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Let’s put 2020 behind us and do a financial reset

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If you had asked me a year ago what I’d be doing in 2020, I might have told you about my upcoming professional projects, volunteer engagements, and travel plans. I never could have imagined that we’d be facing a global health crisis and the economic fallout thereof.

As the leader of a Financial Wellness business, I could have also shared some predictions about the changing nature of work, but I could not have anticipated the complete overhaul we’ve experienced. In my role, I am acutely aware of what the events of 2020 have meant for everyday American workers: In short, we’ve been through it. Many of us have been in stopgap and survival mode, just trying to put food on the table or make our next rent payment.

So as we wrap up the year, we owe it to ourselves to pause, check in on our finances, and strive to get on more stable footing for the road ahead. Here are some questions to ask yourself.

What’s the state of your savings?

The conversation around emergency funds has become increasingly fraught in recent years. While it is important to have money saved for unexpected expenses, it’s not exactly constructive to tell cash-strapped people they need an emergency fund while an emergency is already upon them.

Here’s the candid truth: Yes, it’s a good idea to have at least 3 to 6 months’ worth of expenses saved up. But the unspoken addendum is that you’re not expected to snap your fingers and have the full amount in hand. This is a goal you can work towards over time.

Take a good look at your credit card and bank statements. If you’re spending less now because you’re not going out to eat every weekend, putting gas in the car as often, or going on pricey vacations, you may be able to steer some of that money towards your emergency fund. Bit by bit, you can build up to your target.

And if you did need to dip into your emergency fund given all of this year’s hardships, aim to top it back up once your income has stabilized. Hindsight really is 2020, and this year has given us plenty. If you’re able, start preparing for the next time you might need extra cash.

How has working from home impacted your finances?

While our essential workers have been holding it down on the front lines, some 42% of the American labor force is now working from home full time. And a third of employers expect half or more of their employees to continue working from home even after their business operations get back to normal.

Remote work can mean different things to different people. For some it’s been a welcome change—and one that can save a lot of money. While you might be racking up higher electricity bills since turning your home into your office, on average, working from home can save you $4,000 year. A protracted break from expensive commutes, $13 salads and dry cleaning can really add up.

Now is a good time to take an itemized view of your spending before and after you began working from home to see if you’ve experienced cost savings—and to think about how you might allocate that money to other financial obligations or goals. Can you chip away at credit card debt, or sock away a little more for retirement?

To be sure, for others—especially those with children or elder loved ones in their care—working from home has posed its share of challenges. To help alleviate some of the financial and emotional burden, see if your employer offers dependent care benefits as well as benefits related to your mental health.

To that end, are you taking full advantage of your employee benefits?

These days, there are plenty of resources—from online portals to educational seminars to one-on-one coaching—to support workers’ personal financial wellness. A recent study found that half of employers offer programs and benefits to help improve employees’ financial well-being, and a quarter of those not offering them now plan to in 2021. What’s their top reason for doing so? Employee demand.

The upshot is that if you don’t have certain benefits available, talk to your employer. Besides doing right by you, offering these resources helps them get a less stressed, more focused version of you. And when you’re less financially stressed, you’ll be better able to utilize the other benefits they sponsor that can contribute to your financial health, such as the company 401(k) plan or an employee stock purchase plan, if available.

Are you prioritizing your wellness, beyond your finances?

If 2020 has taught us anything, it’s that our health and safety, and that of our loved ones, are what’s most important. My mom is a nurse, and she taught me that money is an enabler of both needs and wants, but you can’t put a price on your well-being. As we wrap up the year, evaluate your insurance coverage, from health to disability and perhaps even long-term care. Explore and consider using any available employee benefits related to physical fitness and mental health. Be gentle with yourself.

The bottom line

Most of us are eager for 2021, if only for the symbolic hope a new year can bring. And for good reason—we have experienced a collective trauma this year, and many have faced personal traumas as well.

When you’re in triage mode, it’s natural to lose sight of the big picture. I encourage you to use this time to reflect on what’s changed in your day-to-day life, including your financial life. And if you have had to put your goals on pause, start thinking about the small first steps it will take to get back on track. Now more than ever, you deserve a healthy dose of financial self-care.

Krystal Barker Buissereth is head of Financial Wellness, Morgan Stanley at Work.



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Opinion: Higher interest rates could mean more cash for seniors

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Here’s a common complaint I hear from seniors all the time: Interest rates are so low that it’s impossible to earn enough cash to supplement Social Security.

“Certificates of deposit don’t earn anything,” writes MarketWatch reader Camille: “Until the mid-2000s, you could easily earn 4% on a certificate of deposit (CD). Today, your money does not earn anything, which penalizes small savers and seniors.”

She’s right. Based on rates as I write this, if you put $500 into a one-year CD, you’d get back about $502.76 in 12 months. Wow! Two whole dollars and 76 cents! Probably enough for a loaf of bread or a gallon of gas, but not much else.

Low interest rates are a double-edged sword. If you’re borrowing money, it’s obviously good, but if you’re trying to make a few bucks, no. And this isn’t likely to change in any significant way, given the Federal Reserve’s recent announcement that it plans to keep its key “Fed Funds” rate low until the economy and jobs market picks up steam.

Since things like money-market funds and certificates of deposits are tied to the Fed, that’s tough news for anyone hoping to squeeze more out of their savings.

Meantime, those paltry returns stand in contrast to things that keep shooting up, like the cost of healthcare. I recently reported that drug prices, for example, are rising much faster than inflation, and much faster than the cost-of-living adjustment that seniors typically get from Social Security.

This one-two punch—more money going out and less coming in—is punishing seniors, pushing many closer to, if not into, poverty.

The need to earn more has nudged some seniors into the stock market, which in and of itself isn’t necessarily bad; financial advisers typically say that given the possibility of decades in retirement, even seniors should have some exposure to equities. But with stocks at nosebleed levels—the price-to-earnings ratio on the S&P 500
SPX,
+1.14%

 is up 80% from a year ago—caution abounds. As usual, I’ll emphasize that how much a retiree should have in stocks depends on factors like age, risk tolerance and so forth, and is best discussed with a trusted financial adviser.

It’s often tempting when rates are super low like now to put cash into things with fat dividends, but “you have to be very careful,” cautions Andrew Mies, chief investment officer of 6 Meridian, a Wichita, Kansas-based wealth management firm. “Saying I’m going to go buy a high dividend-paying stock or MLP (master limited partnership, an investment vehicle common in capital-intensive businesses, like the energy sector) were disasters in 2020. Buying high-dividend stocks was one of the worst performing strategies you could have had last year, and some MLPs were down 30-40%.”

In other words, what’s the use of buying something that pays a dividend of 8%, 9% or more—only to see the stock itself plunge by a third? One market strategist, the late Barton Biggs of Morgan Stanley, once said “More money has been lost reaching for yield than at the point of a gun,” and he was right. Echoing that is none other than Warren Buffett, who has called reaching for yield “stupid,” but “very human.”

So what to do?

Mies urges something that many people have trouble with: Patience. That’s because rates, all of a sudden, appear to be moving higher, and if you can wait a bit, you just might be able to find safer investments that yield more than you might be able to get now.

He’s right. As of Friday, the yield on the 10-year Treasury bond stood at 1.34%, hardly robust, but up from 1.15% for the week. Two things to remember here: When bond rates go up, bond prices go down; higher bond yields can also make stocks less attractive on a relative basis as well.

Mies thinks rates will continue to climb. “I think you’re going to have a chance in the next 12 months to put money to work at higher interest rates.” Buying or selling are choices, but so is doing nothing, so “I do think that not getting aggressive right now is probably the most prudent action.”

And after rates go high enough, he thinks municipal bonds could become more attractive, corporate bonds could, Treasurys could. “There will be pockets of opportunity that pop up.”

You may want to consider what have long been considered so-called “widow and orphan” stocks: utilities. “Utilities have been trading as if the 10-year (Treasury) is significantly higher than it is. That could be a spot worth dipping your toe in.” Possibilities to consider—preferably in consultation with your financial adviser—include the Standard & Poor’s Utilities Select Sector Fund
XLU,
-1.17%

and iShares’ Global Utilities ETF
JXI,
-0.54%
.
XLU currently yields 3.3%, while JXI yields 2.78%, certainly more than those measly rates found in CDs or money-market funds.



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Opinion: Few 401(k) participants changed portfolio allocation when market tanked

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The rumor has been that 401(k) participants took little action when the stock market declined by more than 30% in February and March 2020. A Morningstar study provides some numbers to back up the lore.

The data come from a major record-keeper for defined-contribution plans. The starting point was snapshots for two dates: Dec. 31, 2019 and March 31, 2020. To be included in the analysis, the participant had to show up in both samples. That is, they had to be enrolled on or before Dec. 31, 2019 and still in the plan March 31, 2020. This construct ensures that observed changes reflect active decisions by participants as opposed to the sponsor replacing one fund with another. The final sample consisted of 635,116 participants across 509 plans.

The important finding is that only 5.6% of participants enrolled as of Dec. 31, 2019 changed their portfolio allocation during the first quarter of 2020. Participants who adjusted their portfolios changed their equity allocations. Most of these changes were relatively small, with an average equity reduction of about 10 percentage points. However, older participants who changed their accounts made larger changes than younger participants, particularly if they were invested more aggressively.

Much of the report goes on to look closely at the 5.6% who did move their money. For this exercise, the report identifies four types of participants: self-directing their accounts, using a target-date fund, defaulted into a managed account, and opted into a managed account. The pattern across participants shows that those with professionally managed solutions — target-date funds or managed accounts — were much less likely to change their allocation.

On balance, this report seems like good news. Buying high and selling low doesn’t end well.



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I’m 28, have zero debt, a 401(k), Roth IRA and $45K in the bank. My parents want me to save for a home. I want a Tesla Model 3. Who’s right?

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Dear Quentin,

I’ve been flip-flopping back and forth between buying a new car or putting a down payment on my first home. With my parents being very money-minded and keeping a careful eye on my finances (still), I’m caught in a predicament.

The original plan was to save up 20% to 30% for a down payment on a condo in the suburbs of Los Angeles and buy into the market within the two years or so, and right now I’m about 40% towards that goal.

However, with the Green Act possibly on the horizon again, the Model 3 has been a temptation, especially with all the extra bonus incentives my state offers, with a net final price of around $27,000. I’m not desperately in need of a new car, but this seems like a great way to save some money on a vehicle with smart features.


With the Green Act possibly on the horizon again, the Model 3 has been a temptation, especially with all the extra bonus incentives my state offers.

I am 28 years old with zero debt as of January 2021. Retirement wise, I am well on my way to maxing out 401(k) contributions this year, and I have already maxed out my Roth IRA contributions, and if everything stays the same, I’ll have about $60,000 in retirement by the end of the year.

In terms of liquid assets and investments, I’m sitting on about $45,000 as of right now. I currently save and/or invest 50% to 60% of my take-home pay, since I moved back home with my parents after being laid off last year, and started a new job remotely.

I don’t know if I should (a) purchase the car straight up and empty out my savings as I will probably have the time to save up the money again before a potential housing crash, (b) not purchase the car and keep saving for the down payment, (c) do both or (d) invest the money elsewhere.

As financial conservatives, my parents are strongly against me buying the car because it’s a depreciating asset, and they believe entering the market should be my priority, so they think that I should have the down payment waiting, to jump into the market whenever I see a good deal.

I believe I can buy the car and strap down, and save more aggressively to replenish the funds. Any advice for me?

Pressured by the Parents

You can email The Moneyist with any financial and ethical questions related to coronavirus at qfottrell@marketwatch.com

Dear Pressured,

What the hell! Give into your impulse, splash out on the Tesla
TSLA,
-8.55%

Model 3. You will be empowered by the knowledge that you are using your spending power to get America back on its feet, while making a cool statement that you have finally arrived. Fully embrace the American dream of being smack-bang-wallop in the middle of the eco-warrior, Tesla-driving, tech-savvy zeitgeist. All any of us have is today, after all and global warming is coming for us all in the end.

Cruise the neighborhoods where you would like to buy a home in your 30s, 40s or 50s (it will all depend on how the property market fares between now and then). Take a good look at those homes, assuming they are not obscured by manicured hedges, and enjoy the view. Drive back to your parents’ house, honk the horn so they can marvel at Elon Musk’s bold vision for themselves, and then and only then ask them nicely if they would make space in their driveway for your Model 3.

I am kidding, of course. You have done everything right so far. Buy the house first and the $27,000 electric car later. You already have a destination in mind. Don’t allow an automobile, regardless of how cool you think it would be to drive, to deter you from that destination. Listen to your parents. They have seen more than you have. They are trying to set you on the road to financial freedom. And as nice as they are to drive and to be seen driving, you don’t need a Tesla to achieve that.

The Moneyist:‘Warren Buffett and Harry Potter couldn’t get those two retired early’: Our spendthrift neighbors said our adviser was ‘lousy.’ So how come WE retired early?

Hello there, MarketWatchers. Check out the Moneyist private Facebook
FB,
-0.47%

 group where we look for answers to life’s thorniest money issues. Readers write in to me with all sorts of dilemmas. Post your questions, tell me what you want to know more about, or weigh in on the latest Moneyist columns.



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