Finances: The No. 1 Reason Americans are More Anxious Than Ever Before
As we get older, more and more expenses end up on our plate. From mortgages to car repairs, it can feel like there are endless bills to pay. And as we all know, with more bills, comes more pressure, anxiety and stress. In fact, the American Psychological Association found that money is Americans’ number one stressor.1 Finances have remained at the top of the list since the survey began in 2007.2
When it comes to stress, the numbers don’t lie. The Proceedings of the National Academy of Sciences conducted a study that evaluated heart health changes before, during and after a recent financial crisis and found that during the recession, both blood pressure and blood glucose levels increased in respondents, signaling a worsening in heart health.3
While many of us dream of being financially secure, most of us can agree that traditional education in our public schools does not properly equip us with the knowledge and resources necessary to be effective financial decision-makers. There seems to be a growing gap between financial literacy and our population, causing many people to lose hope and get trapped in a deeper hole of debt. However, when it comes to money, there are four ways you can more effectively manage your finances so you remain in control of your spending habits.
Tip #1: Automate Your Savings
It can be difficult to set aside money every month, especially after you’ve been anxiously awaiting to get your paycheck. If you’re someone who struggles with putting money away, consider setting up an automatic transfer from your checking account to your savings account each month to make sure that no matter what, you’re continuously growing your nest egg. Whether you want to be prepared for any emergencies that may come up or have a dream of buying a house one day, adding money to your savings account every month — even if it’s only $100 — can get you closer to the financial stability you need to feel confident about your future.
Tip #2: Stay Away from Impulse Purchases
With so many products out there — ranging from new gadgets to the latest must-have accessories — it can be difficult to put a cap on your spending habits. Instead of putting yourself right in front of your guilty pleasures, consider putting your money towards experiences, rather than material items. If your favorite past-time is going to the mall, swap window shopping with a picnic out in the park or a day out at your local museum (some museums offer discounted prices over the weekend). While retail therapy may seem like the solution to your problems, oftentimes, you end up feeling worse than if you had spent your time making memories instead. With these memories, your craving for consumerism may gradually die down, leaving you with more time to enjoy the simple pleasures in life.
Tip #3: Focus on What You Can Control
While it’s difficult to effectively plan ahead for every single expense we’re going to have, you can at least have an initial game plan for where your money is going to go. Theoretically, every month, you know you’re going to have to pay rent or a mortgage, buy groceries, pay other utility bills and fill up on gas a few times. So, after you get your paycheck, subtract all of these expenses from your total amount. This will give you a clear idea of how much “fun” money you have to spend each month. And, if you plan to put some money into your savings account, you’ll want to make a note of that too. The purpose of this exercise is to make yourself more mindful of the money you’re spending each month. When you know — without a doubt — certain specific expenses are going to come up, you can start planning ahead to make sure you’re not spending more money than you have.
Tip #4: Be More Goal-Oriented
For some people, the thought of having a goal can be terrifying as it means there is a chance they might fail. However, if you never set goals for yourself, you’ll never have complete control over your financial life. To get started, begin with a realistic goal that can ideally be achieved in less than five years, such as paying off your credit card debt or student loans. Once you’ve identified what you want to accomplish, write it down.
Oftentimes, the simple act of writing down your goals can make it feel more real, therefore making you more accountable. Next, create a rough timetable of how you are going to achieve your objectives. This timetable could include information such as how much money you’re going to save every month, as well as milestones for each payment you’re going to make. Over time, you’ll begin to gain more confidence about your finances, in turn leaving you feeling more in control — and capable — of managing your money on your own.
- https://www.apa.org/news/press/releases/2015/02/money-stress
- https://www.marketwatch.com/story/one-big-reason-americans-are-so-stressed-and-unhealthy-2018-10-11
- https://www.pnas.org/content/115/13/3296
6 Financial To-Do's for New Parents
Having a new baby is a much-anticipated event. While growing a larger family brings added joy and love to your household, it can also wreak havoc on your finances if you don't properly plan. Being prepared financially can go along way to reducing stress and allowing you to enjoy the new life that you are bringing into the world. To help you get started, below are six financial to-do's that new parents should consider.
1. Figure Out Your Health Insurance Coverages and Processes
Even if you have good health insurance coverage, the bill for having a baby can be an expensive one to pay. When you find out you are expecting, contact your insurance company and get a basic framework for what portions of the physician and hospital costs are covered and which ones you will need to pay out-of-pocket. Even though the determined amount is only a ballpark figure, it can help you set a goal to save, so that you don't get underwater with medical bills after your new bundle of joy arrives. If you have a health savings account, be sure to adjust it so that you will have as much as possible towards your medical costs while enjoying the tax break on your paycheck. When contacting your health insurance company, it may also be a good time to determine the process to add your new little one to your policy as well.
2. Create a Baby Budget
Even if you have a fairly well-laid out budget, you will need to make changes to it to account for the additional cost of your newborn. If you plan on making payments for medical expenses, you will need to include that in your new budget as well as diapers, feeding supplies, clothing, and doctor visit costs. You may also want to consider starting your budget when you find out you are expecting and including a section where you work in the expenses of high-cost baby items such as a stroller or crib. If you plan to return to work, you will need to estimate your child care expenses as well.
3. Make Any Necessary Insurance Adjustments
If you have a life insurance policy, you will probably need to increase the value to have enough for the care of your child in the event something unexpected occurs. If you don't have a policy, now is the time to get one so that you can ensure your family is protected if you are no longer around. It is also a good time to address any other policies, such as disability insurance, checking all of the amounts to make sure that you and your new family are fully covered.
4. Make a Financial Plan
Find out what your employer covers for maternity or paternity leave and make sure to include savings in your budget so that you will have the amount of lost income during this time saved up. This will help you alleviate any strain to your budget after your little one arrives. If you don't plan to return to work, or plan to work only part-time after your leave, you will need to create an adjusted budget and make other adjustments to bridge the gap that your loss of income will have.
5. Start an Education Fund
While it may seem like college is a long way away, it can sneak up on you in a financial sense. College tuition is one of the largest expenses that families will face when raising their child and all too often savings fall short because many parents don't get started until later on in life. Starting early will help your money grow faster, reducing the amount that you will have to put into the account in the end.
6. Start or Increase Your Emergency Fund
It is always critical to have an emergency fund. This way if you suffer a loss in income, an expensive event, or unexpected major repair, you will have the funds to cover it without having to fall behind in bills or borrow against your assets. If you currently have an emergency fund, you will probably want to increase it as your financial need will be greater with a new baby.
Get your financial house in order before your little one arrives, so you can relax and enjoy your new addition without having to stress over your monthly bills.
Sole Income Earner: Tips to Surviving the Pressure
So you're not a "DINK." If you aren't familiar with that phrase, it means "dual income no kids." Those types of families are some of the most financially stable because obviously they have two steady incomes coming into the household and they also don't have the financial responsibility of having children to take care of. Sounds pretty ideal, right? But...
If it's just you as the sole income earner in your life, you can easily thrive and succeed with some key pieces of advice. Because honestly being a sole income earner means that all the bills, debt, monthly expenses and anything else miscellaneous you might need falls on your shoulders. That can be a pretty heavy burden to stress over at times.
Let's take a look at, regardless of your circumstances, how to survive as a sole income earner with these five best tips for feeling more financial secure in your life.
Tip #1: Have a Detailed Monthly Budget Set
People tend to slack on budgets, mainly because they don't like seeing the facts and figures written on paper in black and white. Makes that five dollar Starbucks Latte each day look like a high expense when you write out the monthly cost, right? Having a detailed monthly budget set out actually helps you focus on what's coming in and what you spend. If you're not making one out each month, you should. Granted things are going to be on there every month, like rent or mortgage payments, utilities, your smartphone, and any student debt you might have, but sitting down each month and factoring in additional things that you know are coming up will help you stick to your budget so that you don't run out of funds.
Tip #2: Share Expenses Where You Can
This is a great tip. Even though you are a sole income earner that doesn't mean you can't share expenses where you can with friends or family. That monthly Netflix bill? Split it with a buddy and save yourself seven bucks. Up to four different people can use the same account. Little things you can save on add up at the end of the month so don't underestimate splitting the cost of things when you can.
Tip #3: Have an Emergency Fund
This is very important in case you become ill or other life events pop up. You want to ideally have at least six months of expenses saved in the bank. If that's too overwhelming aim for at least three months of expenses.
Tip #4: Pick Up Gig Work
It's a gig economy now folks and the best part is that for sole income earners there are always extra ways to make more money. Become a dog walker on the weekends, play out with a band, do some contract or freelance work within your field of expertise. The point is that by using your skills you can always figure out a way to make additional funds.
Tip #5: Relax!
Money is stressful. Bills are stressful. Life is stressful. You get the point. Try to relax and know that you are a fiscally capable person. You can be a sole income earner and survive. If you find that money troubles are on your mind a lot talk to a financial planner that can help to set you on the right path.
Crush Your Financial Resolutions by Becoming Rather than Doing
Who doesn’t like a fresh start? The beauty of New Year’s Resolutions is that we all have an opportunity to fully commit to losing weight, getting organized, or finally saving more money at the turn of the calendar year.
In fact, resolving to change one’s life for the better is a tradition that goes back millennia, starting with the ancient Babylonian 12-day New Year’s celebration. During the Akitu festival, Babylonians promised the gods to return borrowed items and pay down their debts. In more recent developments, some historians note clippings from an 1813 Boston newspaper documenting what could be considered the first contemporary use of the “New Year’s Resolution”:
“And yet, I believe there are multitudes of people, accustomed to receive injunctions of new year resolutions, who will sin all the month of December, with a serious determination of beginning the new year with new resolutions and new behavior, and with the full belief that they shall thus expiate and wipe away all their former faults.”
Whatever the origin of this tradition, the fact is that many of us will create financial resolutions in the coming days only to find those well-intentioned goals falling short soon after they’re conceived. One study from sports company Strava, using over 800 million user-logged activities in 2019, found that individuals are likely to give up on their fitness goals by January 19 – less than three weeks into the start of the New Year.
Another study from Scranton University found that only roughly 19% of individuals keep their resolutions for the year. The data go on to show that the majority of New Year’s resolutions are abandoned by mid-January, confirming findings from many different studies.
Whether you want to admit it or not, the chances are that the work you’re about to put into one or more of your financial resolutions this year likely will soon end in frustration and disappointment. So, what can you do to ensure that your financial resolutions stay on the right track heading into the New Year? Well, one way is to focus your goals on “becoming” rather than “doing.”
Becoming Rather than Doing
Let’s face it: the past two years have derailed many of our New Year’s resolutions and life goals as we’ve rightfully focused on doing everything necessary to keep ourselves and our loved ones safe. Even so, heading into year three of this healthcare crisis, many of us have a choice to set our sights on a bigger goal of thriving financially rather than surviving in day-to-day uncertainty.
While external circumstances can be a reason for goal failure, they can also be an excuse for not getting to the heart of what’s preventing long-term success with your financial plans. And quite often, that roadblock is being focused on “doing” the work necessary to achieve a goal, rather than first taking the time to understand who you need to “become” to make your New Year’s Resolution a reality.
Indeed, some individuals will suggest that the way to improve your odds of achieving your resolution is to ensure that you’re defining SMART goals (Specific, Measurable, Achievable, Relevant, and Time-Bound). While SMART goals are important, more often than not, what many well-intentioned individuals miss is what needs to happen before specific goal setting begins. And that is asking yourself: “who do I need to become this year to make my financial resolutions a reality?”
One school of thought suggests that individuals operate in two modes: “Doing” and “Being”. The Doing Mode individual is focused on explicitly defining a goal, then developing a system to monitor their progress and striving for the future outcome they’re attempting to achieve. Whether it’s a reward that you plan to give yourself for accomplishing the goal – or a threat, like the potential shame experienced from friends and family – quite often, this carrot and stick approach sets the stage for a possible resolution failure.
When you shift your approach to accomplishing resolutions from Doing Mode to Being Mode, there’s a broader sense of aligning your daily actions, choices, and behaviors with who you are as an individual. When you approach your goals from a Being Mode, saving more money or investing in a disciplined manner isn’t a task, it’s a way of life – you’re simply doing what’s natural for who you are as an individual. When positive developments or setbacks occur, they’re viewed as part of the natural process of being rather than a good or bad outcome.
This approach to Being is essential because when your New Year’s resolution is at odds with who you believe yourself to be, you’re more likely to experience self-sabotage and reject the “new” habits you’ve identified for yourself. Such a disconnect often leads to what psychologists call cognitive dissonance or the mental anguish of holding two competing thoughts simultaneously. Fortunately, becoming the person who does the desired behaviors is one way to overcome this resistance.
Dealing with Resistance
At first glance, many individuals will dismiss the notion of “becoming” and state that what’s needed is focus, discipline, and a firm commitment to accomplishing goals. While there’s some truth to this notion, again, the reality is that your subconscious mind does not like to engage in habits or behaviors that conflict with your identity.
...once you’ve identified who you want to become, achieving your New Year’s Resolution continues to progress by aligning your daily habits with the outcomes necessary to become the person you need to be.
For example, a New Year’s resolution to become more disciplined with your household spending could quickly become derailed if you don’t intrinsically believe that you’re a good steward of your finances. Indeed, your first misstep after setting a financially prudent resolution likely could prompt negative internal dialogue like, “I’m not good with money” or “I’ll never be good with money, so what’s the point of trying to save.” When this disconnect arises, it potentially could lead you to abandon a worthwhile goal for the coming year.
So, how can you overcome this negative self-talk and self-sabotaging behavior? Well, one way to overcome cognitive dissonance is to either 1) change your thoughts, 2) change your behavior, or 3) justify your behavior by adding new thoughts. In his book, Atomic Habits, James Clear points out how we are likely to meet resistance when we start new habits inconsistent with our self-image.
For example, a couch potato could have an ambitious goal of completing a marathon in the coming year. Certainly, willpower and self-discipline likely will lead to some progress initially, that is, until that individual begins to experience setbacks, like an injury or scheduling conflict, naturally leading them to give up on their goal to run a marathon.
Cast differently, if your goal is to become a runner (rather than accomplishing a running feat, like a marathon), then the daily one-percent improvements that Clear outlines in his book naturally will lead you to get in the kind of shape you need to compete in a marathon.
From this perspective, once you’ve identified who you want to become, achieving your New Year’s Resolution continues to progress by aligning your daily habits with the outcomes necessary to become the person you need to be. How is this accomplished?
Well, Clear refers to the work necessary as the Four Laws of Behavior Change:
- Make it Obvious – list all the steps that need to happen to make your new habit a reality
- Make it Attractive – link your new routine with behaviors that you already enjoy doing
- Make it Easy – simplify your environment to make your new habit easy to accomplish
- Make it Satisfying – create intrinsic rewards when you complete behaviors that align with your identity
Starting with this approach could help you overcome resistance as you put in the work to become the person you want to be this year and accomplish essential life goals. Now it’s easy to say that an individual who wants to run a marathon should focus on becoming a runner first.
So, who does an individual need to become to save more money or become a more disciplined investor? From this perspective, consider becoming the master of your financial independence journey.
Becoming the Master of Your Financial Independence Journey
In the simplest terms, financial independence represents a state of financial well-being where you have enough money to pursue experiences of utmost value. Unless you’re already retired or anticipating a financial windfall, becoming financially independent requires a daily discipline of creating, growing, and preserving financial wealth.
...a deliberate lack of understanding of what intrinsically motivates you might leave you feeling stuck in a perpetual cycle of earning and spending more but making little headway towards long-term financial goals.
Considering the journey itself, the path to mastery (financial independence) forces you to think outside of the constraints of the money scripts presented to you by other people. Indeed, pursuing those experiences that satisfy feelings core your value system can activate higher levels of intrinsic motivation and potentially reduce the yo-yo effect of unconscious savings and spending decisions.
What’s more, the journey itself becomes transformative. For example, each step in the wealth-building process (creating, growing, and preserving wealth) serves an explicit role in helping you move toward financial independence.
Each of these steps requires you to learn disciplines that enable you to build wealth for the long term. And because the knowledge you’re gaining serves an intrinsically defined purpose, its application likely will have a more profound impact on your achieving financial independence than learning money management techniques simply for the sake of knowledge or to mark off a completed resolution for the year.
Many individuals see their financial choices as discrete win/lose outcomes when it comes down to it. They think of their behaviors as things that need to be done. And more often than not, people play the game of life not to lose: settling for comfort rather than striving for a goal for which they may fail. They’re looking for quick fixes, temporary relief to get them through their day.
While this approach may work initially, a deliberate lack of understanding of what intrinsically motivates you might leave you feeling stuck in a perpetual cycle of earning and spending more but making little headway towards long-term financial goals.
Whether you’re earning six figures and broke, or simply trying to take control of your finances, doing the work of learning a new financial management technique, determining your “retirement number” or achieving some material outcome may not be the approach you need.
What might better suit your situation and help you stay committed to and crush your New Year’s resolution is reframing your relationship with money, rewriting your money scripts, and becoming the master of your financial independence journey.
10 Rules to Live by if You Want to Achieve Financial Independence
Financial independence can be defined in a number of ways. However, when most think of financial independence they dream of a time in their lives when they are generating enough income to cover the essential expenses so that they never have to work again. For some, financial independence is far off into the distance, for others it's within close reach. Wherever you fall on the spectrum, here are 10 financial rules to never break if you want to achieve full financial independence someday:
1. Earn More Money Than You Spend
You obey this principle by always living below your means. Follow this simple rule, no matter what your income and everything else will fall into place. As your income goes up, so will the extra money for savings and investment.
2. Make a Budget and Stick to It
You cannot live within or below your means without knowing what your expenses are and where you can start cutting. The path to that higher knowledge is a budget. There are dozens of free budget templates online. Fill in the template blanks and you’ll learn some rather eye-opening facts about where your money is going. Follow that budget and see how spending discipline give you an immediate leg up on financial independence.
3. Eliminate Unnecessary Living Expenses
Take a critical look at your budget. Are you spending over $100 for cable TV, for example? Cut the cable and save an extra $1,200 a year. Look everywhere and be ruthless.
4. Get Into Daily Financial Awareness Habits That Result in Wealth Accumulation
If your daily habits include a stop at Starbucks for that $5 latte, you are spending $100 a month — another $1,200 a year. Make your own frothy caffeinated beverage from the mixes on sale at your grocery store. Look for ways to save costs and expenses through coupons and sales. Keep track of your monthly bills and look for ways to cut down on energy expenses, for example.
5. Concentrate on Doing Well at and Keeping Your Job
You cannot obey financial rule number one without the income from your present employment. There is a correlation between job satisfaction, promotion and ever-increasing earnings. If you are bored, unchallenged and unhappy with your work, you need to take steps to resolve the matter or you will be stuck in a financial rut.
6. Avoid Money-Making Schemes and Scams
No matter what the slick infomercials and bombastic websites shout out, there is no shortcut to wealth. Anyone who advertises that buying their plan or paying to attend their seminar is manly only interested in making money from you. That meets their financial goals, but detracts from yours.
7. Pay off Your Debts
If you are bogged down in heavy debt and your monthly expenditures are beginning to leapfrog your income, it may be time to consolidate your debts. There are many pathways to debt consolidation. Check around on the web. There is help out there.
8. Pay Your Monthly Credit Card Bill on Time
If you’re carrying a monthly balance on your credit card, you’re swimming upstream in your quest to get out of debt. Consider instead using a bank debit card, or at least get into the habit of paying off your monthly credit card balance.
9. Pay Down Your Mortgage
Your budget will show that your monthly mortgage payment is one of your biggest expenses. Paying off your mortgage early takes discipline and can eat into those excess funds you will begin accumulating through following steps one through eight. However, once your home is free and clear, you have the true wealth of the worth of your home’s market value. When the mortgage payments go away, you likewise have the income excess that becomes a powerful savings and investment resource.
10. Begin a Savings and Investment Plan
Start slow if you must, but save something each month. You’re in this for the long term and your goal is to be debt-free and to accumulate real wealth (i.e., to be financially independent). The savings and investment plan that is best for you depends on your age, situation and how much you need for a comfortable retirement. Again, look around. There are financial experts and expertise out there ready to help.
How to Avoid Financial Stress During the Holidays
Depending on who you ask, the holidays are either a season full of celebration and connecting with family and friends, or they’re a seasonal burden that adds to the never-ending stresses of life. A recent survey found that 88% of people believe the holidays are the most stressful time of the year and 56% say that financial strain brought on by the holidays is their largest source of anxiety.1
We’ve identified a few ways to manage stress, keep your budget in line, and experience the joy of giving in a tax-advantageous way.
Sticking to a Budget
Everyone understands the past year has been tough, and while the economy is recovering, we’re not out of the woods yet. American balance sheets are in better shape, but it’s easy for the end-of-year festivities to blow a holiday-shaped hole in any budget. American Express reports that 86% of millennials spent more than they had planned to during the holidays last year.2 With ‘buy now, pay later’ services on the rise, it may be even more challenging to keep spending to a limit.
One way to keep holiday spending manageable is by setting a budget. It’s never been easier to compare prices online to figure out where the best deals are, so before hitting the mall or scrolling through Amazon, have an idea of what you’re able to spend. Take some time to list out your gift buying. Planning your purchases ahead of time will help you avoid impulse buying and overspending.
Another strategy is to use a separate card or account for holiday spending so you can easily see how much you’ve spent. It may even help to download a budgeting app, such as Mint or You Need a Budget, for the holidays so you can set limits on spending and get notified when you’re close to hitting them.
But remember, memories and experiences are worth more than the number at the bottom of a receipt. Don’t overextend yourself and add more stress to your plate when gifting this holiday season.
Practicing Gratitude & Prioritizing Mental Health
Practicing gratitude is a good habit no matter what season it is, but it feels more significant during the holidays. Oftentimes, the focus around this time of year is on gifts, but the holidays are more than spending money and exchanging presents. They can be a time of reflection and a chance to spend time with family. Many studies have shown a direct correlation between practicing gratitude and increased levels of happiness and reduced stress.
Overall, we tend to take little things for granted. It’s easy to get caught up in the day-to-day stresses of life, but don’t forget to take some time to be thankful and grateful for the positive aspects of life, the blessings you have, and the time you may get to spend with loved ones.
The past year has taken a toll and mental health conversations are at the forefront. In addition, many Americans struggle with seasonal depression as the holidays can trigger a variety of different feelings. One way to help reduce negative feelings is by being proactive and recognizing triggers and symptoms. This can allow you to plan ahead to avoid certain situations or at the very least, be aware that actions need to be taken to help cope.
During the holidays we may feel obligated to do certain things or act certain ways around family or friends and it’s not always healthy. Setting boundaries is important in any relationship. Without them, you may end up in uncomfortable or undesirable situations, leading to more stress and frustration. By setting boundaries, even with those you love, you’re laying out guidelines for yourself to determine what works for you and what doesn’t. This can be challenging to do but overall, but it can lead to healthier relationships.
The Season of Giving
Giving back is a great way to ground yourself and find purpose during the holiday season. It’s a time of giving and right now, the world needs more of it. Giving can come in many forms and also doesn’t have to be monetary. Spending time in your community and volunteering at a food kitchen or charity both have an impact and volunteers often report having higher personal satisfaction and gratitude than those who don’t. Additionally, you may also be able to deduct volunteer expenses if you purchased any supplies or had significant travel costs.
Don’t forget about the local businesses when you’re shopping. Small businesses keep money in the local economy, may not have the same supply chain issues as the big stores, and may participate in a lot of giving back to the community. They’re often the local sponsors for sports teams and arts clubs, and they often support food banks and sponsor charitable drives.
Tax-Advantaged Giving
Of course, there are direct donations to charities and other organizations as well. This may be easier to do and it can also come with tax benefits. Depending on the type of organization you donate to and how the donation is made, you may be able to deduct the full donation amount.
Setting up a trust is a classic option when it comes to charitable giving, but depending on your circumstances, a donor-advised fund may be simpler and achieve your goals. According to the National Philanthropic Trust, DAF contributions exceeded $38 billion in 2019, an 80% increase since 2015. DAFs allow you to donate highly appreciated stock and assets, receive an immediate tax deduction, but rather than select a charity immediately, the funds can be invested in the DAF, left to grow over time, and distributed at a later date.
Donating appreciated stock is advantageous because it can allow you to donate more than if you sold investments and donated cash. When charities receive appreciated stock, they’re not required to pay capital gains upon liquidation. As long as requirements are met, you receive a tax deduction for the full market value of the assets.
Those over age 70 1/2 can use a qualified charitable distribution strategy that allows donations of up to $100,000 directly to a charity from an IRA instead of taking RMDs. This can help reduce taxes because you avoid taking income, which could mean staying in a lower tax bracket, and potentially lowering the amount of RMDs in future years.
The Takeaway
The holidays bring out a variety of different emotions, and we often focus on others during this time, but don’t forget to take care of yourself. If you typically feel overwhelmed during the holidays, taking appropriate steps can help you spend more of the season enjoying the festivities. With a little planning, the holidays can be a time to unwind and spend much-needed time with loved ones.
1. Anderer, John. Jingle Bell Crock: 88% Of Americans Feel The Holiday Season Is Most Stressful Time Of Year. Study Finds. December 21, 2019.
2. White, Alexandria. 86% of Millennials Overspent on Holiday Gifts Last Year—Here’s How to Avoid the Same Mistakes. CNBC. August 17, 2021.
10 Tips to Aggressively Pay Down Your Debt
Debt can wreak havoc, not only on your finances but also on your ability to borrow. Having a lot of debt can create stress and sometimes be hard to get under control. The good news is, is that there are ways you can aggressively pay down your debt, helping you to get in a better financial position quicker and alleviate the stress that debt can bring.
1. Always Pay More Than the Minimum
Not only will paying the minimum only cost you a significant amount in terms of interest, but it will also typically take ten years or longer to repay the debt without even without additional charges. Look at your budget and find areas you can cut that can allow you to pay at least double the minimum each month.
2. Consider the Avalanche Repayment Structure to Reduce Debt
Start with your highest interest rate card or loan and pay as much as you can each month while paying the monthly minimums on the rest. Once that first debt is paid, take the amount that you were paying on it each month and begin paying that in addition to the minimum payment on the next highest interest debt. Continue this method until each debt is paid off.
3. Snowball Down Your Debt
A snowball repayment plan is similar to the avalanche repayment except instead of targeting your highest interest rate debt first, you will start with debt with the lowest balance. This may be the best method if you have multiple cards with low balances as it will free up funds more quickly.
4. Look at Balance Transfer Offers
You may receive credit card offers with a zero percent balance transfer interest rate if you repay the debt in a certain period. Consider these to transfer high-interest credit card debt. Without interest accruing, you will be able to pay the balance down much quicker.
5. Apply for a Home Equity Loan
If you have accrued a large amount of equity in your home, you can secure a home equity loan to pay off your debt. If you have a lot of equity and a fairly good credit score, you will be able to get a much better interest rate than most credit card interest rates. Also in many tax situations, you will be able to deduct the interest from your loan on your personal tax return.
6. Look at a Debt Consolidation Loan
Debt consolidation loans are personal loans that are used to pay off high-interest rate credit cards. You will typically need good credit and a strong income for this option to result in significant savings. The other benefit of a consolidation loan is that it will be for a set term. This means if it is a three-year loan, you know at the end of three years you will be debt free.
7. Trim Your Budget to the Bare Minimum
Part of paying your debt down aggressively involves finding more money to put towards your debt. This means taking a hard look at your income and budget and finding areas where spending can be cut, and that money can be put towards paying down debt.
8. Raise Additional Income
If you have trimmed down your budget and realize you need more money coming in to put towards debt repayment, consider taking on a side gig to bring in some extra money used solely to put towards debt.
9. Consider Loans From Friends and Family
If you have family and friends that have the means to loan you money, you might want to consider borrowing money to pay down your debt. Odds are your family and friends will give you a more favorable interest rate, but always make sure to honor your repayment so the relationship can stay strong.
10. Try to Renegotiate With Your Creditors
When you are way in over your head with debt, it may be time to talk to your creditors to see if they would be open to renegotiating the terms of your debt. Sometimes creditors will offer settlement amounts to save you on fees and interest, but this can have a negative effect on your credit, so it should be done with caution.
When following the tips above to aggressively pay down your debt, it is also critical to take the time to identify what caused the debt in the first place. You will need to get a plan to make sure that once you have paid your debt down, you prevent yourself from getting into that situation again. This can include cutting back on spending or setting up emergency funds. Remember one of the most essential parts of paying off debt is putting systems in place to ensure it won't happen again.
Early Retirement: Don’t Make these Five Mistakes
Handing in a resignation letter and walking away from an unfulfilling career may be one of the most satisfying acts in an individual's life. By some measures, there are an increasing number of satisfied people in the world today. Indeed, recent accounts increasingly show that people are leaving their jobs in droves. These developments are evident in articles about quit and vacancy rates and even rising Google Search trends for early retirement. To be sure, one study found that COVID has prompted a growing wave of early retirements, especially for people who had not planned to quit their jobs but are now thinking of doing so. Can you relate?
Maybe your investments have performed solidly over the past 18 months, and now you have the financial resources and confidence you need to pull the trigger and finally step into financial independence. Maybe your company has recently gone public, and you've come into a large financial windfall that has set you up for early retirement. Or, perhaps you've had time to consider whether the work you're doing today truly aligns with what matters most to you in your life.
Whatever the case may be, now could finally be the time for you to take the next steps towards early retirement. But before you walk into your boss's office and hand in that resignation letter, you'll likely want to consider some potential pitfalls that might derail your financial independence early retirement plans. Indeed, not thinking through some crucial early retirement mistakes could leave your financial goals falling short.
Here are five financial mistakes that you'll likely want to avoid as you take your next step towards becoming the master of your financial independence journey:
Mistake #1: Underestimating your retirement cash flow needs
Let's assume that you're 45 years old, have saved one million dollars, and are now ready to pull the trigger on early retirement. If this is you, I'd like to give you a round of applause because, according to a study from Fidelity, the average 401k balance for an individual in their forties is roughly $93,000. So, if you've accumulated one million dollars by this age, you're well ahead of your peers. But will this savings be enough to cover your lifestyle expenses if you decide to retire tomorrow?
Let's take a look at an example to understand when a million dollars may not cut it when it comes to covering your retirement cash flow needs. First, if we assume that you'll need $50,000 per year to keep the lights on and allow you to enjoy your current lifestyle and your investments grow by about five percent annually, you should be fine, right?
Well, one problem with this assumption is that your living expenses will stay fixed at $50,000 annually over the next half-century. Realistically, however, your cost of living is likely to creep higher by an average of 2% per year. Rising inflation means that the lifestyle that costs you $50,000 today could well rise to over $130,000 in 50 years. At this rate, your million-dollar savings could be wiped out well into retirement if specific lifestyle changes aren't made today.
Therefore, if you're trying to determine whether a million dollars or any amount for that matter is enough to retire early, start by figuring out what your inflation-adjusted household expenses may be throughout retirement.
This analysis involves developing realistic expectations for your lifestyle spending in the years ahead, evaluating the effects of inflation on your annual income needs, and setting some realistic expectations about your investment return rate. Only then can you determine with some certainty whether the nest egg you have today is enough to cover your living expenses for the rest of your life.
Mistake #2: Relying solely on your 401k or IRA for early retirement
Another mistake that some early retirees make is concentrating their savings in qualified accounts and not putting enough away in taxable investment accounts. Why is this a problem? Well, with some exceptions, money in a qualified account, like a 401k or IRA, won't be available penalty-free until you reach age 59 ½.
So, if you're 45 years old, ready to retire early, and have all of your savings tied up in a 401k, your options likely will be limited when it comes to using your savings to cover everyday expenses. That's because tapping your qualified savings early could lead to a host of penalties that could otherwise derail your best laid financial plans. How can you ensure that you're prepared for early retirement without incurring unnecessary costs?
One option is to save enough money in a taxable account to cover your living expenses until you can begin safely drawing down money from a 401k or IRA at 59 ½. So, how much money should you have saved up in each type of account?
Well, let's assume that you're 45 years old and plan to spend $50,000 per year on living expenses, inflation-adjusted over the next 50 years. Based on several simplified assumptions, you'll likely need to have saved 1.3 million dollars before you quit your job. Two-thirds of that amount (or about $830,000) should be in a taxable account to pay for day-to-day expenses.
The remaining amount of your retirement savings (about $400,000) should be spread across qualified accounts like 401ks or IRAs. As you draw down your taxable account early in retirement, your qualified accounts likely will continue to appreciate, untouched but for periodic contributions or rebalancing, hypothetically appreciating to a level of $850,000 by the time you reach age 59 ½. At that point, you can begin spreading living expenses between both taxable and qualified accounts.
Complex calculations aside, the key takeaway here is that the farther out you are from retiring at age 59 ½, the more of your retirement savings you'll need to have allocated to a non-qualified savings account. Not anticipating this mistake could derail your early retirement goal for quite some time.
Mistake #3: Dismissing social security benefits entirely
One financial planning component that many financial independence retire early (FIRE) proponents often overlook is social security's effects on how much you'll need to have saved for early retirement. For example, recall from our previous example that an individual might need $1.3 million to cover lifestyle expenses of $50,000 (inflation-adjusted) over fifty years. A $36,000 annual social security income benefit could reduce your investment savings need by about $200,000 starting at age 45 and put you closer to that $1 million savings target.
How? Let's take a closer look.
You'll recall that between various retirement savings accounts, we estimate that an individual with an income need of $50,000 per year, retiring at 45, would likely need about $830,000 in taxable accounts and $400,000 in their qualified accounts. Factoring in social security benefits starting at age 67, this same individual would likely need about $750,000 in their taxable account and $274,000 in their qualified accounts. The added social security benefit lowers the amount of money drawn down from retirement savings in later years, naturally reducing the total amount of money that needs to be saved before quitting their job.
The good news is that making one million dollars work for retirement is feasible, so long as the savings are spread across the proper accounts, and social security benefits kick in as expected. So, how can you determine the social security benefit amount to use in your financial projections? One of the simplest ways to obtain this number is to visit https://ssa.gov/myaccount. Here you'll be able to get a copy of your social security benefit statement, which outlines your projected future benefits based on what you've already paid into the system.
But what if you're 45 years old today, and you expect that social security will go broke by the time you start drawing down benefits twenty years from now? This concern certainly is legitimate. Even so, it's possible that being such a politically sensitive topic, lawmakers won't let the social security program die entirely. Even so, the further you are away from receiving projected social security benefits, the more of a discount you'll likely want to apply to projected future income benefits as a way to account for uncertainty related to the program.
Mistake #4: Forgetting to factor in healthcare expenses
So, you're 45 years old, in good health, and doing everything right to take care of your body and mind. You exercise regularly, eat a balanced meal, and take your vitamin supplements daily. You don't have any health concerns right now and expect to live a long life. Why should you care about potential healthcare expenses?
Well, what happens if your health situation unexpectedly changes somewhere down the road, say in 10 years or so. Indeed, the events of 2020-2021 have taught many of us that our health, no matter how hard we try, can be drastically affected by circumstances entirely out of our control.
Add to this the fact that the cost of medical care has been outpacing the average level of inflation for years. From this perspective, if you're not building in rising healthcare costs into your financial independence early retirement plans, you could be setting yourself up for a big disappointment in the years ahead.
So, how do you know whether you're accounting for the right amount of healthcare spending?
To answer this question, you'll need to take time to think through the kind of care you will need in old age and account for their related costs. While medical expenses (like paying for insurance premiums) may only constitute a sixth of your early retirement income need at age 45, by the time you reach age 70, those expenses could rise to a third of your income needs. And depending on your living situation, these numbers could increase to over half of your spending by your late 80's when considering expenses related to assisted or long-term care needs.
So, if we take a simple 6% appreciation in medical costs from age 45 and extrapolate it out through retirement, how does that affect our earlier projections? Recall that with social security benefits, your financial independence retire early savings need would be about 1 million dollars spread across taxable and qualified accounts at age 45.
When factoring in rising medical costs, you'd likely need to have saved an extra $300,000 at age 45 even after factoring in the bump from social security benefits. When accounting for rising medical costs, this time around, you'd likely need $870,000 in taxable accounts and $420,000 in qualified accounts compared to $750,000 and $274,000 in our previous example when you begin early retirement.
Again, the key consideration here is ensuring that you'll have enough saved to cover unexpected medical expenses when you're healthy while being prepared for the unexpected over the long term. Without employer medical coverage, you'll need to be prepared for private healthcare coverage, which you can purchase in your state's insurance marketplace. You can visit healthcare.gov to get a better sense of the options available to you. Either way, no matter how healthy you are today, don't make the mistake of being unprepared for some form of medical care that you'll likely need in the decades ahead.
Mistake #5: Not giving your money a purpose
One final but a fundamental mistake that some individuals who retire early make is not having a purpose for their money. These individuals often have one goal, and it's simple: save money so you can quit your job. But then what? If your goal has been to live frugally and save every penny so you can leave the workforce but don't have a purpose for life after that, then what's this journey been about?
For many of us with financial independence retire early (FIRE) aspirations, these qualitative, squishy questions may seem irrelevant at face value. You may say, "I already know how much I intend to spend." Or "I'm content with my life today; nothing will change." But honestly, how can you be so sure? Many of us don't know where our lives will take us a year from now, let alone a decade or half-century from now.
One analogy that we use when discussing an individual's finances is to think about it as a home divided into two parts. The right-hand side of the house defines the financial resources and tactics used to make retirement a reality. In other words, it encompasses a lot of the items that we discussed here today: tactics.
However, the left-hand side of the home defines your values, your relationship with money, and your life goals in retirement. In order words, it contains the elemental component: strategy. It represents, "where is my life headed, and what's all this money for?"
The point here is to spend time thinking about the general direction you'd like your life to go. One analogy that we often share is that of taking a flight from Los Angeles to New York. A pilot's five-degree navigation error at the start of the journey could put the plane thousands of miles off course when it reaches the East Coast.
Giving your money purpose will take some deep thought, and at times involve having uncomfortable conversations and thinking through some harsh realities. But in the end, the outcome produces greater clarity and direction for your money's use. At the same time, if you do plan to retire at age 45, it can help you define exactly how much savings you'll need to cover your lifestyle expenses over the next 50 years.
Avoiding Early Retirement Mistakes
Before we wrap things up, we need to talk about one of the biggest mistakes individuals aspiring for financial independence retire early make: blindly following the four-percent rule. A lot has changed since this concept was introduced nearly 30-years ago, and, quite frankly, this approach to calculating how much money you need to retire early is likely outdated.
To be sure, financial markets, central banks, and government policies have fundamentally changed since the four-percent rule was introduced in 1994. So, what can you do to ensure that you've saved the right amount of money for retirement to maximize your chances of avoiding a savings shortfall? First, start by spending the time to think through what you want your post-career years to look like. Ultimately, answer the question, "what is this money for?"
Next, think about how you expect your lifestyle spending to change over the coming years and decades while being mindful that inflation will create a greater demand on your savings. Here again, you'll want to ensure that your financial plan is realistic regarding income needs as prices rise, even if you don't anticipate a significant change in lifestyle spending today.
Then, be sure that you've put enough money away in savings accounts that you can access today. Recall that qualified accounts, like a 401k and IRAs, aren't accessible penalty-free until age 59 ½. Therefore, you'll want to have money socked away in taxable investment accounts to cover living expenses before tapping your retirement savings.
Finally, consider how social security benefits and medical costs will impact your overall income drawdowns, and more broadly, your retirement savings needs for the long-term. Recall that factoring social security benefits into your income projections could cut your retirement savings need at age 45 by hundreds of thousands of dollars. At the same time, not preparing for unforeseen healthcare concerns could leave you with unexpected medical expenses not accounted for in your savings plan.
Are you ready to quit your job and live life on your own terms? While you might think you have enough money saved today, one way to ensure that your retirement savings are on the right track is by avoiding some common early retirement mistakes. While calculating your retirement need is no simple task, it nevertheless highlights a key reason why developing a financial plan is an essential component of early retirement preparation. Indeed, doing the work today could maximize your chances of success for the long term and help you finally become the master of your financial independence journey.
6 Ways to Start Helping Your Kids Manage Their Money
Helping your children learn to manage money at a young age can provide them with a solid foundation and teach them the true value of money. Remember, teaching your child about finances at a younger age will provide them with a better understanding of the role that money plays in their everyday lives. If you are looking for ways to help your children start managing their money, consider the tips listed below.
1. Be a Good Financial Role Model
Children learn best by modeling the behavior that they see from their parents. This means the first step is examining your own attitudes about money and how you handle it, especially in front of your children. Always be mindful to set a good example and make sure to take advantage of teaching moments that you encounter along the way.
2. Provide Your Child With an Earned Allowance
Your child needs to know that they receive money by working for it. For younger children, you can provide them with an allowance for simple tasks such as making their bed, clearing their dishes, etc. As they get older, you can assign them more difficult household tasks. This allowance should be their spending money, and they should be allowed to spend it on what they choose. Use the allowance as a teaching tool and let them know if they plan for what they want, they can save up their money and buy it.
3. Help Your Child Start Their Savings
A crucial part of learning to manage money is understanding the value of savings and how to save to meet your wants and needs. Teaching your child to put their money aside to build until they have what they need to to make their purchase can not only show them how saving their money can result in them getting what they want and need but also teaches them patience and discourages impulse spending.
4. Teach Your Child About Credit Early
Credit problems are one of the biggest financial issues that young adults have to deal with. This is often due to a lack of understanding of how the credit process works. When credit is misunderstood, it is often viewed as free money, and young adults fail to realize how much it costs them both regarding their ability to borrow and how much they will really end up owing. When your child enters their teen years, considering loaning them money for something they need. Then structure a repayment schedule as a deduction from their allowance, having them also keep track of the balance each week until the debt is fully paid.
5. Show Your Child the Benefits of Being a Wise Consumer
One of the biggest parts of managing money is controlling spending. This can mean making the best choices when it comes to making purchases and also deciding whether or not the value of the item is worth it. When your child wants something, discuss with them if they think they need the product or will use it for a while or see if they were perhaps just swayed by heavy advertising. The why behind a purchase is very important in determining if it is a wise purchase. Once they have decided the product is worth buying, help them to learn to comparison shop to get the best price.
6. Set Budgets and Stick to Them
While every parent loves to spoil their children, buying them what they want all the time is setting them up for failure in the future. You should always set budgets and limits when you can and stick to the budget so your child can learn to make choices and understand that staying in budget is important. Budgets can be used for special occasion outfits, back to school shopping, or when planning a party.
Even though it is your job to provide for the needs of your child, it is also your responsibility to teach them about finances and money so that they can have a successful future. By following the six tips above you can set a good foundation that helps your child understand how to manage their money as well as the importance of doing so.
Worried About Ukraine and Your Money? Consider these Six Things.
Words seem to fail when attempting to describe the horrors of war currently faced by the people of Ukraine. Since last Thursday, millions of innocent Ukrainians have been displaced and hundreds killed following Russia's invasion of an Eastern European democracy.
Indeed, world leaders have since responded by providing Ukraine with financial and military support while imposing heavy economic and financial sanctions on Russian President Vladimir Putin and his cronies. Today, much of the world looks on with bated breath, hoping for a quick and triumphant victory for the Ukrainian people.
How and when this war ends remains largely unknown. It could end tomorrow or persist for weeks to come. Indeed, we're hopeful that delegates from Ukraine and Russia can find a way to end this war diplomatically. Even so, as we pointed out in last week's note, a seismic shift in the geopolitical status quo could lead to economic spillover effects that likely will impact US households for months or even years to come.
So, this leaves many asking, what do these developments mean for my finances, and is there anything I should do right now to protect my wealth? Well, here are six points you may want to consider when it comes to guarding your money during periods of uncertainty:
#1 Expedite big-ticket purchases
Inflation is likely to stay elevated for months to come as a result of this conflict. If your emergency fund is already topped up (see point #3 below) and you have adequate means to buy a new car, house, or anticipate any other big-ticket cash expenditures later this year, you may want to consider purchasing those items now before they become more expensive later.
While a military confrontation currently is limited to Russian and Ukrainian, globally imposed sanctions could, directly and indirectly, affect imported goods and compound supply chain issues that have recently contributed to inflation's rise to multi-decade highs. That's why front-loading spending within your means today may help you avoid potentially higher prices tomorrow.
#2 Revisit your lifestyle spending and savings plan
While inflation's rise likely will mean higher costs for big-ticket spending, you can also expect to pay more on everyday living expenditures not only over the coming months but also potentially for years. Not accounting for these rising costs could leave your retirement nest egg falling short. Indeed, uncertainty surrounding the implications of sanctions and global supply chain efficiency could broadly affect the cost of keeping the lights on at home, filling up your gas tank, eating out, or even buying everyday staples.
In isolation, these higher expenditures may seem manageable in the near term. However, not accounting how these expenses could remain at elevated levels over the long-term could potentially derail your overall financial independence journey when not considered within the context of your broader lifestyle spending goals. That's why now's a good time to reset future cost of living expectations in the face of higher inflation, recalculate your traditional/early retirement total savings need, and make necessary adjustments today to your lifestyle spending or savings contributions to ensure that your everyday financial decisions keep you aligned with your path to financial independence.
#3 Top up your emergency savings fund
The US labor market remains favorable for workers and job seekers alike by many measures. Indeed, while jobs in specific sectors of the economy are plentiful and wages continue to rise, the fact is that US economic growth is slowing and faces headwinds from ambiguous central bank policy, systemic financial instability, and global military conflict.
While an economic recession is not baked into economists' GDP forecast of 3.5% this year, a policy misstep by the Federal Reserve, a shock to the global financial system or a global military escalation could put downward pressure on US economic activity. That's why if you don't have 6-9 months-worth of cash to cover living expenditures, now may be the time to reconsider big-ticket spending decisions along with how much you spend on non-essential goods and services, so that you can increase your monthly savings or reduce needed distributions from your retirement savings.
#4 Prepare for a smaller employer bonus or limited equity award payout
Even if you feel like your job is secure and your emergency savings are topped off, relying on an employer bonus or equity award payout to cover living expenses may lead to financial disappointment later this year. Generally speaking, firm bonuses are tied to corporate earnings. As evidenced during the Covid-induced recession, when economic conditions soften and earnings decline, employers tend to cut back on incentive compensation in a given year.
Present expectations of weaker economic conditions, combined with many of the risks we’ve already mentioned, likely could weigh on risk asset prices this year. That's why if you're the recipient of equity awards and dependent on ISOs or RSUs to cover a portion of your lifestyle spending needs, you may be in for a disappointment should stock prices decline in the months ahead. Put simply, you may want to reevaluate how much of your household outlays are funded by once-per-year windfalls and consider adjusting your lifestyle spending today.
#5 Avoid timing the markets & increase your home country bias
When it comes to your investments, how markets respond to Russia's war with Ukraine likely will depend on day-to-day developments. As such, we expect market volatility to ebb and flow with the news cycle. Indeed, there are times when you may be tempted to make changes in your investment portfolio when it appears that the news is about to get bad.
Nevertheless, during these times of uncertainty, astute investors stick to their disciplined investment process. Rather than trying to identify an inflection point in stock prices or trying to time the next move in the markets, you'll likely be best served by ensuring that your portfolio is aligned with your long-term goals over the coming years, rather than responding to near-term uncertainties by trying to pick the right securities to buy or sell over the coming days and weeks.
#6 Rebalance international risk exposure
Finally, the Russia-Ukraine war coupled with the potential for further confrontations with China has some investors concerned about holding securities tied to these countries in their investment portfolios. While we continue to advocate for investing internationally, we also believe that now may be a good time to reevaluate your investment exposure to countries where the rule of law or the potential for escalating military conflict may lead to downside investment risks.
We're evaluating the current situation more opportunistically, particularly as it relates to international vs. domestic exposure. Indeed, while Russian securities make up a small portion of emerging market stock and bond benchmarks, China's dominance in traditional EM indices likely may argue for a tactical rebalance from traditional asset class benchmark guidelines. We'll provide further guidance and clarification to our active clients in the coming weeks.
For now, only time will tell whether the current situation will escalate to a broader conflict or settle more amicably. Our hope is that substantial financial and economic sanctions coupled with a solid political resolve from Western leaders will convince Putin to end his military incursion in Ukraine. Until then, we anticipate market volatility to ebb and flow with the news cycle. For now, avoiding the noise, evaluating the six items we covered today and committing to your long-term financial plan will not only give you peace of mind during this time of uncertainly, it may also enable you to continue your journey toward financial independence mastery.