How to Write a Winning Resume

October 26, 2016

Landing an interview for your dream job (or just your next job) can take a combination of several factors: skills and qualifications, networking, timing and sometimes just plain old good luck. But no matter how you found the job opening, if your resume isn’t up to par, you could lose the opportunity before you have a chance to speak with your potential employer. Even if you’re perfectly happy in your current role and have no reason to believe you’d leave in the foreseeable future, it’s a good idea to keep your resume up to date. If nothing else, it’s a good place to track the accomplishments you’re most proud of! Here are some tips for making the most of yourself on paper, both from my own personal experience in helping with hiring in various roles as well as from various experts in the career and hiring field:

Make it easy to read. A hiring manager or recruiter should have no trouble giving your resume a quick skim to glean the important information. If there’s too much text, there’s a chance your resume could end up in the recycle bin without a second glance. Save the nitty gritty details for your interview and avoid long paragraphs of text with no bullets.

Write a custom, personal cover letter. At Financial Finesse, this can be the differentiator in whether our hiring managers even look at your resume. Use your cover letter to explain why you are excited about the job and highlight anything that would make you the most qualified for the role over someone else with similar experience. Your resume may be a bit dry and clinical, as it should be, so your cover letter is where you can let your personality shine through.

When I applied for my role at Financial Finesse, my cover letter started out, “I am enthusiastically submitting my resume for what I’ve bookmarked as my Dream Job and am so excited to learn more about this opportunity.” It wasn’t hyperbole, that was the truth. And it got me in the door.

Emphasize success, but don’t exaggerate or lie. If you note that you tripled sales in your first year on your current job and it’s the truth, be sure to say that! But also be prepared to give specifics. If you went from $1,000 to $3,000 in sales, there better be a good story behind why that is noteworthy.

Choose a type that fits your career best. Most first resumes are chronological. They list your education and work experience in chronological order. But as you gain more experience and start to move into more strategic roles, you may need to shift your resume to be more functional, where you focus on functions of a job you’ve performed, with the actual jobs and education listed later, or you may want to target your resume for each role you’re applying for.

Before I was at Financial Finesse, I was the Director of Marketing for a small CPA firm. On the surface, that isn’t exactly the type of position that would transition well into a financial planning role, so I targeted my Financial Finesse resume to focus on my prior planning experience, as well as the things I did while in my marketing role that would complement my qualifications to join Financial Finesse. It’s one of the reasons I lead our social media efforts and am on the blog team!

Use key words. This is particularly important if you are submitting your resume online for a published job opening. Many companies use software that scans resume for certain words to help the hiring managers sort which to even look at. Make sure yours includes many of the same words that are used in the job description.

Keep it focused on the value you can add. View everything you put on your resume through what I call the WIIFT lens – what’s in it for them. That means avoiding statements that start with ‘I,’ focusing on how your experience can add value rather than just listing duties and tasks you performed, leaving out information on what you hope to get from the job, deleting irrelevant experience (especially from the distant past), and staying away from flowery language. Everything on your resume should be laser focused on telling the prospective employer what you can do for them.

Proofread, use spell check and proofread again. Nothing turned me off more when reviewing resumes than a typo or grammatical error. Ask a friend or family member to give your resume a thorough read for errors and then proofread it yourself once again. Don’t let a boneheaded oversight ruin your chances for your next job.

Don’t forget that if you hire a resume writing coach for a job search in your current field, you may be able to write off the cost. Your resume should always be a work in progress. If you haven’t updated it lately, let this be a reminder to dig it out of your files and do a little refining in the next week or so.

 

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Can You Deduct Your Job Hunting Expenses?

October 19, 2016

Editor’s note: Please note that all miscellaneous deductions were eliminated with the passing of the Tax Cuts and Jobs Act of 2018, but would still apply for tax year 2017 and prior.

Did you know you might be able to deduct your job search? If you itemize deductions on Schedule A of your tax return and incurred significant expenses while searching for a new job in your field, you may be able to reduce your taxable income by keeping track of them. Here are the rules and caveats:

  1. Most importantly, job search expenses are considered to be miscellaneous deductions, which means they need to exceed 2% of your adjusted gross income (“AGI”) before you can even include them as deductions. To roughly calculate AGI, add up your total income (including interest, dividends, capital gains, alimony received, wages and self-employment earnings), then subtract any pre-tax IRA or 401(k) contributions, HSA contributions, moving expenses, alimony paid and student loan interest1. Multiply that by .02. If your job search expenses are in the ballpark of the result, then it’s worth tracking.
  2. It’s also important to realize that this does not apply if you’re actually switching careers. If you’re thinking of leaving your corporate job to be a yoga teacher, you won’t be able to write off the cost of your teacher training. Only expenses incurred while searching within your current field from one job to another qualify. This also means you can’t write off expenses associated with your first job or even after long breaks away from working unless you were searching the whole time. In that case, keep as much data as possible to prove you were actively seeking work during that stretch to prove it – things like calendars, cover letters submitted, receipts for travel, etc.
  3. Here’s what you can deduct, according to the IRS:
    Resume costs – anything you spent preparing and mailing your resume (if you actually mailed it to anyone!)
    Travel expenses – if you take a trip primarily to interview or seek a job
    Meals – if you happen to have lunch with someone to discuss a job while you’re on vacation, you can only deduct 50% of the cost of the lunch plus any transportation costs directly related to getting to lunch like parking or a cab
    Agency fees – the cost of using a placement agency to help you land interviews
    Networking events – attending events to meet prospective employers or even people who can help you meet prospective employers as long as that’s what you’re there to do – aka you’re actually asking people for help with landing a job
  4. Make sure you keep a solid record of any expenses you plan to deduct. The best way to remember what you need to note is to think of it like an invitation. You need a record of:
    Who was there
    What were you doing
    When you incurred the expense
    Where the expense was incurred (like the name of a restaurant)
    Why it would qualify as a job-search expense

Don’t forget that if you do land a new job in your field that requires a move, you may be able to deduct those expenses too! Searching for a new job can be a tedious and expensive process. Make sure you track the expenses to avoid paying more taxes than you need to.

1 Disclaimer: Not an exhaustive list of “above the line” deductions, but the most common

 

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How to Deduct Your Moving Expenses

October 12, 2016

Editor’s note: The moving expense deduction was eliminated with the passing of the Tax Cuts and Jobs Act of 2018, but would still apply for tax year 2017 and prior.

I know several people who have embarked upon long distance moves recently, which also means that they were often changing jobs. My first question when I learned of the moves was, “You know you can deduct your moving expenses, right?” First, here’s what the IRS has to say about it:

If you moved due to a change in your job or business location or because you started a new job or business, you may be able to deduct your reasonable moving expenses but not any expenses for meals [emphasis added]. You can deduct your moving expenses if you meet all three of the following requirements:

  • Your move closely relates to the start of work
  • You meet the distance test
  • You meet the time test

Here’s what that means:

Related to the start of work: Your move doesn’t have to be because you got a new job, but the two events do need to be closely related. Specifically, you can deduct moving expenses incurred within one year from the date you first started your new job.

Distance test: Your new job must be at least 50 miles further from your old home than your old job was from your old home. If you weren’t working before you moved, then your new job must be at least 50 miles from your old home.

For example, when I graduated college in Michigan and moved to Cincinnati to start my new job, I was able to deduct my moving expenses. But when I moved to a new house in Cincinnati about the same time I started a different job, my new commute was only 5 miles longer than my old commute, so those expenses were not deductible. If you had a 5 mile commute that turned into a 55 mile commute and you switched jobs to work closer to home, you could deduct.

Time test: You have to work full-time at least 39 weeks during the first 12 months immediately after you arrive in your new location. If you’re self-employed, that time requirement increases to require full-time work for at least 39 weeks out of 12 months and for a total of at least 78 weeks during the first 24 months. So a self-employed person who works full-time for a year and 26 weeks from the day they arrive would qualify. There are exceptions to this rule for death, disability, involuntary separation, and a few other things. Publication 521 lists them all.

If you pass all of those tests, then you can deduct your moving expenses. It’s what we CPA geeks call an “above the line” deduction, which has a more favorable effect on your taxes than “below the line” deductions like mortgage interest, taxes and charitable giving. Moving expenses actually decrease your adjusted gross income, a number upon which other tax calculations are determined, including eligibility to deduct medical expenses and even your state taxable income.

What You Can Deduct

Generally speaking, you can deduct any expenses that were incurred to move your stuff, including travel. That includes the cost of storage up to 30 consecutive days, supplies such as tape, boxes, moving blankets, etc., any costs to move pets (I once had a client pay FedEx to move his horse from Florida to California) and your mileage for making the drive there. If your move involves an overnight in a hotel, you can also deduct that along with the cost of renting a moving truck. You’ll have to complete Form 3903 and file it with that year’s return and make sure you keep receipts for everything in case the IRS wants proof.

Remember, the purpose of the move doesn’t have to be because you found a new job. You can move to a new place because you want to move and as long as you switch jobs and meet the three tests, you also get a little tax boost to offset the costs. Moving is expensive. Take advantage of all the breaks you can get!

 

If you have questions that we can answer on the blog, please send me an email, and I’ll do my best to help. Did you know you can also sign up to receive my blog posts every week, delivered straight to your inbox? Just head over to our blog main page, enter your email address and select which topics or bloggers’ posts you’d like to receive. You may also follow me on Twitter and Facebook as well.

How To Network Your Way To A New Job After A Lay-off

October 05, 2016

I’ll never forget the date October 5, 2001. It was the day I was called into HR at my very first job after only one year and one month to be advised I was being let go as part of a firm-wide staffing decrease. I was given a generous separation package, including an assigned mentor, Steve, to help me find a new job.

After I scraped my pride up off the ground, called my mom to cry and accepted that it was time to move on, I called my mentor Steve to get started. His first and most emphatic piece of advice was, “Let your network know. Tell them you’re looking.”

Finding your network

I was clueless to what he meant. I was a lowly staff accountant at a Big 5 accounting firm. We didn’t network. That was for partners and salespeople. My “network” consisted of other second year staffers who went out drinking together on Thursday nights and played flag football on Mondays — in other words, my friends.

As the years went by and my network naturally expanded due to co-workers leaving for other jobs and even led to me being recruited to a new job, I started to understand what Steve was talking about. When I moved to Chicago in 2010 and didn’t know a soul, I took to networking to make friends and find clients for my coaching business. That eventually led to a post as the president of the Professional Women’s Club of Chicago, the premiere networking organization for women in all industries in Chicago.

Networking is just making friends for business

What I’ve realized is that networking is really just making friends in a business setting, and the truth is that the best time to build your network is when you don’t need it. When you’re in a position to help someone else out before you need help, you’re much more likely to receive the help you need when it comes time to ask, even if it’s not from the same people you’ve helped. Basically, it’s karma. So how do you use networking to find a new job? Here’s what’s worked for me and my network:

Reach out to former colleagues. Who knows your work self better than people who have actually worked with you? Connect through LinkedIn or just send them a note to let them know you’re looking and see if they know of any opportunities.

Use those professional associations. Almost any professional career has some type of association that posts jobs and other networking opportunities. CFP® professionals have the CFP® Board, CPAs have state societies as well as the AICPA, lawyers have local, state and even the national bar associations, marketing people have the AMA, and IT specialists have AITP. The list goes on. Even if you’re not a member, check their website to see if they have job postings or upcoming events where you can meet others in your field.

Look to your alma mater. Pretty much every major city has an alumni group for larger universities. Look on your school’s alumni website to see if they have any local events coming up that you could attend to make new connections.

Even if there is no local chapter, you may still find job postings or at least a listing of other alumni in your area. Reach out and ask for coffee or lunch. You never know who your fellow alumni may know.

Just show up. Virtually any situation where you’re meeting new people can offer networking opportunities. The next time you’re invited to an event where you feel like you might not know anyone besides the host, consider going anyway and set a goal to meet three new people. That takes the pressure off from feeling like you have to work the entire room and even if you don’t find your next job, it’s good practice for networking at events designed for job seekers in the future.

Be specific about what you want. My friend Marcy wrote in her brilliant book You Know Everybody!: The Career Girl’s Guide to Building a Network That Works about how to zero in on exactly what you’re looking for before asking for help. Make it easy for people to connect you to others by being very clear about who you want to meet or what you want to do. It’s much easier to flip through your mental Rolodex and offer an introduction when someone says, “I’m seeking introductions to sales managers in the hospitality industry,” than when you hear, “I’m looking for a job in sales.” Unless I’ve just spoken to someone who said, “I need salespeople!” it’s unlikely I’ll be able to help you find what you need in that situation.

Above all, remember to be yourself when networking. It can be nerve-wracking to introduce yourself to strangers, especially if you’re desperately seeking a new job opportunity. Keep in mind that pretty much everyone else in the room is probably equally as uncomfortable and find your common ground there. Then just work on making friends. You never know where it might take you!

 

How to Decide if You Can Afford a Large Purchase

September 28, 2016

I’ve often read that September and October are the best months to buy large appliances. Since our washer and dryer are showing signs of calling it quits, I’ve been thinking about whether or not we should go ahead and buy new ones while they’re on sale. When trying to figure out whether or not it’s the right time to make a big purchase like this, including cars, furniture or even booking a long-awaited vacation, there are a few ways to look at whether you can afford it.

Cash is King

Ideally, you’d pay cash. As long as you don’t need to dip into your emergency fund, paying cash for the purchase of depreciating assets (or stuff that you won’t be able to sell for as much or more than you paid for it) is the best way to go – yes, even for cars. (For help saving up, try the no-tracking budget.)

Same as Cash or 0% Promo Rates

If you don’t have the cash saved yet, then look at same-as-cash financing deals, but only if you can actually pay the balance off BEFORE the interest kicks in. To figure out if you can afford to do that, divide the purchase price by the number of months you’d get interest-free. For example, if it’s a $1,500 purchase on a 90 days same-as-cash deal, you’d have to pay $500 per month.

Can you afford that payment? If not, don’t use the same-as-cash deal. It’s not worth it.

If you’re using a credit card with a zero percent promo rate, the same rules apply. It’s only a deal if you can pay the balance in full by the end of the promo rate. Otherwise, the high interest rate that will kick in will inflate the price of the purchase beyond reason.

Financing with a Loan or Credit Card

If same-as-cash or zero percent financing isn’t available (or you wouldn’t be able to pay the balance by the time the zero percent period ends), then there are a few things to consider before you take out a loan or use a credit card. First, make sure you’re considering the total purchase price including interest. To figure out how much interest you would pay, use the cost of credit calculator. When you add the interest to the amount you’d be paying for the purchase, is it still a good price?

Debt Rule of Thumb

Finally, anytime you’re considering adding a new monthly payment to your budget, make sure that your total debt payments won’t exceed 36% of your gross income. For example, if you make $50,000 per year, then you would want to keep your debt payments to $18,000 per year or $1,500 per month, including your mortgage. So if you have a mortgage payment of $1,000 and a student loan payment of $250, and you’re looking to finance a car, you could reasonably afford a $250 per month payment.

In a perfect world, you would never finance something that you couldn’t sell for its purchase price or higher. This is why it’s a financial folly to charge clothes or food on a high interest rate credit card if you’re not paying the balance off every month. But in times when debt can’t be avoided, having a plan to pay it off is the best way to avoid getting yourself in financial hot water.

If you have other pressing questions that we can answer on the blog, send me an email, and I’ll do my best to help. Did you know you can sign up to receive my blog posts every week, delivered straight to your inbox? Just head over to our blog main page, enter your email address and select which topics or bloggers’ posts you’d like to receive. Obviously, I suggest at least “Posts from Kelley.” Thanks for reading!

 

 

 

What is APR and Why Should You Care?

September 21, 2016

Ever wondered what promotional ads for loans mean when they talk about APR and more importantly, why you should care? Well, you should care and the answer comes from Teig Stanley, one of my brilliant CFP® colleagues who has perhaps the most diverse career experience on our team. He started his career as a child actor, has lived all over the world, and most relevant to this post, he was involved in the mortgage industry before we were lucky enough to hire him to the Financial Finesse Planner Team. Here’s what he has to say:

First of all, APR stands for “annual percentage rate.” It is the actual annual cost of any loan, including mortgages, car loans and even credit cards, expressed as a percentage of the total loan amount, including interest AND fees. It must be disclosed in nearly all consumer credit transactions according to Consumer Finance Protection Bureau regulations.

For example: If you took out a five-year $1,000 loan with no interest or fees, you’d simply divide the total loan amount by five years to arrive at a payment of $200 a year. Since there is no interest or fees, the APR is 0%. Let’s imagine that the loan has a simple interest rate of 5% but no fees. Each year, you would pay $200 (principle) plus 5% of the loan balance ($50 the first year, $40 the second year, $30 the third, etc.) That 5% is a cost for you, so in this case, the APR would be 5%.

Now let’s say there was a one-time $100 fee for the loan (sometimes called an origination fee). That would make the APR 7% – higher than the interest rate because it is taking the total cost into account. Finally, imagine that the interest is compounded. In the first year, you not only owe $200 in principle, $100 in fees, and $50 in interest, but you also owe 5% on the $50 in interest that has accrued during the year (an additional $2.50). While this amount is small, it does add to the APR, making it 7.0024%.

Confused? Don’t worry. Any bank that is offering a loan must disclose the APR so they already do this math for you.

But it’s important to pay attention to the APR because if you are expecting a simple interest loan (no fees or compound interest), you can actually confirm that by checking the APR. It should match the interest rate. If it doesn’t, that’s a red flag that something is wrong. In most cases, the APR for a loan is going to be higher than the interest rate because of fees and compound interest.

So one way to compare two loans with the same interest rate would be to compare the APR on those loans. A higher APR for one indicates that the fees or compounding would cost you more over time. It’s quite common for lenders to advertise super-low interest rates to get you hooked, only to have you discover that that they will make up for the lower interest rate with fees. Checking the APR allows you to spot these tactics and avoid paying more than you would with a higher rate but no fees.

If you have other pressing questions that we can answer on the blog, send me an email, and I’ll do my best to help. Did you know you can sign up to receive my blog posts every week, delivered straight to your inbox? Just head over to our blog main page, enter your email address and select which topics or bloggers’ posts you’d like to receive. Obviously, I suggest at least “Posts from Kelley.” Thanks for reading!

 

5 Ways You’re Wasting Money by Trying to Save It

September 14, 2016

In its purest form, “saving money” means you actually take money that you’ve received or not spent, and you set it toward one of your goals. But sometimes when we try to save money by spending less, it can lead to over-spending. Here are five situations where our best intentions often backfire. Make sure you’re not falling prey!

1. BOGO: Buy one item, get the second half off – it’s so tempting, especially when it come to things like shoes and accessories! But chances are that you’ll end up talking yourself into something that you’re not crazy about just to take advantage of the deal. Plus the store is betting that you will pick a more expensive second item than you originally came to shop for, driving your bill even higher. Suddenly, a $40 purchase turns into $80, and you’re not even sure you like the bonus purchase. BOGO only works when you’re getting something free from buying something that you were planning to purchase anyway, like microwave popcorn or my favorite treat, ice cream.

2. Cheaping out at the parking meter: I know how annoying it is to feed the meter just to pop in for a cup of coffee. But those meter maids are omnipresent, and they are trained to ignore your pleas once they’ve spotted your car at an expired meter, even if you’re standing there with your keys in hand. (Don’t ask me how I know this.) Saving a dollar is NOT worth the $35 or more parking ticket that you’ll end up with when your good parking karma runs out. Feed the meter every time and for enough time.

3. Signing up for retail credit cards for the discount and then not paying them off: It’s one thing if you open the store credit card to get the discount and then pay the balance due in full. That’s smart. But only paying the minimum can negate any money saved due to the high interest rates charged. Whenever I use a store card for the discount, I either get back in line and pay off my balance right there (a lot of stores even accept debit cards for payment!) or I go home and do it online right away.

4. Carrying the wrong cell phone plan. When was the last time you checked your phone plan to make sure you’re using the best one? Carriers are constantly changing their offerings, so double check that you’re still on the plan that’s best for your usage. The last time I checked, I was able to add a gig of data for $5 less than my old plan!

5. Justifying impulse purchases because they’re on sale. Check your closet. How many items are you hanging onto because you haven’t worn them, but feel bad getting rid of them since you spent the money? I’d guess that most of those items were things you picked up and thought, “What the heck? It’s only $12!”

The next time you find yourself cruising the clearance racks, think twice. Is this actually something you need or want? How else could that money be used? Plug it into the Daily Savings calculator and see. Just $5 a day could add six figures to your long-term savings.

Finally, here’s a simple way to save a little extra money that my mom taught me: keep every five dollar bill that comes your way instead of spending it. It’s easier to stay disciplined with this if you have a plan for the savings. My mom uses hers for fun money when my parents travel. That way when she does find a good deal while cruising her favorite Ross store, it’s guilt-free!

 

4 Financial Moves I’m Glad I Made in My 20s

August 31, 2016

It’s easy to dwell on the shoulda, coulda, woulda’s of our past – those things we wish we’d done differently. But I’m also a big believer in reflecting on what went right! After all, if history is bound to repeat itself, wouldn’t we want the good stuff to repeat as well? So here are the financial moves I made in my earlier years that I would be glad to repeat.

Contributed to the match in my 401(k) since day 1. It’s worth noting that with my first two employers, I actually didn’t get to keep my full match as I left the companies before I was vested, but I still had the money I’d saved to start my nest egg. I also had the established habit of saving as I went on to higher-earning jobs, where I eventually qualified for and got to keep the match. So even if you’re quite certain you won’t be around long enough to keep matching dollars, you should still save enough to earn it. You never know when plans might change, and it’s silly to give up the chance at free money. Isn’t that why we buy lottery tickets?

Aggressively paid off credit card debt. There have been two occasions in my life when I used credit cards to get through times of income challenges. Both times I also reached a point when it was time to pay them off, and I committed to an aggressive monthly payment in order to eradicate the debt as quickly as possible. I also put any windfalls toward the debt, including things like tax refunds (Remember the “stimulus” checks we all received in 2001? Mine went straight to VISA), work bonuses and freelance income. I also made sure my spending reflected my desire to get out of debt and saved the luxuries as my reward for financial dieting. The Financial Finesse Debt Blaster calculator is a great way to make a debt pay-off plan.

Participated in my employee stock purchase plan. I’ve worked for three publicly traded companies that offered employee stock purchase plans, which basically allow employees to buy stock in the company at a discount through payroll deductions. This is another example of free money but was also a fun way to build up some side savings that made me care a little bit more about how my company did beyond just my own job. I never invested more than I could afford to lose, so in all three cases, I was just saving a small amount, but it was worth it to have that little investment nest egg that I could access before retirement. Caution though: make sure that your investment in any one company doesn’t exceed more than 15% of your total investments. If your employer match goes into company stock too, keep an eye on when you may need to diversify out of the stock.

Earned my BODYPUMPTM certification. What the heck does teaching a fitness class have to do with finances? Well, since I became a certified instructor in 2005, I’ve not had to pay for a gym membership, plus I get paid to work out. It’s not a ton of money, but it’s better than paying to work out! I try to make the most of it by transferring 50% of my BODYPUMPTM pay into a separate savings account. I can’t quantify the health benefits of teaching three times per week, but suffice to say, I probably wouldn’t make it to the gym more than once a week if I wasn’t paid to be there, so it’s worth it for the health benefits too.

How about you? What financial moves did you make early on that are paying off today? Please share them with me on Facebook or Twitter.

Did you know you can sign up to receive my blog posts every week, delivered straight to your inbox? Just head over to our blog main page, enter your email address and select which topics or bloggers’ posts you’d like to receive. Obviously I suggest at least ‘Posts from Kelley.’ Thanks for reading!

 

 

4 Financial Moves I Wish I’d Made in My 20’s

August 24, 2016

Whenever I have the opportunity to work with an employee who is just starting their career by calling the Financial Helpline to make sure they’re making all the right financial moves, I can’t help but gush a little bit. This simple phone call often sets into motion actions and habits that will legitimately change the course of this person’s life. I often wonder how my life would have been different if I’d had the Financial Helpline to call for unbiased financial guidance from someone who would have given me a straight answer, no strings attached. If I could turn back time, here’s what I’d have done differently:

Joined an HSA plan as soon as it was offered. I still remember the hoopla in the financial services community when health savings accounts were first rolled out, but I didn’t get it. I wasn’t yet a financial planner, so I didn’t fully understand why anyone would sign up for a health insurance plan that could cause them to pay full price for the first couple thousand dollars in healthcare expenses each year, and didn’t even consider signing up. Similar to many people’s logic, I avoided the HSA due to the high-deductible without taking into consideration the fact that my employer was willing to fund some (or all) of that deductible and based on my lack of health issues, I was unlikely to spend even that. By the time I realized the beauty of the HSA, I only had a couple years before it was time to switch to more comprehensive coverage since I knew my costs were going to increase.

Opened and funded a Roth IRA. I’ll never forget the day I stepped into my co-worker Tom’s office and asked him to open a brokerage account for me to begin investing in an index fund with the extra money I had been paying toward my low-interest student loan. Tom looked at me and said, “Are you sure you don’t want to use that money to fund a Roth IRA instead of a taxable account?” I nodded, thinking that I didn’t want to kiss that money goodbye for the next 35 years, so I opted for a regular brokerage account.

I was wrong. Had I instead used that money to fund a Roth IRA, I still would have had access to my deposits without tax or penalty, and I would never have to pay taxes on the growth of my investments after age 59 1/2. When asked by young people about priorities in savings, I never waiver in my answer:

  1. First get the match in your 401k. It’s free money, enough said.
  2. Then max out your HSA. If you don’t need the money tax-free for healthcare expenses, you can access it like a normal retirement account after age 65. It’s also often free money.
  3. Then fund a Roth IRA. While you are still under the income limits and the money has years to grow, take advantage of it.

Created a pet care fund. I adopted my first cat, Hattie May, my senior year of college and over the course of her short 13 year life, I estimate that I spent at least $5,000 on her care. The worst part about this is that I should’ve spent more to take care of her issues, but because I didn’t have money set aside, I skimped. This is something I’ll forever regret and I often wonder if she’d still be alive today if I’d prioritized saving for her costs. Here’s what I should’ve done: find out the cost of pet insurance for annual visits plus emergency care and then instead of buying the insurance, set that amount aside each month into a separate savings account. That way when things did come up, I would’ve had money available and if nothing came up, I wouldn’t be out the money.

Spent less money on cheap clothes. Confession: I engage in retail therapy with the best of them. I just wish I could go back to those early years and made a few less trips to stores like Old Navy and Target, where I succumbed to merchandising brilliance and bought clothes I maybe wore twice. I could’ve re-routed that money toward Hattie’s fund or a Roth IRA. The worst part is that when I went through periods of closet-cleaning during those years, I didn’t receive any tax benefit from donating those clothes as my itemized deductions weren’t high enough to qualify.

What I wish I’d done is put a limit on myself for impulse shopping. I don’t believe in going cold turkey. I do think we can all handle moderation though.

I can’t turn back time, but I can share the wisdom of my mistakes so here’s hoping you can learn from mine. What financial moves do you wish you could do over? Let me know on Facebook or send me a tweet.

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How This Millennial Couple Bought Their First Home Before They Thought They Were Ready

August 17, 2016

We often discuss planning for obstacles in our financial planning workshops, acknowledging that even the most perfect plans need contingencies. Life happens! So when our director of PR, Danielle, and her husband Adam discovered they were expecting their first child a few years before they had planned to start their family, they obviously had to shift some of their other plans. “Obstacles” aren’t always negative things!

Danielle shared with me that she and Adam had a 3 year plan that included purchasing their first home before having kids, so when they found out they were expecting, the home purchase plan was pushed back. When she announced they were closing on a home less than 7 months after their son was born, I had to know how they worked that out! Here’s what I learned and what we can all learn from prioritizing goals and examining our spending, in an edited interview with Danielle:

Me: When did you and your husband start thinking about buying a house?

Danielle: We’d been talking about buying a home since we got married in 2014 as part of a three-year plan, but when we found out we were having our little boy earlier than we’d planned, buying our first family home became a ‘when we can’ sort of goal that sat on the back burner for about a year. We kept saving but weren’t looking seriously and were even discussing renewing the lease on our apartment when we filed our 2015 income taxes. The straw that broke the camel’s back was our tax guy telling my husband, “You need more kids and a house” to write off as we were paying a ton in taxes. We started our search then.

Me: Did it happen on the timeline that you planned?

Danielle: Surprisingly, it happened before we had planned. We didn’t think we could afford a home or were ready for the responsibility. When we realized that we’d saved enough for the required down payment and could get a pretty low rate because of the current economy, we thought now’s the time!

Me: What were the initial financial moves you made to start the process?

Danielle: We had to get our financial ducks in a row, so to speak. First, we checked our credit scores to see what kind of a rate we could get. My husband works in mortgage, so we had a pretty firm grasp on what we could qualify for and what the best program was for us based on our income and down payment savings.

We crunched the numbers to decide what our maximum monthly payment could be and then after dreaming a bit, settled on what a comfortable payment would be, and started looking. I am SO glad we stuck to the lower amount, even after looking at some awesome homes in our peak price range! We also decided to pay off some credit cards to make sure we could qualify since my husband’s income, being commission-based, could get complicated through the loan process.

Me: Did you make any changes to your spending in order to save for a down payment?

Danielle: Yes! We had been cutting back for about a year prior to looking, like going out to eat less and cutting our cable back from the full package to a basic package while using Netflix instead. I also have a hybrid car, so I started charging it more instead of filling up for more mileage on less money. We cancelled magazine subscriptions we weren’t using, and I cancelled my gym membership because our apartment complex had a pretty nice one on the premises.

My husband and I are pretty impulsive, so saving money is hard for us, but we knew we had to change those habits – especially if we were going to be responsible for a mortgage! We have been working hard to do that and it’s paying off. We also said “NO” a lot more to friends who invited us out for social events. Not only were we trying to save more in general, we were expecting a baby so we knew saving needed to be our number one priority!

Me: What tips or tricks did you learn from working at Financial Finesse that helped in this process?

Danielle: I have learned so much about simple ways to save money that can really equal large amounts of savings. I remember sitting at the counter with my husband and talking about where we could cut back. At first, it felt like nowhere!

But when we really began to break it down, we found hundreds of dollars every month we could save. That was pretty cool. I’ve also learned a lot about using credit wisely and keeping your debt to income ratio balanced, which paid off in the home buying process.

Me: Was there anything you wish you’d known before about buying a house that you have learned?

Danielle: Yes! I didn’t realize how difficult it is to buy a home in a competitive market like Southern California. It was extremely frustrating and at times, I couldn’t help but feel like the industry is pretty biased in some areas.

We were finding it was hard to even get our offers looked at. We were beat on several homes by all-cash offers, which is to be expected. What caught us off guard was that we were being completely overshadowed by offers that were being written by an agent acting as both the selling and buying agent.

This seemed crazy to me. How is this legal? It made it impossible for anyone who wasn’t working with the selling/buying agent to get a look.

When we lost a home we really wanted because the agent held off on even showing our offer to his client in order to give his buying clients a chance to put theirs in first, we learned our lesson and ended up going through the selling agent ourselves on the home we finally did get. As a result, we had to pay our agent outside of contract for all of his work with us AND the selling agent for getting our offer accepted. We were so desperate at that point, we went ahead with it, but if we weren’t needing a home (our lease was up in 3 weeks at this point!) we probably wouldn’t have done it.

Me: How does this change your financial picture going forward?

Danielle: It has helped us lay down our roots to really start planning for our future. We look around our new place and think, “Wow this is ours!” and it feels so good to not be paying someone else’s mortgage! Now that we have a home with a comfortable payment, we are focused on saving for our son’s education, preparing for more children and saving for our retirement someday. It was definitely the right decision for us even though we didn’t anticipate making the move for another year.

Me: What words of advice do you have for other young families who are thinking about buying their first home?

Danielle: Do your research. Don’t rely on what listing agents are sending or telling you. Go to open houses yourself and talk to the agents.

Get a scope of what the seller is looking for. It’s always good to get as much information as you can about what you’re going into. Compare loan rates at different financial institutions and ask about first-time home buyer programs.

Also, don’t skimp out on the inspection! My husband and I spent nearly $1,000 on three different home inspections because we decided to go with a very thorough inspector instead of a cheaper, less thorough one. As a result of what he found, we backed out of two homes that would have ended up being financial nightmares for us down the road.

Finally, start saving now. We didn’t honestly think we could buy a home this soon after having our son, but saving was pretty painless, and it wasn’t nearly as hard as we expected to cut back on things we rarely used anyway. Pick 2-3 small expenses you can cut and start there. You’ll find that it’s kind of fun to see how much you can save every month!

Thank you so much to Danielle for sharing this experience and wisdom! For tips on applying for a mortgage, check out Five Things to Know About Applying for a Mortgage. Now you tell me – what things did you learn as you saved and shopped for your first home? Anything you’d do differently? Please email me, share on our Facebook page or send me a tweet @kclmoneycoach.

 

 

Why Health Savings Accounts Are Such a Great Deal

August 10, 2016

Health savings accounts have been around for several years now, but we still find that there are plenty of people out there who don’t understand how they work or why they can be such a great deal. We are lucky enough to have access to them at Financial Finesse and my colleagues with great health and relatively little expenses simply love the plan. Here’s why: it’s a high-deductible plan connected to a health savings account (HSA), a plan type that is becoming more and more common as traditional insurance premiums continue increasing.

In our case, our company pays lower premiums because we have to spend $3,500 each year before the insurance even begins to cover us. That doesn’t sound like a great deal for us employees though, huh? That’s what a lot of people originally think too. But the other side is that our employer uses the savings to put $2,500 each year into a health savings account for each of us that we can then use to pay that $3,500 deductible. As a result, we would only have to pay an additional $1,000 to reach the deductible, and that’s only after our healthcare costs exceed $2,500.

The best part is that we pay no taxes on this money and unlike FSAs, we get to keep whatever we don’t spend in our account. That doesn’t mean you can take the money and splurge it on a nice vacation (at least not without paying taxes plus a 20% penalty on it). But it does mean you can invest that money in your HSA tax-deferred until age 65, when you can then spend it on retirement without penalty, use it tax-free for medical expenses (which Fidelity estimates will be about $245,000 over the remaining lifetime of a 65-yr old couple without retiree health insurance), or just let it continue to grow tax-deferred.

The interesting thing is that it changes your whole view on health spending. Normally, you probably just go to the doctor when you feel sick and don’t think much about costs since someone else (the insurance company directly and your employer indirectly through higher premiums) is paying. Think about how you’d spend if other areas of your life worked that way (as someone who loves to eat out, I wish my company provided us food insurance). Instead, when the dentist asks when the last time you had your x-rays done, you’re more likely make sure you know the answer before paying for x-rays you don’t need.

Annual wellness visits are free of charge by law. If you rarely get sick, you may not have to spend any money at all while still keeping up on your vital visits (and banking those employer contributions). You can also use your HSA for medical expenses as well as on your spouse and dependents even if they’re not covered on your health insurance plan.

Another thing I love about HSAs is that an individual at my company can also add another $850 to it each year since the limit is $3,350 per year for a single person. If you have the deposits deducted from your paycheck, you also don’t have to pay the 7.5% payroll tax on it. Not even 401(k) contributions let you do that. When you consider that HSAs offer you both pre-tax contributions AND the potential for tax-free withdrawals, there’s an argument for funding it even ahead of your 401(k) (after you’ve maxed the match, obviously) or IRA.

So what’s not to love? Apparently not much. With two caveats: make sure you have at least enough cash on hand to pay each year’s out-of-pocket maximum and if you have latent health conditions like I do, consider switching to a lower-deductible plan when your healthcare needs are projected to grow.

 

 

7 Signs You’re Living Beyond Your Means Even If You Can Pay All Your Bills

August 03, 2016

I’m pretty sure most people understand that the first step in achieving financial security is to spend less than you make. Sometimes easier said than done, but it’s the only way you can save any money and avoid high interest credit card debt. What a lot of people don’t get though is that just because you’re able to pay your bills each month, it doesn’t mean you’re not living beyond your means. If your bank account balance gets dangerously close to zero right before payday, you’re not “getting by,” even if you don’t overdraw and are technically making ends meet. Here are 7 other signs you’re living beyond your means, even if you are able to pay all your bills on time, and what you can do about it:

1. You’re not paying off your credit cards every month or you don’t have a plan in place to pay them off. Use the Debt Blaster to get a plan going and then stick to it.

2. You don’t have an emergency fund. This is your first line of defense against long-term financial issues. Get started on this ASAP.

3. You say you can’t afford to do that thing you really want to do. This was actually the wake-up call for me to realize that I was living beyond my means even though I was making ends meet. I really, really, really wanted an iPad and a new bike, which added up to about $1,000. I said I couldn’t afford it and yet I was spending that amount monthly on dining out and booze. If you tell yourself you can’t afford something you really want, and that thing would be reasonable for someone of your income, lifestyle and life stage to have, that’s a sign you need to examine your spending and start living within your real means.

4. Unplanned expenses like a traffic ticket or a family member’s destination wedding send you into a tailspin. If the first thing you think of when you hear a cousin is getting married at an all-inclusive resort in the Caribbean is, “How rude! I don’t have the money for that!” you are not “making it” financially. There needs to be wiggle room in your cash flow for things like this. Here’s a good way to plan for it.

5. You’re taking out 401(k) loans to pay off other bills. Even though you’re paying interest to yourself, this is still a form of debt. If you’re borrowing against your savings, you’re not living within your means.

6. You’re not on track to retire at 65. Ideally, you’d be financially able to retire before you are mentally ready, but 65 is a good age to shoot for if you’re still in the earlier parts of your career. Here’s how to find out if you’re on track. If you’re not, the earlier you start saving, the sooner (and easier) you’ll get on track.

7. A job loss or medical emergency would severely alter your future. If going without even just one paycheck would send you into late fees with all your bills, it’s time to get a system in place that helps you save for these unexpected events.

The best and easiest times to escape the paycheck-to-paycheck lifestyle is when you experience any type of windfall like a tax refund, an unexpected bonus or even just your annual single-percentage increase at work. Be strategic with that money and use it to find some space in your finances, rather than just adjusting your spending to match. You don’t have to wait for a windfall to do this though. Even just a small change each day that you mindfully use to put away a little extra adds up.

 

Should You Buy Whole Life Insurance?

July 27, 2016

One of my favorite parts of being an unbiased financial planner is that I have the opportunity to answer questions for family and friends as well, with no concern as to whether there is a conflict of interest or a loss of earning opportunity. I love it when people ask me for help making their decisions. It’s what I do every day, and it’s why I’m in this business in the first place.

A friend recently asked for my thoughts on a whole life insurance policy that she was being pressured to buy after meeting with an agent to discuss disability and term life insurance. She was pretty sure that whole life was bad since that was the thing the agent was pushing the most, which is a definite red flag. If someone is trying to sell you something that you don’t understand, and they’re unwilling to take the time to educate you on why it’s the right thing for you, JUST SAY NO. However, in this case, the answer isn’t cut and dry. This is basically how I answered the question:

The big downside to whole life policies is that they tend to have high fees, especially in the first couple years, when the agent makes their big bucks off commissions. (This post explains a little more about the intricacies and the different types of life insurance.) Whole life insurance is most appropriate for higher income people who are wealthy enough that all their other tax-advantaged ways to save money are being fully utilized.This means that:

1. You and your spouse are both maxing out your workplace retirement savings plans. ($18,000 if you’re under age 50, $24,000 if you’re over. The limits can be higher for self-employed people who have a SEP-IRA).

2. If you have an HSA due to high-deductible health insurance, you’re putting the full $3,400 (for individuals) or $6,750 (for families) into those accounts.

3. You are maxing a Roth IRA (using the “back door” method, if necessary and applicable).

4. You have no debt besides a mortgage, car loan, and possibly student loans as long as the rate is 3% or less.

5. You have at least 6 months of expenses set aside in a savings account.

6. You feel like you have enough extra money every month to do the stuff you want to do within your lifestyle values like travel, caring for pets, entertainment, etc. and you can adequately fund things that might pop up like medical procedures, etc.

If all of those financial needs are either met or you’re on track to meet them, and a whole life policy premium wouldn’t derail them, then they can be a decent investment that can fulfill the “fixed income” part of your long-term investments. That’s how the agent I purchased my small policy from described it. I also decided to purchase my whole life policy because there was a strong chance I may not qualify for long-term care down the road due to blood clot issues (and ironically enough, I got a blood clot exactly one week after my policy was accepted for underwriting – timing was impeccable, and my policy had a cheap rider for that coverage). Here’s how we looked at it:

The annual premium for at least the first 5 years is equal to an amount that we would typically be saving in a bond fund or other less-risky investment anyway. The policy builds a guaranteed cash value and based on the projection of the cash value’s growth, we would break even (aka the cash value would equal and then exceed the total amount of premiums we’d paid in to date) after 13 years. The real question then was whether we would otherwise take that money and save it some other way.

Since the answer was yes, we went with making this a small part of our overall investment savings strategy. Once I’m 65, we no longer have to pay premiums and at that point, we could borrow against the policy and use the cash value as we needed. It’s actually a great way to invest tax-deferred, as long as it’s truly looked at as a long-term investment.

Could we take that money and invest it in a bond index fund for lower fees and expenses? Sure, but there’s no guarantee on the growth of that money, and should I meet an early death (heaven forbid!), my policy would pay its full face value starting from the day we made the first premium payment. It’s worth it to us.

Post was updated 3/9/17 for current savings limits.

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.

 

 

What Financial Security Really Means

July 13, 2016

When my colleague Matthew recently announced that his family had made the decision to move to Maui this summer, I was immediately intrigued. I’m a big believer in gathering wisdom from the experiences of others, so I asked Matthew to share the process that he and his family went through in making this life-altering decision. Here’s what he had to say, from an edited interview:

Q: You and your family have decided to move to Maui this summer. Was this something you always planned to do?

Matthew: This wasn’t something we always wanted to do. I was pretty content living in Southern California, due to our strong relationships here, up until recently. My wife’s family is from Maui, and she was born and raised there. Moving to Maui is something we only began to seriously consider end of December, last year.

Q: Was there a specific event that triggered you to start thinking about this?

Matthew: A number of happenings triggered us thinking about moving to Maui. For 14+ years, we had been part of a tight knit community through our church. Recently, some of the key leaders in that community passed away. Our families were really close so it was a big hit. It really hasn’t been the same since.

We started re-thinking why we were in Los Angeles. It’s a busy place, and in many ways, not our ideal place to live, although we have really enjoyed the work and relationship opportunities we’ve had. We began to consider other places to live, Hawaii being the chief place, due to my wife being from there.

Q: What was your timeline for making this decision and what things did you consider?

Matthew: It took about 6 months to determine if the move was viable, and after we determined it was viable, we went with it. We considered a number of different factors:

  • Cost of living: Hawaii is a pretty expensive place to live, but so is where we currently live (the South Bay of Los Angeles). We performed a cost of living analysis and determined that besides food and gas, it’s pretty much a wash.
  • Housing costs: Rental rates are about the same between Maui and LA. We were pleasantly surprised to learn that housing prices are a bit more affordable than the South Bay, especially if you stay away from the beach.
  • Potential job salary (if we were unable to keep our jobs): We weren’t sure if we’d be able to keep our jobs or have to find new ones, so this was a bit of a gamble. After doing research on IT jobs for me and biology jobs for my wife, we found that we could possibly take a 50% pay cut if we moved. So we did some soul searching and felt ok with this decision – a more restful, peaceful way of life was more important to us than making more money and having a more expanded lifestyle.
  • Our current savings: We have been aggressively lowering debt and saving money for the last few years, which was a huge factor in our decision to move. Having a financial cushion to fall back on helped ease concerns over the cost of moving, initial rent payments, and possibly being without a job for a few months.
  • Relationships: Friends we’d be leaving behind as well as the benefit of being closer to my in-laws were important considerations. My son has a lot of close friendships with kids his age through school, so that was a big one to work through.

Q: Anything that would have caused you NOT to make the move?

Matthew: A number of things had to line up for this to work, and if any one of them had not, we probably wouldn’t have considered moving. First, and most important, we needed the existing relationships in Maui (my wife’s family and friends), which leads to potential connections between us and the community. Second, we had to have a viable financial plan to move. Third, the hope of a better lifestyle is what pushed us over the edge.

Q: If you had one piece of advice for people thinking about making a life change like this, what would it be?

Matthew: There’s a lot that goes into a decision like this, and obviously it’s not something to take lightly. I think understanding yourself, as well as understanding your immediate family is super important. What type of environment will make you and your family most effective and happy should be your starting place.

Some of us are lucky, and we understand ourselves from the get-go pretty well. Others may need to spend some time soul searching and looking for answers as to who we are and where we should go in life before decisions like this. This process takes time, but if you want to be effective and happy as a person, you’ll want to undergo this process and continue to re-evaluate and develop over time.

After you do some soul searching within yourself and with your family, then you can start evaluating where you might want to move. Is the place you’re thinking of a place to visit or is it a place to live? Could you really be happy there long term?

Do I, as a person, make sense within that community or region? Will I fit in well there? Do I have something to offer that community? Do I have the potential to care about the people that live there or will all of my relationships likely be superficial?

Lastly, have an exit plan in case you miscalculated. If it doesn’t work out or if the place doesn’t line up, what’s the worst that can happen? Can you and your family leave relatively unscathed?

The CFP® viewpoint: I was very happy to see that the long and short-term effects on family finances played a central role in the decision but that this wasn’t the primary factor. I’ve seen so many instances where families are dragged around the country as one parent climbs the ladder in a corporate job only to find that the financial success wasn’t worth the strain on their marriage, kids and overall life. I also love the fact that before they had this idea, they had already begun laying the financial foundation, and to me, that’s actually the key takeaway for all of us.

Even if you’re not sure what your “Moving to Maui” event will be, being financially prepared will make the decision much simpler. It’s a real shame to say no to the things you really want to do because you’re too burdened by debt or don’t have any savings in the bank to allow for leaps of faith. To me, that’s the true definition of financial security – making choices for every reason besides money because you’ve already got that one taken care of.

 

Use These 5 Tricks to Keep Online Shopping in Check

July 06, 2016

When was the last time you indulged in a bit of retail therapy? Even the most financially savvy of us are prone to impulse buys at times. Considering the fact that we often end up regretting those splurges, it’s wise to explore this leak in our budgets and try to keep these guilty pleasures from turning very quickly into shameful regrets.

One way I avoid impulse buying is by shopping with a list and avoiding stores like Target when my emotions are high. I’ve noticed that even when I go into certain stores with a very specific buying mission, I find myself wanting to buy something else, even if I have zero needs. Marketing gurus have figured out how to trip our psychological need to consume and those stops are fully pulled out when you walk into any retail outlet. I’m mindful of this and it helps.

My Achilles heel of impulse buying, however, is the Internet. The “avoiding it” option doesn’t exist, so I’ve had to implement other techniques to quell the shopping. Here are a few tips I use to keep online shopping sprees in check:

1. Create a filter for emails. There’s a reason that stores are so generous with discounts offered via email. They work!

Just this morning, I found myself browsing skorts from Athleta because they sent me an email about their semi-annual sale, even though I didn’t wake up thinking, “Hey, I need a new skort.” I don’t want to give up on the opportunity to enjoy coupons and discounts when I DO need something, so I created a filter that directs all my shopping-related emails straight to a folder aptly titled, “Shopping.” Then when I actually do need to buy something, I just check that folder to see if there are any current coupons or discounts in effect (note to self to add a filter for Athleta).

2. Don’t save your card. Make it one step harder to complete a purchase by opting out of storing your credit card information on a retailer’s site. Not only does this hopefully make you think twice if you have to get up and get your card, it could potentially save your card number from hackers. Win-win.

3. Beware the lure of free shipping. If you find yourself going back to shop for one more thing to put you over the mark and qualify for free shipping, stop for a second and do the math. If the one extra thing you buy is less than shipping would cost, then it’s worth it. Otherwise, you’re just spending money on stuff you don’t need to avoid paying less total money. Pay the shipping or skip the purchase altogether.

4. Realize that Facebook isn’t all-knowing. It’s no coincidence that the pair of shoes you were contemplating on the Nordstrom website suddenly show up in your news feed on Facebook. That’s part of what you signed up for when you agreed to Facebook’s terms. They track everything you browse, not just on their site. For this reason, I try to remember to sign out of Facebook when I’m done so that I can both maintain my privacy and avoid temptations the next time I log in.

5. Only shop sober. Do I really need to explain why shopping online after a few glasses of wine is a great way to blow your budget? If you can’t resist the pull of shopping after happy hour, then at least make an agreement with yourself that you’ll leave everything in the shopping cart and complete the purchase in the morning. Deal?

I’m not suggesting that you cut out all online shopping, but if you spent more money last month on purchases that you don’t really need than you saved for retirement (assuming you’re not on track to have enough to retire by age 65), then a change in priorities is necessary. Consider increasing your savings and opening a separate shopping account where you direct deposit a set amount of money you can afford to spend on splurges each month. Just make sure you don’t go beyond that and find yourself in unnecessary credit card debt either.

 

 

3 Reasons We Spend Beyond Our Means

June 29, 2016

While the US personal savings rate is higher these days at 5.4% than it was a year ago, Financial Finesse’s research shows that 34% of people are living beyond their means or spending more than they make. Some of this overspending is due to factors beyond their control like medical expenses or other emergencies. But in many cases, it’s more from a lack of planning ahead combined with rationalizing what one can “afford,” a measurement that is often more emotional than based in reality.

For example, when it comes to meeting up with friends after work for happy hour, I’ll go to great trouble to avoid paying $15 for parking or a taxi cab, but don’t think twice about ordering a glass of wine that costs the same. When I stop to question this logic, it sounds nuts. How can I mindlessly afford $15 for a glass of wine but schlep for several blocks from the bus to avoid spending the same amount for more convenient transportation? We make the same kinds of bargains with ourselves all the time. If you’re looking to save more money by cutting back on spending, it’s important to be aware of these three reasons that often cause us to compromise our savings goals:

1. It feels good. Emotional buying is a lot like emotional eating. When we’ve had a bad day or are tired, sad or sometimes even ecstatic, our emotional mind tends to rule out our rational thoughts. But while a purchase may temporarily lift your spirits, it won’t solve the emotional need you’re seeking to fill.

One way to overcome this trap is to build a “bad day” spending amount into your monthly budget. I have a friend who keeps a fifty dollar bill in a hidden fold of his wallet for those days. Another way is give yourself visual reminders. I keep a sign in my office that reminds me, “Until you make peace with you are, you’ll never be content with what you have.” Rather than trying to buy your way to happiness, think about what’s really missing and take the baby steps to get closer to that.

2. The Pinterest effect. Social media has taken celebrations like weddings and even simple backyard barbecues to a whole new level of creativity and even competition to have the prettiest, the hippest, and the most impressive decorations and ideas. I cannot believe the themes some of my friends pull off for their kids’ birthday parties. To me, it’s a modern day version of keeping up with the Joneses times ten.

If your 5-year old’s classmate has a farm-themed party complete with pony rides, there’s an element of peer pressure to match or better that with your own kid’s party. That’s fine if it’s part of your budget, but if it stresses you out to think of what you’ll have to pay for a bouncy house or to have a live Elsa show up to the party, take a step back and assess your priorities. Your child won’t miss what’s NOT there, and you can use the money you save toward their education. “I wouldn’t mind taking out student loans if it means my parents had thrown me extravagant birthday parties as a kid,” said no college student ever.

3. We all love a good “deal.” It’s a proven fact that when large retailers go out of business, they often hire liquidation firms who come in and actually mark up prices so that they can “discount” them in an effort to clear items out of the store. They’re banking on buyers’ perception of getting a deal and it works. Same goes when you’re shopping online and buy more simply to qualify for free shipping.

When you find yourself buying something that you weren’t actually seeking out, take a pause and first consider whether it’s something you need and can afford. Try to fast-forward in your mind to the next time you’re cleaning out your closet or packing up to move and whether you’ll be glad you have that thing or wish you hadn’t purchased it. If you do decide it’s something you need, then do a quick check on your smartphone to make sure the price is actually a deal. Stores call this “showrooming,” which means they hate it when people do this, so try to be inconspicuous, but if you do find a lower price online, see if the retailer will honor it.

Finally, when you do find yourself overcoming the urge to spend, don’t let that money find itself being wasted somewhere else. Consider turning that victory into actual savings by transferring the amount you were considering spending into your savings. It adds up and you’ll never regret saving more.

 

3 Numbers That Matter More Than Your Credit Score

June 22, 2016

While knowing your credit score and the elements that impact it is important to your overall financial well-being, I sometimes find that people are overly concerned about it at the peril of other more important financial measurements. Your credit score only really matters when you’re applying for a loan, certain types of insurance and increasingly, when applying for a job. If none of those things are on your horizon, then your score is more like your high school ACT scores – perhaps a point of pride, but pretty irrelevant for the time being. Here are three more important numbers you should be focused on instead:

Net Worth

What is it: Assets (bank accounts, investments, home, car – basically cash or anything you could turn into cash) minus liabilities (credit card balances, car loans, student loans, mortgages, 401k loans – anything you owe).

Ideal number: As high as possible.

Why it matters: Your net worth is the ultimate measure of your ability to weather financial storms and maintain financial choices in life. The higher your net worth, the more financial freedom you can afford. There are countless cases of people who were millionaires on the asset side but broke on the net worth side as cautionary tales of neglecting this important number. Many of these people suffered during the last recession when their debts were called.

How to track it: I calculate my net worth on a monthly basis using Google sheets at the same time I sit down to set up any bill payments for the month. Here’s a snapshot of what it looks like:

Net worth snapshot

One nice side effect of this is the fact that I’m checking on all of my accounts at least once a month, so I can also do a quick check for anything fishy.

Worth noting: I pay all my credit cards off each month, but I include them on this sheet because that’s money I still owe that is reflected in my checking account above. It’s the only way to have a truly clear picture of what I have. I keep things like my student loan and Mini Cooper loan on there both for historical accuracy as well as for the psychological thrill of seeing a big fat ZERO under old debts. It’s a little, “Yay me! Look how far you’ve come!” moment each month.

Retirement Readiness

What is it: The best way to measure whether you’re saving enough to retire comfortably when you want to, especially if you have many years to go until retirement.

Ideal number: On track to replace about 80% of your current income, unless you’re within 5 years of retirement (when you can be more specific about how much you’ll need each year).

Why it matters: Retirement, which really just means transitioning to living off your savings one day, is one financial goal that pretty much all of us share. Whenever anyone asks me what to do with extra money or if they can afford to take on an additional debt payment or savings goal, my first question is, “are you on track for retirement?” Even though it may be one of your longest-term goals, it should be in the top 3 in terms of priorities.

How to track it: There are countless calculators out there, but for people with a 401k or other workplace savings plan, I prefer this Retirement Estimator.

Worth noting: Many people who say they aren’t on track to retire have never run a calculator. Knowing is the first step!

Emergency Fund

What is it: A cash cushion in place to tap into in case of an unexpected loss of income due to job loss or extended illness or injury.

Ideal number: 3 months of expenses, minimum. For single income households or career fields that aren’t as certain, at least 6.

Why it matters: Life happens and when it does, having cash that’s easily accessible takes away much of the financial stress and allows you to focus your energy on finding a job, healing or adjusting to the new normal.

How to track it: If you’re starting from zero, start with a goal of setting three months of rent or mortgage aside. Then tack on three months of your next highest expense and so on until you have all essential expenses covered. Once you’re at three months, make sure you adjust for any changes such as a new home, new baby, etc.

Worth noting: It can be tempting to keep a credit card on hand instead of the cash or want to invest the cash for higher earnings, but resist. Should something happen, consider the probability that it could be due to an economic downturn when credit may not be as easily accessible and/or the stock market could be down. The best place for your emergency fund is in a high yield savings account.

These are the three numbers you want to focus on. Even if you’re not at the ideal numbers yet, you’ll be well on your way to financial freedom if you can find a way to track them on a consistent basis. And you just may find your credit score improving as well.

What Really Matters to Your Credit Score

June 15, 2016

Do you know what elements make up your credit score? First, it’s important to know the difference between your credit score and your credit report, which are often confused. Your credit score is based on the items found on your credit report, kind of like how your grades are based on how you did on your homework and class assignments.

In order to get a better grade, you need to improve your homework and assignments. So before you freak out because your score is lower than you think it should be, you need to know how it’s calculated. Here are five things that you might think matter – but don’t – and five that really do.

What Doesn’t Matter

  • Employment history. Even though the amount of credit card offers I receive skyrocketed when I re-entered the workforce after being self-employed back in the day, credit agencies do not track your employment, nor does it affect your credit score. Whether or not you have a job may affect your ability to obtain credit (such as a loan or credit card), but that information does not go into your credit history.
  • Interest rates on debt. The lower your rates, the quicker you’ll pay off debt, which matters. But having higher rates does not affect your score.
  • Savings account balance. Your credit score is based solely on your credit history. Your bank account balance is not a part of your credit history. Rich people can have bad credit too.
  • Your age. Your date of birth might be on your credit report, but it does not play into the calculation of your credit score.
  • Where you live. Sorry, but that swank ZIP code won’t do diddley for your credit score if you’re not paying your bills on time!

What Does Matter

  • Paying on time. Whenever anyone asks me how to increase their credit score, my automatic response is, “Pay all your bills on time. Every time.” One late payment can wreak havoc on your score. You’d be surprised how many wealthy people struggle with this one!
  • Your credit utilization. The balance of your accounts relative to your credit limits definitely makes a difference on your credit report. The closer you are to maxing out, the worse the effect.
  • How long you’ve had credit. It’s called a credit history for a reason. The whole purpose is to help a creditor decide if they should lend you money. The further back you can demonstrate that you regularly pay your debts back, the better your score will be. This is where the advice about keeping a zero balance card open comes into play – just to show how long you’ve had it.
  • New accounts and credit checks. Opening a slew of new accounts (or attempting to) in a short period of time is a red flag to a lender. It can indicate that you’re planning a spending spree or that you are expecting to lose your job. If you’re planning to apply for a mortgage or other loan where your interest rate is determined by your credit score, try to avoid applying for any new credit cards at the same time.
  • The number and type of accounts. There are such things as “good debts” and “bad debts.” Having a mortgage, student loan or car loan looks better (as long as you don’t have late payments on your record), because it implies that you’re responsible enough to maintain a home, go to school and take care of a car. Plus the things that credit bought tend to last longer than the loan, making it good debt. Credit card debt isn’t as flattering – especially a bunch of store cards that are maxed out. Hello, shopaholic!

Finally, make sure you’re checking your credit report annually and cleaning up any errors. (The ONLY official place to get your federally mandated free reports is at www.annualcreditreport.com.) After all, one more thing that can matter to your credit but shouldn’t is someone else’s mistakes.

 

How to Teach Your Kids About Money With An Allowance

June 08, 2016

Do you remember the financial lessons you learned from your parents or other close adults while growing up? No doubt your own financial habits and mindset are influenced to this day by the actions and attitudes you observed as a child. This is a good reminder that your adult behavior around money will most certainly affect your children and other young people who look up to you.

One great way to have a positive influence, even if you’re still on your own personal journey to financial security, is by paying an allowance. There is an ongoing debate about whether an allowance should be tied to household chores or not, but many people agree that it’s a great way to teach children about money and financial responsibility. Regardless of whether you believe children should work for their allowance or whether it should be a gift, here are some tips to make the most of this lesson for your kids.

Be consistent. One of the greatest things an allowance can do is teach your kids how to budget, which requires consistency of income. Whether you pay weekly, biweekly or even just monthly, do it on the same day and in the same amount so they understand the value of making their money last. Caving and paying kids early could be akin to payday loans, which is the exact opposite of what you want to teach your kids.

Help them set goals. This can help them see the value of skipping short-term wants, like candy, in exchange for reaching longer-term goals like a video game. One suggestion is to require kids to put one-third of their allowance into savings and one-third toward a charitable need like an animal shelter or church, with the remaining third available for immediate spending.

Introduce them to banking. Open a savings account for your child’s longer-term savings and show them how to check their balance online, pointing out how interest (however miniscule) accumulates, allowing their money to compound. This is also a great way to demonstrate that the ‘M’ in ATM doesn’t mean “magic.” That cash gets in there somehow!

What if you don’t have the money to pay an allowance? This was sometimes the case in my earlier years, but there are still ways to pass along the lessons even if you can’t pass along cash:

1. Use a grocery allowance. Allow your kids a certain amount of the grocery budget that they can spend on special treats or even for their breakfast foods, which you need to buy anyway. I’ll always remember watching a mom do this at the store. When her son selected an expensive yogurt smoothie, I heard her explain how that was a fine, healthy choice, but if he wanted that instead of the less expensive store brand yogurt for breakfast, he would have to put back the juice he had already chosen. The trade-off was tangible and clear.

2. Keep a written tab. If you don’t always have the cash available on allowance day, simply keep a written record by adding that week’s amount to your child’s tab and then when you buy something for them, subtract it from the tab. This isn’t a bad way to go even if you do have the funds as it’s closer to the way we are paid and spend money in modern times anyway.

3. Remember that it’s often more about the practice than the amount. Perhaps you can’t afford to pay the average $67.80 per month that’s the current going rate. Even just $5 a week can teach the lessons.

These are some great ways to use an allowance to raise financially responsible adults, but I know there are others out there. How do you teach your kids about money? Please let me know via Twitter at @kclmoneycoach or post on our Facebook page.