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Category Archives: Finance

3 ways to give your children a financial head-start

Many parents find it very difficult to talk to their children about money. Either the topic is seen as too sensitive or they just feel that they don’t know enough to give good advice.

However, the worst lesson that any parent could ever give a child about money is not talking about it. Children learn the most from the example that they are set, and that is why it is so important to show that money is not something to be scared of or anxious about it. It is something that should be made to work for you.

This is why it is best to expose children to the idea of saving sooner rather than later. From a young age they should see that they can have control over their money.

Here are three easy ways to get them thinking the right way about saving:

Give presents that mean something

Of course children love toys and having something to play with, but not every present they receive has to give them instant gratification. Putting money in a unit trust or stock broking account might not sound like the most exciting gift in the world, but it can be very rewarding.

For a start, it gives them some sense of having their own savings and some money of their own to look after. Over time, it’s also the best way to teach them about different savings products, asset classes, and things like interest and dividends, as they can see for themselves how they work.

A low-cost online stock broking account could even allow them to make their own decisions about what stocks to invest in. At an early age their decisions are not likely to be influenced by rigorous analysis, but they can still invest in companies that they know something about.

For instance, if they like eating at Spur, why not show them that they can actually buy a part of that company? Or if you always do your shopping at Pick n Pay, let them buy the stock. Over time, the likelihood is that their interest will grow in how these businesses work, how they generate earnings, and what being a shareholder means. This will eventually lead them to making more informed decisions about their investments.

Involve them in their own savings

If you are saving for your child’s education, are they aware of it? Do they know that you are putting away money every month, where it is going, and what it is for?

Explaining to your children that you are saving for their future allows for you to have a discussion around why it’s important to do this and how it works. Not only will this give them some sense that they can’t just take things for granted, but it also gets them thinking about the importance of financial planning.

Think of their future before they do

The earlier your children start saving for retirement, the less they will need to save. One of the biggest impacts you can make on their future financial well-being is therefore to start for them.

Plan to present your child with a lump sum on their 18th or 21st birthdays, either in their own tax-free account or placed in a retirement funding vehicle. You may not think you are contributing much, but just R10 000 will grow to nearly R1 million over 45 years at a compound growth rate of 10% per year. That is a worthwhile boost to their future retirement, and will also get them thinking about their financial future as soon as they enter the working world.

If you do this in a retirement annuity (RA), they will not be able to access the money until they are at least 55, which will ensure that it is kept for what it is meant for. However, if you believe that they will be disciplined it makes more sense to use a tax-free savings account. This is because over such a long period the benefits of a tax-free savings account will likely be greater, and you can also invest fully in growth assets like equities, while an RA will have to meet the restrictions of Regulation 28.

As with all savings, the earlier you start planning for this, the better. If you put away just R100 every month from the day your child is born, you would have saved R21 600 by the time they reach 18. If this portfolio grows at 10% per year, you could present them with over R60 000.

It is possible to do this through a tax-free savings account from the start, as you can open an account in your child’s name. It doesn’t, however, make as much sense to open an RA for them while they are still children, as nobody will gain any benefit from the tax deductible contributions. If you want to give them money in an RA, invest in a unit trust until the point where you want to give them the lump sum, and then transfer it into an RA once they are income-earning adults and will benefit from the tax deduction.

Tips to reduce the costs in an estate

The death of a spouse, friend or relative is often an emotional time even before estate matters are addressed.

And truth be told, death can be an expensive and cumbersome affair, particularly if estate planning was neglected, the claims against the estate start accumulating and there isn’t sufficient cash to settle outstanding debts.

People generally underestimate the costs related to death, says Ronel Williams, chairperson of the Fiduciary Institute of Southern African (Fisa). Most individuals have a fairly good grasp of significant expenses like a mortgage bond that would have to be settled, but the smaller fees can also add up.

To avoid a situation where valuable assets have to be sold to settle outstanding debts, it is important to do proper planning and take out life and/or bond insurance to ensure sufficient cash is available, she notes.

Costs

The costs involved in an estate can broadly be classified as administration costs and claims against the estate. The administration costs are incurred after death as a result of the death. Claims against the estate are those the deceased was liable for at the time of death, the notable exception being tax, Williams explains.

Administration costs as well as most claims against the estate will generally need to be paid in cash, although there are exceptions, for example the bond on the property. If the bank that holds the bond is satisfied and the heir to the property agrees to it, the bank may replace the heir as the new debtor.

Williams says quite often estates are solvent, but there is insufficient cash to settle administration costs and claims against the estate. In the event of a cash shortfall the executor will approach the heirs to the balance of the estate to see if they would be willing to pay the required cash into the estate to avoid the sale of assets.

If the heirs are not willing to do this, the executor may have no choice but to sell estate assets to raise the necessary cash.

“This is far from ideal as the executor may be forced to sell a valuable asset to generate a small amount of cash.”

If there is a bond on the property and not sufficient cash in the estate, it is not a good idea to leave the property to someone specific as the costs of the estate would have to be settled from the residue. Where a particular item is bequeathed to a beneficiary, the person would normally receive it free from any liabilities. This could result in a situation where the beneficiaries of the residue of the estate may be asked to pay cash into the estate even though they wouldn’t receive any benefit from the property, Williams says.

The most significant administration costs are generally the executor’s and conveyancing fees.

If the will does not explicitly specify the executor’s remuneration, it will be calculated according to a prescribed tariff, currently 3.5% of the gross value of the assets subject to a minimum remuneration of R350. The executor is also entitled to a fee on all income earned after the date of death, currently 6%. If the executor is a VAT vendor, another 14% must be added.

Assuming an estate value of R2 million comprising of a fixed property of R1 million, shares, furniture, vehicles and cash, the executor’s fee at a tariff of 3.5% would amount to R70 000 (plus VAT if the executor is a VAT vendor). Conveyancing fees will be an estimated R18 000 plus VAT. Depending on the situation, funeral costs may be another R20 000, while other fees (Master’s Office fees, advertising costs, mortgage bond cancellation and tax fees) can easily add another R10 000. By law advertisements have to be placed in a local newspaper and the Government Gazette, with estimated costs of between R400 and R700 and R40 respectively. Master’s fees are payable to the South African Revenue Service (Sars) in all estates where an executor is appointed with a gross value of R15 000 or more. The maximum fee is R600.

Where applicable mortgage bond cancellation costs, appraisement costs, costs of realisation of assets, transfer costs of fixed property or shares, bank charges, maintenance of assets and tax fees will also have to be paid. The executor is also allowed to claim an amount for postage and sundry costs, while funeral expenses, short-term insurance, maintenance of assets and the cost of a duplicate motor vehicle registration certificate may also have to be taken into account.

Luckily, there are ways to reduce the costs involved

Williams says the first step is to try and negotiate the executor’s fee with the appointed executor when the will is drafted. The fee could then be stipulated in the will or the executor could give a written undertaking confirming the agreed fee. But even if the deceased did not negotiate it at the time of drafting, the family or heirs can still approach the nominated executor and negotiate a competitive fee when they report the estate to the executor.

“Depending on who the executor is and what the composition of your estate is, you can probably negotiate up to a 50% discount.”

The composition of assets will generally be a good indicator of the amount of work that needs to be done and the executor will quote a fee against this background. The sale of a fixed property and business or offshore interests may complicate the process of winding up the estate.

If the surviving spouse is the sole heir, and/or there are no business interests and sufficient cash is available to cover the costs, the executor will generally offer a larger discount. Ultimately, the executor is responsible for signing off the liquidation and distribution account, confirming that all the costs are correct and that it will be settled.

Unfortunately, most of the smaller administration costs will have to be paid, with limited scope for negotiation, Williams says.

Costs of security can be avoided completely by exempting the nominated executor from lodging the bond of security in the will, Williams says.

3 Ways Managing Money Is Like a Mountain Marathon

No pain, no gain

Watching a YouTube flyby of the race course last winter — a video with calming music and breathtaking scenery —I thought it looked like a great thing to do. Having done it, and having had the chance to recover for a while, I know for sure that it was. While I was doing it, though, it was painful. Like, how-the-heck-did-I-get-into-this-mess painful. Going through the pain was what I had to do to make progress.

Ever had to reallocate your portfolio in the middle of market hysteria? Buy stocks when they are down 40%? Buy bonds when stocks are up 40%? It can make you a little ill to stick to your plan in times like that, but that discipline is what makes you successful.

How about going through the painstaking process of tracking exactly how much you spend? Asking your financial planner how much his management fee plus the underlying fund fees are costing you? Asking your insurance agent about the actual costs of that whiz-bang annuity he’s pushing?

These can be difficult tasks and conversations. If you’ve done them and seen the payoff, however, you understand that doing hard things financially is often good for you and gets you where you want to be.

Don’t worry about other people

When I crossed the finish line almost 13½ hours after I started, I felt so relieved and so accomplished. What I didn’t know at the time was that I was the slowest guy to finish the course that day. Dead last. But I didn’t care. While some people were racing other people, I was merely racing myself, trying to finish the course before it finished me.

Comparing ourselves to others can sink us financially. In the investment world, we call this the same thing you’d call it anywhere else: unproductive.

Say you’ve got a friend who’s invested in a miracle mutual fund that’s up so much higher than all the others. By the time you actually buy in, it’s probably just as likely that it’s that fund’s turn to do worse than the rest. Same thing with that hot tech stock. Just because everyone else is borrowing against their house for money to invest in the market doesn’t make it the right thing for you to do. Understand your risks, make your decisions, stick to your plan and experienceyour success.

Don’t quit, no matter how bad it gets

At the toughest point of the race, I was in a the middle of a boulder field that was several miles long, on a ridge at 10,000 feet. What seemed like (but clearly weren’t) hurricane-force winds and rain were blowing from the Idaho side, trying to push me over the 800-foot cliff on my right down into Montana (which I’ve always wanted to visit, but didn’t seem so inviting at that particular moment).

My legs were jelly, and I was moving like my grandpa did in his mid-70s. I felt like quitting, but realized that if I did, I would still have to walk across the rest of those dang rocks to get off the mountain. I thought to myself, “How do I get out of this mess?”

Maybe you’ve found yourself at a similar point financially. I know I have. For me, it was waking up to the amount of credit card debt I had. “At what point did I think it would be a good idea to use these cards like this?” For you, maybe it was a job that didn’t work out. Or you thought there was no way that real estate investment could be bad. Or you were sure you could double your retirement account in that IPO.

Once you’re there, though, it doesn’t do any good to quit. You aren’t the only one who has blown it financially. So lastly, remember that, like me on the ridge, you just have to keep putting one foot in front of the other, get through the position you put yourself in, and learn not to be there again without being better prepared.

But don’t sweat it too much — doing what is right financially can hurt, but it’s a beautiful thing. My run was worth every step, because by sticking to my plan, I found what I was looking for in the first place.

A Smart System to Track Your Money Flow

Part of the reason we accumulate debt is that there are so many distractions in our lives — things we want to buy but don’t need. But we also ring up debt because we simply don’t understand the flow of our income and expenses, so we can’t accurately estimate how much money we have available to spend.
I’ve struggled with this myself. A few years ago, I put in place a “Money Flow” system to help my family track our spending. You may have heard of a system like this before, but follow along on this tour, because it really works.

Putting the pieces in place

1. Set up two free checking accounts:

  • One to pay fixed expenses (such as the mortgage, car payments and utility bills).
  • One to pay variable expenses (groceries, gas, clothing and so on).

2. Set up a high-yield online savings account.

We call this our “curveball” account. It’s an emergency fund for use when life throws us curveballs — large medical bills, a job loss or reduction in income, major home repairs, that kind of thing.

3. Make a plan for big-ticket items.

My husband and I agreed that we would use one family credit card for large purchases, such as airline tickets and hotel stays. We still have our separate credit cards – it’s wise to keep your own credit cards to maintain your credit score and credit history. Using them once or twice a year should be sufficient. And don’t close those cards because it will eliminate credit history you’ve accumulated and affect your overall credit score.

Implementing the system

1. Draw up a budget for fixed and variable expenses.

Add up how much you need in each category. This will be your guideline for how much should be in each of your checking accounts.

Fixed expenses might include:

  • Rent or mortgage payment
  • Property taxes
  • Utilities (gas, electric, water, etc.)
  • Home, auto and umbrella insurance
  • Life, disability and long-term-care insurance premiums
  • Health insurance premiums (if not taken out of your paycheck)
  • Cable TV, Internet, phone and cellphone
  • Gym or yoga memberships
  • Debt payments (credit cards, student loans, car loans, personal loans, etc.)
  • Savings (yes, this is an expense — pay yourself first!)

Variable expenses might include:

  • Groceries
  • Eating out
  • Gas
  • Clothing/shoes
  • Personal services (haircuts, doctor visit copays, etc.)
  • Entertainment

2. Distribute money to the accounts.

When your paycheck comes in, allocate the designated amounts into each checking account based on the budget you created. The sum earmarked for the curveball account can go there directly.

3. Pay fixed costs directly.

 All bills are paid automatically from our fixed-expenses account. We do not have to write any checks, and no debit card is necessary. This account has a cushion of a few hundred extra dollars in case a bill shows up unexpectedly or before we have a chance to replenish the account.

4. Pay variable expenses from the second account.

This account should have a debit card, which you can use for purchases.

5. Link the curveball account to either checking account.

If an emergency arises, you can transfer funds within 24 to 48 hours. You can then access the money with a check or debit card.

Realizing the benefits

Once I implemented this system, the process of tracking expenses wasn’t so cumbersome anymore. Separating expenses into fixed and variable categories meant I didn’t have to worry constantly about checking account balances. Having fewer transactions in each account also made it easier to see the bigger picture of our spending.

4 Reasons Why Renting Is Better than Buying

Have you ever felt pressured to buy a house? Maybe from your friends, your family, your co-workers, or even yourself? Like you haven’t actually made it as an adult until you own your home?

It’s a common feeling, but the truth is that buying a house ISN’T always the right decision. In some cases renting is a smarter move, both for your wallet and your lifestyle. Here are four reasons why.

1. Flexibility

Life changes fast. That great new job you just started might turn into an exciting opportunity in a different city. That big family you planned on having might turn into a smaller one.

Renting gives you the ability to quickly change your living situation to best match the new realities of your life. That flexibility can be the difference between seizing an opportunity and having to pass on it.

2. Cost

Proponents of buying like to say that when you’re renting, you’re essentially paying off someone else’s mortgage. So why not buy and make sure that money is going towards yourself?

There is some truth to that, if you stay in one place for an extended period of time (typically 5-7 years or longer), then buying often results in the lower long-term cost.

In the meantime buying can be really expensive. There’s the upfront cost of the down payment. There’s the cost of handling the fixes and improvements that come with any new purchase. There’s the cost of new furniture. There are the ongoing costs of insurance, taxes, and maintenance.

Renting has costs too, but they’re often much smaller and more predictable, at least in those first few years. And in many markets where housing prices are high, renting can actually be a better long-term financial decision.

You can use this calculator from The New York Times to figure out just how long you would have to live in one place before buying became cheaper than renting.

3. Adjustment

Renting is often a great idea any time you move to a new place.

It gives you the opportunity to figure out which neighborhoods you like and which you don’t so that you can eventually make a buying decision you’ll be happy with for the long-term. There’s no sense in being stuck somewhere you don’t like simply because you felt rushed into buying a house.

4. Stress

Owning a home has plenty of benefits, but it can also come with a lot of stress.

Any time something needs to be fixed, it’s on you to either do it yourself or pay for it to be done by someone else. And of course there’s that big mortgage that can feel like a weight on your shoulders.

Renting comes with fewer commitments and fewer responsibilities, which can lead to lower day-to-day stress.

Social Security Survivors Benefits

Social Security Survivors benefits are paid to widows, children, parents and ex-spouses of covered workers.

The Social Security program actually consists of three benefit programs that make payments for various reasons. They are:

  1. Retirement benefits,
  2. Disability benefits,
  3. Survivors benefits.

This post covers number 3, Survivors benefits. These are not the same as the benefits commonly referred to as spousal benefits.

If a worker, who is covered by Social Security, dies and leaves family members behind, they are the “survivors” and are covered under the Survivors benefits program. Social Security will use the deceased worker’s record to calculate payments for his / her family.

There are four eligible parties that may receive payments after the worker’s death. They are the widow (or widower if the wife dies first), children, parent, and ex-spouse. Each has detailed rules for eligibility.

A widow(er) will get benefit payments if:

  • They are age 60+, or
  • Age 50+ and disabled, or
  • Any age and caring for a worker’s child under 16 or disabled and entitled to benefits on worker’s record.

A child will get benefit payments if:

  • They are under age 18, or
  • Between 18 and 19 and still in secondary school, or
  • Over age 18 and severely disabled before age 22.

A parent will get benefit payments if:

  • They are dependent on the deceased worker for greater than 50% of their support

An ex-spouse will get benefit payments if:

  • They fit one of the three requirements for widow(er) above and were married to covered worker for 10 or more years, and
  • They are not entitled to a larger benefit based on their own record, and
  • Not currently married unless marriage was after they turned 60 or 50 and are disabled.

Another aspect of Survivors benefits that comes into the payment amount is that the “full retirement age” (FRA) for Survivors benefits is different from the full retirement age for retirement benefits.

This chart matters because a widow(er) or ex-spouse can start claiming benefits as early as age 60, but the benefit will be reduced. For the full benefit payment, the survivor must wait until their FRA in the center column above. For some people it is several months earlier than the full retirement age for Retirement benefits and they may wait unnecessarily long to receive their benefits if they are unaware of this anomaly in the Social Security benefits.

Tips to Read Financial Statements

While the EPS captures the media headlines and is the most-sought-after metric, it is only part of one of the three major components of a company’s financial documentation that is necessary to understanding both the company’s performance and its financial condition. The other two major financial statements are the balance sheet and the statement of cash flows.In the upcoming weeks, I will highlight each of the individual financial statements. The objective of this series of lessons is to provide the necessary tools to ascertain financial information and understand those reports without having to possess a CPA (certified public accountant) or CFA (chartered financial analyst) designation. (However, it is the role of the CPA to audit and certify the financial statements that will provide the independent account.)This week, let’s kick off this multipart examination of financial statements by looking at the annual report and 10-K for a lesson on financial and regulatory reporting.

Getting Started:

As is often the case with any research project, we start by aggregating information and materials that will provide the basis for our financial investigation. This prompts the questions: What should I look for? and where can I find it?Here is our punch list:– Form 10-K
— Form 10-Q
— Annual Report
These documents can usually be found in the “Investor Relations” section of a company’s Web site.

Form 10-K

This is an official filing made by the company to the Securities & Exchange Commission (SEC). On the face of the 10-K will be a statement to this effect:”Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the fiscal year ended 1996 .”The 10-K will contain the following sections:– An overview of the company and selected financial data
— Director and senior management information including executive compensation, as well as signatures by senior management and the directors
— Consolidated financial statement including the Report of Independent Registered Public Accounting Firm
— Notes to the financial statements

Form 10-Q

This is the quarterly and slimmed-down version of the 10-K. It typically only includes unaudited financial statements, notes to the financial statements and a management discussion.

Annual Report

This publication is sent to all shareholders and is available from the company for prospective investors. The annual report varies from company to company. Some companies, such as Ruth’s Chris Steak House, just slap a glossy cover over a 10-K and call that an annual report.On the other hand, some companies, such as Amylin Pharmaceuticals, put together a professionally designed annual report that incorporates a message to shareholders; a business overview featuring (but not limited to) the company’s management, products, operations and new endeavors; the auditors’ report; consolidated financial statements; and notes to all of those statements.Yet another spin is the summary annual report as presented by Duke Energy. Duke issues a summary annual report with plenty of gloss, a business overview and financial statements. However, ultimately, the Duke report refers readers to its 10-K for more details.

Step by Step:

Now that you know what reports to obtain, let’s walk through what you should do with them — before you even get to analyzing the financials.

Step 1. Read the Report From the Independent Accounts

You want to ensure that the company has received an unqualified report. This means that the company has complied with Generally Accepted Accounting Principles (GAAP) and that the auditors found no material items that might cause an exception to GAAP and no financial conditions that might indicate that there are questions that the company can exist as a going concern.An unqualified report would contain language along these lines (as taken directly from the 2006 report of independent accountants for Amylin):

We have audited the accompanying consolidated balance sheets of Amylin Pharmaceuticals, Inc. as of December 31, 2006 and 2005, and the related consolidated statements of operations, stockholders’ equity (deficit), and cash flows for each of the three years in the period ended December 31, 2006. Our audits also included the financial statement schedule listed in the Index at Item 15(a)(2). These financial statements and schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits.

In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Amylin Pharmaceuticals, Inc., at December 31, 2006 and 2005, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2006, in conformity with U.S. generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.

As discussed in Note 1 to the consolidated financial statements, effective January 1, 2006, Amylin Pharmaceuticals, Inc., changed its method of accounting for share-based payments in accordance with Statement of Financial Accounting Standards No. 123R, Share-Based Payment.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of Amylin Pharmaceuticals, Inc.’s internal control over financial reporting as of December 31, 2006, based on criteria established in Internal Control Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated February 23, 2007 expressed an unqualified opinion thereon.

As you can see, there are no issues or red flags. The one accounting change (“Amylin Pharmaceuticals, Inc., changed its method of accounting for share-based payments…”) was of a material enough nature to include in the report, but once you read the note to the financial statement you will understand that it is not a problem to be concerned with.

Step 2. Read the Letter From the CEO

The CEO (chief executive officer) is the leader of a company. In that capacity, not only does the CEO manage the current operations of the company, but he also sets the vision for the future. Thus, as an investor, what you want to hear from the CEO is where the company has come from, where it is and where it is going. On one end of the spectrum, some CEOs will use this section to cheerlead. On the other end, some will use it to be cathartic and talk about mistakes made and future challenges. Most CEOs’ letters are somewhere in between.

Step 3. Check Out the Senior Management Team and the Board of Directors

The management team and board of directors will tell you who is operating and who is looking over the company. High on investor and regulator watch lists are concerns over corporate governance. You want to avoid companies with managers or board member who have tarnished or shaky backgrounds. As an example of the flip side of this, while the board of directors at Apple has had to contend with options back-dating issues, the background of its members is highly reputable.

Step 4. Read the Business Overview

Companies will change over time. Its products and businesses will go through cyclical phases. Demand for old and new products and services will dictate future strategy. Economic and other market conditions will affect a company and industry.Expansion and growth are factors that investors will pay for. Reading the business overview will give you an idea of the company’s current products, competitive position and future plans.As you can see, there are some important things that you should do before you analyze a single number.

4 Steps to Merging Finances with Your Partner

 It’s not an easy thing to figure out. There are logistics to handle, habits to change, emotions to manage, and often it feels like there is never enough time in the day for any of it.

But successfully managing money together is key to creating a happy partnership, so here are four pieces of advice as you go through this process yourself.

1. Focus on Joint Goals, Not Joint Accounts

It’s tempting to get caught up in the logistics of joining your finances. How do you create joint accounts? Which accounts should you join? What if you want to keep some money for yourself? Does that mean your relationship is in trouble?

Ignore all of that. It doesn’t matter. At least not at the start.

What really matters are your joint goals. What are you working towards? What is your shared vision for the life you’re building together?

Start having conversations about what you each value and want out of life. Listen to each other so you can truly understand what’s important to the other person.

Find the goals you already have in common and make those the priorities. And start talking about how you can find middle ground on the others.

This communication is the real key to successfully merging your finances. All the rest is just logistics.

2. Establish Shared Expenses

Now, about those logistics…

ne easy place to start is with your everyday expenses. Things like cable, internet, electricity, and groceries.

Decide which expenses you want to share and how you want to split them up. For example, if one person makes significantly more, maybe they’re responsible for a bigger share of certain expenses. That way each of you is left with some free money at the end of it.

3. Create a System

There are two main ways you can start sharing those expenses.

The first is to create a joint bank account where those bills are paid. Then you each are responsible for transferring money to that account on a regular schedule to cover the bills. This lets you practice managing a joint account without having to join everything.

Another option is to put each person in charge of certain bills. For example, one of you could handle the cable bill while the other handles the electricity bill. This kind of system may be easier to get up and running quickly.

Also, create a system for long term savings. I know someone who gave half their paycheck to their partner to invest for the long term. This might not be the right move for you, but start by discussing each of your current habits and how you might change those or improve on them as a couple.

4. Plan for Extra Money

Here’s something my fiance and I have done that’s helped us a lot.

In addition to our regular expenses and savings, we each have a number of “wants” that our extra money could go towards. For example, I’d like to get curtains and my fiance wants gardening supplies.

So we made a list of these things and put them in priority order. And now any time we have some extra money, we simply refer to this list and put it towards the top item.

This makes these decisions easy, limits the opportunity for arguments, and ensures that we’re both able to indulge a little bit.

Top 5 Financial Mistakes Beginners Make

 There’s a lot of financial advice out there. Enough that your head starts to spin when you try to take it all in, understand it, and figure out which pieces are relevant to you.

I’d like to make it a little easier for you by pointing out some things NOT to do.

Here are five of the biggest mistakes I see people making when they first start trying to improve their financial situation.

1. Obsess Over Investment Strategy

There’s often this feeling that if you can just find the perfect investment strategy, your financial success will be guaranteed.

So you read articles, listen to the experts on TV, and tinker with your investments, all with the hope of finding an edge that puts you over the top.

But here’s the truth: the returns you earn, good or bad, have almost no impact on your bottom line until you’re a decade into the process.

What does matter, a lot, is your savings rate. It may not be sexy, but simply saving enough money is far more important than any other investment decision you can make.

2. Forget About Irregular Expenses

If you’ve tried budgeting before and it hasn’t worked, chances are you’ve been undone by all the unexpected expenses that keep popping up.

Your car needs a new tire. Your daughter has to go to the doctor. Your friend gets married in another state.

Here’s the thing: a good budget knows that these kinds of expenses aren’t unexpected. You may not know when they’re coming, but you do know they’re coming.

And you can make them a part of your regular budget simply by saving ahead for them each month. That way the money will already be there when you need it.

3. View Cutting Back as the Only Option

Cutting spending is often the quickest and easiest way to free up room in your budget for the big financial goals you’d like to achieve. Which is why it’s usually a great first step.

But it’s not the only option.

In fact, the biggest long-term results often come from finding ways to increase your income. So don’t be shy about asking for a raise or starting a side hustle. Those are powerful tools that can expand your world of financial opportunities.

4. Think That Credit Card Debt Is Normal

According to NerdWallet, the average American had $15,310 in credit card debt as of 2015. So I guess debt is normal in the sense that a lot of people have it.

But if you want to be financially healthy, you need to accept that credit card debt cannot be part of your life. It’s actually the biggest obstacle that’s keeping you from reaching your goals.
If you have credit card debt, getting rid of it is almost always a top financial priority. That may mean that other financial goals have to wait, but the sooner you get rid of your debt, the sooner you’ll be able to make real progress towards the things you care about most.

5. Look for Easy Fixes

Unfortunately, there is no easy button when it comes to your finances. The solutions are often fairly simple, but they take time, dedication, and hard work before they truly pay off.

For example, creating an account with mint.com and linking all your bank accounts is a great start to the budgeting process. But the app itself won’t solve all your problems.

You’ll still need to take the time to categorize your expenses, both up front and on a regular ongoing basis. And you’ll need to use that information to take action and make changes in how you use your money.

No single app or tactic is going to fix everything for you. You have to take ownership of your situation and do the hard work to make it better.

Focus on What Matters

There’s a lot of noise out there in the world of personal finance advice. And your job is to filter that out so that you can focus on the small number of things that actually matter for your personal goals.

Avoiding common mistakes is a big part of doing that well. And if you can avoid the five mistakes above, you’ll be off to a good start.

Tips to Manage Finances and Save Money

 To help you manage your money and reach your saving goals:

Create a Budget

A budget is your plan for how you will spend money over a set period of time. It shows how much money you make and how you spend your money. Creating a budget can help you:

  • Pay your bills on time.
  • Save for unplanned expenses in the future.
  • Prepare for retirement.

Consumer.gov offers more information about what to include in your budget, along with aspreadsheet (PDF, Download Adobe Reader) that you can use to create your own.

Consider Ways to Save

Saving money involves looking for deals and buying the items you need at the best price, using coupons or by shopping around. Check out MyMoney.gov’s spending tips for ideas. You can also set up a saving plan to help you save for emergencies and for short term and long term goals. MyMoney.gov offers tips on saving, including helping you achieve your saving goals.

Invest in Long Term Goals

You can save for long term goals, such as retirement (PDF, Download Adobe Reader) and college education, by investing. The U.S. Securities and Exchange Commission offers tips to help you be aninformed investor.

Saving for Retirement

As you approach retirement, there are many things to think about. Experts advise that you will need about 80 percent of your pre-retirement income to continue your current quality of life. The exact amount, of course, depends on your individual needs. Some important factors to consider include:

  • At what age do you plan to retire?
  • Can you participate in an employer’s retirement savings plan, such as a 401(k) plan, or a traditional pension plan?
  • Will your spouse or partner retire when you do?
  • Where do you plan to live when you retire? Will you downsize, rent, or own your home?
  • Do you expect to work part-time?
  • Will you have the same medical insurance you had while working? Will your coverage change?
  • Do you want to travel or pursue a new hobby that might be costly?

Resources to Help You Prepare for Retirement

To help you plan for retirement:

  • Find practical tips for building retirement savings in the Top 10 Ways to Prepare for Retirement(PDF, Download Adobe Reader).
  • Use a retirement calculator to find out the best age to claim your Social Security benefits.
  • myRA can help you start saving for retirement, when you don’t have access to an employer-sponsored plan or lack other options to save.
  • Find out the trade-offs between taking your pension in a monthly payment or in a lump sum(PDF, Download Adobe Reader).
  • Social Security pays benefits that are on average equal to about 40 percent of your pre-retirement earnings. You may be able to estimate your benefits.
  • Learn how you can boost your retirement savings at Investor.gov.
  • If you have a financial advisor, talk to him or her about your plans.

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Savings Bonds

U.S. savings bonds are one of the safest types of investments because they are endorsed by the federal government and, therefore, are virtually risk free.

Visit TreasuryDirect, a website from the U.S. Department of the Treasury, to learn about savings bonds, treasury bonds, and securities: how to buy and redeem your investments, what to do in the event of the death of an owner, and much more. TreasuryDirect is your one-stop shopping site for government securities where you can find information about the wide range of savings options, including EE/E, HH/H, and I savings bonds.

Manage and determine the value of savings bonds using these tools:

  • Savings Bond Calculator
  • Savings Bond Wizard
  • Redemption Tables

You can give savings bonds for many occasions, such as birthdays, weddings, and graduations. Learn how to give savings bonds as gifts.

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Treasury Securities

Treasury securities are debts issued by the federal government’s Bureau of Fiscal Service. When you buy a treasury security, you are lending money to the federal government for a set amount of time. In return the government promises to pay you back the entire amount, also known as the face value, when the security matures.

There are several types of treasury securities:

  • Treasury Bills—Short term securities that mature between a few days and 52 weeks.
  • Treasury Notes—Medium term securities that mature between one and 10 years.
  • Treasury Bonds—Long term securities, with a 30 year term that pays interest every six months, until the bond matures.
  • Treasury Inflation-Protected Securities (TIPS)—Securities with principle values that adjust based on inflation, but with fixed interest rates for five, 10, or 30 year maturities.
  • Savings Bonds—Securities that offer a fixed interest rate over a fixed period of time.
  • Floating Rate Notes (FRNs)—Securities with variable interest rates, so that as bank interest rates increase or decrease, the interest rates on the FRNs change in the same direction.

You can purchase treasury securities for yourself or as gifts. You can purchase them in several ways:

  • Banks, brokers, and other financial institutions through the Commercial Book-Entry System.
  • Online through Treasury Direct
  • Payroll savings plans
  • Public auctions

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Trusts

A trust (or trust fund) is a legal entity that allows a person (the grantor, donor, or settlor) to transfer assets to another person or organization (the trustee). Once the grantor establishes the trust, the trustee controls and manages the assets for the grantor or for another beneficiary—someone who will ultimately benefit from the trust. To help you decide if a trust is right for you, first consult a licensed attorney experienced with estate planning and trust matters.

Reasons to Set Up a Trust

Some common reasons for setting up a trust include:

  • Providing for minor children or family members who are inexperienced or unable to handle financial matters.
  • Arranging for management of personal assets, if you become unable to handle them yourself.
  • Avoiding probate and immediately transferring assets to beneficiaries upon death.
  • Reducing estate taxes and providing liquid assets to help pay for them.
  • The terms of a will are public while the terms of a trust are not, so privacy makes a trust an appealing option.

Types of Trusts

Trusts can be living (inter vivos) or after-death (testamentary). A living trust is one that a grantor sets up while still alive and an after-death trust is usually established by a will after one’s death. Living trusts can be irrevocable (can’t be changed) or revocable (can be changed), although revocable trusts don’t get the same tax shelter benefits as irrevocable ones do.

The most common type of trust is the revocable living trust. If there’s a specific purpose in mind for the trust, dozens of different options exist (charitable trusts, bypass trusts, spendthrift trusts, and life insurance trusts). Two types of trusts can help pay for long-term care services:

  • Charitable Remainder Trusts – This trust allows you to use your own assets to pay for long-term care services while contributing to a charity of your choice and reducing your tax burden at the same time. You can set up the trust so that you receive payments from the trust to pay for long-term care services while you are alive.
  • Medicaid Disability Trusts – These trusts are limited to persons with disabilities who are under age 65 and qualify for public benefits. Parents, grandparents, and legal guardians often set up these trusts to benefit people with disabilities and a non-profit organization manages the assets. This is the only kind of trust that is exempt from rules regarding trusts and Medicaid eligibility.