Tag Archive Security

ByCurtis Watts

Are Social Security Disability Benefits Taxable?

A disabled woman talks to her accountant about taxes.Social Security benefits, including disability benefits, can help provide a supplemental source of income to people who are eligible to receive them. If you’re receiving disability benefits from Social Security, you might be wondering whether you’ll owe taxes on the money. For most people, the answer is no. But there are some scenarios where you may have to pay taxes on Social Security disability benefits. It may also behoove you to consult with a trusted financial advisor as you navigate the complicated terrain of taxes on Social Security disability benefits.

What Is Social Security Disability?

The Social Security Disability Insurance program (SSDI) pays benefits to eligible people who have become disabled. To be considered eligible for Social Security disability benefits, you have to be “insured”, which means you worked long enough and recently enough to accumulate benefits based on your Social Security taxes paid.

You also have to meet the Social Security Administration’s definition of disabled. To be considered disabled, it would have to be determined that you can no longer do the kind of work you did before you became disabled and that you won’t be able to do any other type of work because of your disability. Your disability must have lasted at least 12 months or be expected to last 12 months.

Social Security disability benefits are different from Supplemental Security Income (SSI) and Social Security retirement benefits. SSI benefits are paid to people who are aged, blind or disabled and have little to no income. These benefits are designed to help meet basic needs for living expenses. Social Security retirement benefits are paid out based on your past earnings, regardless of disability status.

Supplemental Security Income generally isn’t taxed as it’s a needs-based benefit. The people who receive these benefits typically don’t have enough income to require tax reporting. Social Security retirement benefits, on the other hand, can be taxable if you’re working part-time or full-time while receiving benefits.

Is Social Security Disability Taxable? 

This is an important question to ask if you receive Social Security disability benefits and the short answer is, it depends. For the majority of people, these benefits are not taxable. But your Social Security disability benefits may be taxable if you’re also receiving income from another source or your spouse is receiving income.

The good news is, there are thresholds you have to reach before your Social Security disability benefits become taxable.

When Is Social Security Disability Taxable? 

A senior's tax return

The IRS says that Social Security disability benefits may be taxable if one-half of your benefits, plus all your other income, is greater than a certain amount which is based on your tax filing status. Even if you’re not working at all because of a disability, other income you’d have to report includes unearned income such as tax-exempt interest and dividends.

If you’re married and file a joint return, you also have to include your spouse’s income to determine whether any part of your Social Security disability benefits are taxable. This true even if your spouse isn’t receiving any benefits from Social Security.

The IRS sets the threshold for taxing Social Security disability benefits at the following limits:

  • $25,000 if you’re single, head of household, or qualifying widow(er),
  • $25,000 if you’re married filing separately and lived apart from your spouse for the entire year,
  • $32,000 if you’re married filing jointly,
  • $0 if you’re married filing separately and lived with your spouse at any time during the tax year.

This means that if you’re married and file a joint return, you can report a combined income of up to $32,000 before you’d have to pay taxes on Social Security disability benefits. There are two different tax rates the IRS can apply, based on how much income you report and your filing status.

If you’re single and file an individual return, you’d pay taxes on:

  • Up to 50% of your benefits if your income is between $25,000 and $34,000
  • Up to 85% of your benefits if your income is more than $34,000

If you’re married and file a joint return, you’d pay taxes on:

  • Up to 50% of your benefits if your combined income is between $32,000 and $44,000
  • Up to 85% of your benefits if your combined income is more than $44,000

In other words, the more income you have individually or as a married couple, the more likely you are to have to pay taxes on Social Security disability benefits. In terms of the actual tax rate that’s applied to these benefits, the IRS uses your marginal tax rate. So you wouldn’t be paying a 50% or 85% tax rate; instead, you’d pay your ordinary income tax rate based on whatever tax bracket you land in.

It’s also important to note that you could be temporarily pushed into a higher tax bracket if you receive Social Security disability back payments. These back payments can be paid to you in a lump sum to cover periods where you were disabled but were still waiting for your benefits application to be approved. The good news is you can apply some of those benefits to past years’ tax returns retroactively to spread out your tax liability. You’d need to file an amended return to do so.

Is Social Security Disability Taxable at the State Level?

Besides owing federal income taxes on Social Security disability benefits, it’s possible that you could owe state taxes as well. As of 2020, 12 states imposed some form of taxation on Social Security disability benefits, though they each apply the tax differently.

Nebraska and Utah, for example, follow federal government taxation rules. But other states allow for certain exemptions or exclusions and at least one state, West Virginia, plans to phase out Social Security benefits taxation by 2022. If you’re concerned about how much you might have to pay in state taxes on Social Security benefits, it can help to read up on the taxation rules for where you live.

How to Report Taxes on Social Security Disability Benefits

If you received Social Security disability benefits, those are reported in Box 5 of Form SSA-1099, Social Security Benefit Statement. This is mailed out to you each year by the Social Security Administration.

You report the amount listed in Box 5 on that form on line 5a of your Form 1040 or Form 1040-SR, depending on which one you file. The taxable part of your Social Security disability benefits is reported on line 5b of either form.

The Bottom Line

A disabled man in a wheelchairSocial Security disability benefits aren’t automatically taxable, but you may owe taxes on them if you pass the income thresholds. If you’re worried about how receiving disability benefits while reporting other income might affect your tax bill, talking to a tax professional can help. They may be able to come up with strategies or solutions to minimize the amount of taxes you’ll end up owing.

Tips on Taxes

  • Consider talking to a financial advisor as well about how to make the most of your Social Security disability benefits and other income. If you don’t have a financial advisor yet, finding one doesn’t have to be complicated. SmartAsset’s financial advisor matching tool can help. By answering a few simple questions you can get personalized recommendations for professional advisors in your local area in minutes. If you’re ready, get started now.
  • While you don’t have to reach a specific age to apply for Social Security disability benefits or Supplemental Security Income benefits, there is a minimum age for claiming Social Security retirement benefits. A Social Security calculator can help you decide when you should retire.

Photo credit: ©iStock.com/kate_sept2004, ©iStock.com/JannHuizenga, ©iStock.com/AndreyPopov

The post Are Social Security Disability Benefits Taxable? appeared first on SmartAsset Blog.

Source: smartasset.com

ByCurtis Watts

10 COVID-19 Stimulus Benefits for the Self-Employed

Since the outbreak of the coronavirus pandemic in March 2020, life and business certainly have changed. If you’re self-employed full-time or earn business income on the side of a day job, you may be wondering what economic relief applies to you.  

Let's review what relief Congress passed to help self-employed Americans cope with financial challenges. I’ll review ten key stimulus benefits that apply to solopreneurs and small businesses.

If you're experiencing economic hardship due to the coronavirus, using some of these new regulations may be the ticket to managing your personal and business finances better.

10 ways the self-employed can get financial relief

The Coronavirus Aid, Relief, and Economic Security (CARES) Act became law on March 27 as the largest stimulus legislation in American history since the New Deal in the 1930s. Here are ten ways it provides relief for individual solopreneurs and small business owners.

1. Getting lower interest rates

On March 3, the central U.S. bank, also known as the Federal Reserve or Fed, made a surprising emergency interest rate cut of half a percentage point. That’s the largest single rate cut since the financial crisis of 2008. While this move wasn’t part of a coronavirus stimulus package, it was an aggressive cut meant to prepare the economy for problems the pandemic was expected to cause.

An economic recovery could take a few years, which likely means the Fed rate will stay near zero through 2023.

In mid-September, the Fed reiterated its promise to keep interest rates near zero until the economy improves and the unemployment rate declines. They indicated that a recovery could take a few years, which likely means the Fed rate stays near zero through 2023.

While savers never celebrate low interest rates, they're beneficial to borrowers. In general, the financing charge on variable-rate credit cards and lines of credit goes down in lockstep with interest rates. Carrying a balance on your personal and business credit cards may be slightly less expensive, depending on your card issuer and type. For instance, if your card’s annual percentage rate or APR is 20%, your adjusted rate could go down to 19.5%.

If you have a fixed-rate credit card, the APR doesn’t change no matter what happens in the economy or with federal interest rates. Also, note that if you pay off your balance in full each month, a credit card’s APR is irrelevant because you don’t pay interest on purchases.

2. Having more time to file taxes

Earlier this year, the due date for filing and paying 2019 federal taxes was postponed from April 15, 2020, to July 15, 2020. You didn't have to be sick or negatively impacted by COVID-19 to qualify for this federal tax delay. It applied to any person or business entity with taxes due on April 15, 2020.

If you missed the tax filing deadline, be sure to request an extension.

Most businesses make estimated tax payments each quarter. Those payment dates have shifted, too. The 2020 schedule gives you more time as follows:

  • The first quarter was due on July 15, 2020, which changed from April 15, 2020
  • The second quarter was due on July 15, 2020, which changed from April 15, 2020
  • The third quarter was due on September 15, 2020
  • The fourth quarter is due on January 15, 2021

Individuals and businesses can request an automatic extension to delay filing federal taxes. But it doesn’t give you more time to pay what you owe for 2019, only more time to submit your tax form—until October 15, 2020.

If you missed the tax filing deadline, be sure to request an extension. Individuals must file IRS Form 4868, and most incorporated businesses use IRS Form 7004.

However, depending on where you live, you may have to pay state income taxes, which have not been postponed. If you need a state tax filing extension, check with your state’s tax agency to determine what’s possible.

Taxes due on any date other than April 15, 2020—such as sales tax, payroll tax, or estate tax—don’t qualify for relief.

3. Getting more time to contribute to retirement accounts

You typically have until April 15 or the date of a tax extension to make traditional IRA or Roth IRA contributions for the prior year. But since the CARES Act postponed the federal tax filing deadline, you also have until July 15 or October 15, 2020 (if you requested an extension) to make IRA contributions for 2019.

However, this deadline doesn't apply to retirement accounts you may have with an employer, such as a 401(k). Nor does it apply to self-employed accounts, such as a solo 401(k) or SEP-IRA, which correspond to the calendar year.

4. Getting more time to contribute to an HSA

Like with an IRA, you typically have until April 15 or the date of a tax extension to make HSA contributions for the prior year. Under the CARES Act, you now have until July 15 or October 15, 2020, to make HSA contributions for 2019.

To qualify for an HSA, you must be covered by a qualifying high-deductible health plan. In early March, the IRS issued a notice that a high-deductible health plan may cover COVID-19 testing and treatment and telehealth services before meeting your deductible. And just as before the coronavirus, you can pay for medical testing and treatment using funds in your HSA.

5. Delaying tax on retirement withdrawals

While you typically must pay income tax on retirement account withdrawals that weren’t previously taxed, the good news is that for a period, you can delay or avoid tax altogether. The CARES Act gives you two options for withdrawals made in 2020:

  • Repay a hardship distribution within three years to your retirement account. You can replace the funds slowly or all at once, with no change to your annual contribution limit. If you take money out but return it within three years, it’s like you never took a distribution.
  • Pay taxes on a hardship distribution from your retirement account evenly over three years. If you can’t pay back your distribution, you can ease your tax burden by paying one-third of your liability for three years. 

Since withdrawing contributions from a Roth retirement account doesn’t trigger income taxes, it’s a good idea to tap a Roth before a traditional retirement account when you have the option.

6. Skipping early withdrawal penalties

Most retirement accounts impose a 10% early withdrawal penalty if you take make withdrawals before age 59.5. Under the CARES Act, if you have a coronavirus-related hardship, the penalty is waived.

Under the CARES Act, if you have a coronavirus-related hardship, the penalty is waived.

For instance, if you, your spouse, or a child gets diagnosed with COVID-19 or have financial challenges due to being laid off, quarantined, or closing a business, you qualify for this penalty exemption. You can withdraw up to $100,000 of your retirement account balance during 2020 without penalty. However, income taxes would still be due in most cases.

The no-penalty rule applies to workplace retirement plans, such as 401(k)s and 403(b)s. It also applies to IRAs, such as traditional IRAs, Roth IRAs, and SEP-IRAs.

Since you make after-tax contributions to Roth accounts, you can withdraw them at any time (which was also the case before the CARES Act). However, the earnings portion of a Roth is subject to income tax if you withdraw it before age 59.5.

7. Getting larger retirement plan loans

Some workplace retirement plans, such as 401(k)s and 403(b)s, permit loans. Typically, you can borrow 50% of your vested account balance up to $50,000 and repay it with interest over five years.

You can delay the repayment period for a retirement plan loan for up to one year.

For retirement plans that allow loans, the CARES Act doubles the limit to 100% of your vested balance in the plan up to $100,000. It applies to loans you take from your account until late September 2020, for coronavirus-related financial needs.

You can delay the repayment period for a retirement plan loan for up to one year. For example, if you have $20,000 vested in your 401(k), you could take a $20,000 loan on September 30, 2020, and delay the repayment term until September 30, 2021. You’d have payments stretched over five years, ending on September 30, 2026. Any amount not repaid by the deadline would be subject to tax and a 10 percent early withdrawal penalty.

Note that individual retirement accounts—such as traditional IRAs, Roth IRAs, and SEP-IRAs—don’t allow participants to take loans, only hardship distributions.

8. Suspending student loan payments.

Starting on March 13, 2020, most federal student loans went into automatic forbearance until September 30, 2020, due to the CARES Act. On August 8, the suspension of student loan payments was extended through December 31, 2020.

On August 8, the suspension of student loan payments was extended through December 31, 2020.

The suspension covers the following types of loans:

  • Direct Loans that are unsubsidized or subsidized
  • Direct PLUS Loans
  • Direct Consolidation Loans
  • Federal Family Education Loans (FFEL)
  • Federal Perkins Loans

Note that FFEL loans owned by a private lender or Perkins loans held by your education institution don’t qualify for automatic forbearance. However, you may have the option to consolidate them into a Direct Loan, which would be eligible for forbearance. Just make sure that once the suspension ends, your new consolidated interest rate wouldn’t rise significantly.

During forbearance, qualifying loans don’t accrue additional interest. Even if you have federal student loans in default because you haven’t made payments, zero percent interest applies during the suspension period.

Additionally, missed payments during the suspension don’t get reported to the credit bureaus and can’t hurt your credit. Qualifying payments you skip also count toward any federal loan repayment or forgiveness plan you’re enrolled in.

However, if you want to continue making student loan payments during the suspension period, you can. With zero percent interest, the amount you pay gets applied to your principal student loan balance, enabling you to get out of debt faster.

With zero percent interest, the amount you pay gets applied to your principal student loan balance, enabling you to get out of debt faster.

If you’re not sure what type of student loan you have or the pros and cons of consolidation, contact your loan servicer. Even if your student loans are with private lenders or schools, they may offer relief if you request it.

9. Having Paycheck Protection Program (PPP) loans forgiven

The PPP is part of the CARES Act, and it supports small businesses, organizations, and solopreneurs facing economic hardship created by the pandemic. The program began providing relief in early April 2020, and the application window ended in early August 2020.

Participating PPP lenders coordinated with the Small Business Administration (SBA) to offer loans to businesses in operation by February 15, 2020, with fewer than 500 employees. Loan amounts could be up to 2.5 times the average monthly payroll up to $10 million; however, annual salaries were capped at $100,000.

For a solopreneur, the maximum PPP loan was $20,833 if your 2019 net profit was at least $100,000. The calculation is: $100,000 / 12 months x 2.5 = $20,833.

When you spend at least 60% on payroll and 40% on rent, mortgage interest, and utilities, you can have those amounts forgiven from repayment. Payroll includes payments to yourself, but you can’t cover benefit costs, such as retirement contributions, or payments to independent contractors.

In other words, a solopreneur could have received a PPP loan for up to $20,833, paid the entire amount to themselves, and not repaid it by having the load forgiven. Using a PPP loan for qualifying expenses turns it into a grant.

The best part about PPP loan forgiveness is that it won’t qualify as federal taxable income. Some states that charge income tax have indicated that they won’t tax forgiven amounts.

However, if you have employees, the PPP forgiveness calculations and requirements are more complex. For example, you must maintain reasonable salaries and wages. If you decrease them by more than 25% for any employee (including yourself) who made less than $100,000 in 2019, your forgiveness amount will be reduced. 

PPP loan forgiveness also depends on keeping any full-time employees on your payroll. But if you had employees who left your company voluntarily, requested a cut in hours, or got fired for cause during the pandemic, your loan forgiveness amount won’t be reduced for those situations.

The best part about PPP loan forgiveness is that it won’t qualify as federal taxable income. Some states that charge income tax have indicated that they won’t tax forgiven amounts.

However, not all states have issued their rules on taxing PPP forgiveness. So be sure to get guidance if you live in a state with income tax.

You must complete a PPP Loan Forgiveness Application and get approved by your lender to qualify for forgiveness. The paperwork should come from your lender, or you can download it from the SBA website at SBA.gov. Most PPP borrowers have from six months after loan disbursement or until the end of 2020 to spend the funds. 

The forgiveness application explains what documents you must include, and they vary depending on whether you have employees. Once you submit your paperwork, your lender has 60 days to decide how much of your PPP loan can be forgiven.

If some or all of a PPP loan isn't forgiven, you typically must repay it within five years at a 1 percent fixed interest rate. You don't have to start making payments for ten months after loan disbursement, but interest will accrue during a deferral period.

10. Getting SBA loans

In addition to PPP loans, the Small Business Administration (SBA) offers several loans for businesses and solopreneurs facing economic hardship caused by a disaster, including the COVID-19 pandemic.

  • Economic Injury Disaster Loan (EIDL) can be up to $2 million and repaid over 30 years at an interest rate of 3.75 percent. You can use these funds for payroll and other operating expenses.
  • SBA Express Bridge Loans gives borrowers up to $25,000 for help overcoming a temporary loss of revenue. However, you must have an existing relationship with an SBA Express lender. 
  • SBA Debt Relief is a program that helps you make payments on existing SBA loans for up to six months.

Depending on your state, you may qualify for unemployment assistance, which allows self-employed people, who typically are ineligible for unemployment benefits to get them for a period.

This isn’t a complete list of all the economic relief available for small businesses and solopreneurs. There are federal tax initiatives, funds from local and state governments, and help from private organizations that you may find by doing a search online.

How to manage money in uncertain times

When it comes to surviving uncertainty, such as how COVID-19 will affect the economy, those who have emergency savings will feel much less financial stress than those who don’t. That’s why it’s essential to maintain a cash reserve of at least three to six months’ worth of living expenses in an FDIC-insured bank savings account.

If you don’t need to dip into your emergency fund, continue shoring it up when possible. If you don’t have a cash reserve, accumulate savings by cutting non-essential expenses, and even temporarily pausing contributions to retirement accounts. That’s a better option than succumbing to panic and tapping your retirement funds early.

If you don’t need to dip into your emergency fund, continue shoring it up when possible.

If you find yourself in a cash crunch, contact your creditors before dipping into any retirement accounts you have. Many lenders will be willing to work with you to suspend payments or modify existing loan terms temporarily.

RELATED: How to Reduce Money Anxiety—Compassionate Advice from a Finance Pro

My new book, Money-Smart Solopreneur: A Personal Finance System for Freelancers, Entrepreneurs, and Side-Hustlers, covers many strategies to earn more, manage variable income, and create an automatic money system so you can strengthen your financial future. It’s a great resource if you’re thinking about earning side income or have already started a business.

Many economic factors that affect your personal and business finances aren’t under your control. Instead of worrying, look around, and figure out how you can create more income or cut unnecessary expenses. Working on tasks that you can control gives you more clarity and helps manage stress in uncertain times.

Source: quickanddirtytips.com

ByCurtis Watts

Why Is There No Inflation Adjustment With My Social Security?

Welcome to our “Social Security Q&A” series. You ask a question about Social Security, and a guest expert answers it. You can learn how to ask a question of your own below. And if you would like a personalized report detailing your optimal Social Security claiming strategy, click here. Check it out: It could result in receiving thousands of dollars more in benefits over your lifetime!

Source: moneytalksnews.com

ByCurtis Watts

FIRE: How to Find Your Aha Moments and the Key to Achieving FIRE

Although enduring the pandemic has been stressful to say the least, I have learned a multitude of lessons I’ll never forget. One of the biggest is that, like it or not, I’m not cut out to homeschool four kids while trying to work at home. Most of all, though, the pandemic has reinforced my feeling of gratitude for the life I live — and the life my family lives.

For example, when schools began shutting down and the whole country went into lockdown, neither my wife, Mandy, or I had to miss work or struggle to find childcare. When I work on my blog, my podcast, and other ventures in my home office, my wife already stays home with the kids and has done so for several years. 

And when the economy stalled and the stock market dropped like a rock, we never had to wonder how we’d pay our bills or what the future might hold. After all, we have a fully stocked emergency fund, and have plenty of passive income streams that aren’t tied to an employer or the stock market on any given day.

The bottom line: The pandemic has reminded me all I have to be grateful for, including the peace of mind that comes with financial independence.

Teaching My Kids About Financial Independence

Anyway, part of me has always worried that my kids wouldn’t get to learn the same financial lessons I did — at least, not in the same way. Because of the situation we’re in, my kids have never really lived in a modest home, and they have never had to go without. They have never been in a situation where we are trying to stretch the groceries for another week until payday, and in fact, the pandemic has made us rely a lot more on takeout and food delivery than we normally do.

Regardless, I recently took some time on one of our homeschool days to map out what it takes to run and pay for a household for my kids. 

Writing It All Out

On a giant whiteboard in my office, I created a list of most of our household bills — our mortgage payment, transportation expenses, phones, gas, insurance, utilities, and all of the taxes we pay. In another column, I wrote out a rough example of the amount of income it would actually take to cover those bills. 

From there, I talked with the kids about our household wants, or stuff they prefer to have. My kids went ahead and added shoes to the list, an Xbox and some dolls. 

At one point, the kids started asking questions about where the money for our bills actually comes from. I explained that, while I continue working on my podcast and blog and other business ventures, the majority of our income is mostly passive — as in, I am not actually working for it and I am no longer getting paid by an employer.

And in that moment, I began explaining to them my thoughts on financial independence — what it means to me, and how we actually got to that point. 

While my kids were sick of dad teaching and barely listening by then, they did have some thoughts on financial independence. I explained to them that, if they could save a ton of their income in their early working years, they could invest in passive income streams they could rely on for decades after that. 

We also talked about how secure it can feel to have enough money stashed away to get by, and to not have to rely on the whims of an employer or a J-O-B to stay alive. 

How I Realized We Were Financially Independent

All of this got me thinking about when I knew we were financially independent, and the “aha moments” I had along the way. After all, our journey to financial security didn’t happen overnight, even though sometimes it does feel that way.

But before I share how I knew we didn’t need to worry about money, I want to explain what I think financial freedom really is, based on a note I wrote on my whiteboard for our kids. 

What Financial Independence Is (and What It Isn’t)

For me, financial independence is not about making the most money you absolutely can, and it’s not about how much is in your bank account, the car you drive, or the size of your home. 

Instead, financial independence is about choice. 

Based on the way I interpret the FIRE movement, financial independence is about being able to choose where you work and what you work on, having the ability to spend your free time how you want, and living life on your own terms. It’s about not having to go to a job you hate, and to still have the money you need to pay bills and live comfortably, regardless.

Further, financial independence means being able to have the freedom of choice without any worry, without any stress, and without any anxiety — at least when it comes to paying bills.  

My Aha Moments

So, what are the “aha moments” that helped me realize we had been blessed with all we need — that we are financially independent?

In reality, it has been a lot of small things over the last decade or so — things like being able to rent two hotel rooms or a large Airbnb each time we travel, and not having to worry whether we can afford it. After all, I have four kids, and my wife and I don’t want to sleep in a hotel room stuffed six-people deep. 

Another big moment we had was the first time my wife and I maxed out our old Roth IRA accounts while also fully funding our 401(k)s, which happened early in our marriage. 

Then there was the year we started building our first “dream house,” which we lived in before the one we live in now. Our “starter home” was around 1,900 square feet and we lived there for quite a while. But we started building our 5,000 square foot dream house right before the birth of our second son — we even put in a pool shortly after that. 

This was when we were in our early 30’s, and building at that time just seemed like a dream come true. We even started building our new home before we sold our old one, which was only possible because we had our financial ducks in a row.

Other key “aha” moments along our journey to financial independence included:

  • The many times I turned down lucrative job offers and opportunities so I could continue pursuing my own dreams
  • When I realized I could take two weeks off to drive my family to the Grand Canyon in an RV — and I did it!
  • When I’ve made more money in a month than my parents used to earn in a whole year (since my parents topped out at around $40,000 to $50,000 per year during their working years)
  • Realizing I had the cash savings to purchase my childhood dream car (a yellow Lamborghini!), if I really wanted to
  • The time I sold a minority stake in one of my businesses and was handed the largest check I have ever received to date
  • The first time I paid $400 for a pair of Jordan shoes with no regrets or stress, which actually happened just a few years ago!

Funny enough, I sent my wife Mandy a text, for research purposes, asking when she first felt financially independent. Her answer was totally different than mine. 

Mandy says that she felt like she no longer needed to worry about money when we reached one year of expenses in our emergency savings account.

I have to agree with her, because that milestone did give me a lot of peace of mind. After all, having 12 months of expenses in an emergency fund means a lot could go wrong with our finances and we would still have the time and space to figure it all out.

3 Key FIRE Principles and How You Know You’re On Track

If you’re pursuing financial independence but progress feels slow, know that your path to financial freedom will have a lot of bumps along the way. If you’re like me, you might also find that you’re inching toward financial freedom in spurts, and that it doesn’t all hit you at once. 

The key for those seeking FIRE is being on the lookout for those “aha moments” that tell you you’re on the right path. No matter what anyone says, you won’t become financially independent overnight. Instead, you’ll probably hit several different stages over the months and years it takes to get there.

Not only that, but you should strive to adopt the right mindset for FIRE. For the most part, this means being willing to think differently about how the world works and how it should work, and being open to going your own way.

What are the key principles of FIRE — or the key mindset changes that can get you there? Based on my personal experience, here’s what I think they are.

Key Principle #1: Gratitude for What You Have

In my opinion, being grateful for what you have (and what God has provided) is one of the most important steps anyone can take. Even if things aren’t really going your way, and if life seems bleak and miserable at times, there is always something we can be grateful for. 

With that said, I recommend being grateful and hungry — as in, don’t be so grateful that you become complacent and stop pushing for more in your life. 

Continue to entertain the idea that there is always something else you can learn, more experiences you can have, and more wisdom to obtain by trying new things. And if you try something and fail, look for the lessons you can find in that failure and be grateful you had the chance to learn them. 

Key Principle #2: Flexing Your Bold Intentions

Another key principle of achieving financial independence is being willing to share your goals with the world — loudly and without hesitation.

In your own life, you might’ve noticed that people who are pursuing FIRE can’t stop talking about it. This is because FIRE enthusiasts usually have one important thing in common: they’re brave enough to put their bold intentions on display no matter what anyone thinks.

Let’s say you have the bold intention of achieving financial independence and retiring at 35. Why not take that goal and post it to your Facebook page? Start sharing it with your family, and don’t forget to tell your friends. 

Chances are good that you’re probably going to get a lot more criticism than support from your peers, but who really cares? 

Most people who pursue FIRE actually don’t care at all what other people think. That’s part of the reason they’re able to live differently, save a large percentage of their income, and stop trying to keep up with the Joneses in the first place.

Key Principle #3: Full Release of the Past

Finally, you have to make sure your future is bigger than your past — as in, don’t let your past mistakes define who you are today and who you can become.

I know from experience that it’s far too easy to focus on all of the mistakes you’ve made and opportunities you’ve missed out on. Trust me, I’ve made more than my share of bone-headed mistakes that could’ve easily derailed me, yet here I am. 

The key for anyone pursuing FIRE is having some humility for the situation while never letting your past mistakes hold you back. You have to be willing to put yourself out there again and again, knowing you might fail. The thing is, every failure has a lesson, and sometimes those lessons lead you to something great right around the corner. 

Maybe you skipped saving for retirement early in your career, and you feel behind from where you should be. Although you definitely missed out by not getting started early, you can only control the steps you take to reach your goal right now.

Perhaps you made a poor investment and lost money at one point, which is something most investors have done at least a few times. Instead of dwelling on that mistake, you have to learn to cut your losses, find the lesson in the mess, and move on. 

Why? Because the alternative isn’t moving forward, and that won’t get where you want to be.

The bottom line: Let go of the past and take stock of where you’re at now. From there, figure out a plan to reach your goals, and don’t stop until you get there.

The post FIRE: How to Find Your Aha Moments and the Key to Achieving FIRE appeared first on Good Financial Cents®.

Source: goodfinancialcents.com

ByCurtis Watts

How Many Credit Cards Should You Have for Good Credit?

Have you ever wondered, "How many credit cards should I have? Is it wise to have a wallet full of them? Does having multiple credit cards hurt my credit score?"

If you’ve been following this blog or the Money Girl podcast, you know the fantastic benefits of having excellent credit. The higher your credit scores, the more money you save on various products and services such as credit cards, lines of credit, car loans, mortgages, and insurance (in most states).

Even if you never borrow money, your credit affects other areas of your financial life.

But even if you never borrow money, your credit affects other areas of your financial life. For instance, having poor credit may cause you to get turned down by a prospective employer or a landlord. It could also increase the security deposits you must pay on utilities such as power, cable, and mobile plans.

Credit cards are one of the best financial tools available to build or maintain excellent credit scores. Today, I'll help you understand how cards boost your credit and the how many credit cards you should have to improve your finances.

Before we answer the question of how many credit cards you should have in your wallet, it's important to talk about using them responsibly so you're increasing instead of tanking your credit score.

5 tips for using credit cards to build credit

  1. Make payments on time (even just the minimum)
  2. Don’t rely on being an authorized user
  3. Never max out cards
  4. Use multiple cards
  5. Keep credit cards active

A common misconception about credit is that if you have no debt you must have good credit. That’s utterly false because having no credit is the same as having bad credit. To have good credit, you must have credit accounts and use them responsibly.

Having no credit is the same as having bad credit.

Here are five tips for using credit cards to build and maintain excellent credit scores.

1. Make payments on time (even just the minimum)

Making timely payments on credit accounts is the most critical factor for your credit scores. Your payment history carries the most weight because it’s an excellent indicator of your financial responsibility and ability to pay what you owe.

Having a credit card allows you to demonstrate your creditworthiness by merely making payments on time, even if you can only pay the minimum. If the card company receives your payment by the statement due date, that builds a history of positive data on your credit reports. 

I recommend paying more than your card’s minimum. Ideally, you should pay off your entire balance every month so you don’t accrue interest charges. If you tend to carry a balance from month-to-month, it’s wise to use a low-interest credit card to reduce the financing charge.

2. Don’t rely on being an authorized user

Many people start using a credit card by becoming an authorized user on someone else’s account, such as a parent’s card. That allows you to use a card without being legally responsible for the debt.

Some credit scoring models ignore data that doesn’t belong to a primary card owner.

Some card companies report a card owner’s transactions to an authorized user’s credit report. That could be an excellent first step for establishing credit … if the card owner makes payments on time. Even so, some credit scoring models ignore data that doesn’t belong to a primary card owner.

Therefore, don’t assume that being an authorized user is a rock-solid approach to building credit. I recommend that you get your own credit cards as soon as you earn income and get approved.

3. Never max out cards

A critical factor that affects your credit scores is how much debt you owe on revolving accounts (such as credit cards and lines of credit) compared to your total available credit limits. It's known as your credit utilization ratio, which gets calculated per account and on your accounts' aggregate total.

A good rule of thumb to improve your credit scores is to keep your utilization ratio below 20%.

Having a low utilization ratio shows that you use credit responsibly by not maxing out your account. A high ratio indicates that you use a lot of credit and could even be in danger of missing a payment soon. A good rule of thumb to improve your credit scores is to keep your utilization ratio below 20%. 

For example, if you have a $1,000 card balance and a $5,000 credit limit, you have a 20% credit utilization ratio. The formula is $1,000 balance / $5,000 credit limit = 0.2 = 20%.

There's a common misconception that it's okay to max out a credit card if you pay it off each month. While paying off your card in full is smart to avoid interest charges, it doesn't guarantee a low utilization ratio. The date your credit card account balance is reported to the nationwide credit agencies typically isn't the same as your statement due date. If your outstanding balance happens to be high on the date it's reported, you'll have a high utilization ratio that will drag down your credit scores.

4. Use multiple cards

If you need more available credit to cut your utilization ratio, there are some easy solutions. One is to apply for an additional credit card, so you spread out charges on multiple cards instead of consistently maxing out one card. That reduces your credit utilization and boosts your credit.

Having the same amount of debt compared to more available credit instantly reduces your utilization and improves your credit.

For example, if you have two credit cards with $500 balances and $5,000 credit limits, you have a 10% credit utilization ratio. The formula is $1,000 balance / $10,000 credit limit = 0.1 = 10%. That’s half the ratio of my previous example for one card.

Another strategy to cut your utilization ratio is to request credit limit increases on one or more of your cards. Having the same amount of debt compared to more available credit instantly reduces your utilization and improves your credit.

5. Keep credit cards active

Credit card companies are in business to make a profit. If you don't use a card for an extended period, they can close your account or cut your credit limit. You may not mind having a card canceled if you haven't been using it, but as I mentioned, a reduction in your credit limit means danger for your credit scores.

A reduction in your credit limit means danger for your credit scores.

No matter if you or a card company cancels one of your revolving credit accounts, it causes your total amount of available credit to shrink, which spikes your utilization ratio. When your utilization goes up, your credit scores can plummet.

Anytime your credit card balances become a higher percentage of your total credit limits, you appear riskier to creditors, even if you aren't. So, keep your cards open and active, especially if you're considering a big purchase, such as a home or car, in the next six months.

In general, I recommend that you charge something small and pay it off in full several times a year, such as once a quarter, to stay active and keep your available credit limit in place.

If you have a card that you don't like because it charges an annual fee or a high APR, don't be afraid to cancel it. Just replace it with another card, ideally before you cancel the first one. That allows you to swap out one credit limit for another and avoid a significant increase in your credit utilization ratio.

If you're determined to have fewer cards, space out your cancellations over time, such as six months or more. 

How many credit cards should you have to build good credit?

Now that you understand how credit cards help you build credit, let's consider how many you need. The optimal number for you depends on various factions, such as how much you charge each month, whether you use rewards, and how responsible you are with credit.

There's no limit to the number of cards you can or should have if you manage all of them responsibly.

According to Experian, 61% of Americans have at least one credit card, and the average person owns four. Having more open revolving credit accounts makes you more likely to have higher credit scores, but only when you manage them responsibly. 

As I mentioned, having more available credit compared to your balances on revolving accounts is a crucial factor in your credit scores. If you continually bump up against a 20% utilization ratio, you likely need an additional card.

You can keep an eye on your credit utilization and other important credit factors with free credit reporting tools such as Credit Karma or Experian.

Also, consider how different credit cards can help you achieve financial goals, such as saving money on everyday purchases you're already making. Many retailers, big box stores, and brands have cards that reward your loyalty with discounts, promotions, and additional services.

If you continually bump up against a 20% utilization ratio, you likely need an additional card.

I use multiple cards based on their benefits and rewards. For instance, I only use my Amazon card to get 5% cashback on Amazon purchases. I have a card with no foreign transaction fees that I use when traveling overseas. And I have a low-interest card that I only use if I plan to carry a balance on a large purchase for a short period.

There's no limit to the number of cards you can or should have. Theoretically, you could have 50 credit cards and still have excellent credit if you manage all of them responsibly.

My recommendation is to have a minimum of two cards so you have a backup if something goes wrong with one of them. Beyond that, have as many as you're comfortable managing and that you believe will benefit your financial life.

Source: quickanddirtytips.com

ByCurtis Watts

How I Invest

One of the most common questions I receive from readers like you—especially since Grow (Acorns + CNBC) published my story last week—asks me how I invest.

All this theoretical investing information is fine, Jesse. But can you please just tell me what you do with your money.

That’s what I’ll do today. Here’s a complete breakdown of how I invest, how the numbers line up, and why I make the choices I make.

Disclaimer

Of course, please take my advice with a grain of salt. Why?

My strategy is based upon my financial situation. It is not intended to be prescriptive of your financial situation.

I’ve hesitated writing this before because it feels one step removed from “How I Vote” and “How I Pray.” It’s personal. I don’t want to lead you down a path that’s wrong for you. And I don’t want to “show off” my own choices.

I’m an engineer and a writer, not a Wall Street professional. And even if I was a Wall Street pro, I hope my prior articles on stock picking and luck vs. skill in the stock market have convinced you that they aren’t as skilled as you might think.

All I can promise you today is transparency. I’ll be clear with you. I’ll answer any follow-up questions you have. And then you can decide for yourself what to do with that information.

Mitte Mystery Clearing For Dual Address Shop - Eatler

Are we clear? Let’s get to the good stuff.

How I Invest, and In What Accounts…?

In this section, I’ll detail how much I save for investing. Then the next two sections will describe why I use the investing accounts I use (e.g. 401(k), Roth IRA) and which investment choices I make (e.g. stocks, bonds).

Stock Market Forecasters See Modest Gains at Best This Fall | Barron's

How much I save, and in what accounts:

  • 401(k)—The U.S. government has placed a limit of $19,500 on employee-deferred contributions in 2020 (for my age group). I aim to hit the full $19,500 limit.
  • 401(k) matching—My employer will match 100% of my 401(k) contributions until they’ve contributed 6% of my total salary. For the sake of round numbers, that equates to about $6,000.
  • Roth IRA—The U.S. government has placed a limit of $6,000 on Roth IRA contributions (for my earnings range) in 2020. I am aiming to hit the full $6,000 limit.
  • Health Savings Account—The U.S. government gives tremendous tax benefits for saving in Health Savings Accounts. And if you don’t use that money for medical reasons, you can use it like an investment account later in life. I aim to hit the full $3,500 limit in 2020.
  • Taxable brokerage account—After I achieved my emergency fund goal (about 6 months’ of living expenses saved in a high-yield savings account), I started putting some extra money towards my taxable brokerage account. My goal is to set aside about $500 per month in that brokerage account.

That’s $41,000 of investing per year. But a lot of that money is actually “free.” I’ll explain that below.

Why Those Accounts?

The 401(k) Account

First, let’s talk about why and how I invest using a 401(k) account. There are three huge reasons.

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First, I pay less tax—and so can you. Based on federal tax brackets and state tax brackets, my marginal tax rate is about 30%. For each additional dollar I earn, about 30 cents go directly to various government bodies. But by contributing to my 401(k), I get to save those dollars before taxes are removed. So I save about 30% of $19,500 = $5,850 off my tax bill.

Editor’s Note: The original version of this article incorrectly stated that 401(k) contributions are taken out prior to OASDI (a.k.a. social security) taxes. That claim was incorrect. 401(k) contributions occur only after OASDI taxes are assessed.

Many thanks to regular reader Nick for catching that error.

Second, the 401(k) contributions are removed before I ever see them. I’m never tempted to spend that money because I never see it in my bank account. This simple psychological trick makes saving easy to adhere to.

Third, I get 401(k) matching. This is free money from my employer. As I mentioned above, this equates to about $6,000 of free money for me.

Roth Individual Retirement Account (IRA)

Why do I also use a Roth IRA?

Unlike a 401(k), a Roth IRA is funded using post-tax dollars. I’ve already paid my 30% plus OASDI taxes, and then I put money into my Roth. But the Roth money grows tax-free.

Let’s fast-forward 30 years to when I want to access those Roth IRA savings and profits. I won’t pay any income tax (~30%) on any dividends. I won’t pay capital gains tax (~15%) if I sell the investments at a profit.

Tax GIFs | Tenor

I’m hoping my 30-year investment might grow by 8x (that’s based on historical market returns). That would grow this year’s $6000 contribution up to $48000—or about $42000 in profit. And what’s ~15% of $42000? About $6,300 in future tax savings.

Health Savings Account (H.S.A.)

The H.S.A. account has tax-breaks on the front (36.7%, for me) and on the back (15%, for me). I’m netting about $1300 up-front via an H.S.A, and $4,200 in the future (similar logic to the Roth IRA).

Taxable Brokerage Account

And finally, there’s the brokerage account, or taxable account. This is a “normal” investing account (mine is with Fidelity). There are no tax incentives, no matching funds from my employer. I pay normal taxes up front, and I’ll pay taxes on all the profits way out in the future. But I’d rather have money grow and be taxed than not grow at all.

Summary of How I Invest—Money Invested = Money Saved

In summary, I use 401(k) plus employer matching, Roth IRA, and H.S.A. accounts to save:

  • About $7,100 in tax dollars today
  • About $6,000 of free money today
  • And about $10,500 in future tax dollars, using reasonable investment growth assumptions

Don’t forget, I still get to access the investing principal of $41,000 and whatever returns those investments produce! That’s on top of the roughly $25,000 of savings mentioned above.

I choose to invest a lot today because I know it saves me money both today and tomorrow. That’s a high-level thought-process behind how I invest.

How I Invest: Which Investment Choices Do I Make?

We’ve now discussed 401(k) accounts, Roth IRAs, H.S.A. accounts, and taxable brokerage accounts. These accounts differ in their tax rules and withdrawal rules.

But within any of these accounts, one usually has different choices of investment assets. Typical assets include:

  • Stocks, like shares of Apple or General Electric.
  • Bonds, which are where someone else borrows your money and you earn interest on their debt. Common bonds give you access to Federal debt, state or municipality debt, or corporate debt.
  • Real estate, typically via real estate investment trusts (REITs)
  • Commodities, like gold, beef, oil or orange juice
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Here are the asset choices that I have access to in my various accounts:

  • 401(k)—my employer works with Fidelity to provide me with about 20 different mutual funds and index funds to invest in.
  • Roth IRA—this account is something that I set up. I can invest in just about anything I want to. Individual stocks, index funds, pork belly futures etc.
  • H.S.A.—this is through my employer, too. As such, I have limited options. But thankfully I have low-cost index fund options.
  • Taxable brokerage account—I set this account up. As such, I can invest in just about any asset I want to.

My Choice—Diversity2

How I invest and my personal choices involve two layers of diversification. A diverse investing portfolio aims to decrease risk while maintaining long-term investing profits.

The first level of diversification is that I utilize index funds. Regular readers will be intimately familiar with my feelings for index funds (here 28 unique articles where I’ve mentioned them).

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By nature, an index fund reduces the investor’s exposure to “too many eggs in one basket.” For example, my S&P 500 index fund invests in all S&P 500 companies, whether they have been performing well or not. One stellar or terrible company won’t have a drastic impact on my portfolio.

But, investing only in an S&P 500 index fund still carries risk. Namely, it’s the risk that that S&P 500 is full of “large” companies’ stocks—and history has proven that “large” companies tend to rise and fall together. They’re correlated to one another. That’s not diverse!

Lazy Portfolio

To battle this anti-diversity, how I invest is to choose a few different index funds. Specifically, my investments are split between:

  • Large U.S. stock index fund—about 40% of my portfolio
  • Mid and small U.S. stock index fund—about 20% of my portfolio
  • Bond index fund—about 20%
  • International stocks fund—about 20%

This is my “lazy portfolio.” I spread my money around four different asset class index funds, and let the economy take care of the rest.

Each year will likely see some asset classes doing great. Others doing poorly. Overall, the goal is to create a steady net increase.

Updating My Favorite Performance Chart For 2019
An asset class “quilt” chart from 2010-2019, showing how various asset classes perform each year.

Twice a year, I “re-balance” my portfolio. I adjust my assets’ percentages back to 40/20/20/20. This negates the potential for one “egg” in my basket growing too large. Re-balancing also acts as a natural mechanism to “sell high” and “buy low,” since I sell some of my “hottest” asset classes in order to purchase some of the “coldest” asset classes.

Any Other Investments?

In June 2019, I wrote a quick piece with some thoughts on cryptocurrency. As I stated then, I hold about $1000 worth of cryptocurrency, as a holdover from some—ahem—experimentation in 2016. I don’t include this in my long-term investing plans.

I am paying off a mortgage on my house. But I don’t consider my house to be an investment. I didn’t buy it to make money and won’t sell it in order to retire.

On the side, I own about $2000 worth of collectible cards. I am not planning my retirement around this. I do not include it in my portfolio. In my opinion, it’s like owning a classic car, old coins, or stamps. It’s fun. I like it. And if I can sell them in the future for profit, that’s just gravy on top.

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Enter full nerd mode!

Summary of How I Invest

Let’s summarize some of the numbers from above.

Each year, I aim to save and invest about $41,000. But of that $41K, about $15K is completely free—that’s due to tax benefits and employer matching. And using reasonable investment growth, I think these investments can save me $15,000 per year in future tax dollars.

Plus, I eventually get access to the $41K itself and any investment profits that accrue.

I take that money and invest in index funds, via the following allocations:

  • 40% into a large-cap U.S. stock index fund
  • 20% into a medium- and small-cap U.S. stock index fund
  • 20% into an international stock index fund
  • And 20% into a bond index fund

The goal is to achieve long-term growth while spreading my eggs across a few different baskets.

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And that’s it! That’s how I invest. If you have any questions, please leave a comment below or drop me an email.

If you enjoyed this article and want to read more, I’d suggest checking out my Archive or Subscribing to get future articles emailed to your inbox.

This article—just like every other—is supported by readers like you.

Source: bestinterest.blog

ByCurtis Watts

Skipping Renters Insurance? Why That’s a Bigger Risk Than You’d Think

As a finance writer, I am surrounded by people who know a lot about managing money. But even those with the most money know-how can still miss financial must-haves.

For instance, in a recent conversation, a few of my coworkers stated they didn’t have renters insurance. This puts them among the 59% of renters who don’t have renters insurance, according to a poll from the Insurance Information Institute. On the other hand, 95% of homeowners carry homeowners insurance.

Granted, renting comes with fewer property responsibilities than owning. But don’t assume you can skip insurance for your home simply because you’re leasing it. Go without it and you’ll expose yourself to some major risks.

See why opting for a policy is protection you can’t live without, and learn how renters insurance can help smooth over the following five major renting crises.

1. Damaged Belongings

If you’re asking yourself whether you need insurance as a renter, a better question might be, Can you afford not to have it?

If the relatively small cost of a renters insurance premium—typically between $15 and $25 per month—seems too expensive, consider the alternative, suggests John Espenschied, agency principal of Insurance Brokers Group.

“Imagine replacing all your clothes, furniture, electronics, food, personal items, and priceless personal memorabilia,” he says. With renters insurance, the insurer will cover most or part of the value of damaged items. Without this coverage, you’re completely on the hook for all those costs.

Espenschied tells a story of one of his clients, a young woman to whom he recommended rental insurance multiple times. She declined the coverage.

Months later, there was an electrical surge in the building. “It took out everything she owned that was plugged in, including the TV, computer, and several other items,” Espenschied explains. These items were permanently damaged and unusable.

Had she opted for renters insurance, Espenschied could have helped her submit a claim and get the money to replace those belongings. Unfortunately, without the policy there was nothing he could do.

Don’t put yourself in the same position—get a renters insurance policy. On top of that, take steps to document all belongings and valuables so you can prove ownership in a renters insurance claim.

2. The Temporary Loss of a Habitable Home

Some disasters—such as fires, flooding, and electrical issues—can require extensive repairs and render your rental uninhabitable. Your landlord will usually handle these repairs, but if you lose the use of your home, your landlord might only be required to refund a prorated rent for the days you can’t live in your rental.

But if you’re out of a place to live, your daily rent rate might not cover any decent hotels or other temporary housing options.

But there’s good news: “Most renters insurance policies can help you in the event something happens to your apartment or house and you have to live elsewhere while it’s repaired,” says Jennifer Fitzgerald, CEO and cofounder of insurance comparison site PolicyGenius.

Typically, you can find a hotel nearby and your renters insurance will cover the costs of your stay until you can resume habitation of your home.

3. Stolen Belongings

Renters insurance typically includes coverage for theft and burglary too. If your home is broken into or burglarized, you can file a claim with your renters insurance provider to replace any stolen or damaged items.

“It even covers your belongings when they’re not physically in your home,” Fitzgerald says. “So if you take your laptop with you to the local coffee shop or on vacation and it’s stolen, your policy could help cover the costs of getting it repaired or replaced.” Renters insurance will usually be the policy that covers theft of personal items from your car too.

If your home is broken into or your purse is stolen from your car, promptly notifying authorities is an important step—filing a renters insurance loss claim will usually require a police report of the theft.

4. Personal Liability for Legal Damages

The most important protection your renters insurance provides, however, might be personal liability protection.

“If your dog bites someone or a food delivery person slips and falls, you’re covered,” says Stacey A. Giulianti, chief legal officer for Florida Peninsula Insurance. Instead of being held personally responsible for those damages, your insurer will step in and help. “The carrier will even hire and pay for an attorney to defend any resulting lawsuit.”

This can be especially important if you are found responsible for damage to adjacent properties as well, Espenschied says. For example, renters insurance will cover you if your toilet or tub “overflows and leaks into the neighbor’s unit below, causing damage to their personal property and cost to repair the building.” You may also be covered if a kitchen fire in your apartment causes damage to the unit above you.

The damage and loss can easily add up to tens of thousands of dollars. In cases like these, renters insurance can be the difference between smooth recovery and huge financial loss or even bankruptcy.

Make sure you understand your coverage. “Every policy is different, so talk to an agent and read your policy terms,” Giulianti warns.

5. An Eviction for Violating Your Lease Agreement

Many lease agreements include a clause in which the tenant agrees to purchase a renters insurance policy. These common clauses usually clarify that the landlord’s property insurance coverage does not extend to your personal belongings.

If you sign a lease with such a clause, you are agreeing to maintain this insurance coverage throughout your residency there. If you fail to get a policy or allow it to lapse, your landlord is within their rights to serve you with a “comply or quit” notice and possibly begin eviction proceedings.

If you don’t currently have a policy, reconsider getting renters insurance. Alongside a healthy emergency fund, having the right insurance can bring vital financial security to your life. For the cost, renters insurance provides protection and peace of mind.

“Most renters can get a policy for around $20 per month,” Fitzgerald says. “That’s a small price to pay when you think about the fact that if you don’t have renters insurance, you’ll be forced to cover the cost of replacing any and all items damaged.”

Procuring a renters insurance policy is a smart step toward financial security. With the right policy, you can avoid debt in an emergency and protect your possessions and your home. If you’re ready to buy a home, learn more about the ins and outs of home mortgages in Credit.com’s Mortgage Loan Learning Center. And to be financially prepared for anything, it’s also a good idea to build your credit score so you can qualify for loans and other credit when necessary. See where you stand with a free credit score from Credit.com.

Image: istock 

The post Skipping Renters Insurance? Why That’s a Bigger Risk Than You’d Think appeared first on Credit.com.

Source: credit.com

ByCurtis Watts

Dear Penny: How Do I Save for Retirement on a Teacher’s Salary?

Dear Penny,

I’m 51 years old and don’t have a large nest egg. I’m a single parent with three kids. I’m a second career middle school teacher, so there is not a lot of money left over each month. 

How much money should I be saving to be able to retire in my 70s? Where should I invest that money?

-B.

Dear B.,

You still have 20 years to build your nest egg if all goes as planned. Sure, you’ve missed out on the extra years of compounding you’d have gotten had you accumulated substantial savings in your 20s and 30s. But that’s not uncommon. I’ve gotten plenty of letters from people in their 50s or 60s with nothing saved who are asking how they can retire next year.

I like that you’re already planning to work longer to make up for a late start. But here’s my nagging concern: What if you can’t work into your 70s?

The unfortunate reality is that a lot of workers are forced to retire early for a host of reasons. They lose their jobs, or they have to stop for health reasons or to care for a family member. So it’s essential to have a Plan B should you need to leave the workforce earlier than you’d hoped.

Retirement planning naturally comes with a ton of uncertainty. But since I don’t know what you earn, whether you have debt or how much you have saved, I’m going to have to respond to your question about how much to save with the vague and unsatisfying answer of: “As much as you can.”

Perhaps I can be more helpful if we work backward here. Instead of talking about how much you need to save, let’s talk about how much you need to retire. You can set savings goals from there.

The standard advice is that you need to replace about 70% to 80% of your pre-retirement income. Of course, if you can retire without a mortgage or any other debt, you could err on the lower side — perhaps even less.

For the average worker, Social Security benefits will replace about 40% of income. If you’re able to work for another two decades and get your maximum benefit at age 70, you can probably count on your benefit replacing substantially more. Your benefit will be up to 76% higher if you can delay until you’re 70 instead of claiming as early as possible at 62. That can make an enormous difference when you’re lacking in savings.

But since a Plan B is essential here, let’s only assume that your Social Security benefits will provide 40%. So you need at least enough savings to cover 30%.

If you have a retirement plan through your job with an employer match, getting that full contribution is your No. 1 goal. Once you’ve done that, try to max out your Roth IRA contribution. Since you’re over 50, you can contribute $7,000 in 2021, but for people younger than 50, the limit is $6,000.

If you maxed out your contributions under the current limits by investing $583 a month and earn 7% returns, you’d have $185,000 after 15 years. Do that for 20 years and you’d have a little more than $300,000. The benefit to saving in a Roth IRA is that the money will be tax-free when you retire.

The traditional rule of thumb is that you want to limit your retirement withdrawals to 4% each year to avoid outliving your savings. But that rule assumes you’ll be retired for 30 years. Of course, the longer you work and avoid tapping into your savings, the more you can withdraw later on.

Choosing what to invest in doesn’t need to be complicated. If you open an IRA through a major brokerage, they can use algorithms to automatically invest your money based on your age and when you want to retire.

By now you’re probably asking: How am I supposed to do all that as a single mom with a teacher’s salary? It pains me to say this, but yours may be a situation where even the most extreme budgeting isn’t enough to make your paycheck stretch as far as it needs to go. You may need to look at ways to earn additional income. Could you use the summertime or at least one weekend day each week to make extra money? Some teachers earn extra money by doing online tutoring or teaching English as a second language virtually, for example.

I hate even suggesting that. Anyone who teaches middle school truly deserves their time off. But unfortunately, I can’t change the fact that we underpay teachers. I want a solution for you that doesn’t involve working forever. That may mean you have to work more now.

Robin Hartill is a certified financial planner and a senior editor at The Penny Hoarder. Send your tricky money questions to AskPenny@thepennyhoarder.com.

This was originally published on The Penny Hoarder, which helps millions of readers worldwide earn and save money by sharing unique job opportunities, personal stories, freebies and more. The Inc. 5000 ranked The Penny Hoarder as the fastest-growing private media company in the U.S. in 2017.

Source: thepennyhoarder.com