Featured, Pay Down My Debt, Strategies to Save, Time Perspective

5 Reasons It Is So Difficult to Keep Your New Year’s Resolutions

Advertiser Disclosure

The editorial content on this page is not provided by any financial institution and has not been reviewed, approved or otherwise endorsed by any of these entities.

5 Reasons It Is So Difficult to Keep Your New Year’s Resolutions

Most of us start the year with high hopes for the health of our bodies, minds, careers, and — of course—bank accounts. But you probably don’t need a statistician to tell you that when it comes to keeping your New Year’s resolutions, the odds are stacked against you.

A popular study published in the University of Scranton’s Journal of Clinical Psychology found that while nearly half of Americans usually make resolutions, just 8% are successful in keeping them, and about one-quarter report that they fail to meet their goals year after year.

[Are you ready to become debt-free in 2017? MagnifyMoney has created a FREE online guide to help you get out of debt.] 

Why do these plans fall apart so easily? We talked to two certified financial planners to find out what held people back from sticking to their self-improvement plans in years past — and what can be done to overcome these obstacles in 2017.

No. 1: Your resolutions are unrealistic or unclear.

Vague, lofty goals like “lose weight” or “save money” can do more harm than good; undefined targets can leave you overwhelmed and discouraged when you don’t immediately succeed. That’s why resolutions should start small, according to Kristen Euretig, certified financial planner and founder of Brooklyn Plans in Brooklyn, N.Y., a company specializing in helping today’s women with their finances. “Take into account a realistic but ambitious goal that can be achieved in a year and would be forward momentum toward an even larger goal,” says Euretig. “Buying a house may be too much to tackle in a year, but saving the first 10% of a down payment could be a realistic starting point that would also be quite an accomplishment.”

Another trick to keep you from getting overwhelmed? Be as specific as possible. Euretig recommends breaking up big resolutions into defined subgoals with set deadlines. Rather than resolving to pay off student debt, says Euretig, start by figuring out if your payment plan is working to your advantage. That way, you’ll better understand the time and effort required to reach your goal and appreciate any incremental progress along the way.

No. 2: Your resolutions don’t align with your needs or lifestyle.

Ever find yourself rationalizing your way out of a behavioral change? Maybe you can’t go to the gym today because you have important errands to run, or you neglect that book on your nightstand because there is a movie on Netflix you’ve been meaning to watch. Your reasons may be legitimate, but using them as a means of abandoning your self-improvement plan is detrimental to you in the long term.

Melissa Ellis, certified financial planner at Sapphire Wealth Planning in Overland Park, Kan., knows that a thorough understanding of your current behaviors and lifestyle can help you anticipate the setbacks you will face throughout the year and think up solutions that will keep you on track when challenges arise. If your goal is to max out your Roth IRA, Ellis notes, you need to make sure you have the discretionary income to make it happen; if you know at the start of the year that you’ll have to cut back somewhere else in your budget (like your take-out habit) to find the extra money, you’re more likely to stick to the plan.

No. 3: You sacrifice your future well-being for your present happiness.

Most of us treat our future self as a different person. Unfortunately, it’s often a person we don’t seem to care much about. This phenomenon — our willingness to sacrifice our future well-being for immediate gratification — is called myopia temporal discounting. It’s one reason why many people continually put off diets, start saving for retirement later than they should, or rack up credit card debt for items or experiences they can’t afford. In fact, credit cards are the ultimate trap for people who like to live in the present vs. think about the future.

“It’s easier to put off the intangible, because it’s not an immediate need,” says Ellis. Try connecting with your future self by visualizing what you would like your life to look like at age 40, 60, or 75, and think about what steps, however small, you can take today to make that vision a reality.

The Time Personality Quiz - Be Well Versed In Your Financial Future

You should know your financial personality — that is, how you perceive time and how that perception impacts your financial  habits — before you make any financial resolutions. The better you understand your strengths and weaknesses, the more likely you will be to succeed.

Take the Time Personality quiz here > 

No. 4: You don’t hold yourself accountable.

Can you remember what your resolutions for last year were? It typically only takes about three weeks for most of us to get back into our old routines and forget all our intentions for the new year, especially if you don’t have a time frame for achieving the goal or a way to measure your progress.

“The best way to stick to resolutions is to make them real and to hold yourself accountable,” says Euretig. “Write goals down. Make a vision board. Put a picture of the vision board as the wallpaper of your phone. Share your resolutions with an accountability partner who you can check in with along the way or with your social media community.” Setting aside time each week or each month to check in with yourself about your success will help you remember the resolutions throughout the year. If you need an extra boost, tap a friend or family member who can help remind you to stay on track or, even better, join you on the journey.

No. 5: You forget to reward yourself.

It’s easy to lose motivation as the year goes on and you settle into old routines. Any sense of urgency goes away, and you can end up putting off behavioral changes indefinitely until it’s January again.

That’s why Ellis recommends rewarding yourself throughout the year if you are successfully sticking to your resolution. If you meet your goals of, say, paying off a department store credit card, maybe buy yourself a pair of shoes — but be sure to do it in cash, so you’re not buying something you can’t afford and racking up more debt. “It’s something concrete you can look at to remind you that you have made a change,” Ellis says.

Whether your goals are about money, your career, relationships, or fitness, it’s important to remember that good things typically don’t come easily. Taking time to set the right goals, define an execution plan, and regularly track your progress will make sticking to your resolutions a little less painful — and a lot more likely to happen.

Are you ready to become debt-free in 2017? MagnifyMoney has created a FREE online guide to help you get out of debt.

TAGS: , ,

Strategies to Save

The Ultimate Guide to CD Ladders

Advertiser Disclosure

The editorial content on this page is not provided by any financial institution and has not been reviewed, approved or otherwise endorsed by any of these entities.

CDs are a very safe investment because they come with built-in insurance. Up to $250,000 of your money at each bank is covered under the Federal Deposit Insurance Corporation (FDIC). Deposits at credit unions are also covered for the same amount by the National Credit Union Administration (NCUA).

However, CDs do have some major downsides. They’re basically just reverse loans you make to a bank, and therefore you can’t withdraw your money before the term of your loan ends without paying stiff fees.

To get around this, some people buy short-term CDs so they can have more frequent access to their money in case they need it, but these short-term CDs offer far lower returns than longer-term CDs.

It’s a big quandary: The best CD rates are for longer-term CDs, but it’s a tough commitment to lock your money up for that long.

That’s where a little-known tool called a CD ladder comes in: It provides a neat solution that allows you to invest in long-term CDs while having frequent access to your money at the same time.

What is a CD ladder?

A CD ladder is basically a series of staggered investments. Rather than putting all your money in one CD and never seeing it again for five years or longer, you split your total investment among several smaller CDs. Each one of these smaller CDs has a different term so they mature (are paid back to you with interest) at different times.

The goal with CD laddering is to plan your smaller CDs out ahead of time so you’ll have one new CD maturing at regular intervals. When this happens, you have the option to take the money out, or you can reinvest it in the coveted long-term CD.

By the end of the cycle, all of your smaller CDs will be invested in long-term CDs. One new CD will mature after each time interval. Thus, your goal is achieved: All of your money is invested in the highest-earning CDs, yet you still have frequent access to a portion of your cash.

Are CD ladders right for you?

CD ladders are a great tool for people who have a hard time saving money because they’re always pulling cash out of their savings for unplanned expenses like a spur-of-the-moment vacation or a last-minute holiday gift. CDs are essentially forced savings accounts – you can get the money out if you need it, but not without paying a price.

Each financial institution charges fees for early withdrawal. Fees can be a set dollar amount, a set number of months’ worth of interest, a set percentage of the principal (the amount you invested), a set percentage of interest (the amount you’ve earned), or a set percentage of both principal and interest.

You could still come out ahead if you’re just charged a percentage of interest, or you could end up actually owing the financial institution money if they have steeper fines. Needless to say, it’s something you should avoid at all costs – even if there’s a tempting last-minute deal on a cruise vacation.

CD ladders are also great savings tools for when you need a specific amount of money in the short term – for example, if you’re looking to save a down payment for a house five years from now, or a car in three years.

Finally, CD ladders are also great tools for people who meet two conditions: They already have money saved in an emergency fund, and they’re also saving in high-yielding investments like stocks or index funds, if they’re working on saving up for retirement.

You don’t want to keep your emergency savings in a CD ladder because if an emergency does happen, you won’t be able to pull out your money without incurring the fees described above. CD ladders are also great investment vehicles, but they don’t earn enough to allow you to really ramp up your long-term savings for things like retirement (more on that further down, though).

What are some examples of CD ladders?

The really cool thing about CD ladders is that you can customize them to fit your needs. The only two things you need to pay attention to are how frequently you want access to your money and how much you have to invest to create your own CD ladder.

All CD ladders follow the same basic principles of splitting up your total investment among multiple staggered investments. Here are two examples of CD ladders that offer you access to your money at different intervals and require different initial investments:

CD Ladder One: Short-term, smaller investment

Let’s say you only have $1,000 to invest. You could split it up into some short-term investments like this:

Start: Buy four CDs. Put $250 each into a three-month, six-month, nine-month, and one-year CD.

Every three months: One CD matures, and you can either cash it out or roll it over into a new one-year CD.

After one year: Each CD is invested in a one-year CD. Because they have staggered start times, one new CD will mature every three months.

CD Ladder Two: Long-term, larger investment

If you have $5,000 to invest, you could split it up and form a CD ladder this way:

Start: Buy five CDs. Put $1,000 each into a one-year, two-year, three-year, four-year, and five-year CD.

Every year: One CD matures and you roll it over into a new five-year CD, or you can cash it out without facing penalties.

After five years: Each CD is invested in a five-year CD. Because they have staggered start times, one new CD will mature every year.

How do CD ladders hold up compared to other investments?

It’s important to know how CD ladders stack up against other potential investments if you’re using them to save money. So we decided to compare an initial $5,000 investment over 10 years to see how CD ladders compare to other options.

It’s also important to take inflation into account when looking at your returns over several years, because this has a real impact on how much your money will be worth. If you started out with $5,000 in 2006, you’d need exactly $6,071.02 today to have equal buying power today, thanks to inflation.

Let’s see how our investments pan out:

CD Ladder

Let’s consider the long-term, larger investment CD ladder structure from above and use the highest rates from MagnifyMoney’s CD comparison tool.

To start out, you’d put $1,000 each into a one-year, two-year, three-year, four-year, and five-year CD. For the next five years, one of these CDs will mature annually, and you will roll it over into a new five-year CD. By the time five years is up, all of your CDs will be in high-interest-earning CDs, with one maturing annually. Then we’ll continue rolling them over into five-year CDs for five more years, for a total of 10 years’ worth of rollovers.

Risk: Very safe because it’s backed by the FDIC or NCUA. You can also take advantage of higher interest rates if they go up.

Reward: $1,019.61. You’d need to make more than $1,071.02 to counter the effect of inflation, though, so your inflation-adjusted returns would be worth –$51.41 ($1,019.61 – $1,071.02).

Two Five-Year CDs

Let’s find out what happens if you take the initial $5,000 investment but put it into two back-to-back five-year CDs instead of laddering it.

Risk: Again, very safe because it’s backed by the FDIC or NCUA. However, you can’t take the money out as frequently if you need it, and you’ll only be eligible to take advantage of rising interest rates once when you roll it over into another CD.

Reward: $1,026. You’ll come out –$45.02 after taking inflation into account ($1,026 – $1,071.02).

Stock Market

The stock market is traditionally the best way to go for long-term gains. We wanted to know how much extra money you would have in 2016 if you invested $5,000 in the stock market way back in 2006. We looked at the average annual inflation-adjusted stock market return (7.92%), compounded annually over 10 years.

Risk: High; you could lose a significant portion of your money in the short term, and it can take a while to build it up again.

Reward: $10,715. This has already been adjusted for inflation, and so represents the real value of your money in 2016.

Savings Account

Most people like to save up money in a plain old savings account. We looked at what would happen to your money if you kept $5,000 in a savings account for 10 years. We used the rates from MagnifyMoney’s savings account comparison tool to find the highest-yielding A-rated bank (Ridgewood Savings Bank, 1.05% APY) and calculated returns using daily compounding.

Risk: Very safe because it’s backed by the FDIC or NCUA.

Reward: $554. You’ll come out –$517.02 after taking inflation into account ($554 – $1,071.02).

Under Your Mattress

Our grandparents might have squirreled away money under their mattress, but now that might not be the greatest idea. Here’s what would happen if you just kept $5,000 completely in cash for 10 years.

Risk: Very unsafe. It can easily be stolen or lost in a house fire.

Reward: $0. You’ll come out –$1,071.02 after taking inflation into account ($0 – $1,071.02).

CD ladder FAQs

  1. How can I find the best rates on CDs?
    You can use MagnifyMoney’s CD comparison tool to find the best rates across the country for CDs of various term lengths.
  2. What are the shortest and longest possible CD terms?
    Generally, three months is the shortest term offered while five or even 10-year CDs are the maximum terms.
  3. Will I owe taxes on my money?
    Yes. You are taxed on your interest earning just like a regular savings account. Your bank will issue you a 1099-INT form at the end of the year.
  4. What if interest rates change?
    You won’t be affected unless you possess either a callback or a bump-up CD. Callback CDs allow the bank to cancel your CD and return your principal and any yields to you if interest rates fall. Bump-up CDs give you the option to boost your interest rate once per term if interest rates rise.

Certificates of deposit (CDs) are a great way to diversify your portfolio. They’re easily available because just about every bank and credit union offers them, there are no tacked-on fees to buy them, and they’ll often earn much more interest than a regular savings account.

TAGS: ,

Reviews, Strategies to Save

Review: You Need a Budget (YNAB) — The Budgeting Tool That Makes Every Dollar Count

Advertiser Disclosure

The editorial content on this page is not provided by any financial institution and has not been reviewed, approved or otherwise endorsed by any of these entities.

The Budgeting Tool That Makes Every Dollar Count

You Need a Budget (YNAB) is subscription-based budgeting software available both on desktop and mobile devices. Its trademark mantra is, “Give every dollar a job.” That means as you have money coming in, you assign it a budget category. Once you have one month’s worth of expenses fully funded, you can start budgeting funds for future months.

How Does ‘You Need a Budget’ Work?

When you first sign up for You Need a Budget, you will be asked to link your checking, savings, and credit card accounts. This allows the app to see exactly how much money you have at this very moment.

Next, you’ll add upcoming transactions like rent, utilities, and groceries. As you add these expenses, you’ll also be prioritizing them. The ones that are most important (generally rent or mortgage payments) will go on top, and the ones that are a little more frivolous like entertainment spending will go at the bottom.

After you’ve set up transactions you know are coming, you’ll be able to establish goals. You can set up goals by a date, in which case the app will tell you how much you have to save per month to meet your objective. You can also set them up by how many dollars you’d like to allocate toward them per month, in which case the app will tell you how long it will be until they are fully funded (or in the case of debt repayment goals, paid off).

6  January screen shot 1

You’ve linked accounts. You’ve accounted for bills and upcoming spending. You’ve set goals. Now it’s time to fund all of those things! You start with the money you have, and not a penny more. You assign each dollar to a certain line item, again, starting with the most important items at the top. Once you reach the end of your current funds, you won’t be able to budget any more until you get more cash in your hands.

If you are able to fully fund one whole month, then you can use any excess funds on hand to start funding the next month. The more you do this, the happier the founders of YNAB get. Their entire philosophy is that you should “age your dollars,” meaning the further in advance you can fund a transaction or goal, the more financial stability you will have.

How Much Does ‘You Need a Budget’ Cost?

Currently, You Need a Budget offers a 34-day free trial — no credit card required. After that, you will have to pay either $5 per month or $50 per year. Students get twelve months free, after which they’ll be eligible for a 10% discount for one year. If you have a previous version of YNAB, you’ll be able to score a 10% lifetime discount on the latest version.

Fine Print

Fine PrintYNAB is extremely transparent and seemingly ethical in their practices. They do not sell information to third parties, but may give others access to it in the course of business as they work to facilitate the software through companies such as Amazon Web Services and Finicity, which are two trusted names in the Fintech industry as far as security is concerned. Your data is always encrypted, and will be completely and irreversibly deleted upon request should you ever choose to close your account.

Pros and Cons

You Need a Budget is commonly recognized as one of the best budgeting apps around. That doesn’t mean that it’s perfect for everyone, though. Think through the pros and cons before downloading.

Pros

  • Transparent company.
  • Committed to security and positive user experience.
  • Helps you change your financial habits through a simple, yet revolutionary, process.
  • Prioritizes your expenses each month.
  • Forces you to address overspending.
  • Allows you to set goals.
  • Can be used by those who get paid regularly and receive W-2s or by freelancers.
  • There are user guides and lessons accessible to members to deepen your understanding of common personal finance principles and concepts.
  • There is a community where you can get support.

Cons

  • There is a price for your subscription.
  • This won’t be good software for you if you’re a percentage budgeter as the interface makes no allowance for that method.
  • At this point in time, there are no reports or analyses to help you disseminate your habits. They are promised on the horizon, though.

How Does ‘You Need a Budget’ Stack Up against the Competition?

YNAB is an extremely useful and user-friendly app. However, it does come with a fee and is far from the only budgeting software on the market. Here are some other options you may want to check out if the YNAB $50 annual subscription is getting you down:

Mint.com

While it may not use the “give every dollar a job” philosophy, Mint.com solves very similar budgeting problems in a very free way. It allows you to link accounts, plan for upcoming expenses, and set goals. It also provides charts and graphs to analyze your past behavior and provides your FICO score at no charge — two things YNAB doesn’t do. The biggest con to this no-cost application is that it is laden with ads.

Wally

If you don’t like the idea of your financial accounts being linked to a third-party app, another free option is Wally. When you use this app, you’ll have to be a lot more diligent at inputting your income and expense as none of it will be automated, but that’s the price you pay for keeping your bank account info completely separate.

Level Money

Level Money is a free app that allows you to link accounts, gives you insights into how much you have left to spend in any given category on any given day, and comes 100% ad-free. This app isn’t the best for the self-employed or those with variable income, and also isn’t as useful for those who make a lot of cash purchases.

Who Should Use You Need a Budget?

You Need a Budget is great for anyone who wants to get a hold on their money today, but doesn’t necessarily want to analyze their past spending. It’s developed for people who prefer budgeting by dollars rather than percentages, and comes with extra savings for students who are trying to establish good money habits at a younger age. It is time-tested, and is created by a company that has continually shown it cares for its customers.

TAGS: , , , ,

Strategies to Save

3 Reasons You Earn More But Still Feel Broke

Advertiser Disclosure

The editorial content on this page is not provided by any financial institution and has not been reviewed, approved or otherwise endorsed by any of these entities.

3 Reasons to Earn More

If you’re earning more but still feel like you’re living paycheck to paycheck, there’s a likely culprit: lifestyle inflation. Lifestyle inflation is the ultimate budget-killer — a widespread phenomenon that occurs when people spend more as their income increases. Before they know it, that raise or bonus they earned slowly but surely disappears … right into that cell phone upgrade, a bigger apartment, or those few extra takeout orders each week.

Any financial planner can offer sound, reasonable methods for avoiding this problem: Stick to a budget. Automate your savings. Bump up your 401(k) contribution. The solutions seem easy enough, but no matter how much more you earn, you still feel like you’re living paycheck to paycheck.

We’ve come up with three simple reasons why you might still feel broke — even though you’re earning more — along with strategies on how to overcome them.

You don’t know what you want from life.

One reason many people struggle to keep their spending in check as their income increases is that they aren’t intentional about how they spend their money, says Meg Bartelt, founder and president of Flow Financial Planning. Bartelt encounters this problem every day with her clients, who are mostly women working in the tech industry who earn healthy paychecks but live in expensive cities.

When people are clear about their reasons for earning money and the goals they hope to achieve with those earnings, it becomes easier to avoid the kinds of incremental spending increases that can quickly consume their budget.

“Ask yourself why you worked hard for a raise,” says Bartelt. “Was it so that you could eat out more or buy fancier clothing or have a better streaming subscription … or was it so that you could make a meaningful change in your life?”

Goals — whether it’s being able to retire at 45 instead of 65, sending your child to college, or buying a home — give workers a reason to keep an eye on their spending from paycheck to paycheck.

To help figure out your financial goals, Bartelt suggests asking yourself a specific set of questions:

What do you want out of life?
What do you want to do, have, or accomplish?
How much money is it going to take to get you there?
And how are you going to get that money?

Taking this approach may also make the concept of budgeting more palatable. Saying “no” to a few upgrades in your life will feel less like deprivation, and more like a positive step toward the future you imagine for yourself.

You compare yourself to others.

Nothing can threaten a healthy budget like a serious case of “FOMO” — fear of missing out.

It can be hard to keep long-term, big-picture goals in mind amid the constant stream of filtered photos of international trips and nights out posted on social media. “It’s a huge contributor [to lifestyle inflation], especially for younger generations,” says Stephen Alred Jr., founder of Atlanta, Ga.-based financial planning firm Ignite Financial. Constant, real-time coverage of internet acquaintances’ adventures can make people feel worse about the state of their own lives and distract them from what they really want or need. Then, when a raise or a bonus comes into play, they are more likely to spend it on something that fits into that picture of what they think they should be doing, rather than what works best for their future goals.

It’s important to remember that you won’t get the full picture of someone’s life by looking at their social media profile — for example, you won’t know that the friend who took the tour of Italy last summer is still paying off the resulting credit card bill a year later, and you won’t see that a person only ordered appetizers at that fancy restaurant she went to last week, says Alred. Focusing on your own needs and goals, separate from those of the people in your life and in your social network, is critical to being happy with the state of your finances and your life, now and in the future.

You haven’t addressed negative spending patterns.

Once your financial goals begin to take shape, the hard part isn’t quite over. If you have a pattern of spending money as soon as it’s in hand, it’s going to take a while to change that behavior. Alred calls this a “behavioral barrier” — something people do every day with money that prevents them from reaching their financial goals.

It’s calling Uber every time you’re at the office later than 5 o’clock. It’s using your credit card to pay for even the smallest purchases. It’s grabbing a $15 salad for lunch every day.

These behaviors can crush financial goals, whether a person earns $30,000 or $300,000. Getting the right habits in place now will not only help combat lifestyle inflation this year — it will help down the road as income (hopefully) continues to grow.

Come up with strategies to help break those negative spending habits. For example, we’ve written about a simple $20 rule that can help break your credit card addiction.

But don’t be too tough on yourself. You shouldn’t deprive yourself of simple pleasures or pinch pennies to the point that you’re putting your mental or physical health at risk. Budget for the things that you know will bring you happiness, like the weekly dinner with friends you can’t miss or your daily $5 latte.

“Be clear about what’s important to you,” says Mary Beth Storjohann, financial planner and founder of Workable Wealth. “You can do it all, you just can’t do it all at once.” Once debts and savings goals are taken care of, “20% should go toward something fun,” says Storjohann. Building in some flexibility will help you avoid stress and self-loathing down the road — and will allow the occasional indulgence without throwing savings goals off track.

The bottom line:

Rigid financial rules may work for some, but will be hard to implement without a solid reason for following them.

“It’s like a diet. If you restrict your calories significantly, maybe you can last for a week or a month,” says Bartelt. “But most likely, you’ll revert to your old habits in the long run.”

 

TAGS: , ,

Strategies to Save

Is it Possible to Save too Much?

Advertiser Disclosure

The editorial content on this page is not provided by any financial institution and has not been reviewed, approved or otherwise endorsed by any of these entities.

Is it possible to save too much?

A recent survey from the Federal Reserve found that nearly half of Americans—including those who are, by other metrics, financially comfortable—would not be able to come up with $400 in an emergency. For many, putting aside extra money at the end of every month is near impossible, or at best a chore.

But there’s another (perhaps less common) group of people who get a thrill from watching the numbers in their savings accounts climb—and who will go to great lengths to make it happen. For these people, the act of saving is its own reward.

“It’s the person who will go to a certain gas station to save two cents on gas, but drive further than two cents’ worth of gas to get there,” explains Dr. Clifton Green, associate professor of finance at Emory University in Atlanta. “Getting those savings is a form of happiness for people, just like anything else.”

Driving that urge to save could be an attempt to quell financial anxieties that developed in childhood. “If a person grew up in a home where money was scarce, and experienced parental disagreements around money, there may be a fearful or negative feeling around money,” says Nancy Curtin, a certified financial planner at New York-based KBK Wealth Management.

“The point of money is to provide safety, but also to allow you to do things with your life,” says Dr. Green.

Anxiety around money can be both beneficial and harmful, depending on how it manifests itself in a person’s daily habits. “This can cause a person to become either extremely frugal…or to develop the attitude that they need to spend it all before it runs out,” Curtin says. “Another person may have grown up with abundance, but if they are not taught from an early age that someone had to work hard to attain that abundance, they may become a spendthrift.”

Financial psychologist and certified financial planner Brad Klontz has been studying these learned attitudes that drive our financial behavior for years. “We all have money scripts—beliefs that are passed on from our parents, our grandparents, our culture,” he says.

The Dark Side of Over-saving

Compulsive savers “look good on paper,” says Dr. Klontz, explaining that their commitment to saving and frugality make them better-positioned to handle financial hurdles down the road. But even these healthy behaviors can become a burden if taken too far.

Ironically, they can even be detrimental to a person’s financial health. For example, someone too concerned with building up a trove of cash for emergencies may be missing out on bigger returns in the stock market, and efforts at frugality—like hours spent clipping coupons or meticulously tracking spending—may cost someone more of their (valuable) time than they realize.

There’s a darker side to the drawbacks, too: an obsession with saving can even eclipse health and happiness. “In the extreme, I’ve seen clients neglect medical care,” says Klontz. “It’s the millionaire that won’t visit the dentist because he’s too afraid to spend money.”

Once they are set, financial habits are difficult to change. There’s a good chance that spending will always feel like pulling teeth for those with deep-rooted anxieties about money and that saving will always be a challenge for others. But even if our belief systems are cemented in childhood, there are ways to break the bad habits that have formed alongside them.

Find the source of your relationship with money. According to Klontz, the first step to fixing your financial shortcomings is taking a good, hard look at your feelings about money. “Ask yourself some questions,” he recommends. “What did your mother or father teach you about money? What are your biggest fears about money? What are your most painful financial memories?” Only once you understand the source of your assumptions about money—whether you compulsively save or like to live large—will you be able to challenge them.

Know when to get a second opinion. For those who often let money anxieties get the best of them, talking to an unbiased expert like a fee-only financial planner can provide a much-needed dose of reality. The same strategies that help people who have a hard time saving may be beneficial to compulsive savers, too. The trick is knowing when you have saved enough and should begin diversifying your assets.

“I have my clients set a savings goal so that they will have enough cash to live for at least six months if they were to lose a job. Then I have them add another 10% for good measure,” says Curtin. Once that goal is met, that cash should be allocated toward specific investment goals, like retirement. There’s an exception here: if you have short-term savings goals like saving up for a house or a vacation, it’s wiser to keep those savings in cash, where the money easiest to access.

Hold yourself accountable. Checking in with yourself regularly about your account balances to make sure that you aren’t hoarding cash in a low-yield savings account (or under the mattress) is critical. And while it may not come naturally to compulsive savers, prioritizing personal fulfillment is critical.
“The point of money is to provide safety, but also to allow you to do things with your life,” says Dr. Green.

TAGS: ,

Investing, Life Events, Strategies to Save

Retirement Accounts: What You Need to Understand

Advertiser Disclosure

The editorial content on this page is not provided by any financial institution and has not been reviewed, approved or otherwise endorsed by any of these entities.

Finances

With mounting concerns over Social Security, and a languishing number pensions, it’s more important than ever to start investing for retirement. Tax advantaged retirement accounts offer investors the best opportunities to see their investments grow, but the accounts come with fine print. These are the things you need to know before you start investing.

What are employer sponsored retirement accounts?

Employee sponsored retirement accounts often allows you to invest pre-tax dollars in an account that grows tax-free until a person takes a distribution. In some cases, you may have access to a Roth retirement account which allows you to contribute post-tax dollars. Contributions to employer sponsored retirement accounts come directly from your paycheck.

The most common employee sponsored retirement accounts are defined contribution plans including a 401(k), 403(b), 457, and Government Thrift Savings Plan (TSP). Private sector companies operate 401(k)s, public schools and certain non-profit organizations offer 403(b)s, state and local governments offer 457 plans, and the Federal government offers a TSP. Despite the variety of names, these plans operate the same way.

According to the Bureau of Labor Statistics, 61% of people employed in the private sector had access to a retirement plan, but just 71% of eligible employees participated.

How much can I contribute? 

If you’re enrolled in a 401(k), 403(b), 457, or TSP, then you can invest up to $18,000 dollars to your employer sponsored retirement accounts per year in 2016. If you qualify for multiple employer sponsored plans, then you may invest a maximum of $18,000 across all your defined contribution plans. People over age 50 may contribute an additional $6,000 in “catch-up” contributions or $3,000 to a SIMPLE 401(k).

In addition to your contributions, some employers match contributions up to a certain percentage of an employee’s salary. Visit your human resources department to learn about your company’s plan details including whether or not they offer a match.

What are the benefits of investing in an employer sponsored retirement plan?

For employees that receive a matching contribution, investing enough to receive the full match offers unparalleled wealth building power, but even without a match, employer sponsored plans make it easy to build wealth through investing. The funds to invest come directly out of your paycheck, and the plan invests them right away.

However, there are fees associated with these accounts. Specific fees vary from plan to plan, so check your company’s fee structure to understand the details, especially if you aren’t receiving a match. If you don’t have an employer match, then it may make more sense to contribute to your own IRA in lieu of the employer-sponsored plan.

Investing in an employer sponsored means getting to defer taxes until you withdraw your investment. Selling investments in a retirement plan does not trigger a taxable event, nor does receiving dividends. These tax benefits provide an important boost for you to maximize your net worth.

In addition to tax deferred growth, low income investors qualify for a tax credit when they contribute to a retirement plan. Single filers who earn less than $41,625 or married couples who earn less than $61,500 qualify for a Saver’s Tax Credit worth 10-50% of elective contributions up to $2000 ($4000 for married filers).

What are the drawbacks to investing in an employer sponsored retirement plan?

Investing in an employer sponsored retirement plan reduces the accessibility of the invested money. The IRS punishes distributions before the age of 59 ½ with a 10% early withdrawal penalty. These penalties come on top of the income taxes that you must pay the year you take a distribution. In most cases, if you withdraw money early pay so much in penalties and increased income tax rates (during the year you take the distribution) that you would have been better off not investing in the first place.

Additionally, investing in an employee sponsored retirement plan reduces investment choices. You may not be able to find investment options that fit your investing style through their company’s plan.

Should I take a loan against my 401(k) balance?

Since money in 401(k) plans isn’t liquid, some companies allow you  to take a loan against your 401(k). These loans tend to be low interest and convenient to obtain, but the loans come with risks that traditional loans do not have. If your job is terminated, most plans offer just 60-90 days to pay off the loan balance, or the loan becomes a taxable distribution that is subject to the 10% early withdrawal penalty and income tax.

It is best to only consider a 401(k) loan for a short term liquidity need or to avoid them altogether.

What if I don’t qualify for an employer sponsored retirement plan?

If you’re an employee, and you don’t have access to an employer sponsored retirement plan you have to forgo the tax savings and other benefits associated with the accounts, but you may still qualify for an Individual Retirement Account (IRA).

However, if you pay self-employment taxes then you can create your own retirement plan. Self-employed people (including people who are both self-employed and traditionally employed) can start either a Solo 401(k) or a SEP-IRA.

A Solo 401(k) allows an elective contribution limit of 100% of self-employment income up to $18,000 (plus an additional $6000 in catch up contributions for people over age 50) plus if your self-employed, then you can contribute 20% of your operating income after deducting your elective contributions and half of your self-employment tax deductions (up to an additional $35,000).

If you qualify for both a Solo 401(k) and other employer sponsored retirement plan, then you cannot contribute more than $18,000 in elective contributions among your various plans.

A SEP-IRA allows you to contribute 25% of your self-employed operating income into a pre-tax account up to $53,000.

What are Individual Retirement Accounts?

Individual Retirement Accounts (IRAs) allow you to invest in tax advantaged accounts. Traditional IRAs allows you to deduct your investments from your income, and your investments grow tax free until they are withdrawn (at which point they are subject to income tax). You can contribute after-tax money to Roth IRAs, but investments grow tax free, and the investments are not subject to income tax when they are withdrawn in retirement. There are income restrictions on being eligible for deductions and these vary based on household income and if an employer-sponsored retirement plan is available to you (and/or your spouse).

What are the rules for contributing to an IRA?

In order to contribute to an individual retirement account, you must meet income thresholds in a given year, and you may not contribute more than you earn in a given year. The maximum contribution to an IRA is $5500 ($6500 for people over age 50).

A traditional IRA allows you to defer income taxes until you take a distribution. Single filers who earn less than $61,000 are eligible deduct one hundred percent of deductions, and single filers who earn between $61,000 and $71,00 may partially deduct the contributions. Couples who are married filing jointly may make contribute the maximum if they earn less than $98,000, and they may make partial contributions if they earn between $98,000 and $118,000.

Roth IRAs allow participants to invest after tax dollars that are not subject to taxes again. The tax free growth and distributions can be especially beneficial for those who expect to earn a high income (from investments, pensions or work) during retirement. Single filers who earn less than $117,000 can contribute the full $5,500, and those who earn between $117,000 and $132,000 can make partial contributions. Couples who are married filing jointly who earn less than $184,000 may contribute up to $5500 each to Roth IRAs, and couples who earn between $184,000 and $194,000 are eligible for partial contributions.

What are the benefits to investing in an IRA?

The primary benefits to investing in an IRA are tax related. Traditional IRAs allow you to avoid paying income taxes on your investments until you are retired. Most people fall into a lower income tax bracket in retirement than during their working years, so the tax savings can be significant.  Roth IRA contributions are subject to taxes the year they are contributed, but the IRS never taxes them again. Investments within an IRA grow tax free, and buying and selling investments within an IRA does not trigger a taxable event.

Additionally, low income investors also qualify for a tax credit when they contribute to a retirement plan. Single filers who earn less than $41,625 or married couples who earn less than $61,500 qualify for a Saver’s Tax Credit worth 10-50% of elective contributions up to $2000 ($4000 for married filers).

IRAs also allow individuals to choose any investments that fit their strategy.

What are the drawbacks to investing in an IRA? 

Investing in an IRA reduces the accessibility of money. Though it is possible to withdraw contribution money for some qualified expenses, many distributions are to be subject to a 10% early withdrawal tax penalty when a person takes a distribution before the age of 59 ½. In addition to the penalty, the IRS levies income tax on distributions the year that you take a distribution from a Traditional IRA.

Should I withdraw money from my IRA?

Taking a distribution from an IRA means less money growing for retirement, but many people use distributions from IRAs to meet medium term goals or to resolve short term financial crises. The IRS publishes a complete list of qualified exceptions to the early withdrawal penalty.

If you have to pay the penalty, withdrawing from an IRA is not likely to be the right choice. Once the money is withdrawn from an IRA it can’t be contributed again. For short term needs, taking out a loan usually comes out ahead.

What’s the smartest way to invest?

Investing between 15-20% of your gross income for 30 years often yields a reasonable retirement nest egg, but even if you can’t invest that much right now, it’s important to get started. The smartest place to invest for retirement is within a tax advantaged retirement account.

If you don’t have access to an employer sponsored plan the best place to start is by investing in an IRA. On the other hand, if you have access to both an employer sponsored plan and an IRA, the answer is not as clear. Anyone who has an employer with a matching policy should aim to invest enough to take full advantage of any matching plan that your company has in place.

After taking advantage of a match, the next best option depends on your personal situation.

Employer sponsored plans and Traditional IRAs offer immediate tax benefits that can be advantageous for high income earners. However, investing in a Roth IRA keeps money more liquid than either an employer sponsored plan or a traditional IRA.

Of course, the best possible scenario for your retirement is to maximize contributions to both an employer sponsored account and an individual retirement account, but you should carefully weigh how investing in these accounts affects your whole financial picture and not just your retirement goals.

TAGS: , ,

Life Events, Strategies to Save

5 Questions to Ask Before Choosing the Right IRA Provider

Advertiser Disclosure

The editorial content on this page is not provided by any financial institution and has not been reviewed, approved or otherwise endorsed by any of these entities.

Man Paying Bills With Laptop

Choosing the right IRA provider can be challenging, especially when you don’t know what you should be looking for when choosing one. Let’s help you cut through the confusing financial jargon and focus on what you should be aware of when making this important decision.

You’ve finally determined that an IRA is the right move for you… now what?

The internet can be a great place to find information, products and services, however, there is no good way to separate the helpful advice from the misinformation. And, that’s why it’s so important to know what questions to ask. Here are the key areas to focus on when choosing your IRA provider.

1. What investment options are available on the platform?

If you already have or are looking to open an IRA, you probably understand the value of saving for retirement. The goal is to save (and hopefully grow) your money for the future. In order to set yourself up for success, it’s important to choose the appropriate investments for you.

We aren’t going to get into the details about determining which investments to choose, but we will look at what options are available on various platforms. Depending on which provider you choose, you may have access to a number of investment options including money market accounts, CDs, mutual funds, exchange traded funds, stocks, and bonds (this list could go on, but these are the most common options).

Each of these choices will expose you to varying degrees of risk and it is important to choose a platform that suits your needs. Some banks might allow you to open an IRA, but they may not have options outside of a basic interest bearing account, like a money market or a CD. These types of accounts are fine if your goal is to not lose money. The problem is that the interest rates are so low that you will have a difficult time beating inflation over time. The end result is that you will be losing buying power, which is a fancy way of saying that prices on products and services will rise faster than your money.

Other platforms like Fidelity, Vanguard or TD Ameritrade, will provide basic interest bearing options as well as investments that provide exposure to the stock market in the form of stocks, bonds, mutual funds and exchange traded funds (ETFs). These investments can allow you to design a diversified investment portfolio that can potentially grow your money for the long term.

Overall, you want to find a platform with a variety of investment options, ranging from the basic money market account, to index funds, target date funds (funds with a retirement year in the name that automatically move from aggressive to conservative based on your projected year of retirement) and maybe additional mutual funds that focus on specific sectors. This last group is not necessary unless you enjoy choosing your own specific asset allocations.

CFP opinion: Investments (other than stocks and bonds) will come with internal fees called “expense ratios”, the average of which is about 1.2%. These fees are common, so there is no need to avoid them completely. However, there are plenty of investments that charge well below 0.50%, so unless you have a compelling reason to choose a more expensive option, I would stick with the ones with lower expense ratios.

2. What platform fees should I be aware of?

Many providers will gladly accept your money because they know that they will earn revenue from the fees they charge. These fees include account maintenance fees, transactions fees (commissions), low balance fees, account transfer/termination fees, among others.

The size of these fees will range by type; some of them will be free, while others will cost as much as $200 dollars or more.

For example, when you open an IRA with Vanguard and invest in Vanguard mutual funds or ETFs, you will not pay sales loads, 12b-1 fees or commissions. You may also avoid paying annual account service fees by setting up online account access. However, you may be paying all of these transaction fees on other platforms. These fees can range from $8 to $60 or more per trade (buying or selling an investment). Others show up in the form of a percentage of your assets (12b-1 fees). I would suggest avoiding 12b-1 fees all together, as they are hidden fees that can really eat up returns.

The downside of going with a platform like Vanguard is that you won’t gain access to more sophisticated investment options (i.e. options, futures, margin accounts). I wouldn’t recommend using these types of investments anyway unless you consider yourself an investment expert and have the time to do the ongoing research necessary to maintain such a portfolio. So, in the end, this isn’t really a negative for most people.

Many platforms will also charge an account transfer and/or account termination fee. So, if you decide that you want to move your account elsewhere, you may be hit with a $25, $50, or even a $200 charge. I don’t recommend moving your IRA account often, however, you should be aware of what to expect if you decide to make a change.

The good news is that any platform you speak with should be able to provide you with a fee schedule that will list all possible fees. This is an important step before making the decision to open an account with a specific provider. Once you know the fees, you can make an intelligent decision on whether they are worth paying for. Most fees are not worth the cost, as every dollar that goes to fees is one more dollar that can’t be invested. Over time, this can add up to a lot of wasted money.

CFP opinion: I suggest finding a platform that charges very few fees. Choose one that will not charge transaction fees, low balance fees or other commissions. Ideally, you will also find one that does not charge IRA custodian fees. The one acceptable fee is an account termination fee, as the goal is to minimize the amount of times you move your account anyway. I would keep this fee under $100 just in case you do need to move it.

3. What about advisory fees?

Depending on where and how you open your account, you may also pay a financial advisor a fee to manage the account. This often comes into play when you are working directly with an advisor to manage your investments. This fee should be disclosed by your adviser at the onset of the relationship, however, don’t assume that it will be clear. The fee can range from 0.10% to as high as 2%+ depending on the advisor’s company and the way they charge (fee or commission).

Make it a point to ask how much you are being charged and what the fee covers. There are many reasons to pay a financial advisor to manage your investments, but you must be clear on the value you receive for the fee. If it’s not clear to you, don’t pay the fee.

CFP opinion: If you would like to work with an advisor, find a fee-only fiduciary who has your best interests in mind. Don’t pay more than a 1% advisory fee for your investments. There are plenty of excellent advisors out there who will charge this rate or less.

4. Are cash bonus offerings worth it?

Some platforms might offer special cash bonuses for opening an IRA and investing a certain amount of money within a period of time. Getting free money might sound great, but make sure to read the fine print and be aware of the above questions before moving forward. For example, Ally Bank is offering $500 if you open an account and rollover $200,000 from another retirement account.

Transferring that amount of money will be a roadblock for most people, however, even if you can do it, the bonus isn’t that great. It adds up to 0.25% (or less) of the account value. Also, you won’t have access to investments, only CDs and other interest bearing accounts with interest rates below 2%. Ally is a great banking option, but doesn’t have the options and flexibility most people require in an IRA.

Other platforms might offer the bonus but require you to invest in an annuity or keep your money in the account for a certain amount of years. If the rules aren’t followed, you can be hit with some pretty harsh penalties of up to 10% of your account balance.

CFP opinion: Don’t choose the platform based on the bonus. If you would select the platform with or without the bonus, then it might be a good option. It shouldn’t be one of the major determining factors.

5. Is the platform easy to use?

You should also ask to take a test drive on the platform. Many providers will (virtually) walk you through the online experience or point you to a video that will show you what to expect. Pay attention to how easy (or difficult) it is to access and make changes to your account. If you find that the platform is clunky, this may be a good reason to go elsewhere. With so many technological advances in the past 10 years, you should be able to see your account activity and investment allocations online from anywhere in the world.

As with all financial choices you make, it’s important to understand your specific goals and intentions for your IRA money. The best option for you will vary depending on your goals, age, wealth level, time horizon and risk tolerance. In general, you should look for an easy to use platform with online access, low fees, a variety of investment options and great customer service. It’s important to feel comfortable with all aspects, as you don’t want any excuse for ignoring your retirement money. Consistently contributing to and managing your money is paramount to a successful retirement.

TAGS: ,

Banking Apps, Reviews, Strategies to Save

EveryDollar and EveryDollar Plus: a Budgeting App to Keep You On Track

Advertiser Disclosure

The editorial content on this page is not provided by any financial institution and has not been reviewed, approved or otherwise endorsed by any of these entities.

Overdraft_lg_mobile vs trad

With so many budgeting apps and options available on the market, it can be hard to decide which tool will work the best for your personal financial situation. One of the newest options that just came out last spring is EveryDollar.

EveryDollar is the budgeting app created by personal finance guru Dave Ramsey. No matter if you agree with all of Mr. Ramsey’s financial advice or not, his “Total Money Makeover” program has helped scores of families get out of debt and gain control of their money.

“I’ve been using the EveryDollar budgeting app for about 6 months now and I initially found out about it by listening to Dave Ramsey’s podcast,” said Allison Haffner, a money conscious millennial from Colby, Kansas. “If I hadn’t heard about it on his show, I probably wouldn’t have started using it.”

EveryDollar is a budgeting app that can be used on your computer or your smartphone. There are two versions of the program – one is free and the other is a paid option that offers more features for it’s users.

How it Works

EveryDollarThe first step to using EveryDollar is going to the EveryDollar website to create an account and set up your zero-based budget. This process should be quick and easy. The website claims that you can create a budget in ten minutes or less, and it’s probably true if you don’t have a complicated budget.

The EveryDollar website creates eight different spending categories that cover the basics of most peoples’ budgets, but you also have the option to create custom categories for your budget if needed.

In addition to creating spending categories, you can also create and set up “funds” which is their term for different savings accounts, like an emergency fund, a vehicle maintenance fund, and more.

After you’ve finished the initial set-up of your budget and financial goals on the website, you can easily maintain your budget by updating it with your day-to-day expenses and purchases with the app.

As you add your expenses to your budget in EveryDollar, it will help you ensure whether or not your spending is in line with your planned budget by showing you graphs of your spending. This is a good reminder for you to make adjustments to your spending as needed throughout the month.

Pros of EveryDollar

Track in real time: Because EveryDollar is a budgeting app that’s available on your iPhone, it’s easy to put in your spending in real time throughout the day. This gives you plenty of reminders to make sure you are staying on track with your goals.

Split transactions: Another feature that’s great is the ability to “split” transactions when you put them in with your iPhone. For instance, your next trip to the grocery store might include more than just food for your family. If this is the case, you can easily split up the transaction to reflect the money you spent on pet food or other items besides just groceries.

Utilize Dave Ramsey’s Method for current followers: EveryDollar also helps you set financial goals and follow Dave Ramsey’s famous “Baby Steps” with a special tool just for those seven steps of your financial journey.

Sync with your bank accounts: In addition to the basic version of EveryDollar, there is a premium version called EveryDollar Plus that can be connected with your bank account to pull in your transactions automatically. This process occurs overnight and then you’ll have to categorize your expenses with a drag and drop system. You can connect multiple bank accounts and major credit cards to your EveryDollar Plus account, which makes it easy to track all of your spending.

EveryDollar makes it easy to keep track of your budget and have confidence that the information is correct because it does sync across multiple devices. This is a great feature for married couples that will both be accessing their budget on different iPhones or computers.

Cons of EveryDollar

Only iOS enabled: Unfortunately, the EveryDollar budgeting app is only available for iPhone users in the AppStore. Although it is not available for Android users at this time, you can still use the program on your computer. But this option may require you to keep better track of your spending as you are out and about so you can input it into your budget later when you get home and have access to your computer.

Can only sync to bank accounts if you pay: another downside of EveryDollar’s free version is that it can’t be connected to your bank account to automatically pull in your transactions every night as they hit your account. If you don’t want to pay for EveryDollar Plus, you will have to input all of your expenses manually. Although if you’ve been using a handwritten budget or even a spreadsheet of your own making, you’ve likely been doing this anyway.

Takes awhile to adapt: Haffner said the biggest downside she experienced with the EveryDollar app was that it took a little getting used to before she could easily use it for all of her budgeting needs.

“It did take me a little while to learn how to use the app to track my spending. I kept using my old spreadsheet alongside the app for a while until I got the hang of it,” she said.

Misnamed transactions: Another thing to watch out for if you decide to try EveryDollar Plus is the translation of merchant names on your transactions. When the app pulls in the transactions from your bank account or credit card, it converts the merchant names from an abbreviated version to the longer version to make it easier for you to drag and drop your expenses into categories. However, the translations are sometimes incorrect.

EveryDollar Plus Costs

EveryDollar Plus is offered for free for 15 days so you can try it out and see if it will work for your financial needs. During this trial period you will have access to all of the premium features, the most popular of which seems to be the automation between the app and your bank account. After the trial period, the cost for the premium version of the app is $99 per year. However, even if you decide to stick with the free version, the EveryDollar budgeting app offers a lot of features and benefits.

How Does EveryDollar Stack Up?

As mentioned, there are lots of options for budgeting apps. In fact, we even put together a list of the 10 best budgeting apps available.

MintMint is one the most popular budgeting apps because it’s 100% free for users. It also offers free transaction syncing between your bank account the app to help you keep track of your expenses. This is a feature you’d have to pay for with EveryDollar Plus. But budgeting with EveryDollar is actually faster and more user-friendly than Mint. Some of the “helpful hints” on Mint are actually ads, and users have been reporting more problems with Mint’s account syncing feature over the past year.

Screen Shot 2016-03-02 at 11.44.03 AMAnother popular budgeting app is You Need a Budget, or YNAB. This app is actually quite different from Mint and EveryDollar because it focuses more on budgeting into the future instead of analyzing the past and present. The YNAB program is based on living off last month’s income, encouraging you not to spend the income you’ve earned until 30 days later once you’ve built up a savings buffer. YNAB is $50 per year and if you are a data lover, this may not be the best option for you, as it doesn’t provide much in the way of analysis and trend data for your spending.

Who Will Benefit Most

Overall, EveryDollar has a very user-friendly interface that should make it easy for budgeting beginners to get the hang of creating and sticking to their first zero based budget. It’s also a good option to consider if you are on-the-go and want to refer back to your budget before making a purchase that could make or break your category for the month.

EveryDollar is a budgeting app that will likely be very popular due to it’s association with popular personal finance guru, Dave Ramsey.

That said, it might be hard to convince people to switch to EveryDollar since there are other budgeting apps, like Mint, that allow users to connect their bank accounts and sync transactions for free.

TAGS: ,

Strategies to Save

The Ultimate Guide for Handling Your Emergency Fund

Advertiser Disclosure

The editorial content on this page is not provided by any financial institution and has not been reviewed, approved or otherwise endorsed by any of these entities.

Woman trying to protect her saving

If our lives always went according to plan, we would never be hit with expensive car repairs, sudden job layoffs, family emergencies, or unexpected health problems. But these curveballs are simply part of life, and if you’ve ever been caught off guard for one of them, you know how important an emergency fund can be.

Most of us can agree having extra money set aside to deal with life’s rough patches is a good thing, but not everyone agrees on the specifics. It’s hard to see a downside to saving as much as possible, but here are some key tactics to keep in mind.

My Emergency Fund Story

I quickly learned the importance of an emergency fund after burning out in my previous career. Five years of promoting concerts throughout North America had taken its toll, and I knew I needed a break to recharge. But working in the music business also led to excessive spending on designer clothing, fancy dinners, and too much partying—leaving little savings to show for my hard work. So I drastically cut back, saving 40-50% of everything I earned, until I had finally socked away six-months of my take-home pay. My six-month emergency fund gave me the confidence to quit my job and recharge for a few months before eventually transitioning into tech.

How Much Emergency Fund Do You Need?

Experts recommend saving three to six months of your take-home pay in liquid assets for your emergency fund. But if you’re properly insured, a smaller amount may be sufficient. It’s also important to consider your existing level of liability. Ultimately, your individual circumstances will determine how much you need.

Ask yourself these important questions during the decision making process:

  • Does your employer or union provide a loss of income protection plan like short or long-term disability insurance?
  • What are the withdrawal terms on your permanent life insurance policy?
  • How robust is your medical insurance plan?
  • What is your existing level of fixed expenses and debt? You should certainly still have an emergency fund of at least $1,000 if you’re dealing with debt.
  • Does your family have additional sources of income?
  • Do you have access to a home equity line of credit?

Although saving too much is never a bad thing, it’s definitely possible to hold onto too much cash. Be aware that inflation eats away at the value of your cash over time. Also, there’s an opportunity cost when holding too much cash in low-return investments as opposed to investing some of those funds.

Tactics To Quickly Build an Emergency Fund

One of the fastest ways to build an emergency fund is by automating your savings. If a certain amount is deducted from every paycheck, you will never have the opportunity to spend that money earmarked for savings on payday cocktails. There are a couple of ways to set this up:

  1. Speak with your company’s HR department about automatically deducting a certain amount of money from every paycheck and depositing it into your savings account.
  2. Ask your bank to automatically transfer a fixed amount from your checking account to your savings account every month.

Even $25 or $50 a month accumulates more quickly than you might think. Remember, you won’t be able to spend what’s not available. Money market mutual funds, asset management accounts, and series EE savings bonds all work well for automated savings plans.     

Allocation of Your Emergency Fund Assets

The Importance of Liquidity

Most financial advisors emphasize the importance of maintaining adequate liquidity with your emergency fund. Liquidity means having easy access to cash, without needing to dip into your long-term investments, in order to pay your bills on time.

Although I saved the recommended six months of take-home pay, I didn’t hold an adequate amount in cash. After two months without a full-time job, I was forced to sell some stocks to cover my expenses—a move that can cause a loss of principal or tax liability.

A misallocated emergency fund certainly isn’t the worst financial problem you can have. But given the choice, you’d probably prefer not to be forced to sell off your assets when they’ve declined in value.

Where To Allocate Your Assets

There’s a lot to consider when you begin thinking about where to stash your emergency fund assets. For starters, you’ll want to consider your own risk tolerance. Next, you’ll need to evaluate each option’s rate of return. This isn’t always easy to compare because compounding interest rates are quoted at different periods (annually, quarterly, or even daily). You’ll also want to think about the tax implications of these allocations. A financial planner or accountant can help with specific tax questions you may have.

Here’s a breakdown of your options:

Checking account: They are convenient, easy to use, and FDIC insured. They generally require a low minimum balance, but some accounts can incur costly fees. The primary downside is no or low interest rates. If you’re using a checking account that keeps dinging you with fees, then it’s time to switch.

Savings Account: They are FDIC insured up to $250,000 and have higher interest rates than a checking account. In some cases the interest rates can be above 1.00% APY. However, the return is still considered low compared to the alternatives. Savings accounts aren’t as liquid as a checking account as it can take a day or more to access the funds depending on your bank.

Money Market Deposit Account: These accounts are insured, have limited checking privileges, and offer relatively attractive (variable) interest rates. However, they still offer lower returns than CDs and money market mutual funds. They also require a high minimum balance.

Certificate of Deposit (CD): CDs are insured, but interest rates are fixed, so you won’t benefit if rates go up. There’s a minimum required deposit and there are penalties for early withdrawal.

Money Market Mutual Fund: These funds work well for an automated payroll deduction plan and offer some checking privileges. There’s limited risk due to the short maturity of the investments, but they are not insured. The minimum initial balance is generally between $500 and $1,000.

Asset Management Account: This account also works well with an automated payroll deduction plan and offers a high return. However, these accounts aren’t insured and require a high minimum balance of $5,000. Additionally, these accounts have monthly fees that range from $25 to $200.

U.S. Treasury Bills: These offer attractive interest rates, are exempt from state and local taxes, and guaranteed by the Federal government. However, they are far less convenient to liquidate than the other options.

U.S. Series EE Bonds: Depending on when they are purchased, the interest rate can be fixed or variable. They can purchased and redeemed at any bank and work well with automated payroll deduction plans. They are exempt from local and state taxes. Interest only accrues twice per year, and there’s a penalty if you redeem before five years.

Regardless of the amount and the allocation you choose, an emergency fund is critical for your long-term financial health. In a perfect world, you’d never have to use it, but you’ll sleep much better at night knowing you’re covered if a disaster strikes.

TAGS:

Banking Apps, Strategies to Save

Review: Toshl Finance Budgeting App

Advertiser Disclosure

The editorial content on this page is not provided by any financial institution and has not been reviewed, approved or otherwise endorsed by any of these entities.

Toshl Finance Budgeting App

When you’re looking for a budgeting app, you’ll find no shortage of options on the market. Yet few mix pragmatic finances with pure fun as successfully as Toshl Finance. As you move through its interface, you’ll be greeted by the Toshl monsters, who will guide and cheer you on.

What is Toshl Finance?

Screen Shot 2016-03-02 at 11.46.42 AMToshl Finance is a budgeting app that is accessible both via a web-based app and on virtually any mobile device. Toshl’s goal is to make money fun, so they’ve set up a friendly user interface to help you evaluate past spending habits, get a snapshot of your current finances, build realistic budgets for the future, and even remind you when bills are due.

How does Toshl Finance work?

When you sign up for Toshl Finance, you’ll be asked to open up your wallet to record your cash reserve. After you have your current cash status uploaded, you’ll have the option of linking your financial accounts.

Using the information from your financial institution, Toshl Finance will give you easy-to-understand charts displaying your spending habits and your current money situation. Using this information, you’ll then be able to build a budget based on your actual, recorded spending habits rather than guesses and assumptions.

What security features does Toshl Finance offer?

Toshl is big on encryption. The web app comes with SSL encryption. All data stored in the database is encrypted, as is all data exchanged between your devices. Passwords are even stored using a one-way hashing algorithm, meaning that even tech support won’t be able to hack your secret code.

What does it cost?

For many, using Toshl is free. However, if you have three or more financial accounts you want to link to your profile, you will need to upgrade. Also, if you want to create more than two budgets, you’ll have to switch to Toshl Pro, too.

Pro comes in at $1.99 per month or $19.99 per year. Along with being able to link unlimited accounts and create unlimited budgets, you’ll also be able to upload pictures of your receipts with this membership level.

If you upgrade and hate it, you can cancel and get a refund within the first 30 days.

Who is Toshl best for?

If you’re looking for a budgeting app that isn’t boring, Toshl is your best bet. The user interface is engaging without sacrificing any functionality. In fact, the ability to both look back and towards the future of your finances is something that’s not found in all budgeting apps, making this a great option for nearly everyone.

Toshl Pro presents interesting possibilities for freelancers or those that want to keep their business and personal finance budgets separate. Because you can add unlimited accounts and create separate budgets, you can simultaneously view your current big picture financial situation while still allotting your dollars to definitively separate endeavors (i.e. rent and groceries versus business cards and automation services.) The added bonus of being able to upload receipts is also great for record keeping.

What are the pros and cons of using Toshl Finance?

There are some amazing pros and a few cons to contemplate before deciding if Toshl Finance is the budgeting app for you.

Pros

  • Allows you to analyze past spending behaviors while also enabling you to budget for the future.
  • Encourages saving.
  • Reminds you when bills are due.
  • Free option is available for those with two or less financial accounts.
  • No ads.
  • Fun and functional interface

Cons

  • Marginal fee for those with 3+ financial accounts or the need for 3+ budgets.
  • Functionality on mobile is good, but limited. You will need to use the web app at least some of the time.
  • Focused on investing? If so, there are better options on the market.

How does Toshl Finance stack up against the competition?

If you find yourself uncomfortable with any of those negatives about the app, then you may want to look at another budgeting app. Here are three alternatives that may better fit your goals:

Personal Capital

Personal Capital Personal Capital has a roughly similar business structure to Toshl. There are no ads; it makes money through subscription memberships. With Personal Capital, though, you can invest directly through the app. If you’re less concerned about basic budgeting and more concerned about managing your investments, this may be the way to go.

Mint.com

MintDislike the idea of paying a subscription fee? Mint.com is an absolutely free budgeting app, regardless of how many accounts you want to link. While there won’t be fun little monsters to greet you, there will be tons of user-friendly charts to help you evaluate past spending and budget for the future. Because they don’t charge a fee for use, you will be inundated with ads.

YNAB

Screen Shot 2016-03-02 at 11.44.03 AMIf you’re looking to completely revamp your financial situation, you may need more help than the Toshl monsters can provide. You Need a Budget (or YNAB) is more about helping you change your lifestyle than simply helping you track your cash. It’s intensive, and won’t have cute little monsters along the way. It also won’t be as big of a help when you’re looking back at your finances retroactively. What it will do is whip you into shape for a better tomorrow, forcing you to reevaluate the way you think about and spend your paycheck. Fees are higher than Toshl at $5/month or $50/year, but may be worth it if you find yourself living paycheck to paycheck even though you’re making a comfortable income.

Overall, we like Toshl. If you’re looking for a comprehensive app that brings some levity into a traditionally boring chore, you won’t find too many other options that are able to meet Toshl’s combination of spirit and practicality.

TAGS: ,