Plan Well, Retire Well Saving and investing your money Sun, 15 May 2005 13:02:08 -0500 http://web.extension.illinois.edu/cfiv/eb141/rss.xml “Being saving” http://web.extension.illinois.edu/cfiv/eb141/entry_12756/ Wed, 26 Jul 2017 16:58:00 +0000 http://web.extension.illinois.edu/cfiv/eb141/entry_12756/ Have you heard that phrase – "being saving"? If not, you might have thought there was a typo or that I've forgotten the rules of grammar. But actually, it's a phase I grew up with. it might be a "regionalism" – a word or phrase whose use is limited to one part of the country – or an antiquated phrase. When I searched online, I found two books from the early 1900s that used it. One even had an entire chapter on it!

To help you get your head around this, think of how we talk today about "going green." Now, the grammar of "being saving" may make more sense.

I remember my grandmother saying this. Maybe other people used it to describe my grandmother, too. To me, it meant using things with care so they weren't damaged or worn more than necessary, or stretching things to make them last. "Being saving" is the opposite of being wasteful.

When we talk about ways to reduce expenses, we usually focus on how to shop wisely and things we can give up or purchase less often. But this concept from my childhood is another way: using no more than is needed and taking care of possessions so that they last longer. The end result is saving money.

I used to teach an activity about ways to save money that was in the earlier editions of University of Illinois Extension's All My Money curriculum. It had several categories of ways to save money, and you were supposed to come up with ideas of what you might do under each one. The list included doing without, sharing, substituting something else, a few others I can't remember, and using wisely. Using wisely? That could be the same as being saving!

I can picture my grandmother doing small things that were labelled as being saving. When she sewed on her treadle sewing machine, she used scissors to snip the threads close to the fabric instead of leaving a tail of thread. 'I'm being saving," she'd say. What she meant was, she was using as little thread as possible so that it would last longer.

She was a skilled quilt maker, and she was renowned for saving even the tiniest scrap of fabric. Many of her quilts were made with pieces that were "pieced on paper" – a technique where each quilt piece was itself pieced together from multiple smaller pieces of fabric. She was being saving – getting the most use possible from the smallest amount of resources.

The photo above is one of her quilts. But this one used "whole" pieces.

Now, you and I may not sew very much or know how to piece on paper, even if we quilt. (I learned many needle arts from my grandmothers, but piecing on paper was one I could never quite understand.) But there are other ways to "be saving."

Here are a few ways this philosophy has influenced me:

 

  • In our kitchen, I store leftovers in containers that have lids. I rarely use plastic wrap to cover a dish that's going in the fridge.
  • Before I cook, I change out of my good clothes or – here's another old fashioned idea – wear an apron to protect what I have on. I'm "being saving" with my clothes, taking care of them so that they last longer.
  • I cut vegetables, meat, and bread on a cutting board so I won't dull my knives or damage my countertop.
  • I try to protect the things I own. For example, I put my gardening tools away before I head back indoors so they'll won't rust from dew or rain. And they won't accidentally get run over by the lawnmower.
  • I rarely get in the car to run a single errand or to buy a single item, to reduce the amount of gas I use.
  • We try to use up the fresh produce we buy and eat up our leftovers, so that we don't have to throw away food. My goal is to throw out as little food as possible. (Are you curious about how much food is thrown out by households in the US? Check the results of a 2016 research study by Ohio State University https:\\news.osu.edu/news/2016/07/21/food-waste/.)

 

Some of my examples of "being saving" may strike you as extreme or having so little benefit as to not be worth the effort. That doesn't mean you can't "be saving" in other ways. The first step is to become aware of where the opportunities are to "be saving." Then weigh the benefits versus any inconvenience or extra effort it requires.

]]>
The Student Loan Chronicles: The Average Amount of Debt http://web.extension.illinois.edu/cfiv/eb141/entry_12726/ Wed, 12 Jul 2017 12:01:00 +0000 http://web.extension.illinois.edu/cfiv/eb141/entry_12726/ The Student Loan Chronicles: What is the average amount people owe?

Back in May, I started the Student Loan Chronicles blog series. Last month I covered "What is it?" trying to define what is a student loan, and how does it work. This month we will be exploring how much the average person owes in student loan debt.

Young people today have pressure put on them to start the American dream. Go to college, get a degree, find a job, find a spouse, get married, buy a house, and have kids. Here's a case example. A young millennial has just come out of college with $30,000 in student loan debt. Started their new job making $42,000/year, living in Illinois. Do you know how much the standard repayment for this loan is? $341/month! Plus that $30,000 loan with interest just became $40,877 over the standard repayment period of 10 years. According to the PEW Research Center, as of 2016, 15 percent of 25 to 35-year old millennials were living in their parent's home. 27 percent of those millennials have some form of college education, including a bachelor's degree or more.

Student loans, while they may not be the next financial crisis, they are hindering some young adults from moving out and becoming financially stable on their own. Join me next month as we hear from some young adults about their student loan journey!

]]>
Help Your Child Understand Spending Money http://web.extension.illinois.edu/cfiv/eb141/entry_12700/ Mon, 03 Jul 2017 12:32:00 +0000 http://web.extension.illinois.edu/cfiv/eb141/entry_12700/ Children see us go shopping, pay bills and go to work, but we don't often talk to them about how we use money. I've found the children we work with have lots of ideas about money: some accurate and some not-so-accurate. We need conversations with our children to help guide their conclusions. Young children seem to especially like conversations about spending and sharing money.

For example, one of our lessons includes making coin rubbings from international coins. Who knew there were so many different coins – not young children who haven't traveled! A book that fits nicely with this activity is "My Rows and Piles of Coins," by Tololwa M. Mollel and illustrated by E.B. Lewis. Recognized for its illustrations with a Coretta Scott King Honor Award, in this picture book, a young boy is determined to help his mother take farm produce to the local Tanzanian market and sets out to save coins to buy a bike. The story has a wonderful twist at the end that will easily lead to conversations about family values, as well.

Another activity revolves around the Max and Ruby story, "Bunny Money," by Rosemary Wells. Max and Ruby's adventures with money while they're shopping for a present for Grandma are engaging. Providing youth with their own envelope of money to spend along with Max and Ruby helps them practice spending (and budgeting) money.

Two other fun books which have inspired activities are "Follow the Money!" by Loreen Leedy and "Fancy Nancy and the Fabulous Fashion Boutique" written by Jane O'Connor and illustrated by Robin Preiss Glasser." In "Follow the Money!" the travels of a quarter are followed step-by-step from its creation to delivery to a local bank and from one spending situation to the next. In Fancy Nancy, the concepts of earning and sharing are explored with delightful illustrations.

You can bring these stories into your home! Look for the books at your local libraries.

Also, the Consumer Financial Protection Bureau (CFPB) has created a "Money as You Grow Book Club" program facilitator's implementation guide to encourage parents, librarians and others to use stories as a way to begin money conversations with children. The CFPB website includes more information about this program plus other resources such as activities and conversation starters for youth at different ages.

For other money-related book ideas read the blog post, "Encouraging Young Entrepreneurs: Summer Reading." Another post is "Stories Help Share Values."

Use summer time to start a money conversation with a child. I think you'll be impressed with how much they are interested in the topic.

 

Reference to specific products does not imply endorsement by University of Illinois Extension, nor is discrimination intended against any that are not listed. Other excellent books about money exist. What are your favorites?

 

]]>
I want to start investing. How much of my savings should I invest? http://web.extension.illinois.edu/cfiv/eb141/entry_12671/ Wed, 21 Jun 2017 16:45:00 +0000 http://web.extension.illinois.edu/cfiv/eb141/entry_12671/ I was recently posed this question by a workshop participant I'll call Rick:

"I have accumulated some money, and it is all in bank accounts. I feel like I should have some part of it invested in things like stocks and bonds. But how much? And how do I get started? I'm worried that stock prices seem like they're very high right now, but the interest I'm getting is very little."

Even though I've been teaching about investing for years, this question made me take a step back and think about that initial leap into investing. It was a challenging question to answer on the fly! Maybe you are also wrestling with this question. Or you're trying to evaluate the advice you're getting from a financial professional on this issue. So I decided to share this multi-pronged answer with you.

Here are some of the points I made in attempting to answer Risk's question.

The interest I'm getting is very little. Many savers are frustrated today by the extremely low interest rates paid by CDs (certificates of deposit), savings bonds, money market funds, and other types of interest-bearing vehicles. It's tempting to look around for something that pays a higher interest rate. And you might find some investments that say they will. But promises of significantly higher interest rates likely mean that those choices are much riskier than your insured bank account. Those promises could even be signs of fraud.

How do I know that? One of the basic rules of investing is that risk and return go hand in hand: To have the chance to earn higher returns, you have to take more risk. There is no free lunch.

Example: If CDs are paying 1% to 2% and most bond funds yielded less than 3% last year, how could another bond fund have paid 10% last year? There has to be more risk involved. In this case, it's because this is a "high yield" bond fund. It holds bonds from companies that may not be able to make their interest payments, or might not even be able to pay back these loans. These are sometimes called "junk bonds" in contrast with more credit-worthy companies whose bonds are considered to be "investment grade."

And if someone is guaranteeing you a 10% return in just 6 months with no risk, that reaches the level of too good to be true. I smell fraud in the air.

I'm worried that stock prices seem like they're very high right now. Yes, by most (if not all) measures that investors use, stock prices seem high right now. But the problem is, that doesn't tell us when prices will drop. Simply knowing that stock prices are historically high doesn't tell when is the right or wrong time to invest. Stocks could go higher. They could hover at the same level for a long time.

So we have to look further for guidance about whether, and when, to move money from savings to investments. And some of these factors are about us, not about the market.

What is your risk tolerance? Risk tolerance basically means, How will you react emotionally if your investment loses money? Investor.gov explains it this way:

An aggressive investor, or one with a high risk tolerance, is willing to risk losing money to get potentially better results. A conservative investor, or one with a low risk tolerance, favors investments that maintain his or her original investment.

Say you put half of your money in a mutual fund that's invested totally in stocks. But you panic and sell when your investment loses 20%. Your investment was too aggressive (risky) for your risk tolerance. By selling when it dropped, you locked in your losses and missed out on the opportunity for your investment to recover. Perhaps a better choice for you would have been to invest just a quarter of your money in that same stock mutual fund. With the remaining ¾ of your money in something more stable, like series of CDs, you might be able to handle seeing a small part of your portfolio lose money.

Risk capacity is a related but different concept. It refers to your financial wherewithal to handle losing money on an investment.

What does someone with high risk capacity look like? Here's one example. Stephanie earns a substantial salary in a stable job. She saves a big portion of her salary because she lives a modest lifestyle. She is 20 years away from retirement, so she won't be need any of the money she invests until years down the road. She has little or no debt, and she has an emergency fund equal to 6 months' of expenses. If she lost money on an investment, she could recover from that loss.

Martha's situation is quite different. She's a widow with three young children who has not worked outside the home in the past 10 years. She plans to go back to work, but she'll probably be in a low-paying job. She has a mortgage, a car payment, and credit cards on which she's carrying balances, plus little if any savings.

Even if Martha wouldn't worry if an investment lost money (meaning that she has a high risk tolerance), it would be very hard for her to recover financially from that loss. Her risk capacity is very low.

Many online questionnaires provided by retirement plans and mutual funds call themselves risk tolerance assessments, when in reality they combine questions about both risk tolerance and risk capacity. I think that's a good thing. These tools may even recommend how much of your money should be invested in stocks, bonds, and "cash" which includes savings accounts, CDs, and savings bonds. Look at those recommendations as a guideline, not something carved in stone. Try more than one questionnaire to see how much their recommendations differ.  And try the one from Rutgers Extension which is a pure risk tolerance tool, developed by two personal finance professors.

Should I invest all my money at once? Let's say that Rick decided that he wants to invest $50,000 of his money in a stock mutual fund. Does he invest the whole amount at once? Or does he break it up and invest just part of it at a time, maybe $2500 a month, so that it would take nearly two years to invest the whole amount? (That's a strategy known as dollar cost averaging.) Dollar cost averaging could help protect Rick against investing the entire $50,000 at the wrong time. But it's actually more likely to hurt him. Since stock prices go up more often than they go down, investing the $50,000 all at once is likely to get him a better return. If he's just too worried about prices dropping right after he invests, dollar cost averaging can manage that risk for him, with the trade-off that he may get a lower return on his money.

Did this help? Rick's response. After I shared these thoughts with Rick and the rest of the group, I asked him whether I'd really answered the question. I wasn't sure what he'd say! I was happy (and relieved) when he said that my comments were quite helpful. Maybe they will help you with your investing decisions, too.

]]>
The Student Loan Chronicles: What is it? http://web.extension.illinois.edu/cfiv/eb141/entry_12640/ Mon, 12 Jun 2017 15:38:00 +0000 http://web.extension.illinois.edu/cfiv/eb141/entry_12640/ Last month I wrote a post about starting the student loan chronicles. For those of us paying back student loans, this is usually what it feels like. You get paid, then your loan is due a few days later, and you feel like all of your money is gone! By knowing what a student loan is, and how they work before you get one, may actually help you in the long run!

What is a student loan?

According to the Financial Student Aid Office, a loan is "money you borrow and must pay back with interest." This sounds simple enough! Until you see that you can borrow from the federal government, the state you live in, your school, non-profit organizations and even private lenders! Where does someone start? By applying for the FAFSA! (See more below!)

How do they work?

Applying for the FAFSA (the Free Application for Federal Student Aid) can help you know if you're eligible for student loans, aid, or even grants. One way, is to try out the FAFSA4caster. It's an online tool that can be used to find out a student's eligibility for aid. This tool is for those who aren't ready to file for the FAFSA (students who may be looking at college, but haven't graduated or accepted attendance at a university or community college!) If you're a parent, or a high-school student, knowing how much your tuition is going to cost will help you decide how much aid you need, as well as knowing how much you can afford as well.

If you're a current student, entering college, you should go ahead and apply. The deadline for application seems to change, so check here and find out when you need to apply. One thing to remember is that as a college student, you don't need to take the whole amount of aid they offer. A while back, I wrote a guest blog post for the Office for Financial Success at the University of Missouri about limiting your student loan liability.

Student loans are a complicated subject! This is just the second of many blog posts, so stay tuned for more information! If you have a student who's ready for college or repayment, watch our hour long webinar on student loan repayment!

]]>
Are You Credit Invisible? http://web.extension.illinois.edu/cfiv/eb141/entry_12627/ Mon, 05 Jun 2017 21:36:00 +0000 http://web.extension.illinois.edu/cfiv/eb141/entry_12627/ Do you have a credit history? If you're not planning to borrow money, perhaps you think it's not important. Well, your credit history can affect your finances even when you're not borrowing money! Insurance companies, perspective employers (for some types of jobs), and utility companies may be looking at your credit report or credit score to determine what to charge you or whether to offer you a job.

When credit reports and scores were first developed, mostly lenders used them. However today, consumers' financial lives are impacted by poor or non-existent credit histories in many ways. For example, a young adult who hasn't yet built a credit history, may pay a higher deposit when they set-up electricity in their apartment than someone with a credit history.

Nearly one in five American consumers have no credit history, or so little data that a credit score cannot be calculated. People without credit history are "credit invisible," and it can make it difficult to build assets. The effect is not equally felt among U.S. consumers; Blacks and Hispanics are more likely than Whites or Asians to be credit invisible or to have unscored credit records.

The CFED's report, "The Importance of Credit Reports & Credit Scores for Building Financial Security," argues, "In many ways, a credit report is the gateway to financial opportunity, determining who has the chance to build wealth and security and who does not." If someone chooses to not borrow money (or have debt), should they be penalized?

Researchers and policy makers are looking at ways to change this financial barrier. An experimental pilot study of including rent payments in credit histories, found that 79% of participants who were credit invisible increased their credit scores after rent reporting. Others are exploring whether to include phone and utility payments in credit reporting. If you'd like to help this effort, the Consumer Financial Protection Bureau is requesting feedback from people who find it challenging to build a credit history.

I talk to people who are trying to build their credit history, but can't get a credit card or loan because they don't have a credit history. One possibility is to apply for a secured credit card. A secured credit card requires that you deposit money in an account as collateral. Often, but not always, this money will earn interest. Typically, the amount you put in as collateral will be your credit limit. For example, if you deposit $500, then your credit limit will be $500.

All secured credit cards are not the same. You need to ask questions and read the credit card agreement to understand fees and interest charges on revolving balances. Ask how the secured card may transition to a regular credit card. Make sure the credit card agreement does not require any other expenditure from you, such as set-up fees or the purchase of an insurance policy.

Double-check that the financial institution issuing the secured credit card will report your payment history to credit bureaus. You can begin to build your credit history by making payments on time. Check with local credit unions and banks to compare their secured credit card offers. In addition, websites like www.bankrate.com have lists of financial institutions offering secured credit cards.

Check your credit report at www.annualcreditreport.com to see what your report looks like. You can check your report for free from each of the three credit bureaus once a year. To check your FICO credit score (the one most often used by lenders), you will need to pay a fee. Are you credit visible or invisible?


]]>
Don't risk a lot to save a little. Or said a different way, stupid ways you can waste your money! http://web.extension.illinois.edu/cfiv/eb141/entry_12595/ Tue, 23 May 2017 15:16:00 +0000 http://web.extension.illinois.edu/cfiv/eb141/entry_12595/ "Don't risk a lot to save a little." That simple phrase has stuck with me through many years since I learned it while studying for my Certified Financial Planner designation. It was one of three basic principles of risk management. (I've forgotten the other two.) The idea is, don't try to save a nickel when that decision might end up costing you $10.

Over the years, I have often thought about ways that we do or don't follow this basic principle of insurance in our daily lives. For a while, I even said it to myself as a sort of mantra when I was trying to make smart decisions.

I'm not sure why our brains don't seem to latch onto this idea. It seems hard for us to internalize this concept. Maybe it's because it's not cool to be cautious, or because we like the stimulation of taking chances. Behavioral economists can probably explain why our brains work this way. But rather than diving into that, for today I'm just going to point out some of the ways that I've noticed that we take on unnecessary risks rather than following the advice, "Don't risk a lot to save a little."

So here is my list of stupid ways we waste our money because we took a shortcut to save a few minutes or a few dollars, and ended up costing ourselves much more in the long run.

"I hate putting up with a slow computer because it's automatically downloading updates, so I turned off auto updating. I'll get around to installing the updates manually…someday."

The huge ransomware outbreak two weeks ago points out the huge risk of not updating. Without the most recent updates to your operating system, this malware can encrypt all your data. The only way to get your data back is to pay the hackers a ransom, usually $300 or more. And even if you don't get ransomware, you're apt to get some other malicious software on your computer that will wreak other types of havoc – costing you time and perhaps money to get it cleaned up.

"I'm only going to be a minute."

Those are the famous last words of many who have parked in front of a fire hydrant or skipped paying the parking meter. But saving the extra couple of minutes in would have taken to find a legal parking spot, or the pocket change to pay the meter, can come back to haunt you in the form of a ticket that could be very expenseive.

"I'll just take some of these XXXX from my worksite to use at home; no one will notice."

Technically, I suppose taking any company resource for your own use could be considered theft. However, I doubt that most employers get too uptight about the occasional personal photocopy or minor office supplies that find their way to employees' homes. But if you get caught up in the idea that the company somehow "owes" you, or that these things are free, you could cross the line where the employer does care and takes it seriously. I actually know of an employee who was taking such advantage of free snacks provided by the company that the person was fired!

"I'll deal with that later." Or, "If I ignore it, maybe it will go away."

Whether it's a bad noise your car is making, a widening crack in your basement wall, or a physical symptom that could indicate a serious illness, many of us tend to ignore a problem and hope it will go away. But time gives a problem time to grow, whether it's a minor auto or home repair that eventually requires an invasive fix with a huge price tag, or a cancer that goes from a treatable Stage 1 to a life-threatening Stage 4.

Our brains also may lead us to ignore or procrastinate about financial problems, like overspending, until the results is a mountain of credit card debt or payday loans.

And finally, let me use an actual insurance example.

"I'll just get the least amount of auto insurance possible, and save myself a few dollars."

States have minimum amounts of liability coverage that anyone owning a car is required to carry. In Illinois, it's $25,000 for injury or death of one person in an accident, $50,000 for injury or death for more than one person in an accident, and $20,000 for damage to property of another person, which is often abbreviated as 25/50/20.

If you hit an expensive car or seriously injure another person, you're going to blow through those limits really fast. And you'll be on the hook for what your insurance doesn't cover. If you'd shopped around, you probably could have gotten a policy with substantial coverages, such as 100/300/50, without paying a lot more. You might have even been able to keep your premium the same by increasing your deductible from, say, $250 to $500.

No one has the time or money to do everything we "ought" to do. But perhaps my old mantra, Don't risk a lot for a little, can help you think about what risks are worth taking and which ones aren't.]]>