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  • Posts Tagged ‘money’

    Here’s Why Financial Literacy Is For Everyone

    Thursday, April 20th, 2017

    little blog pictureApril is Financial Literacy Month.

    “Financial Literacy” is a somewhat new term and trend in the United States, and for that reason, some find it off-putting and discouraging. Don’t let the fancy phrasing scare you, though. The reality is, financial literacy simply means knowledge about money and savings. Even though most of us didn’t learn the basics of financial knowledge in an educational setting (hopefully that will change in the future!), important, life-changing saving information is easily within reach.

    In fact, understanding of the importance of financially literacy only became widespread in the past fifteen years or so. In 2002, the U.S. Department of Treasury created the Office of Financial Education as a way to organize its efforts in the area. The next year, Congress passed the Fair and Accurate Credit Transactions (FACT) Act, which established the Financial Literacy and Education Commission, a group that later published a “National Strategy on Financial Literacy.”

    That means that, hopefully, financial education will become a standard and required part of education. However, just because it wasn’t something you learned about in school doesn’t mean you cannot become extremely knowledgeable on investing, saving, retirement and other financial topics. It is important for everyone to educate themselves about their finances, but know that you don’t need to be a financial expert to make smart decisions. Some basic information can go a long way.

    In particular, it is important to know what you should be doing at every stage of life to make sure you are on track financially and preparing for long term financial security. WISER’s “7 Life Defining Financial Decisions” booklet breaks down key topics into stages and explains how to approach each one.

    For example, when it comes to jobs and careers, when taking a job, consider not only salary but also benefits. There are two basic kinds of employer-sponsored pension plans: defined benefit and defined contribution plans. When leaving a job, it is important to consider that changing jobs, even for higher pay, can cost you a bundle in lost benefits and retirement income. If at some point in your life you decide to stay home full time, think through the family finances, including retirement planning. Where there are large upsides, you will lose compensation, benefits, job skills and contacts if you leave work completely.

    The booklet offers more advice on financial decision-making at every stage of life. By focusing on life stages and basic information, financial literacy is within reach for everyone.

    Why Saving As A Young Person Is Important

    Thursday, March 23rd, 2017

    “Live while you’re young!” “Youth is wasted on the young!” “I’ll sleep when I’m dead!” “Live in the moment!”

    Everywhere they turn, young people are inundated with messages encouraging them to live now, worry later. In financial terms, that translates to “spend now, save later”—and it’s a hard message to ignore. The internal justifications to spend instead of save often sound like this: all of my friends are planning an expensive trip overseas, why shouldn’t I join them? Why not rack up credit card debt—I’ll be able to pay it off later, when I’m older and have a higher paying job! I’m only young once!

    The same mentality leads to young people to taking out large amounts of student loans, beyond what they may be able to afford or what may be worthwhile. According to new research from the National Endowment for Financial Education, more than 70% of millennials (people ages 23 to 35) have at least one long-term debt, which could be student loans or something else, like a car loan. About 34% of millennials have two long-term loans. These numbers alone are troubling, but to make matters even worse, the research also found that about a quarter of millennials with a retirement account took out a loan or hardship withdrawal in the last 12 months. This emphasizes that many young people are prioritizing the present much more than the future when it comes to finances.

    This trend is putting young people at a serious financial disadvantage—making it more difficult to purchase a home, open a business, or pursue other ventures later in life. Here are several additional reasons why saving as a young person is important:

    Financial Habits Are Set When You’re Young

    The same holds true for any habit: the earlier you adopt it and the more often you carry it out, the more likely it is to stick. Being smart with money is no different. If you are careless about money for most of your life, it will be extremely difficult to switch gears and become a scrupulous saver once there is truly something to save for—like a child or a home. The inverse is also true. If you are smart with money from a young age and put in place good habits, like putting a certain amount of your paycheck each month into savings, you are likely to carry those habits later in life.

    Saving a Little Now Equals A Lot Once You Retire

    We often hear about “the power of compound interest.” We,ll that power is only powerful if you start saving young. The more years that go by, the more powerful compound interest becomes. If you save a little bit as a young person, that money will accrue interest and, by the time it’s time to retire 30 or so years later, a little bit of money will have grown into a lot of money. You can only take advantage of this is if you save early.

    Cost of Living Grows As You Age

     It’s easy to assume that because you can support yourself now, you’ll be able to do so later. However, the cost of living grows dramatically as you age. The odds increase that you will become a caregiver, in terms of both finances and time, for an aging parent or a child. Medical costs also increase as you age. Your salary will also likely grow, but it may not grow enough to support these costs, let alone enough to put aside enough for retirement, when your income will decrease dramatically. Saving early helps ensure financial stability throughout your entire life.

    Be Smart When Giving Money to Kids

    Thursday, February 25th, 2016

    A cracked egg with money flying out the window.

     

    New research suggests that younger generations are increasingly relying on their parents and grandparents financially, and while it might seem like instinct to open up your wallet to your children or grandchildren, doing so without paying attention to how it might affect your retirement can cause financial trouble down the road.

    A recent study by Ameriprise Financial of adults in the baby boomer generation (in other words, those who are likely to have recently retired or are about to) found that a large majority (93%) provided financial support to their children.  This could include things like helping them pay for college (71%) or helping them buy a car (53%), but many also admit to helping fund unnecessary luxuries.

    While it may feel selfish to not share your money with your kids and grandkids, keep in mind the many years you worked to save for your retirement. It is important to be smart and cautious about how much you give, so that your generosity doesn’t affect your ability to live the lifestyle you need to be happy and healthy during retirement.

    Be Selective About How You Give

    There’s a big difference between dipping into your retirement savings to pay your son or daughter’s medical bills versus funding their move to a fancier new apartment.  Ask yourself if the money will go towards something they really need and if will help them be financially independent in the future. If the answer to both of those questions is no, it is probably best to not provide a monetary handout. The fact that your grandchild wants the coolest new video game isn’t enough—a new version will be out in a year.

    If you determine that the need is big enough to dip into your retirement savings, make sure that the gift will not push you above your safe withdrawal rate—defined by Kiplinger’s as “the annual spending amount that gives your portfolio good odds of lasting a lifetime”. Think about what you’re willing to give up in order to write that check. When something is framed not as what you are giving, but rather as what you are giving up, it is less likely that it will seem worth it.

    It is also a good idea to make direct payments whenever possible. Rather than writing a check that is meant to be used for school, pay the school directly. Making direct payments prevents the possibility that your child or grandchild will misuse the funds. Furthermore, if you pay medical or tuition bills directly, the money is not considered a taxable gift by the IRS.

    If you decide to offer your child a loan, create a promissory note, set a strict repayment schedule, and charge an interest rate. If you do not do these things, the IRS might consider the loan a gift, and determine that it has to be taxed as such.

    Find Ways to Help Beyond the Checkbook

    If you take an honest look at your finances and decide that you can’t give monetarily, think about how else you can help. There are many alternatives beyond writing a check. If your kid or grandkid is having trouble paying rent, offer to have them live at home (but still pay their share of the utilities). Offer to babysit while they work extra shifts at work, or help them in their job search. If managing money is an issue, help your kids or grandkids create a budget and find ways to adjust their spending.  This will not only help them in the short-term but you will also be helping them develop an important life skill.

    The internet is filled with stories of parents who gave too much money to their kids and ended up bankrupt, struggling or having to sell their home during retirement. An outcome like that is not beneficial to anyone, and a little monetary gift in the present isn’t worth the long-term hit it can cause to retirement security. All to say: be smart and careful about how you give.

    WISER

    About Us

    WISER is a nonprofit organization that works to help women, educators and policymakers understand the important issues surrounding women's retirement income. WISER creates a variety of consumer publications including fact sheets, booklets and a quarterly newsletter that explain in easy-to-understand language the complex issues surrounding Social Security, divorce, pay equity, pensions, savings and investments, banking, home-ownership, long-term care and disability insurance.

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