Dollars & Sense
The A to Z look at your financial literacy
Money. It makes the world go round and is, no doubt, always on your mind. From grocery budgets to retirement accounts to simply digging in your wallet to see just how much you have left, sometimes it is as if your money is running you and not the other way around.
Here's the good news. We (women) hold the financial keys. Women in America control a little more than 51% of the private wealth in our country. Almost 40% of women are the primary breadwinners in their homes. And, on top of that, when it comes to spending those dollars, 85% of buying decisions are made by, you guessed it, women.
HOW IS YOUR FINANCIAL LITERACY?
What does it mean to be a financially savvy and confident woman? If you look at the woman who has her financial business in order, she is saving early and often for retirement. She manages her family finances and she sees her financial planner as her family's trusted guide. Are you there yet? Sadly, most are not.
First things first, you can't conquer money trials without one critical tool in your financial tool chest. That's a budget. According to a 2013 Gallup poll on family finances, only one third of all American families prepare and stick to a detailed budget that tracks their earnings and expenses each month.
"No one really likes it," says Michelle Gams CFP®, co-owner of Retirement Solutions and Financial Adviser with Eagle Strategies LLC. "You have to be disciplined with your budget and live off of what you make."
After a budget, it's critical that you know every single bit and piece of your financial picture. Gams says one mistake many women make is to leave those big financial decisions to their spouses. She calls it the 'Prince Charming' mentality. "It is so critical that women take charge of their finances or at least have an idea of where all of the assets, insurance policies, and brokerage accounts are located," Gams says. If your husband has a meeting with the family's financial planner, banker, insurance agent or accountant, go along and be involved in the decision making. Why? Simply put, women tend to outlive men. When a spouse dies, it's often the woman who is left trying to pick up the financial pieces. If you've not been a part of the process, how can you be sure that the decisions your husband made gel with the goals you have for your future.
Comparing your finances to a wheel, there are many spokes that help keep your cash flow moving. Let's take a look at those spokes that, if not strong enough, could end up derailing you if you're not careful.
THE EARLY YEARS: ON THE COLLEGE TRACK
What's rising faster than the rate of inflation and has no sign of slowing down when it comes to cost? Other than health care, it's the cost of a college education.
According to The College Board, 69% of all graduating college seniors will grab their degree and do it while carrying a bag of student loan debt. The research shows that the average tuition and fees for the 2013-2014 school year was $22,203. For a private institution that number jumped to $30,094. That's not small change.
"I asked a couple of people what would they wish they would have known in their twenties? And the number one answer that came back to me was, they wish they would have learned how student loans work," Gams says.
What many college grads don't realize is, the choices they make to finance their education can truly impact them for the first 10 years of their professional life. Gams says if you're a parent of a soon- to-be college student, help your child do the math before the financial aid papers are signed. Gams says, "Show your kids how interest works." And, if you're not sure how to calculate how long it will take to pay off different types loans, there are online calculators that can help (See "College Calculators" side bar). Take a look at the various kinds of aid: those that need to be paid back immediately versus loans that can be deferred. It's also a good idea to show your child why making just minimum payments only causes the amount in interest paid to rise.
When it comes to paying back the loan, students need to know upfront that defaulting isn't an option. Gams says, "Death and disability are about the only ways to get out of student loans and they are events that nobody wants to have."
To add to the statistics, the average college student is graduating with $33,000 in student loans to pay back. That can mean a student loan payment upwards of $350 a month for ten years just to be back in the black. Can a college student who now has health insurance, car insurance, rent, utilities and other living expenses afford that extra payment tacked on each month? Gams says, "Someone who graduates with a computer engineering or an accounting degree probably can afford to pay off a higher student loan balance versus someone who graduates with a political science degree." Bottom line, she adds, "Just because someone gives you a loan doesn’t necessarily mean you can afford to pay it back."
COLLEGE PLANNING 101: If you're worried about the cost of college, want to explore careers, or look at the financial aid possibilities and make a plan, visit bigfuture.collegeboard.org for all those topics and more.
How much to borrow and how to repay
Not sure how much you'll need to enroll in college and pay for your degree? Visit direct.ed.gov/calc.html. Here, you'll find not only calculators to figure out how much you might need to borrow for basic needs, but you'll find links that will share repayment calculators as well.
PREPARING FOR LIFE'S WRINKLES
What if, God forbid, you got in a car accident or were hit with an unexpected medical bill. Or, what if your plumbing went haywire and you had a home disaster on your hands? Could you write a check to cover the unexpected events of life? According to a recent Bankrate survey, more than 60 percent of Americans don't have enough of a rainy day fund to deal with even minor mishaps. They are one small financial emergency away from a downward spiral.
When it comes to preparing for "life's wrinkles," what does it mean to be truly protected? Gams says you need an emergency savings, one that could hold you not for weeks but for months. She says, "You need to have three to six months of expenses set aside. If you have a good paying job and it is pretty stable, you can just have your necessities like your mortgage or insurance for three to six months. This saves your retirement and it saves the risk of going into credit card debt."
Whatever you do, Gams says, don't dip into your future to pay for your present maladies. "Try to avoid making withdrawals from IRAs and other qualified plans unless absolutely necessary. If you do start cashing in your qualified plan money prematurely, you may be penalized for early withdrawals plus you'll have to pay additional taxes. This could jeopardize your future financial security."
When it comes to insurance, keep it current and don't skimp on medical, life and disability coverage. Right now, 40% of Americans —even those with medical insurance — have medical bills they say they will need more than a year to pay off. Medical bills are still the number one cause of bankruptcies in the U.S. So protect yourself by making sure your insurance fits your family's needs.
WHEN DIVORCE HAPPENS
"I don't think anything compares to the emotional damage that divorce causes," Gams admits. And that's why, even the best of marriages should have a plan in place to prevent that kind of financial pain. "If you've been married for several years, all of the assets and liabilities have to be split up. Divorce is expensive. It is a $28 billion a year industry with an average cost of about $20,000. It need not turn your life into a financial wreck," Gams says.
While you might think a prenuptial agreement is only for the mega-millionaires, think again. Gams says if you own your own business or have family assets that you want to hold on to, it's critical to seek the help of a qualified attorney to help you get a written plan in place.
When divorce does happen, Gams stresses that there are so many little financial details that come into play. "You need to revise your will, update your retirement plan and life insurance beneficiary designation." She adds that you'll also need to identify hidden assets and look at all the accounts you share (i.e., checking, savings, and brokerage accounts). Look at your joint credit cards also, "Each person listed on a credit card account is still responsible to pay the debt back even though there may be an agreement that the debt be paid off by the other spouse. Establish your own credit by opening new accounts in your name. Get a copy of your credit report and watch it carefully." Gams, who got married last summer, had her eyes opened to this very issue. "When my husband and I got married, we pulled a credit report on him. He was amazed that there was still a credit card in his and ex-spouse’s name. They had been divorced for more than 10 years. Needless to say, we got that account closed immediately." Bottom line, Gams says, it's critical to sever all unnecessary financial ties to your ex-spouse. If you don't, she says, your liability for his bills will continue.
JOINING THE SANDWICH GENERATION
Right now, nearly half of women in their 40s and 50s are members of the so-called Sandwich Generation. What's that, you ask? It is someone who is struggling to take care of children still living at home, while serving as a primary caregiver for one or both of her parents. One in seven middle-aged adults (15%) are not only caring for a parent and a child, they are financially supporting both too.
It's safe to say the life in the Sandwich Generation is more than a little stressful. Gams says, "It puts a strain on them financially, emotionally and their own families suffer." That's why, Gams says, family discussions are imperative. Gams adds that if members of this age group aren't careful, they could be setting themselves up for financial ruin. In fact, according to one Pew Research study, 30% of those in the Sandwich Generation say, month to month, their budgets only have enough money to meet their basic needs. Eleven percent said they don't even have enough to cover basic needs. Gams says, "Quitting their job to take care of their parents puts them more in jeopardy for their own retirement. It isn't easy. How do you tell someone who raised you that you can’t take care of them?"
How can you tell if you are on a troubled path when it comes to caring for your loved ones? Ask yourself these questions. Am I sacrificing my own retirement? Am I sacrificing my child's education? Am I sacrificing my business aspirations? Am I missing time at work? If you answered "yes" to any one of those questions, now might be the time to talk to a financial advisor about how to keep a healthy balance. It also might be a great time to talk about long term care protection for your own future. This is designed to cover long-term care and support. Seventy percent of those 65 and up will need some sort of long-term care in their lives. In many cases, it's not "if" you'll need it, but "when."
ON TRACK TO RETIRING RIGHT?
There's a telling ad on television right now that shows a group of people armed with streamers. They all start in the middle of a circle and start walking away from the center. The streamers signify their retirement savings and the length signifies how much savings they have to last through the ages. As some giggle, they can be seen tugging on their streamers trying their hardest to stretch them beyond the age of 70.
For many Americans, this isn't a made up scenario to sell retirement plans. Shelly Gams sees it day in and day out in her office. "They just don't know where they stand and what it actually takes to retire. They have the cash flow today from Social Security, from their pension, and from their investments. But, what they underestimate is their longevity and the rate of inflation that has an impact on their standard of living when they're in their seventies and eighties."
Taxes? Rate of Inflation? Isn't that built into a retirement plan? Actually, it's like a crystal ball. No one truly knows how taxes will impact our investments. Laws change. Tax brackets change. Then, there's inflation. It keeps going up and if you are a retiree, you have to deal with medical inflation, which is rising much faster than consumer inflation. Gams says you need to take all of that into account to make sure you are protected. Look at your retirement savings, is it tax diversified? Do you have a mix of pre-tax, tax free and tax deferred accounts? If not, Gams says you should. You've heard about diversifying your investments. The same holds true for your retirement plan.
Moving back to that streamer reference, how can you be sure you have enough money that can and will outlive you? As a general rule, you'll need eleven times your salary in order to maintain the same standard of living as you have now. Gams says," Another common rule of thumb is that you need 70 to 85% of your current expenses to maintain your standard of living." Whatever number you decide that you need, Gams says, "Retirement planning is not a set it and leave it plan. It is about monitoring and making changes when appropriate." As Gams stresses, planning for retirement isn't a sprint. It's a marathon.
SHARING THE WEALTH
There will come a time when you'll pass on from this world and your loved ones will have to deal with your estate. Have you shared where you keep all those important documents with those you trust? "As a Financial Advisor, I meet with a lot of kids (50- and 60-year-olds) trying to figure out Mom and Dad's finances," Shelly Gams says. "This usually hits the kids at the worst time." By worst, Gams means in the event of a critical illness or, worse yet, death. She says, make sure your Power of Attorney or Executor knows where all your important paperwork and assets are. Have a checklist and don't assume that your children will know what you want. Give them the big picture. "A great book for children and parents to read is called "Parent Care Conversation" by Dan Taylor." Gams says it helps spell out what kind of legacy a parent wants to leave behind and how their family can respect their wishes.
From college to the golden years, there's plenty to keep your attention when it comes to your personal wealth and finance. It's not an overnight lesson but a life of watching, asking questions and staying on top of anything and everything that could impact what you've worked so hard to build financially. When going over your finances, Gams has one more piece of parting advice that she hopes people take to heart. "Money is something to be enjoyed,” Gams says. "If you are always stressed out about it or a slave to it, take some to enjoy life too."
MONEY THROUGH THE AGES
No matter how old you are, there are common sense money rules to follow
Maintain a budget and keep an eye on it.
Have an emergency cash fund.
Stay out of unnecessary debt. Pay off credit cards. Only go into debt for a reasonable home and reasonable car.
Meet regularly with your Professional Financial Adviser to review your portfolio.
Review your credit report regularly. This is critical to protect against identity theft.
Create and update your will, Living Will, and Durable Power of Attorney.
When you receive a pay increase, put one-third toward debt, one-third in savings and use one-third for fun.
Contribute towards your company’s sponsored retirement plan. Does your employer match your contribution? Invest as much as their full match. Don't leave free money on the table.
Take advantage of all of your employer sponsored benefits.
Protect yourself and your family with term or whole life insurance.
If you have children, begin saving for college with a section 529 plan.
Contribute toward your 401k even when the market is down. Remember, retirement saving is a marathon and not a race.
Start contributing towards a Roth IRA. Remember tax diversification in retirement saving is important.
In your 50s and 60s, start to consider Long Term Care Insurance.
Make a plan to review your beneficiaries and change when necessary.