How to #savelikeagirl and Close the Retirement Savings Gap
December 6, 2018
Olympic Gold Medalist, Mia Hamm once said: “my coach said I run like a girl. I said if he ran a little faster, he could too.” With that simple statement she redefined the word “girl” to mean something more encouraging and inspiring than its historical connotation.
When it comes to finances, women have traditionally trailed behind men in retirement readiness, confidence and savings. A recent survey found that only 55% of women are confident about retiring comfortably, compared to 68% of men.¹ There is also, however, data that suggests that women are behaviorally better savers than men. Consider these data points
If women are poised to be great savers, why are we they still facing roadblocks impacting how and when they can retire? The reason is women still face 5 key obstacles when it comes to saving for retirement. Here we outline those obstacles and provide actionable steps to help redefine what it means to “save like a girl:”
1. Pause on Careers Impacting Earnings
In a recent study, 70% of women admitted they would feel anxious about taking a career break. And while a brief stint away from their career to raise a family is typical, the amount of time taken can have a big impact on earnings. It’s estimated that women who take more than 3 years out of the workforce miss out on 46% of their earnings potential.⁴ The key is to not stress about wanting to take time off and instead, focus on having a plan to help keep you on track financially.
Solutions to help:
2. Reduced Access to a Workplace Retirement Plan
According to a recent retirement study, women (66%) are less likely to be offered a 401(k) or similar plan compared to men (75%).¹ This can in large part be explained by the fact that women are twice as likely as men to work part-time and employers don’t typically offer retirement plans for part-time employees. We’ve also seen a rise of women in the ‘Gig Economy’, with side jobs like ride share drivers, e-commerce and freelance work – where employer-sponsored plans are not offered.
Solutions to help:
3. Women still make less
As of 2017, the women to men earnings ratio is approx. $.81 to $1.00.⁵ And while there are many influences contributing to the gap, there are just as many actions women can take to help improve their own financial situation, while further bridging the gap for women as a whole.
Solutions to help:
4. Women are less aggressive investors than men
Generally speaking, women tend to invest more conservatively than men as a perceived way to preserve capital. In addition, most women (62%) say they want some level of advice when it comes to their retirement saving and investment-related decisions.¹
Solutions to help:
5. Women are living longer
According to the National Center for Health Statistics5, the average life expectancy for women in the U.S. is 81 years, compared to 76 years for men. While many factors contribute to this difference, a recent shift to more proactive health measures plays a large role. More women are focused on preventative healthcare and leveraging technology to help manage their health (64% of fitness tracker owners in the U.S. are women). So with those extra years, you’ll want to have enough savings to cover your income needs.
Solutions to help:
No one’s financial picture is the same. One-on-one, personalized help from a financial advisor or retirement professional can help you customize a plan that works for your family, your life, and your goals.
There has never been a better time for women to take charge of their lives, their careers and their financial futures. Women already possess the innate behaviors to exemplify financial success and help close their existing retirement savings gaps. By simply incorporating some of these aforementioned solutions you too can – “save like a girl.”
¹Transamerica Center for Retirement Studies, Here and Now: How Women Can Take Control of Their Retirement, March 2018
²Leading Retirement Solutions White Paper, 2017, Retirement Preparedness of Women Business Owners and Leaders
³Money Magazine, The Investing Gap, March 2018 Edition
⁴Center of Talent Innovation, Off Ramps and On-Ramps (revisited June 2010)
⁵Hegewisch, A., Phil, M., & Williams-Baron, E. (2018, March 7). The Gender Wage Gap: 2017 Earnings Differences by Race and Ethnicity. Retrieved from https://iwpr.org/publications/gender-wage-gap-2017-race-ethnicity/
⁶U.S. Department of Education, Trends in Education Equity, https://nces.ed.gov/pubs2000/2000030.pdf
⁷National Center for Health Statistics
⁸Kochanek, K. D., Murphy, S. L., Xu, J., & Arias, E. (2017, December). Mortality in the United States, 2016. Retrieved from https://www.cdc.gov/nchs/data/databriefs/db293.pdf
2018 retirement plan dates and deadlines
November 21, 2018
The holidays are drawing near, which means it’s time for your annual retirement plan key dates reminder from the ABA Retirement Funds Program (“the Program”).
If your firm maintains a qualified defined contribution retirement plan such as a profit sharing or 401(k) plan there are many important dates and deadlines you need to know about. The Program is providing the following list of important dates* for qualified retirement plans. Whether your firm participates in the Program or not we hope you will find this friendly reminder helpful in the administration of your firm’s plan.
About the ABA Retirement Funds Program:
The ABA Retirement Funds Program currently services over 4,000 law firm retirement plans with more than $6 billion across the United States. The Program helps law firms of all sizes with this important benefit. Please contact us using the information below if you have any questions or need additional information.
Please read the Program Annual Disclosure Document (April 2018) carefully before investing. This Disclosure Document contains important information about the Program and investment options. For email inquiries, contact us at: email@example.com.
Registered representative of and securities offered through Voya Financial Partners, LLC (Member SIPC).
Voya Financial Partners is a member of the Voya family of companies (“Voya”). Voya and the ABA Retirement Funds are separate, unaffiliated entities, and not responsible for one another’s products and services.
Is Your Retirement Plan Realistic?
January 31, 2018
Whether you're years away from retirement or are about to leave the workforce for good, it's critical to have a well-thought-out plan in place.
Without one, you risk falling short of your financial goals and entering retirement without a clue as to how you'll spend your days.
But while creating a plan is a crucial first step on the road to a satisfying retirement, that plan will only serve you well if it's rooted in reality. Here are a few questions to ask yourself when evaluating your plan.
1. Will you have the income to sustain the lifestyle you want?
Perhaps you've mapped out a retirement plan that incorporates a healthy mix of travel and time close to home. But unless you have the finances to support that plan, it won't do you very much good.
Before you get too comfortable with your plan, get a good sense of what your various expenses will cost, and make sure your savings actually stack up. For example, did you know that healthcare will cost the average healthy 65-year-old couple today $400,000 or more in retirement -- and that's not including long-term care? Also, are you accounting for the various housing costs you're likely to encounter as a senior? Even if your mortgage is fully paid off, you'll still need to cover insurance, property taxes, and maintenance, which can equal as much as 4% of your home's value.
You might look up your nest egg balance and see a respectable number there on the screen, but unless that figure is great enough to cover the expenses you're likely to face, you'll need to do better. That could mean postponing retirement for another year or two or adjusting your lifestyle plan to align with your savings level.
2. Are you aware of how much (or how little) Social Security will provide?
There's nothing wrong with factoring your Social Security benefits into your retirement budget. Quite the contrary -- you should estimate your benefits and get a sense of how much income Social Security will give you based on your earnings record. But don't wait too long to take this step, because many seniors are surprised to learn what limited buying power those payments give them.
The average Social Security recipient today, for example, gets $1,360 a month, or $16,320 per year. That's hardly enough to live on, nor can it constitute the bulk of your income if you want a reasonably comfortable retirement. When assessing your retirement plan, make sure it includes an accurate estimate of what you'll get from Social Security -- because the wrong assumption could throw the whole thing off
3. Are you equipped to handle the cost of long-term care?
If your retirement plan doesn't include a contingency for long-term care, then you're making a big mistake. A good 70% of seniors wind up needing some type of long-term care, the cost of which could be astronomical without insurance. The average nursing home stay, for example, costs $225 per day, or over $82,000 per year, and that's with a roommate. Assisted living facilities, though less costly, are also no bargain: You'll likely pay over $43,500 a year to reside in one.
Signing up for long-term care insurance in your 50s or 60s can help defray the eventual costs you might face. Another option, if you don't want to pay those premiums, is to pad your nest egg so you have enough money to cover long-term care expenses on your own. The choice is yours -- as long as it's factored into your retirement plan.
4. Are you making reasonable assumptions about your investments' performance?
Countless financial professionals swear by the 4% rule, which states that if you begin by withdrawing 4% of your nest egg during your first year of retirement, and adjust subsequent withdrawals for inflation, your savings should last 30 years. But whether you plan to withdraw 3%, 4%, 5%, or another percentage of your savings each year, you'll need to make sure your investments perform well enough to support the rate you're counting on.
A bond-heavy portfolio, for example, won't do as good a job of keeping up with inflation as a portfolio loaded with stocks (at least not in today's interest rate environment). That's why you'll need to take a closer look at your plan and make sure your investment mix is healthy and allows for the yearly distributions you're aiming to take.
Though having a retirement plan, to begin with, is far better than having no plan at all, if you really want that plan to count for something, spend some time analyzing it to make sure it's realistic. You may need to make some changes to ensure that you don't run out of money later in life, and the sooner you do, the better you'll fare in retirement.
Find your balance: 5 tips to help you pay down debt
February 21, 2018
Building a healthier financial life, means striking a balance between living for today, while preparing financially for tomorrow.
You have multiple savings goals and as your priorities change, it is good to know how best to save for the things that matter most, without sacrificing your own financial future. Here are five tips to help you get out of debt.
Know what you owe and build a budget
Imagine knowing where your money goes and what it would be like when you do not owe anything. How would life change if you were out of debt? How would you feel? Understanding how debt can cost you over time and beginning to plan a way to eliminate it will help you find your financial balance. Once you know how much you owe, you may want to identify unnecessary spending and a debt elimination goal over time. It all starts with plan – start with building a budget with the Voya.com Home Budget Savings Calculator.
Determine your pay down strategy
Now that you know what you owe, here are a few strategic options you can use. First, you may want to prioritize how you want to pay off your balances. One option is paying off the highest interest rate first, while also making minimum payments on the rest. Consider the snowball method as well, where you pay off the lowest balance and then, take the amount you would have paid for that card each month and roll it into the next debt amount.
Stay balanced, stay strong
Getting to where you want to go will depend on the choices you make today. Finding the balance means making sure all of your expenses, insurance protections and emergency savings are in place first. Then, after you budget and account for everything else, with anything left over, you can prioritize your debt strategy and place a high percentage of your remaining discretionary income toward your debt to help you stay balanced and stay strong.
Reduce spending temptations
Although technology can work in your favor, sometimes having immediate access to retail sites such as Amazon.com is too convenient and can get you into trouble. Sites that save your credit card information could have you spending more than intended. Remove any temptation from sites like this by deleting its ability to save your information. By not having things auto-saved, it may give you more time to determine if it is something, you actually need.
Know the score
Your credit score is more than a number. It is what potential lenders use to determine how likely you are to keep your word and pay them back. It also reveals a lot about your financial wellness and knowing what is in your credit report is essential. Did you know you are entitled to one free copy of your credit report every 12 months from each of the three nationwide credit-reporting companies? When you know the score and stay on top of your credit, it makes it easier to get and stay healthy financially.
Remember, building savings and reducing debt takes time. As you look for more ways to get out of debt, be sure to budget for all of your competing savings goals. Save early and save often, so you can provide for your loved ones, and live the life you’ve envisioned.
Retirement Planning for Women
March 13, 2018
Why Living Longer Means You Have to Save That Much Harder
On average, women live longer than men. With a longer life expectancy, you’ll most likely have more time to enjoy your retirement. So far, so good. But here’s the catch: Living longer means you have a greater chance of outliving your savings. And while gender equality has come along in leaps and bounds statistically, you’re still at a disadvantage when it comes to accumulating money for your retirement. The bottom line is that you’ll need to save more to live comfortably in retirement.
The Financial Obstacle Course
Your Retirement Future Is Bright
Five Steps to Get Started on Your Plan
Envision Your Future
Take Stock of Where You Are
Make It Easier to Save
Put Your Money to Work
Plan to Spend Later
This material is provided for general and educational purposes only; it is not intended to provide legal, tax or investment advice. All investments are subject to risk. We recommend that you consult an independent legal or financial advisor for specific advice about your individual situation.
Doing Something Is Always Better Than Doing Nothing
April 11, 2018
"I don't have enough money to save for anything! I can barely keep my bills paid now!"
"Being frugal is just too much work!"
"There's no way I can ever possibly save that much for retirement! Why bother?"
If you visit virtually any message board or open comment thread or Facebook thread in response to a personal finance article of any kind, you'll almost always find a pile of comments like the one above.
Although the words and the tone and the original article might be different, the core idea from those comments is the same: improving my personal finances is too hard and so it's better to do nothing at all.
There are a number of reasons for that feeling.
For starters, a lot of personal finance topics are discussed in terms that are outside the bounds of what people can afford. When you start talking about saving $3 million for retirement, a person earning $23,000 a year is going to immediately feel as though the article is coming from fantasyland. It's just not realistic.
Another key issue is that some of the strategies provided for achieving change are not realistic for the particular lifestyle of the reader. You'd be surprised how often the responses to a list of frugality tips includes people pointing out the two or three out of fifty that are "impossible," which means that the other 48 tips must also be irrelevant and that any change is simply out of reach.
The biggest reason, though, is that change of any kind is never easy. There is always resistance to change on some level, and if you're coming into the situation without being open to trying new things, it's probably not going to work out well for you.
Whenever I think of situations like this, where people are resistant to change, I think of something my father told me when I was a kid. We had just watched some show about people doing ultra marathons – 100 miles or more in a single run. I had made some comment about how I thought such a thing was impossible. He just looked at me sideways and said, "If you run around the garden and back and do it a couple times a day for a year, you'll have run 100 miles. If you just stand there and say it can't be done, you'll have run zero miles."
Sitting there and doing nothing will achieve just that. On the other hand, doing something, even if it is the absolute smallest step you can conceive of, will achieve some kind of positive result, and then you have something to start with, a seed to build from.
For example, you can build a pretty nice emergency fund on a dollar a day. Put aside one dollar each day in a jar under your bed and at the end of the year, you have $365. That's going to be enough to handle a pretty significant emergency. That's going to fix a broken washing machine or even buy a simple new one. That's going to replace the worn out tires on your car.
Upgrade to a coffee can and keep going and after five years you'll have about $1,825. That's enough to buy an older car to get you back and forth to work. That's enough to pay rent for a month or two or more, depending on where you live. That's enough to put a lot of food into quite a few bellies.
How hard is it to save a dollar each day? You can probably find that much in change if you look around for it. Just choose not to buy a soda today out of the vending machine, or when you go to the grocery store, choose to buy a few store brand items. Perhaps you can skip one stop at McDonalds – you'll probably cover a week of it that way.
Want it to be even easier? Just set up an automatic transfer at your bank. Have them transfer $7 a week out of your checking into your savings account – this is something your bank can probably do. That's literally the equivalent of finding some change on the ground each day or buying a few store brand items at your next grocery store visit. It takes almost no effort to save a dollar a day, and then you don't even have to go through the effort of actually putting that money aside – it's done for you.
That's not the end of it, either. Let's say that $365 you just saved on a washing machine means you don't have to buy that replacement on a credit card. If you had to put it on the card, that's another $60 a year in interest if you can't pay it off quickly.
All of that is achieved through the most minimal of efforts.
What about that big list of silly frugal tips? If you can find just one out of fifty that you can easily do – just one – then you're going to save some money.
Maybe you decide to start buying store brand ketchup. You buy a bottle of ketchup every three months. The store brand is basically identical in taste and costs $1 less. That's $4 saved with basically no change in your life. Repeat that with other store brand items. You're saving a few bucks a year with each shift – or maybe more. Store brand sandwich bags. Store brand flour. Store brand cheese. Store brand frozen broccoli. You save. And save. And save.
Maybe, instead, you decide to take on a one time project, something you just do once that keeps saving money for you over the long haul. You decide to borrow a caulking gun and a putty knife from your neighbor and use a bit of his caulk to seal up a few of your windows. You go around, strip the old caulk off of the window edges with a putty knife, squirt the new caulk out like toothpaste, spread it out with a rounded corner on the putty knife, and repeat for your other windows. You're done in an hour, but suddenly your households hot air in the winter and cool air in the summer much better than before. Your energy bill drops by 10% permanently. That's $100 a year, or maybe more.
Doing something is better than doing nothing.
What about retirement savings? Many people feel completely overwhelmed by not being able to afford to save for retirement. They just can't save nearly enough to have a "good" retirement, so they save nothing.
How about saving just 1% of your paycheck?
Let's say you save just 1% of your income for 20 years at a typical 7% average annual return. At the end of those twenty years, you'll have most of a year's worth of living expenses built up. If you supplement that with Social Security, it'll last for several years of supplementing what you have and making life a whole lot better. There's a pretty nice quality of life jump when you leap from Social Security benefits to benefits plus 25%.
If you're saving just 1% for retirement while working a $50,000 a year job, you're literally saving less than $10 a week. It's barely more than a dollar a day. As I pointed out above, a buck a day isn't hard at all. Sign up for that, let the money slowly roll in, and you'll have $30K or so saved up after twenty years.
$30,000 at retirement is far better than $0. $30,000 means you can withdraw $1,000 a year without breaking a sweat and that money will last and last and last, and an extra $1,000 a year on top of your Social Security is going to give you a nice lifestyle bump for the rest of your life. All because you decided to save a buck a day – pocket change, really – for the last 20 years of your working life.
Doing something – even if it seems small and inconsequential – is better than doing nothing, especially if you stick with it. Something as silly and small as buying store brand sugar every time or caulking your windows once or making a double batch of spaghetti and eating a spaghetti casserole in a few days instead of dining out makes a big difference.
It's just one little step, and it makes a difference.
The best part? One successful little step gives you the courage to take another, and that one makes a difference, too.
Doing something is always better than doing nothing.
Reasons to save in a 401k or similar employer-sponsored plan
October 29, 2018
Investing in your employer sponsored retirement plan may provide an opportunity for savings.
Excuses, excuses, excuses
Pay yourself to save
If you decide to invest, doing so with an employer-sponsored plan actually may keep more money in your pocket today. Please note that distributions will be taxed as ordinary income when distributed and are subject to any tax penalties that may apply. Consider the chart below showing the difference between investing with a plan versus investing outside a plan.
Youth is on your side
Note: This hypothetical illustration assumes a biweekly savings of $92 – or six percent of pay – equal to $2,400 per year and a federal tax rate of 28 percent and is for demonstration purposes only. It is not intended to (1) serve as financial advice or as a primary basis for your investment decisions and (2) imply the performance of any specific security. Before-tax contributions into tax-deferred investments are subject to Internal Revenue Code limits. Taxes are generally due upon withdrawal and early withdrawal penalties will apply to withdrawals taken before age 59½, unless an IRS exception applies. Your employer may offer you a choice among retirement accounts qualifying for tax deferral. Your local Voya representative can explain the benefits, features and costs of each. You should consult with an advisor when you consider your alternatives or make tax-related decisions. Legal and tax advice are not offered by Voya and its representatives.
Compounding is a multiplier effect. Consider Larry and Susan:
Note: This hypothetical illustration assumes each account earns an annual rate of return of 8 percent and is for demonstration purposes only. It is not guaranteed and not based on the rate of return of any particular investment and does not include costs incurred under a particular investment. It is also not intended to serve as financial advice or as a primary basis for your investment decisions. Systematic investing does not ensure a profit nor guarantee against loss. Investors should consider their financial ability to continue their purchases through periods of low price levels. Taxes are generally due upon withdrawal.
Susan not only ends up with more money than Larry, but she also contributed significantly less money than him. This is one of the potential benefits of starting early.
Pension and Social Security are not what they used to be
It’s never too late to start
You may even be able to take advantage of “catch-up” provisions to increase your contributions. A few years of investing could put you ahead of where you’d be if you’d done no investing at all.
Borrow money from yourself
Note: loans will reduce your account balance, may impact your withdrawal value and limit participation in future growth potential. Other restrictions may apply.
No expertise required
Saving made painless
4 Tips That’ll Save Your Retirement
April 17, 2018
We repeatedly are told to prepare for retirement during our working years.
But what if that milestone is quickly approaching and you're nowhere near ready? If you're anxious about retiring, you're not alone, but rather than fear what lies ahead, you can take steps to be prepared financially. Here are a few ways to salvage your retirement if you've been grossly neglecting it thus far.
1. Take advantage of catch-up contributions
Maybe you didn't start saving for retirement early on and are looking at a somewhat paltry savings balance. You wouldn't be the only near-retiree with that conundrum -- the median savings balance among households aged 56 to 61 is just $17,000. But it may be if your savings look somewhat similar, or you've yet to start saving at all, it's time to play catch-up.
The good news is that older workers get the option to contribute more to tax-advantaged retirement plans than younger workers, so if you're 50 or over, you can put away up to $6,500 annually in an IRA and $24,500 in a 401(k). Of course, you'll probably need to cut some of your present expenses to hit the latter limit, but if you're willing to do so, you can catch-up on savings in a relatively short period of time.
For example, socking away $24,500 for 10 years will leave you with an ending balance of $338,000 if your investments generate an average annual 7% return, And that, combined with your Social Security income, could make for a reasonably comfortable retirement.
2. Plan on paying taxes
If you just read the paragraph above, you're probably thinking: "Great, I'll just max out my 401(k) for 10 years and have $338,000 to use as I please." Not so fast. One of the biggest mistakes retirees make is failing to account for taxes, and if you have a traditional 401(k), you'll have no choice but to give the IRS a piece of your savings once you start taking withdrawals.
Remember, the money you contribute to a traditional 401(k) or IRA goes in tax-free, but in exchange for that immediate benefit, you pay taxes when you're older. That said, if you prepare for those taxes and factor them into your retirement budget, you'll avoid getting caught off-guard later on. (Incidentally, there's also the option to convert some of your savings to a Roth account, which will allow you to take tax-free withdrawals as a senior. However, doing so means paying more taxes up front.)
3. Knock out your debt
The scary thing about retirement is living on a fixed income. If you enter that stage of life burdened with debt, you'll have less flexibility in spending your money. That's why it's crucial to eliminate as much debt as possible before bringing your career to a close.
If you're carrying a credit card balance, cut corners in your budget to free up cash and use that money to chip away at the outstanding balance. If you still owe money on your mortgage, try sneaking in a few extra payments each year to knock it out by the time you're ready to call it quits. Entering retirement debt-free will make for a much less stressful existence down the line.
4. Be willing to work in a different capacity
Many folks associate retirement with not working at all. But if you change your outlook on working, you may discover that you're a lot less financially stressed than expected. Rather than discount the possibility of earning money as a senior, think about the ways you can do so enjoyably. For example, maybe you're an avid baker or enjoy caring for animals. There are a host of hobbies you could conceivably turn into a business, and once you do, you'll benefit in two ways.
First, you'll have extra money coming in, which will buy you more wiggle room in your budget. But just as importantly, the more time you spend earning money, the less of your savings you'll have to spend to keep yourself occupied. Talk about a win-win.
If you're worried about retirement, don't just resign yourself to a financially shaky future. Instead, use the remainder of your working years to make smart decisions that serve you well in the long run. At the same time, embrace the idea of earning money in retirement, albeit on your own terms. Collectively, you'll be doing your part to minimize your stress both now and in the future.
Economic Policy Institute analysis of Survey of Consumer Finance data, 2013.
Imagine your best retirement: 4 tips to maximize your savings
February 16, 2018
Building a healthier financial life means striking a balance between living for today, while preparing for tomorrow.
You may have multiple savings goals and as your priorities change, it is good to know how best to save for the things that matter most, without sacrificing your own financial future. Here are four tips to help you maximize your retirement savings.
Imagine your best retirement and then save
When you think of retiring, what do you imagine? Most of us, whatever we envision, likely want to maintain our current lifestyle. To achieve this, think about maximizing your savings efforts to meet your income needs.
Now that you have a vision for retirement, it is a good idea to calculate your future retirement income and the expenses not often considered when planning. So how much saved income should you have by retirement? While everyone’s personal needs are unique, the accepted standard within the financial industry is to consider your income goal to be equal to 70% of your current salary.
Give yourself a boost – kick up your retirement savings
When you think about maximizing your retirement savings, what does that mean to you? It can mean maxing out the annual IRS limits on each of your retirement savings accounts, which means this year, you have a chance to save an additional $500 over previous years. For 2018, the contribution limit increased to $18,500 for a retirement account and more for IRA accounts, learn more here. It can also mean maximizing any employer’s retirement plan benefits such as a match program if available to you.
For example, some employers match dollar-for-dollar up to a certain percentage of your salary. If your employer extends a retirement savings plan such as a 401(k) and you are eligible to participate, but not enrolled, take advantage of the tax benefits and savings growth potential and sign up today. If you already participate within an employer retirement plan, ask if they match your contributions. Be sure to take advantage of the entire match to give yourself a boost – and kick up your retirement savings.
Play catch-up with your contributions
If you are 50-years or older, another way to maximize your retirement savings is to take advantage of catch-up contributions beyond the $18,500 maximum allowed for your 401(k). Fifty-somethings can also contribute an additional $6,500 dollars to an IRA within the same year; the amount has increased from years prior, to give you more savings power.
Get guidance for the financial road ahead
Your financial journey begins with you. You have goals and you want to save. Learn how working with a financial advisor can help you start and stay on track. An advisor can give you a better understanding of how everything works together making the most of what you have – so you have more for your road ahead.
Remember, building savings takes time. As you look for more ways to maximize your retirement savings, be sure to budget for all of your competing savings goals. Save early and save often, so you can provide for your loved ones, and live the life you’ve envisioned.
8 Simple Steps to Avoid Debt
August 23, 2018
By your mid-thirties, you are far enough along in life to understand that staying out of debt is a key to your long-term financial health. But have you ever sat down and thought about what, specifically, you need to do to stay debt-free? Here are eight simple steps that will help you.
Sarah is 35 and single. She owns a home and lives alone. She is not an extravagant spender. She rarely takes vacations. She always buys a secondhand car. Yet she has trouble staying out of debt, and she has had no success with saving. What can she do to change the pattern?
Step 1: Set up a budget.
By definition, avoiding debt requires that you spend less than you take in. It is just common arithmetic. But while Sarah knows exactly what her income is—she can recite the amount of her biweekly take-home pay to the penny—she is only vaguely aware of her full range of expenses.
Voya’s Home Budget & Savings Calculator can help Sarah understand her monthly expenses by showing her exactly where her money is going. Visualizing her spending is the first step toward managing it.
As with her income, Sarah knows the amount of her monthly mortgage from memory. It’s around 25% of her pre-tax income. She also knows her monthly car payment by heart as well as the number of months before she pays it off (22).
However, Sarah does not have such a strong sense of her discretionary monthly expenses, such as the cost of dining out, or even her fixed monthly expenses. The simple act of plugging numbers into Voya’s Home Budget & Savings Calculator made her realize how little she thought about utilities, home maintenance and general expenses such as food and clothing. Even though her mortgage and car payment are her largest individual expenses, Sarah realized that when she added all her smaller monthly payments together, they exceeded the combined total of those two largest expenses.
So what can Sarah do to bring that number down?
Step 2: Use cash for everyday purchases.
Years ago when Sarah first got a credit card, she started carrying less cash. It seemed to make sense; if she didn’t have cash in her pocket, she wouldn’t spend it. So she used her card for every purchase she could. Soon she was charging almost all of her expenses: morning coffee, lunch, dinner out, movie tickets and so on.
Then she tried an experiment. For a month, she paid cash for all small everyday purchases, saving her receipts as if she was on a business trip. When the month was over, she added up the receipts and compared the total to her typical monthly credit card statements.
She was shocked by what she found. When she used a credit card, she spent far more. The difference was particularly noticeable when it came to food. A single $12 lunch, bought with a simple swipe of her credit card, seemed like a painless expense. But five $12 lunches a week is $60, and that’s $240 a month—more than the total of her car payment.
Once she started using cash and she saw the total amount of her cash dwindling as the week went on, it became easy to decide that she really didn’t need chips and a $2 bottle of water with her lunch. She even started bringing lunch from home a few times a month. At the end of the month, she had trimmed her lunch bill by $100. The conclusion was clear. Sarah knew what to do next.
Step 3: Watch monthly credit card debt more carefully.
For Sarah, this was a natural result of using cash more often and becoming more price-conscious at the point of purchase. She never fully grasped the psychology of it before: Just because she could buy something using a credit card that did not necessarily mean that she could afford it. She now assessed every potential purchase in the context of her monthly budget.
Step 4: Pay more toward credit card bills than the minimum amount due.
That small figure is so tempting. On one of her cards, Sarah has a balance of $1,000 with a minimum monthly payment of just $30. Under her current terms, it would take her 47 months to pay off that debt with a total interest charge of $396.74. If she increased her monthly payment by just $10, she would pay only $262.81 in total interest—a savings of $133.96—and pay off her debt in just 22 months.
Step 5: Pay off the credit card with the highest interest rate first.
If Sarah had a total card balance of just $1,000, she would be in pretty good shape. But she got a second card to collect airline miles, and the interest rate is higher by three percentage points. On the same $1,000 balance, with the same $30 minimum payment, it would require an extra four months to pay off the second card with a total interest charge of $513.97. Therefore, Sarah will save money in the long run if she pays off the card with the higher interest rate first.
Step 6: Pay off credit cards and short-term debt before paying off the home mortgage.
Two years ago Sarah received a small inheritance of $5,000. She used $2,000 to take a trip and used the remaining $3,000 to help pay down her mortgage. Unfortunately for Sarah, she would have been better off using that money to pay off the balance on her credit cards.
This might seem counterintuitive. A home mortgage is the largest debt most of us will incur in our lifetimes. Wouldn’t paying it off first be the wisest way to rein in debt? Not necessarily. Remember, avoiding debt involves effectively managing all of your financial assets. That includes tax deductions, and interest on short-term debt is not tax-deductible but interest on mortgages is.
Step 7: Resist the temptation to use home equity or assets in a 401(k) plan to pay off credit cards.
If Sarah follows steps 1 through 6, this ought to be a moot point. We’ve included it as a point of emphasis. Sarah needs to think of her home and her 401(k) plan assets as protection from risk, not as sources of funding for debt. If she ever reaches a point where she is even thinking of using them to pay off debts, that is a clear indicator that it is time for her to reevaluate her income/spending balance.
Step 8: Do not let credit card payments detract from personal and retirement savings.
Again, avoiding debt means staying within a budget. Thanks to Voya’s Home Budget & Savings Calculator, Sarah realized that trimming her credit card debt was the shortest route to staying within her monthly budget.
Now she has to get into the habit of funneling those savings into her retirement plan, which will also reduce her tax payments. As Sarah has learned, her financial well-being isn’t just a matter of what she makes—it’s about limiting what others take.
Sarah no longer panics about occasional short-term debt. Now that she has a more thorough understanding of her finances, including a viable plan for managing debt while continuing to save, she’s on track to a secure future.
Sarah should also consider whether her employer offers matching contribution on employee salary deferrals when she determines how much to contribute to her 401(k) plan.
Please read the Program Annual Disclosure Document (April 2018) carefully before investing. This Disclosure Document contains important information about the Program and investment options. For email inquiries, use: firstname.lastname@example.org.
Securities offered through Voya Financial Partners, LLC (member SIPC).
Voya Financial Partners is a member of the Voya family of companies (“Voya”). Voya and ABA Retirement Funds are separate, unaffiliated entities, and not responsible for one another’s products and services.
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