A Guide For College Grads On Your Company Benefits Plan

A Guide For College Grads On Your Company Benefits Plan

Congratulations, Graduate!

“Find a job you enjoy doing, and you will never have to work a day in your life.” Mark Twain

This is commencement season when college graduations get the best and brightest to provide all kinds of advice for your life. Some of those speeches through the years have become legendary.

For one of the most inspiring, read or listen to the commencement speech of Steve Jobs, co-founder of Apple, at Stanford University in 2005.

Enjoy this moment of sunshine.

After years of toil at your college, and most likely working hard in high school to land at your top college choice, you have earned the chance to enjoy this moment. The time between college and starting your first job is often a special but awkward time and may involve traveling, family, friends and possibly part time employment.

The value of obtaining your bachelor’s degree remains a major factor in your lifelong income and financial well being.

Your first job after college

On average, most graduates believe the benefits of their education meets or exceeds the costs. If you are in the top fields of study: 76.3% of these engineering graduates believe the benefits exceed the costs and 70.2% of business/ management grads believe the same.

Likely you are either starting your first job soon or are engaged in your search. A Korn Ferry 2018 study pegged average salaries for 2018 graduates at $50,390 though software engineers commanded over $67,000.

Hiring for college graduates is forecasted to rise 16.6%  for the class of 2019 according to National Association of Colleges and Employers (NACE), above 2018’s 4% year-to-year rate.

Here are some tips for making the most of your first job:

Perfect is the enemy of the good. This is the beginning of your professional life. You don’t know what to anticipate in your new environment. Expect to make mistakes and learn from them.

If you haven’t already done this in preparation for your interview for the job, read their annual report and any articles to understand the company. Competence is what you are aiming for when you first get started in your new job.

“Paying Your Dues.” Initially, you are not likely to get the “cool” assignments. You will be doing a lot of the grunt work or doing something you believe is beneath you. Everyone goes through this feeling. Remain enthusiastic as your co-workers and boss may be wanting to see how you handle the easy work before they give you more tasks.

Volunteer to help others so long as you have fully completed all your work. When I hired associates to work with me I often had “eager beavers” wanting to do everything everyone else was doing, leaving behind the work that they were asked to do or do a quick and shabby job.

Seek opportunities to learn new skills. As you get deeper into the swing of your job, complete tasks on or ahead of schedule, become a sponge. Learn as much as possible and take advantage of any company-sponsored training offered to you.

Be inspired to do more than asked

I heard a great story from a now successful executive at a major newspaper firm, who migrated from the entry level job, by completing her work efficiently, then helping others, along the way picking various skills to make herself invaluable.

Understand your company benefits package. According to the Bureau of Labor Statistics, the combined benefits plan averages about 30% of your total compensation. In a tight employment market, companies often become more generous with their benefits. Besides the standard vacation days, your benefits package may vary widely.

A recent Glassdoor survey said 4 out of 5 employees prefer benefits to a raise.

Key parts of a company benefit package:

Retirement 401K Plan: As soon as you begin to work at your new firm, you need to set up an account to start saving in your 401K plan. You need to understand the dollar amount or percentage of company matching contribution with any defined cap amounts on employee contribution.

For example, Discover, the credit card company, has a generous company match up to 7%.

What is the vesting period of the company’s matching contribution for the 401K? If vesting is partial or two years, it is more likely you will keep the company’s match amount than if the vesting period is 5 years or more. Find out if there is partial vesting.

As this is your first job, you may not expect to stay the five years required to earn the company’s contribution. You should still begin to put money in your 401K. You can take the amount you invested and maybe you will stay longer. 

Student Loans repayment. Student loan repayment as an employee benefit is in its infancy period. It could grow into a core part of a company’s benefit package. Currently, about 4% of employers are offering student loan help through the company’s 401K.

More companies are indicating some interest in helping on student loans, especially since the IRS ruling last year.

Abbott Laboratories had received permission from the IRS private letter ruling last year to allow workers who direct a certain amount of their paycheck toward student loan repayments to still get the employer’s contribution in their 401K even if the worker didn’t contribute themselves.

Company stock ownership plans differ widely. They are a desirable benefit for the employees to participate in the growth of the company and may offer tax deductions to the company.

For closely-held or private corporations, Employee Stock Option Plans or ESOPs, mean that the company is owned in part or fully by employees. Publix, the supermarket company, is among the largest owned.

Employee Stock Purchase Plans or ESPPs are offered by 52% of mostly public corporations though employee participation is relatively low at 42%.

The ESPP plan is offered usually as a tax-qualified plan. All employees may participate based on a minimum number of years at the company. These employees may buy stock during “an offering period” over  3 months-to-27 months, set at a discount up to 15% from the market price.

Employees can profit immediately or over a longer holding period. If holding more than a year and a day, your income is taxed at the capital gains rate. Make sure you diversify your investment portfolio beyond holding any concentrated positions.

A Word of caution

Sometimes employees can expand their stock ownership on a tax advantaged basis, even buying the shares inside their 401K plans. I have great concerns about employees using their employer’s stock in their 401k for three main reasons:

  • Owning too much stock of the company you are working for is too much risk no matter how great the company is as your employer. That is too many eggs in one basket and you need diversification.
  • WorldCom and Enron financial scandals were devastating for those companies’s employees who received an inordinate amount of compensation in their company stock for bonuses and 401K plans. There was little heads up of the calamity coming.
  • Many of them lost a substantial amount of their life savings along with the devaluation of their homes due to  their close proximity to corporate headquarters. I knew many of the WorldCom folks.

 


Health insurance plan. Not surprisingly, 58% of new college grads want 100% employer-paid medical insurance but only 7.5% of employers provide that. You need to understand the premiums, deductibles, and co-pays you are responsible for and what your plan covers. If there is a high deductible, find out about whether your employer contributes to health savings accounts (HSAs).

Disability Insurance. According to Social Security Administration, 25% of all 20 year olds will be disabled by the age 67 years. Disability insurance is an important part of any package but few think of this kind of insurance until you need it. 42% of private sector companies offer this insurance.

This insurance plan replaces a portion of an employee’s gross income, usually up to 50%-60% to you, while you remain disabled subject to a physician’s approval. It is offered on short-term and long term basis, with premium paid fully or in part by the employer, with remaining amount paid by the employee.

On a short term basis, the disability benefits extend up to 52 weeks, kicking in 1-14 days after the employee is unable to work and has applied their sick days.

Health Care Flexible Spending plans. A flex plan allows employees to pay for certain unreimbursed healthcare and dependent care expenses with pretax dollars. This plan helps to offset some of the costs not met with the main health insurance up to a capped amount (eg. $2,000).

Dental and Vision insurance is offered by about 62% of employers and considered a desirable perk for college grads. Vision insurance is part of the larger health insurance, allowing for regular eye exams and some employer contribution for glasses.

Life insurance plan. Usually employers offer a relatively small amount of life insurance rather than enough to fully protect you and your family. The employee can increase its coverage amount by paying the premiums on a monthly or quarterly basis through its company’s group term life plan at reduced rates than what they would pay on their own.

Tuition reimbursement for education. Most employers are often willing to provide tuition reimbursement for advanced education rather than lose the employee. The reimbursement is often provided based on grades. An “A” would 100% reimbursement, “B” gets 75% and so on.

Increasingly, companies are offering online courses to employees to complete their degrees for high school and college, as well as “English as a Second Language.”

Unique lifestyle benefits.  There is a long list of unique benefits often found by the best companies to work for. Here are some of the best I found:

  • egg freezing for female employees
  • adoption and surrogacy assistance and reimbursement
  • employee relief fund for national disaster victims
  • doctor’s office or medical clinic onsite
  •  counselling sessions to reduce stress
  • high quality dining
  • leave of absences to care for family members or newborns
  • financial aid coaches
  •  career planning
  • discounts or full paid courses for high school, undergraduate degrees, yoga, and ESL
  • flex hours or work from home
  • dry cleaning on premises
  • paid time off for volunteering
  • pet insurance
  • onsite gym
  • personal or professional time off
  • child day care or  day elder care

Maybe there is a free lunch

Take advantage of your company benefits plan by reading it thoroughly. Ask questions of human resources to understand it better. Work diligently and convey a positive attitude. Whether this is your first job or fifth job, your company benefit package is a meaningful part of your compensation.

What is your company benefit package like? What are the benefits you value you the most? Please share your thoughts with us!

 

 

 

 

11 Ways To Avoid Costly Procrastination

11 Ways To Avoid Costly Procrastination

“It’s the job that’s never started that takes the longest to finish.” J.R.R. Tolkien

I have been putting off writing this article for no apparent reason.

And I am not even the procrastinator in our home. My husband is!

Procrastination is the enemy of good financial planning.

For those who procrastinate, tomorrow is always a better day to start to making better financial decisions about saving and investing. Procrastinators voluntarily delay doing something like paying their bills, despite knowing they will be worse off due to the delay.

College students are big procrastinators

Procrastination tends to be particularly prevalent among college students. An estimated 25%-75% procrastinate on academic work. As a professor, I can attest to grappling with students handing in assignments well after deadlines despite  having known the due dates at the start of the term, and amplified often by me in the classroom.

Ferrari, Johnson, and McGown have written academic research on students  and their tendencies to:

  • appropriate too little time to perform tasks;
  • overestimate how motivated they will be in the future, and
  • mistakenly assume that they need to be in the right mind to do the project.

It’s not just college students who procrastinate. According to Ferrari, 20% of US adults are chronic procrastinators. Delaying is part of their lifestyle.

Surveys show employees often put off opting into an employer-sponsored retirement plan because they are confused by choices given. Yet, they often are aware that they can make future changes to their plan.

Present Bias

Behavioral economics refer to procrastinators as having “present bias” tendencies. They frequently overweight today with instant gratification and underweight resulting pain and losses  in the future.

Academic research is plentiful in confirming that procrastination is a significant predictor of impulsive financial behavior and poor financial planning.

Procrastination can be costly but here are 11 tips to help you fix some of these bad financial habits:

#1 Pay your credit card monthly balance in full. balances Making late payments on our credit cards result in late fees and potentially the penalty interest rate. Total revenues for these fees amount to over $10 billion annually for the credit card companies.

One in 5 credit card accounts incur a fee. Don’t wait for your ballooning credit card debt to further paralyze you. Work on a plan to reduce these debt levels and ask the card companies to waive fees.

#2 Avoid paying all your bills late. You should use as many automated paying options as possible to pay your rent, your student loans, your credit cards, your mortgage, utilities, phone, cable or streaming services.

#3 Pay your income taxes on time. Filing your taxes late means you may have to have to  pay the IRS more. The penalty for filing late is normally 5 percent of the unpaid taxes for each month or part of a month that a tax return is late. That penalty starts accruing the day after the tax filing due date and will not exceed 25 percent of your unpaid taxes.

When filing your taxes late is simple procrastination

There is rarely a good reason for filing of taxes to be delayed yet in our home it has been a chronic happening. The excuses range from simply waiting too long to put records together, delayed K-1 records, or our accountant asking  “one more question.”

These excuses (from my husband who is in charge with filing taxes)  truly amount to laziness. I love my husband but this pet peeve has become huge.

#4 Keep some cash as a cushion to avoid bouncing checks.Overdraft fees are charged by most banks when you don’t pay attention to your bank account balances. You can opt-in for overdraft coverage. You can also ask your bank to waive these fees and do better in the future.

#5 Be proactive about participation in your workplace retirement plan. Delaying your participation in an employee-sponsored 401K retirement plan often results from decision inertia if there are too many choices to make. Yet you benefit by saving with tax-deferred dollars. Companies should automate saving through direct-deposit paychecks for employees.

Some companies offer these plans with an “opt-out” provision and participation has increased.

Fidelity pointed out that 76% of 20-24 year olds saved for retirement when “opt-out” was used versus 20% saving when the company used an “opt-in” instruction. Saving for retirement in your 20s is a relatively painless way to benefit long term from the positive effects of compound interest.

The earlier you can fund your 401K and Roth IRA, the greater your retirement nest egg will be.

Schlomo Bernartz and Richard Thaler have pioneered “Save More Tomorrow” behavioral intervention program. Thus far it has helped the more than 15 million people in their program with increasing savings results.

The program has a 3 prong approach:

  • people are asked to commit now to saving more in the future, helping to avoid present bias;
  • planned increases in savings rates are linked to future pay raises, minimizing influence of loss aversion since their take-home pay never decreases; and
  • once employees are enrolled, they remain in the program, unless they “opt-out.”

#6 Setting up a 529 college savings plan provides tax deferred benefits like a retirement savings. Saving for your children’s college education with a 529 savings plan is easy to set up. You should begin as soon as possible as compound interest works well when you have as much as 18 years to save for your children.

Don’t let the plan choices overwhelm you as you are able to make changes.Your incentive is to save now rather than borrow more later.

#7 Your savings, after you create your emergency fund, should be earmarked for investing. Investing outside of retirement is also often delayed with excuses that you don’t understand how to invest. Yet, there has never been a better time to buy low cost diversified S& P 500 stock funds if you don’t have the time or inclination to pick individual stocks

#8 Practice spending limits. Impulsive spending behaviors are particularly problematic for procrastinators. A 2016 study in the Journal of Academy Marketing Science points out that procrastinators spend a great amount online shopping, to avoid work tasks. This leads to increased impulsive purchases.

Change your spending patterns

For some people, this amounts to a shopping addiction so changing spending patterns is important.

  • Carry cash with you rather than credit cards so you have some kind of spending limit.
  • When you shop online, put items of interest into the cart and abandon the cart. If you still need it, it may not be an impulsive buy.
  • Track your spending for 30 days in a diary or use spending apps.

Marketers thrive on impulsive shopping

Marketers are well aware of impulse buying tendencies. The Internet is loaded with articles, “How to Encourage Impulse Buys and Unplanned Purchases In Your Retail Store.” This is akin to having a bar at an Alcoholics Anonymous meeting.

#9 Avoid last minute shopping for presents. Those who delay buying presents during holiday season or for anniversaries and birthdays, often are in a panic to buy quickly. Choices may dwindle and you may face having to pay for shipping to make sure the gift gets to that person on time. Sometimes we feel guilty at having waited until the last minute, so we overcompensate by spending more.

It is always important to shop wisely. Send yourself a reminder or pay heed to the Facebook reminders of upcoming friends’ birthdays.

#10 Checking your credit report regularly. If you particularly procrastinate with paying bills, it is likely your credit scores are less than stellar. As your credit report is used to buy a car, home, college loan, rent an apartment, get a job and to check for fraud, review your report to  prevent future problems that may be harder to fix with delay.

#11 Estate planning delays could be costly. If you have accumulated wealth and assets during your lifetime, creating a will, a durable power of attorney and healthcare proxy are the minimum you need to do, often for the sake of family harmony. This will alleviate stress in your family in the event you or a loved one becomes disabled or are unable to make life decisions.

Attending to your estate planning may allow your family to avoid unnecessary tax payments. Consult with a tax professional.

How we can use technology to help us

As digital overload is often the culprit, getting in the way of making better financial decisions, it can often be used to benefit us.

While some of these were mentioned above, here are ways we can use technology to avoid delays:

  • Automate your payment where it is available.
  • Pay your credit cards in full to avoid fees and higher debt costs.
  • Set up automatic withdrawals from your paychecks
  • for retirement, health insurance, insurance and investing so you can participate in workplace programs that are beneficial for you.
  • Track your spending either in a simple diary or in a budget app like Mint or Wally. Look for simplicity if that appeals to you.
  • For an investing account, sign up with an online broker like Ameritrade or Fidelity and research a number of low cost index funds. If an app is more appealing, try Robin Hood which is free trading without the frills.
  • To change bad habits, look into Coach.me, a habit tracker that allows you to create short term and long term goals.

 

Most employers have Employee Assistance Programs that help with financial and non-financial matters. They can help on a number of financial issues like buying a home, credit counseling, tax preparation, retirement plans, and health insurance.

Procrastination is a tough behavioral issue for the procrastinator who doesn’t necessarily minimize his or her stress levels by avoiding tasks and decision-making, and for their families, co-workers and friends who often suffer the consequences of their actions.

Bad financial habits can be turned around by those with strong motivation and dedication to address their problems.

Getting professional help for chronic procrastination may work.

We all procrastinate at one time or another but most of know how to snap out of the lull of not being productive. I fight with myself all the time, delaying the harder task and tackling the easy one first. We all have our own tricks to change these potential patterns. How do you get yourself back on track? We would love to hear from you!

 

 

 

 

 

 

 

 

 

Step-By-Step Guide: When A Loved One Dies At Home

Step-By-Step Guide: When A Loved One Dies At Home

Death happens to everyone.

It is one of life’s inevitable truths.

Do you know what to do if a loved one passes away at home?

Most of us of would not, especially if it was unexpected but even it is was expected due to a long illness, it is an emotionally stressful time and thinking straight is likely challenge.

This comprehensive step-by-step checklist should guide you through the steps to take during upsetting time.

Here are the steps you need to go through upon death

If unexpectedly:

#1 If a person dies at home expectedly, immediately call 911 emergency services. You need to call the authorities to have police involvement to ensure that the medical examiner legally pronounces the death.

#2 If the deceased was under the regular care of a doctor or under hospice care, call that doctor or hospice nurse.

He or she will be able to pronounce death or may be to help the responding emergency medical personnel determine the cause of death and expedite the official pronouncement.

If the deceased had a do-not-resuscitate (DNR) document, make sure you have it in hand. Otherwise, the paramedics will start emergency procedures and take the person to the emergency room and police may insist on investigating as a potential crime.

This is exactly what you DON’T want at this already stressful time.

#3 Once death is pronounced and the necessary paperwork completed, you should contact the funeral home to arrange for the transportation of the body. If you and your deceased love one did not choose a funeral or interment provider  (burial below ground) ahead of time, you will need to choose one.

As this was unexpected, finding a funeral home in your neighborhood is appropriate unless your family has previous experience with one.

If expected:

#1 Call the decease’s regular care doctor or palliative care doctor if the deceased was under terminal or hospice care. If possible, have the mobile number of the regular doctor or palliative doctor.

#1 Once the doctor has pronounced death and completed the necessary paperwork, you should contact the funeral home to arrange for transportation of the body.

Upon pronouncement of death.

  1. Make sure any dependents or pets are taken care during this time. If you have children, remember they are grieving and possibly confused. They will require care and support.
  2. Contact family and friends, and delegate someone to call and reach out to others. You do not need to inform everyone about the death if you are not able to do so. Instead, your immediate family members, key relatives and friends are usually helpful in getting the word out to others. You can ask them to contact specific individuals. You want to make sure you don’t leave someone off the list. Often you ask friends to make other friends aware. Some people put the news on Facebook or other social media for expediency’s sake, however, be aware of the potential of unsavory people who can take advantage of grieving families. If you take this route, direct people who will hear via Facebook to go to a private message for details.
  3. Prepare for organ donation if you know that this was the loved one’s wishes. If unsure, you can check the deceased’s driver’s license or if there is an advance directive that is usually prepared with other estate planning documents.
  4. Contact the funeral home to alert them to the death. If you and your deceased love one did not choose a funeral or interment provider  (burial below ground) ahead of time, you will need to choose one. Finding a funeral home in your neighborhood is appropriate unless your family has previous experience with one.
  5. Call deceased’s employer, if they were still working. You need to inquire about whether benefits and wages were due to your loved one and whether there was any company life insurance policy.

Within the next few days (or hours depending on the deceased’s religious beliefs):

  1. Arrange for funeral or cremation in accordance with the deceased person’s wishes.
  2. Write an obituary to provide notice. Sometimes the funeral home will help you with writing the obituary and publishing it in a local paper.
  3. Organize a post-funeral gathering according to your tradition. Again, family and friends can be enlisted for help for the plan.
  4. If the deceased was a veteran, contact the VA to ascertain if any burial benefits or military honors are due.
  5. If the deceased person was the sole occupant, secure the deceased person’s home and car. You may want to notify someone to be in the home for the short term.
  6. Notify the post office to forward the deceased person’s mail, if they were the only occupant, to someone that can go through the mail and organize into different categories:subscriptions, bills, accounts and other correspondence. Some of important bills like for mortgage payments will need to be paid promptly. This will provide a window into what needs to be canceled, paid, closed or transferred according to estate planning documents.
  7. Contact Social Security Administration (800-772-1212 or social security.gov). The funeral director may notify the local social security office of your loved one’s death.

Within two weeks after death:

  1. Obtain death certificates from the funeral home. They will usually give ten certificates. Make sure to order more copies. You will be surprised how many agencies and institutions will require original raised seal copies.
  2. Engage a probate attorney whether or not there is a will and other estate planning documents. The attorney can help you decide how to proceed with either taking the will to probate or, in the case that there is no will, petitioning for letters of intestacy from the Probate Court. When a person dies without having a valid will, his or her property passes by what is called “intestate succession” to heirs according to state law. All 50 states have laws addressing the order and is designed to simulate how the average person would have designed his estate plan.
  3.  Contact the deceased’s financial advisors, accountant, and banks to determine the deceased’s assets. Increasingly, the deceased may have some of their assets at fintech companies through apps. You will need login information to access these digital assets. If you know the deceased’s online accounts and logins you should look for this information.
  4. You will likely need to contact a tax practitioner to be file a return and an estate tax return. The date of death will be used to determine asset values.
  5.   Close credit card accounts. Find the statements or call the number on the cards. You may need to submit a death certificate to each card company.
  6. Notify all three credit reporting agencies: Equifax (https://www.equifax.com/personal/), Experian (https://www.experian.com/) and TransUnion (https://www.transunion.com/). You will need to provide copies of the death certicates to minimize the risk of identity theft that could make things even more difficult for you.
  7. If deceased had life insurance, submit claims with a death certificate. Cancel car insurance and any other insurance policies that are no longer needed.
  8.   If not already done, if the deceased collected Social Security payments, contact Social Security Administration (800-772-1213 or socialsecurity.gov) to stop the payments and ask about survivor benefits.
  9. If deceased person belonged to any organizations, you should cancel those memberships.
  10. You can contact your local election board to make them aware of your loved ones’s passing. I am not being funny, but you do hear of the high incidence of deceased persons’s voting.

For all situations, you should know the person’s wishes and intentions before death:

  1. Know the location of any will, birth, marriage and divorce certificates, deceased’s Social Security information, financial documents, including life insurance policies, and whether he/she had a safe deposit box at the bank.
  2. Know the person’s wishes about funeral arrangements, organ donation, and burial or cremation.
  3. Have the person complete an advance directive, including a living will, which specifies wanted and unwanted procedures. The person should also appoint a health-care proxy to make medical decisions if he or she becomes incapacitated.
  4. Have a do-not-resuscitate (DNR) order drawn up if the person desires. That tells healthcare professionals not to perform CPR if the person’s heart or breathing stops and restarting would not result in a meaningful life.
  5. Make sure the person gives copies of the documents to their doctor and a few close family members or a close friend. Take the documents to the hospital if the person admitted.

End of life of a loved one is an emotional challenge

The end of life for a loved one is a tough time for everyone, whether the passing was expected or unexpected. When it is unexpected, and the deceased person is young, it is often very traumatic for the family left behind. I, too have experienced the passing of my loved ones, and the despair of not knowing what to do at that very first moment when you realize they’re gone is debilitating.

I hope this list gives you some comfort, if only so you can put this list in a drawer for a very long time!

It is a good idea to sit down with your loved one and talk about your plans, such as DNR, where you keep your important papers and important contacts. Have you considered  drawing up your living will, considered who your health proxy will be, and considered speaking to a professional about estate planning?

Unfortunately, the loss of a loved one is common. When we are dealing with the emotional feelings, it is often hard to think. Hopefully, this step-by-step guide should help. Share your thoughts or experiences. We want to hear from you!

 

 

 

 

 

 

 

 

 

 

 

10 Ways To Better Manage Your Spending

10 Ways To Better Manage Your Spending

If you want to live comfortably, you need healthy financial habits.

A top priority must be to live within your means.

Only 46% of Americans report making more than they spend, according to a Pew Research study.

Overspending leads to borrowing, usually with higher cost debt associated with credit cards.

#1 To seriously cut spending, you need to examine your household budget.

Build a simple budget plan. The key to spending at least within your means is to know your fixed expenses (more predictable but less flexible) and variable expenses, where we may be better able to control.

Track your daily spending for a month and review it for items you may not have needed.

see our post: “How To Control Spending With A Simple Budget” 

Income volatility is often a big reason we may spend more than we make or can’t make ends meet.

34% of Americans have large earnings swings of 25% year-to-year. Those swings could go in either direction: upward (due to a large bonus) or downward (illness, job loss). An emergency fund would be useful for those experiencing a downturn in earnings. Without consistent, stable income year-to-year, families have to work extra hard to understand their budgets and keep spending control.

An extreme case of this is when someone wins the lottery, a sports figure lands a multi-year contract, or someone receives an unusually high bonus that may not necessarily be repeated and is by no means assured. For these situations, seeking out a financial professional, you can trust to help you make rational decisions is an excellent place to start.

#2 Learn to deal with inconsistent income.

You need to consider your current lifestyle and review your budget. If you received a large bonus, don’t leave it in your checking account. It is too easy to spend. Using the windfall amount to pay down debt or investing in investment accounts like an S& P 500 low-cost index fund or a retirement account is a prudent move.

When I worked on Wall Street, my salary was always relatively modest, while my bonus could amount to as much as 80%-90% of my total compensation. It was difficult to rely on the reward. I always knew that job loss was high in my industry. Often it had little to do with you and more to do with the overall environment. Twice my firms failed (bankruptcy in one case, closure in another).

There were significant time frames where I was not working, and it was not clear whether I would land somewhere. Once, my husband, an attorney, and I both lost our jobs on the same day!

Losing our jobs at the same

Linda: “Hi, Craig, not a good day. They closed our firm today, and I just packed up boxes to send home. I am with friends now. Home soon.”

Craig: “Linda. I’m in your camp. I’m on my way home soon too.”

Linda: “Craig, I know you are always supportive! Thanks.”

Craig: “No, I meant my boxes are on their way to the apartment, too. They let me go, too.”

We did not have children at the time, but it gave us a lesson about living carefully within our means despite sometimes earning outsized paychecks. There will always be droughts that you must plan for. Understanding what your reasonable costs are will keep you more grounded.

Good financial habits at any stage of life will help your comfort level through the tough times.

When wants become needs

I only have to look at my own family and our home to see the fruits of what has become “must-haves.”

With the proliferation of technology, we have expensive smartphones, data plans, giant screens, video streaming, music plans, video game consoles, online shopping, smarter cars, and so much more. These plans add to our monthly fixed costs or encourage overspending to a great degree.

This transformation into our lives has brought so much variety, information, knowledge, and benefits at our fingertips, but we need to better manage our money in paying for it all.

 

#3 Use cash for more categories 

Increasing your pain of spending is the best way to curb unnecessary buying. For more expensive items, like furniture, I have asked the salesperson for a different price if I pay entirely in cash, and I often receive a discount.

Learn how to save money on groceries.  

#4 Go to go your grocery with a detailed shopping list.

It saves time and stops from meandering down all the aisles. I often give myself just enough time to buy what I need. When shopping for groceries without a list, I find surprises in my cart. It feels like somebody possessed me. I bought things we didn’t need but forgot the items I needed to cook with that evening.

#5 Save money with coupons and apps 

Confession: my husband has been doing most of our food shopping. He has been an avid user of coupons for years and is a loyal shopper at certain outlets. We have also been using Ibotta and Checkout 51 with good results. Using coupons can be fun, but you need to be organized—recommended apps such as thegrocerycame.com, couponsuzy.com all worth a try.

#6 Use unit pricing.

Take the case of buying carrots:

  • One pound of baby carrots,  $0.99 ($0.99 per pound)
  • Two pounds of baby carrots, $1.89 ($0.94 per pound
  • One pound full-size carrots   $0.68 ($0.68 per pound)

If you have time to peel and cut the carrots, the full-size carrots are the better deal. All you need is basic math to make better buying decisions.

I had a great teachable moment with my son. 

Tyler had recently bought one ounce of cashews at a small grocery store with about 18 cashews for $4.99. He was “starving” on the way home from school, about a 15-minute walk home. We had just bought a large container (40 ounces) of cashews from Costco a day earlier. He had asked for them.

I asked him to do the math. He then realized he had paid 10x more for his little plastic cup. Incidentally, Amazon sells that large-sized Kirkland cashews for $26.99. Just saying!

#7 Avoid brand bias

You are often paying more for brand marketing than for higher quality when you buy name brands. The private brands (also known as private label or generic brand)  and the name brands are often sitting near each other, so it is easy to compare the ingredients’ labels.

They are usually identical except for the price, with the generic brand costing one third-two thirds less. Many private brands are forms of brand names repackaged. The better-known company sells their product as private labels, generating higher margins. Check out Kirkland batteries and Duracell batteries. They’re the same.

#8 Handle the pitfalls of online shopping

Online shopping has benefits: quick, convenient, and the opportunity to avoid crowds and lines. However, it is just too easy to buy things online. Retailers know this and have developed strategies to induce overspending. To save money on shipping, they will tell us to spend more than we intended.

Retailers have had difficulty keeping with their products being “Amazoned,” resulting in softer sales, so they have improved their websites and sales approach.

They stalk us with targeted ads.

I have sometimes looked into certain items to price and read reviews, and for days (or longer) afterward, that ad is popping up everywhere. Cookies store sites we visit, and those trackers can tell if you are interested in buying something. You can disable those ads by periodically clearing your cookies and resetting your advertising IDs within your iPhone or Android settings. Or you can just use a private browser.

#9 Practice cart abandonment

One way to counter some aggressive online tactics is to make it work for you. I would not necessarily consider myself an impulsive shopper, but we all have our weaker moments. Sometimes, I have put things into my cart, testing myself as to whether I need that item. I have found different prices for the same article the next day (higher and lower). Ever see a coupon? I have.

#10 Make your own rules for going shopping for food and personal care

I have no more bottled water. My Takeya 32 ounce insulated stainless steel bottle is a great replacement. We all have some version of water bottles. Better for the environment.

See our post on “25 Ways To Save Money And Feel Good About It”

Plan your menu for the week to the best you can, especially if you have temperamental teens at home. What sounded good on Monday is not so desirable on Thursday.

Post-purchase behavior

Understand the store’s return policies (online and in-store), especially if you are prone to cognitive dissonance, that guilt you sometimes feel post-purchase. Marketers are well aware of that familiar feeling in that they have created post-purchase customer service, following up on our recent purchases. You’ve gotten those emails asking you if you like that new pot you bought online.

In the past, if I couldn’t decide between several items (shoes, shoulder bags, dresses), I’d buy it all, egged on by my spendthrift husband. Rarely would I return anything only to find the stuff still in the store bags. Instead, now I often ask the salespeople to hold on to things.

Bargain Hunting or Shopping Addiction

Retail expert Mark Elwood has written about the psychological benefits of seeing bargains. He points out that stores like Best Buy use Goldilocks pricing or three-tiered pricing, ranging from low-to-high prices. The store is hoping you will buy the middle option with higher pricing than the low-end but not necessarily feature-worthy enough to pay more.

We should not pay list price for anything but make sure it is a real bargain. There has been a lot of worthwhile academic research about bargain hunting being a form of shopping addiction. There is the thrill of getting a deal rather than the specific item itself. 

Be purposeful when shopping

We need to be mindful of purposeful shopping.  Listen for the sales details of the bargain, and making sure it is what we want. One of my weaknesses in the past was shopping with others. I love being with my friends, but the exhilaration of shopping often led me to buy more clothing and jewelry than I needed.

Final Thoughts

Spend less than you earn is essential to proper money management. Examine your household budget for ways to save money when shopping for groceries. Buy generic brands, go shopping with a list, and be purposeful about your needs.

What is your shopping experience online and in the stores? What ways are you using to control spending? We would love to hear from you!

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

How To Pay Down Your Debt For Better Financial Health

How To Pay Down Your Debt For Better Financial Health

You can reach financial success but you need to manage your debt wisely.

Be ready to tackle some tough choices and trade-offs if you are aiming to grow and accumulate wealth

Your planning should start as early as possible so that you have a reasonable early start on your roadmap to accumulate wealth, have financial flexibility, and retire comfortably and early. To strengthen your financial health, you need to deal with your debt wisely.

You will accumulate debt in your lifetime.

Borrowing is not always a bad thing especially for good reasons like for your college education, furthering your career or buying your home.

 Getting a college education is expensive.

Jumpstart your children’s college education by investing in 529 savings plans for your child’s education as early as possible. This will lessen your debt burden and potentially lessen theirs as well. About one-third of student loan debtors say they were late paying their bill at least once in 2017.

Plan to get the more attractive federal loans. Apply for scholarships, grants and work-study programs. Most importantly, make sure you and your children understand how to repay yours and their obligations on time.

Read our post: “How To Pay For College: A Family Guide.”

Buying A Home

Before actively looking to buy a home, make sure to check your credit reports first to see what kind of financial shape you are in. Make sure it becomes a regular part of your life to habitually check your credit reports and score. It is not uncommon to find errors or issues which can be corrected but it takes time. You should deal with it quickly.

See our post on reviewing your credit reports: “Are You Creditworthy?…”

Consider 15 year fixed mortgages vs. 30 year fixed mortgages

When buying a home, consider opting for a shorter term mortgage as your total cost will be lower.

Let’s use an example to illlustrate what your mortgage costs will be:

Assume you found an $800,000 single family home, putting a 20% down payment, or $160,000. In both mortgages, you are borrowing $640,000. I know what you might thinking..that is an expensive home! Bear with me a bit.

Recent rates from NERDWALLET’s mortgage calculator produce these numbers:

The 15 year mortgage rate is 3.4%, and you will be paying a higher monthly amount (principal and interest)  of $4,544 versus the lower monthly amount of $3,092 based on a 30 year 4.1% mortgage interest rate. The higher rate for the longer 30 year period is expected. These rates are pretty attractive.

Here is your breakdown for your 15 year mortgage:

  • Monthly principal and interest costs: $4,544 and total year’s costs are $54,528, excluding down payment.
  • Your home’s total costs with a 15 year mortgage are $977,898.
  • This includes the $160,000 down payment, $640,000 you borrowed and $177, 898 in interest payments over the course of 15 years.

Here is the breakdown for your 30 year mortgage:

  • Monthly principal and interest costs of $3,092 and total year’s costs are $37,104, excluding down payment.
  • Your home’s total costs with a 30 year mortgage are $1,273,289.
  •  This includes the same $160,000 on a 20% down payment, $640,000 you borrowed but a whopping $473, 289 in total interest costs based on the15 year longer time frame.

The 30 year mortgage added $295,391 to the price of your home. That amount could be put into investment or retirement accounts, or can be used to pay down your student debt, and provide you with extra financial flexibility!

Existing home prices appreciated annually from 1968 to 2009 by 5.4% from 1968 to 2009 based on the National Association of Realtors but that doesn’t take inflation into consideration which may bring down the rate. Also, prices vary significantly across the country.

While it would be nice to get a price pop on your home, remember you are living in it and hopefully enjoying the house. If you are fortunate to get a low mortgage rate, this is good debt to have.

Look at your borrowing rate versus potentially alternative investment returns if you did not have a mortgage.

The 3.4-4.1% respective mortgage rate above is attractive. It allows you to free up capital you would have used to buy that home and invest it in the higher yielding S& P 500 stock index, which have higher returns than the mortgage rate you would be paying.

Inclusive of dividends, S&P annual returns generated 12.50% post WWII. Longer term, the S& P 500 generated annual returns were over 9%.

You want to make good trade-offs. If you are able to afford the 15 year mortgage monthly amounts, it is a better investment.

You need to shop around for mortgages using calculators are conveniently available online.

Good Debt versus Bad Debt

While using debt for student loans and mortgages can be painful to bear, it is for the good of your future that is likely to result in a good career and higher earnings.

If you can get an affordable mortgage by buying a home you will  love, you should realize modest home appreciation, pacing inflation. Your home should allow you to preserve your capital.

You need good financial habits when dealing with credit card debt

Don’t overleverage yourself with credit card debt. Have rules you can keep. Pay off your credit card balances off in full every month.

According to FINRA’s 2015 financial capability study, 32% of consumers pay only the minimum monthly card balance as compared to 52% that pay the balances in full. Paying the roughly 2.5% required minimum on a $3,000 balance can take over 20 years to pay if off.

APR vs APY

A credit card’s interest rate or the annual percentage rate (APR) is your price you pay for borrowing money, and it is usually the highest rate (high teens percentages unless you have great credit) you will pay. Far higher than for mortgages or for student loans. The APR doesn’t include the compound interest rate.

On the other hand, the effective annual rate on the annual percentage yield (APY) does include how often interest is applied to your balance (eg. daily, monthly quarterly or yearly). This means that when you don’t pay your card’s monthly balance in full, you are paying interest on interest. Here, compound interest is working against you, building up your debt amounts.

Remember these credit cards interest rates are higher than mortgage rates.

Depending on your credit score, whether you are an existing card holder or a new card holder your APR could range from 15%-19%. According to Federal Reserve’s report in February 2019, average credit card interest rates were 15.09%, and including assessed interest were 16.91%.

Borrowing rates will likely rise for types of debt as the Federal Reserve hikes the federal funds target rate.

The average US consumer has 3.1 credit cards with an average balance of $6,354 plus an additional 2.5 retail store cards with $1,841 average balance according to Experian’s 2018 study. About 41.2% of all households carry some credit card debt.

If you pay the minimum amount required, there will be no changes on your credit score and no fees but it will take a long time to pay down your debt.

If you miss that monthly minimum, you will pay dearly after 30 days of nonpayment.  You will incur a penalty rate upwards of 29.99% monthly until you make six consecutive payments on time. You will also pay flat fees, and your credit score will be impacted negatively.

Ouch!

If you can’t pay your monthly card bill in full each month, cut your spending. When you pay only the minimum balance on your cards, you will be wearing a financial noose around your neck far longer than you want.

Be careful about what you put on your credit card

I have always been fearful of building up my debt levels (not counting our mortgage) so I have often paid cash or by check. It increases your pain of spending much faster and introduced me to financial discipline at an early age. Pay for more things with cash like your next car and make it a used car.

When you shop for credit cards, make sure you read the fine print known as the terms and conditions. You need to understand your effective annual rates, the penalty rates, late fees and such.

When you get overwhelmed with your credit card balance and your debt balances, make reducing your debt levels your top priority. The stress levels of having too much debt can engulf us, resulting in higher absenteeism at work and an inability to fully function.

Related Post: Common Credit Mistakes And How To Avoid Them

Two methods to reduce debt: the Avalanche Method and the Snowball Method

Assuming you have the following debt balances:

  • Credit card debt of $3,500 @ 15%
  • Student federal loan#1, of $5,000 @ 4.5%
  • Student private loan#2,  of $7,000 @ 7.5%
  • Car loan of $13,000 @  5%
  • Miscellaneous debts of $1,500 @ 4% average rate

Using the avalanche method, you would prioritize your high cost debt first. That will likely be your credit card balance by targeting the credit card debt at the higher 15% rate.

If you are only able to pay $1,000 per month, it would take you 3.5 months to bring down your balance to zero.

Mathematically, the avalanche way makes sense to rid yourself of high cost debt. That debt grows faster and your total interest costs will likely be lower using the avalanche method.

The snowball method is gentler. You begin to pay down your smallest debt amounts. This should motivate you to get into the habit of paying down debt and feeling accomplishments sooner. Here, you would pay the smaller amounts in the miscellaneous total before challenging yourself with the bigger amounts at higher rates. You will likely be paying more in total borrowing costs.

Which method to use?

Guru Dave Ramsey has been a proponent of the snowball method. Academic studies back this method. The anxiety of having a lot of bills can paralyze debtors from doing anything at all. Tackling bills one at a time can be an accomplishment and is motivating.

One of the most recent studies out of the National University of Singapore by Dr. Ong Oryan, suggested that “getting rid of debt clears up cognitive functions, lessens anxiety and improves impulse control.” The study pointed out that debt impairs psychological functioning and decision-making.

One way to look at debt reduction, is to look at as a trade-off in investments.  Paying down debt with higher interest rates of over 15%, is like  making a 15% return! That already feels like an easy choice.

For those who are highly motivated, analytical, and ready to take on the task to lower their borrowing costs, the avalanche method is better.

It is truly a personal choice. The best choice is to get started on addressing your debt so you can move on to better financial health.

Ways to find cash to pay down debt: 

  • Annual tax refunds
  • Sale of an investment earning lower returns than what you are paying
  • Your annual bonus
  • Spending below your earnings and resultant savings can help

Managing your money requires financial discipline. High debt levels disrupt our plans for wealth accumulation and need to be dealt with firmly.

Have you used the snowball method, avalanche method or some other way to effectively reduce your debt? Your comments are greatly appreciated. Thank you for sharing!

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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