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Financial Wellness I

We are excited to present a seven-part series on financial wellness that will cover several financial struggles Americans are facing and ways to overcome them. This quarter’s newsletter includes parts 1 – 4. Look for parts 5 –7 in next quarter’s newsletter.

Part 1: Do You Have an Emergency Fund?

If you had an unexpected emergency expense of $400, would you be able to pay for it? If your answer is no, you’re not alone. Forty-six percent of Americans said they would have difficulty with an emergency expense of $400.1 Furthermore, 140 million Americans have little or no savings at all.2

With an emergency fund in your back pocket you will have the money to pay for the little emergencies that pop up in life. Such emergencies are:

  • Job loss
  • Medical or dental emergencies
  • Unexpected home repairs
  • Car troubles
  • Unplanned travel expenses

Your emergency fund should have three to six months’ worth of expenses in it. That way you’ll be prepared for the curve balls life throws your way. Try cutting back on unneeded purchases, such as lattes on the way to work, and put that money towards your emergency fund.

Having that extra stash of cash also keeps your stress level down and keeps you from making poor financial decisions such as taking out a loan or borrowing from your retirement plan.

Part 2: Are You Reducing Your Debt?

If debt is a leading contributor to your overall stress, you are not alone. The national mean for household credit card debt is $16,000. The average total household debt, including mortgages, is $132,500.1 That volume of debt can be a real burden on your wallet, relationships and ability to achieve other important goals like saving for retirement.

Millions of people attempt to juggle these goals all at once, but your method does not need to be mentally and emotionally taxing. Start small, and then continue to roll the money you were paying on that debt into the next smallest balance.

Try the Debt Snowball Method:

Step 1: List your debts from smallest to largest.
Step 2: Make minimum payments on all your debts except the smallest.
Step 3: Pay as much as possible on your smallest debt.
Step 4: Repeat until each debt is paid in full.

Ditching the small debt first, and gaining momentum as each balance is paid off is the key to becoming debt-free! Soon the second debt will follow, then the next. Stick to the plan and begin leading a healthy progression toward reducing your debt.

Part 3: Saving for College

You have big dreams for your children. Maybe they will grow to be an astronaut or a doctor—their potential has no limit. Have you considered how they will get there? Have you started to save for your children’s future education? According to the National Center for Education Statistics (NCES), the average annual cost for undergraduate tuition, fees, room and board were estimated to be $16,188 at public institutions, $41,970 at private non-profit institutions and $23,372 at private for-profit institutions—that’s a significant additional cost.

If you haven’t begun to save for your child’s college education, you are not alone. Just over half of families (57 percent) have started to save1. Consider saving in a 529 plan. A 529 plan is a tax-advantaged savings plan designed to encourage saving for future college costs2.

Benefits of 529 Plans:

  • Flexibility over investment options
  • Tax-free growth and withdrawals made permanent with passing of the Pension Protection Act (PPA) in 2006
  • Some states allow tax deductions and exemptions on gains
  • Donor has control over assets and investments
  • Can be used in any state, any school
  • Can be transferred to another beneficiary at any time
  • No income limitations or age restrictions

Begin saving for your child’s future today and you’ll thank yourself for it when the Ivy League acceptance letters start rolling in.

Part 4: Buying a Home

Purchasing a home is a big decision. There are many factors to consider. Most importantly, what is your budget? Is now the time to rent instead? How do you know?

If you do become a homeowner, what about your mortgage? Should you go full-force and pay it off as soon as possible? Or are there advantages to carrying the mortgage?

The answer is not the same for everyone. Let’s take a look at factors that can help you make this decision.

Buying vs. Renting

First thing’s first, can you afford to buy a home? If the answer is “Yes” to these questions, you may be on your way to home ownership:

  • Are you out of debt?
  • Do you have an emergency fund with three to six months of expenses, plus enough for a 10-20 percent down payment on a 15-year fixed mortgage?
  • Will your mortgage payment comprise no more than 25 percent of your monthly take- home pay?Next consider which is more beneficial. Renting may be less expensive because there are no costs for maintenance, taxes and homeowner’s insurance. However homeownership may be beneficial because your mortgage will not increase annually.

Next consider which is more beneficial. Renting may be less expensive because there are no costs for maintenance, taxes and homeowner’s insurance. However homeownership may be beneficial because your mortgage will not increase annually.

Paying off the Mortgage

Congratulations, you’re a homeowner! Now what?

  • Should you pay it off early?
  • Should you delay saving for retirement in favor of paying off the mortgage?
  • Will the employer match and investment growth sacrificed be worth it?
  • Should you keep the mortgage in favor of the annual tax deduction?These are just a few important questions to consider as you assess and strategize your financial future.

These are just a few important questions to consider as you assess and strategize your financial future.

1Fed Reserve Report on the Economic Well-Being of U.S. Households in 2015. May 2016.
2CFED Study