January 5, 2017
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. …
December 15, 2016
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.” …
December 6, 2016
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
December 1, 2016
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
October 27, 2016
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. …
October 20, 2016
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
October 6, 2016
Starting the College Conversation Early
Parents have finished the summer college tours with their teenagers. Now comes the hard part: figuring out how to pay for college. But Judith Ward, a senior financial planner for T. Rowe Price in Baltimore, urges parents to prepare for this moment well before their child’s high school graduation to help minimize college costs when the time comes.
Squared Away interviewed Ward, whose advice comes from a combination of her professional experience and putting her own two kids through college. They are now 23 and 27, employed, and paying back modest student loan balances.
Your company’s 2016 survey of parents and children between ages 8 and 14 about paying for college points to a disconnect between what young kids are expecting in terms of paying for college and what their parents are planning on.
Yes, we found in our survey that 62 percent of kids expect their parents to cover most of whatever college they want, but 65 percent of parents say they’ll only be able to contribute some to their college. There’s definitely a disconnect. But it’s easy to rectify – just start talking to your kids about college.
Question: Can parents really talk to their kids about college at 8, 9 or 10? And what do they talk about?
In fairness to the kids who answer these survey questions, they have no idea what the cost of college is. It’s not the enormous number it is to their parents. But start when they’re young by having conversations that are not necessarily about the cost of college. Just start making college part of the conversation and sharing your own stories. That will have them thinking about college and thinking, “I’m going to be expected to go to college.” …Learn More