Monthly Archives: December 2016

Best Financial Advice You Need in Your 30s

Now that you’re in your 30s, your career is a bit more established and your personal life may be more complex if marriage and kids have entered the picture. You (hopefully) are no longer living paycheck-to-paycheck, but aren’t sure what to do with your extra cash. When you have kids, debt, and your retirement to fund, where is the best place to put your money to work? Someone keeps calling you about buying an annuity or whole life insurance policy. Should you listen to what they have to say?

As a general rule, it’s good to put 50% of your paycheck toward your necessities (including all types of insurance), 30% toward your wants (like cable, dining out, and travel) and 20% toward savings (including paying down debt). (For related reading, see: The Financial Advice You Need in Your 20s.)

You may be able to contribute to all the items listed below. However, if you have to prioritize where to invest your limited resources, review my comments on each item then decide what works best for you.

Necessities:
Life Insurance – If someone is depending on your salary (i.e. kids, elderly parents, or spouse), consider buying term life insurance. It’s relatively cheap and you’re less likely to have health issues now that may prevent you from being insurable later. If you have kids, this is a must. At a minimum, have enough coverage to pay their expenses until age 18. Whole life policies or annuities tend to combine life insurance with investing and charge a high fee to do so. Instead, just buy term life insurance and invest the rest of your money on your own.

Disability Insurance – What would you do if you could no longer work? Could your spouse cover all the household expenses? Could someone else step in to help? If not, consider buying long-term disability insurance. It’s better to get some coverage outside of work, but if you can only get some through work that’s better than nothing. The reason it’s better to have coverage outside of work is if you develop a medical condition that makes it impossible to get insurance, then you leave your company, you will no longer be covered.
Other Insurance – Try to bundle your car/renters/homeowners/umbrella insurance at one company to take advantage of reduced rates. Also, if you get married be sure to pass that information along to your insurance agent for possible lower premiums.
Wants:
Saving for a down payment on a house – This could be part of your “savings” but I’d rather you categorize it as a “want.” Cut back on some of your non-essential expenses to work toward your worthwhile goal of homeownership. Consider opening a separate savings account called something like “My First House” and have a certain amount of each paycheck automatically deposited into it. I recommend a savings account over an investment account because it has no chance of declining in value. (For related reading, see: How to Start Saving for a House.)
Savings:
1. 401(k) with company match – This is a no-brainer. Free money is free money. Contribute to your 401(k) at least up to the point you get your company match. Some companies give you an option to automatically increase your contribution each year. If your company offers this then sign up. You probably won’t notice any change to your paycheck, but it’ll have a huge impact on the size of your account on the day you retire.
2. Pay off high-interest credit card debt – After contributing enough to your company retirement plan to get that free money, focus the rest of your savings allocation on paying off your debt as quickly as possible. Pay the minimum each month for all your cards except for the one that charges the highest interest rate. For that one, pay off as much as you can afford each month. Once that one is paid off, focus on paying off the card with the next highest rate. Continue this strategy until all credit cards are paid off. (For related reading, see: Expert Tips for Cutting Credit Card Debt.)
3. Student loan debt – Although I’m listing it here, this shouldn’t necessarily be your next highest priority. If you’ve got a low-interest loan it might make sense to make your monthly payments but not pay it off early. However, if you have a high-interest student loan pay it off as soon as possible. Remember, student loan debt is one of the few debts not forgiven when filing for bankruptcy. (A Note on Debt: The only new debt you should accumulate is a mortgage. Yes, this includes buying a car. If you don’t have the funds to buy a new car without a loan, it’s probably a car you can’t afford.)
4. Roth IRA – Contributing now, while you’re likely in a lower tax bracket than you will be later in your career, allows you to grow your investments tax-free for a very long time. The longer you hold your Roth, the longer the power of compounding works in your favor. Also, as you get older you may make too much money to be allowed to contribute to a Roth. (2016 Roth contribution limit for those under 50 is $5,500.)
5. 401(k) with no company match – If you’ve contributed as much as you can to your Roth IRA, then by all means continue to contribute to your company’s 401(k) until you reach your yearly contribution limit ($18,000 in 2016 for those under 50). It’s still a good deal since the taxes are deferred until you take the money out in retirement.
6. 529 College Savings Plans for your kids’ college – Yes, this should be your lowest priority. Although it’s great if you have enough money to fund your kids’ college education, it has to take a back seat to funding your retirement. Your kids can get a loan to pay for college, but you can’t get a loan to pay for retirement.

Should Know About Setting Financial Goals for Your Future

Setting short-term, mid-term and long-term financial goals is an important step toward becoming financially secure. If you aren’t working toward anything specific, you’re likely to spend more than you should. You’ll then come up short when you need money for unexpected bills, not to mention when you want to retire. You might get stuck in a vicious cycle of credit card debt and feel like you never have enough cash to get properly insured, leaving you more vulnerable than you need to be to some of life’s major risks.

Annual financial planning gives you an opportunity to formally review your goals, update them (if necessary) and review your progress since last year. If you’ve never set goals before, this planning period gives you the opportunity to formulate them for the first time so that you can get – or stay – on firm financial footing (see How can I set financial goals for the future for more on this).

Here are goals, from near-term to distant, that financial experts recommend setting to help you learn to live comfortably within your means and reduce your money troubles.

Setting Short-Term Financial Goals
Setting short-term financial goals can give you the confidence boost and foundational knowledge you need to achieve larger goals that will take more time. These first steps are relatively easy to achieve. While you can’t make $2 million appear in your retirement account right now, you can sit down and create a budget in a few hours, and you can probably save a decent emergency fund in a year. Here are some key short-term financial goals that will not only start helping you right away, but will also get you on track to achieving your mid- and long-term financial goals.

• Establish a budget.

“You can’t know where you are going until you really know where you are right now. That means setting up a budget,” says Lauren Zangardi Haynes, a fee-only financial planner with Evolution Advisers in Midlothian, Va. “You might be shocked at how much money is slipping through the cracks each month.”

An easy way to track your spending is to use a free budgeting program like Mint (see Mint.com: Top Free Money-Tracking Tools). It will compile the information from all your accounts into one place and let you label each expense by category. But you can also create a budget the old-fashioned way by going through your bank statements and bills from the last few months and categorizing each expense with a spreadsheet or even on paper.

You might discover that going out to eat with your coworkers every day is costing you $315 a month, at $15 a meal for 21 workdays. You might learn that you’re spending another $100 per weekend going out to eat with your significant other. Once you see how you are spending your money, you can make better decisions, guided by that information, about where you want your money to go in the future. Are the enjoyment and convenience of eating out worth $715 a month to you? If so, great – as long as you can afford it. If not, you’ve just discovered an easy way to save money every month: You can look for ways to spend less when you dine out, substitute some restaurant meals for homemade ones or do a combination of the two.

Creating a budget also allows you to see what your essential expenses are, how your spending compares with your income, where you might be able to cut back and how much you can save each month.

• Create an emergency fund.

An emergency fund is money you set aside specifically to pay for unexpected expenses so you don’t have to do things like avoid going to the doctor when you’re sick or drive around with an engine that keeps overheating. To get started, $500 to $1,000 is a good goal. Once you meet that goal, you’ll want to expand it so your emergency fund can cover larger financial difficulties, like unemployment.

Ilene Davis, a certified financial planner™ with Financial Independence Services in Cocoa, Fla., recommends saving at least three months’ worth of expenses to cover your financial obligations and basic needs, but preferably six months’ worth, especially if you are married and work for the same company as your spouse or if you work in an area with limited job prospects. She says finding at least one thing in your budget to cut back on can help fund your emergency savings.

Another way to build emergency savings is through decluttering and organizing, says Kevin Gallegos, vice president of Phoenix sales and operations with Freedom Financial Network, an online financial service for consumer debt settlement, mortgage shopping and personal loans. You can make extra money by selling unneeded items on eBay or Craigslist or holding a yard sale. Consider turning a hobby into part-time work where you can devote that income to savings.

Zangardi Haynes recommends opening a savings account and setting up an automatic transfer for the amount you’ve determined you can save each month (using your budget) until you hit your emergency fund goal. “If you get a bonus, tax refund or even an ‘extra’ monthly paycheck – which happens two months out of the year if you are paid biweekly – save that money as soon as it comes into your checking account. If you wait until the end of the month to transfer that money, the odds are high that it will get spent instead of saved,” she says.

While you probably have other savings goals, too, like saving for retirement, creating an emergency fund should be a top priority. It’s the savings account that creates the financial stability you need to achieve your other goals. If you have to charge every unexpected car repair to a credit card and pay it off over time with interest, you’re losing more to the credit card company every month than you can possibly gain with even the most aggressive investments in a retirement account.

• Pay off credit cards.

Experts disagree on whether to pay off credit card debt or create an emergency fund first. Some say that you should create an emergency fund even if you still have credit card debt because without an emergency fund, any unexpected expense will send you further into credit card debt. Others say you should pay off credit card debt first because the interest is so costly that it makes achieving any other financial goal much more difficult. Pick the philosophy that makes the most sense to you, or do a little of both at the same time.

As a strategy for paying off credit card debt, Davis recommends listing all your debts by interest rate from lowest to highest, then paying only the minimum on all but your highest-rate debt. Use any additional funds you have to make extra payments on your highest-rate card.

The method Davis describes is called the debt avalanche. Another method to consider is called the debt snowball. With the snowball method, you pay off your debts in order of smallest to largest, regardless of interest rate. The idea is that the sense of accomplishment you get from paying off the smallest debt will give you the momentum to tackle the next-smallest debt, and so on until you’re debt free.

Zangardi Haynes says you will likely have to cut spending to pay down debt, and the best categories to consider cutting are dining out, clothing, gifts, extracurricular activities for the kids, hobbies and vacations.

Gallegos says debt negotiation or settlement is an option for those with $10,000 or more in unsecured debt (such as credit card debt) who can’t afford the required minimum payments. Companies that offer these services are regulated by the Federal Trade Commission and work on the consumer’s behalf to cut debt by as much as 50% in exchange for a fee, typically a percentage of the total debt or a percentage of the amount of debt reduction, which the consumer should only pay after a successful negotiation. Consumers can get out of debt in two to four years this way, Gallegos says. The drawbacks are that debt settlement can hurt your credit score and creditors can take legal action against consumers for unpaid accounts. Still, it can be a better option than bankruptcy, which should be a last resort because it destroys your credit rating for up to 10 years.
Setting Mid-Term Financial Goals
Once you’ve created a budget, established an emergency fund and paid off your credit card debt – or at least made a good dent in those three short-term goals – it’s time to start working toward mid-term financial goals. These goals will create a bridge between your short- and long-term financial goals.

• Get life insurance and disability income insurance.

Do you have a spouse or children who depend on your income? If so, you need life insurance to provide for them in case you pass away prematurely. Term life insurance is the least complicated and least expensive type of life insurance and will meet most people’s insurance needs. An insurance broker can help you find the best price on a policy. Most term life insurance requires medical underwriting, and unless you are seriously ill, you can probably find at least one company that will offer you a policy.

Gallegos also says you should have disability insurance in place to protect your income while you are working (see What is disability-income insurance?). “Most employers provide this coverage,” he says. “If they don’t, individuals can obtain it themselves until retirement age.”

Disability insurance will replace a portion of your income if you become seriously ill or injured to the point where you can’t work. It can provide a larger benefit than Social Security disability income, allowing you (and your family, if you have one) to live more comfortably than you otherwise could if you lose your ability to earn an income. There will be a waiting period between the time you become unable to work and the time your insurance benefits will start to pay out, which is another reason why having an emergency fund is so important.

• Pay off student loans.

Student loans are a major drag on many people’s monthly budgets. Lowering or getting rid of those payments can free up cash that will make it easier to save for retirement and meet your other goals. One strategy that can help you pay off your student loans is refinancing into a new loan with a lower interest rate. But beware: If you refinance federal student loans with a private lender, you may lose some of the benefits associated with federal student loans, such as income-based repayment, deferment and forbearance, which can help if you fall on hard times.

If you have multiple student loans and won’t stand to benefit from consolidating or refinancing them, the debt avalanche or debt snowball methods can help you pay them off faster.

• Think about your dreams.

Mid-term goals can also include goals like buying a first home or, later on, a vacation home. Or it could be a boat on which you will take long vacations, now or sometime in the future. Maybe you already have a home and want to upgrade it with a major renovation – or start saving for a larger place. College for your children or grandchildren – or even saving for when you do have children – are other examples of mid-term goals.

Once you’ve set one or more of these goals, start figuring out how much you need to save to make a dent in reaching it. Fantasizing about the type of future you want is the first step toward achieving it.

Setting Long-Term Financial Goals
The biggest long-term financial goal for most people is saving enough money to retire. The common rule of thumb that you should save 10% to 15% of every paycheck in a tax-advantaged retirement account like a 401(k), 403(b) or Roth IRA is a good first step. But to make sure you’re really saving enough, you need to figure out how much you’ll actually need to retire.

• Estimate your retirement needs.

Oscar Vives Ortiz, a CPA financial planner with First Home Investment Services in the Tampa Bay/St. Petersburg area, says you can do a quick back-of-the-envelope calculation to estimate your retirement readiness.

1. Estimate your desired annual living expenses during retirement.

The budget you created when you started on your short-term financial goals will give you an idea of how much you need. You may need to plan for higher healtcare expenses in retirement.

2. Subtract income you (and your spouse) will receive. Include Social Security, retirement plans and pensions. This will leave you with the amount that needs to be funded by your investment portfolio.

3. Estimate how much in retirement assets you will have at your desired retirement date. Base this on what you currently have and are saving on an annual basis. (An online retirement calculator can do the math for you.) If 4% or less of this balance at the time of retirement covers the remaining amount of expenses that your combined Social Security and pensions do not cover, you are on track to retire.

Why 4%? “If you look at the safe withdrawal research, 4% was found to be the highest initial withdrawal rate that has survived all historical periods in U.S. market history, assuming a diversified portfolio of stocks and intermediate government bonds,” Vives Ortiz says. For example, if you started with a portfolio of $1,000,000 and withdrew $40,000 in year one (4% of $1 million) then increased the withdrawal by the rate of inflation each subsequent year ($40,000 plus 2% in year two, or $40,8000; $40,8000 plus 2% in year 3, or $41,616, and so on), you would have made it through any 30-year retirement without running out of money. “This is why you often see 4% as a rule of thumb when discussing retirement,” he says. (See The 4% Retirement Withdrawal Rule: What to Know and What’s the Best Retirement Drawdown Strategy for You?)

“In most scenarios, you actually end up with more money at the end of 30 years using 4%, but in the worst of the worst, you would have run out of money in year 30,” Vives Ortiz adds. “The only word of caution here is that just because 4% has survived every scenario in history does not guarantee it will continue to do so going forward.”

Information About Some Ways to Reach Your Financial Goals

The last few weeks of the year are often a mad rush so we thought this would be a good time to share a checklist of important items to consider well before the calendar year ends. They’re all related to your investments and finances, so that you can reach your goals and dreams faster.

1. Review Retirement Accounts: Are You on Track?
You could increase the funding of your IRA and company retirement plan like a 401(k) or 403(b). Returns generated in IRA and 401(k)/403(b) accounts compound tax-free over their entire life. Avoid taking distributions prior to age 59½, otherwise a 10% early withdrawal penalty may apply.

401(k) and 403(b) accounts allow individuals younger than 50 to contribute $18,000 each year, and individuals 50 and older to contribute $24,000. Some plans allow workers to make additional contributions of after-tax money. For those under 50, the maximum is $53,000. Doing so does not reduce your taxable income, but taxes are deferred on any earnings that the after-tax money makes. Later, some people roll these contributions into a Roth IRA so the money would then grow tax-free.

Traditional and Roth IRAs allow individuals younger than 50 to contribute $5,500 each year and individuals 50 and older to contribute $6,500. Even if you earn too much to contribute to a Roth IRA directly, it may be beneficial to you to open a traditional nondeductible IRA and convert it to a Roth. There is no income limit on traditional nondeductible IRAs or conversions.

2. Start Tax Planning
Review your taxable and non-taxable accounts to ensure they are optimized for tax efficiency. Evaluate if you should delay purchasing mutual fund shares until 2017 to avoid taxes on brand new investments. If you have foreign bank accounts, make sure you comply with FATCA and FBAR (forms FinCEN 114, 8938, 8621, etc.). If you have forgotten, you may look into the Offshore Voluntary Disclosure Program (OVDP) or streamlined procedures.

The federal income tax rates on long-term capital gains and qualified dividends are 0%, 15% and 20%. High-income individuals can also be hit by the 3.8% NITT. It is still lower than the top regular tax rate of 39.6% (43.4% if the NITT applies). Holding on longer to your appreciated securities can lower your taxes. Owning them for at least one year and a day is necessary to qualify for the preferential long-term capital gains tax rates.

Selling the right shares may also lower your taxes. It may be beneficial to you to sell shares that have been held a year or less rather than those held longer. Selling recently purchased shares at little or no gain may be better than selling shares held for more than one year if that sale would produce a significant gain. In that case, you should notify your broker as to the specific shares you want to be sold. Finally, you can also invest in tax-free securities.

3. Rebalance Portfolio
Make sure you have rebalanced your portfolios to keep them in line with your goals, time horizon and risk tolerance. Market movements may have thrown off your portfolio balance between stocks and bonds.

David Swensen, the Chief Investment Officer at the Yale Endowment, in his book Unconventional Success: A Fundamental Approach to Personal Investment performed an analysis that showed optimal rebalancing could add 0.4% to your annual return.

4. Harvest Capital Losses
Maybe it is time to sell some funds, ETFs or stocks to generate some capital losses? Tax-loss harvesting is a method of reducing your taxes by selling an investment that is trading at a significant loss.

Find out if you have any loss carryovers from prior years to be applied against capital gains (from sale of funds, ETF, stocks in your taxable brokerage accounts). If your current year’s capital losses exceed your capital gains, you have a net capital loss. You can use up to $3,000 of that loss ($1,500 if you are married filing separately) to offset other taxable income such as your salaries, wages, interest and dividends. If the capital loss is more than $3,000, you can carry over the excess and apply it against capital gains next year.

5. Check Emergency Fund
Don’t forget to establish or tune up your emergency fund. It is an account that is used to set aside funds to be used in an emergency, such as the loss of a job, an illness or a major expense. This is also a good time to set aside money for the next year’s cash needs.

6. Review Insurance Policies
Do you have a life, disability, long-term care or an umbrella insurance policy? Make sure you and your loved ones are well protected if something happens to you. Your life may have changed (birth, marriage etc.). If you do have enough coverage it is also a good time simply to review the different types of coverage you have. Whole life or variable universal life policies may help you reduce your taxes.

7. Contribute to Health Spending Account
Did you maximize your contribution to your healthcare HSA? The interest and earnings in this account are tax free. The maximum contribution for 2016 is $3,350 for an individual and $6,750 for a family ($1,000 catch up over 55). The contributions are tax deductible and withdrawals are non-taxable if they are used for medical expenses. Over the age of 65 you can withdraw funds at your ordinary tax rate if the distribution is not used for unreimbursed medical expenses.

Fidelity Investments estimates that a 65-year-old couple retiring will need $220,000 for health care costs in retirement in addition to expenses covered by Medicare. The HSA can be a great source of tax-free money to pay those bills. If you don’t have an HSA, make sure that you have spent the entire balance in your Flexible Spending Account.

8. Take Required Minimum Distribution
If you are age 70 1/2 or older, remember to take your required minimum distribution to avoid a potential 50% penalty.

9. Contribute to 529 Plan
Did you contribute to your 529 educational plan for yourself or your child/children? You can contribute $14,000 per year (annual gift tax limit) for each parent or you can pre-fund accounts in a single instance up to five years’ worth of contributions, $70,000 (5 x $14,000). Together, that means a married couple can open a 529 plan with $140,000.

Money saved in a 529 plan grows tax-free when used for eligible educational expenses and some states have additional tax benefits for residents who contribute to a plan in that state.

10. Determine Net Worth
Add up what you own (home, car, savings, investments etc.) and subtract what you owe (mortgage, loans, credit cards, etc.). This will allow you to track your progress year to year. It may also give you some incentive to save more and create a better budget for next year.

11. Check Credit Score
Go to annualcreditreport.com and request a free credit report from each of the three nationwide credit reporting agencies. You’re entitled to one free report from each agency every 12 months.

12. Check Beneficiaries
You can check the beneficiaries on your financial accounts or insurance policies at any time, but it’s a good idea to do this at least annually.

13. Update Estate Plan
New baby? Newly married or divorced? Make sure your beneficiary designations reflect any changes. Don’t yet have an estate plan? Make that a new year’s resolution. Estate planning may include updating or establishing a will or trust that can help avoid public disclosure of assets in probate.

14. Maximize Business Deductions
You may want to increase your participation in passive activities since the rules prevent taxpayers from deducting losses from business activities in which they do not “materially participate.” To meet the material participation standard, there are some tests (e.g., spending more than 500 hours per year in day-to-day operations, performing substantially all the work in the activity, or completing more than 100 hours per year and more than anyone else). It may be very beneficial if you’re expecting a loss from your activity.

15. Spending and Automated Savings: Look Ahead
Did you review your budget and set up automated savings? You may have started the year with a clear budget, but did you to stick to it? Fall can be a good time of the year for your financial checkup and to reflect on your spending and develop a budget for next year.

It is also a very good time to put whatever you can on autopilot Bills, recurring payments, even savings – the more you can put on auto-pay now, the easier your financial life will be next year. With this year’s facts and figures in front of you, it will be easier to plan and prioritize your expenditures for next year.