young you can take it,’” writes one reader. “You will 100% be ok. The way your life is set up right now, your 30s are going to be a blast!”

We’ve written before about why you should encourage your kid to open a Roth IRA—they can start building up savings from a young age, benefitting from compounding and learning about saving and investing along the way.

To sweeten the deal, though, consider adding an “employer match” to your child’s contribution: Match them dollar-for-dollar, or whatever you decide, to incentivize more savings.

For a child to open/contribute to a Roth, they must have earned income. But you can gift money to a Roth separately from that.

“The contribution you make to your kid’s Roth IRA can be a gift from you or someone else,” reports RothIRA.com. “Remember to consider the IRS’s gift tax rules. The contributions you make to a Roth IRA for your kid will count against the limit on tax-free gifts you can make to one person, which is $15,000 for 2018 and 2019.” If you gift under that amount, there won’t be any tax paperwork to deal with for either of you. The IRS’s gift guidelines are here (and the IRA contribution limit for 2019 is $6,000).

Alternatively, you could subsidize their contributions (from, say, babysitting, housework or another after-school job) completely.

Roths are perfect for kids because of the long time horizon the investments will have to grow, plus the fact that the earnings will grow tax-free. Consumer Reports breaks it down:

Let’s say you give $500 annually over five years that is invested in a Roth IRA and the account grows at a conservative 4 percent annual rate of return. That $2,500 investment would grow to more than $16,000 in 45 years. If the account grows at an annualized 6 percent, it would be worth almost $40,000.

As CR also notes, the “matching” contributions shouldn’t come for free. You’ll want to talk to your child about the importance of saving and investing, and explain why they shouldn’t just cash out their account when they think they need to. Those will be the truly valuable lessons.

Manhattan is losing wealthy residents, home sales are falling in Westchester County, and real estate prices are flattening in several counties. Those are some of the effects that New York says it’s feeling because of the new cap on state and local property tax deductions.

The painful fallout of the new tax law is getting very real for certain Democratic-leaning states, and that should pave the way to a legal victory against the cap, those states said in recently filed court papers.

Months into tax season, New York, New Jersey, Connecticut and Maryland claim their case to void a $10,000 cap on state and local tax deductions is only getting stronger as the cap’s consequences come into sharp focus.

For example, home sales have slipped in Manhattan and the surrounding areas, while the state is now contending with a drop-off in income tax revenue because wealthy residents are moving to states with lower taxes, according to Manhattan Federal Court papers filed Friday.

“If there were any question” whether the states and their residents would be hurt financially by the cap, “recent developments dispel any doubt,” lawyers for the East Coast states argued.

The four states sued the Treasury Department last July over the $10,000 deduction limit written into the Tax Cuts and Jobs Act that President Donald Trump signed in December 2017. Before the new law went into effect, there wasn’t any deduction limit on state and local taxes.

The limits were meant to “inflict economic harm on the Plaintiff states, with the intent of coercing them into lowering their tax rates and cutting public investments,” the states wrote Friday.

Earlier this month, a MarketWatch analysis found that states that voted for Trump paid less of the federal tax burden, but reaped 56% of the money from the tax cuts.

The Treasury Department says the lawsuit is a loser from the start. It has argued that Congress has far-reaching powers to set tax levels and deduction rules. The cap is part of broader tax changes that reduces individual and corporate tax rates through 2025.

The court papers cited New York’s alleged predicament, where lawmakers are reportedly dealing with a $2.3 billion income revenue shortfall and home sale prices in Gov. Andrew Cuomo’s own Westchester County were off 3% in 2018’s last quarter.

In February, Cuomo called the deduction cap “economic civil war” that helped “red states at the cost of blue states.”

But some of the other suing states, like New Jersey, have said elsewhere they’re dealing with budget fallout from the deduction cap.

In January, United Van Lines said more people were moving out of the Garden State than any other state last year.

Lawyers for the federal government said if individual taxpayers feel wronged they can pay their taxes and sue for a refund; they don’t need the states stepping in to pick a fight, the feds said.

Internal Revenue Service filing statistics don’t break down average refund amounts state by state. IRS statistics show the average refund so far this year, $2,957, is just around the same amount as last year at this time, though more taxpayers had filed by this point last year.

A Treasury Department spokesman did not immediately return a request for comment.

Manhattan Federal Judge Judge J. Paul Oetken has the case.

Ticket prices aren’t taking off.

In fact, airfare is getting cheaper. When you adjust for inflation, the average round-trip domestic airfare in 1995 would have cost you $480, according to government data. In 2018, it cost you just an inflation-adjusted $346 — which means it’s fallen more than 27%. What’s more, it’s been falling for the past few years, dropping from $398 in 2015 to $346 last year.

Average inflation-adjusted domestic round-trip airfare

• 2015: $398
• 2016: $364
• 2017: $355
• 2018: $346

It wasn’t always so cheap to fly. The first commercial flight — which took off from Florida 105 years ago this January — cost $400 when it was purchased. But adjust that for inflation and you’re looking at more than $10,000 to be in the air for just 23 minutes.

In other words, though you may not feel like it, you’re getting those plane tickets for a steal these days. But it often comes at consumers’ expense. Seats are getting smaller — with airlines now cramming 10%-12% more seats on aircraft than they did in the past, says Robert Mann, the founder of R.W. Mann & Company and an airline industry analyst. On top of that, they’re filling flights to the max: Occupancy now approaches 90% on average, he says.

They’re also charging more fees — for things like checked bags or selecting your seat — which allows airlines to keep ticket prices low. In 2017, the top 10 airlines generated $29.7 billion in total ancillary revenue. Compare that to the total ancillary revenue from 10 years ago, $2.1 billion — that’s over 1,300% growth.

Of course, there are other reasons for cheaper airfare: Planes are now more fuel efficient and larger, so they run more cost effectively and with more passengers on them, says Mann. Plus, airlines are getting smarter about eliminating unpopular routes, he adds. And when low-cost airlines like Spirit or Frontier enter a market, that competition can reduce the average good deal by 40%-50% and can push legacy carriers to drop their prices 20%, says Patrick Surry, chief data analyst for Hopper.

Even with all these factors, you’re still paying a decent sum for airfare. That’s because airlines must cover a variety of costs including jet fuel; airport and landing fees; crew and staff costs; maintenance; facilities; commissions on ticket sales; marketing and advertising; insurance; and the planes themselves.

Should you want to save on airfare, experts say that January through the middle of February, when school vacations start, can offer very low fares, as can the period just after Thanksgiving until the middle of December. It also often pays to fly on a Wednesday.