Financial Lessons Learned

Financial Lessons Learned

Aside from the unswerving advice to spend less than you make, personal finance wisdom has a way of evolving year by year, as the economy, tax laws, and other variables change.

True, most lessons these days have to do with it being harder and harder to build a nestegg, the need to start earlier and the importance of saving more robustly and wisely than ever before.

But even under that broad canopy, the important teachings in 2012 changed a bit from the previous year.

To get a handle on what was resonating with Americans in 2012, I just visited the “Readers’ Picks for 2012, ” published by the Financial Security Project at Boston College. That list of the last 12 months’ 10 most visited FSP “Squared Away” blogs shows that folks across the United States in 2012 were most eager to absorb guidance on saving for college and retirement.

From that roster, I selected a few of the key takeaways to take away from the year past. I believe implementing any one of these will be very conducive to your fiscal health and vitality. And if I’m not mistaken, putting into practice two or more could end up injecting fifty to a hundred thousand greenbacks into your bank account over time.

Waiting for Social Security Pays Off Like Never Before

Conventional wisdom has long held that taking Social Security at 62 and getting smaller checks over a longer period will essentially net you the same amount over your retirement as waiting for age 70 and taking larger payments over a shorter period. Only the more dialed-in among us realized that that was a costly fallacy, and that waiting until later ages to take Social Security truly pays off in very real ways.

A new study shows that waiting is even more important in this era of decidedly low interest rates. How much more can folks earn? Single people can pocket tens of thousands more, and couples almost $125, 000 more, over the course of their retirements by waiting until around age 70 to turn on the flow of Social Security payments.

Plan on Four Years, Not Six

Although not well acknowledged, it’s a fact that earning a degree in some majors at many larger four-year undergraduate institutions may actually require not four, but six, years of study. That can wreak havoc with efforts to save enough for a college education.

The reason is that at very large institutions, supply and demand forces may make it difficult for students to get into courses they need to graduate, leaving them in college longer and paying more for tuition, room and board. Parents are urged to discuss this reality with admissions counselors, bluntly asking whether their son’s or daughter’s chosen major can be completed in four years, as opposed to six.

Considering the opportunity cost of earning paychecks in a profession versus spending an extra two years in college, accurate answers to that question can save families vast amounts.

Boomer Women, Pay Heed

If you’re like numerous Baby Boomer women I’ve known, you’ve devoted a lot more of your life to spending than to saving. Once the kids have left the nest, that trend needs to be reversed, reports a Squared Away blog called “Boomer Moms, Here’s a Radical Idea.”

The key steps in that strategy? First, pay down that $15, 000 to $80, 000 credit card debt common to many couples. Second, if you’ve let your husband make the financial decisions, get involved and share the duties and responsibilities. Third, if you need a financial plan, hire a professional to guide you. You are likely to live longer than your husband, so you need to develop a plan to provide income throughout your life.

Associates Degrees or Certificates vs. Bachelor’s Degrees

I once suggested to a friend she consider a community college vocational program, as opposed to a four-year bachelor’s degree program, for her son. Though I’d intended no disrespect, she virtually disowned me. She had missed the point of my remark, which was that many four-year degree holders are returning to college at community colleges to get the training they require to actually land a paying job, according to U.S. Education Secretary Arne Duncan.

And that’s only logical. Many four-year programs teach theoretical principles, but the curriculum at community colleges across the nation is strategically designed to train people in skills needed by local employers. Once you’re employed in a well-paying job, your employer may help pay the piper when you return to academia for Bachelor’s, Master’s and Ph.D degrees.

Early Mortgage Paydown? Not

According to the Federal Reserve, mortgage debt has decreased from $11.1 trillion to $10 trillion in recent years. The reason is that as Americans pay off their credit card debt, many are turning to paying extra on their mortgages in an effort to pay them down or off more quickly. But that probably isn’t the wisest strategy.

It’s a much better move to invest newly freed-up dollars in your 401(k). Not only do most Americans need to better fund their retirements, but they gain the benefit of deducting those contributions from their taxable income. In addition, the investment income they make on those contributions is likely to outstrip what they will pay in mortgage interest. The lesson: invest in a higher-yielding investment as opposed to paying off low-cost debt.

Put all of these recommendations into practice in the coming year, and you could find the number ’13 anything but unlucky.

10 Responses to “Financial Lessons Learned”

  1. Anonymous

    As someone who got off sync in college, I agree with planning on 6 yrs of college. But I didn’t do it all on my parents dime. While I truly got off sync, I maintained jobs and later jobs related to my degree. As a result, my starting salary came out 20% ahead of my peers who graduated in 4 years, since I had experience they didn’t have.
    Also, I was able to cover most of my extended college stay because the jobs I had during college paid and I lived with my parents.
    I think it’s time college bound students get over needing the “college experience” by living on campus for 4 – 6 yrs. Sure, try it for a year or two, and for some research positions it may be advantageous. But living off campus, or better yet in your childhood home helps immensely. The cost of a beater, gas & parking tickets was much less than living on campus.
    Plus I had healthier homemade food! No freshman 50 for me!

  2. Anonymous

    I will weigh in on the college front. My one child got off sync during the begining of their junior year and now needs another year because of what classes are offered and prerequisite needs shutting them out of available classes. We’d planned on four, and that extra year, while I will help, is now mostly on their dime (i.e. loans and job savings). The child didn’t even switch majors as much as concentration within a degree program based on assurances by an advisor this was doable within the junior and senior year, or at worst with some summer classes. One bad advisor mixed with some changes in program path has led to another full year of payments. That said, talking to other parents I am hearing more and more say that their kids are taking 5 years or more to get the Bachelor’s because of program restrictions, lack of class offerings, and students being unable to force into necessary classes for their degree programs.

  3. Anonymous

    One more practical consideration on the benefit of the mortgage pay down question is the level of equity you have in your home… If it is less than the amount needed to not have to pay private mortgage insurance, getting the equity in the home above that level quicker may provide some incremental benefit, and, if you want to re-fi with historically lower rates, getting above water may be a good way to apply that extra cash. And I agree with the concept of financial peace of notnhaving that payment.

  4. Anonymous

    If you had a paid-for house (no mortgage): would you mortgage the property and put the money into the stock market?

    If your answer is no, then pay off the mortgage.

    However, when you are talking about 401k accounts (a very nice tax loophole), it does make sense to try to max that out. Even if you can’t max the 401k out, it is a no-brainer to invest enough in the 401k to grab all of your employer matches — and not pay the mortgage off early.

  5. Anonymous

    I know from personal experience about the mortgage paydown question.

    Around 2007, we inherited enough money from Husband’s mom to pay off the house. Any conventional advice we heard said to invest it in a 401(k) or stocks. We were being foolish, we’d make a lot more in the market blah blah blah.

    But I grew up in a family who felt strongly that you get your house paid off — THEN you invest elsewhere.

    So we paid the house off.

    And the market crashed soon after.

    The same people who advised us lost 30% or so of their original investment money. Not profits — but the money they’d started with. Some have made that money back; some haven’t.

    We make no mortgage payments….a great comfort when times have been hard. And every month, what would have gone into the house can now go to investing.

    With today’s market yo-yoing all over, still want to advise that paying off your mortgage early is a foolish idea?

  6. Anonymous

    Have to disagree on the Social Security advice. Can’t speak for everyone but I have run a spreadsheet on my specific situation. Using a five percent interest rate ( I earned over six last year in a balanced portfolio in a low interest rate enviroment) and a present Worth analysis, my break even for taking SS at 66 rather than 62 is 87 years old and at 70 it is 90 years old. I did not even take tax implications into account. If you have a sizable IRA and delay taking distributions until 70.5, a portion of your SS will start being taxed at that point whereas if you take SS early, you can avoid that portion being taxed for as much as 8 years. So, yes if you want to gamble that you will make it to 87 or older and that SS will actually still be there in its present form, you may make some extra money. I am not willing to take that gamble.

  7. Anonymous

    RE: Mortgage pay-off v 401K investments

    I’d concur with the others that I think this is horrible advice, but my risk tolerance I’m guessing is lower than it is with Jeffrey Steele.

    If this advice was taken in 2007, then many individuals would probably be very angry and feel as a fool during the bear market. However, the reverse if just before the bull run of the mid-90’s or mid-00’s. If missing out on every possible dollar to be gain would bother you more than the crashes (presuming in it for the long term and not selling the devalued shares and ride the rebounds) than the above advice should taken.

    I’m more risk adverse and like some surety in my investment. So, paying off my 2003 mortgage gave me guaranteed 6% return on money I’d otherwise would pay (okay for those who’ll chime in about the tax break, then about a 5% to 5.5% guaranteed return. Hint, run your numbers yourself — most articles overrate the tax advantage. I’m in a middle of a middle tax bracket and my mortgage was less $100K which is very different than just over the top bracket with interest on large loan — it is not a one-size-fits-all solution, but easy enough to figure out with a tax table).

    As with Nickel, I’ve never regretted it! I could always get another one if I did. Now, I am maxed out for my yearly individual contributions, but with a peace of mind that works for me.

  8. Regarding the mortgage payoff, I will say this: We paid off our mortgage two years ago and haven’t regretted it one bit. That being said, we were still able to fully fund our retirement accounts while doing this, so the choice was more clear.

  9. Anonymous

    I’m going to have to agree with Dorothy about the mortgage. A few yrs ago, DH and I were in a spot where we could choose to pay off our remaining mortgage in full…or not.

    I sat down and did the math. Had DH double check it. It turned out that paying ourselves the interest we had been paying on the mortgage made us a little wealthier in the long run.

    We have owned our house free and clear for several years now,and truly owning your house brings a peace of mind that almost nothing else can compare to.

    Even if it were a little more financially smarter to sock more away into retirement – which our calculations show that it’s not, really – it’s still a lot better decision to pay off a mortgage when you want greater financial security.

  10. Anonymous

    Regarding the mortgage paydown, I respectfully disagree. And I encourage you to think outside the box on this one. All your financial-advice colleagues agree with you and I’m concerned that you’re following the crowd. This notion ranks right up there with the worst financial advice in the universe, that you should hold a large mortgage “for the tax deduction”.

    The premise of your principleis that paying down a mortgage is a purely financial decision. But your premise ignores the emotional and psychological facets of the question.

    I made my last mortgage payment in 1999 (at age 44). I built a home with cash in 2010. There is no feeling on earth more freeing than living in a home you know is paid for. It’s like the MasterCard says — “Not writing a mortgage check every month? Priceless!”

    And as I have discussed the notion with people over the years, it’s been a revelation to them. Most people upon hearing the idea of paying off a mortgage see it as an unrealistic fantasy akin to winning the lottery. They don’t think that THEY could ever be that “fortunate”. And once I tell them that I did it — and how they can do it — once they see that it is possible for ordinary mortals, the idea opens up new financial independence vistas for them.

    To address the question of using money to pay off a mortgage that you might have invested in a retirement account I say what my broker says, Money is money. When you retire, you’ll have the money — whether it’s in a (now-taxable) 401k or IRA, or as equity in a house you might sell with the plan of buying someplace smaller. And simply eliminating the mortgage payment from your budget in retirement results in restful sleep undisturbed by dreams of financial ruin.

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