Archives for November 14, 2019

Most people who start saving for retirement expect things to go well.

However, a number of wrong turns can make it hard for your nest egg to grow.

Recent research at Boston College found that a 25-year-old with a median income who contributed regularly to his or her 401(k) account starting in 1981 — when the plans first took off — would have accumulated around $360,000 by age 60. Yet the typical 60-year-old has under $100,000 saved.

Here are some of the mistakes people make along their savings journey and tips on how to avoid them.

Missing out on the employer match

If your company offers a 401(k) plan, it may also offer a 401(k) match.

The average employer 401(k) match reached 4.7% this year, according to Fidelity, which manages more than 30 million retirement accounts.

Yet more than a third of workers contribute below the match rate, “leaving money on the table,” said Anqi Angie Chen, assistant director of savings research at the Center for Retirement Research at Boston College.

Try to gradually increase your savings as time goes on, particularly if you get a raise, Chen said.

“Many plans allow auto escalation, which means your contribution amount will be increased by 1% or so every year,” said Arielle O’Shea, a retirement and investing expert at personal finance website NerdWallet. “Opt into that – you might find you don’t miss the money.”

Failing to regularly contribute

Skipping just a few years of contributions to your 401(k) can significantly reduce the amount you retire with, said Katie Pehrson, senior wealth planner for Wells Fargo Private Bank.

For example: If a 35-year-old saves $19,000 a year — the current annual limit for savers under 50 — until age 65, they’ll end up with $1.34 million. (That assumes an annual return of 5%.)

But if the person missed just three years of contributions — at 44, 54 and 64 — they’d have a balance closer to $1.24 million, according to Pehrson.

“Just missing contributions of $57,000 can have a $100,000 impact in the long run,” she said. (That’s, of course, because of losing out on compound interest.)

It’s important to make saving a habit, O’Shea said.

If you’re between jobs and can’t make 401(k) contributions, try to continue to set aside some money in an individual retirement account, she said.

“Even if you contribute $10 or $20 a month, it keeps your savings momentum going,” she said.

Dipping into your account

People often cash out their 401(k)s when they leave a job or need money to pay a debt or unexpected expense, O’Shea said.

“If you do, you’ll owe taxes and penalties that can wipe out a fourth of your balance,” she said.

To avoid this hit to your retirement savings, work to build up a healthy emergency savings fund. It’s better to stop or scale back your 401(k) contributions for a period than to dip into the plan early, O’Shea said.

Even a loan from your plan is typically better than an early withdrawal, O’Shea said. Keep in mind: You’ll need to repay the loan within a certain period or risk the IRS treating it as an early withdrawal.

“Dipping into qualified retirement savings is generally a last resort,” Pehrson said.

Low returns

Fees on your 401(k) can add up to over $200,000 over a lifetime, according to NerdWallet.

“Anything you pay to fees, no matter how small, eats into your returns because that fee is money that wasn’t invested,” O’Shea said. Experts generally say any fees above 1% are a “ripoff.”

One study found that in 16% of 3,500 plans analyzed, fees were so high that they “consume the tax benefits of investing in a 401(k) for a young employee.”

If you have a particularly expensive 401(k), you may want to contribute enough to get your full employer match, but save any other money in an individual retirement account, “where you’ll have a much larger investment selection so you can seek out low-fee funds,” O’Shea said.

And make sure you take a careful look at the investment options for your 401(k). Sometimes the default option “may not be the best option for you,” O’Shea said.

LIVING DEBT-FREE IS A common goal, but it’s no easy feat if you’re living paycheck to paycheck. In fact, in your effort to steer clear of debt, you could make mistakes that make it more challenging to reach your goals. So if you’re striving to eliminate debt – or avoid it altogether – don’t fall for these common pitfalls.

Here are common mistakes to avoid to live debt-free:

• Skimping on saving.
• Giving up on investing.
• Ditching credit cards.
• Neglecting insurance.
• Overspending.
• Forgetting to create and stick to a budget.

Skimping on Saving

While nobody wants to be saddled with debt, paying off the money you owe at the expense of putting money aside in a savings or retirement account isn’t an effective long-term strategy, says John Bergquist, senior founding partner at Common Sense Financial, a financial planning firm in South Jordan, Utah.

“I know some talking heads in the financial world preach against this and recommend you put everything into the debt plan, but there are dangers in doing this,” Bergquist says. If it takes a long time to pay off your debt, Bergquist points out that you’re missing out on compound interest and all that it can do for a retirement account. And, if nothing else, a savings account can help keep you out of debt, he says. “We need the savings to pay for all those unexpected expenses along the way, so we don’t add to our debt repayment plan and stay the course,” Bergquist says.

Zach Ashburn, president of Reach Strategic Wealth, a financial planner in Winston-Salem, North Carolina, also stresses the importance of having a well-stocked emergency fund. “Whether you’re getting out of debt or living without using debt, your emergency fund is the buffer between you and new debt,” Ashburn says.

Most experts also recommend setting up automatic transfers from your checking to your savings account to build an emergency fund. Experts also suggest putting the money aside in a different bank savings account to allow your balance to gradually grow each month.

Giving Up on Investing

If you’re mired in debt, likely the last thing on your mind is investing. However, too many people focus on not getting themselves into debt or more debt and forget about building wealth, Ashburn says.

“When your primary goal of living debt-free is both ambitious and tied to a vision of freedom, it can be easy to get tunnel-visioned,” Ashburn says. He advises building savvy investment habits into your financial plan.

Ditching Credit Cards

If you’ve had bad luck with credit card debt, you may be tempted to swear off credit cards forever. While you may want to ditch your credit card, paying with plastic can be an effective way to bring up your credit score. Ultimately, a high credit score is the best way to get low-interest loans on a house and a car.

In short: Use credit cards responsibly, such as never buying more than you can afford to pay off every month and getting into the habit of not carrying revolving debt. That way, if you need to buy a home or a car or take out a personal loan, you should be able to get one with a low-interest rate. If you do have credit cards and are trying to get your debt down, remember to pay more than the minimum monthly payment; if you only pay the least you need to pay, you’ll remain in debt far longer.

Neglecting Insurance

Insurance is designed to keep you from paying exorbitant costs to fix a problem if something goes wrong – and then going into unnecessary debt. And that’s a real concern. For instance, according to an American Cancer Society report released earlier this year, 137.1 million Americans had medical financial hardship in the last year.

But it isn’t just medical debt you need to be concerned about. If you’re underinsured and you get into a car accident, you could end up spending a small fortune to replace your vehicle. That could be very problematic, especially if you are already in debt.

“One of the common mistakes I see among people who strive to live debt-free is that they lack adequate insurance coverage,” says Henry Hoang, a certified financial planner and founder of Bright Wealth Advisors, a registered investment advisory firm in Orange County, California.

“Being frugal is a key trait to living debt-free for most, but when taking it too far at the expense of not properly managing risk, it can backfire,” Hoang says. “Whether it be personal, auto or commercial lines of insurance, people who are debt averse may commonly skimp on their coverage amounts or opt not to purchase important policies to save on premium dollars. Unexpected illnesses or accidents can set families back beyond what their liquid savings can cover.”

Disability insurance or business interruption insurance might also be important to have, Hoang adds. He says that he had a client who was a dentist with her own practice. She had a ski accident and injured her arm and couldn’t work on patients for a few months. She was properly insured and was able to heal without seeing her practice implode. After that, Hoang says he began talking with every client about the importance of managing risk and being properly insured.

Overspending

You don’t have to constantly cut corners to avoid going into debt, but you do need to curb impulse purchases. According to a survey commissioned last year from Slickdeals, a coupon and deals website, respondents reported spending an average of $450 a month on unplanned purchases. That comes to $5,400 a year. Avoid overspending by practicing self-discipline, creating a concrete spending plan and pinpointing other ways to reward yourself.

Forgetting to Create and Stick to a Budget

Bergquist says that people who put all of their money into the debt and don’t budget for anything else, “inevitably have some sort of a hiccup on their debt repayment plans and incur unexpected expenses.”

As for sticking to a budget, many experts endorse the 50/30/20 rule. Here’s how it works: Once you receive your after-tax income, spend half of your pay on things like housing, utilities, health insurance, car payments and groceries. About 30% of your paycheck should go toward things you want but don’t need, like streaming entertainment services, and 20% should go toward savings and paying off debt. However you budget, it doesn’t matter how you split your expenses up, as long as you come up with a system that works for you.

If you have unexpected expenses that you then have to pay for, and it hurts you financially, Bergquist says that you might then get discouraged. “So often they throw their hands in the air and exclaim, ‘I will never get out of debt,’” The danger, he explains, is that some people then stop trying to get out of debt.

Bergquist also endorses keeping something in the budget for fun and some of the extras in life. “If we, as human beings, were just computers and it all came down to simply unemotional numbers on a paper, then focusing only on a debt plan and then adjusting it as things change might just work,” Bergquist says. “However, we need the little successes along the way to help encourage us to stick with the plan until it comes to fruition and we are out of debt.”

In other words, if you want to be debt-free, like working toward any ambitious target, you need to do it in moderation and work incrementally, making small but significant steps toward concrete long-term goals.

Many Americans are in debt and live paycheck to paycheck.

The basic living expenses are trending upward but wages are increasing at a much slower rate. It’s no wonder why money is a common problem for most people today.

According to a MarketWatch article, money is the biggest source of stress for Americans and it is seeping into our work lives. Based on this same article, many of the stress that comes from money may be impacting your health both physically and mentally.

So, how can we improve our well-being by forming a better relationship with our personal finances?

Here are 6 ways to reduce financial stress, so that you can live a more relaxed and healthy lifestyle.

1. Avoid keeping up with the Joneses by practicing gratitude

We often see our friends and peers who seem to be doing very well in life. Out of the blue, we see that they have the biggest house on the block (like HGTV style) and drive the most expensive cars.

We subconsciously think we need to be like them, or even better. So we head out and spend most of our money, or even getting ourselves into debt, just so we can buy those same lavish goods that we can’t afford.

At the end of the day, these material goods are causing us to become financially stressed because we are under the pressure of wanting more and more.

When is “more” ever enough?

The first step to fixing this is practicing gratitude and being happy with what you have. There are so many people who are less fortunate with no access to food, water, healthcare, education, Internet, etc. and would die to be in your shoes!

Instead of carrying a load of debt to keep up with the Joneses, you could be living within your means and saving a percentage of your paycheck for an emergency fund or retirement.

By doing this, your piggy bank will be happier and thank you for appreciating what you already have.

2. Pay yourself first

According to Fidelity, you should aim to save at least 15% of your annual pre-tax income for retirement.

Reducing financial stress and planning for retirement means that you’ll need to start saving now by paying yourself first.

Of course, every individual is different and the savings rate you set will depend on many factors such as your age, when you plan to retire, how much you’ve already saved, and what type of lifestyle you desire in your retirement years.

3. Create a budget and track your income and spending

Learn how to create a budget by tracking your spending. Along with that, understand your spending behavior.

In this step, you’ll want to track all your cash inflows which include any income and your outflows which are your expenses. While analyzing your expenses, try to find areas you can cut back on that won’t reduce your happiness.

For example, your daily Starbucks may make you happy and you decide to keep this expense, but what about those monthly subscriptions like Spotify that you forgot about and barely use?

By creating a budget and understanding where your money goes, you will be able to pay yourself first.

Overall, becoming more organized by creating a budget can help you avoid overspending and financial stress.

4. Make extra money to increase financial stability

Many people are financially stressed because they live above their means by keeping up with the Joneses.

However, some live above their means, not because they are keeping up with the Joneses, but because they just don’t earn enough to begin with.

Either way, finding ways to increase your income or making extra money can substantially improve your financial situation and reduce stress.

Earning more gives you more financial flexibility in many ways such as being able to save more, invest more for retirement, or fund the dream vacation you’ve always wanted.

After all, we all want to be able to afford a nice getaway so that we could relax and come back to work fully recharged, right?

5. Find the right side gig or job that will make you happy

Making extra money for the sake of earning more may not reduce financial stress if it’s something you don’t enjoy.

A quick tip when it comes to earning more is to find the right side gig, job, or business idea that will spark your interest and make you happy.

Being able to earn extra money and enjoy what you do is a win-win. Not only will this reduce financial stress, but it may also make you become a happier person.

Side gigs are all the rave today and creative ideas include starting a YouTube channel, selling on eBay, becoming an AirBNB host or flipping furniture for extra money.

There are tons of fun ideas for you to try when you do a simple search on the Internet.

6. Learn how to build wealth and manage your money

Another way to cope with financial stress is to learn more about personal finance and how to build wealth from nothing.

Before you start building wealth, it is recommended to get rid of all your debts. It’s no doubt that debt causes a lot of stress and problems for families, so be sure you learn how to pay off your debt before you save and invest for your future.

Slashing your debt and having a healthy savings account can help you sleep better at night.

Summary

Being rich and having all the money in the world does not always equate to happiness.

However, preparing for any financial disaster and building a healthy relationship with your money can help reduce financial stress and improve your lifestyle and well-being.

When you learn how to take control of your money (i.e. not have money control you or your life), you won’t be desperately waiting for the next paycheck to cover your bills. You also won’t lose sleep over a mountain of debt on your shoulders.

As a recap to reducing financial stress, keeping up with the Joneses may not make you happy in the long run. The first step to becoming happy is to be thankful for what you have and practice gratitude. Money doesn’t buy all happiness.

The next step to reducing your financial stress is to learn how to pay yourself first and create a well-organized budgeting plan. This will allow you to analyze your spending behavior and see what expenses you can cut.

At the same time, find ways to increase your income or earn extra money. When you’re looking for creative ways to make extra money, be sure it’s something that makes you happy and you enjoy doing.

Following a solid financial plan and accumulating wealth over the years will allow for a healthy retirement that is stress-free. By the time you know it, you’ll be smiling your way to financial independence.

In brightly colored ads on London’s Tube, investment company Wealthify tries to grab the attention of aspiring savers not by highlighting potential returns or its low barrier to entry. It proffers instead a more unusual pitch to catch commuters’ eyes. “Want to invest ethically?” one ad reads. “Stay true to your values.”

The advertising campaign speaks to the tactics that companies are using to try to attract younger customers to saving and investing, a group which presents a unique blend of difficulties and opportunities.

If generations are shaped by their economic circumstances, then millennials have had a raw deal. Many of this cohort became adults during the financial crisis of 2008 and the subsequent global recession, and are suffering the consequences of when they were born. In the United States, research published last year by the Federal Reserve concluded: “Millennials appear to have paid a price for coming of age during the Great Recession.”

Companies are responding to a generation with shifting financial needs and priorities, and in some cases new interpretations of financial wellness that prioritize personal experience and values over traditional metrics such as investment or homeownership.

The Federal Reserve’s paper showed that millennials in the U.S., loosely defined as those born between the early 1980s and late 1990s, are less well-off than members of previous generations at the same age and have lower earnings and fewer assets. They hold similar levels of debt to Generation X — the previous generation — and more than the baby boomers.

“Millennials are stressed out about their finances,” says Lorna Sabbia, head of retirement and personal wealth solutions at Bank of America. “Even just the definition of what adulthood means to this population is now financial independence. It is no longer about buying a house or getting married; it is all about independence.”

In developed countries, the financial security available to older generations — from good pensions to being able to afford a house — has vanished. In its place have followed fresh burdens, including the insecurity of the “gig economy” and student debt, which has spiraled. Americans owed roughly $1.5 trillion in student loans at the end of March, more than twice the figure a decade earlier, according to the Pew Research Center.

Some age-old questions persist in this new world. One pressing example is how do you persuade a young person to plan for their retirement?

One in four millennials with a 401(k) plan — a U.S. defined-contribution-style pension scheme — has already taken some cash out of their portfolio, Sabbia says.

She adds that companies looking at how to tailor workplace benefit schemes to suit younger people should ignore the “lie” that millennials seek help only online and offer both electronic and in-person services to discuss budgeting, debt and retirement planning. Blending tools such as online tuition videos and debt calculators with professional advice and a review of personal financial situations can help younger customers start saving. Sabbia concedes it is not an easy challenge. “They feel like, ‘I am just trying to get out of my parents’ house, how can I wrap my head round one day not [working]?’”

Among the challenges millennials pose to companies is their low opinion of business, according to surveys, as well as a fresh set of priorities. Deloitte’s 2019 Global Millennial Survey, which canvassed 13,000 people in 42 countries, found that seeing the world was the generation’s top priority. Of those surveyed, 57 percent aspired to travel, compared with 52 percent who wanted to earn a high salary and 49 percent who wanted to buy a home.

“What money they do have they would rather spend on experience than taking on more debt,” says Christine Selph, who led the development of the Deloitte survey.

Millennials are also increasingly wary of the motivations of businesses — the number of respondents who said business has a positive impact on wider society fell to 55 percent this year. Companies are responding by innovating, offering a range of products to lure young customers into saving, investing and watching their spending.

Michelle Pearce-Burke co-founded Wealthify, whose ads on London’s Tube target potential ethical savers. The 25-year-old was working for a wealth management firm and felt there was no service in the market that met her needs.

Wealthify, in which insurer Aviva acquired a majority stake in 2017, offers investors access to low-cost investment plans through individual savings accounts and general investment accounts from just 1 pound ($1.30). It prioritizes accessibility and usability, including via its mobile app.

“I think people feel blocked out of the market; they don’t understand it,” says Pearce-Burke. “We wanted to create a service accessible for everyone. It is amazing when you are speaking to customers how low the level of financial literacy is.”

Business has not sat on its hands. With millennials expected by a PwC estimate to make up more than 50 percent of the global workforce by next year, companies are responding. In the U.S., more than half now offer financial wellness programs, according to Bank of America — double the proportion four years ago.

Several millennials who work in large multinational companies say they feel they’re being offered genuinely useful financial help, but the changing nature of the workplace has also led some young people to rely on more informal practices.

Jack, a 30-year-old who works for a U.S.-founded startup with offices in London that largely employs freelancers, says staff educate one another. “If it is a thing at our workplace it is informal, not institutional,” he says. “When one of us got an app that lets you invest spare change, they came in and told everyone about it. Now everyone is on it.”