Money is not about bank balances, it’s about emotions. Recognizing how money influences our emotions can help us to make smarter decisions, and lead to a prosperous future. Money shouldn’t consume us or be the center of our lives. Materialism and consumerism are entrenched in our everyday lives through movies, television, advertising, etc. It shouldn’t be about having the nicest stuff, trying to impress people, or thinking that money makes us better. We rather go to an expensive dinner with friends knowing that we can’t really afford it, as opposed to the embarrassment that we think would come from telling our friends that we can’t afford it. We need to be honest with ourselves, holding our actions accountable for the financial decisions we are making. Is going into debt worth experiencing the stress of having to pay for that expensive dinner with your friends? Good friendships aren’t built on money.
While financial goals will probably change as our needs change, we need to make sure that we are reviewing them periodically. At a minimum, doing an annual financial check-up on our goals helps to measure our progress, and determine any new priorities. However, your first priority should be starting an emergency fund and then staying out debt.
Saving money always seems to have its challenges, but there are really only 2 ways to save: to earn more money, or cut back on our spending. Unfortunately, most of us spend money without thinking about the consequences. If we want something, we buy it. It feels good, or it was impulsive, but then we have to deal with the after effects of spending the money, especially if we went into debt to do it. Our desire for that new car or the exciting trip overrides all sense of judgment. It’s a buy now, deal with it later mentality that can create so many problems. Ironically, there are probably many times where we second guess our purchases with a sense of buyer’s remorse. While spending the money was exciting, the thrill is usually very short lived. Ironically, if we could have just taken a step back first and thinking through all the potential problems our spending can cause, we might not make needless purchases. If we would stop and remember what we had to do to earn the money in the first place, and how hard we worked for it, many of us would probably re-think our spending. We need to ask: “Do I really need this?” or “Is this going to change my life?” or “Does this help me reach my financial goals?” If the answer is “no,” or anything less than a resounding, “yes!” then it’s probably not worth the expense. It is a commitment to decide what’s really important, and to spend our money wisely. Our promise should be to live within our means, looking for ways to cut back on our expenses. Some additional points to consider are:
Remember that living within our means is spending what we have, not what we don’t have. Two of us can make the same amount of money, and yet have such different financial circumstances because of the way we save and spend. As we mentioned, save first, put money away towards your financial goals, then pay your bills, and spend what’s left over. Most of us do the exact opposite, we spend first, then try to make what’s left over work to pay our bills, savings is just an after thought, and never a priority. If you can’t afford it to begin with, then don’t spend it. Live within your means, and the savings will start to build.
American Financial Literacy Institute provides a lot of educational events for organizations and companies. Subsequently, we meet with many people to discuss their personal situations in greater detail, have questions they want answered, or advice on what they should be doing with their finances. When it comes to conversations regarding retirement issues, a couple of questions come up regularly:
- What happens if we get sick or need long term care during retirement? Can we afford it? Will we be wiped out financially?
- If I want to work while I’m retired, what happens to my social security?
With regards to the first question and getting sick, there are obviously many different outcomes. In a recent report with Fidelity Investments, they discussed a couple retiring at age 65 to age 85 could spend over $260,000 on medical expenses during retirement. Unfortunately, as we get older, we have a greater risk for critical illnesses like cancer, heart attacks, stroke, and many other problems. People also have a greater need for chronic illness protection associated with long term care and assisted living needs. One solution that I have used successfully to help reduce these risks is getting life insurance with “living benefits” protection. This hybrid type of life insurance gives the policyholder access to a portion of the death benefit to help pay for critical and chronic illness. When designed properly this can be a great way to help offset medical costs, and even allow the money from the policy to be used on a tax-free basis. There are rules, exceptions, and underwriting details, but it could be worth considering.
As far as working during retirement, Americans are doing this more and more. Maybe someone is concerned that they haven’t saved enough money, want to stay active, or really just enjoy working. We get asked about social security benefits quite often, and what happens with my social security while I continue to work. It depends on your age and your income, but you can start receiving 75% of your social security payment as early as 62 before your FRA (full retirement age). Full Retirement age now is 66 for people born between 1943 to 1954, and rising eventually to 67 for people born after 1960. You can actually defer until age 70 and receive about 8% more per year.
If you are drawing social security prior to age 66, the Retirement Earnings Test temporarily reduces your social security benefit by $1 for every $2 earned above $16,920. For example, if you earned income of $18,000, your social security payment drops by $540. However, once you reach your FRA (full retirement age), they you get your full social security regardless of what you earn. You need to decide if taking social security is worth it based on what you are making from work, or to keep deferring it. It’s a personal decision because there isn’t one “best choice,” in my opinion, but social security does have a report available “When to Start Receiving Retirement Benefits,” that you can access on the Social Security website to help you make the best decision possible.
As far as social security benefits being taxed, that is a completely different issue. That calculates how much of your social security benefit will be added back into your income tax calculations based off your total income from all sources except a few things. For example:
Single/Individual tax filing $25,000 to $34,000 requires that 50% of your social security be added back into your income tax, and anything above $34,000 means 85% is added back.
Joint filers can earn between $32,000 to $44,000 with 50% of social security added back in, and 85% for everything above $44,000.
Basically: Your adjusted gross income + tax exempt interests + 50% or 85% of social security Equals your combined income for paying income taxes
Social security taxation usually happens if you have other sources of income because about 70% of people aren’t subject to this, so plan carefully. There are also income ideas that don’t effect social security being taxed, so getting professional advice can help you plan what’s best for your situation. If you want more information on anything that we have discussed, feel free to reach me at (602) 571-1035 or email email@example.com
We need to spend our money on brand-name products because those are the best. Don’t automatically assume that higher quality means more money, because there are plenty of examples of good quality with lower prices. We often waste money buying only brand-names, but brand name products aren’t necessarily better, or worth the higher prices. There are countless examples of different products that provide a great alternative to higher priced name brands. For example, grocery store brands are a terrific example of how we can save money without having to buy the name brand. Ironically, many store brands are identical, but you are paying more for the name brand. Heinz ketchup costs more than Walmart’s ketchup brand, or Safeway’s Home brand paper towels vs. the higher cost Brawny paper towels. We also see a lot of brands in the clothing business, but does that mean that a Hanes tee shirt is better than a Target brand tee shirt? Probably not–but you are going to end up paying a lot more for that Hanes label. Remember that just because one brand spends a lot of money on advertising, doesn’t mean that they must be better than a lesser known brand. A great way to cut costs is to look for brand name alternatives, things that are on sale, or any promotions where a company provides great savings on their brand. How many times have you gone to the store, and the store brand is less expensive than the name brands? They are trying to create product awareness, and we benefit from the savings.
Besides budgeting, debt management, and educating ourselves on “understanding our money,” having an emergency cash fund is the first place to start saving money. The temptation may be to invest in the stock market, or invest in your company’s retirement plan–but the emergency fund is arguably the most important piece of getting your finances in order. An account that is used to stave off unplanned expenses that can often cause financial turmoil. When we have some money put away for a “rainy day” or to handle unexpected financial curve balls, it provides a safety net and peace-of-mind. The money should be readily available and safe to be used specifically for emergencies, i.e. an emergency fund. How much we put away really depends on us, what we can afford, and what’s sufficient to cover our expenses for a period of time. A good rule of thumb is to have 3 to 6 months of expenses set aside. Obviously, if we have unpredictable income, such as commissions, seasonal income, concerns about our employment, a lay-off, or possible job change, then we may want more. Also, if we are having health concerns or potential needs with other loved ones, consider that as well. There are no set rules, but the goal is to make the unpredictable expenses more predictable, and feeling less stressed. Ideally, this money should be in a safe, accessible place, such as a savings account, money market, or in 3-month T-Bills. Most mutual fund companies have a money market option available, but beware of any service fees that may be charged if we don’t maintain a proper account balance. Unfortunately, there are also many examples where people get into a financial bind, and take a loan from their retirement 401(k) as their emergency fund. This isn’t what the retirement monies are to be used for, because they can come with potential fees and penalties, income tax consequences and are supposed to be earmarked for long-term retirement needs.
A couple of examples may help further illustrate: If our monthly budget totals roughly $2,100, then we should shoot for having about $6,300 in an emergency fund. Also, in this same example, let’s say that we have a leaky roof that needs about $1,700 to fix. Then our emergency fund should be $8,000, ($6,300 + $1,700).
As with any saving’s goal, getting started and sticking with it is the best plan for success. Having an emergency fund gives us flexibility and reduces stress.