Keys to Financial Success
Monday, April 30th, 2012Making resolutions to improve your financial situation is a good thing to do at any time of year. Regardless of when you begin, the basics remain the same. Here are a few tips to getting ahead financially.
Get Paid What You Are Worth and Spend Less Than You Earn
Make sure you know what your job is worth in the marketplace, by conducting an evaluation of your skills, productivity, job tasks, contribution to the company, and the going rate. Being underpaid even a thousand dollars a year can have a significant effect over the course of your working life. No matter how much or how little you’re paid, you’ll never get ahead if you spend more than you earn. It doesn’t always have to involve making big sacrifices.
Stick to a Budget
How can you know where your money is going if you don’t budget? How can you set spending and saving goals if you don’t know where your money is going? You need a budget whether you make thousands or hundreds of thousands of dollars a year.
Pay Off Credit Card Debt
Credit card debt is the number one obstacle to getting ahead financially. Despite our good resolves to pay the balance off quickly, the reality is that we often don’t, and end up paying far more for things than we would have paid if we had used cash.
Contribute to a Retirement Plan
If your employer has a 401(k) plan and you don’t contribute to it, you’re walking away from one of the best deals out there. If you are already contributing, try to increase your contribution. If your employer doesn’t offer a retirement plan, consider getting an IRA.
Have a Savings Plan
Make sure to set aside a minimum of 5% to 10% of your salary for savings BEFORE you start paying your bills. An even better approach is to have money automatically deducted from your paycheck and deposited into a separate account.
Invest!
If you’re contributing to a retirement plan and a savings account and you can still manage to put some money into other investments that is even better to your overall financial planning.
Maximize Your Employment Benefits
Employment benefits like a 401(k) plan, flexible spending accounts, medical and dental insurance, etc., are worth big bucks. Make sure you’re maximizing yours and taking advantage of the ones that can save you money by reducing taxes or out-of-pocket expenses.
Review Your Insurance Coverage’s
Too many people are talked into paying too much for life and disability insurance. What is important is that you have enough insurance to protect your dependents and your income in the case of death or disability.
Update Your Will
70% of Americans do not have a will. If you have dependents, no matter how little or how much you own, you need a will.
Keep Good Records
Keeping good records all year will save you time and money, instead of scrambling to find everything when tax season approaches.
5 Credit Myths that lead to disaster
Thursday, February 10th, 2011People are obsessed with getting and keeping an excellent credit score. We hear these statements regularly on our financial helpline:
A caller who can’t pay their monthly bills because their debt payments are so high says, “I can’t go to credit counseling because I heard it will damage my credit score.”
A caller who is not saving in their 401(k) and missing out on the company match says, “I don’t want to pay off my credit cards. I am keeping a balance to help my credit score.”
This makes no financial sense. People aren’t going to seek help getting out of debt — lowering the interest rate and possibly the balance owed — because it will hurt their credit score? How is this helpful? If people don’t get their debt under control, they may never retire. We’ll have a nation of people working into their 80′s with no savings but they can all come together and brag about their credit scores.
Don’t even get me started with the notion that carrying a balance on a credit card will somehow help the score. First of all it is wrong and secondly, people are actually harming themselves financially — thinking that paying high interest on credit cards instead of paying them off is a good financial strategy.
Don’t get me wrong, having a good credit score has value; it can save on the cost of borrowing money so it is helpful to have the best score possible. Just make sure you are basing your credit strategy on sound information — not common myths that get you nowhere.
Let’s examine some of the biggest credit myths that can lead to disaster:
Assuming if you pay your bills on time, you don’t have to do anything else.
Paying your bills on time accounts for about 35% of your credit score but there is another 65% which includes amount owed (30%), length of credit history (15%), new credit (10%) and type of credit (10%). Consider all of the other factors.
Also remember that there may be errors on your credit report so if you don’t check it, you’ll never know and your score will be affected. According to Deborah McNaughton, author of The Get Out of Debt Kit, 80% of credit reports have errors (as cited by Bankrate.com). Many of the erroneous reports had missing information that may boost a score, such as missing a revolving account in good standing, or miscellaneous incorrect information such as an incorrect birthday.
Check your credit report. You can receive a free report from each of the three credit reporting agencies once a year at www.annualcreditreport.com. Credit reports are unique to Social Security numbers, so if you are married, you may want to stagger your requests with your spouse every six months. You can also request your actual score for a onetime fee (which is less than $15 through most credit bureaus). Most credit monitoring services will provide your score for free when you sign up for their service.
Assuming when you divorce, your accounts automatically divorce with you. They don’t. If you have a joint account and one of the parties on the account is late, you are both late. With some types of loans, such as a mortgage or a car loan, the lender may not accept a letter asking you to be removed from the account after a divorce even if that property is going to your ex-spouse. They will need to qualify for the loan on their own before you will be removed from the account. Take this into consideration because if they don’t refinance, and then have late payments, you may find yourself with some credit issues. When possible, close all joint accounts and refinance any debt separately. If it is not possible, maintain some type of control, whether it is an escrow account or at least access to information to make sure the accounts are paid in a timely manner. Don’t assume. Also see the last point about closing accounts.
Avoiding consumer credit counseling because it will hurt your credit score. For someone with serious debt, working with a not-for-profit credit counseling agency to develop a debt reduction plan and get out of debt permanently should take priority over credit scores. Credit counselors will work with your creditors to try and reduce your monthly payments, or settle your debt altogether. Debt settlement doesn’t affect scores as badly as you would think. In fact, many people don’t realize that late payments affect scores more than a debt settlement. Here is an example of how a debt settlement can affect credit scores, and how that compares to late payments.
A late payment hurts your score more than a debt settlement if your score is in the 680 range; it only significantly pulls it down if you are in the 780 range. Let’s be honest here, people ready for credit counseling probably don’t have the highest scores anyways, and the bottom line is credit scores are fluid — they can be rebuilt. According to Credit.com, a debt write off can stay on your credit report from seven to ten years, but as the information ages, so does its negative impact.
Making late payments aren’t that big a deal. According to FICO, a 30-day late payment can affect your score by as much as 110 points. Late payments can have a huge impact on your credit score causing it to drop like a stone. This is one disaster that is relatively easy to avoid. Simply set up all of your accounts with an automated minimum payment schedule from your checking account. This way you’ll never miss a payment. You can always pay additional amounts through online banking. Set yourself up for success with this one because it can be an easy one to miss and makes a significant impact.
Closing accounts to clean up your credit. Closing an account may be a good idea if you only opened the account to get a discount on merchandise or have too many credit cards which is causing confusion, but it won’t clean up your credit or help your score. In fact, it can hurt your score when the account you close has a long credit history — especially a good one. Your credit history accounts for 15% of your score, so in making decisions which cards to keep and which ones to close, keep in mind how long you’ve had the account open and close the most recent ones first.
Are credit scores important? Yes, but they are not the “be all and end all.” Now that we’ve dispelled some of the biggest myths, consider what the “be all and end all” is for you. What are your biggest financial challenges and concerns? Our latest research shows that less than 18% of employees feel they are on track for retirement. Are you part of the 82% that isn’t? Do you have a personal net worth statement and is it going in the right direction? The point is when you focus on the important financial issues, you have a chance to meet your financial goals. Clean up your credit if you have to, and do your best to keep a good credit score, but let’s not go overboard and lose sight of everything for just one number.
“Slow and steady wins the race” has never been truer than it is today.
Saturday, January 8th, 2011The “New Rules of Personal Finance” start with the foundation of eliminating debt and saving money.
It may not sound new or glamorous, but getting this first piece of your financial life right will help make everything else fall into place. And though slashing debt and saving money sounds familiar, a huge number of people have aggressively ignored this wisdom. Much financial ruin over the past 20 years stems from people borrowing heavily against their future, rather than saving for it.
Many people have rediscovered the power of thrift. Some people eat out less, while others put off buying new clothes and many are focused on rebuilding their savings. In sum, thrift is the new black.
Here are 5 things you can do to establish your own thrifty bona fides.
1. Get on a Budget
For the personal-finance writer, this is a bit like recommending that people floss more. Fact is, everyone hears about budgeting, but very few people actually do it.
The key here is to start simple and keep it simple. Don’t let minutia deter you from getting the budget down in rough terms. You have your income (salary or other income, after taxes), and you have your expenses (housing, food, transportation, etc.).
Ideally, the difference between those two is positive. If it’s not, then you know you’re losing money on basic expenses, and we haven’t even gotten to fun things like movies, trips or new clothes!
A number of websites, such as Quicken.com, provide budgeting help. SmartMoney.com (part of The Wall Street Journal family) also has a number of budget-related worksheets that can help get you started on the numbers-crunching game.
2. Eliminate Credit-Card Debt
Once you get on a budget, the first thing you should do is eliminate your credit-card debt. Why? Because it’s almost certainly the most costly debt that you have.
I know this is challenging for many of us, but before you can start thinking about cashing in on great investment opportunities, you have to get rid of expensive debt.
This advice might sound like common sense, but a surprising number of people try to build a savings account or investment account while maintaining relatively high balances on their credit cards.
This, of course, doesn’t make much sense. Credit-card interest rates can easily run in the mid teens. Savings rates are nearly 0% in many cases, and investment accounts on average return 6% to 9% over time — though not lately!
In other words, you’d be much better off paying down the expensive credit-card debt and then moving on to investment and savings.
3. Reduce the Cost of a Common Thing
Once you’ve got a budget, look for a common thing (meaning something you do often) that could be done more cheaply.
For instance, I plan to start riding my bike to work as it gets warmer. A friend of mine says she is opting to walk to the coffee shop rather than drive. These small actions save money on subway fares or gas. It may not sound like much, but it adds up.
The key is to find something already built into your lifestyle and do it in a cheaper way, creating a recurring savings.
Energy costs are another way to build in savings. For instance, energy costs can fluctuate. Up north, winter is usually costlier. In the south, the summer, especially if you have air conditioning, can be more expensive.
Take the peak months and maintain a budget that handles those peak months. As the costs come down in nonpeak months, move that extra money into savings instead of blowing it on something frivolous.
4. Delay Gratification
It’s good to treat yourself to a nice meal or a trip somewhere. But you can’t do it every day. As my grandfather said, “First we work, then we eat.”
By delaying gratification, we build discipline, we establish control of our financial lives.
For instance, say you want to get a flat-screen television. There are several ways to do this. Pop out to Best Buy and put it on your Visa — and sort things out later. That would be a carefree approach more common in the pre-crisis era.
Second, you could time the purchase to come after a key income moment, such as a raise or an expected bonus. At least in this way, you are directing a reward toward the acquisition. A bit more disciplined.
Third, you could set a savings goal and build in a “matching” notion that would go into the flat-screen TV fund.
In other words, you decide that you want to add $5,000 to your savings account in the next 12 months. For each dollar you put into the savings account, you put 20 cents into your flat-screen TV account. Once you get to the goal, you will have a contingent “reward” account from which you can buy the flat-screen TV.
5. Develop an Accountability Strategy
When you commit to something — exercising more, eating better, saving money — it is challenging to stick with it. Whole forests have been felled in the name of books meant to help us stick to self-improvement promises.
A powerful tactic is to share your goals with someone you trust so that this person can hold you accountable. It’s easy to tell ourselves that we’ll “get to it tomorrow.” It’s tougher to confess letting things slide to someone who is holding you accountable.
Who is the ideal accountability partner? Ideally, someone you trust enough to be straight with, especially when you’re not meeting your goals. Spouses can keep each other accountable, and that’s how my wife and I have it arranged. Other options are good friends, but make sure you’re ready to give it to them straight. If you prefer someone more removed from your personal life, a financial adviser or even someone in the clergy might play a deeper role in helping you meet your goals.
Share your budgeting and money-saving strategy with your accountability partner and then schedule check-ins on a weekly or monthly basis. Ideally, your accountability partner will help you get back on track when you fall behind.
If you or someone you know is struggling with paying the mortgage or have a mortgage with onerous payment terms, call Georgette Miller for a consultation on how you can help lift a heavy burden or visit my site: www.georgettemillerlaw.com
Source: Adapted from “The Wall Street Journal Guide to the New Rules of Personal Finance” by Dave Kansas. Copyright 2011 by DowJones Co. To be published by Harper Paperbacks, an imprint of HarperCollins Publishers, on Dec. 28, 2010.