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First Steps for Your Baby’s Financial Future

First Steps for Your Baby’s Financial Future

Dear Carrie: I’ve just had a baby! Things are pretty crazy in my house right now, but I want to be sure I give my daughter every opportunity I can. I have a little bit of money saved up, but I’m uncertain what the best use is for it. Should I buy a savings bond, a CD, open an investment account or put it all in a college fund? — A Reader

Dear Reader: First, congratulations to both you and your daughter. I’d say she’s pretty fortunate to have a mother who, in the midst of all the new baby responsibilities, is already thinking about the future. As a parent myself, I can tell you that the future — and all the related expenses — comes all too quickly!

Being ready for those expenses goes hand-in-hand with smart saving habits, so it’s great that you’ve already begun. Whatever the future holds, continuing to save will be the cornerstone of providing a solid financial foundation for your daughter.

In terms of what to do with the money you’ve already saved, that depends on how you expect to use it. While college is often a primary goal, there will be a number of interim financial goals that you’ll want to meet as your daughter grows up. Let’s look at how you might plan for each.

Consider a 529 Account for College Saving

When it comes to planning for higher education, a tax-advantaged college savings account such as a 529 Plan is often the best choice. This is a state-sponsored program that lets parents, relatives and friends invest for a child’s college education. The account belongs to you, not your child, and you remain in control of the money.

Usually you have a choice of professionally managed investment portfolios. Potential earnings grow tax-deferred. And you pay no federal taxes on earnings as long as you use the money for qualified higher education expenses such as tuition, books, and room and board.
Opening minimums vary by state, but can be as low as $25. You’re not limited to your own state’s 529, so you’re free to shop around at different financial institutions (though you should first consider any state tax benefits your own state’s plan may offer). Plus, you can set up automatic contributions — say $50 or $100 a month — making it easy to keep saving.
If grandparents want to help, gift tax rules make it easy for them to contribute larger amounts. This can benefit their estate planning as well as your college planning.

Designate Different Accounts for Other Needs
While a college account may be at the top of your list, there will be other opportunities — say, music lessons or private schools — that you want to provide for your daughter along the way. To save for these eventualities, consider a couple of other types of accounts.
–Custodial Brokerage Account: This is a brokerage account managed by a parent or guardian on a child’s behalf. It offers minor tax advantages and has minimal restrictions on how the money can be spent as long as it’s for the benefit of the child beyond daily living expenses. Unlike a 529, there are no recommended investment portfolios. You can choose from a wide variety of investments — stocks, bonds, mutual funds — according to your feelings about risk. A key difference is that the child takes control of the money at the “age of majority,” which is 18, 21 or 25 depending on state rules. That’s something to think about.
–Regular Brokerage Account: This is a taxable account that you could open in your own name and earmark the savings and investments for your daughter. You’d then have the control and freedom to use the money as you see fit.
–Passbook Savings Account: This could be for short-term savings needs. It’s also an account your daughter could contribute to, as she gets older.
As for investments, equities generally have the greatest potential for long-term growth.  Realize, though, that because stocks are volatile, they should be reserved for goals beyond a 3-5 year time frame. For shorter-term goals, CDs and Savings Bonds are safer; the downside is that they carry very low interest rates.

Create a Plan
If you have a savings plan, putting money aside will be easier, so here’s what I suggest right now. Assuming college is your first goal, put the money you currently have saved in a college savings account and commit to adding more each month. There are a number of online calculators to help you determine a realistic monthly savings goal.
As you’re able to save more, consider a brokerage account or passbook savings account for other types of expenses. Once you know your monthly college savings goal, you might also establish a monthly savings goal for this account and put it on automatic.

Don’t Forget your Daughter’s Financial Education
As your daughter gets older, be sure to involve her in the process. Help her create her own savings goals and have her save a portion of any money she gets. This will get her into the savings habit early, teach her how money grows, and help her make good spending decisions. Because no matter how much you save for your child, teaching her to be financially independent is really the greatest opportunity you can give her.
Carrie Schwab-Pomerantz, CERTIFIED FINANCIAL PLANNER(tm), is president of Charles Schwab Foundation and author of The Charles Schwab Guide to Finances After Fifty, available in bookstores nationwide. Read more at http://schwab.com/book. You can e-mail Carrie at askcarrie@schwab.com. This column is no substitute for an individualized recommendation, tax, legal or personalized investment advice. Where specific advice is necessary or appropriate, consult with a qualified tax advisor, CPA, financial planner or investment manager. To find out more about Carrie Schwab-Pomerantz and read features by other Creators Syndicate writers and cartoonists, visit the Creators Syndicate website at www.creators.com.
COPYRIGHT 2015 CHARLES SCHWAB & CO., INC. MEMBER SIPC.
DIST BY CREATORS SYNDICATE, INC. (0316-1055)

Photo: U.S. Republican presidential candidate Gov. John Kasich (R-OH) holds a baby while former Republican presidential nominee Mitt Romney (R) speaks at a campaign rally at the MAPS Air Museum in North Canton, Ohio March 14, 2016. REUTERS/Aaron P. Bernstein

Getting Started: Are You Saving Enough For Retirement?

Getting Started: Are You Saving Enough For Retirement?

By Carolyn Bigda, Chicago Tribune (TNS)

Saving for retirement is no easy task, but a new study says you don’t need to be a Powerball winner to put away enough cash for old age.

According to the study by Fidelity Investments, 45 percent of those surveyed in 2015 were on track to cover essential expenses during their retirement, up from 38 percent in 2013.

Although that’s still less than half the population, the percentage is heading in the right direction. One reason: People are saving more.

From 2013 to 2015, the median savings rate among survey participants jumped from 7.3 percent to 8.5 percent.

Millennials, those age 25 to 34, made the biggest leap of any group, with a median savings rate of 7.5 percent in 2015, up from 5.8 percent two years before. (The study was based on responses from 4,650 people age 25 to 75 who earn at least $20,000 annually.)

For young investors, a higher savings rate is especially beneficial.

“They have time on their side and a long work history ahead of them,” said John Sweeney, executive vice president of retirement and investing strategies at Fidelity. “So the biggest thing that they can do is to increase their savings rate.”

Although millennials are socking away more, they still fall short of the 15 percent savings rate that many financial advisers, along with Fidelity, recommend for retirement.

“If millennials doubled their savings rate, it would have a very significant improvement on their retirement preparedness,” Sweeney said.

You can see the impact for yourself by using Fidelity’s Retirement Score calculator. The calculator will ask your age, annual salary, how much you’ve saved for retirement so far and a few other financial details. It also makes assumptions about the future, like market returns and Social Security benefits.

In the end, you get a score, which is then ranked on a scale of colors ranging from red (the worst) to dark green (the best).

If your score puts you in dark green, you should be able to cover all of your essential costs in retirement, plus fun stuff like travel. Land in the red, and you’re at risk of not being able to cover even your basic needs.

The 15 percent recommended savings rate includes any employer match you might get in your 401(k) or other company-sponsored retirement plan. The closer you can get to — or even exceed — that goal, the better off you’ll be.

Take a 27-year-old today with $10,000 in retirement savings and an annual salary of $50,000. His score lands in the red if he saves $300 per month and retires at age 67, when he is eligible for full Social Security benefits.

But if he saves twice as much per month, his score changes to light green. (Light green means you can cover your essential expenses in retirement but not all of your discretionary ones.)

If you can’t save more for retirement, changing your portfolio’s asset allocation can also brighten your financial future.

“It’s not as impactful as other steps,” Sweeney said, “but it does make a difference.”

In the example above, the 27-year-old had an allocation of 70 percent stocks and 30 percent bonds and cash. But if the portfolio mix was too conservative — say, with only 20 percent in stocks and the rest in bonds and cash — his score fell. Likewise, the score took a hit if he invested 100 percent in stocks.

For a young investor, Fidelity recommends putting 90 percent in stocks and the remaining 10 percent in bonds.

ABOUT THE WRITER

Carolyn Bigda writes Getting Started for the Chicago Tribune. yourmoney@tribune.com.

©2016 Chicago Tribune. Distributed by Tribune Content Agency, LLC.

Photo: Retirement Plan. American Advisors Group via Flickr

 

3 Tips To Build Up An Emergency Fund This Year

3 Tips To Build Up An Emergency Fund This Year

By Gina Horkey, GOBankingRates.com (TNS)

Life is full of twists and turns. So when an unforeseen home repair, illness or job loss happens, having a stash of cash set aside can make the difference between a financial disaster and a minor inconvenience.

However, roughly one-third of American adults (nearly 72 million people) have no emergency savings to fall back on if they had to deal with a financial crisis, according to a survey released by NeighborWorks America, a community development organization. A recent survey by GOBankingRates found that 62 percent of Americans have less than $1,000 in savings.

Although spare cash might sometimes seem hard to come by, building emergency savings doesn’t have to be difficult. Here are three easy tricks you can use to quickly save for an emergency fund in 2016.

SWITCH TO A HIGH-YIELD SAVINGS ACCOUNT

Typically, the best place to keep an emergency fund is in a savings account with a bank or credit union. These accounts offer easier access to your money than certificates of deposit, or CDs, but not so easy that you’re tempted to access the funds on a whim. By keeping your money in a savings account, it remains safe, and you’ll earn better interest than you would on your checking account — and certainly better than if you kept it under your mattress.

When it comes to savings yields, all accounts are not created equal. Current annual percentage yields on a basic savings account at many banks range anywhere from 0.01 percent to 0.25 percent. Although this is better than earning nothing, your money is not growing as fast as it could. There are, however, a few banks that offer higher-than-average savings account rates. For example, the savings account from MySavings Direct offers an impressive 1 percent yield.

If you were to put $10,000 in a MySavings Direct savings account and let it sit for a year, you would earn $100 in interest. If your interest rate was only 0.01 percent, you would earn $1; with a 0.25 percent rate, you would earn $25.

By moving your emergency savings into a high-yield savings account, you have the advantage of earning a higher interest rate and growing your funds faster, while still enjoying the safety and accessibility of a simple savings account.

LEVERAGE CASH-BACK REWARDS CARDS

One of the biggest reasons to have an emergency fund is to avoid going into debt when you have an unexpected expense. So it might sound counterintuitive to suggest using credit cards to build up your emergency fund, but that’s just what John Rosenfeld, head of Everyday Banking at Citizens Bank, suggested you can do.

“Using a cash-back rewards card for your everyday purchases can help you save money, provided you pay off your full balance each month,” he said. Credit cards can offer up to 1.8 percent cash back on your purchases, which can quickly add to your savings balance. Plus, a credit card that gives you an extra bonus can help grow your savings as well, he said.

Let’s say you have Chase’s Freedom card, which offers 5 percent cash back on up to $1,500. If you spend $1,500, that’s an extra $75 you’ll get back. You can also get unlimited 1 percent cash on all other purchases, plus a $150 bonus after you spend $500 on purchases in the first three months following your account’s opening. So if you charge $10,000 on your credit card on all other purchases in 2016, you can potentially have at least $325 to add to your emergency savings fund.

ELIMINATE ‘SLOW LEAKS’

Bank fees are some of the most common, yet unnecessary, expenses paid by consumers, according to Benjamin Glaser at DealNews.com. Take a look at the average fee for these three banking services, according to Money-Rate.com’s mid-2015 survey of bank fees:

—Checking account monthly fee: $13.09

—ATM fee for non-customers: $2.71

—Overdraft fee: $32.44

Getting rid of just the most common three fees each month — ATM, overdraft and monthly maintenance — could save you more than $500 a year. Finding a fee-free checking account could save you more than $157 alone.

Other common fees you might be paying include 401(k) fees, investment fees and cash advance fees. Check with your financial planner or financial institution to find out if you’re overpaying in fees. A typical American who starts earning a median salary at age 25 is expected to pay $138,336 in 401(k) fees over their lifetime, according to The Motley Fool. Since the median expected retirement age is 65, according to a Gallup poll, that’s nearly $3,460 a year for 40 years.

Glaser also thinks that the new year is a perfect time to review your phone bill for additional ways to save. “Carriers have introduced a confusing array of new payment options over the last year, but if you know your phone usage habits well, you could save money,” he said. With low-cost providers like Republic Wireless and Ting offering monthly service for around the price of a few cups of coffee, now’s the time to really take advantage of the potential cost-savings.

Jeffrey Christakos of Westfield Wealth Management found his money leaking in the form of eating out for lunch. He suggested making lunches at the beginning of the week and freezing them until you plan to use them. “We would take a sandwich with us to work and let it thaw out during the morning hours,” he said. “Otherwise, we would have gone out to lunch and eaten random meals at expensive prices.”

It can be well worth your time to detect and eliminate slow leaks. With a little legwork, your annual savings could be more than a few thousand dollars.

GOBankingRates.com is a leading portal for personal finance news and features, offering visitors the latest information on everything from interest rates to strategies on saving money, managing a budget and getting out of debt.

© 2016 GOBankingRates.com, a ConsumerTrack web property. Distributed by Tribune Content Agency, LLC.

Photo: Your financial life raft. Chris Potter via Flickr

 

How Your Ego Is Sabotaging Your Retirement

How Your Ego Is Sabotaging Your Retirement

By Gina Horkey, GOBankingRates.com (TNS)

As diligent as you have been about saving for retirement, your ego might have been quietly working against you the whole time. Even the best-laid plans fail, and your retirement plan is no exception. Here are three ways your ego is rearing its ugly head and how you can regain control of your financial plan before you retire.

UNREALISTIC EXPECTATIONS

Many newly retired people find that their reality doesn’t live up to the grandiose dreams they had for their retirement. As you save for retirement, you should periodically give yourself a reality check.

Statistics show that you should lower your expectations and save more aggressively. According to a survey conducted by the Insured Retirement Institute, only 27 percent of baby boomers are confident that they will have enough money to last through their retirement (which is down from 33 percent a year ago).

If you find yourself part of this 27 percent, you will want to ensure that your confidence is not unfounded. One way to make sure that you are adequately prepared is to calculate your projected expenses — the costs to maintain your current home, transportation, health care, and other predictable expenses — and determine whether any changes to your current budget are necessary.

Don’t let overconfidence wrongly convince you that you don’t need to downsize your lifestyle. Few people have the ability to replace 100 percent of their preretirement income, but by eliminating nonessential expenses and saving for monthly bills and emergencies, your likelihood of building a substantial nest egg is greatly increased.

NOT MAKING TIME FOR TOUGH CONVERSATIONS

Doting on your grandchildren is easy. Having an honest conversation with your adult children about what your financial transition into retirement will really look like can be difficult.

It’s hard to go from raising your children to discussing finances with them — and perhaps even heeding their advice — but it helps to be candid with them. If your situation looks bleak, they might be able to help.

According to the Pew Research Center, nearly 23 percent of adults with retired parents contributed some sort of financial assistance during 2012, and 72 percent of those adult children said their contributions were for ongoing expenses. Regardless of your comfort level with your retirement account balances or your and your family’s busy schedules, you need to make these conversations a priority. In the event that you’re not as ready for retirement as you think, or the market unexpectedly goes south, you might be faced with looking to your adult children for some form of support, whether it’s financial or logistical.

FEAR OF DIVERSIFICATION

Just because you’re heading toward retirement doesn’t mean you have to settle for the same low-risk investments that everyone else seems to be chasing since the recent market downturn. You also don’t want to expose yourself to unwarranted risks that you won’t have time to recover from, however. A 2015 report from Fidelity Investments showed that baby boomers are keeping too much of their assets in the stock market — in fact, 10 percent of people ages 55 to 59 have all of their 401(k) assets in stocks.

To maintain a comfortable standard of living and maximize your retirement benefits, it is beneficial to seek out low-cost investments that offer steady returns while minimizing short-term risks. Consult a financial advisor about the benefits of diversifying beyond traditional stocks and bonds. Options like index funds, exchange-traded funds and blue-chip dividend stocks can provide adequate returns along with favorable expense and fee structures that make them viable alternatives for boomers.

Gina Horkey writes for GOBankingRates.com (), a leading portal for personal finance news and features, offering visitors the latest information on everything from interest rates to strategies on saving money, managing a budget and getting out of debt.

© 2015 GOBankingRates.com, a ConsumerTrack web property. Distributed by Tribune Content Agency, LLC.

Photo: 401(K) 2012 via Flickr