Tag Archives: finances

Ask Brianna: How do I save for goals other than retirement?

“Ask Brianna” is a Q&A column from NerdWallet for 20-somethings or anyone else starting out. I’m here to help you manage your money, find a job and pay off student loans — all the real-world stuff no one taught us how to do in college.

Q: I know I should save for retirement, but that’s so far away. How do I also save for the things I want sooner, like a house, a vacation or a move to a new city?

A: You’ll see me write about retirement over and over in this column — it comes with the territory as a personal finance writer. Talking retirement gets my planning, strategizing, and, yes, lecturing engines going, because Americans need encouragement. Almost half of families had no retirement account savings in 2013, according to an Economic Policy Iask-briannaanstitute analysis of Federal Reserve data.

You’ll need to start saving now if you want your post-work years to be filled with excitement and possibility, not anxiety over how to pay your bills. But while you save, you can also live a varied, satisfying life in your 20s and 30s. Decide on your priorities, make a plan, and be savvy about where you put your money. Smart money management now means more fun stories to tell your grandkids when you’re happily retired later on.

GET YOUR RETIREMENT SAVINGS ON TRACK

As a 20- or 30-something, you have one big advantage over older folks when saving for retirement: time. The money you earn on your investments has decades to grow, so you can save a little every month without drastically cutting back on other expenses. If you wait to save, you might have to make some tough sacrifices to catch up in your 40s and 50s.

Contribute to a 401(k) if you have one at work, and add enough to match your company’s contributions if they’re offered. Open an individual retirement account if you don’t have a 401(k). Aim to save 10 percent of your gross income for retirement, which can include an employer match.

PRIORITIZE OTHER GOALS

Pick your top nonretirement goals, decide when you want to achieve them, then create a savings plan. You can set up direct deposit at work so part of your paycheck goes straight into your savings account, says Damian Dunn, a financial planner and president of NextGen Financial Life Planning LLC in Auburn, Indiana. You’ll be less likely to spend your money if it’s not easily accessible, he says; federal law limits withdrawals from savings accounts to six per month.

Here’s how to save for the three common goals you mentioned in your question:

  • Down payment: Renting works just fine for many 20- and 30-somethings, especially if you want to be able to move easily. But if buying a house is a major dream of yours, start saving as early as you can to get close to the 20 percent down payment most conventional mortgage lenders prefer.

The best place to save depends on how soon you think you’ll buy. An online savings account is the most flexible, but a certificate of deposit, also known as a CD, will offer a higher interest rate if you can wait for four or five years. CDs require you to keep your money locked away at a bank or credit union for a certain amount of time, which will keep you from dipping into your account in the interim.

  • Travel: Online savings accounts are also ideal for upcoming trips; some let you set up sub-accounts you can name (say, “Costa Rica Adventure Fund”) to keep you motivated. Consider using a cashback or travel rewards credit card before your trip, especially if it has a sign-up bonus, to get discounted flights or hotel stays. Pay off your balance each month so you don’t pay interest, which is money that could go toward your vacation instead.
  • Moving: Your 20s is an ideal time to explore careers and live in different places. But with rent and student loans to pay, you’ll need to save money before you can run away to Los Angeles to pursue your acting dreams. Save at least six months’ worth of necessary expenses so you have a buffer if you can’t find a job right away. Before the move, try making extra money by negotiating down or canceling subscriptions like cable, taking on extra part-time work or socking away tax refunds and bonuses.

A full life is more than just planning for the future, and your postgrad job lets you afford the trips or leather jackets you could only covet when you were in college. You should enjoy those things in the decades before you retire. All you have to do is plan for them.

 

On the Web

NerdWallet: Which CD Term Length Should You Choose?

https://nerd.me/3-nerdwallet-banking

 

This column was provided to The Associated Press by the personal finance website NerdWallet. Brianna McGurran is a staff writer at NerdWallet. Email: bmcgurran@nerdwallet.com. Twitter: @briannamcscribe.

 

Ask Brianna: Will I ever be able to afford a house?

“Ask Brianna” is a Q&A column from NerdWallet for 20-somethings or anyone else starting out. I’m here to help you manage your money, find a job and pay off student loans — all the real-world stuff no one taught us how to do in college.

ask-briannaa

Q: Affording a house seems out of reach. Will I ever be able to buy a home of my own?

A: I’ve asked myself this question too many times to count, maybe because I know homeownership wasn’t always so hard to achieve. My parents bought their three-bedroom house on Long Island in 1978 for $46,000, or $169,782 in today’s dollars. My dad was a truck driver, and my mom was an artist, both in their late 20s.

Now, nearly 40 years later, I’m also in my late 20s, but I drop off a rent check each month instead of making a mortgage payment. First-time homebuyers are four years older than they were in the late 1970s and rent longer before buying, according to research by real estate website Zillow . Median incomes for first-time buyers didn’t change much between 1978 and 2013, but the median home price for that group went up more than $40,000.

So here we are, fellow 20- and 30-somethings, eager to buy homes but unable to afford them.

It’s not your imagination. The most recent data for median existing home prices shows they reached a new high of $244,100 in July, according to the National Association of Realtors. Low interest rates have kept monthly mortgage payments affordable by historical standards, says Jonathan Spader, senior research associate at Harvard’s Joint Center for Housing Studies, but higher home prices make it tougher to cobble together a down payment.

That’s especially true when student loan payments and high rents drain our bank accounts. A record 21.3 million renter households allocated more than 30 percent of their pretax incomes toward housing in 2014, reports the Joint Center for Housing Studies, a 44 percent increase from 2001.

While you don’t need to own a house to be happy, many of us still want a place we can be proud of. It’ll take some creativity, but it is possible to buy a house someday. Here’s how.

SAVE LONGER

If you want to settle in an expensive area long term, you’ll have to save diligently and feel comfortable waiting longer to buy, which is what I’m doing. A down payment averages 24 percent of the home’s purchase price in high-priced locations, according to real estate data firm RealtyTrac. That makes the down payment one of the biggest hurdles to overcome if you’re angling to live in a competitive market, where mortgage lenders look for more money down as an indication that you’re an attractive buyer.

Sock away a portion of your annual bonus from work, or increase the amount you save whenever you get a raise or quit subscription services you don’t use. Set up an automatic transfer into a savings account designated for your down payment so it grows without much effort.

LOOK INTO FIRST-TIME HOMEBUYER PROGRAMS

Those strategies might not be enough to reach your down payment goal. If you’re eager to buy a house soon, government-sanctioned companies Fannie Mae and Freddie Mac will let you make a down payment of just 3 percent of the home’s price. The Federal Housing Administration also offers mortgages that require down payments of 3.5 percent. Local housing counseling agencies can tell you what programs you qualify for and whether down payment assistance is available in your area, Spader says.

You’ll need to weigh the trade-offs of a smaller down payment. You’ll pay mortgage insurance if you put less than 20 percent down, for instance, which increases your monthly mortgage payment. A mortgage calculator can help you figure out what monthly payment you can afford.

SEARCH IN AFFORDABLE LOCATIONS

You might be able to have your long-awaited housewarming party sooner than us coastal dwellers – without stretching your budget to its limit – if you live in or move to a region known for its affordability.

A September 2015 report by real estate website Trulia found that eight of the 10 most affordable cities for homeowners were in the Midwest, for instance, while seven of the 10 least affordable cities were in California. The median home price in the Midwest was $194,000 in July, according to the National Association of Realtors, about $50,000 less than the national median.

Lower prices mean lower down payments and a mortgage that won’t take a huge chunk of your income. Living in a lower-cost area isn’t the right choice for everyone, but it’s an option if you’re ready to put down roots sooner than a higher-priced city will allow.

On the Web

NerdWallet: Mortgage calculator

https://nerd.me/3-nerdwallet-mortgages

Zillow: The Evolving First-Time Homebuyer

http://www.zillow.com/research/first-time-homebuyer-profile-11188/

U.S. Department of Housing and Urban Development: Approved Housing Counseling Agencies

http://www.hud.gov/offices/hsg/sfh/hcc/hcs.cfm

This column was provided to The Associated Press by the personal finance website NerdWallet. Brianna McGurran is a staff writer at NerdWallet. Email: . Twitter: @briannamcscribe.

Not so golden: Wealth gap lasting into retirement

William Kistler views retirement like someone tied to the tracks and watching a train coming. It’s looming and threatening, but there’s little he can do.

Kistler, a 63-year-old resident of Golden, Colorado, has been unable to build up a nest egg for himself and his wife with his modest salary at a nonprofit. He has saved little in a 401(k) over the past decade, after spending most of his working life self-employed. That puts him far behind many wealthier Americans approaching retirement.

“There is not enough to retire with,” he said. “It’s completely frightening, to tell you the truth. And I, like a lot of people, try not to think about it too much, which is actually a problem.”

With traditional pensions becoming rarer in the private sector, and lower-paid workers less likely to have access to an employer-provided retirement plan, there is a growing gulf in the retirement savings of the wealthy and people with lower incomes. That, experts say, could exacerbate an already widening wealth gap across America, as more than 70 million baby boomers head into retirement — many of them with skimpy reserves.

Because retirement savings are ever more closely tied to income, the widening gulf between the rich and those with less promises to continue — and perhaps worsen — after workers reach retirement age. That is likely to put pressure on government services and lead even more Americans to work well into what is supposed to be their golden years.

Increasingly, financial security for retirees reflects how much they have accumulated during their working career — things like 401(k) accounts, other savings and home equity.

Highly educated, dual income couples tend to do better under this system. The future looks bleaker for people with less education, lower incomes or health issues, as well as for single parents, said Karen Smith, a senior fellow at the Urban Institute, a Washington think tank.

“We do find rising inequality,” said Smith, who added that it’s a problem if those at the top are seeing disproportionate gains from economic growth.

Incomes for the highest-earning 1 percent of Americans soared 31 percent from 2009 through 2012, after adjusting for inflation, according to data compiled by Emmanuel Saez, an economist at University of California, Berkeley. For everyone else, it inched up an average of 0.4 percent.

Researchers at the liberal Economic Policy Institute say households in the top fifth of income saw median retirement savings increase from $45,539 in 1989 to $160,000 in 2010 in inflation-adjusted dollars. For households in the bottom fifth, median retirement savings were down from $8,433 in 1989 to $8,000 in 2010, adjusted for inflation. The calculations did not include households without retirement savings.

Employment Benefit Research Institute research director Jack VanDerhei found that in households where annual income is less than $25,000, nine in 10 saved less than $10,000, up slightly from 2009. For households with six-figure incomes, 42 percent saved at least $250,000, up from 34 percent five years earlier.

The days of retirees being able to count on set monthly payments from pensions continue to fade among non-government workers. Only 13 percent of private-sector workers now participate in “defined benefit” plans, compared with a third of such workers in 1985. They’ve been eclipsed by “defined contribution” plans, often 401(k)s, in which employers match a portion of employee contributions.

Americans know they need to save for retirement. The trick for many is actually doing it. It’s estimated that about half of private-sector workers don’t take part in a retirement plan at their current job.

“Over the years, all I’ve been able to do, especially as a single parent, is just pay your bills every month,” said Susan McNamara, a 62-year-old adjunct professor from the Boston area. “Anything that’s left over is used up when your car breaks down or when the furnace breaks down. … There’s never anything left over, ever.”

McNamara is divorced and her son is now grown. But she has had heart issues linked to cancer in 2004 and related financial worries. She sold her home to meet expenses. McNamara has a defined contribution plan from past stints as a full-time professor, but its balance is under $50,000.

Or consider Kistler, who makes $41,000 a year working as a benefits counselor for a nonprofit health care provider. He has no substantial savings beyond the 401(k) worth roughly $19,000, and he has debt. He plans to keep working.

Kistler is philosophical about being on the short end of a retirement gap, though he wonders what will happen when boomers in his financial situation begin retiring by the millions.

“This next 10 to 15 years is going to be quite interesting,” he said.

EBRI, a Washington-based nonpartisan research group, projects that more than 55 percent of baby boomers and the generation that follows them, Generation X, will have enough money to last through retirement.

But EBRI also found the least wealthy boomer and Gen X households are far more likely to run short of money in retirement. Under some models, 43 percent of those in the lowest quarter run short of money in the first year of retirement.

VanDerhei, EBRI’s research director, said members of that group are relying mostly on Social Security and lacked consistent access to retirement plans over their careers.

Many of those retirees will find that it won’t be enough, David John of AARP’s Public Policy Institute said, noting the average monthly Social Security retiree benefit last year was about $1,300.

“In the long run, if we have significant numbers of people retiring on Social Security and very little else, there’s going to be a tremendous pressure on state and local governments for additional services, ranging from health to housing to libraries,” John said. “There’s going to be significant pressure on the national government to provide additional support.”

John said a good first step would be to ensure more workers have the ability to save through employer-sponsored retirement plans.

For many, it will mean working to a later age and cutting back.

In Brooklyn, 60-year-old Madeline Smith is already thinking about a modest future. While she has no illusions about living the “little fairy tale” of a cushy retirement, she also is confident she can get by, maybe working part-time, living simply or even renting out her house.

“Sometimes you have to learn to be a little bit more conservative,” she said. “I think a lot of people are learning that now as they get older.”

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Raise the minimum wage now

The minimum wage reached its peak value in 1968 and has been falling ever since. If it had kept pace with inflation, the minimum wage would now stand at $10.74 per hour instead of $7.25.

Today, with less of the nation’s wealth going to workers than ever before and income inequality near record levels, it’s both morally and economically indefensible not to raise the federal and state minimum wages to at least $10.10, as Democrats have proposed and Republicans have blocked. 

Since the year began, 13 states have raised their minimum wages, as have numerous municipalities (including Milwaukee). On average, those states have seen higher job growth than states (like Wisconsin) that have kept their minimum wages at 2013 levels. 

Raising the minimum wage increases the standard of living for workers at the bottom of the pay scale and saves taxpayers costs associated with public assistance programs, such as food stamps. The majority of food stamps go to the working poor.

The liberal Center for American Progress found that increasing the minimum wage to $10.10 per hour nationally would save taxpayers $4.6 billion in spending on food stamps alone. 

Under the current minimum wage, highly profitable companies such as Walmart tell workers to apply for food stamps so they can afford to eat. Walmart and other minimum-wage-paying companies argue that if they had to pay employees a livable wage, then consumers’ prices would rise.

That argument amounts to a strange form of socialism whereby government protects the uber-rich from having to pay the cost of doing business and protects consumers from having to pay the actual cost of goods. We find it disturbingly hypocritical that conservatives rail that individuals should live from the fruit of their labor and not from government handouts, yet they support a minimum-wage policy that forces government to pick up the costs of private business in order to maintain corporate profits and hold down consumer prices. (A UC-Berkeley study on the effect of raising the minimum wage to $12 found that the average shopping trip to Walmart would cost 46 cents more and the average cost of a Big Mac would rise by a dime.)

Conservatives’ views on the minimum wage also put them in the position of opposing a policy that spurs both job growth and economic activity. Studies have demonstrated that raising the minimum wage puts more money into consumers’ pockets and thus increases economic activity in our consumer-based economy.

A study of the state of Washington is particularly revealing. At $9.32 an hour, the state’s minimum wage is the nation’s highest. Washington first adopted the nation’s highest minimum wage in 1998, and it’s been tied to inflation ever since, allowing for plenty of time to examine its impact.

A Bloomberg study found that in the 15 years following Washington’s initial minimum-wage increase, job growth averaged 0.8 percent annually — 0.3 of a percentage point above the national rate. Payrolls at Washington’s restaurants and bars, which are said to be the most vulnerable to higher wage costs, expanded by 21 percent. 

At the time Washington’s higher minimum wage was raised, opponents warned it would kill jobs and hurt the workers it was designed to help. It didn’t. It helped Washington’s economy, and it would help the nation’s.

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