When people accumulate a little too much credit card debt, there’s always a strong temptation to work out some sort of debt consolidation that will make the plastic go away in one fell swoop. On the surface this can seem like an excellent idea. But debt consolidation is really about converting debt from one type to another – without actually paying it off. There are all kinds of riskS to this maneuver, but especially when you use your house for the consolidation.
Here are five reasons you shouldn’t use your home equity to pay off your credit cards.
1. Increasing the Mortgage Puts Your Home at Greater Risk
Anytime you increase the amount of money you owe on your home, you also increase the risk of owning it. This is especially true if you use a home equity line of credit (HELOC) to payoff your credit card loans. A HELOC is really just a credit line secured by your house, and you’ll be moving your revolving debt from unsecured status to secured – by your house.
But that’s not the worst of it.
HELOCs typically come with variable rates, which is part of the reason they have lower closing costs than a traditional mortgage. Since the HELOC is secured by your home, the rate on it is generally lower than what it is for credit cards. But since it’s variable, it can change – meaning increase.
Nothing constructive will be accomplished if you consolidate a bunch of 10% credit card debt into a 5% HELOC, if two years later the rate on the HELOC is up to 10% – or higher. A large HELOC balance at much higher interest rates could threaten your ability to make the monthly payment on the home.
2. It May Not Be As Easy to Sell or Refinance Your Home With a Higher Mortgage
Whether your credit card debt is consolidated using a HELOC or a straight up refinance of your first mortgage, you will be increasing the indebtedness on your home. That will make it harder to refinance or to sell, should the need arise.
This can be a serious problem should the value of your property fall as it did in much of the country after 2007. A 25% drop in the value of your home could leave you “underwater” on your mortgage, if your indebtedness reached 80% of the original value. That could leave you trapped in the home, unable to sell or refinance it.
Even if values don’t fall, the increased indebtedness could leave you with less equity after a sale, and that would leave you with less cash to put down on your next home.
3. You’ll be Converting Short-term Debt to Long-term Debt
Credit card debt is short-term debt. But when you consolidate it on your home, it becomes long-term debt. You may be converting unsecured revolving debt to a 30 year mortgage on your home.
If your credit cards happened to contain – among other short-term purchases – last year’s summer vacation costs, then you will be paying for that vacation for the next 30 years. You may also be converting last years Christmas gift purchases, last weeks dinner at Olive Garden, and a whole bunch of Starbucks latte’s to semi-permanent debt. That’s a bad trade off, no matter how much you’re saving in interest costs.
4. Refinancing Your Mortgage Costs Money
Should you refinance your first mortgage to payoff credit cards, you will incur costs as a result of the refinance. These costs are generally between 2% and 3% of the new loan balance. On a $200,000 loan, you may pay $5,000 for the refinance. That means that the credit card consolidation was accomplished at a very high cost. For example, if the refinance was mainly to consolidate $50,000 in credit card debt, you will have paid 10% of that amount to make the refinance – up front!
The problem is compounded if you reset your mortgage term. For example, let’s say that you have 25 years remaining on your 30 year mortgage. In order to consolidate your credit cards, you refinance your first mortgage back to a 30 term. The payment may be lower than what you were paying for your old first mortgage plus the credit card payments, but you will have added an additional five years of payments to the back end of the loan.
5. One Debt Consolidation Will Beget Yet Another
We can categorize this this one under “moral hazard”. If you use your home to accomplish one credit card debt consolidation, you’ll use it again. That’s because the consolidation makes it easier to get into – and out of – credit card debt. Refinancing your home is a way to get out of credit card debt without actually having to repay the debt.
Anything that’s easy is something you’ll do again. Nothing is learned about the negatives of running up large credit card balances, because fixing the problem was so easy.
At least part of the reason so many people lost their homes in the housing and mortgage meltdown was because they engaged in serial refinancing for debt consolidation purposes. Sure, their homes increased in value over the years, but they consistently borrowed the equity out to cover non-housing expenses. Eventually, the perpetually rising mortgage balance outstripped even the sizeable gains in property value.
You have a chance to prevent that outcome, by not using your home as a debt consolidation scheme for your credit card debt.
One of the unfortunate realities of today’s workplace is that we’re usually not given advanced warning about an upcoming job loss. Many employers would have us tool along thinking everything is fine, right up until the day we’re asked to leave. But even if there is no formal notification that your job is in jeopardy, there several ways to know if it is.
Here are several strong clues…
1) You’ve Just Had a Bad Review
You can virtually assume that you are on probation if you have just had a bad performance review. Even if your employer doesn’t tell you as much, you will most likely be gone if you don’t begin showing measurable improvement soon. But a bad review can be an even bigger marker if you’re pretty certain that it isn’t true. Some employers will use a bad review as an unofficial warning, or as an attempt to push an employee out the door.
Do your best to improve your performance after a bad review, but it’s also a good time to start considering other options. You can never be entirely certain that it’s really about your performance, or maybe about something much bigger.
2) An Important Function (or Two) Has Just Been Taken Away From You
Everyone has one, two, maybe three, critical functions that substantially defines their job, and justifies their existence on the payroll. If one of these functions has been taken away from you – without your consent – there is a better than even chance that you are being demoted, even if your title and pay aren’t degraded.
It’s generally a sign that either your employer has lost confidence in your ability to perform that function, or they think that someone else can do a better job. Unless the removal of the function has been accomplished to free you up for a more important function, it’s probably best to assume the worst.
3) You’re Company Has Been Bought Out
If your company has been bought out by a larger organization, there is an excellent chance that you – and many of your coworkers – will lose your jobs. It may not happen immediately, but there’s an exceptional chance that the axe is being sharpened.
Most companies involved in mergers will dedicate a lot of ink, emails, and stage presentations to assuring all staff that their jobs are safe. But don’t bet on it. One of the major reasons why businesses merge is to take advantage of economies of scale. That is, they will merge operations and eliminate excess staff from one or both entities.
If your company has been bought out, make sure that your radar is up, and that you’re now approaching your job as though you are a rookie who has to prove himself all over again.
4) You’re Increasingly “Out-of-the-Loop”
If you have recently noticed that there are a lot of closed-door meetings and private conversations going on your department that don’t involve you, you may be a short-timer. This is particularly true if you have previously been part of the loop in most information exchanges.
All employees are excluded from a certain amount of information, but if you find that it is more common than not, something is getting ready to happen that you won’t be informed of – until it’s too late.
Sometimes information exclusion can affect an entire department. That probably means something negative is coming down the pike, and layoffs are a distinct possibility.
5) You’ve Been Re-assigned to a Job You Didn’t Ask For
Employers sometimes reassign employees in the hope that they will “take the hint” and leave the company. This is especially true if you have been with your employer for several years. The employer may be trying to engineer the voluntary resignation, rather than being put in the position of having to fire a long-term player, who may have the respect of her coworkers.
On the other hand, if you approve of the change – even though you didn’t request it – it may be an opportunity to thrive in a different capacity. If that’s the case, sit down and discuss the situation with your superiors, making it clear that you’re perfectly happy with the new position and harbor no ill feelings over the transition.
6) You’re Employer Is Losing Money – A Lot of It
These days, employers won’t sit much longer than two or three quarters in red ink before throwing the layoffs switch. If your employer is losing money, particularly a lot of it, you should never ignore this. This is especially true if the company becomes obsessed with cutting expenses, even little ones. I’ve seen companies go from cutting back on the coffee service to large-scale layoffs in less than six months.
This doesn’t mean that you should panic and prepare to jump ship at the first sign that the company is losing money. But it does mean that you should be aware that the situation has changed, perhaps radically, and you may need to have your parachute in good working order.
None of these events mean categorically that your job is in jeopardy. But if any is particularly severe, or you see a combination of several, it will be time to prepare yourself and your finances for whatever may happen.
Teaching my kids the value of a dollar is something that’s important to me and I’m always trying to find ways to help them understand that process of earning & spending money isn’t as simple as swiping your credit card.
There aren’t as many teaching moments as there were in my childhood because money is less visible in our society now. Credit cards, direct deposit, and auto bill pay mean that I hardly ever have actual cash in my wallet and my kids don’t have as much exposure to money coming in and going out of the household.
Teaching through Stories
I was really pleased when I unexpectedly ran across a discussion on the value of money in a book my son is reading. He’s really gotten sucked into the stories of pioneers as told in the “Little House on the Prarie” books. The rigors and dangers of life as a pioneer in the 1800s are enough to keep him interested and excited to read more each night before bed.
Reading about how the Wilder family got by with so few worldly possessions and how hard they worked just to put food on the table and a roof over their heads teaches a little about the value of hard work and money. But last night we ran across a section in the “Farmer Boy” volume of the series where a young boy named Almanzo asked his dad for a nickel to buy some lemonade at the town Fourth of July celebration.
I liked his answer and also that my son read it in a book. Sometimes advice from mom and dad goes in one ear and out the other. But when they read it in a book or hear it in a story sometimes it soaks in a little more. So here’s the mini-tale of how this boy’s dad helped him understand the value of a money.
Money for Lemonade
To set it up, they’re at a July Fourth celebration in the town square and the young Almanzo is jealous because all his friends and cousins are buying lemonade. He approaches his dad who’s in conversation with the men of the town and asks his Father if he can have a nickel:
Father looked at him a long time. Then he took out his wallet and opened it, and slowly he took out a round, big silver half-dollar. He asked:
“Almanzo, do you know what this is?”
“Half a dollar,” Almanzo answered.
“Yes. But do you know what half a dollar is?”
Almanzo didn’t know it was anything but half a dollar.
“It’s work, son,” Father said. “That’s what money is; it’s hard work.”
So I can imagine at this point the boy probably has a confused look in his eyes. He looks up to his dad so he believes what he says but he doesn’t understand what it means. So then his Father goes on and relates it to something more specific that the boy can relate to.
Father asked: “You know how to raise potatoes, Almanzo?”
“Yes,” Almanzo said.
“Say you have a seed potato in the spring, what do you do with it?”
“You cut it up,” Almanzo said.
“Go on, son.”
“Then you harrow ? first you manure the field, and plow it. Then you harrow, and mark the ground. And plant the potatoes, and plow them.”
“That’s right, son. And then?”
“Then you dig them and put them down cellar.”
“Yes. Then you pick them over all winter; you throw out all the little ones and the rotten ones. Come spring, you sell them. And if you get a good price son, how much do you get to show for all that work?”
So up until now Almanzo’s been talking about something he knows well, helping grow potatoes. Earlier in the book it talks about all the steps that he and his brother go through to help with potatoes. So this is something he does every year and not necessarily something he enjoys. Now his dad relates all that hard work to money.
“How much do you get for half a bushel of potatoes?”
“Half a dollar,” Almanzo said.
“Yes,” said Father. “That’s what’s in this half-dollar, Almanzo. The work that raised half a bushel of potatoes is in it.”
Almanzo looked at the round piece of money that Father held up. It looked small,compared with all that work.
That part of the story is neat because the dad helps him tie the value of the money to all the work that the boy does to help grow potatoes. But the next part is even cooler because the dad puts his son’s newly gained understanding of the value of money to the test.
I don’t know if my kids would act as responsibly as young Almanzo does in this next section but I’d like to think they’d at least consider it. So continuing on:
“You can have it, Almanzo,” Father said. Almanzo could hardly believe his ears. Father gave him the heavy half-dollar.
“It’s yours,” said Father. “You could buy a pig with it, if you want to. You could raise it, and it would raise a litter of pigs, worth four, five dollars apiece. Or you can trade that half dollar for lemonade, and drink it up. You do as you want, it’s your money.”
What I really love about this part of the story is that his dad doesn’t use a typical generic statement that us parents often fall back on, like “don’t waste money”. Instead he shows his son an alternative to spending his money on lemonade. It’s also neat because he’s planting entrepreneurial seeds, showing his son how to turn some money into more money.
Almanzo forgot to say thank you. He held the half-dollar a minute, then he put his hand in his pocket and went back to the boys by the lemonade-stand.
Frank asked Almanzo:
“Where’s the nickel?”
“He didn’t give me a nickel,” said Almanzo, and Frank yelled: “Yah, Yah! I told you he wouldn’t. I told you so!”
“He gave me half a dollar,” said Almanzo.
The boys wouldn’t believe it till he showed them. Then they crowded around, waiting for him to spend it. He showed it to them all, and put it back in his pocket.
“I’m going to look around,” he said, “and buy me a good little pig.”
So after the dad’s mini life lesson is over, he lets his son make the decision on his own. So how could this lesson be updated for the current day?
So if my son asked me for a dollar to buy a lemonade at the fair I suppose I could offer to give him $20 to use to setup his own lemonade stand. If I gave him that much money would he listen to my advice and use it to invest in his own business or would he just spend it on lemondade and candy? I don’t know but I guess there’s only one way to find out.
How about you, what teachable moments have you encountered with your kids? What have you done to help them understand the value of a dollar?
Have you ever received a great, big, ugly bill for services rendered from a hospital or other healthcare provider? This can happen to just about anyone, whether or not you have health insurance. When a bill of this size comes in, you can sometimes get it cut by using the services of a hospital billing negotiator.
That’s a person or agency who steps in on your behalf and negotiates a reduction in the amount of the bill, or can set up other terms that will make it easier for you handle the obligation.
Why you may need a hospital billing negotiator
There was once a time – long gone – when you could have a major medical procedure and never see a bill from a provider. If you did, it was a small amount, probably no more than a few hundred dollars.
That whole situation has changed today. It’s now more the rule than an exception that you’ll receive a bill for thousands of dollars in connection with just about any health care procedure you have. Whether or not you have health insurance will determine the size of the medical bill you need to pay. If you have health insurance, your portion may be a few thousand dollars. But you don’t have insurance, the bill will likely be in the tens of thousands of dollars.
In recent years, health insurance companies have increased the amount of out-of-pocket payments by patients in order to keep premiums more affordable. The kind of health insurance that will provide you with top coverage without ever seeing a bill from a provider is prohibitively expensive, if it’s even available.
The patient portion – comprising the bill you’ll receive – typically includes co-payments, deductibles, co-insurance, and uncovered charges. It’s precisely that combination of responsibilities that can make figuring out a health care bill so complicated.
As a patient, the complexity of a medical bill can be overwhelming. Not only will the bill be written in some language that looks like Greek, but if you have no experience in negotiating, trying to handle it yourself can be beyond difficult.
Going the DIY route to negotiating
If you have at least some basic knowledge of medical billing, and you are confident in your ability to negotiate, you might want to try the do-it-yourself route.
If you do, make sure that you review any bills you receive from the healthcare provider. Check the bills for errors, as well as for overcharges and for services not provided. If there are any items on the bill that need to be disputed, this should be the first place you’ll start your negotiations. You want to get the bill down to its true amount, and nothing more.
Once you and the healthcare provider are in agreement on the amount owed, it’s time to do what you can to cut down the bill to a number that you can actually afford to pay.
Healthcare providers, and especially hospitals, often negotiate lower settlements. Just like everyone else, providers want to get paid, and they are well aware of the half a loaf is better than none doctrine. In addition, they don’t want to push the patient into bankruptcy, in which case they’ll get nothing at all.
You can use this to your advantage. Try to get the provider to cut the bill as low as possible. You may have to make the entire payment in order to get the biggest reduction. But failing that, make the biggest upfront payment that you can, and work to arrange a monthly payment plan that your budget can accommodate.
Using a patient advocate
Healthcare providers, and especially hospitals often have a person on staff – either an employee or an outside contractor – known as a patient advocate. It’s this person’s job to represent the patient’s interest throughout the process, typically from pre-admission through your final payment.
While the job of the patient advocate isn’t strictly to handle the financial side of your treatment, they can nonetheless represent an inside contact when the bills start coming in.
The advantage to using a patient advocate is that they are involved in the system, and understand how works. They are aware of various financing options that the provider has available, options that you as a patient would never know about. They may be able to direct you toward the proper parties within the organization, help to arrange financing plans, or even settlement options.
However else you might plan to handle your hospital billing, it’s a good idea to start with the patient advocate.
Using a professional hospital billing negotiator
If you’re not getting much help from the patient advocate, or you don’t feel comfortable negotiating a settlement on your own, or the size of your bill is just so enormous that you have no capability of ever paying it, you always have the option of bringing in a hospital billing negotiator.
This is a person or agency specifically involved in the business of negotiating medical bills. Since this is what they do, they have a solid idea as to what can be done to reduce medical bills, and even how much flexibility a specific provider will offer.
A good hospital billing negotiator starts by validating the accuracy of your bills. Once that’s done, they will handle the negotiations for you, and negotiate the best settlement possible. Some will even review and negotiate your charges prior to your receiving services.
Hospital billing negotiators do charge fees. However, they do it by charging a percentage of the amount they’re able to save on your overall bill. Their fees are typically somewhere between 25% and 35% of the amount that they reduce your bill.
Let’s say that you receive a bill of $10,000 from a hospital for a recent stay. If the hospital billing negotiator can get that bill cut down to $5,000, and their fee is 30%, they’ll take $1,500 of the $5,000 that they saved you. This is similar to attorneys working on a contingency basis, and only charging you if they win your case.
This will mean that you will owe the hospital $5,000, the hospital billing negotiator $1,500 ($5,000 X 30%), and you will get the benefit of a $3,500 savings on what was originally a $10,000 bill. You’re total out of pocket on the bill will be reduced from $10,000 down to $6,500.
Which ever way you choose to go – DIY, patient advocate, or hospital billing negotiator, it’s important to develop a strategy for dealing with large medical bills. It‘s likely they’ll only increase in the future.
This is a touchy subject – it’s easy making a case for keeping personal debt problems secret from your family and friends. But let’s take the opposite side of that debate – should you let your family and friends know about your debt problems?
Despite the problems that are inherent in sharing negative information about yourself with people close to you, there are compelling reasons it may be to your advantage.
They may be able to help
Generally speaking, no one is in a better position to help you – or more willing to do so – then the people who you are closest with. Even though family and friends may not be able to help you to completely fix your debt problem, they may be there as a safety net to provide for short-term needs while you’re working out a longer-term solution.
Family and friends may also know of people or organizations that can help you to deal with your debt. Simply pointing you in the right direction might provide the kind of assistance that even money can’t buy.
Under extreme circumstances, and if the friend or relative has the money, they might be able to help you in a more direct way. For example, they may offer to payoff your debt with the stipulation that you will repay them.
This arrangement, while tempting, will represent transferring your debt problems from creditors to a friend or family member where the arrangement will be very personal. You have to consider the possibility that the relationship may be impaired or permanently destroyed if you are unable to repay the debt to that person. You may not be able to do it, for all the same reasons that you can’t pay your creditors now. Tread lightly if this offer is ever made!
Still, even if you don’t accept such an arrangement with a friend or family member, it can be comforting just knowing that it’s available – just in case.
You’ll have less explaining to do when you can’t afford something
One of the stickiest parts of not telling family and friends that you have a debt problem is that it leaves you constantly explaining to them why you can’t participate in certain activities. This practice gets old in a hurry. If you let family and friends know that you’re having debt problems, that you can’t afford to keep up with them, you might be lifting a major burden from yourself.
If nothing else, you won’t need to come up with an excuse every time you can’t afford to do something with other people close to you.
You may be surprised to find that some of them have the same problem
When we’re going through a crisis of any sort – including debt problems – we often think that we’re the only ones who have the problem. But it can be both a shock and a comfort to find out the others close to us are having the same issue.
That’s not even an unlikely situation. A lot of families have still have not recovered fully from the recession a few years ago. Many are still dealing with either a career crisis, or the aftermath of an extended period of unemployment. Any of those situations could leave them saddled with oversized debts.
If you find a friend or family member with debt problems, you’ll have a confidant to talk to about your problems. And you can know that person fully understands the situation in you’re in, and won’t judge you.
You should never go through a serious crisis alone
Money problems can be embarrassing, which is why a lot of people try to keep it from others, especially those closest to them. It’s hard not to blame yourself for debt problems, even if you weren’t entirely to blame.
A debt problem is a crisis, even if you are fully responsible for it. And like any crisis, you should never go through it alone. You need people, especially family and friends, to help you go through it. Their camaraderie alone can make the experience easier to live with, and even speed a solution.
There are whole lot of emotional issues that go with debt problems, and you’ll need the people closest to you to help you weather those issues.
People tend to go through debt problems alone, embarrassed that anyone else might know. They also cling to the idea that somehow “I can handle it”.
In truth, if you don’t share your debt problems with at least one or two people who are close to you, the chances that you will come out victorious over the problem is a lot less likely.
Accountability is often necessary in order to deal with a long-term problems like debt. If secrecy is one of the fundamental reasons for debt, accountability will be one of its solutions. The fact that someone else is aware that you have a debt problem, and especially the magnitude of it, can make you accountable to them should you decide to come up with a plan to pay your debts off.
It’s human nature that we tend to behave better when we know that other people are watching. That’s what accountability does for people with debt problems. If there’s no one keeping an eye on what’s going on except for you, there is a very good chance that the problem will continue to do what it has always done, which is to get worse.
Is there a downside to cluing in family and friends about your debt problems? Of course. But in many cases, the benefits outweigh those negatives.
Every year thousands of people raid their retirement savings early. It could be to get out of debt, to cover living expenses during a time of unemployment, to deal with a medical crisis, or even help a family member in trouble. While the reasons for doing so may be perfectly noble, it’s best to consider all possible alternatives before doing this.
There are at least four reasons why raiding your retirement savings early is not in your best interests:
- Income tax liability – If the money is withdrawn before you turn 59 ½, the amount of the distribution will be added to your income, and taxed as ordinary income.
- Early withdrawal penalty – If income tax liability weren’t bad enough, you’ll be subject to the IRS early withdrawal penalty, equal to 10% of the amount of the distribution.
- Permanently weakening your retirement – Because of the time value of money, any funds that you withdraw will represent a permanent reduction in your retirement plan. That means you will have less money available when it comes time to retire, and there’s no way to make that up once you do.
- Selling “the family jewels” – In most households, retirement savings represent the largest percentage of their financial assets. This is long-term money, and if you withdraw it for short-term needs, you will be weakening your family’s overall financial position.
What alternatives do you have to avoid raiding your retirement savings?
1) Sell what ever you don’t need
If you absolutely need a few thousand dollars to cover an emergency expense, consider selling some kind of personal asset instead of raiding your retirement savings.
It could be an extra car, a recreational vehicle, a boat, or even a second home. Selling any of these would be preferable to liquidating retirement savings, as they generally will not create an income tax liability (except perhaps the second home), and certainly not a penalty on top of it
2) Borrow from a family member
Still another way to borrow money rather than liquidating retirement funds, is to get a short-term loan from a family member. If the need for cash is brought on by a true emergency, then a family member would be more likely to step in and help you in your time need.
Once the crisis passes, you can begin working out repayment using one or both of the strategies below.
3) Slash your expenses radically
There are two factors at play here. First, it’s often true that when a person needs to tap retirement savings early, it’s due to some kind of financial imbalance. While the imbalance could be due to temporary factors, such as a job loss (which could become long-term) or high medical bills, it can be due to long-term factors just as well. That might include excess debt levels, high living expenses, or a lack of liquid savings.
If the need for cash is in any way related to long-term financial difficulties, you should seriously consider slashing your expenses radically. That will be the best permanent solution to your money troubles.
Second, lowering your living expenses will also help you to pay off any short-term financing you took to deal with your emergency. Eliminate any recurring expenses that you don’t absolutely need, cut way back on discretionary spending, and even consider how you can reduce your major expenses.
It may be that the house you’re living in is simply too expensive for your income level. In that case you may have to consider downsizing your living space. Or it may be that you have two cars, both of which have payments. You may need to sell one of the cars, and replace it with a very used car that does not require a monthly payment.
Sometimes the only way to get control of your finances is to cut your structural expenses. Not easy to do, granted, but it is a permanent solution to a financial problem, and may help you to repay short term loans taken to deal with the emergency.
4) Borrow from your 401(k)
If you have an employer-sponsored 401(k) plan, you probably have the option to take a loan against it. Under IRS regulations, you can typically borrow as much 50% of the value of the plan, up to $50,000. And you’ll have five years to repay the amount of the loan.
Borrowing money would be preferable to taking distributions because not only would it avoid creating a tax liability, but it would also leave your retirement savings intact.
5) Create an additional income stream
Creating an additional income stream can work well in combination with a short-term loan from your 401(k) plan, a family member, or some other source. The idea is to borrow the money that you need – without taking distributions from your retirement savings – and then to pay it back out of the additional income.
The extra income could be from a part-time job, or a side business. Not only can this be used to cover short-term loans once the crisis passes, but it may also be a way to improve your long-term financial situation, so that you will have less debt and more liquid savings. When the next crisis comes, you’ll be in a better financial position, and won’t need to consider raiding your retirement savings early.
Avoiding early withdrawal of retirement savings is mostly about advanced planning. That means creating extra room in your budget – either by lowering your living expenses or creating more income – so that you won’t have to resort to raiding your retirement savings.
Any one of these strategies will put more money your pocket, without causing an income tax liability that will only add to the financial problems caused by the emergency you need to deal with.
Want a hot tip on the stock market? It’s more profitable to reduce risk at the top of the stock market than once a full-blown bear market develops. Is now the top of the stock market? We can’t know for sure, but what we do know is that the market remains in record territory, and that’s when it’s time to take steps to reduce your portfolio risk.
What can you do now to lower that portfolio risk?
Take some profits
There’s no need to perform a wholesale liquidation of your stock portfolio if you feel the market is flying a bit too high. But you can take some profits in order to reduce your overall exposure to stocks, while leaving most of your positions intact. That’s a good strategy because market tops are notoriously hard to anticipate, and stocks can continue rising for much longer (and farther) than anyone thinks.
But if you have stocks that have done particularly well for several years, you might consider selling them to take profits. By selling stocks that have done well, you are locking in your gains on those trades. Sooner or later, the market will fall, and if the fundamentals of those winning stocks are still strong, you can buy them back at lower prices.
Stop funding new stock purchases
One of the best ways to lower your risk in a record stock market is by not investing fresh cash contributions into more stocks. You don’t sell your primary stock positions (other than the profit taking on the best performers as discussed above), but you increase your non-stock positions (cash) with the new money you contribute.
This will lower your stock allocation without selling off large blocks of stocks. You can use the money either to build up cash, or to invest in assets that might have a better chance when the market turns down.
The time honored technique for making money in the stock market has always been buy low, sell high. Though it may not necessarily be time to sell, by not funding new stock purchases with fresh cash, you will at least avoid buying at the top of the market (or “buying high”).
Increase your cash
By taking profits on some high fliers and not buying stocks with your fresh cash contributions, you’re accomplishing something that’s fundamentally important at market tops: you’re raising cash.
Though some people try to raise cash during bear markets, it’s usually much easier to do at or near market tops. This is because you’re in a position to sell when prices are high, which not only raises greater amounts of cash, but it also avoids selling stocks into declining markets where you will lock in losses on those trades.
Cash is typically the single best asset to have during market downturns for the following reasons:
- It reduces portfolio losses during general price declines because it has a fixed value.
- It can be invested in interest bearing assets, providing at least a small cash flow while equities are losing value.
- It can be accumulated so that you will have ready capital available so that you can buy stocks at bargain prices after a significant fall.
Unfortunately, cash is also perhaps the most under-appreciated asset class at market tops when everyone wants to be “fully invested”. But start building your cash reserves now and when the direction of the market turns, you’ll be in a perfect position to ride out and exploit the changing circumstances.
Move money to income producing assets
We just touched on moving cash into interest bearing assets as a way of generating an income, but you can do this with stocks as well. High dividend paying stocks can often be the perfect place to ride out a downturn in the market. Not only will the dividend income provide a reliable income stream, but high dividend stocks also generally resist market declines, preserving your portfolio’s value.
The one caveat with high dividend stocks is a market decline caused by rising interest rates. In periods of rising rates, high dividend stocks function much like bonds, moving in an inverse direction from interest rates. Thus when interest rates rise, high dividend stocks tend to fall in price.
Still, high dividend stocks can represent a diversification away from typical growth stocks that are a pure play on price appreciation – something that’s in short supply in declining markets.
Have you been giving any thought to lowering the risk in your portfolio with stocks being in record territory?
One of the biggest fears that many current retirees have is that they might out-live their retirement savings. That can be a particularly difficult problem, because once you’re retired there’s not much you can do about it. But if you’re planning for your retirement, there’s a lot you can do about a right now.
Here are five ways to not outlive your retirement savings:
1) Delay Retirement
This is something virtually anyone can do, as long as you are in good health. Actually, there is nothing sacrosanct about age 65 as the preferred age of retirement. The Social Security Administration is now in the process of forcing full retirement to gradually move up to age 67, for those born in 1960 or later.
But if you are concerned about outliving your retirement savings, you can delay the date of your retirement for virtually as long as you are able to work. And considering that people today are living longer, and are generally healthier, than what they were 50 years ago, delaying makes abundant sense.
If you can delay for retirement until age 70, you’ll reduce the number of years that you will live in retirement by five (with the assumption of 65 being a normal retirement age). For example, let’s say that for planning purposes you expect that you will live to be 90. If you retire at 65, you’ll need to provide for 25 years in retirement. But if you delay until you turn 70, you’ll cut that down to just 20 years. The difference in required financial resources will be substantial.
There is a another benefit to delaying retirement at least until age 70. Social Security will increase your monthly benefit by 8% for each year that you delay retiring past your normal retirement age. If normal retirement for you is 67, and you delay collecting benefits until 70, your monthly benefit will by 24% over what it would be if you retire at 67. (There is no benefit to delaying past age 70, as Social Security will no longer increase your monthly benefit beyond that age.)
2) Work Part-Time For as Long as You Can
This can be a halfway option, that will enable you to delay retirement out-right. Instead of delaying full retirement to, say age 70, you can instead spend the first few years of your retirement working part-time. Under that scenario, you’ll be trading full-retirement for semi-retirement. And the fact that you will be relying less on investment income will help you to preserve those assets for the time in your life when you’re not able to work at all.
This can work for people on a lot of fronts too. You may not be quite ready to fully retire at age 65 or 67, and working at least on a part-time basis – or starting your own part-time business – could help you to ease into the transition of finally living the work-free life.
3) Set Up a Roth IRA and Save It For…Later
We’re hearing a lot these days about the many benefits of the Roth IRA. These plans are something of a supercharged retirement plan, because they enable you to withdraw money from the plan tax-free, as long as you are at least 59 ½ when you begin taking distributions, and you have been in the plan for at least five years.
Other tax-sheltered retirement plans require that you begin paying taxes on any money that you withdraw from the plan. Unlike the Roth IRA, these plans are merely tax-deferred, and not tax-free.
But Roth IRAs have another advantage over ordinary retirement plans, one that make them particularly suitable as investment vehicles to keep you from outliving your retirement savings. Roth IRAs do not require you to take required minimum distributions (RMDs) when you turn 70 ½. Virtually every other retirement plan requires that you take RMDs as soon as you reach that age. That will virtually guarantee that other plans will eventually be depleted.
This is not true with the Roth IRA. Since there is no requirement to take RMD’s, you could allow the money in the account to continue to earn investment income and to grow until the time comes when you need to funds. This can enable you to live out of other retirement accounts, while you hold your Roth IRA funds until you actually need the money. Even if you exhaust other plans, you can still have your Roth IRA growing for the day when you need the money. You can delay withdrawing your Roth IRA funds until you’re 75, or 80, or what ever age you decide you need to.
4) Live on Non-Retirement Savings For as Long as You Can
If the idea of delaying retirement, or working part-time for the first few years, don’t interest you, you could also consider living on non-retirement savings for the first few years. This will enable you to delay tapping retirement savings for several years. During that time, the plans can continue to grow, so that you will have more money available in them when you finally do begin taking distributions.
As an example, let’s say that you begin taking Social Security benefits at age 65. You also have $100,000 in non retirement assets – savings, CDs, money market funds, stocks, mutual funds, etc. Rather than beginning to draw funds out of your retirement accounts at age 65, you instead withdrawal $20,000 per year from your non-retirement holdings for the first five years. That will allow your tax-sheltered retirement plans to continue growing for an extra five years.
Perhaps equally significant is the fact that your non-retirement assets can be withdrawn without creating an income tax liability.
5) Keep Your Cost of Living to an Absolute Minimum
This has to be a strategy if you are at all concerned over the prospect of outliving your retirement savings. There is nothing at all exotic about this strategy either. The less money you need to live on, the less you’ll need to withdraw from your retirement savings, and the longer they will last.
This involves keeping your basic living expenses as low as possible. That can mean trading down to a less expensive home, driving a modest car, and avoiding expensive entertainment hobbies. Even more fundamentally however is that you should make sure that you are completely out of debt. That means everything – credit cards, car loans, installment loans of all types, and yes, even your mortgage. The less money you owe, the lower your cost of living will be, and the longer your retirement savings will last.
Do you ever worry about outliving your retirement savings?
Do you have a good life? Maybe compared to some, yes. Perhaps compared to others, no.
A lot of it depends on your perspective and how you measure your life.
Last year I had a good life but sadly didn’t realize it until I was abducted by a UFO and held prisoner in an alien dungeon. Okay, there were no UFO’s or aliens involved in my life catalyst, just a health scare.
But it did open my eyes to how I was measuring my life and the things I was taking for granted.
So whether you think your life is awesome or whether it seems to suck there are a few things I wish for you next year.
Note: I know you may feel too busy getting ready to “crush it” in the new year to listen to my wishes. What I’m going to share won’t make you the most productive you’ve ever been. However, I believe it will help you enjoy what you do produce.
In addition I think it can help you focus on the journey of earning a living and building a legacy rather than just focusing on the dollars and cents of your bank account and retirement plan.
Your life struggles won’t get any easier. The decisions and choices you make won’t change, it’s how you approach them that can make you happier.
So here are four things I hope you can do next year.
1) Enjoy Life More
Many of the simple things I had taken for granted before last year have regained some of their wonder. I always get jealous when I watch one of our young kids experience something for the first time. They can be amazed by the seemingly simplest of things. I find myself wishing I could see the world through that lens again.
Thanks to my new appreciation for life, it’s much easier for me to enjoy the small things and not get so hung up on trying to “manage life”. It’s much easier to enjoy your day when you put things in perspective and just be thankful that you’re alive.
As Willie Nelson puts it, “blue skies smiling at me, nothing but blue skies do I see. Blue days all of them gone, nothing but blue skies from now on!”
I think part of this is giving up some of the absolutes and rigidness to how I approached the different compartments of life. Just because things don’t go as planned today doesn’t mean they can’t eventually end up heading in the right direction.
So if you’re on a diet and want to eat a cookie, then eat the tasty treat. Don’t eat the whole box and don’t do it every day, just eat one and take the stairs at work.
Or if you’re on a tight budget and you want to buy a latte, then drink the frothy caffeine. Spend on what you want and cut something else you don’t need. Or find a way to earn more money.
2) Be Content
It’s tough to be present in your life and content with what you do have when you’re constantly thinking about what you’re trying to acheive in the future.
It used to be that I was so caught up thinking about the future that I would miss things in the present. For example, on a Saturday at the start of last year I would spend time with my kids in between work times. The work was the main thing, the family time was just squeezed in the gaps.
Now I can spend a Saturday with my family and not feel guilty and stressed that I should be working.
Part of being content is not feeling your chest tighten with jealousy when you hear about the success of others. I feel blessed to be alive and thankful for the chances and opportunities that I have. So now when I hear about the success of others it doesn’t make me feel inadequate or jealous. I can genuinely feel happy for them and inspired by their progress.
3) Take Health Seriously
For years my family would tell me that I needed to get more sleep and more exercise. I waved them off thinking that when things slowed down I would be healthier. Now I realize that I was being quite foolish. As you probably know, life doesn’t really tend to slow down.
So if you put off exercising until you have time, then you’ll never do it. Eating healthier, exercising more, and getting more sleep has had it’s benefits. It’s not just that I weigh less and have better scores on my annual checkups.
I feel better in general. I have more patience with my co-workers, family, strangers, and just life itself.
That’s not to say I don’t have stretches where I work out less and get too little sleep. But when that happens it’s only for a period of time and then I get back to the healthy habits again. I’ve realized that I’m not invincible and that if I don’t take care of myself then I won’t be around as long to enjoy life.
4) Think of Your Legacy
This sounds crazy on a personal finance site but I’ve come to realize that people don’t care about money. We only care about what we can do with that money.
What doors the money opens for your family and the people around you. What difference you can make in the world with that money.
So money still matters to me, a great deal. But it’s not for the sake of having money, it’s about the experience that the money can offer.
The things you create and experience in life, and the people you create them with, are what builds your legacy. Those things add up over time, they define how people remember you and what mark you leave on the world.
You’ve probably heard someone says “you can’t take it with you”, referring to the money you make in life. The logic is sound but most of us probably don’t think we’re going to die in the near future.
So we shrug it off.
We work hard to make money and don’t think about what it would be like if we weren’t around.
You may know the story of people who wait until they’re 60 to start saving for the challenges of getting older. They say, “if only I’d known to save sooner, things would be different now”. There are still things they can do but they missed out on 3 decades of investing time they can never get back.
The same thing happens to people who miss out on life because they’re so busy with “planes to catch and bills to pay” as Harry Chapin sings about in “Cats in the Cradle”.
Nobody wants to look back and regret the things they missed out on or didn’t do. The problem is that we often don’t realize it until it’s too late.
You’ve probably had the experience where you hesitated to say or do something and then the moment passed and it was too late. In those cases the time is short, so we feel the pressure to act and we feel regret when we don’t.
The difference with our life legacy is that we believe that our life will go on for decades. So that urgency to act often isn’t there. When we’re so busy that we miss things that are important to us in life (our kids events, a date with our spouse, drinks with friends, the weekly workout, the trip we’ve been wanting to take, coffee with a business mentor, our monthly volunteer event, etc) we tell ourselves that we’ll do it “next time”.
Weeks, months, years pass by and that “next time” materializes never or infrequently.
Often times it takes a major life catalyst to open our eyes to what we’ve been missing out on or taking for granted. Sadly we may not experience that catalyst until decades in the future, at which point we look back with hearts full of regret and wish we’d realized sooner the things we’d been neglecting.
I don’t want this to happen to you. I went through a life catalyst just last year and it transformed my life. I want you to have the same chance. That’s why I put together a checklist of 5 ways you can start building your legacy today and why I’m working on a project to take that much further.
Enter your email below to get the checklist and for early access as more tools are ready. Here’s to a great year!
Car insurance is one of those necessary evils in life. No one wants to pay for it, but then no one wants to be without it either. And no matter what you think about it, it’s required by state law so you must have it. But just because you have to have it doesn’t mean you can’t make it as inexpensive as possible.
Like most other types of insurance this recurring cost pops up on a regular basis so cutting its costs means you’ll be saving money every time your policy is renewed. We’ve talked in the past about a few different ways you can save on car insurance, some are easier than others. Here’s another look at some strategies you can use to lower your car insurance rates, and it’s generally without increasing your liability in the process.
1.Ask About Discounts
Most of us know about common discounts, like good student driver discounts or discounts for driving certain types of cars that are deemed to be especially safe. But there are all kinds discounts available, and they can even vary from one auto insurance company to another.
For example, there can be discounts for having certain types of safety equipment on your car, and these can be extremely specific. There may also be discounts for employment in certain occupations. You can also get discounts for paying your premium in full, rather than in installments.
Ask your insurance company for a list of all of the potential discounts that they provide, and see if you qualify for any. It is highly likely that the company did not inform you of all the discounts they have at the time when you applied.
2. Bundle With Other Insurance Policies
This is a standard recommendation, so we won’t spend too much time on it. But you can often get discounts – sometimes substantial ones – by bundling your auto insurance with other policies that you have. Homeowners insurance is a common one, but it’s also possible that you can get a discount if you combine your auto insurance with a business insurance policy that you have.
You don’t want to go too far with this, since not all insurance companies offer every type of coverage you may need. You also don’t want to accept inferior coverage in another area just so that you can save money on your auto insurance.
3. Raise Your Deductible
This is another standard recommendation to lower your insurance premium, but it’s also a good one. Just by raising your deductible from $500 to $1,000 you can save a significant amount of money on your premium.
One way to raise your deductible without increasing your risk, is to simply have an amount equal to your deductible sitting in your emergency fund. As long as you have the money available, you’ll be covered in the event of an accident. And if you never have one, the savings will be yours to keep.
4. Watch Your Driving Habits
If the major reason why your auto insurance premiums are as high as they are is because you have a history of traffic violations and accidents, it’s time to clean up your act. Drive more carefully, obey traffic laws to the letter, and always watch out for the other guy – especially pedestrians.
Driving is never an area of life where you should throw caution to wind. If you tend to speed and disregard traffic signals because you’re perpetually late, get in the habit of leaving a little early so that you won’t feel the need to break traffic laws.
If you can keep your driving record clean for at least three years you should start to see your insurance premiums fall, at least in most states.
5. Take a Defensive Driving Course
Most of us only think about defensive driving courses when we’re getting our licenses. Auto insurance companies offer discounts if you complete such a course. You can actually take a defensive driving course at any point in your life, and it is strongly recommended if you’ve recently been in an accident that was your fault, or if you’ve been given a traffic citation.
Insurance companies will often waive surcharges if you complete a defensive driving course. The courses however are not free, so you’ll have to weigh the cost of the course versus the savings that will result in your insurance premiums.
6. Ask What You Can Cut That Would Have the Least Impact
I’ve actually done this very recently myself. My wife had a minor accident, judged to be her fault, and our premiums increased. I simply contacted my insurance company, and asked the agent “What would you do to lower the premium if it were you?” The agent quickly asked me if we have medical insurance – which of course we do. She then suggested that we can cut some of the medical insurance benefit on the car insurance, since it essentially represented duplicate coverage.
Reducing the coverage brought our premium back down to where they were originally, but it only increased our medical liability by $1,000 – and then only under the assumption that we were to cancel our medical insurance.
Anytime you’re unhappy with your insurance premium, or if you’re suddenly increased as a result of an accident of violation, try contacting your insurance company and asking that question. You may be pleasantly surprised what you find out.
7. Buy a Less Expensive Car
People often buy the best car they can afford, and with little regard to the impact that it will have on their car insurance. But it is a fact that a more expensive car, or certain models – particularly sports cars – result in higher auto insurance premiums, often much higher.
You certainly don’t want to sell your car if it’s one of the reasons why your car insurance premium is so high. But it is certainly something to keep in mind when the time comes to buy a new car. As a general rule, the less expensive and more conservative the car is, the lower your auto insurance premium will be.