Monthly Archives: November 2016

More Information Personal Finance Resolutions You Need

New Year is almost upon us and that means it will soon be time to start making some resolutions. This year, consider making some financial resolutions to go along with your solemn promises to quit smoking, lose 75 pounds and stop torturing the family dog.

TUTORIAL: Budgeting Basics

Here is a list of resolutions that can help you to get your finances in order.

Live Within Your Means
This is probably the simplest of all steps that you can take to get your financial life in order – and the hardest to actually perform. Start by reviewing your budget over the past year to see where your money actually went. (Be warned: this often leads to some disturbing and painful revelations, as it will reveal how much of your cash went into the register at the local liquor store or other proprietary establishment of your favorite vice.) After this, see where you can cut costs without sacrificing things that you need. Finding a new cable/internet or car insurance provider can often free up about a hundred dollars a month. Budgeting programs such as mint.com can help you do this and provide numerous other services and benefits as well, such as reminders of upcoming expenses.

Start a Retirement Plan
If you are not saving for retirement yet, now is the time to start. Your company retirement plan is a good place to begin saving, especially if your employer offers matching contributions. If you are already participating in your employer plan, consider increasing your contribution percentage or even making the maximum possible contribution, if you can afford it. If you make $40,000 a year, then a 15% contribution equals $6,000. If your employer will contribute 50 cents for every dollar you put in up to the first $3,000, then you have a total of $7,500 per year going into your plan. If you are 35 years old, then that would amount to $225,000 in contributions alone by the time you are 65. If you are already contributing the maximum amount to your company plan, then consider opening a Roth IRA and doing some investing on your own. (For more on retirement, see The Best Retirement Account For You.)

Create an Emergency Fund
Nothing disrupts a well-planned budget like large, unforeseen expenses such as major car repairs, medical bills and legal fees. Resolve to set aside $200 a month every month this year to put into a liquid savings or money market account so that you will be prepared for this type of expense when it comes up. You may need to get an additional part-time job to fund this, but allocating some time for this now may be a very wise investment for you when catastrophe comes calling.

Get Out of Debt
This is one of the greatest financial feats that you can accomplish in a given year. Resolve to take a second job for 12 months and get your car loans and credit cards paid off. Of course, this is a major sacrifice for the year, but the money you save will benefit you for years to come. Paying off your debt is equivalent to getting a major raise, in terms of cash flow. Working an extra 12 hours a week for one year, at $10 an hour, will net you an extra $5,000 for the year. Even if you don’t pay off your debt entirely, you will save hundreds of dollars in interest charges over the life of your loans.

Should Know About Financial New Year’s Resolutions You Can Keep

Did you make any resolutions concerning your personal finances last January? If so, how did you do? Did you attain your financial goals, or was this year a total financial washout for you? While the days leading up to New Years Eve are often spent reflecting on the year gone by, the following days should be spent reflecting on the New Year, reviewing your financial scorecard for the past year, and then look for ways to improve in 2014.

There’s a good chance last year’s resolutions didn’t stick. According to a report from the University of Scranton’s “Journal of Clinical Psychology,” only 8% of us actually achieve our New Year’s resolutions. The good news about New Year’s resolutions is that you get a fresh crack at them each year. Here’s some financial changes you should resolve to make in 2017.

Calculate Your Net Worth
If you haven’t done so already, The New Year is as good a time as any for determining what you’re worth (financially, of course). Calculating your net worth is a key step to assessing your financial health and reaching your financial goals. Looking closely at all your assets and liabilities helps create a clear picture of where you are prioritizing your current spending and saving and where you need to make changes in your spending and saving habits.

It’s a good idea to recalculate your net worth each year to keep on top of your progress towards your financial goals and correct any mistakes you’re making before they create overwhelming debts. Many sites, including Investopedia, offer free tools to help you calculate your net worth. The resolutions you need to make will become more obvious after making this calculation.

Reset Your Retirement Savings
At work, you probably have the opportunity to save for your retirement through a 401(k), 403(b) or 457 plan sponsored by your employer. If so, consider that most people find it easier to max out their retirement contributions by budgeting to contribute a set amount each month.

Employer Plans

If you have access to a 401(k), 403(b) or 457 plan at work, consider instructing your employer to withhold enough through salary deferrals to ensure that you reach the maximum limit each year. If you’ll be 50 or older by December 31, bump that amount to account for the additional catch-up contributions you’re allowed to make. If you are paid on some other frequency, such as weekly or bi-weekly, simply divide the contribution limit by the number of your pay periods for the year.

Of course, you should save only amounts that you can realistically afford, as contributing more than you can afford may result in having to incur debts to cover everyday expenses. To determine how much you can save each period, incorporate your retirement savings into your regular budget.

Are you self-employed? If so, depending on your income, you can contribute to an SEP IRA, profit-sharing plan or independent 401(k) plan. And if you’ll be 50 or older by Dec. 31, the contribution limit jumps for independent 401(k)s, helping you save even more.

Don’t Forget About IRAs

Even if you’re covered under a retirement plan at work, you and your spouse can each contribute to a Traditional IRA or Roth IRA, as long as your combined taxable wages and net self-employment income is not less than the total amount contributed. Anyone 50 or older can contribute an extra $1,000, increasing the total allowable contribution to $6,500, or $541.66 per month. Keep in mind, however, that in 2017, a modified adjusted gross income of $62,000 to $72,000 ($99,000 to $119,000 for married couples filing jointly) puts you in the phase out range for deducting your traditional IRA contributions (these numbers apply if you are covered by a retirement plan at work, limits will be different if you are not, see here for more information).

Update Your Savings and Debt Reduction Goals
Creating easy access to your funds can be quite tempting, and if you are like most people, you will spend money that you can easily attain. Therefore, to help you reach your goal, be sure to transfer amounts earmarked for savings from your checking account to a designated separate savings or investment account that is not easily accessed, making it less tempting for you to spend the money that you have managed to save.

Take a few minutes now to set new savings goals for 2017, including how much you would like to add to your retirement nest egg, your children’s education fund or the down payment on your home. You should also reset how much you plan to pay on your personal loans, debts and home mortgage accounts.

And don’t forget about paying some extra principal toward your mortgage payment each month. By doing so, you’ll earn a risk-free return on that money equal to your mortgage interest rate. Plus, you’ll cut down on the number of years it will take to pay off your mortgage. However, if you must choose between adding to your retirement nest egg and paying extra on your mortgage, talk to your financial advisor to determine which option is more suitable for you.

Other Resolutions
Rebalance Your Investment Portfolio

The previous year was no different from any other year: some sectors over-performed and some sectors under-performed. Chances are that the sectors that did the best last year may not enjoy a repeat performance this year. By rebalancing your portfolio to its original or updated asset allocation, you take steps to lock in gains from the sectors with the best returns and purchase shares in the sectors that have lagged behind last year’s leaders.

Pay Down Your Credit Cards.

If you owe money on your credit cards, determine how much you can realistically afford to pay off during the year. For best results, try not to charge additional purchases on those cards while you’re trying to pay down what you owe. If you have high interest credit card balances, consider whether it would be more beneficial to pay off those high interest debts or to add to your savings.

Review Your Credit Report

Review your credit report, and take steps to repair any negative aspects. Now that you’re entitled to three free credit reports each year, there is no excuse for not reviewing what is one of your most important financial reports, especially since errors in these reports are not uncommon. That said, obtaining a truly free credit report isn’t as easy as some companies claim, so be sure you know all the terms and conditions before requesting a report. A poor credit report could adversely affect the amount you are able to save, as it could result in you paying higher interest rates on loans, which reduces your disposable income.

Review Your Life Insurance and Disability Insurance Needs

As you move through your career, your life and disability insurance need to continue to change. Give some thought as to how much protection you need and compare it to the coverage you currently have through your employer’s benefit package. Consider whether you need more or less life insurance, and whether your needs would be better satisfied by term or permanent life insurance. Also, review your disability insurance coverage to determine whether you have enough coverage.

Know More About 10 Bank-Breaking Money Myths

Unfortunately, one of the factors that will prevent many people from becoming financially successful is a false belief about money. In fact, widespread financial myths can negatively impact both your short- and long-term net worth. Throw away these top 10 money myths, and you’ll avoid the consequences of believing them.

TUTORIAL: How To Manage Credit And Debt

1. If I get a raise that bumps me into a higher tax bracket, I’ll actually take home less money.
Thankfully, this isn’t true. Moving into a higher tax bracket only increases the rate of tax paid on the last dollars you earn. Suppose you’re filing single, your old salary was $30,000 a year and your new salary is $33,000 a year. According to the IRS’s 2007 federal tax rate schedules, when your salary was $30,000, your marginal tax rate was 15%. With a salary of $33,000, your marginal tax rate is now 25%.

The key to unlocking this myth is the word “marginal”. In this scenario, your first $31,850 of income is still taxed the same way it was before you got your raise. With a $30,000 income, your take-home will be $25,891.25. If you make $33,000, you will take home $28,326.25. This is because only the extra $1,150 above $31,850 is taxed at 25% – not the whole $33,000.

2. Renting is like throwing away money.
Do you consider the money you spend on food to be thrown away? What about the money you spend on gas? Both of these expenses are for items you purchase regularly that get used up and appear to have no lasting value, but which are necessary to carry about daily activities. Rent money falls into the same category.

Even if you own a home, you still have to “throw away” money on expenses like property taxes and mortgage interest (and likely more than you were throwing away in rent). In fact, for the first five years, you are basically paying all interest on your mortgage. For example, on a 30-year, $250,000 mortgage at 7% interest, your first 60 payments would total about $100,000. Of that you “throw away” about $85,000 on interest payments.

3. You get what you pay for.
Higher-priced items are not always higher quality. Generic drugs are medically considered to be just as effective as their name-brand counterparts. A million-dollar home that falls into foreclosure and is repurchased for only $900,000 may still have $1 million worth of value. When the price of Google’s stock drops on a random Tuesday because investors are panicking about the market in general, Google isn’t suddenly a less valuable company..

While there is sometimes a correlation between price and quality, it isn’t necessarily a perfect correlation. A $3 chocolate bar may be tastier than a $1 bar, but a $10 bar may not taste significantly different from a $3 bar. When determining an item’s value, look past its price tag and examine its true indicators of value. Does that generic aspirin stop your headache? Is that home well-maintained and located in a popular neighborhood? Then you’ll know when paying the higher price is worth it when it isn’t (and you’ll be on your way to understanding the venerable Benjamin Graham’s principles of value investing, too).

4. I don’t have enough money to start investing.
It’s true that some brokerage firms require you to have a minimum amount of money to invest in certain funds or even to open an account. However, if you wait until you meet one of these minimums, you may get frustrated and have a harder time reaching your goal.

These days, it’s easy to start investing with very little money thanks to the proliferation of online savings accounts. While traditional bank savings accounts generally offer interest rates so low that you’ll barely notice the interest you accrue, an online savings account will offer a more competitive rate based on how the market is currently doing. In 2007, it was common to find online banks offering 5% interest, which is a pretty good return on your low-risk savings account investment when you consider that stocks historically return an average of 9-10% annually. Also, some online savings accounts can be opened with as little as $1. Once you’re in a position to start investing in stocks and mutual funds, you can transfer a chunk of change out of your online savings account and into your new brokerage account.

Alternately, you could open a brokerage account with minimal funds through one of the online trading companies that have cropped up. However, this may not be the best way to start investing because of the fees you’ll pay each time you purchase or redeem shares (generally $5 – $15 per trade). While these fees have been drastically reduced from when you had to trade through human stockbroker, they can still eat into your returns.

5. Carrying a balance on my credit card will improve my credit rating.
It’s not carrying a balance and paying it off slowly that proves your credit worthiness. All this strategy will do is take money out of your pocket and give it to the credit card companies in the form of interest payments. If you want to use a credit card as a tool to improve your credit score, all you really need to do is pay off your balance in full and on time every month. If you want to take it a step further, don’t charge more than a small percentage of your card’s limit because the amount of available credit you’ve used is another component of your credit score.

6. Home ownership is a surefire investment strategy.
Just like all other investments, home ownership involves the risk that your investment may decrease in value. While commonly cited statistics say that housing appreciates at somewhere between the rate of inflation and 5% per year, if not more, not all housing will appreciate at this rate. In fact, it is perfectly possible for your home to lose value over the years, meaning that if you want to sell, you’ll have to take a hit. The only way you’ll avoid realizing a loss in such a situation is if you continue to own the home until you die and pass it on to your heirs.

Even in a less drastic situation, a job transfer, divorce, illness or death in the family could compel you to sell the house at a time when the market is down. And if your house appreciates wildly, that’s great, but if you don’t want to move to a completely different real estate market (another city), the profit won’t do you much good unless you downsize because you’ll have to spend it all to get into another house. Owning a home is a major responsibility and there are easier ways to invest your money, so don’t buy a home unless you are attracted to its other benefits.

7. One of the major advantages of home ownership is being able to deduct your mortgage interest.
It doesn’t really make sense to call this an advantage of home ownership because there is nothing advantageous about paying thousands of dollars in interest every year. The home mortgage interest tax deduction should only be looked at as a minor way to ease the sting of paying all that interest. You are not saving as much money as you think, and even the money you do save is just a reduction in the costs that you pay. Interest tax deductions should always be considered when filing your taxes and calculating whether you can afford the mortgage payments, but they should not be considered a reason to buy a home.
8. The stock market is tanking, so I should sell my investments and get out before things get any worse.
When the stock market goes down, you should really keep your money in. This way, you can ride out the dip and eventually sell at a profit. In fact, stock market lows are a great time to invest even more. Many seasoned investors consider a decline in the market to be a “sale” and take advantage of the opportunity to pick up some valuable investments that are only experiencing a temporary dip. Believe it or not, investors who continued putting money into the stock market during the Great Depression actually fared quite well in the long run.

9. Income tax is illegal.
Sorry, folks. There are quite a few different arguments here, but none will hold up in court. One is that the tax code says that paying taxes is voluntary. Another is that the IRS is not an agency of the United States. The IRS considers all of these arguments to be tax evasion schemes and will punish so-called tax protesters with penalties, interest, tax liens, seizure of property, garnishment of wages – in short, whatever it takes to get tax evaders to pay the full amount due when they’re caught. Most tax protester arguments and the IRS’s rebuttals can be found on the IRS website. Don’t fall for this shenanigan – it will ultimately cost you much more than you were hoping to save by not paying your taxes.

10. I’m young – I don’t need to worry about saving for retirement yet. / I’m old – it’s too late for me to start saving for retirement.
The younger you are, the more years of compound interest you have ahead of you. Compound interest is like free money, so why not take advantage of it? Someone who starts saving and earning interest when they’re young won’t need to deposit as much money to end up with the same amount as someone who starts saving later in life, all else being equal.

That said, you shouldn’t despair if you’re older and you haven’t started saving yet. Sure, your $50,000 nest egg may not grow to as much as a 20-year-old’s by the time you need to use it, but just because you may not be able to turn it into $1 million doesn’t mean you shouldn’t try at all. Every extra dollar you invest will get you closer to your goals. Even if you’re near retirement age, you won’t need your entire nest egg the moment you hit 65. You can still sock away money now and make a considerable sum by the time you need it at 75, 85 or 95.