Tag Archives: financial literacy

25 Personal Finance Improvement Strategies

By Barbara O’Neill, Ph.D., CFP®, Rutgers Cooperative Extension, oneill@aesop.rutgers.edu

The first month of the new year is a great time to help service members develop New Year’s resolutions; a.k.a., financial action plans. Take the time to review their progress toward future financial goals and make recommendations to enhance their overall financial security. Below are 25 personal finance improvement strategies to discuss with military families:

  1. Set Specific Financial Goals– Determine what you want, when you want it, and how much it costs (e.g., $14,000 for a car in 2020). Once the goal is specific, divide the time frame into the dollar cost to determine the required savings.
  2. Calculate Your Retirement Savings Need- Use a tool such as http://www.choosetosave.org/ballpark/ that includes factors such as age, life expectancy, sources of retirement income, and the value of existing savings (e.g., IRAs).
  3. Increase Retirement Savings– Save at least the amount of employer match and more, if possible, up to the IRS limit. Matched savings is “free money.” Savings of 1% more of pay can grow to thousands of additional dollars later.
  4. Live Below Your Means- Spend less than you earn and use the difference to reduce debt and/or save and invest for emergencies and future goals. Track expenses to see where money goes and adjust spending to free up cash.
  5. Build Liquid Cash Reserves- Calculate a liquidity ratio, a measure of the adequacy of emergency savings, by dividing liquid assets (from a net worth statement) by monthly household expenses. The ratio should be 3:1 or better.
  6. Pay Yourself First- Treat savings and investments with the same priority given to a mortgage, rent, or car loan payment. Save and invest automatically through an employer retirement savings plan and other automated deposits.
  7. Invest for Long Term Growth- Put history on your side. Past investment performance data show a higher return in stocks, or growth mutual funds that invest in stock, than for any other asset class (e.g., bonds) over the long term.
  8. Harness the Power of Compound Interest- Calculate the number of years to double a sum of money by dividing 72 by the rate of return (example: 72 ÷ 6% = 12 years). The longer and more frequently money compounds, the better.
  9. Keep It Simple– Consider a “total stock market” mutual fund that tracks U.S. companies and a “total international” fund that provides exposure to companies overseas and the TSP lifecycle (L) fund for “low maintenance” investing.
  10. Develop an Asset Allocation Strategy– Split money among asset classes. An example is 50% stocks, 30% bonds, and 20% cash assets. Keep the portfolio close to its target allocation and rebalance when target weightings shift.
  11. Keep Good Financial Records- Prepare a file folder for each stock or mutual fund owned. Save annual summary statements that list deposits and investment earnings to help calculate your capital gain or loss when shares are sold.
  12. Review Your Insurance- Contact an insurance agent to make sure you are adequately covering “big ticket” risks, such as liability, disability, health care expenses, loss of a breadwinner’s income, and destruction of your home.
  13. Revise Your Tax Withholding- Consider revising your W-4 form to increase take-home pay and minimize potential tax refund delays resulting from identity theft. Use the extra income to save and/or reduce debt.
  14. Maximize Tax Breaks – Consider strategies such as deposits to tax-deferred retirement savings plans, tax-free municipal bonds, tax credits and deductions, and long-term capital gains taxes on investments held more than a year.
  15. “Bunch” Itemized Tax Deductions– Shift payment of tax deductible items (e.g., charitable donations) from one calendar year to the next to be able to itemize every other year if you are close to the standard deduction limit amount.
  16. Calculate Your Net Worth– See where you stand financially at year’s end with a net worth statement. Subtract the amount that you owe (debts) from the value of everything you own (assets). The difference is your net worth.
  17. Take the Wealth Test- Use the formula from The Millionaire Next Door with two key factors: age and gross income. Multiply these numbers together and divide by 10. The result is what your net worth should at least be equal to.
  18. Shop Smart- Question your motives before spending money. Ask yourself “Do I really need this?” When you purchase a product or service, follow the “Rule of 3” and get price quotes from at least three stores or professionals.
  19. Borrow Smart- “Shop” at least three lenders before applying for credit. Compare the annual percentage rate (APR), various fees (e.g., late fee), and other features (e.g., rewards programs) and repay the amount owed quickly.
  20. Check Your Credit– Review your credit report annually from the central site that allows consumers to request free credit reports from the major credit bureaus (Experian, Equifax, and TransUnion): annualcreditreport.com.
  21. Get Educated About Money- Take time to learn about personal finance. Suggested learning methods are briefings, webinars, financial books or magazines, CNBC, and financial Twitter chats and websites.
  22. Plan Your Estate– Prepare key documents including a will, living will, and power of attorney. Remember that everyone has an estate plan: either one they prepare themselves or one established by their state of residence.
  23. Develop Financial Resilience – Build financial resilience with adequate savings, low household debt, marketable employment skills, and a social support system. Resilience is the ability to “bounce back” when bad things happen.
  24. Take Care of Your Physical Health- Practice good health habits (e.g., diet, physical activity) to decrease the frequency of having to spend money on doctor visits, prescription drugs, and other health care expenses.
  25. Think Positive- Believe in the saying “if it is to be, it’s up to me.” Positive people generally experience greater success than “naysayers” because they see a connection between what they do today and what happens in the future.

Measuring Your Financial Health

By Kristyn Jackson, LMFT and Jennifer Hunter, Ph.D., University of Kentucky Cooperative Extension Service

Have you ever heard someone discussing their “financial health?” Financial health refers to how well you are doing financially and is based on a number of factors. Much like you go to your family doctor for yearly check-ups, it is a good idea to perform a financial check-up from time to time.

Unfortunately, many families often find it overwhelming to measure their financial health because of all of the factors included. What further complicates measuring your financial health is the fact that financial advisors and firms often recommend different ways of doing so. You can use more subjective measures of financial health such as your personal satisfaction with your financial status, the amount of financial stress you experience, and how financially independent you feel. However, you can also measure your financial health through more concrete measures.

Capt. Pedro Rodriguez gives two thumbs up while running the 26.2 mile course of the Marine Corps Marathon Forward at Camp Leatherneck, Afghanistan Oct. 27. Rodriguez finished second with a personal record time of 2:47:11. This was Rodriguez's second marathon. (Photo by Sgt. Bobby J. Yarbrough)
Capt. Pedro Rodriguez gives two thumbs up while running the 26.2 mile course of the Marine Corps Marathon Forward. Photo by Sgt. Bobby J. Yarbrough

Provided below is an overview of the various measures that a financial advisor may suggest calculating in order to measure your financial health. It is a good idea to calculate these values on a fairly regular basis, such as the beginning of a new year. If you have questions, do not be afraid to reach out to a professional advisor who can answer them.

  • Liquidity ratio. Liquidity ratio refers to your ability to meet your necessary expenses when you are faced with an emergency such as an unexpected home repair or medical bill. It is recommended that you keep a 3 to 6 month emergency fund, meaning that an ideal ratio is between 3 and 6. To calculate this ratio: LIQUIDITY RATIO = CASH OR CASH EQUIVALENTS ON HAND / MONTHLY COMMITTED EXPENSES
  • Asset-to-debt ratio. This ratio compares your assets to your total existing liabilities. Liabilities include home loans, car loans, credit card debt, etc. It is always desirable to possess more assets than debt. To calculate this ratio: ASSET-TO-DEBT RATIO = TOTAL ASSETS / TOTAL LIABILITIES
  • Current ratio. The current ratio refers to your ability to meet short-term liabilities which include all of your debt repayments to be made in the current year. CURRENT RATIO = CASH OR CASH EQUIVALENTS/SHORT TERM LIABILITIES
  • Debt-service ratio. This ratio refers to the percentage of your income that is designated to debt repayment and the percentage of income remaining for other mandatory household expenses and savings. Lower ratios represent better financial management. DEBT SERVICE RATIO = SHORT TERM LIABILITIES / TOTAL INCOME
  • Saving ratio. The saving ratio is perhaps the easiest to calculate and will provide you with insight as to how well your finances are managed and how likely it is that you can achieve your saving goals. SAVING RATIO = MONTHLY SURPLUS / MONTHLY INCOME
  • Solvency ratio. This ratio refers to your ability to repay all existing debts using your assets in the case of an emergency. You may wish to use a net worth calculator prior to calculating this ratio. SOLVENCY RATIO = NET WORTH/TOTAL ASSETS

Do not worry if these ratios seem complicated. There are numerous resources available to you that can help you to understand what each of these ratios mean. What is important is that you are aware of what you need to be considering when measuring your financial health!

Being aware of your financial health will help you to meet your short-term and long-term financial goals while avoiding unreasonable amounts of debt. Financial experts recommend calculating your financial ratios on a yearly basis and making any adjustments to your spending and saving patterns that you deem necessary.

Contact Jennifer at jhunter@uky.edu

 

Personal Finance Virtual Learning Event

The Personal Finance team will host our third Virtual Learning Event June 14-16. This year, we’ll focus on Financial Fitness. Join us as we engage with learners in this 3-day interactive series of events.

Join the Personal Finance Team June 14-16 for a unique online learning opportunity.
Join the Personal Finance Team June 14-16 for a unique online learning opportunity.

Schedule of Events

Tuesday, June 14, 11 a.m.- 12:30 p.m. ET: What is Financial Fitness & How is it Measured? Dr. J. Michael Collins of the University of Wisconsin, Madison will present this session, using the findings from the research he has gathered on this subject. Dr. Collins studies consumer decision-making in the financial marketplace, including the role of public policy in influencing credit, savings and investment choices. His work includes the study of financial capability with a focus on low-income families. He is involved in studies of household finance and well-being supported by leading foundations and federal agencies. In 2015, Palgrave Macmillan released a book Collins edited called A Fragile Balance: Emergency Savings and Liquid Resources for Low-Income Consumers. His 90-minute webinar on June 14 will focus on financial fitness as a goal for many people, but achieving fitness in terms of money management may require a combination of financial education, coaching, and financial access. After reviewing the components of financial fitness, this session will provide an overview of measures of financial capability and well-being, as well as practical applications of program measures in the field. The session will include discussion, interactive polling and Q&A.

Wednesday, June 15, 11 a.m.-12:30 p.m. ET: Positive Personality Traits of Financially Fit PeopleDr. Martie Gillen will deliver this 90-minute webinar using data and research from psychology that tells us what traits are most commonly found in individuals who make positive financial decisions. Dr. Gillen is the Project Investigator for the Military Families Learning Network Personal Finance team and an Assistant Professor and Extension Specialist for the Department of Family, Youth, and Community Sciences, in the Institute for Food and Agricultural at the University of Florida. Her research interests include personal and family finance, behavioral economics, older adults, Social Security retirement benefits, employment, retirement planning, financial social work, food security, and innovative post-secondary education models. The first section of the webinar  on June 15 will include an overview of personality traits as well as a discussion of the research related to personality traits and personal finance. The webinar will conclude will suggestions for working with individuals while taking into account their personality and impact on their personal finance decisions. Participants will have an opportunity to take a personality trait quiz.

Thursday, June 16, 11 a.m.-12:30 p.m. ET: Wealth Building with Saving, Investing & Windfalls. Dr. Barbara O’Neill will lead this session. Dr. O’Neill is a financial resource management specialist for Rutgers Cooperative Extension, has been a professor, financial educator, and author for 35 years. She has written over 1,500 consumer newspaper articles and over 125 articles for academic journals, conference proceedings, and other professional publications. She is a certified financial planner (CFP®), chartered retirement planning counselor (CRPC®), accredited financial counselor (AFC), certified housing counselor (CHC), and certified financial educator (CFEd). Dr. O’Neill served as president of the Association for Financial Counseling and Planning Education and is the author of two trade books, Saving on a Shoestring andInvesting on a Shoestring, and co-author of  Investing For Your Future,Money Talk: A Financial Guide for Women, and Small Steps to Health and Wealth.  She earned a Ph.D. in family financial management from Virginia Tech and received over three dozen awards for professional achievements and over $900,000 in funding for financial education programs and research. Her webinar on June 16 will focus on ways that ordinary people with average incomes can grow wealthy over time. The first section of the webinar will discuss time-tested investment and financial management strategies and the second section will describe dos and don’ts for handling a financial windfall. Resources for each topic will be shared including the Rutgers Cooperative Extension Financial Fitness Quiz: http://njaes.rutgers.edu/money/ffquiz/.

Thursday, June 16, 1-1:30 p.m. ET: 2016 MFLN PF VLE Wrap Up This half-hour event is designed to allow participants to share their own experiences from the 3 previous webinars, and to share findings from the assignments given during those sessions. Drs. Collins, Gillen and O’Neill be be on hand to guide this interactive discussion. If you are interested in sharing your experiences during this session, please email me at mollyh2@extension.org.

We hope you’ll join us for 3 days of interactive and engaged learning. For more information, click here.

Steps to Financial Freedom

Contribution by Molly Herndon and Carolyn Bird

Digging out of a mountain of debt can seem like an impossible task, and many resist asking for help. Service members may feel anxious about their options or be unaware of the wide range of services provided to them on base and, increasingly, online. As a PFM you may ask yourself– how do I help a service member find the motivation to stick with a financial management plan? Over the next few weeks, we will be going back to the basics by outlining steps and strategies you can use to help your clients who are looking for financial guidance to get on track.

Step 1: Assess the Situation
The first step is to assist the service member in getting the finances under control by assessing the current financial situation. The service member, and you, must know what you’re up against before you can create a plan to get out of the cycle of debt. Using a net worth calculator

Depending on the specific circumstance, you may recommend your client consider consumer credit counseling, debt consolidation, refinancing or transferring balances to get a handle on existing debt. Each of these strategies comes with advantages and disadvantages. It is important that the client be aware of and ask the lender for an explanation of any increase in the number of payments and interest rates or fees. A clear explanation of costs or extended periods of indebtedness will help the client to evaluate whether the plan is in their best financial interest. Credit repair agencies often promise to remove negative credit information for a fee. Be sure your clients know that the only legal method of improving a credit score is through a history of on-time payments or the removal of false negative information. Steering clients away from credit repair agencies is good practice, saving your clients valuable time and hard earned money.

These initial meetings may be a good time to suggest creating a monthly budget tracker. Tracking every penny that comes in and goes out is the only effective measure toward changing spending habits. Providing clients with an easy-to-use worksheet, like this one, may help clients get started with this new habit.

Step 2: Find the Motivation
What’s really important is what happens after the service member leaves your office. One way to motivate might be to show just how much the debt truly costs. Using the credit card calculator on myfico.com, I experimented with a balance of $3,000 at an interest rate of 18 percent and payments of $75 a month. Guess what? This debt costs $509 a year! Before you run the calculator, ask the service member about favorite hobbies or something he or she would like to buy. Run numbers on the calculator and show the service member just how much the debt at minimum payments is costing them each year. Ask if they wouldn’t rather use that $509 toward that hobby or purchase.

Step 3: Recruit Your Team!
While PFMs are part of the service member’s team for financial fitness, the most important team member is the service member’s spouse. Discuss with the service member how he will discuss this with his spouse to get her motivated too. Ask about the spouse’s favorite things and help the service member devise an approach that rewards both of them for working together toward a financial goal.

These are just the initial steps in working toward financial freedom. Later we will discuss saving, investing, and raising financially fit kids. There are many approaches to debt solution. What strategies have you found works well in helping service members turn their financial situations around?