I recently heard from the parents of a yet another high school senior who turned down a huge scholarship from a good college to attend her “dream school,” which of course has lousy financial aid. Now her parents are scrambling, trying to figure out how to pay for it.
This madness must end.
Asking teenagers to pay the whole cost of a four-year college degree probably isn’t realistic or smart. Kids may be cut off from financial aid, since need-based help is largely based on the parents’ resources. The debt they accumulate may be crippling, and students who try to pay for school entirely on their own are more likely to drop out.
But the open bar approach isn’t wise, either. Setting limits and requiring a kid to pay at least part of the cost can actually lead to better grades while protecting parents’ finances.
The sticker price to attend many private universities now exceeds $70,000 per year, including tuition, room, board, books and fees. Most college educations cost much less, of course: The net average cost, after scholarships and grants are taken into account, was $15,367 last year, according to student lender Sallie Mae.
Many families aren’t prepared for the expense: Some 4 out of 10 parents aren’t saving for college. Among those who are, the average amount saved is $18,135, Sallie Mae found.
The high cost of college and the low rate of savings has led to a whole lot of debt: $1.5 trillion in student loans, at last count. Although the typical college graduate has a manageable level of education debt, it’s easy to borrow far more than a student, or a parent, can comfortably repay.
Given these realities, parents should set clear boundaries about how much they’ll pay for college.
Start with the Department of Education’s FAFSA4caster, an online tool that predicts your “expected family contribution” based largely on parental income and assets. Enter the cost of a college to see roughly how much need-based aid to expect. Once families have the financial aid figure, parents can add in the amount they want to contribute (or borrow) to determine how much they can help.
Parents often want to spare their kids from student loans, but the kids are the ones benefiting from the education, and they have many more years ahead of them to pay off the debt.
Having student loans typically isn’t a huge hardship. Students can borrow up to $31,000 in federal student loans for their undergraduate degrees, including $5,500 for their first year. The typical college graduate can easily pay that back within 10 years.
A rule of thumb for students: Don’t borrow more in total than you expect to earn in your first year out of school.
Parents usually have access to PLUS federal education loans, but those have higher rates and less generous repayment plans. Parents and students should be wary of using private student loans, since those typically come with variable rates and fewer consumer protections. Parents also may be able to borrow against their home equity or retirement funds.
A rule of thumb for parents: Don’t borrow more than you can pay off before you retire, while still saving enough for that retirement.
The more financial help parents offer, the more likely college students are to graduate, according to a 2013 study by Laura Hamilton, a sociology professor at the University of California, Merced. At the same time, students’ grade-point averages decreased as parental support increased.
Having loans didn’t help grades, but scholarships, work-study and grants did. Some studies have found that working less than 20 hours per week while in college is associated with better grades. So even parents who can afford to give their kids a full ride might insist they at least get a job.
Most parents, though, should be sending a different message: “Honey, we can afford to contribute this much to college. If you want to spend more, you’ll have to come up with the difference on your own.” Follow that with a discussion of the impact excessive debt could have on their futures.
Have this conversation long before college applications are due. It will be a much more wrenching discussion later, when the student has her heart set on the dream school that would be a nightmare for the family’s finances.
This article was written by NerdWallet and was originally published by The Associated Press. Liz Weston is a writer at NerdWallet. Email: [email protected]. Twitter: @lizweston. The article Why Your Kid Should Help Pay for College originally appeared on NerdWallet.
Choosing the best way to pay for something — credit or cash — can make a real dollar difference for you. So knowing when to do which is key. Personal finance experts say it’s especially smart to avoid using cash for these five types of purchases:
Paying with a credit card can help keep your digital purchases protected — and your loved ones happy. This includes e-books, games on Facebook, ring tones — anything delivered digitally. If you pay with cash, or more likely with a debit card, the money is gone from your account immediately. Credit cards offer protections if you didn’t get what you paid for.
Next time you buy electronics, check your credit card benefits for a potential warranty boost. For items that come with a warranty, using a credit card can often extend that warranty by up to a year.
Using a credit card can help cover you in case a move doesn’t go as planned. If the flowers aren’t delivered, the furniture is damaged or the movers didn’t do everything the contract said, you’re not immediately out of the money if you used a credit card.
Get free checked bags when you pay for your next flight with the right card. You may need a card to reserve your hotel room, and if you use a debit card, there can be a “hold” on your card for at least the expected total. If you use a debit card for gasoline, the hold it puts on your money may be for more money than you actually used. In contrast, putting air travel on an airline credit card can often give you perks like free baggage. And many credit cards offer free car rental insurance and trip interruption insurance.
Avoid paying with cash to protect yourself from scams at the stadium. Counterfeits abound. And if you paid cash for tickets that won’t get you in the gate, it’s gone.
Dan Andrews, a certified financial planner in Fort Collins, Colorado, warns that cash and, more recently, prepaid cards are the preferred currency of scam artists. And once you hand over cash or funds from a prepaid card to a scammer, it’s likely lost forever.
Another advantage of using plastic: Your credit card company will help you if you don’t get what you paid for, says Morris Armstrong of Armstrong Financial Strategies in Cheshire, Connecticut. “The beauty of credit is, you always have recourse,” he says. If you pay with cash, your best shot at recovering your money when there’s a disagreement is in small claims court, Armstrong says.
Armstrong and Andrews say that keeping your tax-deductible expenses on a credit card can be a big help at tax time, too.
Of course, cash is often the only option when you’re buying something from a garage sale or on Craigslist. So the price of a vacuum cleaner found at a moving sale may well be worth the risk of paying cash.
Cash also can be an easy way to stick to a budget, if you give yourself a set allowance each week. But if you pay off your credit bills each month, using a credit card could help you earn rewards and protect your purchases.
Usually, the choice is fairly straightforward, says Megan McCoy, a financial therapist. “Use a credit card if you can pay off your balance. Don’t do it if you can’t.” The potential rewards for using a card won’t outweigh what you’ll pay in interest if you carry a balance. And if you normally carry a balance, McCoy says, you may want to take a look at building a more realistic budget.
Bev O’Shea is a writer at NerdWallet. Email: [email protected]. Twitter: @BeverlyOShea.
The article 5 Times to Stash Your Cash and Pay With Plastic originally appeared on NerdWallet.
Recessions are like natural disasters: They’re inevitable, but smart preparation may reduce the impact on you.
The U.S. economy has grown steadily since emerging from the “Great Recession” in June 2009, but expansions can’t continue forever, and this one is already the second-longest on record. Only the expansion from March 1991 to March 2001 lasted longer.
Recessions occur when growth stops and the economy starts to shrink. They vary in severity and length, but often jobs disappear, incomes decline and lenders make it harder to qualify for credit.
Knowing what may be coming can help you fortify your finances to withstand a possible slowdown. Here are some steps to consider.
The 50/30/20 budget suggests limiting your must-have expenses to 50 percent of your after-tax income, with 30 percent allocated to wants and 20 percent to debt payment and savings. Must-haves include shelter, transportation, food, utilities, insurance and minimum loan payments.
Limiting essential expenses ensures you have room to pay off the past, save for the future and have a little fun. Capping them also helps during bad economic times, when you may need to sharply reduce your spending because of job loss or reduced hours.
Lenders often get pickier during recessions. They may freeze lines of credit, close credit card accounts and make new loans harder to get.
People with good credit scores tend to fare better when lenders get choosy. Lenders need to stay in business, after all, so when delinquencies and defaults rise they want to cultivate customers who are most likely to pay them back.
Because high scores suggest you’ll pay as agreed, protecting your scores is essential. That means paying all your bills on time, using only a small amount of your credit limits, keeping old credit card accounts open and being selective about opening new accounts.
Ideally, everyone would have an emergency fund equal to at least three months’ worth of expenses. But most people don’t have nearly that much saved, and building up such a stash can take years.
In the meantime, it’s smart to set up access to additional credit that you can tap if you lose your job or face other financial setbacks. If you own your home, you may be able to set up a home equity line of credit or replace your current line with one that has a higher limit. Having a few credit cards can help as well.
The key to the strategy is to keep these lines open and unused. (You’ll need to make a few small charges to keep the credit cards active, but you should pay the balances in full each month.) If you have credit card debt, focus on paying that down since you’ll free up available credit and save money on interest.
But don’t rush to pay off student loans or mortgages, especially if you have higher-rate debt or a paltry emergency fund. Your extra principal payments typically won’t reduce your required monthly payment, and you can’t get that money back if you need cash in an emergency. Although being debt-free is a good goal, in a recession it can be more important to have financial flexibility.
If your stock market investments include money you’ll need in the next five years, now is the time to move it to a lower-risk investment such as a short-term bond fund or cash.
You should be able to leave any stock market investments alone for at least five years and preferably 10, so your portfolio has time to recover from downturns.
Now is also a good time to rebalance your portfolio to your target mix of stocks, bonds and cash. The long bull market means that you may have too much money in stocks, which leaves you more vulnerable to drops. If you’re not in the habit of rebalancing at least once a year, consider using a target-date retirement fund, a lifestyle fund or a robo-advisor, which all take care of that chore automatically.
There won’t be tax consequences for these moves if you’re investing inside a tax-deferred account, such as an IRA or 401(k). Before making moves in a taxable account, consult a tax pro.
All of these steps make sense regardless of what happens with the economy. Taking them now can help you better handle whatever comes next.
This article was written by NerdWallet and was originally published by The Associated Press. Liz Weston is a writer at NerdWallet. Email: [email protected]. Twitter: @lizweston. The article There’s Always a Next Recession, so Be Prepared originally appeared on NerdWallet.
Picture this: You open up a bistro and enjoy some early success. Everyone wants to try the new hotspot. A few months later, two similar restaurants open nearby, and they take a deep bite out of your profits. It’s not unusual for new businesses to struggle with turning a profit — especially those in intensely competitive industries, such as restaurants. If you’re thinking of starting a business, understanding what affects the profitability of your industry is one key to managing risk.
Financial information and software firm Sageworks recently identified the most profitable industries — as well as the least profitable — by analyzing the average net profit margins (the percentage of revenue turned into profit) of privately held companies. Although the research covers only a one-year period, it can suggest factors that help and hurt profitability. Here are reasons why some industries are more profitable than others.
When entering an industry requires you to be an expert or have specialized education, there’s lower likelihood of new competitors. Less competition means you’ll spend less money retaining customers and you’ll keep more profits. With net profit margins of 18.4%, accounting, tax preparation, bookkeeping and payroll took the top spot on Sageworks’ most profitable industries list. There’s a low threat of new competition because of the education required to start such a business, says Libby Bierman, vice president of marketing for Sageworks. This can include getting a degree in accounting and passing the CPA exam. Offices of real estate agents and brokers — another industry whose profitability relies on the skills and qualifications of its professionals — ranked seventh on the list with a net profit margin of 14.3%.
In some industries, cost may not be customers’ top consideration. For example, in the death care services industry (10.8% profit margin), which includes businesses such as funeral homes and crematories, price wars are less intense because customers make decisions more quickly based on emotions and are less likely to shop around, says Dan Olszewski, director at the Weinert Center for Entrepreneurship at the Wisconsin School of Business. On the flip side are industries in which intense rivalry among competitors drives down prices and lowers profits. This is the case with grocery stores (2.2% profit margin), beer, wine and liquor stores (2.4%), automobile dealers (2.4%) and restaurants (6%).
If a new company enters your industry and offers consumers an alternative to your product or service, it can threaten your profitability. Take automobile dealers (2.4% margins). Ride-sharing options such as Uber and Lyft threaten them because they provide alternatives to buying a vehicle, Olszewski says. With net profit margins of 17.9% and the second spot on the Sageworks list, lessors of real estate — houses, apartment buildings and townhomes, as well as mini-warehouses and self-storage — fared much better. For those looking to rent out a home or store personal items, there are few alternatives to property management companies and self-storage facilities. Likewise, there’s no substitute for expertise and experience for those seeking legal help. Legal firms took the third spot on Sageworks’ list with net profit margins of 17.4%. Other top profitable industries on the list include medical and diagnostic laboratories (12.1% margins), automotive equipment rental and leasing (12%), warehousing and storage (11%), management, scientific and technical consulting services (10.3%) and specialized design services (10.2%).
Your strengths. If the industry you’re considering is highly competitive and less profitable, it doesn’t mean that you won’t succeed. It’s more about skills and approach than it is the industry landscape, Olszewski says.
The long game. Sageworks’ data provides only a one-year snapshot, so look into industry trends over a longer period. And be realistic as you approach your new business. A startup likely won’t have the same profit margins as industry averages. Have a strong business plan, and be prepared for industry downturns or recessions.
Standing out. By providing excellent customer service, differentiating your product or service, advertising and marketing your business effectively and focusing on competitive pricing, you’ll better position your business for success, regardless of the industry you decide to enter.
Steve Nicastro is a writer at NerdWallet. Email: [email protected]. Twitter: @StevenNicastro.
The article Profit and Loss: Why Some Industries Fare Better Than Others originally appeared on NerdWallet.
Creating an estate plan is a gift to the people you leave behind. By expressing your wishes, you’re trying to guide your loved ones at a difficult, emotional time. All too often, though, well-meaning people do things destined to create discord, rancor and resentment among their heirs. What looks good on paper may play out disastrously in real life, says estate and trust attorney Marve Ann Alaimo, partner at Porter Wright Morris & Arthur in Naples, Florida. “People want to think everybody will be nice and do right,” Alaimo says. “Human nature is not always that way.” You can reduce the chances of family discord by doing these four things:
I regularly hear from people convinced their siblings are stealing from an estate. Just as common are executors who drag their heels or who ghost the family entirely, refusing to deal with the necessary paperwork or even respond to emails and calls. People often name executors based on family hierarchy (the oldest child, the only male) or personal relationships (the spouse, the best friend), rather than considering the skills needed for the job, estate planning attorneys say. The person tasked with settling an estate should be responsible, organized and scrupulously ethical. Estate planning attorney Jennifer Sawday, a partner at TLD Law in Long Beach, California, often recommends that clients consider appointing a corporate trustee or a professional fiduciary as their executor. Many banks have trust departments that provide trustees for larger estates, typically those worth over $500,000, while professional fiduciaries often serve smaller estates, she says.
Some of the littlest things — a childhood toy, a holiday decoration, a piece of costume jewelry — can trigger the biggest family fights. Anything with sentimental or emotional attachments can stir up old rivalries and lead to lifelong rifts. “It can be ‘Mom always wanted me to have that’ or ‘Mom always wanted you to have that, and it bugs the heck out of me,’” Alaimo says. Alaimo recommends clients ask their kids what they want and make decisions now about who gets what. They should make a list, update it as needed and keep it with their wills or other estate documents. If people avoid this discussion because they’re afraid of conflict, they should imagine the battles to come when the parents are no longer around to mediate, she says. As a final bid to keep the peace, or at least remind kids to value relationships over things, Alaimo suggests adding a clause to the will that directs the executor to sell any disputed item if the heirs can’t agree on who gets it.
People can, and should, make sure their surviving spouses are adequately provided for. It’s also unwise to dump a large amount of money on someone too young to handle it. But estate provisions that tie money up for decades may also be a mistake. For example, people with larger estates often create trusts that allow the children to inherit only after the surviving spouse dies. But if Dad’s new wife is closer to the kids’ age than his own, that could be a long, resentment-filled wait. Another common estate provision is to dole inheritance out over several years, for example with a chunk at 21 and another at 25, with the balance paid out at 30. But some people use such provisions to drag the distribution out over decades or try to restrict what middle-age children do with the money. “Children often find these provisions to be an indictment by the parents … and a statement that they do not trust them with their inheritance,” says Frank Moscardini Jr., a partner at Shimanovsky & Moscardini in Chicago and a LegalShield Advisory Council member attorney.
Parents usually think they have good reasons for leaving one child more than others. Perhaps one child is not as financially successful, or was more attentive in the parents’ final years. But unequal bequests often feel unfair to those left behind, Moscardini says. Parents who aren’t planning to make equal distributions should schedule a family meeting and explain their thinking to their kids, Alaimo says. Those discussions may not be comfortable, but hearing the explanations directly from the parents can help keep the kids from blaming one another later. “If you’re not there to answer their questions about ‘why did you do it that way,’ people will make up their own answers,” Alaimo says.
This article was written by NerdWallet and was originally published by The Associated Press. Liz Weston is a writer at NerdWallet. Email: [email protected]. Twitter: @lizweston.
The article How to Write a Will That Won’t Trigger a Family Feud originally appeared on NerdWallet.
No matter how enthusiastic you are, trying to formally teach finance to kids is a tall order that is likely to make their eyes glaze over. Hold their attention by keeping money lessons relevant, age-appropriate and a bit playful.
Preschoolers can grasp that money is exchanged for stuff. Teach them the names of coins, and as their counting ability develops, explain their values. Playing “store” lets them gain skills as they “buy,” “sell” and even “price” household items.
Begin giving your children a small allowance so they can experience money in the real world, and appoint them as valuable “assistants” on your shopping trips. They’ll feel important while clipping coupons and helping you find items on the shelves.
Early grade school kids can understand goals, saving and budgeting. Have them create and decorate wish lists and give them four containers for allowance labeled “spending,” “saving,” “investing” and “giving.” The spending jar is for inexpensive things kids want, such as candy or stickers. The savings jar provides a place to save for wish-list items, while the investing jar builds overall savings. The giving jar can encourage compassion as kids contribute to charities that are meaningful to them, or save to buy presents for family members.
Bring kids along when you visit a branch of a financial institution, explaining that the institutions keep your money safe and even pay you for letting it rest there. Make sure they understand the automated teller machine doesn’t spew free money and only releases cash you’ve already put in your account. By the later grade-school years, kids should graduate to their own savings accounts. Look for those with no fees and full parental access.
Middle schoolers are ready to be included in appropriate family financial discussions about basic living expenses and savings goals. Wish lists can be swapped for goal charts, and you may want to offer to match your children’s savings as an incentive to help them make a special purchase.
Most kids this age enjoy the experience of running a garage sale where they can set prices, make change and bargain with customers. They’ll have fun earning extra cash while you clear out space at home.
In the teen years, introduce savings certificates, bonds and securities as investments. You may even want to give your teens a small amount of money and let them choose mutual funds or exchange-traded funds to invest in. Encourage teens to work part-time and help them open a student checking account that has a debit card, mobile access and low or no minimum balance or maintenance fees. Consider downloading a mobile financial app to help them track spending and savings. When tax time comes, let them fill out their own return with your supervision and guidance.
No matter what the age, odds are kids would still rather play computer games than listen to you discuss money. Rather than get discouraged, introduce some fun financial apps and games. The experience kids gain through your efforts and a little help from technology will pave the way for a lifetime of financial savvy and success.
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Setting smart, achievable goals is important if you want to take charge of your financial life. But many of us are surprisingly bad at choosing the goals that actually matter most to us.
Investment research firm Morningstar had 318 people write down their top three financial priorities, then showed them a master list of goals prepared by the researchers. Three out of four investors changed at least one goal after seeing the master list, and one out of four switched their top priority. “We were like, ‘Wow. People don’t really know what they want,’” says lead researcher Ray Sin, behavioral scientist at Morningstar.
Other behavioral research has shown that even when people think explicitly about what matters to them when making decisions, they overlook many of their most important goals. That interferes with their ability to evaluate their choices and consider alternatives. Among the problems: We’re better at thinking short term than long term, Sin says. Plus, we may overvalue goals that are currently on our mind.
A renter who just attended a housewarming, for example, might say her top priority is saving to buy a home. She may forget that she really wants to be able to quit her job and travel the world for a year. She probably has other goals as well, such as retiring someday and perhaps starting her own business. Of course, all those goals may matter to her, but “resources are finite,” Sin says. That’s why prioritizing is so important. Someone determined to retire early, for instance, may not be able to fully fund a child’s college education or leave an inheritance.
If you want to check for your own blind spots, quickly write down your three most important financial goals. Then look at Morningstar’s master goal list and see if you want to change what you wrote:
Something you may notice about this list: Many of the goals involve feelings. Goals that resonate on an emotional level can help people maintain the discipline they need to stick with a financial plan, says Ryan O. Murphy, head of decision sciences at Morningstar Investment Management. “When it starts to become more emotional, it becomes more personal,” Murphy says. “This abstract thing of ‘save more money for later’ may not be a goal that really gets people to move now, today.” Even the goals that don’t seem emotional, like managing debt, can be transformed into something more powerful if you consider the feelings around them. Paying down debt can make you feel more comfortable and secure and less stressed, for example.
Morningstar researcher Samantha Lamas, a recent college graduate who just started paying her student loans, has firsthand experience with goal blind spots. Lamas initially thought paying off her debt was her top priority, but during the study realized that saving for retirement was important as well. Accelerating her student loan payments might have meant missing years of company matches, tax breaks and tax-deferred compounding she can get from contributing to her retirement accounts. “I no longer think of my financial goals as a zero-sum game where I’m forced to either save for retirement or pay down debt,” says Lamas. “I can achieve both, simultaneously, if I’m thoughtful about it.”
This article was written by NerdWallet and was originally published by The Associated Press.Liz Weston is a writer at NerdWallet. Email: [email protected]. Twitter: @lizweston.
The article Are You Picking the Wrong Money Goals? originally appeared on NerdWallet.
Maybe you’ve been ordering too much stuff on Amazon or watching your bank account shrink after spring break travel. When your spending spins out of control, one way to rejuvenate your finances is to go on a financial fast. But while chopping up your credit cards may feel cleansing, you might be surprised at what it could do to your credit score. Here’s how to think about whether to cut them up, or simply cut back.
If you stop using your cards — whether you dice them up or put them in the freezer — but keep the credit accounts open, your score will go up, says John Ulzheimer, a credit expert who has worked for credit bureau Equifax and credit scoring company FICO. “The primary reason you want to keep your card open is because your score benefits from the unused credit limit,” he says. Credit scores are heavily influenced by how much of your available credit you use. When you stop charging purchases to your cards, the balances you’re carrying will go down with each payment you make. Ideally, experts recommend using no more than 30% of your credit limit on any card, and lower is better. However, once you’ve paid the balance down to zero and stopped using the card completely, issuers may lower your credit limits or close your accounts if there’s no activity on them. How long it takes depends on the issuer, Ulzheimer says. “Some of them will start to reduce credit limits after 12 months of inactivity,” he says. “Some card issuers will let you go years before they do anything.” To prevent your accounts from being closed, charge a small purchase to your card every now and then and pay it off promptly, Ulzheimer says.
If you take the more serious step of closing your accounts, your score is likely to drop in the short term. The reason is the same as before: Credit scores are influenced by how high your balance is compared with your available credit. Closing an account lowers your overall credit limit (or eliminates all of it if you have only one card). Now, even if you’re carrying the same balance, it represents a bigger chunk of your remaining credit, which could cause a drop in your score. “Unless you’ve got some punitive annual fee on a card, I can’t think of a reason to close it,” Ulzheimer says. You may want to go on a spending fast right now, but your score will matter if you apply for a loan or credit card down the road, he says. A credit card can also be useful in case of emergencies. Pair it with a decent emergency fund so you can pay the balance back down as soon as possible.
A fast is a temporary measure. To keep your spending under control long-term, start tracking your cash flow, says Daniel Milks, a certified financial planner and founder of Woodmark Wealth Management in Greenville, South Carolina. “Figure out where your money is going and where it’s coming in,” he says. “The more you know about yourself and what you’re spending on, the more equipped you are to control it.” Armed with that knowledge, you can build a budget that helps you cut back on expenses and save for bigger goals, like paying off debt or saving for a down payment.
Amrita Jayakumar is a writer at NerdWallet. Email: [email protected]. Twitter: @ajbombay.
The article Ditching Credit Cards? Here’s What Could Happen to Your Score originally appeared on NerdWallet.
Parents are often more than happy to offer financial advice to their kids. They like to feel needed and want to make sure you’re on solid financial ground. But it’s important to turn the tables and ask about their financial plans, too. Are they saving for retirement? Have they updated their will? What’s their plan for long-term care, should they need it? It doesn’t matter if you’re living on ramen or running your own business, asking your parents about their financial future can feel odd. But life moves fast. And your parents’ financial plans can and will affect your own, eventually. So it’s important to talk early and often about how they’re planning for retirement and the often high cost of aging.
“It’s never too soon to have this conversation,” says Greg Young, owner of Ahead Full Wealth Management LLC in Rhode Island. “If something happens to your parents, not only there goes your safety net and a key part of your support network, but their affairs will likely pile onto you.”
Tact is everything when talking about money. Show them you want to learn and you want to help. Use your own life events, like a new job, a new house or an expanding family, as an opening to talk about their plans.
It’s important to know if your parents are saving, but this conversation isn’t just about money. It’s also about their dreams for retirement.
Your first real job (or any new job) is a good chance to ease into the conversation. Ask your parents for advice as you navigate 401(k) contributions. A simple “What did you do?” gives you insight without being invasive. House hunting? That’s another opportunity to check in with your folks about their retirement plans. You know, in case you need to add “in-law suite” to your wish list.
The cost of extended care is staggering — assisted living carries a median price tag of $48,000 per year, while the annual median cost for a nursing home is nearly $90,000 for a semi-private room, according to an annual survey by Genworth, an insurance company. In-home care can be just as costly, depending on the services needed. Long-term care insurance helps offset the cost of nursing care and help with routine activities like eating, bathing and dressing, whether at home or in an assisted living or nursing home.
Long-term care insurance gets more expensive with age, so most people who buy it do so in their 50s or 60s. It’s good to start the conversation early to have the topic on your family’s radar. “‘Do you have long-term health care insurance?’ That’s a specific question that is pretty palatable,” says Thayer Willis, a wealth counselor. “If they say yes, the follow-up question is: ‘How does it work exactly?’” If the direct approach doesn’t jibe, try backing into the conversation. Use someone else’s experience as an example and ask whether your parents have considered assisted living in the future and how they would pay for it.
Sorting through an estate without clear directives can tear families apart. That’s the last thing your parents want. Talking openly about things like wills and trusts, life insurance and advance medical directives can help you understand what they have in place, and give you insight into their intentions, Young says. “Knowing what to expect from them, or that they’ve done some planning, will certainly make an emotional eventuality a little easier,” he says.
Starting your own family, and setting up your own estate plan, is a great opportunity to ask your parents what they have in place. You can also use someone else’s experience to start the conversation. “Ask questions like: ‘A friend from work had a parent pass and they could not find any paperwork. … Do you and Mom have all your paperwork together in one place? If you were to pass, who has access to it?’” says Mark Struthers, owner of Sona Financial, a wealth management firm.
Your folks might not be comfortable talking about their finances. That’s OK. Don’t push them. Instead, make it clear that you’re ready and willing to talk another time, Willis says. “You might need to take the approach of planting a seed, and that’s all you do in the first discussion,” she says. “Which is another reason for beginning early.”
This article was written by NerdWallet and was originally published by The Associated Press. Kelsey Sheehy is a writer at NerdWallet. Email: [email protected]. The article Yes, You Should Ask Your Parents About Their Financial Plans originally appeared on NerdWallet.
Bravo! Everyone wants to make more money, and you’ve managed to do just that. Whether you received a raise or took a higher-paying job, a salary increase is something to celebrate. It’s also something to evaluate within your larger financial picture. That way, you know what to do with your additional cash. Here’s what to do when you get a salary bump.
It’s too easy to fall into the “earn more, spend more” trap known as lifestyle creep. Extra spending could easily surpass your additional income — and that’s before you even see most of it.
“People will say, ‘Well, annually, I’m going to make this much more,’” says Autumn K. Campbell, certified financial planner at The Planning Center in Tulsa, Oklahoma. “Well, that’s from one year after the time you got the raise,” she says. In that time, she adds, “we can learn habits that are tricky to get out of.”
Before building such habits, get a reality check by calculating how much more you’ll make in the shorter term. “We need to talk to ourselves in real numbers,” says Lynn Ballou, CFP and senior vice president and partner with EP Wealth Advisors in Lafayette, California.
Say you were making $50,000 and received a 4% increase, or $2,000 over a full year. Divide that $2,000 by 12 for about $167 per month. If you’re paid every other week, divide $2,000 by the 27 pay periods expected for 2020, and you’re looking at $74 per paycheck.
This math doesn’t account for tax withholdings and deductions that chip away at your take-home pay. (Scrutinize your paychecks to calculate that amount.) But having a rough figure for this extra income does help you figure out what to do with it.
To identify opportunities for your extra income, first take stock of your cash flow (incoming and outgoing money), as well as savings, investments and debts. Depending on your situation, these questions may help you think about next steps:
Are you meeting basic needs?
Consider food and shelter. If you’re facing overdue bills and shut-off notices for utilities, those payments should be a priority, says Campbell, who is also the president of FPA NexGen, a professional group for young financial planners.
Could you cover an emergency?
Emergency funds help prevent you from taking on debt if — actually, when — you face unexpected expenses. This is a smart time to start the fund if you don’t have one, Ballou says.
Ideally, the fund could cover a few months’ worth of living expenses, but it’s OK if you can’t swing that. Just build a buffer. For example, perhaps you set up automatic monthly transfers of $50 from your checking account to a high-yield savings account.
Do you have high-interest debts?
These are debts with interest rates around 20% or higher and could be from credit cards, personal loans or payday loans. They can hinder both your current and future finances. “It’s very hard to plan long-term if our short-term needs are in flux or being stretched,” Campbell says.
Sound familiar? Identify your debt strategy and consider using some of your additional income to pay it down.
Could you put more toward goals?
Use this opportunity to check on your financial goals, Ballou says. (Or identify a few, if you don’t have any.)
Say you’re aiming to retire with a certain amount saved. Consider contributing more to your 401(k), a tax-favored retirement savings account offered by some employers.
Other goals may lead you to put more earnings toward a down payment or vacation fund, or toward your student loans. Or perhaps this is the time to buy life insurance or contribute to a 529 plan for your kids’ college savings.
Celebrate your raise “in a way that honors your hard work and also moves you forward in life without the stress of spending it and never really getting ahead,” says Lazetta Rainey Braxton, CEO and founder of Financial Fountains, a financial planning firm in Baltimore, and president of the AAAA Foundation, which helps cultivate the next generation of African American financial planners.
To pull this off, give yourself the “gift of time” rather than something that costs money, Ballou says. Spend an afternoon hiking or digging into a book, for example.
If you do spend money, Braxton suggests setting boundaries, such as a spending limit equal to the increase you’ll see in one or two paychecks.
Before spending, try to wait a few weeks or even months. By that time, you’ll have paychecks that show exactly how much more you’re taking home — and hopefully you’ll have cooled on any impulse-purchase ideas. After all, “there’s no rush,” Campbell says. “It’s not like the money is going to disappear.”
Laura McMullen is a writer at NerdWallet. Email: [email protected]. Twitter: @lauraemcmullen.
The article 3 Things to Do When You Get a Salary Increase originally appeared on NerdWallet.
