How to Manage Money in a Financial Crisis

April 25, 2017

Murphy’s Law is that anything that can go wrong will go wrong. I used to laugh when I heard this until Murphy and his entire family decided to park themselves in my life. In about a 3 month period, we experienced a dramatic drop in income, had a head-on collision and wrecked our other car. (If you read my other posts, Murphy seems to sit on top of our cars).

The accident sent me to the ER and resulted in weeks of physical therapy.  Our heating and air systems went out in our homes a few weeks later. It seemed like there was a permanent rain cloud over our family that we could not get out of – but we did. It was not easy, but the steps we took early in the process made everything smoother.

Accept our new reality. As crazy as it sounds, the first step was accepting that our finances had changed. Even after the drop in income, we still spent as if we had our full salaries. This just got us deeper into debt.

Create a budget based on our new income with a focus on the essentials. As we started filling in budget categories, we first focused on the categories that were essential – food, shelter and transportation. Next, we focused on the things that we considered important but would not cause us to be homeless, starving or jobless –Internet service (if your work from home, ask about being reimbursed for Internet services), cell phones, credit card bills, student loans, etc. At the bottom was entertainment, travel, and eating out.

Contact our creditors BEFORE we had problems paying our bills. I cannot overstate that the most important thing to do during a crisis is to communicate. Talking to our creditors – the mortgage, student loan and credit card companies – created a record.

I learned later that the record was two folds. One is that we stated we had a crisis in advance and the second is that we are committed to paying our bills on time and will work with our creditors. You will also know which department to call and the process for getting help if you cannot pay.

Eventually, we got to a point where we could not pay all of our bills. When we called, we knew to call the hardship department, state our situation, explain our budget and ask for help. We were able to get help from all the creditors we contacted. If you are facing a financial crisis, even if  can currently pay your bills, consider contacting your creditors to inform them of your circumstances. We learned the earlier you contact them, the more likely they are to work with you.

Start slashing our expenses. I will admit, drastically reducing our expenses felt like the Band-Aid dilemma of our childhoods. Do we take it off quickly or slowly? No matter what you choose, it will hurt so just do it quickly.

The same goes with expenses. Just start slashing. We completely got rid of cable, went to a cheaper cell phone plan, cut out all eating out and got rid of our gym memberships. I listened to just about every YouTube video on healthy eating on a budget and we cut our grocery bill in half.

We did a staycation instead of traveling. Our kids still say it was one of their favorite vacations. We became Craiglist and Ebay pros and started selling stuff around the house we did not use anyway (old, unused wedding gifts and toys were our first targets) as well as taking the kids’ old clothes and toys to consignment shops.

When things stabilize, do not make up for lost spending time. When your life returns to normal, do not immediately start adding expenses. We learned our lesson about the importance of having some money set aside for emergencies so the first thing we did was to build a small emergency fund of about $1,000.

Then we used calculators like the Debtblaster calculator to come up with a strategy to get rid of the debt. It took a few years, but we were able to pay off all of our debts. The key for us was to keep our frugal lifestyle until the debts were paid. As our incomes went up, we did not increase our lifestyle so in a weird way, our financial crisis led us to getting out of debt.

The biggest takeaway we got from our experience is to never assume your financial situation will not change. We are all one car accident, layoff or family emergency away from a crisis. Living below your means, paying off high interest credit debt and having an emergency fund are the greatest barriers to keep Murphy and his family from becoming uninvited guests in your life.

 

Does a Money Market Fund Make Sense for You?

April 24, 2017

Are you looking for a stable value investment with easy access to your cash when you need it but a higher return than leaving your money in a checking or savings account? A money market fund could be a good fit. Here are some things to consider.

What is a Money Market Fund?

While a money market fund is often referred to as a “cash equivalent” because of its low risk profile, a money market fund is not cash. It’s actually a mutual fund which invests in very short term, low risk debt securities such as treasury bills, the debt of various government agencies, and “commercial paper” (short-term corporate IOUs). The investment objective of a money market fund is to earn interest for its shareholders while maintaining a stable net asset value (NAV) of $1 per share. The value of these short-term investments rarely fluctuates, which is why they’re considered almost as good as cash. But since they’re not cash, money market mutual funds yield a slightly higher return than savings accounts or money market accounts.

When to Use a Money Market Fund

The benefits of money market mutual funds — safety, liquidity and a higher yield on “cash-equivalent” savings — make them attractive to many savers with differing goals. Here are some common uses for money market funds:

  • For an emergency fund – A money market fund can be a low risk place to keep 3-6 months of expenses. Make sure you choose one that doesn’t have a penalty for redeeming shares.
  • For cash management – Many financial institutions offer money market accounts with cash management privileges, where unused cash balances are swept into a linked money market fund and shares are redeemed to pay a check, debit card or ATM withdrawal.
  • To save for short term goals like a home down payment – Money you know you will need relatively soon shouldn’t be subject to the volatility of the stock or bond markets.
  • As a parking place between investments – If you sell an investment, you can park the proceeds from the sale in a money market fund while you research other investment options.
  • To balance the asset allocation of your portfolio – Many investment strategists recommend that a portion of any investor’s portfolio remain in “cash,” available to take advantage of opportunities that come up in the stock and bond markets.

When Not to Use a Money Market Fund

A money market fund is considered a short term, cash-type investment. That’s great for your emergency fund but may not be the best place for retirement savings that you don’t plan to access for decades. If you’re not sure what the mix of stocks, bonds and cash (such as money market funds) should be in your portfolio, download this Risk Tolerance and Asset Allocation Worksheet.

Types of Money Market Funds

There are differences among money market funds that make for variations in taxation, safety and yield. Savers with different goals will choose different funds. Money market funds, depending on their objective, can offer a taxable return or a full or partially tax-free yield, depending on what type of debt securities they hold in the fund..

What to Know Before Investing

Money market funds are not federally insured. However, most people consider the amount of extra risk in money market funds to be so minimal as to be easily offset by the slightly higher interest they earn. Fees on money market funds can vary, so do some research before you invest, including reading the fund’s prospectus.

 

Do you have a question you’d like answered on the blog? Please email me at [email protected]. You can follow me on the blog by signing up here and on Twitter @cynthiameyer_FF.

 

How Should You Invest In Your Roth IRA?

April 20, 2017

If you’re like many people I’ve talked to recently, you may have decided to contribute to a Roth IRA before the deadline on Tue. However, it’s not enough to open an account and fund it. After all, a Roth IRA is simply a tax-sheltered account, not an investment. You still have to decide how to invest the money. Here are some options to consider:

Use it as an emergency fund. If you don’t have enough emergency savings somewhere else, you can use a Roth IRA as part or all of your emergency fund since you can withdraw your contributions tax and penalty-free at any time and for any purpose. (Earnings are subject to taxes and a 10% early withdrawal penalty before 5 years and age 59 ½ but the contributions all come out first.) In this case, you’ll want to keep it someplace safe and accessible like a savings account or money market fund. Once you accumulate enough emergency savings elsewhere, you can invest it more aggressively for retirement.

Save for a short term goal. A Roth IRA can also be used penalty-free for a first-time home purchase (up to $10k) or education expenses. If you intend to use your Roth IRA for either goal in the next few years, you’ll probably want to keep it in savings.

Choose investments that complement your other retirement accounts. For example, you may want to use your Roth IRA for investments that may not be available in your employer’s plan like real estate, gold, commodities, emerging markets, international bonds, and microcap stocks. They can help diversify a more traditional mix of bonds and large and small cap US and international stocks.

Choose a more conservative mix for early retirement. If you’re planning to retire before becoming eligible for Medicare at age 65 and are planning to purchase health insurance through the Affordable Care Act (assuming it hasn’t been repealed and replaced), a tax-free Roth IRA can help reduce your insurance costs because the insurance subsidies are based on your taxable income. Since a large percentage of the account may be coming out over a relatively short period of time, you may want to invest it more conservatively than your other retirement investments.

Choose more aggressive investments for long term tax-free growth. If you’re not planning to withdraw your Roth IRA early, you may want to take the opposite approach and use it for the most aggressive parts of your portfolio. That’s because the account is growing tax-free and may be the last to be touched. (It helps that Roth IRAs aren’t subject to required minimum distributions.) Some examples of more aggressive investments would be emerging market and small and micro cap stocks.

Keep it simple. If this all sounds confusing and you want to just keep your investing as simple as possible, you can look at each account separately. For example, you might choose a target date retirement fund for your Roth IRA since it’s a fully diversified one stop shop that automatically becomes more conservative as you get closer to the retirement date. All you need to do is pick the one with the date closest to when you think you’ll retire and set it and forget it. If you want something more customized, you can also use a robo-advisor or design your own portfolio based on your particular risk tolerance.

Like all financial decisions, your choice begins with your goal. Are you trying to save for emergencies? Do you plan to use the account early or late in your retirement? Or do you just want to keep things as simple as possible?

 

 

 

What You Need to Know About Keeping or Tossing Tax Records

April 19, 2017

The basic reason you need to keep any tax documentation is so that if the IRS comes calling with questions about what’s on your return, you can prove the numbers. The most acceptable rule of thumb is that for anything you used to put numbers on your tax return, you should keep it at least three years or seven if you’re toeing any lines with what you put on your return. This includes receipts, cancelled checks, tax forms and even bank statements.

But the fact is that any official tax form you receive, such as a W-2, 1099 or 1095-B, was also provided to the IRS. That’s why if you forget to include, say, that withdrawal of your old job’s 401(k) on your return, the IRS WILL send you a letter reminding you (and requesting a little extra for penalties and interest). So do you really need to keep your copy? The answer is a bit of a “yes but…” and you obviously want to keep anything that wasn’t on an official tax form like receipts for donations or property tax statements.

The biggest “but” is that in terms of what the IRS accepts, there is no need to keep a paper copy of anything that you can easily obtain digitally. Since my accountant prefers to receive documents online anyway, I scan everything to a removable jump drive and just keep that in a safe place for three years. Besides being able to substantiate what you put on your tax return, here’s why you need to keep…

W-2s – These are mostly in case you want to do something like buy a house, refinance your mortgage or some other activity that requires you to prove your income.

Bank account statements – In case you are doing any type of mortgage application, the bank will want at least the past 60 days of any checking or savings accounts you hold.

Brokerage account statements – If your only transactions for the year were dividends and interest received, then you can get rid of the statements and just keep the 1099 that you received showing the income for the standard three years. However, if you purchased investments (including dividend reinvestment of a mutual fund), you’ll want to keep the statements as long as you hold the underlying investment plus three years. This is so that when you do sell, you’ll be able to properly calculate any gains or losses based on what you paid for the shares. The “plus three years” is because once you sell and claim the gain or loss, it becomes a tax document.

Receipts for home improvements – That new roof you had to put on your home may have been your least favorite purchase of the year, but if you’re lucky enough to eventually sell your house for a gain greater than the exemption amount ($250,000 for single, $500,000 for married), you’ll be able to reduce the gain by the cost of any improvements you made to the home throughout the years. One simple way to keep track would be to keep a running list, either in Excel, in Google Sheets or even by hand. Then scan and store the receipts with the other tax documents for the year of the expense.

Home sale/purchase documents – Besides providing evidence of any basis you used to calculate a gain (or lack thereof) on the sale of your home, you’ll want to keep these documents in case you need them on future mortgage applications. When my husband and I purchased our home, the title agency uncovered something that indicated he still owned the home in Michigan that he’d sold years before. He had to show them the sale document in order to avoid compromising our purchase.

IRA-related forms – If you ever made a non-deductible contribution to a traditional/pre-tax IRA or converted a traditional/pre-tax IRA to a Roth IRA, you’ll need the documents proving that so when you begin your distributions, you can avoid paying taxes twice on any of your savings. It’s best to create a separate file just for these forms and when they come in the mail each year, either scan them or place them into their designated place.

While you really should keep all tax documents for at least three years, make it seven if the interim years include red flag items like self-employment income, a home office deduction or large non-cash donations. The IRS really has a seven year statute of limitations to audit returns if they have any reason to believe abuse of the tax code. (That statute of limitations disappears if they uncover massive tax fraud so just don’t go there, okay?) The above list is meant to share exceptions or alternate reasons to save certain documents. Again, it’s okay to store your documents digitally, just make sure you’re shredding the originals to help avoid identity theft.


Kelley Long is a resident financial planner with Financial Finesse, the leading provider of unbiased workplace financial wellness programs in the US. For more posts by Kelley or to sign up to have her weekly post delivered to your inbox each Wednesday, please visit the main blog page and sign up today.

 

 

Are You Prepared for the Next Natural Disaster?

April 11, 2017

I seem to have a thing for natural disasters. I know that sounds strange, but I do. I cannot hear about a local natural disaster without immediately getting on the Internet to figure where I need to go to help. I think of how helpless I would feel if everything I had was gone, and I feel compelled to do something – even if it is to pick up debris or pass out sandwiches.

Doing this for a number of years has created what many would consider to be an unusual obsession with preparing for disasters. A lot of this comes from the lessons I learned being onsite to personal disasters and talking to people who have been through a natural disaster. Below are some of the lessons I learned:

ATM’s are in slim supply after a natural disaster. Keep cash on hand to cover necessities. I remember traveling two hours to a tornado site and helping with the cleanup all day. As I got in my car to go home, I saw that my gas was nearly on empty. It took me almost an hour to find a gas station since most were destroyed in the tornado.

The only one that was working could only accept cash. If I had no cash, I would had been stuck. Most people do not think about it, but most natural disasters take out power, which would also take out the ability to use an ATM and a store owner’s ability to accept plastic. Keep a certain amount of cash on hand to cover necessities in a disaster like gas and food.

Make sure your documents are in a place that can survive a disaster and give you easy access to the documents if you need to leave in a hurry unexpectedly.  One of the biggest frustrations the survivors of the natural disasters I talk to experienced was not being able to get all of the available natural disaster aid immediately because they had no documentation to prove who they were or to file an insurance claim.  What I learned from their stories was to make sure I have all of my important documents in one place that can survive a disaster, like a fire-proof safe. You can use checklists like the one on the FEMA website to gather your documents. You can take this one step further by storing your documents electronically as a backup plan in case you could not get to them otherwise.

Do not assume you are covered by your insurance. Review your insurance policies and call your insurance carrier and ask about coverage. Nothing broke my heart more than the anguish of people who realized that few or none of their possessions would be covered by their insurance carrier. Please do not assume that everything you own will be covered. Thirteen years of talking to natural disaster survivors have taught me that this is not the case.

Make it a practice to review your insurance policy annually. Consider using websites like AlertSystemsGroups.com to learn the disasters your area is the most at risk to experience. Contact your insurance carrier and ask if you are covered for these disasters.

Ideally, you want to be covered for cost to replace your possessions at today’s cost without factoring in depreciation. Also, do not assume your insurance company will take your word on everything you have in your home. Consider taking pictures of your possessions and scanning receipts of high dollar purchase to prove what you own.

Find out how you are covered if you can no longer live in your home. This may sound obvious, but one of the biggest needs for many survivors was having a place to stay if they could not live in their homes.  FEMA does offer rental assistance, but this can take time when patience is in short supply. Contact your homeowner’s policy about additional living expenses coverage. This coverage could cover hotel, rental, and even restaurant meals and storage fees.

Don’t wait until it’s too late. Take action now. FEMA has a comprehensive guide to prepare you financially for a disaster, but don’t step there. Make it an annual practice to review your homeowner’s insurance policies to make sure that if the unexpected hits, you can return to your normal life as soon as possible.

Meet Our Newest Planner: James Jacobucci

April 10, 2017

The newest member of our CERTIFIED FINANCIAL PLANNER™ team, Jim Jacobucci, CFP®, MBA, has always liked to save money. It’s one of the reasons he switched careers to financial planning from manufacturing. I asked Jim some questions about his money story, money and family life, and what it means to come to Financial Finesse:

What’s your personal mission? Who do you most want to help?  I most want to help people who generally do not have access to sound financial guidance. Those who have problems making ends meet each month or who have taken on high levels of credit card debt need help just as much, if not more, than anyone else. My mission is to provide sound guidance on how to navigate through everyday financial issues that are important to everyday people.

What’s your money story – what your parents taught you about money, etc.? Did you hold any negative beliefs about money that you had to overcome? For as far back as I can remember, I liked to save money. I’m not really sure why. When I was, say, 8 years old, I did not have a goal in mind to buy something specific, but I just liked to save what little money came my way.

I do not recall my parents teaching me specifically about money, but we were a middle class, single income family. When my dad was working, things were fine, but if he was laid off, things got pretty tight, pretty quickly. Maybe just experiencing this influenced me to save when I could.

What is the biggest mistake you ever made with your money, and what did you learn from it? The biggest financial mistake I ever made was not having an adequate emergency savings fund while I was going through a career change. I knew that my income would drop during this transition, but I did not properly plan for all scenarios. For a while, money was pretty tight until I gained some more traction in my new profession. What I learned from this is to always hope for the best but plan for the worst when it comes to making decisions that will have a long term financial impact.

What have you learned about money and marriage that you can teach the rest of us? I am very fortunate in that my wife and I are pretty much on the same page regarding our finances and how to prioritize. And therein lies a lesson learned. This may sound a bit too clinical, but I believe when you commit to spending the rest of your life with someone it just makes sense to be sure you have the same general philosophies when it comes to money.

My wife and I never really had in-depth money conversations before getting married, but you get a pretty good grasp on someone’s financial tendencies when you are spending time together. While dating someone, if I saw she was spending frivolously on luxury items at the expense of more practical things, that would have been a red flag for me. Not that she would be “wrong” in her spending choices, but having such a different outlook on spending compared to mine would present some challenges if we did get married.

How do you teach your kids about money? I try to explain to my kids why I am making the everyday choices that I am with regards to money. It started out at the grocery store when they were young.

If we were going to buy a gallon of ice cream, I would explain why I was buying the brand that I was. Was it on sale? If one brand is more expensive, is it worth spending that extra dollar on that brand or would it be wiser to spend that dollar somewhere else?

Now that they are a bit older, when it is time to make a purchase for my kids for say, new summer clothes, it is left up to them what to buy (as long as it is tasteful). They are given a budget of how much to spend, but it is up to them on how they spend it. My wife and I certainly provide some coaching along the way and help weigh the pros and cons of buying a designer item vs. a more run-of-the-mill item.

What do you think your generation does differently with money/attitudes about money? Being a Gen Xer, I think my generation sees money that is something that you need to work hard for, to earn. Put in an honest day’s work and get an honest day’s pay.

If you could wave a magic wand and reform financial services, what would you do? I am frustrated that those who need the most help, those who are really struggling to make ends meet, get the least help. One of the great things about delivering workplace financial wellness benefits is that we’re compensated and incentivized equally for offering financial guidance to an employee with a net worth of $10 or one with $10 million. This is the approach of Financial Finesse and why I love working here.

Tell me about your financial coaching philosophy? First and foremost, I respect every employee that I am coaching. They may be in a bad financial spot, but there are always reasons for getting to where they are.

Understanding those reasons, how they affected their finances, and what can be done to improve their financial wellness is what I strive to do. I never pass judgment on a person, regardless of their situation or how they got there. It’s my job to listen and understand and give employees the tools to make improvements.

Why did you want to earn your CFP® designation? What does it mean to you? There were three main reasons that I decided to pursue my CFP®: to broaden my knowledge base in tax and estate planning, to provide myself with a certain level of intellectual stimulation that was lacking in my job at the time and to give me the ability to help a wider range of people. To me, the CFP® designation represents an ongoing commitment to keep current on financial planning topics, which enables me to be in a position to help people make the right financial decisions.

Is there anything that really surprised you about coming to work at Financial Finesse? Why? The thing that surprised me the most about coming to work at Financial Finesse was all of the planners are deeply involved in the company in areas which impact how workplace financial wellness programs are designed and delivered. They are involved in many parts of the business – research, consulting, communications, recruiting and fact-checking. This is a great because the planners all have unique skill sets and experiences that are useful in multiple areas of the company.

 

Do you have a question you’d like answered on the blog? Please email me at [email protected]. You can follow me on the blog by signing up here and on Twitter @cynthiameyer_FF.

 

Which Retirement Plan Benefits Are You Missing Out On?

April 06, 2017

This week, we’re recognizing Employee Benefits Day on April 3rd by writing about ways to appreciate and “benefit from your benefits.” One of the most common benefits that is often underappreciated and underutilized is your employer’s retirement plan. In particular, here are some features that you may not be taking full advantage of if you’re fortunate enough to have them in your plan:

Employer’s match. According to our research, 92% of employees are contributing to their plan but almost a quarter aren’t contributing enough to get the full match from their employer. At the very least, make sure you’re contributing enough to not leaving any of this free money on the table.

Contribution rate escalator. If you can’t afford to save enough to hit your goal, try slowly increasing your contributions by one percentage point each year. This tends to be less than cost of living adjustments so people generally don’t even notice the difference in their paychecks, but after just a few years, they may be saving more than they ever thought they could. A contribution rate escalator can do this for you automatically.

Roth contributions. Unlike pre-tax contributions, you get no tax benefit now, but Roth contributions can grow to be tax-free after 5 years and age 59 ½. This is especially useful if you’re worried about paying higher tax rates in retirement or if you’re planning to retire early since tax-free Roth distributions won’t count against you in calculating the subsidies you would be eligible for if you purchase health insurance through the Affordable Care Act (assuming the subsides are still in place) before becoming eligible for Medicare at age 65. Roth contributions are also more valuable if you max out your contributions since $18k tax-free is more valuable than $18k that’s taxable. (Yes, you could technically invest the tax savings from making pre-tax contributions, but then you’d still have to pay a tax on those earnings too.)

After-tax contributions. If you max out your normal pre-tax and/or Roth contributions, you may be able to make additional after-tax contributions. These aren’t as advantageous since the money goes in after-tax and the earnings are taxed at distribution, but you can convert them into a Roth account to grow tax-free, either while you’re still at your job if the plan allows it or by rolling it into a Roth IRA after you leave. You can also generally withdraw after-tax money while still working at your job (subject to taxes and a 10% penalty on earnings before age 59 1/2).

Asset allocation funds. To simplify your investing, retirement plans will often provide you with fully-diversified asset allocation funds that can be a one-stop shop. Some, called target date funds, even automatically become more conservative as you get closer to the target date so you can simply “set it and forget it.”

Online retirement and investing advice. Some plans provide access to a free online retirement planning and investment tool that can tell you whether you’re on track for retirement and make specific investment recommendations based on your particular risk tolerance and time frame, typically using the lowest cost funds in your plan.

Brokerage window. If you’re looking for an investment not otherwise available in your plan, see if you have a brokerage option that will give you access to thousands of other funds and in some cases, even individual stocks.

Employer stock. While you don’t want to put too much in any one stock (no more than 10-15% of your overall), especially your employer’s, there can be a tax benefit for doing so when you eventually cash out the account. If you transfer the employer stock directly to a brokerage firm in-kind, you can pay a lower capital gains tax on the growth instead of the higher ordinary income tax rate that you would normally owe on distributions.

Retirement plan loans. If you need a loan, borrowing from your retirement plan doesn’t require a credit check and the interest goes back into your own account. However, you miss out on any earnings that money would have received and if you leave your employer, you may owe taxes plus possibly a 10% penalty (if you’re under age 59 ½) on any outstanding balance after 60 days. (Some plans do allow you to continue making loan payments though.) Also, be aware that retirement plan loans are paid back from your paycheck so there’s no possibility of default and you can’t discharge them through bankruptcy.

Financial wellness. Some plans offer free, unbiased financial wellness coaching to help you plan, save and invest for your retirement. This is an important benefit since it can help you take advantage of all the others.

Which of those benefits are you not taking advantage of? See which ones are offered by your plan and start utilizing them. Your future self will thank you.

 

 

 

Why a Lower Paying Job May Still Be Worth More

April 05, 2017

When looking at job opportunities, it can be easy to be wooed by increases in salary. I learned the hard way that it’s not the only thing that matters when I took a new job many years ago for a couple thousand more per year, only to find that my actual take-home pay was lower because my new employer didn’t offer the premium benefits I’d enjoyed at my first job. But how do you know which benefits are better than others?

While you can’t put a price on things like “dress for your day” or bring your dog to work policies, you can figure out how much a lot of benefits are actually worth to you, personally, in actual dollar amounts. I’ll use my own benefits as an example since Financial Finesse is a well-recognized employer of choice. Obviously you’ll have to use your own numbers according to the benefits available to you and who would be covered in your family, but here’s a good framework to start with:

Health insurance – Definitely find out what your premium would be to factor that in, but don’t only look at that, especially if the employer covers your costs like they do at Financial Finesse. Is there a high-deductible option that comes with a health savings account and does the employer make a deposit into that account on your behalf? That’s also part of your compensation. If I were comparing offers, I’d also want to know the maximum I’d be on the hook for with each health plan since coverage levels matter as well. It’s all well and good if your employer covers your premium, but that could seem irrelevant if any costs incurred would require you to spend $5,000 of your own money to hit your deductible before any coverage kicks in.

  • HSA deposit to my account for individual coverage: $1,500 (This also happens to be my deductible. If I had to pay a premium, I would subtract that amount from this to arrive at the net increase to my compensation.)

Retirement plan – Any match your employer gives you should be considered additional compensation, so definitely take that into account. Some employers even make discretionary deposits regardless of your own level of contribution, which should absolutely be accounted for when considering total pay. Financial Finesse basically matches me 4% as long as I contribute 5%, which is a no-brainer. Contributing less than 5% is the same as saying, “No thanks. I don’t want that extra bit of pay.”

  • Annual employer match: 4% of my eligible pay = over $3,000

Financial wellness benefit – Offering a workplace financial wellness benefit is becoming an increasingly common (and smart, if you ask me) way for employers to demonstrate their commitment to employee wellness. In fact, it can be a great resource in helping you to make the most of all your other benefits! How you quantify this benefit will depend on what’s offered. At Financial Finesse, all employees have access to calling our Financial Helpline, which is the equivalent of having a CERTIFIED FINANCIAL PLANNERTM professional on retainer. When I was an independent financial coach working with the general public, I charged clients $300 per quarter for a similar service. That meant they had unlimited access to call, email or meet with me as long as they paid that fee, similar to the Financial Helpline that many of our clients offer to their employees. If the offer you’re looking at includes an unlimited benefit like Financial Finesse, that’s the best way I know how to quantify it.

  • Annual savings by not having to hire a financial coach: $300 x 4 quarters = $1,200 (Note that this has nothing to do with what employers actually pay for their employees to have access to financial wellness but instead is what you’d have to pay if you sought an equivalent service on your own.)
  • Not included in this number: The financial benefit of using a financial wellness program to pay off debt, create a budget, increase savings for the future or invest appropriately along with reduced financial stress. Value: priceless

Professional development support – This depends heavily on your career field and any credentials you have to maintain but can be a real differentiator. I have three professional credentials that aren’t cheap to maintain on an annual basis. Financial Finesse supports all of them, but my last employer only supported part of them, which is a big difference to my wallet. Beyond that, each employee at Financial Finesse also has a $250 per year personal professional development budget to be spent on things related to enhancing their job function such as books, classes, conferences, and even role-specific consultants. For mine, I add up all my credential licensing fees, professional association dues, cost of continuing education and the professional development fund.

  • Annual savings by having my professional expenses reimbursed: about $1,750

Life insurance – Most employers offer employees automatic coverage of at least a year’s salary should the employee pass away while they are employed. The differentiator is when they cover more than that. Quantifying that truly depends on your personal situation. For some people, one times their annual salary is enough so additional coverage might not factor in as applicable compensation to consider. If you would need more coverage than the employer offers, you can figure out the savings based on what you pay for any additional policies you have outside of work.

  • Annual savings by having a portion of my needed life insurance covered: $50

To add it all up, I’m actually receiving at least $7,500 in benefits beyond my salary and insurance coverage – not too shabby!

There are plenty of other benefits to consider as well, depending on your personal situation and what you need. For example, your employer may offer discounted pet insurance, but that’s only applicable in your calculation if you’d switch your pet insurance over and get a discount. Another example would be pre-paid legal assistance, a benefit that’s really handy for people who need to draft estate planning documents or own rental property and need a little real estate legal advice but not as useful if you’re all set it those areas. This also doesn’t include the more typical benefits that the majority of employers provide like disability insurance, an EAP and obviously unemployment insurance. Since you’re likely to have those benefits at any place you work, they won’t really help in making a decision even though they are useful and important benefits to have and appreciate.

 

Kelley Long is a resident financial planner with Financial Finesse, the leading provider of unbiased workplace financial wellness programs in the US. For more posts by Kelley or to sign up to have her weekly post delivered to your inbox each Wednesday, please visit the main blog page and sign up today.

 

Employee Benefits New Moms Need to Know

April 04, 2017

I joined the Army in 1993 and spent the next 11 years in the military. I have been called every name you can imagine in my military career. I have also accomplished things I never thought possible such as scaling a 3 story building, training in hand-to-hand combat and shooting a rocket launcher (my G.I. Joe moment). Later, I became an instructor helping people navigate through simulated grenade attacks. I did this with no tears, just a determination to finish anything I started.

With all I have experienced, you would think that there is nothing that could bring me to tears. I thought so too until I had to drop my newborn daughter off at her daycare for the first time. I cried so hard the day care director had to give me a hug. What made this easier was the wealth of benefits I took advantage of through my employer. If you are about to have a baby or recently had a baby, consider researching the following benefits:

Affinity Groups For Mothers. For all of you that are parents, you learned that there were things you did not even think to ask because you just did not know they might be a problem. I was lucky. My employer offered affinity groups for mothers and even classes for expectant mothers. I learned invaluable lessons such as when and how to tell your employer you are expecting and how to develop a transition maternity plan and a post-maternity plan for when you return.

Employee Assistance Programs. Personally, I think employee assistance programs (EAPs) are one of the most underused employer benefits. My EAP provided information on what to expect after my daughter was born and guidance on deciding what type of childcare works best for my needs. The right childcare is different for everyone. For some, a daycare center eliminates the uncertainty of finding last minute daycare if your nanny or in-home provider is sick or on vacation. For others, a nanny eliminates the uncertainty of your kid getting sick because of another child.

My EAP offered a daycare referral service that saved me hours of research. I filled out a form with the details of the type of daycare I wanted and they sent me a list of the daycare centers that met my criteria. This made the process so much easier.

Daycare Discount Programs. Some employers have partnerships with daycare centers. This could translate into substantial savings. Other employers  offer “emergency daycare” programs where you get a discount if you need daycare for a day.

My employer partnered with a daycare center that discounted one day services to $25 – much cheaper than the normal drop in cost for that particular daycare. Some even offer daycare discounts for children who may be too sick for daycare (temperature over 100.5 in some cases) but not sick enough to be bedridden or go into a hospital. Contact your employer to get a list of possible daycare discounts. The list can literally save you hundreds of dollars per month.

Dependent Care Tax Breaks. For those of you that have children under the age of 13, consider using a dependent care FSA to pay for daycare expenses pre-tax. If you are going to pay for daycare anyway, you might as well do it in a way that can help you save money on taxes. You can even use the dependent care FSA for summer camp. A good rule of thumb is the dependent care FSA may be the most beneficial for taxpayers in the 15% or higher tax bracket. If you are in the 15% or below tax bracket then paying the costs with after-tax money and taking the dependent care tax credit may be more beneficial.

Being a new mom can be tough, but you don’t have to be alone. Talk to co-workers who recently had children and contact your HR benefits department and your EAP to explore every benefit you have available to you. This will help make the transition to motherhood a lot easier.

 

Quiz: Do You Get the Most Out of Your Benefits?

April 03, 2017

Today is Employee Benefits Day. How will you celebrate? Don’t worry. Celebrating Employee Benefits Day does not require you to make a special trip to the party store or spend a single dollar.

In fact, the best way to celebrate it is to recognize and appreciate the value of your employee benefits and to maximize them for your personal financial situation. Don’t know where to start? Take this quick quiz to test your benefits knowledge.

1) You have decided it’s time to prepare a will. Where might you most likely find links to basic estate planning tools?

a. The public library

b. Your employee assistance program (EAP)

c. Your retirement plan provider

d. The HR department

2) Next year you plan to get laser eye surgery to correct your vision. Where is the best place to save extra money pre-tax to pay for it?

a. A health savings account (HSA)

b. An employee stock purchase plan (ESPP)

c. A flexible spending account  (FSA)

d. A deferred compensation plan

3) Where you can save and invest for retirement so that the income after age 59 ½ will be tax-free?

a. Non-qualified stock options (NSOs)

b. Nowhere – there’s no such thing as tax-free retirement income

c. A cafeteria plan

d. A Roth 401(k)

4) During this year’s open enrollment, you choose a high deductible health plan (HDHP) because of the lower premiums. You have the option to save money pre-tax in an HSA to cover the deductible and a portion of out-of-pocket expenses. You should:

a. Skip the HSA. The point of choosing your health insurance was to save money.

b. Contribute no more than $1,000.

c. Contribute the maximum ($3,400 for an individual and $6,750 for a family in 2017). If you don’t need to use the money, you can roll it forward to future years.

d. Contribute no more than $1,500.

5) Taylor takes the train to work every day, Max drives and parks in the public garage and Jenna rides her bike. Who can use a pre-tax commuter benefits account offered by their employer?

a. Only Taylor. The point of pre-tax commuter benefits is to encourage employees to take public transportation.

b. Taylor and Max can contribute up to $255 per month in 2017, but not Jenna. There are no employer-sponsored bicycle benefits.

c. Everyone but contributions are from the employer only.

d. Taylor and Max can contribute up to $255 per month in 2017. Jenna can’t contribute pre-tax, but she can participate in her employer’s bicycle reimbursement program, for up to $20 per month in eligible expenses.

6) According to our recent financial wellness research, the single most important tool an employer can offer to boost employee retirement preparedness is:

a. A “bank at work” program

b. A retirement calculator

c. Incentive stock options (ISOs)

d. A target date fund

7) Which benefit replaces your income if you have an injury or illness which is not work-related?

a. Disability insurance

b. Long term care insurance

c. Workers compensation

d. Unemployment insurance

8) According to the 2016 Milliman Medical Index, what is the typical total cost for family coverage in an average employer-sponsored group health plan?

a. $25,826 for a preferred provider organization (PPO) plan

b. $6,742 for a health maintenance organization

c. $43,350 for a high deductible health plan (HDHP)

d. $15,003 for preferred provider organization (PPO)

9) Your employer will reimburse you up to $3,000 for an undergraduate course, a graduate course or a professional certification. How will the reimbursement be taxed?

a. Reimbursement for a professional certification will be taxed  but not reimbursement for college/university courses

b. Reimbursement for college/university courses will be taxed  but not reimbursement for professional certification

c. Tuition reimbursements are generally included in the employee’s taxable income

d. Tuition reimbursements of less than $5,250 are generally not included in the employee’s taxable income

10) What type of pre-tax benefit can you use to pay for after-school care expenses for your children?

a. Health savings account

b. None – after school care is not eligible for reimbursement

c. Education savings account

d. Dependent care flexible spending account

See the answers in italics below. How did you do? If you scored a 9 or higher, congratulations! Chances are that you see your employee benefits as an integral part of your overall compensation.

If you scored an 8 or lower, you may be leaving money on the table by not taking full advantage of everything your employer offers. If you have access to financial coaching via your workplace financial wellness program, consider setting up a time to talk to a planner about how you can fully maximize the value of your employee benefits. In addition, check out the blog posts for the rest of this week, which will focus on various aspects of your benefits.

Answers:  1 – b, 2 – c, 3 – d, 4 – c, 5 – d , 6 – b, 7 – a, 8 – a, 9 – d, 10 – d

 

Do you have a question you’d like answered on the blog? Please email me at [email protected]. You can follow me on the blog by signing up here, and on Twitter @cynthiameyer_FF.

 

Financial Lessons From a Chess Board

March 31, 2017

I don’t always watch 60 Minutes anymore, but when I do, I am reminded that I have liked it since I was a kid. That brings up a few points. First, the show has been on a very long time! Second, I was a weird kid – watching 60 Minutes while my neighborhood friends rode their bikes. I’d join them before and after so it’s not like I wasn’t social too…just nerdy.

In a recent episode, there was a story about a man teaching chess to kids in Mississippi. Google “60 Minutes chess” and watch the quick story. Here’s a quick synopsis of the segment. What I found fascinating is that while he’s teaching the kids to play chess, he is actually teaching them about far more than that. He’s teaching incredibly valuable life lessons.

I have some odd thoughts on parenting, but I’ve summed it up this way: If I teach my kids how to win with class, lose with grace and think through a decision making process, I’ll feel like I’ve prepared them for the real world. That’s a part of what he is teaching these kids.

Chess, like life, requires patience and constant learning in order to succeed. They kids, like all of us, learn more from their losses than their wins. For them, this is because they review the losses for what they could have done better. The sting of a loss is a great teaching tool.

In a way, conversations about money can have that flavor too. I’ve talked with a lot of people who start their conversations with me by saying “I’m lousy with money” or “I’ve made a lot of mistakes in my financial life.”   The good news is that they recognize that they could have done things differently. The downside is that they haven’t worked with anyone, like a coach, who has been able to help them review their mistakes and provide suggestions for ways to improve based on those losses.

When I hear conversations start that way, I immediately stop the conversation and tell people that they are no longer allowed to speak negatively about their financial skills. I ask if they were handed a violin and put on stage with the New York Symphony, if they’d do well or if they’d fare well in a chess match against Bobby Fisher (for those with great memories) or Magnus Carlsen (for a more current reference) if they have never played before. The answer is a universal “NO.” Those are skills that are honed over a lifetime of practicing and learning.

Managing your personal finances is way easier than mastering chess or the violin so it won’t require nearly as much effort or skill. In fact, it’s relatively simple to become a financial success. There have been years worth of blog posts in this space giving little tips about how to become financially well/secure. I’ll close by summing up several years of posts in a few bullet points:

  • Spend less than you take home.
  • Save 15-20% of your income for retirement.
  • Have a healthy emergency fund. (Start with $1,000, get to $2,500, and then get to 6-9 months of expenses over the course of time.)
  • Pay attention to where you spend money. No one will care about your money as much as you, so guard every dollar that you work hard to earn.
  • When you mess up, which we all do, figure out why. Learn from it and don’t repeat it.

 

 

 

Hiding Purchases From Your Husband is So 1950

March 29, 2017

When I was a little girl, I remember my great aunt sending my mom money with a note that simply said, “Please don’t send a thank you note. I don’t want my husband to know.” My great uncle was a bit of a curmudgeon and my aunt would have suffered for her generosity. I also remember my grandmother taking me shopping for back-to-school clothes but telling me to leave everything in the car when we went back to her house so my grandpa wouldn’t know she was spending money. Sound familiar?

A lot of us grew up with this example and continue to exhibit similar behavior in our lives today. Have you ever rushed to put purchases away in the closet before your husband could see or stuffed your Lululemon purchases into your purse before walking into the house to avoid a potential fight about overspending on perceived wants versus needs? How about hiding a Target splurge on stuff for your kids?

While these actions may have been slightly justified back in our grandma’s day, these are all examples of financial infidelity. Just like if you were deleting texts between you and a male coworker to avoid a fight with your husband, hiding purchases from him is the same behavior. It’s a violation of trust. What do you really have to hide?

Back then, women didn’t have as many choices when it came to careers and having their own money or even sometimes in choosing a life partner. I will never forget the day I nervously broke the news that my first marriage was ending to my grandmother. Her response surprised me.

She said, “Good for you. You will do just fine. If I’d had a career and options like you, neither one of my marriages would have lasted.” And while I didn’t relish the thought of anyone I love feeling “stuck” with someone else I love, I understood what she meant and she was right. The big difference between back when my grandmother had to sneak spending behind my grandpa’s back and today is that if you find yourself in a marriage where you truly don’t have economic power, you have the choice to work it out or leave.

I’m not saying you shouldn’t have the autonomy to make your own purchasing decisions – quite the opposite. You may never get on the same page with your spouse about the value of spending on certain things like clothes or wine or electronics or name the thing that causes money fights in your marriage. But there are ways to solve that without hiding purchases such as having separate spending accounts where you agree that you each can do whatever you want with that money with no judgment and no arguing. The kicker is that you both have to stick to the agreement where you only spend that money and not other money that’s allocated towards your family’s goals.

It may be a challenge to arrive at an amount you both agree on for your spending money. When a spender marries a saver, the saver will always want to spend less, but there are logical ways to arrive at that number. Start with your shared goals like retirement, paying off debt, saving for college, etc. Assign a number to those goals and calculate what it will take to get there and agree together whether that amount is reasonable or if you need to modify the goal. Getting on the same page about this helps you both feel responsible for your part in achieving that goal and should help the saver partner relax a little bit about spending on things they don’t perceive as necessary.

Kelley Long is a resident financial planner with Financial Finesse, the leading provider of unbiased workplace financial wellness programs in the US. For more posts by Kelley or to sign up to have her weekly post delivered to your inbox each Wednesday, please visit the main blog page and sign up today.

Why and How to Have Weekly Money Talks

March 28, 2017

When I first got married, money talks in my home looked something like this: I brought out my spreadsheet and the four other programs I was working on to have a financial summit with my husband. He mentally tuned out the second he saw the first version of the budget and was in another place (I suspect it was at a college football game) by the time the meeting was over. Over the years, I learned to simplify my budgets and my husband brought both his mind and body to the meeting. My colleague Steve offers great insight into how to make couple money meetings work that I wish I knew from the beginning:

I have a confession to make. For over a decade in my professional career, I was the pot calling the kettle black. Almost 20 years ago, I followed the advice of a fellow CFP® professional and started advising clients to schedule a weekly 30 minute money meeting to focus on their finances, but I wasn’t doing these myself. Then about 7 years ago, I started having those meetings with my spouse and guess what? They work.

The basic idea is this. Many of us can go a month or longer and not spend any time thinking about our investments or whether we are spending our money on what is important to us instead of where we have always spent it. We pay our bills but don’t think about our spending plan.

On a side note, I hate the word “budget.” It sounds like “diet” to me. They both are limiting and negative.

A friend of mine told me “Steve, you’re a financial planner. Don’t think of it as a diet. Think of it as an eating plan.”

That works for me. I don’t think of my spending as a budget. I think of it as a spending plan.

The ideal time to have a conversation about money is not when you’re late for work, trying to get the kids off to school and have a deadline that is consuming all of your mental energy – been there done that. The Weekly 30 Minute Money Meeting can either be with yourself or with your partner. The rules are the same:

1.You cannot change the past. It is a waste of time to argue about or beat yourself up about things that have already happened. Learn from your mistakes (we have all made them) so you don’t repeat them in the future.

2. Be thoughtful and focus on the future. With my eating plan, if I choose to have a 1,500 calorie breakfast (which is delicious), I’d better plan on eating a lot of salad with little dressing for the rest of the day. If I choose to spend my future paychecks now (think credit cards), I’d better plan on not spending any other money.

3. Hold yourself accountable. Notice I didn’t say hold your partner accountable. We are adults and need to hold ourselves accountable. If you make a mistake, own it and try hard not to repeat it.

4. Schedule the meetings when your energy is high. I am an early morning person. I wake up at 5:30 am every day no matter the time zone or if it’s a weekend.

The ideal time for me would be 6:00 to 6:30 on Saturday morning. My wife’s response to this suggestion is not fit for publication. We meet from 11:00 to 11:30.

These are some tricks to make the most out of your meetings:

  • Put them on your calendar and if you think about something, pull your phone out and add a note to this week’s meeting. That way you don’t forget it.
  • Use the meetings to develop a spending plan. Your spending plan needs to get you, not the other way around. Look at your bank’s online tools, other online tools like Mint, our Easy Spending Plan, a custom made Excel spreadsheet or paper and pencil. Try different ones until you find the one that gets you.
  • Find an item in your spending plan that you buy because you have to but don’t enjoy spending money on and see if you can cut that cost.  Think of auto insurance and electricity. Any money you can free up from those is money you can save or use for something you want.
  • Run a retirement estimator calculator and make sure you are on pace to retire. Update this at least once a year.
  • Run a DebtBlaster calculator and make sure you are paying off your debt as efficiently as possible. Update this every 6 months or when you pay something off.
  • Review your investments at least once a quarter and make sure you are taking an appropriate amount of risk.

As someone who has done this for a while, the benefits of these meetings include reduced financial stress, you and your partner having a plan and fostering honest, direct and sincere conversations about money. Start now. Don’t wait a decade…like some people.

 

 

Should You Take a Hardship Withdrawal?

March 27, 2017

If you are considering a hardship withdrawal, by definition you have a challenging, time-sensitive financial problem. You are probably feeling very worried and anxious about your situation. When money is tight, it is tempting to look to your retirement plan for resources to solve the problem.

Under certain limited circumstances, you may be able to access funds in your 401(k) or 403(b). However, just because you could withdraw funds doesn’t mean that you should do it. A hardship withdrawal should only be used as a last resort, in a truly urgent situation. Why?

It is expensive both now and later. You will pay income taxes on the amount you withdraw, as well as an additional 10% penalty if you are under age 59½. If the withdrawal is large, it could bump you up into a higher marginal income tax rate. Plus, you’re taking away funds which should grow to provide income in retirement for your future self. Here are some questions to help you to find the best choice for your situation:

1. Does this have to be paid right away?

Sometimes a need is urgent, very important and immediate. Some examples include preventing eviction or foreclosure, paying for medical treatment, or repairing your home after a natural disaster so you can live in it. In those cases, a hardship withdrawal for the amount of the need may be the only way you could stay in your home or get the care you or a family member needs. If the bill does not have to be paid all at once, such as a past-due medical expense or a home purchase you could defer, it may be better not to take a hardship withdrawal.

2. Do I have any other sources of funds?

Have you considered all your options? While your cash situation isn’t ideal, make sure you have thought about all things you could sell or places you could borrow from to raise funds:

  • Do you have any non-retirement investments you could liquidate such as stocks, bonds, or CDs even if it means you would take a loss?  Taking a loss on an investment is usually much less costly over the long run than withdrawing funds from your retirement plan.
  • Do you have a Roth IRA? If so, you can withdraw the contributions – but not the earnings – without taxes or penalty.
  • Can you borrow against your home equity or take a personal loan?
  • Do you have non-essential personal property you could sell to raise some cash? Some examples might include a second car, motorcycle, art, collectibles or jewelry.

3. Could you take a retirement plan loan?

Before deciding on a hardship withdrawal, explore taking a loan from your 401(k) or 4013(b). Many, but not all, employer-sponsored plans permit loans that allow you to borrow up to fifty percent of your vested balance up to a cap, whichever is less, for a one to five year period. Some plans also permit longer term loans for the purchase of a home.

The interest rate is usually low and paid into your own account, payments are deducted from your paycheck and it’s not reported to the credit bureaus. See here for situations when a retirement plan loan may make sense. A retirement plan loan has downsides, but they’re not as impactful as a hardship withdrawal.

4. Would the IRS consider your situation an allowed “hardship?”

A hardship is something that causes suffering or privation. The IRS allows hardship withdrawals from qualified retirement plans when the employee has immediate and heavy financial need, limited to certain:

  • Medical expenses incurred by you, your spouse or dependents
  • Payments to avoid eviction from or foreclosure of your primary residence
  • Post-secondary education expenses for you, your spouse, children or other dependents
  • Funeral expenses for you, your spouse, children or other dependents
  • Expenses to repair damage to your primary residence
  • Costs to purchase a primary residence

Note that credit-related needs such as satisfying payday loans, title loans or credit card debts are not covered under the definition, nor are tax bills or business expenses. See IRS guidelines here.

5. Are you taking out funds to purchase a home or pay tuition?

Finally, just because the IRS considers a home purchase or tuition payment a hardship does not mean it’s always wise to take a withdrawal for those reasons. A hardship withdrawal is meant for a true emergency. If the only way you can purchase a home is by taking a hardship withdrawal from your retirement plan for the down payment, you may not be financially ready yet to be a homeowner. As for tuition, consider exploring other options listed in #2 and #3 first, such as borrowing against your home equity or taking a retirement plan loan.

Once you’ve worked through these questions, if it seems like a hardship withdrawal is the best choice for you, know that you’ll have to go through an application process to move forward. You may be required to demonstrate heavy and immediate financial need, that you’ve considered a retirement plan loan but the payments would be burdensome, and that your financial need can’t be satisfied through other channels. Expect the process to take a few weeks.

If you do take a hardship distribution, you won’t be able to pay the money back and you may be precluded from contributing to your plan for six months. Your distribution will be included in your taxable income, plus you’ll pay an additional 10% penalty if you’re younger than 59 ½. If you have access, consider contacting your workplace financial wellness or employee assistance program for financial coaching, to help you put together a plan to manage your cash flow so you can get back on track.

 

Do you have a question you’d like answered on the blog? Please email me at [email protected]. You can follow me on the blog by signing up here, and on Twitter @cynthiameyer_FF.

 

 

Are You Facing a Problem With a Creditor?

March 21, 2017

From 2008-2011, I volunteered my time to work at various community events to help people navigate the Great Recession. It didn’t take long before I started to hear story after story of people feeling trapped by various financial products, such as loans with questionable terms and credit cards with due dates that were like moving targets, one miss and your interest rates jumped. At that time, the best I could offer was complaining to the creditor or better business bureau. Today, when people feel that a creditor has treated them unfairly, they can turn to the Consumer Financial Protection Bureau for help.

The Consumer Financial Protection Bureau (CFPB) was birthed from the financial crisis in 2008 under the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010. The CFPB is unique in that it is the first government agency exclusively focused on protecting you from unfair and unlawful financial practices. One of the major features of the CFPB is the ability to get a third party involved in a dispute you may have with a creditor. If you have an issue with a creditor and feel like you are hitting a brick wall, you can take the following steps.

1. Submit Your Story: If you are angry but do not feel your issue warrants a formal complaint, consider submitting your story. Your story is published but does not include any sensitive information. This can serve as a warning to others that are thinking of using the same financial product and/or service.

2. Submit a Complaint: If you have an issue and feel like you are getting nowhere, consider filing a complaint. Once your complaint is submitted, you get an email along with updates as to the status of your complaint. Your complaint is then forwarded to the creditor in question and the creditor has 15 days to reply. You will be able to review the company’s response and you will have 60 days to provide feedback to the CPFB.

The CPFB has handled over 1 million complaints with 97% of the complaints getting a timely response. The CPFB enforcement has resulted in billions of dollars in compensation for consumers. So if you are facing a problem with a creditor, you now have an advocate that can help you.

 

Should You Follow Elizabeth Warren’s Money Management Advice?

March 16, 2017

While much of the country is discussing the president’s tax return, I stumbled upon an interesting article from a few years ago about the finances of one of the president’s possible opponents in 2020, Senator Elizabeth Warren. The article is titled “You, Too, Can Invest Like Elizabeth Warren” and is based on the information she submitted in a financial disclosure report along with tips from a financial planning book she wrote called All Your Worth: The Ultimate Lifetime Money Plan. Regardless of what you think of her politics, should you follow her financial recommendations? Before we get into the investing side next week, let’s take a look at the first set of recommendations called ”First Things First:”

1. Get debt free. Warren recommends that you “Drain your savings account, empty your checking account, and sell any stocks or bonds” to pay off all your debt. Warren herself has no debt except for a $15k student loan at 0% interest. In some ways, her advice makes a lot of sense. If you’re paying 18% interest on a credit card, paying it down is like earning a guaranteed tax-free 18% on your money and will also improve your credit score.

However, there are a couple of reasons why you might not want to “drain your savings account” to become debt-free. What if you suddenly find yourself in between jobs? You generally can’t put those mortgage or car payments on a credit card so now you risk losing your car and home. You can’t always rely on lines of credit either since they can be cancelled, especially if you’re unemployed or if the economy is weak. That’s why it’s always important to have some emergency savings (ideally enough cash to cover at least 3-6 months worth of necessary expenses) even before paying down high-interest debt.

Second, you might not want to pay off any debt balances early that have interest rates below 4-6% like many mortgages and student loans. That’s because you’re likely to earn more by investing that money instead. Perhaps that’s why Warren hasn’t paid off that  0% loan yet. This is especially true if you’re not contributing enough to your employer’s retirement plan to get the full match and leaving that free money on the table.

2. Don’t buy a sailboat if you work at Wendy’s (or are a journalist). What Warren really means is that 50% of your income should go to needs, 30% to wants, and 20% to savings. But how can you really separate “needs” and “wants?” Is your home a “need” because you “need” somewhere to live or a “want” because you’re paying extra for a really nice place you “want” in a great location? The same goes for everything from the car you drive to the food you eat.

This also seems like too much of a one-size fits all approach to me. Your spending and saving should be based on how you decide to balance your various personal goals and priorities. For example, I personally save a lot more than 20% of my income because achieving financial independence is a high priority of mine and I’m willing to live in a small studio apartment and not have a car to do it. If you work at Wendy’s and are willing to live with your parents and not spend much money so you can achieve your dream of buying a sailboat, go for it. As long as you understand and are willing to accept the trade-offs, do what makes YOU happy.

3. Pay off your mortgage if you have one. Mortgages tend to be low-interest and we already addressed the downside of paying off low-interest debt early, but mortgages have an additional benefit in that the interest is also tax-deductible. That means if you’re in the 25% tax bracket, a 4% mortgage costs you only 3% after-taxes so that’s the number you should consider when deciding whether to make extra payments. (You can calculate your mortgage tax savings here.) In fact, considering the low mortgage rates and the tax breaks, there’s even an argument for NEVER paying your mortgage off.

Of course, there’s much worse things you can do than getting debt-free, creating a money management plan, and paying off your mortgage. I just think her advice is overly simplistic. Next week, we’ll take a look at Warren’s investment advice…

 

Don’t Lose Your Voice When It Comes to Your Finances

March 14, 2017

My husband loves cars. No, I mean he really, really, really loves cars. Whenever he is driving, our conversations will quickly go from what we are going to eat for lunch to the engine power on the vehicle next to him – often in the same sentence. 

I thought I was all alone, until my colleague, Vekevia, shared with me that her husband loves cars too. As we started talking, I wanted to share her wisdom on how to keep the peace in a household with very different interests, especially when one person manages the household finances. Below are her thoughts:

Some couples manage money together and other couples have one person who primarily manages the money. Usually, in cases where one spouse manages the finances for the family, that individual is more financially savvy or may just be better at handling that responsibility.  That makes sense.

It becomes an issue when either spouse, most likely the one not handling the finances, feels like their financial goals or desires are overlooked or not taken as seriously as the other spouse’s financial goals or desires. This is especially true when you just do not see eye to eye on the value of what either spouse holds dear. I handle the finances in our family and have had to learn to work with my husband so that we both feel heard.

My husband is an avid car lover and I don’t just mean that he enjoys seeing nice cars. No, his passion extends far beyond that. He is fascinated over how a car is designed and built. He cares about the horsepower and enjoys seeing how it performs.

Every year, we go to a well-known racetrack in our area to see other car enthusiasts show off what they’ve built and race each other. As you might suspect, this is not cheap. On average, the cost to build a car like what you would see at this type of event can sit close to six figures and annual maintenance after racing can fall in the five-figure range. Guess what? He wants to build one.

Initially, this was a problem for me because I do not value cars the way he does. I just like when a car is visually appealing, dependable.…and INEXPENSIVE! The good news is that we are compromising and he plans to build a much less expensive car, but the financial planner in me wants to scream. Cars are depreciating assets that lose value rapidly over time.

However, my husband’s passion for cars, as expensive as it may be, holds a value that I can’t technically plug into my calculator and put down on paper. It would mean a lot to him for his dream to become a reality at some point this lifetime.  I value him and his happiness. Life is short and you only live once.

Being financially healthy doesn’t mean denying yourself the things you’re passionate about just because of cost. It’s about fitting your passions into your budget. Sometimes, you may have to find ways to make more money or decrease your expenses. We’ve chosen to fit building a car into our budget, not at the sacrifice of keeping a roof over our head, saving for our son’s college, or being able to retire, but it’s important, so it’s there.

Are you in a similar situation with your spouse? Here are some tips to show your spouse he/she has a voice in your finances:

  • Have an open conversation about your financial passions or dreams.
  • Decide what you value most. (You may have to choose 1 or 2 passions each this go around and take on the others in your next lifetime.)
  • Calculate how much you need to save for other financial priorities like retirement and funding your kid’s education.
  • Estimate the cost of making it all a reality.
  • Determine if your current income can carry the cost.
  • Seek opportunities to increase your income. That might mean pursuing a degree to make a career change, going for a higher paying position, or taking on a second job for extra income.

Realize that the cost of something is important, but so is the way your partner feels when you are willing to acknowledge and support his/her interests. You both should have a voice in your finances and work together to set up a feasible plan to make your dreams become a reality.

 

 

Getting Smiles Into Your Days

March 03, 2017

As I sat down to write a blog post, my phone’s text message alert went off.  One of my friends sent a message that he was watching the Baltimore Orioles first spring training baseball game of the year. He sent that to a group of us who get together periodically to go to baseball games and that message made me smile. When pitchers and catchers report to spring training, it tells me that warm weather is right around the corner. The first day of spring training games is almost a holiday in my mind.

Opening Day is one of my favorite days of the year. As a kid, my uncle took me to a lot of Opening Day games in Baltimore and that feeling of being a kid taking the day off from school to watch baseball still hits me as an adult. Baseball, to me, means the end of winter and the start of spring and summer which are my favorite seasons.  It’s all about renewal and hope (for a winning season). On Opening Day, everyone believes that their team has a shot at winning the World Series. 

I’ve seen the spirit of hope and optimism hit employees of our client companies when we have had a few conversations and their debt level starts to come down. A large percentage of people I talk to are coming to me for help with reducing or eliminating their debt load. In those cases, the first meeting is usually one where they come in looking very tense and full of stress. Being overwhelmed with debt, from my observations, is bad for a person’s posture, mood and stress level. 

After the initial conversation, we put together a personalized plan of attack for their debt and we check in periodically (the time line depends on the person and the severity of the debt load) for what I like to call “brag sessions.” In a brag session, they come in and tell me how much of their debt they’ve been able to pay down since our last meeting. We celebrate the progress and acknowledge that there is still room to go. The important part is that these sessions are enjoyable and we are always looking for ways to make more progress. 

In many cases, after a couple years of check-ins and brag sessions, the debt level is close to zero and you can see their eyes light up when talking about what life will be like when they get to $0 debt. I’ve had a number of people come in to the office and pull up their final credit card balance on their laptop to show me that they just paid their last little bit of debt off. When they show me that or bring in the checkbook and write the last check in the office, their level of excitement about what comes next reminds me of the first days of baseball season when excitement and optimism reign.

Are you’re looking for a way to generate some smiles and some enthusiasm into your days? Check out some spring training baseball or..get one of your debts to $0. Either way, it’s a great idea.

How to Save Money on Your Next Auto Loan

February 28, 2017

My first car was what we call in the south a “hooptie.” I paid about $1,500 dollars for it. The car was a multiple array of rust-created colors and the air conditioning did not work, which was a joy during the hot southern summer. As a new car owner, there were a lot of car rules I ignored, such as regular car maintenance. As a result, I soon found myself on the side of a road with a locked engine due to no oil.

This made me rethink my ideas on car maintenance, but it also put me in a position where I needed a new car. With no experience or common sense, I walked into a nearby dealer, told him the payment that made the most sense to me and trusted him to find the car that matched my payment. To his credit, he stuck to my budget and helped me find a halfway decent car. The payments were in my budget and I was happy so I drove off and did not think anything of it.

Recently, I found the auto loan paperwork from that car and almost choked when I read the document. Had I known what to look for and asked when I was getting the auto loan, I could had saved myself thousands of dollars. If you are shopping for an auto loan consider doing the following.

1. Establish rules around how much of a car you can actually afford. Although I considered the payment, I did not take the actual cost of repairs under consideration.  A great rule of thumb to use when budgeting for a car is the 20/4/10. This rules involves putting at least 20% down towards a car loan, financing a vehicle for no more than 4 years and keeping your total monthly vehicle expenses to less than 10% of your gross monthly income. (Monthly expenses includes insurance and gas.)

2. Pull up your credit report using websites like Annual Credit Report.com or use websites like Credit Karma or CreditSesame.com to gauge your credit score. The last thing you need is a surprise on your credit report as you talk to your potential auto lender.

3. Research your auto loan options through banks, credit unions and non-bank auto finance companies to find the best option for you. Consider getting pre-approval and using the CFPB’s Auto Loan Shopping Worksheet to compare your loans. Going into a dealership with a pre-approved loan gives you bargaining power.

4. Understand what’s in your auto loan contract. Find out if there is a pre-payment penalty if you pay off your loan early. Fees such as processing fees, dealer preparation fees and delivery charges may be negotiable. Even your interest rate may be negotiable. It never hurts to ask.

As you shop for a loan, consider printing the CPFB’s Auto Loan Shopping Worksheet and using it as a guide to shopping for loans. Also, read your contract carefully and constantly ask for discounts. Doing these few things can help you save potentially thousands on your auto loan.

What Do You Really Need?

February 24, 2017

I try to maintain a calm demeanor in most circumstances. Even-keeled would typically be a good descriptor for me. But some things are worth really getting excited about.

When I saw the headline “Nation’s Bacon Reserves Hit 50 Year Low as Prices Rise”, I was no longer so calm, cool and collected. “ARE YOU KIDDING ME??? WHAT THE ***??? YOU CAN NOT BE SERIOUS!!!” That’s just a small and sanitized version of the words that came out of my mouth.

Bacon is good! Most things are better with bacon. (I’m part of the crispy bacon fan club. I don’t like it under-cooked.) But…I digress (which bacon always makes me do).

The good news is that we are in no danger of running out of bacon, which the article points out toward the end. It just took a wee bit of calm to come over me to process that little tidbit. I can’t imagine a world without bacon, and I’m glad that I won’t be forced to live in it. The thought of that, if only a fleeting thought, made me ponder the concept of living without things…and living with too many things.

For most of the developed world, we live in abundance. We don’t have to stalk our prey and kill it in order to eat. We head to the grocery store and come home with bags or we hop on our phones and order take-out. We sit on furniture and have to figure out which of the many articles of clothing in our closets we want to wear on any given day. Painting with a broad brush, we in the United States live in abundance right now.

Yet, that abundance creates some issues. Our near constant state of abundance helps create an instant gratification society, which leads many people to live above their means and incur a fairly sizeable amount of debt. It’s through over-spending that I see far too many people with near-crippling levels of credit card debt. 

When someone really wants to reverse that trend and get serious about paying off their debt and building wealth, I sometimes steer the conversation into the concepts of abundance vs. scarcity. The “what do we REALLY need?” question is a fun one to ask. It helps to re-frame the conversation.

In an effort to see if someone is receptive to a radical life change, I will ask (when the person seems like they are willing to engage in the discussion) if they’ve ever considered moving into a very low cost housing situation, selling most of their possessions and trying to live like a minimalist. Most people won’t ever consider that lifestyle, but for my deep debt conversations, it’s a starting point for things that they are willing to live without. (Bacon is NEVER one of the things I suggest living without.)

I know a lot of the personal financial press will talk about small ways to save money (give up Starbucks and pack your lunch), and I talk about that stuff too. But I like to start with the two biggest areas of spending in most people’s lives – housing and transportation. Most of the people I’ve met with who have large credit card balances (except those who incurred the debt because of job loss or medical expenses) pay 60-70% of their monthly income on mortgage/rent plus car payment and car insurance. I’m a big fan of keeping housing costs below 25-30% of take home pay and transportation costs below 10-15%.

If those expenses can be trimmed, progress can happen quickly.  Cutting back on some of the small things can add fuel to the fire. Going slightly minimalist and selling “things” at a yard sale or on eBay can simplify life and raise funds to pay off debt. It all adds up. But for me, starting the conversation with the biggest expenses creates the opportunity for the biggest results.

If you’re in debt and looking to get out, think about the things that you REALLY need and the things you could live without.  Start big! Look at the biggest expenses in your budget and challenge yourself to reduce them. And if you try to take my bacon, prepare to lose a limb!