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Smart Credit Use: Should You Use Debt To Improve Your Home?

piggy bank in a houseSmart credit use does not necessarily mean you have to stop putting yourself through debt. Total elimination of debt is something that will really restrict you in terms of financial opportunities. There are certain financial improvements that are easier to achieve if you put yourself through debt. The most popular to this is buying your own home.

Buying a house is one of the most expensive spending that you will ever make. It cost hundreds of thousands of dollars to purchase. This is why most homebuyers can usually afford this purchase if they apply for a mortgage loan.

According to an article published on Reuters.com, the US housing is forecasted to gain steam in 2015. Thanks to the strengthening job market, more and more people are confident to borrow money just so they can buy their own home. This is one way for them to increase their personal net worth. If they wait to save up to buy a house in cash, it will take them forever to do so. In the meantime, they will be wasting their money paying rent. Instead of the monthly rent, it is more logical to just borrow money to buy your own home. The monthly amortization that you pay towards your mortgage increases your home equity. That means you get to increase your personal net worth as you pay off your mortgage loan. That is more preferable compared to the money that you will be wasting making your landlord rich.

But while putting yourself through debt to buy a house is acceptable, do you think the same is true with home improvements? Is it an example of smart credit use to borrow money so you can renovate your home to look at lot better? After all, to increase the value of your home you need to improve it every now and then. If the housing market is forecasted to improve this year and the next, you can really maximize the value of your home by doing a bit of improvement every now and then.

Survey shows that consumers plan to use debt for home improvement

According to a survey published on PRNewsWire.com, 30% of homeowners who plan to improve their home would be using their credit cards. 59% said that they will tap into their savings. But some of the people who plan to use their savings are also thinking of using credit for a portion of their home renovations.

Do you think that these people are practicing smart credit use by borrowing money to improve their home? That probably depends on a couple of factors. If you are one of these people contemplating to borrow money just to renovate your home, look into these factors first.

Why do you want to improve your home?

Start by looking at the purpose of this home renovation. Do you plan to sell your home in the near future? With the improving housing market and the rising value of homes, any improvement that you will make could help you sell your property at a higher price. You can profit more from this transaction than when you leave it as is.

But if you simply want to improve your home because you want to make it more modern, you need to further scrutinize the specific renovations you will make. If the improvements will help insulate your home so you do not have to spend so much on utilities, then it might be justifiable. If you want to make your home more eco friendly and energy efficient, then borrowing may also be justified. But if you only want to increase your living space or improve the aesthetics of your home, then you should ask yourself other questions.

What is the status of your current debts?

This is the next question that you need to ask – what is the current status of your debts? Do you still owe a lot on your mortgage? If you only own a small percentage of your home equity, do you really think it is practicing smart credit use if you add more to that? And what about your credit card debt? How much do you owe your creditors? This is a high interest debt that you still need to pay off. If you want to use your credit card for the home improvement, that would add to the high interest balance that will burden you.

If your current debt is still high, you may want to find ways to keep your home improvements to a minimum. Or you can ask the next question.

Is your source of income stable?

If your income is currently struggling to pay off the debts that you owe, then that is a sign that you cannot take on more credit. Otherwise, it would be very difficult to pay off everything. You might end up really selling your house just because you got too much debt to your name. If ever you still have a lot of debts, you can be justified in borrowing more money as long as your income can still support the additional debt. That is how you practice smart credit use.

If none of the answers to these questions justify borrowing money, then you should postpone it or just save up for it.

Good and bad ways to use credit to improve your life

CNN.com published an article that says it is impossible to live debt-free. Apart from homes, the college education of children is hard to pay for in cash. While it is not impossible, a lot of households cannot afford to put their kids through college without the help of student loans.

While debt is unavoidable, that does not mean we should let it get out of hand. It is all about smart credit use.

One way for you to really implement it is to know the difference between good and bad debt. For those of you who got stung by too much debt during the Great Recession, it might be hard to believe that there is such a thing as good debt.

But there is such a thing as good debt. You need to know the difference between what is a good or a bad debt so you can make the right choices when it comes to your credit.

Good Debt

According to the CNN article, a good debt is something that you really need but cannot afford to pay in cash. At the very least, this is something that you cannot do without liquidating your assets and wiping out your cash reserves. Robert Kiyosaki defines good debt as something that puts money in your pocket. That means, the debt should lead you into a position that allows you to earn more money or increase your assets. This include mortgages, student loans and business debts. These three can help you put more money in your pocket.

Bad Debt

Robert Kiyosaki defines bad debt as something that will take money from your pocket. The CNN article identifies it as debt that you took to pay for things that are unnecessary and you cannot afford. These include credit card debts for designer clothes, accessories you can live without or that vacation that was clearly beyond your budget. You need to stay away from these debts because they will not really do you cany good to have. These could even drag you under if you are not careful.

Here is a video that simplifies what good and bad debts are.

In the end, smart credit use is not really about debt elimination. It is taking on debt that is necessary, improves your financial situation and you can afford to pay off.

Purchasing A Big-Ticket Item – Pay Cash or Use Credit?

Man looking frustratedIt doesn’t happen every month but at least once or twice a year you’re faced with the task of purchasing a big-ticket item. It might be a new washer-dryer, new living room furniture or an entertainment center. You’ve decided what you want to buy and how much you’re willing to pay for it but … the question is should you pay cash or use credit? Unfortunately, what financial experts will tell you is that there is no hard and fast answer. The decision to pay cash or to use credit will depend on your finances, whether or not the asset will increase in value and what interest rates are available.

The first thing you should do according to most financial experts is evaluate your personal finances. What’s your household income? Do you have one or two wage earners? Is your income very consistent? How much are you saving for retirement? Do you have a lot of revolving, credit card debt? If your answers to these questions tended to be on the negative side, it would make less sense to buy that big-ticket item in the first place. If you find that you would have trouble financing the purchase, this could create even greater problems going forward.

When financing doesn’t make sense

If you’re eyeing something that’s actually out of your reach financially or beyond your means then financing it just doesn’t make sense. The only time it makes sense to finance a big purchase is if it’s an asset that will grow in value such as your home or an educational degree. The reasoning here is that the asset will ultimately be worth more than what it would cost you plus the interest you paid. And despite what you may have been told, it just doesn’t make sense for most people to pay $500,000 in cash for a home when they could invest that money and get a 6% or 7% rate of return.

Not all are created equal

It’s important to understand that not all loans are created equal. If you were to take out an interest-only loan this can mean that you’re buying a house you truly can’t afford. When you do this, you really don’t own your home. The bank does. While your mortgage loan payment may be low it’s important to remember that you’re spending money every month but not making any progress towards owning your home. In other words you never gain any equity. The better option is to get a loan where every month you’re paying on both the interest and principal.

The conventional wisdom

While conventional wisdom is that you shouldn’t finance any asset that will depreciate such as a car, a vacation or consumables this is not necessarily true these days. Interest rates are at almost all-time lows. It might make good sense to finance that car. If you can find a dealer that will give you 2%, why not take it? This means that if you have a four- or five-year loan, you’re basically financing your purchase at the rate of inflation. For that matter, 0% financing can be had on a number of purchases such as furniture and jewelry or even an automobile. Unfortunately, those mouthwatering rates are typically available only if you have a credit score of 720 or higher.

Paying it off immediately

If you decide it’s not best to finance that big-ticket purchase you might consider using a credit card to buy it and then pay off your balance immediately in place of handing over cash or writing a check. The policies on credit cards vary but there are often advantages to charging a big purchase. In fact, any time you can put a large purchase on a credit card, it’s pretty appealing to do so. When this is the case, you’re simply using the credit card as a sort of payment conduit so that you can pick up points or miles. In addition, some cards offer protection for the purchases you make with them. As an example of this, if you have a credit card with built-in travel insurance you’d probably be better off charging that $5,000 vacation as cash doesn’t come with any of these kinds of protections.

The caveats

If you decide to use your credit card to make a big-ticket purchase there are some caveats to keep in mind. For one thing, don’t max out your card in such a way that it disrupts your everyday cash flow. You could have an utility bill you pay automatically that bounces because putting that big-ticket item on your card put you at your credit limit. In addition, you should try to keep your debt-to-credit ratio at 30% or less to maintain a good credit score. If you’re not familiar with your debt-to-credit ratio it’s simply the amount of debt you’ve used divided by the total amount of credit you have available. For example, if you have $7500 in total credit limits and you’ve charged up $2000, your debt-to-credit ratio would be roughly 26%, which is good. Your debt-to-credit ratio makes up 30% of your credit score so if you were to let it get to 40% or more your credit score could be adversely affected. You need to be careful when charging that big-ticket item as it could put you over the 30%. And of course, you don’t want to put a big purchase on a credit card if you’re already carrying a revolving balance. This can be a slippery slope that ends in serious financial problems. In fact, this is where most people get into trouble – by continuing to use their credit cards when they can barely make the minimum monthly payments required.

If you’d like to learn more about credit scoring and why your credit score is important then here’s a short video from the credit reporting bureau TransUnion you should find of interest.

When it makes more sense to pay cash

There are certain instances where it’s better to pay cash or to write a check then to put the purchase on a credit card. As an example of this, it’s best to pay cash if it would allow you to negotiate a price as with an independent shop or a dealer. You might be able to save 10% or even better on a purchase if you can pay with cash. There are also some institutions or businesses that charge credit card-processing fees. If this is the case, make sure that the miles, points or cash back that you’re earning is more than what these fees will cost you.

In short, the answer to the question of whether to pay cash or to use credit when purchasing a big-ticket item is … it all depends. You need to take stock of your financial situation including how much you currently owe on your credit cards, whether you’re purchasing an asset that will grow in value and what the purchase could do to your credit score. If you do this you’re certain to make a good decision and not one that will come back to haunt you in the months ahead.

8 Tips To Keep From Having Your Income Tax Return Audited

young woman looking frustratedWell, it’s that time of the year again. If you’ve already filed your income tax, congratulations. If you’re typical you should be getting more than $3000 refunded. You might think that’s great but remember it’s your money and you let the government use it interest-free. Many people choose to claim fewer or even no dependents so that they can take home more money every paycheck. Others and maybe you’re one view withholding as a sort of savings account that can be cashed in the following year.

Our government has made it clear that fewer people will be audited this your because of funding cuts to the IRS. Of course, that doesn’t mean that you won’t be audited. A tax audit can have a severe effect on your life. You could end up learning that you owed thousands of dollars more than you had thought. However, there are things you can do to reduce the risk that you might be audited.

#1. Prove that you run a small business

If you have a small business, the IRS will forgive you if you show a loss for the first few years. However, if you report that your business has lost money for three years or more the IRS will begin to suspect that it’s more of a hobby than a business aimed at turning a profit. This can trigger a field audit, which is done in person and is a lot more nerve racking than an audit by correspondence. You need to keep records of all of your business expenses and be prepared to document how much time you spend on the business and what you did with it.

#2. Make sure you report all and we mean all of your income

The income you earn from your job is reported to the on an IRS W-2 form. If you have income from dividends, interest or capital gains this is reported to the IRS on form 1099s, as is any income that you earned as a freelancer or independent contractor. You are sent these forms and so is the IRS. So make sure that you include all of the information from them on your tax return. The reason for this is because the IRS uses a program that matches these forms to your return and flags any differences between what you reported and what was reported to the IRS. If the program finds any discrepancies, this will trigger what’s called a correspondence audit. What this amounts to is a letter from the IRS on how much more money you owe because of what you didn’t report. You can either just pay whatever amount the IRS has said you owe or challenge it if you believe that the IRS has made a mistake.

#3. Explain anything that seems “weird”

The IRS is a shark when it comes to unreported income. If you have any income that seems weird, you need to explain it as this may stop the agency from auditing you. As an example of this, if you the net income you report is too little to live on given the size of your family size and where you live, you need to include a statement revealing how you supported your family including any credit cards, loans or savings you used to pay for your cost of living.

#4. Watch those deductions for you home-office

It’s typical to have your office in one place, which would be either in your home or a rental space. Be careful to not report a deduction for both. Of course, you might legitimately have an office at home and in a rental space. If so you will need to explain this in a disclosure statement. You might also have an expense for equipment or a business storage unit. If so label this as a “storage rental cost” or an “equipment rental cost.”

#5. Be honest if you have any money overseas

If you have investment accounts or a bank account overseas you must report any income you earned from it to the IRS. While you’ve always been required to do this, there is the new Foreign Account Tax Compliance Act so that the foreign institution where you have money may start to report the information to the IRS just as would any brokerage or bank in the US. Here’s the scary thing. If you’ve had that account for years but never reported it and the IRS discovers it from your foreign investment firm or bank, you could owe some really serious penalties in addition to back taxes.

#6. Report the sale of mutual funds correctly

Let’s suppose you sold a mutual fund that you bought prior to 2011 and it was not part of your tax-advantaged retirement account and then reinvested in another mutual fund. This must be reported on your income tax return. If you fail to do this the IRS will treat everything you made from the sale of the mutual fund as a taxable gain and will recompute how much you owe. When this is the case, you need to be able to prove that only part of the proceeds you received were actually capital gains and the remaining portion was he amount you had originally invested in the fund. Of course, if you lost money on the fund, you owe nothing on the sale.

#7. Report the sale of your houseHouse with cash on the roof

The title company sends the IRS a 1099-S form when you sell your house showing how much you sold it for. This is true even if all the capital gains you made on the sale are tax exempt because they weren’t more than $500,000 if you’re married or $250,000 if you’re single. It is recommended that you still report the information on your income tax return anyway. Why is this? It’s because that 1099-S will be part of the IRS’s automated form-matching program. If you don’t report it, this can lead to a correspondence audit.

#8. Be wise about your mortgage interest

When you and your spouse own a home, your mortgage holder will send both you and the IRS a form 1098 showing the amount of interest you paid the past year. This is an area where you need to be careful because there are cases where the 1098 has only the Social Security number and name of one of you. If that person were to die and the surviving partner tries to take the deduction, a correspondence audit may be triggered. When this is case you need to have the mortgage holder change the name and Social Security number on the 1098 to yours before it’s filed.

What’s Your Excuse For Not Paying A Bill On Time?

Lying salesman or businessmanHave you ever been late in paying a bill? If so, did you know that this has a very bad effect on your credit score? While it’s not possible to say exactly how much of a hit your credit score would take, it could be 50 points or more. This could drop you from having “good” credit to “poor” credit, which would make it harder for you to get new credit in the future.

Do you know your credit score?

Your credit score is what tells potential lenders how much of a credit risk you would be. The credit score used by most lenders comes from the company FICO and ranges from a low of 300 to a high of 850. If you haven’t seen your credit score recently or even ever, you need to get it. FICO makes it available on its website www.myfico.com. You can also get it from one of the three credit reporting bureaus, Experian, Equifax and TransUnion. If you have a Discover Card you may be getting your credit score automatically every month. There are also websites such as CreditKarma.com and CreditSesame.com that will give you your credit score free.

Are you scared of having a low balance?

You may be one of the millions of Americans that simply can’t afford their bills. But not having enough money in your bank account to pay a bill and not wanting to see your balance grow smaller after you pay one is a different matter. Of course, it’s possible that you might be charged a fee by your bank if your balance drops below a certain amount and you should avoid this if you can. But skipping a payment or being late in making a payment will be much more costly. You will be charged late fees that add up and as you have read, if you’re late in making a payment your credit score will be damaged.

Do you think carrying a balance will help you build credit?

Do you believe that if you carry a balance on a credit card it will help you build credit? If so, think again. One of the two best things you can do with a credit card is pay your bill on time and use only a small amount of the credit you’ve used. This gets into what’s called your debt-to-credit ratio. You can calculate yours by dividing the total amount of credit you have available into the amount of your debt. As an example of this, if you have $5000 in available credit and have used up or charged $1000 of it, your debt-to-credit ratio would be 20%, which is very acceptable. In fact, most experts say that your credit utilization or debt-to-credit ratio should be 30% or less. It has no direct impact on your credit score whether or not you carry a balance from month to month. The way that you would hurt your credit utilization is if you carry a balance and continue to add to it either because you’ve made new purchases or the interest on your balance has accrued. This is what hurts your credit score.

Is it because you protested the bill?

Have you balked at paying a credit card bill because you thought it didn’t reflect what you had spent? Or maybe you didn’t understand what your interest rate would be when you signed up for the card. If you think that by refusing to pay a credit card bill you’re taking a stand against the credit card issuer, you need to understand that things don’t work that way. If you’re the type of person that has that same sort of approach to other financial matters such as refusing to pay the utility company because you think you were billed incorrectly or ignoring payments on student loans that you took out for a degree you never earned? All this type of thinking will do is wreck your credit. Your accounts will be ultimately sent to collection and you could actually be sued. Plus, of course, this will cost you more in late fees and collection fees.

You’re just confused.

Maybe your excuse for having been late in paying a bill is because you just didn’t understand interest, finance charges or how promotional offers for credit cards work. This can leave you unable to pay the bills you receive. Before you sign up for a credit card, read the fine print. Understand if it has an annual fee, its interest rate and what you have to do per the agreement you signed. If you don’t do this, you could end up learning that you owe more than you ever thought.

Is it a problem with prioritization?

Do you have a problem prioritizing your bills? If you get a bill from your vet do you believe it’s more important than paying a credit card bill? Sometimes you just have to prioritize your bill paying to make sure you get them paid on time and that you don’t miss a payment. It’s typical for parents to make sacrifices for their kids but it’s important to understand the difference between sacrificing for them and risking financial ruin. While you might love to take them to Disneyland you won’t love it so much when the bill rolls in and you find you can’t pay it or when you’re ultimately forced to declare bankruptcy.

Stop making excuses

Regardless of what your excuse might be you need to stop making late payments on your bills. If it’s because you simply can’t afford the payments or you’re having a hard time prioritizing them, one good option is to go to a consumer credit counseling agency. It generally costs either very little or nothing to use the services of one of these agencies. The best ones are nonprofits. When you go to a credit-counseling agency you will have a debt counselor that will review your spending, your debts and your assets. He or she will help you develop a budget that would make it possible for you to catch up on your bills and start paying them on time. Or your debt counselor might recommend a debt management plan (DMP). This is where the two of you determine what payments you could realistically make on your bills. Your counselor will present your DMP to your creditors. If they sign off on it you would no longer be required to pay them. Instead you would send one check a month to the credit counseling agency and it will distribute the funds to your creditors. It generally takes about five years to complete one of these plans.

Paying your bills on time is critical

The harsh truth about bill paying is that it’s critical that you pay them on time. It’s even more important to not skip a payment. Lenders don’t like to take risks. If you don’t pay a bill on time or skip it altogether this will damage your credit score and make it look as if you were more of a risk to potential lenders. This will not only make it tougher for you to get new credit in the future but it will cost you more money in the higher interest rates you will be forced to pay.

Finally, if you’d like to learn more about credit reports and credit scoring, here’s a helpful video courtesy of National Debt Relief.

5 Things You Absolutely Must Know About Your Personal Finances

woman thinkingThere are situations in life where what you don’t know could actually kill you. You don’t know that the snake sitting next to your chair is one of the deadliest in the world. You don’t know that little spider is a Brown Recluse and that its bite could send you to the hospital or worse. And maybe you don’t know that tree branch right above you is rotten and could fall on you any minute.

While the things you don’t know about your personal  finances won’t kill you they can definitely cost you. For example, do you know your net worth? If you don’t, you’re not the Lone Ranger. Most Americans have no idea about the net worth. It’s very important for you to know this and it’s very easy to calculate. It’s just the total value of your assets including your savings and retirement accounts, your home, car, any collectibles you own and your boat, your second home or RV (if any of these are applicable). Subtract your total debts from that number including the payments on your house and car and you’ll have your net worth. It’s important because it’s the key to keeping track of your financial health. When you know what your net worth is, you will have a good picture of the state of your finances showing how you handle your money. Once you’ve determined your net worth you should calculate it regularly like once a quarter so that you will be able to see those areas where you can make improvements.

What’s your mortgage interest rate?

There was a report released recently by the website Bankrate.com revealing that an amazing 35% of us don’t know our mortgage interest rates. Or maybe you once knew your interest rate but forgot it over the years. The interest rates on mortgages have hovered around historical lows for the past few years. If you don’t know your interest rate you need to look it up, as you might be able to benefit from refinancing. We’ve heard stories of people who refinanced their mortgages and saved $200, $300, or even $400 a month. Wouldn’t this kind of increase help you?

Have you seen your credit report recently – or ever?

If you haven’t seen your credit reports recently it’s absolutely critical that you get them. You have three reports, as there are three credit-reporting bureaus. They are Experian, Equifax and TransUnion. You can get your report from each of them free once a year or on the website www.annualcreditreport.com.

Why is this so important? It’s because your credit report has very detailed information about your credit history. This includes the way you have used credit cards, your auto loans and any debts that were sent to collection. Even more important, they could contain errors that are hurting your credit. One recent FTC study revealed that almost 40,000,000 Americans have mistakes in their credit reports. Given the fact that fewer than one in five of us check our reports, the odds are that most people have errors in theirs but don’t know about them. If it turns out that you are one of these people and that it’s a serious error or even a case of identity theft, you definitely should dispute it with the appropriate credit bureau. While all three of the credit bureaus have forms on their sites for this purpose most experts say it’s best to dispute the matter in writing and be sure to send a letter registered and return receipt requested. Once the credit bureau receives your letter it’s obligated by law to contact the institution that provided the information and ask for it to be verified. If the institution doesn’t verify the information or fails to respond within 30 days, the credit bureau must remove the item from your report, which could give your credit score a nice boost.

credit history definitionSpeaking of your credit score

Something else that’s crucial to know is your credit score. It’s the little three-digit number that represents how much of a risk you are for credit. The credit scoring service used by the overwhelming majority of lenders is FICO. Its scores range from 300 to 850 and as you might guess, the higher your score the better. Everyone from lenders to landlords look at your credit score as do an ever-growing percentage of employers. The National Foundation for Credit Counseling recently discovered that 60% of us haven’t reviewed our credit scores within the previous year. This can be a really big mistake, especially if you’re looking for a loan. The reason for this is that there is an inverse ratio at work here. The higher your credit score in the lower your interest rate will be. If your score is somewhere in the mid-700s you will save thousands of dollars in low interest rates. Conversely, if your score is below 620 and you apply for a loan it will be at a higher interest rate and less favorable terms or you might not even be able to get the loan at all.

Where can you get your credit score? The only place you can get your true FICO score is on its website www.myfico.com where you may have to pay for it. The three credit reporting bureaus will give you your credit score though it won’t be your true FICO score. There are also sites like CreditKarma.com and CreditSesame.com where you can get your credit scores. While these won’t be your true FICO scores they should be close enough to give you a good idea as to how lenders will view you.

Your credit card statements

When one of your credit card statements arrives in the mail to you review it carefully or do you simply make a note of your balance and then file it away until it’s time to make a payment? In this day and age of identity theft and data breaches its critical to review your credit card statements carefully every month. Look for transactions you don’t remember having made or merchants you can’t remember doing business with. Also look for small charges of one dollar or less. What identity thieves often do is make a very small charge to your account to see what happens. If you don’t spot the charge and dispute that you could then be in for a world of trouble, as the thief will then hit your card hard. The same is true of any errors you find. Most credit card issuers restrict your liability in cases like this to $50 and may even waive that. But if you do find an error it’s important that you report it to the credit card issuer within 60 days or it’s possible you could be stuck with the charge.

8 Tips To Help You Become Smarter About Personal Finance

woman putting a coin in a piggy bankThe US economic recovery continues as witnessed by recent job growth. In fact, according to the Brookings Institute employment increased in January by 267,000 jobs. In addition, private companies have now increased their payrolls for 59 consecutive months, which boosted their total employment by 11.8 million people.

However, the past few years have been difficult ones for most people and this may include you. If you’re typical, your number one priority has probably been financial security. Now that things have loosened up might be a good time to start revisiting personal finance and here are eight tips that could help you become smarter about it.

#1. If you don’t already have the budgeting habit you need to get started. The easiest way to do this is to log your expenses every day. Use a spreadsheet and group your expenses by categories. This needs to include everything from your once-every-four-week haircut to that sweater you bought on impulse last week. You should find it much easier to keep track of your expenses if you do it every day.

If you’re not quite sure how to make a budget, here’s what one woman calls the simplest budgeting technique ever.

#2. Be smarter about how you feel about saving money. Don’t think of it as denying yourself or renouncing something. Instead, imagine what you will do with the money you save. For example, if you usually buy a $3 latte on the way to work every day think of the $60 you would save by forgoing it and how you might use the money for something important such as saving for a vacation or a weekend getaway.

#3. Spend some time thinking about the biases and assumptions that could be holding you back. As an example of this you might have been a student a few years back and had little or no money. Today, you might be thinking about money the same way you did back then even though you’re now earning a lot more. You could be having a problem handling money because you’ve just become used to having more and spending more and don’t feel that you’re actually making any headway. If you find you have more money in the bank than in those previous years, there’s the temptation to spend it. That $10,000 you have in the bank should stay there as an emergency fund and not be used as a deposit on a new car you don’t really need.

#4. Be smart about your spending. Before you make any purchase consider whether it’s a need or a want. You might want a new car but do you really need one? You need food, gasoline, shelter, some clothes and you might need a cartridge for your inkjet printer. On the other hand, you could want that expensive piece of jewelry, a new computer or a saber saw. You can save a lot of money if you look at purchases this way with the goal of spending money only on those things you need and not the things you want. The money you save by buying only the things you need will eventually add up to the point where you will be able to easily afford one of those things you want without busting your budget.

#5. Be smart by always looking for ways to earn more money. There are a myriad of ways to earn more money besides asking your manager for a raise. We recently sold enough items on Craigslist and eBay to buy a new computer and without taking a cent out of our budget. Spend a few minutes thinking about what you could do that saves other people time and money and start a side business. One way to determine what a good part-time business would be is to think in terms of three things and where they meet – what you’re very good at, what you could do for other people and what they would be willing to pay you for.

#6. Never stop learning. There are numerous places where you can get information free on personal finance. The websites Yahoo Finance, CNN Money, Microsoft Money and Mint.com all have good articles daily on various aspects of personal finance. Our government has a very good website dedicated to personal finance with information on everything from money management to credit and debit and from home ownership to how to get your credit reports free. And if you haven’t done this already you should invest in at least a couple of books on personal finance. Two of the most popular of these are Rich Dad, Poor Dad and Dave Ramsey’s Total Money Makeover.

Two smiling girls have coffee time#7. Schedule a weekly “money date.” We understand that sitting down and going over your finances is not the most exciting thing you will do this week. But it’s an important part of being smart about your money. If you set a day and time to pay your bills, review and update your budget and take care of any other financial concerns and call it your “money date” this could bring some fun and exciting elements into your personal finances and help you stay committed. There’s a strategy that could help where you couple the tasks you really don’t like with rewards. This can really work for tasks that take a lot of time but don’t require a lot of concentration like updating your budget for the month or working through the backlog in your email inbox. You could do this on your laptop at your favorite restaurant or coffee shop or while watching TV at home. Some people have found it’s much easier to get through these kind of mindless tasks by doing them with a friend that needs to do the same sort of thing. These are generally called concurrent rewards because they are things you do to reward yourself concurrent with doing tasks you really don’t enjoy.

#8. Look for smarter places to put your money. If you’re keeping your money in a bank savings account, the interest your earning is probably best termed abysmal. We’ve seen ads bragging about interest rates of less than 1%. on savings, These rates are costing you money because they’re lower than the current rate of inflation. If you have money in a bank savings account get it out and put it at least in a money market account. These accounts offer better interest rates and usually include free check writing privileges. There are also online banks where you could put your money. Most of these have the same FDIC insurance as a brick-and-mortar bank. Also, have you looked at the interest rate on your credit cards recently? If you’re paying 17% or more, you need to do a balance transfer to a card with a lower interest rate. Or better yet transfer those balances to a 0% interest balance transfer card where you would have anywhere from 12 to 18 months interest free. If you shop around you should be able to not only find one of these cards but one that offers good rewards, which could save you even more money. For example, as of this writing the Chase Freedom Card was not only offering 15 months’ interest-free on purchases and balance transfers but also a $100 bonus just for signing up.

8 Important Tips To Prevent Identity Theft

Man in ski maskIdentity theft has become just about as common as sunshine. It’s almost impossible to pick up a newspaper or watch a news broadcast without learning about another theft. The most recent was the insurance company Anthem where hackers gained access to the company’s computer system and got the personal information of their current and former members such as their names, birthdays, street addresses, email addresses, medical IDs/social security numbers, and employment information, including even income data.

If you are or were a member of Anthem this is a reason to be very concerning. There’s no telling what those hackers will do with the information they were able to obtain but you know it won’t be anything good. If it turns out that the attackers decide to use your identity this could mess up your financial life for many years to come. For that matter the same thing would be true if you weren’t a member of Anthem but had your identity stolen.

You can prevent your identity from being stolen or at least minimize the chances it will happen by following these tips.

#1: Request a 90-day credit alert

You can contact each of the three credit reporting bureaus – Experian, Equifax and TransUnion — and ask them for a 90-day credit alert. While each of these agencies is supposed to notify the other two, it’s probably better for you to contact all three yourself just to be on the safe side.

#2: Get your free credit reports

The law requires the credit bureaus to provide you with your credit reports free once a year. You could get each individually or all three together on the website www.annualcreditreport.com. Most experts feel it’s better to get your reports one at a time at four-month intervals. That way you’re basically monitoring your credit year round and at no cost.

When you get one of your credit reports be sure to review it very carefully. Doctors can make mistakes and so can credit bureaus. If you do find an error you will need to dispute it. The three credit bureaus have pages on their sites for this purpose. However, the experts say it’s much better to write a letter to the credit bureau disputing the item. When it receives your letter it is required to contact the company that provided the information and ask it to verify it. If the company cannot verify the information or fails to respond within 30 days the credit bureau must remove it from your credit file.

If you’d like to know how to write a letter disputing something on one of your credit reports, here’s a helpful video courtesy of National Debt Relief …

#3: Watch your credit card statements like a hawk

We know that when a credit card statement arrives in the mail the simplest thing is to just pay it and move on. However, you really need to review it very carefully looking for discrepancies or charges you don’t remember having made. What identity thieves often will do is add a bogus charge of less than a dollar to see what happens. If you find a charge such as that or a big charge you don’t remember having made, immediately contact the credit card company. Most credit cards limit your financial liability to $50 and some cases won’t require you to pay anything. But it’s critical that you report any suspicious activity immediately so that the credit card company can protect you from further damage.

#4: Keep copies of everything

If your identity has been stolen or you have any disputes with a credit bureau be sure to keep copies of all correspondence and all reports. It’s a good idea to use certified mail so that you will get delivery receipts and can prove that you actually sent the letter or letters. When you make a phone call, keep notes as to what was said and what you and the credit bureau or credit card issuer agreed to.

#5: Sign up for credit monitoring … if it’s free

The experts say that it’s probably not worth the money to pay for credit monitoring, especially since you can basically do it yourself (see #2). However, when a company has been hacked it may offer its customers free credit monitoring. If so, sign up for it, as it can’t hurt. The monitoring service can tell you if a new account has been opened in your name but can’t prevent this from happening and many of them fail to check for things such as fraudulent applications for government benefits, bogus cell phone accounts or claims for medical benefits. Some do have a trained staff that will work with you and your credit card companies and some offer a limited amount of insurance.

#6: After a data breach

If you belong to Anthem or some other company where there has been a data breach these scammers might try to use your data to trick you into giving them more of your personal information. They will then use this information to open a new credit card or steal money from one of your accounts. If you get an email asking for information and with links don’t click on them. And if you receive a letter saying that you should call a certain phone number, don’t do this. It’s a ploy.

#7: Consider asking for a full freeze

You can always ask the credit bureaus to put a freeze or fraud alert on your credit files. A freeze will keep anyone from checking your credit in order to open a new account, which is how identity thieves often operate. This will give you very good protection against ID theft but you need to weigh this against the bother of having to notify the credit bureaus to lift the freeze, which can be very time-consuming. Alternately, you could ask the bureaus to put a fraud alert on your accounts. Lenders could then access your credit reports only if they first verify your identity.

#8: Don’t respond

If you receive a call asking for any kind of personal information, just hang up. If you receive emails requesting that kind of information delete them. Reputable companies do not request personal information from you either via phone or email. If you receive any of these requests you can just about bet it’s coming from a scammer.

A sad fact

It’s a sad fact that we all live in an era where much of our information such as our names, addresses, phone numbers, places of employment and Social Security numbers are all out there somewhere in electronic form, which means this information can be stolen by identity thieves. This puts the burden on you to monitor your credit and keep an eye on your credit card statements. However, it’s a burden you need to accept – as it’s much better to be safe than sorry.

13 Things You Need To Know To Know All About Personal Finance

Two smiling girls have coffee timeWhen you hear the term personal finance does it cause you to roll your eyes? Or maybe it just puts you to sleep or causes a headache. We understand that the subject of personal finance is not an exciting one. But it is an important one. We’re sure you know the old saying that insanity is doing the same thing over and over but expecting a different outcome. Personal finance is a bit like that. If you’re having a problem with your finances it’s probably because you’re continuing to do the same things over and over but hoping for different outcomes.

The good news is that it’s easy to learn the important stuff about personal finances and here it is.

#1: Don’t buy lottery tickets

States don’t run lotteries unless they can make a profit. The way they win is by you losing. In many lotteries your odds of winning are one in several million. You would stand a better chance of walking outside and being hit by lightning. Plus, studies have shown that people who win those huge jackpot lotteries end up no happier than those that lost.

#2: Buy high-deductible car and home insurance

While you need to have insurance on your house and car, it can be very expensive. If you buy high-deductible insurance, you’ll save money over the long run but will still be protected against those big-ticket items like having to replace your roof.

#3: Keep it simple

Were sure you’ve heard the old acronym KISS as in Keep It Simple, Stupid. We’re sure you’re not stupid but you do need to keep it simple. When you try to follow complicated financial strategies it just makes things tougher and your life more stressful. All you really need to manage your personal finances successfully is a budget and a savings account. Creating that first budget doesn’t have to be that tough, either. The easiest way to do it is to get out your checking account statements and credit card bills for the past month and total them up. Then compare this to your total earnings for that month. Ideally you should be spending at least 10% less than you earn. If not, you’ll need to go back to those statements and make a list of your spending by categories such as food, dining out, entertainment, utilities and so forth. That will show you roughly where your money’s going. Once you do this you should be able to see where you can make cuts in your spending to get it down to that 10% less than your earnings.

#4: Create an emergency fund

If you’re wondering why it’s important to get your spending down to less than 10% of your earnings it’s so that you can use the difference to create an emergency fund. You must have an emergency fund. Let us repeat that. You must have an emergency fund to shield you from the unexpected. When you don’t have an emergency fund and you run into an unexpected occurrence your only option will be to borrow money, which means creating debt.

#5: Protect yourself from worst-case scenarios

Disasters happen. We’re not talking about needing to put a new transmission in your car or pay for a medical emergency. We’re talking about a real disaster such as losing your job or becoming disabled. You can buy disability insurance either directly or through your job. It’s a relatively inexpensive way to protect yourself. You should also buy term insurance to protect your loved ones in the event you suffer the worst-case scenario possible, which is to die. If you’re in, say, your mid-30s you should be able to buy $100,000 or more in term life insurance for practically pennies a month.

#6: Learn to be content with what you have

We all tend to be on what’s called the “hedonistic treadmill,” which is that no matter how much we earn we want more. Try not to pin your hopes on that next raise or a new high-paying job. The only path to true happiness is by getting off the treadmill and learning to be satisfied with what you have.

cutting a credit card#7: Pay off your credit cards

Credit cards come with the highest interest rates you’ll probably ever pay on a loan. In fact, we’d be surprised if you don’t have at least one credit card with an interest rate of 19% or even higher. When you rollover the balance on a credit card the interest will be compounded meaning that you’ll be paying interest on the interest you accrued the month before and so on and so on. There are essentially two ways to pay off credit card debts. The first is to order your debts from the one with the highest interest rate down to the one with the lowest and then do everything possible to pay off the card with the highest interest rate, as this will save you the most money. The second method is called snowballing your debt. It’s where you list your debts from the one with the lowest balance down to the one with the highest and then do everything possible to pay off the card with the lowest balance. Whichever of these methods you choose be sure to keep making the minimum payments on your other cards.

#8: Never buy a vacation home as an investment

Sharp sales people will tell you that a vacation home is a good investment because of the depreciation you’ll earn. What they won’t tell you is that the cost to finance and maintain that vacation home will outweigh the depreciation you’ll earn. It just makes much better sense financially to rent a vacation home two or three weeks a year rather than buying it.

#9: Don’t spend money trying to impress people

“Luxury” clothes labels and designer brands are designed to overcharge people that are seriously insecure. You’ll save money when you buy non-designer brand clothing and you won’t be seen as nouveau riche. Watch what old-money families do and you’ll see they generally keep it on the down low.

#10: Cut out the waste

Review your bills and you’re very likely to find ones where you’re spending too much. One of the best examples of this is your cell phone bill. You may also be spending too much money on your car or cars. And nothing busts the budget more than dining out regularly.

#11: When you invest put the majority of your money into equities (stocks)

Once you build up an emergency fund equal to three or six months of your living expenses you can begin investing. The best place to put your money into is equities or stocks. They might be the most volatile but they almost always generate the best returns long term of anywhere from 4% to 5% a year above inflation. And don’t panic when your stocks plummet. Hang on to them, as they will come back.

#12: Never gamble on individual stocks

Your Uncle Henry might tell you that you’ll double or triple your money by buying stock in Amalgamated Industries but don’t do it. You could make money this month but then see it all disappear next month. The safest way to invest money in stocks is by buying mutual funds or indexed funds.

#13: Plan to live a long life

The odds are that you will live one third of your life after you turn 65. This means the best strategies are to pay off your mortgage and then save at least 10 times your annual salary by the time you’re ready to retire. Also, avoid taking your Social Security benefits for as long as you can up to when you turn 70. This will maximize your monthly checks.

Could You Answer These 8 Important Questions About Personal Finance?

Video thumbnail for youtube video How To Be A Smart Credit Card UserThere’s the old saying that “you don’t know what you don’t know.” For example, we certainly don’t know what we don’t know about astrophysics except that we don’t know very much. Of course, it’s not terribly important to know a lot about astrophysics unless you’re an astronomer or physicist. But when it comes to personal finance, it’s important to learn what you don’t know as this could have a very important effect on your life. As an example of this, if you have a mortgage do know your interest rate? The website Bankrate.com recently surveyed 1000 customers and found that 35% weren’t completely sure. And if you don’t know your interest rate, how would you know when or if to refinance? There’s a mortgage company where we live advertising 30-year, fixed-rate mortgages at a little above 4%. If your mortgage interest rate is 5% or higher you could save several hundred dollars a month by refinancing. But do you know your mortgage interest rate?

Here are eight other questions about personal finance. The more of them you can answer correctly the smarter the financial moves you can make.

#1: How are your possessions valued by your homeowner’s or renter’s insurance?

There are two ways that insurance companies generally value possessions – either replacement value or cash value. If your policy covers your possessions at cash value it will cost you less but you will be reimbursed only for the item’s depreciated value. You might have paid $1000 for that dining room table and chair set when you purchased it 10 years ago but today the insurance company might value it at just $100. In comparison, if your policy included replacement value you would get whatever it costs you to replace it. As you can see it’s important to know how your policy values possessions and whether or not you might want to make a change.

#2: What are your the terms of your mortgage?

Is your mortgage fixed rate or variable rate? If it’s a variable-rate mortgage do you know when your interest rate will change? Will it change after three years or five years? When it changes do you know what it will be? If you have a variable-rate mortgage that’s likely to take a jump in the next year or two and you plan to stay in the house longer than this, you might want to refinance.

#3: What’s the interest rate are on your credit card(s)

The interest rate on a credit card isn’t important if you pay off your balance every month. If you don’t, it’s important to know the interest rate. Most credit cards have the highest interest rate you’ll pay on any debt. Your cards may also come with very high fees should you be late or miss a payment. If you do carry a balance on a credit card with an interest rate of 19% or higher it might be time to do some comparison shopping and try to find one with a lower interest rate. Or better yet, you might be able to move that debt to one of those 0% interest balance transfer cards.

#4: If you have an emergency fund when would it run out?

We hope you do have an emergency fund because that’s the best way to keep from piling on more debt in the event you lose your job or have some type of emergency. If you do have an emergency fund do you know when it would run out? Do you have enough socked away to cover three months of living expenses? It would be even better if you had enough to cover six months. But the critical thing is to know how much you have saved and how long it would last.

man jumping with a chart behind him#5: What’s your credit score?

Your credit score is that little, three digit number that ranges from a low of 300 to a high of 850. As you might guess, the higher your score the better. Knowing your score is especially critical if you’re about to apply for a mortgage or buy a car. While you may not know your score you can bet that your lender does. If you have a very good score of 750 or higher you’ll not only get the loan you need it will have a very favorable interest rate. Conversely, if you have a low credit score you might not get approved for the loan or if you are it will have a high interest rate. For that matter, if you have a low credit score you’re probably paying more for your homeowner’s and auto insurance. If you don’t know your credit score you can get it free on sites such as CreditKarma.com and CreditSesame.com. Neither of these will be your true FICO score but will be close enough that you will know how potential lenders view you.

#6: What’s the reward rate on your credit cards?

If you use a credit card sensibly and pay off your balance every month do you know your rewards rates? If you don’t know this, you can’t know whether the amount of rewards you earn will offset the fees you pay to have the card. The rewards rate for most cards is one point or cent for every dollar you spend. This means if you have a card with an annual fee of $50 would need to charge $5000 just to break even.

#7: How much are bank fees costing you?

If you’re paying anything at all for your checking account you might want to make a change. The overwhelming majority of checking accounts are free these days. Banks usually charge fees for things like an overdraft, using an out-of-network ATM or maintenance. You can probably avoid having to pay any maintenance fees by having your paycheck direct deposited into your checking account or by making sure you keep a minimum amount in the account. You can avoid overdraft fees by instructing your bank to decline any debit card transaction that would overdraw your account. And finally, if your bank doesn’t have branches near where you work or your home and if it doesn’t reimburse you for using out-of-network ATMs, you might want to find another bank. These fees are just a silly way to spend your hard earned money.

#8: Are you being paid fairly?

Do you know how your salary stacks up in the job market? It’s important to know this. If you’re job hunting and know what other people at your skill level are being paid you will know what salary to request . It can also tell you when it’s time to ask for a raise at your current job. The answer to how your salary stacks up against other people with the same skill level might really surprise you.

The bottom line

If you don’t know the answers to some of these questions you at least now know what you don’t know. You should then get busy and learn the answers, as this would definitely profit you. In fact, in some cases it could even put several hundred dollars a month more in your pocket. And wouldn’t that be nice?

Can’t Keep Up? Here’s 5 Tips For Simplifying Your Financial Life

man balancing a checkbookFeeling overwhelmed by your finances? Staring vacantly at a pile of credit card bills, bank statements, department store bills, and mortgage statements and on and on? We all live busy lives these days and sometimes there are just not enough hours in the day to handle all the financial issues we face. This is especially true if you have a family with children and both you and your spouse work. By the time the work day’s over, the dishwasher’s loaded and the kids in bed, all you probably want to do is crash on the couch and watch a couple of hours of television before heading off to bed.

Take heart. You can simplify your financial life and in just 21 days. Here’s what you need to do.

Cut down on the number of your accounts

We don’t know whether or not you’re average but if you are you have at least four credit cards and maybe more. In fact, if you count up the number of credit cards held by both you and your spouse it could be as many as six or even seven. Then there are your debit cards, investment accounts and savings accounts. It wouldn’t be surprising if you have 15 or even 20 different accounts to deal with every month. When you have this many accounts it just adds complexity to your already complicated financial life. This can also open the door to fraud. There was a survey done in 2012 that found people have an average of 26 different online accounts but only five different passwords. That’s understandable as to how many people do you suppose can remember more than five? But if you mercilessly close accounts you don’t really need or use, you can simplify your life and reduce the odds that you’ll be scammed.

However, when it comes to closing credit cards keep in mind that 30% of your credit score is based on your credit history. When you close credit cards this shrinks your credit history and can have a negative effect on your credit score. You can keep this damage to the minimum by closing the accounts you opened most recently.

For those accounts you keep open, be sure to review your passwords. Research has found that the most popular password is the word password followed by things such as abc123 and 123456. If you have passwords like these you need to create strong new ones. There are sites where it’s easy to do just this. You will probably need to make a list of your new passwords and keep it handy until you have them memorized. But don’t put this list somewhere at work where it would be easy to find.

Cancel (or pretend to cancel) all of your services

Review year recurring expenses by going through all of your spending. Cancel any services you don’t really use. Then pretend you are going to cancel the others by calling up the lender or vendor and suggesting that you are about to cancel. You may be surprised at what they may be willing to do to keep you as a customer. Also, keep an eye out for little things such as that international calling plan you don’t really use. Find 10 tiny expenditures for things you don’t really need and you could save $50 a month or even more. Plus, you will also be simplifying your financial life.

Set aside four or five hours this weekend to rid yourself of everything you don’t really need

If you’re typical you’ve spent the past three, four or five years accumulating a bunch of paperwork you really don’t need. So start with it. Sort everything into two piles – important papers and unimportant papers. Shred the unimportant stuff. Then make two tax files – one for last year and a second for this year. That way when tax time rolls around next year you won’t have to go through a huge pile of documents again.

Be sure to keep everything that would be required to prove or substantiate to the IRS the income you received or any deductions you took. Unfortunately, this means seven years’ worth of tax returns and their supporting documents.

Documents that you could shred include any bank statements that are over a year old, any credit card offers, the convenience checks that you get with your credit card statements, old statements from your broker and your pay stubs — once you’ve double checked your W-2s and paid your taxes.

woman putting a coin in a piggy bankPlan for this year’s expenses

This may also take some time but you will eventually be glad you did it. What this means is sitting down and making a list of the expenses you’ll have this year so you can set aside funds to pay for them. You know that Christmas will roll around and there will be birthday gifts to purchase. Do you want to take a vacation? There will also be car and home repairs although it’s difficult to account for them because you can’t know how much they will be until they occur. However, you know they will crop up. The best way to handle these expenses is to create a new savings account just to cover them. Once you add up all these expenses you will know how much you’ll need to save. Then divide this by 12 or 24 so you can see how much you will have to put aside every month or out of every paycheck in order to cover them.

Automate everything possible

One of the things that bogs down many people is bill paying. It can be tough to remember the dates all your payments are due and how much is each. You can take a lot of the brain damage out of this by using automatic withdrawals to cover your recurring fixed payments. Your bank or credit union probably offers this service and if not your auto and life insurance companies, cell phone providers and credit card companies undoubtedly do. Sit down for a few minutes, go through all of your bills to identify your recurring, fixed expenses and then set up automatic withdrawals to pay them. Note: Be sure to review your automatic withdrawals at least quarterly to see it they are still correct.

You could also set up automatic withdrawals from your checking account to your savings account or accounts. This can make saving virtually painless because it’s harder to miss money you’ve never seen then when you have to consciously move it from one account to another. If you have a standard IRA or Roth IRA you could automate your payments to it through automatic withdrawals.

Focus on that 21-day “sprint”

The secret to getting your finances under control and simplifying your financial life is to do it quickly. As noted above, focus your attention on a short-term, 21-day sprint. Block out these days on your calendar and use them to work through the tasks you’ve just read. You may find it hard to block out those 21 days but if you do you’ll find the other 306 (or so) days of the year will be much easier to handle – at least financially. As far as your job, your spouse and those kids – well, that’s a totally different matter.

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