We at MyPlanIQ wish everyone a wonderful holiday season!

We will not publish newsletters in the following two weeks. 

Smart Rules of Thumb to Manage Your Personal Debts

In this issue:

• Student Loan Payoff and 401(k) Match
• Smart Rules of Thumb to Manage Your Personal Debts
• Savings Goal Calculator: Payoff Debt and Save More
• Most Popular Bond Funds in 401(k) Plans
• Market Overview

Student Loan Payoff and 401(k) Match

Based on CNBC, employers are increasingly offering 401(k) matching contributions to employees who make student loan payments, a practice enabled by the SECURE 2.0 Act starting in 2024. This is a good news for many Americans who have student debts. 

• SECURE 2.0 Act Provision: Allows employers to match employees’ student loan payments with contributions to their retirement plans, treating these payments as if they were direct 401(k) contributions.

• Employer Adoption: Companies like Kraft, Workday, News Corp., and Comcast have implemented this benefit, aiming to assist employees in managing both debt repayment and retirement savings.

• Employee Impact: This initiative helps employees who might otherwise forgo retirement contributions due to student debt, enabling simultaneous debt repayment and retirement savings.

Some specifics on this policy on ‘qualified student loan payments (QSLPs)’ with contributions to their retirement plans, treating these payments as if they were elective deferrals.

• Annual contribution limit: the QSLP and employee’s actual 401(k) contribution is still limited to the same IRA annual contribution limit. 
• QSLP certification: Employees must annually certify that they have made QSLPs to qualify for the employer matching contributions. Employers can rely on this certification without requiring additional documents.

This development reflects a growing recognition of the burden of student debt and represents a significant step toward enhancing employee financial wellness. We commend the companies that have embraced this initiative to support their employees!

Smart Rules of Thumb to Manage Your Personal Debts

The current personal debt crisis in the United States is concerning. As of 2024, the average American carries approximately $101,915 in total personal debt, which includes liabilities such as credit cards, student loans, and auto loans​. Recent data indicates that about 36% of Americans have increased their debt in the past few months, with 34%reporting that they carry over $10,000 in consumer debt​. With rising costs and economic uncertainty, nearly half of adults have struggled to make timely bill payments, and a significant portion anticipates using credit cards for essential purchases, especially during the holiday season​.

Credit card debt, in particular, has become a significant concern. The average American now carries around $6,271 in credit card debt, a figure that has been steadily rising as consumers increasingly rely on credit to manage everyday expenses. The Federal Reserve reported that total credit card debt reached $1.03 trillion, the highest level on record​. This surge in credit card debt can be attributed to a combination of factors, including inflationary pressures and the rising cost of living, which push consumers to borrow more just to keep up with basic needs. Consequently, many find themselves trapped in a cycle of high-interest repayments, making it increasingly difficult to achieve financial stability​. 

The following are the common types of personal debts:

1. Mortgage Loans

• Yield Range: 2-7% annually
• Features:
  • Mortgages tend to have the lowest interest rates among personal loans, especially with a fixed-rate, 30-year term.
  • Interest may be tax-deductible.

2. Credit Card Debt

• Yield Range: 15-25% annually
• Features:
  • Credit card debt has one of the highest interest rates, quickly accumulating if not paid off monthly.

3. Car Loans

• Yield Range: 4-10% annually
• Features:
  • These loans usually come with fixed rates over a term of 3-7 years.
  • Cars depreciate quickly, which makes financing them costly in the long run.

4. Student Loans

• Yield Range: 4-8% annually
• Features:
  • These loans often come with favorable repayment terms, including deferment and income-based repayment options.

5. 401(k) Loans

• Yield Range: Prime rate + 1% to 2% (e.g., if the prime rate is 7.5%, the loan’s interest rate will be 8.5% to 9.5%).
• Features:
  • Repayments consist of principal and interest, typically made monthly or bi-weekly via payroll deductions.
  • Interest repaid goes back into your 401(k), effectively “paying yourself.”
  • No credit checks or third-party lender involvement.
  • Reduces the growth potential of your retirement savings during the loan period.
  • Leaving your job could require repaying the balance as a lump sum, typically within 60 to 90 days. Failure to do so may result in taxes and penalties.
  • Best used as a last resort to avoid jeopardizing long-term retirement goals.

6. Other Personal Loans

• Yield Range: 6-15% annually
• Features:
  • These loans tend to have higher interest rates than secured loans like mortgages but lower than credit card debt.

Smart rules of thumb to manage these various types of debts:

• Pay Off High-Interest Loans First

  • Example: It’s a no-brainer to first manage your credit card debt that obviously has the highest interest rate! If you have a credit card debt with a 20% APR and a car loan with a 6% interest rate, prioritize paying off the credit card to save on interest costs.

• Consider Loan Advantages

  • Example: A 401(k) loan allows you to repay yourself with interest, which can be more advantageous than taking out a personal loan with higher interest rates. Similarly, some mortgages or student loans offer tax benefits worth retaining.

• Refinance to Lower Interest Rates

  • Example 1: Switch your credit card debt to another credit card debt that has lower interest rate or borrow from your 401(k) to pay off the highest interest rate credit card debt if necessary!
  • Example 2: If you’re repaying a 10% personal loan, consider consolidating it into a 6% home equity loan to lower your interest expenses.

Ultimately, there are effective ways to improve your debt situation if you are willing to investigate and explore your options more thoroughly.

For more detailed discussion and examples, see Comparing Yields on Various Types of Personal Loans: Should You Pay Off or Invest?

Tools & Tips: Savings Goal Calculator: Payoff Debt and Save More

We offer a simple Savings Goal Calculator that takes your monthly income, expenses, savings, and debt information as inputs and then calculates the net cash flow to derive the time it takes to achieve your savings goal after paying off the debt.

The following screenshot show its inputs and outputs:

You can use this to plan your debt payments and savings ahead of time. While this is only a rough calculator providing an approximate estimate, the key lies in planning and taking action. Focusing on progress is far more valuable than searching for the perfect or most precise tools without actions. 

Most Popular Bond Funds in 401(k) Plans

Here is a list of the most popular bond funds frequently found in 401(k) plans. Unsurprisingly, most of these funds are either active funds with outstanding fixed-income managers or ultra-low-cost index funds:

1. PONAX (PIMCO INCOME FUND CLASS A)
2. DODIX (DODGE & COX INCOME FUND DODGE & COX INCOME FUND)
3. MWTRX (METROPOLITAN WEST TOTAL RETURN BOND FUND CLASS M)
4. PTTAX (TOTAL RETURN FUND A)
5. FTBFX (FIDELITY TOTAL BOND FUND FIDELITY TOTAL BOND FUND)
6. WOBDX (JPMORGAN CORE BOND FUND CLASS I)
7. WACPX (WESTERN ASSET CORE PLUS BOND FUND CLASS I)
8. VBMFX (VANGUARD TOTAL BOND MARKET INDEX FUND INVESTOR SHARES)
9. TLRAX (FEDERATED TOTAL RETURN BOND FUND CLASS A SHARES)
10. ABNDX (BOND FUND OF AMERICA CLASS A)
11. PTRQX (PRUDENTIAL TOTAL RETURN BOND FUND CLASS Q)

Most of these funds are included as candidate options in MyPlanIQ’s total return bond fund model portfolios. You can track and implement these model portfolios in your brokerage IRA or taxable accounts. For more details, visit the Income & Savings > Income Portfolios page, where you’ll also find numerous newsletters discussing them.

Market Overview

Last week, the November Consumer Price Index (CPI) matched consensus expectations, coming in at an annualized rate of 2.7%. In contrast, the Producer Price Index (PPI) came in hotter than anticipated at 0.4% for November 2024, compared to the expected 0.2%. This data highlighted a somewhat unstable inflation outlook, with potential for a resurgence.

Investors are now uncertain about whether the Federal Reserve will continue cutting interest rates.

As a result, stock and bond prices declined last week.

The following  table shows the major asset price returns, as of last Friday: 

Struggling to Select Investments for Your 401(k), IRA, or Brokerage Accounts?