The recipe for building wealth hasn’t changed

Building wealth has gotten harder for most people in recent years. But the habits that can make you rich haven’t changed.

It boils down to this: putting aside money, regularly and consistently, that can be invested for your future. You have to leave that money alone to grow, which means you also need an emergency fund. And you must be careful with debt, because the wrong kinds can erode your wealth rather than build it.

It’s a simple formula but one that’s become increasingly hard to implement as incomes stagnate and prices rise. A shocking number of American households — nearly half, by the Federal Reserve’s last count — don’t have enough savings to cover an unexpected $400 expense. Our inability to save has contributed to a 21 percent decline in household median net worth between 1998, the year median incomes peaked in America, and 2013, the last year for which Fed stats are available.

Hardest-hit are households in the lower middle class, which in 2013 meant incomes from $23,300 to $40,499. Their net worth fell by half.

In my latest for the Associated Press, how to use the habits of wealthy people to build for your future.

Monday’s need-to-know money news

401k-planToday’s top story: Why long-term care insurance is worth the expense. Also in the news: The differences between a 401(k) and a Roth 401(k), how to make yourself a better retirement saver, and keeping an eye out for electricity surge pricing.

Long-Term Care Insurance Is Worth the Expense
Paying now can save a lot later.

You Know About the 401(k) — But What About the Roth 401(k)?
Know the differences.

5 Ways to Make Yourself a Better Retirement Saver
Taking the long view.

Beware of Surge Pricing on Your Electric Bill
Running your air conditioner just got a bit pricier.

Q&A: Does Social Security pay survivor benefits in same-sex unions?

Dear Liz: I am 65 and was recently laid off after 26 years with the same company. My life partner of 25 years died in 2010. We had been legally married in 2008. I’d like to wait until I’m 70 to collect my Social Security. Is there any way I can collect her Social Security until then? I don’t know what the federal laws are regarding this and whether they have caught up to the intent of the law regarding same-sex unions. I’m sure I’m not the only one wondering about this, so any guidance you could provide would be greatly appreciated.

Answer: Yes, you should be entitled to a survivor benefit that’s either equal to what your wife was getting at her death, or what she would have received at full retirement age if she died before applying for her benefits.

A reduced survivor’s benefit is available starting at age 60. You can’t backdate your application until then — the most you can get if you apply now is a lump sum equal to six previous months of benefits. You retain the ability to switch from a survivor benefit to your own (or vice versa for that matter). That’s one of the many ways that survivor benefits differ from spousal benefits, since the ability to switch from a spousal benefit to one’s own benefit is being phased out.

Q&A: Conflicting credit scores

Dear Liz: Why is there such a difference between my FICO 4 and FICO 8 scores? My FICO 4 score is 646 while my FICO 8 score is 678. I want to buy a home and I know some lenders may still use the FICO 4.

Answer: Most (not just some) mortgage lenders use outdated versions of the FICO credit scoring formula. The agencies that buy most mortgages, Fannie Mae and Freddie Mac, accelerated acceptance of credit scores in the mid-1990s when they made FICOs part of the underwriting required for the loans they purchased.

But the agencies haven’t authorized lenders to use the newest versions or alternative scores, such as VantageScore. So an old collection or other misstep that’s ignored by modern versions of the FICO formula could hurt your efforts to get the best rates and terms on a mortgage.

There are several ways you can boost your scores in the coming months. First, get your actual credit reports from all three credit bureaus at www.annualcreditreport.com. (You don’t need to provide a credit card. If you’re asked for one, you’re on the wrong site.) Scan the reports for errors, such as accounts that aren’t yours or late payments showing when you paid on time. Dispute those and prepare to follow up with any creditors that insist on reporting false information. (Complaints to the Consumer Financial Protection Bureau can help you get the creditors to cooperate.)

Make sure you’re making all credit account payments on time and pay down any credit card balances. Your goal is to use 10% or less of your reported credit limits, and to pay your balances in full each month. (Homeownership is expensive enough without dragging costly credit card debt into the financial picture.) It may take a few months to start seeing improvements, but they should come.

When you’re closer to pulling the trigger on a home purchase, consider buying your FICOs for all three credit bureaus from MyFico.com. In addition to the FICO 8, which is the one other creditors use most often, you’ll get your FICOs for the mortgage, credit card and auto loan industries, which can give you a clearer picture of where you stand.

Q&A: Divorced, and in debt

Dear Liz: I recently got divorced and found myself in about $50,000 of credit card debt. While I’m struggling to slowly pay off this debt, I do have some money saved in a tax-sheltered annuity as well as a small Roth IRA. Should I use those, take a personal loan or file for bankruptcy?

Answer: A good rule of thumb is to leave retirement money alone for retirement. Early withdrawals can trigger taxes and penalties that eat up one quarter to one half of what you take out. You can always withdraw your contributions tax free from a Roth, but any earnings can trigger taxes and penalties. The biggest cost, though, is the loss of future tax-deferred compounding that can equal 10 times or more of what you take out.

If your credit is good, low-rate balance transfer offers could help you lower the interest rate on your debt so you can pay it off faster. A personal loan from a credit union, your bank or an online lender could work if it offers a low, fixed rate and a repayment term of five years or less.

If you can’t pay this debt off within five years, then you should talk to both a credit counselor (visit the National Foundation for Credit Counseling at www.nfcc.org) and a bankruptcy attorney (referrals from the National Assn. of Consumer Bankruptcy Attorneys at www.nacba.org).

Friday’s need-to-know money news

Financial-PlanningToday’s top story: How to find the best mortgage rate online. Also in the news: How to set up your first 401(k), what happens if you work after signing up for Social Security, and why we value purchases more when we pay with cash.

How to Find the Best Mortgage Rates and Lenders Online
Comparison shopping.

Class of 2016, Here’s How to Set Up Your First 401(k)
Happy Graduation! Time to focus on retirement.

What Happens if You Work After Signing Up for Social Security?
What you can and cannot collect.

Why We Value Purchases More When We Pay With Cash
The psychology of spending.

Thursday’s need-to-know money news

Image9Today’s top story: How payday loans work, and what they cost. Also in the news: Getting the most out of a retirement calculator, money tips you should ignore, and the best budgeting apps for your financial life.

Payday Loans: How They Work, What They Cost
Reading the fine print.

5 Steps to Get the Most Out of a Retirement Calculator
Planning ahead.

15 Money Tips You Should Ignore
Not all advice is good advice.

The 5 best budgeting apps for tracking and planning your financial life
Help at your fingertips.

Wednesday’s need-to-know money news

money-vacation-saveToday’s top story: Overcoming the obstacles between you and retirement. Also in the news: What the President wants to tell college students, what happens when your debt goes to collections, and how to pay less for staying cool this summer.

5 Obstacles Between You and Retirement (and How to Overcome Them)
Clearing the pathway to a solid retirement.

5 Things the President Wants to Tell College Students
Messages for students and student loan borrowers.

What Happens When Your Debt Goes to a Collector?
Not every debt collection process is the same.

Stay cool, but pay less for electricity this summer
Your wallet’s hot enough.

Tuesday’s need-to-know money news

Zemanta Related Posts ThumbnailToday’s top story: Carrying a credit card balance for the first time. Also in the news: Closing the bank of Mom and Dad, why the starter home is in decline, and an employee benefit that could help with student loans.

Carrying a Credit Card Balance for the First Time
Managing the debt.

Closing the Bank of Mom and Dad
Take your business elsewhere.

More first-time buyers skip starter home stage for bigger, better
The decline of the starter home.

This employee benefit could become as popular as the 401(k)
Seeking help with student loans.

Should you save enough to live to 100?

common-retirement-mistakesFirst, you were supposed to die at 85. Then 90. Now 95 and even 100 are common defaults when financial planners tell people how much to save for retirement.

Except that’s nuts.

In the U.S., the typical man at age 65 is expected to live another 18 years. The typical woman, about 20. Yet many financial planners contend we should save as if we’re all going to be centenarians.

In my new column for the Associated Press, why we need to save for the retirement we’re most likely to have.