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More Americans Are Earning More Income – What Now?

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earning more incomeDid you know that majority of Americans are earning more income compared to 5 years ago? This is according to the data revealed by Gallup.com. When asked about their current financial situation, 68% of the respondents said that they are earning more compared to 5 years ago. Only 11% said that they earned the same amount while 20% said they earned less.

This is actually great news for a lot of Americans. The cost of living continues to rise and a higher income would mean more money to spend for everyday living expenses. It would mean more chances of improving the current financial position.

Then again, you need to ask yourself – what happens next? Now that you are earning more income, what should your next steps be?

While the decision to spend your salary is entirely up to you, this should never be done lightly. To maximize the benefits of earning more income, you have to plan how you will use it. You should not be quick to increase your spending. You have to determine what areas in your financial life will benefit the most from this increase in income.

3 ways you can use your extra income wisely

The truth is, there is no right or wrong when it comes to spending your salary. As long as the spending stays within your limit and not into debt, then it does not matter where you will put the extra money. But if you want to get tips on how you can be wise about any raise in your salary, here are three smart financial moves for your extra income.

Build up your emergency fund.

There is no question about it – you cannot live without an emergency fund. If you want your finances to be strong and secure, this is a must. This is the money that you will use in case of an unexpected expense. That means an expense that you did not plan and thus is not included in your budget. This is your reserve fund for emergency expenses like a busted transmission or a trip to the ER.

Most of the time, this is what puts people in the red in their finances. But if you are prepared for unexpected expenses, you do not have to worry about the future. You know that you have the money to spend to fix your car or your house. You do not have to think twice about getting medical help because you know that you have put aside some money to help you pay for it. As your emergency fund grows, the more you feel secure with the knowledge that you have the ability to face an unexpected financial problem which might come your way. These do not come announced and more often than not, catch people off-guard.

Pay off debt.

The second way that you can be smart about earning more income is to use to pay off your debt. To be specific – your high-interest debts. According to the data from Fool.com, the average household in America owes $90,000 in debt. This includes mortgages, credit cards, car loans, student loans, etc. Take note that this amount considers all households – including those who do not have any debt. If you only include the American households who are in debt, the average goes up to $130,000. The data also revealed that this amount of debt costs the average household $6,600 in interest. That is the amount of money that you pay for using credit.

Instead of using it to grow your finances, it only makes your creditors and lenders richer. This is why any extra income that you will make should go to your debt payments. You will not only get out of debt faster, you can also save a lot of money in terms of interest.

Invest your money.

Finally, you should seriously think about investing your money. Make your income work hard for you. This is possible through investments. Learn about the power of compound interest. As you put your money in any type of investment, you are forcing it to earn interest which you can use to increase your net worth. Most people seem to understand this concept as CNBC.com shares that about 90% of consumers would intentionally save or invest a part of their money. At least, this is what they plan to do if they were to get their hands on windfall money. That is comforting to know because it shows that American consumers are smarter when it comes to their finances.

What not to do with a higher income

If there is a list of what you should do after earning more income, you can bet that there is a list of what you should not do. Here are two things that you should think twice before you do.

Immediate lifestyle upgrade.

Lifestyle inflation is one of the more common financial pitfalls consumers tend to make as soon as they start earning more income. Let us be clear: there is nothing wrong about wanting to upgrade your lifestyle. After all, this is the reason why we are working so hard every day. However, you need to be cautious about it. Do not immediately buy a new house thinking that you can afford the monthly mortgage of a bigger property. You should not be quick to buy a new car – especially if you will borrow money to buy it. You need to consider carefully the expenses that would benefit from your income increase before you actually proceed with it.

Buying more “stuff”.

You should also be cautious of buying more items. The truth is, it is okay to give yourself a reward. If you think that you deserve that new pair of shoes or a new designer bag – then go ahead. But do not make a habit out of it. Otherwise, you might end up overspending. Before you buy anything, think about what that product would mean to you after a year or so. If you want a reward, a trip for the family or a day at the spa is probably more preferable than just accumulating stuff. This is especially true if you only want to buy these things so you can appear more affluent. You do not have to prove anything to anyone. Make smarter choices about what you will purchase after earning more income.

These two are not really that bad but they have to be done in moderation. And before you think about them, make sure you consider your emergency fund, debts, and investment options first. Once the first three are met, then you can consider a modest lifestyle upgrade or a well-deserved reward.

Common questions about earning income

Question: How do I start earning income online?

Answer: There are various options to earn online – it really depends on what you can do. Some people earn extra money by setting up online shops. Other people earn through freelancing. Figure out what you want to first before you decide so you can narrow your options.

Question: How do I start earning income without a job?

Answer: It helps to look at your strengths and go from there. If you are good at baking, you can bake batches of cookies or cakes to sell. If you are good at arts and crafts, you can create products to sell online. In case you lose your job and you need to earn money, look into your habits. It can be a simple gardening job or a babysitting job.

Question: What are my options to earning income at home?

Answer: You can choose to earn through online jobs or an online store. You can also choose to sell products that you can create at home (e.g. baking or arts and crafts). It is possible for you to set up a business from your own house.

Question: How can I start earning income from a hobby?

Answer: First of all, you need to check if there is a market for any product or service that will come out of your hobby. Once there is a market, you need to figure out what would make them want to avail of what you offer. Then you can package your hobby to increase the chances of profiting from it.

Question: Is it possible to earn income during retirement?

Answer: Yes it is. There are special jobs for seniors that take into consideration your age and physical abilities. There are also companies who can hire you for consultation purposes – if you wish to continue working.

Do you qualify for debt consolidation?

Think You Own Your Paycheck? Better Think Again

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business man looking tiredYou drag yourself out of bed five days a week, brew up some coffee, get dressed and then hurry down to your job where you spend eight hours or even more. Then, at the end of the day, you go home feeling totally stressed out – all in pursuit of that glorious paycheck.

But do you really own your paycheck?

That would be a no. In fact, you may own only a very small percentage of that check.

How can that be?

If you earn $90,000 a year

For the sake of an example let’s suppose you earn $90,000 a year. Let’s look at how much of that $90,000 your Uncle Sam takes.

First, there’s that nasty income tax. It’s based on the size of your earnings. If you don’t earn much, you don’t pay much. But in this case – at $90,000 a year – you will pay $18,000 in income tax. That’s 20% of your money. So now you’re down to 80%.

Your state will also want its share. If you live in Michigan, you’ll be taxed at the rate of 4.25%. The tax will be 3.07% if you live in Pennsylvania and 5.0% in Utah. So, if you live in Michigan it will cost your another $3825 in state income tax.

You will also pay a Social Security tax. While you may not ever get this money back it will cost you 6.2% out of every paycheck or $5580 a year.

But the government still hasn’t quit taking money out of your pocket because there’s the Medicare tax. This is an easier one to swallow because it helps provide medical care for the elderly. But whether you think this is good or not, it will nick you $1305 a year.

What you now have left

If you haven’t been adding up these taxes as we go, the government has now taken a total of $28,710 out of that hard-earned $90,000. So instead of $90,000, you have $61,290. While that may not seem too bad, there’s more to come because of the decisions you’ve made.

Your bad choices

It may be a bit harsh to say that you’ve made some bad or, even worse, stupid choices. But you probably have. And this will mean that $61,290 still isn’t yours. We live in a sort of “have it now” society and you, like most of us, have undoubtedly bought things you couldn’t really afford with the idea that you would pay back the money over time. To put this another way, you’ve willingly agreed to make payments on something you wanted to experience today but couldn’t pay for. The number one example of this is auto loans. Very few of us actually save enough money to pay cash for an automobile. Since the average auto loan today in the US is $30,000 this would mean a monthly payment of $503 or $6036 a year. Was it necessary to buy an automobile this expensive? Probably not. If you saved enough to put $3000 down on a new car you actually would have enough to buy a decent used car that could last you many years. But you didn’t so instead of you having that $6036, your bank does.

money and graduation cap in chainsStudent loans?

Last May’s graduates owed more than $36,000 in student loans. Since you’ve been out of school a few years we’ll assume that you don’t owe anything close to this. You could have had a plan that would have allowed you to graduate without owing anything in student loan debt but you didn’t. The good news here is that some experts consider student loan debt to be “good debt” because the money helped you get a better career, which meant earning more money. However, that said you probably have yearly payments of around $4000.

Don’t forget credit cards

If you’re typical you don’t have an emergency fund. This means that if you have to pay for an emergency you probably do it with, yes you guessed it, a credit card. In fact, thanks to not planning adequately the typical American has $4750 in credit card debt. That translates into $120 a month just in the minimum payments. Of course, if you make just the minimum payments you’ll owe that credit card issuer $1440 a year for many, many months. In fact, it could actually take you 25 years to pay off that $4750.

Where you now stand

After the government took its share of your paycheck you had $61,290 left. But now, after your $11, 476 of bad decisions and lack of planning there’s just $49,814 left. And that’s not the end of it. You now have to pay for things like shelter, food, clothing and utilities.

Your mortgage

If you earn $90,000 a year, it’s almost certain that you have a mortgage. Houses in the US get bigger every year and so do the mortgages. According to The Motley Fool website people age 35 to 44 have an average mortgage payment of $1073 per month. That’s $12,876 a year. So now you’re down to $36,968 and were still not through.

Food and clothing

Let’s take food first. According to USA Today, it takes, on the average, $800 a month to feed a family of four, which is another $9600 out of your paycheck each year. The Bureau of Labor Statistics has found that $1700 a year is spent on clothing by the average family, which isn’t too bad. But subtracting the cost of food and clothing means another $11,300 a year you don’t really own out of your paycheck.

Utilities

If you live in a part of the country where there’s both summer and winter your utility bills should be pretty constant throughout the year. This will be somewhere around $250 a month or another $3000 subtracted from your hard-earned paycheck.

If you throw your smart phone bill into the category of utilities, it’s probably costing you an average of around $150 a month – not counting the cost of the phones – or roughly $2000 a year. And if you’re an iPhone user you’re probably paying more as revealed in this short video.


Then there’s cable and Internet. Again, if your family is typical these two “luxuries” are probably costing you around $200 a month or $2400 a year unless, of course, you choose to cut the cable.

Transportation

Since we’ve assume you have a car we can’t leave out the cost of fuel and automobile insurance. How much is gas costing you? The US average is approximately $2200, plus there’s the cost of insurance, which averages $815 per year. If you add this to that $6036 your auto loan is costing you then wow! That car just by itself is taking a hefty chunk out of your paycheck.

So how much of that paycheck is really yours?

When you add up all of this, what you have left – or how much you actually own of your paycheck is a whopping $15,233. And, of course, this doesn’t include saving for retirement. What this boils down to is that, sadly enough, the average American really owns about 17% of their paycheck.

Do you qualify for debt consolidation?

5 Mistakes That Can Compromise Your Financial Health

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financial health dollars and stethoscopeThere are many reasons why you need to be careful of your financial health. This is the thing that will help you build a stable future for you and your family. Think of it as your life’s health. Just like your physical well-being, if your financial well-being is not okay, you won’t be able to maximize the opportunities that you will encounter in life. Regardless of your goals and what you want to happen in your life, a great financial standing will allow you to reach your targets. As you complete one target after the other, you are one step closer to your dream life.

Being financially healthy is not something that you only do once. You have to continually work hard to keep your finances healthy. You cannot exhibit good financial habits while you are young and then be irresponsible with it once  you have gained the ideal financial health. You need to continue making the right financial choices all the days of your life. This is why you need to be careful of your lifestyle upgrades because it can compromise the health of your personal finances.

Apart from helping you live your dream life, a great financial condition will also keep you from going through the dreaded financial stress. This is when you are filled with constant worries and feelings of anxiety because you know that your finances are not in good shape. According to a study published on PWC.com, more than half of their respondents admitted that they feel a certain level of financial stress. 45% said that the level of stress increased in the past year. When you feel anxious or stressed about your money, that is an indication that you do not have a good financial health. You need to get serious when it comes to making your financial situation better.

5 mistakes that can ruin your financial well-being

The key to improving your financial health is to practice the right habits that will make it better. But sometimes, it is not always what you do – but what you stop doing. Given that thought, here are 5 mistakes that you may be doing that is costing you a healthy financial situation.

Failing to follow a budget plan. A budget is one of the most important tools that you can use to help you improve your finances. Sometimes, you cannot move forward if you do not know where you are. A budget plan will allow you to identify how much you are earning and more importantly, where each money goes. There are certain money drains that are wasting your finances. Unless you identify these, you might continue with these unnecessary expenses and that can slowly compromise your financial. It is also important to note that a budget is only as good as your ability to follow it. Even if you have just created a perfect budget, if you cannot implement it in your life, it will be for nothing. So make sure you do not just create a budget – you have to commit to following it no matter what.

Delaying your retirement savings. Another mistake that you may be doing is delaying your retirement savings. According to the data from CNBC.com, even if Millennials only have 5% deferrals, it can help them get $1 million saved by the time they retire at the age of 65. You see, it does not take much to save for retirement – as long as you start early. The longer you wait, the higher the amount that you need to contribute to reaching your ideal retirement fund target.

Forgetting about your emergency fund. The third mistake that can cost you a good financial health is a lack of emergency fund. This is one of the best ways to secure your finances. Sometimes, an emergency fund is just what you need to keep yourself from the burden of debt. There are people who make all the right choices about their finances but because of an unexpected situation, they end up being forced to borrow money to get out of a tight fix.

Borrowing a home loan that costs 30% of your income. The fourth mistake that can threaten your finances is getting a mortgage loan that takes30% or more of your income. This will make it difficult for you to meet your home loan payments. Either that or it can compromise the other saving goals that you have. Failing to pay your home loan is usually not an option because you will end up losing the property in the end.

Paying the minimum of your credit card balance. Finally, choosing to pay only the minimum of your credit card balance will keep your financial health in a “sickly” position. This will keep you in debt for a very long time and will cost you a lot of money in terms of interest rates. If you pay more than the minimum, you can save a lot of money in the long run and you can be free from credit card debt quite fast.

How to improve the condition of your personal finances

In case your financial health is currently in bad shape, there are ways for you to make it better. Here are tips that will help you make it better.

  • Be aware of your current financial situation. Before you can make something better, it is important for you to know your current financial situation first. It is important for you to create a budget that will allow you to see both your income and expenses. You need to determine if your money is going to the right expenses that will help you improve your financial position.
  • Set financial goals. This is the best way for you to map out the road towards financial improvement. According to the data published in GlobeNewsWire.com, retirement is the main financial goal of most respondents (35%). Budgeting and debt follow. Most of these were the financial goals of those earning $75,000 and more. But even if you earn a low-income, it is possible for you to start saving for retirement. Start low but be consistent about it. Soon you have amassed enough to help you improve your financial situation.
  • Know your lifestyle needs. Another thing that you need to look into is your lifestyle needs. If you want to be wise with your financial decisions, you need to have a clear understanding of what your chosen lifestyle prefers. Not only that, you need to keep your expenses within what you need. This will keep you from getting a lifestyle upgrade unnecessarily. Some of the modest millionaires around us were able to amass a fortune because they maintained simple lives. As long as you can meet your lifestyle needs, that should be enough.
  • Practice smart spending. Focusing on your spending is also one thing that will help you improve your financial health. There are some things that we spend too much money on but we do not have to. Think about your expenses because it says a lot about how you can maintain a healthy financial life.
  • Make your money work for you. Finally, you need to invest your money. This is the best way for you to make your money work for you while you focus on something else. Do not let your cash sit idly in a savings account. Invest it and earn from the interest rate.

Here is a video that gives tips on how you can improve your finances now. It provides specific financial tasks that you need to do each day of the week – from Monday to Friday.

Common questions about financial health

Question: What does financial health mean?

Answer: This is basically the measurement of your financial situation. It tells you if you are in a good or bad financial position.

Question: What is considered a good financial health?

Answer: You can say that you have a good financial health if you have enough savings, you are on track with your financial goals, and you are in full control of your credit obligations. Not having debt is not exactly a sign so a healthy financial situation. If anything, it actually keeps you from a great financial situation. If you have enough extra cash to help you pay for extra expenses, that is also an indication of a good financial health.

Question: What can weaken your financial health?

Answer: While the presence of debt does not necessarily mean you are in a bad financial shape, it can compromise it especially when you are irresponsible about your borrowing. Be careful of the small financial decisions you make. Sometimes, these are the most destructive.

Question: Why is financial health important?

Answer: This is important because it will tell you if you need to improve your finances or not. It will help you identify the problem areas as you diagnose your financial position. It is one way for you to keep yourself on track when it comes to your financial goals.

Question: How can I evaluate my financial health?

Answer: There are three areas you need to look into. The first is your savings. If you are able to save consistently, that is a good sign. The second is your debt. If you have debt but you can manage it well and keep it below 30% of your credit limit, you are also in good financial shape. Finally, if all your financial goals are being addressed, that points you towards a healthier financial position.

Do you qualify for debt consolidation?

Six Unorthodox Ways to Pay Off Debt. Number One Will Surprise You

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pay off debt textWe recently saw a news item about a son that but failed to report his father’s death and continued to collect his social security benefits for a year to pay off his debt. And that’s not an isolated case. The sad fact is that many people cheat on Social Security. This is especially true of disability benefits.

If you want to get out of debt, there are better ways then claiming a dead person’s social security benefits. Here are six out-of-the ordinary options for people that have already cut their spending to the bone or simply can’t work a second job.

Redeem credit card rewards

This option won’t get you completely out of debt but it could help you chip away at a credit card debt. If you got into debt because of the way you used your credit cards, here’s a better way to use them. It actually involves spending more. You just put all of your necessities such as food, transportation, housing and insurance premiums on a rewards credit card. This will yield points that you may be able to redeem as a statement credit. For example, if you were to put $500 of necessities on a rewards card that results in 500 points, you might be able to use them to pay down your balance. However, you should use this option to reduce your debt only if you pay off all your new charges each month. If not, you’ll simply be adding on to your balance and digging yourself into a deeper financial hole. The biggest problem for most people with credit cards is that they just lead to bigger and more impulse purchases. It’s just too easy to pull out that little piece of plastic to buy something even when you know you can’t really afford it.

Shop then sell

Shopping might have been what got you into trouble with debt in the first place but it could actually help you dig yourself out. The idea here is to buy clearance items or stuff in garage sales locally and then sell them online for a profit. There are also websites such as TheSellingFamily.com and FBAFreedom.com that explains how you could make a full-time income using the Amazon Fulfillment service. The downside to the buying then selling option is that you will need to make an upfront investment to purchase the stuff that you hope to sell. That could be risky. It’s tough to stand out on eBay or Amazon. Many people found they were unable to sell their items for a profit and ended up increasing their debt instead of solving it.

Ask to borrow money from a family member

This is also risky but for a different reason. If you borrow money from a family member and don’t repay it, you could cause a big rift in the family. But if you expect to get cash as a gift – for your birthday or Christmas – then you could ask for an advance on it – which could be somewhat uncomfortable. Also, if you ask for a loan from a family member and are turned down this could really strain things in your family. And if you are able to get a loan there may be a downside to it. Since you haven’t made any sacrifices to pay off that debt you could lose track of things and quickly pile up new bills.

Enlist in the sharing economy

Enlisting in the sharing economy could be a great option for people who can’t find time for a second job. You could drive for Uber, do pet sitting through Dog Vacay or do odd jobs through Task Rabbit. These are all ways to earn some extra money without having to make a significant time commitment. One person was able to pay off a significant amount of his debt by using Airbnb to rent out a room in his home to flight attendants that have stopovers between flights in his town.

woman looking at a lot of billsRenegotiate your balances

While this may not work for everyone it is possible to renegotiate credit card balances and interest rates. For example, if you have credit cards at 19% interest or higher you could likely negotiate that down to 12% or at least 15%. This would result in lower credit card payments, which should help you get rid of that debt much quicker. You might also be able to negotiate a settlement for less than the balances on your credit cards by offering to make lump sum payments. You should shoot for probably 40% of your balances. The credit card issuers are often willing to settle a debt for a lump sum just to close out an account that’s overdue or to get the money immediately instead of having to wait for months. Of course, there’s a catch here, which is that your accounts must be pretty delinquent creditors will be willing to settle. In addition, your credit score will take a serious hit if you fail to pay your bills own time.

Borrow from your 401(k) to pay off debt

You could borrow from your 401(k) although there are some rules and regulations you would need to be aware of. And, of course, you will have to pay interest on the money but at least you’ll be paying yourself instead of a credit card company. Financial advisors will tell you this should be your very last resort such as if you’re facing medical liens, bankruptcy or some other financial emergency. The downside to this is that you will have a less comfortable retirement if you fail to repay the money as you would miss out on the benefits of compounding interest. Also, your entire balance would become due immediately if you leave your job before repaying the money. And if you don’t repay the money you would pay income tax on it as well as a 15% early withdrawal penalty if you’re younger than age 59 1/2.

Here’s a video from Fidelity that addresses the question of whether you should borrow from your 401(k).

Frequently Asked Questions about debt

Q. What debt does bankruptcy eliminate?

A. A chapter 7 bankruptcy, which is the type of bankruptcy most people choose, will eliminate most unsecured debts. This includes credit card debts, personal loans, personal lines of credit, payday loans and so forth. However, bankruptcy will not discharge secured debts such as your mortgage and auto loan nor will it discharge student loan debts, alimony, spousal support, family support and unpaid taxes.

Q. What debt can be consolidated?

A. Virtually all unsecured debts can be consolidated. This includes student loan debts and unpaid income taxes. As a general rule, you cannot consolidate secured debts such as the aforementioned mortgage and auto loans nor can you consolidate debts such as family support, child support and spousal support.

Q. Who regulates debt management companies?

A. Debt management and debt settlement companies are managed by the Federal Trade Commission (FTC). As an example of how this works, the FTC cracked down on the fraudulent debt settlement companies that had sprung up after the Great Recession by making it illegal for them to charge upfront fees.

Q. What debt to pay down first?

A. There are two schools of thought on this. The first is the Avalanche method where you first pay down the debt with the highest interest rate. The thinking behind this is that it will save you the most money. Alternately, there is the Snowball method where you would first pay off the debt with the lowest balance. The idea here is that you would pay it off fairly quickly, which would give you momentum to begin paying down the debt with the second lowest balance and so on.

Q. What debt-to-income ratio is good?

A. Is easy to determine your debt-to-income ratio. All that’s required is to divide your total monthly payments into your gross monthly income. As an example of this if your gross monthly income was $4000 and your total monthly payments added up to $2000, your debt-to-income ratio would be 50%, which is way too high. A good debt to income ratio is 30% or less.

Q. Are debt reduction programs legitimate?

A. These programs are legitimate so long as they adhere to Federal Trade Commission regulations. The legitimate ones charge no upfront fees and have at least an A rating with the Better Business Bureau. They will also have a number of positive reviews online from actual customers.

Q. Who buys debt?

A. The most common debt buyers are attorneys and debt collection agencies. The attorneys that buy debt are those that specialize in debt collection so there is very little difference between them and debt collection agencies. Both will hassle you until you pay up and sue you if you don’t.

Do you qualify for debt consolidation?

8 Times When You Might Want to Talk with a Financial Advisor

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couple consulting a debt professionalDo you need a financial advisor? The answer to this question has become somewhat controversial. The problem is that many of these advisors are compensated for the financial packages they recommend to their clients. The biggest example of this is annuities. If a financial advisor suggests a client buy an annuity, is it because he or she honestly believes in the product or is it because the annuity company pays a commission that could be as much as 20%?

One way to make sure you’re getting honest advice from a financial advisor is to choose one that’s a member of the National Association of Personal Financial Advisors as these people are fee based. This means they’re more likely to provide unbiased recommendations.

But beyond this the question remains – do you really need a financial advisor? The answer is, well, sometimes. And here are the eight times when you might want to talk with one.

You’re having a major change in your life

Are you getting married? Or maybe you’re getting ready to retire. Or are you having a child? These are all major changes when you might want a professional opinion. There will be financial adjustments you’ll need to make to accommodate this new phase of your life and a financial advisor could help you get through them.

You’re thinking about retirement

According to the 2016 American Investor Report the number one reason investors turn to professional advisors is retirement. Do you know when you want to retire? Do you know how much money you’ll need to have for a happy retirement? Are you not sure you’ll ever be able to retire? A good financial advisor will be able to answer these questions as well as create strategies that will assure you have a retirement that’s financially secure .

You haven’t planned your legacy

What will happen to your money when you’re gone or worse yet, if you were to suddenly pass away? A financial advisor can’t help you draw up a will or create the other important documents you’ll need such as a medical power of attorney that will make sure things will be treated the way you want them treated. But he or she can point you in the right direction so you will know how your money will be handled when you’re gone.

College student catching money in the airYou’ve just received a sudden windfall

Did a relative die and leave you money you hadn’t expected? Did you just win a lottery prize or get a really big tax refund? This is where a professional financial advisor could help you determine what would be your best investment and savings strategies. For example, your best option might be to pay off your debt or put the money in an emergency fund or invest it in an indexed fund. A financial advisor will be able to help you determine how best to use that windfall.

Your aging parents need help

As your parents age they may need expensive financial care, assisted living or costly in-home care. A financial advisor will be able to help you overcome the challenges of caring for your parents. For example, he or she should be able to help you decide where to move your parents once they can no longer care for themselves and determine how best to pay for the care they will require.

You’ve hit $250,000

Some financial experts say that once you’ve squirreled away a quarter of a million dollars you should talk with a financial advisor. This is considered to be a sort of a benchmark where you might want to engage the services of a financial advisor on an ongoing basis. In other words, once you reach a quarter of a million dollars, things start to become more complicated. You will have more investment options, some of which may involve more risk than others. A financial advisor would help you sort things out and decide where and how much to invest given your financial goals and tolerance for risk.

You just got your first job

How exciting! You’ve gotten your first job. Believe it or not, you don’t need for that job to have a six-figure salary to talk with a financial advisor. While some of them do require you to have a certain amount of money there are also ones that are fee-based – where you’d pay an hourly fee for a one-time planning session — that would ensure you get off on the right foot and begin contributing to a retirement fund. In addition, you’re bound to have questions about things like your company’s 401(k) and whether you need a traditional IRA or Roth IRA and a financial advisor will be able to answer them.

You’ve determined a financial goal you want to achieve

Do you have a financial goal such as retiring early and traveling the world or funding your children’s’ college education? A financial advisor could help you achieve your goal no matter what it might be. One that specializes in “holistic” financial planning could be an especially good choice as they focus on helping clients achieve financial goals through very careful financial planning.

Choosing a financial advisor

If you’ve gotten a windfall or your first job or run into any of the other instances you’ve just read and would like to talk with a financial advisor the next question is how to choose one.

According to the Wall Street Journal you need to find one that’s a Certified Financial Planner (CFP). This is because CFPs are regulated and licensed. Plus, they are required to take classes on different areas of financial planning to make sure they’re up-to-date on security laws and new investment vehicles.

Second, it’s best to choose one whose services are fee-based and not commission-based. Financial advisors that charge by the hour can be more objective as they have no incentive to steer you to some specific financial product.

Finally, be sure to read the code of ethics that the advisor must adhere to. It’s important to find the word “fiduciary” and other language in the code that means he or she must, first and foremost, look out for your best interests.

Beyond these tips, here’s a video from Barron’s and the Wall Street Journal with the three questions you must ask a financial advisor.

Frequently Asked Questions about financial advisors

Q. Who can be a financial advisor?

A. Sadly enough just about anyone can be a financial advisor. All that’s about necessary to be a be one is to rent an office, hang out a sign and then find clients. Of course, good financial advisors have experience, a background in finance and belong to a well-respected organization such as the National Association of Personal Financial Advisors.

Q. Who pays a financial advisor?

A. Some financial advisors work on a commission only basis. This means they’re paid based on the financial services they sell such as insurance products, investments, real estate or loans. Examples of this are financial advisors associated with companies like State Farm, American Family, and Edward Jones. Others are fee based or are compensated based on a combination of commissions and fees.

Q. What is a financial advisor job description?

A. According to Edward Jones the job of a financial advisor is to deliver to their clients personalized investment solutions and to help them achieve their long-term financial goals. In addition, again according to Edward Jones, the job of a financial advisor is to develop relationships with their clients.

Q. Where to find a financial advisor?

A. The easiest way to find a financial advisor is by asking friends that use them as they are in the best position to help you choose one. You could also go online to such sites as cfp.wiseradvisor.com or www.napfa.org where you will find links you could click to locate a financial advisor near you.

Q, What are financial advisor fees?

A. Financial advisor fees vary greatly. If you choose a fee-only advisor, you will likely be charged anywhere from $150 to $250 an hour depending on where you live and the scope of your project. Financial advisors that are asset based usually charge around about 1% of the assets they’re managing.

Q. Who should use a financial advisor?

A. You probably don’t need to have a financial advisor on a regular basis – unless you’ve hit the quarter million mark as described above. If not, you may need to talk with a financial advisor only at certain times as explained above – a major change in your life, a windfall, because your aging parents need help and so forth.

Do you qualify for debt consolidation?

Tips When You Are Itching To Have A Lifestyle Upgrade

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lifestyle upgradeIf you are itching to get a lifestyle upgrade right after you get some extra money – you are just like 28% of Americans. In an article published in CNBC.com, it is revealed that 28% of Americans will buy a new home if they chance upon millions. Some will buy their loved ones some fun things (17%) while others will buy a new car (8%). It is comforting to know that 86% of the respondents said they will invest or save the money. But at least 3 out of 10 respondents of the TD Ameritrade survey revealed that they would fund a lifestyle upgrade.

Don’t get us wrong – a lifestyle inflation is not so bad. Most of the time, we need to reward ourselves for all the hard work that we have accomplished. But then again, that does not give us the excuse to splurge. We have to find a balance so that we will not feel too deprived and yet we can make a practical decision about how we will spend the unexpected extra money that we have.

Smart reasons to upgrade your living conditions

Sometimes, people react to windfall money in extreme ways. On one side, they feel guilty if they do not save or invest it. On the other, they are quick to give themselves a lifestyle upgrade so they can show the world that they are financially successful.

You have to be careful about where you want to go when you receive some extra cash. As we said, a lifestyle inflation is not so bad – as long as you do it for the right reasons.

Here are the smart reasons that can justify a lifestyle upgrade.

Because there are more people in the family.

It costs a lot of money to raise a child in the US. According to the data published on WSJ.com, it will cost you $245,340 to raise a child from birth until they reach the age of 18. Take note that the calculations used were based on the living costs in 2013. We all know how quickly the price index rises over the years. If you and your spouse are contemplating on adding more children or you already have them, a lifestyle improvement is in order. However, you need to choose where you will implement these upgrades. For instance, if you can concentrate your resources on buying a bigger house to accommodate the new members of your family.

Because it addresses a need.

Another reason that will make a lifestyle upgrade okay is when there is a need for it. For instance, buying a new car may seem like an unnecessary upgrade. But if your old car is not fuel-efficient or it costs you a lot of money when it comes to repairs and maintenance, then buying a new vehicle makes sense. It is not a waste of your resources.

Because it can help increase your income.

If the lifestyle upgrade can help you increase your income, then go ahead with it. Sometimes, a new wardrobe for a new job will help you feel more confident and will give off a respectful vibe in you. When you are starting your own business, you may need to invest in a new gadget or laptop to make you look more professional. Not only that, these additions can help you be more productive. Do not feel guilty about buying new devices – if they can help you with your work, then it is not a luxurious expense.

Because it enriches the quality of your life.

Finally, if the lifestyle upgrade will help boost the standard of living of your family, then go ahead. As long as it will not put you in debt or make you struggle to make ends meet, then do the upgrade. Renovate your house to add a new wing that will serve as your home office. Or if you need a second car to help the wife go around with the kids while the husband brings the other vehicle to work, then make the purchase.

The only time that a lifestyle upgrade is not okay is when you are merely doing it for appearance’s sake. If it is meant to keep up with your colleagues or neighbors, then it is not worth the expense.

Sometimes, we have this mindset that wherein we look at what is outside before we decide on what we want to change inside. That is not the right way to do it. In a video from TIME, author Carl Richards explain how we should go about making financial decisions.

According to the video, what most people do is to read about financial advice and then decide what they want to do. If that is what you do, then you have it all wrong. What you have to do is to understand what you want out of life – what you want to achieve through your finances. Once that is clear, you can now go through all the advice you read. You can choose one that you can follow because it fits your financial plans.

Before you take that first step towards a lifestyle upgrade, you have to know your financial goals first. Do not compare it with others. Do not think about what others will say about it. Be concerned only with what you want and need in your life. Only then will you know if a lifestyle upgrade is really needed at this point in your life.

Signs that you can upgrade your lifestyle

In case you want further confirmation that an upgrade is the right thing to do, here are signs that you can give your standard of living a boost.

  • If you have enough emergency funds. According to the survey done by Bankrate.com, almost half of Americans cannot cover 3 months worth of expenses. In fact, 28% of their respondents admitted that they do not have any emergency savings. Unless you have this money, you do not have the right to get an upgrade on anything. Fund your emergency savings first so you can secure your financial future.
  • If you are on track with your saving goals. Another sign that you can proceed with the lifestyle upgrade is when you are on track with your saving goals. You can splurge as long as your retirement savings and investments are intact.
  • If you got an increase in your income. If you have more money coming in and it is quite stable and secure, then you can afford to rent a bigger house or pay for a bigger mortgage. Just make sure that you have built your savings first and your emergency fund before you spend on other things.
  • If you just paid off your debts. Finally, if you just paid off your debts, then it is a great time to splurge on yourself as a reward. Buy some nice things for yourself – but do not overdo it! Some Americans feel like debt elimination is impossible so if you managed to achieve this feat, then you deserve a reward.

Common questions about a lifestyle upgrade

Question: What is a lifestyle upgrade?

Answer: This is when you make permanent improvements in your way of living. This is usually manifested in how you physically live your life.

Question: When is a lifestyle upgrade okay?

Answer: A lifestyle upgrade is only okay if you have no debt (or minimal debt), have saving goals on track and an emergency fund. Unless all three are met, you need to put that lifestyle upgrade on hold.

Question: When is a lifestyle upgrade not okay?

Answer: It is not okay to upgrade your lifestyle if you are only doing it to impress other people. If you do not really need it, then do not make the expense.

Question: What makes a lifestyle upgrade dangerous?

Answer: If the lifestyle upgrade will lead you to debt or live from paycheck to paycheck, then that is when it becomes dangerous to your financial stability. You might end up amassing a huge amount of debt because you wanted to upgrade your lifestyle unnecessarily.

Question: How should you implement a lifestyle upgrade?

Answer: Ideally, you want to do it gradually. And continue living below your means. Do not live within it – but below. This will ensure that you have some extra cash that is always handy for emergency expenses.

Do you qualify for debt consolidation?

Just Paid Off a Debt? Here’s 7 Financial Steps You Could Take Next

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Husband and wife happily talking to another personPaying off a debt just has to be one of the best feelings in life. That debt has been hanging over you for maybe two years or longer and now it’s gone. You may feel as if a large weight had been lifted off your shoulders or maybe you just have a nice feeling of relief that whew! I don’t have to make that payment anymore. This can be an especially great feeling if the debt you paid off was a big one such as a car loan. But even if it was a smaller debt it can still feel terrific to get rid of it.

But now that you have that debt paid off, what comes next? Here are seven financial steps you could now take. Of course, you will not be able to take all of them at once but you should at least consider putting them on your to-do list.

1. Give yourself a treat

Since you won’t have a payment to make on that debt next month spend the money on something to reward yourself. You might have a special meal out or buy something you’d been putting off for months like a new desk chair, a weekend trip or a gas grill – depending, of course, on the size of that payment you no longer have to make. The important thing is to choose something fun that will be a nice reward for having paid off that debt.

2. Establish your priorities

Once you’ve rewarded yourself now would be a good time to establish your financial priorities such as how much you can now save each month or what debt to pay off next. The idea here is to determine what would be your next highest priority. Some experts would advise you to put the extra money you now have into your retirement savings account while others would counsel you to pay off your debts first. There’s no definitive answer to this. It will probably depend on what other debts you have to pay off and how much you’ve been able to put into your retirement savings account each month. Of course, if you’ve not been able to save anything then the answer would be clear — use the money to fund either a traditional or Roth IRA.

3. Boost your emergency fund

Of course, this assumes you have an emergency fund. If not, you definitely need to start one. If you have one, it’s likely that repaying your debt came at the expense of your emergency savings account. You should put one-third of that payment you’re no longer making into your fund every month until you’ve fully funded that account, which means having the equivalent of six months of your living expenses in your emergency account. Most experts say you should put the other two-thirds of that payment into funding your long-term goals.

If you’re like many Americans and are having a hard time funding an emergency fund, here’s a video with 11 suggestions for doing things to raise money for your fund.

https://www.youtube.com/watch?v=mlQgoch-5A

4. Reroute that cash into your long-term savings

If you have a 401(k) through your employer, you might use that cash to boost your contributions. This year the IRS says if you are under 50 you can contribute up to $18,000 or if you’ve over 50 up to $24,000. If you have a traditional IRA you can contribute $5500 until you reach the age of 50, after which you can contribute up to $6500. The amount you could contribute to a Roth IRA is more complicated and you will need to go to this page to determine what yours would be.

woman putting coins in a piggy bank5. Save the money for a college education

Do you have a child or grandchild headed for college? Then you should consider putting that extra money into a 529 account. This plan is what’s called a tax favored savings account and can be a very smart way to pay for a college education. These plans vary from state to state so you will need to go to a 529 Finder to determine the plan options available to you. For example, where we live there is a CollegiateInvest Direct Portfolio and a Scholars Choice College Savings Program. But in the state of Arkansas there is the Arkansas 529 Education Savings Plan and a Gift College Investing Plan. So if you’re interested in saving for a college education be sure to go to the 529 finder page to learn what plans are available in your state.

6. Save the money for your next big purchase

If you save the extra money you now have from paying off that debt you should be able to make your next big purchase without having to use credit. Establish a savings goal and then work towards it. This could be a new car, a big home renovation project or a dream vacation.

7. Avoid going back in debt

If the debt you just paid off was a big credit card bill you will need to make sure that you change what’s necessary to avoid doing it again. Once you’ve paid off a credit card bill the last thing you want to do is start accumulating new credit card debt. There’s a reason why the credit card companies love people that run up debts on their cards. It’s called compounding interest. Some have called it the most powerful force on earth. Whether this is true or not, one thing is certain. If you fall back into the habit of carrying your balance forward on a credit card, you will end up right back where you started — with a big debt. Here’s an example of how this happens. Let’s say you owe $5000 on a credit card at 18% interest and make just the minimum payment each month. When this is the case then, believe it or not, it will take you 273 months to pay off that debt and cost you $6923 just an interest.

Choose wisely

Since you will obviously not be able to take all seven of these steps at once, choose wisely. Pick the one or two that make the most sense to you and that would do the most for your financial future. Then, start using that new found money to achieve your goal or goals. It should feel pretty terrific to not only have paid off that debt but to have a new goal you can start working towards that will mean a better future.

Frequently asked questions about debt

Q. What is debt to income ratio?

A. You can calculate your debt to income ratio by dividing your monthly gross income into the total amount of your monthly debt payments. For example, if your gross monthly pay was $5000 and your monthly debt payments totaled $2000 your debt to income ratio would be 40% which potential lenders would view as too high.

Q.  What debt is forgiven after death?

A. This answer is simple. Any one that was just in your name belongs just to you and is forgiven. It is not passed on to your family members when you die. However, if you have a debt such as a mortgage that’s held in both your and your spouse’s name then the surviving spouse would be responsible for repaying it.

Q. Why debt is a good thing?

A. A small amount of debt is a good thing assuming you make your payments on time every time. This is because it will help you build good credit reports and a high credit score. You want a high credit score because this will allow you to get credit at low interest rates, which will save you money.

Q. When debt is too much debt?

A. If you calculate your debt to income ratio and its higher than 30%, that’s too much debt. And maybe this goes without saying but if you find you’re unable to make all the monthly payments on your debts then you have too much debt.

Q. What happens when debt collectors take you to court?

The first and most important thing that happens is that you need to show up in court at the appointed time. If you fail to do this, the collector will automatically be awarded a judgment against you. When you meet with the debt collector in court you could try to negotiate a settlement. Most debts are purchased by debt collectors for literally pennies on the dollar. This leaves a lot of room for negotiation.

Q. What happens when debt is written off?

A. If a lender concludes that you will not be paying off  what you owe then it will write it off. But this doesn’t mean your debt goes away. What will likely happen is that it will be bundled up with a number of other debts that were written off by that lender and sold to a debt collector.

Q. Are debt consolidation companies worth it?

A. The answer to this will depend on the type of consolidation company you choose. One way to achieve debt consolidation is by going to a consumer credit counseling agency. This would be worth it because reputable credit counseling companies charge very little for their services and can usually help you become debt free in 4 to 5 years.  A second option for debt consolidation is to hire a debt settlement company. This will not only consolidate your debts but should save you money as, on the average, a reputable debt settlement firm will save you anywhere from 30% to 37% of what you owe even after their fees.

Q. Are debt collectors legal?

Debt collectors are definitely legal. However, what they can and can’t do is regulated by the Federal Trade Commission. For example, debt collectors are not allowed to call you prior to 8:00 AM or after 9:00 PM unless you agree. They are also not allowed to harass you with repeated calls, misrepresent the amount you owe or talk with anyone but you and your attorney (if you have one) about your debt.

Do you qualify for debt consolidation?

Need Help with Financial Self-Control? Here are Six Useful Strategies

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young woman looking at her walletWhen you get to the end of the month do you find yourself a little short and wonder where all your money went? It’s probably because of all the money you spent on things you didn’t really need because of a lack of financial self-control. It might have been those bottles of Gatorade at your local convenience store and because you just couldn’t resist one of Amazon’s Deals of the Day. Or maybe it was all those drive-through coffees and breakfast sandwiches or those restaurant lunches with coworkers.

The problem is that when you’re spending just a few dollars it doesn’t seem like such a big deal and you just forget about it. But if this happens again and again throughout the month it can add up to a tidy sum and leave you wondering how you’re going to get through those last three days until payday.

The problem is financial self-control

The reason you’re running out of money before you run out of month is simple. It’s because of your lack of self-control. You’re making short-term choices over and over without thinking about their long term consequences. While it’s hard to make long-term choices, they’re almost always a better option.

Breaking out is hard

If you’re consistently making short-term choices, then breaking out of the routine can be difficult. It’s easy to get accustomed to all those little pleasures – like that bottle of Gatorade – that you want when you want them. You probably have long-term goals like retiring early or starting your own business but they get undermined by all those short-term decisions you make on a daily basis.

If this is the case, what can you do?

Here are six strategies that could help you gain financial self-control so that you will be able to achieve your financial goals.

Strategy 1: Ask yourself will that purchase help me survive?

Before you make any purchase ask yourself do you really need the item. This is true of whether you’re paying cash or using credit. Will the thing you’re about to buy help you survive? You need to ask this question before you buy anything as well as every one of your bills and every single line on those bills. If you answered “no” to this question this means that buying that item or service will only set back your plans for building a financial future. The simple fact is that financial self-control begins when you consider the negative consequences of everything you buy.

Strategy 2: Quit making excuses

The hard, cold reality is that every time you buy something you don’t really need you’re undercutting your future. You’re giving in and using money to buy something you happen to want now but taking away dollars that could help you have a better future. Whenever you make an excuse to justify a purchase you’re just choosing short-term desire over building a decent financial future for yourself. If you really do want to have a good financial future, you need to stop making excuses for giving into short-term desires. Stop rationalizing those purchases and begin realizing that every time you do this you’re just creating a setback in your financial future.

hand taking money from walletStrategy 3: Leave those credit cards at home and live on cash

The people who issue credit cards are not stupid. They push them because they know that using plastic can distract you from how much money you’re actually spending. You just whip out that little piece of plastic, no money changes hands, and that latte or book is yours. You may not think at all about the consequences of what you’ve done until your credit card statements start trickling in and you find that they’ve become huge. Fortunately, there is a simple solution. Just pay cash for everything. Stop using your credit cards for some period of time. If you find there’s not enough money in your checking account to pay for a purchase then just don’t make it.

Strategy 4: Take no money or credit cards to your “tempting” places

You may not have ever thought of this but there are certain places where you may be spending money on short-term desires. Typical of these “tempting” places are the bookstore, the coffee shop, the electronics store and the clothes store. Your first thought might be to just avoid your “tempting” places. But that doesn’t really teach you anything. A better approach is to go to them sometimes but make sure you don’t take either a credit card or any cash. This will help you learn how to resist temptation. And resisting temptation is the very basis of learning financial self-control.

Strategy 5: Avoid costly social engagements

Do your social engagements typically revolve around clubs or restaurants where you’re strongly encouraged to spend money? Suppose you meet friends at a restaurant for dinner, go to a movie and then to a bar for a nightcap? You may not realize it but you’ve probably just spent $100. Stay away from these kinds of social engagements. Try to do your socializing either at home or at a friend’s house or someplace where you don’t have to spend money as part of the experience. For example, you could schedule a picnic somewhere or you could play soccer with friends at a local park.

Strategy 6: Track and review your spending – very carefully

The biggest reason that most people lose track of their spending and let it get out of control is because they really don’t know where their money is going. You should make a pledge to track all of your spending, carefully recording and categorizing every single cent you spend. There are tools such as Mint, Quicken and You Need A Budget that are easy to use and can help you do just this. You could even track and analyze your spending with a pocket notebook or a spreadsheet program. The important thing is to write down every cent you spend, divide it into categories and then review everything to see where you’re overspending. Doing this can be a real eye-opener. It’s almost certain that you’ve spent far more on stuff than you thought you had so seeing a monthly total of how much you spent at the Google Play store, on Amazon or at the convenience store may actually shock you. And it’s very likely that you could eliminate a lot of that spending so you’d have extra money to save or pay down your debt.

If you’ve never budgeted before, here’s a video titled Budgeting for Beginners that shows how to develop a budget using nothing but pens and a calendar.

Do you qualify for debt consolidation?

6 Warning Signs You Are Living Beyond Your Means

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young woman looking at her walletAre you living beyond your means or not? This simply means you are spending more than what you are earning.

If you cannot answer this question, then you need to make time to analyze your financial situation. Regardless if the answer is yes or no, your inability to answer the question tells a lot about your knowledge of your financial position. You cannot go a long time without knowing your finances because you will be in danger of making the wrong decision about your life. We all know that it can take only one mistake to put your finances in danger. Do not leave everything to chance – at least, not if you can help it.

If your answer is no, then you are in a great financial position. Your ability to answer means you know your finances and you are making the right choices about it. Your expenses are below your income and that leaves you with enough room for savings, investments, or more entertainment money. This is a good sign that you are handling your finances really well.

If you find yourself spending more than last year, you might be part of what WSJ.com shared where consumer expenditure went up in 2014-2015 from 2013-2014. Though part of the survey revealed that average income also was on an upswing by about 6.6%, this can also be attributed to financial management as well as lifestyle inflation.

How spending too much for your lifestyle can lead to trouble

Lifestyle upgrade or inflation remains to be one of the things you need to keep an eye out for when you are guarding against living beyond your means. Here are warning signs that should tell you that your lifestyle is about to put your finances in danger.

  • Not having enough to cover emergencies. You are spending to live in the moment without any regard for future needs. What this can lead to is an utter disregard for the need to have reserve funds. This can prove to be devastating when financial emergencies knock on your door. Your reserve funds consist of your emergency money as well as rainy-day fund that should cover everything from big emergencies to small needs. If you find out that you do not have enough to cover financial emergencies in your life, you might be living beyond your means.
  • Paying for a vacation using credit. The ideal financial approach to taking a vacation is to save up for it. You need to have some forward planning so you can pay for it in cash. According to Creditcards.com, about 15 % of consumers put their vacations on their credit card. This is not advisable. The only time it is okay is when you intend to use it for the rewards and you plan to pay the statement in full when the billing comes. But if this has become a habit and you just deal with the bill when it comes at the end of the month then you better reassess your lifestyle. There is a good chance you are spending more than what you are earning.
  • Refinancing to lower down payment. There is nothing wrong with refinancing to take advantage of a lower monthly payment. In fact, this is a great way to manage your budget. But if you are doing this to free up space to purchase items in your “wants” list then you need to think things through. While it is true that you are able to lower down monthly payment if you have a better credit score or the interest rate market is low, you need to understand how it works. You are essentially spreading the payment over a longer period – that means you are paying more on interest as time goes by. This situation can put unnecessary stress on your finances without you even knowing it.
  • Choosing a 30-year term mortgage. This is a great option in mortgage loan because it allows you to stick to a lower monthly payment. However, if you only want a lower monthly payment because you need more funds for   are forcing the issue to make space for expensive hobbies or trying to keep up with Joneses then you have another thing coming. You are definitely prioritizing your lifestyle and undoubtedly living beyond your means. This is the simple fact that you are putting your finances in peril because you are more concerned with your wants rather than your needs.
  • Paying for an overdraft fee. One of the clear signs that you are already spending more than your budget is when you had to pay an overdraft fee in the last few months. This means that you are not able to manage your budget and that you are not on top of your fund level. You are also losing money in the process because that amount that you had to pay up for the fee could have been used to increase and strengthen other funds in your budget. It could have gone to your reserve funds, retirement fund, investment account or even an ice cream date with your children.
  • Going over your credit limit. You are living beyond your means when you are going over your credit limit. That amount is not a suggestion but a cap on your card use. It is meant to protect you from getting into unmanageable debt as well as protection for your lenders in managing risk. This can also affect your credit score because the way you utilize credit has an effect on how your report is put together and scored.

Getting your financial lifestyle in order

If you are decided on getting your finances in order, here are a few things you can look into to get you started and pointed in the right direction.

  • Understand the importance of budgeting. According to a study done by Gallup, one out of three Americans prepare a detailed household budget. The rest, which is the majority, fail to practice this. If you want to stop living beyond your means, you have to use a budget and to follow it like your life depended on it. This is the only way you can monitor if you are living within your means or not.
  • Set long-term financial goals. Setting financial goals is a great way to give your financial life some direction. If you have goals, your decisions will be aligned with each other.
  • Find a way to make your money work for you. Compound interest is your friend. If you want to grow your personal wealth, you need to understand how this type of interest work. It can increase your finances – so make sure you learn how to use it to your advantage.

Common questions about living beyond your means

Question: What does living beyond your means mean?

Answer: This simply means you are spending more than what you are earning. Your monthly expenses go beyond the money coming in through your income.

Question: What to do when you are living beyond your means?

Answer: You need to identify what makes you spend more than your income. Is it because of wrong lifestyle choices? Or maybe you are paying for a lot of unnecessary things. Analyze your expenses to find out what makes you spend the way you do. Once you identify the cause, you need to stop it.

Question: How do you avoid living beyond your means?

Answer: Knowing your financial capabilities is the first step. If you know how much you can afford, you can base your decisions on that. This will help you stick to the money coming in and avoid overspending.

Question: What are the habits that will make you live beyond your means?

Answer: Budgeting and smart spending are two of the most important habits that you need to implement. Before you buy anything, make sure it is a necessity – and not something you are buying just because it is on sale.

Question: What tools can you use to avoid living beyond your means?

Answer: There are many tools that you can use. In fact, there are financial apps that you can use to monitor your finances. The most basic of them all is a budget plan.

Do you qualify for debt consolidation?

Personal Finance Myths That Just Won’t Die

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couple going over billsHow does something morph into the category of personal finance myths? It’s usually a combination of factors. First, the idea has to be believable. You could repeat the phrase, carrots are hazardous to your health 100 times but it won’t become a myth because no one will believe that carrots are hazardous to your health.

Second, the idea has to be repeated by many experts. Here’s an actual case in point. One scientist released a study linking vaccinations with autism. Expert after expert cited this study and a whole legion of anti-vaxxers sprung up. However, this scientist has now admitted he made up the entire study. It turned out to be not a fact but a myth because none of the scientists that quoted this study ever attempted to replicate it — they just repeated what they had read.

There are also personal finance myths or ideas that just won’t die because they’ve been repeated by experts over and over. Here are seven of the most prevalent of them.

When you retire you need to plan on spending 4% of your nest egg each year

This is actually more of a guideline than a rule but is one of the personal finance myths. You might actually be in a position where you could spend more. That’s the good news. The bad news is that in today’s economy, with its incredibly low interest rates and a very pricey market, it may be optimistic to plan on spending 4%. A better guideline might be 3% to 3.5%. And finally, the problem with this “rule” is that it doesn’t factor in the likely 20% tax bite.

You need to have an emergency reserve of three to six months of your living expenses

This one is so pervasive and makes so much sense we’ve actually cited it ourselves. But the fact is that in today’s economy people are often required to dip into their emergency reserves between jobs. It takes so much more time today to find a job that some people actually quit looking. But if yours is a dual-income household, your emergency reserve should be at least six months of your living expenses. Also, keep in mind that the more money you make the longer it will take you to find a new job. If you’re in a senior position it will just take you a lot more time to find a new job than when you were younger and you need to adjust your emergency savings reserve accordingly.

There is no cost to saving for retirement

Saving for retirement is always a good idea and the more you can save the better. However, despite what you might have read, there is a cost to saving. It is the invisible cost of what you miss out on while you’re sticking money away. As an example of this, if you put $3000 in your 401(k) instead of going on a great vacation, that $3000 will grow over the years but at the opportunity cost of a great vacation.

man holding multiple credit cardsCredit cards are a bad idea

Many experts criticize credit cards because of the negative effect they can have, which is why it’s become one of the most often cited personal finance myths. Of course, it you misuse credit cards it can be financially devastating but this doesn’t mean you should necessarily avoid them entirely. Credit cards can actually be a great financial tool when used correctly. Your credit score is an important indicator of how reliable you are financially. If you have no credit cards it can be tough to establish good credit in order to get a mortgage, a car loan or other collateralized debt. In addition, if you have one or more credit cards and use them sensibly, you will have a high credit score which usually translates into lower interest rates and the ability to borrow more money. For many people, credit cards offer numerous financial opportunities and rewards so long as they pay off their balances at the end of every month.

It’s too late – I won’t be able to reach my financial goals

The fact is it’s never too late to start saving seriously for retirement. Of course, if you start saving at age 50 you certainly won’t be able to retire at age 55. But there are steps you can take to positively impact your goals. For example, if you are starting to save late, just increase the amount you save each month. You should also take a hard look at reducing your debts. As an example of this, you might downsize your house, pay off any personal loans or keep driving that car where you’ve paid off the loan instead of buying a new one.

If you’re getting started saving for retirement here’s a brief video with personal finances expert Dave Ramsey and how much he believes people should save out of their take-home pay to have a decent retirement.

 

It’s better to buy a home then to rent

The cold, hard truth here is that it can cost more to own a home than to rent. Homes always need maintenance and some of it can be very expensive. Just ask anyone that has had to replace a roof or have their home painted. Plus, there is no guarantee that a home will increase in value and they are highly illiquid. While the market where we live is very hot and homes tend to sell in a matter of days this is not true throughout the country. For example, in the state of Virginia it takes an average of 45 to 60 days to sell a house.

Your life insurance should be 10 times your income

This myth that you need to have 10 times your income in life insurance is very widespread. Unfortunately, like many personal-finance rules of thumb it’s inappropriate for most of us as it often leads to bad decision-making. The amount of life insurance you buy should be driven by a number of factors such as how many children you have, how likely it is that your spouse will suffer long-term employment and what this would mean financially. In addition, you should factor in your debts and your family’s long-term goals. If you do this, you might find buying 10 times your income in life insurance is either not enough or too much.

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