How Financially Literate Are You? 3 Things You Should Know About Your Money

Most of us received little guidance or instruction on how to handle money when we were growing up. That’s OK — we can learn now, a little bit at a time. Let’s start with the basics.

How do most of us learn how to use our money wisely and well? When we’re growing up, we’re given special instruction in important subjects — swimming, driving, sex — to arm us with info and keep us from harm.

Yet when it comes to managing our money — an activity that every one of us needs to do, every day — we receive surprisingly little preparation. We’re not taught much about it in school, because education systems leave it to us to learn from our families and friends. However, those people often don’t fill in the gaps because money can be such a loaded or taboo topic.

Natalie Torres-Haddad, who grew up in southern California, saw many people around her struggling with debt and financial instability. She was determined to be the exception, and she purchased her first rental property in her early 20s and earned an MPA in Finance & International Business. In the process, however, she became buried in debt. Only by teaching herself the basics of money — basics that she’d never learned — was she able to steady herself and her finances.

Today she leads workshops and sessions to prevent others from falling into the money pit. (She’s also the author of the self-published Financially Savvy in 20 Minutes ). She’s found that even among the college-educated people she meets, “the majority feel confused and overwhelmed about balancing their income and expenses,” she says. The stats show they’re not alone. A 2015 Ohio State University study reported nearly 70 percent of college graduates in the US say they don’t feel equipped to manage money and deal with their debt.

Not only must we get up to speed on the basics, we also need to start having honest conversations with each other about money, says Torres-Haddad. In the same way we’d tell family and friends that we’re cutting out refined sugar from our diets or practicing yoga to increase our flexibility, we should be open with them about the steps we’re taking to boost our financial health. That way, we can get advice and support. This transparency, she adds, can also make us less susceptible to peer pressure-related spending. How many of us have agreed to a pricey meal or weekend trip because we didn’t want to come clean about our money concerns?

Becoming financially literate does not require a huge time investment. Torres-Haddad believes we can start by dedicating 15 – 20 minutes a day to developing our skills and knowledge by learning new terms and resources. Just like attaining literacy in a foreign language, she says, “it’s an ongoing education.” Here are three things you need to know about your money.

1. Know How Much Money You’re Bringing in Every Month vs. How Much You’re Spending

Most of us can rattle off our salaries in our sleep, but could you do the same for your monthly after-tax income and where you’re spending your money every month? If you can’t, that’s normal. But now is the time to learn your actual take-home pay and your actual expenses (and not just ballpark figures or estimates).

For your income, look at your physical or online pay stubs, and start keeping a record of the after-tax amounts. If you’re a salaried employee, that number should be fairly steady; if you’re not, those numbers will vary.

For your monthly expenses, Torres-Haddad suggests writing down — whether it’s in a physical or online notebook — every single daily purchase (coffee, take-out, Uber, online shopping, etc) you make and every single ongoing payment you make through autopay or credit cards (Netflix, gym membership, car insurance, utilities, etc.).

If you’ve never done this before, you may find this uncomfortable — even painful — but it will force you to face up to your spending habits. It will also make these purchases visible. Often, our regular outlays (such as Netflix, Hulu, etc.) can go unnoticed or unquestioned, and our daily spends — especially if we pay by debit card so the funds are instantly drawn from our bank accounts — can go forgotten. Torres-Haddad calls the latter “runaway spending” — “when the little things that you thought cost only a few dollars actually cost much more” in the long run. Take a daily $5 green smoothie. By making them at home, you could save yourself a few hundred dollars in a month.

After you have a fundamental understanding of income and expenses, you can download an app to help you track these categories; see your bank account, credit-card and loan balances; and organize your purchases into buckets so you can identify areas where you might cut back. Two free apps to try are Mint or Charlie, says Torres-Haddad. But, she cautions, apps can be a little “out of sight, out of mind,” meaning if you need extra help to be aware of your spending, stick with the pen-and-pad (or fingers-and-keyboard) method a while longer.

2. Know Your FICO Score and Your Other Credit Scores

While you don’t need to have a good credit score to be financially literate, you must know what it is. ( Note: Most of the information in this section applies to people living in the US.) In the US, FICO was the first company to offer a three-digit credit-risk score for lenders to use when deciding whether or not to approve a loan or line of credit, a credit limit, and an interest rate. There are three other national credit reporting bureaus — Experian, Equifax and Transunion — which also keep track of all your loans (student, auto, personal, etc.) and your balances and histories for all your credit cards (whether issued by banks, stores or businesses).

However, the FICO score is the one most frequently used when you apply for credit cards, mortgages and most types of loans; rent an apartment; or sign up for utilities. FICO scores range from 300 to 850; 670 and up is seen as a good score and 800 and up is excellent. While the FICO score is calculated with a proprietary algorithm, the primary factors that go into it are your repayment history (do you pay your credit-card bills on time? how late are you?), how much debt you’re carrying on cards and loans, how long you’ve successfully held a credit card or loan for; and whether you’ve managed to hold a mix of different kinds of credit.

Most banks and credit cards offer free access to your FICO score on their mobile apps and websites ( here’s a list of the ones that do). If you don’t use one of these companies, you can also find out how to access your score on FICO’s helpful FAQ, including a chart showing where your score falls between “Poor” and “Exceptional.”

Besides checking your FICO score every year, do an annual check of the reports issued by Experian, Equifax and Transunion. This is so you can verify that they’re correct, make sure no one has opened up a line of credit in your name, and see where you might improve. You are entitled to a free copy of a credit report from each bureau once a year. Beware: Many sites will charge you a fee, so use the federally approved and secure Annual Credit Report site.

If it’s your first time checking or you’re about to make a big purchase (such as a car or a home), Torres-Haddad suggests getting all three reports at once. After that, she recommends spacing them out throughout the year. That way, you can quickly catch any errors, fraud, identity theft or any other actions that could hurt your credit history. Mark your calendar so you know when you can request your next free credit report.

3. Know How Much Credit Card Debt You’re Carrying

Knowing how much credit-card debt you’re carrying — and how quickly it’s increasing due to interest — is critical to your financial literacy. Make a list (on paper or on a computer) of each of your credit cards, their current balances, and their current interest rate. Then, put them in order from highest interest rate to lowest.

In general, says Torres-Haddad, this should be how you should prioritize paying them off, paying as much as you can towards the card with the highest interest rate while paying the minimum on the other cards. Called the “ debt-snowball method,” this was popularized by money expert Dave Ramsey.

If you have any cards that offered a 0% APR as a promotion when you signed up, mark down the date on which the promotional rate expires because that’s when you can expect your debt to accumulate at a high interest rate (20% or more). Try to budget your monthly payments so that this card will have little to no balance when that expiration date arrives.

Believe it or not, having a credit card can be a great thing for a person’s FICO and credit scores — if you use it responsibly. Of course, carrying no debt on your cards is best. Otherwise, Torres-Haddad recommends using no more than 30 percent of your available credit limit. So if you have two credit cards with limits of $6K apiece, totalling $12K in available credit, make sure the total balances you’re carrying do not exceed $4K.

If you’ve managed to pay off a credit card, congratulations. But while you may be tempted to close it, Torres-Haddad advises against it. Why? Closing the account will shrink your total amount of available credit and cause your credit score to dip. Instead, delete the card number from any online shopping accounts, cancel any auto-pays billed to it, and freeze the card in ice. It may sound silly but it means that if you want to use it, you’ll be forced to wait for it to defrost — and forced to take a little time to think about your purchase.

When choosing a new credit card, look for ones that offer incentives — such as travel points or cash back — which could help you and your finances. Torres-Haddad recommends going to nerdwallet.com and bankrate.com to compare credit card offers.

Obviously, these three points represent just a small part of financial literacy. That’s why Torres-Haddad urges people to be patient and to learn gradually. Two books she recommends are Napoleon Hill’s Think and Grow Rich!  and Robert T. Kiyosaki’s Rich Dad, Poor Dad. For those who like to get information through listening, she suggests the “Popcorn Finance” and “Her Dinero Matters” podcasts.

When you can, supplement your research with an in-person workshop, adds Torres-Haddad. “Even going to one financial literacy workshop can have a life-changing effect,” she says. A good time to find free workshops is April, which is Financial Literacy Month in the US. One of the best investments you can make in your life is to educate yourself about money, says Torres-Haddad. “It can really give you a lot of peace of mind.”

By: Erin McReynolds

Source: How Financially Literate Are You? 3 Things You Should Know About Your Money

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Visa’s 54 Bitcoin-Linked Cards Pave The Way For Younger Generations To Spend Growing Crypto Wealth

Visa V -0.5% is taking robust steps to connect digital currencies to its global electronic payments network in order to prepare for a financial future where digital assets comprise a meaningful amount of a saver’s wealth.

To date, 54 crypto companies have partnered with Visa to enable crypto spending. Much of this progress comes from the issuance of debit cards using Visa’s FastTrack program, which is targeted towards integrating fintech companies with the Visa network. Over the summer, the firm launched two more products, a crypto rewards credit card in partnership with BlockFi and a debit card with major crypto exchange FTX, which just raised a record $900 million at an $18 billion valuation.

Other crypto-friendly card partners include CoinZoom, Coinbase, Zap, Crypto.com, Bitpanda, Fold, Upgrade, Wirex, and ZenGo.

“We saw this opportunity as these crypto platforms grow, as consumers want to gain access to the liquidity that they have held in these assets, issuing a Visa card could become a bridge that unlocks that value and enables it to be spent at any merchant that accepts Visa,” Head of Crypto at Visa, Cuy Sheffield said.

These projects have gained traction — crypto-linked Visa debit cards facilitated over $1 billion worth of transactions across Visa’s 70 million merchants worldwide in the first half of 2021 alone. $1 billion is only a small fraction of the trillion-dollar payments industry, however retail interest in cryptocurrencies is picking up, suggesting the market has room to grow, especially with younger generations. Sheffield says that no single predominant spending category has emerged in crypto-linked card use.

Survey data suggests that younger generations are increasingly diverting wealth into cryptocurrencies and digital assets. This is especially true for the most affluent members of these generations, which are especially prized by financial institutions and card networks.

A Michelmores survey of 501 ‘affluent Millennials’ in the United Kingdom found that one in five have invested in cryptocurrencies and a CNBC survey of 750 investors conducted in April and May of 2021 reports that nearly half of Millennial millionaires have at least 25% of their wealth in cryptocurrencies. Millennial interest in crypto isn’t limited to the Western world — a recent Mastercard MA -0.1% survey found that Middle Eastern and African Millennials surveyed during February and March of 2021 are especially interested in crypto with 67% agreeing they are more open to using crypto now than they were in 2020.

Meanwhile in Asia, India and China each account for 33% of the $9.4 million worth of weekly peer-to-peer payments volume in the region. In both nations, tech savvy millennials with aspirations of wealth are leading the trade. The Covid-19 pandemic only accelerated this trend by simultaneously spurring savings ambitions and interest in cryptocurrencies.

Approximately 70% of burgeoning retail brokerage platform Robinhood’s $80.9 billion assets under custody came from users aged between 18 and 40. $11.5 billion of those assets under custody are cryptocurrencies, according to the firm’s S-1 filing, and for the three months ended March 31, 2021, 17% of its total revenue was derived from transaction-based revenues earned from cryptocurrency transactions. This number is up from 4% for the last three months of 2020. All of this data suggests high interest among retail traders between 18 and 40 in crypto assets.

As retail brokerage accounts boomed, the crypto market was also hitting new heights, adding to the excitement among younger generations. Bitcoin reached its all-time-high price of $64,654 on April 14, 2021, just after the one year anniversary of the start of the pandemic. The market crashed a month later, bottoming out in July at a $1.2 trillion value for all cryptocurrency in circulation. Since then, the crypto economy has started to recover. The market broke past $2 trillion again on Wednesday, August 11, for the first time in nearly three months.

While investors are still mostly thinking long-term, a time will come when they need to generate liquidity from their holdings. Speaking to that effect, Sheffield argues that even if crypto owners intend to HODL (hold on for dear life, a crypto rallying cry), the day will come when they want to spend.

When that happens, Lisa Ellis, partner and senior equity analyst at research firm MoffettNathanson noted that they won’t want to go through the often arduous process of converting that crypto into fiat because of what Visa is doing.

“Brokerages like Fidelity figured out a long time ago that they should — and Merrill Lynch — figured out that they should issue a card against the balance in your brokerage account because that way you can keep your money in the brokerage account and you’re not constantly moving money,” Ellis said. “It’s basically the same. This is just allowing people to keep funds in what’s essentially a brokerage account and keep it in crypto. And then if they need it for spending fine and people like to do that.”

These developments are unlikely to stop with crypto-fiat payments. In pursuit of creating opportunities for seamless crypto transactions, Visa is finding new ways to appeal to crypto platforms who are looking to expand client offerings. Among these upgrades is the ability for crypto firms to settle payments using a dollar-pegged and quickly-growing stablecoin, USDC. As of writing, USDC’s market cap stands at $27.39 billion.

Typically when transactions are carried out with a crypto-linked debit card offered by a company like Crypto.com, that company converts the crypto to fiat and then sends the funds to Visa, who then sends the funds to the merchant’s bank for the appropriate amount and in the correct currency. Through a partnership with the first federally chartered digital asset bank, Anchorage, Visa will now accept USDC, instead of fiat, from card providers like Crypto.com.

“The goal is if we can make it easier for crypto platforms to issue Visa cards and interact with Visa we think many more — and we’re already seeing a ton of demand in crypto companies coming to us — will have a path to creating a Visa card,” Sheffield said. “We are committed to Visa being the preferred network for crypto wallets and so we want to meet them where they are.”

Follow me on Twitter or LinkedIn. Check out my website.

Source: Visa’s 54 Bitcoin-Linked Cards Pave The Way For Younger Generations To Spend Growing Crypto Wealth

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Visa And BlockFi Launch 2% Bitcoin Rewards Credit Card

In this photo illustration a Visa logo is seen on a mobile...

Cryptocurrency services company BlockFi launched its first-ever crypto rewards credit card, in conjunction with Visa, to approved clients in the United States on Tuesday. BlockFi’s plans for a credit card were initially disclosed in December 2020 when the exchange released a waiting list for US-based clients, which is now over 400,000 people. BlockFi CEO Zac Prince expects everyone on the waitlist to receive their card around the end of July.

The new offering provides clients with a simple way to acquire bitcoin without having to pay fees or navigate the sometimes complicated onboarding processes at exchanges. BlockFi stands to benefit from utilizing the card as a customer acquisition tool as well as from the fees it will receive from money spent on the card.

“The crypto industry has come a long way since the first Bitcoin payment transaction 11 years ago,” Flori Marquez, Co-Founder and SVP of Operations at BlockFi said. “Today, nearly everyone knows about the important role crypto plays in reshaping the financial space, and our new credit card is set to be another game-changer. This card will make it easier than ever for people to earn Bitcoin back while making day-to-day purchases.”

Holders of BlockFi’s Rewards Visa Card will be able to earn 1.5% back in bitcoin on every purchase, with the payout increasing to 2% on every dollar spent over $50,000 annually. As an incentive to new users, they will receive a 3.5% bitcoin rewards rate for the first 90 days or until they receive $100 worth of bitcoin. The card also offers other benefits such as rebates on trading fees and comes with no annual fee or foreign transaction fees.

These rewards are competitive when compared to other traditional cards. For example, Bank of America’s Customized Cash Rewards credit card offers 3% cash back in one spending category of the customer’s choosing, 2% back automatically on grocery purchases and 1% back on all other purchases.

However, depending on an individual’s spending habits they could be outshone by Gemini, the crypto exchange headed up by the Winklevoss twins, when it launches its crypto rewards credit card this summer in partnership with Mastercard. While BlockFi only offers rewards in bitcoin for now, Gemini will give clients 3% back on dining purchases in any cryptocurrency offered on the exchange on purchases without annual fees or exchange fees. However, the rewards drop to 2% on groceries and 1% for all other purchases.

The launch of the BlockFi crypto rewards credit card also marks a new offering in Visa’s expanding crypto business. The electronic payments company has partnered with several crypto firms to offer Visa debit cards and supported over $1 billion worth of volume through crypto-linked cards in the first half of 2020, but the partnership with BlockFi will bring its first crypto rewards credit card. In 2021, Visa appeared on Forbes’ Blockchain 50 list after applying for over 150 blockchain-related patents and announcing an integration with US-dollar pegged stablecoin USDC.

Card users will receive a 1.5% cashback on an accrual basis for every transaction made through the card, which will then be converted to bitcoin and placed into a BlockFi account in a regular monthly cycle.

“Crypto rewards programs are a compelling way to engage consumers in the crypto economy,” Terry Angelos, SVP and Global Head of Fintech at Visa said. “We’re excited to see programs like the BlockFi Rewards Visa Card, which offer rewards that are relevant to the growing community of digital currency adopters.”

The move by BlockFi comes after PayPal Holdings Inc in October said it would allow customers to hold bitcoin and other virtual coins in its online wallet and shop using cryptocurrencies, a move which could help bitcoin and rival cryptocurrencies gain wider adoption as viable payment methods.

Bitcoin has surged about 160% this year, fueled by demand for riskier assets amid unprecedented fiscal and monetary stimulus, interest in assets perceived as resistant to inflation and expectations that cryptocurrencies will win mainstream acceptance.

Follow me on Twitter or LinkedIn. Check out my website.

 

Source: Visa And BlockFi Launch 2% Bitcoin Rewards Credit Card

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Critics:

BlockFi is a New York City-based start-up cryptocurrency financial institution. It lends U.S. dollars against bitcoin and other cryptocurrency collateral, as well as accepting deposits of cryptocurrencies which pay interest to the depositor. BlockFi Co-Founder and CEO Zac Prince has a background both in consumer lending and start-ups.

In February 2018, BlockFi received a $1.55 million funding in a seed round from ConsenSys Ventures, SoFi and Kenetic Capital, among others. In July it secured another $50 million in funding from Michael Novogratz‘s Galaxy Digital Ventures

References

How to Buy Happiness (Responsibly)

The great reopening offers ample opportunity to lift your spirits if you have some money to spare. Here’s how to do it right. Bring on the nationwide spending binge. Half of all people over 18 in the United States are now fully vaccinated. Tens of millions of them are emerging, blinking in the springtime sunshine, and heading straight for restaurants, movie theaters or a flight to somewhere — or anywhere, really.

It is true that millions of people are still trying to get their hotel jobs or theater gigs back. But collectively, Americans are holding on to a larger share of their income than they have in decades.

That leftover money is a kind of kindling. We may look back on this moment as a once-in-a-lifetime period, when many millions of Americans felt that money was burning actual holes in their pockets.

It is an unfamiliar sensation for many of us. “There is a puritanical streak that runs through all aspects of money in America,” said Ramit Sethi, an author who focuses more attention than most on spending well in addition to saving intelligently. “And most of the conversations start with no.”

But we should consider the strong possibility that saying yes right now could bring a true improvement in happiness. So this column — and another one next week — will be about maximizing it through strategic spending.

The conversation begins with “Yes, and … — with perhaps with a side order of “Yes, but …” To help us all get there, I called on some of my most thoughtful contacts among people who talk, think or write about money. And I made sure to ask them this: What are you doing yourself?

Brian Thompson, a financial planner in Chicago, was prepared for this moment. He generally has two questions at the ready: What do you want to spend your money on? And why are you really spending it?

There are no wrong answers, Mr. Thompson said. “I always come from the approach that there is no judgment, and I try to come with empathy to help people clarify what the money means for them,” he said.

Paradoxically, the first thing to think about here is saving. Paulette Perhach said it better than I could here in her classic 2016 article exhorting everyone to build a freedom fund. (“Freedom” is my word — she uses an F-bomb, if you’re trying to find it via internet search.)

Savings aren’t just for when your car breaks down or you get sick. Having a freedom fund means you are not beholden to someone else — whether that’s a significant other who is treating you like garbage or a boss who is harassing you or otherwise making you miserable.

“This is about power, and power comes in a lot of different forms,” Ms. Perhach, an essayist and a writing coach, told me this week. “It comes from options. From looking at life and making sure one person does not have so much say over the outcome of your finances that you would have to tolerate behavior that goes against your own self-respect.”

Every few years, I reopen my well-worn copy of “Happy Money: The Science of Happier Spending,” a book from 2013 by Elizabeth Dunn and Michael Norton, for a review session. This time, I called Professor Dunn, a member of the psychology department at the University of British Columbia, to help me along.

A first principle of research in this area has generally been that buying an experience brings more satisfaction — and less buyer’s remorse — than buying stuff. In the years since the book was published, Professor Dunn said, this conclusion has largely held up for people with more money, though it can be less true for people farther down the socioeconomic ladder.

So what types of experiences should we be making a priority?

After a year marked by loss, I adopted a narrow approach focused on things that I might not have a chance to do again. I will never attend another John Prine concert or again eat food touched by the hands of Floyd Cardoz, both of whom were among the many we lost to the pandemic.

But there are things I can do instead that aren’t likely to recur, like attending my friend’s swearing-in ceremony as police chief in another state. And I’m prioritizing a trip with my daughters to the Great Barrier Reef (using approximately 9,000 years of frequent-flier mile savings) before it is no more.

Professor Dunn endorsed my plans, and the need to get out into the world again. “The only experiences I’ve been having are Netflix and DoorDash,” she said.

Professor Dunn lost her mother, Winifred Warren, to lung cancer in September and has a plan to celebrate her someplace other than a Zoom chat. Soon, she’ll get over the border to California and dine with her aunt and her mother’s best friend at the famed French Laundry — where Ms. Warren had been hoping to go herself, once she got better.

But just because so much fun seems available again all at once, it doesn’t mean you should pursue it all simultaneously. People who have reasonably high incomes — but the proclivity to go the immediate gratification route — can rack up quite a bit of debt,” Professor Dunn said.

Indeed, credit card issuers are licking their lips in anticipation of whatever orgy of spending ensues this year. Ms. Perhach found herself impulsively buying concert tickets recently and was inspired to pen a warning about the behavioral science of overspending for Vox.

The gratification doesn’t necessarily last long — and can even be wiped out by the dread of any new debt, she said. “I’ve done trips with an undercurrent of ‘I’m about to be in trouble,’” she told me this week. “And that’s not a great recipe for fun.”

If you are among the many lucky millions who are better off financially than you were at the beginning of 2020, consider how good it might feel to give something away.

Minnie Lau has spent much of the past year helping her accounting clients in the San Francisco Bay Area spend and save the windfalls from initial public offerings and other stock winnings in as tax savvy a manner as possible. Both they and she have done quite well. They did nothing wrong and have nothing to apologize for.

But amid so much death, fear and suffering, coming out ahead still leads to conflicted feelings. “My ill-gotten gains are going to the food bank,” Ms. Lau said of the money she has made investing this year. “People should not have to line up for food. Didn’t California just announce that it had a surplus? What kind of crazy world is this?”

Everyone else I talked to this week felt a similar urge. Professor Dunn recalled being overwhelmed with gratitude after receiving her coronavirus jab. Now, she’s a monthly donor to UNICEF’s vaccine equity initiative. Ms. Perhach is supporting VONA, which helps writers of color, while Mr. Sethi busted into his emergency fund to donate to Feeding America and match his readers’ donations.

Mr. Thompson, the financial planner, has given money to help people who are both Black and transgender — a segment of the population that he believes needs more help than most. And he’s redoubling his efforts at work to reduce the racial wealth gap.

“If I can help more people build more wealth to pass down, it is a way of serving my purpose and helping people in the process,” he said. “And I think that takes more than just giving. It means systemic change.”

Ron Lieber

 

 

Source: https://www.nytimes.com/

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Critics:

Money management is the process of expense tracking, investing, budgeting, banking and evaluating taxes of one’s money which is also called investment management. Money management is a strategic technique to make money yield the highest interest-output value for any amount spent. Spending money to satisfy cravings (regardless of whether they can justifiably be included in a budget) is a natural human phenomenon.

The idea of money management techniques has been developed to reduce the amount that individuals, firms, and institutions spend on items that add no significant value to their living standards, long-term portfolios, and assets. Warren Buffett, in one of his documentaries, admonished prospective investors to embrace his highly esteemed “frugality” ideology. This involves making every financial transaction worth the expense:

1. avoid any expense that appeals to vanity or snobbery
2. always go for the most cost-effective alternative (establishing small quality-variance benchmarks, if any)
3. favor expenditures on interest-bearing items over all others
4. establish the expected benefits of every desired expenditure using the canon of plus/minus/nil to the standard of living value system.

References

If You’re In Your 50s or 60s, Consider These Moves To Avoid Higher Taxes In Retirement

If you are working with an eye toward retirement or even semi-retirement, you are probably (hopefully) saving more than you could in the past in your retirement accounts. You may have paid off the mortgage and paid for college and other heavy expenses of raising children. That all sounds like you are on your way, except for one big problem I call the “ticking tax time bomb.”

I’m referring to the tax debt building up in your individual retirement account, 401(k) or other retirement savings plans. And, as I wrote in my newest book, “The New Retirement Savings Time Bomb,” it can quickly deplete the very savings you were relying on for your retirement years. But there are a few ways you can avoid this problem.

While you may be watching your savings balances grow from your continuing contributions and the rising stock market, a good chunk of that growth will go to Uncle Sam. That’s because most, if not all, of those retirement savings are tax-deferred, not tax-free.

The funds in most IRAs are pretax funds, meaning they have not yet been taxed. But they will be, when you reach in to spend them in retirement. That’s when you quickly realize how much of your savings you get to keep and how much will go to the government.

The amount going to the Internal Revenue Service will be based on what future tax rates are. And given our national debt and deficit levels, those tax rates could skyrocket, leaving you with less than you had planned on, just when you’ll need the money most.

So, that’s the dire warning. But you can change this potential outcome with proper planning and making changes in the way you save for retirement going forward.

You can begin by taking steps to pay down that tax debt at today’s low tax rates and begin building your retirement savings in tax-free vehicles like Roth IRAs or even permanent life insurance which can include cash value that builds and can be withdrawn tax-free in retirement.

In addition, if you are still working, you can change the way you are saving in your retirement plans. If you have a 401(k) at work, you could make contributions in a Roth 401(k) if the plan offers that. A Roth 401(k) lets your retirement savings grow 100% tax-free for the rest of your life and even pass to your beneficiaries tax-free too.

Learn more: All about the Roth IRA

What the News Means for You and Your Money

Understand how today’s business practices, market dynamics, tax policies and more impact you with real-time news and analysis from MarketWatch.

For 2021, you can contribute up to $26,000 (the standard $19,500 contribution limit plus a $6,500 catch-up contribution for people 50 and older). With some Roth 401(k) workplace plans, you might be able to put in even more.

Then, see if you can convert some of your existing 401(k) funds either to your Roth 401(k) or to a Roth IRA. Once you do this, you will owe taxes on the amount you convert. The conversion is permanent, so make sure you only convert what you can afford to pay tax on.

Also read: We have $1.6 million but most is locked in our 401(k) plans — how can we retire early without paying so much in taxes?

Don’t let the upfront tax bill deter you from moving your retirement funds from accounts that are forever taxed to accounts that are never taxed.

Similarly, you can convert your existing IRAs to Roth IRAs, lowering the tax debt on those funds as well. The point is to not be shortsighted and avoid doing this because you don’t want to pay the taxes now. That tax will have to be paid at some point, and likely at much higher future tax rates and on a larger account balance.

It’s best to get this process going now, maybe even with a plan to convert your 401(k) or IRA funds to Roth accounts over several years, converting small amounts each year to manage the tax bill.

If you have been contributing to a traditional IRA, stop making those contributions and instead start contributing to a Roth IRA. Anyone 50 or over can put in up to $7,000 a year ($6,000 plus a $1,000 catch-up contribution) and you can do so for a spouse even if that spouse is not working.

If one of you has enough earnings from a job or self-employment (and you don’t exceed the Roth IRA contribution income limits), each of you can contribute $7,000, totaling $14,000 in Roth IRA contributions each year. That will not only add up quickly, it will add up all in your favor because now you are accumulating retirement savings tax-free.

Related: Should you convert your IRA to a Roth if Biden’s infrastructure plan passes?

Once the funds are in a Roth IRA or other tax-free vehicles (like life insurance), those funds compound tax-free for you.

The secret is to pay taxes now. It’s so simple, but also so counterintuitive that most people don’t take advantage of this and end up paying heavy taxes in retirement that could have all been avoided.

Ed Slott is a Certified Public Accountant, an individual retirement account (IRA) distribution expert and author of “The New Retirement Savings Tax Bomb.” He is president and founder of Ed Slott and Company, providing advice and analysis about IRAs.

This article is reprinted by permission from NextAvenue.org, © 2021 Twin Cities Public Television, Inc. All rights reserved.

Source: If you’re in your 50s or 60s, consider these moves to avoid higher taxes in retirement – MarketWatch

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