7 painless moves to save $1,000
Yes, it’s possible to whittle your budget without suffering. Small savings, month in and month out, can fatten your bank account without cramping your style.
It is possible to save big bucks by making small changes in your spending. At first blush, the amounts may not seem like much. However, taken together over the course of a year, they really add up.
Here are seven tips to give yourself a $1,000 raise:
1. Look for discounted dinner entrees
Saving money doesn’t mean you can’t enjoy meals at your favorite restaurants. Discounts can be found in the mail, in your local newspaper or online.
“Before you head out to eat, check out your restaurant online,” says Fatima Mehdikarimi, the founder of the coupon Web site The Shopping Queen. “Or, after you arrive, simply ask the manager if they have any special promotions. Don’t forget to ask about promotions that are offered on other days or times.”
Mehdikarimi notes that one restaurant near her home has a relationship with a local movie theater, and diners can get a discount on an entree if they present a ticket stub.
“Your restaurant might not advertise these types of specials, so definitely ask about them,” she says.
If you received a half-off-your-entree special or similar promotion a couple of times a month, and each discount was worth $5, the savings would top $120 after a year.
2. Return unopened, unused items
Many times, extra money may be even closer at hand than you might think.
“If you’re looking for extra money, your closets or drawers are a good place to start,” says John Mruz, the president of Juggling Duck Organizers in Morristown, N.J.
Nearly everyone has a recently purchased product they will never use: the too-large blouse that still has the tag on it or an unopened set of salt-and-pepper shakers that didn’t fit the kitchen decor. Try to return the item to get your money back, Mruz says.
Even if you can’t find your receipt, the retailer may accept the return for a store credit.
“I bought $90 worth of new energy-efficient light bulbs for my kitchen a few months ago — for the purpose of saving money — only to find that I had the wrong size,” says Mruz.
He meant to return the bulbs and exchange them for the correct size but didn’t get around to it right away. Eventually, he forgot about them.
“I put the bulbs in the basement, and they soon got covered over by random junk,” Mruz says. He recently discovered them when he was clearing out his basement.
“Fortunately, my home-center retailer had a generous return policy,” he says. For Mruz, clearing some clutter from his basement meant an increase of $90.
3. Look for extra grocery savings
There are several opportunities to save at the local grocery store, even if you don’t clip coupons.
“When you enter a store, check to see if there are sales ads located near the front,” says Mehdikarimi.
You might find a coupon for a purchase you were planning to make. Just make sure the sales don’t entice you to buy items that were not already on your shopping list. If you don’t find any deals at the store’s entrance, there’s still a chance to save money at the checkout counter.
“Ask the cashier if there are any coupons or specials going on that would apply to any of your purchases,” Mehdikarimi says.
Counting pennies? Here are tips to beef up that bank account and make that resolution to save money a reality.
By getting in the habit of asking about sales each time you pay for your groceries, you could regularly discover discounts for items that you were already planning to purchase. The clerk might have extra coupons on hand, or a manager who’s ringing up your groceries might let you know about a special offered on one of your brands.
Even a customer may help you if he or she hears your question and mentions a two-for-one deal that you had missed.
Another way to save is to sign up for store coupon clubs.
“Grocery stores have many programs that allow you to get discounts for purchases,” says Mehdikarimi.
If your grocer has a baby club, for example, signing up for the program could save you hundreds of dollars in diapers, infant food and other baby products over the course of a year.
If you could shave just $4 off your bill during each weekly shopping trip, the total savings would be more than $200 a year.
4. Check out materials from the library
The next time you plan to buy or rent a movie, head over to your local library instead and borrow the video for free. Many libraries stock DVDs — movie classics and newer titles — and compact discs with generous borrowing periods. If you need children’s videos, visit the juvenile area for new cartoons and educational selections.
While you are at the library, see if they have the latest book releases. Many libraries post best-seller lists, and they probably have several copies of many titles. Remember to return everything on time; libraries charge late fees just like rental stores do.
If you want reading material but you don’t want to leave home, call your local library and ask if they offer e-books that can be downloaded to your computer.
If you borrowed just two books or movies a month that you would otherwise buy or rent, you could save $120 to $240 per year.
5. Bundle cable, phone and Internet services
If you can’t live without your cable, telephone and Internet access but the monthly bills are getting uncomfortably high, consider bundling all of your services under one company.
“With the competition for cable and Internet being so high, there’s a good chance that you can negotiate a promotional rate,” Mehdikarimi says.
Just be aware that unexpected fees could be added to that low quoted rate.
“Because of taxes and other state-imposed fees, the overall savings for a bundle might not be as great as you may have been led to believe,” says Mruz. However, your bill could still be much less than if you paid for the services separately.
Even if you don’t opt for a bundled package, ask your providers for a price break.
“If your rates are too high, call some other companies to find their rates. Then call your current provider and ask them to match the price,” Mehdikarimi says. “My philosophy is that it never hurts to ask.”
If you were able to reduce your total fees by $20 a month, that would add up to $240 for the year.
6. Negotiate with monthly service providers
Once you get off the phone with your cable, Internet and telephone provider, call your alarm company, lawn-care person and any of your other monthly service providers to negotiate prices. Depending on where you live, you might even be able to negotiate natural-gas rates.
“Obviously, you’re not going to get very far with monopoly utilities, but for the companies that have competition, you can definitely negotiate your price,” says Mehdikarimi.
In each case, find what out what the competitors are charging. Then ask your provider to match the price.
Don’t get discouraged if the first person you speak with can’t approve a rate decrease. “You might need to ask for a supervisor,” Mehdikarimi says.
One tip is to call during normal business hours to increase the chances of reaching a supervisor who can authorize a rate change.
Counting pennies? Here are tips to beef up that bank account and make that resolution to save money a reality.
If the idea of negotiating for a better price sounds intimidating, remember that the conversation can be pleasant, even if you have to ask the customer-service representative to put the boss on the phone.
“The call doesn’t have to be confrontational,” says Mehdikarimi. “Remember that you’ll be in a telephone situation where you’re not looking at someone face to face. Tell yourself that they’re a random person, and after this call, you’ll never have to see them again.”
If you saved just $10 a month negotiating all your monthly services, you’d save an extra $120 a year.
7. Stash money for easier savings next year
By making these barely noticeable changes to your lifestyle, you could save as much as $1,000 over the next year. But how could you increase your savings in future years?
Bill Billimoria, a personal-finance expert and the author of “On Golden Pond . . . Or Up the Creek?” suggests letting your cash work for you.
“Take the money you saved so far and put it into a high-interest savings account or mutual fund,” he says. “Then let compounding interest do the magic.”
If you place $1,000 in an account that pays a 7% annual return on investment, the original amount will nearly double after 10 years. That means twice the money for no extra work.
Saving money by doing “nothing” can be a very lucrative habit.
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
5 lessons the rich can teach you
They don’t just have more money. They spend it, borrow it and save it in ways that might benefit you, too.
We might envy their lifestyles or their bank accounts, but very, very few of us will ever approximate their wealth.
Most of us, though, have a shot at being millionaires. In 2004, the number of households worth $1 million, not counting their primary residence, grew 21% to 7.5 million, according to Chicago-based research firm Spectrem Group.
Studying the habits of this relatively large and growing group of affluent folks can teach us a lot. These people don’t just have money; they treat it differently than people farther down the economic ladder.
The rich are indeed different
At least, so say various surveys of the affluent. Among the most notable differences:
They give away more. Charitable giving dropped sharply among the wealthy after the 2000-2001 bear market, according to Spectrem Group. Still, households with $500,000 or more in investible assets gave away 6% of their incomes in 2004, and those with net worth of $5 million, excluding primary residences, contributed 6.1% of their incomes. That compares to an average of about 2% for all American households and 4% for households with incomes under $25,000, according to American Demographics.
Talk back: Do you have what it takes to become a millionaire?
“Our clients appreciate the success that they’ve had and they want to pay it forward in some way,” said financial planner Ross Levin of Edina, Minnesota. “We have one client, a developer and his wife, who give away 50% of their income.”
They are much more likely to own businesses. Overall, about 12% of American families own all or part of a privately held business, according to the Federal Reserve, compared to 41% of those whose net worth puts them in the top 10% of households. Business assets comprise 21% of the total net worth of households who have $500,000 or more in investible assets, Spectrem said.
Closely held and family owned businesses are a major source of wealth for many of financial planner Victoria Collins’ clients, but these holdings present major challenges. It’s risky having so much of one’s net worth tied up in a single investment that could be tough to sell. That’s why Collins and other planners encourage their business-owning clients to diversify their other investments.
“Any time you have a super-concentrated position — whether it’s an individual stock or a business — you have to be concerned,” said Collins, who’s based in Irvine, Calif.
They borrow strategically. The wealthy are only slightly less likely to owe money than average folks, according to the Fed, but how they borrow is quite different. The richest 10% of Americans are half as likely to have credit card debts (22.4% vs. 44.4% overall), although the median balances for those who carry balances are about the same for both groups (around $2,000). The wealthier folks are also much less likely to have installment debt, such as auto loans (25.6%, compared to 45.2% overall).
What the wealthy often do have is mortgages. More than half — 55.5% — have a primary mortgage, compared to 44.6% of households overall. Another 15% carry loans on other real estate, compared to 4.7% of the general population.
Mortgage money is pretty cheap debt at current low rates. Although many wealthier folks can do and own their homes outright, financial planners say, many prefer to put their money to work for them in investments that can earn higher returns.
They don’t blow a lot of money on cars. Jay Leno, with his fleet of exotic cars, is the exception rather than the rule. The average millionaire does tend to spend more money on his wheels, but vehicles represent a much smaller proportion of his net worth.
Video: Weston on ‘Lessons the rich can teach us’
The Fed survey showed the median value of all vehicles owned by the wealthiest 10% of households was $25,400, compared to $11,800 for households overall. But vehicles represented just 2.4% of the wealthiest households’ median net worth, compared with 8.8% of net worth overall.
“My wealthier clients are much more likely to own an American-made SUV than a Range Rover or a (Mercedes) S500,” said Mark Lamkin, a financial planner in Louisville, Kentucky. “Most of them live a very unassuming lifestyle, but they’re able to do anything they want, whenever they want.”
They’re almost always homeowners, and many own investment property, too. Homeownership is almost universal among those in the top 10% of net worth: 95.8%, according to the Fed, compared to 67.7% overall. About 40% of the highest-net-worth group own some kind of real estate such as rental property or a second home, compared to 11% overall.
But real estate isn’t their major source of wealth. On average, principal residences account for 10% of the net worth of folks with more than $500,000 in investible assets, Spectrem said, while other real estate accounts for 7%.
Investments are king
Most of their wealth is investments:
46% in stocks and bonds, managed accounts, IRAs, mutual funds, deposits and alternative investments
10% in pensions and defined-contribution plans like 401(k)s
6% in insurance and annuities
There are also some indications that wealthier Americans are cutting back their exposure to real estate. The percentage of people with net worth over $1 million who own investment property shrank to 44% in 2005, down from 50% in 2004, according to TNS Financial Services, a market-research company.
Financial planner Deena Katz believes her clients and other wealthy folks will continue to buy second or vacation homes but may be less likely to buy rental or commercial properties.
“They’re starting to re-evaluate their real-estate holdings,” said Katz of Coral Gables, Florida. “Real estate is overpriced, and people are recognizing that.”
The lessons here aren’t revolutionary, but they’re well worth learning: Don’t be a miser, take strategic risks, live within your means, diversify. You may never make the Forbes 400 list of the wealthiest people, but you can create a richer life.
Liz Pulliam Weston’s column appears every Monday and Thursday, exclusively on MSN Money. She also answers reader questions in the Your Money message board.
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
12 steps to become a millionaire
You don’t have to own the company or be a CEO. Here’s how to build a rich nest egg one paycheck at a time.
1. Keep your eyes peeled for better ways to do your job. Streamline a procedure, shave costs, create a new profit center, become an expert on a specific topic, volunteer for a company committee — anything that will make you stand out as a prime candidate for a promotion or a pay boost.
2. Don’t be afraid to negotiate. In a study of master’s degree graduates from her university, Carnegie Mellon economics professor Linda Babcock found that those who negotiated their first salary boosted their pay by 7.4% compared with those who didn’t bargain.
3. Get your ducks in a row and your numbers on paper. If possible, quantify how much your efforts add to the company’s bottom line. If that’s not feasible, spotlight your value with comparable salaries for workers in your position from a Web site, such as Salary.com, or from a professional association.
Talk back: Do you hope to be a millionaire?
4. Plot your strategy when it’s time to move on. Create a professional-looking page on MySpace that tells prospective employers why you’re an exceptional candidate, recommends John Challenger of the outplacement firm Challenger, Gray & Christmas. And don’t neglect more conventional networking: Join a professional association or show up at school reunions toting business cards.
Milk your benefits
5. Contribute as much as you can to your 401(k) and other tax-deferred retirement plans. You’ll not only build a bigger nest egg, but you’ll also cut your tax bill. In the 25% federal tax bracket, every $1,000 you contribute to a 401(k) trims your taxes by $250. And you’ll save on state income taxes, too.
6. Flex your tax-saving muscle. Contribute pretax dollars to a flexible spending account to pay for dependent care or out-of-pocket medical expenses. If you set aside $1,500 per year and you’re in the 25% bracket, avoiding federal income and Social Security taxes means Uncle Sam will subsidize almost $500 of your expenses.
7. Review your tax withholding. If you’re expecting a refund this spring, you’re having too much tax withheld from your paycheck — and making an interest-free loan to Uncle Sam. That’s no way to become a millionaire. Put more money in your pocket by using Kiplinger’s withholding calculator and then filling out a new Form W-4.
8. Stash savings in a Roth IRA if you’re eligible. Withdrawals in retirement, including decades of compounded earnings, will be tax-free. This year, income-eligibility limits for a Roth increase to $114,000 for individuals and $166,000 for married couples.
Invest like crazy
9. Don’t delay. The quicker you get a jump on putting money aside, the easier it will be to stuff a seven-figure cushion. If you start at age 25, for example, investing $286 per month will get you $1 million by age 65, assuming you earn 8% annually.
10. Invest automatically, either through your employer’s retirement plan or by setting up a regular deposit to a mutual fund or broker. You’ll never miss the money, and you’ll avoid two big mistakes: buying too much when stock prices are high and not buying at all when prices fall.
11. Watch for fund fees. The more you pay, the tougher it is to earn an above-average return. The typical hedge fund, for example, takes 20% of any gains, a huge hurdle to overcome. A better bet: no-load mutual funds with expense ratios of 1% or less. If you trade individual stocks, watch those commissions.
12. Keep it simple. Be wary of get-rich-quick schemes or sales pitches for complex investments, such as oil-and-gas partnerships, that trade on the millionaire cachet to lure investors into buying high-fee products they don’t understand. Most millionaire households accumulate their wealth over the long term by sticking to a regular investing plan in a balanced portfolio.
Published Feb. 27, 2007
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
Your 7 biggest financial decisions
How you manage a handful of major life choices can make or break your financial future.
They pore over Internal Revenue Service publications and fat tax guides searching for ways to save a few hundred bucks on taxes. They read personal-finance magazines, buy books and scour the Web looking for tips.
Fine. It pays off. But does managing your money have to be this complicated?
Actually, no. In fact, if you spend all your time focusing on fractions of a point, you may lose sight of the big picture.
The blunt truth is that if you make the right choices early in life on a handful of major decisions, you’ll never have to worry about financial security.
1. How you handle risk
Risk affects all aspects of your life. Would you rather work for a rock-solid company with a strong benefits package, join a smaller startup with great stock options or start your own business? The potential payoffs escalate as you take on more risk, and so do the possibilities for disaster. The same is true for investments.
Make sure your risks are age-appropriate. If you’re young, you can dust yourself off and start again. For people over 40, the ability to absorb losses diminishes rapidly as retirement nears.
Do your homework. Risk without research is just another form of gambling. Before jumping into any kind of investment, it’s vital to do the due diligence required to accurately evaluate risk, the potential for gains and the potential for losses. (Start with MSN Money’s Stock Research or Mutual Fund Research centers.) Don’t make yourself a target for unethical advisers or garden-variety con artists.
Example: The long-term rate of return for big-company stocks has averaged 10% yearly over the past 70 years. Say Joe invests $2,000 a year in those stocks (via a low-cost S&P 500 Index fund in a tax-deferred individual retirement account) while Dexter buys supersafe Treasury bonds paying an average of 5%. They start at age 25 and continue until age 65. Though the rate of return is double, the accumulation is quadruple: At age 65, Joe has $1,006,513, while Dexter has just $248,561. Use our Savings Calculator to play with your own figures.
2. Your choice of career
There are worse things than a fat paycheck. Your options depend largely on your education and skills, but some fields will always pay better than others. Getting the training needed for a better job could be the best investment you make. Ask yourself what the long-term salary expectations are for your career field and consider how you could make yourself more valuable. (See “10 surprising six-figure jobs” and “The 10 best-paying blue-collar jobs.”)
Does your pay depend on distortions in the market? A lot of semiskilled but highly paid union workers now know the sting of competition here and overseas. Blue-collar incomes have stagnated over the past 20 years as manufacturers found cheaper workers abroad. So, consider what your skills would be worth in a truly open, worldwide market.
Will your skills retain their value? Knowledge is the key to survival in the years ahead, whether you’re a carpenter or a computer programmer. The pace of innovation is staggering, and those who fail to keep up will find their personal stock in a nose dive. Nothing has a more disastrous impact on financial security than a lengthy period of unemployment.
Example: Joe’s salary averages $60,000 over a career of 40 years; Dexter’s averages $30,000 per year. In addition to their IRA accounts, they each put 10% of their income aside each year in taxable investment accounts that yield 8% annually. At retirement, Joe has $1,092,093 to Dexter’s $546,047.
3. Your lifestyle
You don’t have to live like a monk to save money. Americans are conditioned to overbuy. Shopping has gone from being a chore to a hobby, a lifestyle even. Shoppers are encouraged to define their individuality in terms of style, which for most people comes down to a matter of which mass-produced goods one chooses to buy. See MSN Money’s Saving Money Decision Center for ideas.
Ask yourself how much house you really require. The square footage of the average U.S. home has been growing steadily since World War II. In the 1980s and ’90s, buying ever-larger homes seemed a good investment. Home values generally have outpaced inflation — by a large margin in some places and despite periods of slow economic growth. Still, as the baby-boom generation downshifts into retirement and the subprime-mortgage mess plays out, those 4,000-square-foot, five-bedroom homes aren’t seeing a lot of buyers. Besides, smaller houses are in: Read “For many homeowners, less is so much more” on MSN Real Estate.
Every dollar you don’t spend on a house saves roughly $2.40 in mortgage payments. A lot of people calculate what they can afford to pay for a house and use that as the floor price for their house search. They don’t even consider less expensive homes, and no self-respecting, commission-hungry Realtor would suggest it. Find a smarter approach in “Don’t bite off too much house” and “8 big mortgage mistakes to avoid.”
Example: Joe and Dexter each have $40,000 for a down payment on a house. Joe buys a house that requires him to carry a $180,000 mortgage. Dexter buys a larger house and needs a $200,000 loan. Buying the lower-priced house saves Joe $43,286 in mortgage payments over the life of the 30-year mortgage at 6% interest.
Budgeting doesn’t have to be a straitjacket on fun. Find out how to budget your way to smarter spending.
4. How you manage debt
Pay yourself instead of your creditors. At its most basic, credit is the privilege of spending money you don’t have. Before World War II, most people avoided it. To help Americans get over that silly notion, interest on credit card debt was a deductible expense until 1987. Then, Congress created a new pool of deductible interest in the form of home-equity lines of credit.
We’ve learned our lessons so well that bankruptcies are now at an all-time high. (If you’re in trouble, see MSN Money’s Bankruptcy Guide.) Everyone is shocked and appalled to discover how deeply in debt the typical American is today. Banks make a lot of money lending to people who can’t wait to buy things. For help getting out of debt, see MSN Money’s Debt Management Decision Center.
Example: Dexter buys his new $20,000 car with 10% down and a 48-month loan, while Joe postpones the purchase, saving up the money and paying cash. Dexter’s monthly payment on the loan is $448, but Joe needs to set aside only $344 each month in a 5% taxable money market account to pay cash for the car at the end of four years. Joe started buying all his cars this way at age 30 and put the $104 savings in an IRA earning 9%. By the time he retires at 65, he’ll have an extra $352,000. Think owning a pricey car is a necessity? Read “The real reason you’re broke,” then check out the concept of car sharing.
5. Protecting your assets
Your most important asset is your ability to work. Disability insurance will pay you a percentage of your income, usually from 60% to 80%, if you’re sick or injured and unable to work, but that income never increases. Living 30, 40 or 50 years on a fixed income is one of the surest roads to lifelong poverty. Consider the financial as well as physical risks when you’re tempted to buy that Harley-Davidson or take up cliff diving.
You also need to protect the rest of your assets. That means making sure you have adequate auto and home insurance, and, for many people, an umbrella liability policy that provides extra protection against large damage awards in certain civil suits. Just about any lawyer can tell you stories about someone forced into bankruptcy by a damage award that exceeded the limits of his or her insurance coverage. See “4 ways to protect your financial freedom.”
If you’re self-employed, insulate your assets. Consider forming a limited liability corporation. It’s easier to set up and maintain than most other corporate forms and will make it much harder for creditors and attorneys to go after your personal assets.
Example: At age 40, Joe and Dexter are each hit by a judgment in a legal case. Joe has an umbrella liability policy that pays the full amount. The judgment exceeds the limits of Dexter’s homeowners insurance, forcing him to turn over the $73,329 he had accumulated in his taxable investment account and file for Chapter 7 bankruptcy protection. It will be seven years, give or take, before his credit rating recovers, but the real damage is the loss of the potential earning power of his investment portfolio. Dexter will have to start saving from scratch at age 40, and instead of a portfolio worth $546,047 at age 65, he’ll wind up with just $180,220. Not having adequate insurance will thus wind up costing him $365,827 in lost principal and investment earnings.
6. How many children you have
Today, there’s a powerful financial disincentive to have children. Let’s start by saying upfront that we all love children. They provide joy and excitement to every family, but this is intended to view them purely from a financial perspective. In the days before Social Security, there was a positive incentive to have lots of children. Not only did they perform necessary labor on the farm or in the family business, but they also were expected to care for their aging parents, come what may. According to the latest figures from the U.S. Department of Agriculture, it now costs between $145,000 and $290,000 just to raise a child through high school. (Higher-income families tend to spend more.)
Add anywhere from $60,000 to $130,000 more for a four-year college education. There are economies of scale as the number of children you have grows, of course, but there are very few multichild discounts available for college. See “6 reasons not to save for kids’ college” and “Balancing kids’ college and retirement savings.”
The cost of a happy accident. Nobody who wants three children is going to be deterred from having that many, of course. But many people who really wanted to hold the line at two wind up with three, and sometimes more, by what is euphemistically called an accident. Just remember that this kind of accident is among the most expensive you can have.
Example: Joe has two children, which will cost him nearly $400,000 to raise to age 18 and $120,000 to send to a public university — a total of $520,000. Dexter had planned to have two children, but a third came along unexpectedly as he and his wife turned 40. (See “Save a bundle on your new baby.”) Even if Dexter scrimps and saves to spend half as much as Joe raising each child, the total tab, including $180,000 for college, will still add up to $480,000.
And because Dexter’s income is half of Joe’s, he can ill afford the expense. Now, instead of socking money away for retirement, he and his wife are using that money to raise their kids and send them to college.
Budgeting doesn’t have to be a straitjacket on fun. Find out how to budget your way to smarter spending.
7. Marrying for better or worse
Take everything you own and divide by two. Deciding whom to marry may not seem like a financial decision, but you’ll find out otherwise if you ever have to endure the pain of divorce. Bankruptcy, a legal judgment and even the IRS can’t touch certain assets, such as money in retirement plans. But nothing is safe from the divorce attorneys. (See “10 steps to a money-smart divorce.”)
On the positive side, getting married can double your income. Though the quaint notion that two can live as cheaply as one is dubious, it doesn’t cost twice as much, either. Financial teamwork (see MSN Money’s Love and Money Decision Center) early in a marriage can yield a substantial payback in later years, provided you stay together. Choosing someone whose long-term financial goals are similar to yours will reduce friction and help you stay on track.
Example: At age 65, Dexter and his wife decide to split up. (See MSN Money’s Suddenly Single Decision Center.) They’ve tapped their retirement funds to put the last of their children through college. They’ve managed to pay off the mortgage on their $240,000 house, and it now represents the total of their net worth in today’s dollars. They’ve both worked throughout the marriage, so alimony isn’t an issue, but they will have to sell their home and divide the proceeds. Instead of living payment-free in the home they struggled 30 years to own, they’ll be paying rent again — on two homes.
As the examples of Joe and Dexter show, it isn’t necessary to be an investment whiz to accumulate a substantial fortune if you make smart choices on a handful of life’s big decisions.
At the end of his career, Joe has a net worth, including his home, of more than $2 million. He can retire in style with the security of knowing his conservative investments, with a 6% annual yield, will provide after-tax income of $91,000 until he’s 95 — and leave a $200,000 cushion.
Dexter’s $120,000 in assets will give him only $4,000 in annual income after taxes. If he retires at 65, he’ll depend on Social Security for a large part of his living expenses and will have only about two-thirds the income he had when he was working. Even if he works part time until he’s 75, bringing home $10,000 extra each year, he’ll have to save most of that money for the future and will have only $4,000 extra to bolster his income from Social Security.
Updated Jan. 16, 2008
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
5 ways to ease retirement worries
Don’t let poor financial planning keep you awake at night. If you take these actions now, you might sleep better — and better sleep might ensure good health as you age.
About 43% of employees at small and midsize businesses, as well as 26% of retirees, are so anxious about being able to afford medical care in retirement that they sometimes can’t sleep, according to the Principal Financial Well-Being Index compiled in August 2006.
Workers are also anxious about being able to enjoy the same quality of life they have now (42%) and being able to afford the basic necessities in retirement (38%).
Women are significantly more concerned with being able to afford the basic necessities than men are. Retirees are also unable to sleep because of their financial concerns, but the No. 1 fear among retirees is inflation’s erosion of their purchasing power (37%).
5 keys to resting easy
Here are some ways to ease your fears about retirement planning so you can sleep soundly:
Plan for the financial transition. It is important to develop a plan to transition your retirement savings into a steady stream of income. Only 30% of current employees and 51% of retirees have a plan for turning investments into bills paid, the quarterly Principal study said. “Just investing the time to plan for the retirement transition with help from a financial professional . . . can make the difference between achieving financial well-being in retirement or not,” says Dan Houston, Principal’s executive vice president of retirement and investor services.
Pay down debt before you retire. Both housing debt and consumer debt are rising for elderly families. The average debt for a family headed by someone age 75 or older rose from $7,769 in 1992 to $20,234 in 2004, the Employee Benefit Research Institute reported in October 2006, citing the latest available figures. Those approaching retirement age have increasing levels of debt as well. “You need to get your finances in order,” says Craig Copeland, a senior research associate for the institute. “Having debt going into retirement is not the way to have a successful retirement.”
Evaluate your assets. Take stock of all the sources of income you’re going to have in retirement. “You need to think about what sort of guaranteed income streams you have — Social Security, defined benefit plans — and also the amount you have in a 401(k) or other savings,” says Emily Kessler, a staff fellow for the Society of Actuaries. “Figure out how much you need to live on, and factor in inflation.” Knowing that you’ve got enough money coming in from various sources is sure to help you sleep more soundly.
Health insurance is a must. If you retire before age 65, you must make sure you have health insurance. You may be able to qualify for COBRA coverage for up to 18 months after you leave your job. But even after age 65, “get access to some form of insurance to help you pay for those things that Medicare doesn’t cover,” Kessler says. Medicare does not cover long-term care or long hospital stays, warns Copeland. Supplemental insurance can help make sure your investments remain intact if major health problems arise.
Take care of your health. Perhaps even more important than financial assets is investing in your health with healthful foods, exercise and preventive care so that catastrophic health-care costs can be avoided as much as possible. Making sure your retirement worries don’t interfere with adequate sleep will keep you healthier, too. “Good sleep is important for good mental and physical health, including resistance to disease,” says Timothy Monk, a professor of psychiatry at the University of Pittsburgh Medical Center. “Good sleep can be a predictor of longevity in seniors,” he adds. Mary Carskadon, a professor of psychiatry and human behavior at Brown Medical School, says, “Poor sleep can contribute to the kind of illness that we typically associate with aging.”
By Emily Brandon, U.S. News & World Report
Published Nov. 3, 2006
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
9 money rules to live by
Americans young and old are flunking their finances, but money mastery isn’t really that hard. Here are 9 simple keys you need to know.
advertisement
Article Tools
E-mail to a friendTools IndexPrint-friendly versionSite MapArticle IndexDiscuss in a Message BoardDigg This By Liz Pulliam Weston
Most surveys that measure financial literacy focus on teenagers, and the results are always grim.
In the latest research by Jumpstart Coalition, a nonprofit that promotes personal finance education, the average high school student correctly answered just 52.4% of the questions covering money basics. That’s down from 57.3% in the 1998 survey and up from 50.2% in 2002, but it hardly matters. Anything less than 60% counts as an F.
Now a poll by Harris Interactive for the National Council on Economic Education shows that adults aren’t that much savvier.
While teens on average scored a 53 (another F) on a quiz testing knowledge of basic economic and personal-finance concepts, the grownups’ average score was just 70 (a C).
In addition:
More than one-quarter of adults failed the quiz.
Women were far more likely to fail than men: 42% scored an F compared with 15% of men.
Men were much more likely than women to get an A or B on the test (51% compared with 17%).
If it makes you female readers feel any better, there are also lots of studies out there showing that we’re better investors than men — once we get around to investing.
But the fact remains that there’s a heck of a lot of financial ignorance going around, and financial ignorance is costly. Women may have even more to lose than men, since we tend to earn less, are more likely to have interrupted careers and live longer, which means we have more time to suffer from our mistakes.
Understanding economics and personal finance doesn’t mean you won’t make mistakes or face financial disasters. But you can lessen the odds and repair the damage faster if you know the rules of the game. (You’ll also be treated a bit more kindly by the denizens of the Your Money board, many of whom believe there is such a thing as a stupid question.)
Here are the economic and financial concepts I wish everybody knew:
The difference between needs and wants
Our actual needs are pretty limited: food, shelter, clothing, companionship. Just about everything else is a “want,” and our wants are essentially endless. Because our resources are limited (see “scarcity,” below), we have to make choices about which wants to fulfill.
Also, the way we fulfill our needs involves a lot of choice. Shelter, for example, can be a bed at a mission for the homeless or a $125 million mansion. Our food choices offer a similar range, from beans and tap water consumed at home to steak and Dom Perignon at an exclusive restaurant.
I’ve discovered many people believe they have to spend money in certain ways or in certain amounts, when in reality their spending is a choice — or is at least based on choices they made earlier. If you’re facing a monster mortgage payment, for example, it’s because you chose to buy that home and selected that particular mortgage.
Taking responsibility for our choices can be scary, but it should also be empowering. After all, if you have choices, you’re not just a victim of circumstance.
Scarcity makes your choices for you
It’s lovely to believe in a world of endless abundance, but the reality is that at any given point in time, our resources have limits. Whether it’s oil in the ground, our time here on Earth or the cash in our pockets, there’s only so much available to be spent.
People who ignore this reality are the ones who run out of paycheck before they run out of month, or who extend their unsustainable spending by relying on credit cards, home equity loans and other reckless borrowing. Their refusal to make the sometimes-hard choices needed to responsibly manage money means that they will have even fewer choices in the future. The money they spend on stuff and on interest can’t be invested in other goals, like retirement, so odds are pretty good they’ll wind up old and broke.
The pointlessness of the hedonic treadmill
This isn’t the latest workout device at your gym. The hedonic treadmill means that we quickly adjust to improved circumstances. A raise at work or a new possession may make us happy for a little while, but we soon take our situation for granted. Our expectations continue to rise: if only I could get another raise, or a better car, or a bigger house. Should those expectations be satisfied, again we’d adjust and quickly want more.
This has a lot of implications for personal finance and the economy, but here’s something to consider: Maybe we need to look beyond our wallets for true happiness.
Solving your money problems doesn’t have to be difficult. Liz Pulliam Weston gives you a few simple steps that can start you on the road to financial security.
Every money decision has a cost of its own
“Opportunity cost,” very simply, means what we give up to get something else. In every choice, there’s an opportunity cost. If you decide to go to college, for example, you’re giving up the income you could have earned by working full-time during those years plus whatever you could have purchased with the money used to attend school. You also may take on loans to pay for school, which will have to be paid back with future income that could have gone for other purposes.
The good news, of course, is that even with opportunity costs, college is a slam-dunk for most people. The average graduate makes 70% more over his or her lifetime than someone who stops with a high school diploma.
If, however, you train for a career that has little demand and wind up making the same amount as a high school grad or trailing huge amounts of student loan debt you can never repay, you may regret the money spent on school and the foregone income.
Understanding that our choices have opportunity costs, and examining what those costs are, should help us make better economic decisions.
Why supply and demand rule
For the most part, prices are set by the interaction between supply and demand. If demand for something suddenly shoots up and the available supply of that something doesn’t change, then prices will increase. If demand drops or supply increases, prices typically fall.
Here’s an example. Say rock star Brittany Amber Tiffany is photographed wearing a cap with the brand name of a Midwestern seed company. Suddenly, all her fans and half the people reading Us magazine decide they, too, need the Midwestern seed company’s hat. The farm supply companies that stock these hats figure out a good thing when they see it, and double, then triple, the price. The hat actually worn by Brittany sells for a mint on eBay, earning a notice in mainstream newspapers and furthering the craze.
The Midwestern seed company wants a piece of this action and starts cranking out hats by the ton. Suddenly you can find one in every Target and Wal-Mart. The retailers can no longer command a premium for having a rare item, thanks to the increase in supply. In fact, the hats start seeming a heck of a lot less cool, lowering demand; Target and Wal-Mart slash the price still further to get rid of their unwanted supply.
The interplay of supply and demand is also why one-day gas boycotts don’t work. Even if a lot of people participated, overall demand wouldn’t change; the boycotters would likely gas up before or after the selected day. Only a big increase in supply or a sustained decline in demand is likely to affect prices.
Supply and demand have a lot to do with our incomes as well. If we have rare skills that are in high demand by employers, we can negotiate higher pay. If, on the other hand, a lot of people can do what we do or the employer need for what we do is limited, our incomes are likely to be stunted.
Throw no good money after bad
“Sunk costs” are expenses that have already been incurred and can’t be recovered to any appreciable extent. “Sunk cost fallacy” means an irrational belief that a further investment of time, money or effort will somehow resurrect the value that’s already disappeared.
A classic example is the investor whose stock has plunged because the prospects of the company have worsened. The investor wouldn’t buy the same stock today, yet continues to hang on to the shares rather than sell them and take the loss. The investor may offer the excuse that he or she wants to at least “break even” before selling, but of course the stock market doesn’t care about the investor getting the money back, and all the wishing in the world won’t bring the stock price back up.
By hanging on to the shares, the investor is giving up the opportunity to invest elsewhere at a profit — an opportunity cost.
Solving your money problems doesn’t have to be difficult. Liz Pulliam Weston gives you a few simple steps that can start you on the road to financial security.
The role risk plays
Every human endeavor carries some risk, and investments are no exception. What differs is the amount and type of risk and how you’re compensated for taking it.
The 30-day Treasury bill, for example, is one of the “safest” investments around if you’re solely concerned with getting back your original investment. The T-bill is backed by the full faith and credit of the U.S. government. But the average return on a 30-day T-bill over the past 80 years is just 3.7%, according to Ibbotson Associates. That’s just above the historical 3% inflation rate for the same period; if you factor in taxes, you probably lost money.
Large-company stocks, by contrast, returned an average 10.4% annually during the same period. That handily beats inflation, but as everyone who has invested in the past decade knows, stocks aren’t a sure thing. There were plenty of years along the way that the market for large-company stocks dived, and if you invested all your money in a single stock — say, Enron — you could be wiped out. That’s called market risk.
Here’s what you should take away: You’ll almost certainly need to take some market risk if you want to grow your wealth and beat inflation over time. But you should also be wary of anyone who “guarantees” a high return on an investment. If you’re earning much more than the going rate on a T-bill, you’re taking some risk, and you should understand that risk before proceeding.
The time value of money
This boils down to a relatively simple proposition: that the dollar I get today is worth more than a dollar I’m promised sometime in the future.
There are several reasons for this. One is the “bird in the hand” reality: the dollar I get today is real, but the dollar I’m promised in the future likely will be worth less (because of inflation), or I might not get it at all (you might renege on your promise to give it to me, or die, or cease operations if you’re an employer or business). Also, the dollar I get today can be invested to create more dollars in the future.
Get the latest from Liz Pulliam Weston. Sign up to receive her free weekly newsletter.
Preferred format:
HTMLPlain TextLearn more about newsletters
Turn this around, and you’ll see why lenders charge interest for loaning money — and why the interest rate depends on your creditworthiness. Lenders want to be compensated for the erosion in their dollars due to inflation, and for the risk of lending money to you.
The higher the perceived rate of future inflation and the more lenders doubt your promise to pay the money back, the more interest they’ll charge to compensate for the risk.
The miracle of compound interest
This is a concept best illustrated by example. Let’s say I give you a penny today, and promise to double the amount every day for a full month. How much money would I be giving you on the 31st day?
The answer: $10.7 million. Check it out:
It all adds up Day 1 $0.01
Day 2
$0.02
Day 3
$0.04
Day 4
$0.08
Day 5
$0.16
Day 6
$0.32
Day 7
$0.64
Day 8
$1.28
Day 9
$2.56
Day 10
$5.12
Day 11
$10.24
Day 12
$20.48
Day 13
$40.96
Day 14
$81.92
Day 15
$163.84
Day 16
$327.68
Day 17
$655.36
Day 18
$1,310.72
Day 19
$2,621.44
Day 20
$5,242.88
Day 21
$10,485.76
Day 22
$20,971.52
Day 23
$41,943.04
Day 24
$83,886.08
Day 25
$167,772.16
Day 26
$335,544.32
Day 27
$671,088.64
Day 28
$1,342,177.28
Day 29
$2,684,354.56
Day 30
$5,368,709.12
Day 31
$10,737,418.24
Each day, the “interest” I paid you the previous day earns more interest. At the beginning, the amounts are nominal, but by the end we’re talking big bucks.
Of course, no one’s going to double your money every day. But this concept explains how people who save relatively small amounts over the years can build rather substantial nest eggs. After a few decades, their actual contributions represent only a small part of their burgeoning wealth — it’s mostly their returns that are earning returns.
But this also illustrates how debts can quickly balloon out of control. If you’re paying interest, rather than incurring it, and you’re not diligent about paying off the finance charges in full every month, the unpaid amount will incur additional interest charges, increasing the total amount that you owe. This is why so many families who incur credit card debt eventually find themselves in trouble as the amounts they owe explode past their ability to pay.
There are plenty more nifty and helpful money concepts, but these nine are among my favorites. If you’ve got some of your own, feel free to share them on the Your Money board.
Liz Pulliam Weston’s new book, “Easy Money: How to Simplify Your Finances and Get What You Want Out of Life,” is now available. Columns by Weston, the Web’s most-read personal-finance writer and winner of the 2007 Clarion Award for online journalism, appear every Monday and Thursday, exclusively on MSN Money. She also answers reader questions on the Your Money message board.
Updated Jan. 16, 2008
