I'm starting to feel real sympathy for my local friends who are in the insurance industry, especially those brokers helping individuals and families figure out the Marketplace Exchanges. I do have hopes that the now-famous website "glitches" will be sorted out ... at which point, we'll be helping our clients navigate the mandate requirements that are scheduled to begin January 1st.
I'm not asking for your sympathy though -- this is what I signed up for when I chose to make a career out of helping families navigate the byzantine world of filling out federal and state forms.
And, it's actually very gratifying to be able to do it. But that doesn't mean that I think things should not be easier!
As usual, I'll be here letting you know what you need to know.
** One nice little tax goodie came through this past week, by the way: On October 31st, the Treasury Department announced that employers now can offer FSA holders the option of rolling over up to $500 left in their spending accounts at the end of the benefit year.
What this means is that if you have $500 left in your FSA on Dec. 31st, the end of the benefit year for most employer-sponsored plans, then that amount can go into your FSA for the next benefit year, along with whatever new money you plan to put into your account via pretax payroll deductions. **
All that aside, I'm sticking to my college theme that I started here two weeks ago (I had written about the college costs bubble, and signs of a possible deflation) ... but this Note is about something much less salutary ...
Michael Kessler's
"Real World" Personal Strategy Note
College Kids Are Getting Sucked Dry By Credit Cards
"He that can have patience can have what he will." - Benjamin Franklin
There's a good reason that credit card companies have gone after college students for so long.
Students assume that they can run up a credit card bill because it will be easy to pay it off after they graduate and get a high paying job. But the larger your debt, the longer it takes to pay off that debt using minimum payments. The average student graduates with about $7,000 in credit card debt. They assume that $7,000 will be easily wiped away with their first high paying job.
Being burdened with $7,000 in credit card debt after graduation costs you nearly $20,000, and can stretch to nearly forty years to erase with minimum payments. Just when you should be saving and investing that $20,000, growing rich, or buying your own home, you are stuck with unwanted credit debt from your college years.
Whenever you casually reach for your credit card during college, visualize the choice between having the downpayment on owning your own home, or making that particular purchase you're considering in the moment.
Studies have linked accumulating credit card debt to psychological stress that increases the likelihood of dropping out of school, and even suicide. Students find themselves ill-equipped to handle the anxiety of mounting collection agencies, alongside their course of studies.
Studies have also shown that a college degree is worth over a million dollars in increased lifetime earnings. Don't sacrifice the million dollar benefits of an education on the frivolous purchases of a credit card.
Every time you reach for a credit card then, imagine also that credit card hanging on your wall -- instead of your diploma. It could cost you a million dollars to frame it.
The years after college and before children are the best time in your life to save. But you lose time and squander your resources, if you enter the marketplace with credit card debt.
Your high school and college years are the prime years for funding your Roth IRA. If you use a credit card, but don't fully fund your Roth IRA, each year you have a credit card problem. Unlike a traditional IRA, you contribute to a Roth IRA after taxes, and it grows tax free, andthen in retirement you can make tax free withdrawals. Because the money is contributed after taxes, it is best to fund an IRA while you are a "poor" college student likely working summers and part-time, and still in a low tax bracket.
Contributing $2,000 a year to your Roth IRA during high school and college is better than starting to contribute during your first year after college and continuing for the remainder of your life.
Every seven years you wait to fund your Roth IRA you cut in half the standard of living you will have in your retirement. With "normal" market returns*, after seven years of $2,000 a year contributions, your Roth IRA will be appreciating at a rate of more than $2,000 a year, without any additional contributions.
(*Disclaimer: I obviously can't predict or control market returns over the coming decades, but we can look at historic rates for some quick math for our purposes here, as I've done.)
At those same rates of return, that $14,000 contribution during high school and college will ultimately grow to more than $2 million dollars by age 67, and more than $4 million dollars by age 73.
Whenever you look at prices in a store or restaurant, imagine taking the decimal out in front of the cents. That is how much tax free income you are losing in retirement by not contributing to your Roth IRA. And by age 85, you could add another zero to the end as well. That $8.50 lunch costs you $850 at age 63 and $8,500 by age 85.
If you don't think you have any problems with your use of credit cards, but you haven't been saving and fully funding your Roth IRA -- you have a problem with your use of credit cards.
Every time you go to use your credit card ask yourself also if you've fully funded your Roth IRA for the year. If you haven't, put the credit card right back in your wallet.
All debt is not equal. Credit card debt is bad debt. Student loans are good debt. Good debt is anything that lasts longer than it does to pay the loan back. Good debt is investing in things that will pay you more money than the debt costs. An education is good debt because it will increase your income, satisfaction in life, and longevity.
Credit card debt is bad debt. Bad debt is anything that you can wear, eat, or drink. Always pay cash for these items. If you do, then what you wear, eat, and drink will be healthier and less expensive. The next time you pull out your credit card for any of these items imagine wearing, eating, or drinking $20 dollar bills. Alternately, just leave your credit card locked in your dorm room. Life's too short to let it get sucked dry by credit cards.
To your family's financial (and educational) future ...
Warmly,
Michael Kessler
(516) 449-2852
