Category: FINANCE (page 1 of 5)

When to Claim Social Security

Social Security is one of the major components of a successful retirement plan. This benefit is not likely to fund a comfortable retirement on its own. However, it can provide a nice supplement to other retirement options. Americans can apply for their Social Security benefits at any age between 62 and 70, and this causes many people to wonder when to claim their benefits.

Benefit Levels

Retirees can start to take their Social Security at age 62. This is actually considered early retirement, and the government will cut benefits by 30% for those who start drawing them at this age. Full retirement age varies based upon the year of a person’s birth. Those born between 1943 and 1954 can earn the full benefit beginning at age 66. This age increases by two months for those born in each year between 1955 and 1960. Those born in 1960 have a full retirement age of 67, and this is the same full retirement age for anyone born after 1960.

Those who wait to draw Social Security until age 70 will see an increase in their benefit levels. This will add 24% to their total payout each month when compared to those who file at their full retirement age. Overall, a person who decides to file at age 62 could lose more than half of the maximum payment they might receive each month.

When To File

When looking at the increased payments for those who wait until age 70 to draw Social Security, it might seem that this is the best time to claim benefits. However, those who have a sizable nest egg might want to start drawing as soon as possible. Those who do not file before they die will not earn a penny. Therefore, it can make sense to enjoy the extra money even if it’s not needed. Also, those who have health issues might that necessitate retirement might need the money on short notice. On the other hand, those who are healthy and enjoy their work might want to hold off on filing until the last possible minute to maximize their monthly payouts. Personal finance is personal. Therefore, it’s a good idea to weigh the pros and cons before deciding when to file.

What to Know About Taxes and Retirement Income

Taxes are one of the most important things to consider when saving for retirement. The way you are taxed depends on the instruments you’re using to save. Sometimes, savers are taxed at the time they put money away. At other times, their contributions are tax-free, but taxes are scheduled to be collected when they’re distributed down the line. It’s important for people to understand a little about how this all works. It can prevent unpleasant surprises in the future.

Former federal employees will find that their FERS annuity is taxed like regular income at the federal level. Depending on the state, it can be taxed at that level, too. Over 80% of retirees’ Social Security payments are also taxable as ordinary income. People can elect to have taxes withheld from their payments, but that doesn’t happen automatically. If not, they will have to pay at tax time. People should make this decision carefully, ideally after talking with a financial advisor.

Retirement accounts that people may contribute to taking different approaches to taxes. With a Roth IRA, account holders pay taxes upfront, when they make deposits. Later, their withdrawals in retirement are tax-free. This is essentially the opposite of a traditional IRA. Contributions are tax-advantage, but distributions are taxed later on. Some people maintain both types of accounts, in order to reap the tax advantages on both ends.

401(k) and 403(b) are popular retirement plans that are offered by employers to their workers. 401(k)s are generally available from for-profit companies, and 403(b)s from charities and religious organizations. These plans offer tax benefits upfront. Employers take money from each paycheck on a pre-tax basis and place it in a plan where the money grows for the account holder. Generally, 401(k) distributions are taxed as normal income. There are Roth 401(k) accounts available, and contributions to those are taxed.

Retirement planning is complicated. It’s important that every worker keeps one eye on the future and considers what they want their retirement years to look at. Being more aggressive, and taking advantage of some Roth-style accounts, can be a good idea for many American workers. Speaking with a financial advisor about these decisions can be prudent.

Four Purchases That Should Never be Made With a Debit Card

Although debit cards are extremely convenient, they aren’t always the right choice for payments. Under some circumstances, it’s actually more beneficial to use a credit card. Here are four things that should always be paid for with a credit card instead of a debit card.

Furniture and Appliances

Large home purchases, such as furniture and appliances, should always be made with a credit card. These purchases are large enough that a mistake by the delivery team or the manufacturer can cost buyers thousands of dollars. With a credit card, it’s possible to dispute the charges, even if the seller isn’t willing to arrange a refund directly. In addition, the size of these purchases means that even 1-2 percent cashback will add up to a considerable sum of money.

Car Rentals

When renting a car, it’s almost imperative to use a credit card. Even if the rental company will allow renters to pay with a debit card, they should expect to pay a large additional fee in order to do so. Rental car companies also tend to run credit checks on renters who pay with debit cards. This, in turn, can cause damage to the renter’s credit score by adding an unnecessary hard inquiry. To avoid this hassle and expense, anyone renting a car should be prepared to pay with a credit card.

Recurring Payments

People with memberships and subscriptions often make the mistake of billing their bank accounts directly through their debit cards. While there’s little risk of losing money this way, credit card rewards on these recurring payments can add up over time to significant amounts. Points, miles, and cashback rewards can all be built on recurring payments with no extra effort. Given this fact, it rarely makes sense to make these recurring payments using anything other than a credit card.

Online Purchases

Unfortunately, online scams are everywhere these days. Sellers who bait and switch their buyers or fail to deliver at all are quite common, even on major online platforms. Credit cards offer a degree of protection against this kind of behavior by allowing buyers to dispute charges and get their money back.

While debit cards certainly have their place, they aren’t for everything. These four types of purchases are generally best made with credit cards, as debit cards introduce higher risks or lower rewards in these cases.

The Best Holiday Shopping Budget Tips

Holidays are a time for giving, but giving too much can also put you in a huge financial hole. If you don’t want to end up having to dig yourself out of a shopping deficit at the end of December, follow these holiday shopping budget tips.

1. Set an overall budget.

Think about what you’re really able to spend overall and stick to that amount. What you’ll spend on each individual can fluctuate within that amount, but the overall budget should remain the same to avoid overspending.

2. Make a list of gift recipients, then trim it down.

Your second cousin whom you haven’t seen in 10 years probably doesn’t need a new set of dinner plates. Stick to the closest family members and friends for gift giving. If you still want to send something to long-lost relatives and acquaintances, a holiday photo card is a nice, inexpensive idea.

3. Use cash for purchases.

Credit cards can make it much easier to overspend. Instead, put cash aside at the beginning of the holiday shopping season and use that money to make purchases. If you prefer online shopping, create a separate account for your holiday shopping money, or be extremely disciplined in sticking to your budget.

4. Take advantage of free shipping.

Online shopping is convenient, but the shipping costs can really add up. Take advantage of free shipping days by making several gift purchases at once. Most retailers offer free shipping if you spend a certain amount.

5. Start shopping early.

Waiting until the last minute can cause you to overspend. Starting your holiday shopping as early as September or October is a good idea because you can shop a little bit at a time. Everyday deals are often better than Black Friday and Cyber Monday deals anyway, and you’ll be more likely to score the big-ticket items that might sell out on these busy shopping days.

6. Think quality, not quantity.

One thoughtful gift is more appreciated than several random items. Homemade gifts are also a good idea as they come from the heart. The best part is, they’re also less expensive.

Stay on budget with these holiday shopping tips and enjoy the season!

Estate Planning Simplified

Nobody likes thinking about dying, but, if you die without a plan in place, you’ll be leaving your assets and your family in a difficult position. In that case, you’ll be taking the chance that the state’s probate laws will work in your family’s favor. It’s much more advantageous to develop a simple estate plan.

Start With a Will

Above all, you need a will to ensure certain arrangements will meet with your approval. Even if you don’t have many assets, you should use your will to identify your heirs and determine how assets will be divided up among them. More importantly, a will is the only way you can choose guardians for your minor children and make arrangements for their care.

Add a Living Trust

Your estate plan should also include a living trust. If you have significant assets, or if you want to make sure a loved one receives a specific piece of property, a living trust will serve this purpose better than a will. Since a trust is a private document, it typically won’t be included in the probate process. This means any property transferred via the trust will also be kept out of the probate process.

Care for Yourself With Powers of Attorney

An estate plan can also help you take care of yourself in the future by helping you choose people to make medical care and financial decisions for you. A healthcare proxy allows you to choose someone you trust to make decisions regarding your healthcare if you’re ever in a situation in which you can’t communicate your wishes. Under those same circumstances, a financial power of attorney will appoint someone of your choosing to take care of your finances until you’re able to act on your own behalf.

While you could probably create a simple will that’s legally binding, it’s a smarter move to consult an estate planning attorney. An experienced lawyer can help you draft the other documents you’ll need for your estate plan, and they can explain how the laws in your state will affect your final wishes. Creating a simple plan for the future may seem bothersome, but you’ll be surprised by the peace of mind it provides once it’s done.

How to Start Building Your Emergency Fund

As the name implies, emergency funds offer some degree of comfort and peace of mind during times of crisis. Alarmingly, 45 percent of people in the U.S. claim that they do not have enough money to cover three months’ worth of expenses if they suddenly lost their source of income. To avoid being included in this statistic, here are four tips on how to start building an emergency fund:

Start Small

You don’t need to go from zero to sixty when building an emergency fund. Starting small by putting $5 a day in your fund can help your fund grow to a significant size over time. It’s also easier to build habits if you make it effortless to perform said habits every day. Start with a $500 emergency fund and then gradually increment it every time you hit your target amount.

Keep Your Emergency Fund Separate

An emergency fund should be easily accessible in tough times, but it should not be mixed in with your checking or savings accounts. These everyday money accounts put your funds at risk of impulse withdrawals. You can put your emergency funds in a separate high-interest savings account, money market account, or certificate of deposit or a mix of these three investment products.

Make Automatic Payments

Just as you would a 401k or any retirement account, it’s essential to deposit money into your emergency fund first before spending the money on other purchases. Allocate a monthly percentage of your income to your emergency fund. If the funds are stored in a savings account, you can set scheduled automatic deposits, so you don’t have to manually transfer the money to your fund every month.

Cut Monthly Expenses

An imbalance between monthly expenses and income is the most common cause of why people can’t build their emergency fund. By cutting down your monthly fees, you’ll have more money to invest in appreciating assets as well as savings. Trim the monthly content subscription services and the costly name brand clothing.

Final Thoughts

Building an emergency fund starts with awareness of one’s finances. Many people underestimate the likelihood of an emergency that costs them money; hence they don’t realize the importance of having a rainy day fund.

Four Questions Prospective Homebuyers Should Ask

It could be argued that owning a home is the American dream. But that dream can rapidly become a nightmare if you buy before you’re ready. Are you prepared to buy a home? These four questions will help you decide.

How’s Your Credit Score?

If it’s below the mid-750s, you have some work to do before you’re ready to buy a home. One of the first things lenders research is a prospective homebuyer’s credit score. They like numbers in the mid-750s or higher.

While you can get a loan if your score is lower, you won’t be allowed to borrow as much money, and your interest rate will be higher. That will make your monthly payments higher; over the life of your loan, you may spend thousands of dollars in extra interest.

Before you apply for a mortgage, bring your credit score up, even if that takes a couple of years.

Can you afford the down payment?

Take a look at your savings account. Do you have enough money for a down payment, closing costs, and insurance? Will there be enough money left for repairs and renovations you want to do right away? If there’s not, amp up your savings practices before you start looking for a house.

Can you afford the monthly obligations?

Predictions are difficult in these uncertain times. But you’ll be ready to buy a home when you’re confident you can make the monthly mortgage and interest payments and pay for homeowners’ insurance, property taxes, homeowner association fees, utilities, trash pickup, and water and sewer charges. Your car payments and insurance need to enter into these calculations, too.

Also, think about your lifestyle. If you love traveling, dining at pricey restaurants, or have an expensive hobby, make sure there’s room in your monthly budget for those, too.

Are you ready to stay put?

Experts suggest living in a home for at least four years before selling it. It can take that long to recoup the upfront costs of buying the house. Of course, you could rent it. But being a landlord isn’t easy. And if your tenant can’t pay the rent, you’re stuck with two mortgages.

If you’re thinking about changing jobs or leaving the area where you live now within a few years, you’re not ready to buy a home just yet.

The Benefits and Drawbacks of Certificates of Deposit For Investing

Certificates of deposit are a less exciting investment than the stock market or other investing methods that gain more attention, but they’re also a durable option that many investors appreciate. Like any investment, CDs have pros and cons worth considering before deciding what’s best for your financial needs.

The Benefits of Certificates of Deposit

They offer better returns than a savings account. Even with a high-yield savings account, you can often find certificates of deposit (CDs) with higher return rates for your money.

Your returns are predictable. One of the comforting advantages of a CD is that you will be locked into the term’s interest rate. When you invest in the CD, you will know exactly how much money you’ll be getting back at the end of the terms.

You have a lot of options. There are certificates of deposit available at financial institutions everywhere so that you can shop around for the best deal. This means looking at the highest interest rates for your return. It also means that you can find the timeline that works best for your needs.

It’s a safe option. Investing in the stock market comes with all kinds of risks. A certificate of deposit is done at a federally insured institution and is a predictable and safe way to invest your money.

The Drawbacks of a CD

Your money will be temporarily inaccessible. When investing with CDs, you are locking your money into the certificate of deposit until an agreed-upon date. While you could cash out in an emergency, this takes time and loses your returns. With a high-yield savings account, you can still have access to your money at any time.

Returns are low compared to other investment methods. The risk is also lower, but CDs are not the best option if you’re looking for significant returns.

There is a risk of inflation. If you put money into a five-year CD, it is possible that the low interest rate on your returns could be less than the inflation rate. Ideally, this won’t be true, but it happens.

Strategies For Building An Emergency Fund

One of the best things you can do to support your financial health is to create an emergency fund. This fund can be used in case of a medical emergency, a sudden visit to the veterinarian, a home repair, or other unexpected costs that could lead you to take out a small high-interest loan to cover the emergency.

Eventually, it can also be a way to cover your expenses if you lose your job.

These kinds of incidents, both large and small, put people into debt and their finances in a tangle for years.

By building an emergency fund, you develop a financial safety net for yourself.

Many people see the suggestion of saving for six months of expenses and feel that goal is far out of reach; they don’t even want to try. This is a big mistake. If you’re in that situation, first focus on building a small emergency fund of five hundred to fifteen hundred dollars. If this takes you a little time, it’s still worth having. Having a thousand dollars at your back can keep your finances well in hand on a tight budget.

How do people save a sizable emergency fund on any budget?

Open a High Yield Savings Account

Your emergency fund should be accessible, so you don’t want this invested in a 401k or stocks. Put this somewhere it can accrue the most interest and still be at the ready.

Use An App For Automatic Savings

There are many apps that can help you automate your savings in various ways, so it happens without you having to think about it. This makes building an emergency savings something you never have to consider again. 

Some people prefer to have a specific amount taken from every paycheck that comes in; others like to round up their purchases. Choose a path that works for your goals.

Prioritize Your Emergency Savings

Keep your emergency savings in that separate account. Never mix it with your vacation savings fund or anything else. You don’t want this money to go toward other things on a whim.

Save At Least Half of Your Tax Refund

Your emergency fund can get a big boost when you earn a bonus during the holiday season or receive your tax refund. Put away at least half of this money to help your savings grow.