June 23, 2016
People often are not sure how to feel about age 40 as a milestone. It has traditionally been thought of as the official entry point into middle age, but it does have some compensations. Compared to 10 years earlier, you are likely to be wealthier, your career should be further along and your personal life is probably more settled.
All those developments entail some changes to your financial situation. While such developments usually happen incrementally, your 40th birthday is a good reminder to take a look at how much your circumstances have changed, and what adjustments you should make as a result.
Personal finance checklist for age 40
Here are 10 financial issues to address once you turn 40:
1. Gain traction on retirement saving plans
According to the National Institute on Retirement Security, average retirement assets more than double between the 35-to-44 age group and the 45-to-54 group. In other words, your 40s is where retirement savings need to accelerate so you can begin to accumulate a significant balance.
2. Take stock of progress on retirement targets
It might be comforting to witness that retirement plan balance growing, but don't look at that balance in isolation. Always look at retirement plan targets to see how you are doing relative to your goals. Even an impressive retirement plan balance looks a lot thinner once you spread it out over a couple decades of retirement spending.
3. Consider if savings targets fit your lifestyle
Say your savings are on target with your retirement plan. Now consider when you formulated that retirement plan. If it was back in your early 30s, both your income and your lifestyle may have improved since then. If that is the case, it may be time to raise your retirement targets so they would support that improved lifestyle. Early on, it is unrealistic to base retirement planning on the assumption that you will achieve financial success, but once you reach that success, it is wise to adjust your plans and the amounts in your savings accounts accordingly.
4. Assess whether your house meets your needs
If you have owned a house for several years, think about your present family situation and decide whether you are likely to stay in that home or move to something that better meets your needs down the road.
5. Look into buying if you currently rent
If you rent your current residence, age 40 is a good time to evaluate whether homeownership is ever going to be in the cards for you. Your conclusions will determine whether you should focus on making your current living arrangement more cost-effective, or whether you should start saving for a down payment on a new home purchase.
6. Research options to save on mortgage
If you are staying in your current home, see if you can save money on your mortgage. Refinancing is one option, but if you are financially comfortable, other options include shortening your remaining mortgage term or paying the loan off altogether. Both of these moves would reduce your long-term interest expense by eliminating years of interest payments.
7. Set a timeline for eliminating high-cost debt
If your mortgage is not the only debt you have to deal with, formulate a plan for paying off that debt over a specific period of time. Otherwise, chronically carrying debt balances is going to steadily erode your wealth, especially with credit card debt.
8. Get serious about college savings contributions
As you move through your 40s, your kids will probably be rapidly approaching college age. At this stage, saving for college is no longer just a matter of putting the odd hundred dollars aside on the kids' birthdays. Saving money needs to be geared toward a specific plan to meet their needs when the time comes.
9. Update your life insurance
Life insurance is intended to help your loved ones replace your income should you die. If you got that insurance back when your income was much lower, chances are you need more insurance now to replace a higher income.
10. Determine job market competitiveness
Don't let your skills get out of date - consider new training if necessary. If you already have in-demand skills, think about whether you are maximizing the career opportunities for those skills.
Ideally, this financial review will find you are starting to reap some of the benefits from financial moves you began making around the time you turned 30. If not, don't worry - it's not too late to start, but it is time to get going so you have some progress to show by the time you turn 50.
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June 20, 2016
Short of getting married or having kids, moving to a new home is one of the most life-altering things you are likely to do. It can impact you socially, professionally, and financially, even if you are just renting a new apartment - and if you are buying a home, the effect is greater still. With all the bother and upheaval involved, you owe it to yourself to make sure that the financial side of things goes smoothly.
7 financial moves to make before changing homes
Before you change your residence, here are seven financial moves you should make:
1. Have a performance review at work
Before you make a new financial commitment in the form of a lease or a mortgage, it is a good idea to make sure you are fully up to date regarding your source of income. If you get the sense that your job may be on thin ice - either because of your performance or the health of the company - it may not be the right time to take on a new financial obligation by moving.
On a more positive note, a good performance review accompanied by a raise or a promotion could allow you to set your sights a little higher when you start looking for a new home.
2. Check out the job market in your new area
Don't move to a new town without determining how strong the job market is there. At any given point in the economic cycle, there can be huge differences in job prospects from one place to another. Variances in employment for specific occupations are likely to further amplify regional differences.
Once you buy a house or commit to a lease, you are somewhat locked into whatever job opportunities are available nearby, so it makes sense to get a read on those opportunities before you make a move.
3. Follow the local housing market
Most people don't pay much attention to rents or home prices until they are actively looking for a new place. This can leave you with a very narrow window on local housing costs. If you spend some time looking at rents or home prices in your target area before you actually have to make a decision, you will get a much better feel for whether a given property is a good bargain or overpriced.
You might also spot differences from one neighborhood to another that could clue you in to an up-and-coming, but still reasonably priced, part of town.
4. Build up your savings account
Face it - moving is a drain on cash. Renters are likely to have to make a security deposit, and homebuyers face down payments and closing costs. Trying to raise money in a hurry can end up costing you, whether it is because you have been forced to sell stocks at the wrong time, make an early withdrawal from a retirement plan, or break into a certificate of deposit before the CD reaches its maturity date.
Getting an early start on building up money in a savings account or money market account can make coming up with cash when you need it much less disruptive.
5. Check your credit record
If there is a problem with your credit record, whether because of previous financial problems or a reporting mistake, it can take a while to clear it up. This does not just matter for perspective homebuyers who will be applying for a mortgage as many landlords check the credit records of their would-be tenants to see how financially reliable they are.
So, it is better to find out about any negative marks on your credit report when you still have time to do something about it.
6. Compare lenders
If you are getting a mortgage, do some comparison shopping. Differences in mortgage rates may seem trivial because they are measured in fractions of a percent, but when you apply those differences to a large sum of money over 30 years of interest payments, they really add up.
7. Talk to your insurance agent
Insurance rates can vary greatly from one neighborhood to another, so run any possible new address by your insurance agent to see what impact it might make on insurance costs. This isn't just an issue for homeowner's insurance as your auto insurance can also be affected by where you live and whether you park in a garage or on the street.
Face it - moving can be expensive, but taking these seven financial steps can help ensure that it does not turn out to be any more costly than it needs to be.
Comment: What are you doing to prepare for your next move?
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June 17, 2016
While the Federal Reserve took no new action following its meeting June 15, there have been significant developments in the economy that could impact bank rates and customers. In concluding its meeting, the Fed decided to leave the target rate for interest rates between 1/4 and 1/2 percent. This means the Fed made no changes since a modest 1/4 percent rate hike in December 2015.
The major economic trends the Fed focuses on have effectively flipped in recent months, leaving the Fed with a monetary policy dilemma. This also affects consumers with some potential financial problems related to interest rates.
Slow job growth, rising inflation complicate Fed response
The Fed has consistently stated that its primary goals are maintaining a strong job market along with a healthy inflation rate of around 2 percent. Over the past couple years, the job market has done its part by consistently putting up strong employment growth numbers. Inflation, however, has repeatedly fallen short of the Fed's target. Lagging inflation has been the leading reason the Fed has gone slow on raising interest rates despite a strong job market.
Recent months have seen job growth and inflation switch roles: Suddenly, employment is disappointing while inflation is on the rise. It is still too early to tell if the slowdown in job growth is just a temporary hiccup or a new trend, but in the meantime it effectively handcuffs Fed policy. It would be very difficult to justify raising rates while employment seems to be stalling, but if the recovery in oil prices continues, inflation could demand a monetary policy response.
Most people would agree that strong job growth and low inflation was a good problem to have. In contrast, the recent direction of weakening job growth and strengthening inflation is a much stickier problem.
Future impact of Fed policy on bank customers
While the Fed took no action on interest rates in its latest meeting, consumers should still be alert for changes in both mortgage rates and in savings account rates and other bank rates. In fact, the current dynamic of slow employment growth keeping Fed policy in place while inflation seems to be rising could very well work against consumers.
In recent years, the saving grace of low deposit rates was that inflation was also very low, and, in some cases, negative. However, if banks continue to follow the Fed's lead and hold off on raising deposit rates even though inflation has started to rise, bank rates may increasingly slip below the inflation rate. For depositors, this means steadily losing purchasing power on their savings.
Since mortgage rates are less directly influenced by Fed policy than deposit rates, it could push mortgage rates higher even while deposit rates stay near zero, if the upturn in inflation continues.
A widening gap between loan and deposit rates and negative inflation-adjusted deposit rates amount to a double disadvantage resulting from inflation strengthening while job growth is weakening. Consumers - and the Fed - should hope inflation and job growth get a little more in sync in the months ahead.
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June 10, 2016
The goal is simple: You want to reach your retirement years with enough money to travel, pursue your favorite hobbies and spend time with your grandchildren without worrying about whether you can pay your energy bill each month.
But how you reach this retirement savings goal is decidedly more complicated.
Financial advisers offer plenty of advice on how to best save for retirement, and the internet is filled with stories that lay out detailed blueprints on how you can meet those goals. But what steps are people actually taking to hit their retirement milestones? MoneyRates spoke to five people about the tools and strategies they are using for retirement. Here's what they had to say.
Kate Dore, 32
Photo courtesy of Kate Dore
Social Media Marketing Specialist
Retirement Funds: IRA, Taxable Investments Account
Saving for retirement has become a passion for Nashville's Kate Dore. The social media marketing specialist regularly lists her net worth on her finance blog, Cashville Skyline. As of early May of this year, Dore had saved more than $53,000 in a Roth individual retirement account (IRA) and more than $21,000 in a taxable investments account.
That's impressive, especially considering that the 32-year-old has, as she says, never been a particularly high annual earner.
"I have always been an average earner," Dore says. "I used to work as marketer in the music business. Now I'm in marketing for social media. I've rarely had access to a 401(k) account. I want to show people that you can get a hold of your money and save for retirement even if you are not making six figures every year."
Dore has had a 401(k) plan exactly once in her working life, when she worked in marketing for a record label. But she only held that job for six months before being laid off. Since then, she's never had the opportunity to invest in a 401(k) retirement savings account.
That hasn't stopped Dore from saving for retirement. Since turning 18, she has invested every year in her Roth IRA. She now maxes out her contribution to this savings vehicle every year. She also makes regular investments in her taxable investments account because maxing out the Roth IRA isn't enough, according to her.
Dore says that she is confident that she is on track to reach her retirement-savings goals.
"When I was in my early 20s, I wasn't earning a lot," Dore said. "But I knew that I had to start saving anyway, even if it was just a little. When I was 18, I contributed $1,000 a year. That was my goal, even when I was waiting tables. Since then, I've tried to contribute as much as I can to that."
Sean Coffey, 35
Photo courtesy of Sean Coffey
Media and Program Evaluation Manager
California Reinvestment Coalition
San Francisco, California
Retirement Funds: Roth IRA, Traditional IRA, 403(b) Plan
Sean Coffey just celebrated seven years of marriage. He and his wife, Elizabeth, have two children under the age of 3. In San Francisco, that means a lot of expenses.
"Our daycare bill in San Francisco is more than our mortgage payment," Coffey says.
Since having children, the Coffeys have slowed the pace of their retirement savings. But that doesn't mean they haven't saved at all. The Coffeys invest every year in a Roth IRA and a traditional IRA. Coffey also contributes to his company's 403(b) plan, which is like a 401(k) plan only for tax-exempt organizations.
Coffey is confident that once his children are in public school, he and his wife will again boost the rate at which they are saving.
"We talked to a financial adviser about a month ago," Coffey says. "The adviser told us that once our kids are in school, we'll feel like we are making money again. In the next couple of years, I don't see us socking away a lot for retirement. Once we are done with paying for daycare and preschool, though, we will ramp that back up."
Coffey said that during the last two years, he and Elizabeth haven't invested more than $1,000 each year in their IRAs. But before they had kids, they had stashed plenty of dollars in these accounts. Because of this, the Coffeys aren't worried about hitting their retirement goals.
"Once the kids are at school, we will maximize our IRAs again," Coffey says. "We were doing that before the kids, and we expect to do it again soon."
Oraynab Jwayyed, 45
Photo courtesy of Oraynab Jwayyed
Founder and Owner
Business Interludes, LLC
Retirement Funds: 401(k), IRA
Oraynab Jwayyed admits that she started saving for retirement late in life, not seriously socking away money until the age of 42.
"I was an independent contractor for most of my adult life, and retirement was never part of the plan," Jwayyed says.
That's changed. Jwayyed returned to school and finished her business degrees. She found her first corporate job, giving her access for the first time to a 401(k) plan. At that time, she contributed about 20 percent of her earnings into her account.
Jwayyed then moved to a new job, working in risk analysis for a mortgage lender. She rolled her first 401(k) fund into an IRA while contributing to the 401(k) account offered by her new employer. Jwayyed has retained a financial adviser to help manage both funds. She contributes 10 percent of her salary to this new account.
"As my salary increases, I plan to contribute more to both funds," Jwayyed says. "I've been told by my financial adviser that my funds are working for me. I should have enough money to retire on when that time comes."
Today, Jwayyed runs Business Interludes, a company dedicated to helping women manage their money. She is also the author of "Starting Over," a book Jwayyed wrote to help women work through financial crises after divorces or break-ups. Jwayyed has experience in this as she had to work through rough financial times after a divorce.
Too many women, even those who were regular savers while married, lose sight of their retirement and financial goals after divorce, Jwayyed said. She wasn't going to fall into that trap, she said.
"I knew that I had to take care of myself financially after the divorce," Jwayyed says. "I had decided it was time to focus on saving for retirement and I wasn't going to let my divorce stop me from doing that."
Jwayyed said that because she started saving for retirement later in life, working with a financial adviser has been key. Her adviser regularly studies Jwayyed's finances and investments to make sure she remains on track to hit her savings goals.
"Every year, we sit down and we go through an investment audit," Jwayyed says. "We look at my portfolio, my assets, everything that I have. We adjust if we have to. We discuss future plans. You have to always adapt as you are working toward retirement."
Abie Cooperberg, 27
Photo courtesy of Abie Cooperberg
New York City
Retirement Funds: Stocks, Real Estate, High Interest Savings Account, 401(k)
When Abie Cooperberg and his wife, Samara, first married, the couple pooled their money into one account with the goal of saving for a home in the New York City area. The only way to do that? They needed to create a detailed budget that would break down every financial detail of their lives, Cooperberg said.
Today, the Cooperbergs use a spreadsheet that they save on Google Drive to track every dollar they spend and every cent they save.
"We live by this," Cooperberg says. "Every single dime we spend goes onto this sheet."
At the end of each month, the spreadsheet tells the couple how much they've saved. They then take that money and move it into a separate savings account. From that point, the couple moves the money to one of three destinations: They invest a portion in the stock market, some in real estate deals and the rest in a high interest savings account.
"We have been doing this for the last year-and-a-half, and we have found this to be the most effective way to monitor and save money," Cooperberg says.
By following their budget, the couple saved 50 percent of their combined post-tax sales in 2015. This money is in addition to the regular 401(k) contributions that both Cooperberg and his wife, who works in public relations, make at their jobs.
Saving might get a bit more challenging. As of the writing of this story, the Cooperbergs were expecting their first baby. But Cooperberg says that the couple expects to continue saving even after adding in the expenses of diapers and baby bottles.
"If we maintain this for the next two years, we should be able to save a lot of money for retirement," Cooperberg says.
Aaron Norris, 39
The Norris Group
Retirement Funds: Roth IRA, Real Estate, Rental Income
Aaron Norris has had an interesting career path. He formerly worked as an actor in New York City. Today, he works as a vice president in the family business, The Norris Group, a Riverside, California-based company that invests in real estate.
And investing in real estate is giving his retirement savings a boost.
Norris owns several rentals -- under 10 -- and his own home. He has converted half of his retirement dollars into a Roth IRA that now holds a rental and several trust deeds. He has hired a professional financial planner to handle the rest of his retirement funds because, as he says, he "doesn't get blamed for not being diversified."
To Norris, a diverse retirement savings portfolio is one that includes investments in physical real estate. Real estate is an especially attractive way to build retirement savings because homes have the potential to increase in value, meaning that when the time comes, Norris can sell them for a profit.
"All of my California rentals have had an exciting run in price," Norris says. "It would be very difficult to ask for a $100,000 raise, despite my dad owning the business. Along the way, the properties continue to generate cash flow, which has been extremely awesome in helping save and buy more assets."
Of course, there's no guarantee that homes will increase in value. This is why Norris says that investors need to do their research, studying an area closely before investing in real estate in any particular neighborhood. But for those investors who do find a property that increases in value over time and generates rental income at the same time? They will be able to grow their retirement savings at a quick rate, Norris said.
"I think investing in real estate is a great tool for building your savings," Norris says. "It's not for everyone, but real estate rentals can be very profitable."
Interested in being interviewed on your retirement savings or personal finance journey? Contact us at email@example.com.
Comment: Which retirement savings accounts or investments do you use to build your retirement fund? Are you close to meeting your retirement savings goal?
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June 9, 2016
Is it better to buy or to lease a car?
That's a trick question because there is no one correct answer. The trade-off between buying and leasing is very specific to the situation. It depends partly on the numbers involved, and partly on the characteristics of the driver facing that decision.
Buying vs. leasing a car: 7 questions to ask
When it's you in the driver's seat, here are seven questions to consider when buying or leasing a car:
1. How soon will depreciation hit?
The steepest amount of depreciation in a car's value comes as soon as you take ownership of a new car. This fact is sometimes used as an argument against buying because you are acquiring an asset that will immediately lose value. In fact, this may put you in the position of owing more than the car is worth in the early months of paying off a loan, since the depreciation is rapid while you only gradually pay down the principal owed.
However, leasing is not necessarily a solution to the depreciation issue. The lease is going to be structured so that the dealer will get back in lease payments more than the car is likely to lose in value during the lease.
2. What is the true cost of owning the car?
Recognizing the depreciation in a car's value is a key to comparing the true cost of leasing as opposed to buying. Suppose you are thinking of leasing for three years, and look at what you would pay to initiate and maintain the lease. Now suppose instead that you bought the car and then sold it after three years. The cost here would include your loan payments plus the value the car is likely to lose over those three years.
To estimate this, look at the same model car from three years ago, and see what its value would be today. Apply the percentage decline in value on that older car to what you would be paying for a new model today, and that will provide you with an estimate of how much you would lose over three years by buying the car.
3. Is cash an option?
Leasing vs. buying comparisons depend in part on the interest rate of the car loan you get. However, if you are in a position to pay cash for the car rather than financing, that changes the comparison by removing the interest expense from buying. It is true that paying cash involves some opportunity cost in the form of lost earnings on that cash, but with savings account rates down near zero, this opportunity cost is drastically reduced these days.
4. Should you invest in a late-model car?
A way to avoid the initial depreciation hit is to buy a slightly-used car rather than a brand-new one. Face it, even a new car becomes slightly-used within a few months anyway. Buying a car with a few thousand miles already on it can vastly reduce the cost of ownership, and this might tip the balance towards buying rather than leasing.
5. Is this new car a need or a want?
Besides buying a used car, yet another option is holding onto the one you already have. If your vehicle still has some life left in it, you can really reduce your automotive costs by waiting a year or two before taking on a fresh set of payments. Why not get out of the pattern of making car payments a constant in your life?
6. How often do you get a new vehicle?
This is an important question. People who hold onto their vehicles for a long time get a lot of low-cost value out of ownership because depreciation is spread out over a greater number of years. On the other hand, if you like getting a new car every couple years, leasing might be a better option for you.
7. How predictable are your driving habits?
The predictability of your driving habits is crucial because leases often carry steep penalties if you exceed a mileage limit or put excessive wear on the vehicle. Make sure you have thought through how much you intend to drive and whether or not you tend to be hard on your vehicles before you commit to lease terms that may subject you to substantial penalties.
This car-owning decision can be as emotional as it is financial. Some people find there is no substitute for the feeling of owning a car, whereas others feel that leasing provides a form of safety net. Still, even if you let one of these personal biases influence your decision, you should still work through the numbers to see how much you might be paying for that bias.
Comment: How did you decide whether to buy or lease your current car?
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