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Fight Financial Fears with Knowledge

In 2018, Bankrate addressed common financial fears and how to overcome them. Two years later, people are still facing the possibility of a financial emergency, in addition to a pandemic. All of these things are frightening but you do not have to give in to fear.

Medical Emergencies: The article not only advises about having good health insurance, most importantly it reminds readers to be aware of their coverage. If you already know what is covered, what is not covered, and what kind of deductible you have, you will be armed with information before you need medical care. Many people recover from injury or illness only to find that treatment wasn’t covered or that they went out of network.

Job Loss: While there are sometimes signs, everyone cannot anticipate job loss. What anyone can do is be aware the one job is not guaranteed to last indefinitely. If you are able, you should set aside six months of expenses just in case you need it. If possible, you should have more than six months of expenses set aside. And if you cannot put aside even six months of expenses, put aside what you can and add to it bit by bit.

The other thing is to consider your skills and keep them refreshed. That way, you can quickly pivot into another job or take on freelance work if you can no longer count on your previous job.

Not Enough Retirement Savings: Bankrate declares, “It’s never too late to begin saving for retirement, though, even if your contributions start small.” This may seem like basic advice but it may surprise to learn that many people who think it is too late give up before they start. It is ideal to begin to save for retirement when you are young and starting to work but if you didn’t do that, it is okay. Don’t beat yourself up. Start to save so you will have something when you reach retirement age. You can reach out to a Fee-Only financial planner for help with retirement planning.

Overall, the article advises using knowledge as a weapon against fear. The more you know, the better prepared you will be to face any unexpected financial event.

Thoughtful Ways to Spend a Windfall

Kiplinger.com offers suggestions for ways to spend a windfall of at least $1000. Should you find yourself with extra money you can pause and think about how to use it. These are uneasy times and one impulse would be to spend it on something fun. That is not a bad impulse because taking care of your wellbeing is an investment.  The list includes things like taking a vacation, upgrading your bike (or investing whatever pastime brings you joy).

There are also ways to spend a windfall so that you can put a little down payment towards a more secure financial future.

Invest in family

You can put extra money into an IRA or 529 plan for a child or grandchild. Kiplinger.com adds, “If your state offers a tax deduction or credit to residents who invest in its plan, using your state’s 529 may be the best bet.” That way you are really making that windfall work for you.

Pay down student loans

If you are doing alright financially and making regular payments, perhaps even paying a little extra, you might not think about putting even more money on your student loans. It is a good idea because you can pay that debt off even faster if you put additional funds towards it.

Invest in the things you use most

You can finally do some of the home improvements you may have been thinking about doing for a while. It is your choice: you can put the money towards something you really think will improve your home’s resale value. Or you can spruce up your home in a way that makes you happy, even if it will have little effect on your home’s resale value.

New tires are also a smart way to spend a windfall because a car is something you depend on. Instead of waiting until your tires are almost worn down, you can feel more secure getting new ones.

Intrafamily Loans: Keeping it in the Family

In” Intrafamily Loans: The Good, the Bad and the Ugly,” Kiplinger.com offers advice on sensible ways to loan money to family members. These are loans for significant amounts with payment plans and interest. The article notes that because the gift tax exemption as now increased to $11.58 million for an individual and $23.16 million for a couple, this has eliminated the need for intrafamily loans for many people. There are still instances, however, when people still make intrafamily loans.

When loaning money to family members, people usually use the Applicable Federal Rate (AFR). This is the lowest interest rate possible so the loan is not considered a gift. If the interest rate is lower than the AFR, then the IRS considers it to be a gift.  (You can view current AFR rates here: https://apps.irs.gov/app/picklist/list/federalrates.html.)

You may wonder why someone would go to the trouble of setting up a formal loan with a family member. One reason is that these loans can be made to people with low credit scores and there is no need for underwriting. In some cases, an intrafamily loan is used so a child or grandchild can purchase a home.

Another, very important reason is to transfer shares of a business. It might seem easier to just  give the child or grandchild the business but:  “If the business is simply gifted to the next generation, all income from the business is passed downstream as well; however, if a note is taken back by the selling generation, then annual note payments will provide parents with a nice income stream.”

The article warns there are situations where this can backfire. If there is resentment because one child gets a loan in the first place, a bigger loan, or a number of loans, it might not be worth it. And if the payback of the loans is based on the profit of a business and the business is not longer profitable, this can be an issue. It is possible to start to incur gift tax when payments are no longer made on the loan.

A Fee-Only financial advisor can talk with about whether an intrafamily loan will be beneficial in your situation.

Gray Divorce Doesn’t Have to Be a Shadow Over Your Golden Years

Divorcing at any age is not easy, even when the split is amicable. For people who are nearing or already in retirement, there are special considerations for “Gray Divorce”. Or, if you want a term with more bling try “Silver Splitters” or “Diamond Divorcees”. 

But often bling or lack thereof is an issue for people who end marriages later in life. People who divorce later in life have fewer working years left to recover from the financial losses of divorce. These losses include the legal costs involved in getting the divorce and for many, the subsequent loss of income. Even those who had solid financial planning in place before a Gray Divorce will need to pivot and reevaluate.

TheStreet.com offers “Five Tips for Surviving Gray Divorce in Retirement.” Before you get to practical tips, however,  the article reminds readers to consider how this life change can be “daunting and stressful and decisions tend to be made on emotions rather than facts.” 

Getting help from an objective Fee-Only financial planner can keep you from making rash decisions. You will need someone who knows how to take a long-range view of the financial considerations you may not be ready to face.

“Perhaps one of the best ways to handle financial expectations and fears is to use a data-driven approach to the divorce settlement process. While developing your settlement it is important to understand the short and long term effects on cash flow, taxes, and your net worth five, ten, even 20+ years into the future. What may seem fair or equal on the surface is not equitable many times when looked at from a longer range view.”

A late in life divorce may mean delaying retirement, waiting longer to take Social Security, getting a reverse mortgage, or selling property. None of these things have to be devastating however, especially if you have a plan in place for financial security despite the divorce.

Invest in Long-Term Care Insurance

One effect of the coronavirus pandemic is that more people have been thinking about living in the moment and taking advantage of opportunities in a carpe diem sort of way. There is nothing wrong with this, especially with so much uncertainty. However, it would not do to forget that you can still make some long-term plans. As one Marketwatch article observes: 

“The coronavirus pandemic has highlighted numerous potential catastrophes for the elderly and their loved ones, including unexpected illnesses, risks associated with underlying health issues and general lifestyle and risks in nursing homes.”

While there were always risks associated with nursing homes, some people who might have otherwise planned to live in one are reconsidering because they’ve seen the way COVID-19 spread through some of these facilities.

MarketWatch’s “This is one task everyone in their 50s should consider before it’s too late” advises people to consider purchasing a long-term care insurance plan. They are saying that your fifties is an ideal time; it is cost-efficient to get long-term care insurance then although some people do purchase plans before they reach that age. You can still also purchase a plan after your fifties.

You can speak with your Fee-Only financial advisor about what type of long-term care insurance plan would be best for you.  Some people opt for a hybrid plan: one that combines life insurance with a long-term care rider.  You can also buy a standalone policy. The policy you choose will depend on a number of variables.

If you think you can rely on Medicare to assist if you need long-term care, you should know that Medicare does not offer a lot of long-term care coverage. The costs of long-term care are high and if you can have money set aside for it already, you will be helping yourself and your family.

A Comic Strip Looks at Estate Planning

Articles and lectures inform us while stories speak to us in a way that these more straightforward sources cannot. It is interesting to see financial planning in pop culture because a narrative can get some  people to think and take action when a seminar may not.

Between July 27 and August 1 of this year the Big Nate comic strip by  Lincoln Peirce spent a week looking at estate planning, in comic form. The older daughter read an advice column where she sees that people write in with disputes over their parents’ estates weekly. So, she and her younger brother decide that they will get ahead of the game by divvying up their father’s belongings themselves. They felt they were being “proactive.” In a sense they were, although their father wasn’t cheered to learn they were planning for his death and thought he could “go at any time.”

After sighing a little, the father told his children that while it was good of them to think ahead, he had already  made provision for them in his will. Not only that, he also told them that he updates his will “every couple of years.”  

This is a key point because as much as people may hesitate to create a will, once they do, some never return to update that will. There are so many things that can change after a will is created so it is important to update your will. Even when you create one, your heirs may still end up writing into an advice column with their disputes if you did not update it to reflect life events and changes to your financial situation.

Next, Nate asks a very important question: he wants to know who will raise them if their father dies and they are still underage. All along the comic throws in a few laughs while broaching this important topic. So, when the father tells his children that their uncle would raise them, they are alarmed because their uncle isn’t the most responsible person they know. The father tells them that the grandfather (his father) is too advanced in age to raise them. The story arc ends with the children taking extra good care of their father because they are not thrilled with the idea of being raised by Uncle Ted.

Stay Positive While Adjusting Your Financial Planning

This past Sunday (September 13) was National Positive Thinking Day. With all that is happening in the world, it can be difficult to continue to think positive but it is important to do so.

There are a lot of people who are suffering and a lot of people who do not have enough. If you are scraping by but still worried, try to focus on what you do have and how you can use all of your resources efficiently.

Many people reached a point of fatigue with the pandemic long before now. They miss the things they used to do. They are tired of the precautions that we have been told are necessary. And, in contrast to the people who are in a financial crunch, people who have enough are sometimes spending more because they don’t feel hopeful about the future. They are deciding to just spend on temporary ways to boost their mood with little regard for the future.

What matters is finding the balance between being despondent and being overly optimistic. If you are feeling down, look at what parts of your financial life you can control:

  • You cannot prevent an employer from letting you go. You can, however, control your spending and save more in the event that you lose your job. 
  • You still have to repay debts, even during a pandemic. But if money is tight, you can make minimum payments (even when you’d prefer to pay down the debt faster).
  • If you are reluctant to use your savings, remember that you put aside money for difficult times and this time qualifies. Don’t worry that you’ll need it later, if you actually need what is in your savings right now to stay housed and fed.
  • Try not to focus on what you have lost, be it work, or investment gains. Focus your financial planning on working with what you have now.

Use This Time to Reevaluate Financial Priorities

Perhaps it is time to re-think how you manage your finances. If you are fortunate enough to have steady employment, you do not have to spend as much money you did before. And if you do spend, you can change the way you spend and allocate your money. This is an opportunity to decide what is really important to you. Even if you do not end up making drastic cuts to your budget, you could find ways to make more of your resources differently so you were able to reach more of your goals.

The Washington Post published an article on people who were leaving smaller city homes like townhouses for homes in the suburbs with more space. (People desperate for more space fuel a pandemic real estate boom). The city-dwellers saw that the kind of lives they had led in very connected urban communities had changed with the pandemic. And some of them also felt it was difficult to manage working at home in a small space while their children were also attending school at home. 

Now, obviously, moving and purchasing a home are not usually money-saving ventures. However, if these people find that they are able to feel more relaxed and comfortable with these changes, then these moves will have been worth it.

On the other side of the spectrum are people who perhaps need to consider making fewer purchases, rather than going for a change of lifestyle with a major purchase like a house.  A number of people on social media confess to ordering a lot more items online now they feel their movement and ability to travel have been restricted. Just because you have the spending power doesn’t mean you need to use it all the time. Instead, revisit your budget and spending habits to make use you haven’t started a shopping habit that might jeopardize your financial future.

While you may not know exactly what the future holds, you do have some idea of how you would like to live. This is great time to reevaluate your financial priorities and a Fee-Only financial planner can help.

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