Money Management 101 for Single Parents Going it Alone

1. Determine What You Owe

As the head of the household, it’s up to you to make sure that your entire family’s needs are being met. In order to do that, you need to be extremely diligent when it comes to money management basics. This is not something that will happen by accident. Instead, you must plan for it and work toward it.

The first step is to set up your “office.” Gather all of your bills, a calculator, a pencil, and your checkbook.

I would also recommend that you grab an old binder that you can use to keep track of your financial data and a shoebox for storing paid bills.

Now you’re ready to begin:

  • Go through all of your bills, and pay anything that is due within the next week.
  • If you have bills coming due that you cannot pay, notify the company and ask them to set up a payment plan with you.
  • Print a copy of the chart “Paying Down My Debts” or make your own.
  • On the chart, list all of your debts, including any car loans, student loans, and credit card debt.
  • In addition, list the total balance left to be paid on all of these debts, and the percentage rate you are paying.
  • For now, leave the fourth column of the chart blank, and store it in your “Financial Data” binder.

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2. Eliminate Joint Debt

Before we create a plan for paying down your debt, it’s important to consider some special circumstances that may apply to you as a single parent. I asked LaToya Irby, Credit/Debt Management Expert, to share her expertise on handling joint debt:

Wolf: Let’s say a single mom still shares a credit card with her ex. What should she do?

Irby: Ideally, she would want her ex to transfer his portion of any joint balances onto his own credit card. That way, everyone is paying for their own debt.

Wolf: What about leaving both names on the account, and agreeing to pay part of the amount due? Is that ever advisable?

Irby: No. If you’ve made an agreement with your ex to split the debt payments on accounts that include your name, and your ex-misses a payment, it’s going to hurt your credit. If the ex-fails to pay altogether, the creditors and collectors will come after you. Not even a divorce decree can change the terms of a joint credit card agreement. In the credit card issuer’s eyes, you’re just as much responsible for post-divorce accounts as before.

Wolf: What about situations when a couple’s divorce decree mandates that one individual must pay off the joint credit card debt, but that person fails to do it?

Irby: You can always file contempt of court papers against him/her, but in the meantime, your credit score suffers. So I suggest paying off the debt to save your credit. If you can’t afford to pay the debt, at least make minimum payments to keep a positive payment history on your credit report.

Wolf: What about other accounts, such as utilities and cell phones?

Irby: The safest thing to do, if you have a service in your ex’s name, is to turn off the account and reestablish service in your name.

 

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3. Find Money to Pay Down Debt

Another thing we have to do before creating a plan to pay down your existing debt is to find money in your budget each month. To assist in this step, I contacted Erin Huffstetler, Frugal Living Expert.

Wolf: How much money do you think the average person can uncover just by being more intentional about spending and budgeting?

Huffstetler: The average person could easily uncover an extra $250 a month—and probably much more.

Wolf: What are the top 5 areas that you think people should look to first when they’re trying to cut their expenses?

Huffstetler:

  • Food spending (both groceries and eating out)
  • TV-related expenses (cable/satellite services, certainly; but also movie subscriptions and rentals)
  • Phone services (particularly extras like call waiting, caller id, long distance, and cell phones)
  • Insurance premiums
  • Miscellaneous spending (all those small amounts spent on coffee, vending machine snacks, and other indulgences)

Wolf: How can single parents, specifically, stretch their child support dollars and reduce child-related expenses?

Huffstetler: For single parents looking to stretch their child support dollars, creativity is the key. Look to children’s consignment shops and thrift stores to buy your kids’ clothes instead of department stores; sign them up for Parks and Rec-run activities instead of privately-run activities (which will always cost more); and don’t feel like you have to make up for being a single parent by buying them extra things—it’s you they need, not stuff.

 

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4. Pay Off Your Debt

The next step is creating a schedule for paying down your debt:

  1. Pay off the debts that charge you the highest interest first.Bob Hammond, author of Life Without Debt, recommends that you pay off the debts that are charging you the highest interest first since borrowing from those creditors is costing you the most money. “Concentrate on paying off the high-cost debts as soon as possible,” Hammond advises. LaToya Irby, Credit/Debt Management Expert, agrees. “Highest interest rate debts cost the most money, especially when those debts have high balances. So you’ll save money on interest charges when you pay off those high-interest rate debts first.”However, there are exceptions to this general rule. Irby notes, “If you’re likely to get discouraged because it’s taking a long time to pay off that high-interest rate debt, you can start with the lowest balance debt. Getting some small debts paid off will motivate you to keep going.”
  2. Pay more than the minimum payment. Aim for paying more than the suggested minimum payment, in order to pay off your debts as quickly as possible.Miriam Caldwell, Money in Your 20’s Expert, shares this advice:
    • Choose one debt to focus on.
    • Increase your payment on that debt by as much as you can.
    • Once you have paid off that debt, move all that you are paying on it to the next debt you want to pay off.
    • You’ll be surprised at how quickly you can get out of debt with this plan!
  3. Meanwhile, continue to pay the minimum balance due on all of your other debts.Record what you intend to pay toward each debt on the debt chart you made in Step 1.

 

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5. Budget Your Monthly Expenses

Now that you know where you stand financially, and you’ve created a plan for paying down your debts, it’s time to make sure that you’re making any other necessary adjustments so that you can keep up with your plan. And this means creating a budget.

I know this can be intimidating, but I’m going to make a suggestion for you: Sign up for Mint.com. It’s a free financial software program available on the Internet, and it will basically do your budgeting for you. It will create a visual pie chart showing how much you’re spending each month on housing, gas, food, entertainment, and more. This way, if it turns out that you’re spending a lot more on food than you really should, you can begin to make the necessary adjustments to get your spending under control.

If you would prefer to create your budget the traditional way, allotting a certain amount of money to each spending category, I’ve created an online budget calculator you can use, which includes categories for child support and other details specific to your life as a single parent.

Finally, in taking a look at where your money really goes each month, it’s important to know approximately how much money you “should” be spending in each category. Generally speaking, your net spendable income (after taxes) should be allocated as follows*:

  • Housing: 30%
  • Food: 12%
  • Auto: 14%
  • Insurance: 5%
  • Debt: 5%
  • Entertainment: 7%
  • Clothing: 6%
  • Savings: 5%
  • Medical/Dental: 4%
  • Miscellaneous: 7%
  • Child Care: 5%
  • Investments: 5%

 

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6. Set Financial Goals

Now that you’ve worked out a plan to pay down your debt, and you’ve created a budget, it’s time to determine your needs moving forward.

Specifically, as a single parent, you need to ask yourself some questions, such as:

  • Do you need to file for child support?
  • Do you need to get a higher-paying job?
  • Is it time to think about going back to school?
  • Do you need to consider moving into a home/rental that would reduce your overall monthly payments?
  • Are there alternatives, such as taking on another job or splitting expenses with another single parent family, that you need to consider at this point?

One of the things that I want you to know is that the ball is in your court. You determine where this goes from here on out. But unfortunately, you can’t do that if you’re ignoring your financial health, right?

So the fact that you’ve come this far in the process of getting a handle on your finances tells me that you’re determined to make the changes you need to make in order to provide for your family’s future.

So go ahead and ask yourself these questions. So much of single parenting is learning to roll with the punches and be creative in the face of adversity. If, indeed, you need to make some pretty major changes, now is the time to do it. Don’t incur any more debt where you are. Be resourceful, follow through, and do what you need to do to turn your financial situation around.

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7. Increase Your Net Worth

The next step is to determine your net worth and begin adding to it.

Determine Your Net Worth:

Your net worth is what you own minus what you owe. Programs such as Mint.com, Quicken, and Microsoft Money will calculate your net worth for you, automatically.

You can also determine your net worth simply by adding up all that you own, including all of your investments, the equity you may have paid into your home, the value of your car, and any other assets you possess; and subtracting what you owe in remaining debts.

Set Up a Savings Account:

Once you know where you stand, you’ll be ready to set up a savings account. You can do this through your regular bank, or begin investing in a mutual fund that pays interest.

Even if you can only afford to set aside $25 or $50 per month, it will begin to add up.

Before you know it, you’ll have an emergency savings plan in place, to protect you in the event that your car breaks down, or your home needs a major repair.

In addition, this regular savings will help you increase your net worth over time.

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8. Become Even More Frugal

Unfortunately, all of the work you’ve already done in steps 1-7 will have little lasting value if you don’t change your attitude toward money. Now is the time to become even more frugal and learn to live within your means.

Practice Discipline:

Stop imagining that more money is going to pour in tomorrow—through finally collecting on unpaid child support, winning the lottery, or getting a promotion. If those things happen, great! You’ll be even better off. But living as if they’re going to happen is causing you to spend money you don’t have.

Instead, force yourself to make purchases with cash only. Do not continue to pay outrageous interest payments toward credit cards for purchases you don’t absolutely need. You can get by without that new furniture, right? What else could you skip, in the interest of spending only what you have right now in the bank?

Try These Ideas:

  • Check Freecycle before you make another major purchase. Someone else may be giving away the very thing you’d like to buy!
  • When you’re getting ready to buy something specific, look for it on eBay first. I buy a lot of my clothes, new-with-tags, through online auctions!
  • Forget trying to keep up with “The Jones’s.” You already know your value; don’t get caught up trying to “prove” your worth to others by having “just the right” house, car, or appearance.
  • Do not use shopping, ever, to appease your emotions.
  • Finally, when you do go to make a big purchase, step back and give yourself a few days–or even a week–to think about it. There’s no reason to suffer through buyer’s remorse and try to justify to yourself purchases that you really can’t afford. Think it over carefully and make those purchases, when necessary, with cash.

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9. Schedule Your Own Weekly Financial Check-In

Grab your calendar and schedule a weekly financial update meeting with yourself. This is an extremely important step in managing your personal finances, and it’s one that you need to continue each and every week. During your “meeting” time:

  • Pay any bills that are due.
  • If your bank statement has arrived, take the time to balance your checkbook.
  • Check the balances of your checking and savings accounts.
  • Update your debt list to incorporate any recent payments.
  • This is also a good time to write out your grocery shopping list and check what’s on sale at your local grocery store this week (either using the store’s Web site or the sales circular that comes in the newspaper).
  • Finally, also make note of any upcoming expenses you need to anticipate and plan for.

An attitude of gratitude and finances.

 

 

References:
Irby, LaToya. Email interview. 24 Oct. 2008, 
Huffstetler, Erin. Email interview. 24 Oct. 2008. 
Sources:
Caldwell, Miriam. Email interview. 27 Oct. 2008, Hammond, Bob. “Debt Free Key: 10 Steps for Coping With Credit Problems.” Life Without Debt. Franklin Lakes, NJ: Career Press, 1995. 31-32, Irby, LaToya. Email interview. 24 Oct. 2008. 
“Spending Plan Online Calculator.” Crown Financial Ministries. 11 Oct. 2008.

Written By: Jennifer Wolf

Source: thebalance

 

 

 

Your Money: Sharing Family Getaways Without Any Cottage Conflicts

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Picture it: 40 picturesque acres nestled in Wisconsin lake country.

That is the ideal getaway the grandfather of Chicago financial planner Tim Obendorf’s wife built around 50 years ago. Then the property passed to the next generation, with ownership shared by four people.

Now they are thinking about the next generation: 11 potential owners.

Without the right planning, that paradise could turn into hell.

As brothers, sisters, parents, aunts, uncles, cousins and grandparents gather this summer at family homes to go hiking, canoeing or swimming, there will also be arguments over schedules, property taxes or mortgage costs, and upkeep duties, along with the thousand other matters that come with shared homeownership.

“Whenever a number of families are under the same roof, conflicts are going to arise,” said Jill Shipley, managing director of family dynamics for Abbot Downing, a division of Wells Fargo that handles high-net-worth families and foundations.

That is why Obendorf’s family has already logged a couple of family meetings. “It’s never going to be perfect, but you have to decide you value the place, more than the hassles of working through family issues,” said Obendorf.

It is not surprising that vacation homes have become a point of contention. Many vacation homeowners are baby boomers: They possess the bulk of the nation’s assets and are projected to hold over 50 percent by 2020, according to a study by the Deloitte Center for Financial Services. They are now beginning to retire as they hit their 60s and 70s.

The potential problems are plentiful: Is the place big enough for everybody? Who gets it on July 4th weekend? Do they split costs equally? Who cleans up, handles repairs, or stocks the fridge?

And the big one: When the owners eventually pass on – who gets the place?

How can families get the most out of shared vacation properties this summer, without either going broke or killing each other? Some tips from the experts:

Draw Up a Calendar

Just like season tickets for a sports team, some dates will be in high demand. So if the property is not big enough to handle multiple families at once – or, let’s face it, you just do not get along – pick your spots. “Establish a rotating lottery each year, and allow each family member to pick their respective dates,” suggests Kevin Reardon, a financial planner in Pewaukee, Wisconsin.

Write Down a Policy

Everyone has different opinions of what a getaway should be, so hash it out and put it all down on paper. One key item: Whether ongoing costs like property taxes, homeowner’s association dues and repairs are split equally, or allocated based on usage.

Create an Opt-out

A sure way to guarantee family resentment: One member being forced into an arrangement they do not want. If a family cottage is being passed to the next generation, allow an escape hatch that permits one member’s share to be bought out by their siblings. After all, not everyone might be able to use the property to the same extent, especially if they have moved far away.

Bring in a Pro

Siblings, of course, do not always get along. In fact, 15 percent of adult siblings report arguing over money, according to a new survey from Ameriprise Financial. To make sure everyone is heard, bringing in a trained facilitator is probably your best bet, advises Shipley.

Have the Discussion Now

“I have been in many family meetings where the kids ask, ‘I wonder what mom and dad would have wanted?'” says Shipley. So if you are fortunate enough that the family matriarch and patriarch are still around, arrange a family meeting and find out what they envision for the property in the decades to come.

Maybe they want it to stay in the family, as a legacy for the grandkids. Or maybe, because of family circumstances like far-flung siblings, it would be wiser to just sell the property and split the proceeds.

Set up a Trust

One way to take future financial squabbles out of the equation altogether: If families have the resources, they should create a trust to “fund the maintenance and ongoing use of the property in perpetuity,” says Shipley. “That is one solution to reduce conflict, and keep the property in the family for generations.”

 

 

 

Written By: Chris Taylor
Source: Reuters

14 Things Ridiculously Successful People Do Every Day

Having close access to ultra-successful people can yield some pretty incredible information about who they really are, what makes them tick, and, most importantly, what makes them so successful and productive.

“Whenever you see a successful person, you only see the public glories, never the private sacrifices to reach them.” – Vaibhav Shah

Kevin Kruse is one such person. He recently interviewed over 200 ultra-successful people, including 7 billionaires, 13 Olympians, and a host of accomplished entrepreneurs. One of his most revealing sources of information came from their answers to a simple open-ended question:

“What is your number one secret to productivity?”

In analyzing their responses, Kruse coded the answers to yield some fascinating suggestions. What follows are some of my favorites from Kevin’s findings.

1. They focus on minutes, not hours. Most people default to hour and half-hour blocks on their calendar; highly successful people know that there are 1,440 minutes in every day and that there is nothing more valuable than time. Money can be lost and made again, but time spent can never be reclaimed. As legendary Olympic gymnast Shannon Miller told Kevin, “To this day, I keep a schedule that is almost minute by minute.” You must master your minutes to master your life.

2. They focus on only one thing. Ultra-productive people know what their “Most Important Task” is and work on it for one to two hours each morning, without interruptions. What task will have the biggest impact on reaching your goals? What accomplishment will get you promoted at work? That’s what you should dedicate your mornings to every day.

3. They don’t use to-do lists. Throw away your to-do list; instead schedule everything on your calendar. It turns out that only 41% of items on to-do lists ever get done. All those undone items lead to stress and insomnia because of the Zeigarnik effect, which, in essence, means that uncompleted tasks will stay on your mind until you finish them. Highly productive people put everything on their calendar and then work and live by that calendar.

4. They beat procrastination with time travel. Your future self can’t be trusted. That’s because we are time inconsistent. We buy veggies today because we think we’ll eat healthy salads all week; then we throw out green rotting mush in the future. Successful people figure out what they can do now to make certain their future selves will do the right thing. Anticipate how you will self-sabotage in the future, and come up with a solution today to defeat your future self.

5. They make it home for dinner. Kevin first learned this one from Intel’s Andy Grove, who said, “There is always more to be done, more that should be done, always more than can be done.” Highly successful people know what they value in life. Yes, work, but also what else they value. There is no right answer, but for many, these other values include family time, exercise, and giving back. They consciously allocate their 1,440 minutes a day to each area they value (i.e., they put them on their calendar), and then they stick to that schedule.

6. They use a notebook. Richard Branson has said on more than one occasion that he wouldn’t have been able to build Virgin without a simple notebook, which he takes with him wherever he goes. In one interview, Greek shipping magnate Aristotle Onassis said, “Always carry a notebook. Write everything down. That is a million dollar lesson they don’t teach you in business school!” Ultra-productive people free their minds by writing everything down as the thoughts come to them.

7. They process e-mails only a few times a day. Ultra-productive people don’t “check” their e-mail throughout the day. They don’t respond to each vibration or ding to see who has intruded into their inbox. Instead, like everything else, they schedule time to process their e-mails quickly and efficiently. For some, that’s only once a day; for others, it’s morning, noon, and night.

8. They avoid meetings at all costs. When Kevin asked Mark Cuban to give his best productivity advice, he quickly responded, “Never take meetings unless someone is writing a check.” Meetings are notorious time killers. They start late, have the wrong people in them, meander around their topics, and run long. You should get out of meetings whenever you can and hold fewer of them yourself. If you do run a meeting, keep it short and to the point.

9. They say “no” to almost everything. Billionaire Warren Buffet once said, “The difference between successful people and very successful people is that very successful people say ‘no’ to almost everything.” And James Altucher colorfully gave Kevin this tip: “If something is not a ‘Hell Yeah!’ then it’s a no.” Remember, you only have 1,440 minutes in a day. Don’t give them away easily.

10. They follow the 80/20 rule. Known as the Pareto Principle, in most cases, 80% of results come from only 20% of activities. Ultra-productive people know which activities drive the greatest results. Focus on those and ignore the rest.

11. They delegate almost everything. Ultra-productive people don’t ask, “How can I do this task?” Instead, they ask, “How can this task get done?” They take the I out of it as much as possible. Ultra-productive people don’t have control issues, and they are not micro-managers. In many cases, good enough is, well, good enough.

12. They touch things only once. How many times have you opened a piece of regular mail–a bill perhaps–and then put it down, only to deal with it again later? How often do you read an e-mail and then close it and leave it in your inbox to deal with later? Highly successful people try to “touch it once.” If it takes less than five or ten minutes–whatever it is–they deal with it right then and there. It reduces stress, since it won’t be in the back of their minds, and it is more efficient, since they won’t have to re-read or re-evaluate the item again in the future.

13. They practice a consistent morning routine. Kevin’s single greatest surprise while interviewing over 200 highly successful people was how many of them wanted to share their morning ritual with him. While he heard about a wide variety of habits, most nurtured their bodies in the morning with water, a healthy breakfast, and light exercise, and they nurtured their minds with meditation or prayer, inspirational reading, or journaling.

14. Energy is everything. You can’t make more minutes in the day, but you can increase your energy to increase your attention, focus, and productivity. Highly successful people don’t skip meals, sleep, or breaks in the pursuit of more, more, more. Instead, they view food as fuel, sleep as recovery, and breaks as opportunities to recharge in order to get even more done.

Bringing It All Together

You might not be an entrepreneur, an Olympian, or a billionaire (or even want to be), but their secrets just might help you to get more done in less time and assist you to stop feeling so overworked and overwhelmed.

 

 

Written By: Travis Bradberry
Source: Inc.

7 Personal Finance Tips From Warren Buffett

Warren Buffett is generally considered to be the best long-term investor of all time, so it’s no wonder many people like to listen closely to Buffett’s words of wisdom, in order to apply them to their own lives. With that in mind, here are seven of the best personal finance lessons I’ve learned from Warren Buffett over the years.

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1. “Someone’s sitting in the shade today because someone planted a tree a long time ago”

The lesson here is to be a forward thinker when it comes to personal finance, whether you’re talking about investing, saving, or spending. When you’re deciding whether to put some more money aside for emergencies, think of a financial emergency actually happening and how much easier your life will be if you have enough money set aside.

Similarly, few people get rich quick by investing, and most people who try end up going broke. The most certain path to wealth (and the one Buffett took) is to build your portfolio one step at a time, and keep your focus on the long run.

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2. “Only buy something that you’d be perfectly happy to hold if the market shut down for 10 years”

In addition to this, one of my all-time favorite Warren Buffett quotes is “our favorite holding period is forever,” which is also one of the most misunderstood things he says. The point isn’t that Buffett only invests in stocks he’s going to buy and forget about — after all, Buffett’s company Berkshire Hathaway sells stocks regularly, and for a variety of reasons. Rather, what Buffett is saying is to invest in stable, established businesses that have durable competitive advantages. That is, approach your investments with the long term in mind, but keep an eye on them to make sure your original reasons for buying still apply.

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3. “Price is what you pay; value is what you get”

When you’re buying an investment (or anything else for that matter), the price you pay and the value you receive are often two very different things. In other words, you should buy a stock if you believe its share price is less than the intrinsic value of the business — not simply because you think the price is low.

For example, if a market correction hit tomorrow and a certain stock were to fall by 10% along with the overall market, would the business inherently be worth 10% less than it is today? Probably not. Similarly, if a stock rose rapidly, it wouldn’t necessarily mean that the value of the underlying business had risen as well. Be sure you consider value and price separately when making investing decisions.

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4. “Cash … is to a business as oxygen is to an individual: never thought about when it is present, the only thing in mind when it is absent”

One of the reasons Berkshire Hathaway not only survives recessions and crashes, but tends to come out of them even better than it went in, is that Warren Buffett understands the value of keeping an “emergency fund.” In fact, when the market was crashing in 2008, Berkshire had enough cash on hand to make several lucrative investments, such as its purchase of Goldman Sachs warrants.

Granted, Berkshire Hathaway’s rainy-day fund is probably a bit bigger than yours; Buffett insists on keeping a minimum of $20 billion in cash at all times, and the current total is around $85 billion. However, the same applies to your own financial health. If you have a decent stockpile of cash on the sidelines, you’ll be much better equipped to deal with whatever financial challenges and opportunities life throws at you.

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5. “Risk comes from not knowing what you’re doing”

In Buffett’s mind, one of the best investments you can make is in yourself and the knowledge you have. This is why Buffett spends hours of every day reading, and has done so for most of his life. The better educated you are on a topic, whether it’s investing or anything else, the better equipped you’ll be to make wise decisions and avoid unnecessary risks. As Buffett’s partner Charlie Munger has advised: “Go to bed smarter than when you woke up.”

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6. Most people should avoid individual stocks

This may seem like strange advice coming from Warren Buffett, since he’s widely regarded as one of the best stock-pickers of all time.

However, Buffett has said on several occasions that the best investment for most people is a basic, low-cost S&P 500 index fund, like the one he is using in a bet to outperform a basket of hedge funds. The idea is that investing in the S&P 500 is simply a bet on American business as a whole, which is almost certain to be a winner over time.

To be clear, Buffett isn’t against buying individual stocks if you have the time, knowledge, and desire to do it right. He’s said that if you have six to eight hours per week to dedicate to investing, individual stocks can be a smart idea. If not, you should probably stick with low-cost index funds.

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7. Remember to give back

Warren Buffett is a co-founder of and participant in The Giving Pledge, which encourages billionaires to give their fortunes away. Buffett plans to give virtually all of his money to charity, and since he signed the pledge, he has given away billions of dollars’ worth of his Berkshire shares to benefit various charitable organizations.

Buffett once said, “If you’re in the luckiest one percent of humanity, you owe it to the rest of humanity to think about the other 99 percent.” And even if you’re not a member of the 1%, it’s still important to find ways to give back.

 

 

 

Written By: Matthew Frankel
Source: The Motley Fool

How To Avoid A 401(k) Meltdown If The Trump Rally Fizzles

Millions of Americans are asking the wrong questions when it comes to their retirement plans. It’s not “how much should I invest now?” or “is the market safe?” You should invest as much as you can in every kind of market.

So forget about the question of whether the “Trump rally” is over, or taking a pause. If that’s your concern, you’re focused on the wrong thing.

Despite this reality, far too many investors are trying to find the right fund manager who can somehow predict and navigate the rocky seas the market will toss up. In rare cases, some managers get lucky and get in and out at the right time. But most don’t have this ability.

Most of us want to believe that professional money managers know just when to get in and out of stocks. We put a lot of faith in them — and mis-spend some $2 trillion in fees hoping that they’ll be right and protect our money.

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The numbers don’t lie, however. Most managers can’t do better than passive market averages and rarely outperform after you subtract their fees. So if you’re placing your trust in active management, you’re headed for a meltdown sooner or later.

A recent study by Jeff Ptak at Morningstar shows the folly of active management for most investors.

Ptak looked a the relationship between what actively managed funds return to the fees they charge for management. In most cases, expenses will cancel out most significant gains.

“Fees haven’t fallen that steeply, and, as a result more than two-thirds of U.S. stock funds levy annual expenses that would wipe out their estimated future pre-fee excess returns.”

What this means is that active managers who time the market aren’t likely to outperform passive baskets of stocks. When you subtract their fees, you’re not coming out ahead.

Fees take an even bigger bite when overall market returns are lower. If stocks return less than double digits, you’re going to feel the pain even more.

Ptak is blunt in his conclusion: “Many active stock funds are too expensive to succeed. The exceptions are small-cap funds, where it appears fees are still below estimated pre-fee excess returns.”

What can you do to avoid the meltdown of overpriced, actively managed funds? It’s a pretty simple process.

1) Find the lowest-cost index funds to cover U.S. and global stocks and bonds. Expense ratios shouldn’t be more than 0.20% annually (as opposed to 1% or more for active funds).

2) If you still want active funds in your portfolio, they should be highly-rated managers who invest in smaller companies.

3) Make sure that the “active” part of your portfolio is no more than 30% of your total holdings. While this is an arbitrary percentage, it will provide some buffer against market timing decisions.

You should also avoid the error of picking funds based on their past performance, which can never be guaranteed. So, instead of asking how they performed, you should ask “how many securities can they hold for the lowest-possible cost.”

 

29 Biggest Tax Problems For Married Couples

Preparing your annual income tax return is a chore. It’s even more complex when you’re married. You might have two sets of income, assets, debts and deductions. Further, if you were separated, widowed or divorced during the year, you might have a thorny tax situation.

A qualified accountant can advise you on the basic tax problems that married couples face. For a brief introduction, read through to see 29 of the most significant tax problems married people might encounter. Understanding these challenges can help you get more tax breaks this year.

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1. YOU’RE NOT SURE OF THE YOUR MARITAL STATUS FOR THE TAX YEAR

When preparing taxes, you first need to determine your marital status. It might seem like a straightforward task. However, life is not always so simple.

The IRS considers you to be married if you were lawfully wed on the last day of the tax year. For example, if you tied the knot at any time in the past and were still married on Dec. 31, 2016, you were married to your spouse for the entire year in the eyes of the IRS. The laws of the state where you live determine whether you were married or legally separated for the tax year.

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2. YOU’RE NOT SURE OF YOUR MARITAL STATUS IN A SAME-SEX RELATIONSHIP

Married, same-sex couples are treated the same as married, heterosexual couples for federal tax purposes. However, same-sex couples in a registered domestic partnership or civil union cannot choose to file as married couples, as state law doesn’t consider those types of couples to be married.

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3. YOU DON’T KNOW WHICH FILING STATUS TO CHOOSE

If you weren’t married on Dec. 31 of the tax year, the IRS considers you to be single, head of household or a qualified widow(er) for that year.

If you were married, there are three filing possibilities:

  • Married filing jointly
  • Married filing separately
  • Head of household

If more than one category might apply to you, the IRS permits you to pick the one that lets you pay the least amount in taxes.

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4. YOU CAN’T DECIDE WHETHER TO FILE JOINTLY OR SEPARATELY

If you’re married and don’t qualify to file as head of household, you typically have two choices: filing jointly or separately. It’s best to choose the one that allows you to pay the least amount in taxes, which all comes down to your particular circumstances.

Sometimes it makes sense to file separately, said Josh Zimmelman, owner of Westwood Tax & Consulting, a New York-based accounting firm. “A joint return means that your finances are linked, so you’re both liable for each other’s debts, penalties and liabilities,” he said. “So if either of you has some financial issues or baggage, then filing separately will better protect your spouse from your bad record, or vice versa.”

If you file jointly, you can’t later uncouple yourselves to file married filing separately. “On the other hand, if you file separate returns and then realize you should have filed jointly, you can amend your returns to file jointly, within three years,” Zimmelman said.

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5. YOU ASSUME MARRIED FILING JOINTLY IS ALWAYS THE BEST OPTION

Even if married filing jointly has been your best choice in the past, don’t assume it will always be that way. Do the calculations each year to determine whether filing singly or jointly will give you the best tax result.

Changes in your personal circumstances or new tax laws might make a new filing status more desirable. What was once a marriage tax break might turn into a reason to file separately, or vice versa.

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6. YOU’RE NOT CLEAR ABOUT HEALTHCARE REQUIREMENTS

The Patient Protection and Affordable Care Act — more commonly known as “Obamacare” — requires that you and your dependents have qualifying health care coverage throughout the year, unless you qualify for an exemption or make a shared responsibility payment.

Even if you lose your health insurance coverage because of divorce, you still need continued coverage for you and your dependents during the entire tax year.

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7. YOU CHANGED YOUR LAST NAME

If you want to change your last name after a marriage or divorce, you must officially inform the federal government. Your first stop is the Social Security Administration. Your name on your tax return must match your name in the SSA records. Otherwise, your tax refund might be delayed due to the mismatched records. Also, don’t forget to update the changed names of any dependents.

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8. YOUR SPOUSE DIED DURING THE TAX YEAR

If your spouse died during the year, you’ll need to figure out your filing status. If you didn’t marry someone else the same year, you may file with your deceased spouse as married filing jointly.

If you did remarry during that tax year, you and your new spouse may file jointly. However, in that case, you and your deceased spouse must file separately for the last tax year of the spouse’s life.

In addition, if you didn’t remarry during the tax year of your spouse’s death, you might be able to file as qualifying widow(er) with dependent child for the following two years if you meet certain conditions. This entitles you to use joint return tax rates and the highest standard deduction amount.

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9. YOU FILE JOINTLY AND YOU’RE BOTH LIABLE

If you use the status married filing jointly, each spouse is jointly and severally liable for all the tax on your combined income, said Gail Rosen, a Martinsville, N.J.-based certified public accountant. “This means that the IRS can come after either one of you to collect the full amount of the tax,” she said.

“If you are worried about your spouse and being responsible for their share of their taxes — including interest and penalties — then you might consider filing separately,’ she said.

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10. YOU FILE SEPARATELY AND LOSE TAX BENEFITS

Although filing separately might protect you from joint and several liabilities for your spouse’s mistakes, it does have some disadvantages.

For example, people who choose the married filing separately status might lose their ability to deduct student loan interest entirely. In addition, they’re not eligible to claim the Earned Income Tax Credit and they might also lose the ability to claim the Child and Dependent Care Credit or Adoption Tax Credit, said Eric Nisall, an accountant and founder of AccountLancer, which provides accounting services to freelancers.

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11. YOU DON’T MEET THE MEDICAL EXPENSE DEDUCTION THRESHOLD

To include non-reimbursed medical and dental expenses in itemized deductions, the expenses must meet a threshold of exceeding 10 percent of your adjusted gross income. However, when you file jointly — and thus report a larger combined income — it can make it more difficult for you to qualify.

A temporary exception to the 10 percent threshold for filers ages 65 or older ran through Dec. 31, 2016. Under this rule, individuals only need to exceed a lower 7.5 percent threshold before they are eligible for the deduction. The exception applies to married couples even if only one person in the marriage is 65 or older.

Starting Jan. 1, 2017, all filers must meet the 10 percent threshold for itemizing medical deductions, regardless of age.

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12. YOU DON’T TAKE ADVANTAGE OF THE MARRIAGE BONUS

Many people complain about the marriage tax penalty. “Married filing jointly may result in a higher tax bill for the couple versus when each spouse was filing single, especially if both spouses make roughly the same amount of income,” said Andrew Oswalt, a certified public accountant and tax analyst for TaxAct, a tax-preparation software company.

However, you might have an opportunity to pay less total tax — a marriage tax break — if one spouse earns significantly less. “When couples file jointly with largely differing income levels, this may result in a ‘marriage tax benefit,’ potentially resulting in less tax owed than when the spouses filed with a single filing status,” Oswalt said.

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13. YOU’RE DIVORCED BUT STILL NEED TO FILE A FINAL MARRIED RETURN

If your divorce became official during the tax year, you need to agree with your ex-spouse on your filing status for the prior year when you were still married. As to whether you should file your final return jointly or separately, there is no single correct answer. It partially depends on your relationship with your ex-spouse and whether you can agree on such potentially major financial decisions.

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14. YOU HAVE TO DETERMINE THE STATUS OF DEPENDENTS AFTER A DIVORCE

Tax laws about who qualifies as a dependent are quite complex. Divorcing parents might need to determine which parent gets to claim the exemption for dependent children.

Normally, the custodial parent takes the deduction, Zimmelman said. “So if your child lives with you more than half the year and you’re paying at least 50 percent of their support, then you should claim them as your dependent,” he said.

In cases of shared custody and support, you have a few options. “You might consider alternating every other year who gets to claim them,” said Zimmelman. Or if you have two children, each parent can decide to claim one child, he said.

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15. YOU DEDUCT VOLUNTARY ALIMONY PAYMENTS

If you want to deduct alimony payments you made to a former spouse, it must be in accordance with a legal divorce or separation decree. You can’t deduct payments you made on a voluntary basis.

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16. YOU DEDUCT CHILD SUPPORT PAYMENTS

Even if you don’t take the standard deduction and instead itemize your deductions, you can’t claim child support payments you paid to a custodial parent.

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17. YOU CLAIM CHILD SUPPORT PAYMENTS AS INCOME

Do not report court-ordered child support payments as part of your taxable income. You don’t need to report it anywhere on your tax return. On the other hand, you must report alimony you receive as income on line 11 of your Form 1040.

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18. YOU DON’T CLAIM ALIMONY YOU PAID AS A DEDUCTION

Unlike child support that isn’t tax deductible, you are permitted to deduct court-ordered alimony you paid to a former spouse. It’s a deduction you can take even if you don’t itemize your deductions.

Make sure you include your ex-spouse’s Social Security number or individual taxpayer identification number on line 31b of your own Form 1040. Otherwise, you might have to pay a $50 penalty and your deduction might be disallowed.

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19. YOUR SPOUSE DOESN’T WORK AND MISSES TAX SAVINGS

Saving for retirement is important. Contribute to a 401k plan and you will both save money for your golden years and lower your taxable income now. If your employer offers a 401k plan, you can contribute money on a pretax basis, subject to certain limits.

However, nonworking spouses can’t contribute to a 401k because they don’t have wages from an employer.

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20. YOU MISS QUARTERLY TAX PAYMENTS

Single or married, you might have to pay quarterly tax payments to the IRS, especially if you are self-employed. Make sure you know how to calculate estimated taxes. If you are required to make such payments but do not do so, you might have to pay an underpayment penalty, Rosen said.

All taxpayers must pay in taxes during the year equal to the lower of 90 percent of the tax owed for the current year, or 100 percent — 110 percent for higher-income taxpayers — of the tax shown on your tax return for the prior year, Rosen said. “The problem for married couples is that often they do not realize they owe more taxes due to the combining of the two incomes,” she said.

You should be proactive each year. “To avoid owing the underpayment penalty, make sure to do a projection of your potential tax for 2017 when you finish preparing your 2016 taxes,” she said, adding that you should make sure to comply with the payment rules outlined above.

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21. YOU PHASE OUT OF PASSIVE LOSSES

Crystal Stranger — a Los Angeles-based enrolled agent, president of 1st Tax and author of “The Small Business Tax Guide” — said she sees a lot of married couples who have issues with passive loss limitation rules.

“With these rules, if you have a passive loss from rental real estate or other investments, you are allowed to take up to $25,000 of passive losses against your other income,” she said. “But this amount phases out starting at $100,000 (of) adjusted gross income, and is fully lost by $150,000 (of) adjusted gross income.”

Married filers lose out, as the phaseout amount is the same for a single taxpayer as for a married couple. “This is a big marriage penalty existing in the tax code,” Stranger said. “It gets even worse if a married couple files separately. The phaseout then starts at $12,500, meaning almost no (married filing separately) filers will qualify.”

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22. YOU CLAIM A CHILD AS A DEPENDENT, BUT YOUR INCOME IS HIGH

You are not obligated to claim your kids as dependents on your own tax return. In fact, it might be beneficial not to claim them.

“High earners lose the personal exemption after crossing certain income thresholds,” said Nisall. So in some cases, it might make more sense to let working children claim the exemption for themselves on their own return, he said.

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23. YOU MISS OUT ON THE CHILD TAX CREDIT

Married couples might be able to claim the Child Tax Credit up to a limit of $1,000 for each qualifying child.

“The Child Tax Credit phases out starting at $55,000 for couples electing to use the married filing separately filing status, and (at) $110,000 for those choosing the married filing jointly status,” said Oswalt. “But married couples receive twice the standard deduction that individuals receive, so the phaseout limitations may not negatively impact a married couple’s return if they choose to file jointly.”

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24. YOU NEGLECT THE TAX BREAK FROM A HOME SALE

The IRS provides a tax break when you sell your home, subject to certain conditions. Generally, you must meet a minimum residency period by owning and living in the house for two of the five years previous to the sale.

A single person who owns a home that has increased in value can qualify to exclude up to $250,000 in gains from income, said Oswalt. However, married people can exclude up to $500,000 in gains. This rule can become tricky if one person in the couple purchased the house prior to marriage.

“If you are married when you sell the house, only one of you needs to meet the ownership test for the $250,000 exclusion,” Oswalt said. “You both must meet the residency period to exclude up to the full $500,000 of gain from your income, however.”

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25. YOU DON’T CLAIM THE CHILD AND DEPENDENT CARE CREDIT

Married tax filers might be eligible for the Child and Dependent Care Credit if they paid expenses for the care of a qualifying individual so that they could work or look for work. The rules for who can be a dependent and who can be a care provider are strict. This credit is not available if you file separately.

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26. YOU CAN’T DEDUCT STUDENT LOAN INTEREST

If you’re paying back student loans, you might be looking forward to taking the student loan interest deduction. However, if you’re married, it might not be so easy to do that.

“For a single filer, the deduction begins to phase out when the taxpayer’s adjusted gross income is greater than $65,000,” said Oswalt. “This amount is doubled to $130,000 when filing jointly.”

“So if both spouses are making $65,000 or less, then their deduction will not be affected by the phaseout,” he explained. “However, if one is making $60,000 and the other $75,000, the deduction begins to phase out, which will ultimately result in a larger tax bill.”

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27. YOU INCORRECTLY ACCOUNT FOR GAMBLING WINS AND LOSSES

Imagine a married couple where both spouses like to gamble in Las Vegas. He’s not so lucky and has losses, while she has winnings. If they file a joint return, they might have to report the gambling winnings as taxable income. Meanwhile, the losses might be deductible if the couple itemizes their deductions instead of taking the standard deduction.

However, they can’t take the amount of gambling winnings, subtract the losses and claim the net amount as winnings. Instead, they must report the entire amount of gambling winnings as income, whereas the losses are reported as an itemized deduction up to the amount of the winnings. The IRS requires you to keep accurate records of your winnings and losses.

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28. YOU BECAME A VICTIM OF TAX IDENTITY THEFT

Identify theft is a financial nightmare, no matter how it happens. Tax identity theft happens when someone files a tax return using one or both of the spouse’s Social Security numbers in hopes of scooping up your legitimate refund. If this happens to you, “contact the IRS immediately and fill out an identity-theft affidavit,” said Zimmelman. “You should also file a complaint with the Federal Trade Commission, contact your banks and credit card companies, and put a fraud alert on your and your spouse’s credit reports.”

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29. YOU CAN’T GET YOUR 2015 RETURN

The IRS and state tax agencies work to develop safeguards to avoid identity theft related to tax returns. In 2017, they will be particularly concerned about the implications of taxpayers who file using tax software.

The IRS has alerted taxpayers that they might need to have their 2015 adjusted gross income handy if they are changing software products this year. This number might be required to submit your return electronically.

Getting your 2015 adjusted gross income might be difficult if you are a member of a divorced couple that is not on positive terms, or that hasn’t even been in contact the past few years.

However, you still have options. You might be able to get the information if you go to the IRS website and use the Get Transcript service.

 

 

Written By: Valerie Rind
Source: GOBankingRates

Three Financial Facts of the Week: March 10, 2016

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Wikimedia

Fact #1
Growth in “labor quality,” a measure of the skill set of the average worker, has declined in the last few years, according to a recent research note from J.P. Morgan Chase. In 2015, the growth in overall workforce skills contributed less than 0.1 percentage points to GDP growth, the smallest contribution of labor quality to growth since 1979.
Source: Wall Street Journal

Fact #2
Among industrialized economies, only the U.S. and Japan are growing at similar rates compared with their pre-financial crisis growth rate, after adjusting for changes in the working-age population, but both economies have still grown more slowly than expected.
Source: JobMarketMonitor.com

Fact #3
As tighter border controls are continuously put into place across Europe, the European Union could face up to 18 billion euros, or $19.6 billion, each year in lost business, steeper freight costs, and interruptions to supply chains, according to a recent report by the European Commission.
Source: New York Times

5 Essential Products That Will Be Cheaper This Year

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Anthony Albright/Flickr

What better way to ring in the New Year than with savings at the checkout counter, especially when those potential savings are expected to continue throughout the year?

According to price predictions for this year, there are a handful of essential household items that will cost less in 2016 than they did in 2015.

“As the dollar continues to gain ground against other currencies and the price of oil maintains at low levels, companies from many sectors are able to keep their costs affordable for their customers,” according to the website Wise Bread.

Here are five common consumer buys that should be cheaper in 2016:

  1. Milk: It’s likely that you’ll continue to drink in some savings in the dairy aisle in 2016. After paying record-high prices for milk in 2014, Americans saw prices dip in 2015 and the “current trend of low milk prices is likely to continue until at least mid-2016,” according to Wise Bread.
  2. Gas: Americans enjoyed lower prices at the pump in 2015, as the average national gas price fell below $2 a gallon for the first time in seven years — a result of a drop in crude oil prices. The cheap gas trend is expected to continue this year. “The average annual price for gasoline in 2016 could stay the same as 2015 or possibly even drop 5 to 15 cents a gallon lower,” Christine Delise with AAA tells CBS Baltimore.
  3. Pork: This may be a good year to feast on bacon and pork chops. “According to an agricultural economist at the University of Missouri, a slight uptick in hog production combined with a low price for corn (the main feed used in raising hogs) will keep the prices of pork products affordable throughout 2016,” Wise Bread says.
  4. Bread: An abundance of wheat will likely keep bread prices down this year, which is great news for households like mine, where loaves of bread seemingly disappear overnight, used for peanut butter and jelly sandwiches for the kids, morning toast with jelly and my husband’s sandwiches at lunch. “Unless wheat farmers experience an absolute loss in crops due to some freak event, you can expect more savings in your weekly bread purchases,” Wise Bread says.
  5. Heating oil: If you use heating oil to keep your home warm and toasty in the winter, this will make you happy. The price of heating oil is expected to dip to $2.52 per gallon this year, compared with $2.67 in 2015, according to the U.S. Energy Information Administration. “In the last four years, we have gone through an absolute revolution when it comes to energy,” Peter Kenny, independent market strategist, told CBS. “Those years of exorbitant prices paid by U.S. consumers have effectively come to an end.” Families that use heating oil are expected to spend about $570 less this winter than last to heat their homes.

Which predicted price drops will have the greatest impact on your budget?

Written by Krystal Steinmetz of MoneyTalksNews

(Source: MoneyTalksNews)

Making $50,000 a Year? Here’s How Much to Invest

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Provided by Investopedia

No matter how much money you earn, the amount you invest each year should be based on your goals.

Your investment goals not only provide you with a target at which to aim, they also provide the motivation necessary to stick with your investing plan.

Your investment goals should also be based on how much you can afford to invest. With an income of $50,000, the constraints of living expenses may prevent you from investing as much as you would like initially, but if you stay focused on your goals, you should be able to increase the amount of your investments as your income increases.

By following four key financial planning steps, you can determine how much to invest in the beginning and have a plan for achieving your goals through gradual increases in the amount you invest. For purposes of illustration, this particular case involves a 30-year-old person earning $50,000 per year with an expected increase in income of 4% per year.

Set Your Goals

At age 30, you may have several goals you want to achieve, which could include starting a family, having children, providing those children with a college education and retiring on time. This is a lot to accomplish on a $50,000 income. However, it is safe to assume your income will increase over the years, so you should not let your current income constrain your goals. You just have to prioritize, and as you set up your investment plan, target each goal separately. For this example, assume the goal you want to target is to retire at age 65. After inputting some assumptions into a retirement calculator, this indicates a need for $1 million in capital. This is your target. Using a savings calculator, and assuming an average annual return of 6.5%, you need to save $500 per month starting at age 30. This is your savings goal. Your next step is to create a spending plan that allows you to meet this goal.

Create a Spending Plan

The mistake many people make when creating a personal spending plan is they determine their savings amounts around their monthly expenses, which means they save what they have left over after expenses. This invariably results in a sporadic investing plan, which could mean no money is available for investing when expenses run high in a particular month. People who are intent on achieving their goals reverse the process and determine their monthly expenses around their savings goals. If your savings goal is $500, this amount becomes your first expenditure. It is especially easy to do if you set up an automatic deduction from your paycheck for a qualified retirement plan. This forces you to manage your expenses on $500 less each month.

Lock in a Percentage of Your Income

A savings goal of $500 amounts to 10% of your income, which is considered an appropriate amount for your income level. Assuming your income increases by an average of 4% per year, this automatically increases your savings amount by 4%. In 10 years, your annual savings amount, which started out as $6,000 per year, will increase to $8,540 per year. By the time you are 55, your annual savings will increase to $16,000 per year. This is how you reach your goal of $1 million at age 65 starting out on a $50,000-per-year income.

Invest According to Your Risk Profile

This investment plan assumes an average annual rate of return of 6.5%, which is achievable based on the historical return of the stock market over the last 100 years. It assumes a moderate investment profile, investing in large-cap stocks. If you are adverse to risk or prefer to include investments that are less volatile than stocks, you will have to lower your assumed rate of return, which will require you to increase the amount you invest. At a younger age, you have a longer time horizon, which may allow you to assume a little more risk for the potential of higher returns. Then, as you get closer to your retirement target, you will probably want to reduce the volatility in your portfolio by adding more fixed-income investments. By staying focused on your benchmark of a 6.5% average annual rate of return, you should be able to construct a portfolio allocation that suits your evolving risk profile over time, which will allow you to maintain a constant monthly investment amount.

Written by Richard Best of Investopedia 

(Source: MSN)

Living Near a Lottery Winner Has a Surprising Downside

Stephen Stickler/Getty Images

When people win the lottery, their less-lucky neighbors often drive themselves into financial ruin trying to keep up, according to a provocative new study from the Federal Reserve Bank of Philadelphia. The more money the lottery winner gets, the worse off their neighbors become, the research suggests.

The paper’s authors — Sumit Agarwal of the National University of Singapore, Vyacheslav Mikhed of the Philadelphia Fed, and Barry Scholnick of the University of Alberta — looked at lottery winners and their neighbors in Canada. They found that for every $1,000 Canadian dollars ($720) a person won, the likelihood of a neighbor declaring bankruptcy increased by 2.4 percent.

The researchers also found that big purchases meant to signal wealth, which economists call “conspicuous consumption,” are behind the money troubles of people whose neighbors win the lottery.

The scenario goes something like this: Your newly rich neighbor buys a new car or two, and a motorcycle, and then a boat. She remodels her house. Every day, there are new deliveries and construction trucks passing your house, reminding you of just how banal yourown perfectly average driveway looks. You don’t really have the money for a new car, but yours is so outdated, especially sitting next to your neighbor’s fancy new Tesla. The next thing you know, you’re burning up your credit card in an effort to keep up.

This paper isn’t just a warning in case the person down the street wins the jackpot, though. It’s a study that takes income inequality to its extreme conclusion and asks what happens to people who get left behind. And at a time when the divide between the economy’s haves and have-nots is widening, it’s worth considering what kind of effect the growing class of rich people is having on all of us.

We aren’t supposed to think about growing wealth as a zero-sum game in which one person’s gain is another’s loss. The basic theory of capitalism is that a rising tide lifts all boats, and when someone gets a big windfall, the markets give them an incentive to invest that money into other projects that will also make money, so the whole economy grows together.

This research, however, shows that really stark income or wealth inequality can have the opposite effect on households: It can drive poorer neighbors into debt. Thus, income inequality begets yet more income inequality. The question is, when does that become a cycle that cannot be stopped?

Written by Shane Ferro of Huffington Post

(Source: Huffington Post)