Expert Financial Advice – Backlist
I’m going to get a considerable amount of money from a severance contract soon. I hope to get another job soon, but I want to have money set aside should I be out of work for a while. Where would be a good place to keep my money?
If you’re looking for a place to keep your money where it’s readily available and safe, I’d recommend an FDIC-insured money-market account or savings account. Consider keeping about six months’ equivalence of living expenses. Certificate of deposit (CD) rates are about the same as
money-market and savings account rates. So if you want liquidity, it’s probably better not to get locked in with CD’s right now.
You can take the money that’s above the six month’s amount and put it in a short-term bond fund. The yields are considerably higher than
money-market yields. You may want to look at a short-term bond index fund, which offers a mix of bond funds.
My husband and I want to get term-life insurance, since we presently don’t have any. What would be a good way for us to shop around for
life insurance quotes?
According to the Wall Street Journal, some life insurers have been raising costs by about 5%-15% since the beginning of the year. Premiums may continue to rise because of higher costs for capital and reinsurance. So the sooner you purchase a life insurance policy, the more money you’ll probably save.
You can go to the online insurance broker AccuQuote.com to easily compare term-life insurance rates. AccuQuote represents top-rated life insurance companies, such as Prudential, American General, Lincoln Financial Group, and Fidelity Life. AccuQuote is recommended by The Consumer Federation of America.
Once insurers have received a completed application, they generally won’t raise the premiums on a policy. The application process typically
takes 30 or more days.
I am a 26-year-old, single woman with a company-matching 401(k) plan, which my employer will match up to 3%. My parents advised me to keep increasing my contribution by 1% each year as long as I can afford it. Is this good advice?
That’s great that you are participating in your employer’s 401(k) plan. Aim to contribute in your company’s plan up to the 3% match. Learn as much as you can from your employer’s plan administrator about the defined-contribution plans available to you. Look for a proper asset allocation that’s right for you. Since you have many years yet to invest, you might look into whether it has target-date funds available. These age-based funds have asset mixes of equities and bonds.
Many companies have limited the number of investment options in their 401(k) plans, so they don’t overwhelm employees with too many choices. This may work against you, as they offer fewer investment options for diversification.
Consider putting some of your retirement money in a Roth or traditional IRA so you can have a broader range in assets. The Roth IRA earnings grow tax-deferred and there are no federal taxes on the distribution after age 59 ½. There are no tax-deductible contributions with the Roth IRA. In a traditional IRA, earnings grow tax-deferred and there are potentially tax-deductible contributions.
To make the most of your investment plan, transfer a fixed (and affordable) investment amount automatically from your bank account to your IRA fund.
After years of renting, I was able to buy a condo. I took out a home improvement loan to do some remodeling and to buy new furniture. I also have a car loan. Do you think I should get a debt-consolidation loan so I will have just one loan to pay? I’m 50 and single.
Are you able to make the monthly payments without any hardship? If so, I would discourage you from consolidating.
Getting a debt-consolidation loan will stretch out your loan payments over a longer length of time, and the interest rate may be higher.
One drawback of the consolidation loan is that many people tend to stop worrying about their bills and make even more purchases after consolidating. They mistakenly think that with the financial pressure off them they can let up their guard.
Another drawback is the consolidation loan’s presence on your credit record. This shows potential lenders that you have poor spending habits and that you may have difficulty making payments on new loans.
Since it appears that you can handle your payments every month, work on repaying each loan off early. Make a list of your loans, your monthly payments, and the total balance due for each one. Begin a debt-reduction plan, repaying the loan with the smallest balance first.
Develop a manageable budget and start paying extra down on the loan with the smallest balance. Set a goal to have the loan paid off as quickly as possible. When your first loan is paid off, take the amount that you were putting toward that loan and work on repaying your second loan early, and so on.
If you follow this plan, you’ll have your loans paid off even faster than you imagined!
I’m a mother of a responsible teenager. What are your thoughts on giving teens an allowance?
I believe our children need to have an allowance before they are teenagers. Our goal as parents is to help our children become competent at managing money from a young age. They are capable of making choices and planning ahead. We can offer them guidance and encouragement, but it’s up to them to decide how to use their money.
An allowance permits children to make small mistakes in a controlled situation. An elementary age child can do less financial damage dribbling away his money than a teenager with credit cards.
Children can begin receiving an allowance as early as kindergarten. They can understand the connection between having chores at home and receiving an allowance. They begin learning that responsibility and money go hand in hand. When their chores are completed, they have earned their allowance.
When deciding the amount of allowance for your children, consider these questions:
What are their ages?What responsibilities do they have around the house?What are they expected to buy with their allowance?
Parents and children need to decide what an allowance will cover: personal needs and lunch money, or personal needs, entertainment, and clothing?
Studies indicate there is a clear relationship between parents’ behaviors and children’s behaviors in handling money. Children observe their parents and learn from them. If parents are wise consumers, their children will likely be wise consumers.
I have two teenagers. Do you recommend that they have their own debit card?
Do your teens handle their checkbooks and money responsibly? If they have a checking account with a credit union or bank, the financial institution can issue them a debit card. The use of debit cards has recently outnumbered credit cards for purchase transactions.
It’s important for the debit card user to regularly enter purchase amounts into the checkbook. Purchase amounts are automatically deducted from checking, so there must be a positive balance in the account. Debit card users shouldn’t be careless with their cards or personal identification numbers (PIN).
I’m 27 and single. I struggle every month to pay my bills. I’m finding that my impulse buying is getting out of hand. I owe $4,000 on my credit cards, and I’m only making minimum monthly payments. I want to pay off my cards and start saving. What can I do to help control my spending?
You’re off to a great start by realizing you need to make changes in your spending. The first thing to do is stop charging on your credit cards. If you pay more than the minimum amount and yet continue to make purchases on credit, you’re not moving forward at all.
Would you like to pay off your debts within a short time and get more joy into your life? Do you want to be a wiser shopper, spending only what is necessary?
Three questions to ask before spending your hard-earned money:
Is what I want to buy a need, a want, or a luxury?
Decide into which category your purchase fits. Be honest with yourself. It is easy to talk ourselves into buying something by saying that it is a need, but is it really? Why not pass up a frivolous purchase, and save the money instead?
Tip: When we develop an awareness of our purchasing choices, we spend our money more wisely.
Am I following through with my goals by buying this item?
Once we have set clear goals of what we want for our life now and in the future, it becomes easier every day to make buying decisions. We can be focused and deliberate about paying off our credit cards, saving for an emergency fund, and saving for the things we value even more.
Tip: We can learn to align our purchases with our personal goals. It will be worth it!
How many hours of my life is this purchase worth?
Let’s say you’re thinking about buying a new car for $20,000. You make ten dollars an hour. Is the car really worth 2,000 hours of your life? And remember that your actual working hours will be more than 2,000 hours if you buy that car on credit. You could find yourself paying for your new car and thousands of dollars of interest besides.
Tip: We can’ get the time back that we spent earning our money. Our time is finite.
I have several cards with high balances. What is the best way to get out of credit card debt if I’ve already stopped using credit cards?
You’ve made a smart decision to stop using your credit cards. At interest rates of 12% and higher, with never-ending and mounting fees, credit cards are keeping Americans from getting ahead financially.
The first step is to call your credit card issuer and ask them to lower your credit card rate. Some credit card companies are agreeing to lower interest rates by a few percentage points for their best customers, according to the Wall Street Journal (Jan. 9, 2007). A survey by Synergistics Research Corp. states that more than 75% of callers who asked for a reduced rate got their rate lowered. A Citigroup representative said they handle requests individually, looking at the cardmember’s credit standing.
Many of us regularly receive credit card applications in the mail with introductory annual percentage rates (APRs). Here’s a suggested script to use when making the phone call to your credit card issuer:
“Hi, my name is _______________. I am a good customer, but I have received several offers in the mail from other credit card companies with lower APRs. I want a lower rate on my card, or I will cancel my card and switch companies” (Source: U.S. PIRG).
Curtis Arnold, founder of the website CardRatings.com, says, “If you can’t get a lower rate, you might want to transfer your balance to a lower-rate card–but keep the original card account open. Closing an account can sometimes harm one’s credit score by increasing the proportion of one’s total available credit that is being used.”
The second step is to pay off your credit cards as quickly as you’re able to. List your credit cards either by interest rates or balance amounts, starting with the highest to the lowest. Decide first whether you want to tackle the credit cards with the highest interest rates or the smallest balances. Try to put down $100 or $200 more toward the bill.
Pay more than the minimum monthly payment, paying them off one at a time.
Then have a little (and inexpensive) celebration every time you pay off a credit card. And imagine the day you’ll have them all paid off!
My husband and I have two preschoolers. I stay home and take care of our children, which I hope to continue doing. What can we do to help prevent any big money hassles in the future?
We can never know for sure what our future may bring. A car may need to be replaced or there may be cutbacks at work. There are three important things you can do to plan for your family’s wellbeing:
Buy life insurance. This protects the family income and net worth upon the passing of income providers. Consider buying life insurance equal to five to 10 times your family’s annual income. Your husband may already have employee coverage. Get more low-cost term insurance, which usually offers the best benefit for your premium. Look for a reputable insurance company with good-quality ratings. Insurers generally have ratings from A.M. Best, Standard & Poor’s, or Moody’s.
Write a will. You and your husband need security if one of you dies. A will prevents the state you live in from making decisions about your assets, protecting your assets. You can designate a guardian for your minor children and name an executor.
Build an emergency fund. Set aside three months’ worth of expenses so you don’t need to borrow when you’re faced with some tough financial circumstances. Couples who haven’t done this have turned to their credit cards for living expenses, making it harder to manage their financial responsibilities.
Mutual funds offer a great way to grow your money for the long-term. If your company has a retirement-savings plan, take advantage of it. You can invest in mutual funds, with your contribution avoiding current taxes, accumulating tax-deferred. What’s better, your company may match your contribution, $1 for every $2 you invest.
Mutual funds pool the money from thousands of investors, buying a larger quantity and variety of investments than a single investor could pay. Investors receive capital gains and dividends after expense and management charges are deducted.
With thousands of these funds on the market, you need to know their investment objectives. In general, they consist of company stocks, bonds, and money market funds. Before investing in a mutual fund, read the fund’s prospectus with information such as the fund objective, its risks, charges, and expenses.
Mutual funds offer the ability to invest with relatively small amounts needed to get in, and make it easier to diversify, with a bigger variety of funds. Some funds charge a “load” or a sales commission usually paid up front when you invest. The money goes to a stockbroker or sales agent.
“No-load” funds don’t charge sales commissions. You purchase them directly from the fund company or a discount brokerage firm offering mutual funds. Consider investment-management firms such as Vanguard (800-662-7447), Fidelity (800-544-8888), and T. Rowe Price (800-638-5660) which offer lower-cost managed funds. Use the free asset-allocation suggestions they provide.
These no-load fund companies offer lower transaction costs and annual expenses, saving you more money. If you want to save even more, buy some index funds, cutting annual fees by a third to a half. Index funds don’t require regular monitoring as managed funds do.
Start saving now while you are young. The earlier you begin, the more you’ll save. Time is on your side.
How can I spend less on food? I’m spending a lot more than I’d like to. Any tips?
The cost of food is rising, up 5% from a year ago. Here are ways to save:
Bring a shopping list to the store and stick to it. Don’t shop when you’re hungry or tired. Consider shopping without the family to eliminate impulse purchases.Use coupons from your weekend newspaper or online for items you need. Some coupon clearinghouse Web sites are coolsavings.com, smartsource.com, and homebasics.com. Look at your grocery store flyer for sale items and stock up. Shop at grocery stores that double coupons, such as Kroger.
I saved about $100 at one grocery store visit recently by shopping smarter. I combined coupons (that were doubled) with weekly sale items.
Buy less processed and packaged foods. You’ll save and eat healthier, too. Purchase grocery store brand items for discounts on food items.
I work for a company that offers a 401(k). Should I put all my extra investment money in it?
Stashing all your spare money in your 401(k) plan at work is not wise. Definitely contribute at least up to your company’s full match, usually 3%-5%, considered “free money” toward retirement. Maximize this avenue of savings.
But don’t max out your 401(k). Plan payouts are taxed at ordinary income rates instead of the lower rates (15% top) for capital gains and dividends.
It’s better to put any extra retirement savings into a Roth IRA where you can earn and withdraw your money tax-free. You can open an account from a mutual fund, broker, bank, or credit union. The contribution limit for a Roth IRA in 2008 is $5,000, or $6,000 if you’re 50 or older.
By contributing to the 401(k) and Roth IRA, you’re diversifying your tax strategy, with tax-deferred funds and income tax free funds.
Every year as it gets close to Christmas, I stress over not having enough money for gifts. It can be a big headache in my life and take away the joy of the season. How can I better plan during the year to avoid this problem?
When we emphasize relationships, traditions, and the true meaning of Christmas over things, it’s easier to avoid stress.
1. Have a family meeting to decide what everyone truly wants to do for the holidays. With so many families needing to cut back on spending, this could be a favorable step for everyone. Some families may decide that it’s more important to spend time together than for everyone to buy and exchange gifts. Others may decide not to travel this year to visit other extended family members.
2. Set up a holiday savings account at your credit union or bank. Decide what dollar amount of your net pay you want to set aside throughout the year. Saving $50 a month will add up to $600 for holiday gifts in one year.
3. Plan ahead by looking year-round for the perfect gift for friends and family. Go bargain hunting when stores have seasonal sales. As you visit unique shops or travel, select items others will enjoy.
With the economy the way it is, I am on a very limited budget this year. Do you have any suggestions on how I can affordably give gifts to everyone on my Christmas list?
Decide to draw names rather than give something to everyone in your giving circle of friends, family and company associates. Set a spending limit. Ask those in the giving circle what they want to receive and make appropriate gift choices from the list.
When it comes to buying gifts for children, give them one or two things they especially want, instead of many small gifts.
Give gifts of your creativity and your time: something handmade, baked, sewn or composed (music or poetry). Make small, personalized scrapbooks of photos or beaded jewelry. You can create CDs of favorite music for the guys in the family. Children’s drawings or photos can be framed as gifts for grandparents. Or give a coupon for future services, such as lawn care, a special meal or childcare.
Many people know that budgets are tight, so be at ease with the fact that you can’t buy gifts for all. To send a holiday message for those you know, consider sending personalized greeting cards.
Is it best to invest in my IRA throughout the year or closer to the April 15 deadline? Should I always invest the maximum amount?
Remember that an individual Retirement Account is nothing more than a basket for you to accumulate your earnings tax-free until you withdraw them. IRA’s can be opened through different accounts such as banks or credit unions, a mutual fund company, a brokerage firm, or an insurance company. They offer a variety of choices, including CD’s, savings accounts, U.S. Treasury bills, bonds, a variety of mutual funds, individual stocks, and annuities.
If you’re not naturally disciplined, it’s usually best to automatically fund your IRA from your paycheck. If you invest through mutual funds or individual stocks, by investing periodically you can benefit from dollar-cost averaging. This cushions the share price fluctuations.
Investing earlier in the year over the course of many years can create a monetary advantage.
Before you decide on the amount going toward your IRA, set out your goals first.
Do you have an adequate emergency fund? Do you have money set aside for annual real estate taxes, auto insurance, and other anticipated expenditures? Is there an education fund?
What you don’t want to do is have to withdraw money early from your IRA for nonretirement outlays and get stuck with hefty penalties later. Since the IRA is tightly regulated by the government, be aware that these accounts are for your long-term retirement needs. Plan to have an allotted amount of cash set aside for short-term needs first.
My car is on its last leg (or tire). Should I lease or buy a new car? What are the advantages and disadvantages?
Consider what monthly payments you can afford and what your needs are.
If you want lower monthly payments, you may want to lease, since they are usually lower than car loan payments. You’re basically paying for the depreciation during the lease period. Leasing a car is like renting a car, and you must return it when the lease ends (usually 2-4 years), unless you opt to buy the car. If you plan to buy it when the lease expires, you usually pay a lot more than if you had bought it originally.
Early termination charges can be quite costly. And if you drive many miles a year, or you want to keep a car for many years, leasing probably isn’t the way to go. Most leases set a limit on miles you can drive, charging 10 to 15 cents per mile for going over the limit.
Up-front car costs if you lease can include the first month’s car payment, a capitalized cost reduction (comparable to a down payment), a refundable security deposit, taxes, registration, and other fees.
Should you decide to buy a car, you own the vehicle, not the leasing company. If you take out a car loan, at the end of the loan term you have no further payments. Up-front costs to buy are the total cash price or down payment, taxes, registration, and other fees.
When doing your research for the car that’s best for you, check with your car insurer how much it will cost to insure. Insurance rates can vary, depending on your car make and model. These rates should be factored in along with the monthly payment costs, as well.
Our daughter is starting college next year. We have visited private and public universities. Her top two school choices are at private schools. She is a good student, and we know she is looking forward to attending college. We’re thinking about telling her that she’ll need to attend a public university, since it will be more affordable for us. Is this a good idea? – Karen
Choosing a college or university should be about looking at all the options available to you. Don’t allow the total cost figures of private schools to scare you into thinking that public universities are the only options.
Private schools offer thousands of dollars in financial aid, making the total cost more affordable for students. Merit-based aid focuses on the student’s leadership, academic, music, and athletic abilities. These scholarships often cut 25-50% of tuition costs. Find out what the schools offer in scholarships and grants.
Need-based aid takes into account the financial needs of the family (number in the household, income, savings, etc.). For students to receive aid, parents and students need to fill out the Free Application for Federal Student Aid (FAFSA) document. This is available online at www.fafsa.ed.gov. The college cost minus expected family contribution (EFC) equals financial need. Federal aid is available in the form of grants, loans, and work-study programs. To receive federal financial aid, a student must: 1) be a U.S. citizen or eligible non-citizen with a valid Social Security number; 2) have earned a high school diploma or equivalent; 3) be enrolled in an eligible program; 4) if male, be registered for Selective Service.
Once the financial aid packages are awarded for your daughter’s schools of interest, the decision-making process may be easier for your family.
Besides looking at the costs, carefully evaluate the college environment and how it will impact your daughter. Many people meet lifetime friends and/or spouses during their years at college. Best wishes for your family and your daughter during this important decision-making time.
Deborah Nayrocker writes on personal money management topics, showing others how to take control of their financial future. An
award-winning writer, she is a guest contributor with www.CBN.com and a finance columnist with www.Crosswalk.com. Deborah is the author of The Art of Debt-Free Living and a Bible study Living a Balanced Financial Life. Her website is www.artofdebt-freeliving.com.