Life Lessons 101

Everything you needed to know, but was never taught in school.

Is Social Security Running out of Money?

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So the answer is Yes, and No. Should you worry, the answer again is Yes and No, or how much are you willing to slow the issue.

The Problem

OK, you might think that is not a good answer, but it is correct. The statements about Social Security running out of money, is actually it not being able to make full payments. (example)

So, and this is just as an example, let’s say you should expect $1,000 dollar a month payment. We’re using that number just for simplicity. Being only able to pay 78%, means that instead of $1,000, you’d only get $780. If you were supposed to get $2,000, you’d get $1,580. Either way, it’s a fairly serious cut in payments, and it will be in that position in just a few years.

So you will get some funds, but you are at risk of losing some. This is most likely going to affect young Gen Xers as they just hit retirement. Older Millennials will be right behind them.

Why is is a Problem

Most people are surprised to learn that Social Security doesn’t pay what you are used to making, rather it is a portion. So their lifestyle takes a hit right off the bad. When you drop that further, it makes normal every day life more difficult as well.

Outstanding debt is harder to pay, and it makes it difficult to make normal necessary payments.

This wasn’t considered as big of an issue when most people had paid off their house by the time the retired, but with more people renting, and buying homes later in life, you could run into a situation where you still need to make a house payment, car payment, etc.

Why is it Running out of Money

Social security needs incoming money to continue to make payments. Workforce participation has been dropping, and that hurts the money coming in. With the Pandemic of 2020, 2021, 20?? there has been layoffs, people quitting, people retiring early, etc. This is reducing the number of people putting money into the system and increasing in the number of people taking money out of the system.

How Bad Will it Get?

In theory, Social Security could essentially run out of money and not be able to pay anything. However, that would be political suicide for anyone in office, and their party, so our government probably won’t let that happen.

Instead, they will increase the payments going in (increase taxes), reduce the payments going out, change the age you and withdraw from, or other things to keep it going. I’ve be surprised if they let it actually get that low, however, they’ve known about this issue for 20+ years, and they like to kick the can down the road. The longer they wait, the harder it will be to solve this problem.

What can you do?

So the real question is, what can you do? You can always run for office, but one person trying to fix a problem that the rest of the politicians only seem to give lip service too doesn’t sound likely.

Instead, consider opening a 401K or similar retirement fund. The earlier you do it, the better, however, anytime is better than never. It’s much like the best time to plant a tree was 20 years ago – so you can enjoy sitting in its shade today. The second best time is today, so it can start to grow and be ready in the future.

Additionally, look at getting out of debt. Anything you can do to get out of debt to reduce future payments will help you. Doing so will help you more than you can imagine.

Five things to help you get a good credit score

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Having a good credit score is important. As much as I like Dave Ramsey, and agree with 85-90% of what he says, we disagree on a credit score because it is used for so many things, not just getting/having credit. Your score can be used when you apply for a job, get insurance (especially car), apply for some place to rent, and many more cases.

Plus, very few of us have enough money to just go out and buy a house cash, so you’ll need a good credit score to make that purchase.

Here are fine things that people with good scores have in common.

Pay their bills on time

Think being a little late isn’t that big of a deal? Well on time payments are the largest influencer of your credit score. And not just to credit companies. Also things like, rent and utilities will report to the credit bureaus. So make sure you paying your bills on time, and the full amount due.

Most people agree that if you can’t pay the whole bill, at least paying something will help, but I’ve not been able to find official documentation on this helping your credit score.

Minimize use of available credit

This is how much credit you can use, versus what you use. Your credit usage percent can be calculated by taking the amount you have borrowed (total minus your mortgage) and dividing it by the total amount of credit you have available.

Let’s do a simple example. Let’s say you have $50,000 available between 4 credit cards, and you have $5,000 that you are using. You would take 5000/50000 and come up with .1, or 10%.

Most people with a credit score of over 800 keep that percentage under 7%.

I notice that moving from 4% to 7% will drop me 5 or 6 points, move that to 10% and I’ll lose almost a dozen points.

This is also why cancelling a credit card can make your score drop temporarily, because your available credit goes down, which makes your credit usage go up.

Tip: Cut up your card, but don’t cancel it so you keep the available credit, but you won’t be tempted to use it!

If you can pay off your credit card(s) every month, you will be miles ahead on getting a good credit score.

Have a long credit history

Your credit score is partially based off of how long you’ve had credit. For years, I couldn’t break a number I was trying to hit, and it was because my history wasn’t that long… because I wasn’t an adult for that long.

It’s unfair, but it’s true. It’s also why canceling an old account can hurt your credit score.

Interestingly, I had a credit card for over ten years that the company quit providing. They switched me over to a new card. One credit bureau sees it as a new account, and a closed old account. Another bureau sees it as being the same account and I have a higher score through them since I have nearly twice the history for my longest account.

Apply for credit only when necessary

Every time you apply for credit, be a car loan, new credit card, mortgage, etc, it is reported. One or two every six months to a year is OK. More than that, and it can start to affect you credit score.

The good news is that credit checks from the same type of credit only count as one check. So if you are checking with multiple mortgage lenders, that is only one credit check as long as they happen in relative short period of time.

The exception to this is credit card credit checks. This is because you probably won’t be looking to buy two or three houses at once. However, you might open multiple credit cards in short order.

Choose credit cards carefully

While this won’t hurt your score directly, people with good scores learn to read the fine print. Not all credit cards are created equal. Will you have to pay an annual fee? What rewards do you get? What is your interest rate? These and many more questions should be looked into.

Generally, I avoid any cards with annual fees. I rarely buy enough to make it worth while, and I don’t care about the status of having a gold/platinum/etc card. I’m also not rich enough to utilize the private buying concierge service that it might come with…

I look for cheap cards. Since I pay mine off every month, I don’t worry about the interest rate, and focus on the reward. Once I got one I liked, I keep it to build my credit history, instead of swapping between them every few years.

66% of Millennials have Nothing Saved for Retirement

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It’s easy to think of Millennials as those still in college, or maybe in their early twenties, but they were born between 1996 and 1980, which means they are between 25 and 41.

It’s easy for those on the younger side to not having any savings for retirement, but those in their thirties and forties should have have a plan, and be working on it, especially given the current situation with social security. Many people estimate that social security will not be able to cover even 20% of their monthly expenses when they retire.

If they are right, that means its even more important to start saving, and investing.

I recently spoke with someone who recently started saving for retirement in their mid-thirties. They are behind, and they know it, but they’ve at least started at 2% of their salary. They are also working on paying down their debt, and will contribute more later on.

There are three keys to getting enough money in your retirement account:

  • Start Early – The earlier you start, the longer your money can grow with interest. Interest is a game of time, and the more time you have, the better. The best time to invest was 20 or more years ago, the second best time is today.
  • Invest a percentage automatically – If you tell yourself you’ll put something aside, you’ll always find something else to spend. Instead, take advantage of a 401k at work or an automated draft.
  • Invest wisely – know what risks you’re willing to take, and how much you can both gain and lose. The younger you are, the more risk you can probably absorb.

40% of Americans can’t cover a $400 emergency expense

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This was the headline of article written in 2018, before the global pandemic of 2020, 2021,….

In talking with many people since then then, I’ve found that they tend to fall into two basic groups.

First – with the ongoing risk from the pandemic, how can you ever have enough saved, and why should you bother.

It’s easy to get down when you’re standing at the bottom of a financial valley looking up.

However, the second group stands in the same valley and thinks, “I’ve got to be better prepared.”

Many people I know are looking to save not just $400, which I consider the bare minimum for an emergency fund, but even more.

As the pandemic has shown, you cannot control what happens to you, but you can control how you respond.

I’ve known many people who have lost their jobs, had hours cut, medical bills, etc. The ones who were better prepared, always came out better – maybe not unscathed, but better.

I recommend three levels of savings.

$500 Saving Level

I recommend a $500 cash savings, be kept on hand. Now on hand for us, is in a small safe in our house. It is meant that we can grab it at any time, day or night, and in the midst of a big emergency, we don’t have to wait for a bank to open, or anything like that.

$500 may seem like a lot, but it isn’t too big. This is where being a saver can really help. Take a few months, save up some money, or sell a few items, to get yourself ready for your emergency fund.

$1,000 Saving Level

That $500 may seem like a lot, until your fridge dies and you have to replace it. A cheap fridge is $700, with larger ones being $1000 to $1200. Need four new tires, or a new transmission – here’s where the $1000 comes in handy.

I don’t keep this on me (or at my house). Instead, aim to keep this in the bank, in a savings account. It won’t grow much in this economic environment, but it makes it a little harder to spend, but still gives you easy enough access five to six days a week.

A $1,000 may seem like a lot, but once you save your first $500, the next amount will seem easy as you’ve put in place ideas on how to slowly save and build up that emergency account.

6 to 12 Months Salary

This seems nearly impossible when starting, but the pandemic has shown just how important it really is.

Many people before the pandemic, before a job loss due to the economy shutting down, were told 6 to 9 months, while many people have said that the global pandemic has shown how fragile the economy really is, and said that 12 to 18 months is what is really needed.

Personally, I aim for 6 to 12 months, as it’s easier to obtain, and as we’ve seen, even with things shut down, there is always things that can be done. It may not be the best job, or the job you want, but it can help slow the financial bleeding.

This emergency fund will be a bit different however. Since you, probably, won’t need to access it all at once, you can save and invest in mutual funds, or other safer style investment engines to help you get there instead of just saving the money on your own.

For myself, it took several years and lots of planning to get to save 6 months. Surprising, even though my salary went up, getting to the next 6 months was easier, since I was used to living on a budget, and we put most of the extra money from raises to the saving.

While we’ve only needed to use this money once due to a job loss, it was comforting to know it’s there, just in case, especially with the job market the way it is right now.

What to do with that Stimulus Money?

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Here, and because of the COVID pandemic, many American’s have received a second, or like me are waiting to receive their second stimulus “check”. Ignore the fact that it’s actually, most likely direct deposit for you, or that many tens of thousands had their second “check” held up due to problems with the IRS putting wrong information in and nothing being done…

The real question here is “what to do with it?” Well, like so many financial questions, a lot of this has to do with your current financial and employment status. A year ago before the pandemic started, I would have said one thing, however, that was then, and this is … now.

So let’s break it down based upon several common situations.

I’ve been out of a job for a while

OK, this is the worst case scenario. Unfortunately I know several people who have been out of work for six to ten months at this point. Unemployment doesn’t or just barely covers the necessities. Here you can look at applying that money to the necessities – which I equate to food, shelter (including utilities), and (necessary) clothing.

Getting that money to make sure those bills are covered is essential. You don’t want to risk losing your residence or going hungry. Don’t do what someone I know did though and splurge on fancy foods. A delicious wild caught salmon might have made for a wonderful meal, but being able to add to your food budget for several weeks is even better.

While many states have enacted, or even extended, no eviction notices during this time, you don’t want to be staying in a place where you haven’t been able to pay your rent. As soon as they can, they will be coming for their back rent and/or evicting you. And if you list them as a previous place of residence, don’t expect a glowing review.

So focus on the real needs, and making sure you have what you need to survive.

Recently lost your job…or think your job’s a risk

The second category is you recently lost your job. I know several people who’s work kept them on for several months, but due to extended lock downs, etc the company either went out of business and/or had to start laying off people.

Maybe you got a severance (one person I know got several months salary) – maybe you didn’t.

It’s tempted to see that extra cash and buy the new PlayStation 5 or something else. However, since no one really knows what is going to happen or how long you will be unemployed, I would put this is savings in case you need it in several months. You can always splurge later on when you find a new job, however, just because you could find a job in 2 weeks prepandemic, doesn’t mean you can now. So be safe, and use that cash later on in one of the following scenarios.

Do you have an emergency fund?

You’re currently working, and feel your job is safe for the next six plus months. This means you see people buying from your company, other’s haven’t been laid off, etc.

But do you have an emergency fund. This isn’t the “lost my job” fund, this is you wake up and find out your fridge died over night, or you head to work and your tire hits road debris and needs to be replaced…

I recommend two sets of emergency funds actually. The first one is for $200. I recommend you keep this in cash in a safe place in your house. A safe, or a good hiding place is best. This is the “I need right money now, and the power is out so I can’t use my debit card” money.

The second I recommend another $800-$1,000 to be kept in the bank for one of those above mentioned emergencies.

Don’t touch that money unless it’s an emergency.

I have an emergency fund. Now what?

So your emergency fund is established. Typically I would recommend paying down any outstanding debts. If you have a small debt that could be covered maybe pay that off, so it’s one less thing hanging over your head.

However, for most people, I’d recommend putting it in the bank for a rainy day. I know several people who thought they’d have jobs even during this situation, or thought they’d be called back from furlough find themselves without.

I hate to admit it, but no job is completely safe, no matter what. So until this is over, keeping some money in reserve for a worst case scenario, might be the best option. Once it’s over then look at pay down your debts and/or creating a three to six month savings in case of job loss.

Typically three to six months is all that is needed, however, many financial advisors right now are suggesting nine to twelve months until the pandemic is under control.