The Discount Myth: Dispelling the idea that spending money is saving money

The “savings” pumped out by our culture are all but unavoidable. Everywhere we go we’re being offered a sale on something, whether it’s the necessities of our lives such as food or the less necessary, such as an extra pair of shoes. It’s easy to get caught up in these sales, look at the original price of the products we’re buying and look at the sale price and think ‘Hey, if I buy this now while it’s on sale, I won’t be spending that extra money when I need to purchase it later.’ In many cases, we begin to tell ourselves (as it’s something we’re told, time and time again by advertisers) that we’re saving money by making these purchases.

 

There are some cases where this actually is a means of saving money. We’ve all heard stories about the coupon queens and kings, who manage to cut their shopping prices down by such a drastic amount that it’s almost unbelievable, but more often than not we’re buying on an impulse. It’s a pervasive, hard to change mindset, but it’s important to take a closer look at just what these “savings” are netting you, and most importantly, to address the language that’s being used to get you hooked.

 

“Saving” is a misnomer—nothing, ultimately, is being saved by spending money. If you buy an item on sale, you’re still buying that item, you’re still spending the money to purchase it—the only actual saving taking place would be refusing to buy it at all. Rather, it’s important to convince yourself that sales aren’t means of “saving” money, they’re a means of spending slightly less money where you would otherwise be spending more. While spending money on sale items will help cut back on your spending habits, it’s still spending, regardless of how little you’re paying for the objects in question.

 
Not only is this important in our personal lives, it’s an important distinction to make for our investments.  While with investing we’re expecting a return, it’s still always a good question to ask yourself, ‘if I’m buying something at a lower price, will it still bring a return?’ Am I still gaining money by spending money? As much as something like a fixer-upper house or cheap stock with a good history will seem like a steal, it’s still money being spent, and it will still require a lot of follow-through to make it anything else.
 

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Maximize Your Social Security Benefits

You have worked hard all of your life. You have raised a beautiful family that you are proud of, and you and your spouse are finally ready to enjoy your golden years together. And yes, you have also planned and saved for these future retirement years. Maybe you planned many years ago or maybe you planned just recently; but either way, you probably factored in the boost offered from your future Social Security benefits. Whatever the boost might be, wouldn’t you rather maximize those benefits if possible? If the answer is a resounding “YES”, then you want to learn about the various claiming strategies, and fully discuss them with your financial adviser/financial planner. The proper strategy can amplify your lifetime Social Security benefits significantly.

An example of one strategy is waiting as long as possible to start claiming your Social Security benefits. The earliest age that a retiree can start claiming these benefits is 62 years old. However, did you know that once you reach your full retirement age (between 65 -67), your social security benefits increase by 8% each year plus inflation adjustments? Wow, the money claimed increase considerably just by waiting a little longer.

Are there claiming strategies that can optimize your Social Security benefits even if you need to start collecting at an earlier age? The answer is “Yes”. Advantageous strategies can be applied to this situation as well when you know how to maneuver through the claiming process… you just need the proper expertise to guide you through the rules. Once you know these rules and know how to navigate confidently through the claiming process, you can apply a strategy that works in your favor, and maximizes this money.

Some of these claiming strategies involve the idea of spousal benefits. Here, spousal benefits can be applied to a “Restricted Spousal” strategy as well as a “File and Suspend” strategy. According to Jim Blankenship, CFP, EA of Forbes Advisor Network, “File and Suspend allows for the lower wage earner to increase his or her benefits by adding the Spousal Benefit, while the higher wage earner continues to delay his or her benefit, adding the delay credits.” On the other hand, the Restricted Application for Spousal Benefits “provides one spouse or the other with the option of collecting a Spousal Benefit, while at the same time delaying his or her own retirement benefit.” All and all, any couple must carefully consider the particular rules pertaining to these strategies in order to determine the appropriate strategy that applies to their specific situation.

Overall, these claiming strategies can cushion your retirement years with thousands of dollars. If you are thinking about navigating through your Social Security claiming process alone, it might be very unrealistic because the rules behind these strategies can be complex and meticulous. Even the employees at the national and local Social Security offices cannot give any advice; therefore, it’s best to seek the help of a financial advisor who has an in-depth knowledge of the best Social Security strategies for retirees. The world today is very different… life expectancy has increased, pensions have dwindled, medical costs have increased, and the economy remains uncertain. Especially now, maximizing your Social Security benefits is necessary because these are unfavorable conditions. So, make certain that you fully learn and understand the rules of each strategy before you chose. You can add thousands of dollars to your retirement funds just by applying the right Social Security claiming strategy for you.

Blankenship, Jim. “Are You Leaving Social Security Money on the Table.” Forbes. 26 November 2012. <http://www.forbes.com/sites/advisor/2012/11/26/are-you-leaving-social-security-money-on-the-table-you-might-be-if-you-dont-understand-and-use-this-one-rule/>

Roberts, Damon. “The Retirement Planning Edge: Maximizing Social Security.” Fox Business. 27 November 2012 <http://www.foxbusiness.com/industries/2012/11/27/retirement-planning-edge-maximizing-social-security/>


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The Tax Season Cometh: Putting your refund to work for you.

With tax season just around the corner and the IRS having just released information that it plans to issue refunds about as quickly as it did last year (9 out of 10 refunds released in under 21 days (www.irs.gov)), now is the time to start considering what you’re going to do with your refund. While the promise of a big check from the government always comes with some temptations (a new grill for the summer, a gift you missed out on over the holiday season) you should always make sure you’re investing that money wisely. While it may seem like a gift, and an easily spent one at that, remember that it’s mostly money from your other sources of income that you were never able to collect on. Your tax return should be treated like any other money put away, safe from withdrawals for a long period of time; take your excitement at getting such a big break in the mail as incentive to be smart and save. Here are a few tips to get you thinking about putting some of your tax refund to work.

Save it! Invest it!: The importance of either putting some of your return into a savings account or investing it cannot be stressed enough. A good rule of thumb, at the bare minimum, is take ~10% of every check you get and put it into a savings account or towards your investments. Before you know it, you’ll have a tax return a few times over waiting for you whenever you need it that can be used anytime throughout the year.

It’s too much and you don’t know what to do with it!: If it seems like you’re getting too much back on your tax return, get in touch with either a tax preparation specialist or financial advisor.  In this case, you can see if there are any changes you can make to your tax documentation in order to get more of that money throughout the year instead of the one big chunk annually. Chances are if you haven’t already done so, you could be seeing a slight rise everywhere else and a reduction in your tax return check.

IRA?: Alongside the 10% rule for saving/investing, it’s also a good idea to look at doing something long-term with some of the money, namely, putting some of it towards an IRA or other form of guaranteed retirement income (annuities, etc). Nothing is more valuable to someone right now than an investment in future stability. Consider asking your advisor, while you’re trying to shrink your tax refund, about recommended retirement investment opportunities.

While it may seem like something of a killjoy at first, making sure that the first thing you do with your tax return is putting some of it in a place that will give you access to it in the future is of utmost importance in tax season. Whether you’re saving, investing, putting it into a retirement fund or contributing to a child or grandchild’s education, just remember that it’s better if your short-term desires wait until your long-term stability is taken care of.  Before you know it, they will have caught up to each-other, and you’ll have made some hefty gains in the meantime.


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How To Dig Yourself Out From Debt

Debt: the deep hole that seems so effortless to dig but impossible to climb out from.  With every new credit plan comes a barrage of danger for consumers already drowning in bills.  It’s a problem that millions of Americans struggle through every day and for many it seems that there is no end in sight.  The pile of debt can get so high that it’s hard to find a place to start, which is often times the most difficult step.  It’s similar to the people on those “Hoarders” shows, when every room is piled high with junk the task can seem too daunting to even begin.  Hours and hours of work hardly make a dent and progress is difficult to achieve.  But for those looking at an uphill climb out of debt, there are ways to make those first few steps easier, and more productive.

 

The first main process on the road to recovery is to recognize and break your bad habits.  There is no point in doing the work to get out of debt if you will simply bury yourself back into it in a year.  You need to take the time to recognize the spending behaviors that have caused the problem in the first place and work to break them. Take a look at your budget for each month, and make more of an effort to live within it. One way to do this: stop using credit cards.  Consumers find it increasingly easy to mindlessly swipe their plastic through every register they see. By limiting yourself to cash or debit accounts you will be more aware of your spending and unable to add to your debt problem in the process.  Once you have curbed the problem you are ready to begin your journey.

 

Step 1:  Map it out.  It’s important to lay out your debt in front of you so you know what you are working with.  The options for these are your choice.  Use a spreadsheet or a chart or a series of pictograms or whatever works best for you to understand your debt.  Separate each account by balance, rate, minimum payment and the number of payments you have left.  This organization allows you to plan out the rest of your steps in order to meet your goals.

 

Step 2: Budget a payment plan.  Once you have all of your debt in front of you, determine how much you can put toward paying off your debt each month.  The goal for this amount should be more than all of the minimum payments on your accounts combined.  This may require some stricter budgeting throughout the month.  Limit your spending wherever you can.  Pack a lunch for work instead of eating out, avoid frivolous or impulse purchases, or turn down your heat at home by a few degrees.  Small changes can give you the boost you need to start to dig yourself free.

 

Step 3: Focus on a few accounts at a time. The first two steps have given you a plan on how to become debt free, but step three is where the work begins. Pick two or three debts and pay off as much as you can above the minimum on those each month.  This will allow you to begin your ascent.  The selection of these few targeted debt accounts shouldn’t be random.  There is an easy order to follow when attacking these balances.  Pay the one with the lowest balance first.  This decision is wise both financially and emotionally as crossing accounts off of your list can simplify your journey and feel super satisfying at the same time.  Second, go after the debts with the highest interest rates.  Paying these down early will help you nip the problem in the bud and keep your debt balance from rising.  Your last goal is to aim for your secured debt that has just a few payments remaining.  If you pay above the minimum you can cut out the final payment or last few payments altogether, giving you a lot more freedom in your monthly budget.

 

The final step is simple: once you have dug yourself out, don’t fall back in.  Often times, the freedom associated with people becoming debt free leads to the same habits and behaviors that caused the debt in the first place.  If you feel the need to reward yourself, do it with a deposit into a savings account or a contribution into your retirement plan.  Keeping yourself debt free and financially stable will be the greatest gift you can grant yourself.


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Seven Questions to Ask Before Investing:

We have all heard of the seven deadly sins, things that you should never do or you risk the harshest of punishments.  But many people don’t know about the seven deadly questions, involving your investments.  There are seven questions that one must answer before dropping a dime on investments, otherwise their money could be lost in the fiery pits of… well you know where.  Making investment decisions isn’t easy, especially if you are just entering the game.  There are a lot of details that many people don’t think about until it’s too late.  So, if you want to avoid the eternal pain of poor investment plans, ask yourself these seven questions.

 

1.       “Why?”  It’s a simple question, but it’s often the hardest one to answer.  Why are you investing, and what do you hope to gain from it?  In other words, you must set specific goals.  Maybe you want to save for retirement, maybe you want to send your kids to college, or maybe you just want some breathing room from everyday expenses.  Whatever the reason, it’s important that you define why you are investing your money and what goals you wish to accomplish in doing so.

 

2.       “What is my time frame?” When can you expect to earn your money back?  This all depends on what kind of investments you make.  Most of the forms of investments which you can cash out of at any time, such as stocks, bonds, and mutual funds, often leave you with the risk of not getting back all that you paid in.  Many other investment options will limit or restrict the opportunities that you have to sell your holdings.  Make sure you are aware of these before you enter the game.

 

3.       “What am I going to get out of it?”  What can you realistically expect to earn on your investments?  Having an unrealistic idea of playing the stock market and striking it rich could leave you simply striking out.  Most earnings, as millions of people encountered in the past few years, are dependent upon the market, and can rise or drop based on market changes.  Other investments, such as bonds, have fixed returns that aren’t as susceptible to market changes.

 

4.       “What kind of earnings will you make?”  Very few times when investing does a wad of cash appear in your mailbox if you’re successful.  Many times your success is paid to you in things like potential for earnings growth, as in real estate purchases. Other times it can come through interest or dividends.  Knowing the details of your payback can help you make better decisions when you are paying in.

 

5.       “What’s my risk?”  And here comes the basic balance in investing, risk versus reward.  The higher the risk, the higher the potential reward.  Overall there is no guarantee that you will get your money back or receive the earnings promised to you.  Unless you have your money in a savings account or a U.S. Treasury security, both of which are backed by the federal government, your money is essentially unprotected.  Make sure that the risk you take is worth the reward that you expect to achieve.

 

6.       “Is my money diversified?”  We can all remember our mothers as some point or another saying, “Now, don’t put all your eggs in one basket.”  Well your mother’s wise words ring true in terms of investments as well.  Certain types of investments do better in certain situations, so by diversifying your investments, you are spreading your eggs across many baskets.  That way if a certain industry tanks or sector is struggling, you will have plenty of other baskets holding your money safe and sound.

 

7.       “What is the effect of taxes on my investments?” It may seem like the nightmare of early April trying to sort out your taxes each year, but taxes are just as critical in making investment decisions.  What you pay into certain investments, such as a Roth IRA, are tax deductible, but there is no tax on the earnings.  Other options, such as Traditional IRAs, work in the opposite way, in that your contributions are not taxed, but your earnings are.  Certain bonds are exempt from state and local taxes, such as U.S. Savings Bonds, while others, such as municipal bonds are exempt from federal income taxes and most state income taxes as well.  Make sure that you are using your investment’s ability to avoid taxes in the most efficient ways possible.

 

Now that you know the questions, it’s up to you to determine the answers.  The important thing to remember is that the best answer to each one is whatever works best for you and your goals.  Take the time to think through your decisions and all the alternatives.  There is no standard pathway to success on the road of investments, but if you take the time to ask yourself these seven questions, it will be a much smoother ride.


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Emergency Funds Are Like Spare Tires…

Emergency funds are like spare tires: you never think about them until you need one.  This is an unfortunate truth for many people who don’t have a rainy day fund saved up for themselves.  Some people fail to see the advantage in creating a fund, while others want to create one, but don’t know how.  Creating an emergency fund is more important, and more simple, than many people believe.

The first thing to cover is why you need an emergency fund.  This question can be answered easily by anyone who has ever needed one.  Life is unpredictable.  The situations that could arise causing a need for extra money are almost endless: divorce, healthcare, car troubles, emergency travel, or, as many people in recent years have encountered, job loss.  Things come up, things that you can’t see coming, and it’s much easier to roll with these punches if you have prepared for them in advance.

The amount needed in this fund varies according to your situation and lifestyle.  Contingency plans are most successful when you plan for the worst case scenario, which in this case, is job loss.  You need to create a monthly budget of your expenses in that case that you suddenly find yourself with no income.  This means your rent, food, utilities, insurance, debt payments, prescription medications, cellphone bill and so on.  The bare minimum amount in your emergency fund should be equal to three months-worth of these expenses.  The overall goal is to have six months of your expenses available to you in the fund.  This may seem intimidating at first, but every little bit helps, so put in what you can over time, and aim for that target number.

Many people think that these emergency funds are best located in a box buried in the back yard or stuffed between their mattresses, but, believe it or not, there are better options.  The main requirement of the fund or account is that is must be easily accessible.  Most emergencies don’t allow for the months or years needed to access money in some investment accounts.  You should be able to access your funds within one business day.  This is the case with traditional savings accounts or money market accounts.  The drawback of these is the lack of growth in those accounts.  There are other accounts that allow moderately quick access, less than 30 days, while still allowing you to earn money from the investments.

One of these options is a bond mutual fund with either a short or immediate duration.  These don’t offer the protection of other accounts, but can bring about modest growth without locking your money away.  Investors must understand that their funds are vulnerable and can expect the value to fluctuate a bit.  Many mutual funds also offer more flexible payouts directly to checking accounts, as well.

Another suggestion in creating an emergency account is to cut into your long term investment contributions.  401(k)’s and IRA’s are critical to your future, in the long term, but if you are walking around with a great long term, and nothing for the short term, you could find yourself in some trouble.  This doesn’t mean you need to take thousands from your retirement contributions, but forty to fifty bucks a month until you have yourself protected isn’t going to drastically affect your plans 30 years from now, but it could be lifesaving in just a few.

One of the easiest ways to protect yourself in an emergency such as a job loss is to take care of what expenses you can eliminate ahead of time.  This means paying off debt.  The debt on high interest credit cards can get a lot more painful if you don’t have an income.  This not only cuts down on your expenses, but if you’re paid up to date, you allow yourself some room if you need to use those credit cards as a source of financing in an emergency.

The two most important aspects of creating an emergency fund is having the foresight to know you might need one and having the discipline to be able to create one.  If you have those two things, the rest is easy.  Just account for your monthly expenses, plan an account to funnel money into, and budget your income to allow that account to grow.


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Running Out of Money


The #1 Fear of Retirees

 

Running out of money remains a big fear of the currently retired as well as the millions of Baby Boomers close to retirement. Uncertainty about the future has never been more real and significant in the minds of these two groups of people. It is interesting that this fear seems to have little bearing on how much money someone has. The wealthier seem to fear running out as much as those who truly do have a reason to be concerned.

 

The biggest cause of this fear is uncertainty about how to invest and the unknown about future returns on investments. The past decade of market volatility has robbed the 401ks, IRAs and personal savings of the much needed funding for a secure retirement. Many have come to face the harsh reality that what they believed to be true about investing has turned out not to be true. That is, the old “buy and hold” approach has turned out to disappoint many who found little or no growth on their money over the past decade.

 

The issue at hand is more than just adequate account balances. Financial security must be considered from an emotional viewpoint before and after retirement. While working, the sense of financial security comes from having a job and a paycheck. Once retired, that sense of security changes dramatically. It now becomes the reality that your financial security comes from how much money you have saved.

 

Resolving this fear of running out of money starts with selecting an advisor who understands both the practical and emotional risks of retirement. This advisor must be experienced in working with retirees. Most financial advisors have a focus in helping their clients accumulate their money. The expertise in managing a client’s savings once retired is a distinctly different. All too often, a trusted advisor who helped a client accumulate their retirement funds does not have the training or expertise to make the appropriate changes in strategy to protect those funds against the risk of longevity.

 

Just as in the area of medicine and your health, getting a second opinion before making an important decision is always beneficial. That opinion may confirm that you are on the right track and thus your peace of mind is secured. Or, you may need to face the reality that what worked to get you to this point, will not be the same plan for your future. Either way, a second opinion is usually well worth the time and effort.

 


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The Road to Retirement: “Are We There Yet?”


Many people preparing for retirement feel like a kid on a road trip. “Are we there yet?”
It’s the common feeling of anyone aiming for a destination.  Unfortunately, for many future retirees it can feel like they are that cartoon character chasing after the sandwich hanging from the stick at their back.  They keep running after it but they never get any closer.  Well a new study by The Center for Retirement Research at Boston College brings both good and bad news for those perpetual chasers.  The good news: you don’t have to work forever.  The bad news: the benchmark age at which the majority of Americans will be prepared to retire at has been bumped back to 70.
It’s no secret that the longer that you work, the more financially secure you will find yourself in retirement.  The age of reaching that financial security varies with the individual based on their circumstances, but the new study shows that 85% of Americans will be financially prepared to retire by age 70.  Overall, the study found that American households fall into a variety of groups in terms of their age when they will be ready to retire.
·         23% will be ready between the ages of 66 and 68
·         17% will be ready between 69-71
·         9% will have to work until at least age 72
These numbers are determined by what are known as the National Retirement Risk Index measures.  These portray the percentage of households that find themselves at risk of being unable to keep up their current standard of living throughout their retirement.

Age 70 provides an attainable goal for many Americans who have envisioned working well into their golden years in order to reach their financial goals.  But if you have set your sights on lounging on the beaches of Boca well before that landmark age, there is hope for you yet.  The study revealed that about half of Americans will be financially secure enough to enter retirement by 65.  Many of you are sitting thinking, “How do I get to be part of that group?”  Well, there are a few things that you can do to finagle your way into the “Sixty-Five Club.”

  • Cost EfficiencyIt’s important to remember that the National Retirement Risk Index measures are based on maintaining your current lifestyle.  A good way to drop your target retirement age is to drop some of your expenses as you enter retirement.  Downsize to a smaller house, save on gas by driving less, buy fewer clothes… you know the drill.  This can be hard for many people who find that their retirement brings more free time, which brings more activities and adventures, which costs more money.  If you commit to being more cost efficient in your retirement, you can be more age efficient in your retirement plans.
  • Increase Your Savings—This doesn’t have to be a huge, life altering increase, but small increments can make a huge difference over time.  Try to increase your savings by just one or two percent each year.  You won’t notice the change now, but you certainly will notice it later.  Ramping up your retirement contributions a little each year could have you living the good life sooner than you think!
  • Become a Part-Timer—This can be a good plan both financially and socially.  Many retirees find it a shock to their system to go from working full time for their entire adult life, to suddenly having nothing but time.  Picking up a stress-free part time job can help you work your way into retirement while keeping you busy and engaged.  Your new job can simply be reduced hours at your current employer, or a completely new and fresh engagement somewhere else.  This part time work can also be a huge boost to your finances, as you continue to bring in a bit of income for the first few years of your retirement.

The bottom line is that changing times have brought about changing circumstances for retirees.  With longer life expectancies and healthier adult years, it can be expected that longer careers will follow suit.  Just remember that the end is in sight, and your hard work and diligence will pay off.  Soon when you ask “Are we there yet?” the answer will be a resounding and confident, “Yes!”

National Retirement Risk Index: How Much Longer Do We Need to Work?


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