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Staying Out of Debt Once You Get Out of Debt

By | Advice, News, Published Articles

Provided by American Wealth Management

Paying off a major debt produces a sense of relief. You can celebrate a financial milestone; you can “pay yourself first” to greater degree and direct more money toward your dreams and your financial future rather than your creditors.

Once you get out of excessive consumer debt, the last thing you want to do is fall right back in. What steps can you take to reduce that possibility, and what missteps should you avoid making?

Step 1: Save money

So often, an unexpected event can put you in debt: an auto breakdown, a job loss, a trip to the emergency room or a hospital stay. If you earmark $50 or $100 a month (or even $20 a month) for an emergency fund, you can create a pool of money that may help you deal with the financial impact of such crises. Every dollar you save for these events is a dollar you do not have to borrow through a credit card or a personal loan at burdensome interest rates.

Step 2: Budget

Think about a 50/30/20 household budget: you assign half of your income for essentials like housing payments and food, 30% to discretionary purchases like shopping, eating out, and entertainment, and 20% to savings and/or paying down whatever minor debts you must incur from month to month.

Step 3: Buy things with an eye on value

Do you really need a new car that will require financing, one that will rapidly depreciate as soon as you drive it off the lot? A late-model used car might be a much better purchase. Similarly, could you save money by eating in more often or bringing a lunch to work? You could find some very nice goods at very cheap prices by shopping at thrift stores or online used marketplaces. These are all smart consumer steps, net positives for your financial picture.

You should also be aware of some potential missteps that could lead you right back into significant debt, or negatively impact your credit rating. Some of them may be taken consciously, others unconsciously.

Misstep 1: Spending freely once you are free of debt

If you get rid of consumer debt, but retain the spending mentality that drove you into it, your financial progress may be short-lived. If the experience of getting into (and getting out of) debt does not change that mindset, then you risk racking up serious debt again.

Misstep 2: Living without adequate health, auto, or disability insurance

Sometimes people are forced to assume large debts as a direct consequence of being uninsured. Hopefully, you have not been one of them. If you must pay for your own insurance and the premiums seem high, remember that they will likely be lower than the bills you could be forced to pay out of pocket without such coverage.

Misstep 3: Getting rid of the credit cards you used to go into debt

You may think this is a great way to quickly improve your credit rating. It may not be. Closing out credit cards reduces the amount of credit you can potentially draw on per month, which hurts your credit utilization ratio. Having more accounts open (rather than less) improves that ratio.1

The key is how you use the accounts in the future. When you use about 10% of your available credit each month, that is a positive for your credit score. When you use more than 30%, you potentially harm your score. For the record, the length of your credit history accounts for about 15% of your FICO score, so if a card has more good payment history than bad, getting rid of it could be a slight negative.

Instead of closing these accounts, keep them open, and use the cards once a month or less. Should a card charge you an annual fee, see if you can downgrade to a card from the same issuer that does not.

If you can keep debt reined in, you will have an opportunity to make financial strides. Not everyone has such a chance due to the weight of their liabilities. Earlier this year, total U.S. credit card debt alone surpassed $815 billion.2

American Wealth Management may be reached at 775.332.7000 or info@financialhealth.com.

This material was prepared by MarketingPro, Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. This information has been derived from sources believed to be accurate. Please note – investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.

Investment advice offered through American Wealth Management (“AWM”), a SEC-registered investment adviser. Certain personnel of AWM may also be registered representatives of M.S. Howells & Co. (“MSH”), Member FINRA/SIPC, a registered broker-dealer, and therefore, may offer securities through MSH. AWM and MSH are not affiliated entities.

Citations.

1 – cnbc.com/2018/01/19/why-you-should-keep-old-credit-card-accounts-open.html [1/19/18]

2 – usatoday.com/story/money/personalfinance/2018/08/15/simple-things-anyone-can-do-stay-out-debt/989168002/ [8/15/18]

Can Social Security Benefits Help with Longevity Risk?

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How long will you live?

It’s not a question anyone can answer with any certainty, and that creates a significant risk when planning for retirement. Your retirement may last for a long time, and you will need to have enough income to live comfortably without running out of money.

In 2018, Gallup surveyed retirees about their retirement income. The top income sources for Americans were:1

  • 57% Social Security benefits
  • 37% Employers’ pension plans
  • 27% 401(k), IRA, or other retirement plan savings
  • 19% Home equity
  • 17% Taxable savings and investment accounts
  • 15% Stocks, bonds, and other investments

Clearly, Social Security is the cornerstone of retirement income for many Americans, and it delivers a steady stream of income for life.

How long have you been paying into the Social Security system?

Americans contribute to the Social Security system throughout their working years. Every pay period, money is deducted from our paychecks to fund Social Security and Medicare. This payroll tax is called FICA (Federal Insurance Contributions Act).2

During 2018, American workers pay 6.2 percent of their income, up to $128,400 in earnings, into FICA. Employers also pay 6.2 percent. If you are self-employed, you pay the entire 12.4 percent.2

The money goes into the Old Age and Survivors Insurance (OASI) and Disability Insurance (DI) Trust Funds, which pay Social Security benefits. These are two distinct funds, although, they are often referred to as a single entity: OASDI.3, 4

An additional 1.45 percent is withheld for Medicare’s Hospital Insurance program and matched by your employer. If you’re self-employed, you pay the full 2.9 percent.5, 6

The money paid to the OASI and DI Trust Funds is used to pay benefits to:5

  • Current retirees – a group that may include your parents and grandparents
  • People with disabilities – a group that may include friends and loved ones
  • Survivors – a group that may include spouses or children
  • Dependents – a group that may also include spouses and children

Social Security benefits can help minimize longevity risk

There are many different Social Security claiming strategies. The one you choose will depend on a variety of factors, including your current savings, your health (and the health of family members), your legacy goals, and other issues.7 If you’re not familiar with claiming strategies, talk with your financial professional before registering for benefits.

Timing makes a difference, too. In general, you can take benefits early (if you’re willing to accept up to a 30 percent lower benefit), take benefits at ‘normal’ retirement age, or delay your benefits and receive a higher payment.6 If you’re married, the decision can affect how much income your spouse and dependents receive, as well.

If you can afford to delay taking benefits, you may be able to minimize the risk associated with increasing longevity because you’ll receive more monthly income from Social Security once you start to take it.7

There is just one catch: The Social Security system is at risk

You should receive Social Security benefits for life – as long as they’re still available.

According to a recent Gallup survey, fewer Americans are concerned about the solvency of Social Security today than they have been in the past. It’s a notable state of affairs because the system is at risk. Justin McCarthy reported on Gallup.com:8

“Americans’ level of worry about the Social Security system is on the low end of the nearly two-decade trend, but the financial solvency of the program’s fate is in jeopardy, as it faces long-term sustainability challenges.”

2018 is a milestone year for the OASI Trust Fund. This is the first year since 1982 the cost of benefits paid is expected to exceed income. Unless changes are made, the OASI Trust Fund will be depleted by 2034. At that time, the income received will be enough to pay about 77 percent of scheduled benefits.9

The 2018 Social Security update from the Center for Retirement Research at Boston College concluded:10

“The 2018 Trustees Report confirms what has been evident for almost three decades – namely, Social Security is facing a long-term financing shortfall which equals 1.0 percent of GDP…stabilizing the system’s finances should be a high priority to restore confidence in our ability to manage our fiscal policy and to assure working Americans that they will receive the income they need in retirement. The long-run deficit can be eliminated only by putting more money into the system or by cutting benefits. There is no silver bullet.”

Before you claim Social Security benefits, speak with the advisors at American Wealth Management to determine which strategy best suits your circumstances.

4 Reasons Smaller Firms Have the Best Client Service

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When it comes to investing your money and planning for retirement, your options are seemingly endless.

Several big-name financial service companies may come to mind when you think about growing your investment accounts. These big-name companies have a lot to offer in terms of investment technology; however, the size of these organizations often makes it difficult for their advisors to find the time to create meaningful client relationships through sincere, quality service.

Robo-advisors are also gaining popularity, using online questionnaires to determine how your money should be invested. Clients may find that their unique financial needs aren’t being considered. This impersonal approach doesn’t appeal to everyone; this is especially true for investors who feel their unique needs should be addressed on a personal level.

Small firms can excel in client service. At American Wealth Management, client service is our top priority. It’s what sets us apart. We maintain a fiduciary standard with all of our clients, which means we act in the client’s best interest. This standard protects clients from excessive commissions and fees, products that don’t match client goals, and more. We know our clients by name, we know their stories, and we try our best to have our advice align with each client’s needs.

Here are four reasons you can trust smaller financial firms to take thoughtful care of you and your money:

1. Small firms treat you like a person, not a number.

An advisor at a large, national firm may have more than 1,000 clients. While this seems impressive on the surface, you can imagine that effectively maintaining all of these relationships is understandably difficult. This advisor will spend time with his or her biggest clients and often forget about the smaller ones. After all, there is only so much time in a day. At AWM, each client is important. We take the time to get to know you and understand how we can best serve you. You are much more than a number to us.

2. Small firms create personal relationships.

Large firms may not have the time needed to learn about you and your goals. The advisors at AWM want to know you. There is so much we need to know about you to effectively take care of your finances today and long term. You can expect us to ask you these types of questions: Do you want to leave a legacy? Are you charitably inclined? What do you do for fun? We consider our clients friends. More importantly, we will ask you about your goals, your ambitions, when you want to retire, and how you want to live in retirement. Through this relationship, we will assist you with strategically investing your assets and planning for an enjoyable retirement. We work hard to make your ambitions tangible.

3. Small firms focus on holistic growth.

While asset growth is a mainstay of our business, the advisors at AWM also spend time helping you plan for retirement, wealth security, and wealth transition. Our holistic approach considers the complexities of your life and how all of the pieces fit together in order to provide a tailored financial strategy. As you transition from one stage of investment planning to another, we stay with you as your needs change and evolve and as financial opportunities change.

4. Small firms use independence to better serve you.

Large firms create partnerships with companies and may recommend these companies’ products to you. Purchasing these products may be in your best interest, but they also might not be. We care about your best interest. As an independent firm, AWM does not have obligations to investment product providers. We don’t need to meet production or cross-sell quotas or other corporate directives that can lead to conflicts of interest. We maintain a fiduciary standard to serve you.

Many financial advisors choose to focus their expertise within smaller firms. The size of a company does not reflect its excellence. When it comes to investing your money, you want a financial expert—someone you know and trust—who is 100% in your corner. When it comes to your hard-earned money, your financial needs deserve personalized attention. American Wealth Management is here to provide that experience.

Securities offered through M.S. Howells & Co. Member FINRA/SIPC. Advisory services offered through American Wealth Management. M.S. Howells & Co. is not affiliated with American Wealth Management.