March 2011 Archives

This is the fourth in a series of posts highlighting results from our Wells Fargo Retirement Study. Our 2010 Retirement Study was conducted to better understand the impact that the current economic environment has had on middle class Americans ranging in age from their mid-20s to their late 60s.

In my last post we looked at the role the recession has played in changing attitudes about saving and investing. Americans are still feeling the impact of the economic recession and continue to have concerns about re-entering the stock market.

When survey respondents were asked if they would find financial advice on retirement planning and investing valuable, at least three-quarters of respondents indicated they would. But few are willing to pay for it.

Two-thirds of Americans (65%) admit they should be saving more and probably could if they made changes or had some help. The vast majority agree that financial advice on retirement would be valuable to them. But when asked, less than one-third say they would be willing to pay a reasonable fee in order to receive help determining how much to save, guidance on managing their investments, and assistance monitoring their retirement accounts.

While those results may sound contradictory, I think the disconnect between valuing advice and a willingness to pay for it is not all that uncommon. Many people greatly value the medical advice they receive, but may not be quite as thrilled when the bill arrives. And few people I know are smiling ear-to-ear when writing a check for legal advice received, no matter how valuable. Maybe the difference is that we're simply used to the fact that advice in certain professions, like medicine and legal services aren't free. It's interesting though that people expect to pay an accountant for tax advice but don't want to pay a financial advisor for investment advice.

What's your opinion? Would you pay a reasonable fee for financial and investment advice? Why or why not?

Now that you've freed up some cash, let's talk about the most effective ways for you to save more. First on the list—particularly in this economy—has to be establishing a solid emergency cushion: six (for two income families) to nine (for one income families) months worth of living expenses you could rely on if you fall ill or are laid off and have to support yourself for a while. Once you have that, then it's time to focus on retirement savings.

So how do you soup up your retirement contributions? By rolling with the tide rather than against it for one thing. If you've started a new job recently (or at least since 2006), you may have found that your new company automatically enrolled you in its 401(k) plan. Why 2006? Because that's when Congress passed the Pension Protection Act of 2006, which encouraged companies to automatically enroll employees in 401(k) plans and cleared up some of the legal issues surrounding the practice. In 2006, 24% of plans offered automatic enrollment, compared to 57% in 2010*.

According to the Employee Benefits Research Institute (EBRI), participation rates rise—often dramatically—when employees are automatically enrolled in retirement savings plans. On average, employees subject to automatic enrollment had a participation rate of 86.2%. 21 percentage points higher than those without automatic enrollment*, and that's a really good thing. For people who don't participate in a company defined contribution plan, on average, they will save less than half of what they will need by the time they meet retirement.* That's pretty huge.

And once you're enrolled automatically, if your company offers to automatically escalate—or increase—the amount of your retirement contributions every year until you max out, again that's something you want to take advantage of.

But what if you don't have a company like this? What if you don't have a 401(k)?,/p>

Then the key is to mirror these auto increases on your own. First, consider opening an IRA or a SEP (beneficial for the self-employed because they allow you to stash away considerably more money than IRAs do). Then, sign up to have money withdrawn from your checking account and deposited into your retirement account automatically every month. The idea is that you want to pull the trigger just once (this prevents you from having to choose to save again and again) and then have the savings just roll. At the same time, you can decide where to allocate the money.

Finally, you'll want to mimic this process for other savings goals, too. I have money withdrawn automatically every month and put into 529 college savings account for my children. If you have a health savings account, you can do the same for it as well.

April's tax filing deadline finds many of us focusing added attention on our finances this time of year. This makes right now a great time to shore up your financial foundation while personal finances are still top-of-mind. Below are five key areas to review before you put all the files and folders away.

If you're expecting a tax refund, consider using it to further your goals in the areas listed below. That's a nice way to jumpstart your plans for the remainder of the year.

Each of these topics includes a quick list of considerations to help you as you build your firm financial footing.

401(k) and other retirement savings:

• Try to take full advantage of employer 401(k) contributions; contribute at match level or above
• Consider a ROTH IRA to sock away even more savings
• Don't forget about catch-up contributions in your 401(k) or IRA if you're age 50 or older
• Considering taking advantage of automatic annual deferral increases if available on your plan for an easy way to increase savings over time (or plan to increase your contribution rate a certain date you'll remember each year like your birthday or employment anniversary date)

Liquid and emergency savings

• Establish a goal for emergency savings; try to build up 6-months of living expenses over time
• Find ways to cut everyday expenses to set more money aside
• Develop a budget to track monthly spending and help identify areas to reduce spending and increase savings

Non-retirement investments (including education savings programs)

• Does your current investment portfolio reflect your tolerance for risk and need for growth, income or both?
• Plan to meet with a financial advisor at least annually to review your investment allocation to ensure your portfolio is aligned with your goals and personal circumstances
• Saving for a child's education? Consider a 529 plan, consult a financial advisor to determine the plan that best meets your needs

Insurance and risk management

• Re-evaluate all insurance policies periodically
• Have you made home improvements that qualify for additional homeowner's policy discounts?
• Do you qualify for a good driver discount if you've been accident-free for 5 years or more?
• Do you have adequate life insurance? Ask your financial advisor to review life insurance policies to help identify any gaps in coverage

Debt Management

• Make sure you're reviewing your credit reports from the three major credit reporting agencies at least annually to ensure they are error free; mistakes can impact your credit score
• Save money and boost your credit score by paying off credit card balances monthly
• If you can't pay the full balance due each month, try to pay more than the minimum due so you're paying off a portion of the balance as well as the interest

For more tips on getting your finances in order in 2011, be sure to read Jean Chatzky's blog. Jean is an award-winning journalist and best-selling author, whom you may recognize from NBC's Today, where she is a financial editor, or from her columns in More Magazine, and the The New York Daily News. Jean's also a weekly guest blogger for Wells Fargo throughout 2011, focusing on a year in the life of a woman who's ready to get her financial life together.

What are some financial tips and strategies that have helped you save more or cut your monthly expenses?

Sometimes after I go through the process of developing a spending plan with someone I'm working with (if you missed this process go back and take a look at last week's blog post) I hear that they're having trouble making ends meet. Sometimes they're not able to save. Sometimes, they're not able to throw as much money as they'd like against their credit card bills or other debts. Other times they're just feeling as if there isn't enough money to give them any wiggle room.

This feeling of living paycheck-to-paycheck is very uncomfortable. It causes trouble in relationships (marriages are much stronger, research has shown, when you accumulate assets including savings rather than debts) and it causes individuals to feel stressed, anxious and sometimes even develop physical symptoms like headaches and insomnia.

One way to start getting past it is by coming up with ways to reduce your monthly expenses to allow yourself to breathe. And cutting those bills you get month in and month out is a good way to start. I'm talking about phone, internet, wireless, insurance, etc. How?

Start with a bill audit. This week, pull out the last few months of those bills (or if you receive them electronically, look at them online) and really look at them. You'll find add ons you didn't know you were still paying for or services you no longer use. In my case, I found I was still paying for one channel on demand ($4.95 a month, close to $60 a year) though my teens stopped watching it years ago. And that's just one example. If you only watch a premium channel half the year because your favorite show is in season, cancel it the other half.

Ask for a better deal. It's worth your time to check in with your providers every six months or so and ask them if there are newer, better deals available. Doing this with your cell phone company can, for example, alert you to the fact that if you were using the friends-and-family option, which allows you free calls to ten people on your list (no matter who their carriers are), you could scale back and buy fewer minutes a month. You can do the same with your cable/television provider. When another provider came to my neighborhood, I used the sheer fact of more competition to get my current provider to lower my bill. It took a single call.

Finally, think about unbundling or going without a contract. Yes, in the past it's often been cheapest to buy your communications services from one provider and to get a low cost phone by signing a one- or two-year contract. This is not always the case anymore. So shop around and look at as many alternatives as you can palate, then make the call that's right for you.

Can you think of any ways to reduce your monthly expenses?

Old friends are often the best friends. Think about those who have been at your side through thick and thin, good times and bad. They probably hold a very special place among the relationships you've forged over the course of your life. That's not to say that old friends are perfect friends. Sometimes the strongest of friendships are tested, but if those ups and downs can be weathered, the bond you share often becomes even more meaningful.

I have a long-term friend who has been with me even longer than my husband of 35 years. I've known my friend longer than I've known my children, my neighbors and many of my professional colleagues. That friend is my 401(k). And believe me, my relationship with my 401K is more about security, peace of mind and my confidence about retirement than it is about accumulating money in an investment account.

You may think it strange that I describe my 401K as my "friend", but in many respects the relationship that I have with my 401K is very similar to that of a longstanding and close friend. This friendship is very important to me, so I make the time to interact with and pay attention to my 401K, checking in periodically to find out what's happening. I make a point of being proactive in our relationship and making sure that I take care to make good choices to insure that our friendship will be there throughout my lifetime.

Yet there's no question we've weathered some turbulent times. Whenever money and friendship come into play, things can get dicey. There was a period in 2009 where I have to say I felt scared and let down. While I wasn't ready to give up on my friend entirely, I was disappointed that I had given so much to this relationship and now things were really regressing. So I spent some time reflecting on the relationship and how much my 401K had given back to me over the years. And I had to admit that for a long time I had taken it for granted. If I abandoned my friend now would it really be in the best interest of either of us? Clearly we were going through a rough patch. But if we came through this, I reasoned, we might both be better off for the experience.

Looking back, I'm glad I didn't give up on my 401K during this difficult period and kept making my regular contributions. And to be honest, my friend never gave up on me entirely, continuing to match my contributions up to the maximum allowed by the plan, demonstrating a willingness to do what it could during a challenging period in my life.

How do you view your relationship with your 401(k) or other retirement savings plans or accounts? Are they important relationships? Do you perceive them as advocates on your path to pursuing your long-term goals? How do you proactively manage or nurture the relationship?

Now that you know where your free cash is going—and I hope you'll keep the exercise of tracking your spending going for the next few weeks or until you feel you have it under control—we can work on a budget in general.

I know how some of you feel about budgets. You feel they're like diets—too restrictive—and that having to live under the guise of one takes away your freedom and individuality.

Point taken. It is a word that feels negative. I prefer the term spending plan. I want you to look at the money coming in and going out, to break it into categories consciously so that you decide how much you're spending on everything from food to housing. And my end goal is to make sure that at the end of all that spending, month in and month out, there is at least 10 percent set aside for you to save.

So here's the way to go about it. First, look at how much you're bringing in each month. This includes your take-home pay and your spouse's or partner's as well as any other sources of income you might have. Do you run a small business on the side? Do you have rental properties? Do you sell old books on eBay? It all goes into the soup. If it varies, come up with the average monthly income over the past year. That will let you know exactly what you're working with.

Then look at how the money is going out. Your bills for the past few months will give you a starting indication. But in general, I'd like to see a breakdown that looks something like this:

• 35% Housing: This is not just your rent or mortgage (first and second if you have both), but also the cost of insurance, taxes, utilities and maintenance (plan on 1 percent of the value of the place per year for the latter).
• 15% Transportation: Again, not just your car payment but taxis, parking, insurance and maintenance too. Also public transportation.
• 15% Other Debt Repayment: Credit card payments, student loan payments and any other debts you owe.
• 10% Long term saving: Money you put away for tomorrow - or many years from now. This includes money you funnel into emergency savings, college savings, retirement savings (including 401(k)s and other work-based plans). You can even include matching dollars if that gets you to the 10%. (Note: If you're not sure where to put this money, this is where a financial adviser comes in very handy!)
• 25% Everything else: This is the cost of your life and it's a good bet that most of the spending you were tracking last week goes into this category. Food, entertainment, clothes, cosmetics, travel and anything that doesn't fit into the other categories goes here.

Once you see where your money is going, you can—and should—reallocate, particularly if it helps you get to that 10 percent saving figure. My basic rule is that you can borrow from any category to fund another except for saving. If you're not spending the full 15 percent on transportation but want to spend a little more on housing? Fine. If you don't have big student loans and want to spend a little more on a vacation, that's okay too. And if you have the ability to save a little more than 10 percent at any particular time? Do it! There will be years when the responsibilities on your plate multiply. Anything extra you can do now will take the pressure off later.

Do you have a spending plan already? How is it working out for you?

Jean

Do you ever find yourself saying "yes" to one of your children when common sense and intuition are telling you "no" is a better answer? I'm not talking about the big things like allowing a new driver to hit the streets in a blizzard or giving underage teens permission to attend a party where alcohol is being served. I'm talking about the nagging little things like the new video game my son needs as much as I need another wire coat hanger in the closet.

When I was growing up, no meant no and you didn't wait around to find out what would happen if you asked a second time. "Everyone's going" and "everyone has one" carried no weight. No was no.

Why did it seem so much easier for our parent's generation to say no? I actually posed this question to Google, the 21st Century's version of the Magic Eight Ball, and received 789,000 results. Apparently, I'm not the only one pondering this.

The most common theme I noticed as I skimmed through the search results was "lack of time." Both adults and children live such busy lives today we're reluctant to spend the little time we do have together arguing. Other common themes included "parental guilt" in two-parent working households and the fact that we're often just too tired to argue about the small stuff or endure the whining.

When it comes to spending, I think many of us need a NO more often. For us to save for the big things like a house, college, and retirement- we need to find a few "no's" on the smaller more discretionary items. I know my kids don't like to hear "no"- but in recent years I've tried to give them another option rather than an absolute "no". I'll say no on a purchase but with an out that if they really want it they can spend their own money. For non-monetary requests, I've gotten better about accepting that the argument "everyone else gets to..." is usually an exaggeration. But I admit I do still cave in at times.

I'm interested to learn how you approach "no" where your children are concerned. Do you pick your battles and allow them some reasonable wins in situations where there is no threat to health or safety and the potential outcome doesn't violate your values? Or do you always stick to "no" once it's out there, no matter what? And what about compromise? Do you feel that's a good skill to teach children or does it merely encourage them to challenge your decisions?

Welcome to March! I hope you're enjoying the blog and that, if you have questions, you'll post them here so I can answer them and we can keep you on track. This month, we're going to start with one of the most important financial habits—maybe the most important financial habit—you can adopt: following the money.

I'm always amazed at how many people know how much money is coming in (at least approximately), but when I ask them where it's going, the answers get ... squishy. They know how much goes to the big stuff that stays the same from month to month (the mortgage payment, car payment, etc.) But when it comes to anything variable, quite often the answers just aren't there.

That's understandable when you think about how we spend money these days. We swipe cards and, quick as that, we've pilfered the balances in our checking accounts or racked up charges on our credit cards. It's so quick sometimes we just don't process it. Research has actually shown that we spend more on credit than we do on debit, more on debit than we do with cash, and more when we're spending small bills than when we're spending large ones. The lesson: The further away we feel from the money, psychologically, the faster it flies out of our fingers.

Well, this week we're going to hug it tight. And we're going to do it by following the money. I once read an article in Good Housekeeping magazine that said the best tool a dieter has in her arsenal—bar none—is a food diary. Writing down what you eat keeps you honest. It makes you think about what you're doing. A spending diary (really just notebook) does precisely the same thing for anyone looking to get a true grip on where their money is going.

So that's your assignment for the week: Put a notebook in your bag or your back pocket. Or if you're so attached to your smart phone that it's easier for you to type than write, that's fine, use the to-do list function to keep a running total of how much you spend (even the change) and what you spend it on.

What will happen? Two things. First, you'll find just thinking about the fact that you have to write it down when you spend the money will convince you not to buy some things. You'll be in the grocery store thinking about keeping your total in a particular range, and you'll put the cookies back. Second, at the end of the week, when you sit down and total up your spending and group it into categories—eating out, clothing, entertainment, taxis, etc.—something will surprise you. It may be take-out. It may be gifts. But there will be at least one category where you've spent more than you anticipated. Then you'll start to adjust!

Valentine's Day 2011 was my second wedding anniversary. Yeah! I'm settling into a routine and feel my life as a "plus one" is evolving quite nicely.

Team Blakeney (a nickname I use for my family) has covered a lot of ground in two years. We've managed to merge both our lives and our finances. Also, my fantasy depiction of married life as "easier" because there are two people tackling life's business is transforming into a more realistic expectation about martial bliss.

It wasn't always this way. I used to roll my eyes whenever our pre-marital counselor would stress over and over again the importance of scheduling time together for both family meetings and date nights. The first, he explained, helps couples handle family business, and the other allows couples to unplug from the daily grind and just enjoy each other's company.

Truth be told, I never saw a problem with a missed date night or family meeting here or there. Now I realize that our counselor was right. When life's treadmill speeds up, it's easy to lose sight of and forget to make time for what matters most.

Of course, scheduling the time for family meetings or date nights is easier said than done. Luckily, I have a spouse who helps me not take things so seriously—a mindset that leaves me plenty of room to try different approaches until we find out what works best for our family.