MONEY Ask the Expert

How to Help Your Kid Get Started Investing

Investing illustration
Robert A. Di Ieso Jr.

Q: I want to invest $5,000 for my 35-year-old daughter, as I want to get her on the path to financial security. Should the money be placed into a guaranteed interest rate annuity? Or should the money go into a Roth IRA?

A: To make the most of this financial gift, don’t just focus on the best place to invest that $5,000. Rather, look at how this money can help your daughter develop saving and investing habits above and beyond your contribution.

Your first step should be to have a conversation with your daughter to express your intent and determine where this money will have the biggest impact. Planning for retirement should be a top priority. “But you don’t want to put the cart before the horse,” says Scott Whytock, a certified financial planner with August Wealth Management in Portland, Maine.

Before you jump ahead to thinking about long-term savings vehicles for your daughter, first make sure she has her bases covered right now. Does she have an emergency fund, for example? Ideally, she should have up to six months of typical monthly expenses set aside. Without one, says Whytock, she may be forced to pull money out of retirement — a costly choice on many counts — or accrue high-interest debt.

Assuming she has an adequate rainy day fund, the next place to look is an employer-sponsored retirement plan, such as a 401(k) or 403(b). If the plan offers matching benefits, make sure your daughter is taking full advantage of that free money. If her income and expenses are such that she isn’t able to do so, your gift may give her the wiggle room she needs to bump up her contributions.

Does she have student loans or a car loan? “Maybe paying off that car loan would free up some money each month that could be redirected to her retirement contributions through work,” Whytock adds. “She would remove potentially high interest debt, increase her contributions to her 401(k), and lower her tax base all at the same time.”

If your daughter doesn’t have a plan through work or is already taking full advantage of it, then a Roth IRA makes sense. Unlike with traditional IRAs, contributions to a Roth are made after taxes, but your daughter won’t owe taxes when she withdraws the money for retirement down the road. Since she’s on the younger side – and likely to be in a higher tax bracket later – this choice may also offer a small tax advantage over other vehicles.

Why not the annuity?

As you say, the goal is to help your daughter get on the path to financial security. For that reason alone, a simple, low-cost instrument is your best bet. Annuities can play a role in retirement planning, but their complexity, high fees and, typically, high minimums make them less ideal for this situation, says Whytock.

Here’s another idea: Don’t just open the account, pick the investments and make the contribution on your daughter’s behalf. Instead, use this gift as an opportunity to get her involved, from deciding where to open the account to choosing the best investments.

Better yet, take this a step further and set up your own matching plan. You could, for example, initially fund the account with $2,000 and set aside the remainder to match what she saves, dollar for dollar. By helping your daughter jump start her own saving and investing plans, your $5,000 gift will yield returns far beyond anything it would earn if you simply socked it away on her behalf.

Do you have a personal finance question for our experts? Write toAskTheExpert@moneymail.com.

TIME Saving & Spending

Here’s Exactly How You Waste $1,700 Every Year

Money in jeans pocket
Image Source—Getty Images

If you do this, you might as well be lighting a pile of money on fire

Traffic congestion isn’t just a frustrating part of commuter life; it’s expensive. A new report finds that every household with a car-commuting member loses $1,700 a year in time and gas burned thanks to bumper-to-bumper traffic.

If you think that’s bad, it’s going to get worse: Researchers predict that annual cost will soar to $2,300 by 2030. Between now and then, the total tab adds up to $2.8 trillion.

The Centre for Economics and Business Research found that last year alone, wasted time and gas from sitting in traffic cost us $78 billion, and it warns that we’ll face greater congestion in the future because our population is growing and we’ll buy more cars, adding to the rush-hour standstill. (The study was commissioned by INRIX, a company that makes traffic-navigation software.)

Researchers say traffic jams also generate indirect costs. The group estimates that $45 billion worth of costs incurred by freight stuck in traffic gets passed along to consumers, and the carbon from the gas we burn has an annual cost of $300 million.

An expanding population and economy are the main culprits, says INRIX CEO and cofounder Bryan Mistele. More people and a higher GDP make car ownership more ubiquitous and more affordable.

And while you might think recent decreases in the price of gas might help, researchers say this actually hurts our traffic prospects in the long run: Cheaper gas means people are more willing to plunk down the money for a car and more likely to get behind the wheel, rather than considering alternatives like consolidating trips or carpooling. This, of course, means more vehicles clogging our roads at any given time.

According to the American Automobile Association, idling burns about a gallon of gas an hour even if you don’t go anywhere. So, what can the average commuter do?

Unfortunately, the answer for many right now is “not much.” Mistele suggests that in-car software or smartphone apps can help by giving drivers real-time congestion information and suggesting alternate routes. (That’s true, but sometimes even an alternate route will leave you staring at brake lights as the clock ticks.) Workarounds like alternative work hours are telecommuting can help, if you’re one of the lucky few who has that kind of job flexibility, but many of us don’t. Alternatives like public transportation, walking or biking will work for some, but will be inconvenient for anybody trying to haul a little league team or a warehouse club-sized package of paper towels across town.

Along with trying to consolidate trips and carpooling, the AAA recommends resisting the temptation to speed up as soon as there’s a bit of a break, then jamming on your brakes again a minute later. “It takes much more fuel to get a vehicle moving than it does to keep it moving,” the group advises, so try to keep a slow and steady pace if you can. Get the junk out of your trunk and remove unused third-row seating to lighten your load and improve your mileage.

MONEY Saving

How Can I Save More?

Financial planning experts share easy ways to trick yourself into setting more money aside for your future.

MONEY pension benefits

California Judge Rules That There’s Nothing Sacred About Pension Promises

A bankruptcy judge rules that bondholders are on equal footing with pensioners in California, sending tremors through the cash-strapped pension world.

In a shot heard round the pension world, a California judge has ruled that in municipal bankruptcies, public employees are no more protected than bondholders. The ruling opens the door for financially strapped towns across the state to cut pension obligations by filing for bankruptcy.

This is just the latest blow to public pensioners. A federal judge ruled similarly in Detroit. The giant California Public Employees’ Retirement System had argued as part of the closely watched case in Stockton, Calif., that different laws applied and required that public pensioners in California be paid in full before anything went to creditors.

But U.S. Bankruptcy Judge Christopher Klein decided against CalPERS, an influential institution that has been leading efforts to preserve defined-benefit pensions nationwide. The Stockton decision, coupled with rulings like the one in Detroit, has public pensioners in every struggling municipality across the country fearing for their retirement security.

CalPERS essentially argued that it was above bankruptcy law because of its statewide charter. For its part, Stockton wants nothing to do with reneging on promises to police and other public employees, arguing that they would leave and the town would not be able to function. But Judge Klein ruled that public pensions are just another contract, and adjusting contracts is what bankruptcy is all about. He came down on the side of Franklin Templeton Investments, a mutual fund company that had about $36 million of Stockton’s debt.

Like many private businesses in decades past, Stockton and other municipalities lavished unrealistic pension guarantees on employee unions while times were booming. The private sector began its reckoning first as autoworkers and airline employees, among others, were forced to take benefit concessions. Now teachers, police and other public employee unions are feeling the sting of flagging finances—part of the fallout of the Great Recession.

The Stockton ruling is a harsh reminder of how frail the retirement system in the U.S. has become. Scores of both private and public pensions are underfunded, and Social Security is scheduled to become insolvent in 2033. The system is not going to disappear. But change will come and almost certainly result in benefit cuts for some. Young workers are especially vulnerable because they have not paid much into the system yet and have many years left to save for themselves. So take a cue from the Stockton case and start saving now.

 

MONEY 401(k)s

Here’s the Least Understood Cost of a 401(k) Loan

401(k) loans aren't always a terrible choice. But make sure you keep saving at the same rate during the loan payback period.

A loan from your 401(k) plan has well-known drawbacks, among them the taxes and penalties that may be due if you lose your job and can’t pay off the loan in a timely way. But there is a subtler issue too: millions of borrowers cut their contribution rate during the loan repayment period and end up losing hundreds of dollars each month in retirement income, new research shows.

Academics and policymakers have long fixated on the costs of money leaking out of tax-deferred accounts through hardship withdrawals, cash-outs when workers switch jobs, and loans that do not get repaid. The problem is big. Some want more curbs on early distributions and believe that funds borrowed from a 401(k) should be insured and that the payback period after a job loss should be much longer.

Yet most people who borrow from their 401(k) plan manage to pay back the loan in full, says Jeanne Thompson, vice president of thought leadership at Fidelity Investments. A more widespread problem is the lost savings—and decades of lost growth on those savings—that result when plan borrowers cut their contribution rate. About 40% of those with a 401(k) loan reduce contributions, and of those a third quit contributing altogether, Fidelity found.

To gauge the impact, Fidelity looked at two 401(k) investors making $50,000 a year and starting at age 25 to save 6% of pay with a 4% company match. Fidelity assumed that at age 35 one investor stopped saving and resumed 10 years later. At the same age, the other investor cut saving in half and resumed five years later. Both employees earned inflation-like raises and the same rate of return (3.2 percentage points above inflation). At age 67 they began drawing down the balance to zero by age 93.

The investor who stopped saving for 10 years wound up with $1,960 of monthly income; the investor who cut saving in half for five years wound up with $2,470 of monthly income. Had they maintained their savings uninterrupted each would have wound up with $2,650 of monthly income. So the annual toll on retirement income came to $2,160 to $8,280.

Nearly one million workers in a Fidelity administered 401(k) plan initiated a loan in the year ending June 30, the company said. That’s about 11% of all its participants and part of rising trend, the company says. The typical loan amount is $9,100 unless the loan is to help with the purchase of home—in that case the typical amount borrowed is $23,500.

These figures are generally in line with data from the Employee Benefit Research Institute, which found that the typical unpaid loan balance in 2012 was $7,153 and that 21% of participants eligible for a loan had one outstanding. The loans were relatively modest, representing just 13% of the remaining 401(k) balance.

Workers change their contribution rate for many reasons, including financial setbacks and a big new commitment like payments on a car or mortgage. But cutting contributions to make loan payback easier may be the most common reason—and the least understood cost of a 401(k) loan.

MONEY Investing

Why We Feel So Good About the Markets—and So Bad—at the Same Time

Investor and retirement optimism is at a seven-year high. Yet most people believe their personal income has topped out. What gives?

Investors are feeling better about the markets than at any time since the financial crisis, a new poll shows. But most also believe they have topped out in terms of earning power, and that the Great Recession continues to weigh on their finances.

Buoyed by stronger GDP growth, record high stock prices, and a falling unemployment rate, investors in the third quarter pushed the Wells Fargo/Gallup Investor and Retirement Optimism index to its highest mark since December 2007. Yet 56% of workers expect only inflation-rate pay raises the rest of their career, and half believe they are destined to end up living on Social Security benefits.

“At the macro level, people are feeling pretty good,” says Karen Wimbish, director of Retail Retirement at Wells Fargo. “But at the personal level, the Great Recession left a deeper wound than a lot of us realize.” The average worker believes that wage growth, which has been stagnant for decades, won’t rebound before they retire. This feeling is especially acute among the upper middle class, those making more than $100,000 a year.

The gloom is partly attributable to the national discussion about wage inequality and some evidence that only the top 1% is getting ahead. It may also reflect a sense that the U.S. is losing ground to the faster growing developing world and experiencing an inevitable relative decline in standard of living.

The Federal Reserve has been battling anemic growth for seven years through an aggressive stimulus program that includes rock-bottom short-term interest rates. This week, the two Fed governors most outspoken and critical of this policy confirmed that they would retire next year, essentially putting the Fed all-in on a growth and jobs agenda with diminishing concern over inflation and underscoring the sense of stagnation so many feel.

Most investors polled (58%) said they are doing about as well or worse than five years ago. Similarly, 63% said they are saving about the same or less than five years ago. These figures are essentially unchanged from two years ago, suggesting that investors have not made much financial headway in the recovery. Roughly half said they are still feeling the effects of the recession.

“Is it real?” Wimbish says. “Or is it emotional?” If our prospects are really so dire, how do you explain record high stock prices, strong quarterly growth, a pickup in consumer borrowing, and an improving jobs picture?

Whatever is causing the gloom, one result is that nearly a third of investors continue to shun the stock market. Those with less than $100,000 in assets avoid stocks at twice the rate as those with more than that level of savings. Arguably, those with fewer assets are precisely the ones who need to be in stocks to take advantage of their superior long-run gains and build a nest egg.

They may be worried that they have missed the rally and that it is too late to get in. But the overriding concern—expressed by 60%—is that stocks are just too risky. So as the average stock has more than doubled from the bottom and recovered all its losses, and as those who remained true to their 401(k) contribution plan through thick and thin have become flush with gains, the truly risk averse have lost valuable time. Seeing this now may be part of what makes them so glum.

TIME Saving & Spending

Young Adults Have Basically No Clue How Credit Cards Work

Close up of teenage girl texting on mobile in bedroom
Cultura/C. Ditty—Getty Images

Cause for concern?

Almost two-thirds of young adults today don’t have a credit card, but maybe that’s for the best, given their sweeping lack of know-how about this common financial tool.

Although Americans of all ages are less reliant on debt since the recession, millennials are far and away the most credit-averse age group. Bankrate finds that, among adults 30 years old and older, only about a third don’t have any credit cards at all. New research from Bankrate.com finds that 63% of millennials, defined as adults under the age of 30, don’t have any credit cards. Among those who do, 60% revolve balances from month to month, and 3% say they don’t bother to pay at all — more than any other age group.

There’s a good possibility that these young adults aren’t irresponsible, though, just misinformed. BMO Harris Bank recently conducted a survey that found almost four in 10 adults under the age of 35 think carrying a balance improves your credit score (it doesn’t). And roughly one out of four say they don’t check their credit score more than once every few years. Perhaps that’s because a third of them think checking your credit score hurts your credit (again, it doesn’t). BMO found that 25% of young adults don’t know even know what their credit score is.

And young adults also think it takes much less to get a good credit score. BMO finds that, overall, most Americans think a score of 660 or higher is a “good” score. In reality, that may have been true pre-recession, but it isn’t anymore. BMO says a good score is one that falls in the 680 to 720 range. Millennials, though, believe than anything above a 625 means you have good credit — a misconception that could cost them in the form of higher interest rates on credit cards and loans.

Millennials are also more likely than any other age group to think that store credit cards don’t count towards your score and that the credit card companies control their scores.

In reality, it’s up to the individual to maintain their credit score, and if millennials continue along not bothering to learn the essentials of credit and how to use it responsibly, they could end up paying for it in the form of lost borrowing opportunities or higher interest rates, Jeanine Skowronski, Bankrate’s credit card analyst, warns in a statement.

“The responsible use of credit cards is one of the easiest ways to build a strong credit score, which is essential for qualifying for insurance policies, auto and mortgage loans, and sometimes even a job,” she says.

TIME

Time to Kiss Your Free Checking Account Goodbye

Your checking account could be bleeding you dry

Just when you thought banks couldn’t get any stingier, the number of banks offering free checking has fallen below 50%, a drop of around 10 percentage points in only a year. Now, want to hear the bad news?

Depending on your usage habits and how much money you have, the price you pay for that account could be an eyebrow-raising $700-plus.

As of June, roughly 48% of banks offered free checking, according to financial research company Moebs $ervices, compared to just over 58% a year earlier. “The Banks are exiting Free Checking because it is too costly,” says Mike Moebs, CEO and economist of Moebs $ervices. The number of credit unions offering free checking fell by a fraction of a percentage point, but nearly 80% still offer free checking.

Not only is free checking harder to find, but a new survey from personal finance site WalletHub.com finds that the privilege of having an account can run into the hundreds of dollars — and banks make the most off customers who are financially struggling or who travel to or send money to other countries most often.

According to a new analysis of 65 different checking accounts offered by the 25 biggest banks, the average annual cost for a checking account runs for just under 18 bucks — that’s for “old school” customers who don’t bank online, use paper checks, never use another bank’s ATM or overdraw their accounts — to $499 and change for the customer segment WalletHub characterizes as “cash-strapped;” that is, those who overdraw and don’t have direct deposit. The bite is the most serious for these customers who have the M&T Free Checking account; WalletHub says this would cost a person with these usage patterns a whopping $735.

Within those averages, though, there’s a lot of variability, and WalletHub points out that just because a bank may offer a good deal for one customer segment doesn’t mean that they’ll be equally affordable for customers with different banking habits.

For instance, it finds that the First Republic Classic Checking account is the best deal at a (still pricey) $185 or so a year for internationally-oriented customers, but it’s the most expensive of the bunch for the consumer groups WalletHub classifies as “young and high-tech” and “everyday Joe,” with annual costs of roughly $300 and $397, respectively. Customers whose living or job situations change drastically could find that the bank account they always counted on suddenly becomes a money pit.

Overall, WalletHub dubs USAA the most affordable in its checking account offerings, with, Capital One and Union Bank, respectively, behind it. The priciest overall choice is M&T Bank, and the second-most-expensive Fifth Third.

TIME Saving & Spending

6 Ways Coupons Actually Cost You Money

200383283-002
Michelle Pedone—Getty Images

Turns out, frugal living can have some pretty serious pitfalls

September is National Coupon Month and you’re ready. You have your mobile apps updated, your favorite sites bookmarked, your filing system ready to go — and you should really just stop. Put down the circular for a minute. Yes, coupons can save you money, but if you just assume they’ll always give you the best deal, think again.

Frugal-living bloggers know a thing or two about coupons, so we asked some to identify situations where a quote-unquote great deal can end up taking money out of your wallet. Here’s why and how they say even avid couponers can get tripped up.

You ignore generics. “If an item is available in the bulk section or as a generic store version, it’s usually less expensive than the coupon-discounted price on name brands,” says Sara Tetreault, who blogs at GoGingham.com. For example, she says she recently passed over a coupon for fluoride rinse because even with two bucks off, the price was still more than the house brand. The same holds true for dollar stores. Yes, there’s some stuff you probably don’t want to buy there, but some items will cost less there than at a grocery or big-box store, even with a coupon.

Your deals expire. “I once bought several duplicate coupons for deodorant, thinking I would stock up for several years,” says Julia Scott, founder of BargainBabe.com. She got them from a coupon website, planning to combine them with an in-store sale nearby — but by the time she got those coupons, the sale that would have made the purchase worthwhile had ended. (Scott points out that it’s technically illegal to sell coupons, so sites charge processing fees instead.)
You buy too much. “Another time I stocked up on so much shampoo but ended moving a few months later and it wasn’t worth it to drag the bottles, which cause a huge mess if they open, across the country,” Scott says. Likewise, if you’re buying coupons, some sites will make you buy a certain number to get the deal. “So you often end up buying extra coupons to make the minimum,” she says.
You do construction. “One thing that’s struck me when I’ve watched Extreme Couponing is that the people profiled always have shelf after shelf of products in their basements, and shelves aren’t free,” says Katy Wolk-Stanley, who blogs as The Non-Consumer Advocate. If you have so much stuff that you have to buy other stuff just to keep it corralled, you’re probably not netting the big savings you think you are.
You stockpile, then forget. “I have stocked up on items — plastic wrap, water pitcher filters — and stored them in our basement only to buy them again because I forgot we had them,” Tetreault says. That stockpile is only saving you money if you remember what’s in it — and could you find a better use for that space in your basement where you’re storing giant bricks of paper towels an an army of salad-dressing bottles? “After getting burned by this a few times by this, I stopped buying items that had to be stored outside of the kitchen or pantry and only purchase items we need,” Tetreault says.

You drive out of your way. This is Couponing 101, but it’s still something you can forget in the excitement of a huge sale: If you have to make a separate trip to score your bounty, you’re spending money on gas and wear and tear on your car.

MONEY Saving

This App May Let You Retire on Your Spare Change

Acorn App
Acorn

The new Acorns app rounds up card purchases and invests the difference for growth, with no minimums and low fees.

Americans spend $11 trillion a year while saving very little. So it makes sense to link the two, as a number of financial companies have tried to do over the past decade. The latest is the startup Acorns, which hopes to hook millennials on the merits of mobile micro investing over many decades.

Through the Acorns app, released for iPhone this week, you sock away “spare change” every time you use your linked credit or debit card. The app rounds up purchases to the nearest dollar, takes the difference from your checking account, and plunks it in a solid, no-frills investment portfolio. So when you spend, say, $1.29 for a song on iTunes, the app reads that as $2 and pushes 71¢ into your Acorns account. With a swipe, you can also contribute small or large sums separate from any spending.

The Acorns portfolio is purposely simple: Your money gets spread among six basic index funds. The weighting in each fund depends on your risk profile, which you can dial up or down on your iPhone. More aggressive settings put more money in stocks. But you always have some money in each fund, remaining diversified among large and small company stocks, emerging markets, real estate, government and corporate bonds. The app will be available for Android in a few weeks and through a website in a few months.

Why Millennials Are the Target

Micro investing via a mobile device clearly targets millennials, who show great interest in saving but have been largely ignored by financial advisers and large banks. Young people may not have enough assets to meet the minimum requirements of big financial houses like Fidelity, Vanguard, and Schwab. With Acorns, there are no minimums. There are also none of the commissions that can render investing in small doses prohibitively expensive. “We want small investors who can grow with us over time,” says Acorns co-founder Jeff Cruttenden.

This approach places Acorns in the middle a rash of low-fee, online financial firms geared at young adults—including Square, Betterment, Robinhood, and Wealthfront. Such firms hope to capitalize on young adults’ penchant for tech solutions and lingering mistrust of large financial institutions. Cruttenden says a third of Acorns users are under age 22. They like to save in dribs and drabs—and manage everything from a mobile device.

Acorns charges a flat $1 monthly fee and between 0.25% and 0.5% of assets each year. The typical mutual fund has fees of 1% or more. Yet many index fund fees run lower. The Vanguard S&P 500 ETF, which invests in large company stocks, charges just 0.05%. If you have a few thousand dollars to open an account, and the discipline to invest a set amount each month, you might do better there. But remember that is just one fund. With Acorns you get diversification across six asset classes—along with the rounding up feature, which seems to have appeal.

Acorns has been testing the app all summer and says the average account holder contributes $7 a day through lump sums and a total of 500,000 round ups. Cruttenden says he is a typical user and through rounding up his card purchases has added $521.63 to his account over three months.

A New Twist on an Old Concept

Mortgage experts tout rounding up as a way to pay off your mortgage quicker. On a $200,000 loan at 4.5% for 30 years your payment would be $1,013.38. Rounding up to the nearest $100, or to $1,100, would cut your payoff time by 52 months and save you $26,821.20 in interest. Rounding up your card purchases works much the same way—only you are accumulating savings, not cutting your interest expense.

Bank of America offers a Keep the Change program, which rounds up debit-card purchases to the nearest buck and then pushes the difference into a savings account. Upromise offers credit card holders rewards that help pay for college. But Acorns’ approach is different: the money goes into an actual investment account with solid long-term growth potential.

One possible drawback is that this is a taxable account, which means you fund the Acorns account with after-tax money. Young adults starting a career with a company that offers a tax-deferred 401(k) plan with a match would be better served putting money in that account, if they must choose. But if you are like millions of people who throw spare change in a drawer anyway, Acorns is a way to do it electronically and let those nickels, dimes, and pennies go to work for you in a more meaningful way.

Read more on getting a jump on saving and investing:

 

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