0 comments on “New vs Used: A Different Angle on Car Buying Advice”

New vs Used: A Different Angle on Car Buying Advice

In the market for a car? There isn’t much debate when it comes to the question of whether you should buy a new or used one. Most advice you can find says go used. But that is too broad. There is little reference to the cost of the remaining life of the car when discussing the merits of used cars over new ones. This can be a critical miss.

New cars depreciate the moment they are driven off the lot. In the first year the value of the car drops by nearly 30 percent, according to Edmunds. By the time the car is five years old it will have lost half its value. But does that necessarily make buying a car after it has depreciated a better deal?

Even with the depreciated value, used cars valued on a price per remaining mile may not compare well. In a very unscientific survey of local used cars, most actually did not.

The following chart shows 4 cylinder Honda Accords, model years 2014 to 2017, available in the Portland Metro area and listed on UsedCars.com.  These are compared to a brand new 4 cylinder Honda Accord based on an on-line quote from a local dealer.

used cars 200000

Of the used cars currently on the market 70 percent were priced at a higher per remaining mile level than the new car. If you want to own your car for fewer miles, the comparison is even worse. The following chart shows the price per mile if you assume you only want to drive the car until it hits 100,000 miles. Only one of the used cars was a better deal than the new car on this basis.

used cars 100000

Cars have become very reliable. Most can be expected to last for 200,000 miles or more with recommended maintenance. The average driver could easily own a car for 15 years. Whether you plan to own your car until it dies, or you tend to sell your cars when they hit a mileage milestone, what you are paying for the remaining life is an important consideration.

The conventional wisdom to buy a used car instead of a new one may not always be good advice. While you will pay less in absolute dollars, you may not get a better value. Comparing the value given the miles you will be able to drive the car may very well lead you to buy new instead.

Image courtesy of Gualberto107 at FreeDigitalPhotos.net

0 comments on “Four Documents Everyone Needs”

Four Documents Everyone Needs

Have you ever considered what would happen if you died suddenly? It is not a subject at the top of most people’s mind. But it is a real possibility. Car accidents alone kill more than 3,000 people every day.

Because you don’t spend much time thinking about death, preparing for it may not have occurred to you. However, regardless of your financial situation, there are four documents that everyone should have.

Everyone needs a will, an advance healthcare directive, a durable healthcare power of attorney and a durable financial power of attorney. Preparing basic versions of these documents is easy and doesn’t cost much.

A will is a document that records what should be done with your savings and other belongings, also known as your assets, if you die. It can take any form, but to be valid it must be witnessed by two disinterested people. A disinterested person is anyone who won’t benefit from the will.

If you haven’t left instructions for how to deal with your assets, the state where you live will make the decisions for you. Each state has a set of rules for how to distribute them. Regardless of what you might want, or have told your family and friends, the state will follow their rules.

In some states, the rules may be far from what you would want. For example, in many states, your surviving spouse might have to split your assets with your parents and siblings, if you haven’t left a will indicating otherwise. If you have children, and both you and your spouse have died, the state will appoint a guardian according to their rules, and that might not be who you intended.

You can write your will without any help, but for good on-line templates consider Rocket Lawyer, Legal Zoom or another on-line resource. A will you create yourself, using one of these sites, will likely cost less than $100. This may be all you need if you don’t have much in the way of assets and have no children. If your situation is more complex, it is worth speaking with an attorney.

Keep in mind, your will will not govern what happens to your retirement accounts and insurance policies. They are controlled completely by the beneficiary designation on the account. What your will says makes no difference. Make sure you maintain the beneficiary designations with an update whenever you have a life change.

An advance healthcare directive, also known as a living will or a medical directive, documents your wishes regarding the types of care you want to receive. This may include how far you want medical personnel to go to keep you alive, the type of pain medications you wish to receive, and whether you prefer to spend your last days at home or in a hospital.

An advance healthcare directive is done on a state regulated form. You can download your state’s form from Caringinfo.org for free. However if you use one of the on-line legals sites, one should be provided for you with your will.

A medical power of attorney gives a person you name authority to make health care decisions for you in line with your wishes. A financial power of attorney gives a person you trust authorization to pay your bills, and otherwise manage your affairs while you are incapacitated. These are separate documents, and you can name different people for each. These documents are also available for free through the links above.

In addition to these legal documents, record your on-line accounts with your usernames and passwords, and save them in a safe place, such as a safe deposit box. This is so the person who has your financial power of attorney knows what accounts you have and can easily access them.

Make sure that anyone who will be responsible for handling any of your affairs knows where all your important documents are located. You should walk them through your wishes, so they will know what to expect if the need arises.

No one wants to think about death. However, if you take some time to do it now, you will save your family from agonizing over what you would want if the worst happens. Preparing a basic version of these four important documents will ease the burden on your loved ones, and it is easy and inexpensive. Make it a priority.

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1 comment on “Fight Credit Card Debt with a Credit Card”

Fight Credit Card Debt with a Credit Card

Welcome to 2018. Now that the Christmas decorations are put away, the champagne has been sipped and the resolutions made, it is time to get down to business. If one of your resolutions was to pay down your credit card debt, there is a tool you may not have considered that can give you a leg up. It’s another credit card.

No, I usually don’t endorse opening new credit cards. You’ve got enough trouble with the ones you have. However, if you are truly committed, a card where you don’t have to pay interest will juice up your debt reduction efforts for any payment amount you intend. The reason is more of your payment will go directly to reduce your balance and less to interest.

Some credit cards offer a balance transfer feature with a zero percent interest promotion for the first 12 to 21 months, depending on the card. If you transfer your balance from another high interest card, you won’t incur interest during that promotional period. That means your entire payment will go to pay down your balance.

The cards generally have a 3.0 to 5.0 percent balance transfer fee. But compared to the high average annual rate charged on a typical credit card, it may be well worth it.

A survey done by U.S. News and World Report, found that most credit card holders who carry a balance had not used zero interest credit cards to reduce the cost of their debt, and two thirds thought they could pay off their balance within 18 months, a typical promotional period.

The following table shows how transferring a $3,000 balance from a typical credit card, with a 16.0 percent interest rate, to a card with a zero interest introductory rate could save you money and get you out of debt faster. With a $200 monthly payment, the balance is paid off two months earlier on a zero interest card, and you save $277 in interest, after the balance transfer fee.

Zero Interest Credit Card

There are some pitfalls, and not all cards are created equal. The first area of concern is which transactions get the zero interest treatment. For some cards, it is only new purchases, and for others it is only the balance transfer. Since you are trying to reduce your debt, you want zero interest on the balance you transfer.

Avoid making new purchases on your card. If you make additional charges, it can hamper your debt reduction efforts. When a card charges different interest rates on different transactions, regulations require payments above the minimum be applied to the balance with the highest interest rate. That means your extra payments will pay off your new purchases before they go to pay off the balance you are working on.

The financial institutions issuing these cards have no mercy when it comes to late payments. If a payment is late during the zero interest period, you may lose the zero interest benefit, and your rate will bounce up to the current new purchase rate. As a result, you will have paid the transfer fee for no reason.

Finally, if you are unable to fully pay off the balance you transferred within the promotional period, you may have to pay deferred interest on the balance remaining. That means your remaining balance will be charged the new purchase interest rate for the full introductory period at the end of that period.

U.S. News has a good comparison of the top balance transfer cards. In addition they provide a more in-depth guide to determining whether a new credit card is the right move for you.

Before you embark on this debt reduction mission, make sure you are working on the right priority. Debt reduction is not the first step on your road to financial security. Your emergency fund is. Don’t make extra payments on your debt until you have built up at least three months of living expenses in savings.

Debt reduction should also wait until you can manage it as well as a contribution to your company retirement savings plan large enough to get the company match. The company match is free money. Or, put another way, it provides a 100 percent return on your contribution. Debt reduction saves you a lot, but not nearly 100 percent.

Eliminating your high interest credit card debt is an important goal. If you have an emergency fund in place and you are getting your full company match in your retirement savings plan, it is the next thing you should be working on. Taking advantage of a zero interest credit card, can make your efforts even more effective. For at least a short time, your payments will go directly and fully to reducing your balance.

Image courtesy of adamr at FreeDigitalPhotos.net

 

2 comments on “The 12 Days of Financial Security for Christmas”

The 12 Days of Financial Security for Christmas

 

Forget the birds and performing artists. These are the 12 gifts of financial security!

On the first day of Christmas my true love gave to me a fund for emergencies

On the second day of Christmas my true love gave to me a budget for expenses and a fund for emergencies

On the third day of Christmas my true love gave to me a maxed out retirement, a budget for expenses and a fund for emergencies

On the fourth day of Christmas my true love gave to me a pay-down on my visa, a maxed out retirement, a budget for expenses and a fund for emergencies

On the fifth day of Christmas my true love gave to me a Roth IRA, a pay-down on my visa, a maxed out retirement, a budget for expenses and a fund for emergencies

On the sixth day of Christmas my true love gave to me full estate planning, a Roth IRA, a pay-down on my visa, a maxed out retirement, a budget for expenses and a fund for emergencies

On the seventh day of Christmas my true love gave to me insurance for disabilities, full estate planning, a Roth IRA, a pay-down on my visa, a maxed out retirement, a budget for expenses and a fund for emergencies

On the eighth day of Christmas my true love gave to me a 529 for my kids, insurance for disabilities, full estate planning, a Roth IRA, a pay-down on my visa, a maxed out retirement, a budget for expenses and a fund for emergencies

On the ninth day of Christmas my true love gave to me a pay-down on my student loans, a 529 for my kids, insurance for disabilities, full estate planning, a Roth IRA, a pay-down on my visa, a maxed out retirement, a budget for expenses and a fund for emergencies

On the tenth day of Christmas my true love gave to me a sound investment strategy, a pay-down on my student loans, a 529 for my kids, insurance for disabilities, full estate planning, a Roth IRA, a pay-down on my visa, a maxed out retirement, a budget for expenses and a fund for emergencies.

On the eleventh day of Christmas my true love gave to me a long-term care policy, a sound investment strategy, a pay-down on my student loans, a 529 for my kids, insurance for disabilities, full estate planning, a Roth IRA, a pay-down on my visa, a maxed out retirement, a budget for expenses and a fund for emergencies.

On the twelfth day of Christmas my true love gave to me, a pledge to be mortgage free, a long-term care policy, a sound investment strategy, a pay-down on my student loans, a 529 for my kids, insurance for disabilities, full estate planning, a Roth IRA, a pay-down on my visa, a maxed out retirement, a budget for expenses and a fund for emergencies.

Merry Christmas everyone!

0 comments on “Give the Gift of Education: College 529 Plans”

Give the Gift of Education: College 529 Plans

The holidays are upon us. I’ve always thought Christmas was mostly about the kids. There is nothing better than seeing a little face light up at the decorations or the absolute glee in your child when she receives that one thing she wanted most of all. But all the gifts can get out of hand.

With grandparents and aunts and uncles all giving to your children, your kids could be on overload before breakfast Christmas morning. If your kids’ eyes are glazed over before they’re done opening all their presents, consider a different tactic that can cut down on the volume of gifts and help with your children’s future. Ask your relatives to make a contribution to a College 529 plan instead of buying the usual gifts that may be forgotten in a corner before long.

A College 529 plan is a tax advantaged savings program for post high school educational expenses. Investment earnings grow tax free and withdrawals for educational purposes are tax exempt.

An AARP survey found that 36 percent of grandparents believe it is their job to spoil their grandchildren by buying them lots of stuff, mostly at the holidays. Of grandparents surveyed, 25 percent will spend more than $1,000 in a year on their grandchildren, and 40 percent will spend more than $500.

Those amounts can add up to substantial college savings by the time your children are ready for school. If your children were to receive a total of $500 in gifts each holiday season from their relatives beginning when they are babies, a 529 plan could grow to well over $14,000 by the time they are 18, assuming a 5.0 percent annual return. Smaller amounts also help. Some 529 plans accept deposits on existing accounts as low as $15.

The gift giver benefits as well. Contributions to a 529 plan in 34 states are state tax deductible, and in two thirds of those states, you don’t need to be the owner of the account to get the deduction. In Oregon, for example, a single person can deduct up to $2,300 of their contribution, and a married couple can deduct up to $4,600. If a larger gift is made, the extra over the deductible limit can be deducted in future years.

For the states where you do need to be the owner to get a deduction, the gifter would open their own account and simply name the child as the beneficiary. There is no limit to the number of accounts that can be opened for a single beneficiary.

For the 16 states that don’t offer a 529 plan, an account can be opened in any other state’s plan. While contributions are not deductible, the investment earnings will still grow tax free. There is no obligation to attend school in the state where the account is opened. Savings in 529 plans can be used for educational expenses at a wide variety of schools nationwide.

There are no limits to annual contributions for 529 plans. Gifts greater than $14,000, which is the gift tax exclusion amount, require the filing of a gift tax return. However that does not mean the gift will be taxable. It can remain tax exempt under the lifetime exclusion for estate taxes, currently at $5.49 million per individual for federal tax purposes. The maximum lifetime 529 plan contribution limit is $300,000

If your child doesn’t attend school, the money can continue to grow tax free in case they change their mind later. The money can remain in the plan as long as there is a living beneficiary, and you can change the beneficiary if school isn’t in the cards for the first one.

If the money is not used for educational purposes, you will pay income tax and a 10 percent penalty on the earnings. While that sounds terrible, if you’ve had the money invested for a while, chances are your earnings will have grown, and you will still come out ahead.

Instead of your parents buying gifts that won’t last or will be set aside to gather dust, have them invest in your child’s future. Toys wear out. Clothes are outgrown. Electronics become obsolete in no time. Most kids can only take so much unwrapping on Christmas. A College 529 plan contribution is a gift that will have a lasting impact, and have your child remembering Grandma and Grandpa’s gift all their life.

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0 comments on “Tips for Dealing With the High Cost of Healthcare”

Tips for Dealing With the High Cost of Healthcare

Healthcare plans are changing. As insurers seek to limit the increases in their premiums and employers seek to lower their costs for providing this important benefit, those who need healthcare are left holding more of the bag. There are a few things you can do to prepare and limit your costs.

Thanks to the Affordable Care Act, many typical medical expenses are required to be covered by both individual and group healthcare plans. And the summary of benefits has been standardized so you can more easily understand your coverage, copayments, deductibles and out-of-pocket maximum costs.

Unfortunately these seem to be on an unending march upward. Regardless of the plan, your share of the cost of healthcare, on top of your premiums, is growing. The increasing use of Consumer Driven Healthcare Plans (CDHPs), also known as high deductible plans, and the elimination of out-of-network coverage in many cases are two developments that can lower your premium but still drive up what you pay for healthcare.

CDHPs

The number of companies offering CDHPs, or high deductible plans, has grown sharply in the last ten years. An annual survey by the National Business Group on Health found that 90 percent of large employers are offering at least one CDHP, and 40 percent will offer only a CDHP in 2018. Almost one third of all covered employees are now enrolled in a CDHP according to a Mercer study.

While wellness exams are fully covered under all healthcare plans now, in CDHPs you must pay for services beyond wellness exams out of your pocket until the high deductible is met. Often the savings on the premium can at least partially offset the expenses, making the lower coverage worthwhile. But there are a couple of things you can do to further limit your costs.

Take advantage of the Health Savings Account (HSA). The HSA is a tax advantaged way to save for your out-of-pocket medical expenses. Your contributions to the HSA are pre-tax, saving you the equivalent of your tax rate on medical expenses paid out of the account. Your contributions to your HSA are yours to keep, with no requirement to spend them by the end of the year. Your goal should be to accumulate at least enough to cover your deductible in the HSA.

Shop around for your prescription medications. Before you spend your deductible you will pay the cash price for your medications. There can be a shocking difference among the cash prices charged by different pharmacies. So it pays to shop around.

Try goodrx.com to see where your prescriptions are cheapest. One prescription I checked ranged in price from $38 at Costco to $341 at Rite Aid.

There can be substantial savings for name brand, non-narcotic drugs purchased through Canadian pharmacies. One name brand prescription can be bought for $78 for a three months supply vs $497 at the lowest cost U.S. pharmacy.  Check out eDrugSearch.com to find the lowest prices for your medications. If the pharmacy is certified, you can be assured they get the medications from the same manufacturers as U.S. pharmacies.

These pharmacies will be out-of-network, so the cost of your medication may not apply to your deductible or out of pocket maximum, but the savings can make that sacrifice well worth while.

Finally, many pharmaceutical companies offer coupons on your name brand medications to make them more affordable. Check your medication’s manufacturer’s web site for offers.

Loss of Out-of-Network Coverage

Whether your plan is a CDHP or not, increasingly, health insurers are cutting out-of-network coverage. Out-of-network coverage pays providers even if they haven’t negotiated pricing with the insurer. Your share of the cost is higher, but your out-of-pocket costs are still limited by the plan maximums. If there is no out-of-network coverage, you will fully pay for services, and the expenses will not go toward your annual maximum out-of-pocket expenses.

This is a big issue with emergency room services. The ACA requires insurers to cover “reasonable” expenses for emergency care regardless of the hospital you use. However the hospital and the service providers working there, are free to bill you for their fees above what the insurer pays them if they are out-of-network.

Even if you seek care at an in-network hospital, the doctor who attends you may not be an in-network doctor. Hospitals often contract their emergency room physicians from outside doctor groups. If you are attended by an out-of-network doctor in the ER, you could be billed for their service separately, and your insurance would not cover the cost. The practice is called balance billing.

The Commonwealth Fund, a private foundation funding healthcare research, reported that 14 percent of those who had visited the ER received an unexpected bill from an out-of-network doctor. Of those who were subsequently admitted to the hospital, 20 percent received an unexpected balance bill. Seven in ten who had unaffordable healthcare bills did not know their provider was out-of-network, according to the Kaiser Family Foundation.

Consumer Reports offers some advice to help you protect yourself. If a family member or friend accompanies you to the hospital, during registration, they should request you be treated only by an in-network doctor if you arrive at an in-network hospital. At discharge, your companion should request a print-out of all charges in case you must fight the bill later.

Carefully validate your bills against the list of charges. If you receive an out-of-network balance bill, check with your insurer to see if you can get them to pay it as part of the emergency coverage. If not, negotiate with the doctor. If that doesn’t get your bill within reach, file an appeal with your insurer. The Patient Advocate Foundation can provide advice on filing an appeal for free. If all else fails, file an appeal with your state insurance commissioner.

Healthcare has become a consumer nightmare. To avoid bills beyond what you can afford make sure you have savings to cover your share of the costs. Take charge of your medical bills by shopping around for the best prices on medications, and be willing to go to bat for yourself if necessary.

Image courtesy of Serge Bertasius Photography at FreeDigitalPhotos.net

2 comments on “4 Things To Review on Your Retirement Plan During Open Enrollment”

4 Things To Review on Your Retirement Plan During Open Enrollment

Every year after Halloween, time begins to accelerate as the year hurtles through the holidays and to its eventual end. But before you brace yourself for the feasts and family, you have some business of your own to take care of. For most employers, November 1st marks the beginning of open enrollment for company benefits.

While the centerpiece of open enrollment is healthcare benefits, its also a good time to pay some attention to your retirement account. You should revisit your contributions and your investments, consider switching your contributions to a Roth option and update your beneficiaries.

Contributions

Your minimum contribution should be enough to get your company’s match. Most employers require you to contribute 6.0 percent to get the full company match. If you are contributing the minimum, you aren’t saving enough for retirement. Make an effort to increase your contributions this year, and each year from here on out, until you hit the maximum.

The 2018 contribution limits for employer sponsored retirement accounts, such as 401(k)s, has gone up. It is now $18,500 and if you are over 50, you can contribute up to $24,500. If your goal is to contribute the maximum to your account, you may need to adjust your contributions.

Rebalancing

With the stock market up, you may find that you have more money in mutual funds investing in stocks than you intend. Now is a good time to sell some of your stock market investments and buy more conservative investments to rebalance your account to its target allocation. If your company’s plan offers an auto rebalancing feature, where your account could be automatically rebalanced to its target allocation, now would be a good time to turn it on.

Not sure what your allocation should be? Most plans offer help with figuring this out, whether its through planning tools available on the web site or some form of professionally managed investment option.

In the professionally managed category, target date retirement funds are now widely available. You can tell which ones these are, because they have a year in the name of the fund, such as target retirement 2045.

Target date funds are fully diversified investment options. The fund’s manager gradually reduces the fund’s allocation to risky stock market investments as the target date approaches. All you have to do is select this investment option, and your retirement account will be managed in a reasonable way for your age and the time remaining before you stop working.

If your company’s plan doesn’t offer target date retirement funds, they may offer a managed account option. With a managed account option, your investments will be managed for you by an investment adviser based on information you provide, usually through an on-line questionnaire.

If none of these are available to you, one easy rule of thumb is to subtract your age from 120 and invest that percentage in stock mutual funds. Then invest the rest in bond funds.Asset Allocation

Roth Accounts

Now is also a good time to check whether your company offers a Roth retirement account option. Both accounts allow your investments to grow tax free while you are saving for retirement, but they differ in the tax treatment on both the front and back ends.

With a Roth option, your contributions are after tax, whereas with a traditional account, your contributions are before tax. While the before tax contributions make the traditional accounts appealing on the front end, Roth accounts have more advantages on the back end, when you are withdrawing your money.

When you want to spend your money in retirement, withdrawals from a traditional account will be fully taxable, while withdrawals from a Roth account will be fully tax-exempt. The following table shows the advantage of the Roth account over a traditional account with a single year’s contribution.

roth example

Because the growth in your investments will be far greater than your contributions, your tax bill on withdrawal from a traditional account will be higher than the tax advantage you gained on deposit. That makes the Roth option, with no tax obligations on withdrawal, more attractive.

Roth accounts have other advantages. You can withdraw your contributions, though not your earnings, at any time without paying taxes. This comes in handy if you plan to retire before you are 59 ½. You also won’t be required to take a minimum distribution when you turn 70. Finally, withdrawals from a Roth account are not included in your income calculation for determining whether your social security benefits are taxable.

Anyone can contribute to a Roth retirement account through work. There are no income limitations as there are with Roth IRAs. If your employer matches your contribution, they will match your Roth contribution by making a contribution to a traditional account. So you will wind up with two retirement accounts through work.

If you move your balance in your traditional account to the Roth account you will be taxed on the amount transferred, so don’t do that unless you’ve checked with a tax professional and know what you’re in for. However, your future contributions can go toward a Roth account.

Beneficiaries

Review your beneficiaries. Regardless of any other documents you may have, such as a will, financial institutions rely solely on your beneficiary designations to distribute your account in the event of your untimely demise.

If your spouse has changed, make sure your prior partner is not still your beneficiary. Do not make minor children beneficiaries, because financial institutions cannot distribute money directly to them until they turn 18. Consider establishing a family trust, and making it your beneficiary, to allow your children’s guardians easier access to the money needed to raise your kids.

There is no time like open enrollment to focus your attention on financial matters. Before things get hectic with the holidays, take advantage of this annual checkpoint to make sure you are on the right track with your retirement benefits. Your work related retirement plan may well make up the bulk of your retirement savings, so take advantage of what is available to you.

Image courtesy of David Castillo Dominici at FreeDigitalPhotos.net