Living on the Edge

Check out this staggering statistic: Nearly two-fifths of American households are living paycheck to paycheck.

A recent report conducted by the Consumer Federation of America and the Consumer Planner Board of Standards, Inc. found that 38% of households live paycheck to paycheck, up from 31% in 1997. The report also found that almost half of American households are behind on retirement savings.

Similarly, a recent Bankrate.com survey found that the financial security of Americans is deteriorating, and almost 40% of Americans feel less at ease about their savings than they did a year ago.

Living paycheck to paycheck is extremely risky. Any kind of financial blow, such as illness or job loss, would be devastating. About 46 million Americans are already living below the poverty line. But about 127.5 million people do not have enough money saved to weather a financial emergency and are just one mishap away from living in poverty as well.

However, it is important to note that financial planning is often the difference in whether or not a household will face financial distress. In the CFA/ CFP Board Survey, more than twice the percentage of respondents who identified themselves as planners, in comparison to those who did not have a financial plan, said they are living comfortably. This gap between planners and non- planners held true across income brackets.

This is why programs such as New Century IDA are so important. New Century IDA helps its clients transition from a pattern of consumption to one of savings. This is a behavior change that lasts a lifetime and helps people become more financially secure.

For more information read, “Living Paycheck to Paycheck is Reality for Two in Five Households: Report” by Khadeeja Safdar.

10 Ways to Improve Your Financial Health

Trying to improve your finances? In “10 Ways to Improve YourFinancial Health,” TIME Moneyland offers 10 ways that you can get a start on rebuilding those finances.

1. Grow Your Emergency Fund

In these times of high unemployment rates, you should shoot for an emergency fund with 6 months worth of savings instead of the traditionally recommended 3 months. The key is to be able to manage emergencies from savings rather than having to liquidate your retirement account or relying on a high interest credit card. Jim Wang, a blogger from Bargaineering.com says, “Trying to resolve an emergency with a credit card can lead down a dangerous path of debt.”

2. Pay Off Credit Card Debt

Tom Gilovich, a psychology professor at Cornell University and coauthor of Why Smart People Make Big Money Mistakes says you should use your existing savings to pay off or pay down credit card debt. With current credit card APRs averaging around 15%, people with credit card debt pay more in interest than they can earn with that money invested elsewhere.

3. Put 10% of Your Income Toward Retirement

No matter how much or how little you make, it’s a good idea to stick to this rule. If you start saving and investing $5,000 a year when you’re 25 years old and earn a 6% rate of return, that money will have grown to $773,809 by the time you are 65!

4. Pay Off Your Mortgage Before Retiring

Richard Thaler, behavioral economist at University of Chicago says, “The term of your mortgage should not be longer than the number of years you plan to work.” After retirement, your income will probably drop but your cost of living won’t. If you can eliminate your monthly mortgage payment, you’ll have more flexibility to handle other costs that will probably increase in retirement, such as health care.

5. Track Your Spending

You’ve probably heard this tip before, but have you put it into practice? Gail Cunningham says, “It’s a basic building block of financial success.” New Century IDA participants take a budgeting course in which they learn the importance of tracking all of their expenditures. It helps them find areas in which they can cut back.

6. Envision Your Future

Don Chambers, author of MoneyBasics for Young Adults, says you should develop a mental picture of where you want to be in five years. This will be great motivation for sticking to your financial plan.

7. Improve Your Credit Score

Did you know that maintaining a score of 750 or higher can improve your finances? “A higher score will get you lower interest rates and lower interests can save you hundreds of thousands over your financial lifetime,” says Elisabeth Leamy, author of Save Big. The potential for savings is even greater when it comes to home mortgages. This is why New Century IDA participants work so hard to improve their credit score in preparation for homeownership.

8. Live Below Your Means

We’ve all heard this phrase: “Just because you can afford to buy something, doesn’t mean you should.” If you get a raise, maintain your former standard of living and funnel the rest into paying off debts or adding to your retirement savings.

9. Act Like You Can’t Just “Throw It Away”

Kerry Taylor, blogger at Squawkfox.com says, “If you act like you can’t just throw stuff away, it will make you more mindful about what you buy and consumer in the first place.” Switch to buying quality items that will endure.

10. Move Your Money Around

Carmen Wong Ulrich, cofounder of ALTA Wealth Management recommends redirecting money from one part of your financial life to another part that may be more profitable.

These are some great tips to help you get started on your path towards improved financial health. Maybe just pick one or two to focus on at first, then as you feel comfortable with your new financial habits, add more of these tips to your list. Do you have any of your own tips to add?

Pay Down Debt or Save?

This is a dilemma that many Americans face: Is it better to pay off debt or to save and invest? A recent article from 360 Degrees of Financial Literacy outlines some strategies that you might want to consider as you ponder this question.

The most common factor used to decide where to pay off debt or make investments is to determine if you could earn a higher after- tax rate of return on the investments than the after- tax interest rate on the debt if you were to invest your money instead of using it to pay down debt.

Here is an example provided by 360 Degrees of Financial Literacy. If you have a credit card with a balance of $10,000 and a nondeductible interest of 18%, you would generally need to earn an after-tax rate of return greater than 18% to consider making an investment rather than paying off the debt.

It is important to remember that it isn’t always an all- or- nothing choice. Another strategy that is useful is to pay off debts with high interest rates first. Then, invest when you have an opportunity to make investments that may earn a higher after- tax rate of return than the after- tax interest rate on your remaining debts.

For example, say your tax rate is 28% and you have a credit card with a balance of $10,00 and a nondeductible interest rate of 18% as well as a mortgage with a balance of $10,000 and a deductible interest rate of 6%. If you have $20,000 available to invest or pay off debt, you should pay off the credit card first and invest the remaining $10,000.

It is also important to remember that when you are investing, the higher the rate of return generally means the greater the risk. So if your investments incur losses, you may still have debt to pay.

Click here to read the full article and for a more comprehensive list of things you should consider when you are deciding whether to pay down debt or save and invest.

Avoid These Mistakes When Planning for Retirement!

New Century IDA promotes savings and asset building. While homeownership is the main avenue we use to promote savings and asset building, there are many other reasons that saving is important. One of the most crucial reasons for saving is retirement.

A survey conducted by the Employee Benefits Research Institute found that only 14% of adults are confident that they will live comfortably after retiring, and 60% of adults ages 25 and over have less than $25,000 in savings. Not saving enough is the biggest mistake people make in planning for retirement. This is understandable if you are unemployed or underemployed. However, Dan Kadlec recommends that if you are working, you should save at least 10% of every paycheck.

If you are just in your 20’s or 30’s, you might think it’s a little too soon to start to thinking about retirement. In reality, it’s never too soon. In the article “The 7 Biggest Retirement Planning Mistakes” Dan Kadlec details mistakes to avoid.

1. Assuming you have control over when you quit. Two in five people retire earlier than planned, for various reasons such as job loss or illness. It’s critical to start saving early, while your health and career are on steady footing.

2. Ignoring the tax impact of distributions. In retirement, it’s helpful to have several different types of income, from fully taxable to tax deferred (401K) to tax-free (Roth IRA). That will give you more flexibility when drawing down assets.

                          

3. Not saving enough for medical costs. The average couple retiring at age 65 will spend $285,000 in health-care costs in retirement. Even for retirees on Medicare, out-of-pocket health care expenses have increased by 50% in the past decade.

4. Failing to lock up lifetime income. It is a challenge for today’s retirees to convert savings to a reliable income stream so that they will be able to cover fixed expenses for life. An immediate fixed annuity is a good way to address this need.

5. Retiring too soon. If you are healthy, try to wait until you are 70 to retire. You may not know this, but working a few extra years can boost your retirement income. Social Security benefits increase about 8% for each year you wait to retire past normal retirement age (66 for most Americans).

6. Underestimating longevity. About 60% of Americans live longer than they expect. At age 65, women live to an average age of 84; men live to an average age of 81.

7. Drawing down retirement savings too rapidly. You don’t want to outlive your  money. Keep your annual drawdown rate to 4% of your assets. At this rate, if you being making withdrawals at age 65, you should income until age 95.

As you think about saving and planning for retirement, keep this list in mind so you can avoid the mistakes that many people make. And remember, it’s never too early to start saving!

Growing Number of Americans Living in Poverty

It’s no secret that more Americans are struggling to stay in the middle class. However, the number of Americans living in poverty are quite staggering. The Census Bureau released a report that shows a record number of Americans are living in poverty- 46 million. This is the highest number reported since the Census Bureau began tracking poverty rates in 1959.

The Census Bureau also reported that the number of families living below the poverty line increased by 18%, from 7.3 million in 2006 to 8.6 million in 2010. In 2010, the poverty line for a family of four was a household income of $22,314 or less. 

There is also a trend of more poor people living in the suburbs.  The number of poor people living in the suburbs of metropolitan areas increased by 24%, from 14.4 million in 2006 to 17.8 million last year. As a comparison, the number of poor living in cities rose by 20%.

As the number of Americans living in poverty are growing, the faces of poverty are changing as well. Timothy Smeeding, director of the Institute for Research on Poverty at the  University of Wisconsin- Madison says “It’s all about joblessness. There’s just not enough work.” The Great Recession has left many Americans struggling to find employment. According to an article in the USA Today, it has not only made the poor poorer, but it has affected those who thought they had escaped poverty as well as those who never imagined being thrust into poverty. The college-educated, the former middle- class worker, the suburbanite, and the homeowner can now all be found among the poor. 

For stories about families that are trying to escape poverty, read the article Poverty Affects 46 Million Americans by Marisol Bello and watch the video below.

Set a Goal. Make a Plan. Save Automatically.

In continuation of our theme of Saves Week, here is another blog from America Saves.

The theme for America Saves Week 2012 is more than just a theme; it’s a simple set of instructions to help you save successfully. Set a Goal. Make a Plan. Save Automatically. Knowing what you want to save for, how to achieve it, and then making the savings process automatic will allow you to reach your savings goal.

Set a Goal
You can save more by having a goal in mind. Visualizing what you want to save for gives your savings a purpose. You may be tempted to withdraw from your savings if it has no purpose. But once you have a goal in place, you know that taking money out of your savings is taking away from that ultimate goal. So what are you saving for? An emergency fund, a home, retirement, a car?

Make a Plan 
Once you have your goal in place, make a plan of how you are going to save. To start, cut down on your spending and reduce high-cost debt. Next, keep track of what you spend and make a budget. Once you know where your money is going each month, you can cut down on unneeded spending and save the difference.

Don’t forget to keep your savings safe, secure, and growing. Banks, credit unions, and even the
government offer a variety of financial products that can help you save.

Save Automatically 
It can be hard to put aside money for savings. But there is an easy way to save money without ever missing it. Once you know how much you can save, make saving automatic. Many employers allow you to divide your paycheck into different accounts through direct deposit. Take advantage by putting part of your pay into a savings account. If you get paid in cash, take a small amount to the bank to deposit into a savings account each week.

Join America Saves to get tips and advice year round and follow them on Facebook and Twitter.

America Saves Week February 19-26

In the spirit of North Carolina Saves Week, we are sharing the following blog from America Saves.

Most Americans today are not saving adequately for retirement, and most lower-income households do not have adequate emergency savings for unexpected expenditures. To help encourage people to save, America Saves, along with the America Savings Education Council, created America Saves Week. Started in 2007, around 2,000 organizations participate and millions of people are encouraged to better their finances. 

This year, America Saves Week is encouraging everyone to ‘Set a Goal, Make a Plan, Save Automatically.’ America Saves provides helpful tips for successful saving, because not everything is always easy done alone. Take a look at our 5 strategies for saving and see how they can help you. 

This year, America Saves Week is February 19-26 and when you join America Saves you will 

receive: 

• Free subscription to our quarterly American Saver Newsletter 

• Free monthly email newsletters with savings advice 

• 100 bonus credits with SaveUp

• Free access to our members-only Savers Tracking Tool to help you reach your goals 

You can also get tips by receiving updates from Facebook and Twitter.

What Does It Mean To Be Poor?

What do you think of when you think of being “poor”? In his article “Working Poor,” Alexander Eichler talks about what it means to be poor.  If being poor is defined as living at or below the poverty line, then 15% of Americans- or about 46 million people- are poor. But if being poor is defined as living off a decent income but hardly any savings, then it is  nearly half the country. These are people that do not live below the poverty line, but they don’t have enough money saved to weather an emergency.

Jennifer Brooks, director of state and local policy at the Corporation for Enterprise Development, said, “The resources that people have- they are using up those resources. They’re living off their savings. They’re at the end of their rope.”

The Corporation for Enterprise Development released a report this week regarding liquid asset poverty households. According to the report, 43% of American households are liquid- asset poor. This means that if one of these households experiences a sudden loss of income, it would fall below the poverty line within three months.

The amount of people living asset poor underscores the effects of a struggling economy. Even though the Great Recession officially ended over 2 years ago, unemployment remains high and wages have remained stagnant.  However, you can receive a monthly paycheck and still be liquid asset poor.

David Rothstein of the nonprofit Policy Matters Ohio says that many people don’t realize how close they can be to one interruption to income or one interruption to health benefits. “They’re one paycheck away from being in debt.” Many Americans are not prepared for financial emergencies.

CFED suggests that while more intensive financial literacy is important in addressing this problem, it is also important to look at asset limits in public benefit programs. Some states restrict services like food assistance to households with few or no assets. Critics say that these policies deny help to many people in need. In a state with restrictive asset tests, a middle class family that faced a job loss would have to liquidate all of their assets and savings in order to qualify for benefits.

CFED suggests other measures that could help alleviate liquid asset poverty, such as strengthening consumer protections against payday lenders and making greater assistance available to first time homebuyers.

New Century IDA is proud to be involved in asset building by offering financial education and down payment assistance to first time home buyers in Forsyth County. What ideas do you have for eliminating asset poverty in our area?

IDA Success Stories: M.M.

Had I been asked to write this success story two months, I would still have a lot to say, and a whole lot more time to say it. I didn’t have house then, but thanks to the IDA program I had already accomplished two things I thought I’d never.

The first was not spending money on things I didn’t need. For years the use of credit cards were my biggest temptation and downfall. The IDA program helped me distinguish between things I needed and things I wanted. Learning about interest rates on credit cards made me realize that the now broken VCR I charged 11 years ago actually cost me $600 dollars. The closet full of clothes I charged (now all too small) cost me four times the good bargain I thought I had found, and with all the money I charged for meals at fancy restaurants (that led to the clothes being too small), I could have almost bought my own restaurant! I was happy to cut the cards up.

Getting rid of them helped lead me to the second accomplishment – saving money. One of the main principles of the IDA program is saving money. And I was able to do it! Believe me, pre-IDA, no bank account of mine had ever seen a four digit balance for more that a couple of days!

That leads me to why I’m short on time today. When my savings account hit $1,000, Sue Simmons told me to start looking for a house. So I looked. And I looked. I looked at houses too small and at houses too big, houses with no closet space, houses with no counter spaces; ugly wallpapered walls, hideous carpeted floors. Until one day, my real estate agent drove me into a perfect driveway that led to a perfect house! I asked her to write the contract to make a bid on it right away.

In a blur, my loan was secured, the house was inspected, and the lawyer was contacted. And at closing, there sat Sue Simmons, along with Mr. Stewart from ESR, providing support and encouragement to the very end, not to mention the checks they passed to the lawyer on my behalf! It was all so simple, and I am so very thankful.

Today, I’m in my home with a garage full of junk waiting to be put away. And every night, I get down on my knees to thank God for that garage and the house to which it is attached, for my family and for the IDA program.

Saving for Repairs and Upkeep of Your New Home

Written by:

Barbara Johnson, IDA Program Director

Experiment in Self Reliance

In today’s economy how do we make repairs to our homes or even maintain and keep them up?  I’ll tell you by planning ahead and using a budget. Some may think of a budget as restrictive but a budget is really a wonderful and useful tool. For example what if you need to purchase a lawnmower before next spring and it is going to cost you $550 if you plan to purchase it in March you have 10 months to save for it @ $55 a month. When March comes around you already have the money to buy your mower. This is a painless way to acquire the things you need and those things you want also. We do not eat an apple in one bite why try to tackle big expenses that way. Wouldn’t it be better to take on expenses like we eat an apple one bite at a time?