Month: November 2018

We have been discussing that one must take the minimum of debt and loan- it may be credit card balance, car loan, education loan or even mortgage of your home. But taking loan sometime becomes imperative especially in case of high value purchases. But the loan amount should be such which can be repaid in a period of ten years or before you retire, whichever is earlier. To achieve this, one must make a monthly Budget and try to control the expenses, so that you can save enough to repay your loan and also invest for your retired life. Unfortunately , most people don’t plan for their future and spend everything they make. When you are young, you could take that liberty with your money, but at the advanced age of 50 or so, you cannot ignore the fact that you are going to retire soon and you have to prepare for your comfortable retired life of 20- 25 years

    Save Money And Pay- off Debt : –

  Telling people how and where to spend their money is a risky undertaking because most people like to spend money. But there’s a world of difference between spending money carelessly and spending money wisely. Your savings dwindle, debts may accumulate and you can’t achieve your financial and personal goals. The four principles to control your spending are: –

  (i) Living within your means.

  (ii) Finding the best value i.e. evaluate the cost of a product or service before purchasing.

  (iii) Cutting excess spending like wasting money on branded products/ consumer items or purchase unnecessary items. And

  (iv) Rejecting consumer credit  and purchases to be reduced on credit cards to the bare minimum.

  50 – 20 – 30 Rule  

  If you are struggling to save money and pay off debt, the 50 – 20 – 30 rule can help you budget in accordance with your financial goals. This simple rule provides flexibility, whether you want to pay- off debt. Save , invest or all three. The rule splits your after- tax , take- home pay into three buckets : –

  “ Fifty percent is for Needs, thirty percent is for wants twenty percent is for saving “. The breakdown is as under :-

• 50 percent :- Includes rent, mortgage, food bills, minimum debt payment and other essentials.
• 20 percent : – Includes financial goals such as savings, investments etc.
• 30 percent : – Dining entertainment, outings etc.
• ( pl. Note- 20 percent savings is placed just next to essential expenditures of 50 percent but before non- essential expenses of 30 percent)

        5 Ways To Cut Your Spending On Credit Cards : –

   The purchases against the credit card/s becomes very expensive if you don’t pay the balance early. Generally, 18- 21 percent interest is charged on the balance amount. To reduce the credit card spending :

• Reduce your credit card limit;, to a level you’re comfortable with.

• Replace your credit card with a charge card , which requires you to pay your balance in full each billing period.

• Never buy anything on credit that depreciates in value like car, clothing, meals out etc.

• Think in terms of total cost- which includes sticker price, interest charges etc. which may become very high.

• Limit what you can spend – try to shop with a small amount of cash nd no plastic or checks.

         Think How Much You Can Save : –

    Before you begin saving to meet your financial as well as personal goals, think how much you can realistically save regularly. For example, someone with high expenses and high debt may need to adjust the rule to 80 – 10 – 10 until they have reduced debt and grown their savings. Take time to examine your spending habits. You got to focus on what you absolutely have to have and getting rid of everything you don’t have to have. You might be overspending money in ways you don’t realize. But you list down your expenses . You would be able to find out the areas which are non- essential and where you overspend. First look at your major expenses – rent, car payments, mortgage etc. You can think to purchase a used car instead of a new car.

     If it is not possible to cut back on major expenses, then you need to take a look at your smaller expenses. You ill also need to examine the expenses in your 30 percent bucket to see what you tend to waste money on the most. Create a mini- budget that will prevent you from overspending on your lifestyle habits like cloths, electronic gadgets or eating out etc. You don’t have to track every dime , you spend. Just pick those two or three categories that cause you the most problems and set a budget for those categories.

           Figure Out Your Savings Goals : –

   How you manage your 20 percent savings bucket will depend on your personal goals. First make an Emergency Savings fund which can be equal to 3 or 6 months of your current pay. Then if your goal is to pay- off debt, earmark a portion of your 20 percent bucket for pay- off the loan. Then, you can contribute part or all of the 20 percent to a retirement fund including your contribution to 401(K) and/ or IRA including catch- up amount.

       Follow Good Personal Finance Habits : –

Some of these habits can be as under : –

• Take advantage of your employer’s flexible spending account. These will reduce your tax liability and also act as a quasi saving plans.
• Tracking your income and expenses.
• -Being careful not to overspend on gifts.
•    – Paying attention to mortgage interest rates- even after you buy a home.
•     – Never buying anything on impulse. Stick to your shopping list.
•    – – Paying your bills online, when possible
•     – Ignoring credit card convenience checks that come in the mail.
•     – Saving part of your income for retirement, save atleast 10 percent of pay.
•      – Spending less than you earn every month.
•      – Never assuming past performance guarantees the future results, while investing.
•     – Reviewing your credit card statements for errors.
•     – Keeping a budget and faithfully following the budget
•       CONCLUSION : –
•      Saving enough for your retirement life, so that you can have a  comfortable and peaceful retired life , which can meet the expenses of at-least 20- 25 years (with inflation), and investing that amount properly is the key for a happy retired life. If you have not saved enough so far, don’t delay it any further as you are already 50 years old and the retirement is hardly a decade away. Don’t carry the burden of debt and loans after retirement. For this purpose, control your spending and try to save atleast 20 percent of your paycheck. Ensure your retirement needs  are taken care of prior to providing for your children’ future.
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Most Investors want to grow the value of their investment portfolio as much as possible. However, as you approach retirement, you might shift your thinking. The proper allocation for your investment will change over the course of your life. When you’re 50 years old, you are much closer to retirement than you were in your 20 s, and your investment allocation should reflect that. However, there is no “one- size- fits- all” way to diversify a portfolio, regardless of your age.

        When you invest your money, you need to decide how to proportion{allocate} it between risky, growth- oriented (such as stocks) whose value fluctuates , and more stable, income -producing investments (like bonds). But while allocating your investments, you should take into account your own personal needs, experience and personality i.e. risk taking capacity. How soon you’ll need the money and how tolerant you are of risk are two important determinants when deciding how to allocate your money.

   Risk Tolerance : –

 This factor is particularly true if you’re already retired or you are in the age of 50- 55 years. In this case you’re close enough to retirement and you don’t have time to recover from a massive market sell- off. To protect your retirement nest egg , at age 50 you should consider shifting at least part of your portfolio from riskier investments like stocks to more stable option, like bonds and CDs. Your asset allocation between stocks and bonds depends on your risk tolerance. Are you risk averse, moderate or risk loving?.

       Investments And Allocation : –

  One general rule of thumb when it come to portfolio allocation is to subtract your age from 100. The resulting number is approximate percentage you should allocate to stocks. For example, at age 50 you should allocate 50 percent( 100-50= 50)in equities whereas ,at age 70, this is approximately 30 percent (100-70=30). This will be further modified depending on your investment objective and risk tolerance.

     Your asset allocation also depends on the importance of your specific market portfolio. For example, most would treat their 401(K) or IRA as a vital part of their retirement strategy because it is or will become their largest portfolio.

        Sticking With Your Allocation : –

   Your goals and desire to take risk should drive the allocation of your investment dollars. As you get older, gradually scaling back on the riskiness (and therefore, growth potential and volatility) of your portfolio makes sense. But don’t play or tinker with your portfolio daily, weekly ,monthly or even annually as a practice. Don’t engage in Trading. Jumping on to a “winner” and dumping a “loser” may provide some short- term psychological comfort, but in the long- term, such an investment strategy often produces below -average returns. The closer you get to retirement, the more you’ll want to protect your funds, generally by shifting to more conservative allocation. In addition to funding your lifestyle with current income, you’re also reducing the number of years in retirement that you’ll need your saving to last. All of these factors should play a role in determining your allocation from age 50.

         Various Asset Allocation Models : –

    There are many asset allocation Models which have been developed by the financial experts. No one model can be recommended for all the investors as their objectives, goals, risk tolerance and personality differ. Some of these models are : –

(i) Conventional allocation model.

(ii) New Life allocation model

 (iii) Survival Allocation Model

 (iv) Nothing to lose allocation Model

 (v) Financial Samurai Model of Investment

These models cater to the need of various spectrum of individuals having different age, priorities, funds requirements, time horizon and risk tolerance. One of these models i.e. Conventional  Model of Asset Allocation is explained below. This model is suitable for the individuals who:-

 — Believe in conventional wisdom and don’t want to over complicate things.

 — Expect to live to the median age of 78 for men and 82 for women

 — Are not interested in the stock market, bond market or economics and would rather have someone manage their money instead.

          Proper Asset Allocation of Stocks & Bonds

               Age                   Stocks                       Bonds

        up to 25                    100 %                       0 %

                    30                     70 %                        30 %

                     35                    65 %                        35 %

                      40                   60 %                      40 %

                       50                  50 %                       50 %

                       60                  40 %                       60 %

                       70                   30 %                     70 %

                       75 +                25 %                      75 %

    Whereas, New life Asset Allocation model recommends an investment of 70% and 30% in stocks and bonds respectively for the personnel in the age of 50 years against 50: 50 given above.

       CONCLUSION: —

 Ideally, your asset allocation should let you sleep well at night and wake up every morning with vigor. When it comes to investing, you need to calculate your existing investment exposure and invest accordingly. Don’t let anybody force you into an uncomfortable situation. But take a proactive approach to your retirement portfolio and don’t be shy of taking moderate risk with your investments even at this age. Take the following into consideration while allocating your assets : –

  (i) What is your risk tolerance on a scale of 0- 10?

 (ii) How stable is your primary income source?  

  (iii) How many income streams do you have ?

  (iv) What is your money strength ?

  (v) What is your knowledge about stocks and bonds ?

  (vi) How long is your investment horizon ?

 

     

 

 

    In most of my posts, I have been discussing about the financial goals, short- term and long- term, which an individual must set for himself/ herself.I have also been mentioning that our savings should  be invested in such a way and for such a duration that we are able to meet our targeted goals in time and that too with comfort. Although everyone is aware of this, but most people don’t take it seriously and go on postponing setting goals, on one pretext or another. Reasons may be very many because everyone is different; you can have goals that are unique to your own situation. Further, accomplishing goals almost always requires saving money, whereas, most Americans spend all the amount, whatever they earn. They have almost nothing in savings even at an advanced age. But procrastinating the issue is not a solution. As one of the Chinese proverbs says “ Do not wait until you are thirsty to dig a well “. So don’t wait to save money until you are ready to accomplish a personal or financial goal.

      Prioritizing Your Savings Goals : –

 Now as you are already in your fifties, and retirement is just a decade away, your maturity is much better. So, instead of dreading it, update your financial life by hitting the targets and embrace the coming decade. Many people may have financial goals, although they may not be having a proper plan to achieve those goals. Most common financial goals are : –

1. Owning Your Home : – Most Americans dream of owning their own home as renting and dealing with landlords can be a financial and emotional drag.
2. Making Major Purchases : – Such as a car, living room furniture, vacations and so on.
3. Retiring ; – is a catch all term for full- time work and you have to plan for your comfortable and peaceful retired life.
4. Educating The Kids : – The college education is quite expensive and requires a detailed financial planning, much in advance, as you may want to help your children get a college education.
5. Owning Your Own Business : – Many employees want to take on the challenges and rewards that come with being the boss, but they are unable to do so as they lack the money to leave their primary job.

      Unless, you earn really big or have a large family inheritance, your personal and financial desires will remain a dream. So, you must prioritize your goals.

       How To Approach Your Goals : –

  Because you’re constrained by your financial resources (most common problem with salaried people) ,especially when you are in your fifties and your children are grown up, you need to prioritize your goals. The following strategy may be helpful in prioritizing the competing goals : –

1 Debt Tamed : – As impressed in earlier posts, take a debt/ loan which you can repay in ten years or before retirement, whichever is earlier. Pay credit card balances before interest is applied.

2. 2 Spending : Under Control : – In your fifties you may be in the peak years of your earning period. You can have fun with your money, but don’t short change retirement goals. Double down on savings, as retirement may last a long, long time.

3 Retirement Goals : Defined : – Set a concrete goal for your retirement. Some people save too much and they don’t enjoy life as they become addicted to their saving habits. The other extreme is spendthrifts who live only for today. Both the habits are not good . You have to perform a balancing act. It is said that a est egg of  $1 million will last 21 years if you withdraw $50,000 a year (assuming inflation is 2.5 percent and investments earn 3 percent after tax and inflation).

4 Retirement Contributions ; – You must value your retirement accounts. Where possible, try to save and invest in accounts that offer you a tax advantage like 401(K), 403(b), IRA and so on. These have the following advantages :

   – Contributions are usually tax- deductible.

• In some company retirement accounts, companies match a portion of your own contributions.

•        Returns on your investment compounds over time without taxation          

(Refer my post on contributions to 401(K) and IRA, for details)

5 Building Emergency Reserves : – Prepare for the unexpected , financially. Conventional wisdom says that you should have approximately six months of living expenses put away for an emergency. However, it depends on how expensive the emergency is, but this reserve will help you a lot.

6 Saving For Big Purchases : – Never buy these big purchases like car, plane tickets for vacations etc. with consumer credit. Get into the habit of saving for your larger consumer purchases and not through high- interest consumer credit.

7  Long Term Care : A Plan In Mind : – By our 50th birthday, it occurs to most of us that we really will get old and may require skilled nursing care. But how to pay for it? Long- term care insurance can be an excellent tool. So, plan for it.

8  Mortgage : Repay The Balances : –  Entering retirement with a paid- off mortgage is a small goal. But its advantages are very many. Try to repay all the mortgage balance before retirement. This will help you enjoy your retirement life with a lesser amount, when your paychecks stop.

9 Insurance : Reviewed and Adjusted : – Life changes, and so should your insurance. Stick with cheaper term insurance. When your children have grown up and are of their own, you may be able to drop life insurance. Similarly, take a look at you home and car/ auto insurance limits. As for health insurance, review your health insurance needs and costs and up-date your health insurance accordingly.

   Top Financial Goals : –

1 Have a well- stocked Emergency fund.

2 Get out of Debt- Completely.

3 Plan for early retirement- this will help you to review your savings.

4 Create multiple income streams – like starting your own side  business, dividend income or returns from investments.

5 Have enough insurance to cover contingencies.

6 Be able to live on less than you earn.

7 End any addiction to stuff that you may have.

8 Plan to Do work, that you love even after retirement.

9 Plan to leave your financial house in order upon your death- create an estate will.

       CONCLUSION : —

 Defining your goals, long-term and short – term would help you to live within your means. But your goals should be SMART.., properly defined which meets your needs, which generally differ from one individual to another. Good detailed planning, even at this advanced stage of your life, would help you live a comfortable, enjoyable and stress- free long life even after retirement. While establishing your financial goals, it is advisable to take the views of your spouse into consideration. This will make implementation of your goals easy and your family life harmonious.   

 

Planning Finance After 50 – Why Repayment Of Debt Early Is Important

   Usually, most of us, borrow money or take loan to meet our Urgent needs, which may not be possible to procure with our own savings or the money available with us at that time. This loan/ Debt is used by many corporations and individuals, as a method of making large purchases they could not afford under normal circumstances.

What Is A DEBT : —

  A Debt or loan can be something, usually money, owed by one party

( The borrower or debtor ), to a second party ( the lender or creditor). Debt is a deferred payment , or a series of payments, that is owed in the future, which is what differentiates it from an immediate purchase.

     Debt is a double -edged sword. Borrow wisely and you may create the opportunity to build equity – for instance in a house, or may be even in yourself, with an education. But rack up too much Debt, and financial distress could be around the corner. Like many Americans, who own a home were able to do so, thanks to a mortgage. Many college Graduates got their degree thanks to a student loan.

       But too much Debt can lead to financial distress and may lead to foreclosure on your home or repossession of your car and may result in low credit score, which can lead to high interest rates and difficulty in borrowing in future.

       So, to avoid bogged down by Debt, know the details of your income and expenses before borrowing. Think carefully about how much Debt your monthly budget can reasonably accommodate.

Types Of DEBT : —

         There may be many different types of consumer Debts. The most common Debt can be :-

      — Credit Card Debts

      — Student Loan Debt

      — Personal Loans/ Debts

    — Auto Loans

   — Medical Debts

   — Utility Bills, Bank Overdraft Charges etc.

   — Home Loan/ Mortgage Debt etc., to name a few.

 Which Debt Should Be Paid Off First : —

      Cut down the credit card or ditch the student plan ? Knock off the house equity line or get a jump in the car loan ? Paying off money you owe is always better- but ditching some Debts will benefit you far more than erasing others. The Debts can be categorized as “ Good Debts” and “ Bad Debts “.

   GOOD Debts : — Money you borrow for a home or an education is considered “ Good Debt “. Some home and student loan/ Debts may be Tax- deductible. There is no need to put pressure on yourself to repay these loans as long as you can continue making regular installment payments. But these are also to be cleared before your retirement, better in your 50’s. And not carry them farther.

   BAD Debts : —   These include anything that doesn’t improve your financial position and that you can’t pay far in full within a month or two. Bad Debt is usually in the form of credit cards Debt or a personal bank loan. You should tackle Bad debt first.

How To Get Out Of Debt Of Your Own : —

        It is always advisable to get out of Debt/ loan at the earliest. The Bad Debts must be paid off by the age of 50- 55 years and all other loans,

including home loan, should be re-payed before you retire so that your retirement life is comfortable. To get out of Debt/ loans of your own and that too fast, the following Important steps will be of great help ; —

1 You must confront your Debt by calculating your Debt ratio. Debt ratio can be defined as the amount of total Debt ( excluding mortgages- which is considered a Good Debt as its payment is tax deductible ) as a percentage of gross annual income.

Example – You earn $50,000 a year and you have $25,000 in debt; your Debt Ratio = 0.50

Example –  You earn $100,000 a year and have $250,000 in Debt; your Debt Ratio = 2.50

2.Permanently change the behavior that got you into Debt

3. You must make enough money to repay the Debt.

Follow These Easy Steps To Set Up A Debt Repayment Plan : —

       To repay the loan early and that too with your own resources, the plan should consist of the following steps : —

1. Make a list of your Debts. First, you need to make a list of all your loans and borrowings, whether good or Bad..
2. Rank your Debts. This is based on the rate of Interest  the Debt carries.
3. Find extra money to pay your Debts. In this regard your monthly Budget would be of great help.
4. Focus on One Debt at a time. The highest interest carrying loan/ Debt must be paid First.
5. Move on to the Next Debt on your list. Bad Debt must be cleared First
6. Build up your Savings. This is required to repay the Debt of your own, with your own resources.

   Rank your Debts and Prioritize Their Repayment : —

        From a financial perspective, it’s smart to pay off your highest rate Bad Debt first. For example, putting $500 towards a $3,000 credit card bill with an 18 percent interest rate will save you far more than paying off a $500 bill at 6 percent.

          Further, if you’re planning to buy a home or a car in the near future, it may be worth paying down any credit cards that are  near their credit limits as it will have a positive impact on your Credit Score and may qualify you for lower interest rates.

   Conclusions : —

   Regardless of how you deal with paying off your Debts, you’re in real danger of falling back into old habits. It becomes a chronic problem with some, that starts to interfere with other aspects of their lives and can lead to problems at work and with family and friends. It is always better and advisable to resist the temptation of making the purchasing on credit, especially of utility articles which are not that Urgent. Further, never buy anything on credit that depreciates in value like meals out, clothing, furniture and even cars. Borrow money only for sound investments- education, real estate, or your own business etc.

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Limited savings but numerous responsibilities. That’s the life. But some of these responsibilities will run parallel to each other. For example, at the age 50 years or so, while you can’t delay saving for your retirement, you can’t afford to ignore our child’s future either, may be his/ her college education or the impending marriage. Further at this phase of your life, you don’t want financial mistakes to derail your retirement game plan. But these financial dilemmas and the responsibilities change during the different stages of life and accordingly the financial priorities also change. To restrict ourselves to the life after 50s, the financial dilemmas can be : —

50s : Child’s Higher Education And Retirement : —

         The deadlines of these two big goals may collide. While neither can be ignored, financial planners say that your retirement corpus is the Priority. Your child can get a scholarship or take a loan. However, the bank won’t extend you a credit because you don’t have sufficient savings post retirement. Even if they do, a personal loan will always be costlier than the education loan.

        “ An education loan creates a sense of financial responsibility in the child; allows you to keep your assets and gives you additional tax benefits”Some may also argue it is better to work longer and save more than depend on an educational loan. But it all depends on your health and other circumstances.

 60s : How And Where To Keep Your Kitty : —

        At this age, this is the big financial dilemma. Your financial resources are getting limited and you have to meet responsibilities after meeting the adverse effect of Inflation and various taxes( federal and state ). So, you may keep moving your investments earmarked for retirement towards debt fund as you near 60s. However, that should not stop you from re-investing your kitty in equity options. Considering they are your best chances to beat inflation, most experts recommend keeping a portion of the nest egg in equities. Depending on your Risk taking capacity and availability of fund, you can invest 15- 25 percent in equities to beat inflation and tax liabilities.

Important Money Moves : —

     To manage your finances and savings as well as plan for your future post retirement is very important at the age of 50 years or so. If you’ve been procrastinating on money matters so far, now is the take- control moment for you and your finances. Some of these financial moves or steps which would help you to keep your next years of life financially sound are as under : —

1 Speed Up Paying Down Debt/ Loan :–

    Repaying of your debt, especially high interest carrying loans or debts like credit card balances, car loans etc. has been emphasized repeatedly in my earlier posts. You don’t want to be dealing with mounds of debt as you work those last few years before retirement. Calculate your current debt load and start paying off larger debts as soon as you can. This includes any includes any car loan, large credit card balances , personal loans and mortgages, that you’ve been carrying around for a while. Most retirees who own their homes free and clear will tell you living without a mortgage is financially liberating. The higher the interest rate, the stronger argument for paying the debt off sooner.

2  Look At Your Life Insurance : —

     The American Council of Life Insurers recommends having life Insurance coverage of seven to ten times your salary. But this is a broad rule of thumb. Actually your life insurance coverage depends on your own individual financial needs which may vary greatly based on various factors like : —

 _ The amount of Debt/ Loan you would want paid off

 _ How much money you’d want to leave for your dependents

 _ Any other financial commitment .

    But the need for life insurance doesn’t end when you attain the age of retirement/ superannuation.

 3 Long – Term Care Coverage : —

       Buying long term care while you’re healthy is way easier at age 50 than, say, at age 70 or 75 years. For example , a man or woman buying a long term care policy at age 50 could pay an annual premium of $3,302. But delaying the purchase for a decade would cost the same person $6,678 annually which would become $17,760 annually if you buy at the age 70 years. As with life insurance, long term care coverage can vary greatly based on where you live, family history and  the duration of the coverage.

4 Don’t Put All The Eggs In One Basket : —

        At this phase of your life, you don’t want financial mistakes and which are related to your Investments– to derail your retirement game plan. Better diversify your portfolio. Make sure you’re not investing all of your savings in just a single account or investment vehicle.

  If you have investments, review them now- or have a money manager do it- to make sure you have a truly diversified portfolio. After age 50, you also want to reap the greatest possible return from your investments as these may be your highest income earning years and the time when you have the most potential to stock away money.

             Ahead of retirement, the goal is to start adjusting your investment risk a bit, while maintaining the opportunity for steady growth in the upcoming years. As you get closer to retirement, the diversification of your portfolio becomes even more important. So, having the right mix of stocks, bonds and cash is essential. In this regard, the investment professionals offered general rule of thumb like “ Take the number 100 and subtract your age” . The remaining number would suggest how much of your portfolio should be invested in stocks.

 5 Finalize Your Will, NOW : —

 It is time to create or update your last Will. This can be done in many ways _Pay a lawyer to create a Will.

_ Use Online software like Legalzoom.com or Nolo.com

_ Use store- bought forms that contain pre-printed Wills.

    Unfortunately, nearly half of all the Americans over the age of 50 don’t have a basic Will, according to various survey reports.

   CONCLUSION  : —

Getting the help of a financial professional can get you on the right track and help ensure that you take care of these essential financial tasks. But we must not delay to plan our finances any further. Having sufficient Insurance coverage, both Life as well as Medical, is of utmost importance.