Thursday, December 24, 2015
Monday, December 21, 2015
78 percent of workers can hope for some kind of year-end bonus from their employers. Few will get anything like the average $172,860 Wall Street bankers can expect in their stockings. But a holiday bonus is still an opportunity to reduce debt, pad savings and otherwise do the right financial thing.
Alternatively, you could do the wrong thing.
Making a mistake with a year-end bonus is just as easy as making a smart move, warns Joe Roseman, a financial planner in Charlotte, North Carolina. The first thing you shouldn't do with your bonuses is spend it all. "Don't blow it on Christmas," Roseman says.
The second thing you shouldn't do is use it for a down payment on a new car. "You're still going to have the payments next year," Roseman points out.
"Don't pay extra on your mortgage," he adds. "You are taking away your tax deduction." While paying down a mortgage will save future interest, at today's low mortgage interest rates that savings is modest, and the benefit is further reduced by the tax deduction.
Finally, Roseman adds, "You shouldn't count on a bonus every year." By that, he means don't spend next year's year-end bonus on next year's summer vacation. Many employers pay bonuses when times are good and then cut back or eliminate them if business contracts. If you charge a vacation to a credit card thinking you'll pay it off with your bonus, you could find yourself in a high-interest hole next New Year's.
So what should you do with it? A really smart move is to sink at least some of it into a retirement savings account, suggests Scott A. Stratton, a financial planner in Dallas. "If someone 25 years old took $5,000 of their bonus and invested it until they were 65 and earned 8 percent, they'd end up with $108,622," Stratton notes.
The younger you are, the smarter it is. For instance, if a 35-year-old socked away the same $5,000 bonus until age 65, also earning 8 percent, the ending balance would total just $50,313, according to the Security Exchange Commission's calculator at Investor.gov. "You'd end up with half as much just by waiting 10 years," Stratton says.
While getting started on retirement saving is important, it isn't only important financial use for a year-end bonus. Because the compounding effect of interest you are paying is just as powerful as interest you are earning, consider paying off all or part of any debts that charge steep interest rates.
"If you're carrying a balance on any credit cards, that's got to be a high priority," Stratton says. "And a lot of people want to look at paying down their student loans, especially those that are higher interest."
Next after that is an emergency fund. "You need six to nine months of living expenses set aside," Stratton specifies. If you have trouble getting traction on an emergency fund, a year-end bonus can help get you started.
The final thing you should consider doing with your year-end bonus is spending part -- not all -- of it on something that isn't necessarily financially whip-smart. Say, a nice vacation, or a piece of jewelry. How much? Roseman suggests 25 percent, but it depends on the size of the bonus.
But whatever you do or don't do with your year-end bonus, remember to treat yourself to a little extravagance. "Everybody, when they get a pile of money, deserves to spend it on something they've always wanted," Roseman says.
Thursday, December 17, 2015
Habit #1: Stop doing the same things over and over again.
Human beings are habit-creating machines. Research shows we crave any mental or physical shortcut that frees time and energy for our minds to focus on higher-level thoughts, such as wondering what to have for lunch or speculating about the true parentage of Jon Snow on Game of Thrones.
A “habit loop” is created in three steps: a cue or trigger, the behavior itself, and a reward for that behavior, according to Charles Duhigg, author of The Power of Habit. Bad money habits are more difficult to steer out of than automated behaviors like driving a car. Why? Financial peace of mind is a much more subtle reward than the satisfaction of navigating a half-ton piece of metal through city streets without death or injury.
Still, every person who’s good at money learned these habits, which means you can, too. “What we know from lab studies is that it’s never too late to break a habit. Habits are malleable throughout your entire life,” Duhigg told NPR.
Habit #2: Stop spending more than you earn.
Who do you think you are, the U.S. government? Even America’s once-ballyhooed fiscal deficit is shrinking–it’s now $492 billion, or 2.8% of the economy, down from $1.4 trillion (9.8% of the nation’s GDP) in 2009 at the height of the financial crisis, according to the Congressional Budget Office.
How is your own personal deficit doing? About one in five Americans spend more than they earn, and 36% break even, research from the National Financial Capability Study shows. Your goal must be to join the 41% of Americans who spend less than they earn.
Habit #3: Stop ignoring your bills.
A 21-year-old woman with medical bills looming recently told this NerdWallet writer that her pattern for prioritizing what bills to pay is this: When a collection agency calls, she pays the bill. This kind of financial firefighting guarantees she will veer from crisis to crisis as her credit score burns.
Payment history carries huge weight on your financial future; more than one-third of your credit score is judged by your ability to pay your power, car insurance, and credit cards on time. If you can’t, work out a payment plan with your provider before it goes to collections.
Credit cards are a weapon in your financial arsenal. Like all armaments, they can be used in strategic defense or to shoot yourself in the foot. Too often, it’s the latter–the average U.S. household carries $15,480 on credit cards.
That plastic in your pocketbook is the greatest enabler of bad money habits, allowing you to spend on a whim and forsake all budget plans. Sticking to a budget should be your most faithful money habit.
Habit #5: Stop thinking you’re not smart enough.
Money matters can quickly confuse. In the rollout of the Affordable Care Act, many consumers struggled to understand basic health insurance terms such as “deductible,” a survey last month by the Kaiser Foundation found.
We live in an age where consumers are forced to take control of their own financial lives, whether it’s being smart with health insurance or guiding their own 401(k) plans to invest for retirement. Learn the lexicon of finance. “I used to catch myself saying, ‘Investing is hard. I just don’t understand it.’ This gave me permission to avoid learning how to invest,” writes Ann Marie Houghtailing, author of How I Created a Dollar Out of Thin Air. “Now I say: ‘Investing is a skill. You just have to start small.’”
Habit #6: Stop making it hard on yourself to save.
Old habits die hard, and one of the oldest habits is using checks to pay bills or make savings deposits. “Personal finance habits take longer to change than the way you might switch from one smartphone to another. That’s because money is so important to us,” Fred Davis, a professor of Information Systems at the University of Arkansas, told Marketplace.
Set up automatic transfers for bill payments. Also automatically have 10% or more of your paycheck sent directly to your savings account. These two steps will go a long way toward building good money habits and credit scores with the least amount of effort.
Habit #7: Stop complaining about your paycheck.
Whatever energy you’re spending complaining about the size of your paycheck takes energy away from finding ways to improve your bottom line. Think you’re being underpaid? Negotiate a raise or at least have a chat with your employer to understand what’s needed to see a bump in pay. If you’re valued, your boss will see the implicit threat that you may leave for a higher-paying job (which, of course, you should be looking for).
Investigate ways to build other streams of income. Look at ways to improve your skill set. Just stop whining and do something about it.
Habit #8: Stop your Starbucks dependency.
If you’re like a lot of people, many of the receipts in your pocket are for caffeine pick-me-ups. That drip-feed coffee habit costs half of American workers nearly $1,000 per year, according to a 2012 survey by Accounting Principals. The survey shows that two-thirds of American workers buy their lunch rather than bringing one from home, costing an average of nearly $2,000 a year. Worse, Americans throw away 40% of the food they purchase each year, about $165 billion worth, which works out to $2,275 in the bin for the average family of four, according to the Natural Resources Defense Council.
Planning meals should be lockstep with planning your budget. Eating out costs you much more than you think.
Habit #9: Stop thinking more cash brings happiness.
OK, money does bring happiness, but only to a point. A 2010 study by Nobel Laureate Daniel Kahneman and Angus Deaton found that emotional satisfaction in life rises with wealth until income hits $75,000 per year. Purchasing experiences and giving to charity have a much longer shelf life for our well-being, research suggests.
Still, the serenity of being free from debt brings its own kind of glee. Look how much fun these people are having…
Monday, December 14, 2015
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