Personal Finance Articles

Article / Updated 03-29-2023

Shopping can often feel like a black hole on your finances. Money goes in and disappears into a vacuum. Every time you step into a grocery store or discount department store, you may feel like you’re out of control and you come out flat broke. To prevent your shopping trips from turning into guilt trips, take time to think about how you can spend more thoughtfully. Save by reducing and reusing When considering a purchase, always keep the following in mind: Reduce, reuse, and recycle. Ask yourself these questions: Do you really need it? Do you already own or have access to something that you can use instead? Try to reduce your purchase of processed, prepackaged foods. The more packaging and processing involved, the more the food costs you. By reducing your purchase of packaged and processed items, you save money and resources. Prepackaged groceries generally cost at least twice as much as whole foods, often multiple times more. Also try to buy whole foods in their natural state whenever possible: fresh fruit, vegetables, meat, and dairy products. Yes, cooking is required, but cooking doesn’t have to be drudgery. Sharing a home-cooked meal brings people together, saves money, and can be much healthier than the alternatives. You can reduce trash and save money by minimizing your use of paper towels, disposable plates, and cups. Instead, reuse cloth towels and napkins and use durable dishes because you can wash and reuse these again and again. Go for permanent or reusable over disposable every time possible. Take your shopping bags with you to the grocery store. Many stores credit you 5 cents per bag for bringing your own or charge you if you don’t. You’re not only saving money but also saving landfills. Over the course of a year, simply reusing shopping bags, napkins, plates, and cups can save you $40 to $60. Just think of how many other items you can apply this concept to. If you can cut costs without cutting your lifestyle, why not? Use your money in other ways that give you more enjoyment and satisfaction. Tips for keeping expenses down The following are some other ways to keep your shopping expenses at a minimum: Use a shopping list and purchase only the items on your list. Organize your list based on the layout of your store and stick to the outer walls where all the healthy options are. By following this guideline, you can begin to better plan your expenditures. And if you stick to your list and a routine, you can eliminate those nasty impulse purchases. Don’t go grocery shopping when you’re hungry. People typically spend more and buy more processed — and, therefore, more expensive — food when they’re hungry. Buy merchandise when it’s going out of season. Buy next year’s winter coat or swimsuit when the prices are dirt cheap instead of at the beginning of the season, when the item’s not on sale. And when you’re shopping for clothes, buy wash-and-wear clothes rather than dry-clean only. Buy second-hand. eBay and Craigslist have changed the landscape of shopping for pre-owned items. Before you buy something, check online first to see whether a pre-owned version is available. You can also find treasures at thrift stores and garage sales. Shop at discount stores. Deep-discount grocery stores, such as Aldi’s, can save you a lot of money. Buying store brands and in bulk Many stores carry store brands, items with the store’s name on the label. Or they may carry generic products, those items labeled without a brand name of any sort. If you’re willing to be a bit adventurous, keeping your eye out for inexpensive store brands and generic products can shave a substantial amount from your grocery budget. People often say that they don’t care for the taste or quality of store brands or generic items, but you may be surprised to discover that many products carrying generic or store brand labels are actually top-quality, name-brand items packaged under a different label. You may have the best luck with generic versions of: Tomato sauce and paste Canned and frozen vegetables Canned soups Cookies and crackers Dairy products (milk, butter, and cheese) Coffee and tea Bread, rolls, and buns Finding space for bulk purchase groceries and supplies Do you think you don’t have room for bulk purchases because you don’t have a pantry? Well, look at the back of your linen closet shelves behind the folded towels. If you’re like many people, you may have some empty space just waiting to be filled with a stack of cans, boxes, or packages. What about that empty corner in the garage? Or, look underneath your beds, and what do you see? Empty space and dust bunnies? Any of these places can be potential storage spots for a case or two of extra stewed tomatoes or refried beans. You can also split bulk orders with a friend or relative if you really don’t have the room but want to experience the savings to be found in bulk purchases. Seeing through grocery store gimmicks Grocery sellers spend money to learn how to fool you into spending more in their stores. Whether they’re enticing you into the store in the first place with sale items or convincing you to buy more expensive items, be aware of some of these tactics: The aisle switcheroo If you shop at a particular store regularly, you know where everything you buy is located in each aisle. Without realizing it, you’ve developed a form of tunnel vision and don’t really see anything except what you need. When the store rearranges the aisles or moves items from one position on a shelf to another, you have to look around and actually focus on each aisle and every shelf. By losing your tunnel vision for a time, the possibility of something new catching your eye increases dramatically, and consequently your impulse purchases increase, too. The store’s layout Most grocery stores have the same general floor plan — they keep produce, bread, dairy, and meat products along the edges of the store or up against the walls. By putting commonly purchased items against the farthest wall or way off in a back corner, customers have to walk past numerous displays and shelves full of goodies. Shop the edges of the store to save considerably on your grocery bill. Added benefit: The perimeter carries the healthiest items in the store. Your waistline — and your budget — will be healthier. Shelf arrangements If you want to find the best values on the grocery store shelves, look high on the top shelves or bend down and look at the bottom shelf. The brand-name and higher-priced products (as well as products designed to entice children) are located at eye level, while the generic, store brand, and lower-priced items are in the more awkward places to see. Using coupons and rebates People either love coupons and rebates or find them to be more work than they’re worth. Coupons and rebates are a valuable addition to a well-rounded approach to saving money. To make the most of your coupon savings, follow these suggestions: Look for double-coupon and triple-coupon deals. Look for coupons for items that are already on sale or that are deeply discounted. Don’t assume you get the best deal with the coupon; store brands can still be cheaper. When shopping online, look for online coupon codes to save on the purchase price or on shipping and handling charges; just type the name of the store and "coupons" into your favorite search engine to see what you find. You can also try websites like Rakuten, Honey, and RetailMeNot. To receive a rebate, you must fill out a rebate form and mail it along with proof-of-purchase materials — usually your original cash register receipt and the Universal Product Code (UPC) or barcode — to the manufacturer. Occasionally, a store will offer rebates in the form of store credit rather than money back from the manufacturer. If you shop in a store regularly, credit for shopping there again can be helpful to the budget. But be careful you don’t use the store credit as an excuse to buy things you normally wouldn’t purchase. The store isn’t really trying to save you money — they’re trying to entice you into spending more money.

Cheat Sheet / Updated 03-27-2023

Taxes are a part of life. Love them or hate them (okay, no one loves paying them), everyone has to deal with them. Learn how to navigate through tax challenges with some straightforward strategies.

Article / Updated 03-22-2023

Filling out a check may seem completely foreign to you if, like most people, you use an ATM card, check card, or debit card with a security pin to pay your bills. Despite the convenience of online bill paying and the conveniences of modern banking, most places still accept paper checks today, and you probably need to know how to write (and read or interpret) checks. Simply follow these easy steps to fill out a check correctly the first time, every time. Clearly write the name of the recipient in the "Pay to" or "Pay to the order of" space. Fill in the date in the "Date" space provided. Fill out the amount you wish to write the check in the "$" box and "Amount" line provided. In the "Memo" space, indicate why the check is being written. Sign the check so it is valid and cashable. All checks have the same information on them so that banks know what to do with them when they cash them. You will find preprinted information or fields to supply the following basic information on all paper checks: Account holder Recipient Date Amount Memo Signatures Account, routing, and check numbers Checking account holder The account holder information is usually preprinted in the top left corner of the check. If it's your checking account, this information will be your name, address, and phone number. If you are cashing the check, the account holder info will be of the person or business that issued you the check. If you recently opened a new bank account, often they will provide you with temporary checks until the official ones are sent to you. These checks do not have preprinted account holder information and can sometimes be difficult to cash. Recipient information Just below the account holder information is a blank line that you would use to clearly fill in the name of the person or business to whom you are writing the check. Usually labeled as "Pay to" or "Pay to the order of." If the check is meant for you to cash it, your name will be written or typed in this space. You can give your checks more than one recipient. If you put the word "and" between two names, both people will need to sign the check to cash it. If you put the word "or" between the two names, either person can sign and cash the check. Most banks no longer accept checks made out to "Cash" as the recipient due to recent identity theft concerns. Date field on checks An empty date box can usually be found right and slightly above the recipient line. If the check was issued to you, the "Date" box will already be filled in. Checks can be pre-dated, current-dated, or post-dated. No matter what date you select, just make sure the funds were/are available on the date indicated to avoid a returned check for insufficient funds also known as a bounced check. Depending on the bank, insufficient fund fees are exorbitant and can range from $25 up to $40 per returned check; this can add up quickly! Banks often offer bounce protection if you link your checking account with a savings account. Checks that are returned, if several occur, may become part of a check fraud investigation, resulting in possible jail time. Only write checks that you have money in your account to cover. You can keep track of your spending through online statements or by manually filling out the check register in the back of the checkbook. Amount of check All checks have two spaces for the amount. The first amount space is a blank line labeled "Amount." The second space is a box labeled with a dollar sign "$." On the blank line, write out the amount in word format. In the box write the same amount in number format. For example: $2,456.34, Two thousand four hundred fifty-six dollars and thirty-four cents. OR $2,456.34, Two thousand four hundred fifty-six dollars and 34/100. Usually people use the fraction for cents because the space provided for all this writing is never large enough. Memo line on checks Found in the bottom left corner, a blank space is provided labeled "Memo." This space indicates what the check's intentions are. Although most people leave this area blank, it is a good idea to fill in why you are writing the check. If the check is a gift, make sure to indicate it by writing gift in the memo line. Same goes for bill pay. If the money/check is a loan, always indicate that it is a loan. Indicating a loan ensures that the person accepting the money will pay it back and not claim it was a gift. Signature lines on your check Usually one signature line is provided on the bottom right corner of the front of the check and one space is indicated on the back of the check. These are the most important spaces. If no signatures are present, no bank will cash the check. The front of the check must be endorsed by the account holder, and the back of the check must be endorsed by the check recipient. Never endorse a blank check. Signing your name to a blank check is irresponsible; it provides an easy way for criminals to wipe-out your bank account. Checking account and routing numbers The account number links the check to a specific bank account. The routing number is the number assigned to the bank from which the check was issued. Both numbers need to be on the check for the bank to know from where to secure the funds. These numbers are always along the bottom of the check so machines can read them. Sometimes a third set of numbers follows the account and routing numbers. This set of numbers is for the account holder and indicates the check number for easier tracking and bookkeeping purposes. Cashier's checks, money orders, payroll checks, and traveler's checks have all this information. The layout may be a little different form one check to another, but the concept is basically the same. Keep in mind, with nonpersonal checks usually the "Amount" spaces are already filled in for you.

Article / Updated 03-22-2023

Copyright © 2020 by AARP. All rights reserved. Something about Social Security stirs the popular imagination. Rumors and phony stories have attached themselves to the program from the start. Sometimes you can identify the grain of truth that sprouts into a tall tale. Other times you can’t. Before Social Security got off the ground in the 1930s, newspapers in the Hearst chain spread the story that people would have to wear dog tags stamped with their Social Security numbers. (The dog tag idea actually was proposed but never approved.) Many people continue to believe that Social Security maintains an individual account with their contributions in it. The reasoning is easy to see, but the story isn’t true. Rumors swirl about the state of Social Security’s finances, hidden meaning in the numbers, and other topics that find fertile ground on the internet and are spread through social media. Unfortunately, myths can be harmful because they undermine public understanding of Social Security and confidence in the program at a time when the nation needs a constructive, fact-based discussion. Myth: Social Security Is a Ponzi Scheme This is a claim made by critics of the program who really are saying that Social Security is inherently unbalanced and doomed to fail. Their charge is based on a superficial comparison of Social Security with a type of fraud associated with Charles Ponzi, a charismatic con artist in the early 20th century. Ponzi’s infamous scheme involved speculation in international postal coupons. He lured his victim investors by promising returns of 50 percent at a time when banks were paying around 5 percent interest. Early investors were paid with money from later investors, a hallmark of Ponzi schemes. Such frauds may work for a little while, but inevitably they collapse. (Just ask Bernie Madoff.) The misleading comparison of Social Security to a Ponzi scheme is based on the fact that Social Security does require one group (workers) to help support another group (retirees and other beneficiaries). This system is sometimes described as a pay-as-you-go system. The Ponzi label falls apart, however, when you think it through. For one thing, Social Security doesn’t rely on a soaring base of contributors, as Ponzi schemes do. Instead, it requires a somewhat predictable relationship between the number of workers and beneficiaries, along with adequate revenues. A lower U.S. birthrate starting in the 1960s and increasing life expectancy that has resulted in an aging of the population are significant causes of Social Security’s expected shortfall. Social Security has other fundamental differences from a Ponzi scheme. Importantly, it’s transparent. Each year, the Social Security Administration (SSA) releases information about its financial state in exhaustive detail, along with projections 75 years into the future, based on different economic assumptions. Scams, by contrast, thrive on secrecy and deception. And unlike a Ponzi scheme, the money not used to pay current benefits has built up a surplus of $2.9 trillion. Another basic difference between Social Security and a Ponzi scheme is in the goals. A crook hatches a Ponzi scheme to get rich at others’ expense. Social Security provides social insurance to protect people. Money goes from one generation to help support another generation. Your tax contributions help support your parents. One day, the contributions of future generations will help support you. Myth: Your Social Security Number Has a Racial Code in It The nine-digit Social Security number has long fascinated people, because it is a unique, personal identifier in a nation that cherishes individuality. One myth is that the number contains a code that identifies the race of the cardholder. According to the myth, the code can be found in the group number, the fourth and fifth digits, in the middle. In one version of the rumor, a person’s race could be determined by whether the fifth digit in the Social Security number is even or odd. (Group numbers range from 01 to 99.) One explanation for this myth is that people have misinterpreted the meaning of the term group number, wrongly assuming that it referred to race. This rumor has caused some people to worry that their Social Security number makes them vulnerable to discrimination by potential employers or others who may spot the racial code in an application. According to the SSA, however, the term group number refers simply to an old system of numerical grouping that traces back to Social Security’s early days, when everyone’s records were stored in paper files. Employees used the two-digit group number to help organize the files. If you want to find possible meaning in your Social Security number, look to the first three digits — the area number. Before 1972, the first three digits were based on the state where the card was issued; after that, they were based on the mailing address on the application. This is no longer true, however. In 2011, the agency began assigning the first three digits randomly, as part of a strategy to protect people from identify theft. Myth: Members of Congress Don’t Pay into the System This myth gets its strength by combining two rich symbols, Social Security and Congress. Variations of the myth include the idea that lawmakers get a special break on Social Security payroll taxes and that they’re allowed to collect benefits at an earlier age than the rest of us. In the past, Congress and the rest of the federal government were covered under the Civil Service Retirement System, which was created years before Social Security. Under a 1983 law, however, all three branches of the federal government were steered into Social Security. As a result, since 1984, members of Congress, the president, the vice president, federal judges, and most political appointees have been required to pay taxes into the Social Security system like everyone else. And the same rules apply to them as apply to you. Vestiges of the old setup endure for some federal employees. Those hired before January 1984 aren’t required to participate in the Social Security system. All federal employees hired since 1984, however, make Social Security payroll tax contributions like everyone else. That includes lawmakers. Myth: Social Security Is Going Broke People have heard so much talk about Social Security’s finances that it’s easy to see why they may think the program is going off the cliff. That’s not the case, however. Social Security can pay full benefits until about 2035 — and it can continue to pay about 80 percent of benefits thereafter, according to the program’s trustees. The gap is caused by the fact that a relatively smaller number of workers will be supporting a relatively higher number of retirees. The large number of Baby Boomers retiring, combined with the smaller number of individuals paying into the system through the payroll tax (because of lower birthrates), has caused Social Security benefits to surpass the amount of payroll taxes coming in. To make up for this shortfall, Social Security will increasingly draw down its trust funds of $2.9 trillion to supplement the revenues that will continue to pour in (primarily through payroll taxes). The funding gap can be closed through a combination of modest tax increases and/or phased-in benefit cuts for future retirees. Although it has been difficult for lawmakers to make a deal, various policy options show that it’s possible. Assertions that Social Security is running out of money erode the confidence of younger people, who will need Social Security one day. Polls have shown, for example, that substantial numbers of future beneficiaries — as high as 80 percent — worry Social Security won’t be there for them when they reach old age. This undue pessimism helps reinforce the next myth. Myth: The Social Security Trust Funds Are Worthless Social Security revenues stream into U.S. Treasury accounts known as the Social Security trust funds. One trust fund pays benefits for retirees and survivors; the other pays benefits for people with disabilities. (The revenues come from the payroll tax and some of the income tax paid by higher-income retirees.) Most of the trust-fund money is used quickly to pay benefits. But a big surplus has developed over the years — about $2.9 trillion. Under the law, Social Security is required to lend the surplus funds to the federal government, which is then obliged to pay the loan back with interest. This lending takes place through investment in special-issue, medium- and long-term Treasury securities that can always be redeemed at face value. This sanctioned lending, by the way, is the reason you may sometimes hear claims that the government “raids” the Social Security trust funds. Those who contend that the trust funds are worthless are really predicting that the federal government won’t make good on that debt — even though the bonds are backed by the full faith and credit of the United States, just like other Treasury bonds held by the public. Investors throughout the world retain confidence in this nation to make good on the debt it owes, as demonstrated by the ongoing demand for U.S. Treasury bonds, even at a time of government deficits and budget battles. In the coming years, Social Security will rely increasingly on income from bond interest and actual bond sales to pay benefits. That means the U.S. government faces a large and growing bill to pay Social Security back for the money it has borrowed over the years. There are no recommendations here on how the government should pay its bills. But if you consider those matters, just remember that Social Security isn’t the cause of the nation’s current deficits. Myth: You’d Be Better Off Investing in Stocks You hear this myth more often during boom times, but for the average person, it’s highly dubious at any time. To be clear: It’s important for people to save as much as they can, and stock investments may be an important element in your savings. But the notion that you’d be better off without Social Security usually doesn’t hold up. For one thing, Social Security and stock investing aren’t substitutes for each other. Unlike stocks, Social Security provides broad protections for you and your loved ones, including benefits for disability, survivors, and dependent family members. These benefits may be payable if tragedy strikes at an early age, before you’ve had the many years needed to build up a nest egg. Also, Social Security shields retirement income from risks that are inherent in the financial markets. Although stock returns may be greater, stocks are more volatile. If a market collapses at the wrong moment, your holdings can be hammered. Social Security, by contrast, provides a guaranteed benefit. If you truly want to save for yourself, it helps to consider how much of a nest egg you need to match the protections you get from Social Security. You could buy an annuity to provide monthly income under certain circumstances. But what would it cost? Suppose you were trying to equal the average Social Security retired worker benefit (about $1,500 a month in 2020). You would need hundreds of thousands of dollars to purchase a survivor annuity that matched the benefit, starting at age 66 and protected for inflation. A higher-paying annuity meant to equal Social Security’s family maximum for top earners (more than $4,500 a month) would cost nearly a million dollars. Annuity price tags vary as interest rates change; also, insurance companies charge different amounts, so you can’t find one lasting dollar figure. Neither of the products described here equals Social Security’s protections. They don’t cover family members while you’re alive, including a spouse or children, nor do they offer child survivor benefits when you die. Could you save half a million bucks? Suppose you had 40 years to build up the nest egg. At a 3 percent rate of return, you’d have to set aside about $6,500 per year. Most people don’t save that much. Many people have nothing left over by the time they pay the monthly bills. Of those who do save, many could set aside more. Also, many people take money out of their nest eggs when needs arise. Unfortunately, such withdrawals can do lasting harm. Saving requires long-term discipline and possibly short-term sacrifice. About one in four adults who have yet to retire report no retirement savings or pension, according to a Federal Reserve study in 2019. While savings do increase with age, millions of older workers lack adequate nest eggs. Imagine how much more insecure your retirement would be if you had to depend completely on yourself to save for retirement. Maybe you could pull it off, but most people are better off with the guarantees of Social Security. Myth: Undocumented Immigrants Make Illegal Social Security Claims Tales that undocumented immigrants are soaking up Social Security benefits pick up steam periodically. As one popular version has it, Congress is about to consider a bill making benefits legal for workers who are in this country without authorization. This notion makes a lot of people angry. It’s also possible that the myth is spread when people stand in line at a Social Security office and make assumptions about others around them. Whatever the cause, the myth isn’t true. Plus, the myth obscures an irony: Undocumented workers actually add revenue to the system through the Social Security taxes that are taken out of their pay, while most never claim benefits. Under the law, undocumented immigrants are prohibited from claiming Social Security, as well as most other federal benefits. (Certain exceptions to this ban are allowed, such as for emergency medical treatment and emergency disaster relief.) In reality, some undocumented workers use fake Social Security numbers to get jobs. Payroll taxes are then deducted from their pay, just as they are from everyone else’s, and credited to the Social Security trust funds. Generally, these workers don’t collect benefits. In fact, SSA estimates that undocumented immigrants contributed $12 billion net — that is, revenue paid into the system over benefits paid out — into the Social Security funds in 2010. Myth: When Social Security Started, People Didn’t Even Live to 65 This observation shows how the “facts” can be misleading. Its underlying point — that Social Security was designed to pay little in benefits because people wouldn’t live long enough to collect them — isn’t true. Back when Social Security was created, life expectancy was shorter; a high rate of infant mortality meant that many people didn’t reach adulthood, and life expectancy at birth was especially low. (In 1930, it was about age 58 for men and 62 for women.) If you survived childhood, though, you could expect to live many more years. Among men who lived to 21, more than half were expected to reach 65. If you reached 65, your life expectancy came to about 78. (Women lived longer than men, as they still do.) Life expectancy at 65 has increased since the 1930s, to be sure, but much less dramatically than life expectancy at birth. The architects of Social Security knew the program would serve many millions of beneficiaries as time passed. They concluded that age 65 fit with public attitudes and could be financed through an affordable level of payroll taxes. The notion that Social Security was designed to cost little because people died early is simply not true. Myth: Congress Keeps Pushing Benefits Higher Than Intended Commentators sometimes assert that, over the years, generous lawmakers have hiked Social Security benefits far beyond the intention of the program’s founders. These heaped-on benefits, the story goes, explain why Social Security faces a future shortfall. It’s true that Congress has enhanced benefits on several occasions since the program’s initial approval in 1935. But such changes were consistent with the intent of Social Security as a social insurance program for all Americans. By the important measure of replacement rates (how much of your pre-retirement income you get back in benefits), Social Security has been stable over the decades. In fact, replacement rates are now declining because of the gradually increasing age for full retirement benefits that Congress approved in 1983. When Social Security first began, benefits were limited to payments to retirees. The intent of the program, however, was to provide meaningful social insurance for certain risks in life and to extend such protections to dependent family members. Family benefits (including for survivors) were added in 1939, followed later by coverage for disabled workers and their dependents. Automatic annual cost-of-living increases took effect in 1975 to replace the ad hoc approach to inflation adjustments that had been followed previously. The fallacy is that these reforms undermined Social Security’s long-term stability. Studies have shown that the addition of survivor and auxiliary benefits was offset to some degree by slower growth in benefits paid directly to workers. The anticipated shortfall reflects the fact that relatively fewer workers (because of a lower birthrate since the 1960s) will be supporting a bigger population of longer-living retirees in the coming years. Myth: Older Folks Are Greedy and Don’t Need All of Their Social Security As some tell it, most older Americans spend their days being pampered in posh retirement villas or country clubs. According to the stereotype, these misers have no concern for young people — they prefer to take advantage of Social Security benefits they don’t need. Talk about myths! Over half of older Americans depend on Social Security for at least 50 percent of their retirement income. The benefits keep more than one-third of older Americans out of poverty, often by a thin margin. Are benefits too generous? The average monthly payment for a retired worker is about $1,500 (as of 2020). That’s about $18,000 a year. Not only do many millions of people struggle with poverty and near poverty, but recent estimates paint a bleaker picture than had previously been thought. A U.S. Census Bureau alternative poverty measure in 2018 found a 13.6 percent poverty rate among Americans age 65 and up. Without income from Social Security, the poverty rate for older Americans would nearly triple — soaring to nearly 40 percent. Such figures make clear what common sense may tell you: A great many older people rely on Social Security to survive. The myth of greedy seniors is further contradicted by the interdependence of generations, which may be growing. An increasing number of older people are helping to support their adult children and grandchildren, and studies have shown a big rise in the number of interdependent, multigenerational families. A U.S. Census survey found that slightly more than 7 million children — nearly 10 percent of all kids — live in families that include a grandparent. Sometimes commentators try to argue that retirees and young people are at odds economically, as if older Americans are grabbing benefits they haven’t earned and don’t deserve. Think of the older people you know personally, people in your own family, and ask yourself: Does that ring true?

Article / Updated 03-22-2023

Copyright © 2020 AARP. Selecting the right time to begin Social Security benefits is a personal matter. Only you know what makes sense for your family. But you should keep in mind some key points when you make this critical choice: Make sure that you know when you qualify for full benefits, but remember, you have broad discretion about when to claim. Refer to the table. Full Retirement Age Based on Year of Birth Year of Birth* Full Retirement Age 1937 or earlier 65 years 1938 65 years and 2 months 1939 65 years and 4 months 1940 65 years and 6 months 1941 65 years and 8 months 1942 65 years and 10 months 1943–1954 66 years 1955 66 years and 2 months 1956 66 years and 4 months 1957 66 years and 6 months 1958 66 years and 8 months 1959 66 years and 10 months 1960 and later 67 years * If you were born on January 1, refer to the previous year. Full retirement age may be slightly different for survivor benefits. Know your benefit. By using the Social Security retirement calculators, you can quickly get an idea of the benefit you’d receive before, at, and after your full retirement age. Each year you wait to collect beyond your full retirement age will add 8 percent to your benefit. Each year you begin collecting before your full retirement age will reduce it between 5 percent and 7 percent. In other words, the earlier you retire, the less Social Security you get each month. For many people, that’s a powerful argument to hold off claiming benefits. Be realistic about your life expectancy. If you don’t like to think about how long you’ll live, get over it. Your life expectancy, and the possibility that you may exceed it, should be factors when you make plans for Social Security and retirement in general. Of course, no one knows how long you’ll live. But there’s plenty to consider: Do people in your family tend to live long? How would you grade your own lifestyle in terms of fitness, exercise, diet, and other personal habits that affect health? How healthy are you? Do you suffer from a chronic condition that is likely to shorten your life? Do you have a lot of stress? If so, do you have ways of managing that stress that make you feel better? Do you lug around a lot of anger and worry? If so, can you do anything about it? Think about all your sources of income and your expenses. Consider your savings, including pensions, 401(k)s, IRAs, and any other investments. Make realistic calculations about how much money you need. Look at several months of statements from your checking account and credit cards to review what you spend on and look for waste, while you’re at it. Ask yourself: Do you have the option to keep on working? Are you physically up to it? Think about your spouse. If you die first, it could determine how much your spouse gets for the rest of his or her life. Consider your spouse’s life expectancy and financial resources. Does he or she have a chance of living for many more years? If so, what are the household finances (beyond Social Security) to support a long life? Does the spouse have health issues that could cost a lot of money in the future? Husbands should bear in mind that wives typically outlast them by several years, because wives are typically a few years younger and because women have a longer life expectancy than men. Is that the case in your marriage? Talk it out if necessary. Couples should discuss this topic together, even though, in many marriages, one person may be the one who makes most of the financial decisions. You also may want to discuss your finances with a financial planner, especially if you’ve built up a nest egg and you have questions about how Social Security income will fit in. Be clear on the trade-offs. You can choose between a smaller amount sooner or a bigger amount later. It often makes sense to talk with a financial advisor, especially if you have investments to help support your lifestyle in retirement. Your decision about when to start retirement benefits will affect your family income for the rest of your life. Experts agree that it is often unwise to claim Social Security retirement benefits as soon as possible (age 62). But that is not always the case. Early claims may make sense for individuals who need the income for necessities and lack other financial resources to pay for them or who do not expect to live much longer. Social Security becomes more important the older you get You can’t make the stock market go up or control whether someone will give you a job. You can’t make your house jump in value if the whole neighborhood is sinking. You can’t go back in time and start an early nest egg if you spent like crazy when you were younger. You can’t make your employer keep a pension plan. And you can’t prevent the cost of living from rising. But you do have some influence over the size of your Social Security benefit, based on when you claim it. This matters for a little-recognized reason: The older you become, the more likely you are to depend on Social Security. The more years pass, the more you need Social Security’s protection against inflation, known as the cost-of-living adjustment. This provision is a big deal (even if the adjustment is small some years) because the effect of inflation over time can be drastic. At a rate of 3 percent inflation, the buying power of unprotected income plunges by half over a 20-year period. Even if you’re fortunate enough to get a private pension, it’s probably not shielded against inflation, and rising prices erode it over time. Other resources can boost your retirement security but are far from a sure thing. Earnings from even part-time work may go a long way. But work may become undesirable or physically difficult in later years. Older Americans have the highest rates of home ownership. But older people still may have mortgages and other debts to consider — their debt levels have actually risen over the years. Social Security benefits compare favorably with many other sources of income, because they’re protected partially from taxation. Most seniors don’t have to pay a penny on their benefits. Even the most affluent pay income taxes on 85 percent of their benefits, not 100 percent. A 2019 report by the Economic Policy Institute found that nearly half of working families have no savings at all. Findings like that help explain why so many people are afraid they’ll last longer than their money does. If their fears are borne out, Social Security will play a critical role in filling the vacuum.

Article / Updated 03-22-2023

Investing in rental real estate that you’re responsible for can be a lot of work. Think about it this way: With rental properties, you have all the headaches of maintaining a property, including finding and dealing with tenants, without the benefits of living in and enjoying the property. Unless you’re extraordinarily interested in and motivated to own investment real estate, start with and perhaps limit yourself to a couple of the much simpler yet still profitable methods discussed here. Find a place to call home During your adult life, you need to put a roof over your head. You may be able to sponge off your folks or some other relative or friend for a number of years to cut costs and save money. If you’re content with this arrangement, you can minimize your housing costs and save more for a down payment and possibly toward other goals. Go for it, if your friend or relative will! But what if neither you nor your loved ones are up for the challenge of cohabitating? For the long term, because you need a place to live, why not own real estate instead of renting it? Real estate is the only investment that you can live in or rent to produce income. You can’t live in a stock, bond, or mutual fund! Unless you expect to move within the next few years or live in an area where owning costs much more than renting, buying a place probably makes good long-term financial sense. In the long term, owning usually costs less than renting, and it allows you to build equity in an asset. Think carefully before converting your home into a rental If you move into another home, turning your current home into a rental property may make sense. After all, it saves you the time and cost of finding a separate rental property. Unfortunately, many people hold on to their current home for the wrong reasons when they buy another. Homeowners often make this mistake when they must sell their homes in a depressed market (such as the one that existed in many areas in the late 2000s). Nobody likes to sell their home for less than they paid for it, so some owners hold on to their homes until prices recover. If you plan to move and want to keep your current home as a long-term investment property, you can. But turning your home into a short-term rental is usually a bad move for the following reasons: You may not want the responsibilities of a landlord, yet you force yourself into the landlord business when you convert your home into a rental. If the home eventually does rebound in value, you owe tax on the profit if your property is a rental when you sell it and you don’t buy another rental property. You can purchase another rental property through a 1031 exchange to defer paying taxes on your profit. Real estate investment trusts Real estate investment trusts (REITs) are entities that generally invest in different types of property, such as shopping centers, apartments, and other rental buildings. For a fee, REIT managers identify and negotiate the purchase of properties that they believe are good investments, and then they manage these properties, including all tenant relations. Thus, REITs are a good way to invest in real estate if you don’t want the hassles and headaches that come with directly owning and managing rental property. Surprisingly, most books and blogs that focus on real estate investing neglect REITs. Why? I’ve come to the conclusion that they overlook these entities for the following reasons: If you invest in real estate through REITs, you don’t need to read a long, complicated book on real estate investment or keep coming back to a blog. Therefore, books often focus on more complicated direct real estate investments (where you buy and own property yourself). Real estate brokers write many of these books. Not surprisingly, the real estate investment strategies touted in these books include and advocate the use of such brokers. You can buy REITs without real estate brokers. Blogs and websites aren’t much better as they are often run by folks selling something else like a high-priced seminar or other direct investment “opportunity.” A certain snobbishness prevails among people who consider themselves to be “serious” real estate investors. These folks thumb their noses at the benefit of REITs in an investment portfolio. One real estate writer/investor went so far as to say that REITs aren’t “real” real estate investments. Please. No, you can’t drive your friends by a REIT to show it off. But those who put their egos aside when making real estate investments are happy that they considered REITs, and have enjoyed annualized gains similar to stocks in general over the decades. You can research and purchase shares in individual REITs, which trade as securities on the major stock exchanges. An even better approach is to buy a mutual fund or exchange-traded fund that invests in a diversified mixture of REITs. In addition to providing you with a diversified, low-hassle real estate investment, REITs offer an additional advantage that traditional rental real estate doesn’t: You can easily invest in REITs through a retirement account (for example, an IRA). As with traditional real estate investments, you can even buy REITs, mutual fund REITs, and exchange-traded fund REITs with borrowed money. You can buy with 50 percent down, called buying on margin, when you purchase such investments through a non-retirement brokerage account.

Article / Updated 03-22-2023

Even though your home consumes a lot of dough (mortgage payments, property taxes, insurance, maintenance, and so on) while you own it, it can help you accomplish important financial goals: Retiring: By the time you hit your 50s and 60s, the size of your monthly mortgage payment, relative to your income and assets, should start to look small or nonexistent. Lowered housing costs can help you afford to retire or cut back from full-time work. Some people choose to sell their homes and buy less-costly ones or to rent out the homes and live on some or all of the cash in retirement. Other homeowners enhance their retirement income by taking out a reverse mortgage to tap the equity that they’ve built up in their properties. Pursuing your small-business dreams: Running your own business can be a source of great satisfaction. Financial barriers, however, prevent many people from pulling the plug on a regular job and taking the entrepreneurial plunge. You may be able to borrow against the equity that you’ve built up in your home to get the cash you need to start your own business. Depending on what type of business you have in mind, you may even be able to run your enterprise from your home. Financing college/higher education: It may seem like only yesterday that your kids were born, but soon enough they’ll be ready for an expensive four-year undertaking: college. Of course, there are alternatives. Borrowing against the equity in your home is a viable way to help pay for your kids’ higher-education costs. Perhaps you won’t use your home’s equity for retirement, a small business, educational expenses, or other important financial goals. But even if you decide to pass your home on to your children, a charity, or a long-lost relative, it’s still a valuable asset and a worthwhile investment. The decision of if and when to buy a home can be complex. Money matters, but so do personal and emotional issues. Buying a home is a big deal — you’re settling down. Can you really see yourself coming home to this same place day after day, year after year? Of course, you can always move, but doing so, especially within just a few years of purchasing the home, can be costly and cumbersome, and now you’ve got a financial obligation to deal with. The pros and cons of ownership Some people — particularly enthusiastic salespeople in the real estate business — believe everybody should own a home. You may hear them say things like “Buy a home for the tax breaks” or “Renting is like throwing your money away.” The bulk of home ownership costs — namely, mortgage interest and property taxes — are tax-deductible, subject to limitations. However, these tax breaks are already largely factored into the higher cost of owning a home. So, don’t buy a home just because of the tax breaks. If such tax breaks didn’t exist, housing prices would be lower because the effective cost of owning would be so much higher. I wouldn’t be put off by tax reform discussions that mention reducing or even eliminating home-buying tax breaks — the odds of such changes passing are slim to none. Renting isn’t necessarily equal to “throwing your money away.” In fact, renting can have a number of benefits, such as the following: In some communities, with a given type of property, renting is less costly than buying. Happy and successful renters I’ve seen include people who pay low rent, perhaps because they’ve made housing sacrifices. If you can sock away 10 percent or more of your earnings while renting, you’re probably well on your way to accomplishing your future financial goals. You can save money and hopefully invest in other financial assets. Stocks, bonds, and mutual and exchange-traded funds are quite accessible and useful in retirement. Some long-term homeowners, by contrast, have a substantial portion of their wealth tied up in their homes. (Remember: Accessibility is a double-edged sword because it may tempt you as a cash-rich renter to blow the money in the short term.) Renting has potential emotional and psychological rewards. The main reward is the not-so-inconsequential fact that you have more flexibility to pack up and move on. You may have a lease to fulfill, but you may be able to renegotiate it if you need to move on. As a homeowner, you have a major monthly payment to take care of. To some people, this responsibility feels like a financial ball and chain. After all, you have no guarantee that you can sell your home in a timely fashion or at the price you desire if you want to move. Although renting has its benefits, renting has at least one big drawback: exposure to inflation. As the cost of living increases, your landlord can keep increasing your rent (unless you live in a rent-controlled unit). If you’re a homeowner, however, the big monthly expense of the mortgage payment doesn’t increase, assuming that you buy your home with a fixed-rate mortgage. (Your property taxes, homeowners insurance, and maintenance expenses are exposed to inflation, but these expenses are usually much smaller in comparison to your monthly mortgage payment or rent.) Here’s a quick example to show you how inflation can work against you as a long-term renter. Suppose you’re comparing the costs of owning a home that costs $200,000 to renting a similar property for $1,000 a month. (If you’re in a high-cost urban area and these numbers seem low, please bear with me and focus on the general insights, which you can apply to higher-cost areas.) Buying at $200,000 sounds a lot more expensive than renting for $1,000, doesn’t it? But this isn’t an apples-to-apples comparison. You must compare the monthly cost of owning to the monthly cost of renting. You must also factor the tax benefits of home ownership in to your comparison so you compare the after-tax monthly cost of owning versus renting (mortgage interest on up to $750,000 of mortgage debt and property taxes up to $10,000 worth per year when combined with other state and local taxes are tax-deductible). The figure does just that over 30 years. As you can see in Figure 10-1, although owning costs more in the early years, it should be less expensive in the long run. Renting is costlier in the long term because all your rental expenses increase with inflation. Note: I haven’t factored in the potential change in the value of your home over time. Over long periods of time, home prices tend to appreciate, which makes owning even more attractive. The example in Figure 10-1 assumes that you make a 20 percent down payment and take out a 4 percent fixed-rate mortgage to purchase the property. It also assumes that the rate of inflation of your homeowners’ insurance, property taxes, maintenance, and rent is 3 percent per year. I’ve assumed that the person is in a moderate federal income tax bracket of 24 percent and about half their mortgage interest and property taxes are effectively reducing their tax burden. In the absence of having enough such deductions to be able to itemize deductions, federal income tax filers now qualify for larger so-called standard deductions. If inflation is lower, renting doesn’t necessarily become cheaper in the long term. In the absence of inflation, your rent should escalate less, but your home ownership expenses, which are subject to inflation (property taxes, maintenance, and insurance), should increase less, too. And with low inflation, you can probably refinance your mortgage at a lower interest rate, which reduces your monthly mortgage payments. With low or no inflation, owning can still cost less, but the savings versus renting usually aren’t as dramatic as when inflation is greater. Recouping transaction costs Financially speaking, I recommend that you wait to buy a home until you can see yourself staying put for a minimum of three years. Ideally, I’d like you to think that you have a good shot of staying in the home for five or more years. Why? Buying and selling a home cost big bucks, and you generally need at least five years of low appreciation to recoup your transaction costs. Some of the expenses you face when buying and selling a home include the following: Inspection fees: You shouldn’t buy a property without thoroughly checking it out, so you’ll incur inspection expenses. Good inspectors can help you identify problems with the plumbing, heating, and electrical systems. They also check out the foundation, roof, and so on. They can even tell you whether termites are living in the house. Property inspections typically range from a few hundred dollars up to $1,000+ for larger homes. Loan costs: The costs of getting a mortgage include items such as the points (upfront interest that can run 1 to 2 percent of the loan amount), application and credit report fees, and appraisal fees. Title insurance: When you buy a home, you and your lender need to protect yourselves against the chance — albeit small — that the property seller doesn’t actually legally own the home you’re buying. That’s where title insurance comes in — it protects you financially from unscrupulous sellers. Title insurance costs vary by area; 0.5 percent of the purchase price of the property is about average. Moving costs: You can transport all of your furniture, clothing, and other personal belongings yourself, but your time is worth something, and your moving skills may be limited. Besides, do you want to end up in a hospital emergency room after being pinned at the bottom of a staircase by a runaway couch? Moving costs vary wildly, but you can count on spending hundreds to thousands of dollars. (You can get a ballpark idea of moving costs from a number of online calculators.) Real estate agents’ commissions: A commission of 5 to 7 percent of the purchase price of most homes is paid to the real estate salespeople and the companies they work for. Higher priced homes generally qualify for lower commission rates. On top of all these transaction costs of buying and then selling a home, you’ll also face maintenance expenses — for example, fixing leaky pipes and painting. To cover all the transaction and maintenance costs of home ownership, the value of your home needs to appreciate about 15 percent over the years that you own it for you to be as well off financially as if you had continued renting. Fifteen percent! If you need or want to move elsewhere in a few years, counting on that kind of appreciation in those few years is risky. If you happen to buy just before a sharp rise in housing prices, you may get this much appreciation in a short time. But you can’t count on this upswing — you’re more likely to lose money on such a short-term deal. Some people invest in real estate even when they don’t expect to live in the home for long, and they may consider turning their home into a rental if they move within a few years. Doing so can work well financially in the long haul, but don’t underestimate the responsibilities that come with rental property.

Article / Updated 03-16-2023

You don’t have to sweat out the dog days of summer, even when cutting back on your awesome, home-cooling air conditioning to save money. You can stay cool, even when it’s hot outside. Add insulation to your home. First insulate your attic floor, and then when time and money allow, add insulation to your basement, exterior walls, floors, and crawl spaces (in that order). Improve attic ventilation. Adequate ventilation under the eaves allows cooler air to enter and circulate throughout the attic. If you don’t have a permanent exhaust fan, you can set a box fan with the airflow pointed outward to pull the hot air out of the house. Shade your house from the sun. If your house isn’t shaded by trees, install awnings over any windows that are exposed to direct sun during the day. Cover your windows. Windows are a major source of heat during the summer. Reduce the heat coming in through your windows by closing the drapes during the day, adding reflective window tint to southern windows, and hanging old-fashioned bamboo shades outside. Make your air conditioner work less. If you use an air conditioner to cool your house, turn the thermostat up a bit higher than the temperature you usually set. Also, set the temperature higher for times when you’re not there. Use fans to circulate air. Moving air feels several degrees cooler than still air. Reduce how much heat you create inside your house. Use appliances other than the stove and oven to cook (such as the microwave, slow cooker, electric skillet, or toaster oven). Don’t use the heat setting on your clothes dryer.

Cheat Sheet / Updated 03-09-2023

An estate plan, including a last will and testament, protects your family and finances after you die. Your first step in estate planning is to write a comprehensive will that moves smoothly through the probate process. Make sure you're aware of current estate taxes that may influence your planning and how insurance factors into your estate plan. Various types of trusts are available; do some research to find out whether setting up a trust is the way to go and consider some special circumstances that may arise and how they can affect your estate planning.

Cheat Sheet / Updated 03-08-2023

So, you’ve heard about Bitcoin and other cryptocurrencies, and you’re ready to add these new kids on the block to your investment portfolio — that’s great! To make the best decisions for your portfolio, educate yourself on the basics of cryptocurrencies and what you need to get started. Also, be sure to do your homework on a crypto’s fundamentals before adding any new assets to your portfolio.