Secure Your Future Retirement By Avoiding These Missteps in Your 40s

The following post is by MPFJ staff writer, Melissa Batai.  Melissa is a freelance writer who covers topics ranging from personal finance to business to organics to food.  She blogs at Mom’s Plans where she shares her family’s journey to healthier living and paying down debt.

When you’re in your 40s, you may begin to feel a great deal of financial pressure.  Your children are growing up, and the expenses associated with that begin to pile up.  You may find yourself shelling out money for more expensive extracurricular activities, higher grocery bills thanks to your children’s endless appetites, car payments so your children can begin driving themselves, car insurance payments, and college tuition.

As if that is not enough to put a strain on your budget, this may also be the time when your aging parents need more support, both financially and physically.  You may be helping them out monetarily or helping them out physically, which may mean less time at work for you as well as less income.

This decade, more than any other, is the one where your choices can make or break your future retirement.  This is partly because if you make a mistake financially in your 40s, there is not much time to recover financially, unlike mistakes you may make in your 20s when you have four or five decades to recover before retirement.

In your 40s, be careful to avoid these financial mistakes:

 

Refinancing Your Home and Extending the Life of Your Mortgage

Refinancing your home for a significantly lower interest rate is a smart money move.  However, too often, people refinance to lower their interest rate, but then they also extend the life of the mortgage.  True, this can reduce your monthly payment, which may offer you financial relief now, but it can later wreak havoc with your finances and your target retirement date.

Let’s say you bought a house when you were 35, and you pay on the loan for 10 years.  You are now 45 and have just 20 years left on your loan; you would own the home free and clear at age 65.  This works out rather nicely as 65 is a time when many people retire.  However, if you refinance at 45 and extend the loan back to the original 30 year term to lower your payment and create some financial breathing room in your budget, your home won’t be paid off until your 75.  This can cause quite a strain in retirement.

Many people do not have enough money set aside in their retirement account to comfortably cover a house payment, especially as medical expenses typically increase as you age.

You may say that you won’t retire until the home is paid off, but you can’t always control that.  Sometimes medical issues make retirement come earlier than planned.

 

Taking Out a Home Equity Loan

When you feel a financial crunch, your first thought may be to tap the equity in your house by taking out a home equity loan.  After all, the interest rates are usually much lower than a loan you can take out at your bank or a credit card.  You can also extend repayment time, often to 10 or even 15 years, which is typically not available on a loan that you get from the bank.

However, if you’re unable to make your home equity loan payments, you can lose your house just as you could if you weren’t able to make your mortgage payment.  In addition, if your home loses value during the time you’re repaying your home equity loan, you may find yourself underwater, meaning you owe more on the house than the house is worth.  If you need to sell during this time, you would need to pay the difference between the current value of the house and what you still owe between the mortgage and the home equity loan, which is often tens of thousands of dollars.  Too often, people who are underwater are unable to even put their home on the market because they know they won’t be able to generate the money needed to pay off the house loan when they sell their house.

 

Taking Out a Student Loan for Your Child

When your child is ready to attend college, you may feel a natural instinct to help him.  College is expensive, and you may not want your child saddled with student loan debt.  However, there are plenty of alternatives to taking out student loans for your child.

First, let your children know, from the time they are in upper elementary school, that you will not be able to help pay for their college education.  (Does this sound too harsh?  Trust me, your children will be glad when you’re retirement age and have enough money to take care of yourself because you made saving for your own retirement a priority.  Your children will be glad that you are not their financial responsibility, especially when they’re just starting out.)

By letting your children know this early, they can pick local colleges that will be cheaper, they can apply for scholarships and grants, and they can save money themselves for college.

Yes, if you don’t take out loans for your children, they will probably have to take out student loans themselves.  Remember, they are the ones who may qualify for loan forgiveness based on their career.  That will never be an option when a parent holds student loans.  Also, children with student loans can choose an income-contingent based repayment plan; parents can’t.

The government takes very seriously defaulting on student loans and will recoup their money if you stop paying.  “Federal payments to borrowers who have not made scheduled loan repayments can be withheld to repay the loan, including tax refunds and Social Security retirement or disability benefits” (US News).

Finally, if you don’t take out student loans for your children and you’re doing well financially and saving enough for retirement, you can always choose to help your children pay down their student loans faster.

Simply put—don’t take out student loans for your children.  Just don’t do it.  You and your child will be glad you didn’t twenty years from now.

 

Raiding Your Retirement Account

Once you start to amass a fair amount in your retirement account, you may be tempted to tap into that account when you hit a financial bind, which is likely in your forties.  However, there are significant drawbacks to raiding your retirement fund.

First, you lose the ability for the money you withdraw to continue generating interest and growing your nest egg further.

Second, you’ll need to pay a 10% penalty for withdrawing the money if you’re under the allowable age.

Third, the money that you withdraw will count as taxable income on your tax returns, so you’ll also need to pay taxes in addition to the 10% penalty.

Your 40s can be the time when you secure your retirement funding and can begin to plan for a relaxing, enjoyable retirement.  However, as you face dual financial stress in your 40s from increased financial needs from your growing children and your aging parents, you may feel pressure to find more money to infuse in the budget.  This pressure can lead to any of the above unwise financial decisions that can derail your retirement plans and lead you to a difficult financial position in your 60s and 70s.

How about you all? What financial moves do you suggest people in their 40s avoid to keep their future retirement secure?

How Millennials Are Avoiding Credit Card Debt

The following is a post by MPFJ staff writer, Toi Williams, who is a professional finance blogger for MarketBeat. She has backgrounds in personal finance, sales, and real estate.

Young Americans under the age of 35, who are often referred to as millennials, are increasingly avoiding credit cards and the debt that tends to come with them. Roughly 63 percent of millennials don’t have a credit card, versus only 35 percent of older adults, according to data from the Federal Reserve. The data also suggested that millennials are using credit cards less than people of a similar age did in the past.

The number of Americans under the age of 35 holding credit card debt has reached its lowest level since the data was first collected in 1989. According to the Survey of Consumer Finances, roughly 37 percent of American households headed by someone aged 35 and under held credit card debt in 2013. That is down nearly a quarter from immediately before the financial crisis that began in 2008. The level has not fallen as much for any other age group.

 

Reasons For Avoiding Credit Cards

There are numerous reasons for millennials’ avoidance of credit cards. Some young Americans say that they are avoiding credit cards because they have lived through the damage such debt caused during the financial crisis. Others say that they avoid credit cards because they do not trust the financial markets. Some watched as consumer and small business credit lines were cut off in the midst of the financial crisis.

Some millennials are dealing with much larger student debt loads than previous generations. The Project for Student Debt found that student debt increased an average of 6 percent each year from 2008 to 2012. According to federal data, the average American under the age of 35 now has $17,200 of student debt. That is 182 percent higher than Americans of the same age had in 1995. These burdensome student debt loads make it hard for them to take on any more debt.

Laws passed after the financial crisis also make it much harder for younger people to secure credit cards. The Credit Card Accountability, Responsibility and Disclosure Act of 2009, or CARD Act, mandated that borrowers must prove they have the means to repay the debt. The CARD Act also altered the lending landscape by restricting the ability of banks to market their products on college campuses. Today, many of the tents that credit card companies used to pitch all over college campuses to advertise their products have vanished.

Many young Americans believe the risks involved with debt outweigh the benefits. Credit cards offer the temptation to spend beyond one’s means. The idea with a credit card is you’re essentially putting money down that you don’t have and making a promise to repay it back with additional money for the convenience of having what you want right now. Some millennials simply prefer to pay for things as they go, without having to worry about paying a bill later.

Millions of millennials are using payment methods that do not involve debt for their purchases. Debit cards, which draw funds directly from a bank account, offer many of the same payment advantages as credit cards without the risk of accumulating debt. For online purchases, an app like Venmo or an online payment service like PayPal can be used.

 

The Consequences of Avoiding Credit Cards

Millennials’ avoidance of credit cards could prove detrimental in the long term, not just for them, but for the financial system as well. Historically, credit card use during the young adult years have made Americans more comfortable with making larger purchases with debt when they are older. Having a credit card also helped them establish a credit score, giving them more access to financial services later in life.

Having a good credit score is more important for this generation than previous ones because today, many more things are tied to credit scores. Credit scores are used to determine interest rates on mortgages and personal loans, may be used as a qualification for a rental home or employment opportunity, and may be used in the determination of insurance premiums. Those with low credit scores or non-existent credit histories find themselves paying more for the same financial services that others obtain at a much lower rate.

Fortunately, millennials don’t need to go into debt to get a good credit score. By paying off the credit card debt completely each month, they can still have good reports sent to the credit bureaus based on the open account. However, a survey by Bankrate found that only 40 percent of millennials with credit cards pay off their balances in full each month, compared with 53 percent of older adults. Millennials were also most likely to miss payments completely.

 

Finding a Good Credit Card

For millennials that do choose to use a credit card, picking the right card is key. Those just starting with credit cards should choose the card with the lowest annual interest rate without being distracted by offers for cash back or rewards. Until you have experience using the card, you will not know whether the rewards offered are worth it or even if you will spend enough to qualify for the rewards. You can always get an additional card with rewards after you have established your credit history.

Finding a credit card with a reasonable interest rate may be difficult for most millennials. According to Experian, the average millennial has a VantageScore of 628, which lenders largely consider subprime. Even for millennials with higher scores, the lowest available APRs offered on new credit cards topped 15 percent on average last summer according to CreditCards.com, marking a five-year high. These rates are expected to rise with future rate hikes by the Federal Reserve, as there are legal limits on certain card fees but no limit on APRs.

While choosing the best interest rate seems simple, it isn’t. Even after you have the card, it’s best to simply assume that the company can change your rate at any time for any reason. The key to ensuring that the rate stays as low as possible is minding the fine print and playing by the rules.

Be aware of when introductory offers end and what transactions they apply to. Review the information for all the fees that apply to the card, including annual fees, balance transfer fees, and cash advance fees, even if you don’t think you would ever use that service. There are many websites available online that will compile the information for several different cards into an easy to read format for comparison.

***Photo courtesy of https://www.flickr.com/photos/128185330@N03/17705922131/in/

What I’d Tell My Teen-Aged Self About Money

The following post is by MPFJ staff writer,Laurie Blank.  Laurie is a wife, mother to 4 and homesteader who blogs about personal finance, self-sufficiency and life in general over at The Frugal Farmer. Part witty, part introspective and part silly, her goal in blogging is to help others find their way to financial freedom and to a simpler, more peaceful life.

I’m turning fifty this year. All in all, I’m happy about fifty. Life is good and I’ve learned lessons that have helped us overcome a massive financial mess. But along with the many good decisions I’ve made, I’ve made my fair share of mistakes along with way – many of them financial ones. If I could go back in time and talk with my teen-aged self, here’s what I’d tell her about money.

 

Money is Always Available…Somewhere

I always had this thought growing up that there was a set amount of money in the world and that either you had it or you didn’t. I grew up believing that whether you were rich or poor was largely out of your control, and we were on the poor side. I’ve learned through side hustling that money is always available somewhere if you’re willing to go out and find it and work for it. The want ads are bustling with opportunities for work, as are sites like Upwork and Craigslist.

The work opportunities out there may not always be pleasing to one’s palette, but they are available. If I could go back and talk to my teen self, I’d tell her not to cling to her job as if it was the only one available, because there’s always other opportunities to earn money for those willing to work to find them.

 

Mindset Affects Wealth

Since I grew up poor and was taught (inadvertently) that we were destined to be poor, my mindset was that there was no use in trying to change things. I believed this up into my mid-forties, and then I found personal finance blogs.  As I read the stories of dozens of people climbing out from under their debt, I realized that we could too.

From there my husband and I began a long process of figuring out why we were always broke, and we learned that we were self-sabotaging our money management because we’d both been under the false belief that we would always struggle for money. We were piddling away our money on small, useless things like drive-thru meals and cable TV, not realizing the impact those “little” spends were having on our bank account.

We were so lack-minded that we’d start to feel panic if we had a little bit of money in savings. It just didn’t feel right. I know that sounds odd, but when you’ve lived with a belief long enough – no matter how wrong that belief is – anything contrary feels wrong.

We had to teach ourselves that, more than deserving “stuff”, we deserved financial security.  This is what I’d tell 16-year-old me: How you view money affects how much money you’ll have.

 

Popular Opinion Doesn’t Matter

Growing up poor in the public school system is not fun. I remember being teased about my two-dollar canvas tennis shoes and thrift store jeans. These memories convinced me that “stuff” meant acceptance. When I got my first job in fast food at 15, I spent nearly every dime I made on clothes at the local County Seat (give me a shout if you’re old enough to remember that store J ).

Eventually – but not soon enough – I learned that the pursuit of the approval of the Joneses is fruitless. If I could tell my teen self that, she’d be one rich woman right now.

 

Thinking Bigger Will Get You Bigger Results

When we were struggling for money and deep in debt, we could never think beyond making it to the next payday and hoping we’d have enough money to pay the bills. If we ended the month in the positive (which didn’t happen very often) it was a good month.

Once we started to pay off our debt, save money and manage our lives differently, we learned to think bigger. Our original goal was to simply have enough money to make it through the month. Then our goal changed to paying off some of our debt. Then we wanted all of our debt gone. Our new goal is financial independence – for the purpose of helping others.

The great thing about learning to think bigger is that it allows you to take others into consideration besides yourself. We now give away more money and “stuff” than we ever have before. We’re making an impact for good on others and aren’t so focused on ourselves. If I could go back in time, I’d tell my teen self to expect more out of life than just making it to the next payday. I’d tell her to think BIG and allow herself to imagine a better future – one where she could journey toward success and help others in the process.

How about you all? What would you tell your teen self about money?  

***Photo courtesy of https://www.flickr.com/photos/goodncrazy/4833445750/in/

How You Could Be Saving 33 Percent More This Year

The following post comes from DJ over at My Money Design, a blog that is completely dedicated to the idea of living a better life through finding financial freedom. You can also check out DJ at his new website, 1,000 Ways to Save. Enjoy!

If you’re looking for something truly powerful to do differently with your money this year, and you really want to ramp up your savings, then look no further than your 401(k) (or whatever tax-deferred savings plan you use)

Follow this simple advice: Max it out!

I’m serious.  Though it won’t necessarily be easy, by maxing out your savings, you could be pocketing an extra $4,500 this year.  ($9,000 if you’re married).

Here’s how it all works.

 

How Tax-Avoidance Saves You More

One of the things that is hard for people to really wrap their heads around is the idea of just how much money they are actually saving by using a tax-deferred retirement account such as a 401(k).

When taken to the extremes, the results are phenomenal! Let me illustrate.

The classic way to save money is to simply do the following:

  1. Earn money.
  2. Pay taxes.
  3. Get a paycheck for whatever is left over.
  4. Save some percentage of that paycheck.

Let’s say for simplicity that your gross (before taxes) bi-weekly pay is $3,000.  This means that:

  1. Earn money: $3,000 gross
  2. Pay taxes: If you’re in the 25% tax bracket, then roughly $750 of your money goes to the tax man.
  3. Get a paycheck for whatever is left over: $3,000 – $750 = $2,250
  4. Save some percentage of that paycheck: Let’s say you save 10%. That means that $2,250 x 10% = $225 goes into your after-tax account.  This leaves you with $2,250 – $225 = $2,025 to do with as you please for your normal, everyday living expenses.

Good effort!  But you’re missing out on an opportunity; a 33% more savings opportunity to be exact!

How so?

Follow the same math but use a 401(k) plan this time.  Here’s how it’s different:

  1. Earn money: $3,000 gross
  2. Save some percentage of those earnings. THIS TIME, because of how a 401(k) works, we get to save our 10% up-front!  Now, instead of saving $225, our same 10% savings works out to $3,000 x 10% = $300!
  3. Pay taxes: With only $3,000 – $300 = $2,700 leftover, now your 25% taxes drops down to $675.
  4. Get a paycheck for whatever is left over. Look at that!  Your net paycheck works out to $2,700 – $675 = $2,025 just as it did in the first example.

Do you see how that works?  You net the SAME amount of spending money in the end, but your savings went way up!

By how much? 

($300 – $225) / $225 = 33% more!

How is that possible? 

It’s simple.  You paid yourself instead of the tax-man.  By taking full advantage of a tax-deferred savings account, for every dollar you save, you’re NOT sending off 25 cents of it to the IRS.  You’re hanging on to it; keeping the full dollar for yourself.

Though that may not sound like a big accomplishment, when you really take advantage of this opportunity to the fullest extent, its true potential is revealed.

The IRS will allow you to save all the way up to $18,000 this year in your 401(k).  Using the same numbers as before, that could end up being a total of $4,500 MORE that you save for yourself (instead of handing over to the government).  If both you and your spouse do the same thing, then it doubles to $9,000 more for the two you!  That’s an incredible amount of savings!

How do I get there?

First off: I completely understand that deferring $18,000 into your 401(k) is not something that is going to happen over-night.  For most people it’s a struggle, and it certainly was for us.

However, once you recognize how powerful this savings tool is, it can become like a deal that is too good to pass up.  Over time, you’ll want to make every attempt imaginable to save money where you can so that you can take advantage of this opportunity more and more.

 

More Ways to Squeeze More Out of Your Savings

As if taking full advantage of your 401(k) and getting 33% more savings wasn’t cool enough, you should also know that tax-avoidance doesn’t have to stop there.  There are plenty of other tricks at your disposal to use as well.

IRA’s.  IRA’s are great because they are like a 401(k) but you have a lot more control over where the money gets invested and how you handle it.  No matter whether you prefer a traditional or a Roth, make every effort available to try to max out these accounts as well.

Even if all you qualify for is a non-deductible traditional IRA, remember that you can always convert it over to a Roth at a later time.  Then you’ll enjoy tax-free spending on the back end!

Employer Contributions.  Does your employer contribute money to your 401(k)?  If so, that’s ALSO tax-deferred money that you get to keep!  Find out from your HR exactly what the rules are and do whatever you have to in order to max this out.  If not, you’re leaving free money on the table!

FSA’s.  If your employer offers a flexible spending account (FSA) for dependent care or health care expenses, this is another golden opportunity for you to save hundreds of dollars in the process.  FSA’s allow you to save a portion of your gross income for special needs before the taxes are taken out.   Here’s an article from the IRS about how they work.

For years, my wife and I would contribute the IRS maximum of $5,000 into our FSA .  That money would simply be turned around and used to pay off our daycare expenses.  But like the example above with the 401(k), had we NOT used the FSA, then after taxes that $5,000 would have really only been $3,750.  The FSA effectively gave us an extra $1,250 to use on our kids.

Now that the kids are older, we still use the FSA for our health care needs.  Though the IRS maximum is lower, we still end up getting hundreds of extra dollars to use on our medical bills that would have normally went away to the IRS.

529 Savings.  If you’ve got kids and would like to set money aside for them to use for college, then a 529 savings plan is one of the better ways to go.  A 529 savings is similar to a IRA, but instead of the end goal being retirement, you use the money to help pay for higher education needs like tuition, room and board, etc.  You can see what kind of 529 plans are available in your state with this website here.

We’ve been contributing a very small amount of money to our children’s 529 funds for years.  Every year when I receive our statements, I’m amazed by how much the money has grown up to in just a few short years.  Thank you compounding returns!

Readers – What are some of the ways that you take full advantage of tax-deferred savings?

***Photo courtesy of https://www.flickr.com/photos/68751915@N05/6355261479/in/

5 Ways to Earn Extra Money Fast for the Holidays

The following post is by MPFJ staff writer, Chonce. You can read more articles by Chonce over at her personal blog, My Debt Epiphany. Enjoy! 

The holiday season is winding down. While the holiday time is an exciting time to relax and spend time with family, it can also be quite stressful on your finances due to all the costs associated with the holidays.

Many people spend hundreds or even thousands of dollars on purchasing holiday gifts, decorations, hosting and attending parties and events, and so on.

Nothing stings more than getting into debt this time of year. One thing you can do to avoid spending more than you earn over the next few weeks is to find ways to earn more money to cover the increased expenses over the past few months.

Here are 5 ways to earn extra money fast to either prepare for or recover from the holiday season.

 

  1. Get a Seasonal Job

 

Earning extra money through a seasonal job is a good idea if you are worried about stretching your budget for the holidays.

Seasonal jobs tend to provide a consistent income (even though it’s temporary) because business usually picks up during the fall and holiday seasons.

Many businesses like Amazon.com will be looking for online customer service reps this holiday season to assist shoppers and answer questions about purchases, shipping inquiries, and more.

This positions with Amazon range from $12 – $15 per hour on average and can last up to 6 months or longer if you leave a lasting impression and they need to take on a regular employee.

You can also try working as a seasonal associate at busy stores like Target, Walmart, K-Mart etc. Or, try getting holiday-themed gigs like doing photography at the mall or decorating store fronts.

 

  1. Test Websites

If you’re looking to earn some extra money from home, you can test out websites during your spare time and offer your honest feedback.

UserTesting is a popular website that pays people to review other websites and blogs.

Testers get paid $10 for each 20-minute review and they just answer simple questions and record their first impressions and experience navigating through the website.

It’s not a ton of money, but it will add up once all those unexpected holiday expenses start trickling in.

 

  1. Sell Items Online

If you’re buying new gifts for people in your family, it’s the perfect time to clean out your home by selling items you no longer use.

You can sell items online via Amazon, Ebay, or Craigslist, or you can sell them directly to buy-back consignment shops.

If you have old clothes, movies, furniture, children’s toys etc. there are many small stores that may buy them back from you if they are in good condition. Plato’s Closet, Once Upon a Child, Clothes Mentor, and Disc Replay are all national chains and there are plenty other options depending on where you live.

If you don’t have many consignment shops in your area, stick to selling your items online for better results.

 

  1. Become an Uber or Lyft Driver

My husband recently started driving for Uber and he loves it. His car is older (a 2006 I believe) and we live in the suburbs but he still gets a decent amount of trips and his side income is currently helping him be able to afford holiday expenses this year.

Uber also pays drivers every week, so if you get started now, you can get paid a few times before Christmas.

One of my friends recently quit a job he didn’t like to drive for Uber and Lyft. Lyft drivers also get paid weekly and Lyft allows drivers to receive tips. According to Lyft, around 60% of passengers tip.

No matter which rideshare option you choose, you can enjoy flexible work and drive to earn money whenever it’s convenient for you.

 

  1. Babysit

If you have friends, family, and neighbors who may be busier over these next few weeks, consider offering to babysit for them. Couples love date nights and since daycares aren’t open in the evening, you can market your services better around that time.

Making a profile on Care.com or Sittercity.com will also help you land clients.

If you can’t or don’t want to watch kids, consider babysitting pets by walking dogs or keeping an eye on them when their owners are out of town.

You can advertise your services in your neighborhood and I always recommend Rover.com which is a site that connects pet sitters and dog walkers with owners who are in need of the service.

If you need extra money to recover from the holidays, you can earn money quickly by trying any of these ideas.

The key is to get started so you know how much you need to earn.

How about you all? How are you earning extra money to recover from the holidays?

Share your experiences by commenting below! 

***Photo courtesy of https://www.flickr.com/photos/76657755@N04/7027602839/in/