When the Going Gets Tough
An educator’s guide to financial stability in tough economic times
While many experts say the economy has stabilized, uncertainty still reigns supreme. The financial and job markets reflect a lack of confidence in the recovery--and educators are feeling the pain of substantial budget cuts.
“Nobody is safe when disaster hits,” says Taren Coleman, a Chartered Retirement Planning CounselorSM and the senior partner relations specialist for investment programs at NEA Member Benefits. “That includes teachers and other education professionals. When times are really tough, we are all exposed.”
Fortunately, with proper planning, you can stop the budget crisis at your front door. Use these tips to create a proactive strategy to keep you on the right financial track.
Find the Silver Lining
The current state of the U.S. economy brings to mind high unemployment rates and a struggling stock market. But the troubled economy also offers a few perks, including low interest rates.
This may not seem significant, but even a small change in the interest rate on your mortgage loan can make a big difference. For example, according to the Federal Reserve, refinancing from 6 percent to 5.5 percent on a 30-year fixed-rate loan of $200,000 will save you $63 per month, which adds up to a savings of $756 over the course of a year. And, if you’re really ambitious, changing the length of your loan from 30 years to 15 years can amount to even more savings. For help calculating potential savings, try NEA’s free refinance analysis, available through the NEA Home Financing Program®.
Consolidating debt is another way to make the most of low interest rates. A consolidation loan, for example, will get you a lower rate on your loans and simplify your bills with a single monthly payment. Or, you can transfer your debt onto a single credit card using a balance transfer. This works best if you find a card that has a balance transfer offer and a competitive rate.
Another option is to ask your credit card companies for lower interest rates. If you have good credit and a strong payment history, you may be able to negotiate a better deal.
Create a Cash Cushion
The recent economic uncertainty has taught the average investor valuable lessons about financial planning—including the fact that cash is still king. While long-term investments are critical for future security, it’s also crucial to have a cash cushion available in case of an emergency.
“A downturn in the economy is a time when individuals may need to rely on cash more so than before,” says Coleman. “Those with an investment portfolio don’t want to be forced to sell out of that portfolio and create a loss when the market is down.”
When times are tight it can seem overwhelming to try to stash money away for a rainy day. So, to get started, it’s good to set an achievable goal, says Coleman.
A reasonable goal is to have four to six months of living expenses saved in case of an emergency, like the loss of a job. Once you’ve decided how much you need to save each month, these simple steps can help you make progress toward your goal:
Reassess your household bills. See if you can reduce your expenses by switching to a different package for your home phone, cell phone, cable TV, Internet, homeowners/renters insurance, and auto insurance. Members often save by switching to the NEA® Auto & Home Insurance Program. You can also visit websites like Billshrink.com and Mint.com for personalized tools to help you find specific opportunities to save.
Cash in on credit card rewards. If you tend to shop using credit cards, get in the habit of using cards that offer cash back on things you’re going to buy anyway, like groceries, clothes, and gas.
Take your taxes to an expert. Preparing your taxes through an expert trained in educator-related tax deductions, like an accountant or tax preparation service, can save you money at tax time. NEA members can even save on the cost of some of these services through a special NEA discount at H&R Block®.
Shop online and save. Through NEA Click & Save® members can save up to $1,000 per year on discounted online purchases. Many of your favorite brands and stores offer discounts through this program.
Plan For the Future
Even when times are tight, Coleman says maintaining stock investments, 403(b) plans and other forms of retirement savings is important, because pensions will most likely not replace 100 percent of pre-retirement income. Beyond reducing retirement readiness, withdrawing these funds comes with risks—like being taxed on that income and paying a 10 percent penalty for withdrawing before the age of 59 1/2.
Once you’ve committed to keeping your retirement savings intact, it’s important to find a way to continue contributing, as well. A great way to get motivated to save is to set a retirement goal, Coleman says.
“The goal will help determine how much should be set aside each paycheck,” she says. NEAMB’s retirement savings calculator www.neamb.com/5minutes can help with figuring out the monthly contribution needed to help reach your retirement goal.
Next, consider putting those savings into a tax-deferred retirement savings program. NEA offers supplementary retirement savings options geared toward educators at www.neamb.com/retire.
While it’s impossible to predict whether the future holds an economic boom or bust, one thing you can control is your own financial stability. To learn more about cost-savings programs designed specifically for educators like you, visit www.neamb.com or call the Member Service Center at 1-800-637-4636.
In Your Own Words
NEA Member Cathy deJong discusses how her family got their finances under control.
What are your financial planning strategies and how have they allowed you to maintain a cash cushion?
When my husband and I were first married, we each brought in debt from college. We had to work to get that under control and consolidate those high interest rate credit cards so we could get out from paying a 20 percent interest rate on department store accounts. First we got a credit card consolidation. What we saved, because of the lower interest rate, we applied toward paying down the principal debt faster so that we had a cash cushion.
When money is tight, what steps do you take to stay in control of your finances?
You have to make a budget. Track your expenses; then you can make better decisions. With the advent of debit cards, people don’t think about how often they are making an impulse purchase. My credit union has an online tool that allows my husband and me to create a family budget. It has a pie chart so we can see how much is being spent on bills, house payments, etc. We can then plan ahead for major purchases.
We know that people have always said, “Have three to six months of living expenses set aside.” But that can seem really daunting when you’re trying to get everything under control. We broke it into smaller, more manageable goals and have been building upon that—and now we have a three-month reserve. It’s probably taken three years.
What advice do you have for other NEA members trying to maintain financial stability in this tight economy?
The minute you begin working, start saving for retirement. If I had started saving on my very first paycheck, I would be in a better-off position than I am in now; I wouldn’t have to crank up my monthly contribution.
Also, don’t be embarrassed about where you are with your finances. A lack of having a conversation because of embarrassment is actually what causes people to get into even more trouble. Don’t ignore your finances or get in the trap of “I’ll take care of that later.” Later can come immediately.
Ask the Expert
How can you accurately predict/project how much money you should have in assets and savings before you retire?
—Meredith Thomas, New Jersey
That’s a great question, Meredith. Today, not only are we living longer, we’re living longer in retirement years. Longevity comes with a higher price tag, too, in the form of ongoing living expenses, inflation, taxes, and health care costs. Now our challenge is figuring out how to plan for this extended stage of life and remain financially secure along the way.
A great starting point in your retirement income planning process is to “run the numbers”—which means you have to do some calculations.
To make the process a little easier, first gather your most recent statements for pension and annuity contracts, investment accounts, and social security. Other helpful information may include a current budget of your income and expenses, a recent tax return, your net worth, and a listing of your assets and liabilities.
Try out an online retirement calculator. They’re relatively easy to use and can help you paint a very basic picture of possible outcomes. However, there will be some guesswork on your part when using the calculators. You will have to make some assumptions or estimates for things like investment rates of return, inflation, and life expectancy. Consider trying out more than one calculator; some are generic while others are more sophisticated and can provide personalized projections and recommendations.
An online calculator is a good start, but no calculator can provide 100 percent accuracy in projecting future outcomes. Run your numbers annually so that you can update assumptions and account for any life changes. Also, consider getting a second opinion from a financial advisor or accountant who may be able to help you manage your assumptions so that you’re not too optimistic or too conservative in your planning.
The road to financial security is challenging. Running your retirement numbers is an important step in helping you see where you stand today. The more you know now, the more you can do to better protect your financial future.
Name: Cathy deJong
Occupation: Former second-grade teacher and full-time president, Auburn Education Association
Membership: 25 years
Benefits she has used:
NEA® Smart Option Student Loan® by Sallie Mae®
NEA® Complimentary Life Insurance
NEA Credit Card Program®
NEA Car Rental Program®
NEA® tax deferred retirement accounts
NEA Home Financing Program®
NEA Member Benefit Web resources
For help calculating potential savings, try NEA’s free refinance analysis, available through the NEA Home Financing Program®
NEAMB’s retirement savings calculator
NEA offers supplementary retirement savings options geared toward educators