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Money Matters

What Percentage of Your Salary Are You Saving?

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The debate about how much of your income you should contribute to a company-sponsored retirement plan rages on. Some say 10% and some say 15%, but according to Aon Hewitt the average 401k contributor only contributed 7.3% of her income. What percentage is right for you?

How many years will you spend in retirement?
One of the main things you’ll have to think about is how many years you might spend in retirement. If you want to retire at 65 and the average American will live to be about 85 years old, you’ll spend about twenty years in retirement. That’s a very long time, but your family history might suggest that you’ll live to be 93 or 107. Obviously, the more you invest, the better.

If you plan to live a few more years than you actually think you might, you’ll give yourself a bit of a financial cushion during retirement. The worst case scenario is that you planned for only twenty years, lived longer than that, and now your nest egg is quickly being depleted. The best case scenario sees you with a sizable nest egg to draw off of, Social Security coming in, and a plan in place to draw the money strategically while leaving a tidy sum to your inheritors.

What do you want those years to look like?
Some of us want to retire to a foreign country. Some of us want to sit in a rocking chair and enjoy our families. Some of us want to travel the world and do all the things we couldn’t do while we were working. What do you want your years in retirement to look like? How much money you’ll need to sock away will depend on how you plan on spending those years in retirement. Golf fees and plane tickets can get pretty expensive. Thinking about what you want to do in retirement, and how much money that life will cost you per year, is a great way to think about how much money you should be socking away now. Unless you want to work until you drop dead, you’d better start planning an exit strategy.

Speaking with a fee-only financial advisor is a great way to start sketching out those ideas. No one can tell you what your life will look like during retirement, but speaking with a fee-only financial advisor can help you to better understand where you stand now and what you need to do to make your retirement plans come to fruition. Will you have paid off all of your debt by then? Will your mortgage be paid off? Will you be taking on new debt (new home, time share, etc.) to live the life you want?

How much money will you need to create that life?
Conventional financial planning says you should only draw 4% to 5% of your retirement portfolio per year. How much money will you need to have in order to last you all of those years, in the lifestyle you want to live, is a very important number. The most confusing part of planning for retirement is that everyone’s number is going to be different based on how long you might live, what you’ve saved and what you plan to do while in retirement.

While the answers to these questions are difficult to answer, what’s not difficult to answer is that you have to take advantage of compound interest and investing now if you want to have any kind of retirement. The great thing about employer-sponsored 401k plans is that the dollars you are using to invest for retirement are dollars that you would have been taxed on. That’s right: you can pay the money to Uncle Sam or pay the money to yourself for retirement. Speaking with a fee-only financial advisor can help you take advantage of all the help from your employer-sponsored plan to shore up your retirement fund while paying less in taxes.

Bottom Line
Speak with a fee-only advisor as soon as possible and increase your 401k contribution to 15%. Which situation will make you more upset: you end up with more money than you think you need and have a cushy retirement or you end up without enough funds to allow you to live independently and wish you had made better choices? Invest as much as you can as early as you can and if it shaves a few bucks off of your tax bill, all the better.

Shay Olivarria is the most dynamic financial education speaker working today. She has written three books on personal finance, contributes to multiple online media platforms, and is a foster care alumni. She's been quoted on Bankrate.com, FoxBusiness.com, and The Credit Union Times, among others. To schedule Shay to speak at your event or to find out more about her work, visit her at www.BiggerThanYourBlock.com.

Is Now the Best Time to Refinance?

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Every commercial on the TV, internet, and radio is talking about how easy it is to refinance your current mortgage and how helpful it will be to have lower payments due to interest rates being so low. Refinancing means more business for financial institutions, insurance carriers (home, title, etc.), and various other industries that profit from the paperwork that comes with any new mortgage. That’s great for them, but let’s makes sure that refinancing really is your best option.

Should You Refinance?
You’ll have to take into account your current credit scores, how much equity you have in your home, how long you want to stay in the home, if your current mortgage has a prepayment penalty, how long you’d like to take to pay off the new mortgage, and how much money you have available for closing costs. Take a look at this list to determine if refinancing is the best option for you:

Interest rate – Take a look at your current mortgage papers to find the interest rate you’re paying. A change in one percentage point over the lifetime of a 30 year mortgage could mean the difference of thousands of dollars.

Prepayment penalty – While you have those loan papers out, see if you have a prepayment penalty. If you don’t have one, then refinancing will be a little cheaper. If you do have one, then on top of paying off the original loan you’ll also have to pay a, sometimes hefty, fee to get out of the original mortgage. Interest payments are how the financial institution makes money; so many mortgages have these clauses. If you aren’t paying your mortgage off over time, they don’t get to collect those interest payments.

Jumbo loan – If you originally took out a jumbo loan (a loan of more than $417,000) and now have enough equity to apply for a smaller loan, then refinancing might be a good option.

Horizon – Depending on how much longer you think you’ll be in your home, refinancing may or may not be worth the hassle and closing costs. If you’ll be in your home three years or less then you probably will pay out more money in closing costs than you saved in payments. Refinancing with fewer than three or more years in a home may not be a good move.

Amortization – When you refinance your mortgage you’re basically taking out a new mortgage. It’s like starting from the beginning. If you had a 30 year mortgage and you’re going to refinance in year 12, if you want to make sure your mortgage will be paid off in the 30 original years you wanted to pay it off in, you’ll need to get a mortgage with fewer than 18 years to pay it off. When refinancing you’ll have to look at your timeframe and decide if you want to a) start all over again with a new mortgage and longer timeframe or b) take out a mortgage with a shorter timeframe and a little bit higher payments.

What You’ll Need to Refinance
If you decide to refinance you’ll have to consider how much equity you have, what your credit scores are, and how much cash you have available for closing costs:

Equity – To qualify for a refinance you’ll have to have enough equity in your current home. How much equity depends on what kind of refinance you’d like to get and which financial institution you’re working with.

Good credit scores – Thought getting refinanced is easier than getting an original mortgage, you’ll still need good credit scores. You can check your credit scores before you apply for a refinance with no negative repercussions. Make sure that your reports and scores are accurate and try to pay off as much debt as possible to get the best interest rate possible.

Closing costs – Just like with your original mortgage, there will be closing costs. Don’t be fooled by companies that offer you “no closing costs” they have to make money too. What they mean is that the closing costs have been rolled into the new mortgage. You’ll either pay now or pay later, but you will pay.

As you start comparing offers from different financial institutions, it’s going to be important that you get, and understand, the PIL (principle amount, interest rate, and length of loan) of each offer.

The best time to refinance is when you have something to gain from it. When you have the equity, credit scores, closing costs to significantly lower your payments or to lower the overall amount of interest that you’ll pay back over time then go for it.

Shay Olivarria is the most dynamic financial education speaker working today. She has written three books on personal finance, contributes to multiple online media platforms, and is a foster care alumni. She's been quoted on Bankrate.com, FoxBusiness.com, and The Credit Union Times, among others. Visit www.BiggerThanYourBlock.com to find out more about her work.

Pay Down Debt

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Paying off debt will take a huge emotional, as well as financial, burden off of your shoulders and it’s usually easier said than done. To make it a bit easier let’s start at the beginning and lay out a plan:

Make a list of all your debt. There should be a column for the name of the company, the amount of debt, the interest rate, and any notes about the debt.; there’s a great Debt Worksheet in Money Matters: The Get It Done in 1 Minute Workbook. After you have filled in all the columns relating to the debt, you’ll have to decide which strategy you’d like to use to pay down the debt.

Choose a strategy. There are two basic ways that most people decide which debt to pay off first. You can pay it off by which interest rate is higher or which debt amount is smaller.

Pay by interest rate – Once you have all your debt listed on the chart take a look and see which interest rate is the highest and write a number one near it. Find the second and write a number two. Continue numerically ordering them until you have them all in order from highest interest rate to lowest interest rate. You’re going to continue paying the minimum balance on all your accounts; however you’re going to start paying a little extra on the account with the highest interest rate to help pay it off faster. Once the highest interest rate is paid off you’re going to apply all the money that you would have paid (minimum balance plus the extra bit) towards the debt with the second highest interest rate while continuing to pay the minimum on all the other accounts. Once that one is paid off you’ll move on to the third account. People like this method because 1) it helps to cut down on the overall amount of interest you’ll pay back over the lifetime of the loan and 2) it creates a snowball effect that helps get debt paid off quickly.

Pay by debt amount – Once you have all your debt listed on the chart take a look and see which is the smallest amount. Write a number one near it. Find the second lowest amount and write a number two near it. Continue until each debt is in numerical order from lowest amount to highest amount. You’re going to continue paying the minimum balance on all your accounts; however you’re going to start paying a little bit extra on the account with the lowest amount of debt. Once the smallest amount is paid off you’re going to apply the payments you would have made (minimum balance plus the extra bit) to the debt with the next highest amount. Continue this strategy until all debts are paid off. People like this strategy because 1) it feels like you’re accomplishing paying off your debts more quickly and 2) it creates a snowball effect that helps debt get paid off quickly.

Pay aggressively. Once you’ve chosen which strategy you’re going to use to pay the debt off, you’ll need to start paying the debt off as quickly as possible. Use every available dollar to pay down the debt. Those extra payments will pay down the principle amount. With a smaller principle amount, the interest accrued will be less. As the required payments get smaller, continue to make payments aggressively. The quicker you pay off one debt the faster you’ll be able to pay off the rest.

Keep your list somewhere you can see it often and remember that every financial expenditure is taking you one step close, or one step further away, from being wealthy.

Shay Olivarria is the most dynamic financial education speaker working today. She has written three books on personal finance, contributes to multiple online media platforms, and is a foster care alumni. She's been quoted on Bankrate.com, FoxBusiness.com, and The Credit Union Times, among others. Visit www.BiggerThanYourBlock.com to find out more about her work.

Planning for the End

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One of the realities of life is that at some point, we all will cease to exist. It’s inevitable. The responsible thing to do is to face up to it and make the best decisions possible for our families while we can. There are three very simple, yet important, steps you can take now to make things a bit easier for everyone involved.

#1 Choose your final resting place
One of the most costly decisions you’ll have to make is whether you’d like to be buried or cremated. According to the 2010 National Funeral Directors of America General Price List Survey the average cost of a funeral is $6,560 while according to CremationResearch.org the average cost for cremation is $1,110. The no-cost alternative is to donate your body to science.

You’ll have to consider the costs involved as well as your beliefs. There is some discussion about whether it’s better to pre-pay for your services or hold the cash in an account or trust until the money is needed. It’s not uncommon for the companies or items that have been pre-paid to no longer be around by the time they are needed. Regardless what you choose, it’s important that you start thinking about it now so you and your family can prepare.

#2 Think about avoiding taxes
Contrary to popular belief, a will may not protect an estate against taxes due after death. It’s important that you make every effort to pass your home, accounts at financial institutions, cars, funds in investment accounts, jewelry, and any other assets to your heirs with the least amount of taxes allowable.

Estates of less than $5 million will owe no estate taxes and those with more than $5 million in assets will be taxed at 35%. That sounds great until you decide that since there are three children of the deceased the house will be sold and capital gains taxes will have to be assessed and paid. The government doesn’t miss any tricks. Make sure you speak with an attorney that can help you pass along your assets to the people you want them to go to with the least amount of taxes owed. It’s even more important if you think you have a small estate. You definitely don’t want your estate to go to the government instead of your heirs.

#3 Make your wishes known
I’m sure we’ve all heard it said before that funerals either bring families together or tear them apart. Making your wishes known to everyone verbally and in writing before you pass will help everyone accept your wishes.

You built your estate up over time and you know what you want to happen to it after you pass. Whether you’re going to donate it to your alma mater, pass it to your heirs, or have it buried with you it’s completely your decision. Don’t let anyone else pressure you into making decisions that you don’t believe in. It’s your job to help everyone understand and get on board with your vision.

What other things need to be considered? Share them in the comments.

Shay Olivarria is the most dynamic financial education speaker working today. She has written three books on personal finance, contributes to multiple online media platforms, and is a foster care alumni. She's been quoted on Bankrate.com, FoxBusiness.com, and The Credit Union Times, among others. Visit www.BiggerThanYourBlock.com to find out more about her work.

Personal Finance Takeaways from the Occupy Wall Street Protest

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Last week, one of the most controversial protests began in New York City. The protestors are talking about the applications of financial education. They are sleeping outside, they are being arrested, they are bringing attention to some very sensitive financial conversations and they just might be teaching us all a thing or two about our individual financial ideals.

What is the Occupy Wall Street Protest?
On September 17, 2011 a group of diverse people set out to change the way corporations do business in this country. Photos posted on the internet show people that are young and old, of many different cultures and ethnicities, and various gender representations. According to the website, www.OccupyWallSt.org, the organization is the “99% that will no longer tolerate the greed and corruption of the 1%”. There are people that want to raise taxes on the wealthy, people that want to modify the way taxes are levied on corporations, people that want to regulate the income difference between C-suite executives and employees and others that wanted to have the “personhood” of corporations repealed. They have different agendas, but similar motivations. People are being taken advantage of by corporations and these peaceful protestors believe that they can change things.

Takeaways from the Protest
Whether you agree or disagree with the message of the protestors there are definitely some things we can learn from them:

Find out how things work. If you want things to be different (i.e. jobs, foreclosures, taxes, etc.) then you have to understand how those things work so you can advocate for changes. Griping to your friends doesn’t count as “doing something”. Figure out who you need to contact and then organize your network to let that person, or those people, know that changes need to occur.

Peacefully fight for your rights. Nothing will change if you don’t let people know, with your dollars, votes, etc. that changes need to be made. It’s up to each of us to advocate for stronger communities. Don’t be afraid to let your voice be heard.

Understand that you’ve got the responsibility, and the ability, to change things. The great thing about our country is that we are built on the idea that each of us can contribute positively to the political and economic climate of our country. That means that you have a responsibility to make sure that you’re doing your part to create stability in your communities. You have some wonderful tools and resources inside of you to get that job done. Your ideas are valuable and our country needs those ideas.

You don’t have to sleep on the streets of New York to contribute your energy to bettering our nation. Do what you feel comfortable with in your own neighborhood, but do something.

Shay Olivarria is the most dynamic financial education speaker working today. She has written three books on personal finance, contributes to multiple online media platforms, and is a foster care alumni. She's been quoted on Bankrate.com, FoxBusiness.com, and The Credit Union Times, among others. Visit www.BiggerThanYourBlock.com to find out more about her work.

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