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It started in the Garage…

“Ehlers, Carol”

Today’s guest blogger is Carol Ehlers, an ISU Extension Family Finance specialist helping Northwest Iowans make the most of their money.

It usually happens in threes, like what I experienced in my garage:

  1. A mother-daughter talk about college and her “minimalist” friends,
  2. Reading great summer books on money and happiness, and
  3. Cleaning around the stuff in our garage.

Joshua Becker, author of “The More of Less,” discovered that there might be more to life while cleaning his garage. It was so packed with rarely used items he couldn’t park the family car inside. His ‘Ah-Ha Moment’ was having to choose between playing ball with his son or spending time with stuff in the garage.

  • What is the ‘More of Less’? Becker sees it as “keeping things we most value and removing anything that distracts us from what we value.”
  • What does it look like? “The More of Less” goes beyond everyday ideas about decluttering (which typically involves placing stuff in three boxes: keep, throw, and give away). Instead “we decipher what possessions we need to accomplish our life role (a farmer needs different supplies than a schoolteacher) and then we refuse to allow anything to keep us from fulfilling our purpose.”
  • What questions do I ask? The downsizing process informs my vision for my future. Do I really need this object? Why or Why Not? What principles should guide me in deciding what I keep and what I get rid of?
  • How does this impact money?  Once you start spending less money shopping, you may be freed up to consider a career change, to work toward getting out of debt, or to support a cause you care about.

Becker shares personal experiments specific to values downsizing:

  • Pride in Your Ride.  Consider the high-impact money decision of buying a vehicle through the “More of Less” values filter.  Is your instinct to buy new? to buy a status car?  Another option is to spend less money to purchase a modest, serviceable car and use the money saved for a future need like college expenses. See “Money Mechanics- Owning A Car.” https://store.extension.iastate.edu/Product/4899
  • Project 333.  Check out Courtney Carver’s strategy for simplifying her morning routine by downsizing to thirty-three items of clothing during a three-month experiment. Her strategy (https://bemorewithless.com/project-333/), saves money, time, and stress.
  • Keeping the Relationship #1.  Show that you value people more than possessions by preventing conflict about stuff from separating your family. See “Who Gets Grandma’s Yellow Pie Plate.” https://www.extension.umn.edu/family/personal-finance/decision-making/who-gets-grandmas-yellow-pie-plate/

I’m back cleaning our garage and thinking ‘Maybe I don’t need to own all this stuff!’ I’m starting my own “The More of Less” personal experiment over the next 12 weeks.

Barb Wollan

Barb Wollan

Barb Wollan's goal as a Family Finance program specialist with Iowa State University Extension and Outreach is to help people use their money according to THEIR priorities. She provides information and tools, and then encourages folks to focus on what they control: their own decisions about what to do with the money they have.

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Paying for College with a 529 Plan

Last week a college student emailed a question about using money from his 529 Plan to pay for college costs, including room and board.  His question prompted this blog entry.

First some background: Qualified Tuition Programs, commonly known as “529 Plans” after the section of IRS code that created them, offer a great way to save for college with tax benefits.  When it comes time to take money out of your account to cover college costs, though, it’s critical to follow IRS regulations in order to avoid penalties.

If you are a student or have dependents who are students in college or nearing college, you may be aware that money you spend on tuition and required books makes you eligible for a really valuable federal income tax credit.  Most college students are eligible for the American Opportunity Credit, which can be up to $2,500 per student; in some cases eligibility rules mean that the Lifetime Learning Credit, which is smaller but still a nice credit, must be used.  The more you spend on tuition and books, the higher your tax credit will be, up to a limit of $4,000 in expenses.  The key, though, is that you can’t count any tuition or book expense that was paid for with money from scholarships or grants, or from tax-advantaged accounts.

Therefore, it’s not generally a first choice to use money from your 529 plan to pay for your entire tuition bill and books.  If you do, you won’t be able to claim that great tax credit.  Instead, try to use money from your regular savings or use student loan money to pay for your tuition (after any scholarships and grants that may cover part of the tuition).

“But I have this money saved for college in my 529 plan! Are you telling me I shouldn’t use it?”  No, that’s not what I’m saying.  The good news is that funds from your 529 plan can be used for room and board! So your first choice should be to use 529 plan funds for your room and board expenses, while using money from ordinary accounts to pay for tuition.

How much can I withdraw from my 529 plan for room and board?  As mentioned earlier, you want to stay within the rules for Qualified Distributions; those rules are spelled out in chapter 8 of IRS Publication 970.  There’s no set maximum dollar amount, since costs vary at colleges across the nation. Instead, the rules refer you to the room and board allowance set by your school for financial aid purposes.  You can make qualified withdrawals for room and board up to that amount, BUT it can’t be more than what you actually spent.  Therefore some suggestions:

  1. Look up your school’s room and board allowance and divide it per semester so you have a maximum figure for the current tax year.
  2. Keep track of your expenses so you can prove how much money your spend on room and board.

In addition to tuition, books, and room and board, you can also make qualified 529 plan withdrawals for special needs services, and for a computer and related equipment that is to be used primarily by the student for educational purposes.  See Publication 970 for details.

To learn more about Iowa’s 529 plan, go to www.collegesavingsiowa.com 

 

Barb Wollan

Barb Wollan

Barb Wollan's goal as a Family Finance program specialist with Iowa State University Extension and Outreach is to help people use their money according to THEIR priorities. She provides information and tools, and then encourages folks to focus on what they control: their own decisions about what to do with the money they have.

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College saving: more than money

I can personally testify to the financial benefit of saving for my children’s education: I started monthly automatic transfers into their college savings accounts when they were young, and at the same time helped them establish a habit of saving a portion of their allowance each month.  My daughters reaped the financial benefits of that saving during college, and continue to benefit as young adults without school loans to repay.

I didn’t know it, but my children benefited in other ways — yours can, too.  Here’s why: children who have savings that is specifically set aside for their education and career goals actually make greater academic progress than children who do not, all other things being equal.  They do better in school, are more likely to finish high school, and are more likely to attend and complete an educational program after high school.

Even though I didn’t know about this research back then, it makes sense to me.  Having a savings account means we’re thinking about the future. It creates a vision for steps beyond high school.  It builds hope and a belief that they can do it, and is a motivator. Having a vision for the future is extremely powerful.

Having savings doesn’t guarantee school success, of course, but it makes it more likely. The benefit of savings is especially strong for children in lower-income families. Research also shows that even small savings makes a difference – even amounts less than $500 have an impact.  Only a small part of the benefit comes from the actual monetary value in the account; most of the benefit results from expanding young people’s vision for their future.

Think of the children in your life. Over the summer, families may be purposeful about encouraging library visits or enrolling children in learning-oriented camps.  Those are great ideas. But it turns out those aren’t the only ways to boost academics!  Build your child’s vision for the future by starting or adding to an education savings account in his or her name. Get them involved too!

Barb Wollan

Barb Wollan

Barb Wollan's goal as a Family Finance program specialist with Iowa State University Extension and Outreach is to help people use their money according to THEIR priorities. She provides information and tools, and then encourages folks to focus on what they control: their own decisions about what to do with the money they have.

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Living Independently following Graduation

Graduation from high school and college is a milestone event for many families in May. Parents might feel that their role as a financial provider is nearing it’s end, but recent data indicates that youth are living at home longer.

Reasons for this trend extend beyond financial reasons. The Boston Federal Reserve report includes a willingness on the part of parents to be more supportive and a trend toward larger homes as additional factors.

Being supportive can extend beyond putting a roof over a young person’s head and food in the refrigerator. It can include teaching the value of setting aside funds earned today for the future.

MyRA  might be a place to start. If a student is employed part-time or in a temporary summer job, they can save in this Roth account which is low risk and pays a higher return than a pass book savings account.  Because it is a retirement account, it isn’t a factor in determination of student financial aid and the rules make it less likely to be raided for spur of the moment expenses. You are expected to leave the money in the account for five years before making a withdrawal of contributions, a time frame that might work well for a high school graduate who intends to earn a college degree and might need a cash reserve when they reach the next milestone.  Introduction to retirement savings also makes sense for a generation that is less likely to see benefits from pensions and social security. Learn more at MyRa.gov

Joyce

 

Joyce Lash

Joyce Lash

Joyce Lash is a Human Sciences Specialist in Family Finance who wants to keep you ahead of the curve on financial information.

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Social Security Matters – at any age

April is National Social Security Month.  It’s really fitting that they chose April, because April is also Financial Literacy Month.  And understanding your Social Security situation is an important part of Financial Literacy.

If you’re under 40, you may be surprised to consider that you need to pay attention to Social Security. (Even some people under 60 may be surprised at that idea!).  Now I’m not suggesting you need to fully understand Social Security – that’s a tall order.  But you do need to be aware of your own social security record and what it means.

The key your record is found at my Social Security.  Here you can activate your own on-line account so that you can log in any time; this lets you verify the accuracy of your earnings record, learn what you can expect in retirement or disability benefits, order a replacement social security card, and more.

Why it matters. On average, Social Security replaces approximately 40 percent of pre-retirement earnings. To enjoy a comfortable retirement, most people will also need income from other sources — like pensions, savings, and investments. Understanding your social security projections can help you make informed plans for your own retirement.

Throughout the month of April, the Social Security Administration will boost its outreach through traditional media and social media, including a Facebook Live Chat:

Social Security will participate in a Facebook Live Chat, hosted by USA.gov, on April 20, 2017, at 7:00 p.m. ET. The public may ask questions via livestream about the “5 Steps Toward Financial Security.”

To participate, follow USA.gov and Social Security on Facebook.

NOTE: some young adults may be skeptical, questioning whether Social Security will still be around by the time they retire.  While Social Security will likely change over the next 2-4 decades, you will not find any experts who believe it will disappear.  Understanding your situation under current law will help you understand policy changes as they are proposed and enacted.  No matter your age, it’s smart to activate your Social Security account and see what it tells you.

Barb Wollan

Barb Wollan

Barb Wollan's goal as a Family Finance program specialist with Iowa State University Extension and Outreach is to help people use their money according to THEIR priorities. She provides information and tools, and then encourages folks to focus on what they control: their own decisions about what to do with the money they have.

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Start the Finance Conversation with your Aging Parents (part 2)

As an adult child who happens to be in the field of family finance, I knew it was necessary to start the conversation with my parents about their end-of-life wishes. I also needed to know where the essential papers were located in case of a crisis.

Essential papers include:

  • Insurance policies
  • Wills
  • Durable powers of attorney for finances and health care
  • Burial plans
  • Where the safety deposit box is, who has the right to open it, and the location of the key
  • Where the birth and marriage certificates are kept, along with…
    • Military service and Social Security records
    • Usernames/passwords to online accounts
    • Names of financial advisors
    • Retirement benefits
    • And investment and banking accounts

Whew! That is quite a list! It may take a while to have a conversation about and to gather all these items, but doing so helps adult children know their parents’ wishes and what is expected when you have to step into a decision making role.

To start today, sign up for a Finances of Caregiving series near you. Or call your county ISU extension office and ask for the publication “Legal Issues in Later Life.” You could use it to start a family conversation. Whatever you do, get the conversation started today.

Guest Blogger: Sandra McKinnon, Human Sciences Specialist

 

Joyce Lash

Joyce Lash

Joyce Lash is a Human Sciences Specialist in Family Finance who wants to keep you ahead of the curve on financial information.

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Start the Finance Conversation with your Aging Parents (part 1)

It is wise to plan ahead and anticipate situations our aging parents may face. As an adult child, it may be emotionally difficult to talk to our parents about death, disability, chronic illness and incapacity, but making financial decisions before a crisis has benefits:

  • There is less emotion
  • Disagreements among siblings may be reduced
  • You are not making decisions in the middle of financial upheaval

It’s a good idea to start the conversation before our parents are 60 years old. If you are an aging parent, start the conversation now with your adult children.

Three ways to start the conversation:

  • Raise the issue when an event occurs: a neighbor or friend is in the nursing home or has been hospitalized.
  • Share your own wishes and then ask your family what they want.
  • Organize a family meeting

Ideally, in a family meeting, everyone in the immediate family participates, even if joining in by phone or online. It is important to respect your parents’ privacy. Parents can decide how much detail they want to share but the goal is to know their wishes and where the essential papers are should a crisis arise.

Guest Blogger: Sandra McKinnon, Human Sciences Specialist, Family Finance

Joyce Lash

Joyce Lash

Joyce Lash is a Human Sciences Specialist in Family Finance who wants to keep you ahead of the curve on financial information.

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The Match: Is it enough?

If your employer matches your contributions to a retirement plan, then it is smart to contribute at least that much.  For example, if your employer matches your contributions up to 3%, then it’s smart to contribute at least 3% of your income. If you don’t, you’re turning down part of your paycheck.

Does that mean that if you’re maximizing your employer match, you’re saving enough for retirement? Not necessarily.

Your employer’s decision about how much they’ll match is not based on how much investment is needed to keep you secure. That decision is up to you.

Only you can decide how much to save toward your future.  Only you can decide to give up certain spending now, in order to have a more secure lifestyle in the future.  Our earlier post describes tools for assessing your progress toward a secure retirement.

Employers who offer a match typically match employee contributions up to 3-5% of income.  If it is a dollar-for-dollar match, then making full use of a 3% match means a total of 6% of your income is being put toward retirement (3% from you plus 3% from your employer).

Based on typical life expectancy and investment returns, experts now estimate that lifelong savings of approximately 15% of income is needed in order to provide retirement income equivalent to pre-retirement income. Of course, workers who will have other sources of retirement income (such as rental income or a traditional pension like IPERS) can achieve full income replacement with lower savings rates.  On the flip side, some workers may decide they don’t need full income replacement, and will be satisfied with a lower retirement income; a lower savings rate may work for those workers as well.

Bottom line? Planning for a secure retirement is up to you. Don’t rely on your employer’s match to determine how much you will save!

Barb Wollan

Barb Wollan

Barb Wollan's goal as a Family Finance program specialist with Iowa State University Extension and Outreach is to help people use their money according to THEIR priorities. She provides information and tools, and then encourages folks to focus on what they control: their own decisions about what to do with the money they have.

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Roth vs. Traditional – Understand your Options

If stepping up your retirement planning is part of your new year’s resolution, one key is to understand the pros and cons of traditional tax-deferred accounts in comparison with Roth accounts.  Individual Retirement Accounts (IRAs) come in both “flavors,” and many employer accounts have both options as well.

The differences between Traditional and Roth affect your retirement in two main ways:

  1. How much money you’ll be able to spend in retirement after taxes; and
  2. Flexibility of withdrawals in retirement (this is affected in a couple of different ways).

Whether you are saving for retirement or are already retired and need to decide when to withdraw from which account, understanding the differences matters.  To better understand how those differences play out and how you might put them to work for you, ISU Extension and Outreach has a new on-line mini-lesson (20 min).  It’s part of our collection of retirement resources, which includes mini-lessons on five other topics and sixteen printable publications.

Barb Wollan

Barb Wollan

Barb Wollan's goal as a Family Finance program specialist with Iowa State University Extension and Outreach is to help people use their money according to THEIR priorities. She provides information and tools, and then encourages folks to focus on what they control: their own decisions about what to do with the money they have.

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Year-End Statements = Opportunity

In the last ten days I have received year-end statements from all three of my retirement accounts.  The arrival of these financial statements presents great reminder to do a retirement check-up.  Now is the time to do a calculation to see whether your retirement investments are on track to give you a comfortable retirement.

There are many retirement calculators on-line; most investment firms have them.  They’re not all the same; different calculators present information in different ways, using different assumptions and perhaps emphasizing different aspects of the situation.

Calculators often have built-in assumptions about things like inflation, life expectancy, or investment return.  With that in mind:

  • Try to identify the key assumptions built into each calculator.
  • Use a variety of on-line calculators, rather than sticking with just one. Looking at the different responses you are given by different tools will make you familiar with a wider range of possibilities.

Most on-line calculators are commercial; they are posted by companies that have products or services to sell. Keep that sales motive in mind as you review the information you receive.  Occasionally, a tool will subtly steer consumers toward a particular type of product.  By being aware, you can avoid making decisions based on biased information.

Fortunately, there are free non-commercial retirement calculators available on-line as well. Here are two provided by non-commercial organizations:

  • Ballpark E$timateThis tool is, as its name suggests, a ballpark estimate.  It doesn’t go into great detail.  It is especially appropriate for people who are a long way from retirement, don’t have detailed retirement goals, but just want to be sure they’re on track.
  • Department of Labor Retirement Calculator This tool provides detailed on-line worksheets for examining retirement expenses as well as your income.  It is particularly useful for those who are fairly close to retirement and ready for more detailed planning.

If you work with a financial adviser, he or she plays a key role in your retirement planning; even then, however, it is wise to take an active role in the planning.  Your adviser will be the first one to tell you that you must be the one to make the final decisions.

Barb Wollan

Barb Wollan

Barb Wollan's goal as a Family Finance program specialist with Iowa State University Extension and Outreach is to help people use their money according to THEIR priorities. She provides information and tools, and then encourages folks to focus on what they control: their own decisions about what to do with the money they have.

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