Tag Archives: savings

Your best financial behaviors

I have covered a variety of financial topics in many posts, but it has come to my attention that there is one topic that is the foundation of financial education. Everyone has a philosophy of life, habits, proclivities, and leanings towards various ways that they live life. This applies to money and our spending habits as well as our beliefs about money. This concept is known as behavioral economics, and this is prevalent in our day-to-day life in ways that you may not realize.

Behavioral economics studies the effects of psychological, cognitive, emotional, cultural, and social factors on the decisions of individuals and institutions and how those decisions vary from those implied by classical economic theory. This studies how people react when markets and other economic changes drive decision-making made amongst consumers. Common examples of this would be the supply and demand of PlayStation 5 consoles. There is consistent demand for the consoles and the supply is never stable enough courtesy of scalpers and others who have bought them. This would drive the consumer to either wait for the demand to drop and supply to increase (such as yours truly) or pay a higher premium for one from another source such as eBay. Another example would be the toilet paper shortage during the beginning of the coronavirus pandemic among other supply shortages courtesy of panic buying considering world events and fears of lacking supplies for survival. These purchases were made based on scarcity, excitement, and fear. Scarcity makes a consumer value something more because it’s in limited supply and some might be willing to pay more for it or if one is willing to wait, they can delay that gratification until a later date.

Our beliefs about money can be formed by the market as well as by those around us. Growing up, we’ve all seen how our parents have handled money and their financial choices for better or worse. These experiences can shape our own viewpoints and we can also study more on our own to learn more about finance. From a coupon clipper, a shopaholic, a minimalistic saver, or a person who likes to enjoy the finer things in life. This can be found in our spending as well as investing style from a more conservative investor buying growth/value stocks to a more aggressive investor looking for growth in more speculative stocks. Some may be more risk and loss averse while others may not be and that can shape decision-making in terms of investing and spending. Some may be more prone to impulse and spend their funds for whatever might be seen. Some may subscribe to the prospect of hustle culture and building streams of income. Some may be more content to have the essentials and nothing more and that is fine for them. Others might think that wealth corrupts and might be more financially inclined to not aspire for wealth to excess. Our social circles also can help determine our financial potential. From friends who always go on lavish nights on the town to those who are content to have a game night a home. The choices of those around us can be another influencing factor.

No matter the school of thought regarding money, it is imperative that we continue to educate ourselves about how money works and how to leverage it as needed. Without proper financial education, there is stagnation and no growth. Without that growth, we cannot reach our full financial potential in whatever walk of life we may be in. I encourage you, dear reader, to evaluate your feelings when making your next purchase. Is it vital to survival? Can the purchase be delayed if needed? Can you afford to go out on the town with friends? Are you hitting your savings and investing goals? I urge you to examine your spending habits and evaluate your goals and see how you can reach what you are seeking to accomplish financially. Until the next time dear reader. Excelsior!

In your best interest

Interest Rate Definition

You hear about it, you probably pay it, you probably get paid in it. Love it or hate it we are going to talk about interest, what it is and how to make sense of it. Interest is a simple concept but there is often misconceptions about it and confusion. Let us get started in debunking that confusion.

Interest is payment from a borrower or deposit taking institution (such as a bank) to either a lender (someone who you took out a loan from) or a depositor (someone who puts money in the bank) above the principal sum (the original amount of the loan or deposit).at a particular rate. It’s not like a fee which gets paid to a lender and it is not like a dividend that is paid to a shareholder. When interest is paid to a lender or a person depositing money in an interest-bearing account more money comes out on the principal balance. The rate of interest  is equal to the interest amount paid or received over a particular period divided by the principal sum borrowed or lent usually expressed by a percentage (such as the annual percentage rate for loans or average percentage yield on interest bearing savings). Wen dealing with interest you also have compound interest (this is the fun one to get paid but not so fun if you are the one paying) which makes the total amount of the debt grow. Interest can be compounded daily, monthly, or on a yearly basis and the impact is affected by the compounding rate.

When dealing with interest you have some rules of thumb to consider. First, the rule of 78s which helps with calculating interest during the life of the loan as you pay on it. (i.e. on a 1 year loan in the 1st month 12/78 of all interest owed over the life of the loan is due and so on and so forth until the 12th month where only 1/78 of all interest is due. The rule of 72 can be used to approximate how long it would take for money to double at a given interest rate, for the compounding interest to reach or exceed the initial deposit, divide 72 by the percentage interest rate. When dealing with interest you always have options to refinance as well as find interest bearing accounts for higher interest to be paid. There are more technical aspects to interest as one looks into the markets and economics outside of the simple aspects of getting pair or paying interest but that is a topic for another time.

Until the next time, stay safe and continue to learn. Excelscior!

Beneficiaries: Assigning your money to infinity from beyond

What Is a Beneficiary and How Do I Choose One? | DaveRamsey.com

In my few years in my banking career I have seen many things but one thing that breaks my heart it is seeing someone without a beneficiary for their funds. This simple step can lead you to avoiding months if not years of hassle with the courts (or even court costs if necessary). It is relatively simple process that I preach on constantly whenever I see it, so get ready for me to get back on my soap box once again.

Intellectual Property: Don't Forget to Cover Your (Other) Assets ...

During this trying time, bank accounts, insurance accounts, brokerage accounts, retirement accounts, you name it. The sheer number of financial institutions that count us as customers may seem staggering and in the rush to open an account, we may have forgotten to add a beneficiary, or even simply postponed that last little detail until it was more convenient (or maybe someone hasn’t thought of one yet). Simply taking the time to ask about it, either you or the agent, will help move the conversation in the right direction for several reasons.

The first reason is that you want to make sure you want the people of your choosing to inherit your money. The person you can list can be a spouse, a child, a relative you trust, or even your trust (we’ll come back to that later don’t you worry). By naming your beneficiaries, you ensure that your money goes where you intend for it to go. That could be to a relative who really needs the financial assistance, a charity that’s close to your heart or whomever you want the money directed to. Without clear directions as to your wishes, executors or the state will follow only what the law says in distributing your assets and that’s not fun. You can name as many beneficiaries as necessary to split the proceeds as well if you would like as well. But do keep in mind if a beneficiary passes or any circumstance arise to compromise the beneficiary that these can be changed in most cases. This way everyone can speed up the probate process (because probate court is not a fun time for your family or the financial institutions reporting process) in addition there’s less going to a court appointed estate to be taken care of.

Legacy Planning Advisors, Inc.

The second reason is being able to update it on an annual basis. If you’re married, you can almost always change the beneficiary of your accounts without your spouse’s permission. In fact, this is one of the first recommendations I make in a divorce process. The worst that can happen is being forced to put the beneficiary designation back to the previous spouse if ordered by the court or other arrangements. You can change a beneficiary so make sure to periodically check to see if you have a beneficiary listed or if you need to change or add one (my recommendation is once a year or every six months if needed.) This will help for several reasons: 1) it keeps your information up to date 2) you can also use this way to limit family fighting over your assets once you’re gone. 3) Beneficiaries trump wills as well, so make sure you plan accordingly. (contact your estate planer regarding this to make sure things are done appropriately.

 Naming a beneficiary is an easy thing to skip over when opening an account, but this small step can save a huge headache – and potentially a lot of money – later. So take an inventory of your financial accounts today, and ensure that your wishes are up to date. Then resolve to keep the accounts updated annually so that you continue to avoid problems for yourself and your heirs. During this time, I urge you now, more than ever. Please get your beneficiaries in order if you haven’t considered it before because we are all human and a simple two-minute process can help save your loved ones from a longer time trying to take care of your estate. Until the next time friends. Stay safe and healthy, Excelsior!

Mucho Mullah Money Markets

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Savings accounts come in different shapes and sizes. One very good savings account type is a money market savings account. A money market account or money market deposit account is a deposit account that pays interest based on current interest rates in the money markets.

Now I am sure you are thinking “if markets are in the name doesn’t that mean my money is in the stock market?”, not quite my friend; those are money market funds that invest in money market securities. That is another animal to tackle later. These are governed similar to regular savings accounts. They are insured by the FDIC (unlike money market funds) and, although they may provide checking services, the restrictions of Federal Reserve Regulation D, a federal law that limits transfers and withdrawals from money market accounts, discourage their use for day-to-day payment purposes. In practice, money market accounts are distinguished from ordinary savings accounts by their higher balance requirements and more complex interest rate structure.

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A money market account is like having a savings account with the flexibility of a checking account. And it almost always offers higher-than-usual interest rates (as an annual percentage yield) than savings checking accounts. You can write checks off a money market account and even use a debit card in some cases. These accounts are also insured under NCUA/FDIC as well

The downside is that with a money market account, you only get six transactions (transfers or withdrawals) per month, or per account cycle of at least four weeks. A transaction could mean writing a check, moving money from one account to another, or using a debit card to make a purchase. If you go beyond the transaction limit, you may get hit with a fee. For example, US Bank charges $15 each time you go over the limit of six. In addition to this, some will give you fees or not give you dividends for dipping below a minimum balance for the account. These are also subject to inflation as well and that could increase or diminish returns.

These accounts work very well with those who keep high checking balances, write few checks and make few debits out of their account each month, and desire to keep funds as liquid as possible if you have no interest in an IRA or a CD. These work very well for those that want to get the most for their money and save for special purposes as well such as an emergency fund, a vacation, a wedding or a new vehicle. There are other alternatives to these accounts such as rewards checking accounts, high yield savings, and even passbook savings accounts. These accounts have competitive rates, do some research and find what kind of accounts might work out for you!

After a month’s worth of writer’s block I hope I was able to give you an informative lesson on money markets. This month will be a double dose of learning so stay tuned for the next entry, excelsior!

 

Savings with a purpose

Savings are an important thing in life that is often neglected. Did you know the average American has less than $400 in their savings? This is an alarming number due to the simple fact that life is full of unexpected things and anything can and will happen so you must be prepared. Learning how to save no matter your situation will help you in the long run. Oftentimes I’ve heard “I’ll start saving later”, sometimes later could be too late. Too often do we wonder “where has my money gone?” it’s time to stop wondering and time to start telling your money where it needs to go. With that, there is no time like the present so let’s begin, shall we?

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The first step in achieving your savings goal is to make a budget. Making a budget isn’t difficult, but it can seem daunting if your finances need a big overhaul and you’re desperately trying to build up your net worth. There are plenty of helpful budgeting tools to get you on the right path, but the most important thing to remember is to make your budget realistic. When you’re trying to decide what to cut from your current spending, look for things you know you can live comfortably without. That means getting rid of your magazine subscriptions, cable, home phone, trips to the nail salon, or anything else that’s more of a want than a need. After you’ve made those cuts, divide your income into three piles: one to pay your bills and necessities with, one for savings, and one just for fun. Too strict of a budget will drive you crazy, and the best way to maintain good financial habits is by rewarding yourself, even if it’s just with a fancy latte or new outfit from time to time. It’s important to keep yourself financially healthy but it’s also important to treat yourself from time to time for your hard work.

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One thing to keep in mind is your why: why are you saving? Keep a goal in mind and you’ll be more likely to reach it by tracking it with your budget.  Even if you make the most amazing budget in the world, without setting any specific savings goals, the chances of you sticking to your budget are slim. Do you want to save up to buy a home? Pay down your student loan or credit card debt? Quit your job so you can backpack around Southeast Asia for a year? Keep yourself a rainy-day fund?  Whatever your goals are, give them price tags and deadlines to give your budget purpose and to keep you motivated.

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There are several “terms” of savings to keep in mind here: emergency, short term savings, midterm, long term, and retirement. The emergency fund is, as the name implies, is for EMERGENCIES only. Things such as your car breaking down and needing repair, your furnace at home breaking, medical emergencies and other things of that nature. When life throws a wrench into your works you need to be prepared to get the wrench out.

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Short term savings are for things you know are coming up very soon (like within the next weeks or months up to 3 years max) these funds are readily available to be used for things that are small but you know they’re things that could happen but you are prepared for them. I call it the “surprise!” fund but others could call it the sinking fund. Things that pop up such as a family member in need, a bridal shower gift you forgot to get, or things to that extent. This is commonly referred to as the sinking fund which is separate from the emergency fund due to it being something you can use for more fun things as well such as a vacation.  Ideally, you want to be prepared for big emergencies, so the “surprise” fund is something I’d put second to your emergency fund.

Midterm savings are things you would plan for that aren’t an immediate event such as buying a new or used vehicle cash or having the startup funds for a business. These things are a year to 5 years out even up to 10 years. Instead of getting into debt with a loan it can help to establish savings for those big-ticket items so that way you have little to no debt for those larger expenditures.

Long term savings are more dedicated to things happening 10 or more years out. One such thing would be your planning to buy a home. Some save up for cash down payments on their home and you can also buy your home outright depending on the home’s price. A good way to ensure good savings for this goal would be a CD so your money is earning more interest while you’re waiting or placing it into an investment fund on some sort depending on your risk tolerance.

Another form of long-term savings is your retirement savings. As I mentioned with my previous IRA series you also have your 401k if your employer offers it or any other type of employer-sponsored retirement plan. You can also invest in a mutual fund or brokerage account with countless firms and funds for your retirement supplementation. Your employer might offer you matching for your retirement plan, it would be ideal to take the maximum match for stuffing your nest egg. Fidelity recommends placing at least 15 percent of your income into a retirement plan, this sounds like a lot but with payroll deductions and automatic transfers into such an account, it makes it easier to put away for retirement.

 

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I know what you might be thinking: how do I do that with all my different expenses and such? The answer lies in several different methods. One method would be having multiple savings accounts for your different purposes, akin to Dave Ramsey’s envelope system but only digitally. Setting up automatic transfers into these separate savings accounts will help you fill the different buckets for achieving your goals. Other cool tools are CDs for mid and long-term saving tools that you cannot touch without penalty to give you more incentive not to touch the money you’ve purposed. Even establishing a separate account for out of sight out of mind savings helps keep you honest and on task.

I hope this basic overview of savings helps spark an idea as to how you can save money for your future. Money is the most renewable resource that someone can obtain. No matter how much you earn you can save with a plan and dedication. Commit to save and you can achieve your goals. That is all for now, until the next time, invest wisely my friends.

IRA contributions

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In my last entry, I went over what IRAs are and why they matter. This entry will cover contributions to your IRA. You can’t retire without money and to fund an IRA you need to make sure you’re able to stay within certain limits set in place by the IRS. I know what some of you are thinking: “why do I have to limit what I put into my IRA? It’s my retirement money after all!” rest assured I will explain what this entails shortly.

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As of this year, the IRS limits up to $6000 to be placed into an IRA each calendar year for regular contributions and $1000 max for catch up distributions. People with eligible compensation (like your earnings from work) of less than their max contribution can only contribute into their IRA equal to their work wages. You can also own a traditional and a Roth IRA, but you cannot go past the $6000 annual limit. Additionally, if you’re 50 or older before the end of the tax year you can make a catch-up contribution into your IRA as well. The deadline for contributions (regular, catch-up, prior year, etc.) is April 15th to the following calendar year.

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To contribute to a traditional IRA, you must be less than 70 ½ years old and eligible earned funds (usually from work) to place into the IRA. The same rule applies if your spouse wishes to contribute to your IRA but in addition, they must file joint on their tax return with you. Now there are factors regarding your contribution regarding deductions on your taxes. Such factors include having an employer sponsored retirement plan (i.e. 401k), marital status and modified adjusted gross income. Your financial custodian over your IRA cannot determine or track deductible contributions so keep that in mind as you contribute this will need to be done yourself. To further break down modified adjusted gross income you will want to make sure to account for having an employer sponsored retirement plan because there are different ranges for those different income tiers. The same rules apply to Roth IRAs as well. Roth IRA accounts can also receive transfer contributions, rollovers, and conversions (from traditional to Roth and vice versa). Your income has phase out ranges for Roth IRA contribution eligibility, this means however much you make could disqualify you for making a Roth IRA contribution. If your adjusted gross income is within the proper phase out range, however, the eligible contribution amount for a person is reduced. These levels can vary from year to year.

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For financial organizations accepting IRA contributions it is required that they keep records of the contributions, the type and the year it was made. This is important for your records and on a typical form for collecting information you’ll see things pertaining to the IRA type, how much you’re putting in, the contribution type and when it was made, as well as any other info including your signature for the records. These contributions can also be reported to the IRS via a form 5498 and have their own tax form for each year you contribute. this information is compared to an individual’s income tax return to determine what’s taxable or tax advantaged as well.  Under some state laws it is possible to have a saver’s credit for contributions (see your states contribution rules for this). Typically. these are low to moderate income individuals and the credit is typically nonrefundable and not to exceed $1000. This is based on the annual adjusted gross income figures calculated by the IRS and cost of living adjustments. To be eligible you must be 18 before the end of the tax year (April 15th), not be a dependent or full-time students (sorry kiddos) and have adjusted gross income in the acceptable limits (depending on the year this could vary). This info can be found on the IRS publication 590-A and 8880 for credit for qualified retirement savings contributions.

I knew I threw a lot of material at you today, I wanted to condense this as best as possible. Tune in next time when I discuss the distributions from an IRA and what that means to you. Until then, invest wisely my friends, ciao!

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IRA Fundamentals part 1: Introduction

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An introduction

All good things come to an end. Nothing lasts forever, not even diamonds if you ask me. We all age, get a little slower and eventually can’t work to the same level we used to. It’s time to discuss the important topic of retirement. I know it’s something no one usually thinks about but it’s a thing that you should probably consider if you haven’t thought of it already. Time stands still for no one and each passing day is an opportunity lost fore retirement savings, allow me to share a little savings tool known as the IRA.

An Individual Retirement Account, IRA for short, is a special domestic trust, custodial account or annuity established for saving for retirement. This is not a CD, a money market account, or any special type of investment (though you can make investments held under the IRA, more on that later). These types of accounts are established in banks, credit unions, loan associations, insurance companies, brokerage firms or any organization that can demonstrate they can lawfully administer the trust.

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Retirement savings

IRAs were created to help supplement retirement savings, promote economic growth, and lessen the burden on social programs (SSI, SSA, etc.). Most people will have 4 primary sources of income for retirement: 1) social security income 2) employer sponsored retirement plan benefits (i.e. 401k) 3) IRA and other personal savings and 4) wages. Some people will need all 4 of these retirement incomes necessary to retain their current lifestyle after retirement.

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IRAs and the US tax law

IRAs are subject to tax law and all kinds of fun legalities such as contribution limits and changes made by the government to make getting an IRA more desirable and increase rollovers into an IRA. There are 2 main types of IRA: traditional or roth IRA. Traditional IRAs have the benefit of being tax deductible if eligible, has tax deferred earnings and potential tax credits if eligible as well. Traditional IRA contributions are tax-deductible on both state and federal tax returns for the year you make the contribution; withdrawals in retirement are taxed at ordinary income tax rates. Roth IRAs offer tax deferred earnings, tax free earnings if there are qualified distributions and, if eligible, tax credits as well. Roth IRAs provide no tax break for contributions, but earnings and withdrawals are generally tax-free. There are other types of IRAs created by changes in tax laws such as savings match incentive programs for employers (SIMPLE) IRAs, SEP IRAs, Self-Directed IRAs, and others.

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Full disclosure

When setting up an IRA you need three key documents to provide to your customer: the plan agreement (contract) between the customer and the financial organization, the disclosure statement expressing the details of the IRA in non-technical terms, and a financial disclosure displaying the projection of the growth of the IRA investment (such as a CD, or money market account within the IRA)  if desired as well. These are provided to the IRA owner for their records and there is a copy retained for the financial organization as well.

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Ownership and successorship

When setting up an IRA you also have the option for setting up beneficiaries. As an account service specialist,  I STRONGLY recommend placing a beneficiary (or several) on your different accounts in the event of your death. Save your loved ones the trouble of dealing with the courts to get your IRA or any other account closed and add a beneficiary. With an IRA you can add primary beneficiaries as well as contingent beneficiaries in the event of the primary beneficiary passing as well. Each beneficiary will receive a portion of the IRA funds upon your death. In some states you also have what is called spousal consent; this essentially requires your spouses consent on major changes to your IRA including adding beneficiaries. Certain states adhere to the spousal consent rule, check with your financial institution to see what regulations are in place for marital /community property are in your state when setting up your IRA.

Setting up and IRA and all their Intricacies can be daunting but I am hoping, by the end of my series on IRAs, that you’ll have a better handle on what these tools are and how to use them. I will say there is a lot of tax law involved with these so depending on your tax needs I would always say do your homework and if need be seek the advice of a tax consultant if you’re unsure of what retirement plan will suit your situation. Tune in next time when I present part 2 of my IRA series, until then, invest wisely my friends.

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