Being Smart Regarding Debt and Savings

A Little Goes a Long Way

Sometimes it is difficult to visualize or imagine something little having a large impact.  That very mentality oftentimes keeps us from implementing strategies that can help us reach our own financial freedom.  Instead, we may find ourselves overwhelmed, procrastinating, and trying to justify doing nothing as a result of this almost paralyzed state.  It only takes one small act to operate as the trigger for a series of positive financial steps that will unfold in an almost serendipitous manner.  It helps to see examples or have it explained in a plain and simple manner.  I’ve selected three core areas to demonstrate how a little can go a long way.

Mortgage

1.)    Add an extra amount to your monthly payment ($20 or $200…either way it will make a difference).  Doing so will reduce your interest, as more is being applied to your principal, and this will also shorten the length of your loan.

(Make sure the extra is being applied to the principal and read your contract to ensure you won’t have to pay pre-payment penalties).

2.)    Making biweekly payments is a good option to consider if you can arrange to have this done automatically by your mortgage lender without third party intervention and without fees!  By making half of your regular mortgage payment every other week, you are in essence making 26 half payments or 13 full monthly payments at year end.  The extra annual payment can take about 6 years off of a 30 year mortgage.

Visit www.dinkytown.net for calculators that can show how much interest you can save or how many years you can chop off of your loan.

Credit Card Debt

1.)    Pay more than the minimum!  Take a $10,000 balance @ 18% APR – that would work out to be $250 minimum payment, which would cost you an extra $14,423 in interest (not including the $10,000 original balance you owe)

2.)    Use balance transfer cards offering 0 percent interest.  (You will have to pay a transfer fee of between 3-5% but if you know you are going to be making payments for a year or more—it is worth it).

Visit www.calcxml.com/calculators/how-long-will-it-take-to-pay-off-my-credit-card

Savings

1.)    Putting aside a little extra money every week can have a huge impact!  For example, just $20/week will equal to more than $1,000/year.  If you assume a 5% annual rate of return, after 10 years you will have $13,700.  After 20 years that number would grow to $36,100…and on and on.

2.)    Set up an automatic transfer from your checking account to your savings account, or have money automatically flow through to your savings account from a payroll deduction.  This way you are paying yourself without actually having to remember to and without requiring action on your part.

The important point to take away from all of this is that no amount is too small.  Every little bit helps when you take the time to put on your macro lens and view the big picture. 

How To Pay For College

Best Practices for Parents with College Bound Children

College -   it is supposed to be an exciting time, not to mention a proud moment in a parent’s life.  However, the stress associated with financing this endeavor is a heavy burden that many have a difficult time understanding and planning for. 

So what is a parent to do?  First, learn the school’s financial aid process, and complete the free application for Federal Student Aid (FAFSA) form each year.  Next, get yourself up to speed with the various loans available.  Visiting www.FinAid.org will help you compare loan terms, rates, limits and fees on some of these loans:

Education loans

Federal Government loans

Traditional Stafford loans

Federal plus Loans

Home equity loans

Kiplinger’s “7 Smart Ways to Pay for College” is a great read.  Another good resource is FastWeb.com.  This site is packed with information aimed at college planning/financing, and also helps identify scholarships your child may be eligible for.  

There is plenty of information available to parents.  You just have to put the time in to sift through it, and pull out the most credible and relevant data.  

Key Triggers: It May Be Time To Adjust Your Withholding

Withholdings – You Can’t Just Set and Forget!

Every employee must fill out what is known as a W-4 form, which tells the employer the amount of tax to withhold from an employee’s paycheck.  The form is based off of allowances, which are based on the IRS look up tables and used to figure out how much tax to withhold.  Basically the formula is total tax deduction divided by personal exemption amount (acts like a tax deduction because it reduces your taxable income).

As you focus your energy on calculating the amount of tax you either do or don’t owe, the primary area you will be concentrating on is that of withholding. You will be asked to report on marital status, allowances you qualify for, and any extra withholdings to report. 

There are key triggers that typically lead to withholding changes you should know:

• Change in income
• Change in household situation
  *Marriage – your household withholdings could go up or down depending upon whether your spouse is bringing in any income.
  *Divorce – your household income is affected and alimony is factored in.  Whether you are on the  paying or receiving end, there are specific forms to fill out relating to alimony.  Note…if you are on  the receiving end, you will be paying tax on it.

• Birth of children (equals new allowances, which reduce withholding)

A good practice to get into is to have a tax projection run every year to see where you stand from a tax standpoint.  You can project your income and deductions based on what you expect for the upcoming tax year, and then use the tax rates for the corresponding year to predict what your tax will be.  The last thing you want is to be surprised with a huge tax bill!!!!  After that, you can go to the IRS web site to check your allowances using their online calculator.

It is easy to forget to check your withholding every year, but a large tax bill is a painful reminder you could have avoided if you would have taken 30 minutes out of your day to do the math. 

Signs Your Financial Lifestyle Needs To Change

Are You Living Beyond Your Wallet?

According to the Consumer Reports Index, which measures American’s financial health, middle income families experiencing financial struggles rose during the month of January.  This comes as no surprise, as a large part of society has become extremely reliant on credit cards and loans for just about everything.  Despite the recession and depressed values in real estate, many are still chanting “consumption is king,” rather than “cash or saving is king.” 

Our tendency to compare ourselves to others does not help (keeping up with the Jones’ mentality), nor does the avoidance of altering a lifestyle one has become accustomed to (something many suffer from). 

So how do you know if you are living beyond your wallet, and what can you do about it?

• Emergency Fund is non – existent

You have not been able to put away a satisfactory amount to float you through times of trouble such as a lay off, medical emergency, or other unexpected large expense. It is ideal to have 3-6 months worth of expenses set aside to cover this need.

• You are robbing Peter to pay Paul

You find yourself delaying making payment to pay another vendor first because you don’t have enough funds to pay both bills on time

• Your credit score is below 600

Scores can range all the way up to 850.  Missed or late payments, outstanding judgments, total debt ratio, and too many credit cards can all add to this score being low, which will hinder your ability to get good financing rates or any loans at all.

• You exceed your credit limit

A red flag should be going up if you are using 50% or more of the credit available on your credit card, and unable to pay your outstanding balance down on monthly basis.  If you compare your credit card balance from year to year and notice you there has not been much change, there is more than likely an issue that should be addressed.

• Overdraft Fees continue to hit your account

Fees are incurred when money is withdrawn from the account via check processing, etc… and there is not enough in the account to cover it.

Overdraft protection is put in place to cover you when there is not enough money in your account.  It is a checking account feature offering a line of credit to write checks for more than the actual account balance.  While this may help you ward off overdraft fees, it can also be viewed as enabling you to continue to use money you don’t have.

• 35% or more of you income is going into your home via mortgage or rent payments, maintenance, etc…

Be careful not to bite off more than you can chew. What good is a big house if you can’t afford to eat or pay your utilities?

• Inability to save 10% of your pay to put towards retirement

This is one of those general rules of thumb figures.  The point is that you should not be living a lifestyle where you are unable to put money away for your retirement every year. 

Now what can you do about it?

• Create a budget, and while doing so cut back in any areas you can such as dining out, “extras such as caller id” with regard to your phone bill, making coffee at home rather than visiting the local Starbucks, clipping coupons to save on groceries, etc… Also look for ways to save in areas such as water and energy.
• Payoff any outstanding judgements
• Pay down your debt.  If you can’t do it on your own, look into other alternatives such as debt relief plans.  One resource is www.careonecredit.com.
• Limit credit card use and use fewer credit cards. 
• Look into whether refinancing your home or auto loan makes sense
• Stop focusing on the size of your house and focus on the quality of your life and ability to save.  Understand this may mean moving to a more affordable home.
• After your paycheck hits, pay your bills first and then pay yourself!  Take necessary steps to ensure saving such as setting up automatic transfers to your savings account, which can then be used to grow your emergency fund and/or retirement account

Visit our blog post entitled, “Simple Money Saving and Financial Planning Tips for 2013”

Baby Boomer Retirement Tips

Is Your Retirement Stress Booming?

According to Baby Boomer Headquarters, there are 75 million baby boomers in the United States, many of which are contemplating whether or not they are financially prepared for retirement.  Here are some guidelines to follow if you are one of them.

• Create a list of your current income and expenses, and how you think this may change once you are retired.
• Simplify your retirement accounts by consolidating your accounts such as IRAs.  This will help from a tax standpoint as well as RMD (required minimum distribution) standpoint.  After age 70.5, you are required to take annual withdrawal amounts from your 401(k) and IRA accounts.  A penalty of 50% will be assessed (on the amount you should have withdrawn) for failure to do so.
• Create a will and/or living will naming executor, power of attorney, beneficiaries, etc…
• Re-evaluate your current investment portfolio.  In most cases, dialing down your risk tolerance and shifting focus to a low volatility, capital preservation and income strategy makes sense. 
• Delay taking social security until after age 70, otherwise the benefit you receive will be decreased dramatically.
• Give yourself a thorough insurance check up. 

*Sign up for Medicare as soon as you are eligible.  Eligibility takes place 3 months before you turn 65, and lasts until 3 months after.  If you enroll after this time period, your monthly premiums will go up by 10% for each 12 month period you were eligible for.  If you are retiring before age 65, a plan such as COBRA continuation coverage will be needed to cover the time between retirement and age 65, when eligibility occurs. 

*Consider long –term care insurance.  Your state may offer a plan that enables you to keep an amount equal to your insurance coverage and still quality for Medicaid if your insurance benefit runs out.  Without insurance you may end up spending down all of your assets to qualify for Medicaid.

• Consult with a certified financial planner.  This professional can help you determine if your anticipated expenses in retirement do not exceed your inflow of money.  They can help identify specific tax strategies that may make sense for you, and help you devise a plan for how much, how often, and from where money should be pulled from during retirement. Planners can also calculate your estate tax (federal and state, which change based on enacted legislation), and recommend strategies for lessening the estate tax. 

Retirement is supposed to be happily referred to as the “golden years,” not the stressful years.  Give yourself some peace of mind by giving your retirement plan the thought and reflection it requires.  

Money Saving Strategies & Financial Tips for 2013

Procrastination - The Silent Killer

When we hear the term “the silent killer” most of us think of things like heart disease or cancer.   While these ailments have certainly earned their notoriety where health is concerned, procrastination has earned its right to this label within the context of a person’s financial well being. 

How many of us have uttered phrases to ourselves such as, “I don’t make enough to put money away for savings every month,” or “I waited too long to start saving for my children’s college education so why bother now?” 

The truth is we procrastinate more often than not, because we can…not because we don’t have a choice.  There are always ways to save if we are willing to sacrifice in other areas.  No amount is too small when the compounding effect is considered, and it is never too late to start saving or to take more interest in your financial well being. 

Some simple things you can start off doing:

°         Review your monthly income and expenses to gauge whether you are spending more than what you make.  If this is the case, analyze your expenses and cut out or at the very least scale back the ones that are not “necessary” (dining out, new clothing, paper/magazine subscriptions, etc…)

°         Put a formal budget in place and hold yourself accountable by using tools such as quicken or www.mint.com to track your progress.

°         Review your current loans and evaluate whether or not you can get better rates (often times car loan rates can be negotiated down or you can find a better rate elsewhere.  There may be an opportunity to refinance, especially at today’s low rates).  There is a great link discussing this in our newsletter. 

°         If you have credit card debt, focus on paying off the card with the highest interest rate first.  You may even be able to transfer the balance to another card with a zero interest offer (keep in mind there is a fee associated with doing so)

°         Start an automatic savings plan.  This can be done various ways.  (1) Have a portion of your paycheck automatically flow into a savings account or (2) Set up recurring transfers from your checking account to your savings account monthly.

°         Pull your credit report and review your current standing.  Your credit score can affect you in so many ways.  Lenders base your rates off of your score, and your score will also determine the rate you get on other loans.  Everyone is entitled to one free report per year.  You can get a free report at www.annualcreditreport.com.  We also discuss this topic in more detail in our newsletter.  Clickhere to learn more. 

°         Explore opening up 529 plans for your kids.  You can start with as little as $25 per child for the Maryland 529 plan, if it is set up as an automatic monthly contribution from your bank account.  Whether or not this makes sense for you will depend upon your specific situation, and consulting a financial advisor is best.  Two sites we see use frequently are www.virginia529.com and www.collegesavingsmd.org.

(Note: Don’t replace saving for retirement with saving for college.  There are resources like financial aid, scholarships, grants, and specific loans tailored for this cost.  You don’t have that kind of flexibility when it comes to retirement.  Make sure you are putting money into the retirement savings!)

Again, these are just a few simple things you can do to get started off in the right direction.  Don’t fall victim to the “silent killer” – procrastination, and do something NOW.