Financial Tip of the Month Archives

December 2007

Do some financial housekeeping for the new year

With the new year fast approaching, now's a great time to assess your household finances and prepare for new opportunities. To help you get started, here are a few suggestions.

Set financial goals. Financially speaking, where do you want to be a year from now? Will you start a small business, cut back spending, or look for better returns on your investments? Take time to dream; then put your goals in writing. Thoughtful planning is a first step toward prioritizing both spending and saving.

Review your credit report. The law requires each of the three major credit bureaus to give you a free copy of your credit report every twelve months. The reports shouldn't contain significant errors; if they do, make sure the discrepancies get resolved.

Make or update a home inventory. Go through your house with a video camera and describe what you see, along with pertinent information about your most valuable assets (purchase dates, prices, estimated values). Make an extra copy or two of the tape. Keep one for yourself, put one in a safety deposit box, or send one to a friend or relative (preferably in another town) for safe keeping. Should you experience a fire or other disaster, your home inventory can be vital for getting insurance claims approved.

Increase your savings. The start of a new year is often a time when companies offer cost-of-living adjustments (COLAs) to their employees. If your employer provides such a benefit, consider contributing a portion of the increase to your 401(k) plan or other savings account. It's a relatively painless way to save more.

Calculate your net worth. This is a great yardstick for measuring your household's financial growth (or shrinkage) from year to year. Simply put, your net worth is the value of your assets (house, personal property, bank accounts, car, investments) minus your liabilities (mortgage, credit card balances, loans). Widely available financial software can help you automate this task.

Purge old financial records. If you're a financial packrat who keeps old cancelled checks and bank statements long past when they may be needed for an IRS audit or your own use, consider shredding them.

If you'd like additional suggestions for setting your financial house in order this coming year, give us a call.

November 2007

Are zero interest credit cards a good deal?

Competition among credit card companies is making zero interest credit cards commonplace. But are these cards always a good deal for consumers? Remember that credit card companies aren't in the business of offering something for nothing. Statistically speaking, they know they'll make money on such offers. So those who apply for zero-interest cards need to understand the details behind that great low rate.

Here are some questions to ask before you apply.

Will you likely qualify for the zero percent rate? Consumers are barraged with mass mailings that offer rates “as low as” zero percent. Consider that students with no income and no credit history regularly receive such mailings. But when an underwriter is reviewing your credit card application, tougher standards will apply. If your credit score isn't stellar or your income doesn't reach certain levels, you may not be offered the “teaser” rate.

Does the rate apply to balance transfers, purchases, or both? If the no-interest rate only applies to balance transfers, you may want to avoid purchases with the new card. In addition, some card issuers apply payments to balances with the lowest interest rates first. That means you'll have to pay off any transferred balances before payments are applied to new purchases.

What's the duration of the zero-interest rate? Some companies offer their introductory rate for three, six, twelve months or more. After that, the rate may skyrocket. If you're not careful to pay off the card before the introductory period ends, you may be charged exorbitant interest on the remaining balance.

What are the penalties for late payment? If you're late on even one minimum payment, the zero percent rate may disappear. In addition, the credit card agreement may allow the issuer to raise the card's rate if you fall behind with any creditor.

Are there minimum use requirements? For example, some issuers require that you use the credit card at least once a month. Otherwise, you'll be charged fees, penalties, or even a higher rate.

As with any financial transaction, it pays to know the details. It also makes sense to know your own purchasing propensities. Zero-interest credit cards can be a great way to manage debt. They may also lead to greater worries.

October 2007

Avoid these 401(k) mistakes

With traditional pensions going the way of typewriters and eight-track tape players, it’s more important than ever to take charge of your retirement savings. If your employer offers a 401(k) plan, you have a ready-made tool for arriving at a financially secure retirement. Unfortunately, many people don’t contribute even a little to their company’s 401(k) plan. Or if they do contribute, they make mistakes — easily avoided mistakes — that can diminish the potential of this great retirement vehicle.

Here are a few pitfalls to avoid.

Don’t neglect the company match. Even if you can’t contribute a big percentage of your salary, you should contribute at least as much as your company matches. Say, for example, for every dollar you contribute to your 401(k), your firm matches 50 cents. Let’s also say the company will make these contributions up to five percent of your gross salary. Do the math. You should contribute at least five percent of every paycheck to your 401(k). Otherwise, you’re walking away from a 50% return on your investment in the first year.

Diversify. Your overall portfolio, including savings outside your 401(k), should include a variety of stocks, bonds, and more liquid investments. These investments should include holdings in large, medium, and small companies, both inside and perhaps outside the United States. The goal is to balance your investment risk. If one segment of the global market takes a ride down, you don’t want your whole portfolio to plummet.

Don’t hold too much company stock. Just ask the folks at Enron or the myriad dotcom companies whose portfolios were heavily weighted with company stock. No matter how strong your firm seems today, you don’t want to risk your future by holding too much stock in a single corporation.

Don’t take out 401(k) loans. Using your retirement savings as a cash machine can be a trap. Sure, you can tap your 401(k) account money and pay yourself back with interest. But in the meantime, your portfolio is smaller and, therefore, earning a smaller return. Furthermore, what happens if you lose your job or change jobs? That outstanding balance on your 401(k) loan becomes a distribution, which may be subject to a 10% early withdrawal penalty and income taxes. It’s generally better to find other sources of funds for your short-term needs.

If you need additional help with your 401(k) planning, give us a call.

September 2007

What's smarter? A rent-to-own plan or using your credit card

Should you buy that new washing machine or sofa using a rent-to-own plan? Or should you pay with a credit card?

The best course of action may be neither alternative. If you can live without the product for a while, it generally makes more sense to save your money and pay cash for such items. No interest charges. No ongoing payments. If, however, you need the item now and can't wait, you're probably better off using a credit card to make such purchases.

With a rent-to-own purchase, consumers typically lease an item for a set weekly rate. After making payments for a prescribed number of weeks, they own the product. Proponents tout certain advantages of this arrangement, such as the option of returning or replacing damaged products. They also argue that renting-to-own keeps your credit intact because you simply return the product if you can't make the payments.

Proponents don't, however, advertise the high cost of these rental contracts. Using a credit card for just about any product is significantly cheaper than renting-to-own. To determine which scenario is cheaper, do the math. Select an item for comparison, then multiply the weekly payments times the number of weeks needed to purchase the product. Be sure to include all taxes, warranty charges, and other fees in your calculation. Next, subtract the cost of the same item if you purchased it with cash. The difference is the cost of renting-to-own.

Say, for example, you rent a $250 (cash value) television set for 78 weeks (18 months) at $13 a week, after which you own the product. Your total cost would be $1,014. That's $764 in interest and charges. What happens if you return the television after just a year of renting? You will have paid $676 for a product you don't own — more than twice its cash value. No credit card company will charge that much in interest over a comparable period.

Bottom line: If you can avoid using credit to make your purchases, do so. If not, use a low interest credit card and pay off the balance as quickly as possible.

August, 2007

Develop three habits to stay out of debt

Staying out of debt is simple, but it’s not easy. It requires fortitude. It means foregoing impulsive purchases in exchange for long-term financial freedom. Staying out of debt requires that you deny cravings, at least temporarily, for the “must-have” stuff that beckons from every mall, television advertisement, and slick magazine.

Personal debt can be categorized as necessary or unnecessary. Necessary debt can generally be linked to appreciating assets, such as your home mortgage, or assets used to generate income, such as a basic car for getting to work or a college degree. Unnecessary debt, on the other hand, might include routine credit card charges or installment loans for depreciable items.

If your goal is long-term financial freedom, avoiding unnecessary debt is crucial. Three simple habits can help you achieve this goal.

1.	*Live below your means.* Much of the stuff that seems so essential today will, in fact, grow less desirable over time. Of course, living below your means requires that you discover what those “means” are. For many people, this means tracking your income and expenses over a period of time — a month or more — to learn where your money comes from and how it’s spent. You might be surprised. That cup of gourmet coffee on the way to work, that weekly meal at the fine dining establishment, that car payment for the latest sedan — all cut into your disposable income. By spending less than you consume, you’ll be able to save for the future and develop long-term wealth.
2.	*Save for emergencies.* By setting aside money in easily accessible accounts, you avoid racking up credit card bills when unexpected expenses occur. Such expenses could include trips to the emergency room, replacing the water pump on the family car, or patching a hole in the roof. A reserve fund can also help you survive periods of unemployment without incurring additional debt.
3.	*Use debt wisely.* If you decide to incur debt, know what you’re doing. Slow down, take a deep breath, think about how valuable this item will seem three months from today. Also ask yourself whether you can pay off these new charges out of next month’s income.

Staying out of debt isn’t glamorous, and it requires more than a little self discipline. But the long-term benefits are substantial. If you’d like additional suggestions for developing habits of financial discipline, give us a call.

July, 2007

What you need to know about private mortgage insurance

If you’re in the market for a home, you’ve probably heard of private mortgage insurance or PMI. It’s insurance that protects lenders — not borrowers — if the mortgage goes into default. Lenders generally require PMI if you’re unwilling or unable to make a down payment of at least 20% of the home’s purchase price. Depending on your credit history, your income, the size of your mortgage and other factors, PMI can run from $50 to several hundred dollars a month. After building up equity in your home (in technical terms, when your loan-to-value ratio drops below 78% of the original loan balance), your PMI policy can be cancelled. But building up that much equity, especially with a conventional long-term mortgage, can take a decade or longer.

Is everyone who can’t afford a big down payment required to take out a PMI policy? If you’re financing a home with a conventional mortgage, the short answer is: probably. Homes financed with a Veteran’s Administration (VA) or Federal Housing Administration (FHA) mortgage don’t require PMI. That’s because the federal government protects these lenders by paying off the outstanding mortgage balance if the borrower defaults. Lenders who finance conventional mortgages don’t have that protection. From the lender’s perspective, if you borrow more than 80% of the home’s market value, you’re more likely to default on the loan. (And, yes, lenders can trot out studies to prove their point.) To compensate for this greater perceived risk, conventional mortgage lenders generally require you to purchase PMI. Those lenders who don’t require PMI will compensate for their risk in other ways, such as jacking up your mortgage’s interest rate.

On the plus side, a conventional mortgage with PMI may enable you to acquire a home that’s otherwise outside your budget. On the other hand, the availability of PMI may entice you to purchase a home that’s more expensive than you can realistically afford. Consider also that PMI premiums add an extra cost to your monthly house payment, and they’re tax-deductible in 2007 only.

So if you’re looking to finance that dream home, be sure to consider all the factors — including PMI. If you need assistance, give us a call.