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June 23, 2021

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What's a Recession?

June 21, 2021

What's a Recession?

Most of us would probably be apprehensive about another recession.

The Great Recession caused financial devastation for millions of people across the globe. But what exactly is a recession? How do we know if we’re in one? How could it affect you and your family? Here’s a quick rundown.

So what exactly is a recession? <br> The quick answer is that a recession is a negative GDP growth rate for two back-to-back quarters or longer (1). But reality can be a bit more complicated than that. There’s actually an organization that decides when the country is in a recession. The National Bureau of Economic Research (NBER) is composed of commissioners who dig through monthly data and officially declare when a downturn begins.

There’s also a difference between a recession and a depression. A recession typically lasts between 6 to 16 months (the Great Recession was an exception and pushed 18 months). The Great Depression, by contrast, lasted a solid decade and witnessed unemployment rates above 25% (2). Fortunately, depressions are rare: there’s only been one since 1854, while there have been 33 recessions during the same time (3).

What happens during a recession <br> The NBER monitors five recession indicators. The first and most important is inflation-adjusted GDP. A consistent quarterly decline in GDP growth is a good sign that a recession has started or is on the horizon. Then this gets supplemented by other numbers. A falling monthly GDP, declining real income, increasing unemployment, weak manufacturing and retail sales all point to a recession.

How could a recession affect you? <br> The bottom line is that a weak economy affects everyone. Business slows down and layoffs can occur. People who keep their jobs may get spooked by seeing coworkers and friends lose their jobs, and then they may start cutting back on spending. This can start a vicious cycle which can lead to lower profits for businesses and possibly more layoffs. The government may increase spending and lower interest rates in order to help stop the cycle and stabilize the economy.

In the short term, that means it might be harder to find a job if you’re unemployed or just out of school and that your cost of living skyrockets. But it can also affect your major investments; the value of your home or your retirement savings could all face major setbacks.

Recessions can be distressing. They’re hard to see coming and they can potentially impact your financial future. That’s why it’s so important to start preparing for any downturns today. Schedule a call with a financial professional to discuss strategies to help protect your future!

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How Inflation Impacts Your Savings

May 10, 2021

How Inflation Impacts Your Savings

It’s time to wake up and smell the coffee!

The reality is that your retirement savings might be losing value every day. It’s because of something called inflation, and it may result in your finding yourself retiring with less than you anticipated. In this blog post, we’ll discuss how inflation affects your savings and what you can do about it.

First, what is inflation? Inflation is a measurement of how much prices are rising over time. And it’s not just that the price of gas is skyrocketing or some other commodity—inflation affects everything.

That may not necessarily be a problem for you, so long as your wages are increasing with the rate of inflation. Commodities might get more expensive, but your rising paycheck means you can still afford what you need. But if income isn’t keeping up with inflation, an upper-class income today may only afford you a middle-class income tomorrow!

But there’s another danger that inflation poses.

Let’s say you have $1 million dollars in the bank that you’ve put away for retirement. Good for you! You’ve probably already dreamed of how you’ll use that cash once you retire. A new home, a new car, worldwide travel, you name it!

But here’s the rub. Over time, the cost of those items (most likely) will steadily increase. So will the basic cost of living. By the time you retire, your $1 million has far less purchasing power than it did when you first started saving. You haven’t lost money, exactly. Your money has just lost value.

So how can you combat the slow decay caused by inflation?

Start by moving your money away from low, or no, growth places. Your Grandma may not like to hear this, but hiding money in your mattress is an easy way to torpedo its value over the long haul!

Find investments that actually grow over time and help beat inflation. Over the last 100 years or so, the average inflation rate has been 3.1%. That’s the bare minimum rate at which your investment should grow, if you’re using it for long-term wealth creation.

A licensed and qualified financial professional can help you with both of these steps. The sooner you start the process of protecting your wealth from inflation, the more you insulate yourself from the danger of waking up with less money than you’d thought!

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How To Save Money On Transportation

December 7, 2020

How To Save Money On Transportation

Americans drain a huge portion of their income on transportation.

It eats up roughly 16% of our income every month, the majority of which is spent on car purchases ($331 per month), then gas and oil ($176 per month), and then insurance ($81 per month).¹

But what if you made that money work for you?

Here are some simple ways to spend less on getting around, so you can save more for your future!

Drive the speed limit <br> Speeding is never a good strategy. Zipping around town with your pedal to the floor is dangerous for you and others and realistically doesn’t save you much time.¹ Even worse, speeding can cost you money in the long term.

Obviously, speeding tickets are expensive. They cost about $150 on average.² They also have a nasty habit of increasing insurance premiums by up to 25%.³ But that’s not all. Rapidly accelerating and suddenly stopping reduces the efficiency of your engine and can cost you at the pump as well. Stick to the posted speed limit, accelerate gradually, and drive safely!

DIY the basics <br> There are plenty of car maintenance basics you can handle from the comfort of your own garage. For instance, a new air filter can boost your gas mileage by up to 10%.⁴ They’re also cheap and usually easy to change out once they get dirty. Even something as simple as inflating your tires can boost your car’s performance.⁵ Remember to do your research and consult your car’s owner manual.

Take the bus <br> If public transportation is available, use it! Research says trading your car for a bus or train can save you over $10,000 annually.⁶ The cost of tickets and metro passes pales in comparison to car insurance premiums, car maintenance, loans, and gas.

Buy Used <br> Don’t have access to public transportation? Stick with used cars and drive them as long as you can.

New cars almost always lose value. By the end of their first year, a new ride will shed 20% to 30% of its value. Over 5 years it loses 60% of its value.⁴ Unless you’re restoring a vintage masterpiece or have cash to blow, you’re much better driving an older model of the same car for a fraction of the price.

Remember, how you get around is a practical problem. It doesn’t need to be fancy or flashy when you’re starting your journey towards financial freedom. Utilize local transportation options, buy a clunker that you maintain yourself, and drive the speed limit. Your wallet will thank you in the long term!

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¹ “The Average American Spends Way More on Transportation Than You’d Guess, ” Christy Bieber, The Ascent, Apr 28, 2020, https://www.fool.com/the-ascent/credit-cards/articles/average-american-spends-way-more-transportation-youd-guess/

² “The True Cost of a Speeding Ticket,” Lars Lofgren, I Will Teach You to be Rich, https://www.iwillteachyoutoberich.com/blog/cost-of-speeding-ticket/

³ “Managing the Hidden Costs of Car Depreciation,” Nicole Arata, Nerdwallet, Jul 17, 2017, https://www.nerdwallet.com/article/insurance/auto-insurance-rates-after-speeding-ticket#:~:text=Car%20insurance%20typically%20goes%20up,clean%20record%2C%20our%20analysis%20found.

⁴ “Changing Your Air Filter Can Improve Your Gas Mileage,” Harris Tire, https://harristirecompany.com/changing-your-air-filter-can-improve-your-gas-mileage/#:~:text=A%20clean%20air%20filter%20can,a%20typical%20tank%20of%20gas.

⁵ “The Importance Of Proper Tire Inflation,” AAA, https://www.aaa.com/autorepair/articles/the-importance-of-proper-tire-inflation

⁶ “Public transit users can save $10,160 annually, says APTA report,” Metro, Jun 8, 2018, https://www.metro-magazine.com/10032643/public-transit-users-can-save-10-160-annually-says-apta-report#:~:text=Individuals%20who%20ride%20public%20transportation,more%20than%20%24847%20per%20month.&text=The%20savings%20are%20based%20on,owning%20and%20driving%20a%20vehicle.

Is Your Home An Investment?

October 26, 2020

Is Your Home An Investment?

It’s a law of the universe that your house is an investment, right?

Just ask your grandparents who bought a $250,000 home for $50,000 during the 1950s. Better yet, listen to your savvy landlord buddy who rules an urban real estate empire that they gobbled up following the Great Recession. We’re surrounded by evidence that conclusively demonstrates the power of houses as investments… or are we?

Hmmm.

It turns out that buying a place of residence may not actually pay off in the long run like it might appear on paper. Here’s why you might want to rethink having your primary residence be an investment only.

Houses (usually) don’t actually grow more valuable <br> Think about that suburban mansion your grandparents snagged for $50,000 that eventually “grew” to be worth $250,000. On paper, that looks like an awesome investment; that house quintupled in value! But remember, $1 in 1950 had about the purchasing power of $10 today. Four gallons of gas or two movie tickets were just one buck!¹ That means $50,000 at that time could buy a $539,249 house today. Your grandparents actually lost money on that house, even though it looked like they made off like bandits!

It’s all because of one simple feature of economics: inflation. Prices tend to rise over time, meaning that your dollar today doesn’t go as far as it would have in 1950. So while it looks like your grandparents netted a fortune on their house, they actually didn’t. They lost over half its value! Unless your neighborhood suddenly spikes in popularity with young professionals or you start renting, your house probably won’t accrue any real worth beyond inflation.

Houses have to be maintained <br> But it’s not just that houses usually don’t actually appreciate in value. They also cost money in property taxes, utilities, and maintenance. Homeowners spend, on average, $1,105 annually to maintain their dwelling places.² You can expect to pay $12,348 annually on the average mortgage and $2,060 for utilities.³ & ⁴ That comes out to a total of $15,513 per year on keeping the house and making it livable. Let’s say your home is worth about $230,000 and appreciates by 3.8% every year. It will grow in value by about $8,740 by the end of the year. That’s barely more than half of what it costs to keep the house up and running! Your house is hemorrhaging money, not turning a profit.

It’s important to note that homeownership can still generally be a good thing. It can protect you from coughing up all your money to a landlord. Buying a property in an up-and-coming neighborhood and renting it out can be a great way to supplement your income. Plus, there’s something special about owning a place and making it yours. But make no mistake; unless you strike real estate gold, your place of residence probably shouldn’t be (primarily) an investment. It can be home, but you might need to rely on it to help fund your retirement!

Market performance is based on many factors and cannot be predicted. This article is for informational purposes only and is not intended to promote any certain products, plans, or strategies for saving and/or investing that may be available to you. Any examples used in this article are hypothetical. Before investing or enacting a savings, investment, or retirement strategy, seek the advice of a licensed financial professional, accountant, and/or tax expert to discuss your options.

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Market performance is based on many factors and cannot be predicted. This article is for informational purposes only and is not intended to promote any certain products, plans, or strategies for saving and/or investing that may be available to you. Any examples used in this article are hypothetical. Before investing or enacting a savings, investment, or retirement strategy, seek the advice of a licensed financial professional, accountant, and/or tax expert to discuss your options.


“7 Things You Could Buy For $1 in 1950,” Megan Elliott, Showbiz Cheatsheet, Oct 9, 2016, https://www.cheatsheet.com/money-career/things-you-could-buy-for-1-dollar.html/

“How Much Should You Budget For Home Maintenance,” Paula Pant, The Balance, May 26, 2020, https://www.thebalance.com/home-maintenance-budget-453820

“National Average Monthly Mortgage Payment,” Hannah Rounds, LendingTree, July 11, 2018, https://www.lendingtree.com/home/mortgage/national-average-monthly-mortgage-payment/#:~:text=What%20is%20the%20average%20monthly,the%20typical%20homeowners’%20monthly%20income

“How much is the average household utility bill?,” Nationwide, https://www.nationwide.com/lc/resources/personal-finance/articles/average-cost-of-utilities#:~:text=The%20typical%20U.S.%20family%20spends,climate%2C%20and%20your%20usage%20patterns

When Education Isn't Worth It

October 19, 2020

When Education Isn't Worth It

After room and board, a degree from a private university costs $46,950 per year.¹

A public university charges less than half that, with an annual price tag of $20,770.² That’s over double what it was in 1980 after adjusting for inflation.³ Why the sharp increase? Part of the answer is that demand has skyrocketed over the past 40 years. An information age requires knowledgeable, highly-skilled workers, and getting a degree is the traditional way of meeting those criteria. Rising demand has occurred alongside a steady decline in state funding for public education. One report found that 79% of tuition increases stemmed from such cuts.⁴

But there’s always been an assumption, despite the ballooning costs of higher education, that attending university would be worth it. Afterall, graduates almost always earn more than their peers.⁵ It’s an investment in a future income, right?

The diminishing returns of a degree <br> But that old model is simplistic at best. College simply doesn’t pay off for some graduates. Data demonstrates that the lowest earning college grads actually earn less than their highschool educated counterparts. ⁶ They actually lost income by going to university! It makes sense when you do the math. Going into crippling debt to get a speech and drama degree only earns you about $28,300 after graduation. ⁷ And the huge supply of highly-educated workers has put pressure on once prosperous careers. For example, more people graduate from expensive law schools in the United States than there are job openings for attorneys. ⁸ Sure, there’s 6-figure potential there if you can land a job, but you’re competing with dozens of other qualified prospects. It’s easy to see why people have become so cynical about higher education.

Simple solutions? <br> Overall, there are certainly times when a college degree is not worth the time and treasure. Spending 12 years at a private institution to get a doctorate in an obscure field with low pay and a brutal job market? There are probably more profitable ways to spend your time. But overall, there are numerous degrees that may still pay off; the average Bachelor’s degree is worth around $2.8 million over a lifetime. ⁹ But you must plan strategically. It all comes down to how you reduce the cost of your education and maximize your upside potential post-graduation.

Narrow your search to only include public schools in your state. Do as much research on scholarships and apply for as many as possible. Live with your parents to cut down on room and board costs. Take a gap year of work between your bachelors and masters degree. And do some research on job opportunities in the field before you get a diploma. You might decide that going into debt to become a petroleum engineer is a better investment than signing your life away to the humanities!

If you’re a parent, start planning your child’s higher education today. That will involve choosing the right schools and encouraging them to work hard and love learning. But you must also provide them with a steady financial foundation to pursue their dreams. Helping them get a degree debt-free might empower them to study their passions instead of chasing paychecks to fight off loans. There are financial products on the market designed to help you save for your child’s future, no matter what level of education they decide to pursue. Let’s schedule a time to meet and we can discuss your options in detail!

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¹ Hillary Hoffower, “College is more expensive than it’s ever been, and the 5 reasons why suggest it’s only going to get worse,” Business Insider, JunE 26, 2019, https://www.businessinsider.com/why-is-college-so-expensive-2018-4

² Hoffower, “College is more expensive than it’s ever been,” Business Insider

³ Hoffower, “College is more expensive than it’s ever been,” Business Insider

⁴ Abigail Hess, “The cost of college increased by more than 25% in the last 10 years—here’s why,” CNBC, Dec 13 2019, https://www.cnbc.com/2019/12/13/cost-of-college-increased-by-more-than-25percent-in-the-last-10-years.html

⁵ Anthony P. Carnevale, Ban Cheah, Andrew R. Hanson, “The Economic Value Of College Majors: Executive Summary,” Georgetown University Center On Education And The Workforce, 2015, https://cew.georgetown.edu/wp-content/uploads/Exec-Summary-web-B.pdf

⁶ Emma Kerr, “Is College Worth the Cost?,” U.S. News & World Report, June 17, 2019, https://www.usnews.com/education/best-colleges/paying-for-college/articles/2019-06-17/is-college-worth-the-cost

⁷ Alison Doyle, “Average College Graduate Salaries: Expectations vs. Reality,” The Balance, June 6, 2020, https://www.thebalance.com/college-graduate-salaries-expectations-vs-reality-4142305

⁸ “Occupational Outlook Handbook, Lawyers” Bureau Of Labor Statistics, Sept 1, 2020 https://www.bls.gov/ooh/legal/lawyers.htm#tab-6

⁹ Anthony P. Carnevale, Stephen J. Rose and Ban Cheah, “The College Payoff: Education, Occupations, Lifetime Earnings” Georgetown University Center On Education And The Workforce, 2011, https://cew.georgetown.edu/cew-reports/the-college-payoff/

A Life Insurance Deep Dive

September 16, 2020

A Life Insurance Deep Dive

We’ve explored the basics of life insurance, how it works, and what it’s for.

Today we’ll be fleshing out some concepts you might encounter as you look at your options for protecting your family. Let’s start with the different kinds of life insurance.

Different types of life insurance <br> Life insurance will almost always have a few basic parts—the death benefit (the amount paid to your loved ones upon your passing), the policy itself (the actual insurance contract), and the premium (how much you pay for the life insurance policy).

There’s a wide range of life insurance policies, each with their own strengths and weaknesses.

  • Term life insurance is the most straightforward form. It lasts for a set amount of time (the term), during which you pay a premium. You and your beneficiaries won’t receive any benefits if you don’t pass away during the term. This type of policy typically doesn’t feature other benefits on its own (you may be able to add other benefits with what is called a rider).
  • Whole life insurance is exactly what it sounds like. It never expires and is guaranteed to pay a benefit whenever you pass away. But it often comes with other benefits. For instance, it can include a saving component called a cash value. It usually builds with interest and you can take money from it any time.
  • Indexed Universal Life Insurance is similar to whole life insurance, but the cash value is tied to the market. The market is up? Your cash value goes up. The market goes down? Your cash value is actually shielded from loss.

Each of these types of life insurance have different strengths and weaknesses. A term policy might be right for you while a whole life policy might be better for your neighbor. Talk with a financial professional to see which one fits your needs and budget!

The right amount of life insurance <br> But can you have too little life insurance? How about too much? The answer to both of those questions is yes. In general, the purpose of life insurance is to replace your income in case of your passing for your loved ones and family. That should be your guidestone when deciding how substantial a policy to purchase. Typically, you’re looking at about 10 times your annual income. That’s enough to replace your yearly earnings, pay-off potential debts, and guard against inflation. That means someone earning $35,000 would want to shop around for about $350,000 worth of coverage.

Employer life insurance <br> This means that most employer-provided life insurance isn’t enough to fully protect you and your family. There’s no doubt that a free policy from your workplace is great. But they typically only cover about a year of wages. That’s not nearly what you need to provide peace of mind to your beneficiaries! Don’t necessarily refuse your employer-provided life insurance, but make sure that it supplements a more substantial policy.

Still have questions? Reach out to a licensed financial professional and ask for guidance! And stay tuned for next week’s article where we’ll debunk some common life insurance myths!

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This article is for informational purposes only and is not intended to promote any certain products, plans, or strategies that may be available to you. Before enacting a life insurance policy, seek the advice of a licensed financial professional to discuss your options.

The Black Hole of Checking (Part 1)

The Black Hole of Checking (Part 1)

What’s the difference between a black hole and a checking account?

One is a massive void with a force so strong that anything that enters it is stretched and stretched, then disappears with a finality that not even NASA scientists fully understand.

… And the other is a black hole.

Joking aside, did you know that a black hole and your checking account actually have a lot in common? Spaghettification is the technical term for what would happen to an object in space if it happens to find itself too close to a black hole. The intense gravity would stretch the object into a thin noodle, past the point of no return.

If you don’t have a solid financial strategy, the money in your checking account may be stretched past the point of no return, too. Why? If your money is sitting in “The Black Hole of Checking” for years on end, you may find that as you get closer to retirement, each dollar is spread thinner and thinner (until it disappears).

Where are you storing your retirement fund? If you’re keeping it in your checking account, instead of growing your money, you might just be stretching it impossibly, uncomfortably thin.

Say you already have $10,000 saved for your retirement. A checking account comes with a 0% interest rate. That means a $0 rate of return. Even if you managed to not touch that money for 10 years, you’d still only have your starting amount of $10,000. With inflation, you’d really have less value at the end of the 10 years than you had to start with.

But if you took that $10,000 and put it into an account with a 3% compounding interest rate, after 10 years, your money will have grown to $13,439. And that’s without adding another penny! Can you imagine what kind of growth is possible if you start saving now and contribute regularly to an account with a compounding interest rate?

This is the power of compounding interest – interest paid on interest plus the initial amount. (This is also a huge reason why getting as high of an interest rate as you can is important!)

So what are you waiting for? If all of your money is disappearing into that Black Hole of Checking, maybe this is the exploding star “sign” you’ve been looking for! Don’t “spaghettify” your money. Do the opposite and give it the chance to grow with the power of compound interest.

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Emergency Fund 101: Protecting and Growing Your Fund

Emergency Fund 101: Protecting and Growing Your Fund

Nearly 60% of Americans report that they don’t have savings to turn to in the event of an emergency.

A measly 41% of Americans surveyed said they had savings to cover the cost of the unexpected. Being blindsided with an emergency could leave anyone who’s unprepared in the awkward and difficult position of asking family or friends for a loan or building up lots of credit card debt. A less stressful and debt-accruing answer to preparing yourself and your loved ones for a financial emergency like an unexpected hospital visit, house and car repairs, or even a sudden loss of employment is an Emergency Fund.

As you begin to save money to build your Emergency Fund, use these 5 tips to protect and grow your “I did not see that coming” stash:

1. Separate your Emergency Fund from your primary spending account. How often does the amount of money in your primary spending account change? Regular daily use, direct deposit, automatic withdrawals, spontaneous splurges – All of this in a single account can make it hard to track the actual amount of emergency spending money you have available. Start a separate account for your Emergency Fund to avoid any questions about whether or not you can afford that new water heater.

2. Know your number. You may hear a lot about making sure that you’re saving for retirement and never missing a life insurance premium. Solid advice. And don’t pause either of those important pieces of your financial plan to build your Emergency Fund. Instead, tack building your Emergency Fund onto your plan. The same way you know what amount you need to retire and what amount you need to pay each month for your life insurance policy, know how much you need to set aside for you and your loved ones to have a comfortable Emergency Fund. A goal of at least $1,000 to 3 months of your income or more is recommended. At least 3 months of income may sound high, but if you experience a sudden loss of income, you’d have at least 3 full months of breathing room to get back on track.

3. Avoid bank fees. These are Emergency Fund Public Enemy No. 1. Putting extra money aside can be challenging enough, but having that money whittled away by bank fees is even worse. Avoid feeling like you’re paying twice for an emergency (once for the emergency itself and second for the fees) by using an account that doesn’t charge you any fees and preferably doesn’t have a minimum account balance requirement. You can find out what you’re in for on your bank’s website or talking to an employee.

4. Do Not Touch (but leave yourself the option). Once you begin setting aside money in your Emergency Fund, the number one rule is: Do Not Touch… Unless it’s an emergency. Best case scenario, that money is just going to be sitting, unused, for a long time. However, just because it’s an “out of sight, out of mind” situation, it doesn’t mean that there aren’t some important details that need to be present for your Emergency Fund account:

  • Funds must be easily liquidated.
  • Amount of funds should be stable.

You definitely don’t want funds to be locked up and worth less than what you thought when you need them. If you revisited an untouched Emergency Fund after 20 years that didn’t have these 2 qualities, you may not be able to get all of the money you need out at once and inflation could leave you wanting. Although these qualities might prevent any significant gain to your fund, you still have the opportunity to make the best of it.

5. Get started immediately. There’s no better way to grow your Emergency Fund than to get started!

So avoid that dreaded phone call to your parents or your children. Don’t apply for another credit card (or two). Start growing and protecting your own Emergency Fund, and give yourself the potential to be prepared for the unexpected.

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Retirement Mathematics 101: How Much Will You Need?

Retirement Mathematics 101: How Much Will You Need?

Have you ever wondered how someone could actually retire?

The main difference between a strictly unemployed person and a retiree: A retiree has replaced their income somehow. This can be done in a variety of ways including (but not limited to):

  • Saving up a lump sum of money and withdrawing from it regularly
  • Receiving a pension from the company you worked for or from the government (Social Security)
  • Or an annuity you purchased that pays out an amount regularly

For the example below, let’s assume you don’t have a pension from your company nor benefits from the government. In this scenario, your retirement would be 100% dependent on your savings.

The amount you require to successfully retire is dependent on two main factors:

  1. The annual income you desire during retirement
  2. The length of retirement

To keep things simple, say you want to retire at 65 years old with the same retirement income per year as your pre-retirement income per year – $50,000. According to the World Bank, as of 2015, the current average life expectancy in the US is 78. Let’s split the difference and call it 80 for our example which means we should plan for income for a minimum of 15 years. (For our purposes here we’re going to disregard the impact of inflation and taxes to keep our math simple.) With that in mind, this would be the minimum amount we would need saved up by age 60:

  • $50,000 x 15 years = $750,000

There it is: to retire with a $50,000 annual income for 15 years, you’d need to save $750,000. The next challenge is to figure out how to get to that number (if you’re not already there) the most efficient way you can. The more time you have, the easier it can be to get to that number since you have more time for contributions and account growth.

If this number seems daunting to you, you’re not alone. The mean savings amount for American families with members between 56-61 is $163,577 – nearly half a million dollars off our theoretical retirement number. Using these actual savings numbers, even if you decided to live a thriftier lifestyle of $20,000 or $30,000 per year, that would mean you could retire for 8-9 years max!

All of this info may be hard to hear the first time, but it’s the first real step to preparing for your retirement. Knowing your number gives you an idea about where you want to go. After that, it’s figuring out a path to that destination. If retirement is one of the goals you’d like to pursue, let’s get together and figure out a course to get you there – no math degree required!

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How much home can you afford?

October 29, 2018

How much home can you afford?

For most households, buying a home means getting a mortgage, which means lenders play a big role in declaring how much house you can “afford”.

Many people take that calculation as a guide in choosing which house they want to buy, but after you’ve signed the papers and moved in, the lender might not be much help in working out the details of your family budget or making ends meet.

Let’s take a look behind the curtain. What is it that lenders look at when determining how large of a mortgage payment you can feasibly make?

The 28-36 Rule
Lenders look closely at income and debt when qualifying you for a certain mortgage amount. One of the rules of thumb at play is that housing expenses shouldn’t run more than 28% of your total gross income.[i] You also may hear this referred to as the “housing ratio” or the “front-end ratio”. The 28% rule is a good guideline – even for renters – and has been a common way to budget for household expenses over many generations. Using this rule of thumb, if your monthly income is $4,000, the average person would probably be able to afford up to $1,120 for a mortgage payment.

Lenders also check your total debt, which they call debt-to-income (DTI). Ideally, this should be below 36% of your income. You can calculate this on your own by dividing your monthly debt payments by your monthly income. For example, if your car loans, credit cards, and other debt payments add up to $2,000 per month and your gross income is $4,000 per month, it’s unlikely that you’ll qualify for a loan. Most likely you would need to get your monthly debt payments down to $1,440 (36% of $4,000) or under, or find a way to make more money to try to qualify.

Buying less home than you can afford
While the 28% and 36% rules are there to help provide safeguards for lenders – and for you, by extension – buying a home at the top end of your budget can still be risky business. If you purchase a home with a payment equal to the maximum amount your lender has determined, you may not be leaving much room for error, such as an unexpected job loss or other financial emergency. If something expensive breaks – like your furnace or the central air unit – that one event could be enough to bring down the whole house of cards. Consider buying a home with a mortgage payment below your maximum budget and think about upsizing later or if your income grows.

A home as an investment?
A lot of people will always think of their home as an investment in an asset – and in many cases it is – but it’s also an investment in your family’s comfort, safety, and well-being. In reality, homes usually don’t appreciate much more than the rate of inflation and – as the past decade has shown – they can even go down in value. Your home, as a financial tool, isn’t likely to make you rich. In fact, it may do the opposite, if your mortgage payment takes up so great a percentage of your monthly budget that there’s nothing left over to invest, pay down debt, save for a rainy day, or enjoy.

Homes are one of those areas where many discover that less can be more. Whether it’s your first home or you’re trading in the old house for a new one, you might be better served by looking at how big of a mortgage payment you can afford within your current budget, rather than setting your sights on the house your lender says you can afford.

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Inflation Over Time and What it Means for Retirement

September 24, 2018

Inflation Over Time and What it Means for Retirement

You may have thought that inflation is always bad, but did you know that sometimes it can be good?

Inflation is simply the difference in prices from one year to the next over time. It’s calculated as a percentage and it goes through cycles:

  • Two percent inflation is actually seen as economic growth and is considered “healthy” inflation.
  • As inflation expands beyond three percent it creates a peak and financial bubbles can form.
  • If the percentage falls below two percent, inflation may be seen as negative and recessions can develop.
  • Finally, there is a trough preceding another cycle expansion.

(If you want to geek out about inflation rates, check out a history from 1929 to 2020 at https://www.thebalance.com/u-s-inflation-rate-history-by-year-and-forecast-3306093.)

Good or bad, inflation should be a concern for everyone in the United States. The economy affects us all, but it can be particularly troubling for seniors living in retirement, or who are about to enter retirement. This is because retirement is usually based on a fixed income budget. Inflation can decrease the purchasing power of retirees, especially for goods and services that increase with inflation.

Here are some tips to protect your retirement income from the effects of inflation over time:

Maximize Your Social Security
Social security benefits have a cost of living/inflation increase built into the disbursement. So, as inflation goes up and the cost of living rises, so too does your social security.

This can be beneficial while you’re on a fixed retirement income. Because this is the only retirement investment with this feature, try to maximize your social security earnings by working until age 70 if you can.

Select Investments that May Grow When Inflation Rises
While living expenses such as gas, groceries, and utilities might rise with inflation, some investments may offer better returns as inflation rises. This is another reason a diverse retirement portfolio might be beneficial.

Minimize Expenses to Combat Rising Inflation
While none of us can affect the inflation rate itself, we can all work to minimize our expenses during our retirement years. Maximizing your income and minimizing your expenses is the name of the game when you’re living on a fixed budget.

Minimizing housing costs is a strategy to deal with inflation and rising prices. Downsize your home if possible. Perhaps investing in a renewable energy source may help save money on energy expenses. A simple kitchen garden can save you money on groceries – a budget item that can take a big hit from inflation.

The Ebb and Flow of Inflation Over Time
Over time, inflation waxes and wanes. A little planning, diversified investments, and consistent frugality may help you sail through inflation increases during your retirement years.

This article is for informational purposes only and is not intended to promote any certain products, plans, or strategies for saving and/or investing that may be available to you. Market performance is based on many factors and cannot be predicted. Before investing, talk with a financial professional to discuss your options.

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