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Ways to save money

One unfortunate fact of our psychological make-up is that humans, by nature, aren’t exactly wired to save. Still, we’re constantly looking for the best ways to save or, should I say, the easiest ways to save. Blame our caveman ancestors – we prioritize the here and now instead of saving for the future. Why pass up a current opportunity in favor of planning for retirement in 10, 15, even 20 years?

That’s why, instead of looking for ways to save money, many of us will buy the new shoes or the new handbag or the new television today, rather than put that money away as a rainy day fund. Deep down, you know that you should be saving. It’s just a matter of forcing yourself to save money do.

Luckily, there are strategies – money saving tricks, gimmicks, mind-games (call them whatever you like) – that can help you. These are ways to bypass buying on impulse and get money in the bank in spite of your instincts to do otherwise:

Make it automatic. If you have a 401(k) at work, you know how this works – money is pulled out of your paycheck before it ever lands in your bank account. You’re not given the opportunity to spend it instead. Jan says this is how she saves, because, in her words, she’s “very much like a dog.” If she sees the money, it’s there for the taking. If she doesn’t, she doesn’t think about it. You can mimic this 401(k) strategy with your other savings accounts by setting up automatic transfers every single month or every single pay period – have your savings account reach into your checking and swipe a set amount of money, before you can spend it instead. Most banks have an automatic savings plan that you can easily set up. Just ask them.

Lock it up. This goes hand in hand with the first point, and is again one of the reasons why saving in a 401(k) or even an IRA is so successful. That money is barricaded until retirement, and if you want to pull it out earlier, you’ll be penalized – heavily. There’s a 10% fee for tapping the money early, plus income taxes. Put it together and you might lose 30% to 40% of your money. It’s just not worth it. You can again mimic these barricades with other accounts – CDs, 529s, and other savings accounts to name a few.

Visualize the future. This tip sounds a bit kooky, but it works: You have to put a picture on your goals. You’re not saving for retirement; you’re saving for a three-bedroom house on the beach with a hot tub and swimming pool. Cut out magazine pictures. Then tape one to your fridge and wrap one around your credit card. Making the goal concrete means you’re more likely to get there.

Finally, small steps are the way to save. Struggling to start? Just do a little bit – put away 2% of your income for a few months. I promise you won’t notice it’s gone. Then, once you realize that I’m right, you’re not missing it, bump up your savings a bit more. Add more every time you get a raise, or receive a windfall (like a tax return) and you’ll be well on your way to a hefty nest egg.

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Taking steps to retirement isn’t always easy

Don't stick out your tongue at taking steps to retirement.

Don’t stick out your tongue at taking steps to retirement.

“Taking action toward any long-term goal can be daunting. The results can seem intangible and the rewards seemingly non-existent. However, taking steps to retirement in order to build a sizable nest egg should be a top financial priority for anyone working today.

Did your mother ever say to you should do something because “It’s good for you”? I know I’ve said that on more than a few occasions to my three kids. Whether it was “Eat your vegetables,” “Get some exercise,” or “Do your homework,” getting them to move from acknowledgement (“Ok, Mom we’ve heard that before”) to taking action wasn’t easy or automatic. Sometimes I even got the eye roll.

When I reviewed the results of our Wells Fargo retirement survey of middle-class Americans, I noticed a similar theme. Most agree that saving for retirement is important, but doing something about it doesn’t happen easily.

More than half of those between ages 40-60 explained that they should be taking steps to fund retirement, but they didn’t know how to start. Maybe that’s why nearly four in 10 of that age group said, “I’ll never be able to retire. I will be working until I die or am too sick to work.” So they know that saving is good for them but their picture of retirement sure is depressing. How can they move from acknowledgement to action? They need a plan! Our survey had some encouraging findings for those who said they have a written plan for retirement. While only three in 10 said they have a plan, that group had saved three times more toward their retirement goal than those without a plan. Those results were across income levels—for those making $25,000 as well as those at $100,000. Think of this plan as a retirement roadmap on how to reach your retirement goal. If you don’t have a plan, what’s your reason? The top two reasons our survey respondents gave for not having a plan were, “I have too few assets” and “I don’t know how.” So if we know a plan makes a big difference (read – it’s good for you), let’s address those two obstacles. Don’t have enough assets? Everyone can benefit from a plan, whatever your income. The sooner you start saving, the better. Don’t know how? Go online and spend a few minutes using a simple tool like the Wells Fargo My Retirement Plan to start your plan and get retirement tips from financial experts.

Need further proof a plan is good for you? Those survey respondents in their 30s were most likely of all the age groups to have a plan- and they were savings 6% annually versus other ages saving an average of 5%. In addition, the 30-somethings estimated they would need a nest egg of $500,000 versus those ages 40 and older, who estimated needing $200,000. The 30-somethings are more realistic and get it.

So do you have any examples of advice you’ve received or given around steps you’re taking to retirement?

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Think before you buy

Much like food, we consume things in the same mindless way and must learn how to control spending.

Much like food, we consume things in the same mindless way and must learn how to control spending.

Do you tend to think before you buy things? An article on PsychologyToday.com got me thinking about some of my mindless buying habits. If you’re a frequent reader of this blog, you’ve probably already keyed into the fact that I’m a frequent reader of their many blogs. They make me think – about myself, my family, my work and my money.

The post by Susan Albers, Psy. D. got me going on the latter. This, despite the fact that she didn’t write about money at all. She wrote about food, specifically about mindless eating. However, there are clear correlations between the two. Much like food, we consume things in the same mindless way and must learn how to control spending. “Clinical studies have examined the effectiveness of awareness and eating,” she blogged. “For example, Timmerman and Brown (2012) conducted a study on middle aged women who frequently ate out at restaurants. The intervention was just teaching the women how to be more ‘aware’ of their choices, hunger, fullness and mindless eating behavior. The result? The women ate 300 calories less each day.”

The point is that small mindless eating adds up. Just like small, mindless spending. If you’ve ever tried to track spending, you know that the little purchases add up. And just like many, many people have no idea how many calories they put into their mouths each day, many, many people have no idea how much money they pull out of their wallets or swipe on their cards. I did the math. Eating 300 fewer calories each day is akin to eating 2,100 fewer calories each week, 9,100 fewer calories each month and 109,200 fewer calories each year. Stick with that for 12 months and you’d drop 31 pounds. (Not that you need to.)

First – I just want you to be mindful before you buy. Note that the idea of being mindful, being conscious, is not about being the calorie – or the shopping – police. It’s about knowing what you’re doing when you make an active decision to eat that donut or buy that sweater. It’s not wrong. It’s not evil. It’s a choice. And because you’ve made it thoughtfully you should be able to enjoy it all the more.

Finally – there are many ways to get a grip on your spending behavior. Expense tracking – writing down what you spend as you spend it – works very well because it forces you to stop and think as you act. Some banks even have online tools that you can use. Tracking expenses and setting up a self-enforced purchasing pause – making yourself walk away from the cash register or the online checkout before you buy – is also surprisingly effective. Dr. James Roberts, professor of marketing at Baylor University and author of Shiny Objects: Why We Spend Money We Don’t Have In Search of Happiness We Can’t Buy notes that some people even use “credit card condoms.” Laugh if you must. I’d never heard of them either. Essentially they’re covers (often self-made) you put over your credit cards that say things like, “Do I Really Need This?”

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Money matters and other notes to my younger self

If I could write a note to my younger self it would include money matters and other financial advice.

If I could write a note to my younger self it would include money matters and other financial advice.

If I had the opportunity to give a note to my younger self with life lessons on it, I would start with financial advice. First, I’d encourage her to engage with money matters as soon as possible and, also, to make money a friend. In the end, I made three fundamental financial mistakes and I plan to teach my daughter, using my own examples, so she creates takes a healthier financial path.

A note to my younger self would include many things. But as far as money matters go, these three bits of financial advice would be at the top:

1. Understand the context of the financial system

2. Don’t cash out your 401(k), ever

3. Create a budget focusing on giving, saving, spending according to your values

I can’t remember a time in life when I did not work in some capacity. I even managed to save $5,000 during high school to use toward college. I had no idea how quickly that $5,000 would be used! I managed to muddle through college and started using my first credit card, all the while not really understanding how the financial system worked, until I started my first job at a bank. Knowing what I do know now, having context on the broader financial system would have saved me much confusion in my younger years.

When I moved from New Orleans to North Carolina, I made the mistake so many younger professionals make – I cashed out my 401(k) to pay for moving related expenses. I know, I know – not bright, but at the time, retirement seemed so far away and, yet, my need for a washer/dryer and new furniture so real!

Finally, it was during my third job after college that I developed a budget for expenses and spending. These days you can get free financial advice and budget calculators everywhere, at your finger tips. (Note to self, include this in the note to self). Though through the years, my budget it has evolved tremendously as my finances have gotten more complex. I have evolved it from a spending budget, to a savings budget, to now include the plan for giving to non-profits that are important to my family. I hope to have it in terrific shape to send with my daughter as she goes to college in nine years – hoping that the financial evolution will continue to improve through the generations.What advice would you give your younger self about money matters?

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Reduce your monthly expenses and bills

Reducing monthly expenses begins with a bill audit.

Reducing monthly expenses begins with a bill audit.

Sometimes after I go through the process of developing a spending plan with someone I’m working with I hear that they’re having trouble making ends meet. Sometimes they’re not able to save. Sometimes, they can’t even cover their monthly expenses or need help with budgeting. Sometimes, they’re not able to throw as much money as they’d like against their credit card bills or other debts. Other times they’re just feeling as if there isn’t enough money to give them any wiggle room.

This feeling of living paycheck-to-paycheck is very uncomfortable. It causes trouble in relationships (marriages are much stronger, research has shown, when you accumulate assets including savings rather than debts) and it causes individuals to feel stressed, anxious and sometimes even develop physical symptoms like headaches and insomnia.

One way to clean out your finances is by coming up with ways to reduce your monthly expenses bills to make ends meet and allow yourself to breathe. And cutting those bills you get month in and month out is a good place to start. I’m talking about phone, internet, wireless, insurance, etc. How?

Start with a bill audit. This week, pull out the last few months of those bills (or if you receive them electronically, look at them online) and really look at them. You’ll find add ons you didn’t know you were still paying for or services you no longer use. In my case, I found I was still paying for one channel on demand ($4.95 a month, close to $60 a year) though my teens stopped watching it years ago. And that’s just one example. If you only watch a premium channel half the year because your favorite show is in season, cancel it the other half.

Ask for a better deal. It’s worth your time to check in with your providers every six months or so and ask them if there are newer, better deals available. Doing this with your cell phone company can, for example, alert you to the fact that if you were using the friends-and-family option, which allows you free calls to ten people on your list (no matter who their carriers are), you could scale back and buy fewer minutes a month. You can do the same with your cable/television provider. When another provider came to my neighborhood, I used the sheer fact of more competition to get my current provider to lower my bill. It took a single call.

Finally, think about unbundling or going without a contract. Yes, in the past it’s often been cheapest to buy your communications services from one provider and to get a low cost phone by signing a one- or two-year contract. This is not always the case anymore. So shop around and look at as many alternatives as you can palate, then make the call that’s right for you.

Can you think of any ways to reduce your monthly expenses?

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A financial to-do list for same sex couples

The laws about gay marriage rights and benefits are constantly changing.

The laws about gay marriage rights and benefits are constantly changing.

It’s been a year since the Supreme Court struck down part of the Defense of Marriage Act of 1996, a ruling that allows people who live in states that allow same-sex marriage to receive the same federal benefits as heterosexual couples. In that time, much has changed. Today, 19 states and the District of Columbia allow same-sex marriage, up from 11 states (and DC) a year ago. The IRS, in response to the DOMA ruling, now recognizes all same-sex marriages in the U.S. for federal tax purposes. And just last week the Obama Administration extended more benefits (including plans to let government workers across the country take leave from their jobs to care for their spouses) to same sex workers.

“It’s been a very exciting time,” says Kyle Young Senior Vice President – Investment Officer with Wells Fargo Advisors, who specializes in working with the LGBT clients. Wells Fargo recently surveyed nearly 900 LGBT investors – some married, some not – to see how they were feeling about their finances in the midst of all the changes. “Some of the information was encouraging,” Young said citing the 95% of respondents who could “fully identify” what the law was in their state. But other results were disconcerting in that they laid bare the fact that – like heterosexual couples – 83% of same sex couples (including 67% who are in legal same-sex marriages) don’t really understand what the changes in law mean to them. As a result, they’re likely not doing anything about it. Worse, many aren’t even talking about it; just 37% say new marriage laws have teed up financial conversations.

So, with the anniversary of the decision as background, a financial to-do list for same sex couples to ponder – and perhaps pursue.

Consider a spousal IRA. When you’re married, you are allowed to make an IRA contribution based on your spouse’s income – even if you don’t have an income yourself. For 2014, the contribution limits are $5500 for individuals under age 50 and $6500 for those 50 and over. This applies whether you contribute to a traditional or Roth IRA; couples who are married filing jointly can make a full contribution to a Roth as long as their modified adjusted gross income is less than $181,000*.

Revisit beneficiary designations. Beneficiary designations are more complicated than people think – but very important. On IRAs, for example, the beneficiary designation overrides what’s in your will. “if you enter into a marriage to go back and reevaluate your beneficiary forms.” If you want to name your new spouse as beneficiary, do it on the account itself. If, on the other hand, you have a workplace retirement account, like a 401(k), your spouse is entitled to inherit those assets – unless he or she disclaims them (that requires a form, too). If you have children or a previous partner that you want to inherit instead, you have to do the paperwork to make sure this happens.

You need a Social Security strategy. This is something heterosexual couples are just now coming to terms with; it applies to same sex couples in states that have legalized marriage as well. In general, if you’re married and one spouse earns significantly more than the other, you’ll want to maximize the higher earner’s Social Security as much as you can (which means delaying when that person takes it.) That way, if and when the higher earner passes away the surviving spouse can get 100% of the higher earner’s benefits rather than just his or her own.

Pay attention at open enrollment time. The rules for same sex spouses are kinder than they are to partners when it comes to health insurance. This is easiest explained by example. Before the Supreme Court ruling, if you wanted to put your partner on the health plan from your company it would typically be allowed – but the value of that benefit would be added to your “income” for IRS purposes and you would be taxed on it. Now, that’s no longer the case. Your company may charge you to have a spouse on the plan (that’s the company’s prerogative) but the playing field is now level. What this means is that if you decided to stay on your health plan (or your spouse on his or hers) because you didn’t want to be taxed on that benefit, you should take another look.

Finally, you may want to consider filing jointly (and amending past returns.) According to the Wells Fargo research 18% of same sex couples file married filing separately compared with 3% of the heterosexual married couples in the country. Why is that? “They are doing this to keep tax returns a little more normalized,” Young surmises. There’s also a “misunderstanding around the benefits of joint tax filing – a lack of confidence of what that means.” What it means is that in most cases by not filing jointly you’re leaving money on the table. Of the survey respondents, 28% found that filing jointly cost them more money, 52% found it cost them less – and that their federal tax liability dropped by an average $2,000. The answer to why has everything to do with the marriage penalty, which is complicated, but the shorthand is: The bigger the income disparity between the two spouses, the more you could potentially save by filing jointly. And if it looks like you’ll save this year, you have the ability to go back and amend your returns for the last three years (assuming you’ve been hitched that long) as well**.

*Traditional IRA distributions are taxed as ordinary income. Qualified Roth IRA distributions are not subject to state and local taxation in most states. Qualified Roth IRA distributions are also federally tax-free provided a Roth account has been open for at least five years and the owner has reached age 59 ½ or meet other requirements. Both may be subject to a 10% Federal tax penalty if distributions are taken prior to age 59½.

**Be sure to consult with your own tax and legal advisors before taking any action that may have tax consequences.

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Living on a budget

A while ago I wrote about the pain of having to start living by a budget in “Budget smudget.” Budgets are a necessary evil at certain times of life and it became a necessity for me. I was planning a trip to Europe in January and also figuring out how to pay for home repairs soon to come. My air conditioner was on its last legs and I thought if I could just make it through the summer, then the price of replacing it wouldn’t be so painful. But as home repairs go you are rarely in control and the air conditioner is now completely down and it took the heating system with it. So, the value of budgeting took on a whole new meaning for me and I’m now a firm believer with a solid plan.

Living on a budget gives you options when it comes to home repairs and doing the things your heart desires.

Living on a budget gives you options when it comes to home repairs and doing the things your heart desires.

Living on a budget hadn’t been that terrible so far. But now that I was facing an emergency home repair, I started by taking inventory of everything. I’m a bit frantic. Here I stand staring at the costs of a new heating and air system, costs for the family and the upcoming trip to Europe. I think the best course of action is to take a deep breath and carefully consider my home repair payment options.

Here’s what I’ve come up with:

  • I could look into financing the cost of the new system with a home repair loan but if the interest rate isn’t as low as my equity line that wouldn’t make sense
  • I considered cancelling the trip to France but I’d lose a good bit of my deposit money
  • I have $1200 saved in my “France account” but that is to offset the costs of the trip
  • I have 5 month’s salary in savings but I’m hesitant to take that out in case of a bigger emergency
  • I have room on my home equity account to pay for this, but it’s just enough
  • I could just purchase a lottery ticket – that would take care of everything – right?
  • I could go without air conditioning but it’s gotten a bit hot here

As I look at my list I realize I’m pretty lucky. I have options that some folks don’t. Thanks to living on a budget and financial plan, I can choose any one option or combine a few different ones to cover the costs. Either way I’ll be ok. I’ll keep my budget in place with maybe a few tweaks to pay off this new cost and I’ll prepare for the next time an unexpected cost comes my way.

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Ideas for how to get out of debt

Planning and motivation are required to get out of debt.

Planning and motivation are required to get out of debt.

I have to admit it bums me out when the numbers don’t tell the whole story of how to get out of debt. If one interest rate is lower than another, I want it to be natural that borrowers will trend in that direction. Likewise, if one price is higher than another I want to know that consumers will lean the other way. But I’ve learned I must accept that’s not always the way it works when it comes to figuring out how to pay off debt.

So, what is the best way to get out from under debt? First, assess your situation. When you know what your situation is, particularly when you have a bunch of debts on a bunch of credit cards with various interest rates, I’ve always advocated debt stacking. This is the approach by which you tackle your debts in order of highest interest rate first. That makes economic sense. The highest interest rates cost borrowers the most. So by eliminating them first, you get out of debt faster and more cheaply. The other popular pay down method is called the debt snowball. If you use the debt snowball, you tackle your smallest debts first wiping them from your plate and enjoying the benefit of wins that come at a quicker pace. I get it psychologically, but always thought that the benefit of saving more money ruled.

As anyone who’s had to do it knows, paying down the years of accumulated debt can take years. As far as debt stacking goes, a new study shows I’m not always right when it comes to the best way to pay off debt. As the New York Times Bucks Blog reported: “Researchers at the Kellogg School of Management at Northwestern University have crunched data from a big debt-settlement firm and found people with large amounts of debt are more likely to succeed in paying down their entire debt if they first attack the accounts with the smallest balances — even though that approach might end up costing them extra money in interest over the long haul. That’s because, they say, ‘maintaining motivation to eliminate debts over a long time horizon might necessitate small wins along the way.’

In other words getting out of debt seems to be the operative word. As anyone who’s gone through credit counseling knows, you need a get out of debt plan. Many people quit before they finish. Which of course, can scratch the whole faster/cheaper benefit. “That’s the downside,” said Blake McShane, an assistant professor of marketing at Kellogg and a co-author of the report. “One of the implications of our findings is that there’s no universally optimal solution.”

In light of this, what do the researchers suggest when paying off debt?

“The one thing I would want to note about the so-called rational strategy is that if you’re someone who knows you’re going be able to get out of debt, I don’t think you can argue with [debt stacking]. It’s unassailable,” McShane told me. “If you lack motivation, building up quick wins can be more effective at keeping you motivated and sustaining the process.”

David Gal, who is McShane’s co-author and is also an assistant professor of marketing at Kellogg, also noted that your payment plan can depend on the variety of interest rates you’re looking at. “In many cases [with credit card debt], the interest rates are all pretty similar. In that case, you can focus on paying the smaller accounts first.”

These seem like two good rules of thumb: one, consider your motivation. Two, consider the variation in interest rates. If you need a psychological boost and the rates of your three accounts only vary by a point or two, maybe (just maybe!) starting with the smallest balance is right for you.

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Checking your credit report and score

Check your credit reports and scores for free three times a year.

Check your credit reports and scores for free three times a year.

How long has it been since you checked your credit report and score? If the answer is more than a few months, it’s time to do it again. That’s because your credit scores are more important than ever as a financial barometer in your life. Lenders look at credit reports and scores naturally, but so do insurance companies (which use it to determine, along with a cocktail of other factors, how much to charge you), employers (which tend to see it as a measure of whether you’ll be a responsible employee) and landlords (which use it to decide if you’ll be a decent tenant.)

In all the years I’ve been reporting on money, there’s been a lot of confusion over whether you can get your credit report and score free of charge. It’s a question I am asked fairly frequently, and the answer is: It’s easier now than ever to get free credit reports.

Here’s the deal: Because of the Fair and Accurate Credit Transactions Act, consumers are entitled to a free credit report once each year from each of the three credit agencies (TransUnion, Equifax, and Experian). If you’re doing the math, that means you can actually access your free credit reports and scores three times a year – once from each of the credit bureaus. You do that through the website annualcreditreport.com . And note: This website was put together by the bureaus for the specific purpose of giving you your credit report and score for free*.

Accessing your credit scores, however, is a bit more complicated. If a lender pulls your credit score and you’re denied credit or given an interest rate that is not the best available, that lender is required to send you information about how they made that decision – including the score used in the process. This is a new regulation, put into place by the Federal Reserve and the FTC in July of last year. You can also take advantage of a service that offers credit monitoring — there are many of these and they’ll generally give you a free credit score when you sign up. Just be careful: You have to cancel the monitoring within the trial period or you’ll start receiving a monthly bill. Finally, there are a few credit-oriented websites (Google them) that offer free credit scores that are similar to at least one of your FICO scores.

This can be a good place to start also. What are you looking for when you get this information? A few things.

First, your own data — free of errors. It’s not uncommon to find errors on credit reports. If you see any, use the website of the bureau that issued the report to dispute the information. They have 30 days to respond to your request.

Second, the absence of data that you know doesn’t belong to you. If random facts seem to be popping up, you could be a victim of identity theft. Immediately get in touch with the fraud departments of all three credit bureaus and put fraud alerts on your account. Then, again, start disputing the information. You’ll also want to file a police report; some of your financial institutions may ask for it.

Finally, you want to see a score that’s in the range of 720 or above. If you’re not there, work on improving your score — make sure you’re paying your bills on time, using only 10 to 30% of your available credit and not applying for any credit you don’t need.

*Please note that we are not responsible for the information contained on the listed website. The site is provided to you for informational purposes only.

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