“If you think nobody cares if you’re alive, try missing a couple of car payments.” – Earl Wilson
Over the decades, you’ve probably uttered a variation of the statement, “I need to get my act together.” In your 20s, maybe you were trying to decide on a career path. In your 30s, maybe you wrestled with the best time to start a family. And now that you’re older, maybe your focus has narrowed on ways to get your house in financial order.
The last thing you want to worry about is whether you’ll have enough money for retirement. Nor, as someone who values your independence, do you want to leave a financial mess for your loved ones to clean up.
So, how to put your financial affairs in better shape? Fortunately, there are many things you can do, and the sooner the better.
One last comforting word before you get started. You’re not alone in your quest to get your financial house in order. In a survey released by the American Psychological Association, 72% of Americans reported feeling stressed about their money at least sometime during the past month.1
Take a good look at your life
It was Socrates who said, “the unexamined life is not worth living.” So, financially speaking, examine where you are now and where you would like to be. Do your financial affairs look like the junk drawer in your kitchen, or are things neatly arranged so that you can quickly find exactly what you need when you need it?
If your financial life looks like the junk drawer, you will want to clean it out. But if you don’t put a new system in place, it will likely fill up again, leaving you no better off than you are now.
Lastly, in your examination, try anticipating future needs. Maybe you’re working full- or part-time now, but ask yourself, what if that income dried up?
Draw up a budget
Founding father Benjamin Franklin said, “If you fail to plan, you are planning to fail.” Drawing up a budget starts the planning process in earnest.
Add what you bring in monthly from earnings, pensions, savings, Social Security, investments, rents if you own property, etc., and then subtract your expenses, things like your mortgage, property taxes, utilities, groceries, credit card payments, and insurance payments. What you have left after all the bills are paid is your net income.
This simple examination of your finances can be a real eye-opener. If you find your current lifestyle is too rich for your income, you’re going to have to cut back. And cutting back doesn’t mean just paying the minimums on your credit cards. You need to form and follow a simple budget to ensure your outflow matches your inflow.
Put all your expenses under the microscope to see what you can trim: lattes, cable bills, bottled waters, excessive trips to the grocery store, runaway heating and cooling bills, gardening services, subscriptions to services that you rarely, if ever, use. Instead of taking Fluffy to the groomers each week, learn how to shampoo and cut her hair yourself. With a little initiative and purpose, you can find all kinds of ways to improve your bottom line.
Make smart purchases
When Benjamin Franklin was 7 years old, he used all his money to buy a whistle. Upon learning he had paid four times too much for the whistle, he said, “This discovery gave me more chagrin than the whistle gave me pleasure.”
Stop overspending and learn to stretch your dollars wherever you can. To keep track of his vast retail empire, Walmart founder Sam Walton often flew planes from one Walmart location to the next. “I’ve owned about 18 airplanes over the years,” Walton said, “and I’ve never bought one of them new.” The multi-billionaire also bought his suits off the rack at Walmart.
For Walton and Franklin, it wasn’t what they earned, but what they saved that mattered. Cowboy humorist Will Rogers, Hollywood’s highest paid actor in the 1930s, would have been a proud member of this parsimonious group. “Too many people,” he said, “spend money they haven’t earned, to buy things they don’t want, to impress people they don’t like.”
You could realize big savings by renegotiating the cost of many things you regularly pay for. If you are driving less, you should be paying less for car insurance. If you are being charged for cable channels you never watch, threaten to take your business elsewhere if an adjustment isn’t made to your bill. Check the interest on every credit card and policy you currently hold, then get on the phone and ask for a better rate.
If you can’t get your providers to budge, then you should think of an alternative plan to consolidate, pay down, or pay off your revolving debt. What you can’t continue to do is pay double-digit interest rates on your debt — especially in this low-interest rate environment — if you ever expect to get your financial house in order. If you start missing payments, your credit score will drop, and then when you need to finance a big purchase like a car, you won’t get the “advertised” rate. Below, you’ll find more ideas to help you better manage high-interest debt.
Examine your various insurance coverages
Insurance deserves its own category because there are so many different kinds, such as auto, home, liability, life, and health. If only you could pay for what you needed. The problem is, it’s impossible to predict the future. Tomorrow, as you’re backing your car out of the driveway, a teenage driver could slam into you. To lower your annual premiums, you could raise your deductibles. For instance, you may live in a newer home and regularly maintain it, so you might reason that the chances of something going wrong with it would be less than they would be for an older, poorly maintained home. Raising your deductible could very well pay off for you. Just keep in mind, it’s a calculated risk. At the very least, make it a point to do an annual review. You might find you’re paying for coverage you really don’t need.
As for life insurance, ask yourself what would happen to your family if anything happened to you? Would they have enough money in the form of savings, investments, and other assets, to pay your funeral expenses and ensure their long-term security? If not, one way to bridge that gap is life insurance. Life insurance policies become more costly as you age, but there are a variety of policy structures to accommodate older adults, even if you aren’t in the best health.
Life insurance can also be a proactive financial tool. It can help high-net-worth individuals cover estate taxes. It can also be a way to provide your heirs an inheritance.
Review your investment mix
If you’re fortunate enough to have a company-sponsored 401(k), individual retirement account (IRA), or investment account that has grown, periodically review your investment mix so it reflects your current wishes, growth goals, and tolerance for risk. A run-up in a certain asset class, like stocks or bonds, may have unbalanced your portfolio. For example, your stock gains may have left you with an 80/20 ratio of stocks to bonds, a significant drift upward from the desired 60/40 allocation your financial advisor had recommended. A simple rebalancing can put your portfolio back in alignment.
Learn all you can about Medicare
Age 65 is the magic number for receiving Medicare benefits. With some conditions, you may qualify earlier. Up to certain caps, hospital expenses (Part A) and medical expenses (Part B) are covered at 80 percent under Medicare, leaving you with a 20-percent gap in coverage. So, were you to have $100,000 heart bypass surgery, you would be out of pocket $20,000.
To help cover this cost, you have the option of selecting a supplemental insurance plan, either Medigap or Medicare Advantage, offered by private insurers. For Medigap, you pay the private insurance company a monthly premium. With Medicare Advantage, it’s possible to escape paying any monthly premiums. How is that possible, and if so, why wouldn’t everyone elect Medicare Advantage?
Medigap insurance plans cover you for any hospital or doctor in the U.S. that accepts Medicare, and the great majority do. There is no need for prior authorization or a referral from a primary care doctor. You literally pay a premium for this kind of flexibility. With Medicare Advantage, your access to hospitals and doctors may be more limited and you may have to deal with higher deductibles and copays.
Bottom line, private companies are in business to make a profit, so don’t be swayed by slick TV advertisements promoting extras like complimentary dental, vision, hearing services, and free gym memberships during the open Medicare enrollment period (October 15-December 7). There’s always a cost. Rather, base your Medigap v. Advantage choice on your anticipated need of care based on a variety of factors, such as your current medical condition, family medical history, travel frequency, and of course, personal choice to receive the level of care you expect. When it comes to your health, cost should not be your sole consideration.
Delay taking Social Security
The decision of when to take Social Security is highly contingent on your circumstances. You can start taking it as early as age 62 (or earlier if you are a survivor of another Social Security claimant or on disability), wait until you’ve reached full retirement age, or even until age 70. Just keep in mind that the longer you can delay taking Social Security, your annual benefit will increase roughly 8 percent a year until reaching age 70. That’s a far better rate of growth than what banks are currently paying. This move can pay off over a long retirement.
Stay in circulation
Being on a budget doesn’t have to cramp your style or limit the activities you enjoy. There are lots of free events and lectures to attend (free Fridays at museums, tuition-free college classes, neighborhood walking tours, etc.). Stay abreast of these activities through networking sites like Facebook and LinkedIn. The only “paying” you should do is paying attention to what you hear and learn at these events. That said, always be aware of the “bait-and-switch,” and never forget what you learned growing up: “There are no free lunches.”
Explore good debt
Not all debt is bad, far from it. From your own experience, you may fondly recall making a small down payment on your current home and financing the rest. After 30 years, once considered the standard mortgage term, your home may now be worth two or three times as much — a good return and smart use of debt by almost anyone’s standards.
Conversely, if you’re now paying exorbitant interest rates on things you have financed, such as a car, furniture, vacation, jewelry, home improvements, medical services, last year’s holiday gifts, or even your current mortgage, and you have the opportunity to significantly reduce that interest rate, this would be a good use of debt.
Three useful loans for better debt management
A cash-out refinance replaces your current home loan with a new mortgage that’s higher than your outstanding loan balance. You withdraw the difference between the old mortgage balance and the new balance in cash and apply it toward reducing higher-interest debt or other financial goals that can put your retirement on a more stable footing. A cash-out refinance can be an ideal solution when you’re able to replace your current mortgage interest rate with a new lower interest rate.
Home Equity Line of Credit
A home equity line of credit is a second mortgage that is tacked on to your current mortgage. Instead of your funds getting disbursed to you in a lump sum, as happens with a cash-out refinance, you have access to a credit line that you can draw on as needed for a set period up to your approved limit.
Unlike the previous two options, you don’t have to begin repaying a reverse mortgage after the loan closes. You can wait to repay the loan until you leave the home, which can do wonders for your cash flow. A reverse mortgage requires no monthly mortgage payments, providing another boost to your cash flow. However, like any mortgage, you must maintain your home and keep up your property taxes and homeowners insurance.
But a reverse mortgage is literally not for everyone. To apply, you must be 62 or older, own and live in your home as your primary residence, and have either no mortgage or a low mortgage balance, giving you enough home equity to borrow against.
Thus, a reverse mortgage loan is simply a flexible financing tool that allows you to convert some of your home equity into tax-free cash that you can use to pay off bills, lower higher-interest debt, and put to work virtually any way you please for a more stable retirement. For example, you could use some of your proceeds to pad your emergency fund or pay for your long-term care needs.
After paying off your current mortgage, if you still have one, a reverse mortgage also offers the advantage of six different payouts, which gives you more financial control over your retirement. The most popular payout option is a line of credit for which you are charged interest only on the portion you use. Whatever portion of the loan you don’t use continues to grow each year of the loan, making it an outstanding reserve fund for whenever you need it.
There are many ways, big and small, to help you get your financial house in order. Start with some of the steps listed above. Furthermore, think about putting all your important documents (tax returns, insurance policies, mortgage documents, investment and retirement accounts, and even warranties and service contracts) in a safe but accessible place, so loved ones can easily retrieve the information if you’re unable to. This will streamline the settling of your estate and help ensure important deadlines are met.
In organizing these documents, review your beneficiaries to ensure they accurately designate your current intentions. Also, take the time to complete an advance health directive, also known as a living will, personal directive, medical directive, or advance decision, which specifies what actions should be taken for your health if you are no longer able to make decisions for yourself because of illness or incapacity.
When working to get your house in financial order, think of not just yourself, but all those who now or may one day come under your financial roof for their care, protection, and security.