Sarah Skidmore Sell

What to expect for your personal finances in 2018

No one wants to be caught off-guard when it comes to their finances. So The Associated Press asked several experts to share their opinion on what will happen with some key issues in 2018 that will directly impact your personal financial well-being. Here’s a look at their forecasts: Q. What will the job market look like in 2018? A. The current strength in the job market should carry into 2018. This is particularly true if you are in a high-demand field like health care, technology or e-commerce, said Andrew Chamberlain, chief economist at jobsite Glassdoor. “Today’s labor market is probably the tightest in a generation so that puts workers in a strong bargaining position with employers,” said Chamberlain. Companies in high-demand fields should offer pay raises and other incentives to help attract and retain workers. Those not in high-demand fields may see some improvements in workplace conditions too. Experts like Chamberlain are warning job-holders not to get lulled into complacency by the unusually long U.S. economic expansion. As economists say: times are good until they aren’t. Chamberlain said this is a good time to prepare for an inevitable downturn by socking away money in savings, polishing your resume and keeping your list of work accomplishments handy. Q. What about tax changes? A. This is the big question mark for many. The tax overhaul bill, which passed Congress Dec. 20 and was signed Dec. 22 by President Donald Trump, will take effect in 2018. You may see changes almost immediately in your withholdings from your paycheck. The IRS said earlier this month that it is closely monitoring the bill and expects to issue initial withholding guidance in January, which would allow taxpayers to begin seeing the benefits of the change as early as February. However, other big changes from the overhaul — such as a lower tax rate or elimination of some deductions — won’t be fully evident until you complete your taxes in the spring of 2019. Generally speaking, the legislation reduces levies on the wealthiest Americans, while making more modest tax reductions for most others. The tax cuts for individuals are temporary, expiring in 2026. And while it doubles the standard deduction used by most Americans, that will also end in eight years. Q. Will wages go up next year? A. In short: most likely. Ian Shepherdson, chief economist at Pantheon Macroeconomics, said that the tight labor market is expected to remain tight. That means companies will be hard pressed to find and retain workers, and in turn, will likely raise pay. Unemployment in the U.S. is already at a 17-year low of 4.1 percent and the economy is growing at a good clip, over 3 percent at last measure. But Shepherdson and other economists think this growth period is near its end, which is typically when the best gains come for workers. He describes next year as the “sweet spot” for individuals to get raises that leave them feeling better off. The only thing that could throw off this lower unemployment trend — which drives the wage growth — is if significant numbers of workers who’ve been on the sidelines try to rejoin the workforce. “That is possible, but it’s very low (risk),” he said. “If we were going to see a big surge we would have seen it by now.” Q. How is the housing market shaping up for 2018? A. This year’s turbulent politics, natural disasters and more should play out in the housing market in 2018, said Ralph McLaughlin, chief economist for housing website Trulia. There will be less enthusiasm for home buying and more enthusiasm for selling, he said. That will help ease two major headwinds in the current market: low inventory and high prices. However, there will be lower demand for homes prone to natural disasters, following this year’s string of hurricanes, wildfires and floods. There will also be a geographic reaction to the tax plan. The shrunken deduction for home interest and property taxes could dampen enthusiasm for homes in expensive and high-tax areas such as parts of the Northeast and much of the West. However, a major increase in the standard deduction should help boost demand in the Midwest and South, where few mortgages and property tax bills are large enough to warrant itemized deductions. Trulia expects prices to rise across the county at a slower rate as the market starts to come into more balance. And for renters, the rate of rent will increase further but at a more modest pace thanks to new construction.

How to invest with $5, $50 or $100

Investing isn’t just for the rich. It is true that if you have lots of cash, you’ll have lots of options on where to put it. But if you are just getting started and have just a minimal amount of money to work with — anywhere from $5 to $1,000 — you may have more choices than you might think. A few things to consider: Should you be investing at all? It’s important to ask yourself first, should you be investing at this point in your life? There may be other things that take precedent, said Nick Holeman, a certified financial planner at Betterment. He suggests making sure first that you’ve paid off any high-interest debts, which he considers anything over 5 percent. A moderate portfolio can earn you roughly 6 to 9 percent, but that comes with a lot of ups and downs along the way. Paying off high-rate interest debt is a guaranteed way to improve your financial well-being. Take advantage of an employer’s 401(k) matching contributions before looking to outside investments. The match alone greatly increases your contributions at the start. No other investment can offer that. Also, your contributions are tax-deductible and grow in a tax-sheltered account. Set your intention If you are in a position to invest freely, determine why you are doing it. There’s no wrong answer. Maybe you want to speed up your savings for a house or perhaps you just want to try your hand at the stock market. It’s important to be honest with yourself because it will help you set a timeline and risk threshold, said Ted Beck, CEO of the National Endowment for Financial Education. He also suggests thinking about how much time you are willing to spend on homework. Some investments, a single stock, for example, require more research and upkeep than something like a mutual fund. If you want to understand some further basics on investing principles, consider checking out NEFE’s “Money Basics ” free educational course on investing. Who to invest with In most cases you are going to need a vehicle through which to make your investments. While you used to need a large chunk of cash to even open an account or work with a financial adviser, times have changed. Now there are many people vying for your business. Traditional firms such as Fidelity, Charles Schwab and Vanguard have some lower-priced investment options these days for new investors. There are also many online firms targeting the lower-dollar amount crowd such as Betterment, Wealthfront, Stash and Acorn. Betterment doesn’t have a minimum balance requirement and Wealthfront has a $500 minimum deposit. But both firms, known as robo-advisers, help determine what investments work best for you and manage them at a low cost. There are also apps like Stash and Acorn, which allow you to invest and manage small amounts of money from your smartphone with similar support. There are perks to each: Stash charges a subscription fee of $1 a month with no commission or trading fees (and new investors get their first three months free.) Acorn sets itself apart by investing your spare change, rounding up your purchases to make a series of micro-investments over time. So that $3.25 latte on your debit card becomes a $4 expense with 75 cents headed to an investment account. The important thing is to find a service you feel comfortable with, offers the investments you want and at a low cost. What to invest in Stocks, bonds, mutual funds: it’s really up to you. You have options at every price point, but experts will generally warn you away from starting with an individual stock as it eats up most of your small investment and leaves you with a lack of diversification. There are ways around that. Some firms will allow fractional share purchases, so you can create a more diversified portfolio. Or you can consider a Direct Stock Purchase Plan, known as DSPP, which allows you to buy a stock directly from a company or transfer agent, thereby avoiding commissions. Not all companies offer them. Don’t forget low-cost index funds, which track market benchmarks such as the S&P 500, or other mutual funds that offer mixes of investments. Exchange traded funds, or ETFs, are also popular. They trade like a stock but represent a basket of assets and often come with lower fees than a mutual fund. Whatever you choose, Holeman, of Betterment, suggests starting out slow. It can be gut-wrenching to watch the normal ups and downs for an investment, so try investing conservatively for a bit to get used to the process. And remember your biggest gains at this point come from regular contributions. The investment gains are just the icing on the cake.

Fund manager Q&A: The appeal of utility stocks

If utility stocks had a motto, it might be “Boring is better.” Traditionally, investors have seen utility stocks as reliable, even conservative investments because they deliver high dividends and have a relatively stable business model. With bonds yields still near historic lows, investors hungry for income have been piling into utility stocks, sending their prices higher. Now some are asking if the sector has become too expensive. We talk about utility stocks with John Kohli, who manages the Franklin Utilities Fund at Franklin Templeton Investments. Answers have been edited for length and clarity. Q. Utility stocks have typically been seen as such a solid investment. What has changed? A. I think in terms of the business, not a lot has changed. We consider them still stable investments. There’s a lot of infrastructure need and work that is taking place in the utility arena. That is good for utilities because they are the ones implementing conversion from coal to natural gas or building infrastructure to get renewable energies onto the grid. Utility earnings have over the past decade had about a 4 to 5 percent growth on a yearly basis and we think that will continue for the next decade. What has changed is the way we look at utilities and how they should perform on a year-to-year basis. Utilities year-to-date are up 24 percent and have done a whole heck of a lot better than they should have. And why is that? It’s because they are correlated to the bond market. The decline in bond yields has allowed the bond-like characteristics of utilities to rally throughout 2016. We make the argument they look expensive to the equity market but they are more correlated to the bond market. If you compare them to what has happened on the federal side and corporate bond side, they still look fairly valued. Q. So you see them as fairly valued? A. When you run regression models against the bond and equity market, there’s been zero correlation between utility market and say, the S&P 500. But there’s extremely high correlation with the bond market. Is that the appropriate way to consider them going forward? In some ways, yes. Utility earnings are unique because of the regulation. States set return based on the cost of capital. So the model has been pretty consistent for the past few years. We focus a lot of our time here at Franklin analyzing the regulatory environment. We would be concerned if we saw a rise in regulatory risk. We are still confident. Q. So what’s ahead? A. Utility companies in general have a good long-term future, given the fact that they are in the base infrastructure business. As new technology evolves, utilities will always be the avenue for delivering it. We don’t see a significant risk to the near-term traditional regulatory model. We are paying out less of the retaining earnings to drive the growth that is taking place. However, the forecast growth rate of dividends for the industry is 5 percent over the next five to six years. So they are comfortably within a band to deliver but also sitting nicely to continue to grow going forward.  

Are parents going for gold, or going broke?

The Olympics spark hope in many a child of going for the gold. But in financially supporting those dreams, some parents are going for broke. For his 15-year old son’s travel hockey team, Tim Richmeier was spending about $5,000 a season: using his tax refunds, halting contributions to his 401(k), and putting travel expenses on a credit card — including $6,000 he’s still paying off. Richmeier said it was a great experience for his child. But after four years, it was a financial relief when his son didn’t make the team. “I was kind of dreading the upcoming season, knowing I’d go deeper in the hole,” said Richmeier, a single father in Phoenix. Competitive youth sports in the U.S. are rising in popularity. The exclusive club and travel teams come with added coaching and intense competition, as well as much higher costs than a school or community team. A survey released July 25 by TD Ameritrade of 1,000 parents whose children are involved in such elite endeavors finds most pay between $100 and $499 a month. For one in five, it’s more than $1,000. Some parents can absorb the cost, but others are working second jobs, depleting their savings or otherwise compromising their own financial well-being to fund the activities. In the survey, 60 percent say the expense has them concerned about their ability to save for the future. Parents largely say they don’t regret the spending because of the physical, mental and emotional benefits for their children. But financial and athletic experts suggest parents make a more objective assessment of at what cost the kids are pursuing these dreams. Of nearly 8 million U.S. students currently participating in high school athletics, only 480,000 compete at the college level at an NCAA school, according to the organization. Few from that group will move on to compete at the Olympic or professional level. And parents hoping for a scholarship to offset their sacrifices may be disappointed. NCAA schools awarded more than $2.9 billion in athletics scholarships last year. But a full ride is rare, and a partial scholarship may come to a fraction of what it cost to get a child to that level. “The presenting of those numbers doesn’t discourage many people; it’s in the American character to go after it,” said Tom Farrey, who leads the Sports & Society Program at the Aspen Institute. Farrey says the economic hurdles of the elite teams leave many kids behind, and it’s not always good for those who do participate. “Parents are coming from a place of love, they want what is best for their kids,” said Travis Dorsch, founding director of the Families in Sport Lab at Utah State University. “Unfortunately they are misinformed.” Specializing in just one sport early, common among elite team players, leads to greater burnout and an increased likelihood of injury, Dorsch said. And he found that families who made larger financial investments in a child’s athletic participation led to kids feeling more pressure, less enjoyment and a lower commitment to the sport. Of the families in Dorsch’s research, which spanned many income and sport participation levels, more than half invested less than 1 percent of their gross income. But nearly 15 percent invested between 2 percent and 5 percent, and 3 percent invested more than 5 percent of their gross income. Even for those who can afford it, there is stress. Lisa Williams of Wilmette, Ill., sees the $2,000 or so she spends each season on her daughter’s soccer team not as an investment in a sports future but in her child’s skill set off the field. In her affluent neighborhood there is a “certain expectation of excellence” and the assumption if your child plays sports that they’ll do so on a travel or elite team. “Some of it is parent peer pressure, do you want to be the parent who doesn’t send their kid to the extra training and the summer camps and the extra clinics?” Williams said. “You don’t want people to think, ‘Oh, she doesn’t love her kid.’” That pressure is part of a shift in parenting and culture over recent decades, experts say. “We tend to get very emotionally invested in the life of our kids in sports, it makes us more vulnerable to making questionable decisions,” said Mark Hyman, who teaches in the business of sports program at George Washington University. He notes that many people have an economic interest in parents spending more on sports — from elite coaches to the facilities that host the tournaments. So parents may be urged to make decisions that are not based on neutral input. “The challenge is to recognize sports for kids are great but they are great because they give you these positive lessons they can carry on through life,” Hyman said. “You should never do sports as an investment. ... If you do that you are almost certain to be disappointed and to turn your kids off sports.” Debbie Amorelli of Upton, Mass., says she wrestles with how much she and her husband spend on hockey participation for her 17-year old son, who hopes to play at college. The fees, gear and travel add up to about $10,000 a year. They pay for it using an inheritance from her father, but without it Amorelli says she doesn’t know what they would have done. “The experiences he is having are priceless,” she said. “But we keep saying to him: ‘This is essentially coming out of your college fund, this is money we could be putting away.’” Amorelli’s son, a junior in high school, may need to keep playing for a year or two after graduation to make a college team. That’s an expense they’re unsure about. “We have no idea if this is going to turn into anything other than literally money down the drain,” she said.  

Investors stay steady on retirement savings

Panic is so passé. Investors are keeping their cool — and keeping their hands off of their retirement accounts — despite huge swings in the stock market that sent it careening to its worst start to a year ever. “They are just plugging away through the ups and downs of the stock market,” said Sarah Holden, director of retirement and investor research at the Investment Company Institute, an association of regulated funds. It can be nerve-wracking to see retirement balances plunge with the market, conjuring fears of spending the golden years in a cardboard box. Retirement account administrators say they see a sharp uptick in phone calls when the market stumbles, and this downturn has been no different. But then, sensibly, they don’t do much, says John Sweeney, executive vice president of investing strategies at Fidelity, one the largest administrators of 401(k) accounts. Retirement savers have come to understand that they need to think long term. Many lived through the far more unsettling years of the financial crisis, then saw the market get back to its earlier peak in about 5 years. That sure felt like a long time then, but even those who retire this week can reasonably expect to live another 20 years, long enough for the riskiest parts of any saver’s portfolio to recover. “They aren’t really worried about timing the market but having time in the market,” Holden says. Vanguard, which oversees $3 trillion in assets, says that while the S&P 500 sank 8 percent during the first 11 days of the year there was no perceptible change in participant trading compared with the same period in the past two years. “There are a few that panic and they are harming themselves when they choose to sell equities at a low,” said Jean Young, a senior research analyst with the Vanguard Center for Retirement Research. “But by and large we aren’t seeing a lot of activity.” And this is while retirement savers at nearly every age group are putting more of their next egg into stocks, as advisers recommend. Vanguard says every age group under 60 has increased the portion of their investments allocated to equities between 2007, the pre-crash peak, and 2014. The change was most dramatic for people under 25, who now have 87 percent of their portfolios in stocks, up from 67 percent in 2007. The figures for 2015 are not complete but Vanguard expects the trend to continue. The median allocation for equities across all age groups is 83 percent, up from 80 percent in 2007. So where’s all this cool-headed confidence amid the chaos coming from? As much from automation as from steely nerves or deep wisdom. Funds based on an investor’s expected retirement date and other professionally managed products that allow investors to go on autopilot have become much more popular in recent years. These don’t require the investor to make as many judgment calls, leaving it up to professionals to adjust the risk based on when the investor plans to quit the daily grind and buy a Winnebago. Vanguard said about 48 percent of its plan participants are in a professionally managed product, up from less than 20 percent in 2007. This has helped greatly reduce the number of people with extreme positions, such as holding all equities or no equities at all. Also, employers have increasingly been enrolling employees automatically, and increasing the number of participants. That leaves many investors unaware of exactly how much they hold in stocks, or unconcerned. Some are simply more confident in the concept that equities are long-term investments. And even in a bad stock market, people tend to continue to contribute to their retirement plan. That helps them buy stocks at lower prices, setting them up for bigger gains later. That’s how those with long time horizons weathered the recession without much bruising — and it should help today’s hands-off investors recover too. “People didn’t know what to do, so they didn’t do anything, which worked to their advantage,” Young said.

What 2016 will do to your checkbook: Rent, food, gas, raises

Wondering how you will fare financially in 2016? Below are what experts think next year will hold for financial matters close to home: Raises, rent, gas, food and health. Will I get a raise next year? Maybe. Wage growth has been perhaps the job market’s biggest weakness since the recession ended. Pay increases have been both slow and uneven, highly dependent on your field of employment. And for many, it has not been enough to keep pace with the cost of living. In November, average hourly earnings climbed 2.3 percent from a year earlier, according to the government’s most recent report. But that is only about two-thirds the roughly 3.5 percent typically seen in a strong economy. Many economists are optimistic Americans’ pay will start growing faster soon because hiring has been good and layoffs have been low. But that’s been the case for a while, and wages haven’t taken off yet. Joseph LaVorgna, chief U.S. economist at Deutsche Bank, is not expecting major gains ahead. He notes that measures that include a broader mix of compensation beyond hourly wages show there’s even less growth in pay than it seems. “I’m not convinced things are going to grow as much as I would like them to,” he said. Will my rent go up? Yes, most likely. It’s been a tough few years for U.S. renters because demand has outpaced supply, causing prices to rise. Rents increased 4.5 percent in October, 5.3 percent in September and 6.2 percent in August, according to real estate data firm Zillow. The median rental payment nationwide was $1,382 in October, roughly 30 percent of the median U.S. family income and high enough for the government to consider it financially burdensome. Over the past decade, that number of renters spending over this threshold on rent has jumped from 14.8 million to 21.3 million, or 49 percent of all renters. There are more rent increases anticipated ahead. “Rents are expected to rise in virtually all major cities in 2016,” said Hessam Nadji, senior executive vice president with commercial real estate services firm Marcus & Millichap. Some small consolation: While rents will still rise, the pace of rent growth will slow modestly from the exceptional levels set in 2015 as new construction creates more housing competition, Nadji says. Will gas prices stay low? Yes, most likely. Oil prices have plummeted over the last year, a result of high global supplies and weaker demand than expected. U.S. drivers are paying less than $2 a gallon on average for the first time since the Great Recession. Seasonal factors and volatile oil prices will push prices up and down throughout the year, but overall prices are expected to remain low compared with recent years. The Energy Department forecasts an average of $2.37 a gallon next year, which would be the lowest annual average since 2009. Tom Kloza, head of energy analysis at the Oil Price Information Service, said drivers should expect lower lows and higher highs at the pump in the year ahead, but he doesn’t expect the price of a gallon of gasoline to go over $3 at any time in 2016. “Nationally we are looking at a year that is very similar to the year we are ending,” Kloza said. What about food? New year, same dish. Food prices should rise at a rate near the historical average, according to the USDA’s forecasts. The United States Department of Agriculture’s Economic Research Service anticipates the price for food will be up 2 to 3 percent for 2016, same as 2015 and in line with the 20-year historical average of 2.6 percent. That includes food people consume at home and out at restaurants. Annemarie Kuhns, an economist at the ERS, said that certain food prices were off this year due to unusual events, such as the avian influenza that led to the death of millions of birds and sent egg prices up roughly 15 percent. Looking ahead, she and fellow economists anticipate these prices may level off in 2016 — assuming cooperation from Mother Nature. Will my health insurance cost more? Probably. People buying their own coverage through the exchanges created by the Affordable Care Act should see premiums go up faster in 2016 than in previous years, said Cynthia Cox, associate director of health reform and private insurance at the Kaiser Family Foundation. According to Kaiser research, if you do not shop around and let your plan passively renew, the premiums for the lowest silver level plan —the most popular on the exchange — will increase 15 percent on average next year. If you are willing to switch, premium increases are expected to be zero to 1 percent. This is because the exchange is set up to encourage shopping around. These increases apply only to people who are receiving subsidies to help pay for the insurance. For those who do not, the increase is expected to be 6 percent. Cox added that shoppers should also update any personal information — such as changes to your family size or income — which can impact what they pay. “It’s very important to go back online and shop every year,” Cox said. “This is still an evolving market — there are new insurers coming in and other insurers leaving. The only way to find (the best price) is to go online or navigate through a broker.” Employer-sponsored plans premiums increased about 4 percent this year. And while Kaiser does not forecast employer-sponsored plan price changes, it does not anticipate any unusual hikes in health care costs that tend to push up insurance prices. However, employees may end up paying more out of pocket for deductibles, copayments and other expenses they are responsible for, depending on their employer’s plan.
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