The road to financial independence is not a simple one. Lisa Smith, writing for Investopedia, outline the issues and dilemmas we face on that journey in the following article. With over 20 years as a financial writer, Ms. Smith offers a very clear analysis of the pitfalls that can slow or even divert us on our way to financial freedom. FFN Editors
Two Roads: Debt Or Financial Independence?
- Get a job
- Start to save
- Get raises
- Save as salary increases
- Take advantage of dollar-cost averaging (DCA)
- Benefit from a bull market
- Hit magic number
It sounds simple and straightforward on paper, but in reality, earning a high income does not automatically translate into a high net worth. This article will explain why.
Income and Expenses
When most people are starting out, they rent a small apartment. Getting married or setting up a living arrangement with a significant other generally results in a higher income, but it is also likely to lead to the desire for more space – often at the cost of the desire to make maximum contributions to a pair of individual retirement accounts (IRAs) or 401(k) plans. Unfortunately,there are many things that people may not know about an IRA, and the opportunity to increase savings often takes a back seat as living accommodations are upgraded to a single family home.
After a decision is made to have children, buying a minivan, paying for clothes, toys, soccer, hockey, ballet, and other associated costs results in an increased outlay of cash, not only eliminating the ability to save more, but potentially resulting in a diminished savings rate. Having children can also result in moving to a larger home in a better school district and,the decision to pay for tuition at a private school, and then maybe even a college education. All of these things start to take precedent over funding your own retirement savings.
Lifestyle decisions can also have negative impacts on savings rates, even as income increases. Scrimping and saving simply isn’t fun. If we can afford to take a luxurious vacation, buy that sports car, upgrade the wardrobe, spend a weekend at the spa, buy that place at the beach or chalet in the mountains, don’t we deserve it for all the hard work we have done?
The desire to spend instead of save is also fostered by a quick look at the shenanigans on Wall Street and the poor investment returns in our portfolios. Anybody holding Enron, Worldcom or dozens of other failed firms in their portfolio aren’t likely to be singing the praises of savings. A look at most investment statements during a bear market also serves as a reminder that a 20% loss is not recovered by a 20% gain. If we’re going to be cheated by the firms we invest in and watch our portfolios decline in value even when we diversify, it’s easy to justify the purchase of something we will at least be able to enjoy in exchange for our money.
Geography can also work against the ability to save. In Silicon Valley, a modest ranch house can sell for $500,000. In New York City, private school tuition for three children can reach six figures and mortgage payments of $150,000 per year are not uncommon. Moving up in the world also places one in a different position on the socioeconomic scale.
If you are living the upscale lifestyle of an investment banker to the rich and famous, driving to a client meeting in a Ford Focus is out of the question. Similarly, if everyone in your social network has a housekeeper and vacations in the Hamptons, those items become an expected part of the lifestyle in order to maintain your social network and class. That correlation between standard of living vs. quality of life is very common.
The Eye of the Beholder
Although it might sound extravagant to those of us earning the national median of around $50,000 (according to Census Bureau figures), having more money (even much more money), doesn’t always put people farther ahead. In fact, those earning more almost always have a lifestyle that leaves them with more things to pay for. That said, before class envy takes hold, those of us at the lower end are also not skipping our lattes, nights on the town, cable television, cell phones, cigarettes, alcohol, new cars, and other nice-to-have-but not-strictly-necessary expenses.
In the end, everybody wants whatever they can afford, and instant gratification is a whole lot more fun than watching a quarterly brokerage statement for 20 years or more. As a result, most of us end up financing our lifestyles with debt. And many are worried that standard of living vs. quality of life is very common.
The Bottom Line
Sticking to the seemingly simple plan of earning more and saving more requires serious discipline and sacrifice. It means living below your means, regardless of the level of your means, and making savings a priority. If requires having a plan, saving and maximizing the amount you invest in our 401(k) and other savings vehicles before spending on the extras. It may not sound like fun, but years from now, when you look back at all the people who seemed to have it all but were really just getting by, you’ll be one of the ones laughing all the way to the bank
While the economy has improved considerably since the crisis years of 2007/2008, where exactly are we today? That is the question that Annalynn Kurtz examines in her article for CNN Money. Her assessment is revealing and thought-provoking.
Let us know your thoughts about this information in the Comment section at the end of this article. Also, please “Like” and “Share” this with others who are interested in achieving financial freedom. FFN Editors
“Recession ended 4 years ago: How far have we come?”
By Annalyn Kurtz, CNN Money, June 4, 2013: 9:24 AM ET
It’s been four years since the Great Recession officially ended. Stocks have fully recovered, but the job market hasn’t. Neither have home prices — but then again, who wants to get back to that unhealthy boom?
Here are the cold, hard facts on where the economy stands, according to the most recent data:
The S&P 500 lost more than half its value between December 2007 and March 2009. Since then, stocks have not only recovered their recession losses, but have also stretched to new record highs.
The jobs recovery has not been as robust. Rather, it’s been a slow, long haul. As the chart above shows, the U.S. economy lost nearly 8.8 million jobs between January 2008 and February 2010, but has since gained back only about 6.2 million jobs.
Meanwhile, the population has grown, and some job seekers have given up. As of April, 58.6% of the adult U.S. population had a job. The rate has barely budged in the last three years, and the last time it was that low was in 1983.
The average American is not yet earning the same income they did back in late 2007. Americans earned an average $32,700 a year as of April, about $184 less than in December 2007, after adjusting for inflation.
Part of what got us into this mess was the housing bubble. Many Americans were in over their heads, and found they were saddled with underwater mortgages after the bust. Since late 2008, households have been deleveraging. Now, the average American is $46,000 in debt — the lowest level since 2006. About 71% of that debt is tied up in mortgages.
Part of this deleveraging process stems from foreclosures and defaults on loans. Housing debt is back to its lowest level since 2006, and credit card debt has been declining. Student debt is bucking this trend, rising recently.
The housing market started recovering last year but remains far below boom levels, when average home prices peaked at $254,000 in 2005. The Federal Reserve is hoping record low-interest rates will spur more home-buying and boost the broader recovery.
(Disclaimer: The views in the above article are strictly those of the author. They do not necessarily represent those of FFN. Please use due diligence prior to applying any of the concepts, recommendations and/or in purchasing any products or services offered by the author). FFN Editors
Does your goal of retiring seem farther away than ever. Well, you aren’t alone. The reality for many is that normal retirement at age 65 is being postponed to some later date. As a result of the financial crisis of 2007/2008 and the widespread lack of retirement preparation, many have to work longer to reach the financial level necessary to retire.
Putting a retirement plan into effect is a critical step in making retirement a reality. Trent Hamm writing in The Simple Dollar outlines several steps that can get your plan underway. And, perhaps close to where it should be if it has been side-tracked.
Let us know your thoughts about this information in the Comments section at the end of this page. Also, please “Like” and “Share” this information with others you may be interested in achieving financial freedom. FFN Editors
How to Approach Retirement Catch-Up
By Trent Hamm for The Simple Dollar
December 10, 2013
It’s well established that if you start saving about 10 percent of your income for retirement starting at age 25, you’re going to be in excellent shape for retirement when you hit age 65. This fact should be emblazoned on every single college and trade school diploma issued in the United States today: start saving for retirement now, not later.
Unfortunately, that fact doesn’t represent reality. Quite a few of us didn’t save at all during our 20s, and some of us didn’t save during our 30s, either. All the time, I hear from readers in their late 30s or early 40s (or even later) who are just now realizing that they need to start saving for retirement or they’re going to work forever.
If this describes you, the obvious answer is to start saving immediately. Right now. If you’re reading this article and you’re a professional adult without any retirement plan in place, you need to start a retirement plan.
If your employer offers a 401(k) program with matching contributions, run (don’t walk) to the HR office and sign up for that plan. Contribute enough to get every dime of that matching money because it’s essentially free retirement savings for you. If your employer doesn’t offer matching in their 401(k) program, look into opening an individual retirement account. I recommend contributing 10 percent of your income to that IRA, for starters.
So, you’re saving. Now what? The first thing to think about is time. If you’re only contributing 10 percent of your income per year to a typical retirement fund, it’s going to take about 40 years of saving before you can safely retire. Like it or not, that’s the reality of it.
If you’re 30 when you start, that means you’re looking at retiring when you’re 70. If you’re 40 when you start, that means you’re looking at retiring when you’re 80.
Another problem is that simply doubling the contribution doesn’t mean that you can halve the time. You can’t expect to contribute 20 percent for 20 years and match what you would get out of 10 percent over 40 years. That would only work if you were getting no return on your money – in other words, if your retirement plan involves stuffing cash into a mattress.
Saving for retirement once you’re behind the curve looks quite scary. Thankfully, there are a few things you can do to help improve your situation.
1. Get a Social Security estimate. The average American earns 40 percent of his or her retirement income from Social Security benefits, so knowing what you have coming to you can go a long way toward soothing retirement fears. The Social Security Administration offers a calculator to help you figure out how much you’re going to receive in benefits. It’s a good idea to wait until you’re as old as possible to start collecting benefits so you can maximize the income.
2. Look for ways to boost your income. Many mid-career folks find opportunities for freelance work and side businesses that can supplement their current income. Instead of simply spending that money, however, channel all of it into retirement savings (or into a mix of retirement savings and debt repayment). If you’re unsure where to start, visit your local library for information on side businesses and freelance opportunities related to your career path.
3. Hike up your savings. If you wish to retire earlier than 40 years from now, you’re going to have to save more. That means stowing away a higher percentage of your income. A good quick rule to use is that for every 10 years you want to shave off your goal, you need to double how much you’re saving. If you want to make it in 30 years, shoot for 20 percent per year. Twenty years? You should be saving 40 percent of your income per year. You need that boost to make up for the time you lost.
4. Cut out unnecessary expenses. Finally – and this is the tough part – you may have to consider some cutbacks. If you’re living a lifestyle that makes saving for retirement inconceivable, then you’re simply living beyond your means. You can’t assume that your ship will come in someday and everything will be OK. Everyone has expenses that they can cut from their life.
The road to retirement is a challenging road – but it’s not an impossible one.
Trent Hamm is the founder of the personal finance website TheSimpleDollar.com, which provides consumers with resources and tools to make informed financial decisions
(Disclaimer: The views expressed in the above article are strictly those of the author. They do not necessarily represent those of FFN. Please use due diligence prior to applying the concepts, recommendations and/or in purchasing any products or services offered by the author) FFN Editors
A key component in achieving financial freedom is reducing and controlling debt. Some financial freedom seekers have been able to shrink debt to an absolute minimum…even to zero. Most of us, however, will have debt in our lives. Managing that debt becomes critical in our ability to realize financial independence.
Our featured article by the GreenPath organization addresses this issue. GreenPath Debt Solutions, a nationwide, non-profit credit counseling and education organization, has come up with a list of ways to work your way out of debt in the New Year.
Let us know your thoughts about this article. Also, please “Like” and “Share” this information with others who may be interested. FFN Editors
Quick Tips On Getting Debt Under Control In 2014
SOURCE: GreenPath Debt Solutions. (GreenPath Debt Solutions shares ways to tame credit card bills and other debts).
FARMINGTON HILLS, Mich., Dec. 18, 2013 /PRNewswire-USNewswire/ —
The New Year is only a few weeks away, and after the holiday gifts and decorations are packed away, mailboxes will soon be packed with credit card bills.
“In early January, we really see a surge in calls from people worried about their holiday bills,” said David Flores, GreenPath personal finance counselor. “Once the excitement of the holidays has passed, they realize they need to get serious about paying off their debt in the New Year.”
Plan Your Finances – This is an important first step to take in the New Year. An active financial plan is a tool that helps reduce spending and increase savings.
“You shouldn’t simply be content with having money left over in your checking account, at the end of each month,” said Flores. Developing a plan will allow more financial freedom and enable you to get through financial emergencies.
Create a Budget – A budget forces you to get your spending under control, and to “live below your means,” which is exactly what you’ll need to do to start eliminating your debt. Making little adjustments to your lifestyle can add up to big savings. “Be sure to give yourself a bit of breathing room in your budget for unexpected expenses,” said Flores.
Prioritize Your Debts – “Debts that take first priority are the ones directly related to your ability to survive, such as mortgages or auto loans,” said Flores. “If you don’t pay these loans, you can face foreclosure or repossession.” Flores recommends prioritizing payments into three categories: high priority (housing, child support, utilities, car loans); medium priority (personal secured loans, student loans, home improvement loans); and low priority (loans for household goods, credit cards, doctor’s bills).
Estimate Available Income – Income can be a weekly paycheck, pensions, public assistance and investments. After you subtract taxes and other deductions from your total income, you will have your available income that you can work with each month.
Check Your Spending – Identify your past spending patterns by reviewing cancelled checks, receipts, and charge statements, for the past two to three months. Place expenses in “fixed” or “flexible” categories. Fixed expenses occur at specific times and rarely change (car note or mortgage). Flexible expenses fluctuate from month to month, and may possibly be altered to balance the plan (credit card bills, electric bill).
Use Cash for New Purchases – Unless you pay off the entire balance every month, you are probably paying interest on new purchases from the date of the purchase. If you stop using your credit cards all together, you will be able to reduce your debt more quickly. Because of compounded daily interest, it is far better to use cash for the things you need and adjust your budget to accommodate those expenses, rather than to use credit cards and then struggle to send large payments.
Review Your Plan – You should review your plan about every two to three months. Do not be surprised if, in the beginning, actual expenses are quite different from what you initially listed. Your plan will become more realistic as you continue the process.
Planning ahead early in the New Year can set you on a path to being debt-free in 2014.
For more information on GreenPath, or to receive a free counseling session and budget plan, log on to http://www.greenpath.org or call (866) 648-8122.
GreenPath Debt Solutions is a nationwide, non-profit financial organization that assists consumers with credit card debt, housing debt and bankruptcy concerns. Our customized services and attainable solutions have been helping people achieve their financial goals since 1961. Headquartered in Farmington Hills, Michigan, GreenPath operates 50 full-time branch offices in 11 states.
They also deliver licensed services throughout the United States over the Internet and telephone. GreenPath is a member of the National Foundation for Credit Counseling (NFCC). Our professional counselors are certified by the NFCC, and we are accredited by the Council on Accreditation (COA). For more information, visit us at http://www.greenpath.org.
©2012 PR Newswire. All Rights Reserved.
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(Disclaimer: The views in the above article are strictly those of the author. They do not necessarily represent those of FFN. Please us due diligence in applying any of the concepts, recommendations and/or in the purchase of products or services offered by the author). FNN Editors
Wondering what the economy will look like in 2014? It’s certainly an important consideration for planning your 2014 financial independence strategies. Here’s a helpful tool for that effort. The Bureau of Labor Statistics has released its forecast of things to come in 2014 in its “Economic Outlook Through 2014”.
While as the name indicates this is the Bureau’s best estimate of the direction of the U.S. economy, it’s worth taking into consideration.
Let us know your thoughts regarding this information in the comments section below. Also, please click “Like” and “Share” this information with others you think may be interested in learning the possible direction of the economy next year.
Economic Outlook Through 2014
Source: Bureau of Labor Statistics, Monthly Labor Review, Nov. 2005, http://www.bls.gov/opub/mlr/mlrhome.htm
Every two years the Bureau of Labor Statistics (BLS) publishes its latest projections on the structure of the economy, labor force demographics, and future job growth. The following is a summary of the most recent BLS projections, which were released in Nov. 2005.
Slow and Steady Expansion
Following very strong growth over the latter half of the 1990s, U.S. economic performance slowed in 2000 and tipped into a recession in 2001. During the 3-year period ending in mid-2003—a period including the bursting of the high-tech bubble, the terrorist attacks of 9/11, significant losses of stock market wealth, the continuing reports of corporate accounting scandals, and the wars in Iraq and Afghanistan—the economy struggled with below-trend growth, accompanied by a rising unemployment rate.
Following the second quarter of 2003, the U.S. economy once again began to grow more strongly. The BLS expects the gross domestic product (GDP) to reach $14.7 trillion in chained 2000 dollars by 2014, an increase of $3.9 trillion over the 2004–14 span. This translates to an average rate of growth for real GDP of 3.1% per year over the period, a tenth point lower than the historical rate of 3.2% from 1994 to 2004.
Boomers Start to Retire
The U.S. labor force is projected to reach 162.1 million in 2014, an increase of almost 15 million employees from the 2004 labor force. This represents an annual growth rate of 1.0%, down from 1.2% in the previous decade. The aging of the baby boomers—the generation born between 1946 and 1964—will have a profound effect. The labor force will continue to age, with the annual growth rate of the 55-and-older group projected to be 4.1%.
By contrast, the annual growth rate of the 25-to-54-year-olds in the labor force will be 0.3%. While the labor-force participation in this age group is expected to rise during this period, this will be offset by the lower population of the generations following the baby boom. The 16-to-24-year-old labor force will be essentially flat, with its participation rate actually decreasing. This is largely because more young people than ever are continuing their educations—in high school, summer school, and college—rather than entering the labor force.
In addition to growing older, the labor force is projected to become more diverse. The BLS expects increases in black, Asian, and especially Hispanic workers; the last is expected to jump from 13.1% of the labor force in 2004 to 15.9% in 2014.
Spending and Saving
Personal consumption spending is expected to grow at an average annual rate of 2.8% from 2004 to 2014. As a percentage of personal income, however, it will drop from 84.6% in 2004 to 82.0% in 2014. The BLS expects that the personal savings rate will slowly rise from 1.8% to 3.4% over the decade, though this is still far short of the average 10.0% rate found in the 1974–84 period.
Among consumer purchases of services, a major contributor to growth is health-care expenditures. The growing number of elderly in the population, as well as advances in medical technology, has resulted in a greater demand for health services. Spending on medical services increased 3.4% per year during the 1994–2004 period. Over the following 10 years, due to the importance of the demographic factors, spending on medical services is expected to continue to post solid gains at a growth rate of 3.4% annually.
In the realm of non-residential investment, the standout numbers are in equipment and software, expected to grow at an annual rate of 7.6% from 2004 to 2014. Residential investments, on the other hand, are expected to settle down as the baby boomers do, with a more modest—but still healthy—average annual growth rate of 1.7%.
Continued Trade Deficit
Globalization and international competition have played an important role in U.S. economic activity. In 2004, imports exceeded exports by a record $601.3 billion in real terms, up from $79.4 billion in 1994. Over the 1994–2004 period, exports grew at an annual rate of 4.7%, while imports had an 8.1% growth rate. The trade gap—due both to the nation’s appetite for foreign-made goods and to the rise in imported oil prices—has grown to a level economists are beginning to describe as “unsustainable.”
The BLS believes that the share of GDP accounted for by both exports and imports will grow over the projected decade, and that a continued decline in the exchange rate will stimulate U.S. exports abroad and increase international competitiveness. Real exports are expected to grow at a 6.7% annual rate between 2004 and 2014, with the largest increases being in exported services. Imports are projected to grow at a slower 3.9% annual rate. Although the bureau projects a continued increase in the trade surplus in services, this still will not offset the even larger deficit in goods.
Disposable Income on the Rise
On a per capita basis, nominal disposable income is expected to increase at an average annual rate of 4.0% from 2004 to 2014, reaching a level of $43,500 in the latter year—a gain of more than $14,000 over the projection span. In real terms—that is, chained 2000 dollars—per capita income is projected to grow 2.0% per year from 2002 to 2012. In other words, real standards of living will continue to rise, at least as measured on the basis of growth of disposable personal income.
The population 16 and older is projected to increase by an average of 1.0% per year from 2004 to 2014. The civilian household employment rate will similarly rise 1.0% per year. These are lower than the annual rate gains of the previous decade—1.3% population growth and 1.2% employment growth—but the gap between the two is closing. The unemployment rate is expected to slow to 5.0% in 2014, down from 5.5% in 2004.
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(Disclaimer: The views presented above are strictly those of the author. They do not necessarily represent those of FFN. Please use due diligence in applying the concepts, recommendations and/or in the purchase of products or services offered by the author). FFN Editors