Cash Smarter


10/03/16 Retirement , Saving # ,

Think You’re Bad With Money? Take This Quiz


Image: RomoloTavani

Americans are financial dunces, and we may be getting denser. When the Financial Industry Regulatory Authority (FINRA) asked 27,000 adults to take a five-question financial literacy test, only 37% could answer four or more questions correctly. That’s down from 39% in 2012 and 42% in 2009. The quiz asked people questions about compound interest, inflation, and investing.

Our financial ineptitude has serious consequences. Many survey respondents were spending more than they earned, had little money in savings, and were only making minimum payments on their credit cards. Over time, those behaviors can put someone in a financial downward spiral from which it’s hard to escape.

Even worse, many of us may be unable – or unwilling – to recognize our own bad money habits. If you have a steady job and pay your bills on time, you might think your finances are under control. But if you’re frequently surprised to discover you have almost no money in your bank account or are carrying a balance on your credit card, chances are you’re secretly bad with money. In the long run, your careless ways will catch up with you, as you discover you can’t afford to buy your dream house, send your kids to college, or retire. In a worst-case scenario, a financial shock, like unexpected medical expenses or a job loss, could force an unpleasant reckoning.

The good news is you can avoid those consequences if you change your money ways. The first step to good financial health is assessing your financial fitness today. Take this five-question quiz to find out if you’re a financial whiz or really, really bad with money. Continue reading

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09/06/16 Personal Finance , Retirement , Saving , Work #

I’m a Financial Blogger Who Isn’t Sinking in Debt. Is That Bad?

I’m a Financial Blogger Who Isn’t Sinking in Debt. Is That Bad?


I’m going to a conference in a few weeks for financial bloggers. Many of the attendees have been in some major debt at some point in their lives, and write about it often and how they’ve overcome it.

Not me. I have three finance blogs — one focuses on personal finance, another on investing, and this one, CashSmarter, is where I share my life lessons on personal finance. Other than a mortgage, I don’t have any major debts and I’ve never been so far in debt to a credit card that I’ve had to pay off thousands and thousands of it down to get my financial life in order.

All of this makes me wonder if I’m meeting my goal of telling a compelling financial story that people want to read about. If I haven’t been $147,000 in debt, or haven’t paid off $26,000 in debt in 18 months — real stories by real bloggers I respect and enjoy reading — how is my story worth reading?

Reading how someone extricated themselves from six figures of debt can be fascinating — even if you’ve never been in that much debt. Anyone with a credit card knows how easy it can be to add more charges to a card, so going into a huge amount of debt isn’t too far-fetched for many of us.

And getting out of it is the typical American tale of overcoming large obstacles to become a success. It’s a life lesson worth reading about for lots of people. Continue reading

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09/11/15 Retirement #

What Are the Basics Young People Need for Retirement Planning?

What Are the Basics Young People Need for Retirement Planning?

It’s not usually a priority for people in their 20s and 30s, but it’s true that it’s never too early to start thinking about retirement.

The majority of young people are usually paying off student debt or saving for a house, so it’s easy to see why retirement planning is put on the backburner – but if you’re making money, then it’s crucial to put aside a small amount.

Recent figures suggest that while 47% of 25-34 year-old Americans have started saving for retirement, there’s still 53% who haven’t. Retirement planning doesn’t need to be difficult or costly, and a few tips are all you need to get you started.

1. How much do you plan to spend in retirement?

The first thing you need to do is figure out precisely how much money you need to save. In order to do that, you need to know both how many years you’ll be retired for and how much you’ll spend during that time.

Obviously, it’s impossible to know just how long you’ll live for – but you can reasonably estimate lifespan and the year in which you’ll retire.

From there, you’ll need to put some thought to the expenses that you’ll have. Perhaps you want to travel? Maybe you’re thinking about buying a beachfront condo? You’ll need to factor these things in when you’re working out how big your nest egg needs to grow in order for you to retire. Continue reading

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02/10/15 Retirement # ,

Never Use a Retirement Account Like an Emergency Fund

Never Use a Retirement Account Like an Emergency Fund

Retirement accounts such as 401(k)s, IRAs and SEP-IRAs are meant to be used for what they’re named for: Retirement.

They’re not emergency funds to buy a home, repair a car, pay for college or pay off a medical bill. Yet those are some of the reasons people give for hardship withdrawals or for withdrawals when they’re not retired but past age 59.5 — the age when withdrawals are penalty free.

As defined benefit plans move to 401(k) retirement accounts, and those move into IRAs (Individual Retirement Accounts), more “leakages” from these retirement savings accounts are becoming more common, according to a February report by the Center for Retirement Research at Boston College.

Based on data from Vanguard, the study found a total leakage rate of 1.2 percent of assets from retirement accounts from four areas: Cashouts, hardship withdrawals, withdrawals after age 59.5, and loan defaults.

Tax penalties and delayed retirement

The immediate need of a hospital bill or home repair, among other short-term expenses, are some of the reasons why people pull money from their retirement accounts years before they should and long before they plan on retiring. Withdrawing the money early can not only lead to tax penalties, but to delaying retirement and having to work longer.

Even for people who don’t touch their retirement accounts until they’re retired, the account aren’t near the amounts they should be, the study found. In 2013, the typical working household with a 401(k) approaching retirement had only $111,000 in retirement assets.

Leakages reduce that wealth by about 25 percent at retirement, researchers found.

Types of retirement account leakages

Hardship withdrawals are allowed for an “immediate and heavy financial need” the report found. These include medical care, college, and avoiding foreclosure on a house.

Hardship withdrawals are generally subject to income tax, a 10-percent penalty tax, and 20 percent withholding for income taxes.

Withdrawals after age 59.5 don’t have a penalty. Most people will have to work past their mid-60s to ensure a secure retirement, and allowing early access to these funds undercuts the idea of preserving savings until retirement, researchers found. About 30 percent of such withdrawals represent leakages, they said.

Cashouts happen when an employee leaves a job and takes a lumpsum distribution from their retirement account. Other options are leaving it in the old employer’s plan, rolling it into an IRA, or transferring it to the new employer’s retirement plan.

Distributions through cashouts are subject to a 10 percent penalty tax if under age 59.5, and the 20 percent withholding requirement.

Loans are limited to 50 percent of the retirement account balance, up to $50,000. They generally must be paid back within one to five years.

Retirement account loans appear to encourage people who value liquidity to participate in their employer’s 401(k) plan and contribute more than they normally would.

But the loans come with risks. If it isn’t repaid due to default or job loss, the remaining balance is treated as a lump-sum distribution and subject to income taxes and the 10 percent penalty tax.

Impact on assets

Taking money out of a retirement account long before you plan to retire reduces your retirement funds by 25 percent, the Boston College researchers found.

For someone who started contributing 6 percent of their pay to a 401(k) at age 30, with a 50 percent employer match and an initial salary of $40,000, and a 4.5 percent annual return, the leakages would result in a retirement account of $203,000 at age 60 versus $272,000 with no leakages.

Policy options

Allowing retirement account participants access to their accounts for hardships encourages them to contribute to such plans, the study found.

Families with financial troubles should still be allowed access to their retirement accounts, but the withdrawals should be limited to serious, unpredictable hardships such as disability, high health care costs and job loss, the study recommends. Predictable needs such as housing and education would be excluded.

The 10 percent penalty tax could be eliminated, and the age for withdrawals could be raised to 62, an age closer to when people are retiring.

Lump-sum distributions at job termination could be eliminated, while the existing options for workers with retirement accounts would remain.

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Hi, I'm Aaron Crowe. Welcome to CashSmarter. I'm a personal finance freelance writer who enjoys spending my money wisely and using minimalism to make my money last longer while increasing income.