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Tag: personal finance

Financially preparing for back-to-school expenses during the pandemic

For many parents, August marks the start of back-to-school planning. While this year is no different, the preparations have changed due to the pandemic as the logistics of children returning to the classroom are more complicated than usual.

While you may not yet know if your children will be learning virtually or in-person, there are still ways to financially prepare for related expenses.

In-person expense planning

With the need to minimize contact and the sharing of supplies, basic school supplies like pencils, folders, crayons, rulers and glue are even more important this year, and so are safety items like masks and hand sanitizer. According to the National Retail Federation, the average American family plans to spend $789.49 on school supplies, which is up nearly $100 compared to last year.

Costs for virtual learning

As our communities continue to reel from the coronavirus, many schools are embracing virtual learning full-time, or creating contingency plans in the event of COVID cases impacting attendance. Hopefully the school district will provide the necessary technology your students’ needs, but in the event they don’t, it is important to be prepared for this added cost. Tablets and laptops can run from $330 – $1,300 depending on the brand you select. You might also want to consider different tools such as timers, planners or apps that can help your student stay focused and manage his or her time.

Creating a designated study space for your student at home could also cost some money. Desks and chairs can get pricey so look for ways to creatively reuse furniture you already have, or scout for deals and sales. If these extra expenses are not part of your monthly budget, start small and buy one thing at a time. Make a list of what your student needs and work it in your monthly costs as you can.

Unforeseen costs

In addition to planning for back-to-school costs—regardless of how schools will operate—it’s also important to refresh your finances related to personal costs related to insurance, at-home medical supplies and cleaning materials. Many students will be due for their annual medical physicals. Check in on your medical benefits to see if the preventative care for your student is covered or which clinics will offer back-to-school physicals.

Depending on your student’s after school activities, you might also need to plan for the costs of new gear and supplies. Be sure to talk with teachers and coaches regularly to know if activities are happening this year and what precautions you need to take to keep your child healthy.

Your grocery bill might also change during this atypical school year. You might need to spend more money on groceries to account for eating most meals and snacks at home. Or you might need to buy additional items for your child to safely eat lunch at school without requiring them to use communal supplies.

No question: the 2020 school year will be a novel experience for children, parents and school staff. Stay financially prepared for whatever is ahead by considering the costs for both in-person and virtual learning and building your budget early.

Wendel Abby Abby Wendel is the president of consumer banking at UMB Bank.

4 Financial moves to make now

Successfully navigating your personal finances is challenging in the best of times but figuring out how to manage your money during a pandemic can be especially difficult.

While economic conditions continue to shift, it seems that the Federal Reserve, Congress and the White House are going to do whatever it takes to avoid a prolonged recession caused by coronavirus-related lockdowns. Although we have not seen an unemployment rate this high since the Great Depression, the markets have continued to rise. These conflicting indicators are confusing at best, so it is no wonder that money-making decisions might be particularly perplexing now.

Here are some strategies to consider for managing your personal finances going forward.

Get off the sidelines

Get fully invested in stocks in your 401(k), IRA and any other taxable money you will not need for the next 10 years or more. With interest rates expected to be zero for at least the next two years, equities offer a much higher return than bonds.

If you are invested in mutual funds or exchange traded equity funds, sign up for dividend reinvestment. If the markets correct from these levels, at least you will be buying or reinvesting at lower prices – what is known as dollar cost averaging. Had you done this in March, April and even May, you would have reinvested at some very good prices. There are still some bargains in the stock market if you look hard enough. Not all stocks have participated equally in the run up since the March 23 lows.

Make that move

While the Great Recession devastated the housing market, the current economic crisis hasn’t had the same impact on residential real estate, particularly in Colorado. In fact, due to the lack of inventory and no spring selling season this year, the pent-up demand is huge. If you are thinking of selling your home, now is as good time as ever. Record low interest rates make homes even more affordable and new visitors to Colorado may decide to move here and leave expensive cities like San Francisco, Boston or New York City. Rental properties could serve as good investment opportunities too if Colorado remains a desirable place to live.

Ditch high-interest cards

With interest rates at record lows, there is absolutely no reason to be paying high interest rates on credit card debt. You should pay off these charges immediately, even if it means borrowing money from a line of credit or home equity line. There may even be opportunities to swap out of high interest rate credit cards into low interest or no interest rate credit cards. Shop around for the best deal. Trade in your old airline affinity card and opt for a cash back credit card instead so you get money back every time you spend money.

Refinance mortgage debt

As a result of the pandemic, the Federal Reserve has cut interest rates to zero and has stated that it will not raise short-term interest rates until 2022. This extremely accommodative monetary policy has caused the 10-year U.S. Treasury to drop significantly below 1%. Since home mortgage rates trade off the 10-year treasury bond, 30-year mortgage rates are hovering around 3%. If you have a mortgage rate of 4% or higher or an adjustable mortgage rate, you should refinance your current mortgage now and lock in these historically low rates at a fixed interest rate. Mortgage rates may never be lower in our lifetimes. My first mortgage in 1985 was at 13% and when I refinanced at 10%, I thought I had won the lottery. Never could I have imagined mortgage rates below 7%, and here we are at 3%.

 

There are always silver linings in any crisis, and it is important to recognize and appreciate this. Now is a great time to take advantage of the recent correction in the stock market and subsequent plunge in interest rates. I suspect if you capitalize on these opportunities now, you will look back on this period of time and be very thankful you paid attention to what was going on when everyone else was too scared to think about anything else but the coronavirus.

What financial literacy means at every age

While you should always try to make informed financial decisions, it’s especially important to understand the impact of financial education during each life stage. Here are three ways you can sharpen your financial knowledge and understand what financial literacy means during every stage of life.

Financial literacy for children and teens

Now may be the perfect time to address the importance of financial education with children and teens. Many schools incorporate basic financial lessons, but at home you can also introduce financial literacy topics and money management, including the following.

Consider an allowance

It’s important to teach kids how to save. Consider giving children an allowance as a tool to build their financial education. Have them save a portion of their allowance – whether it’s 10% or 20% — and keep them informed of their progress over time. Teaching money basics can be simpler when children have real money to learn and interact with.

Open a youth savings account and establish long-term goals

Children like to be given opportunities to show their responsibility. One way to do just that is setting up their own youth savings account. Not only does this give them a financial foundation, but it also allows them to make measurable savings goals. As children approach their teens, discuss a car-buying goal and keep them involved in the savings process.

Graduate this goal into giving teens hands-on experience with spending. Once they have a car, they will need to make purchases for gas, their weekly outings or their car insurance. If they have a part-time job, make sure they save some of their earnings and appropriately budget the remainder for their expenses.

Have honest financial conversations

Just as it’s important to show and teach how to save, have an open, honest dialogue with your children about money mistakes you have made. Bring your kids into the conversation and discuss how and why the mistake was made, and what you have done or plan to do to resolve the problem.

Learning about finances in your 20s and 30s

As you enter adulthood, you should understand the basics of budgeting and the responsibilities that come with financial independence. Here are ways you can improve your financial literacy during this life stage.

Secure your financial foundation

As you take on expenses such as rent/mortgage payments, phone bills and other monthly payments, map out your monthly budget—and stick to it. Financial literacy at this age sometimes means limiting the nice-to-have expenses, such as eating out or traveling. One of the most important elements of your financial foundation is a savings plan. As a rule of thumb, your savings should include an emergency fund that can cover at least six months of your expenses.

Research large purchases

This life stage is often the first in which you will be faced with making big-ticket purchases and saving for future purchases. Research is an important stage in the purchasing process. Make sure you are getting the best value by shopping and comparing before making a major purchase or taking out a loan for an expensive item.

This also means staying on top of credit card and student loan payments. Try to steer clear of additional debt or missing any payments, which can negatively impact your credit score.

Take advantage of offerings from your employer

As you enter the workforce, learn about the programs your employer offers. Many businesses may offer 401(k) plans, tuition reimbursement and wellness incentives that can help cut costs. Even if retirement is 40 years away, saving now can make a difference in the long-term growth of your portfolio.

Strategies for your 40s and 50s

As you enter this age range, financial education and focusing on the long term is more important than ever. Three ways to improve your financial literacy at this life stage include the following.

Consider increasing retirement contributions

Your 40s and 50s may be your peak earning years. There are many ways you can maximize your earnings during this period, such as using your professional know-how to start a side business, seek a promotion, or search for career advancements. These can help increase your income with the goal of saving more for your retirement.

Eliminate your debt

While you may have accumulated debt from student loans, car purchases or a mortgage, now is the time to trim debt. In today’s rate environment, it may make sense for you to refinance your home loan, which could reduce your monthly mortgage payment, and cut your monthly spending. In general, the financing decisions you make at this stage can impact your long-term plan and goals.

Adjust your budget as your life changes

As you get older, you may have children move out and gain financial independence. You might also downsize your home. Or, in some cases, you may assume additional financial responsibilities if your parents require support in their golden years.

Whether you experience an increase or decrease in your spending, adjust your budget and savings. Take advantage of a financial partner to help navigate a more robust savings strategy and walk through the steps you need to take as you near retirement.

Staying savvy in your golden years

As you enter this life stage, continue building your financial literacy by taking the below steps.

Establishing a post-retirement budget

Once you retire, your budget will look completely different. While this can be unsettling if you have been following the same general budget for decades, it’s an important and necessary transition. Work closely with a financial partner to determine your strategy as you start tapping into your retirement funds and create an entirely new budget for your changing finances. At this stage, you need to know how much you can continue to save.

Determine when to start using Social Security

The minimum qualifying age for taking Social Security is 62, but you may not want to opt in immediately. If you already have a strong retirement plan, you should consider waiting until you reach the full retirement age, which can allow you to receive larger payments.

Keep investing

Reaching retirement does not mean you should abandon your investment strategy. Maintain an investment strategy that allows you to address your future financial needs.

While you should work with a financial partner to determine the mix of savings and investments you are most comfortable with, both are important to make sure you continue earning money after retirement.

Tips for controlling your financial portfolio in times of uncertainty

“The chief task in life is simply this: to identify and separate matters so that I can say clearly to myself which are externals not under my control, and which have to do with the choices I actually control.  Where then do I look for good and evil?  Not to uncontrollable externals, but within myself to the choices that are my own . . .”

—Epictetus, Discourses, 2.5.4–5

Epictetus was a Stoic philosopher who was born a slave and lived in Rome until his banishment to Greece.  He reasoned that all external events are beyond our control so we should calmly and dispassionately accept whatever happens. However, Epictetus also believed that individuals are responsible for their own actions, which they can examine and control through rigorous self-discipline.

When we find ourselves awash in confusion, anxiety and uncertainty, we can apply Epictetus’ lessons, particularly in the realm of personal finance.

Lesson 1:  Classify

The critical first step is to understand the world and create a realistic “control” taxonomy.  It’s actually quite simple.  All the variables in our financial lives fall into one of these three categories:

  • Total control.  Here, the most important variables are saving and deferring consumption vs. spending, asset allocation and our behavior regarding our investments.
  • Some control.  Based on our educational and occupational choices, we have some control over our employment earnings and how long we choose to work.  Based on our nutrition, exercise and wellness choices, we also have some control over our potential life spans.
  • No control.  We have no control whatsoever over public policy, including taxes and the treatment of different forms of savings over time, or market returns.

Drivers of Lifetime Investment Outcomes

Keating-control-finances-chart1

Lesson 2:  Control the controllables

We need only turn on the TV or open a newspaper to realize the futility of focusing on public policy or market returns.  More often than we might like, the former gets made up on the fly as events transpire, and the latter is largely dependent on the former.  There is no playbook, there is no precedent, there is no crystal ball—and no one knows exactly what’s going to happen.  It’s that simple.

And since the “some control” category largely reflects the cumulative consequences of a lifetime of decisions, there is no lever we can suddenly pull to quickly change the arc of a long trajectory.  Reality doesn’t work that way.

This effectively reduces the control pie to how much we save, how we invest our assets, and—most critically—how we behave with respect to our investments.

How we behave

Let’s assume that you have a perfect financial plan and a perfect asset allocation—designed in concert to maximize both the probability of achieving all your financial goals and the value of your portfolio value at the end of the plan.  What remains is the most excruciatingly difficult task of all: staying the course.

Your portfolio is like a bar of soap

Think about your portfolio like a bar of soap:  The more you touch it, the smaller it gets.

Researchers have observed that excessive trading is a major drag on performance.  Based on studies of the relationship between portfolio turnover and performance, equity mutual funds in the highest quartile of turnover consistently have the lowest rates of benchmark outperformance.

Don’t Just Do Something, Stand There

Benjamin Graham said, “The investor’s chief problem—and even his worst enemy—is likely to be himself.”  Similarly, Nobel Prize-winning behavioral economist Daniel Kahneman advised, “All of us would be better investors if we just made fewer decisions.”  Here is Vanguard founder Jack Bogle’s more memorable spin on the same subject:

While the interests of Wall Street’s businesses are well served by an aphorism “Don’t just stand there—do something!” the interests of Main Street’s investors are well served by an approach that is its diametrical opposite:  “Don’t do something—just stand there!”

The takeaway is that investor behavior—not investment performance—drives the financial outcomes experienced by most investors.

If your financial plan hasn’t changed, there is no need to change your portfolio.  Long-term equity investors simply need to tune out the volatility—over which they have no control—and stay the course by remaining fully invested, where they have complete control. Declines always turn out to be temporary—a blip in one’s investing career—but the uptrend in equity prices is permanent.

Ulysses put wax in his men’s ears and had them tie him to the mast to avoid the deadly consequences of hearing the Sirens’ songs.  Likewise, you must block out the media noise and avoid the adverse investment consequences of reacting to the shallow risk of temporary declines.  Or as another great Stoic, Seneca the Younger, observed:  “We should always allow some time to elapse, for time discloses the truth.”  In other words, think in decades, not days

Behavioral takeaway

The illusion of control is the tendency for people to overestimate their ability to control events.  To achieve superior lifetime investment performance, we need to focus on the three elements we do control:  savings, asset allocation, and our own investing behavior.

 

Timothy Keating is the president of Keating Wealth Management, a financial planning and investment advisory firm. He has 34 years of Wall Street experience, previously serving as the CEO and founder of a publicly traded closed-end fund focused on pre-IPO investing