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9 ways to hurt your finances in your 30s

April 6, 2015

| Money Rates Columnist

Your 20s are a unique time. You may have gotten your first real job, but you may also have few financial obligations, allowing you to spend money -- and make minor financial errors -- somewhat freely.

But your financial life may become very different in your 30s. A mortgage payment could appear in your expenses. Old debts might begin to take a toll. Children may add significant new costs.

That makes your 30s a great time to leave those elementary financial mistakes behind for good. Here are nine money missteps that can derail the financial growth that should mark your 30s.

Mistake No. 1: Keeping the same old financial strategy

Andrew Meadows, consumer and brand ambassador for Ubiquity Retirement + Savings in San Francisco, says 30-year-olds often bring home increasingly large paychecks and have opportunities that weren't available to them 10 years ago.

"One of the biggest mistakes we make is not recognizing that change has happened," he says.

Instead, some 30-year-olds continue living like there is no financial tomorrow -- despite their new ability to both live comfortably and plan for the future.

Kelsa Dickey, owner of Fiscal Fitness Phoenix, an Arizona-based financial coaching firm, says there's no reason to let your old habits define your financial future.

"Your values change as you grow, and your spending should too," says Dickey.

Mistake No. 2: Starting a family without a plan

Getting married and having children aren't purely financial decisions, but they shouldn't be made without consideration of how they will impact your household's bottom line. Being a parent can be stressful enough without the added burden of financial shortfalls.

Meadows suggests couples look at whether they might want to delay having children in order to set more money aside for retirement or otherwise shore up their finances.

Mistake No. 3: Putting your kids' wants before your needs

When the kids do come along, they often bring a variety of expenses, particularly as they get older. Dickey says that while most parents want to give their children the best life possible, no parent should put their kids' wants ahead of their own financial needs.

She says parents need to focus on getting out of debt and funding their retirement before draining the bank account for voluntary kid expenses, such as enrolling in sports or pursuing other costly extracurricular activities.

Mistake No. 4: Overlooking your children's financial education

Another mistake 30-something parents make is failing to talk to their kids about money matters.

"It's so easy to have a conversation once in a while," Dickey says. "It doesn't have to be that complicated."

To help your kids gain critical financial knowledge, use everyday opportunities -- such as visiting an ATM or sitting down to calculate your monthly budget -- to explain basic financial concepts to your children.

Failing to do so might not hurt your finances immediately, but raising financially inept children can lead to significant costs down the road.

Mistake No. 5: Not talking to your parents about money

"We want to do it on our own," Meadows says. "But not talking to the rest of the family about finances is a mistake."

Meadows says that parents of 30-somethings might be able to share useful financial wisdom -- if their children are open to the conversation.

Also, some 30-year-olds may also believe that they are in line for a big inheritance or that money will be coming from their parents to help pay for their children's college expenses. However, without actually discussing these issues, they may be setting themselves up for an unpleasant surprise in the future.

Mistake No. 6: Planning for the best-case scenario

By the time they're in their 30s, people may begin to think life will only get better in the future: Incomes will go up, expenses will go down and their vision of the American Dream will become reality.

"Most people in their 30s are riding that upward wave," Dickey says. "They're not prepared for a setback."

Unfortunately, setbacks are a reality for many workers, whether that comes in the form of a lay-off, disability or natural disaster. Dickey says it's a mistake for 30-somethings to plan their finances around the best-case scenario. Instead, they should hope for the best -- but plan for the worst.

A strong emergency fund can be a good first defense against the unexpected.

Mistake No. 7: Not increasing retirement savings

Ubiquity Retirement + Savings specializes in 401(k) and retirement accounts for millennials, and Meadows says he sees some young adults take the "set it and forget it" style of retirement savings a little too far.

Specifically, he says 30-year-olds may neglect to update the contributions to their plan.

"Retirement savings should evolve along with paychecks," he says. "Make one small change to put more in when you get bonuses and raises."

Mistake No. 8: Trying too hard to impress on social media

In the past, it was called "keeping up with the Joneses." Today's electronic twist on this phenomenon might lead some 30-somethings to squander their raises and bonuses on items designed to impressed their friends on Facebook or other networks.

"It's always the splurging," says Meadows about what he sees as 30-somethings' biggest financial mistakes. "It's getting that crucial promotion and buying that thing you didn't need."

Mistake No. 9: Failing to take budgeting seriously

Dickey says young adults shouldn't worry about creating a yearly or even a monthly budget right from the start. Instead, they should begin with a single paycheck and decide where every dollar from that check is going.

Meadows adds that this knowledge can have the side effect of reducing the number of sleepless nights related to financial uncertainty.

"As long as you know where (your money) going, you'll feel so much better in your day-to-day life," he says.

Progress over perfection

Although avoiding all mistakes is the ideal, Dickey says it's unrealistic to think that you can always manage your money perfectly. Fortunately, she says there is no such thing as a dumb mistake -- provided you only make the error once.

"What's dumb is not learning from the mistake," she says.

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5 habits of money-savvy 20-somethings

March 30, 2015

By Dan Rafter | Money Rates Columnist

Even when you're in your 20s, burdened with student-loan debt and earning an entry-level salary, it's still possible to make savvy financial decisions that will positively impact the rest of your life. Katie Kiihnl, an associate with Atlanta-based law firm Boyd Collar Nolen & Tuggle, is proof of this.

As soon as Kiihnl graduated from the University of Memphis School of Law, she did something rare among 20-somethings: She met with a financial planner.

"There are a ton of financial advisers out there who have smaller firms and who would be happy to work with young professionals, even when these young people don't have a lot of assets," Kiihnl says. "This was the best move I could have made. Meeting with a financial adviser at a young age helped me form my financial goals. I've followed them ever since."

Want to make smart money moves in your 20s? Then follow Kiihnl's advice: You need to start saving, budgeting and paying down debt early in your career. When you boil it down, taking a proactive approach is what being financially savvy 20s-something is all about.

Here are five smart habits that wise 20-somethings use to keep their finances in order.

Smart habit No. 1: Prioritizing debt reduction

Kiihnl's financial planner gave her an important lesson: The best move that 20-something professionals can make is to pay down their student-loan debt as quickly as possible.

"Put all your money into paying down your student loans before you look at investing," Kiihnl says. "Focus on your debts."

Kiihnl left law school with $80,000 in debt. She worked out a plan with her financial planner that will pay down this debt in five-and-a-half years. That's significant: During this time, Kiihnl will pay $20,000 in interest. That's a lot, but it's not nearly as much as the $75,000 in interest she'd pay if she instead only made her minimum student-loan payments each month and carried her loans to their full terms.

Smart habit No. 2: Taking their budget seriously

Rachel Cruze, a financial speaker and author based in Franklin, Tennessee, says that smart 20-somethings learn early on that they have to live on a budget.

"Too many 20-somethings don't live on a budget," Cruze says. "Their paychecks come in and their money goes out. They have no control over the money. They think that living on a budget means that they can't have any fun. But what smart 20-somethings find is that they have more fun if they have some control over their money, some boundaries in place."

Why? If you live on a budget, and you follow that budget, you can spend money without guilt or shame.

Smart habit No. 3: Using credit cards to their advantage

There is nothing wrong with using credit cards. Using credit cards wisely helps 20-somethings build a strong credit score.

Michael Meese, chief operating officer of the American Armed Forces Mutual Aid Association in Ft. Meyer, Virginia, says that too many 20-somethings build up massive amounts of credit-card debt. That debt comes with high interest, and can prove a financial burden as 20-somethings move into their 30s, 40s and beyond.

"With all the credit-card applications you get in your 20s, it can be easy to get into trouble," Meese says. "Smart 20-somethings realize that they don't have to use all the credit they get. They have the perspective that they need to save up for the things they want. They don't just charge what they can't afford today."

Smart habit No. 4: Getting a head start on retirement

Retirement seems a long way off when you're in your 20s. But you should start saving for retirement as soon you start working. If your company offers a 401(k) plan, you should participate. Even if it doesn't, you should set aside a portion of your paycheck -- even if it's a small amount -- for your retirement years.

"The way retirement savings goes is, 'the earlier, the better,'" says Jim Poolman, executive director of the Indexed Annuity Leadership Council.

You might think it makes sense to wait until you're earning more money. But, as financial professionals will remind you, as you get older, your costs of living rise too. You might start a family or take on a mortgage. There's never a perfect time, then, to start saving for retirement.

Poolman says that smart 20-somethings start saving for retirement, and enjoying the benefits of compound interest, as soon as they enter the workforce.

Smart habit No. 5: Building an emergency fund

Bad things happen, and often these bad things require a quick infusion of cash. If you don't have an emergency fund built up, you could easily fall into debt should you suffer a car accident, get injured at work or have to replace your home's water heater.

And what if you lose your job? If you have an emergency fund, you can tap those dollars to help support yourself while you search for a new job. That fund might keep you from running up credit-card debt while you're hunting for new work.

That's why Kiihnl says that 20-somethings need to steadily build up an emergency fund that can cover up to six months of their expenses. This isn't easy, and it takes time. Kiihnl says that her goal has always been to put 10 percent of her income into a savings account to cover unexpected purchases.

"I've done that ever since I graduated," Kiihnl says. "Sometimes you can't do the whole 10 percent. But you should always put something in that account."

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5 things financially reckless young people say

March 20, 2015

By Dan Rafter | Money Rates Columnist

Michael Chadwick has a simple message for 20-somethings: You can't have everything you want right away.

You can't live in the same kind of home your parents have. You can't motor around town in the same kind of car your parents drive. And you can't afford to follow your parents' example and take two vacations a year.

"Unfortunately, too many young people want the same things that it took their parents 10 or 20 years to get," says Chadwick, chief executive officer of Chadwick Financial Advisors in Unionville, Connecticut. "There is no more delayed gratification. And that's what can get young people into financial trouble."

Chadwick isn't alone in this theory. Financial advisers say that too many 20-somethings make serious financial mistakes in an effort to live a lifestyle that is beyond their means. Many, after all, are still paying off piles of student-loan debt. The financial mistakes that 20-somethings make can haunt them throughout their 30s, 40s and beyond.

Sometimes, these grave errors may follow a few simple words. Want to avoid the financial chaos that characterizes some people's youth? Then think very carefully about what you're doing when you find yourself making the five statements below.

1. "I can pay for it on my card."

Credit cards are important financial tools if used properly, especially for young consumers. Those who pay their credit-card bills on time every month are taking steps to build a solid credit score. But it's far too easy for 20-somethings to misuse their cards. They use plastic to purchase big-ticket items that they can't afford, from high-end flat-screen TVs to rooms full of furniture.

Soon they're staring up at a mountain of credit-card debt, which often comes with exorbitant interest rates.

"Running up credit-card debt is the biggest mistake I see young people make," says Melinda Kibler, certified financial planner with Fort Lauderdale, Florida-based Palisades Hudson Financial Group. "The interest rate is so high that it is extremely difficult to dig yourself out. It becomes a vicious cycle."

2. "I've got years to save for retirement."

Retirement seems a long way off for consumers in their 20s. But David Lyon, chief executive officer of Chicago's Main St. Advisor, says that young people need to start saving for retirement in their 20s. It's the easiest way for them to guarantee that they'll have enough money for a happy and satisfying retirement.

Too many people, though, don't save a dime for retirement in their 20s, Lyon says.

"When you're in your 20s, it's easy to convince yourself that you'll put money away for retirement when you start making a bigger salary," Lyon says. "But what happens is, as your salary increases so does your cost of living. You buy a bigger house. You get married. You have kids. So people keep pushing off their retirement savings."

Lyon says that young people should start saving at least a small amount of money each month for retirement as soon as they enter the workforce. That little bit of savings will grow, thanks to the magic of compound interest, into a solid nest egg.

3. "I deserve a few nice things."

There was a time when 20-somethings lived on Ramen noodles in cramped studio apartments as they saved for their first house or new car.

Too many 20-somethings today, though, skip this period of austerity, says Kelley Long, resident financial planner for El Segundo, California-based Financial Finesse and a spokesperson with the National CPA Financial Literacy Commission. Instead, they borrow huge amounts of money for homes and cars that they can't afford on their entry-level salaries.

"Young people too often borrow against their future earnings to elevate their lifestyle so that it matches the lifestyle they experienced when growing up," Long says. "They don't recognize that it took their parents 20, 30 years to get to where they are. The austerity days of 20-somethings seem to be coming to an end. Instant gratification is the crux of the problem."

4. "I don't make enough to save for emergencies."

Chadwick says that it is essential for young adults to build an emergency fund that they can tap if they get into a car accident, run into unexpected medical bills or experience some other financial calamity. A good rule of thumb is for young people to save at least six months of living expenses in an emergency fund.

But too many 20-somethings instead spend their extra $20 or $30 on items that they don't really need. Chadwick says that this is a problem that is only getting worse.

"There are far more things for people to spend their discretionary income on today," Chadwick says. "They can Uber their way home instead of taking public transportation. They can subscribe to Netflix. It's so easy to order in delivery food. This is all a burn on people's disposable incomes."

5. "I'll look into investments when my salary is better."

A good way to build up wealth is to invest in the stock market or in mutual funds. But many 20-somethings don't do this, Kibler says, thinking that they'll invest once they start earning a higher salary. But in doing so, these young adults are wasting valuable time.

And those 20-somethings who do invest, often invest too conservatively. They might set up their 401(k) plans so that they are sinking their dollars in only the safest of investment vehicles, Kibler says. That's a mistake: Young people have plenty of time to experiment with higher-risk but higher-reward investments.

"Don't be afraid to take risks when investing," Kibler says. "Without that growth it can be hard to save for retirement. You have to depend on the market even if it can be volatile. When you are young is the best time to put up with that."

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6 financial terms every 20-something should know

March 6, 2015

| Money Rates Columnist

Financial advisers, it seems, don't always agree. For instance, there seems to be some difference of opinion regarding when exactly young adults should be expected to understand and manage their own finances.

"If they are old enough to drink alcohol, get married and drive a car, they should also be old enough to learn to manage their finances," says Douglas Goldstein, CFP, investment adviser and author of "Rich as a King: How the Wisdom of Chess Can Make You a Grandmaster of Investing."

Meanwhile, Andrew Meadows, consumer and brand ambassador at Ubiquity Retirement + Savings, gives young adults a pass on financial self-sufficiency until they are done with their education and entering the workforce. "It's when you get your first real job," he says.

While Goldstein and Meadows may have slightly different opinions about when young adults should be financially independent, both agree 20-somethings need to be able to speak the language of money to be successful. Here are six financial terms every young adult should know before striking out on their own.

1. Overdraft protection

When you get a job, you'll likely need a checking account, if you don't already have one.

"The various aspects of banking can be a bit confusing and difficult to understand at the beginning," Goldstein says.

Overdraft protection is one example of a confusing bank product. It may sound like a benevolent service offered by banks, but it can actually cost you a lot of money. Overdraft protection doesn't protect you from overdrawing your account. Instead, it allows you to do so for a price.

For example, if you have a zero balance in your account and try to use your debit card, the bank will allow the charge to go through if you have overdraft protection. You are then charged a fee for the privilege. Without overdraft protection, your card will be declined. This can be embarrassing, but it may save you money in the end.

2. Compound interest

Ubiquity Retirement + Savings offers retirement accounts geared toward young business owners, so Meadows has had plenty of experience talking to those new to investments. While all investing concepts can be tricky to understand, he says millennials seem to have particular difficulty with the idea of compound interest.

"It seems unreal," Meadows says of the online graphs and calculators that show how a small amount invested now can turn into a big number by retirement age. The reason young adults may have trouble believing the numbers is because they don't understand compound interest, which lets you earn interest on interest.

In other words, a 10 percent annual return on a $100 investment will give you $110 at the end of year one. In year two, you earn interest on your $100 initial investment plus the $10 interest, for a total of $121 in year two. In this example, by the end of 10 years, your investment will have grown to more than 2.5 times your original investment without your depositing another cent.

"It's not magical," Meadows says. "It's a mathematical fact."

3. Defined contribution plan

When you accept your first real job, it will hopefully come with some sort of retirement benefit. Typically, that may be either a defined contribution plan or a defined benefit plan. You may also hear the term deferred compensation used in conjunction with both of these. "We thrive on confusing terminology," Meadows says of the retirement industry.

A defined contribution plan means your employer will put a certain amount of your salary into a retirement account for you, usually a 401(k) plan.

4. Defined benefit plan

The second type of retirement plan you could get, if you're lucky, is a defined benefit plan. These are commonly referred to as a traditional pension plan.

With these plans, your employer says they will pay you a specific (i.e., defined) amount after you retire. The amount is often paid monthly and is calculated as a percentage of the income you earned during your final years with your employer.

5. Asset allocation

Those who end up with a 401(k) at work or open their own individual retirement account (IRA) will need to contend with something called asset allocation. This term simply means deciding how best to invest the money you put in the account.

When it comes to asset allocation, there are several theories regarding how best to split money between stocks, bonds and cash options. However, Meadows says young adults shouldn't worry too much about asset allocation up front.

"Don't over-analyze," he says. "The best advice is to just start saving period."

6. FICA

Retirement benefits aren't the only thing that can confuse new workers. They may also find the array of withholdings from their paycheck to be baffling.

One of the largest numbers you might see taken off your income is FICA. An abbreviation for the Federal Insurance Contributions Act, FICA levies a 15.3 percent tax to pay for Social Security and Medicare benefits.

Of that amount, 2.9 percent goes toward Medicare while 12.4 percent is earmarked for Social Security. In 2015, the Social Security portion is assessed on only the first $118,500 you earn for the year. For payroll workers, the FICA tax is split between workers and their employers.

Embracing financial adulthood

Those are a few of the financial terms you should know before heading out into the workforce. If they are new to you, you're probably in good company.

"Many kids graduate high school without being able to read a bank statement, and that's pretty sad," Goldstein says.

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5 overlooked tax deductions for families

February 19, 2015

By Dan Rafter | Money Rates Columnist

No one looks forward to April 15. For busy families, preparing a tax return can prove stressful -- not to mention costly. But part of the problem is that too many families fail to take all the deductions to which they are entitled.

"What I take for granted, many filers don't have any clue about," says Peter Baum, partner with the Harrison, New York, office of accounting firm O'Connor Davies, LLP. "A finance person might understand all the deductions available. The average person, no."

The deductions noted below may save your family some dollars this tax season. Remember though, you only want to itemize your deductions if your deductions total more than the IRS' standard deduction. For married taxpayers filing jointly, the standard deduction for the 2014 tax year is $12,400.

1. Medical expenses

Eric Green, a tax attorney in the New Haven, Connecticut, office of law firm Green & Sklarz, says that families might be able to reduce their tax burden by claiming medical expenses. But there are some caveats.

Medical expenses are tax deductible only if they total more than 10 percent of a family's adjusted gross income for the year. This means that for most families, medical costs would have to be fairly significant to generate enough expense to qualify for a deduction. But if someone in the family lost a job, dramatically reducing the family's income, it is possible that medical expenses could reach that 10 percent threshold.

If they do, it's important for families to claim these expenses. They can shave a significant amount of money off the taxes they owe.

Timing is key though, Green says. This is advice that families should heed this year in preparation for next tax season. If you have a medical bill for a late-in-the-year procedure, you might want to pay it before Jan. 1, even if the bill isn't due that soon. That way, you can claim it on your taxes the following April 15.

"Timing plays a role in so many tax decisions," Green says. "It's about accelerating your expenses in a given year and deferring your income for that same year. That's one way to maximize your deductions. You can do this with your medical expenses."

2. Job-search costs

Were you or your spouse looking for a job this year? The expenses involved in hunting for that job can be deducted as miscellaneous expenses if you itemize your deductions, says Michael Atias, tax director at Irvine, California-based financial education company Online Trading Academy.

Again though, there are some rules. First, your total miscellaneous expenses, including the expenses you incurred looking for a job, must be more than 2 percent of your adjusted gross income for you to deduct them.

If your miscellaneous expenses hit this threshold, you can deduct transportation expenses that you paid while searching for a job, including 56 cents a mile for driving your own car plus any parking fees or tolls that you paid, Atias says. You can also deduct food and lodging expenses if you have to spend an overnight stay while searching for your next job. Cab fares, employment agency fees and the costs of printing resumes are all deductible too.

You don't even have to have been successful in your attempts to find work.

"Qualifying expenses can be written off even if you didn't land a new job," Atias says.

3. State sales taxes

Some states don't have income taxes. But this doesn't mean that the residents there are out of luck when it comes to deductions. If you live in a state with no income tax, you can instead write off all the state sales tax that you paid during the year, says Baum.

This can pay off if you've made a big purchase during the year. If you bought a boat or car, those deducted sales tax dollars can have a big impact on your tax bill.

If you live in a state with low income taxes, you might still consider deducting your sales taxes instead of your income taxes to help boost those itemized deductions. Remember, you can only deduct state income taxes or sales taxes, not both.

4. Profitable hobbies

Cal Brown, adviser with Savant Capital Wealth Management in McLean, Virginia, says that if you already spend money on a hobby, you might be able to reduce your taxes by turning that hobby into a business. For instance, Brown plays guitar. During some years, he gave private lessons out of his home. He was then able to deduct the money he spent on guitar supplies on his taxes.

"I was spending money on strings, picks and other supplies anyway, so I turned my hobby into a business and deducted some of those expenses," Brown says.

A key guideline here is that you can only deduct purchases that are actually used for a business. Eventually, you also need to show a profit from your hobby-turned-business. If you don't show a profit in at least three of the prior five years, the IRS will classify your business as a hobby, and you won't be able to deduct any expenses associated with it.

5. Care for relatives

Do you provide a home or financial support for relatives who aren't your children? You might be able to claim a dependent exemption of $3,950 this year for any extra relative -- of the non-child variety, of course -- whom you support.

Again, you must meet certain requirements to earn an extra dependent exemption. First, the person you support must be a relative or a full-time member of your household and must be a citizen or resident of the United States or a resident of Canada or Mexico.

These relatives must not have filed a joint income tax return with anyone else and must receive more than half of their financial support from you. The relative must also have earned less than $3,950 in 2014.

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