Saving

  • WHAT SHOULD I DO WITH EXTRA SAVINGS?

    Covid-19 has impacted society and how we go about our day to day lives in many ways, and we will discover more changes as long as it remains a threat without a successful treatment or vaccine. Quarantines, reopening, subsequent outbreak related shutdowns, and looming waves of infection all have the capacity to change our behavior in ways we can’t predict. We have already seen the largest spike in unemployment in the history of the U.S. and some of the largest bailout/stimulus/aid packages passed in record time.

    One somewhat surprising financial effect has been the increased personal savings rate. The rate jumped from 8% in February up to 13.1% in March and according to the U.S. Bureau of Economic Analysis it hit a record 33% in April. I guess an increase shouldn’t be too surprising given that due to stay at home orders people weren’t able to spend at many of the places they usually do like restaurants and bars, and people with small kids didn’t have to pay for childcare (but still had to find a way to care for kids and get work done, if this is you, I’m in the same boat and I feel for you). Still, the magnitude of the increase is a bit shocking.

    If you are part of the lucky group with stable employment and you’ve seen your savings balance go up, what should you do now? Blowing it on stuff you don’t need from Amazon might seem appealing, but there are probably better uses for your excess cash.

    Create an emergency fund

    Step number one in all of personal finance is earn more than you spend, and step two is to set some cash aside in case of future emergencies. If you are someone that’s been operating right on the edge between income and spending, take this time to build up a cash cushion. The old statistic that 40% of people can’t afford a $400 emergency is said to be false, but that doesn’t mean that everyone is sitting pretty with plenty of savings, or wouldn’t be in a bad spot if they had to replace the transmission in their car tomorrow.

    The recommended emergency fund amount is between 3-6 months of expenses depending on your personal comfort level and situation. Chances are that the increased savings you may be experiencing is not enough to fully fund 3-6 months of expenses and that’s ok. Start by making a deposit to this fund and continue adding to it over time.

    If you already have an emergency fund that you felt comfortable with heading into 2020, right now when the world is so uncertain is the perfect time to re-evaluate. Make sure your risk tolerance and comfort level aligns with the amount you have in savings. I think it’s helpful to think back to how you felt when the shutdowns started and everything was so uncertain when considering the correct emergency fund amount for you. I am not advocating for people to pull all of their money out of the stock market and keep it in cash, but having a decent emergency savings account, might come in handy and help you sleep much better in the coming months. Especially when it seems extremely likely that we will continue to deal with more uncertainty going forward.

    Review your spending habits

    It’s rare in life that someone or something mandates that you stop doing anything inessential. But that’s exactly what happened when the coronavirus shut downs occurred. Most of us had between 1 to 3 months of time where we were not allowed to do much outside of the basic functions of eating, sleeping, working, and caring for our children.

    It was definitely frustrating in the moment when you couldn’t go out and grab a meal at your favorite restaurants or get coffee in the morning before heading to work the way you would normally do. But it also offers an opportunity to take a look at your spending pre-shut down and more mindfully consider what actions you want to continue or change now that life is moving back in the direction of normal, or at least our new normal.

    Maybe during quarantine you discovered how much you like cooking for you and your family at home during the week. Or maybe you discovering how much you were spending on snacks and coffee and other things throughout the throughout the week. Or maybe you’re surprised that the extra money you have in your bank account because you were not able to head to happy hour for drinks 2 to 3 times a week like you previously were. On the flip-side you might realize just how much you relied on your weekly yoga session to destress after your work week, or how much your weekly date nights out helped you and your partner connect.

    The quarantine has provided a great chance to review how you spent your money and time before and consider if there are any changes worth noticing. It’s perfectly fine not to make any changes after life gets back to normal, the important part of this process is taking a mindful look at how you were spending in both situations and making sure that you’re aligning your money with your goals to live your best life.

    Give to those that need it the most

    If you’re fortunate enough to be in just as secure a financial position today as you were in February 2020 that’s great, but the effects of coronavirus and the shutdowns have impacted some people much more than others. The economic effects have impacted people unequally based on race, income and education. Those with higher income and higher education levels have seen minimal effects to their financial well-being. They have been able to continue working and in many cases working from home. The shutdown has more severely impacted communities of color and less educated workers who have seen a much higher rate of unemployment since the start of the shutdowns.

    If you are in a position to donate, now is a great time to give to charities that are helping those hit hardest during this time. There are many organizations that could use your help supporting the work they do. World Central Kitchen has been working to feed people during the coronavirus crisis, you can also support Feeding America or use their site to find local food banks that would gladly accept your help as well.

    Along with the increased economic impact that they have to deal with, minority communities have been disproportionately hit with the health impact of coronavirus as well. Blacks and Latinos are more likely than Whites to be infected by the coronavirus and are more likely to die as a result as well. The protests around the murder of George Floyd have helped shine a light on the systemic racism and injustice that these communities must deal with everyday. One small way you can help is by donating to Black Lives Matter, the NAACP Legal Defense and Education Fund, and the Loveland Foundation or another charity working to promote racial equity in the U.S.

    There are many causes and people that can use your help even more these days than in the past. I strongly recommend finding a way to support organizations like these or others that are important to you if you are able.

    Plan for future goals

    One of the most impactful things that you can do with any unanticipated cash is to you give yourself a head start on achieving your future goals. Putting a healthy chunk into savings account for a future house down payment, or maxing out your Roth IRA contributions for the year as well as getting a start on next years are great uses of excess funds.

    As they say compound interest is one of the most powerful forces in the universe, and it’s made even more powerful the earlier you put it to work. Giving yourself a head start on savings allows compound interest to work for you for longer and potentially reach your goal much more quickly.

    Don’t Look Back With Regret

    However you choose to spend your coronavirus savings windfall please do it wisely. There are still plenty of ways to spend and as the U.S. opens up it will be tempting to go wild or fall back into default spending patterns without realizing it. The worst outcome financially would be to look back at this time with regret that you wasted this opportunity to build up your savings, help others or set your future self up for success.

  • 4 NEW YEARS RESOLUTIONS THAT FAIL AND HOW TO FIX THEM

    We are 3 weeks into 2019 and if you set any resolutions for the new year you’ve probably given up or forgotten all about them by now. Don’t feel bad, you’re in the same boat as everyone else. We humans are bad at making and sticking to resolutions, especially if they are non-specific and tied to an arbitrary date like when the Earth completes full revolution around the sun.

    The secret to crafting resolutions that stick is to make them SMART: Specific, Measurable, Action oriented, Realistic, Timely. Most resolutions that fail do in part because they don’t have enough of these attributes. They’re too broad, “what does lose weight or get in shape mean?”. Or they aren’t realistic, “are you really going to run a marathon this year if you haven’t run more than one mile in 2018?”.

    Here I’m going to go through 4 typical failure prone resolutions and how you can structure them SMART-ly to ensure success!

    1. Embark on a no spend January

    This is a popular resolution because we just finished with the holiday season and all of the orgiastic consumer spending that entails. Most of us start January looking at our bank balances and credit card bills thinking that somethings got to change. Going cold turkey by only spending money on the essentials seems like the best bet.

    This resolution is specific and measurable, but it’s not very realistic, one of the hallmark problems of a New Year’s resolution.

    The problem is the binary nature of the resolution. Once you commit to buy nothing other than the essentials, one of two things start to happen. You start to backslide on what you categorize as essential – “Well I really need that double mocha frappe latte because I need the caffeine kick if I’m going to get anything done today” – until you’re back to your old spending patterns. Or the first time you fall off the wagon and buy something you don’t really need, you say “screw it” and give up on the rest of the resolution.

    What you should do instead

    Resolve to use the 48-hour for non-essential purchases and track your subsequent spending. This resolution is still specific and measurable, while also being more realistic and achievable.

    How does it work

    When you think you need to buy something, set a 48-hour timer. After two days, consider the item again and whether you still need it. Often, you’ll find the initial desire to purchase has passed and you find you don’t actually need it. But if you do need it, then you can make your purchase guilt free.

    The second part is to track your spending on these items, especially on things that you purchase while bypassing the 48-hour rule. By tracking what you spend and buy, you can build that into your budget, or set limits to help yourself in the future. Like, no browsing amazon.com after 11pm at night.

    2. Start exercising

    Another all-time favorite resolution. If you do an online search for popular resolutions this one appears on almost every list. After the extra eating and drinking during the holidays, all of us could do with a bit more exercise.

    We start with the best of intentions. The first visit to the gym is great, we feel awesome after spending a half hour on the treadmill and moving some weights around. The next few trips don’t give us quite the same rush, and by the second or third week of January it just feels like too much effort to go to the gym after work.

    This one is action oriented, but not very measurable, or realistic if you don’t happen to enjoy going to the gym or running during the cold winter months.  

    What you should do instead

    Find an active hobby you enjoy and sign up for classes or schedule events at specific times.

    How does it work

    Everyone knows they should get more exercise, but for most people the initial good feelings you get of going to the gym wears off after the first few visits. Rather than spending money on a gym membership that you won’t use, the better bet is to find an active hobby that you enjoy doing instead.

    Even if you spend a bit more money signing up for a weekly tennis or soccer league, you will get more in value than the gym membership you paid for but didn’t use. By signing up for a group class, team event, or scheduling another weekly hobby like a snowshoe outing you add specificity and timeliness to your resolution as well.

    3. Stop eating out as much

    It seems a lot of these resolutions deal with the aftereffects of all the overspending and overeating during the holidays. Or maybe that’s just me?

    On the face of it this is a great resolution for your health and your wallet. Spending less on meals at restaurants leads to a better budget and eating healthier food at home as well. But this also lacks in measurability and realistic aspects. Similar to vowing to “work out more” it’s easy to backslide after a few days or weeks and especially after a long day at work when you’re fridge is out of groceries.

    What you should do instead

    Meal plan at the beginning of each week, but allow yourself two makeup days for when life gets in the way.

    How does it work

    It’s better to allow and budget for one or two meals out per week if you know that by Thursday you get swamped at work and won’t have the energy to make dinner at the end of the day. Resolving to make a plan at the beginning of each week improves the action orientation and giving yourself the option to have a cheat day or two during the week makes it much more realistic that you will stick with it and achieve your goal of reducing the amount of times you go out to eat.

    4. Build up your emergency fund

    Ok, I lied, this is one resolution you should definitely put on your list, but there are ways we can SMARTify it to ensure that we achieve our goal.

    A good emergency fund target to shoot for is having 3-6 months of living expenses on-hand. If you currently have $2,000 and you need to build up another $4,500 to feel comfortable, a good way to structure your resolution is by resolving to put $375 every month into your emergency savings account. An even better way is to do this automatically by setting up a monthly auto deposit into your account. This resolution is specific, measurable, action oriented, realistic and timely. Boom! Nailed it.

    If you’re looking at your finances and thinking you should have structured some 2019 resolutions around making a budget, paying off debt or organizing your bank accounts give us a shout. We’re happy to talk and the first meeting is always free!

    Here’s to a year of growth, health and adventure!

  • MARKET CORRECTIONS ARE HEALTHY AND NECESSARY

    Looks like we’re in bear territory now!

    With the stock market’s historic growth that began after the recession in early 2009, many experts believe a 10% pullback would be a healthy sign for the markets going forward. This sort of drop is not horribly painful, especially by historical standards, and in order for the stock market to keep advancing there must be at least a risk of decline.

    Why is a market correction healthy and beneficial? After all, most people are counting on continued gains to be able to meet their goals. The main reason is that it prevents a stock bubble from forming. Bubbles occur when stock prices rise so far that they are clearly out of line with the earnings potential, and value, of the underlying companies. We saw the consequence of that in the awful 2000-02 and 2008-09 market wipeouts, when some people lost half their wealth or more.

    Certainly, market corrections never feel healthy when they occur. It seems people only think it’s a healthy correction when it is other investor’s holdings that are affected. People get fearful as the market declines, the media fan the flames by giving investors reason after reason to be afraid, and worries that this is the beginning of the next crash begin to develop.

    While many investors admit that a 5% pullback is manageably unpleasant, concerns expand when the market decline hits 10%. That’s what customarily constitutes a correction. In the most recent sell-off, at the beginning of this year from January 26th to February 8th of 2018, the S&P 500 index fell 10.2%. The market barley crept into correction territory, but then rebounded and went on to have several days of all-time highs later in the year.

    In a great post at awealthofcommonsense.com, Ben Carlson looked at the S&P data going back to 1950, and found 28 time periods when stocks fell by 10% or more. So, on average, the market has experienced an official correction every 2.25 years.

    S&P Losses of 10% or More Since 1950

    • Total Occurrences: 28 Times
    • Average Loss: -21.6%
    • Median Loss: -16.5%
    • Average Length: 7.8 Months
    • Greater Than 20% Loss: 9 Times
    • Greater Than 30% Loss: 5 Times

    As you can see, the average post-1950 market correction lasted just under eight months and the median total loss was 16.5%. But what about steeper declines?

    Out of the 28 times the S&P 500 decreased by 10%, the market went on to decline by 20% – the standard definition of a bear market – only nine times (32% of the time), and a loss greater than 30% only five times (18%). The data confirm that, although these types of large losses do occur, they really are the exception.

    Here are the past 12 corrections in the S&P 500 Index, according to Standard & Poor’s:

    Can you Stomach a Correction?

    Are you thinking: “I don’t think I can stomach a drop of 16.5%.” Then that’s where the wisdom of diversification and having a financial plan becomes apparent. Remember that the data above represents the historical performance of the S&P 500, an index composed of 100% stocks.

    Working with a capable financial advisor can help ensure you have an asset allocation mix of stocks, bonds and cash that reflects your tolerance for risk. A riskier portfolio tilted more heavily towards stocks will perform worse than a conservatively balanced one if you panic and sell when the market declines.

    Even for a younger investor, your portfolio likely shouldn’t consist of 100% stocks. The appropriate allocation for an average investor in their 30s or 40s might be closer to 80% stocks. This means that your portfolio should suffer a drop of around 13.2% during the median market downturn. If that number still makes you queasy, consider having a conversation with your advisor about the amount of volatility you are comfortable enduring within your portfolio.

    By making adjustments to your plan: boosting savings, changing goals, or altering time horizons; you should be able to construct an asset allocation that allows you to rest easier during these periods of market turbulence.

    Although the recent market pullback might create anxiety, media headlines and possibly fear, remember this: we’ve been here before.-source for market data included in this article: “When Stocks Fell 10%…” Ben Carlson. https://awealthofcommonsense.com/2018/10/when-stocks-fell-10/

  • 9 SMART USES FOR YOUR TAX REFUND

    If you have a refund check coming your way, consider using it to bolster your personal balance sheet. The average refund is usually around $3,000, and most people receive the money within three weeks of filing their returns (I filed our taxes a few days before the April 17 deadline and received ours in a little over a week, woo!).

    So, chances are you have a nice chunk of change in your bank account right now, do you know what you want to do with it? If you don’t have a plan in place, you might end up making a few flashy purchases, spend a bit more money than usual for a few weeks, then regret not putting it towards something more meaningful once that surplus is gone. Here are nine good things you could do with the money.

    If your refund was substantial, consider giving yourself an immediate raise by adjusting your tax withholding to increase your take-home pay. You’ll see more dollars show up in your paycheck and lessen the amount of that interest free loan you give to Uncle Sam.

    PAY OFF CREDIT-CARD DEBT

    Using your refund to pay off a balance with an 18% interest rate is like earning an 18% return on your investments. I’ll take that all day, every day.

    REBUILD YOUR EMERGENCY FUND

    It’s a good idea to keep three to six months’ worth of expenses in an emergency fund, so you don’t end up in debt or have to raid your retirement funds if you have unexpected expenses. If you’ve had to tap the fund over the past few years, you can use your refund to help build the account back up. Keep the money easily accessible in a savings account or money-market account that earns some interest.

    BOOST RETIREMENT SAVINGS

    You can contribute up to $5,500 to a Roth IRA for 2018 (or $6,500 if 50 or older) — and withdraw the money tax-free in retirement. You can contribute the full $5,500 as long as your income falls below $118,000 if you’re single, and $186,000 if married filing a joint tax return. You can make a partial contribution if you earn less than $133,000 if single or $196,000 if married filing jointly. If you work and your spouse does not, you can also contribute to a Roth IRA in his or her name if your joint income is within those limits. Even if you earn too much for a Roth, you can contribute to a nondeductible traditional IRA, then convert it to a Roth.

    BUILD YOUR COLLEGE SAVINGS

    It’s always hard to juggle saving for college and retirement. Here’s an opportunity to use your extra money to contribute to a 529 account. You’ll be able to use the money tax-free for college bills, and you could get a state income-tax deduction for your contribution.

    HELP YOUR KID SAVE

    You can use the extra money to contribute to a Roth IRA for your child. Your kid is eligible as long as he or she has earned income — from mowing yards or babysitting, for example. Your child can contribute up to $5,500 or the amount of his or her earned income for the year, whichever is lower, and you can give him the cash to do it.

    MAKE HOME IMPROVEMENTS

    Your refund won’t be enough to redo your kitchen or bathroom, but it can pay for some smaller home improvements. Use the extra cash to add a backsplash, paint a room or cabinets, replace your bathroom sink, swap out your faucets, organize a closet, install a programmable thermostat or spruce up your yard.

    SAVE FOR SOMETHING SPECIAL

    Set aside some money for vacation rather than using your credit card and paying interest long after you have returned. Or you can use some of your refund to start saving for holiday gift-giving or help with other short-term goals, such as for a down payment on a new car.

    MAKE AN EXTRA PAYMENT TOWARDS YOUR HOME LOAN

    If you are on track with your other savings and investing goals for the year, consider making an extra payment towards your mortgage principal. Making an additional principal payment on your mortgage earns you an instant return the same way paying off your credit card balance does. Your personal balance sheet consists of all your assets and liabilities, it’s important to grow your assets (investments) for use in retirement, but don’t neglect the other side of the ledger either.

    GIVE TO CHARITY

    If you have your financial bases covered, consider using your refund to make a charitable contribution to help others in need. You’ll feel good — and you’ll be rewarded for your good deed when you file your tax return next year (charitable contributions are deductible if you itemize).

    You also can use your refund to help accumulate enough money to open up a donor-advised fund. Most funds require a minimum of $5,000 to $10,000. You can claim a tax deduction in the year you make a contribution to the fund, but you have an almost unlimited amount of time to decide which charities to support.