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Finance 101: August 2023 Thumbnail

Finance 101: August 2023

In August the financial advisors at Ruedi Wealth Management wrote 5 more “Finance 101” columns for The New-Gazette’s Business Extra section. Make sure to look for them every Sunday, but in case you missed the columns from August all five are below.

Where Do You Stand?

Ryan Repko, CFP®

On our radio show this week we received a question from a person who was much younger than our typical listener. This 34-year-old gave us a few details about his financial situation and asked us if his savings rate is on track relative to his peers. Though comparing yourself to others can be a recipe for unhappiness, it is only natural for all of us to benchmark our savings to see how we’re doing.

To understand where you stand relative to your peers, I think it is helpful to look at median net worth by age. The Federal Reserve makes this information available as part of the Survey of Consumer Finances they do every three years. Since we are still waiting on 2022 data to be published, the most recent numbers we have are from 2019.

For people ages 30-34, the median net worth is $35,111.76. For people ages 35-39 the median net worth is $55,519.42. For people in the 40-44 age bracket the median net worth is $127,344.55. For those in the 45-49 age bracket the median net worth is $164,196.96

But I think a better question is where do you stand relative to your goals? In this case we could look at rules of thumb based on how much of your annual income you should have saved by age. It is helpful to look at your savings relative to your income as this can help account for your lifestyle needs.

Fidelity did research that suggested savers should aim to save at least 1x their income by age 30, 3x by 40, 6x by 50, 8x by 60, and 10x by age 67. T. Rowe Price did similar research and suggest that people should have a total savings of half of their income by age 30, 1-1.5x salary by age 35, 1.5-2.5x by age 40, 2-4x by age 45, 3-6x by age 50, 4.5-8x by age 55, 5.5-11x by age 60, and 7-13.5x saved by age 65. Since everyone’s financial situation is unique, none of these rules of thumb are perfect, however they can serve as a good starting point to see if you are heading in the right direction.

Finding out where you stand relative to your peers, or using rules of thumb, is interesting, but it should not be the determinant for one’s success. What is relevant is if you are on track to achieve the specific goals you want to achieve, which may require more (or less) saving than a rule of thumb dictates. If you need help determining your unique savings goal, you may want to talk to a financial planner.

Ryan Repko is a CERTIFIED FINANCIAL PLANNER™ professional with Ruedi Wealth Management in Champaign, Illinois.


Paying Off Debt vs. Investing

Paul R. Ruedi, CFP®

Savers often get stuck choosing between investing their money or paying off debt. There are many things that must be considered when making this decision, both the objective mathematical considerations but also the human emotional side as well.

If you use $100 to pay down debt that is accruing at 5%, thus saving you 5 dollars of interest, you are $5 better off. If you were to instead use that same $100 to invest and receive a 5% return, you are $5 dollars better off. Though one involves saving $5 in interest and the other involves earning that $5 as an investment return, it is functionally the same thing. It is mathematically optimal to put more of your dollars wherever you get the highest rate, whether it be avoiding interest or receiving a return as an investor.

When the gap is large the decision is obvious – for example an investment that returns 10% vs. paying down a mortgage at 3.5% interest. If you have credit cards accruing interest at upwards of 20%, it is probably better to pay those off than invest at 10%. But people often get stuck when the rates they are choosing between are similar. In those cases, it may actually be better to simply choose whichever option makes them feel better.

Though on paper paying down debt vs. investing could be a purely mathematical decision, in real life there are practical elements that can take priority over the numbers. Debt often feels like a monkey on people’s backs – the constant feeling of being “in the hole” can be oppressive. It hangs over their personal finances like a dark cloud, which makes it difficult to celebrate any other financial successes that occur in life because they feel like moving pebbles relative to the boulder that is their debt.

Regardless of what the numbers say, it may be better for someone who is very stressed about their debt to pay down their debts before investing and get the mental reward of doing so, which will eventually turn to lasting peace of mind once the debt is paid off.

My job as a financial planner is more often to prevent people from acting on their emotions and pursuing a course of action just because it makes them feel better. But given the choice between empowerment or frustration as people start taking responsibility for their own financial well-being, the first option certainly is more likely to reinforce good habits and set someone on a path to financial success, even if it is a little mathematically sub-optimal.

Paul R. Ruedi is a CERTIFIED FINANCIAL PLANNER™ professional with Ruedi Wealth Management in Champaign, Illinois.


US Credit Rating Downgrade

Paul Ruedi

You may have heard the news about the US Government getting its credit rating downgraded this week. The financial media wasted no time drumming up headlines about it. But what does it mean to have the US credit rating downgraded? Is it a big deal for investors?

When governments and companies want to borrow money, they often do so by selling bonds to investors. Since typical investors don’t have the resources and expertise to research the issuers themselves, they often look to credit ratings provided by three major ratings agencies to give them an idea of the riskiness of a bond: Moody’s, Standard and Poor’s, or Fitch.

 These companies look at all the details about the issuer of a bond and its ability to pay that particular debt obligation. Depending on what they find they will issue a credit rating. The highest quality bonds are considered “investment grade bonds.” Lower ratings are called “speculative grade bonds.” There are even credit ratings for bonds that are going to be defaulted on.

Fitch recently downgraded US debt obligations from AAA to AA+. Though any debt downgrade isn’t good, Fitch only knocked the US credit rating down from the very highest rating, to the second highest rating - out of 20. It could be downgraded 8 ratings lower and still remain “investment grade.” If I had to put it in plain English, I’d say their opinion of the US debt obligations moved from “extremely safe” to “very, very safe.” It does not mean the US credit rating went from “not risky” to “risky” all of a sudden.

Fitch cited “repeated debt-limit political standoffs and last-minute resolutions” as the reason for the downgrade. A similar situation took place in 2011 when Standard and Poor’s downgraded the US credit rating a similar magnitude in the wake of a similar debt ceiling standoff. I think in both cases the ratings companies were just confirming what was already apparent to investors.

Is this a big deal for investors? Not for those with a long-term investment outlook. Any short-term fluctuations in stock prices will be temporary interruptions along a permanent uptrend in stocks. After the 2011 downgrade the S&P 500 index declined temporarily, but has more than tripled since then (though past performance is not an indication of future results). The best option, as always, is for investors to stick with their investments for the long haul regardless of what news items get thrown at them.

Paul Ruedi is the CEO of Ruedi Wealth Management in Champaign, Illinois.


What is a 529 College Savings Plan?

Ryan Repko, CFP®

Back to school season is upon us, which is a great time to think about the benefits of opening a 529 College Savings Plan to fund future education expenses. A 529 College Savings Plan is a special type of savings account that allows investments to grow tax-free, and withdrawals to be made tax-free for qualified college or trade school expenses. These plans are provided by individual states and nearly every state has at least one; Illinois, for example, has two. The plan is sponsored by each state, but it does not have to be the state where the beneficiary attends school.

The plans are funded with after-tax dollars, and while contributions are not deductible on federal tax returns, they may be deductible on some state tax returns, like they are in Illinois. In a 529 savings plan, you can invest your contributions in a portfolio of mutual funds or similar investments. The account balance goes up and down based on the performance of the investments in the account.

In order to avoid taxes on the gains in the account, the proceeds must be used for “qualified education expenses.” These include tuition and fees, books, computer technology and equipment (including internet access), special needs equipment, and some room and board expenses.

If the proceeds are not used for qualified education expenses, earnings on those proceeds will be subject to tax at your ordinary income tax rate plus a 10% penalty. There are some exceptions, for example if the beneficiary dies, becomes disabled, or receives a scholarship, in which case the earnings will avoid the 10% penalty, but will be subject to tax at your ordinary income tax rate. Additionally, a new tax rule now allows up to $35,000 of a 529 plan to be rolled into a Roth IRA in the name of the 529 beneficiary.

529 plans are considered to be owned by the account opener, rather than the beneficiary of the account, which is usually a child or grandchild. A 529 plan can only have one beneficiary, so one must open multiple accounts if there are multiple people. That being said, the beneficiary of a 529 can be changed, so it may be possible to use the same 529 plan and switch beneficiaries over time.

529 plans provide some extra help when it comes to funding higher education, but the majority of the progress towards this goal will be based on advance planning and diligent saving. Savers should start early to give themselves extra years to save, and their investments extra time to compound and grow.


Ryan Repko is a CERTIFIED FINANCIAL PLANNER™ professional with Ruedi Wealth Management in Champaign, Illinois.


Lost Investment Accounts

Paul Ruedi

Many investors are what I call account collectors – after years of working at different employers and saving in different types of retirement accounts, they have often accumulated an unnecessarily large number of investment accounts. This can lead to many headaches, but the biggest problem with having so many accounts is that they can be lost to the sands of time or forgotten in one way or another.

As we age, our minds inevitably start to slow down. We become more forgetful. Accounts can easily fall out of your thoughts and be forgotten, forever. On top of that, it is fairly common for one person in a joint household to be the one who handles the finances. This includes keeping track of all their various investment accounts, and often times the other spouse has no idea where the couple’s money is actually kept. If something happens to the spouse who handles the finances, it is very easy for accounts to slip through the cracks.

A great way to avoid losing accounts is simply by having fewer accounts to remember. It is extremely helpful as people age to consolidate money into as few accounts and custodians as possible. This not only decreases the likelihood something will be forgotten, it will make things like calculating and withdrawing Required Minimum Distributions (RMDs) and keeping beneficiaries up to date much easier.

It is very helpful to keep someone in the loop on your finances as you age. This person can be a family member, trusted acquaintance, or financial professional – whatever makes you the most comfortable. It is ideal for them to have some level of financial aptitude to prevent you from making obvious mistakes, but the most important thing is that they help you keep track of everything so nothing gets lost.

If accounts remain dormant for a long time, financial institutions are required by law to try to notify you in some way. If they can’t find you, the title to these accounts will be transferred to the state under escheat. You can search for and claim this property by going to: https://icash.illinoistreasurer.gov/.

Though we have seen people who had the help of a diligent advocate track down and recover lost accounts, prevention is still the best medicine. By consolidating investment accounts and designating a responsible person to help you keep track of your finances, you can avoid the many headaches of lost accounts and spend your time enjoying your money instead of searching for it!

Paul Ruedi is the CEO of Ruedi Wealth Management in Champaign, Illinois.


Disclaimer: Past performance is no indication of future results. You should not make any investment decisions without first performing your own due diligence and consulting your financial advisor.