Archive for October, 2008

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How To Be Happy In This Economy

Friday, October 31st, 2008

Two interesting studies have come out over the last couple of days.  The first is the US Commerce Department’s quarterly report, released 10/30.  The second was a study from First Command on the correlation between confidence and financial progress.

 

First the bad news from the Commerce Department:

        GDP contracted by .3% in Q3

        Disposable personal income dropped by 8.7%, the biggest drop since 1947

        Consumer spending dropped 3.1%, the first drop in consumer spending since 1991

o        Spending on nondurable consumer goods saw the biggest drop since 1950

o        Spending on durable goods fell 14.1%, the first drop since 1987

        Prices rose at a 5.4 percent annual rate, the sharpest since early 1990.

        Mass layoffs — involving 50 or more people — hit their highest level since September 2001 last month.

 

The good news is that despite the considerable insecurity, Americans can take steps to feel more confident and secure.  According to First Command:

        40% of those who said they save the most on a monthly basis feel financially optimistic versus just 24% of those who save the least

        50% of those respondents with the highest ratio of savings to debt felt financially optimistic vs. just 19% of those with the lowest ratio of savings to debt

        Just 4% of respondents with the highest ratio of savings to debt felt financially stretched vs. 28% among those with the lowest ratio of savings to debt. However, the relationship between savings to debt and feeling financially stretched was independent of income levels, suggesting that it’s not how much money a family makes, but rather how it managers money.

 

The survey concludes that the primary driver of feeling financially secure is short-term debt, including credit cards and personal loans and that taking a disciplined approach to improving the savings-to-debt ratio is the greatest way to feel more financially secure.

 

Americans seem to be taking this to heart.  As the economy has worsened, savings has gone up:

 

Short-term monthly savings rose to an average of $901 in September from $756 in August, up nearly 20% and the amount of money people used to pay down short-term debt such as credit cards, rose 6% to an average of $1,010 for the month from $953 in August.

 

Tell us how the economy is affecting your feelings of security and how you’re responding to it.

 

 

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Reduce Retirement Contributions to Pay Off Debt

Thursday, October 30th, 2008

A variety of economic studies points to the fact that as a country, Americans are largely unprepared for our own retirements.  Here are a few of the sobering findings:

 

        According to the Center for Retirement Research, 32% of those aged 51 to 61 are at risk of not being able to successfully retire, up from 20% 15 years ago.  Overall, 45% of Americans are at risk of not being able to retire.

        A recent retirement study from Fidelity Investments found 83 percent of workers recognized they were saving too little for retirement.

        According to a study conducted by Pew Charitable Trusts, a couple earning $45,000 a year will need nearly $200,000 in savings in addition to Social Security to retire at 65. Yet half of American households nearing retirement age have $10,000 or less in retirement savings.

        Despite the findings above, the Employee Benefit Research Institute Future finds that retirees are overly optimistic:   24 percent of survey respondents said they are “very confident” they will have enough money to live comfortably in retirement and another 44 percent said they are “somewhat confident.”

We’re not prepared to retire, and yet we have debt that that we know we will need to pay off before we can retire.  If this is you, should you save for retirement, pay off debt, or both at the same time?

 

The simple answer is that you should put as much toward debt as you can, with the one exception that you should contribute to an employer-sponsored plan if your employer matches your contributions.  This employer match is essentially free money if you have vested or plan on being with your employer long enough to fully vest.  Although your credit card debt may have higher interest rates that the return on your retirement investments, the free match makes the overall return higher. 

 

The important point to remember is that paying off debt is positive savings, just as much as contributing to a retirement account.

 

Here’s how to create your plan:

 

 

  1. Determine your current monthly retirement contributions

  2. Determine whether you should take advantage of your employer match.  If you have debt at a very high-interest rate and your employer matches is less than 100%, then it may make sense to discontinue your retirement contributions entirely.  WARNING: this is extremely rare.  But to see if this applies to you (or just for fun), fill out the form below:

    401(k) Breakeven Calculator
    Employer matching (%):
    Debt APR (%) :
    Annual investment return (%):
    Years to breakeven:

     
    The calculation is as follows: LN(1+match_rate)/(LN(1+debt_APR)-LN(1+inv_return))

    This result shows how quickly you will have to pay off your debt for it to make sense to continue to make matching contributions to your 401(k).  If you feel that it will take longer than this to pay off your debt, discontinue all retirement contributions.  However, as a general rule of thumb, if this is greater than 3 years, continue your matched contributions up to the point where your employer no longer matches. 

    Note that if you’re over 55, tax rules allow you to immediately withdraw your retirement contribution and the employer match without penalty.  If this is the case, you can still contribute up until the employer match, but then withdraw the money to pay off debt.  Although this makes mathematical sense, you should only do this if you have the discipline to control spending, pay off your debt as quickly as possible, and then begin to aggressively save for retirement.

  3. Calculate how much of your current retirement contributions can be redirected toward paying off debt:

    Current monthly contribution:
    Contribution to max out employer match:
    Monthly amount to apply to debt:

  4. Apply this amount to your DebtPlan to increase your total monthly payment. If you don’t wish to commit to applying the entire amount to debt, alter the total before marking the action complete.

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      DebtGoal.com Mentioned on FOXBusiness.com

      Thursday, October 16th, 2008

      We recently spoke with FOXBusiness.com personal finance reporter Kathryn Tuggle, for her story on the Top 10 Dumbest Ways to Go into Debt. Debt is the “On Topic” featured theme for the month of October within the Personal Finance section of FOXBusiness.com and we at GoalSpring are excited to be a part of the solution for overcoming debt for our first group of DebtGoal users.  I thoroughly enjoyed the conversation with Kathryn and hope this piece will serve as an eye-opener for readers who find themselves considering some of the riskiest behaviors out there – in terms of getting into debt. There are many strategies to avoid getting into debt, and realistic alternatives to the “must-have” purchases many consumers feel pulled towards in spite of today’s tough economic climate. For those of you feeling the pinch, and looking for a clear path to get out of debt – we invite you to participate in the DebtGoal.com Alpha! We share your goal, and will help you achieve it every step of the way!

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      Take our survey

      Wednesday, October 15th, 2008

      Want to help DebtGoal?  Take our short survey to help us prioritize features.

      DebtGoal Feature Survey

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      Pay Off Debt or Build Cash Reserve in Current Market?

      Tuesday, October 14th, 2008

      Today we received a media request as follows:

       

      Does it make more sense to pay off debt or save money when the unemployment rate is growing and the economy is in peril? I’m looking for experts who can address the issue of paying off debt versus saving and investing in relation to the fears created by today’s financial crisis.

       

      Here’s what we have been advising people:

       

      In healthy economic times, paying off debt is actually positive savings and is generally a borrower’s highest rate of return.  However, in times of economic turmoil all this can change.  Here’s how you should think of your situation:

       

      First, understand your emergency spending plan in advance.  Even if you’re still employed and can make your payments, do this now.  Having a plan and being prepared to act can greatly reduce stress if a crisis should come.

              Break expenses into mandatory and discretionary expenses and have a plan to attack discretionary expenses the minute your financial situation becomes threatened.  Be prepared to take drastic action quickly to cut out things like cable, cell phones, and other non-essentials. 

              Know which expenses you can pay for with credit (some utilities, groceries, etc.) and which require cash (mortgages, etc).  Determine how much cash you will need to have a significant safety cushion of 6-12 months.  Make sure that you have enough cash on-hand to cover the cash expenses.  If you have surplus cash after that, by all means pay off debt.  You will reduce your balances on high-interest debt and can draw against them later if needed.

       

      Second, take action now to build a sufficient cash reserve of 6-12 months of cash expense by cutting non-essential expenses.

       

      Third, if you are close to bankruptcy or feel that your job is in immediate jeopardy, do not pay more than you have to against consumer debt.  Save this cash as a spending safety cushion and use it against your most important requirements if the need arises.  Make sure that you can stay current on your house payments and essential utility bills.  Save until you reach the point that you could cover your cash-only expenses for 12 months.  If you reach that point, borrowers who still feel that their job is at risk and that they might ultimately have to declare bankruptcy should think twice about paying down unsecured debt before secured debt such as auto loans, student loans, and mortgages.  In general, unsecured consumer debt can be forgiven or restructured in a bankruptcy while secured debt and student loans cannot.  So if you think there is a chance that you could go bankrupt, make payments against the loans that will stay with you.

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