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How To Cut Your Spending

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Do you know what could really help you reach your financial goals? Answer: If you had more money to work with! Cutting your spending is an integral part of your finances.

I’m not saying you need to cut out the things you love (insert Starbucks coffee, avocado toast, etc.). I’m saying you need to splurge on those things wisely, either by reducing their frequency or cutting out something else.

Let’s figure out ways we can cut our spending.

Track spending

How are you supposed to know what to cut spending on if you don’t know where your money is going?

Go back a few months and look for a “pattern.” Where is all of your money going? Bills, housing, transportation, debt payments, etc. are in their own category. Everything else that’s not considered necessary spending (minus groceries) goes in the discretionary spending category. Everything else that’s not considered necessary spending (minus groceries) goes in the discretionary spending category. Keep in mind, things will change if you’re living in an affordable city like Columbus, Ohio, rather than an expensive place like New York City.

This discretionary spending is what you need to pay attention to.

Grocery spending is necessary, but the amount can vary. Figure out what you typically spend, each month, on groceries and determine if that amount can be lowered. More often than not, it can. Just don’t go hungry.

Budget (and budget alternative)

The classic budget lists the necessary expenses (housing, groceries, debt, utilities, savings, and other bills). You then assign dollar amounts for other “unnecessary” expenses (take-out, clothes, etc.).

The dollar amount is what you’d like to spend on that item/category, and not go over. The purpose of a budget is to come to a total expenditure that’s less than your monthly income.

My approach is similar. I list the necessary expenses (excluding debt payments and savings). Just the things I need to pay (housing, streaming, utilities, insurance, and transportation).

Next is my grocery budget. This is a necessary expense, but I try to keep it relatively low. Between my son and I, the limit is $300 per month. Then I list debt payments and savings.

I calculated how much I needed to pay per month to pay off my debt by a certain date. My savings is automated and partitioned.

I have one savings account for emergencies, one for car repairs, one for holiday spending, and one for vacations. Once a week, money is automatically transferred from my checking to each savings account.

The amount of each transfer is less mathematical and is more about comfort. My retirement savings is done right away at the beginning of the month so I don’t have the chance to spend it away.

Whatever remains is mine to do with as I please.

No spend days

Have one day per week or a few days per month where you don’t spend any money.

I’ve seen some people go as far as having a no spend week! Implement these days at your discretion because obviously, you’ll still want to pay your bills and such.

Another cool idea is to restrict paying for certain items during particular times of the year. For example, you don’t buy any clothes during the month of September, or you don’t have any take-out/restaurant food in April.

Coupons/rewards/etc.

With smartphones, applying coupons to your purchases has never been easier. I use coupons.com. You can save which coupons apply to you and they can be scanned at checkout. From your smartphone!

Also, wherever you do your shopping, make sure you are a member/rewards member. There’s usually a sale for members. Excluding paid memberships (like Costco), being a rewards member is free and can save you money.

By the way, it costs money to shop at Costco, but their goods are very reasonably priced. They make their money on the memberships, and they sell all of their goods at cost. That means they sell a product at whatever price they paid to get it in the store.

Use price per unit/item

When you are making a decision about how much of something you need to buy, always use price per unit as your factor. The overall price of something may look less expensive than the bulk item, and it is at the time of purchase, but more often than not, the price per unit is lower for the bulk item.

It’ll cost you more when you check out, but through time, you’ll spend less money.

Quick hacks to cut expenses

  • Negotiate a lower interest rate on your credit cards
  • Balance transfer to 0% introductory APR
  • Personal loan to lower average credit card APR
  • Unplug unused electrical devices
  • Cancel unused subscriptions
  • Reduce entertainment expenses
  • Carpool to work
  • Keep tires properly inflated (better gas mileage)
  • Use LED light bulbs
  • Use a programmable thermostat
  • Lower the temperature on your hot water heater
  • Eat at home more/eat out less
  • Buy generic

Conclusion

Achieving financial success doesn’t have to be difficult and boring, though it does take some discipline. Small rewards are important. Without them, you’ll go crazy!

Cut the fat off of your budget, and you’ll see how much better it feels to make significant progress in your financial life.

Financial Planning For All Ages

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Don’t you hate it when you Google financial planning tips, and it spits out articles that don’t apply to you? This could be because you’re a different age than the article is directed towards or you’re in a different position.

Well, look no further. I’ve created a rough outline of how you can plan, regardless of your age or situation.

But I’ll be honest with you, a lot of this article will link to resources or previous articles that explain these topics in more detail, but I wanted to create a rough outline of how people in different age groups can plan.

Twenties

Ideally, you want to get a budget started, but nobody likes doing that. Instead, give your money a job. Figure out when you would like to have your debt paid off, then do the math to determine how much per month you need to pay.

List that payment plus housing, transportation, food, and other bills. That total tells you how much MUST go out, everything else is extra to do what you please.

In terms of saving for retirement, you have a lot of time to put money away, but if you start sooner, you’ll have to save less later. 10% of your salary is a good goal. If you can’t get there just yet, save what you can, but try to incrementally increase it over time.

Investment allocation here, as well as in your thirties and forties, should primarily be stocks. Not 100%, but definitely the majority of what you own.

Thirties

The financial plan in your thirties is similar to the one in your twenties. Pay down debt and save for retirement. However, at this point, you probably have more assets and you may have some children as well.

With the cost of tuition constantly rising, saving for their future education costs is important. The 529 is the most popular, and probably the best vehicle available to do just that. (Be advised: 529 plans do involve risk so please talk to your financial advisor prior to investing)

With more assets and children, comes more insurance. Make sure your property and belongings are adequately protected. Additionally, if your children depend on your income for support, life insurance and disability insurance are a must!

Fourties

Same story, different decade. Pay down (off) debt, save for retirement, and make sure you have adequate insurance. (Honestly, the save more, pay down debt, and have insurance is a great catch-all financial plan).

At this point, however, your retirement plans should become more detailed and concrete. Through your twenties and thirties, retirement planning essentially was just saving for retirement.

Now you should think about where you live and what you’ll do. You should also calculate if you’re on track and increase your savings if you’re behind.

Fifties

Hopefully, by the end of this decade, your debt will be mostly paid off, you have a good idea of what retirement will look like, and you’ve determined what needs to be done (if anything) for you to hit your target number.

As you age through your fifties, you should start thinking about adjusting your investment allocation. You don’t have as much time to gain back what you lose during a down market.

Reallocating to a 60/40 or 50/50 (stocks/bonds), depending upon your risk appetite, is a good way to reduce your risk and still participate in a bull market.

Sixties

Where you are at this stage in life depends on a few factors. Have you saved enough to live comfortably in retirement? Do you enjoy what you do? Are you healthy? Plans for Social Security?

If you haven’t saved enough, then you’ll probably have to work a little longer so you can save more. If you like what you do, then why not continue if you are able? If you don’t, consider a career change or (if you’ve saved enough) volunteering for a cause that’s meaningful to you.

If you are healthy, I recommend staying active and social as long as you can. Activity and a healthy social life are two of the three important variables for a fulfilling retirement.

Social Security and when to receive it is a huge decision. Obviously, I’m going to recommend waiting as long as you can so you receive a higher monthly benefit, but there are other things to consider.

Are you healthy? What’s your family history like? Do you have adequate savings/retirement income from other sources?

Health and family history help determine longevity. Poor health and/or poor family history may give you a reason to start receiving earlier.

There are calculators out the web (like this one here) that can help you discern what’s the best strategy for you. That’s to say, how do you optimize your Social Security and other retirement income so you receive the most possible?

Seventies

We’re living longer, healthier lives now, and down the road, the retirement age will probably make its way into the seventies.

If you have to work for the income, you’re not alone. As of 2017, the percentage of the population that are 70 or older and still working was 19%. Up from 11% in 1994. (Source)

My recommendation. Develop an income strategy that will a) afford you to live a somewhat comfortable lifestyle (obviously, cutbacks are necessary if money is tight) and b) help your savings last as long as possible.

There are a variety of calculators out there to help figure this out.

Conclusion

Financial planning is tough. As I said in the beginning, not many like to budget, so it’s important to give your money a job. $100 goes towards emergency savings, $1,000 to retirement, and $250 for debt repayment.

Do this, along with several of the other items I listed (as well as the ones linked below) and you’ll do just fine.

Helpful articles and resources:

Retirement, It’s More Than Money

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When it comes to retirement, most people think about money. Don’t get me wrong, the financials are important, but it’s not the only thing to consider.

Sure, a well-funded retirement gives you utility and flexibility, but that only goes so far. You have to think about what you’re going to do, where you’re going to live, and how those golden years will be spent.

In this article, we’re going to dive into the non-finance side of retirement.

Where will you live?

One of the most important considerations is where you’re going to live, and there are many factors to take into account.

Are you/do you need to downsize?

If your children are out of the house, downsizing may cross your mind. The time and energy needed to maintain a house are significant. Moving to a smaller place could be a good move.

You’d spend less time cleaning, and you would use less energy keeping your home at its desired temperature.

Move to another state?

There are many states around the country that are go-to destinations for retirees. Do you know why? Generally speaking, the climate is better (no snow or cold winters to deal with), and there are no state income taxes.

Moving to a different state is a big move, so you need to consider all factors as to whether it’s the right move for you.

Things to consider:

  1. Taxes
  2. Climate
  3. Activities
  4. Family

Another Country?

There are several countries around the world with the cost of living metrics much lower than the United States.

Here’s an article by U.S. World News that lists the most desired countries for retirees. Some of the factors include the cost of living, climate, and health care.

What will you do?

Are you going to work, volunteer, or play golf? A lot of people say that when they retired, they were busier than when they were working.

What you do in retirement will play a significant role as to how fulfilling your retirement is. It can also play a role when deciding where you want to live.

If you want to spend as much time as you can with your grandkids, then you’ll probably want to stay close to them.

Whatever you decide to do, you have to make sure it fulfills four things.

  1. The activity has to make you use your mind. You need to stay sharp.
  2. The activity needs to create a community, of sorts, around you. Having a network of people you talk to and hang with is important.
  3. The activity needs to keep you active.
  4. The activity needs to give you a sense of purpose. Checking those first three things is awesome! That’s a great start! I would recommend you do something that benefits others. Whether it’s your community or people in need.

The most important factor in retirement, for current retirees, is their health. Keeping active, social, and mentally stimulated is essential for a long and happy retirement.

Conclusion

When we talk about retirement, finances play a very important part, but it absolutely should not be the only thing you think about.

What you do, where you do it, and who you do it with are all incredibly important details to keep in mind.

If you’d like to learn more about anything I talked about, I’ve linked to several resources below.

Should I Downsize?

When Should You Retire?

Income During Retirement

Retiring Out Of State

Retiring Abroad

What You Need To Know About Retirement Savings

Choosing A Retirement Plan For Your Business

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What type of retirement plan to use is a big question for employers. Not only do they want to do what’s right for the business, but they also want to do what’s best for their employees and future employees.

In the following article, we’ll break down three of the most popular options for employer-sponsored retirement plans.

What are your options?

If you’re an individual, your options are pretty straight forward. Outside of your employer-based plan, you can either contribute to a Roth IRA or a Traditional IRA.

As a business, however, you have many other options. For organizations that are for-profit and not a government body, you the SEP IRA, SIMPLE IRA, and the 401(k).

More than likely, you’re most familiar with the 401(k). We’ll explore each of these below.

SEP IRA

Stands for Simplified Employee Pension Individual Retirement Account.

This retirement account is typically used with one-man shops or small businesses with a couple of employees.

The reason is the money contributed to the employee’s accounts can only come from the business. Employees are not eligible to contribute to their SEP account.

Here the characteristics of a SEP IRA:

  • Must contribute the same percentage of salary for each employee
  • Don’t need to contribute every year
  • Maximum contribution is $54,000 per year or 25% of annual salary, whichever is less
  • Contributions are deductible as a business expense for the entity
  • Money grows tax-deferred
  • When funds are withdrawn, they are taxed as ordinary income
  • Rules similar to a Traditional IRA
    • Withdrawals prior to 59 ½ unless used for a qualified purpose (qualified meaning exempt from the penalty, which is 10%)
    • Required Minimum Distributions must begin at 70 ½

SIMPLE IRA

Stands for Savings Incentive Match for Employee Individual Retirement Account.

Designed for small businesses, and has an employee limit of 100. If you go over 100 employees, you need to switch to a 401(k).

The SEP and SIMPLE (compared to the 401(k)) are inexpensive to set up and administer, and may be a great option for small businesses that want to offer a plan for their employees, but don’t want to pay the costs associated with a 401(k).

Here are the characteristics of a SIMPLE IRA:

  • Contribution limit of $13,000. A catch-up contribution of $3,000 for those 50 or older
  • Employees can contribute to their own plan (unlike the SEP)
  • Employers match contributions
    • Match up to 3% of employee’s contribution (doesn’t have to contribute if the employee doesn’t contribute).
    • Contribute a flat 2% whether or not the employee contributes.
  • Similar to the last plan, withdrawals before 59 ½ are penalized.
  • Also similar to the last plan, distributions must begin at 70 ½
  • There’s a weird quirk with the Simple, as well. If you withdraw funds earlier than 2 years after your first contribution, you’re penalized 25%.

401(k)

The 401(k). The plan that most people are familiar with, and if you have an employer-sponsored plan, it’s more than likely, this one.

The 401(k) gained popularity as companies switched from defined benefit plans (pensions) to defined contribution, where it became the responsibility of the employee to save for retirement instead of the employer.

Here are the characteristics of the 401(k):

  • Contribution limit is $19,000 with a catch-up of $6,000 for people 50 or older.
  • Total contribution limit, including employer contributions, is $54,000.
  • The 401(k) is an expensive plan to set up and administer, especially when compared to the previous two plans.
  • Like the previous two plans, the 401(k) penalizes you if you withdraw before 59 ½ unless your reason for withdrawal qualifies for an exemption. And you must begin withdrawing funds when you turn 70 ½.
  • With this plan, however, you are able to take a loan out against your savings. This loan has to be paid back, usually in the form of increased monthly contributions.
    • If you are let go from your job while you have a loan on the plan, you will be forced to pay it back with 60 days. If you don’t you’ll be taxed on the amount, and if you’re under 59 ½, you’ll be penalized 10%.
  • This type of plan is designed for larger employers, though there is no maximum or minimum on how many employees you can have.
    • They have a type of 401(k) called the solo 401(k). It has all the same rules and quirks as the standard 401(k), but it’s designed for someone who works by themselves OR their only employee is a spouse.

How to choose

Unfortunately, I can’t say which plan is the best. Each one has its own unique advantages and disadvantages.

When deciding which plan is best for you and your business, there are a few things I would take into consideration.

  1. Number of employees – some plans disqualify you if you have too many employees.
  2. Matching ability – Most 401(k) plans match up to 6%. The SIMPLE requires you to match up to 3% or contribute a flat 2% for every employee.
  3. Cost – Some plans are less expensive to set up and service than others. In terms of the 401(k), the more participants and assets you have in the plan, the less expensive (per user) it becomes.
  4. Attracting talent – More and more employers are using benefits packages to attract employees rather than salary, in what’s called all-in compensation. If you want to get qualified candidates in the door, you have to offer good benefits.

Conclusion

It should be known that whatever you decide, it’s not set in stone. If you set up a SIMPLE and you need to hire more employees than you anticipated, you can set up a 401(k). The SIMPLE will have to stay in place, and you’d just have current and new employees contribute to the 401(k).

For more information on all of these plans and others, read this article here.

Be advised: The numbers and figures listed in this article are for 2019. Contribution limits tend to change over time. Please review the IRS website for up to date information.

Why I Love The Roth IRA

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The Roth IRA started in 1997 and it changed the retirement savings game.

It’s probably my most recommended retirement savings vehicle, other than your employer-sponsored plan of course. You have to get that match!

The Roth IRA can be your primary retirement account or a nice complement to a work-based plan.

Here’s why I love the Roth IRA.

Tax-free withdrawals! That’s right, if you save for retirement using the Roth IRA, you get to take that tax-deferred (don’t pay taxes while money grows) savings out of your account without paying taxes.

While you’re working, you generally have two options (besides contributing to your 401k or Simple IRA) do I contribute to a Roth IRA or a Traditional IRA? The amount of money you make plays a little bit of a factor, as the Roth IRA has an income limit ($137,000 – single, $203,000 – married filing jointly).

However, a back-door contribution is available. That’s where you make a contribution to a traditional IRA and roll the money from there into a Roth IRA. Be advised: You’ll be taxed at the time of the rollover.

That aside, contributions to a traditional IRA are tax-deductible (an income limit applies here). Conversely, contributions to a Roth IRA are not tax deductible.

Here’s why I like to recommend the Roth. I’d save for retirement, without getting that tax-deduction and pay $0 taxes upon withdrawal in retirement. At that point in time, your ability to earn more money is either dramatically reduced or gone completely.

It’s at this point when you need that money the most. I’d rather pay for it now and benefit from it later.

With all that said, I suppose I should list all the characteristics of a Roth IRA.

  • For 2019, the contribution limit is $6,000. If you are 50 or older, you can contribute an extra $1,000. Be advised: these contributions limits change often. Consult the IRS website for up to date information.
  • Because the money in the account was already taxed, there are no mandatory withdrawals. Uncle Sam got his cut already so you can let that baby grow for as long as you want.
  • If you withdraw before 59 1/2, you’ll pay a 10% tax penalty
  • There are exceptions to this penalty, however.
    • Death
    • Disability
    • Use up to 10% on your first home purchase
    • Pay for higher education
    • Medical costs are more than 7.5% of your AGI
    • Can pay health insurance premiums if you’re unemployed
    • The IRS has a tax levy against you
  • You can make contributions for the prior “tax” year up to April 15th.
  • If you withdraw your savings within 5 years of your first contribution, you’ll pay some taxes on your withdrawal.
    • Note: The 5-year clock starts ticking on January 1st of the year you made your first contribution

Conclusion

As I said, the Roth IRA is a great savings vehicle. Whether you use it on its own or use it as a complement to an employer-sponsored plan, it has a place in everybody’s retirement plan.

One last thing I want to mention. My reasoning behind why I recommend the Roth IRA so often is my personal belief. Please use your situation and your money/retirement philosophy when making this decision. It also pays to talk to a professional to see what they’re thoughts are, as well.

What is the Coverdell ESA?

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Introducing the last account type on our quest to find the best way to save for college, the Coverdell ESA.

Without further delay, here’s what you need to know about the Coverdell ESA.

What is it?

Like the 529, the Coverdell ESA is an education savings vehicle for K-12 and secondary education. Coverdell ESA stands for Coverdell Education Savings Account.

It got its name from Senator Paul Coverdell, who introduced the legislation for a similar account, the Education IRA. In 2002, a new piece of legislation was introduced to make the account what it is today.

The 529 and the Coverdell ESA share many of the same characteristics, but there are some things that set it apart. All of these will be listed below.

Advantages

  • Savings and investments in the account grow tax-deferred and are withdrawn tax-free when used for qualified education expenses.
  • When it comes time to withdraw, those funds are not considered income, as long as you are using them for qualified education expenses.
  • Can use in conjunction with other education tax credits, like the Lifetime Learning Credit, as long as there’s no double-dipping.
  • These accounts are self-directed, so your investment options are plentiful. They include…
    • Age-based funds
    • Static mutual funds
    • ETFs
    • Stocks
    • Bonds
    • Real estate

Disadvantages

  • Contribution limit of $2,000 per child per year.
  • The funds inside the account are taken into consideration when you file for financial aid. The assets are considered their parents assets.
  • If the money is not withdrawn from the account by the time the beneficiary is 30, they could be subject to taxes and penalties.
    • After 30, the funds inside the account become fully taxable and you’re penalized 10%.
  • Like the 529, contributions to this account are not tax-deductible.

Unique Characteristics

  • Only eligible to families/individuals that fall below an income threshold ($110,000 for single taxpayers and $220,000 for couples who file jointly).
  • The contribution limit is $2,000 per child per year, so even if a family member opens an account for your child, you still can’t go over that number, or there will be a penalty.
  • Qualified expenses include…
    • Tuition
    • Books
    • Supplies
    • Equipment
    • Tutoring
    • Special needs services
  • And can also include…
    • Room and board
    • Uniforms
    • Supplementary and transportation services
  • With a 529, the account owner has control over the assets. Conversely, with a Coverdell ESA, the beneficiary has control.

Conclusion

Effectively, there are three education savings vehicles used today. The UTMA/UGMA, Coverdell ESA, and the 529 plan. I’ve written about the other two in the past so go check those out.

On paper, the 529 looks like the best option, with a high contribution limit, a large number of qualified expenses, and there’s no penalty for letting funds sit for decades.

That is all true, and honestly, I prefer the 529, but the vast, vast majority of people that are helping their children save for college will not come close to the high contribution limit.

The only drawback to the Coverdell ESA is the penalty if the funds aren’t used before 30. Other than that, I don’t think the $2,000 contribution limit is a factor because most people can’t put that much away, anyway. Not without sacrificing their ability to save for retirement, as well.

That said, they’re both great options and you can’t go wrong with either one.

What Is A 529 Plan?

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Education, especially secondary education, is getting more and more expensive. The cost of a 4-year public university has gone up 110% from 1994 to 2014 (Source).

Conversely, wages have grown an astounding 8 times slower than that (Source).

What can you do to save for college? How can you help your kids? Are there certain vehicles that work better than others?

We’ll take a look at one of those in the following article.

What is a 529?

A college savings plan that is exempt from federal taxes, if you use the funds to pay for qualified education-related expenses.

Those expenses include tuition, books, room and board, computer equipment, and necessary supplies for students with special needs, as long as the student is attending at least half-time.

Advantages

  • Funds can be used for K-12, university, graduate school, and trade schools.
  • Parents can withdraw $10,000 per student per year to pay for tuition ONLY.
  • Other people, besides the account owner, can contribute to a 529 plan.
  • If funds are used for the beneficiary you intended, they can be transferred to a family member.
  • Earnings grow tax-deferred

Disadvantages

  • Gift tax exclusions – You are exempt from paying gift taxes if you keep it under $15,000 per individual per year, or $75,000 as lump sum every 5 years.
  • A penalty of 10% will be assessed for funds used on non-qualified expenses.
  • Limited investment options – most plans offer mutual funds as investments
    • Risk-based – Aggressive, moderate, conservative, etc.
    • Age-based – You can select an age-based fund from the get-go, and the fund company will reallocate into new funds as your child gets older.
    • Self-selected

Miscellaneous

  • All plans come with federal tax advantages, but some states offer tax deductions and credits as well!
  • Every dollar in a 529 plan will deduct 5.6% from your family’s need-based financial aid
    • One way around that is to have a family member act as the custodian for the account, so it isn’t in your name
    • However, once the child begins withdrawing the funds and is still attending school, they could have 50% of their financial aid withheld because those withdrawals are considered income
  • You can open one using other state’s plans, besides your own state

Other types of accounts

  • Coverdell ESA – Similar to the 529 in that you use the funds to pay for education-related expenses, However, there is an annual contribution limit of $2,000 per beneficiary, and there’s also an income restriction (once you make above a certain amount, you can no longer contribute to a Coverdell ESA).
  • UTMA/UGMA – Stands for Uniform Transfer to Minors Act/Uniform Gift to Minors Act. I’ve written about this in the past, so if you’d like to learn more, check out the article here.
  • IRA – You can use a Traditional IRA or a Roth IRA to pay for education expenses. Similar to the 529 and the Coverdell ESA, the expenses must be qualified and the student must go to a qualified institution, as indicated by the Department of Education. The most beneficial way to use an IRA is to withdraw the funds from a Roth IRA, but only withdraw what you contributed.

Conclusion

Secondary education is expensive! If you start saving for your kids’ college right away, the compounding returns could really help you save a decent amount.

It’s important to use the right vehicle, and, in my opinion, there’s no better option than the 529.

If you’d like to learn more about paying for college, read this article here. Or if you’re a future or current student that need some finance tips, read this one here.

Be advised: Investments in 529 plans involve risks to principal and may involve additional fees such as enrollment charges and annual maintenance fees. 529 plans offer no guarantees. There are exceptions to the gift tax and estate tax exemptions; please contact a qualified tax, legal, or financial advisor for more information prior to investing.

 

If reading this blog post makes you want to try your hand at blogging, we have good news for you; you can do exactly that on Saving Advice. Just click here to get started.

Why Do Interest Rates Matter?

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I was running through my normal Google alerts yesterday and saw a headline that said, “Do interest rates matter?”

My answer is an emphatic YES!

Of course, interest rates matter. It determines how much you pay and how much you get paid!

When you borrow

Whether you’re talking a mortgage, an auto loan, a business loan, or a credit card, you are charged an interest rate when you borrow money.

For example, the average mortgage rate right now is a shade under 4.5%. In 1981, that same rate got to over 18%. To put these numbers into context, here’s a comparison of the same mortgage with different rates.

Loan amount $250,000. Interest rate 4.5%. 30-year fixed rate. Monthly payment – $1,266.71. Total amount paid after 30 years – $456,015.60.

That same mortgage with an 18% interest rate translates into a $3,767.71 monthly payment, and a total amount paid after 30 years – $1,356,375.60.

Obviously, these are extreme examples, but you get my point.

Just 3 years ago, mortgage rates were a full percentage point lower, until the Federal Reserve started to increase interest rates.

The same goes for credit cards. That 18% mortgage rate from ‘81 is close to the average credit card interest rate today. If you’re using credit cards to buy things you can’t afford, you’re definitely paying for it.

When you save

If you are responsible with your money and are able to save it, you should be rewarded for that behavior. Interest rates are creeping higher now, but a year or two ago you were getting paid next to nothing on your savings account.

When interest rates increase, so does the money you earn from your savings.

The Federal Reserve

The FED sets the tone. They raise or lower the Federal Funds Rate and that has a ripple effect on all the other interest rates in the financial system.

They have a tough job, as you can see currently because they have to raise rates enough to keep inflation at bay but keep them low enough as not to cause a recession.

You see, when the FED raises interest rates, all rates that are classified as variable (on existing debt) go up. The most common example is credit cards. As credit card rates increase, so does the cost of servicing those outstanding balances (minimum payments go up).

As people’s debt gets more expensive to service, the number of defaults (failure to make adequate payments) goes up. This will create a domino effect and can bring the economic system to a halt.

This is similar to what happened in 2008, although on a much larger scale. And 2008 wasn’t caused by frivolous spending, it was caused by finance executives giving mortgages to people who couldn’t afford them, as well as signing poorly structured loans that were affordable in the beginning, but became unaffordable a short while later.

Approaching recession

When The Great Financial Crisis happened, the FED lower interest rates to 0%. This encouraged financial institutions to lend money, and incentivized businesses and individuals to borrow money.

People who borrow, spend, and people who spend help grow the economy.

Here’s our current problem. The Federal Funds Rate is currently at 2.5%. When the economy experiences a recession, in order to encourage borrowing and spending to get the economy out of the recession, the FED needs to cut rates by at least 4 percentage points (I got this number from Dr. James Rickards).

The Trump Administration and other parties are calling for the FED to cut rates to continue the current expansion.

The only problem is this expansion will have to come to an end at some point, and when it does (if rates don’t increase) the FED won’t be able to cut rates enough to help the economy.

Conclusion

I’ll say it again. Interest rates matter.

If you’d like to learn more about this topic and for my disclosures, please visit CRG Financial Services.

 

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What are UGMA and UTMA accounts?

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What is a UGMA account? What is a UTMA account? How are they different? What is the purpose of using one over other savings vehicles?

We’re going to dive into those questions and a few others in the following piece.

What are they?

The UTMA and the UTMA are custodial accounts. An adult (the custodian) opens an account for the benefit of a minor.

UTMA stands for Uniform Transfer to Minors Act. UGMA stands for Uniform Gift to Minors Act. The difference has to do with the age of majority, but more on that later.

Characteristics

For all intents and purposes, these accounts are treated the same. As I said, an adult opens the account for the benefit of a minor.

The account itself does not have a limit of how much you can contribute to it, however, there is a gift tax exclusion for the custodian or anyone else that contributes to the account. While I’m here, I should mention that anyone can put money into the account, not just the custodian.

Anyway, the gift tax exclusion is $15,000 per recipient. If the person doing the gifting this amount, they could owe the gift tax.

As far as the age of the majority goes, generally the UGMA is 18 and the UTMA is 21. However, every state is different, so make sure you check to see what the age of majority is in your state.

Prior to the age of majority, the minor is unable to use the funds in the account UNLESS it’s for the benefit of said minor. Once they hit the age of majority, they can use the funds however they want.

Disadvantages

Two of the more common vehicles for education savings are the 529 plan and the Coverdell ESA. Now, I’m not going to go into those two, but they each share one key advantage. Any funds withdrawn for education-related expenses, come out tax-free.

The UTMA/UGMA does not have this capability. What’s more, the taxes on any capital gains made and/or dividends received throughout the year must be paid by the minor.

Also, funds sitting in a UTMA/UGMA, for the sake of the FAFSA, are considered the minor’s assets, and can negatively affect financial aid.

Advantages

There’ve been a lot of negatives so far, and if I’m being honest, there are other savings vehicles available that have more advantages.

The one thing I can think of as an advantage is accessibility.

With the 529 and the Coverdell ESA, any funds not used for education-related expenses are subject to a penalty.

With a UGMA/UTMA, the beneficiary can use the funds for anything that benefits them (while they’re a minor), or they can use them for anything at all once they’ve hit the age of majority.

Conclusion

If you are looking for accounts that are designed around saving for college, then a UTMA/UGMA is not for you. However, if you are looking for an account that is easy to set up, easy to use, and gives you more control, then I definitely would recommend utilizing one.

To make a formal recommendation, I’d go with the UTMA. Again, depending on your state’s rules, this enables you to save more for the beneficiary and prolongs when they can have access to those funds.

If you have any questions about what was said here and for my disclosures, go to my website.

 

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Saving Money With Regular Maintenance

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When was the last time you exercised, had your furnace worked on, or had your oil changed? Performing regular maintenance, in any part of your life, can be quite annoying at times, but it can really make a difference.

The difference can come in the form of money saved, longevity, and/or decreased stress. That said, let’s look into why maintenance is important.

Health

As a nation, the United States is unhealthy. We put junk food into our bodies and lead a sedentary lifestyle that is causing more problems than gaining weight.

Not only is physical exercise good for your body, with benefits like preventing bone loss, increasing muscle strength, improving coordination and balance, and reducing your risk of cardiovascular disease, but it also helps your mind.

Just over half of all Americans are meeting the physical aerobic exercise requirement (Source). The requirement is either 150 minutes of moderate aerobic activity per week or 75 minutes of vigorous aerobic activity per week. Not a lot, right?

Americans spend $3.4 trillion per year on healthcare (Source), and I believe this number could drop dramatically if we all just took better care of ourselves.

Bottom line, regular exercise, and a well-balanced diet can (depending on other genetic risk factors, etc.) can dramatically reduce your long-term healthcare costs.

Home

Regular maintenance of your home has a number of benefits.

  1. It saves you money because all the mechanical components are running optimally. Efficient use of utilities is less expensive. It also increases the longevity of that equipment.
  2. Maximizes your home’s value and resale potential
  3. Peace of mind knowing your home is well-cared for. Stress has negative health effects. Reducing it can improve your health and lower healthcare-related costs.

Car

Keeping your car in optimal running condition will extend its life. It also makes the vehicle more safe to operate because the odds that something breaks while driving is reduced.

A poorly tuned vehicle can use up to 50% more fuel (Source). Spending $50-$100 every three months on an oil change is definitely worth it.

For example, let’s say you fill up once per week at $25. Over a three month period, you’d normally spend $325 on gas. If you’re driving a poorly tuned vehicle, you’ll spend $487.50. Over 1 year, that’s a difference of over $600.

Budget

Creating a budget and regularly checking in to make sure that a) you’re sticking with it and b) it’s still appropriate.

Often when people start budgeting, they find themselves with more money to play with. If they have outstanding debt, they can use that extra money to pay it off.

This could free up more cash that can be used for saving, investing, or getting that cable TV back.

Another thing you should do is cut or eliminate expenses that are otherwise unnecessary. The average American spends almost half of their food budget on eating out (Source).

Investing

This section will revolve around asset allocation and not about picking stocks and the like, specifically, in ones’ retirement plan.

If you have a retirement plan (you really should) my advice is to allocate your assets according to your risk tolerance, time horizon, and comfort level (from a psychological perspective).

If you have a retirement plan through your employer, I strongly recommend utilizing a target-date fund. This takes the worry and the guesswork out of the equation.

Where was I, oh yeah, asset allocation? Unless we’re in a bear market, your stock allocation will do better than your bond allocation.

Over time, the stock part of your portfolio will take up a larger share of your overall portfolio. It’s wise to regularly (though opinions differ) to rebalance back to your original allocation, otherwise, you risk being more aggressive than you intended.

Conclusion

Whether you’re talking about your home, car, or anything else, regular maintenance can save you a lot of money.

Please visit our website to learn more and for our disclosures.

 

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