These are your 2021 401(k) and IRA Contribution Limits

The IRS released annual inflation adjustments for 2021 for many tax provisions on Monday, including new income tax brackets and an increased standard deduction. It also announced that contribution limits for 401(k)s and IRAs will not increase next year. 

What Changed?

The following limits are going up for 2021:

  • The annual additions limit for defined contribution plans increases to $58,000
  • The annual compensation limit increases to $290,000
  • The Social Security Wage Base increases to $142,800

The following limits will remain the same next year: 

  • The salary deferral limit for 401(k), 403(b) and 457 plans remains at $19,500
  • The SIMPLE deferral limit remains at $13,500
  • The catch-up contribution limits for 401(k) plans and SIMPLE IRAs remain the same $6,500 and $3,000 respectively
  • The annual additions limit for defined benefit plans remains at $230,000
  • The compensation limit for determining who is a highly compensated employee will remain the same at $130,000

For more 2021 cost-of-living adjustments and 401(k) limits, visit the IRS’s bulletin. If you have any questions, please reach out to us at info@shermanwealth.com or check out our other blogs for more information on 401(k)’s. 

 

Financial Advice For Parents

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Raising a child in today’s world can cost hundreds of thousands of dollars. As a parent of four children ranging from ages 5 to 16, I can attest to just how expensive kids can be. Besides just the essentials like food and clothes, there are club teams, tutors, dance lessons and so much more. With each additional family member comes new financial considerations and expenses. The importance of planning for these costs before they arise is a key reason why many financial advisors are targeting young families and helping them successfully navigate how to cover their children’s expenses without compromising their own financial security. Here are a few top takeaways from some of these advisors:

SAVING FOR COLLEGE

With a high school junior in our house, it won’t be long before we are paying that dreaded college tuition bill. And, due to the ballooning costs of higher education, this bill is not likely to be a small one! If possible, new parents should try to start saving as soon as they can for their child’s college tuition.The earlier you start saving, the better prepared you’ll be. If you save $500 a month at birth, you should have around $190,000 saved by the time that child reaches 18 (assuming an annual return of 6%). However, if you don’t start until your son or daughter is 10, you’ll only have around $60,000 by the time they graduate high school. Setting up a state-sponsored 529 college savings plan, allows parents to invest money and then withdraw it tax-free, so long as the funds are used for certain education expenses. However, as you prepare for your children’s future, make sure that you remain focused on your retirement saving as well. There are lots of ways to pay for college, but you can only use the resources you’ve accumulated for your own retirement.   

CHILDCARE AND HEALTH CARE

When our first child was born, my husband and I were both working, and trying to find affordable childcare was not easy. Childcare is one of the biggest expenses new parents will face, especially if both parents work. In some cases, one parent will decide to leave their job and take care of the child themselves, especially if the cost of childcare is more than one parent is making. This is exactly what happened when our second child was born, since it was no longer cost effective to pay for childcare for two children with my salary.   

Meanwhile, childbirth and adoption count as qualifying events that allow parents to make changes to their employee benefits outside of the open enrollment period at work. For example, new parents can expect to see their medical expenses rise and those who have access to a flexible savings account and health savings account at work should use them since the money put into an FSA or HSA avoids federal taxation. In some cases, employers offer a Dependent Care FSA, which can be used for costs picked up from a nanny, babysitter or childcare center.

When it comes to health insurance, if both parents work, you should examine which plan will cost less to add the child to. Most doctor visits in the first couple of years are considered wellness visits, which are typically free or very low-cost in most health-care plans today. But, you should look into which plan is most cost-effective in the event of a trip to the emergency room or having to see a specialist – even with good insurance, the price tag of a broken bone is a lot more than you might think!

LIFE INSURANCE

Even though it’s not something most people like to think about, preparing for death is of utmost importance when becoming a parent. Your financial advisor should be able to run various calculations to figure out the amount of protection you would need. Many families make the mistake of only getting life insurance for the main earner, experts say, but both parents should be covered. Many people think that since stay-at-home parent isn’t actually earning anything, they don’t need insurance. However, when it comes to life insurance, you need to evaluate what it would cost to have someone else take care of your children if something were to happen to that parent.  

It is also extremely important to put together estate planning documents, including a will and health-care directives, as well as discussing appointing a guardian in the event of an unexpected life event. When we found out we were expecting our first child, it forced us to have some difficult conversations about who we would want to take of our child and how our assets would be distributed if something happened to us. It’s also important to revisit those questions each time you add another child to your family or if there is another major change to your assets. The guardians you might have written in your will when you were 25 might not be the same guardians you would choose when you are 45. None of these decisions are easy ones, but they are vital to preparing for your life as a parent.

EMERGENCY SAVINGS

With all the additional expenses new parents can face, from diapers to a larger home and mortgage, it’s more important than ever to have a safety net for those unexpected costs. Having children is a good reason to have a bigger emergency fund, simply because there are now more people who are dependent on you financially. Aside from the random home and car repairs that always seem to pop up when you least expect them, now add braces, sports equipment and teenage social lives to the mix. Having some money from each paycheck deposited directly into an account that you don’t touch is an easy way to make sure you are creating an ample emergency fund should you need it.  

There are so many wonderful aspects of being a parent, but it is definitely a costly undertaking. Seeking some financial guidance before you become a parent is always a good idea, but it’s never too late to start planning for your future with a family. If you have any questions about saving for college, choosing the right health plan, putting together your estate documents or anything else related to your financial goals or plans, please contact us.  We offer a free 30-minute introductory consultation and would love to hear from you!  Check out our other blogs for more financial advice and tips.

 

How to Maximize Tax Savings From Workplace Benefits

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When preparing your finances for 2021, make sure to review your workplace benefits for next year before the open enrollment period comes to a close. Your household finances for next year could depend on it. An interesting CNBC article discussed the benefits you can unravel within your workplace health-care and ways to maximize it. 

After one of the most difficult and financially stressful years for many Americans, digging back into the details of workplace benefits like health savings accounts, or HSAs, and flexible spending accounts (FSAs) is probably the last thing you want to do.

Overcome that fatigue and get to it.

Every year, we take a brief look at these options and plans, but COVID-19 has greatly changed the optics of these plans. For some, the coronavirus pandemic had led to much higher medical expenses than expected this year. For others, it has prevented them from accessing health care they expected to use, due to community lockdowns and overburdened health-care facilities. 

Workplace health-care plans require a fresh look going forward, especially after COVID-19. Talk to your HR rep and discuss the details of options open to you. Below we will touch on a few potential options and benefits you should consider. 

The Tax Benefits of HSA’s

First part of your workplace benefits to analyze is HSAs. HSAs, available to savers with a high-deductible plan — that is, one with a deductible of at least $1,400 for self-only health coverage — have three key tax benefits.

First, they allow participants to contribute money to the account either pre-tax or on a tax-deductible basis.

Second, the investable funds accumulate free of taxes. Finally, you can withdraw the money tax-free if it’s used for eligible health-care expenses. You don’t need to spend the balance down each year, as unused funds in the account roll forward, regardless of how much you spend. Employers can also boost your savings with a matching contribution.

The Ins and Outs of Medical FSAs

Medical FSAs share some commonalities with HSAs.Both allow for pre-tax contributions. Balances can also be used on tax-free basis if it’s for qualified medical expenses. In 2020 and 2021, you can contribute up to $2,750 to a medical FSA.

You generally can’t contribute to both an HSA and a medical FSA at the same time.

The major difference between the two accounts is that FSAs have a  “use it or lose it” stipulation that requires participants either spend the money they save or forfeit the funds to their employer at year-end. Firms may choose to let employees roll over some of the money — that is, up to $550 for funds from the 2020 plan year — or they may give them a grace period up until March 15 of the following year to use the funding.

Dependent care FSAs

Another area to analyze within your workplace benefits are Dependent Care FSAs. Dependent care FSAs, which help employees offset dependent and childcare costs, have been dramatically affected by the pandemic and resulting community shutdowns. Generally, a worker can save up to $5,000 in one of these accounts on a pre-tax basis, but again, the funds must be used up by the end of the year or they’re forfeited.

Due to Covid-19, daycare centers in many parts of the country have been closed for much of the year. What’s more, many employees found themselves working from home and taking care of their children themselves, which means they could have hefty balances in these dependent care FSAs.

The IRS addressed this situation by allowing employers to give workers the option of changing the amount they’d normally defer in the middle of the year.

That option may not be available next year, so be thoughtful about the money you commit to these dependent care FSAs as you decide how to proceed in 2021.

Given the crazy year we’ve had, it’s important to take a deeper look at all your options when it comes to your workplace benefits. The coronavirus pandemic has shown us what unprecedented circumstances can cause and the importance of taking advantage of all the benefits that are available to you. If you have any questions, please reach out at info@shermanwealth.com and make sure to also take a look at other tips and advice written in our blogs.  

Top 5 Pieces of Financial Advice

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As we are all adjusting to the new norm that the coronavirus pandemic has created in our world, we are also learning pieces of advice that we could share from this experience. When going through an economic crisis, it’s important to keep some tips at top-of-mind to help you navigate the bumpy waters. In a CNBC Select Article, we found 5 great pieces of financial advice that we want to share with you to put in your financial repertoire.

First and foremost, try not to accumulate credit card debt. Racking up credit card debt can have very negative long term consequences, so it’s important that you pay the full balance on time. When you do not pay the full balance on time, your card will quickly accumulate interest, which often can get so high that it’s hard to pay off. 

According to recent Federal Reserve data released in September, the average interest rate for all credit card accounts is 14.87%. Among accounts assessed interest, or accounts with outstanding finance charges, the average interest rate rises to 16.88%. But for consumers with credit scores below 670, interest rates can near 30%, CNBC Select reports.

Next, make sure you don’t buy things you can’t afford. Although this one seems obvious, it’s much more common than you think. Avoid overspending and spending on things you can live without. Start putting that extra money into savings accounts where you can be accruing interest and earning money. 

Third, invest the year’s expenses or anything saved after you have the year’s expenses saved? Before the pandemic, many people were saying how you should have several months of rent and expenses in a savings account for a rainy day, but as we have seen the economic hardships the coronavirus has inflicted upon our society, we are suggesting to save about a year’s worth of expenses before investing it elsewhere. 

Fourth, start to think like a savvy businessman or woman. Learn to negotiate. Especially in the world we are living in today, make sure you are constantly looking for deals and inquiring about credit card versus cash options. Oftentimes, places will charge you less if you pay in cash. So, before swiping that card, make sure you think about all your options. 

Lastly, buy in bulk. With Amazon becoming increasingly popular and making it possible to get what you need in a matter of hours, take advantage of deals and places you can buy in bulk. If you can save a few dollars here and there, take advantage of it. It’s important to be a smart shopper, especially when buying something pricey, such as groceries for a large family. 

By implementing some of these basic money management tips into your daily routine, you will find yourself becoming a more savvy shopper and saving more money. It is especially important during an economic recession to take these concepts into consideration and make the most of your finances. If you have any questions on other ways you can maximize your financial portfolio and find places in your budget where you can save money, please reach out to us at info@shermanwealth.com or visit our site at www.shermanwealth.com. Check out our other blog posts for more financial advice and tips! 

 

Here’s The Importance of Financial Literacy

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Sherman Wealth has long been advocates of promoting financial literacy and empowering our world to become more educated on how to manage all aspects of their financial lives. We want to highlight an interesting article we saw on www.evidenceinvestor.com, discussing several reasons why “high flying professionals fail at investing”. This piece highlights the lack of financial literacy in our country, regardless of occupation or socio-economic upbringing. According to the article, “the best investors often times aren’t those with the highest IQs or who’ve read the most books, it isn’t knowledge, but SELF-knowledge, that really sets them apart.” 

Often, high-earning professionals think they are saving enough but countless financial complexities exist within a professional services career track. Biases or mental errors are some of the biggest things standing in the way of financial success, mainly because they’re not easy to recognize in ourselves. Additionally, people are naturally resistant to change and most people are hesitant to pay small costs even for big gains. 

Failure to rebalance is also something that many people struggle with and contributes to financial literacy. People are reluctant to take action to rebalance a portfolio. It’s too much fun to let winners run. It’s also psychologically difficult to sell winners to buy losers. But failure to rebalance quickly causes the client to be dangerously exposed to a downward turn in the markets

People also tend to overestimate the significance of recent events and irrationally discount longer-term trends. Those of us over a certain age remember Black Monday on October 19th, 1987. The stock market lost a quarter of its value in a single day. That spooked a lot of people – and many got out of the market right after. Looking back at it now, Black Monday barely registers as a blip on the graph. This is an example of recency bias. Recent losses play havoc on our emotions and cause us to lose perspective. The long-term trend of the stock market makes any single day’s volatility look insignificant in comparison, so when we look back at a single day like Black Monday on a chart, we wonder how we could have panicked. Furthermore, given the current climate with COVID-19, it’s important to consider this idea, as people may have panicked back in March, selling assets in their portfolio, instead of holding onto them as the economy recovers. While it often seems natural to panic during an economic downturn, it’s important to remember that these dips recover naturally over time. 

These are just a few examples of how society and perception can lead us to make poor financial decisions. Given the current climate we are living in today, it is crucial to make sure you fully understand the decisions you make within your portfolio and that they are long-term, strategic moves. With a lack of financial literacy amongst all career fields and economic classes in our society, we realize the importance of being financially educated and would love to help you to make smarter decisions. If you have any questions or would like to set up a time to talk about your finances, please feel free to reach out at info@shermanwealth.com. Check out more of our blogs that discuss the importance of financial literacy.

Financial Literacy More Important to Americans Than Health and Wellness

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As we’ve mentioned previously, financial literacy is a skill that is lacking in our education system and amongst individuals across the country. A recent survey by Charles Schwab discusses the importance of financial literacy to Americans and how it should take precedence over health and wellness. 

According to the survey, the COVID-19 pandemic has underscored the need for basic personal finance and money management skills. Nearly 63% of U.S. adults said financial education was the most important supplementary graduation requirement to Math, English, and Science. That’s comparable with 43% of individuals who said health and wellness was more important. 

History shows that everytime our country faces a detrimental crisis, “the need for greater financial literacy becomes more apparent,” said Carrie Schwab-Pomerantz, president of Charles Schwab Foundation.

The following data was collected to support the need for financial education within our schooling system and within our country. 

Nearly nine in 10 Americans (89%) said a lack of financial education contributes to some of the country’s social issues, including poverty (58%), lack of job opportunities (53%), unemployment (53%) and wealth inequality (52%).

They survey found half of respondents would be hard-pressed to cover a $1,000 or less emergency expense in the next month if they had to. Financial education stresses the importance of saving and building up an emergency fund. 

Many respondents indicated that they wished they had been taught financial skills when they were younger, including the value of saving money (59%), basic money management (52%) and how to set financial goals and work toward them (51%). Due to this lack of financial education, so many individuals are lost when it comes to how much they should be saving, where they should save, where they should invest and more. 

Sherman Wealth has long been a strong advocate of increasing financial literacy in our country and encouraging our youth to educate themselves early on in their lives. A thorough financial education is now more important than ever. Learning the proper way to manage money and set yourself up for financial success will ensure you are prepared at all times, even during an economic crisis, such as a pandemic. 

Many schools across the country are realizing the importance of beginning a financial education at an early age. Studies show that having state-required classes can have a significant impact on students’ money moves in the future. Forty-five states now include personal finance education in their curriculum standards for kindergarten through 12 grades. In addition to programs in schools, Wall Street Bound is an organization that provides urban youth with financial, educational, and technical resources to get them closer to Wall Street. If you are passionate about spreading awareness about financial literacy, you can support Wall Street Bound with a donation.  As always, Sherman Wealth is here to answer any questions you may have and most importantly, happy to help educate you and those around you on what money means and how you should make financial literacy a priority.

Recently Graduated? How to Establish A Good Credit Score

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Are you a recent college graduate? Are you starting your first job? While it’s extremely important to save money when you are first starting out, it’s also quite important to know how to spend money and understand the concepts behind your credit score and establishing good credit. 

Many consumers, especially those just joining the workforce, oftentimes don’t understand basic credit score concepts. Here are some tips on understanding credit and ways to establish a good credit score. 

As your first paycheck starts rolling in, make sure you are opening multiple lines of credit, including opening credit cards, putting your name on your school apartment lease, and signing your name on the comcast bill. However, when you open these lines of credit and sign your name, make sure you are paying your bills in full each month. If your roommate hasn’t paid your cable bill, make sure to stay on top of them so it doesn’t impact you down the road. However, if you have been impacted by the coronavirus pandemic and can’t pay the full bill, make sure you understand to pay the minimum and reach to your creditor to figure out a reasonable solution or game plan. 

Here are five important credit concepts that you should be aware of:

  1. Low credit scores can cost car buyers thousands more

According to the CFA and VantageScore Solutions survey, only 22% of consumers reported knowing that a low credit score borrower, when compared to a high credit score borrower, would likely pay over $5,000 in interest on a $20,000, 60-month car loan. With a low credit score, you are likely to only qualify for subprime auto loans whose annual interest rates often exceed 20%, the study says. 

Having a good credit score matters since not only will your interest on credit cards be less than those with worse-off credit, but so will the interest you pay on loans. Having healthy credit can earn you a lower interest rate on new loans and make it easier to qualify for financial milestones in life, like a first apartment or a new car.

  1. Your credit score actually measures your risk of not paying

Only 33% of those surveyed said that they know a credit score measures the borrower’s risk of not repaying a loan, while 14% thought it measures the borrower’s knowledge or attitude toward consumer credit.

You could have a good attitude about credit, but still have a bad credit score. The point is that your score illustrates to lenders how you would use the credit they extend to you. If you’re just beginning your credit journey, know that you need credit to build credit. Once you start using your credit card, lenders and card issuers like to see that you can use credit responsibly, which means using less than 30% of your available credit and paying your monthly bills on time and in full.

  1. Credit repair companies charge for services you can sometimes do yourself

Before you sign up for a credit repair service advertised to you, know what it will cost. While over two-fifths (42%) of consumers surveyed may be right that credit repair companies are usually helpful in correcting any credit report errors or helping to improve one’s credit score, these companies tend to charge relatively high fees to do what you could do on your own for free.

  1. Your age has nothing to do with your credit score, except for how long you’ve been borrowing credit

Nearly half (48%) of the survey respondents reported thinking that age is a factor used to calculate a credit score. The truth is that your age doesn’t matter in calculating your credit score, only your use of credit matters. In fact, the five components that make up your credit score include your payment history, utilization rate, length of credit history, new credit, and credit mix.

  1. Utility companies can check your credit score

Your credit score is a good picture of how likely you are to pay your bills on time, but the survey found that only 50% of consumers know that an electric company can use credit scores to determine the amount of deposit you make.

Unless you have a perfect credit score, there is always room for improvement. The bottom line is that when you are just starting out, it’s easy to overlook the small steps needed in establishing a good score. However, having a good credit score is something that should be maintained and will impact many financial decisions you are able to make in your lifetime. If you have any questions about your credit score, how to obtain credit or how to fix a bad credit score, please contact us for a free 30 minute consultation.

 

Fees & Your Investments: What You Need To Know

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Whether your investment portfolio consists of a 401k or multiple brokerage and retirement accounts, it is important to understand the fees associated with your investments which can dramatically lower returns over the years. Here are some fees you should look out for. 

Account Fees:

For 401k accounts, there are typically fees charged by the plan provider to administer the plan. Brokerage accounts may also have various account service fees, so check the fine print for more details. Sometimes these are waived if you opt-in to electronic delivery and or meet certain account minimums.

Fund Fees:

When it comes to fund fees, ETFs tend to be lower cost than mutual fund fees. Most ETFs are passively managed index funds, while most mutual funds are actively managed funds although the reverse also exists. Actively managed funds will have higher fees, but fees will also vary depending on the underlying assets.

Expense Ratio

The expense ratio is the annual fee that ETFs and mutual funds charge their shareholders. It is expressed as the percentage of assets deducted for fund expenses such as management fees, administrative fees, operating costs, and all other asset-based costs incurred by the fund. Mutual funds also include 12b-1 fees in the expense ratio, which ETFs do not have. What is not included in the expense ratio of a fund is the cost to trade the fund itself.

Mutual Fund Specific Fees:

12B-1 Fees

These mutual fund fees are charged annually and are considered to be an operational expense associated with a fund’s “marketing and distribution.” This could be anything from paying brokers to sell the funds or providing sales incentives. These fees are included in a fund’s expense ratio meaning the higher the 12B-1 fee, the higher the expense ratio. Investors can locate more information about these particular fees in a fund’s prospectus.

Front-End Load Fees

Front-end load fees are paid out to a broker in the form of commission when he or she sells a mutual fund. When an investor purchases a front-end load mutual fund, a percentage of their investment, usually 2% to 5%, goes to the broker. 

Back-End Load Fees

Also known as a deferred sales charge or DSC, back-end load mutual funds charge a penalty fee if you sell your shares within five to ten years. Fees are highest within the first year of purchase, and decrease each year until the end of the agreed-upon holding period. 

Trading Costs:

Transaction Fees

Despite a trend of more brokerages offering free transactions, transaction fees still exist when buying and selling investments. The price range of transaction fees varies, and it should be an expense to keep track of if you make lots of transactions over time. 

Bid-Ask Spread

The bid-ask spread is a truly hidden cost to trading and is referred to as an implicit cost. This is the difference between the price to buy a security and to sell a security, which are not the same. Highly liquid securities will have very tight spreads, making this cost minimal, but it is important to pay attention to the liquidity of the fund. 

Advisor Fees:

Looking for someone to manage your finances? 

While some advisors are commission based and make money through the commissions associated with each investment transaction, here at Sherman Wealth, we are a fee-only (RIA) financial planning advisor, and can help you manage your finances and encourage you to think differently about your money.

As a fee-only registered investment advisor (RIA), we charge a flat rate for our services. RIAs have a fiduciary responsibility to act in their clients’ best interests. Unlike investment brokers who can end up costing the client a lot of money depending on the frequency and volume of trades, we provide advice and make transactions without taking commission-based compensation. RIA’s  tend to use low-fee investments, including low-cost no-load mutual funds, individual stocks and bonds and investments that do not have 12B-1 fees.

If you have any questions or think we could be of service to you, please sign up for a free 30-minute consultation here. We would be happy to help you and answer any questions you may have. 

 

Inheriting Money Attitudes – Are Financial Habits Learned?

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Whom we become as adults is largely influenced by how and by whom we are raised. Our parents shape us in many ways. If you are given chores as a child, you are more than likely to become an independent worker as an adult. If you live in a house where there are lots of arguments, you are more likely to struggle to form healthy relationships on your own.  As we consider that these types of characteristics are often learned as we grow up, does how we are raised also impact our finances?  A recent survey gives us a better understanding of how certain financial upbringings can shape our money attitudes as adults.

EARLY INFLUENCE

According to over three-quarters of those surveyed, parents influenced their financial habits as adults and those in good current financial standing were the most likely to have had some parental influence at an early age.  Those with bad financial standing also claimed that their parents influenced their financial habits.

For some reason, many parents shy away from money conversations with their children, even though it could have a positive influence on their financial habits. Over half of those surveyed said their parents never talked to them about the value of their financial accounts or life insurance or whether they had investments or debt. If these topics were discussed, it typically wasn’t until the children were adults themselves. Of the parents who did talk to their children about money, it was most commonly about their general financial standing and occurred around age 15.

FINANCIAL EMERGENCY DISCUSSIONS

Research suggests that talking to your children about the scarier side of money can be quite impactful. Respondents whose parents talked to them about the possibility of financial crises or recessions as children were more likely to be in good financial standing as adults. A key component of financial security is having cash resources you can tap in case of a financial emergency. This is why it’s important to talk to your children about financial crises or recessions, like the “dot-com bubble” that changed the way many baby boomers viewed investing, or the Great Recession that scarred millennials. Now, the COVID-19 global pandemic is likely to have a similar impact on Generation Z. Discussing these worst-case scenarios increases the likelihood that your children will plan ahead with an emergency fund as adults. 

PRINCIPLES FOR FINANCIAL STABILITY

Teaching your children financial life lessons could reduce the possibility of entering into credit card debt. According to our respondents, people whose parents taught them basic financial life lessons had less credit card debt than those whose parents didn’t teach them anything about money. The most common financial lesson parents taught their millennial children was the difference between a need and a want.  Despite having received the most financial education from their parents, millennials reported the highest instance of being worse off financially than their parents.  However, the majority of millennials thought they would eventually be better off than their parents. Their financial optimism may be due to the fact that nearly one-third of millennials received a pay raise in the past 12 months. 

The least commonly imparted financial lesson for all generations was how to invest, which is unfortunate given those whose parents did teach them how to invest typically reported having the highest income and estimated net worth. When it comes to gender, parents were especially negligent in discussing investing where their daughters were concerned; men were 35% more likely than women to have been taught to invest. Men were also more likely to have been taught about financial goal setting. One reason for the discrepancy could be that mothers are more likely to teach their daughters about finance, thus causing traditional gender roles to get passed down from generation to generation. However, when it comes to generational changes, many millennial women have made strides in income and now earn more than their mothers.

SPENDING STYLES

The survey results suggested a connection between parents’ spending style and their children’s style. The more responsible a parent is with his or her spending, the more likely their children are to be responsible spenders themselves. Over half of respondents whose parents only spent money when they could afford it reported being debt-free today, compared to only 42% of respondents whose parents often spent beyond their means. Children whose parents were conservative spenders, often choosing to forgo luxuries even when they could afford it, were the most likely to have an emergency fund as an adult and children whose parents only spent when they could afford it were slightly less likely to have emergency funds as adults. Having a parent who often spent beyond their means can lead to more debt and less in emergency funds, but the majority of children brought up in such households said they’ve done better for themselves as adults. Children of responsible and conservative spenders were far more likely to emulate their parents’ spending habits as adults. 

CREATING A BETTER FINANCIAL FUTURE

How we raise our children has a formative impact on who they become as adults. If you teach them how to save and invest, they are more likely to become financially responsible adults. A financial education should be a key aspect of any child’s upbringing. It is important to facilitate healthy conversations about money with our children so they are prepared for the important financial life lessons as they grow up.  Teaching key financial tools to our children will enable them to budget, manage their finances and plan for their futures as adults.  If you have any questions relating to teaching your children about early financial habits, please contact us – we are here to help!

The Importance of Financial Literacy

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It was recently announced that the state of South Carolina was pushing to pass a bill that would require all high school students to take a course on financial literacy in order to graduate. Five states (Alabama, Missouri, Tennessee, Utah, and Virginia) are the only other states to have passed a similar law. As professionals who strive to preach the importance of this topic, we are very happy to see these developments. In fact, we think it’s particularly great that we, as a nation, are beginning to demand that children learn the basic of personal finance, before they step out into the real world.

But first off, let’s tackle what the actual definition of “financial literacy” is. Financial literacy is the combination of financial, credit and debt management and the overall knowledge that is required to make responsible decisions regarding financial matters. Really, we are talking about the impact of finances on the daily issues an average family may encounter.

Is the rate of financial literacy low in the US? Yep. (Actually, it’s low around the world.) Of course, the level of financial literacy varies according to education and income levels. However, there is a lot of evidence out there that shows that highly educated individuals with above-average incomes are almost equally as under-educated on these topics as those who may live a more modest lifestyle.

source: S&P GLOBAL FINLIT SURVEY

Given this information, it is becoming increasingly more important to ensure that we are preparing our children with this knowledge well before they are starting college, creating families, and living an “adult” life. Why? Because it’s about the “long game”. Financial literacy is critical in helping people plan for retirement and avoiding high levels of debt. Last year, a study from TIAA-CREF showed that those with high levels of financial literacy  are more likely to make astute decisions and typically, over their lifetime, amass twice as much wealth as those without a plan.

If you can’t build a simple household budget, then you are likely financially illiterate. If you are oblivious to money-related decisions, are unsure of the consequences of these decisions, or you simply don’t care, then you’re financially illiterate. Most importantly, If you have learned the “hard way” over the years that not being up-to-date on financial matters has affected your life in a negative way, it is imperative that you do not allow your children to make the same mistakes. Important financial decisions are popping up earlier and earlier in life, as the world becomes more complex. You don’t “build” wealth and then figure out how to manage it properly. That ability to grow comes with managing it properly along the way.

The statistics mentioned above are some of main reasons we have created the “Beers with Brad” seminar series. We feel that increasing your financial literacy is incredibly important to your long term financial goals and obligations. If you are in the DC/Maryland/ Virginia area and would like to hear more, feel free to stop by our next event.