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Welcome to MoneyWise Matters

MoneyWise Matters is a weekly blog published each Wednesday by the Office of the Indiana Secretary of State. Here we discuss money related topics including; debt reduction, budgeting, saving strategies, scam alerts, investment fraud prevention and investor insights. You don’t want to miss out on this helpful information, hit subscribe for email updates (above) so you’ll be notified when we publish a new post.  


Why Compound Interest Matters

Why Compound Interest Matters

 

By Kylee Hale

Wednesday, February 19, 2020

Compound interest has been called the 8th Wonder of the World. It can be a double-edged sword, benefiting those who use it to build wealth, and burdening those who accrue interest on loans and dig themselves into deep financial holes. Let’s discuss the basics of compound interest and the effect it has on your financial future.

What is compound interest and how does it work?
Compound interest is interest calculated on an amount of principal (e.g., a deposit or loan) including all accumulated interest from prior compounding periods. Put more simply, it is interest on top of the interest previously added to the principal. Compound interest causes principal to grow exponentially over time. In the case of invested assets, it is a powerful tool to build wealth.

Examples of how compound interest can help build wealth:

Compound Interest

 

Warren recognized early in life that if he routinely saved and invested, he could accumulate wealth and live a better life. He started investing at 22, adding $500 per month to an account which held an index fund tied to the stock market. The index fund returned 7% per year for the next 40 years, when Warren retired at the age of 62. The initial $500, and the monthly contributions thereafter, grew to almost $1.2 million thanks to time, compound interest, and Warren’s investing strategy.   

Compound Interest

 

 

 

Warren’s friend Charlie wasn’t able to put away as much as Warren during his career, but he invested a $10,000 inheritance at 22 in the same index fund. Charlie’s investment, despite him not adding any more money to it, was worth almost $150,000 when he turned 62.  How? Time and compound investment returns caused Charlie’s inheritance to grow without him adding a penny.

 

 

From these examples, you can see how remarkable compound interest is and why you would want to take advantage of it whenever possible. However, compound interest also applies to most of your debt like student loans, mortgages and unpaid credit card balances. In my next post I will explain how compound interest can have a negative effect and how you can best avoid it. Here are a few tips on how to get the most out of your money with compound interest.

Don’t just save — invest! To take advantage of compound interest, your savings must be in an account that pays some kind of return on investment. That rate will depend upon the amount of risk taken. Higher rates of return are associated with higher risk of loss, and lower rates of return are associated with lower risk of loss.   

Start as early as possible: Time is one of the most important elements of compound interest. The longer your money is invested, the more opportunities it will have to grow. A 25-year-old who puts away $500 a month until age 65 with a 7% rate of return would have nearly $1.2 million, while a 35-year-old doing the same thing would have only $567,000 at age 65.  The earliest years of investing are the most important when it comes to compounding.

Be consistent and patient: Consistent contributions to an investment account over time gives compounding more principal to compound on and can enhance returns. As Warren and Charlie discovered, even modest contributions, paired with investment returns over long periods of time, can help you reach your financial goals.

 Check it out for yourself: The U.S. Securities and Exchange Commission has a compound interest calculator available on their website. Look at what your savings could look like based on different timeframes and rates of return.

Recent Posts


Recent Posts

Why Compound Interest Matters

Why Compound Interest Matters

 

By Kylee Hale

Wednesday, February 19, 2020

Compound interest has been called the 8th Wonder of the World. It can be a double-edged sword, benefiting those who use it to build wealth, and burdening those who accrue interest on loans and dig themselves into deep financial holes. Let’s discuss the basics of compound interest and the effect it has on your financial future.

What is compound interest and how does it work?
Compound interest is interest calculated on an amount of principal (e.g., a deposit or loan) including all accumulated interest from prior compounding periods. Put more simply, it is interest on top of the interest previously added to the principal. Compound interest causes principal to grow exponentially over time. In the case of invested assets, it is a powerful tool to build wealth.

Examples of how compound interest can help build wealth:

Compound Interest

 

Warren recognized early in life that if he routinely saved and invested, he could accumulate wealth and live a better life. He started investing at 22, adding $500 per month to an account which held an index fund tied to the stock market. The index fund returned 7% per year for the next 40 years, when Warren retired at the age of 62. The initial $500, and the monthly contributions thereafter, grew to almost $1.2 million thanks to time, compound interest, and Warren’s investing strategy.   

Compound Interest

 

 

 

Warren’s friend Charlie wasn’t able to put away as much as Warren during his career, but he invested a $10,000 inheritance at 22 in the same index fund. Charlie’s investment, despite him not adding any more money to it, was worth almost $150,000 when he turned 62.  How? Time and compound investment returns caused Charlie’s inheritance to grow without him adding a penny.

 

 

From these examples, you can see how remarkable compound interest is and why you would want to take advantage of it whenever possible. However, compound interest also applies to most of your debt like student loans, mortgages and unpaid credit card balances. In my next post I will explain how compound interest can have a negative effect and how you can best avoid it. Here are a few tips on how to get the most out of your money with compound interest.

Don’t just save — invest! To take advantage of compound interest, your savings must be in an account that pays some kind of return on investment. That rate will depend upon the amount of risk taken. Higher rates of return are associated with higher risk of loss, and lower rates of return are associated with lower risk of loss.   

Start as early as possible: Time is one of the most important elements of compound interest. The longer your money is invested, the more opportunities it will have to grow. A 25-year-old who puts away $500 a month until age 65 with a 7% rate of return would have nearly $1.2 million, while a 35-year-old doing the same thing would have only $567,000 at age 65.  The earliest years of investing are the most important when it comes to compounding.

Be consistent and patient: Consistent contributions to an investment account over time gives compounding more principal to compound on and can enhance returns. As Warren and Charlie discovered, even modest contributions, paired with investment returns over long periods of time, can help you reach your financial goals.

 Check it out for yourself: The U.S. Securities and Exchange Commission has a compound interest calculator available on their website. Look at what your savings could look like based on different timeframes and rates of return.

Love Hurts: How to Spot a Romance Scam

Love Hurts: How to Spot a Romance Scam

 

By Kelly Griese

Wednesday, February 12, 2020

Love Hurts

A quick Google search of the words “Love Hurts song” yields numerous results. The Everly Brothers, Patrick Swayze, Roy Orbison, Rod Stewart, Heart, Joan Jett, and more. They all sang about heartache. It’s relatable. Most of you reading this blog have experienced such emotions and can think of someone in your life who “gave love a bad name.” But the pain of a broken heart can be even greater when THE ONE doesn’t even exist. It can also be costly.

Online dating and social media have made it easier than ever to meet new people. You chat with a lot of them, meet a few for dates in the real world, and hopefully find someone special worthy of additional dates. Or maybe not. One of those online profiles seems too good to be true. The perfect catch! And while they have a lot of reasons why they can't meet in person yet, they want to know everything about you. 

In December 2019, the internet couldn’t get enough of one guy’s online romance. Twitter user @nickturani had met THE ONE! He tweeted, “Ladies take notes! Met this girl online YESTERDAY, and she’s already trying to learn more about me, not just hook up. It’s called conversation. Learn it.” Then he proceeded to share a screen grab of all the things his new girlfriend wanted to know about him. 

  • The name of his first pet
  • His mother’s maiden name
  • The name of the town where he was born

No doubt she would also be interested to learn his Social Security number… you know, typical first date information. 

Obviously, Nick was being “catfished.” If that term is new to you, let me explain. Merriam-Webster defines this type of catfish as "a person who sets up a false personal profile on a social networking site for fradulent or deceptive purposes." Catfishing is sometimes done as a cruel joke, possibly by a person who knows you in real life, but it’s also quite popular as a means of stealing information and money. In the example above, it seems that Nick is aware his new “girlfriend” isn’t real, and he’s making a joke about the blatant attempt to gather answers to password recovery/reset questions. Not only is Nick’s girlfriend not actually interested in him, she’s probably not a person at all. In all likelihood, she’s a bot, which is the common name for autonomous computer programs that can interact with real people online.  

Dating websites and apps are filled with bot accounts, so you need to be careful. Some are obvious, like Nick’s girlfriend, but others are more advanced. And, yes, sometimes a real person is on the other end of the conversation. If you’re dealing with a con artist, brace yourself. They can create compelling backstories with full-fledged identities. They might also use attractive photos of models to lure you in. That’s what happened in a romance scam reported by Bob Segall with WTHR. He talked with a 70-year-old widow who spent two months talking with a con artist named “Richard.” The scammer was after cash, as many of them are. 

According to the Federal Trade Commission, Americans reported losing $143 million to romance scams in 2018. The median reported loss was $2,600, and for people over 70, it was $10,000. Online dating isn’t just for young people. More and more seniors are looking for love via dating websites and apps, creating an even bigger pool of potential victims. 


Spotting Scams

So how can you spot a scam? Here are some great tips provided by the Better Business Bureau

  • Too hot to be true. Scammers offer up good-looking photos and tales of financial success. Be honest with yourself about who would be genuinely interested. If they seem “too perfect,” your alarm bells should ring.
  • In a hurry to get off the site. Catfishers will try very quickly to get you to move to communicating through email, messenger, or phone.
  • Moving fast. A catfisher will begin speaking of a future together and tell you they love you quickly. They often say they’ve never felt this way before.
  • Talk about trust. Catfishers will start manipulating you with talk about trust and how important it is. This will often be a first step to asking you for money.
  • Don’t want to meet. Be wary of someone who always has an excuse to postpone meeting because they say they are traveling or live overseas or are in the military.
  • Suspect language. If the person you are communicating with claims to be from your home town but has poor spelling or grammar, uses overly flowery language, or uses phrases that don’t make sense, that’s a red flag. 
  • Hard luck stories. Before moving on to asking you for money, the scammer may hint at financial troubles like heat being cut off or a stolen car or a sick relative, or they may share a sad story from their past (death of parents or spouse, etc.).

Many of these examples are included in a video created by the Federal Trade Commission.

The Federal Trade Commission provides some additional information about the types of requests that romance scammers often make

  • Pay for a plane ticket or other travel expenses
  • Pay for surgery or other medical expenses
  • Pay customs fees to retrieve something
  • Pay off gambling debts
  • Pay for a visa or other official travel documents

The scammers often ask you to wire the money or purchase prepaid cards from MoneyPak, Amazon, Google Play, iTunes, or Steam. 


Protect Yourself

There are ways to protect yourself from romance scams. The Better Business Bureau provides more tips: 

  • Never send money or personal information that can be used for identity theft to someone you’ve never met in person. Never give someone your credit card information to book a ticket to visit you. Cut off contact if someone starts asking you for information like credit card, bank, or government ID numbers.
  • Ask specific questions about details provided in a profile. A scammer may stumble over remembering details or making a story fit. 
  • Do your research. Many scammers steal photos from the web to use in their profiles. You can do a reverse image lookup using a website like tineye.com or images.google.com to see if the photos on the profile are stolen from somewhere else. You can also search online for a profile name, email, or phone number to see what add up and what doesn’t. 

So, yeah, “Love Hurts,” and scammers certainly “give love a bad name.” I’d use more lyrics and song titles as puns, but I think you get the idea. Stay safe in this season of love and romance. Protect your heart. Protect your identity. Protect your bank account. 
 

5 Reasons to Shift Investments

5 Reasons to Shift Investments

 

By Kylee Hale

Wednesday, February 5, 2020

We must start off saying, it's best not to stir up your investments. When you choose to invest, it’s advised to relax and ride out the roller coaster twists of the market. Trying to beat the market is not a good strategy and often doesn’t work. Stick to the motto of investing steadily, diversely and for the long term. This will provide the most foolproof route to success.Set it and forget it

 

However, there are times when Showtime’s rotisserie chicken oven infomercial tagline “Set it and Forget it” just isn’t meeting your needs. Here are 5 relevant situations where you might be better off moving your funds around.

 

  1. New job, new retirement account  

If your employer provides the option to invest in a 401(k), 403(b) or similar retirement saving vehicle your contribution to this investment typically cuts off when you terminate employment with that employer. It’s often a good idea to consider rolling the funds over to your new retirement saving investment vehicle whether that’s a new employer-sponsored plan or a different account of your choosing. It is possible to leave the account as it stands but this could become a loose end. If you choose to roll it over, you’ll want to follow the protocol from the IRS to avoid a tax penalty and opt for a direct rollover to reduce tax filing complications.

Side note: In a previous post, I analyzed the state employee’s paycheck. The state-sponsored 457 plan is yours to keep after you leave state employment, and you can roll it. There is no age penalty but you are responsible for paying income tax on the funds.

 

  1. You're over the fees

There will always be fees, every cent you pay in fees is a cent not in your account, not earning returns. If you’re using a digital adviser, you can expect to be charged about 0.25% - 0.30% of your assets per year. If you’re shelling out for fees themselves, or if moving your investment could lower your fees, it’s probably a good idea to make the move. You may also consider moving your investments if the options you’re looking for aren’t available for you. If impact investing or investments made to generate positive, measurable social and environmental impact alongside a financial return, is your desire, you may have to shift your investments to meet this ambition.

 

Memory Overload

  1. Requires excess memory 

An overall financial picture can be difficult to maintain if you have multiple accounts. Consolidating your investments can ease your stress and create a simpler way to follow your investment goals. Another benefit of having your investments all under one scope is the ability to work with a single person or company. Developing a relationship with one person that you can speed dial with all your investment questions is a relief when it comes to money. Multiple accounts also means multiple logins, statements, and tedious account updates when your address or beneficiaries change.

 

  1. Need some risk or stability

Managing your investments all in one spot can avoid overlapping investments, but it’s still important for your portfolio to stretch across multiple asset classes. Maintaining balance within your portfolio might urge you to shift your asset allocations. Maybe you bought a stock a while ago and then inherited a similar or were gifted an investment. Rebalancing your portfolio helps preserve your desired amount of risk and continue progress towards your goals.

 

  1. Retirement is on your horizon

When you’re getting close to the golden years you may want to reevaluate your assets. You can’t keep money in tax-advantaged retirement accounts forever. There are age restrictions on certain accounts and you are required to begin withdrawing at least the minimum distributions. If you don’t, you will lose that hard-earned and saved money to penalties. It’s easy to forget about an old 401k, from a previous job, if you have not consolidated in a while.​​​​​​

 

As you may have noticed none of the examples above include moving investments due to market dip. It’s important to remember when investing if you experience a market plummet or prolonged downtown, the loss is not locked in until you sell. History shows the market always returns and often surpasses the previous high. If the conditions above apply to you and you decide the time is right to shift your investment, be sure to ask about a direct rollover or in-kind transfer to ease the process. Investments and taxes can be complicated, if you have any questions, be sure to seek out a licensed professional. To confirm a professional licensure, you can search the database on the Securities Portal. 

Much Ado About Resolutions

Much Ado About Resolutions

 

By Kelly Griese

Wednesday, January 29, 2020

Did you make a new year’s resolution? University of Scranton psychology professor John C. Norcorss tells CNN that about 40% of Americans set new year’s resolutions, and about 40-44% of those people actually succeed. So what does it take to turn a resolution into a realized goal? CNN provides some good advice in the link above, and I wrote about S.M.A.R.T. goal setting a couple weeks ago in this blog. 

When we set resolutions, we do so for a reason. We want to succeed. But are you putting the correct pieces in place to ensure you reach the finish line before the next ball drop? Try switching out the word resolution and replace it with the word goal. Make that goal specific (that’s the S in S.M.A.R.T.). Make the goal something that’s actually possible to achieve (that’s the A in S.M.A.R.T.). Know that failure is also possible, but that it doesn’t have to mark the end of you trying to reach your goal. Try again and be kind to yourself in the face of failure. 

Change is hard, especially when you consider that the most popular 2020 new year’s resolutions are exercising more and saving money… two things a lot of people struggle to do! According to survey results shared by YouGov, 50% of Americans making resolutions say exercise is their top priority, while 49% are focused on saving money. We can help you with both of those resolutions. The fitness edition of our Indiana MoneyWise e-magazine includes information on yoga for every budget, meal planning, and more. And the Indiana MoneyWise website as a whole is filled with information to help you get on a better financial path. 

Speaking of finances, not all resolutions are equal when it comes to the cost of success. Let’s use the “exercising more” resolution as an example. There are a lot of different ways to exercise, but new gym memberships peak this time of year. So how much will a membership cost you? According to The Motley Fool, the average cost of gym membership is $58.00 per month, or $696 per year. But the monthly fee isn’t your only area of consideration. Many gyms charge an initial fee just for joining, and there may be other hidden costs. Keep in mind that there is a LOT of room for negotiation when joining a gym, and you should check to see if you qualify for any discounts based on your age, your employer, or even your health insurance provider. There are also numerous specials this time of year, so be sure to check online before walking into a high pressured sales pitch at the gym itself. And before joining, make sure you read the contract’s fine print… especially when it comes to the gym’s cancelation policy. 

There’s one more thing we need to talk about when it comes to resolutions, and that’s when to cut ties with anything that’s draining your budget in order to help you achieve them. Don’t hold on to subscriptions and memberships out of guilt or a belief that if you keep paying for these services, you will magically resuscitate your new year’s resolution. If it’s dead, it’s dead. Bury it in a shallow grave rather than digging a deeper debt hole. Cancel the subscriptions and memberships. If you still want to work toward food choice and exercise resolutions, do so in ways that don’t stretch your budget. There’s a wealth of free information online. You can exercise in your living room or local park without expensive equipment. You can shop for your own groceries and cook your own meals without consulting pricy apps first. And if you need accountability to keep you motivated, ask a trusted friend for such help.

What Exactly is a Real Estate Investment Trust?

What Exactly is a Real Estate Investment Trust?

 

By Kylee Hale

Wednesday, January 22, 2020

In past years, stocks would have been considered the best long term investment, but as of last year, real estate has made its way to the top. According to this Bankrate survey that asked Americans “What is best way to invest money that you wouldn’t need for more than 10 years?” approximately 30% of all generations are in favor of real estate as a long term investment. Real estate can be a very lucrative investment at any age, however it usually requires a lot of money, or very good credit, to get started and is known to be a big time commitment. For busy individuals who might not have the extra cash for a huge down payment, a real estate investment trust (REIT) might be a less demanding way to get started.

Market Exposure - REITs allow investors to pool money together to invest in large-scale, income-producing commercial real estate. These may include office buildings, shopping malls, apartments, hotels, resorts, self-storage facilities, warehouses, and mortgages or loans. This collaboration provides people who may not have the funds to buy commercial real estate on their own with the opportunities to invest but without the time commitment and cost of buying and managing a property. 

Diversity - By being in a different asset class than stocks or bonds, REITs, provide the opportunity to diversify a portfolio. REITs can be found in public and private markets, although publicly-traded REITs are the most liquid. Before investing in a REIT, you should understand whether or not it is publicly traded, and how this could affect the benefits and risks to you. For more, check out FINRA’s Investor Alert on reviewing non-traded REITs.

Appreciation - REITs are generally passive investments as opposed to active…meaning that they are generally suited best for long term investors rather than short term. Unlike other real estate companies, a REIT does not develop real estate properties to resell them. Instead, a REIT buys and develops properties primarily to operate them as part of its investment portfolio. A benefit to investing in REITs is the potential for long-term appreciation, if the real estate market you're invested in gains value, your shares may too.

Fees - Publicly traded REITs can be purchased through a broker. Generally, you can purchase the common stock, preferred stock, or debt security of a publicly-traded REIT. Brokerage fees will apply. Non-traded REITs are typically sold by a broker or financial adviser. Non-traded REITs generally have high up-front fees. Sales commissions and upfront offering fees usually total approximately 9 to 10 percent of the investment. These costs lower the value of the investment by a significant amount. 

Taxes - When the REIT collects rental income from its properties, at least 90% of those earnings are returned to the investors as dividends. The shareholders of a REIT are responsible for paying taxes on the dividends and any capital gains they receive in connection with their investment in the REIT. Dividends paid by REITs generally are treated as ordinary income and are not entitled to the reduced tax rates on other types of corporate dividends.

REITs provide the option to add real estate to an investment portfolio when it otherwise might not be feasible. Some REITs yield higher profit dividends than other investments, but with reward comes risk. Be extra cautious of non-exchange traded REITs and fraudulent salesmen. You can verify the registration of both publicly traded and non-traded REITs through the Securities and Exchange Commission’s EDGAR system. You can also use EDGAR to review a REIT’s annual and quarterly reports as well as any offering prospectus. Lastly, you should also check out the broker or investment adviser who recommends purchasing a REIT. To learn how to do so, visit the SEC’s Investor.gov page: Working with Brokers and Investment Advisers.

Financial Relationship Status: It's Complicated

Financial Relationship Status: It's Complicated

 

By Kelly Griese

Wednesday, January 15, 2020

Let’s face it, we are emotional spenders. Few of us are able to make purely logical financial decisions. Instead, we spend based on how we feel, and our feelings are impacted by a lot of internal and external forces. If our relationship with money was a Facebook status, it would be listed as “it’s complicated.” And to make matters more complicated, our financial behavior is set at an earlier age than most of us realize. 

According to a study from Cambridge University, not only are kids able to grasp basic money concepts as early as age 3, but money habits are set as young as age 7. By the time we reach the age of making major financial decisions, we’re already firmly set in our ways. And that’s why it’s okay if you’re struggling to change. Improving our financial behavior is hard, and it takes much more than some facts and figures on a spreadsheet to make changes. 


Pay Yourself First

So how do we begin? Well, I like to start with some of the best financial advice I’ve ever heard: PAY YOURSELF FIRST! When faced with a financial decision, repeat those three words in your head. Each time you buy something new and exciting, you are paying someone else. You are giving them money in exchange for the latest gadget you crave. 

Paying YOURSELF means setting aside money for YOUR future. This requires discipline. It also requires you to think beyond your need for immediate gratification. If you find yourself frequently tempted into making impulse buys, look for ways to remind yourself of the things you want months or even years from now. Do you want a new car? What about an awesome vacation? Retirement? 

Spending that money now can make us feel good in the short term (remember, we spend with our feelings), but in a few years, when we really want/need something big, the money won’t be there. If you’re still working when you’re in your 80s, you may regret not paying yourself first.


Values

Now let’s talk about some of those intangible things that influence our emotional spending. Things like values. Values are qualities or standards people consider to be worthwhile or desirable. These are the basic and fundamental beliefs that guide or motivate our attitudes and actions. Examples include: accomplishment, community, entertainment, generosity, and so on. You may possess some of these values or different ones. Take a moment to think about what you truly value and write it down. Better yet, prioritize your values. When I give financial fitness presentations, I provide folks with a worksheet, so feel free to print a copy for yourself


Goals

Now let’s talk about goals. Goals are the specific plans or purposes we have in life. Short-term goals can be accomplished in a few weeks, months, or even a year.  Examples include setting up a savings account and using it, building an emergency fund, or saving for a family vacation.  Long-term goals require more planning and saving, and they are often not realized for many years.  Popular long-term goals include homeownership, a college education, or a comfortable retirement.  

Unfortunately, goals are somewhat meaningless without a plan to achieve them. That’s why I encourage you to create SMART goals. SMART is an acronym. 

  • Specific – state exactly what you want to buy or accomplish with the money you save
  • Measurable – indicate the exact dollar amount you need in order to reach the goal
  • Attainable/Achievable – identify the necessary steps to achieve this goal
  • Relevant – the goal needs to be meaningful or you may lose motivation
  • Time-Bound – the goal should have a deadline for achievement 

Let’s transform a regular goal, such as “I want to buy a car” into a SMART goal. “I plan to save for a down payment on a new car. I need to save $5,000 for the down payment. I will reach my goal of saving $5,000 by setting aside $200 from my paycheck each month. I need a new car because my current car is getting old and repairs will become costly. By saving $200 a month, I will save $5,000 in 25 months (or two years and one month).”

Now that’s a SMART goal! To help you create your own SMART goals, print the worksheet I created.


Wants vs Needs

Now that we’ve established our values and goals, it’s time to buy stuff, right? Not yet. We need to talk about wants versus needs. 

As children, we are taught that needs are the stuff that’s necessary for survival: food, water, shelter. Wants are all the stuff we can live without but would enjoy having. Using these simple definitions, we can put things like rent, groceries, and transportation into the needs category, and most of our entertainment options are considered wants. But this whole post is about our complicated relationship with money, and wants and needs are not quite so simple. 

A few years ago, I was helping some local Girl Scouts earn their Junior level Savvy Shopper badge. We made collage posters with magazine clippings, with wants on the right side of the poster and needs on the left side. One girl brought up an interesting question: where does deodorant go? It sparked an insightful conversation that helped me realize our wants and needs are more complicated and simply deciding what’s necessary for survival. The girls and I talked about how it might be hard to make friends or get a job if we smell bad. We Googled the history of deodorant (great article can be found here).  We even discussed cultural differences related to hygiene. In the end, we decided that wants and needs are complicated. They are also unique and personal. Everyone has different priorities, and so everyone has different wants and needs. Identify your own wants and needs, just as you did with your values and goals. Your spending and saving decisions should be reflective of these choices. To help you determine your own wants and needs, we have another worksheet you can complete. It’s a great activity to do with other members of your family. 


So how will all of this critical thinking improve your financial situation? Wants, needs, values, and goals are important parts of every budget. After you have identified the emotional drivers behind your spending and saving decisions, start a spending log. I recommend using it for at least a week, but a month is preferred. Keep track of every last cent! In addition to writing down the date, purchase, and cost of all your expenses, also write whether they satisfy wants or needs. You can use this spending log to help you make adjustments to your budget. Spending logs are great at revealing problematic spending. We have a spending log worksheet as well as a budget worksheet that you can print. 
 

New Year, New You, Anatomy of Your Paycheck Part 2

New Year, New You, Anatomy of Your Paycheck Part 2

 

By Kylee Hale

Wednesday, January 8, 2020

On average, an employee’s salary makes up seventy percent of their total compensation, while the remaining thirty percent is compiled of fringe benefits. These “extras” often include; insurance, tuition reimbursement, childcare, retirement plan contributions, and discounts. In my first post about understanding your paycheck, I discussed the common terms on most pay stubs such as Gross Income and Net Pay. In this post, I’m going to dive deeper into the deductions listed on most pay stubs to explain where every penny goes to determine your take-home check. 

Before we talk benefits, I want to point out, about thirty percent of your Gross Income is reduced by taxes. Tax withholdings are dependent upon your W-4 form filling, the example pay stub (right) for John Smith is claiming one exemption. Multiple income tax withholdings are calculated according to a person’s claimed exemptions.

Federal Income Tax: Federal tax is calculated by tax brackets determined by taxable income and your tax filing status: single, married filing jointly, married filing separately, etc. There are Paycheckseven tax brackets, the progressive tax system allows your taxable income to be taxed in chunks according to the portion of income that falls in each tax rate category. John Smith is a single filer with $32,692.30 in annual taxable income. That puts him in the 12% tax bracket in 2019, but he only pays 10% on the first $9,700 of income, then he pays 12% on the rest up to $39,475 of taxable income, because the next bracket of 22% begins with $39,476 taxable income.

FICA/Medicare: Federal Insurance Contribution Act (FICA) tax is a payroll tax that funds Social Security benefits and Medicare health insurance. This tax is split between employers and employees who both pay 7.65% (6.2% for Social Security, 1.45% for Medicare). You can calculate these individually but for many employers, these are lumped together. John Smith is paying $95.38 for FICA and $22.30 for Medicare each pay period, equaling $117.68 together.

State Income Tax: Some states do not collect income tax, some collect a flat rate and some impose a progressive tax meaning people with higher levels of income pay higher taxes. The state of Indiana has a flat tax rate of 3.23%. John Smith will pay $49.69 per pay period or $1,242.25 a year in state income tax.

Local Tax: This is also known as county tax, in Indiana, this is based on your County of residence as of January 1 per tax year. For John Smith's pay stub, he is a Marion county resident with a tax rate of 0.0202%. 

Insurance Premiums: Most pay stubs itemize the insurance premiums for the services you selected. For health, dental, vision, life and disability, your employer likely requires you to pay a portion of the premium. These costs are deducted from your gross pay. If your employer offers TaxSaver benefits, this prevents you from paying tax on the premiums. John Smith has medical, dental, vision and life insurance on a single plan, rather than a family plan. If applicable, this section of your pay stub is also where you will find disability insurance. For state of Indiana employees, I have found that the employee portion of the premium for disability insurance is about 0.0025% per paycheck. 

Other deductions: Depending on your employer, there may be additional deductions. For example, if you choose to donate part of your paycheck to a charity that partners with your employer — like the State Employees' Community Campaign (SECC), this should appear on your pay stub.

Deferred Compensation: These funds are also known as your retirement money. The tax is deferred on this income until payout which is likely in your retirement years. The strategy with this is that you benefit from a lesser tax burden at the pay out because you expect to be in a lower tax bracket after retiring, than when you initially earned the income.

The Direct Deposit amount is your take-home pay, also known as net pay. Most pay stubs include how much you've received year to date (YTD).

The last section of the state employee paycheck, Employer Provided Benefits, is my favorite. Most employers who offer benefits are required to pay a portion of the premiums for the employee’s coverage. For example, while John Smith pays $1.22 per pay period towards his premium for dental insurance, his employer pays $10.38 per pay period towards the premium. This is the same for medical, vision, life and disability insurance premiums. 

Let’s talk about retirement accounts, this will be different for non-state employees, but I hope this information will provide some insight and spur you to find out more about how your employer retirement accounts are structured. 

On John Smith’s pay stub, we see the deductions titled:

Def Comp.: This refers to a Target Retirement Fund account offered by Hoosier S.T.A.R.T., sometimes also referred to as a 457 plan, only for state and local government employees and some non-profits. This is similar to a 401(k) plan that might be offered by a private employer.

PERF St and PERF Spe: This could be referred to as your state employee pension and the state pays 100% of the cost. While employed, the state will continue to put money into these accounts, this is provided by INPRS. This appears as two separate contributions on the pay stub because a portion is invested via an annuity and the other via Target Date Funds

Def Comp St Pd: This is another Hoosier S.T.A.R.T. sponsored retirement plan, sometimes referred to as a 401(a) plan. The unique feature of this plan is, state employees receive a $15-per-paycheck matching contribution which equates to $30/month or $390/year of “free money”. Another way of thinking is to view the state’s match as BOGO, you put in $15 a payday and the state will match that giving you $15 in your account each payday. It’s wise to contribute at least up to the match so you’re getting the benefit of all the money your employer is offering and padding your retirement savings.

HSA Employer: The last thing to mention is a Health Savings Account (HSA). If enrolled in a High Deductible Health insurance Plan (HDHP), you qualify for an HSA, an account allowing you to save specifically for medical costs. As an employer, the state of Indiana contributes thirty-nine percent of your annual deductible into your HSA. Your contributions to an HSA are pre-tax or tax-deductible and you don’t pay tax on the account’s growth nor the withdrawals if used for eligible expenses. An HSA is similar to a Flexible Spending Account (FSA), although an FSA does not allow for the leftover funds to roll over to the next year, and an FSA is often better paired with a lower deductible health insurance plan.

It’s important to stay on top of tracking your deductions and contributions. Any errors are your responsibility to find and report, the last thing you want is for an error to be repeated through several pay periods.

I can write from experience, my first year as a state of Indiana employee, somewhere a mistake was made by HR. The information on my W-4 was incorrectly filed in the system. For about seven months my taxes were withheld in “married” filing status, although I would be filing as “single”. I noticed this on my paystub a little too late in the year, and when tax filing time came around, I owed more than I was excited to pay.

If you have questions about any of the information listed on your pay stub, be sure to contact your human resources representative.        

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