Don’t Set Resolutions- Create Good Habits

It’s Resolution Time- At the start of each year, some people set New Year’s resolutions and there is a lot of media coverage about them. Common resolutions are healthier eating, increased physical activity, saving money, decreased debt, improved personal relationships, quitting smoking, learning a new hobby or skill, and reading more.

Not Everyone Makes Resolutions- Other people avoid making resolutions completely because they never produce the desired results. Statements like “I always break my resolutions” and “I always give up by mid-January” are commonplace.

Resolutions Require Change- One reason that New Year’s resolutions are so difficult to keep is that they require people to change their behavior. Examples of behavior changes include eating less or exercising more to lose weight and decreasing spending or earning more income to reduce debt or save money.

Change is Hard- People tend to resist it because it requires a lot of mental energy, willpower, and motivation to do things differently. It is much easier to stick with the status quo, especially if you do not have a clearly defined action plan with detailed steps for how to go about changing.

Try Changing Habits- Whether you call your personal goals New Year’s resolutions or not, there is a better way to achieve them: create good habits. When an action becomes a habit, you do not have to remember when, where, why, or how to do it. It gets done because it becomes part of your daily routine.

Stack Good Habits- “Habit stacking” incorporates a desired behavior into something that you already do. Health-related examples are going to a gym on the way to work and flossing your teeth after brushing them. Financial examples are dropping loose change into a jar when you walk in the door and depositing the tallied up loose change into a savings account.

Do you want to improve some aspect of your life in 2020? Create good habits. Best wishes for a happy, healthy, and financially secure year in 2020.

The SECURE Act: What You Need to Know

The Setting Every Community Up for Retirement Enhancement (SECURE) Act was enacted as part of a year-end budget appropriations bill that passed the U.S. Senate on December 19, 2019. It was subsequently signed by President Trump. Among its key provisions that affect retirement planning are the following:

§  Change in RMD Rules- The start date for required minimum distributions (RMDs) was pushed back from age 70.5 to 72 for those who turn age 70.5 in 2020 or later. Thus, those with tax-deferred retirement savings accounts can let them grow another 1.5 years before having to tap their savings.

§  Change in IRA Rules- Traditional individual retirement account (IRA) contributions are no longer prohibited at age 70.5 and beyond. This, of course, assumes that the person saving money in an IRA has earned income from a job or self-employment. This change is welcome news for older workers who are planning to work into their 70s or beyond and need to save more money.

§  Replacement of “Stretch” Provisions- A new 10-year rule for non-spouse beneficiaries of IRAs and defined contribution plans will replace previous rules that allowed them to stretch distributions over their life expectancy. The entire account balance must now be distributed by the 10^th year following an inheritance.

§  New Rules for Small Businesses- Provisions to encourage the use of retirement plans by small businesses were enacted. For example, there are tax credits available for retirement savings plan start-up costs. The SECURE Act also makes it easier for part-time employees to qualify to make savings plan deposits.

For a comprehensive summary and analysis of the SECURE Act, review this Nerd’s Eye View blog post by nationally known financial planning industry thought leader Michael Kitces.

Trends in Personal Finance: 2019

I recently attended a webinar about 2019 trends in personal finance sponsored by Next Gen Personal Finance (NGPF) and presented a webinar of my own. Below are five 2019 statistics and trends that caught my attention:

¨     One third of new car loans have a loan term of seven years or longer with 1.5% of loans lasting for 8 to 9 years. The average price of a new car in 2019 was $37,000 according to Kelly Blue Book and the average new car loan was over $32,000 according to Experian. When borrowers get large auto loans and focus only on monthly car payments, the length of the loans get extended and they pay more interest over the life of the loan.

¨     Apple launched a credit card in 2019, Amazon launched a secured credit card, and Google announced plans for a checking account. Other non-banks that got into the banking space by partnering with banks and credit unions were robo-advisory firms Wealthfront and Betterment and student loan refinancing company SoFi.

¨     In 2019, index funds comprised a majority of mutual funds. Two reasons that investors choose index funds are their broad diversification and relatively low expense ratios compared to actively-managed funds. Another is, in the words of NGPF co-founder Tim Ranzetta, “it has been a phenomenal decade for investing.”

¨     In October, the brokerage firm Charles Schwab announced zero commissions on all stock trades. Other parts of their business are generating revenue. Brokerage company stock prices dropped and Schwab subsequently acquired TD Ameritrade. Other brokerage firms followed suit and also slashed their commissions.

¨     The Capital One data hack affected 106 million credit card holders and applicants and 400 billion records have been breached so far in 2019. Experts recommend freezing your credit and checking credit reports regularly.

My Take-Aways from the 2019 NJCFE Symposium

I recently attended the 2019 New Jersey Coalition for Financial Education (NJCFE) Symposium. Below are some key take-aways about personal finance topics and financial education:

¨     Financial author Beth Kobliner recommended that parents have “college conversations” early on with their children to set realistic expectations and avoid disappointment in the college selection process. A student’s total debt load should be no more than their first year salary. On average, people will earn $1 million more during their lifetime if they graduate from college with a four-year degree.

¨     Kobliner also noted that people spend about twice as much with plastic than cash. The less “physical” a spending experience is (e.g., using Apple Pay or Google Pay for purchases instead of taking money out of a wallet and paying with cash), the less pain people feel so they buy more and think they got a good deal.

¨     Both Kobliner and Arindam Nag, co-founder and chief executive of CentSai, an online financial education platform, noted the importance of conversations and stories in teaching personal finance concepts. Nag noted that stories should focus on people’s “pain points.” Examples include financial hardship, the high cost of living, and career changes.

¨     NJCFE board member David Vinokurov noted that Social Security will be 85 years old in 2020. It started in 1935 under President Franklin Roosevelt. Social Security benefits are based on a person’s best 35 years of career earnings and full retirement benefits are available at age 66 to 67, depending on your year of birth.

¨     Financial journalist Jonathan Clements noted that behavior change is hard. People know they should save more, but it is hard to do. Knowledge is not enough. What can help people save is removing temptations to spend, making public commitments (so there is accountability), tracking progress, and creating sympathy for your “future self” so you are willing to make sacrifices today.

¨     Another success strategy that Clements mentioned is “habit stacking,” i.e., incorporating a desired behavior into something that you already do. A health-related example is going to a gym on the way to work. A financial example is dropping loose change into a jar when you walk in the door from work or doing errands.

My Take-Aways from the 2019 AFCPE Symposium

I recently attended the 2019 Association for Financial Counseling and Planning Education Symposium. Below are some key take-aways about personal finance topics and financial education:

¨     FINRA has a useful online calculator to determine retirement savings goals. It asks 12 questions including amount already saved for retirement, expected annual income, current age, planned retirement age, inflation rate, and current tax rate. The calculator is available at https://tools.finra.org/retirement_calculator/.

¨     Critical issues related to retirement planning that surfaced in a group discussion at the Cooperative Extension Pre-Symposium workshop included: lack of savings, health care concerns, outstanding debt, downsizing living spaces and possessions, and emotional issues related to finding fulfillment after leaving a long-time career.

¨     Financial education is most successful when it is accompanied by resources and assets. Examples are a “living wage” and individual development accounts (IDAs) for people with limited resources. People will talk about money if financial educators and coaches create a safe, “no shame” place to do so.

¨     The financial security of Americans is foundational for a better economy. Conversely, financial insecurity generates costs and consequences. One third of Americans have a second job and 53% reported feeling anxious about their finances according to the 2018 National Financial Capability Study.

¨     Four “drivers” of the financial insecurity experienced by many Americans are declining wages, the increasing cost of housing, decreased savings, and increased household debt. With more stable finances, people can be producers in the economy as well as consumers.