Alternative Investments Are Not Just for the Wealthy

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We hear a lot these days about alternative investments. Wall Street firms regularly tout their expertise in these investments and try to convince us we need them in our portfolio.

In the beginning, alternative investments were only available to what most would consider the wealthy.

The SEC set the definition of the wealthy with their accredited investor definition. To be eligible to invest in these alternative investments, one has to have an income of at least $200,000 (individual) or $300,000 (joint) for the last two years. Additionally, the rule states the investor expects that income to continue going forward.

If they don’t meet the income requirement, accredited investors must have a net worth of at least $1,000,000 (exclusive of personal residence). Though that group is growing, it leaves out millions of people who could benefit from the diversification offered by this asset class.

One thing common in the early days of these investments was high fees. In the beginning, managers charged investors 2% of the amount invested plus 20% of profits. Here’s what that means.

In This Article

The High Cost of Fees

If someone invested $100,000 in a fund, and the fund earned 10% (few do), the total dollars paid by the investor would be $4,000 ($100k x 2% = $2,000 + $10,000 x 20% = $2,000). That means instead of making $10,000 on your $100,000 investment, you walked away with $6,000! Instead of a 10% return, you earned 6%! That’s a 40% drop in your profit!

Also, your money was not available to you until the project or fund sold or closed. That typically is five years or more.

Over the years, investors became wise to the scheme, as did other investment product producers. They introduced lower cost, more liquid alternative investments into the marketplace, and lowered the bar for investing.

In today’s post, we’re going to introduce you to six investments you may not have considered – three for accredited investors, three for everyone else. We think by the end of this post, you’ll feel more comfortable and confident in looking at these investments for your portfolio.

What Are Alternative Investments?

Let’s start with what most consider the traditional investment products – those would be stocks, bonds, and cash. Investors can put money in the U.S. and international markets in both stocks, bonds, and cash. Most investors access these products via mutual funds and exchange-traded funds (ETFs). The most popular form of investing in these markets is via index funds.

When investing in index funds, investors put their money in funds that mirror the market. There are no fund managers picking which stocks to buy, when to buy them, and when to sell. Instead, in index funds, investors get all of the stocks in that index (like the S & P 500) at the same proportion each stock makes up in the indexes.

Rather than trying to beat the market, investors take what the market offers. It’s a very inexpensive and easy way to invest.

Alternative investments, on the other hand, are not mutual funds, ETFs, or index funds. Instead, the funds have a management team and invest in things that are different from the stock and bond markets. They include offerings like private equity, real estate, hedge funds, venture capital, managed futures, and derivative products.

Many of you have heard these names thrown in the financial press. In addition to high fees, many alternative investments have high minimum initial investments.

Crowdfunding – The Game Changer

For the reasons mentioned above, innovation entered the alternative investment arena. As a result, companies began developing investments with lower fees and smaller minimum investments. They made these accessible to non-accredited investors. These innovative investments are a game-changer for the everyday investor.

Crowdfunded real estate investment trusts are the primary vehicle for these investments. These newer funds register with the SEC as exempt funds, usually under the SEC’s Regulation Crowdfunding. Crowdfunding in real estate, like with individual or small business crowdfunding allows smaller investors into an investment space that hasn’t been available to them in the past.

We’ll offer a couple of specific funds to consider shortly.

Other options come in the form of mutual funds (managed futures, commodities, long-short funds, etc.). We will leave the discussion of these for another day. We want to focus on private funds, which are more like the traditional alternative investments initially designed for the wealthy.

Alternative Investments for Everyone

We want to highlight three investments available to non-accredited investors. One, Vinovest, is a unique offering. The other two, DiversyFund and Fundrise, are crowdfunded real estate funds as described in the last section.

Let’s dive into the summaries.

Vinovest

Vinovest offers a unique alternative investment in assets; one would normally not consider an investment class. We’re talking about fine wine. You can read our review of Vinovest for a more detailed description.

The first thing to know about investing in fine wine is that it takes knowledge to understand how to choose the right wines. Vinovest has a team of experts, called sommeliers, who have undergone rigorous training over several years. Three of their four sommeliers have achieved the Master Sommelier title. That’s the highest degree of recognition in the wine industry. These folks know their wine.

Wine selections come from their knowledge and a sophisticated algorithm their technical team developed — the result – the best wines with the best chance or price appreciation. You own the individual bottles. Vinovest will store and age the wine at their state of the art facilities around the world. They guarantee the safety of your wine.

The minimum investment is just $5,000. It’s a unique offering and worthy of consideration.

Fundrise and DiversyFund

Crowdfunding offers a method of fundraising that can bypass Wall Street firms and big banks with their high rates and fees. The introduction of crowdfunding was disruptive. In crowdfunded real estate, non-accredited investors now have access to similar real estate investments that accredited investors have always enjoyed.

Both FundRise and DiversyFund are crowdfunded real estate funds. Investors can invest in these funds with as little as $500.

Here’s a summary of each. You’ll find a link to our review of both for reference.

Fundrise

Fundrise has invested over $2.5 billion to date and has a history of above-average returns. They offer three core plans to get you started – Supplemental Income, Balanced Investing, and Growth. Each name describes the goals of the fund. If you’re looking for income, consider the Supplemental Income fund.

If you want a mix of income and growth, go with the Balanced Investing Fund. Are you looking for capital appreciation? Choose the growth fund.

You can get more details and learn more about REITS and crowdfunded real estate in this review.

DiversyFund

Contrary to Fundrise, DiversyFund is a reasonably new entrant in the field of crowdfunded real estate investing. Unlike the Fundrise investment options, the team at DiversyFund focuses on growing investors’ capital. They have a value add investment strategy when looking for properties.

What that means is they look for multi-family properties (apartments, condos, etc.) that have positive cash flow (renters) in good neighborhoods. The value add in their property selection comes from finding properties that need some work. We’re not talking about a complete redo. Instead, the building might need a new roof, updated bathrooms or kitchens, or maybe a fresh coat of paint.

With the improvements, they can charge more rent when the leases expire, and new tenants come on board. Get additional details from this review.

Alternative Investments for Accredited Investors

What follows are three recommendations for those of you who meet the criteria of the accredited investor. What follows are offerings that have much lower minimum investments and fees. Two are crowdfunded offerings. The other is not.

FarmTogether

Have you ever thought about investing in farmland? Did you not pursue that thought because you didn’t know you had enough money or didn’t know enough about it? If either of those describes you, you’re going to want to learn about FarmTogether.

FarmTogether offers a low-cost investment opportunity that allows investors to own real land. Real land is less subject to inflation and more stable than many other investments. Why? For one thing, we’re not making any more of it. The law of supply and demand means it’s likely to appreciate.

For those looking for cash flow, they offer that as well. The typical investments range from $10,000 – $50,000 per transaction. That $10,000 number is much more accessible than many of these types of offerings. And there are precious few funds that offer investment in farmland with cash flow.

Here’s a look at their current offering:

alternative investment offering details from FarmTogether

You can read our full review here.

Yield Street

YieldStreet is a fixed income alternative investment. The team focuses on investments in litigation finance, real estate, consumer and commercial financing, to name a few. Getting into these types of alternative fixed income areas has typically been limited to hedge funds and other institutional investors. Accredited investors can now access these alternatives with Yieldstreet. They have the experience and expertise you want. Below are some of the details and history.

YieldStreet alternative investment stats

They have multiple offerings from which investors can choose. The minimum and maximum investment depend on the offering chosen. The minimum investment is usually $10,000. Once again, that is much lower than many alternative investments.

You can read our review of YieldStreet here.

PeerStreet

PeerStreet is another alternative investment in the real estate space. Rather than buying properties, the team at PeerStreet invest in loans backed by real estate. The quality of the loans is directly related to the quality of the real estate backing the loans. Here’s a picture of their loans.

Snapshot of PeerStreet loan history

The returns for loan investments are above average. The LTV (loan to value) of the properties shows they are not heavily leveraged, and the terms are relatively short. Like many of the investments we highlight here, PeerStreet has a low minimum investment of only $1,000 per loan.

Be sure to check out our review of PeerStreet to learn more.

Finding Other Alternative Investments

When it comes to investing, there are numerous options from which to choose. The problem comes in knowing where to look for the options. MoneyMade has you covered. What is MoneyMade?

From our review – “It’s a discovery engine built to help you find and compare all types of investment opportunities, spanning from alternative investment platforms through to Robo Investing.” And it’s super simple to use. Just enter the criteria of the investment you’re looking for and let MoneyMade do the rest. Take a look at a search for Startups on MoneyMade below.

MoneyMade: Discover | Startups

Read our review of MoneyMade to learn more and take advantage of this great new platform.

Final Thoughts

I hope by now, you see that alternative investments are no longer the exclusive investments for the uber-wealthy. Competition from mutual funds, and, more recently, from the crowdfunded investment arena have brought costs and minimum investments way down. That’s not so good for the Wall Street product producers. But it’s great for consumers.

The six investments we highlight are, by no means, meant to be the cure-all be all for alternative investments though we do think that Vinovest and FarmTogether are two of the more unique offerings available.

Before doing any investing, you should know why you’re investing. You should know what you want your investments to do for you. Once you get those foundational questions answered, you can take the time to investigate the best investments to help you achieve those goals. If you don’t know where to start, a great place would be MoneyMade. If you feel like you need help deciding, consider hiring an independent financial advisor.

Whether you’re a seasoned investor of a DIYer who is looking for alternatives to the traditional stocks and bonds, we think the six investments highlighted here are worthy of consideration. If none of those make sense, head over to MoneyMade and let them help you find what you’re looking for.

Good luck!

Fred started the blog Money with a Purpose in October 2017. The blog focused on three primary areas: Personal Finance, Overcoming Adversity, and Lifestyle. During his time at Money with a Purpose, he was quoted in Forbes, USA Today and appeared in Money Magazine, MarketWatch, The Good Men Project, Thrive Global and many other publications.

I April 2019, Fred, along with two other partners, acquired The Money Mix website. To focus his time and energy where he could be the most productive, Fred recently merged Money with a Purpose with The Money Mix. You can now find all of his great content right here on The Money Mix, along with content from some of the brightest minds in personal finance.

Source: debtdiscipline.com

Is Investing During Coronavirus a Good Idea?

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The coronavirus bear market might look appealing to some. But for many, the economic changes that come with COVID-19 cause anxiety and uncertainty. Investing during coronavirus, when you can buy stock or other assets for lower prices, might sound like mathematical sense, but is it right for you?

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Start with the information below—and the advice of your
financial planner—to make an educated decision for yourself.

A Look at the COVID-19 Stock Market

The stock market took a beating as the coronavirus
began to sweep across the US. On Feb. 20, 2020, the Dow Jones Industrial
Average was 29,219.98 points. By March 23, 2020, it had dropped to
18,591.93 in an extreme slide downward related to the pandemic.

But even as the Dow continued to drop, economic experts were warning people not to panic with their money. Peter Mallouk, a chief investment officer, said he was worried people would make irrecoverable mistakes by using emotion- and fear-based decisions in managing their portfolios.

And in fact, the Dow did start to climb again, reaching as high as 23,949.76 on April 14, 2020. While it’s likely to rise and fall throughout the pandemic, economic experts predict the stock market will eventually rally.

Some Reasons a Rally Is Likely

Nothing falls forever. Eventually, the economy will
begin to rise again. Consumers are eventually going to hit the market with enormous
demand.

According to MarketWatch, the economy in the US is about 70% driven by consumer culture—the buying and selling of goods and services. During the coronavirus quarantine, many people have been stuck in their homes or limited in how they can shop, dine or recreate. Once stay-at-home orders are lifted and people start to get back to a new normal, there’s likely to be a huge spike in spending.

MarketWatch also predicts that changes in supply chains
and money from various economic stimulus efforts will continue to stimulate the
stock market. While no economic future can be 100% predicted, historical trends
support some of these predictions.

Should I Invest During Coronavirus?

But an eventual rise in the stock market isn’t a free pass to go all in. Investment adviser Ric Edelman says knowing how to proceed according to your own situation and needs is important. Regardless of what the economy might be doing right now or in the future, understanding your own financial goals is the place to start.

First, consider how long you have to regain lost wealth or build new wealth. Someone who is on the verge of retirement or already retired may not have the time it takes to wait for bear market investments to increase in value. Older adults might want to stick with low-risk investments or savings accounts that maintain what wealth they already have.

Next, consider your current financial status. “Buy low, sell high” might be the prevailing wisdom among investors, but it only works if you have the money to buy with. Many families are facing loss of income or jobs right now, and it might not be the time for investing. Instead, it might be time to work on your personal budget and negotiate with creditors to reduce expenses, at least temporarily.

Finally, consider how risk adverse you are. No investment is a sure thing, but some
do come with more risk than others. Understanding what you can afford to lose
helps you determine which types of investments might be right for you.

Investing During Coronavirus: Where and How?

Ultimately, only you can decide if investing during
coronavirus is the right move for you. Once you make that decision, though, you
have many options to choose from. Here are just a few possible investments that
might be right for you.

  • Buy stocks that have dropped enough to make them affordable but are for companies that you feel will weather the storm and come out swinging after the pandemic.
  • Invest in companies that have enough cash. Most expert-level investors are still looking for opportunities, but they’re being picky and opting for companies that have strong cash flow and stable balance sheets. Now isn’t the time to make big gambles, especially if you’re not young enough to recover before retirement.
  • Consider investing in real estate, which historically has weathered recessions and global economic crisis better than many other options.

If and how you invest is a very personal decision—and
always a big one. It’s a good idea to seek help from personal financial
advisers or other wealth management professionals even in good times. Consult
professionals for help understanding the best ways to support your
wealth-building goals if you decide to invest during coronavirus.

Other Coronavirus Support

Coronavirus has impacted more than just our investment opportunities. If you’re worried about other money or credit questions at this time, check out our COVID-19 finances guide. From keeping eyes on your credit to what to expect from stimulus packages, Credit.com has information to help you plan and manage your money during this time.


Sign up now.

Source: credit.com

Are You a Homeowner Seeking Forbearance on Your Mortgage? Watch Out for These Red Flags

Homeowners are asking for breaks on their mortgage payments in droves, as millions of Americans face the prospect of unemployment or reduced income because of the coronanvirus pandemic. But requesting forbearance on your mortgage isn’t foolproof.

The $2.2 trillion CARES Act stimulus package requires servicers to provide forbearance — a temporary postponement of payments — to any homeowner with a federally-backed mortgage. Americans with other mortgages may also be able to receive forbearance at their servicers’ discretion.

Requests for forbearance have poured in. Forbearance requests grew by 1,896% between March 16 and March 30, according to a recent report from the Mortgage Bankers Association, a trade group that represents the mortgage industry. And before that, forbearance requests had increased some 1,270% between March 2 and March 16.

As consumers have rushed to call their servicer in search of assistance, call centers have been overwhelmed, leading to longer wait times to speak with a representative.

“If you are eligible for this and you need the help, take full advantage of the program,” said Rick Sharga, a mortgage industry veteran and founder of CJ Patrick Company, a real-estate consulting firm. “But similarly, if you don’t need the help, and if you can pay your mortgage, don’t try and game the system and make it harder for people who really do need the benefits to access.”

For those who have yet to get a forbearance agreement in place, here’s what you need to know:

‘Forbearance is not forgiveness’

To be clear, mortgage borrowers will still need to pay off their loan eventually if they receive forbearance.

“Forbearance is not forgiveness,” said Karan Kaul, a research associate at the Urban Institute, a left-of-center nonprofit policy group. “You still owe the money that you were paying, it’s just that there’s a temporary pause on making your monthly payments.”

‘Forbearance is not forgiveness. You still owe the money that you were paying, it’s just that there’s a temporary pause on making your monthly payments.’

Karan Kaul, a research associate at the Urban Institute

Under a forbearance agreement, a borrower can pause payments entirely or make reduced payments on their mortgage. Homeowners with federally-backed mortgages are eligible for up to 180 days of forbearance initially under the CARES Act. At that point, if they’re still facing financial difficulty, they can request an extension of up to another 180 days of forbearance.

The provisions in the stimulus package stipulate that during the forbearance period, mortgage servicers cannot make negative reports about the borrower in question to credit bureaus, including the three main ones, Experian, Equifax and TransUnion. Borrowers also will not owe any late fees or penalties if they are granted forbearance.

You need to know who your servicer is

Struggling homeowners won’t automatically receive forbearance. You need to request it from your servicer.

Mortgage servicers are the companies who receive your monthly payments. A homeowner’s mortgage servicer isn’t necessarily the same as their lender — many lenders sell the servicing rights for mortgages to other companies.

The first step to figure out who your servicer is would be to check your mortgage statement. If for some reason the information isn’t there, you can look it up by searching the Mortgage Electronic Registration Systems website. Alternatively, you can check with Fannie Mae and Freddie Mac, if your loan is backed by one of them.

How do you know if you qualify?

To qualify for forbearance, a borrower must have a mortgage backed by one of the following federal agencies:

• Fannie Mae

• Freddie Mac

• The Federal Housing Administration (FHA)

• The U.S. Department of Veterans Affairs (VA)

• The U.S. Department of Agriculture (USDA)

Borrowers should avoid calling their servicers to find out if they’re eligible, Sharga said.

“Find out what you can before you try and reach your mortgage servicer, because they are overwhelmed with call volume right now,” Sharga said.

Fannie Mae and Freddie Mac both have websites where you can check whether your loan is backed by one of them. You can access those websites here and here. Almost half of all mortgages in the U.S. are backed by Fannie and Freddie.

To find out if your loan is backed by the FHA, check the original closing documents or your most recent mortgage statement. If you pay for FHA Insurance, then that agency is backing your loan. Alternatively, your closing documents should include a HUD (Department of Housing and Urban Development) statement and a 13-digit HUD number.

Because the VA and USDA loan programs target specific borrowers, those borrowers should already know if they have loans backed by those agencies. In the event you are still unsure, you can call your servicer.

Those who aren’t eligible aren’t necessarily out of luck, though. Servicers for non-federally-backed mortgages may still be willing to provide forbearance to borrowers facing financial trouble right now.

Be prepared to answer some questions

You don’t need to provide documentation to prove your financial hardship at this time, but your servicer may have some questions to determine how much assistance they will offer you.

The Consumer Financial Protection Bureau suggests being prepared to answer the following:

• Why you can’t make your payments?

• Is the problem you are facing temporary or permanent?

• What is the current state of your income, expenses and other assets, including money in the bank?

• Are you a service member with permanent change of station orders?

“Consumers should indicate they have had a hardship due to COVID-19 and ask about their forbearance options with the company servicing the mortgage loan,” said Chris Diamond, director of financial products at online mortgage lender Better.com. “They should ask how long of a forbearance they can qualify for as well as what their options are at the end of that forbearance period.”

Get your forbearance agreement in writing

The CFPB stresses that any borrower who has received a reprieve on mortgage payments should get their agreement in writing.

“Once you’re able to secure forbearance or another mortgage relief option, ask your servicer to provide written documentation that confirms the details of your agreement and that you’re clear on what the terms are,” the agency said on its website.

Having the agreement in writing will protect you if there are errors in your mortgage statement or your credit report.

Watch out for balloon payments

After a borrower has secured a forbearance agreement from their servicer, they should discuss repayment options.

“You don’t want a surprise like finding out that six months of deferred loan payments are all due immediately upon the end of the forbearance,” Sharga said. “Most people simply won’t have six months’ worth of mortgage payments available.”

Some borrowers have expressed concerns after being offered a balloon payment option like the one Sharga described. With a balloon payment, a borrower would pay back the entire amount owed for the forbearance period at once.

While a lender may offer a balloon payment as an option, there is no mandate that a borrower must repay in this manner, Kaul said.

Homeowners can and should aim to negotiate the best possible repayment options for them. “All those terms are negotiable,” Sharga said. “Be diligent, be steadfast and try and stand your ground.”

Beyond a balloon payment, servicers may offer to extend the term of the mortgage and tack on the missed payments at the end, so a 30-year mortgage would be extended by 4 months if that’s how much forbearance a borrower received.

There is no mandate that a borrower must repay what they owe in missed payments in one balloon payment after forbearance.

Alternatively, a borrower may also be offered the option to amortize the balance they owe over the life of the loan. This means they would repay a portion of the balance owed in addition to their usual monthly payments.

A borrower can request information on who owns their mortgage note, since the owner might be able to provide more relief options. Servicers must respond to these requests within 10 business days, said Andrea Bopp Stark, an attorney with the National Consumer Law Center.

“If the servicer does not respond, the borrower should send another letter and seek legal assistance,” Bopp Stark said. “The servicer could be held liable for actual damages and up to $2,000 statutory damages for a failure to respond.”

If you’re still in financial trouble after forbearance, consider a loan modification

It’s too soon to tell whether 12 months of forbearance will be enough assistance for those who are among the millions of Americans who have lost their jobs in recent weeks.

“The most beneficial option if the borrower might be out of work or impacted for an extended period is to request to modify the loan at the end of forbearance,” Diamond said.

Unlike forbearance, a loan modification involves a permanent change to the details of the mortgage. This can include adjusting the interest rate, extending the duration of the loan or deferring the amount owed until the end of the loan as a separate lien.

A servicer will determine whether or not a borrower qualifies for the modification.

For more smart financial news and advice, head over to MarketWatch.

Source: realtor.com

Affording a Second Child: How to Make Your Budget Work

Having kids is anything but cheap. According to the USDA, families can expect to spend an average of $233,610 raising a child born in 2015 through age 17—and that’s not including the cost of college. The cost of raising a child has also increased since your parents were budgeting for kids. Between 2000 and 2010, for example, the cost of having children increased by 40 percent.

If you’ve had your first child, you understand—from diapers to day care to future extracurricular activities, you know how it all adds up. You’ve already learned how to adjust your budget for baby number one. How hard can it be repeating the process a second time?

While you may feel like a parenting pro, overlooking tips to prepare financially for a second child could be bad news for your bank account. Fortunately, affording a second child is more than doable with the right planning.

If your family is about to expand, consider these budgeting tips for a second child:

1. Think twice about upsizing

When asking yourself, “Can I afford to have a second child?”, consider whether your current home and car can accommodate your growing family.

Think twice about upsizing your car or house if you're concerned about affording a second child.

Kimberly Palmer, personal finance expert at NerdWallet, says sharing bedrooms can be a major money-saver if you’re considering tips to prepare financially for a second child. Sharing might not be an option, however, if a second child would make an already small space feel even more cramped. Running the numbers through a mortgage affordability calculator can give you an idea of how much a bigger home might cost.

Swapping your current car out for something larger may also be on your mind if traveling with kids means doubling up on car seats and stowing a stroller and diaper bag onboard. But upgrading could mean adding an expensive car payment into your budget.

“Parents should first decide how much they can afford to spend on a car,” Palmer says.

Buying used can help stretch your budget when you’re trying to afford a second child—but don’t cut corners on cost if it means sacrificing the safety features you want.

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Families can expect to spend an average of $233,610 raising a child born in 2015 through age 17—and that’s not including the cost of college.

– USDA

2. Be frugal about baby gear

It’s tempting to go out and buy all-new items for a second baby, but you may want to resist the urge. Palmer’s tips to prepare financially for a second child include reusing as much as you can from your first child. That might include clothes, furniture, blankets and toys.

Being frugal with family expenses can even extend past your own closet.

“If you live in a neighborhood with many children, you’ll often find other families giving away gently used items for free,” Palmer says. You may also want to scope out consignment shops and thrift stores for baby items, as well as online marketplaces and community forums. But similar to buying a used car, keep safety first when you’re using this budgeting tip for a second child.

“It’s important to check for recalls on items like strollers and cribs,” Palmer says. “You also want to make sure you have an up-to-date car seat that hasn’t been in any vehicle crashes.”

3. Weigh your childcare options

You may already realize how expensive day care can be for just one child, but that doesn’t mean affording a second child will be impossible.

A tip to prepare financially for a second child is to weigh your childcare options.

Michael Gerstman, chartered financial consultant and CEO of Gerstman Financial Group, LLC in Fort Lauderdale, Florida, says parents should think about the trade-off between both parents working if it means paying more for daycare. If one parent’s income is going solely toward childcare, for example, it could make more sense for that parent to stay at home.

Even if this budgeting tip for a second child is appealing, you’ll also want to think about whether taking time away from work to care for kids could make it difficult to get ahead later in your career, Palmer adds.

“If you stay home with your child, then you’re also potentially sacrificing future earnings,” she says.

4. Watch out for sneaky expenses

There are two major budgeting tips for a second child that can sometimes be overlooked: review grocery and utility costs.

If you’re buying formula or other grocery items for a newborn, that can quickly add to your grocery budget. That grocery budget may continue to grow as your second child does and transitions to solid food. Having a new baby could also mean bigger utility bills if you’re doing laundry more often or running more air conditioning or heat to accommodate your family spending more time indoors with the little one.

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Gerstman recommends using a budgeting app as a tip to prepare financially for a second child because it can help you plan and track your spending. If possible, start tracking expenses before the baby arrives. You can anticipate how these may change once you welcome home baby number two, especially since you’ve already seen how your expenses increased with your first child. Then, compare that estimate to what you’re actually spending after the baby is born to see what may be costing you more (or less) than you thought each month. You can then start reworking your budget to reflect your new reality and help you afford a second child.

5. Prioritize financial goals in your new budget

Most tips to prepare financially for a second child focus on spending, but don’t neglect creating line items for saving in your budget.

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“An emergency fund is essential for a family,” Palmer says. “You want to make sure you can cover your bills even in the event of a job loss or unexpected expense.”

Paying off debt and saving for retirement should also be on your radar. You might even be thinking about starting to save for your children’s college.

Try your best to keep your own future in mind alongside your children’s. While it feels natural to put your children’s needs first, remember that your needs are also your family’s—and taking care of your future means taking care of theirs, too.

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“Putting money aside when you’re expecting can help offset the sticker shock that comes with a new member of the family.”

– Kimberly Palmer, personal finance expert at NerdWallet

The key to affording a second child

Remember, the earlier you begin planning, the easier affording a second child can be.

“Putting money aside when you’re expecting can help offset the sticker shock that comes with a new member of the family,” Palmer says. Plus, the more you plan ahead, the more time you’ll have to create priceless memories with your growing family.

The post Affording a Second Child: How to Make Your Budget Work appeared first on Discover Bank – Banking Topics Blog.

Source: discover.com

How Tapping Home Equity Can Pay the Taxes on a Roth IRA Conversion

Single Family Home with Beige Clapboard Exterior and Trees in Autumn Colors (Foliage) in Sleepy Hollow, Hudson Valley, New York. OlegAlbinsky/iStock

The benefits of incorporating a Roth IRA into your retirement strategy are often praised by financial advisers, citing the ability for money to grow tax-free for decades and provide tax-free income in retirement. While a Roth IRA conversion is one way to take advantage of this savings tool, the tax implications of converting investments from a traditional retirement account to a Roth IRA typically deter most people. Yet the effects of new legislation and persistent market volatility make a Roth IRA conversion worth considering, and paying for it doesn’t have to break the bank.

A Roth IRA conversion uses assets from a traditional or rollover IRA, 401(k), SEP or Simple IRA to fund a Roth IRA. Unlike regular contributions to a Roth IRA, which are constrained by income limitations and annual contribution caps, there are no restrictions when converting retirement assets to a Roth IRA. Any amount can be converted regardless of your age, income, or employment status. But the Roth IRA conversion doesn’t come without a cost.

When you convert pre-tax assets in a traditional retirement account to your Roth IRA, the conversion is treated as income and you must pay taxes on the assets converted. The amount you pay in taxes depends on your income tax bracket for the year. In some cases, a substantial conversion in one year could boost taxable income by multiple brackets. To help manage that liability, a series of partial conversions over several years could be planned to keep the distributions within a targeted tax bracket.

For many retirees, income from a traditional IRA or 401(k) can create a tax headache, especially when required minimum distributions (RMDs) raise their tax bracket. That’s where a Roth IRA comes in.

A Roth IRA provides the flexibility to take tax-free withdrawals in retirement when you want and in whatever amount you want. This is unlike other retirement accounts that have RMDs beginning at age 72. The RMDs are taxable income, which means that in addition to your tax bracket they can also impact your Medicare premium bracket and the taxation of your Social Security benefit, whereas distributions from the Roth IRA will not.

This year the CARES Act temporarily pauses RMDs from traditional retirement accounts. So, if you are 72 or older and you don’t take your RMD then your income will be lower. This provides a potential opportunity to make a larger conversion while maintaining the same income tax rate.

Additionally, since the Secure Act of 2020 eliminated the stretch provisions for inherited retirement plans, the Roth IRA is also a great estate planning tool. Non-spousal heirs can no longer take distributions over their life expectancy, but rather all distributions must be taken within 10 years. While this is true as well for an inherited Roth IRA, the distribution would not be a taxable event.

The cost of an IRA conversion can be daunting, but it doesn’t have to be. Conventional wisdom is to pay the resulting tax bill with non-taxable assets from outside the retirement plan. Using plan assets would defeat the purpose of the conversion as you will permanently give up a portion of the capital that is accumulating on a tax-free basis. In addition, if you’re under age 59 ½, the portion of plan assets used to pay for the conversion could also be subject to a 10% tax penalty.

If you have the cash on hand, that’s likely the best way to cover the tax implications. But depending on the size of the conversion and your tax bracket, the up-front costs could be significant. Another option is to take out a loan against your life insurance policy. While this permanently reduces the policy value if not repaid, the loan doesn’t count as taxable income so long as the policy isn’t surrendered, doesn’t lapse, and the amount owed doesn’t exceed the premiums paid. If any of these do occur then the tax implications will likely be even larger than the taxes paid on the Roth IRA conversion.

Considering a reverse mortgage

Alternatively, tapping into your home equity can provide the means to pay the taxes. You could leverage current low interest rates and get a home equity line of credit (HELOC), though many banks have stopped accepting applications for HELOCs in recent months. Additionally, a HELOC will require a monthly mortgage payment, decreasing your cash flow.

For homeowners age 62 or older, a reverse mortgage could pay the tax liabilities from the Roth IRA conversion, creating tax and cash-flow flexibility and potentially a higher net worth.

With a reverse mortgage, the available line of credit grows and compounds at a value that is tied to current interest rates. This can be particularly beneficial with a series of partial Roth IRA conversions as it provides a growing resource to pay future tax bills. The line of credit also provides flexibility to convert a greater portion of your retirement assets during market plunges, so you only pay taxes on the lower value at the time of the conversion and not on any gains in the Roth IRA when the markets recover.

Since there are no principal or interest payments required for as long as you live in your home, the line of credit from a reverse mortgage provides the liquidity to pay for the Roth IRA conversion with no impact on household cash flow or the need to sell other invested assets.

A good rule of thumb is to use a reverse mortgage if your home equity is less than or equal to the value of the retirement assets you plan to convert. If the home represents a major portion of your net worth, a reverse mortgage may not be the best option to cover the tax bill. In this case, the reverse could better serve as a tax-free source of supplemental income, or to pay for in-home care, or other retirement expenses that distributions from the smaller invested assets may not be able to cover.

Evaluating the use of a reverse mortgage also depends on the projected costs in comparison with the projected returns. For example, if interest rates on a reverse line of credit are at 3%, and your home appreciates at a 3% rate, you could borrow 50% of your home equity and still maintain a 50% retained equity position throughout the duration of the loan. Even if the home only appreciated at a 1% rate, you would still have a retained equity position.

Projected returns on the Roth IRA conversion would also need to be evaluated. For simplicity’s sake, let us assume you borrow a total of $250,000 from your reverse line of credit to pay the tax bills on $1 million conversion. If you accrue interest on the line of credit balance at a 3% rate and the Roth IRA grows at a 6% tax-free rate, the return could be quite compelling over time.

Of course, there are no guarantees on any projections, which is why you should consult a financial professional and evaluate your specific situation. A number of “what if” scenarios should be considered including changes in interest and tax rates, home and investment growth rates, and legacy desires. These considerations will help determine if using a reverse mortgage to take advantage of the benefits of a Roth IRA conversion could be a retirement strategy that makes sense for you.

The post How Tapping Home Equity Can Pay the Taxes on a Roth IRA Conversion appeared first on Real Estate News & Insights | realtor.com®.

Source: realtor.com