Can I Still Contribute to an IRA & Get a Tax Break for 2016?

Can you contribute to your IRA and still get a tax break? Here's what you need to know.

Individual Retirement Accounts (IRAs) are an excellent means to save for retirement. You have until the tax-filing deadline (generally April 15) to make a contribution to your IRA for the previous tax year.

There are two types of IRAs: Traditional IRA and Roth IRA. The maximum contribution is the lesser of $5,500 ($6,500 for those aged 50 and over) or your earned income. This is a combined limit for all IRA contributions in a year (in either or both types). In order to contribute to a Traditional IRA, you must be under age 70½, but you can contribute to a Roth IRA at any age. You can learn more about IRAs here.

Whether you can contribute to an IRA and how much you can contribute depends primarily upon two factors: 1) your Modified Adjusted Gross Income and 2) whether you (or your spouse) participate in an employer-sponsored retirement plan.

Adjusted Gross Income (AGI) is the number listed on line 37 at the bottom of the first page of your Form 1040. In order to determine IRA contribution limits, AGI must be adjusted by adding back certain items that were deducted to arrive at AGI. Items added back to AGI include deductions taken for traditional IRA contributions, student loan interest, college tuition and fees, and some other less common items. The final result is Modified Adjusted Gross Income (MAGI).

Here’s how to know if you can deduct your IRA contributions this year.

Traditional IRA

While anyone under age 70½ with earned income can make non-deductible contributions to a Traditional IRA, deductible contributions are not as certain. If you are single and not covered by a plan at work or you are married and neither you (nor your spouse) have a plan at work, then your full contribution up to the annual limit is deductible.

However, if either you (or your spouse) participate in an employer retirement plan, your deductible IRA contributions may be limited or even completely eliminated. To determine if you are covered by work, you can look at your W-2. If there is a check next to “Retirement Plan” in Box 13, then you are covered. This chart on the IRS website illustrates deduction limits for both single and married taxpayers covered under an employer’s plan at work.

Roth IRA

While there are no age restrictions on who can contribute to a Roth IRA, there are income constraints that must be observed. Unlike Traditional IRA rules, Roth IRA regulations do not consider whether you have an employer plan. The only factor is your MAGI. Again, you can find the chart showing the income levels that affect Roth IRA contribution limits on the IRS’ website.

Kay Bailey Hutchison Spousal IRA

A Spousal IRA is not a third type of IRA but a provision for spouses without enough earned income to fully fund a Traditional or Roth IRA on their own. Named for the former United States Senator from Texas, the Kay Bailey Hutchison Spousal IRA allows a spouse with little or no earned income to have his or her own IRA account by qualifying with the working spouse’s income.

The Spousal IRA limits are the same as the Traditional and Roth limits ($5,500 or $6,500 if aged 50 or over). So the total combined contributions for both spouses are $11,000 or $13,000, if aged 50 or over. The working spouse must have earned enough money to fund both contributions.

Saving for retirement is more important than ever. (You can see if you have enough shored up here and keep tabs on your finances by viewing two of your credit scores, with updates every two weeks, on Credit.com.) If you don’t have a retirement plan, it’s never too late to start one. But knowing the rules is a critical step for a successful plan. Tax laws are complicated, and penalties for mistakes can be costly. Make sure you seek out the guidance of a tax professional before making important financial decisions.

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Got Extra Cash? Here Are 11 Smart Purchases Under $400

Here's a list of smart purchases you should never feel bad about buying.

There’s always a lot of talk about how to be financially responsible and increase wealth with very little money. Many Americans live paycheck to paycheck. But put some real numbers behind that generic statement. The Bureau of Labor Statistics Consumer Expenditure Survey of 2015 reports an average household income per consumer unit (think entire household of family members or single, financially independent people living alone or with other people) is $69,629. And the consumer’s unit average yearly expenses is $55,978.

Let’s say you dedicate those yearly expenses to standard things, such as food, housing, transportation and insurance. While the actual percentage breakdown per expense differs from household to household, depending on your family picture, you’ll still be dedicating a good chunk of your income to various necessities each month.

If we continue with this logic, the money you have left over — that unreasonably small portion of your salary that remains after paying bills — is what many would dub “play money.” The average consumer unit will have about $13,000 a year to play. (Speaking of “play money,” here’s how to stop buying stuff you can’t afford.)

With all that extra cash, what can we do? Of course, we could blow it on a steak dinner or splurge for the newest tech gadget. But what are a few smart items we should buy when we have the opportunity? We’ve compiled a list of smart purchases you should never feel bad about buying. And the best part? They’re all less than $400.

1. Student Loans

The average recent graduate has about $37,172 in student loan debt and pays about $351 per month toward the loan, according to Student Loan Hero. For those who are super strapped for cash, they might choose to defer their loans to a later date or skate by paying just the minimum. But the interest will kill you. One of the smartest things you can do with extra cash is to pay more into your loans when you can afford to do so. It’s a solid bet that added expenses will pop up eventually, and staying ahead of the curve means one less financial burden down the road. (Check out some tips for paying off your student loans here.)

2. An Interview Suit

Even if you’re not in the job market, investing in an interview suit is a wise decision. You never know when you’ll need a go-to outfit for networking events, conferences or a random “I’ve got someone I want you to connect with” meeting. Shopping for the perfect outfit is a lot more bearable when you’re not under duress or in a time crunch. Instead, you can browse for sales. You’ll find cheaper options in many locations, but a nice suit should put you right around that $400 mark. (What else can you do to get yourself ready for a job interview? Check your credit — many employers look at a version of your credit as part of the application process, so it’s helpful to know where yours stands. You can see two of your credit scores — absolutely free — on Credit.com.)

3. A Durable Mattress

What does anything matter if you don’t get a good night’s sleep? When you have extra cash at the end of the month, put it toward a high-quality mattress that will ensure you wake up ready to tackle each morning with spunk. High-quality mattresses come at a price. But they also last for years. You could spend thousands on a name-brand mattress, but a foam mattress from IKEA could work just as well.

4. Digital File Protection

External hard drives and online storage are perfect for backing up all those vacation shots, your wedding album and imperative side-business files. Hard drives are easy to find online, and they’ll run you about $82 for one with worthwhile storage capacity. Online storage pricing varies when it comes to options and personal preferences, but you can choose between services, such as Mozy, Dropbox or SugarSync. These cloud-storage providers charge a monthly fee but give discounts for yearly subscriptions. Expect to pay between $28.98 and $99.99 per year.

5. Online Classes

The most successful people will tell you learning never stops. As workforce trends continue to change, the need for specialized expertise grows. Devoting a few extra bucks to improving your knowledge is a practical expense. Maybe you want to become a better public speaker. Or pick up a new hobby to clear your head at night. And maybe you’ve heard tech gurus ramble about an increasing demand for coding professionals. Buy books, go online and enroll in a course. Do whatever you can to set yourself up for future success.

6. A Commuter Bike

Why spend what you could save? One of the smartest purchases you can make with $400 or less is a commuter bike. When considering what you’d also pay for gas, maintenance and car insurance, a commuter bike will pay for itself. There are definitely good, better and best when it comes to bikes, but you could find a quality road bike for around $300.

7. An Emergency Fund

It’s never a bad idea to start establishing an emergency fund. Experts say three months’ worth of expenses is a reasonable amount of cash to stash away just in case. A good trick is to make your savings automatic. Once you’re unable to see your money coming in, it’s easier to get by without it and find ways to work with what you have. Then, when you break your arm doing back flips off a boat or blow a radiator in your car, it’s covered.

8. Retirement Savings

Expanding on the previous point, try to accumulate as much wealth as you can for early retirement. Consider creating a moderately aggressive investment plan by opening IRAs, 401K accounts, brokerage accounts, etc. Take advantage of your employer opportunities and set up automatic contributions to your company’s 401K plan. Start at a respectable 3% contribution, and gradually increase it until you get to at least 10%. When in doubt, seek a fiduciary financial planner.

9. Solid Clothing

Some of us find it absolutely insane to buy a pair of jeans that cost more than $39.99. However, quality clothing items, such as boots and winter coats, hold up over time. And the money you shell out is worth it later. Reddit’s Buy It for Life adheres to this philosophy. This subreddit aims to “emphasize products that are durable, practical, proven and made to last.” It might seem insane to pay $219 for insulated L.L. Bean Duck Boots, but you’ll be grateful when they’re still keeping your toes warm and dry 10 years later.

10. A Coffee Maker

Does life really exist without coffee? Another smart purchase is to invest in a solid coffee maker. If you fancy those specialty drinks, you could buy a combination machine from DeLonghi for $162 on Amazon. Considering the price of specialty drinks from coffee shops — and our dependency on caffeine — this is a purchase that will pay for itself in a matter of weeks.

11. Various Fitness Programs

There’s no safer bet than to invest in your health. Health equals wealth, right? Whether you buy a treadmill for $399.99 or invest in various meal prep services popular for those always on the go, they’re all worthwhile expenses.

Depending on your employer, you might also be eligible to receive reimbursements for health-related expenses, such as gym memberships, fitness classes or playing in sports leagues. While you’re at it, look into other reimbursement programs you might be eligible for, such as cellphone plans, moving costs or professional-development classes.

This article originally appeared on The Cheat Sheet.  

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The Credit Card That Can Help You Save for Retirement

If you’re serious about long-term savings — whether for your retirement, your child’s college fund or both — you already know you need to do more than just save your pennies. You need dollars, and lots of them.

So, what if you could put a percentage of every purchase you make on your credit card into one of those investment funds? Would you do it? If your answer is yes, you may want to take a look at the Fidelity Rewards Visa Signature card from Fidelity Investments, because that’s exactly what this credit card does.

What Is the Fidelity Rewards Visa Signature Card?

The Fidelity Rewards card offers cardholders a very straightforward 2% back on all purchases, simple as that. Your reward is then deposited directly into a Fidelity account. For every $2,500 spent, a deposit of $50 is made into the investment account of your choice, and you can choose from a variety of accounts that meet your savings goals. Want your money deposited directly for retirement? Fidelity can put your 2% right into a traditional, Roth, rollover or SEP IRA. (Not sure what an IRA is? No worries: We have a full explainer on individual retirement accounts right here.) You can’t deposit directly into a 401K, however.

Prefer a brokerage account? No problem. For certain cardholders, there’s also the option of depositing your rewards into a 529 college savings account.

Of course, you can choose to spend your rewards instead of investing them, but the redemption value is lower if you choose to redeem your points for other rewards. The exact redemption rate varies, depending on how you cash in, a Fidelity spokesperson said. For instance, if you redeem rewards for retailer gift cards, the rate is .5% (10,000 points for $50 gift card).

No Spending Categories & No Limits

Not only does the Fidelity Rewards card making saving easy, there are no special spending categories and no limits or caps on the amount of rewards you can earn. Plus, the card’s variable 14.99% annual percentage rate means carrying a small balance every now and then won’t necessarily wipe out the rewards you earn. (Friendly reminder: It’s still important when using a rewards credit card to try your very best not to.)

New cardholders can get a $100 bonus after spending $1,000 in the first 90 days, but the funds must be deposited directly into a qualified Fidelity account. Qualifying accounts for both the regular rewards savings and signup bonus include:

  • Fidelity Cash Management Account
  • Fidelity-managed 529 College Savings plan
  • Retirement account
  • Fidelity Go account 

The Fidelity Rewards card also comes with all the benefits provided through the Visa Signature platform, including:

  • Auto rental collision coverage. Rent your automobile with your Fidelity Rewards card and you can waive the rental agency’s collision coverage.
  • Emergency assistance while traveling. Find the help you need when you’re on the road.
  • Purchase protection. Extra coverage for the things you buy with your card, including reimbursement for damage or theft.
  • Warranty manager service. This service helps you keep track of the warranties on the items you purchase with your card.
  • Lost luggage reimbursement. This service covers lost or stolen baggage.
  • Travel accident insurance. This coverage will help if you’re injured while traveling.
  • Roadside dispatch. Need a tow? Locked yourself out of your car? This pay-per-use service offers many benefits, including emergency roadside assistance.
  • Visa Signature Concierge. Access to 24-hour complimentary assistance with everything from booking travel to getting concert tickets.

Is the Fidelity Rewards Visa Signature Card Right for You?

Even if you like the idea of of a card with no annual fee that lets you earn 2% on every purchase you make and then directly invests that money toward your savings goals, the Fidelity Rewards card isn’t for everyone. Here are a few things to keep in mind as you weigh your decision:

  1. Do you have a Fidelity investment account? If you don’t, you’ll want to keep in mind that you can’t use your rewards as a deposit to establish a new Fidelity account. Rewards can only be deposited into existing accounts.
  2. Do you have excellent credit? To qualify for the Fidelity Rewards card, you’re going to need excellent credit. If you don’t know what your credit score is, you can get your two free credit scores, updated every 14 days, right here on Credit.com using our free credit report snapshot. It provides personalized details on how you can improve your scores, including a timeline of how long it will take to do so, across five key areas affecting your credit scores. It also provides you with a personalized list of some of the credit cards you would qualify for.
  3. Do you prefer investing over perks or cash back? If you travel a lot, whether for work or play, you might prefer some of the benefits that travel rewards cards offer, like free upgrades, free hotel stays, waived baggage fees and other non-monetary perks. Likewise, if you’d like more flexibility in what your rewards can be used for, a cash-back rewards card might be better for you.
  4. Can you get higher rewards with another card? If you want more flexibility than the automated investing inherent with the Fidelity Rewards card allows, there are cards that offer higher rewards (for example, the American Express Blue Cash Preferred gives a whopping 6% cash back on up to $6,000 in purchases per year at U.S. supermarkets), so the automated investing aspect should be particularly important to you.

Remember, whenever you’re shopping for a rewards card, it can really pay to keep your spending habits and rewards goals in mind as you compare cards. To get started, you can check out our list of the best cash back credit cards. And, no matter what type of plastic you’re on the hunt for, you can reference our expert guide to getting the best terms you possibly can on a credit card.

At publishing time, the American Express Blue Cash Preferred credit card is offered through Credit.com product pages, and Credit.com is compensated if our users apply and ultimately sign up for this card. However, this relationship does not result in any preferential editorial treatment. This content is not provided by the card issuer(s). Any opinions expressed are those of Credit.com alone, and have not been reviewed, approved or otherwise endorsed by the issuer(s).

 

Note: It’s important to remember that interest rates, fees and terms for credit cards, loans and other financial products frequently change. As a result, rates, fees and terms for credit cards, loans and other financial products cited in these articles may have changed since the date of publication. Please be sure to verify current rates, fees and terms with credit card issuers, banks or other financial institutions directly.

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How to Protect Your Money Under Trump’s Financial Regulation Changes

An executive memorandum signed by President Donald Trump on Feb. 3 is aimed at consumers’ retirement accounts and will impact a majority of Americans almost immediately. The memo might delay, potentially forever, the so-called “fiduciary rule” that would have legally bound financial advisers to give retirement savers the best advice possible.

Critics lashed out, claiming the memo was a gift to Wall Street, as it threatens to roll back rules designed to protect Americans’ retirement accounts instituted in the wake of the financial crisis, when some savers saw their account balances drop by 25% in a single year, according to an estimate from Hewitt Associates. But supporters say those rules were flawed, and that this cure for the financial crisis was worse than the disease.

Investors’ Best Interests Could Take a Back Seat

If you are looking for a bottom line, here it is: Financial advisers could be let off the hook from higher standards that were about to be placed on the advice they give investors. Those standards would have opened up advisers to lawsuits if they gave advice to clients that put their own commissions above their clients’ best interests.

But at least some of the intended effect of the rule may still happen. Because the rule was years in the making, and just weeks away from taking effect, many brokerages have said they’ve already implemented the changes it required. Some are even using the moment as a marketing opportunity.

In practical terms, the new rules discourage advisers from offering commission-based products to buyers, so some firms, like Merrill Lynch and JP Morgan Chase, were moving away from commission-based IRAs. That change will probably continue.

For now, the memo also means consumers must be vigilant and ask financial advisers, “Are you getting a commission?” when taking their advice.

Consumer advocates spent years working to get the federal government to enact a rule that targets these potential conflicts of interest. They finally made progress in 2010 when the Labor Department, which regulates some retirement accounts, initially proposed a fiduciary rule. After years of bickering with the financial industry, the Labor Department finally settled on the rule in April 2016. It was set to take effect this April.

Only retirement accounts were to be covered by the rule; normally taxed brokerage accounts were not. The rule would have covered certain financial advisers who use titles like wealth manager, investment consultant or broker; certified financial planners are already required to meet the fiduciary standard.

Many consumers don’t realize that current rules mean some advisers can legally steer clients into high-commission products when better, cheaper options exist. The Obama administration, which supported the Labor Department rule, issued a report last year claiming that less-than-best advice to savers costs Americans $17 billion annually in retirement funds.

Undermining Consumer Protections?

A second financial-related executive action signed by Trump last week may have even farther-reaching consequences, but they won’t happen right away. That order called for a review of financial reform legislation known as “Dodd-Frank,” which passed after the housing bubble burst. Its numerous protections included tighter monitoring of the stability of banks and creation of the Consumer Financial Protection Bureau. Trump’s order calls for the Treasury Secretary to review the law and recommend changes within 120 days.

Advocacy groups said that taken together, the two orders threaten to undermine a host of new rules put in place to protect consumers.

“President Trump’s comments and executive order today suggesting rollback of financial regulations would violate his campaign promises to hold Wall Street accountable and to help everyday American families,” said Christine Hines, Legislative Director of the National Association of Advocates, in a statement. “We must never forget that the reckless behavior of big banks and predatory lenders and the lack of safeguards to hold them responsible for their actions caused the Great Recession, leaving millions of Americans without jobs, wiping out their savings, and causing devastating loss of their homes.”

A draft of the fiduciary rule memo called for a 180-day delay of the rule and a review by the Labor Department. The order actually signed by Trump omitted the language calling for immediate delay, but that’s still a likely outcome. Acting U.S. Secretary of Labor Ed Hugler made that clear in a statement:

“The Department of Labor will now consider its legal options to delay the applicability date as we comply with the President’s memorandum,” it read.

The memo was cheered by some on Wall Street. Discouraging commission-based products hurts smaller investors who don’t like paying up-front fees, they argued.

“Americans are going to have better choices and Americans are going to have better products because we’re not going to burden the banks with literally hundreds of billions of dollars of regulatory costs every year,” said National Economic Council director Gary Cohn to the Wall Street Journal. “The banks are going to be able to price product more efficiently and more effectively to consumers.”

But consumer advocates were unanimous in their condemnation of the review, saying it could remove a critical tool for protecting unsophisticated retirement savers.

“If the Department of Labor follows through on this threat and delays and repeals the rule, brokers and insurance agents will be free to go back to putting their own financial interests ahead of the interests of their clients, recommending investments that are profitable for the firm but not the customer,” the Consumer Federation of America said in a statement. “And they will be permitted to do all this while claiming to act as trusted advisers.”

Sen. Elizabeth Warren (D-Mass.), said in a statement that the review “will make it easier for investment advisors to cheat you out of your retirement savings.”

“Donald Trump talked a big game about Wall Street during his campaign — but as President, we’re finding out whose side he’s really on,” she said.

Retirement savers should know that the immediate effect of the Trump memo means advisers can continue to give out bad advice that’s compromised by commission structure; the rule that remains in effect now requires only that the investment is “suitable.” That might sound like a small distinction, but John Bogle, the man who popularized low-cost index funds, put it in context in an interview with Business Insider at the end of December:

“Fiduciary means putting the client first, and as I have observed in the past, the only other rule we have is the client comes second,” Bogle said.

The Trump administration did not immediately respond to requests for comment on how the actions would affect consumers.

How You Can Protect Yourself

Before making any investment decision based on an adviser’s recommendation, always ask if he or she will earn a commission. When picking an adviser, ask if their firm accepts fiduciary responsibility. Even if it’s not legally required, advisers can voluntarily accept the fiduciary standard. But make sure you get that in writing.

It’s also wise to monitor your financial goals, like building and maintaining a good credit score, which you can do for free here on Credit.com.

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How to Get the Most From Your 401K

how-to-build-your-401k

Perhaps you’ve heard of 401Ks or already contribute to one, and you’re intrigued about how you can use them to fund your retirement. These employer-sponsored plans are there to help you do just that, so it’s in your best interest to take advantage of one, especially if your company offers saving incentives, like a company match. We asked Robert Dowling, a financial planner with Modera Wealth Management in Westwood, New Jersey, who’s worked with high net worth individuals for 18 years, for tips on getting the most from your 401K. Here’s what he said.

1. Contribute More Than 3%

Most people who sign up for a 401K start out by contributing 3% of their salary, Dowling said. But if your budget can handle it, it wouldn’t hurt to raise that percentage, even just a bit. “Try to participate as much as you can without putting yourself in dire straits,” he said, noting the danger of overspending. Over time, your savings will thank you. (Concerned that your spending is out of control? You can get a sense of where your debts stand by viewing two of your free credit scores on Credit.com.) “We suggest every year to work it into your expectations to increase your contributions by 1%,” Dowling said. Some plans even allow you to fill out paperwork so your contributions rise automatically.

2. Enroll in Your Company’s Match 

“Take advantage of your company match to maximize company contributions,” said Dowling. “It can be quite powerful.” And besides, it’s free money!

3. Know Your Company’s Vesting Schedule 

While taking advantage of your company match can help you boost contributions, you won’t get far if you leave the company before they’ve vested — i.e., the company’s given you ownership. “What a company will say is, We will reward you with matching contributions, however, we want you to work for us for a certain period of time,” Dowling explained. So it’s important to know what that schedule is, especially if you’ve got one foot out the door. With the schedule in mind, you’ll be able to ask yourself if it makes sense to forfeit the company’s share of your savings rather than stick it out.

4. Play Catch-Up With Your Contributions

Those under 50 can contribute a maximum amount of $18,000 to their 401K every year, said Dowling. However, if you’re 50 or older, that maximum jumps to $24,000, meaning you can contribute an extra $6,000. “Sometimes folks aren’t aware of that,” he said, so “we remind clients to start their catch-up contributions,” as the provision is called, “early.”

5. Sock Away Your Bonus  

When someone says “bonus,” we can’t help but think of steak and fancy nights on the town. But the fact is, the more you can contribute to your 401K early on, the better prepared you’ll be for whatever life throws your way later, Dowling said. Also, if you’re having a hard time making those weekly, bi-weekly or monthly contributions, what better way to get a leg up than by throwing your bonus right into retirement savings? Bonus points if you tell HR that’s your plan, Dowling said, since companies tend to view this as a longterm benefit. You can even ask to have the bonus direct deposited into your account.

6. Take Out a Loan 

Though we’d never recommend borrowing money you can’t afford to pay back, it is helpful to know you have the option to borrow against your 401K. According to Dowling, some programs allow this, and you can take out up to $50,000. Rather than pay interest to a creditor, with a 401K you pay it back to yourself by putting the money in the plan, Dowling said. There can be penalties for defaulting on these loans, so make sure to do your research before choosing this option.

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Makers vs. Takers: Is Wall Street Driving Income Inequality?

Rana-Foroohar

Rana Foroohar’s new book, “Makers and Takers,” is a first-class takedown of the ways many American firms make money today. The book’s subtitle, “The Rise of Finance and the Fall of American Business,” argues a sad paradox: Some people make money by making things. Others make money by playing financial tricks with stuff the first group makes.

In the late 20th century, some clever folks on Wall Street realized it was far easier to make gobs of money doing the latter. It wasn’t long ago that Goldman Sachs was accused of boosting Coca-Cola’s profits by hoarding aluminum and forcing its price higher. (Goldman told the New York Times, which reported the news in 2013, it was in compliance with all industry standards.)

A massive system of this kind of speculation was put in place, creating wild profits for “financial innovators” and bubble swings for everyone else. But more fundamentally, the rewards for hard work are arguably steered toward the wrong people — the takers, not the makers — and that has contributed to the growing income inequality problem threatening the American social fabric.

In her book, Foroohar calls this development “financialization.” I asked her to explain what that could mean for consumers and the future of American business.

Bob Sullivan: What is financialization, and what does it mean in the (real or perceived) conflict of Wall Street versus Main Street?

Rana Foroohar: Financialization is the growth in size and power of the financial sector — it creates only 4% of the jobs in this country but takes 25% of all corporate profits, is regularly one of the top three industry lobbying forces in Washington, D.C., and has come to dictate the terms of American business, which results in a corporate focus on short-term profits rather than long-term economic growth.

B.S.: Is there a connection between financialization and what I’ve seen you call the “falling down” problem, where older workers lose their jobs and have to settle for lower salaries in their new jobs or worse?

R.F.: Yes, the neo-liberal philosophy of letting capital go wherever it will — which is usually where labor is cheapest — is a crucial part of how financialization works. Unfortunately, it leads to greater inequality and slower growth as wealth is funneled to the top of the economic pyramid. Over the last 40 years, the rise of finance has correlated with fewer startups, less [Research & Development] spending, flat wages and lower economic growth.

B.S.: A generation or two ago, if you asked parents what they hoped their kids would become, they’d give answers like doctors, pilots or perhaps engineers. Today, that’s a harder question to answer. App developer doesn’t sound as secure or prestigious. How would you respond?

R.F.: Well, today, parents might say they want their kids to be a financier — in fact, it’s the number one job choice for MBA grads, in part because wages in the financial sector have so outpaced those in other fields as a result of the monopoly power of the financial industry.

B.S.: Just what are they teaching in those MBA programs?

R.F.: Balance sheet manipulation. As I explain in chapter 3, (one) of the biggest complaints that business leaders have about MBA education today is that it has become too focused on the short-term engineering of capital rather than innovation, industrial expertise or a real understanding of how to nurture human talent.

B.S.: Uber-rich social commenter Nick Hanauer has famously said, and repeated, that income inequality could eventually lead to an ugly pitchfork scene. Is that where the makers-and-takers world is headed?

R.F.: If we don’t fix things, for sure. I’m a big fan of Thomas Piketty, and as he sketched so clearly and powerfully in his book, greater income inequality eventually leads to political and social instability. It doesn’t have to be that way, though. As I talk about in my book, there are countries and communities that have found better, more sustainable ways to grow. Private companies in the U.S., for example, that aren’t under pressure from the financial markets, invest about twice as much into productive things like factory upgrades, worker training and R&D as similar public companies do.

B.S.: Many Main Street Americans will be hearing these concepts for the first time, and it will make them feel helpless, like a game where the rules are a secret. How can they respond?

R.F.: The most direct way to respond to the problem of financialization is via our retirement savings. Asset management is the fastest growing and one of the most exploitative areas of the financial sector. Actively managed funds that have higher than average fees and lower than average returns can eat up 30 to 60% of our retirement nest egg over our lifetimes. Put your money in an index fund, and forget about it.

[Editor’s Note: If you’re eager to save for retirement, but debt is holding you back, you can see how long it will take to pay it all off with this calculator. And you can monitor your financial goals, like building a good credit score, for free each month on Credit.com.] 

More Money-Saving Reads:

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Makers vs. Takers: Is Wall Street Driving Income Inequality?

Rana-Foroohar

Rana Foroohar’s new book, “Makers and Takers,” is a first-class takedown of the ways many American firms make money today. The book’s subtitle, “The Rise of Finance and the Fall of American Business,” argues a sad paradox: Some people make money by making things. Others make money by playing financial tricks with stuff the first group makes.

In the late 20th century, some clever folks on Wall Street realized it was far easier to make gobs of money doing the latter. It wasn’t long ago that Goldman Sachs was accused of boosting Coca-Cola’s profits by hoarding aluminum and forcing its price higher. (Goldman told the New York Times, which reported the news in 2013, it was in compliance with all industry standards.)

A massive system of this kind of speculation was put in place, creating wild profits for “financial innovators” and bubble swings for everyone else. But more fundamentally, the rewards for hard work are arguably steered toward the wrong people — the takers, not the makers — and that has contributed to the growing income inequality problem threatening the American social fabric.

In her book, Foroohar calls this development “financialization.” I asked her to explain what that could mean for consumers and the future of American business.

Bob Sullivan: What is financialization, and what does it mean in the (real or perceived) conflict of Wall Street versus Main Street?

Rana Foroohar: Financialization is the growth in size and power of the financial sector — it creates only 4% of the jobs in this country but takes 25% of all corporate profits, is regularly one of the top three industry lobbying forces in Washington, D.C., and has come to dictate the terms of American business, which results in a corporate focus on short-term profits rather than long-term economic growth.

B.S.: Is there a connection between financialization and what I’ve seen you call the “falling down” problem, where older workers lose their jobs and have to settle for lower salaries in their new jobs or worse?

R.F.: Yes, the neo-liberal philosophy of letting capital go wherever it will — which is usually where labor is cheapest — is a crucial part of how financialization works. Unfortunately, it leads to greater inequality and slower growth as wealth is funneled to the top of the economic pyramid. Over the last 40 years, the rise of finance has correlated with fewer startups, less [Research & Development] spending, flat wages and lower economic growth.

B.S.: A generation or two ago, if you asked parents what they hoped their kids would become, they’d give answers like doctors, pilots or perhaps engineers. Today, that’s a harder question to answer. App developer doesn’t sound as secure or prestigious. How would you respond?

R.F.: Well, today, parents might say they want their kids to be a financier — in fact, it’s the number one job choice for MBA grads, in part because wages in the financial sector have so outpaced those in other fields as a result of the monopoly power of the financial industry.

B.S.: Just what are they teaching in those MBA programs?

R.F.: Balance sheet manipulation. As I explain in chapter 3, (one) of the biggest complaints that business leaders have about MBA education today is that it has become too focused on the short-term engineering of capital rather than innovation, industrial expertise or a real understanding of how to nurture human talent.

B.S.: Uber-rich social commenter Nick Hanauer has famously said, and repeated, that income inequality could eventually lead to an ugly pitchfork scene. Is that where the makers-and-takers world is headed?

R.F.: If we don’t fix things, for sure. I’m a big fan of Thomas Piketty, and as he sketched so clearly and powerfully in his book, greater income inequality eventually leads to political and social instability. It doesn’t have to be that way, though. As I talk about in my book, there are countries and communities that have found better, more sustainable ways to grow. Private companies in the U.S., for example, that aren’t under pressure from the financial markets, invest about twice as much into productive things like factory upgrades, worker training and R&D as similar public companies do.

B.S.: Many Main Street Americans will be hearing these concepts for the first time, and it will make them feel helpless, like a game where the rules are a secret. How can they respond?

R.F.: The most direct way to respond to the problem of financialization is via our retirement savings. Asset management is the fastest growing and one of the most exploitative areas of the financial sector. Actively managed funds that have higher than average fees and lower than average returns can eat up 30 to 60% of our retirement nest egg over our lifetimes. Put your money in an index fund, and forget about it.

[Editor’s Note: If you’re eager to save for retirement, but debt is holding you back, you can see how long it will take to pay it all off with this calculator. And you can monitor your financial goals, like building a good credit score, for free each month on Credit.com.] 

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The Stock Market Is Iffy Right Now. What Can You Do With Your 401K?

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On a daily basis, the stock market seems to buzz around like a balloon you let go of before tying the end. Equity fund prices are all over the place. The concerns de jour are China, oil prices, interest rates and the possibility of a global recession. With so much going on, it’s no wonder that the market is acting like a drunken monkey. And it’s no wonder that many investors are confused and frightened.

If you are asking yourself how to invest your retirement money now, you aren’t alone. Everyone is asking the same question. But the good news is you don’t have to sit there and remain anxious. I can’t predict the future so I’m not going to try, but there are plenty of steps you can take to protect and grow your retirement money now. Here are five of them.

1. Compare Your Funds to the S&P 500

Good markets mask underperformance, but weak markets usually don’t. Compare the year-by-year performance of your funds to that of the S&P 500. I’m not talking about 3- and 5-year averages. I’m talking about year-by-year performance. You can easily find this information online or in the fund prospectus. Another approach is to simply look at a graph of your fund vs. the market. (You can learn more about how to do so here.)

When you do this exercise, you might see funds that should have been sold long ago. Even if your funds did well during good years in the past, how did they do during market downturns? For example, aggressive funds might earn more during strong periods, but they often lose more during downturns. If you are not comfortable with those losses, it might be time to switch. This is why it’s important to review the year-by-year performance and review these kinds of graphs.

2. Make Sure You Have the Right Asset Allocation

Are you taking too much risk? Do you have too much money in the stock market? Should you shift some assets into fixed income? Even if you have great equity funds, if your allocation is too aggressive, you might get blown out of the water when things get rocky. According to a recent study by Dalbar, the average investor underperformed the market by up to 7 percentage points in 2008 due in big part to their emotions. On $100,000, that’s a potential loss of $7,000 per year. As you can see, our emotions can be extremely expensive.

One great way to keep your emotions in check is to have the right asset allocation. This simply means reconsidering the mix you have between equity and fixed income. By moving more money into fixed income and out of equity funds, you might be able to mute losses during downturns while still allowing the portfolio to grow over time.

How do you know how much risk you should take or what kind of mix works for you? There are a number of free tools to objectively measure the risk you are comfortable with and compare it to the risk you are actually taking in your portfolio. Take the time to understand your risk tolerance and then make sure you know how much risk you are actually taking. If there is a mismatch, realign your investments.

3. Review Your Process for Picking Investments

By far the most important predictor of your investment success is the process by which you buy and sell holdings in your retirement account. Some people like the “set it and forget it” approach to investing. I know this is easy to do and it saves time, but it can be very expensive as well.

The buy and hold might work if you buy index funds, but even then, you have to be mindful. Indexes come in and out of favor all the time. Take a look at how markets around the world are doing and adjust your portfolios to lighten (or eliminate) your holdings in distressed areas while perhaps putting a heavier emphasis on those areas that are performing well.

Whatever process you use to pick investments, make sure you evaluate your fund’s performance at least each year.

4. Remember Your Timeframe

When the market is soft and you see a lot of red ink on your investment statements month after month, it’s difficult to remain sanguine. But if you shift your thinking and consider your ultimate investment timeframe, it just might be easier to relax.

When most people plan their retirement, they consider the end date of the plan as the day they retire. I understand this, but I think it’s a little short-sighted.

According to the Social Security Administration, if you are 45 years old today, you can expect to live about 40 more years. This means that if you are 45 years old today, you should plan your investments with a 40-year timespan – not just until you retire.

That being the case, it doesn’t matter what your account values are today, this week, this year or next year. What matters is how to grow your money safely until you retire and how to invest that money once you do retire to create the most income in a safe way for the rest of your life.

5. Accept Imperfection

Stock market prices reflect conviction (or the lack thereof) in the economy. Right now there are both strong positives and serious weaknesses in our system. Over the short-run, the market could go either way. Nobody knows which “story” will win the hearts and minds of investors. And, as I said above, the future is unknowable – despite what some pundits say.

People who expect to call every market turn right often end up going broke. That’s because they jump in and out of investments at the instant the market turns against them. As a result, these people never give the market a chance to work its magic.

As you’ve seen, there are plenty of steps you can take to make sure you have the right investments and the right investment approach.

If you’ve taken the steps I’ve suggested above and are confident in the funds you hold and the process by which you make your decisions, your best step might be to do nothing right now and accept the fact that sometimes account values drop. It’s true and unavoidable. But you should accept that only after you’ve done everything you can to make sure you hold the right investments.

You might feel like current market volatility is a threat but it’s actually an amazing opportunity. When the market is strong, few people take the time to evaluate whether or not their retirement money is invested wisely or not. Now that the market has got your attention, take advantage of it.

[Editor’s Note: You can monitor your other financial goals (like building good credit) for free on Credit.com.]

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5 New Year’s Resolutions You Wish You’d Made 10 Years Ago

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The new year brings reflection and reassessment and, although a big list of New Year’s resolutions can be difficult to keep, it is worthwhile making and keeping just one solid change each year.

Here are five changes that will move you toward a better future. Think where you would be now if you had acted on even one of these resolutions 10 years ago. Make one or all of these moves now, and thank yourself heartily in a few years!

1. Boost Your Retirement Savings 1% a Year

Can you picture yourself saving 20 or 30% of your salary toward retirement? I know, right? It sounds radical.

Yet, when you consider the losses you could suffer from a volatile stock market, our growing lifespans and the potential shrinkage (or even loss) of Social Security in years to come, the only guarantee against old-age poverty is to save about 30% of your earnings and invest it conservatively, some retirement experts are saying.

Ten years ago, if you’d started adding a measly 1% a year to your retirement savings, just $25 more out of each $2,500 paycheck, today your contribution would be 10% higher. If you were saving 10% in 2006, you’d be at 20%. If you were deducting 15% toward retirement, you’d be saving 25% by now, solidifying a safe future in retirement or maybe even a chance at early retirement.

Here’s how to get started:

  • Divert money before you see it: Sign up for automatic payroll deductions so the money never reaches your checking account, derailing any temptation to spend it. If your employer doesn’t offer automatic deductions, your bank will let you automatically divert a set amount into savings monthly. (If not, find a new bank).
  • Automate your increases: Some workplace retirement plans let you choose to automatically bump up your savings each year, which makes the dent in your paycheck scarcely noticeable. If you don’t have this feature at work, muster your resolve and do it yourself, raising your retirement contribution by 1% each January.
  • Run the numbers: Say you earn $80,000 a year. At a 10 percent annual savings rate, you put $8,000 before taxes into a 401(k) each year. If you’d bumped your savings rate by a half percent a year for a decade, to 15%, you’d be putting away $12,000 a year today. If you’d pushed your rate up by 1%, you’d be saving $16,000 a year now, doubling your contribution in 10 years. Experiment with your own numbers using several online retirement calculators. These are not precision instruments, so try several to get a rough idea.

2. Drop Your Defenses

Maybe you needed your weapons when you were younger. Life is rough, after all, and many kids get kicked around in families and by peers while they’re too young to escape. So, we’ll give you that.

But defensiveness – the impulse to meet every challenge with an attack – robs us of the chance to hear information we need. It cheats us of the chance to hear what friends, colleagues and loved ones want from us. That, in turn, robs us of chances to grow, to succeed and to make more and deeper connections. In other words, defenses protect us from life. If you’d been listening 10 years ago who knows how much richer your life would be today.

Here’s how to do it:

When someone asks you to listen, just do it. No arguing (nope, not even in your head). No counter-attacking. You don’t have to agree. Or respond. Just say you’ll think it over. You’ve got your own grievances, no doubt. Save them for later, for when it’s your turn to be heard.

3. Quit Smoking

It’s not easy to be a smoker today. Scorned and despised, smokers are stuck puffing away in backyards and alleys, in rain and snow, because no one else wants their second-hand smoke. Daily smokers dropped from 16.9 to 13.7 percent of the U.S. population between 2005 and 2013.

Probably you’ve tried to quit. It’s likely you’re wrestling with a serious addiction. We get it. If quitting was easy and you wanted to stop, you’d have done it by now.

But don’t give up trying. Even the most-committed addicts can and do drop cigarettes for good. Often it takes many attempts and many failures to succeed at quitting for good.

Smoking harms nearly every organ in your body. It contributes to a fat catalog of diseases, from atherosclerosis (hardening of the arteries) and blindness to chronic obstructive pulmonary disease and diabetes, to a dozen kinds of cancer. Quitting is the kindest possible thing you can do for yourself.

If you’d quit smoking in January 2006 and stuck with it, you’d have a smoke-free decade by now, adding years to your life. Your risk of a stroke would be nearly the same as a nonsmoker’s. Your chance of getting lung cancer would be nearly half that of a smoker’s. (Here are the health benefits of quitting.)

Here’s a starting point:

Tobacco-free.org has the tools and help.

You can do it alone, but the long-term success rate grows when you combine counseling, medications and other tools. Says the American Cancer Society:

  • Just 4 to 7% of quitters succeed even short-term without medicines or other help.
  • A quarter of quitters who use medicines are able to stay off tobacco for at least six months.
  • Some combinations of medicines work better than one drug alone.
  • Counseling, emotional support and behavioral therapy boost the success rate of medicines and help quitters stay smoke-free.

4. Ask Regularly for Raises

If you aren’t getting regular raises, you should be. Don’t wait for review time. Raises are critical for your ability to keep pace in your field and progress financially. Even small increases are better than none as they add up over time and build a larger base from which to negotiate next time.

Consider your request from your manager’s point of view; prepare to demonstrate your value to the company, citing numbers and anecdotes. This may require you to put on the steam at work and keep careful track of your results so you’re armed with data. The Harvard Business Review has dos and don’ts, including how to gather evidence to support your case, choose the right moment to ask, make the pitch confidently and negotiate.

If your company simply won’t part with the money, it may be time to look for a better job which, fortunately, is doable in the improved economy.

5. Decide Whether to Change Careers

If you’ve spent years wondering whether to leave your career or double down and improve it, make a decision. Decisions that drag on and on sap your energy and make it difficult to commit enthusiastically.

If you’d chosen your course in 2006, you’d be established in a new career by now, with training and job hunting behind you.

Here’s how to proceed:

Don’t just go back to school without researching and shaping a detailed plan. School is expensive and taking on student debt is risky. A certification program or vocational training may pay off better in the long run.

Learn all you can about the field you like, interviewing and job-shadowing people who do the work you want. Here’s help with the decision, including learning about employment and earnings after graduation:

  • The Bureau of Labor Statistics’ earnings report gives employment projections and wage data by industry. This tells you if the field you want to enter is in demand and what you’re likely to earn.
  • The BLS’ Occupational Outlook Handbook delves even deeper into the likely growth rate of jobs, the number of expected new jobs in a field, the pay and education and training required
  • Consider using a career coach. The Wall Street Journal tells how to shop for one. Fees run between $50 and $300 an hour, The Journal says, so do your research before hiring.
  • Forbes’ careers writer Kathy Caprino lists 5 ways to tell whether to switch careers.

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