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Now that Minimum Wage is Rising, Is America Truly Doing Better?

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Bankrate conducted a survey and discovered that over 60% of people in the US do not have enough funds to handle even $500 worth in a financial setback. Nearly 50% of those that were part of the study, and make a minimum of $75,000 each year said they had inadequate funds if they were ever to experience a financial emergency. About 20% of those who completed the study stated they believe they would have to cut back on what they are spending if they want money for an emergency fund. 15% of people said that if they were in that situation, they would simply use their credit card to pay for the expenses.

Lauren Berg, a spokeswoman for Simple Finance, says that those who turn to credit may find that it can also become a setback, even if it’s just minor. She added that just a minor setback can still be all it takes to form a serious long-term financial crisis. Berg continued to say that her company strongly discourages people to transfer unexpected expenses to credit cards.

Continuing this type of financial behavior will only make it worse, as people accrue credit card interest. Another 15% of those said if a negative financial situation were to occur, they believe they would be ok because they would find a friend or a family member to borrow it. Sheyna Steiner, reporter and senior investing analyst at Bankrate, said that of you choose to borrow the money to get past a tough bind, it also means you may not have the credit during the times you do need it. She says that if a situation were to arise when you need a line of credit, it is possible it will not be there in the event there are any changes to your report.

Steiner mentioned that one thing that occurred during the great recession was people discovering that their credit lines had significantly lowered. Therefore, if you depend on it to be extended to you when you need it, the answer may not be what you want. Experts say that going the payday loan route during your times of trouble is just as bad as a credit card. Their interest rates are ridiculously high, as much as 400%, and can easily lead someone to a downward spiral.

The same survey conducted by Bankrate found they about 57% of people successfully made it through the year without using any source of financial help. Nearly 40% of people said that they, or someone they knew, experienced a major financial setback in the last year. Steiner says that unexpected expenses can arise often enough that people should prepare for it. Of course, saving money even when you know you need it is not as simple as it sounds for many. There are people, namely young adults, that are still working on paying their student loans back or are finding a job where they can make an adequate income.

Without a proper job that pays enough, it difficult to save anything when someone is living paycheck to paycheck. These adults typically make just enough to pay their bills, and any financial setback would be extremely detrimental to them. Berg, who says she understands and recognizes this, says that saving money can typically feel like a thankless ordeal when someone is faced with that of extreme debt. She recommends that even the smallest effort can make a big difference. The main thing you want to have is to focus on gaining more confidence in money management. She states that it is the foundation of her company philosophy, which is that all consumers should feel completely confident with their cash. Berg adds that that if you can put away even $5.50 away each paycheck, that can amount to $2,000 in emergency savings you can use after a year.

Steiner even says that she advises people to ease a little on their debt payments so they can prioritize saving for an emergency first. She believes it the key is putting saving first and reducing money where you know you can reduce it, even if it is temporary. Steiner says that if you truly want to be fully equipped and prepared for the inevitable, you have to start treating it as if it will happen. Most people are bound to need car repairs sometime down the road or will need to call the plumber. She believes if it’s debt that is the main reason you’re having financial setbacks, then remember to deal with it as best as you can. That alone will save you $500-$1000 in a year that you can use when you need it. Most importantly, it will be money that is now owed. She believes that after you get all that set up, then you can go back to tackling any debt you have.

Personal Finance

Is There a Lesser Evil Between Buying and Renting?

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Most people are excited to move out of their parents’ home and gain a little independence. The only major downside is having to pay a mortgage or monthly rent. The big question is whether to buy or rent. No matter which you go for, the rule of thumb is always to keep your housing costs to no more than 30% of your monthly income.

Harvard’s Joint Center for Housing Studies states that over 21 million tenants who rented in the last year spent much more than 30% of their monthly income. About a quarter of these people experiences a higher degree of a financial burden because over half of their monthly income goes to rent. In those cases, these individuals have to compromise the remainder of their budget. The study states the result is a 55% drop in healthcare spending and a 40% in grocery shopping to compensate. The primary reason that so many people are struggling is rental prices are climbing higher than ever while wages are on the decline.

From 2001 until 2014, the average household income decreased by about 10% while rental prices inflated 7%. Last year, the average apartment cost $1,380 to rent, which is a 25% increase compared to prices three years ago. Even so, there is still an incredible demand for apartments, and the national vacancy rate has been pushed to a 30-year low. Nowadays, low-income households are not the only ones struggling; about 20% of middle-class households find themselves in the same predicament. As if things couldn’t get any worse, experts, like chief economist of Zillow, Svenja Gudell, speculate that prices will only go up over the next year, by about 3% to 5%.

Still, not all hope is lost for those that are looking for something cheaper. Interestingly enough the head of strategic marketing at Zumper, Devin O’Brein, states that prices will be more leveled out in metro hot spots like New York City, San Francisco, and Boston. O’Brien believes that there will be price gains in Oakland that will outpace those in San Fransico in 2016. He also suspects that there will be an increase in growth around Dallas, Miami, Austin, and Houston.

Is there a lesser evil between buying and renting?

If you had to make a smart move between one of the two, it might be a better option to purchase a house this year. Although mortgage interest rates are also expected to climb for the first time in about a decade, there is still a chance you might find a bargain on a home. House prices are expected to drop this year; the opposite of rentals. If you have been contemplating purchasing a home, but you have been stuck in the wave of high prices, it may be your only chance for a while to find a deal.

Around six million homes are projected to be sold from April through September alone this year, and not everyone will be able to take advantage of what is out there. Jonathan Smoke, chief economist at Realtor.com, stated the slowdown in home prices will push more homeowners to list their houses, which means you will have plenty of options. It is also believed that new home markets will climb next year with builders keeping a watchful eye on both starter and middle-range homes. There will likely be a significant amount of homes listed, so the amount of bidding will decrease.

With increased interest rates on the way, the window for record low mortgage rates will soon end. Higher rates will push up borrowing costs and monthly mortgage payments. If you are considering to buy or have a rental contract that is almost up, it won’t hurt to look into becoming a homeowner. Housing Economist at Trulia, Ralph McLaughlin, stated that mortgage interest rates would need to rise as high as 6.5% for the cost of buying a home to equal the cost of renting. Are you happy where you currently live?

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Investing

Not All 401k’s Are Alike: How to Recognize and Fix a Bad 401k

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Most people believe that a 401k is beneficial. This type of investment can provide the same percentage of a retired person’s income that pensions once provided. However, there are millions of people haven’t a clue whether their 401k plan is a good one. Many have inadequate funding options and excessive fees.

It could end up causing you to lose hundreds to thousands annually. The costs associated with a plan will range, making it a complicated ordeal to find out what you are paying. According to an AARP survey, there are not many who catch that they are in fact paying someone to invest into their plan.

What Do the Fees Look Like?

There is a lot of confusion around the charges these plans can have. The largest of three standard fees is known as the investment management fee. The costs can vary from up to 2% to 3% of assets for actively managed funds down to 10 basis points for institutional shares of index funds. There is also a plan administration fee paid to businesses that run day-to-day management of the plan. Expect to pay around $100-$200 if it’s out of pocket. The last of the three is the 12b-1 charge – a recurring fee used to fund commissions for salespeople and brokers.

On top of these three main fees, count on an individual service fee for additional services, like loans from your 401k or for using a brokerage window.

David Walters, CPA and certified financial planner with Palisades Hudson Financial Group said that altogether, the charges can range from 50 basis points (which is half a percent) up to 3%. He believes people should be suspicious of those that ask over 1%. He also noted that it could make a significant difference in what workers get to spend when they retire.

A report by the liberal think tank Demos found that married couples who invested consistently and never made withdrawals would have lost up to $154,000 in fees, about a third their entire savings.

Are There Any Stats?

It may not always be possible to get the best plans out there. Small companies, in particular, have more fees as they don’t have any negotiating leverage to reduce them. They often do not in-house experts to research plans and find the best deal for the employees.

Yoav Zurel, CEO of FeeX, says one shouldn’t assume that working for a large company means you will have minimal fees or optimal investment options. He adds that only about 40% of the largest companies have optimized their 401k.

The good news is that according to BrightScope, 401k charges have been dropping annually since 2009, and the pattern is expected to continue.

This is most likely because more people are learning to pick the best plans possible for them. Brooks Herman, Bright Scope’s director of research, said that it’s because of the rise in plan sponsor awareness. In 2012, the Department of Labor mentioned that companies are to disclose fund fees to their customers each year.

Rick Meigs, president of 401khelpcenter.com, said that even with that, few people ever take the time to read over their plans. Still, he commented there is always that one individual from the pool of employees that will take the time to read it and when they take the time to do go through it, it benefits the majority.

Is it Possible to Make a Bad Plan Work?

FeeX has researched and analyzed annual reports and individual plans. They suggest alternative investments within each plan to lower charges.

Even with new disclosures, some workers may still be stuck with less than ideal plans. If you are in that predicament, Walters believes it’s best to find workarounds to place yourself in a better financial position.

You can begin by using index plans as they often have lower charges and 88% of plans include them. However, don’t think that’s the only answer. S&P 500 funds can charge 80 basis points when you can get the same thing from Vanguard for only five basis points. Nearly 50% of 401k plans have brokerage windows that allow you to invest in any mutual fund, exchange-traded stock or fund which is available at any brokerage. Doing so may also help with lowering costs as you have access to an entire universe of low-cost fund options and exchange traded funds.

It’s time to start taking financial matters into your hands. Start talking to your spouse about it if you are married, and sit down with your boss. Talk to your boss about improving the plan for the company as a whole.

If you are currently working in a small business, the company owner will likely be the plan’s biggest participant and shouldering a majority of the charges. Keep that in mind and remember to tread gently when bringing up the topic. Zurel, of FeeX, says you should never accuse your employer of anything, and instead, believe that they are doing the best that they can. After all, they too have the same interest as you and would like to have lower fees themselves.

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Personal Finance

Is Your Money Flying Out the Window?

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Most people will tell you that they find it odd that they cannot seem to grow money in their savings account enough though they strategically ensure ways to cut spending their money. You are not the only one that feels this way. It’s the most common issue that people struggle with today.

People can start to feel frustrated when they have the willpower to save, but the results don’t reflect the effort. When this happens, people will become discouraged from wanting to continue then stop, and this cycle can be quite a dangerous one.

Saving your cash and not spending your cash are completely different things. Most believe they are the same. There are various forms of the “no spending, not matching savings” issues. Let’s say, for example, you choose to make your lunch at home and take it to work with you over the next few days so you can save yourself some money. However, you notice two weeks later, you savings account is no higher from the time you started. Or how about when you are ecstatic that gas prices are lower, which could are decreasing which you know will translate into a reduction of spending gas by $160 each month. In both of these instances, you only took half the necessary steps you should be doing to save cash.

Let’s take a deeper look as to why not spending your money doesn’t equate to savings. The true culprit is online banking. From the time banks have come into existence, they’ve altered the financial world and started implementing a couple of odd habits. Most people love instant gratification, and electronic devices give them that. Individuals will look on their phones or their PCs to look at the balance of their checking account more often than they should, and this is where the problem happens.

A lot of people believe that looking at their current balance is the true depiction of what their savings account actually contains, so they may spend down to the last dime. Let’s say you believe that your account has $500, but when you look at it, it’s actually m$1024. Discovering this causes variations in the average person’s spending behavior even though there are likely several reasonable explanations as to how their balance is more than they suspected. More often than not, transactions have not been posted yet, or a check or a payment did not get cleared.

If someone were a chronic balance spender, they would probably find themselves spending more. Think about waking up in the middle of the night and feeling hunger, so you decide to walk inside of the kitchen to get a late night snack. When you rummage and search the pantry to get those tasty bite-sized brownies you love so much, you are sure the box is close to finished. However, you’re pleasantly surprised when you learn that there are more cookies in the box. You decide to treat yourself with more cookies. Whenever we are given a lot of a particular resource, we tend to use up that resource more than we intended.

It works the opposite way as well. Whenever we have to work with spare resources, we will end up using fewer resources than we would like. Whenever you don’t spend cash, you don’t think about how much money you have in the bank.

Any time you notice you don’y use up a certain amount of money that you normally spend, the best thing for you to do is immediately move the money from your checking’s account and straight into your savings account. Are your saving yourself a hundred or so buck each month because you don’t have to put as much money towards certain things anymore? Then you should start putting the money you would have spent on gas to your savings account every time you fill up your gas tanks. Did you make lunch and take it with you to your job? You should be moving the extra money to your savings account that you didn’t spend dining out.

It really is that simple.

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