Archives for April 25, 2019

April is Financial Literacy Month and financial stress is something the American Psychological Association lists as the number one stressor for all Americans.

That stress can have an impact on our work life. Experts say an eighth of employees’ work flow is spent on personal financial stress. Companies are hiring younger, which financial advisers say is causing millennials to be bogged down with money woes at a rate of almost two times those of their older colleagues.

Dr. Kimberly Greenman with Financially Fitness Employees tells us, “Unfortunately employee’s financial stress is costing their company money. It costs companies on average 250 billion dollars a year in lost employee wages and this is because of the 90 percent of employees who admit to struggling with personal financial stresses and that it impacts their work.”

Millennials are banking on winning the lottery to fund their retirement, according to a new survey by investing app Stash. Sixty percent of millennials think winning the lottery is a reasonable retirement plan, and 18% of all those surveyed are basing their retirement plans on hope of hitting the jackpot someday.

The chances of winning the Powerball lottery are 1 in 292 million. Want to try Megamillions? Odds are 1 in 302.6 million. While it seems like an impossibility, many millennials view retirement savings as similarly far-fetched. According to the Stash report, 76% of millennials are living paycheck to paycheck, and 29% of millennial women have debt and are unable to save. Thirty-one percent of millennial women have no retirement plan at all.

Americans in general are not saving enough for retirement: The average person has just $85,000 saved for retirement, and one third of people have less than $5,000 saved, according to a survey by Northwestern Mutual. That’s far less than the $1 million experts recommend you save, combined with your retirement accounts like a 401(k), Roth or Traditional IRAs or pensions.

Though all of these options involve investing, the Stash survey found one-third of Americans think investing is “too risky.” But Erin Lowry, author of Broke Millennial Takes on Investing, says it doesn’t have to be. She says the key to retirement savings is to start early, and start small.

“I would recommend starting small — [saving] 1%,” she says. “Then every six months, try to increase it by another [percentage point] until you reach your goal. It’s a slow way to reach your goal while not putting so much pain on your month to month budget”

Starting in your 20s and 30s allows time for the money to benefit from compound interest, something Lowry says is crucial to having enough saved for when you’re ready to retire.

“The worst case scenario to me is if you get into your fifties and you’ve done nothing to prepare for retirement, because that means probably three decades have gone by where you didn’t take advantage of compound interest,” Lowry says.

If you thought the Bank of Mom and Dad closed its doors after the kids have grown up, think again.

The average cost of raising a child to age 18 is estimated to be $233,610, according to the U.S. Department of Agriculture.

The expenses continue long after your child has entered adulthood.

Half of parents participating in a recent Bankrate.com survey said that they’ve sacrificed their own retirement savings in order to help their grown children with their finances.

The personal finance site polled 890 adults in April. The participants had at least one child who’s 18 years old or over.

Even parents with higher incomes curtailed their retirement savings. Six out of 10 parents said they’ve jeopardized their retirement savings in order to help their kids pay the bills.

“We found that higher earners are more likely to sacrifice retirement savings,” said Kelly Anne Smith, a Bankrate.com analyst. “It’s a trend spanning across all different households.”

College expenses

Three out of 10 parents with kids who are currently in college or who have recently graduated said they may have to postpone retirement because they pitched in for higher education, according to a 2018 survey by Discover Student Loans.

College expenses only constitute a portion of the bills parents are paying.

More than half of parents whose kids are between 18 and 34 are covering at least part of their cell phone bill, according to data from Bank of America.

Six out of 10 continue to buy food for their grown children, Bank of America found. Nearly 30 percent are paying down Junior’s student loans.

“There are people who will put their retirement on the backburner just to have their kids living at home, even if they aren’t paying rent,” said Doug Oosterhart, a certified financial planner and founder of LifePoint Planning in East Lansing, Michigan.

“In extreme cases, they’re not really saving anything for retirement,” he said.

Reaching a compromise

Instead of abruptly cutting your kids off, Oosterhart recommends gradually turning off support and redirecting that cash toward your retirement savings.

Here are a few steps to consider.

• Set limits: Reach a compromise with your child to keep him or her accountable.

For instance, Oosterhart has a client with three kids in college and a high-schooler. She needs to save for retirement, but she also wants to help her kids with their higher education.

“An interesting idea we came up with involves having the kids use loans for college and then her potentially helping with the monthly payment as the kids demonstrate their work ethic and get jobs,” Oosterhart said.

• Get organized: Tally the bills you’re paying and see where you can rein in the expenses and what your child can cover. “The communication is ‘Here’s when the phone bill payment stops and how you can start paying for it,’” said Oosterhart.

• Be realistic: It’s one thing to save responsibly in a tax-advantaged 529 college savings plan. It’s an entirely different issue if you’re putting money away for your child at the expense of your own retirement.

“You can borrow your way through school, but you can’t borrow through retirement,” Oosterhart said.

Is buying a home Opens a New Window. always better than renting? Should you close credit cards Opens a New Window. after paying them off? If your answers to both questions are yes, you believe some of the most common money myths. April Lewis-Parks, director of education and corporate communications at Consolidated Credit Opens a New Window. , says not understanding how credit works can be very dangerous.

“They go along thinking they are doing the right thing, only it’s really damaging their credit score,” she says. “If you have a low credit score, you are paying more for credit and loan products in the future. It can cost people hundreds to thousands of dollars if they don’t understand how to use credit the right way.”

Lewis-Parks shared some of the most common money myths and how to avoid them:

Lewis-Parks says credit card companies make people believe that all they have to pay is the minimum payment. From their point of view, that is all you need to pay.

“Whatever balance you have on the card will keep accruing interest,” she says. “Everyone should try to pay off their credit cards every month. That is still going to give you an excellent credit score because 35 percent is paying on time.”

Do you have a large purchase on your card that prevents you from paying it all off? Lewis-Parks suggests making a payment every two weeks instead of once a month.

“When you are paying it every two weeks, the interest accrues usually on a daily average balance,” she says. “So you’ll be paying less interest as you are paying the debt off.”

MYTH: Buying a home is always better than renting

Many people believe that buying a home is part of the American Dream. Lewis-Parks warns that purchasing a home is not always the best financial move. She stresses that everyone should look at their own financial situation.

“For some people, if they have a really good deal with renting, it can be much better than trying to own a home, make the monthly mortgage payment, get the insurance and maintain the home,” Lewis-Parks says. “A home can be very costly to heat and keep up with repairs. If you have a great rental and love the area, you won’t have to worry about maintaining the property and the liability is so much less. There are so many other ways to build wealth other than owning a home.”

MYTH: You don’t need to make a 20 percent down payment on a mortgage when buying a home

While you may be able to buy a home with less than 20 percent down, you will have to pay private mortgage insurance or PMI. PMI is insurance you pay every month to protect the lender in the event you default on the loan.

“PMI insurance can be anywhere from $100 a month to $500 a month,” says Lewis-Parks. “That insurance money doesn’t go to paying the balance. It doesn’t go to the principal and it doesn’t go to your interest. It’s basically money into the ether.”

If you are a first-time homebuyer who is having trouble saving the 20 percent, she suggests looking into down payment assistance programs.

MYTH: You should always close credit cards after paying them off

Finally! The day is here when you have paid off your credit card debt. You may be so relieved that you want to close your credit cards and be done with them altogether. Don’t do it. Lewis-Parks says what most people don’t realize is that closing a card affects your credit utilization ratio – which is the amount of your credit card balance compared to the credit limit. When you close a credit card, the utilization rate jumps up and your credit score goes down.

“If you need to get another credit card or some other type of loan product, you are going to pay higher interest,” she says. “Pay off the credit card, just don’t close them. You can destroy them if you don’t want to use them anymore. Place them in the freezer or put them away.”

Length of credit is a big factor in credit scoring. Lewis-Parks says if you’ve had a card for a long time and don’t use it, it’s best not to close it. Keep it open and let the credit history length strengthen your credit score.

MYTH: Secured credit cards are bad

A secured credit card is a credit card that requires you to place a deposit of your own money as collateral for the card. The deposit becomes your credit line for the account. Lewis-Parks says some people mistakenly believe that secured credit cards are less of a product. She says those types of cards can be beneficial if you have a limited credit history.

“You don’t get into debt with a secured card, because you are already giving them the money upfront,” she says. “You are making purchases with your money, but it reflects really well on your credit report and it can help strengthen your credit score.”