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Financial Stress Rings in the New Year

Having dug ourselves out of the worst financial crisis since the Depression, the nation entered 2017 amid rising wages and record-low unemployment.  Yet three out of four adults report being “financially stressed.”

And no wonder: half of the 2,000 adults in the December survey by the National Endowment for Financial Education (NEFE) said they are living paycheck to paycheck.

Americans’ specific financial issues are routinely documented in this blog and run the gamut from cash-flow shortages to poor retirement prospects.

The primary sources of financial stress identified in the NEFE survey were not enough savings and too much debt.  This was consistent with a second finding in which respondents said that solving these issues would also provide the most “financial relief.” Here are the other findings: …
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Millennial Couple Squares Away Finances

The Knapkes hiking last May in the Rocky Mountains.

Heather and Tyson Knapke were like a lot of young couples starting out: they were in debt.

One household expense on their credit cards loomed larger than all the others: at least $1,000 every month for groceries and dining out. Some weeks, the Denver-area couple could be found at their various favorite restaurants Thursday night straight through Sunday night.

The food budget “was astronomical, and I had no idea,” Heather said.

Their lives changed dramatically after realizing about 2 1/2 years ago that their finances were spinning out of control. How this couple transformed their debt-laden household into one that is free of credit card and college debts and has a tidy emergency fund, with retirement saving now well under way, could be a blueprint for other Millennials in the new year.

Here is the order in which the Knapke’s accomplished this: reduce expenses, impose a budget, pay down debt, and start saving for retirement.

“I’m trying to get ahold of my finances early – earlier than most people – so compound interest works in my favor so I’m set when I’m older. That’s the goal,” said Tyson, who is 32.

How did the couple get into trouble in the first place? Before marrying, Heather, a 33-year-old hairdresser, had learned a few things about controlling expenses as she purchased shampoos and hair dyes for her clients. Her personal finances were, as a result, in decent shape. Then she fell in love with a man in debt. Tyson had graduated from the University of Colorado with a communications degree, $16,000 in student loans, and another $9,000 distributed among three credit cards. …
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Bypassing College for a Professional Job

Apprenticeship programs in the United States are largely found in just a few unionized skilled trades: construction worker, plumber, electrician.

But a recent panel made up of British and American employers and other experts made the case that U.S. employers in myriad professional fields – health care, social care, information technology, law, medical exercise therapy, lab technician, teaching assistantship, nursing, and finance – would benefit from thinking more creatively about providing apprenticeship training.

Apprenticeship programs are much more common among U.K. and other European employers. Microsoft Corp. is a big exception here: its U.S. program, modeled on what the company does in Europe, will graduate 1,000 apprentices next year, said Bill Kamela, Microsoft’s policy counsel for U.S. government affairs. Apprentices “have incredible intangible skills, and they’re incredible learners,” he said.

These programs seem more relevant than ever in the wake of U.S. and European elections shaped in part by blue-collar voters dissatisfied with their economic circumstances, said Tom Bewick, founder of New Work Training Ltd. in London, which arranges employer apprenticeships. Bewick moderated the November panel for the Urban Institute in Washington.

“Our working and middle classes are in revolt against stagnating wages, a lack of affordable housing and distant institutional structures that come across as elitist,” he said. Apprenticeships aren’t a “silver bullet, but they are surely one of the practical responses to this set of challenges.” …
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Life preserver

Student Loan Repayment: 12 Rules

It’s easy to drown in the financial details of student loan repayment.  Here’s a life preserver.

The rules of thumb listed below were culled from interviews with two experts on student loans. Betsy Mayotte is director of consumer outreach for American Student Assistance, a non-profit that educates people about their loans. Craig Lemoine is program director for the American College of Financial Services, which trains financial planners.

1. If you earn enough to make your payments, start paying.

The reason: Student loans in most cases must be repaid in full.  The sooner you start making your full monthly payments, the sooner your loans will be paid off and the less in total you will have to shell out.  A decision about how much extra to pay on student loans should be weighed in the context of other financial goals, including paying off high interest credit cards and putting enough money in a 401(k) to ensure you receive your employer’s match.

2. Open your student loan mail.   

The reason: Owing tens of thousands of dollars is serious business. Ignoring a letter from the company that holds your loan won’t make the problem go away – in fact, it could worsen things.

3. Call your loan servicing company.  But do not call without doing some homework first.  

The reason: If you’re struggling to pay your loans, the companies that handle your student loans can be very helpful.  They are experts not only on your particular loan account but also on the federal government’s rules for loan repayment. Nevertheless, student loan servicers are not perfect.  Representatives might not know much more than is on the U.S. Department of Education’s website, Lemoine said.  And sometimes their advice can conflict with information from another representative in an earlier phone call. To make sure you’re getting the best advice, it’s important to read the information on the federal website, know your potential options, and compile a list of detailed questions pertinent to your unique situation. “Going in blind can cost you money,” he said.

4. The best option for lower-income former students with high debt levels is an income-based repayment plan. …Learn More

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Retirees’ Tax Puzzle: Pay Now or Later?

The majority of retirees pay no federal taxes. But taxes should be a concern for retirees who have retirement savings. That’s because the money they take out of their retirement accounts for living expenses will be treated as federal taxable income. It’s difficult enough to figure out how much money to withdraw – and when. Taxes are a separate but related issue.  

In this blog, we interviewed Michael Kitces, a well-known financial adviser and partner with a Maryland financial firm, who writes the “Nerd’s Eye View” blog. He discusses the basics of navigating the tax code. The challenge facing retirees is to make tax decisions today that will minimize taxes now and in the future.

Question: Do you find that new retirees are surprised by their retirement tax situation?  

Kitces: It’s usually not even on their radar screen. Pre-tax and post-tax income, different tax buckets – I don’t think most people even think about it once they’re in retirement. That’s why we’re still seeing people who are “surprised” when they turn 70½ and the required minimum distributions (RMDs) begin, and their tax bill gets a whole lot higher. They say, “Why didn’t we plan for this?” We say, “We’ve been recommending you plan for this for years!” …Learn More

Parent and child holding hands

Parents Pass (Bad) Money Habits to Kids

When people are asked why they are stressed, money – or the lack of it – is often at the top of the list.

Ask psychologists why this is so, and many would point to a deeper explanation: our parents.

How and whether our parents talked about money, as well as the emotional tenor of these conversations – or silences – are critical to how we manage money as adults.

Sonya Britt, a certified financial planner and associate professor at Kansas State University, explained how these family dynamics play out in a research summary written for financial planners, under a contract with the federal Consumer Financial Protection Bureau.

Britt describes a two-way street between parent and child.  Parents signal their attitudes about money, either through purposeful and explicit messages or in unconscious ways.  Meanwhile, children learn the behaviors that take them into adulthood by observing what parents do.  These observations can override financial knowledge in shaping behavior.

For example, college students who remember that their parents had healthy credit card practices, such as living within their means, are more successful at keeping their college debt under control.  Generally, parents are advised to talk about financial matters with their children – it’s known as parental financial socialization.  Avoiding such conversations has a negative effect that can “wreak havoc on children as they age.” In extreme cases, silence can lead some to hoard money as adults and others to be careless spenders.

Financial dependence in post-adolescence is an emerging issue as young adults extend the amount of time they live in their parents’ homes, often to cope with college debts and inadequate employment options.  Young adults whose parents provide financial help tend to develop dependency. In contrast, the offspring of people with fewer financial resources – who can’t help their children – learn more quickly to become financially independent. …
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Guy in front of chalkboard with equations

Your Social Security: 35 Years of Work

This blog is for a part-time Macy’s saleswoman and immigrant whom I met in a hospital waiting room – she’d never heard of Social Security.

It is also for a 22-year-old contingent worker I know who lacks steady employment and isn’t regularly accruing credit toward the Social Security pension he will probably need when he retires.

And it is for a 62-year-old eager to claim his benefit right away, possibly short-changing his retirement.

A substantial share of retirees would fall into poverty were it not for the Social Security program passed during the Great Depression.  It’s especially important for two groups of people to understand how Social Security calculates their pension benefits: young adults making employment decisions that will impact them decades from now and older people figuring out when to retire.

Yet research shows that many people do not know the basic workings of a program that is crucial to their financial security.

Steve Richardson, a Social Security official in Boston, holds regular seminars to explain the pension program to the public. “The first thing I ask is – before I say my name – ‘How many people in this room know how many years Social Security looks at to determine your pension payment?’

“Not many of them know it’s your high 35 years of earnings.”

To qualify for a pension benefit at all, a person must work full- or part-time for 40 quarters – a total of 10 years. That’s not a difficult hurdle for most to clear during decades in the labor force. What’s central is the size of your future benefit check, which is determined by your highest 35 years of indexed earnings, Richardson said – and that brings us to the math thing. …Learn More

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