Category: Savings tips

How to Balance Your Lifetime Savings vs. Spending

Are you spending more than you are saving? If so, you’ve got company — the average American spends beyond their means. If you continue to do so, you could find yourself in a jam during an emergency, or you may have to work well into your retirement years because you didn’t build a healthy enough nest egg. If you have savings goals, such as paying for a bachelor’s degree for your children and funding your retirement, you need to have control over your money and make sure that you are saving enough of it to reach your goals. 

Korving & Company provides financial planning advice for clients in Suffolk and the surrounding Hampton Roads communities. Reach out to our team today to discuss your retirement goals, proper saving strategies, get estate planning guidance, and review all your financial needs. By meeting with a financial advisor, you can increase your confidence, discipline, and wealth.

Take the first step in managing your personal finances with the advisors at Korving & Company. 

In the meantime, this article explores the question, “How much money does the average person spend in a lifetime?” Additionally, you’ll learn strategies to help you curb your spending and stash away more cash for your future.

How Much Does the Average Person Spend in Their Lifetime? 

Knowing how much the average American spends over the course of their life can help you better manage your money. However, keep in mind that the amount spent  corresponds to how much is earned. Therefore, those in their 20s and 30s, who typically have not hit their peak earnings years, may spend less money than adults in their 40s and 50s when most people tend to advance in their career and income levels.

Factors that typically influence spending habits include your job, family size and dynamic, education level, and health. The average American spends between 40% to 50% more than they earn in a lifetime. You may wonder how that’s possible. Due to the easy availability of credit in America, it’s easy to overspend and live beyond your means. This is a huge problem.

If you’re like the average American, you’re likely to earn between $2 million to $6 million over the course of your working lifetime. When you’re able to retire and how you’re able to live in retirement will depend on the actions and steps you take right now in the decades leading up to your retirement.

The average annual income of all Americans is $51,480, according to the Bureau of Labor Statistics. So, for example, if we apply that average to a 24-year-old worker who has worked full-time since finishing high school (or perhaps landed a higher-paying job after college), they have probably earned over $300,000 thus far in their lifetime. Accounting for inflation and rising salaries, they’re very likely to double that amount by the time they turn 34. If they keep increasing their salary, they could earn over $800,000 over the next ten years. By the time they reach retirement, assuming they continue to earn salary increases, their total lifetime earnings by age 64 should be over $3,000,000.

How Should You Manage Your Income? 

Knowing that you’re likely to reach at least $3 million in total earnings over the course of your life may seem surprising. Perhaps you haven’t focused on saving earlier in your career and now wonder or lament where the money you earned has gone. Creating a system to save and manage your wealth will help you keep more of your hard-earned income. Make sure to account for rising average life expectancy ages when calculating what each earner in your household should save.

Here are a few tools to help you save enough to last a lifetime. While the average life expectancy in America is age 75, we always recommend accounting for increasingly longer lifespans as the figure continues to rise with improvements in medical technology.

Envelope Method

The envelope method is simple. By separating your spending into categories, you can create a real-life or virtual envelopes for each category. For example, if you spend $100 weekly on dining out, for the month you should set aside $400 for dining out.

If you run out of the budgeted amount of money in your envelope, your spending on that category should cease for the month. This method of money tracking makes you more aware of your spending. Hopefully, it will help you curb impulse buying and allow you to more into savings.

Live Within Your Means

​​​​​​​This one seems self-explanatory, but it requires a bit of work. Leave your credit cards at home when you go shopping and pay in cash instead. If you’re using the envelope system, put no more than your maximum budgeted amount in the envelope, and don’t go over your limit. If that’s too inconvenient, create a savings account for discretionary spending and link a debit card to that account so you aren’t able to overspend.

You can also seek advice from financial coaches who can help you solidify your budget and track your progress. It’s important to budget for entertainment, vacations, and other things that make life more meaningful. However, you’ll also need a plan to stay on track with your retirement savings goals.

Retirement Plans 

Retirement planning encompasses everything needed to save and invest money to support yourself once you stop working. Saving builds wealth, and investing compounds it so that you will have more money available for your bank account in retirement. There are two things that you can do immediately to expedite the process.

If your employer sponsors a 401(k) plan, contribute the maximum amount that you can afford until you hit the maximum amount allowed by the plan. Some employers match employee contributions up to a certain percentage of your income. So, if your employer matches 50% up to a 6% max, make sure you allocate at least 6% of your income to your retirement plan. Your employer will match 3% of that, which is basically free pre-tax income and will grow tax-deferred into retirement. (You don’t pay income taxes on this money until you take it out to spend in retirement!)

In 2022, you can save a maximum of $20,500 in a 401(k) plan. Those age 50 or older can put away up to $27,000. The less you spend, the more you can put into retirement accounts and, if you put more into pre-tax retirement accounts, the less you’ll pay in income taxes.

If your company doesn’t offer a 401(k) plan you can still save for retirement by opening an individual retirement account (IRA). Your financial advisor can explain how these plans work in detail and help you choose the right kind of IRA that matches your goals. Some IRAs come with tax-deductible contributions, and in all of them, your money grows tax-free until you distribute it. If you are self-employed, you may have the option to open and fund an individual solo 401(k) or what’s known as a SEP IRA. Your financial advisor will be able to explain these accounts as well, and help you determine which account type matches best with your goals.

Does your job come with a pension plan? If so, take full advantage of it to help increase your income in retirement.

There are many investment options available in retirement accounts, including stocks, bonds, and mutual funds that should increase in value over time to increase your net worth for your retirement years later in life.

Budgeting Rule

​​​​​​​The 50/30/20 rule of thumb acts as a guide to help you avoid overspending. Under this plan, you spend 50% of your income on needs, 30% on wants, and 20% on savings and other financial goals.

Needs include things you can’t live without, such as:

  • Housing 
  • Food 
  • Transportation 
  • Utilities

Wants are things you love or want but don’t need to survive, including:

  • Hobbies and Entertainment
  • Monthly subscriptions (including cable and streaming services)
  • Travel
  • Dining out

Savings and financial goals help you save to prepare for your future, and may include:

  • An emergency savings fund
  • Saving for retirement
  • Paying off debt, starting with consumer debt (i.e., credit card debt)

This 50/30/20 is just a rule of thumb, but it is a convenient start to a budget.  It is important to remember that budgets are meant to bend, so if you live in an area where the cost of living is higher, your “needs” bucket may be slightly higher. If you need to increase that to accommodate, it’s okay to shrink your “wants” bucket; the goal is to try to always keep your “savings” bucket to at least 20%. 

Life Insurance

Purchasing life insurance can provide for your family should something happen to you. Although you’ll never see the ultimate benefit of having a policy, it can give you peace of mind and help you leave something behind for your children and spouse. You should talk with a fiduciary financial advisor to make sure that you are properly insured but not unnecessarily over-insured. Insurance is an expense that should be smartly monitored.

Homeowners Insurance

Homeowners insurance can protect you from catastrophic loss. If your house burns down or vandals cause thousands of dollars in damages, homeowners insurance protects you from devastating financial loss.

Health Insurance Plan

You may wonder what your healthcare plan has to do with financial planning. You’ll no longer wonder if you have a hospital stay and receive the bill at the end. If you don’t have coverage, or you don’t understand the coverage that you do have, you’ll quickly find that medical care can be ridiculously expensive. You can usually get insurance through your employer, but your financial advisor can make suggestions or even provide feedback on the options available to you.

Social Security

Although Social Security supports millions of older Americans, there is no guarantee about the program’s future. It’s better to have saved enough on your own to be able to support yourself in retirement. Even if you do receive it, the actual cost of living is rising much faster than the Social Security adjustments are.

Should You Be Avoiding Debt? 

Yes, you should avoid debt if at all possible. However, there’s a difference between necessary and unnecessary debt. For example, few people have the ability to pay cash for a home. What is unnecessary debt? Credit card debt from dining at expensive restaurants or taking vacations every six months falls in this category. Getting a car loan on a new car with monthly payments that take up more than 20% of your “needs” bucket falls into this category.  Buy used instead or something that is within your budget. We’d argue that taking on excessive student loan debt to stay in school longer or get a hard-to-get or low-paying job falls into this category.

Keep in mind that both necessary and unnecessary debt can negatively impact your credit score and jeopardize your financial goals. For example, not paying off your credit card bill in full every month can become a dirty and vicious cycle. If you don’t pay off your credit card bill in full, the next month part of your payment will go toward interest, and part of it will go toward the principal. The longer you carry the debt without paying it off in full, the more you’ll wind up paying in interest. And the interest rates on credit card debt are usually very high. This can become a vicious cycle if you continuously live beyond your means and keeps many people from becoming financially successful.

Your debt level accounts for 30% of your credit score. You could pay every bill on time for the rest of your life, but if you never pay the full balance, your credit score could still remain low. If you are stuck in this cycle, don’t have enough to cover the full balance, and don’t know where to start, you can begin by making additional payments on loan balances or pay twice a month (once a paycheck) to decrease the total balance.

Unnecessary debt could prevent you from properly saving for your retirement and other savings goals, owning property, and accessing low-interest credit.

Is a Financial Advisor Right For You? 

If you are saving regularly but don’t know if you’re using the best accounts, don’t know a stock from a mutual fund (much less how to choose which one may make the most sense for you), and want to make sure that you’re making prudent, informed and tax-aware decisions regarding your financial future, including your retirement and estate, you might need a financial advisor. 

Korving & Company offers financial planning services and can help advise you on the best ways to put aside money today to reach your goals for tomorrow. Whatever priorities and goals you have for your financial future, our experts can help you make them happen.

Working with Korving & Co., you gain access to a personal financial advisor. Our financial services and financial planning experts help you build solid portfolios for retirement and your other important priorities. 

Contact us today to start your personalized investment plan.

Would You Prefer to Have $1 Million Cash Right Now or a Penny that Doubles Every Day for 30 Days?

Albert Einstein is credited with saying “compound interest is the eighth wonder of the world.”

To get back to the original question, would you prefer to have $1 million today or one cent that will double every day for 30 days?  If you chose the million dollars, you would leave millions on the table.

If you chose the penny and passed up the million dollars, on the second day your penny would be worth two cents, on day three it would be four cents, on the fourth day it would be 8 cents.  By day 18 the penny will have grown to $1,310.72.  By day 28 it will be worth over a million dollars:  $1,342,177.  On the 30th day it would be worth an astounding $5,368,709!

If the penny were to be allowed to double for another 30 days, the penny would grow to over $5 quadrillion (five thousand trillion!) dollars.

One of the things this illustrates is that compound growth takes time to make a dramatic difference.  For the person who wants to have enough money to retire in comfort, starting early is the key to success, even if the starting amount is small.

 

Is your money going in the right direction?

An acquaintance recently asked me how his money should be invested.  With banks paying virtually zero on savings, it’s a question on everyone’s mind.  Should he invest in stocks or bonds? If it’s stocks, what kind: Growth, Value, Small Cap or Large Cap, U.S. or Foreign?  The same can be asked of bonds: government or corporate, high yield or AAA, taxable of tax free?  That’s a question that faces many people who have money to invest but are not sure of where.

It’s a dilemma because we can’t be sure what the future holds. Is this the time to put money into stocks or will the market go down? If we invest in bonds will interest rates go up … or down? How about investing in some of those Asian “Tigers” where economic growth has been higher than in more developed countries?

There is no perfect answer. We are not gifted with the ability to read the future. And what is this “future” anyway? Next week? Next year? Or 20 years from now when we will need the money for retirement?

We know that generally, people who own companies usually make more money that people put their money in the bank. Another word for “people who own companies” is “stockholders.” That’s why, over the long term, stockholders do better than bondholders. On the other hand, bonds produce income and are generally lower risk than stocks. So my first answer to the question I was asked is: invest in both stocks and bonds.

Choosing the right stocks and bonds is a job that is best left to professionals. That’s the benefit of mutual funds. Mutual funds pool the money of many investors to create professionally managed portfolios of stocks and bonds. They are an easy way of creating the kind of diversification that is important for reducing risk.

To circle back to the original question our friend asked: the answer is to create a well diversified portfolio. We know that some of the time stocks will do better than bonds, and vice versa. We know that some of the time foreign markets outperform the U.S. market. We know that some the time Growth stocks will do better than Value stocks. We just don’t know when. So we select the best funds in each category and measure the over-all result. With so many funds to choose from, the smart investor will get help from a Registered Investment Advisor like the folks at Korving & Company.

Call us for more details.

This Simple Tip Could Make a Big Difference in Your Retirement Account

You can make a 2016 contribution to your IRA or Roth IRA as early as January 1, 2016 and as late as April 15, 2017.  It would seem obvious that the sooner you contribute to your retirement account and invest the money, the more money you’ll have by the time you retire.
However, according to research from Vanguard, people are more than twice as likely to fund their IRAs at the last minute as opposed to the first opportunity!  When Vanguard looked back at the IRA contributions of its clients from 2007 to 2012, only 10% of the contributions were made at the optimum point in January, and over 20% were made at the very last month possible.
IRA Contribution Month
To demonstrate the type of real, monetary impact this can have on someone’s retirement savings, take the following hypothetical example.  On January 1 each year, “Early Bird” contributes $5,500, while “Last Minute” makes their $5,500 contribution on April 1 of the following year.  Assume that each investor does this for 30 years and earns 4% annually, after inflation.  Early Bird ends up with $15,500 more than Last Minute.  Put another way, Last Minute has incurred a $15,500 “procrastination penalty” by waiting to make his contribution until the last possible month.
Procrastination Penalty
At the beginning of every year, make fully funding your IRA contributions a habit. (And if you’re the type of person who works better when things are automated, look into setting up an automatic savings & investment plan from your paycheck or bank account to your IRA to save on a monthly or per-paycheck basis.)

8 Things Every Parent Should Know About 529 College Savings Plans

We often are asked by parents (or grandparents) of young children about college savings plans.  529 college savings plans offer tax-advantaged ways to save for the various costs of higher education.  While these plans have a lot of name recognition, many people still have questions about the details.  Since it is the first day of school for most kids here in Virginia, it seemed an appropriate time for us to share these eight things you should know about 529 college savings plans:

  1. Earnings on 529s are tax-free, as are withdrawals, as long as you use the money for qualified educational expenses.  Qualified expenses include tuition and fees, books, room and board, supplies, and even computer-related expenses.
  2. There are no income restrictions to open and contribute to a 529 account.  Even high-income earners can open and fund college savings plans.
  3. The money in a 529 account can be used towards in-state or out-of-state schools, both public and private.
  4. The contribution amounts are very high: you can contribute up to $350,000 per beneficiary into a 529 account.  (Keep in mind that you will need to get a little deeper into gift tax rules if you intend to contribute more than $14,000 to a 529 account in any one calendar year.  You can do it, but you should know the rules first.)
  5. The beneficiary is portable.  If your child decides they want to do something else instead of going to college, you can name someone else the beneficiary (sibling, first cousin, grandparent, aunt, uncle, or yourself).  You do not need to decide on a new beneficiary the moment that your child decides not to go to college.  For instance, you could hold onto it and eventually name your grandchildren the beneficiaries.
  6. Charitable family members can contribute to an existing 529 account that you own or set up their own 529 and name your child as beneficiary.
  7. In Virginia, putting money into a 529 plan has the added bonus of providing a state tax deduction for contributions up to $4,000.  Thirty-three other states also offer state tax deductions for contributing to a 529.
  8. If your child gets a scholarship, you will not lose the money.  You can use the plan to cover expenses that the scholarship does not, such as books, room and board, or other supplies.  You can keep the plan open in case your child goes on to graduate school.  You can change the beneficiary and name another college-bound relative.  A final option would be to simply cash out the plan.  Doing so would subject you to income tax and a 10{030251e622a83165372097b752b1e1477acc3e16319689a4bdeb1497eb0fac93} penalty on the earnings.  If you were feeling generous, you could name your child the owner and let them cash it out at their (presumably) lower tax rate.

If you have questions, or are interested in finding out how to start a 529 plan, please let us know!

How To Have A Comfortable Retirement

No one plans to live in poverty in retirement. But one of the biggest problems for the majority of current workers is that they don’t plan … period. So what can we do to live better in retirement?

  •  Save, save, save and start early. The biggest tool that anyone has is time. Time is the magic that makes compound interest a miracle.  There is no substitute for starting early, and that means as soon as you leave school and begin work. Those who begin saving in their 20s saving $50 a month will end up with more money that those who started in their 40s.
  • Don’t retire early. People are living longer than ever before. Unless you are already rich, retiring early has at least three pernicious effects. First, your income stops and you begin drawing down your savings. Second, your pension and social security payments are much lower than if you wait. Third, you will spend more time as a retiree, forcing you to reduce spending to stretch your savings dollars.
  • After you retire from your main job and if you are physically able, find a paying job that will supplement your other income sources.
  • Find a way to cut costs. One of the best ways to reduce the cost of living during retirement is to be out of debt and that includes mortgage debt. It also pays, once you are empty nesters, to downsize the home. This has the effect of reducing taxes, utility and maintenance costs.

And once you are retired, get a copy of my book, Before I Go, so that you will be ready for the next stage on your journey.

10 Common Mistakes Made with Company Retirement Plans

Surveys say that most people don’t take full advantage of company sponsored retirement plans.
What are some of the most common mistakes?

1. Many people never participate at all, and others wait months or years to participate.
2. Failure to make enough of a contribution to obtain the full company match.
3. Failure to increase your contribution after getting a raise.
4. Failure to study the investment choices.
5. Putting too much of the money into company stock.
6. Failure to re-balance the portfolio on a regular basis.
7. Leaving the plan behind when changing jobs.
8. Failure to name a beneficiary.
9. Failure to review beneficiary information.
10. Cashing the plan out before retirement.

10 Mistakes Gen Y Makes with Advisors

1. Not Having an Advisor Help with Big Financial Decisions

Keep in mind that you are dealing with a financial advisor, not a stock broker.  If you can’t tell the difference you’re dealing with the wrong person.  Big financial decisions affect your plan, your investments and your future.  The role of a financial advisor is to advise you on all the important financial decision you make.

2. Not having a spending plan in place

As Dave Ramsey is fond of saying: every dollar should have a name.

3. Not “paying themselves” first rule

First pay yourself by putting some money aside.  If it’s hard , have it done automatically so you don’t have to do it yourself every payday.

4. The Ones who Make Less Money Can be Less Receptive to Advice

Poor people are poor for a reason, and that reason is often that they don’t want to take advice.

5. Not Appreciating their Long Time Horizon in Investments

The biggest asset that a young person has it time.  They may not have much money but the magic of compounding turns a small amount into a big amount over time.

6. Itching to Get Ahead Professionally

It takes time and patience to get ahead.  An advanced degree does not necessarily let you skip rungs on the ladder of success.

7. The Budget Cliche

If you don’t know where you’re money’s going it’s impossible to know where to economize.  There are several good computer programs that can help you keep track of where your money is going.

8. This Generation Struggles with Insurance

It’s the young professional who is most in need of insurance and who is apt to put off getting it until it’s too late.

9. Working with “Old School” Advisers

The old school advisor is really a stock jockey who doesn’t bother to listen to your needs but promises to “beat the market.”  This person is not an advisor, he just wants to manage your money.

10. Planning too far out

Too often people get a lengthy, expensive “financial plan” that projects the future 40, 50 or 60 years out.  That’s nonsense and a waste of time and money.  Simple plans of a few pages are better and should be reviewed annually and updated with new information.  Keep in mid the old saying: the map is not the territory.

Open a Roth IRA for Minors

Consider this example: If a child invests $2,000 in a Roth IRA each year from ages 13 to 17, that $10,000 could increase in value to almost $296,000 by age 65, according to research by  T. Rowe Price. That assumes the account earns a 7% annual rate of return. If that panned out, the account could provide tax-free income of $11,800 a year for 30 years.

Tax-free compounding of earnings inside an IRA is a beautiful idea — and a powerful one. The longer you can keep your money invested in a tax-free vehicle, the greater your wealth accumulation. What better way to accumulate a large amount of savings than to start during childhood? When tax-free compounding has more than 50 years to run its course, a relatively modest savings plan can produce substantial wealth.

There’s no minimum (or maximum) age to set up a Roth IRA. And there’s no requirement that the same dollars that were earned be used to fund the IRA. If your child earned money on a summer job and spent it on whatever kids spend money on these days,* there’s nothing wrong with using money provided by parents to establish the IRA. The child has to have earned income, though.

The major impediment to IRAs for children, especially young children, is the earned income requirement. An unmarried person must have earned income of his or her own to contribute to a Roth IRA. The income has to be compensation income, not investment income. And it has to be taxable compensation income.

That doesn’t mean your child has to actually pay tax on the income. If the total amount of income is small enough so your child doesn’t have to pay tax, that’s okay. But your child has to have the kind of income that would call for a tax payment if the amount were large enough.

You’re never too young to start thinking about retirement.

For most 20-somethings, the idea of retirement isn’t front and center. It isn’t even a glimmer.  But it ought to be.  This is especially true for young people today, many of whom believe that Social Security will not be there for them when they retire.  When you’re young the most valuable resource you have is time.

Time provides you with the power of compound interest.  Albert Einstein called it the “greatest invention of all time. ”  For example, a 25-year-old who starts saving just $600 a year could have $72,000 at age 65, nearly twice as much as someone who saves $1,200 a year beginning at 45, according to calculations by LearnVest, an online financial-planning service.

Retirement may be 40 years away, and your paycheck may small, you may have rent to pay and student loans to pay off, but saving even small amounts early on can make a big difference.  Many employers offer 401(k) plans that offer a company match, which is “free money” to the employee.   The money grows tax deferred, or if it’s a Roth plan it grows tax free.  These plans are often among the single biggest pools of funds that people have to draw on when they retire.   If you don’t work for a company that offers some kind of a retirement plan, start your own by contributing to an IRA or a Roth IRA.  The best time to begin was yesterday, the second best time it today.

 

Tools for getting out of debt

Getting out of debt is easy, stop spending and pay off your bills.  The overweight person gets very similar advice: eat less and exercise.  They are both pieces of good advice, but they rarely work all by themselves because we are creatures of habit, whether it’s spending or eating.  So here are my twin tools for helping you with the debt issue (for the dieting part, you’re on your own.)

First, get a copy of Dave Ramsey’s book    “The Total Money Makeover.”  It’s a virtual 12 step process designed to get you debt free and build wealth.  The book costs about $25.00 and is worth every penny.  Dave Ramsey has built a business around personal finance advice that includes books, a radio program and courses that are being offered throughout the country.  The course is offered by many churches and is both entertaining and filled with outstanding information.

Second, if you have a computer, get a copy of “Quicken.”  It is the number 1 selling personal finance software.  If you are in debt you have to know where your money is going before you can fix your problem.  Quicken allows you track every penny that you spend.  In addition it makes balancing your checkbook a snap and has other features that are useful once you begin to accumulate wealth.  The program costs less than $50.

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