Is Your Money Leaking Away?

The other day, I was putting the cushions for our patio furniture away when I realized we have had them for at least ten years. They’re nothing special. I bought them at Home Depot for less than $20 each. They’re definitely not something you’d expect to last so long. So what is the secret?

The secret to their longevity is in what I was doing when I had my revelation; putting them away. We put the cushions in a container when we’re not sitting on them. They don’t get left out in the sun or the rain. They stay nice and dry and ready for use every time we want them.

They’re still in perfect condition. If I had to replace them today, it would cost me around $140 for the four of them. There you go. $140 saved. If you assume I would have replaced them at least a couple of times in the last ten years, had they not been so well protected, that’s a few hundred dollars saved.

I’ve written before about the value of maintaining the big things, like your car and your home systems and appliances. But there are lot’s of little places where your money can leak away.

It turns out your Mom and Dad were right.

“Put the tools away!”

“Don’t leave the windows open while the heat is on!”

“Don’t stand with the refrigerator door open!”

The reason they said those things, wasn’t to annoy you. It was to save them money.

If you put the tools away instead of leaving them out in the elements they last longer. Leaving even one window open with the heat or AC on needlessly increases your utility bill, as does leaving the refrigerator door open any longer than necessary.

Now, admittedly, you’re not going to retire on the money you save by putting your patio furniture cushions away, or making sure all your windows are closed if the heat is on. But money is a precious resource representing your time and hard work. Letting it slip away needlessly means you simply have less for other things that are actually important to you.

Maybe you would find a bit of extra money to take your partner out for a nice dinner. Or maybe you’re able to save up for that weekend get away sooner than you thought. Or you might just be able to increase the contributions to your retirement account.

Everyone has little ways that money quietly leaks away from them. Simply being cognizant of the possibility will help you find yours. If you can plug as many of those leaks as possible, you may be surprised by how much extra money you have to do the things that are truly important to you.

How to Lose Money with Every Dollar You Invest

Recently I was helping my daughter with her bank account and noticed a $1 withdrawal labeled “Stash Fee”. It was a fee to robo-adviser, Stash. Normally I would be thrilled by the good news that my daughter was saving and investing. But in this case I wasn’t.

I had a couple of concerns, but the biggest one was that $1 fee which would be coming out of her account monthly as long as she maintained her account with Stash. It doesn’t seem like a lot, $12 per year, but she had only invested $50 so far. That’s an investment expense of two percent per month! It would be really hard for her investment to make money with that expense load.

I’m a fan of robo-advisers. They offer a great service for savers with both small balances and big ones. They generally use low cost exchange traded funds to build a well diversified portfolio, and their management fees are also low. For more details on robo-advisers, check out the post I did a little over a year ago.

The Stash service allows investors to invest as little as $5.00. You can set up an automatic regular transfer from your bank account. In fact, you are required to link your bank account to your Stash account, so they can automatically withdraw your fees every month.

Most robo-advisers subtract your fees from your investment account, and even with small balances, the fees are lower. Betterment, and Wealthfront two other robo-advisers, offer investment management for 0.25 percent per year. Betterment has no minimum balance, but Wealthfront does require an initial $500 investment.

Stash bills itself as a way for young investors to learn more about investments while building their portfolio. They offer lots of information on investing as well as help selecting investments. But they seem to leave out the bit about how high fees eat into your savings.

Stash’s fees do become more reasonable as a percent of your investments the more you invest. Once your balance hits $5,000, the fee converts to 0.25 percent per year, which is about $12.50 on that amount of money. That is in line with Betterment and Wealthfront, but both those advisers will build your portfolio for you, as opposed to offering to help you build your own.

This experience highlights the importance of understanding what you are getting into. Never hand over your money to any adviser without investigating how they work, what they offer and how they compare to other alternatives. There are many low cost ways to have your money invested for you.

Robo-advisers are a good way to go, particularly if you don’t have much to invest right away. However, Stash’s fee structure makes them a poor choice for balances less than a few thousand dollars. There are other options with much lower fees. If you like what Stash has to offer, wait until you’ve saved up the $5,000 to make the fees competitive before you invest with them. Whatever investment adviser you choose, make sure that you understand what they offer and what they charge before you hand over your money.

Five Rules to Get Your Spending Under Control

Does your money simply disappear without you fully knowing what happened to it? It can be really frustrating, when you’re trying to save money, if you never seem to have anything left over at the end of the month.

When you don’t have a recollection of how you spent your money, you are spending it mindlessly. Essentially you have a habit, and when you have a habit you can do something without thinking about it.

It’s like when you drive home from work, but you can’t recall any of the details of your trip. You make all the right turns, avoid obstacles and securely arrive in your driveway without having to engage the decision making part of your brain.

Mindless spending can be a big road block to saving money. It can keep you living paycheck to paycheck even if you have a decent income. You pay your bills, go about your life and at the end of the month there isn’t anything left. You don’t really have anything to show for it. You just don’t have any money.

If this sounds like your life, you can change your spending habits by imposing a few rules on yourself. Rules are low barriers to spending, but they can be very effective. After following your rules consistently, you can change your spending habits.

Only you can decide what rules will work for you. But here are five that have worked well for others.

  1. Set your savings aside first. Put your savings goal in savings before you pay any bills, buy any groceries, go out to eat or do anything else. Use automatic deposits to savings to take the decision making off your plate.
  2. Give yourself an allowance. Aside from the bills you must pay, in other words, those you’ve agreed to pay by contract, allow yourself a specific amount of money to pay for everything else. Your groceries, gas, entertainment, essentially everything else must be paid from the allowance. The amount you choose should leave room in your monthly income to meet your savings goals.
  3. Only carry cash. Studies have shown that you are more conscious of your spending when you physically experience the cash leaving your hand than when you swipe a card to pay for your purchases. If any cash you carry disappears, carry only enough for purchases you plan ahead of time. If you don’t plan to buy something on a given day, don’t carry any cash or your cards. If you need to put gas in your car, only carry enough cash to fill the tank.
  4. Only go out if it’s an event. Skip the $10 sandwiches scarfed at your desk. Not only will you not remember you spent your money on them, you won’t remember eating them. Save your restaurant trips for experiences you’ll remember, like a date night, a celebration or catching up with a friend.
  5. Give yourself a cooling off period. If you are tempted to buy something that wasn’t in your plan, give yourself 24 hours to think it over. Chances are it won’t be quite as appealing once you’ve turned your back on it. If the day goes by, and you really think the object of your desire is your priority, you’ll have had time to figure out how to rearrange your spending plan.

Find something that works for you. If you are ready to prioritize saving over spending, giving yourself some rules can help you change your spending patterns. Once you get the hang of it, you won’t be able to stop being conscientious with your money. You will know too much.

 

 

Double Your Salary in Savings by Age 35 or Double Your Savings from Salary

This last Monday (May 21st, 2018), Buzzfeed highlighted the Twitter responses to a recent Marketwatch article that said by the time you are 35 you should have saved twice your salary. Some of the Twitter comments were very funny. Here are a few from the Buzzfeed article.

By the time you’re 35 you should have saved at least half your sandwich for lunchtime instead of noming it at 10am.

By age 35 you should have approximately 10 times the existential dread you had when you graduated high school.

By age 35 you should stop paying attention to condescending life advice from strangers writing think pieces.

While accomplishing such a feat seems incredible, there are reasons why it is a good benchmark. First, it is a reasonable savings rate for anyone leaving college. The math follows. Second, it’s necessary unless you want to give up much more of your income later.

To have twice your salary in savings in ten years, with a reasonable rate of return, you would  need to save 15.0 percent of it. That is common advice for those beginning to save in their twenties. If your employer matches your contribution to your retirement account, you could save less.

Say your starting salary when you left college was $45,000. With annual increases, you now make about $54,000. Your employer would contribute 5.0 percent to your company 401(k) if you contributed at least that much. You only have to contribute 10.0 percent of your salary to save 15.0 percent. You would contribute $375 each month to start, and your employer would contribute $187.50. Your and your employer’s dollar contribution would grow with your salary.

Your share of the contribution would be less if you contribute pretax dollars in a traditional 401(k). With a combined state and federal tax rate of 24 percent, your paycheck would only have been reduced by $285 per month to start. For $285, you would be saving $563 every month with your employer match.

At the end of ten years, assuming a 7.0 percent rate of return, your balance would have grown to over $105,000, which is almost double your current salary. Your contributions would have totaled $48,781 before tax and $37,073 after tax. With the employer match and market returns, doubling your money in ten years is very possible.

If you haven’t been saving a total of 15.0 percent of your income, between you and your employer, prior to reaching age 35, you’ll need to save much more after to be able to maintain your current lifestyle when you eventually do retire.

If you begin saving in your 36th year, to accumulate the same amount of money by age 65 as you would have if you started saving at age 25, you would need to save a total of 28.0 percent of your salary, using the 7.0 percent return assumption. If your employer matches 5.0 percent, you still have to contribute 23.0 percent of your salary. You would need to give up more than twice as much of your take home pay to arrive at the same balance.

On the surface, to have saved twice your salary by the time you’re 35 seems outlandish. Who could save that much? But if you take into account market returns, it’s not as crazy as you first thought. Add in typical employer matching contributions, and it is down right doable. If you didn’t manage it, you can still get to where you need to be. You’ll simply need to save more.

Love and Student Loans: 4 Tips to Make it Work

So you’ve found your perfect match. He’s funny, kind and hard-working. You love doing the same things, especially together. But after finishing grad school, he has a mountain of student loan debt. Is he still the one?

These days 17 percent of student borrowers have more than $50,000 in debt. That debt load comes with repercussions. The payments will crowd out the other uses for your money, and the financial strain could lead to relationship strain.

Using a standard ten year repayment plan, monthly payments will be over $500 per month on a balance of $50,000. That is a big bite out of anyone’s salary. However, most who have that level of debt choose an extended repayment plan to lower the payments. Using a 25 year repayment schedule, the payment will decline to $331 per month.

In ten years, 65 percent of the loan will still be outstanding, and by the time the loan is fully repaid you will have paid interest equal to the amount of the loan. So for a $50,000 loan, $50,000 in interest will also be paid.

Generally those with graduate degrees have higher paying jobs, making it easier to handle the burden of the payment. But it’s not always the case. Now more and more, undergraduates are leaving school with high debt balances without the higher professional salaries.

The payments and the length of time they hang around will make reaching your other goals more challenging. The loan payments will reduce the amount you can afford to spend on housing, daycare, vacations and more. They will make it more difficult to save for retirement and college for your own kids. You will need to have a larger emergency fund to cover the debt payments, and it could be harder to qualify for a mortgage.

It’s no wonder that a significant number said they wouldn’t marry someone until their debt was paid off. If your partner-to-be has significant debt, you need to go into the marriage with your eyes wide open. Here are a few tips to make sure your relationship can handle the extra burden.

  1. Openly discuss the debt.
  2. Understand that as a couple you will be paying off the loan together. If your partner has to give up something to pay off the debt, you’ll be giving it up too. For example, if he puts less into retirement savings, you’ll both have less to retire on.
  3. Agree on how you will adjust your lifestyle to fit in paying off the debt and meeting your other financial goals.
  4. Pay down the debt as quickly as you can. Avoid repayment plans that allow you to pay less than the interest owed even if you qualify for them. If you pay less than the interest owed, your loan balance will grow every month. You are essentially borrowing more with every payment.

Debt can put a strain on any relationship. If you are diving into a new one with debt hanging over your heads, know what you are in for. Don’t believe the debt is your partner’s problem. It’s yours too if you go forward. But if you work together, you can still accomplish your financial goals.

When to Take Social Security

My husband, Jeff, recently turned 60. It’s an interesting age. It’s as if you’ve crested some hill, and can now see retirement laid out before you. Jeff has been retired for five years, but his friends who are still working are starting to think seriously about what’s next. Conversations on the topic inevitably turn to Social Security claiming strategies.

Should I take it early, at age 62, is the usual question. A few have done some math to arrive at a dubious conclusion. If you assume you live to a certain age, say 80, you will get the same amount, in total, from Social Security whether you claim it at 62 or the normal retirement age of 67, despite the larger benefit. If you wait until you are 70, you’ll actually get less money. Here is an example of the calculation.

SS Claim Strat

The first problem is you’re not likely to die at age 80. In the absence of some known health issue, at the age of 62, men can expect to live to be 84, and women can expect to live to be 87, according to the Social Security Life Expectancy Calculator. That change alone makes a significant difference in the total benefit you can expect to receive, and claiming at 62 no longer makes sense, if your goal is to maximize your life time total benefits.

SS at Life

If you live to be 80, it turns out you are likely to live to be 89 if you are a man and 90 if you are a woman. At those ages, the difference in life time benefits between claiming early and claiming at the full retirement age grows to $52,000 and $58,000 respectively.

But all of these calculations miss an important purpose of Social Security. It is a guaranteed income that supplements your retirement savings. If you wait to claim Social Security until your full retirement age, or later, the larger benefit will allow you to take less from your savings, and therefore your savings will last longer. Since you really don’t know how long you will live, you need your savings to last as long as possible.

Say that you have $1 million saved for retirement and you need $60,000 per year to maintain your current lifestyle. Also assume your savings will earn 5.0 percent per year. If you claim Social Security at age 62, your savings will only last until you are 92, whereas if you wait until age 67 to retire and claim Social Security, the higher benefit means you are not likely to run out of money ever.

If you consider that things may not work out as planned, that extra buffer is even more important. About two thirds of people over the age of 65 are expected to need long term care sometime in their life, according to a paper by the Society of Actuaries. Long term care will sap your savings quickly. The higher social security benefit you receive at the full retirement age will leave you with more savings to deal with these higher expenses.

A higher benefit will also provide you a buffer against the vagaries of the market. Your savings won’t earn 5.0 percent every year. Some years it will earn more and some less. The larger your Social Security benefit the better you will be able to maintain your lifestyle in the event returns aren’t as high as expected.

Maximizing your lifetime Social Security benefit shouldn’t be your primary goal. Making sure you have enough money to last your lifetime should be. You are more likely to realize the latter goal if you wait to take Social Security until your benefit is higher.

 

 

 

Don’t Gloss Over the Cost of College

If you have a high school junior at home, you may have spent the week of spring break touring a few college campuses. It’s the perfect time to kick off the college selection process with your prospective college student.

You want the world to be your child’s oyster, and no one wants to talk about expenses when dreaming about the future. However, as you reflect upon the tours, it is a good time to bring a dose of reality into the equation.

College is expensive no matter where your child chooses to go, but some choices will set you back farther than others. The following chart shows the average cost of college for the 2017-2018 school year from the College Board.

Average Cost of College

While most parents want to send there children to college, only about 57 percent of them save for it. The average household savings for college was only $16,380, according to Sallie Mae. That means the money must come from somewhere else. The following chart shows how America pays for college, also from Sallie Mae.

How America Pays for College

A full 28 percent of the cost of college will be paid for with loans. The average student loan debt per borrower from the class of 2016 was $27,975. At the current Federal Direct student loan interest rate of 4.45% for undergraduates, over the standard 10 year repayment period, payments on loans of that amount will be about $289 per month.

That can be a significant piece of a new graduate’s entry level job income. It’s no wonder that 30 percent of college graduates with student debt move back in with their parents. With money like this on the line, it is important to sit down with your future college student and cover the facts.

Here are five things to discuss with your child before she chooses a school.

  • Tell your student how much you will be able to pay. This includes what you have saved and what you are willing to commit to out of your income. The converse of this is how much should she expect to pay. Only 70 percent of parents of teenagers have discussed their expectations with their child.
  • Outline options for raising the extra money. In addition to student loans and scholarships, your student may be able to raise some money through part-time or full-time work. Taking a gap year to work and save up for school is a reasonable approach.
  • Help your student understand the implications of their choices. Student loans may be hard to avoid, but they can certainly be minimized if you understand your trade-offs. You can calculate the monthly payments given different loan amounts on the Federal Student Aid web site.
  • Provide context for the information. Estimate the kind of monthly salary your student might earn given her career interests. Payscale’s College Salary Report is a good place to start. It wouldn’t hurt to also talk about average living expenses. Career Trends has a cost of living calculator. Don’t forget to show the impact of taxes. How much of her take home pay will be left after student loan payments?
  • Consider starting school at a community college. The average cost per year at public two year colleges is only $3,570 assuming your student can stay at home while she attends.

If you don’t have enough saved to pay for college, think carefully about the impact of paying for school out of your current income. If you are behind in saving for your own retirement, paying for college should not be your top priority. Your child has time to recover from the expenses of school. You do not.

A college education can substantially improve your child’s ability to earn a living. But taking on a lot of debt to pay for it can weaken her financial stability. Help her understand that her choices have implications for her lifestyle after school. Before she makes her final decision, she should know what she’s in for.