Five Ways You Can Defeat Debt

Five Ways You Can Defeat Debt

Nov 2020

Debt and the American way of life have become synonymous. From the 1850s when the Singer sewing machine company first introduced installment loans so that more homes could purchase its revolutionary appliance, a rising standard of living and debt have gone hand in hand.

In 2018, less than a quarter of respondents to a Northwestern Mutual survey said they were debt-free. The rest reported debt totaling an average of about $38,000, excluding a home mortgage. Cumulatively, all consumer debt surpassed $14 trillion in the beginning of 2019. For perspective, the GDP of the U.S. in 2019 will be around $21.4 trillion, China’s GDP will be $15.5 trillion and Germany $4.4 trillion. In fact, U.S. consumer debt surpasses the GDP of 8 of the top 10 countries with the largest economies in the world. The largest single category of U.S. consumer debt is mortgages, totaling $9.4 trillion. But that still leaves a chunk of debt rivaling the size of Germany’s whole economy made up of student loans ($1.4 trillion), auto loans ($1.3 trillion), credit cards ($834 billion) and personal loans ($291 billion.)

Debt has clearly become the albatross of the American family budget. And while not all debt is bad, [link to good debt blog] some types of debt can be destructive, nibble away at your finances and give you that “I just can’t get ahead” feeling. High credit balances and low savings can be a one-two punch that prevents you from accumulating sufficient savings to insulate yourself from financial stress.

The road to recovery? Reduce debt. You could just keep making your current payments, but unless your debt is structured in an unusual way, that’s probably the most costly and difficult way to do it in terms of payoff amount and duration.

Once incurred, debt can be mighty hard to get rid of. But here are five ways to overcome those pesky, persistent loan balances.

Snowball Method

Look at your lowest credit balance. Maybe it’s a retail store credit card or a low-balance credit card you don’t use much. Take everything you can scrape together and throw it at that card each month until it’s paid off. Now do that again with the next highest balance, and so on. This is part financial strategy and part behavior modification: By “removing” those payments from your budget, you start building a reserve into your monthly spending habits. And that reserve gets bigger and bigger as you move up to the higher balances. Eventually, you’ll pay off enough of your debt to be able to start diverting some of that reserve into savings. Win!

Avalanche Method

The snowball is highly effective in motivating you to act and keep with the program; however, it may not result in the lowest overall payments. If that’s your goal, and you can stay motivated, consider the avalanche: making minimum payments on all of your debts along with the biggest additional payment you can on the debt that has the highest interest rate, often a credit card. When that’s paid off, do it again with the debt with the next highest interest rate, and keep following that pattern until you pay off your lowest-rate debt. This approach will save more money on interest over time.

Prioritize Bad Debt

If you go into debt to buy a house or get an education in a field that’s going to pay well enough to repay the loan or start a profitable business, that’s good debt. You’re investing money in a way that can help eventually increase your net worth. Bad debt includes money borrowed for things that decrease in value as soon as you buy them or debt taken on for purchases that are beyond your budget. That could include discretionary credit card purchases for nonessential items or a car loan for a vehicle you really can’t afford.

The strategy here is to focus on paying off bad debt first by making more than the minimum payments to get out from under. Often, bad debt carries higher interest rates, so you may also save some interest costs by doing this. But the main benefit is that you’ll feel better by decreasing your bad debt — and be in a better financial position — if you owe money on a house that builds equity and provides a place to live than if you owe money on a new wardrobe that will probably be out of style by next year.

Biweekly Payments

This strategy is simple, straightforward and fiscally sound: Take each of your monthly payments and split them in half. Make one of those payments every other week. Because there are 52 weeks in the year, you’re actually making one additional monthly payment, 13, each year. In addition, you’re lowering your loan balance more rapidly. Both of those things will save you money on interest. This is especially effective when used on longer term obligations like an auto loan, student loan or mortgage.

For example, if you have a 30-year fixed mortgage of $250,000 at 4%, making biweekly payments will save almost $30,000 in interest and retire the loan five years sooner. Even if you only stay in the house for seven years, you’ll still save several thousand in interest while paying down an extra $10,000 in principal, which means more money in your pocket when you sell. It takes discipline to stick to this program, and you have to make sure your lender will allow this and then apply the additional payments correctly, but there are biweekly loan services that can help for a fee.

Balance Transfer/Consolidation

Of the five strategies, this is probably the least desirable, but it can save money without requiring larger payments. If you have credit card debt, you’ve doubtless received offers for consolidation loans or balance-transfer credit cards. The idea is to move balances from higher-interest loans to a loan or card with a lower interest rate. Over time, that can save you money on interest.

However, read the offers carefully: Many have a transfer fee, and that fee can severely limit the amount you save. Also, with balance-transfer credit cards, the introductory “low, low rate” often only lasts a few months to a year. If you can’t substantially pay down that balance before the rate goes up, you’re not making any real progress.

Which One Is Best?

Like diet and exercise, the best debt-reduction strategy is the one you’ll actually follow over the long term. Pick a path that fits your personality, your finances and your lifestyle, and then stick to it and it will — literally — pay off.


What is a Target Date Fund, and Should I Invest in One?

What is a Target Date Fund, and Should I Invest in One?

Nov 2020

Target date funds, or TDFs, have become very popular among investors in recent years. And if you’re opening a new 401(k), this may be an option to consider if you want to minimize the stress of adjusting your retirement strategy as you get older.

In the past, 401(k) participants would have to create their own blend of investments called an asset allocation, typically including an array of stocks, bonds and cash equivalents. Asset allocation should reflect the risk tolerance of the investor as well as the time horizon until the money is needed, usually retirement. Typically, a longer time horizon allows for greater risk, which might translate to a higher proportion of stocks and riskier investments, whereas a shorter time horizon warrants more conservative choices.

That means your investment strategy should include rebalancing the allocation periodically as the retirement or target date draws closer. And this requires monitoring investments and making decisions about what exactly to adjust from time to time.

But what if this could all be done automatically, with no action required on your part?

This is precisely what a target date fund aims to do. The manager of the fund constructs a strategy around a target date at which time the participant is expected to start withdrawing funds. This target date is typically the participant’s retirement date, although it can also be directed toward other needs, like a child’s college fund. The fund manager will periodically reallocate the investment mix, usually annually, to become more conservative as the target date draws closer.

The Upside

Good for hands-off investors. TDFs can be an excellent option for those who tend to avoid managing their investments but still want a steady path to retirement.

SimplicityIn theory, choosing a TDF could be the only investment decision you make, although this strategy may not always be advisable. Be sure to consult a qualified investment advisor.

Less intimidating.If you’re not particularly interesting in learning about different asset classes, mitigating risk and other issues an informed investor should understand, then a TDF offers a way to easily hand those decisions over to a professional.

The Downside

Not amenable to changing goals.If your investment goals suddenly change or you have to retire earlier or later than planned, you could find yourself poorly positioned if your money is invested in a TDF whose target date no longer matches up with your needs.

Potentially more expensive.As TDF’s are actively managed by a fund manager, they typically will have a higher expense ratio than a passively managed fund, such as an index fund — although it may be comparable to other actively managed funds.

Not all TDFs created equal.Different fund managers may manage risk differently. Even if two TDFs share the same target date, that doesn’t mean they will have similar investments. And this is important for a potential investor to understand before making a decision.

If your 401(k) offers a TDF, don’t hesitate to ask your financial advisor how the fund is structured and how often it’s rebalanced. And remember that even though you can “set it and forget it” when it comes to TDFs, you’re not locked in permanently. So do your research and see if this approach might be a good fit for you.


Is Social Security 'Going Broke'?

Is Social Security 'Going Broke'?

Nov 2020

Social Security’s financial cliff is coming closer into view. Experts project that the fund that pays for government retirement benefits through FICA taxes will be depleted within the next 15 years.

The Trust Fund was set up to hold excess amounts of FICA taxes from when the Baby Boom generation dominated the workforce. But now that Boomers are retiring, the number of workers per Social Security beneficiary is dropping from 5.1 workers per beneficiary in 1960 to a projected 2.1 workers per beneficiary in 2040.

Taxes coming in are now less than benefits going out, and the shortage comes out of the Trust Fund. Once the Fund runs out, benefits would be paid through taxes from a decreasing pool of workers. Without any changes to the system, it’s likely that either taxes will rise or benefits will shrink sometime around 2035.

Possible Solutions

There are policy proposals that could potentially address these issues. The last major reform of Social Security was in 1983 during the Reagan administration. At that time, the retirement age was raised, taxes were imposed on up to half of a recipient’s Social Security payments and many people lost benefits they were receiving through Social Security Disability.

Many of the same proposed solutions are reappearing this time around: Increase the age that workers receive full retirement benefits, cut benefits and index lifetime benefits to account for longer lifespans (therefore reducing monthly payments). One recent proposal could fix the shortfalls while making room for some benefit increases: Currently, workers pay the FICA tax only on the first $132,900 of wages. Once they hit that threshold, they’d no longer pay FICA tax that year. Raising the threshold to wages over $400,000 could wipe out the projected deficits.

Even if the Trust Fund runs out, it’s highly unlikely Social Security would go away — although unpleasant changes might be necessary. But don’t panic: There are several non-legislative ways that this crisis might be avoided or mitigated. As Yogi Berra said, “It’s tough to make predictions, especially about the future.

Immigration is a complex and fraught issue in the current political environment with wide-reaching consequences — including an impact on Social Security. Many undocumented immigrants pay into the Social Security system but don’t receive benefits. In 2010, the government estimated it received a net surplus of $12 billion from undocumented immigrants. Legal immigrants can qualify for Social Security once they meet certain qualifications, including earning enough work credits. An influx of such workers could increase the pool of those paying into the system, boosting the ratio of workers to beneficiaries.

Workers staying in the workforce longer could similarly extend the length of time until the trust fund’s depletion. This could happen under a variety of circumstances. For example, the growing utilization of telework may allow some older workers to remain in the workforce longer and continue to contribute into the system. On a less-positive note, the inability of many workers to afford retirement could create the same net effect.

Plan, But Don’t Panic

Don’t wait for someone else to solve the Social Security dilemma. Create an online account and get your Social Security benefits estimate. Then make an appointment to speak with your financial adviser about how much you should realistically expect Social Security to contribute to your retirement and plan accordingly.

#socialsecurity #retirement #usa


Start or Open a 401(k)

Start or Open a 401(k)

Nov 2020

Let's say you've started your first job. Or, maybe, you've simply started to think about saving for retirement. Your employer offers a 401(k), but you don't know where to get started (or even what that is). Here's everything you need to know.

What Is a 401(k)?

To put it in really general terms, a 401(k) is a retirement savings account offered through your employer. (If you're self-employed, you can open a Solo 401k, but that's a whole separate topic).

You set aside a certain amount of money each month from your paycheck, and use it to invest money through this account. You have the option of investing in a variety of assets (i.e. stocks, bonds, mutual funds). Over time, your money grows. Ideally, when you retire, you'll have a big stack of money that's been growing for years.

The money you earn from your 401(k) investments isn't taxed until you withdraw it—ideally, after you've retired.

Why Do I Want One?

Saving for retirement is boring, but important, and you should do it as soon as you can. Saving even $50 a month can work for you.

With a 401(k), your company might offer to match a percentage of some of your 401(k) contributions. This is basically free money. Also, since the money you invest is 'pre-tax,' you could reduce your annual tax bill. CNN Money explains:

Another benefit to having a 401(k)-retirement plan is having taxes deferred until you withdraw the money at retirement. So, since the 401(k) actually reduces your tax rate, you won't be paying taxes on the money until you withdraw it. Since many people tend to be in a lower tax bracket when they retire, the 401(k) actually has you paying a smaller tax rate on your savings when you take it out of the account.

Of course, you'll eventually have to pay taxes on this money when you retire.

How Do I Pick My Investments?

When you open your 401(k), you'll have to pick your investments. Your employer usually works with an investment broker to come up with a list of options. This means you're stuck with the list they offer, and sometimes, the list isn't great.

Either way, you'll have to pick a fund from this list that's based on a risk level you feel comfortable with. Investor Place runs down the five major types of funds you'll likely have to pick from:

Stock Funds: As the name suggests, this type of fund covers a variety of stocks that you can invest a percentage of your account in. According to Investor Place, Target-Date Funds: These funds are pretty simple and basic. You pick your target date for retirement, then pick the matching fund. Because they're so simple, there's not much maintenance, as the fund adjusts your asset allocation over time. The fees of target-date funds might be higher.

Blended-Fund Investments: These funds have a set ratio of stocks and bonds. You can pick one that's appropriate for your situation. This means you'll have to consider your tolerance for risk and how many years you have until retirement.

Bonds/Managed Income: These are funds are meant to safeguard your money, but your money won't grow much with these funds.

Money Market Funds: Investor Place calls the money market fund a 'glorified CD.' There's zero growth here, and, in fact, these funds barely keep up with inflation rates. They recommend avoiding money market funds if you want your money to grow.


tags: 401k, starting a 401k

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8 Things About 401(k)s Every Baby Boomer Should Know

8 Things About 401(k)s Every Baby Boomer Should Know

Nov 2020

For those considered baby boomers, retirement has now become reality with 10,000 people retiring daily. Unfortunately, research shows that 54 percent of older Americans do not have enough savings to fund their retirement.

If you’re on the pre-retirement end of this age group, it’s never too late to start setting money aside. Here are eight facts about 401(k)s that could help you prepare for your golden years.

Retirement Is Expensive: Although it can vary from one person to the next, the current total cost of retirement is estimated at $738,400.

Social Security Won’t Be Enough: It depends on your income, but even someone earning $100,000 annually will only get $2,670.37 per month. This calculator can help you determine your projected earnings.

The Money Stays with You: The best thing about a 401(k) is that the money travels with you from one job to the next.

It’s Never Too Late: Even those who are over 50 can begin to set money aside in a 401(k). In addition to saving money, you should also look for ways to boost your income during your final working years.

You Can Catch Up: The new tax plan may change this, but those over 50 can make catch-up contributions to make up for lost time.

The Money Won’t Wait Forever: Halfway through your 70th year, you’ll be required to begin withdrawing money from your 401(k).

There Are Penalties for Early Withdrawal: Before retirement age, the money will need to stay in place unless you can roll it over to another type of account.

You Have Investment Options: You may not realize that you can choose where your money goes within your 401(k).

Good fiduciary risk management is about preparing for the future and simultaneously protecting your current finances. If you haven’t begun saving for retirement through a 401(k), it isn’t too late. Check with your employer on available options, talk to an advisor, and take advantage of any opportunities you can find to save.

Tags: social security, retirement

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