Monthly Money Sense- Are You Saving for Retirement?

Retirement may seem like a long way away (or maybe it doesn't), but now is always a great time to be saving for retirement. There are also many reasons why it should be a priority. So why is it so important?

• Most of us live far past the typical retirement age. Some people have even been retired for longer then they spent working. You will need much more money then past generations needed.
• Many jobs no longer offer pensions. This means you need to be responsible for funding your own retirement. This isn't to say some companies don't pitch in to your retirement account, it just means it no a pension, guaranteed payout.
• Social security is not your retirement. It was never meant to be. Regardless of how you feel about politics and social security, you should not just assume social security will be your retirement. It is meant to be a supplement to your other retirement money, not all of it. There is also no guaranteed amount or if Social Security will still exist when you retire.
• Your kids can get a student loan, you cannot get a retirement loan. Many people put their kids education at a higher priority than their own retirement. This is a bad idea. There is a plethora of student aid out there, but there is no such thing as retirement aid. If you plan it right, you can even make withdrawals from to help out with college without a penalty (talk to a financial advisor for specific information). 
• Your kids are not your retirement plan. Some people mistakingly think that if they some how can't make it their kids are going to bail them out or let them live with them. That's not fair to you or them.
• Don't think "I'll just get a job if times get tough." Again, you can't depend on the economy to help you out. There are jobs out there for retired people, but you shouldn't count on it as a way to get by.
• Your house is not your retirement. Sure you could sell it or do a reverse mortgage, but what happens when that runs out? Where are you going to live? And of course everyone should remember that home values aren't always great, and selling isn't always an option.

There are so many reasons why you should be saving for retirement. If your employer offers matching on you contributions, you definitely should take them up on that. Your retired years should be a time of relaxing, not a time of worry and anxiety. Plan now, and enjoy your retirement.

Decisions...

I'm trying to decide whether I want to continue this segment. I was thinking of making it a monthly segment, and instead replacing this segment with something else.

What do you think? I'd love your opinion.

Monday Money Sense- How Are You Doing?

It's been awhile, so I thought I would take a break and ask, "how are you doing?"

1. Have you gotten out of debt? Or started climbing out of debt?
2. If you are out of debt, are you actively working to stay out of debt?
3. Have you established an emergency fund?
4. Have you looked into your credit report and scores?
5. Are you making sure to keep your information safe?
6. Have you thought about what you are willing to splurge on?

So how are you doing? How are these economic times treating you? Please share below!

My Adventures in Buying a House

For today's money sense, I felt like changing it up a bit, so I'm going to share the adventure that was buying our first house.

It all started last December when my husband received a job in a new city. We needed to move out of our house asap. Luckily my FIL lived close enough to this new city that we didn't need to rush into any housing decisions right away. We originally were going to rent because we didn't have much saved and thought we didn't have the income to buy a house, but then we learned that the place we were living was one of the top places in the country to be hit by the housing crisis. We went to a Realtor to look at rentals and quickly realized a mortgage payment with insurance, PMI, and taxes would be cheaper monthly then rent, and we could get a bigger house! 

However, we still didn't think we had enough for a down-payment, but then we learned about an FHA loan which only required 3.5% down, which considering homes this area were in the 60-100k range, made it very do-able along with the help of some relatives. So we decided to do it, and so began a long and stressful process.

First, we had to find a home we loved. That wouldn't be so hard, but when there are easily thousands of homes for the picking it made my head hurt going through the various MLS sheets to narrow down houses we wanted to see. We narrowed it down to six houses we wanted to see. We fell in love with one immediately. We went to get pre-approved for a mortgage, but due to some difficulty getting proof of my husband's job, it took a day or two to get everything squared away. We submitted an offer, and we were rejected. We submitted another offer only to learn that another offer had been accepted. A few months later we learned that it was a cash offer for more then the $69,900 asking price. 

So we moved on, having learned more we realized short-sales were a no-go because we wanted to move in sooner rather than later, so that narrowed our list. Our wonderful Realtor gave us access to an online detailed MLS service, and that helped a lot. We then found six more houses to look at. We found one that we liked (and luckily we could see past the vibrant paint colors). It was priced at $89,900, but we took a risk in making our offer. We asked for $88,900 and 3k in closing costs, and they accepted! Little did I know this was just the beginning of the stressful part.

FHA loans take about 45 days to close, so we scheduled the closing for February 22nd. We had our home inspection and the home inspector only found minor problems like a pipe leaking under the sink, a switch plate missing, filters being changed, trees being trimmed, etc. He actually said it was one of the nicer foreclosures he had seen. The mortgage on the other hand was just a mess. We apparently had the worlds most crazy underwriter, who could not use common sense and required several forms of verification for each thing she needed. For example, to verify my husbands employment she wanted a months worth of pay-stubs, a verbal employment verification, a written employment verification, and his contract (he's a teacher). We had trouble verifying money in our bank account because we had cash deposits (remember we weren't planning on buying a house). The underwriter was adamant about following the purchase contract to the very word. If it said "may" have some kind of inspection (mold or chinese drywall), we had to have it or have the seller (a bank), sign an addendum to remove it. A few weeks before closing they wanted some sort of proof from the seller that the person signing the documents had the authority to do so (did I mention the bank selling the home and the bank we were getting a mortgage company from are the same company?). Then they decided because our home had a septic tank that we needed to have a septic inspection, which would require pumping the tank. Thankfully the appraisal of the house came at the house being worth slightly higher than the purchase price, so at least one thing went right. We also had problems with the money from relatives (did I mention my FIL works overseas?). The underwriter then wanted some form signed by the seller, which was another version of a form he had already signed. For some reason the seller kept missing one spot to initial, and it ended up that we did not get that form back until the Friday before our Monday closing, but our wonderful mortgage person assured us we would be able to close on Monday! Whew! Or so I thought...

We decided to drive up to see the house on Saturday, buy some things we needed and put them in our storage unit, etc. When we went to drive up to the house, my husband noticed right away that our water softener was gone. Someone had cut the pipes and stolen the system, meaning there was no running water to the house! We called our Realtor, who called the selling agent. We discussed just wanting a credit. Well this created all sorts of crazy. We ended up just telling the Realtor it didn't matter we just wanted to close on Monday. Well someone ended up telling our mortgage company, and our loan could not close without running water, and the seller did not want to repair the softener, they wanted to give us a credit (we had since learned the softener was an expensive model). So we could not close on the day we had planned. Eventually we convinced our mortgage company that there was running water, and someone convinced the seller to just replace it and split the cost of the replacement with us. So we closed two days later, and ended up paying only the down payment (remember the 3k closing costs? It ended up being enough for the closing costs + the repair) and we had a nice new water softener (which we weren't sure the old one was working correctly to begin with, the inspection report said it needed to be serviced). We also were able to close in time to get the first time homebuyer's tax credit, so everything worked out great.

If you are thinking about buying a home in the near future, contact a mortgage company and ask what kinds of things need to be in order before you actually start on the task. Check out some books from the library. I recommend: Nolo's Essential Guide to Buying Your First Home or Home Buying For Dummies. Be careful what you do with your money for at least the three months before you plan to apply for a mortgage, and be prepared to document everything! 

The moral of the story: buying a home is stressful, but worth it! 

What is Your Splurge?

The other day I was reading a blog where they told how they never spent money on cable, home phone, and trash pick-up. It came off kind of judgmental in the way that it was worded, but as we all know it's hard to tell tone from the internet. Maybe what bothered me is I don't like anyone telling me what is and isn't a waste of money because really it all depends on the person. It also bothered me that people who commented on this post were also quick to make judgments about a person's character and/or parenting based on what things they "wasted" money on. For example, some were saying that those with cable don't spend time with people, don't get things done, etc. or "my kids have never had cable and that is why they are able to entertain themselves!"

 So, let me be real with you. These kind of mentalities annoy me. I have satellite tv for several reasons. First, we had cable, but it was awful and they kept raising prices. Second, we pay less for more channels plus DVR then we were paying for our basic cable before. In fact we pay less to have phone, internet, and tv then to just have cable and internet through the cable company. My husband and I watch a lot of shows that just aren't online or available through Netflix. Mainly things on History, Discovery, Animal Planet, and Bravo. We DVR them and when our daughter is in bed, we watch them. It takes infinitely less time because you can fast forward through the commercials. Our satellite also offers us programing about our church, which is nice. I get plenty done during the day because I don't have to watch it right then because I have the DVR. When cleaning or cooking, I can put on the music channel and not have to buy fancy ipods. But guess what even though my daughter has been around tv since the day she was born, she still is capable of playing by herself. 

Our tv is the vast majority of our entertainment budget, so I can justify having it.

Now as for the landline, I need it to get internet, but to be honest I would keep it anyway. I live in South Florida. Hurricanes are a real threat, and so are really bad thunderstorms. Many people say, "I don't need a home phone because I have a cell phone or because I have voip," and my frugal side would agree, but my emergency preparedness side says no way. If you lose power your voip is no good, and your cell phone is only as good as the battery (and do you really want to waste precious fuel either for a generator or car to charge your phone?) There's also the problem that during national disasters cell towers often become jammed. So I have a very basic landline phone, no fancy bells and whistles.

The fact of the matter is we all have a line on what we are willing to splurge on, and it is different for each of us. I like tv, while you may like your iphone. I may like eating out, but you may like going to the movies. So you won't be finding me telling you what is a waste of money, but I sure will tell you how you can save money on things you splurge on (even if I personally wouldn't waste money on it :-)  ).

Happy Labor Day!

There will be no Monday Money Sense today, as I take the day off for Labor Day and enjoy some fun, sun, and BBQ! 

Happy Labor Day! 

Monday Money Sense- Credit Scores

This week we are talking about the always confusing credit score. Confusing because a lot of people do not understand it, but I'm here to help with that.

What is a credit score?
 A credit score is a number used to determine your credit worthiness. It ranges from 300-850, with 300 being bad and 850 is good. Most Americans are around around the 720's. Each credit bureau has a credit score, so each person has three credit scores.

How is a credit score determined?
This is a fun one! The actual formula isn't readily known, but there is some general information on how the score is determined.

35%- Payment History- Paying Bills on time raises your score, late payments lower your score.

30%- Credit Utilization- What is your debt to credit ratio? The closer you are to your credit limit the lower your score, the farther from the credit limit the higher the score.

15%- Length of Credit History- The longer your accounts are open, the higher score. The shorter they've been open, the lower the score.

10%- Types of Credit Used- Revolving, installment, mortgage, etc. You benefit from showing responsible usage in multiple areas.

10%- Credit Inquiries- How many times has your credit been pulled to offer you credit? Too many and your score goes down, so don't go signing up for every credit offer you get.

How do I improve my credit score?

It takes time. If it is incorrect information, work to get it removed. If it is correct however, it will take a length of time for your score to go back up. For example, late payments become less of a negative the farther in the past they are. If it's your debt to credit ratio, pay down your debt! People with excellent credit scores, often have been using their credit correctly for many years.

Why should I care what my credit score is?

Although it's possible to do things with bad or no credit, life is easier with good credit. Good credit means good interest rates, good insurance rates, and sometimes if you can have a job. Unfortunately, many companies use your credit score as a means to determine the kind of person you are. Equally unfortunate is that a credit score actually is not a great way to determine who you are. Confusing? The reality is sometimes people with good credit can end up in bankruptcy/foreclosure and people with bad credit can pay every bill on time and just had a series of bad luck several years ago. Credit scores are not an exact science.

How do I get my credit score, and when should I get it?

Most of the credit bureaus will tell you how to get your score when you get your report. It typically costs around $10. You'll also get it if your score has been pulled for a loan. If you have never seen your credit score, it may be wise to get it now, so you know where you stand. If your planning on obtaining a mortgage, car loan, or other types of loans, you probably would like to know in advance. The reason for this is so you can research what interest rate you should be entitled to. It will also keep you from having any surprises, like being denied because of your credit score.

I finally just paid off one of my cards, should I close it?

I put this one on here because a lot of people ask this question. The answer is generally no. The reason is simple it affects your score in two ways. The first is you credit length because it changes the average length of time your accounts have been open. This is usually the only thing people think about when making the decision, and they usually rationalize that it is only 15%.  But closing an account also affects your debt to credit ratio. Closing a card closes the credit limit on the card, so then any debt you have is now closer to your credit limit. This accounts for 30% of your credit! When you add it to the other you get 45%, that's practically half of what your score is made of.

Now here's the thing usually the intention behind this is to keep yourself from getting into it again, and so it's easy to see why someone would want to do that. By keeping the card open with a zero balance, your score will receive a boost because you have now bettered your debt to credit ratio. Don't close the card if it can at all be avoided.

I hope credit scores became a little less mysterious for you. Join me next week for more money sense!

Monday Money Sense- Keeping your info safe

I know today was supposed to be about Credit Scores, but since this is fresh on my mind I will write about this instead.

Late Saturday night my personal email was hacked. The email sent out basically said that I was mugged in London and that I needed money to get home. The hacker also changed my password, alternate email, and security questions. 

I must say it feels awful! I almost feel violated in a sense. I was able to gain access within an hour of it happening (thanks to a wonderful brother who txted me at 12:30am to tell me). Because it was noticed quickly, they weren't able to get into other accounts such as my facebook, my other email accounts, etc.

Now when it comes to email hacking it can be the result of a few different things. They are:

• Malware, Spyware, Virus- Usually the result of downloading something unfamiliar, or visiting suspicious websites
• Phishing- This is when an email or link is used to collect personal information. Usually they try to be convincing claiming your account needs to be verified or that you need to login to see some sort of material.
• Key Loggers- these are essentially a form of spyware. Essentially it is program that tracks every single thing you type. It can be done remotely or on your computer.
• Bots- Essentially the concept here is that a computer (or a bunch of computers) crawls the web and essentially tries various combinations of letters and numbers.

For my personal situation, I know it was one of the last two, leaning toward the bots. The reason I believe this is because I haven't clicked any links or responded to any phishing emails. I've also run several different virus scans (I have a couple because a couple years ago I got a really bad virus on my computer out of the blue that resulted in a complete reformatting of the computer, so now I am extra cautious), and come up with nothing. I don't think it is a key logger because absolutely none of my other accounts have been hacked. Some people have wondered if maybe it was a site I signed up for that may have done it. I don't believe this is so because when I sign up for sites I always use my surveys and offers email address, so if an email address was going to be hacked I would have assumed it would be that one. So this really leaves the bot, which is really quite scary.

So I thought it might be nice to have a great list of ways to keep your information safe on the internet:

• Use a complicated password. This link shows how long it takes for a hacker to hack certain passwords. The best passwords are a combination of upper and lower case letters, numbers, and symbols. Unfortunately not every site with a password allows symbols, but use them if you can. (I'll admit my password wasn't the strongest it could have been) 
• Change your password regularly. I think this was my big downfall. I often forget to change passwords. If you look at that link above again, you'll notice that even the strongest passwords can be hacked in a couple months to a couple years depending on the hackers set-up. 
• Don't use the same password on every account. Imagine if your email was hacked and you use the same password for everything. From your email they can see where you have accounts, and if the password is the same it's that much easier. (Given enough time they may be able to access all of your accounts). I believe this is the reason all of my other accounts were not compromised.
• Don't give away passwords. A company will never contact you to ask for your password (this goes for email or telephone). Also, if you arrive at a website via a link and it tells you need to login or re-login, don't do it. Manually type in the website (www.facebook.com, www.yahoo.com, etc.). Hackers are really good at making a login page look just like the real thing. 
• Have a good spyware/firewall/virus protection. 
• Make sure on websites that you enter passwords that you are on a secure connection. Depending on your browser you might see locks, have a yellow url bar, etc. But one sure fire way is to look for the https:// at the beginning of the web address.
• Be careful what you do on public computers or through public internet. 
• Be cognizant of the emails you send and receive. If somehow you get hacked, you have no idea what they may gain from it. This is what is most unsettling for me right now.

If your account has been compromised, it can take sometime to get access to it again. When you do make sure to check everything, make sure your mail isn't forwarding to some other account, check your filters, etc. This is a good source for gmail.

I hope this may prove valuable for some of you. Hopefully, none of you will have to go through it yourself.

Monday Money Sense- Credit Reports

How many credit reports are there?
In the U.S. there are three: Experian, Transunion, and Equifax

What is in a credit report?

• Personal Identification Information- This section includes your name, current address, previous address(es), social security, employment, and other names you might have had.
• Credit Account Information- This section includes all credit accounts (open and closed). It shows the payment history, date opened, credit limit, current balance, and high balance(what is the highest the balance has been). It also includes a pay status which is whether the account is in good standing or not. Each account will also show a type of account. The type can be revolving or installment, as well as individual or joint.
• Public Records- This will be records of public action, such as bankruptcies and foreclosures.
• Negative Accounts- This is going to be accounts like collection accounts. Collection accounts can be for anything not just credit accounts. It can be a medical bill, library fine, or anything that you owe money for.
• Promotional Inquiries- These are people/businesses who have pulled your credit report for promotional items. This might also be inquiries from if you pulled it from a free credit report site. These inquiries can only be seen by you and they do not affect your score.
• Account Review Inquiries- These are businesses that have pulled your credit for an account review or business transaction. These again are only seen by you and do not affect your credit score. This may be your credit card pulling your credit to change your terms.
• Inquiries- These are inquiries used to establish your credit. These are often inquiries for mortgages, loans, credit cards, and occasionally land lords and insurance. These can be seen by others and do affect your credit.

How often should I check my credit report?

At least once of year. Many people have mistakes on their credit report, and the only way to check them is to check your credit report at least once a year. It takes time to fix mistakes, so you want to catch them well before you try to get a loan. You are entitled to a free credit report from each company annually. You can get it HERE. If you have never checked your credit report, it would be wise to check them all at once. If you have checked your credit report before, you may want to spread out your free ones across the year.

What if I find an error?

Many of the companies have this information on their website, and many you can do online. When you receive your credit report, there should be information on how to start a dispute/investigation. When you start a dispute or investigation, you may need proof of what ever you are claiming (this is especially true for information such as addresses, names, and personal information). For accounts that have errors they will contact the company and ask them to verify the information on the report. It can be very long and annoying process. Once the investigation is complete, the company will send you a notice of it's completion and you will receive a new credit report. 

What if the dispute comes back and says the information is right, but I know it is wrong?

I definitely understand this one. I once checked my credit report to find two collections on it. Both were from medical accounts that I had no idea I owed money on. They were both due to billing/insurance issues (and ironically neither medical office ever sent me a bill). These took some work on my part of calling the medical offices and the insurance companies. In the end they told me they would remove it from my credit report, but I filed another dispute stating that with the credit bureaus, just in case. Disputes can be very annoying, but stand strong. You should also keep copies of everything concerning your dispute, and make sure that it stays removed.

Hopefully that makes things a little clearer, but feel free to ask any questions! Next week we will look at credit scores.

For more Money Sense, click here.

Monday Money Sense- Intro to Credit Reports and Credit Scores

For more Money Sense, click here.

What is a credit report?

A credit report is essentially a history of your use of money. It will include all credit cards, mortgages, student loans, car loans, and any other credit you may receive. It will include your payment history, balances, high balances, and length the account has been open. Your credit report will also include personal information such as addresses, employers, phone numbers, and names, as well as your social security number. It will also include any inquiries of your credit. And finally it also includes any negative information about you such as bankruptcies, foreclosures, collection accounts, etc. 

What is a credit score?

A credit score is essentially a grade on how well you use credit. It ranges from 300-850, with 300 being a bad credit score and an 850 being a good credit score. It can be used to give a brief snapshot into your personal credit worthiness.

Why do I want good credit?

Because credit is used to determine many things in your life, whether we want it to or not. The foremost is credit and loan decisions. While it is sometimes possible to get these things without good credit, it can sometimes come at an expensive and/or time consuming cost. Your credit score/report can also be used to obtain insurance, housing (landlords may do a credit check to make sure you will pay the rent), jobs (some employers believe a person with a bad credit score is more likely to try to steal from the company or will be unable to handle company resources effectively), or even to obtain a cell phone. Good credit also means better interest rates when you need credit.

Join me next week as we learn more about credit reports.

Monday Money Sense- Emergency Fund

How Much Money Do I Really Need?

Today we are going to look at how to calculate how much money you need to have in your emergency fund. But before I start that I would just like to remind people if they are still in debt pay-down mode, it would be wiser to put money toward debt than to build 8 months of savings, however you should have a small emergency fund of $1000 or one month's income to cover things like a deductible on insurance. So without further ado, the steps to calculate how much you really need. 

1. Pull Out Your Budget. After all, your budget should give you a very good indication of how much money you use every month. Write down the amount of expenses you have every month.
2. Look for Things that Go Away with Your Paycheck. For example, if you are now living off of your emergency fund because you have no income, you won't be putting money into it. You may also not be making donations. Subtract these items from your expenses.
3. But Remember Some Things May Cost More. For example, if you choose to keep insurance coverage through your employer you may be paying more to have COBRA. If you know exact amounts for these then add them to your expenses, if not I would add 10% of the amount in #2 for things that may cost more.
4. Multiply Multiply this number by the number of months of emergency fund you want. 

Other Things to Consider

1. Do You Have Food Storage? If you do you can reduce money going toward groceries, I wouldn't eliminate it completely because you may find yourself needing to pick up some fresh items, etc. depending on how much food storage you have and other self-reliance techniques you have mastered.
2. What Can You Do Without? Cable? Internet? Dining Out? There are lots of things that are probably wants... However, only eliminate these things if you truly believe you will cut them out if necessary. Be realistic about it, don't eliminate a cell phone completely if you have no other phone because how will a future employer contact you? You'll also need to look at contracts for these items because while you may be ok with giving them up, the company may smack you with a big fee to do so.
3. Are There Any Life Changes in the Near Future? If you are about to have a child, you will have more expenses. Did you buy a house? You might want to save more to cover any expenses for your house.

Hopefully this gets you thinking about how much you need. It's not an exact science, and there is no magic formula. 

For more in the Monday Money Sense Series, click here.

Monday Money Sense- Intro to Emergency Funds

For Monday Money Sense, click here.

What is an emergency fund?
  An emergency fund is an account used to save money for emergencies.

What isn't an emergency fund?
   It is not your credit cards, personal loans, home equity lines of credit, your retirement plan, or your possessions. 


What is an emergency?
  The term emergency does not necessarily mean disaster or medical emergency in this situation. This could be money to use when your car battery is dead and you need to buy a new one. This could be money to pay the deductible if your house is damaged in a storm. This could be money to live off of should you lose your job or become injured. This money could pay for unexpected medical bills.


Why do I need an emergency fund?
  So you don't end up in debt. Also, so you have a safety net should something happen to you. Here's a personal story about why I love having an emergency fund. Last month our air conditioner stopped working right. We figured it was just a minor problem. The repair people came out and found that our compressor had died. As it turned out federal regulations had changed and in order to repair our air conditioner they would need to put a brand new one in. It was going to cost a lot of money. We thankfully had enough money in our emergency fund to cover it. We didn't have to worry how we were going to pay for it, if we could pay for it, what would we have to do without, etc. It was such a relief. I can also attest to not having an emergency fund and being afraid that something would go wrong. Having been on both sides, it's much better to not have to worry about it.

How much money do I need in an emergency fund?
  Well the financial advice varies on that one. I've seen anywhere from 3 months to a year. It also varies between your take home income and your expenses. I personally would do at least 8 months of expenses, but ideally a years worth would be the best. A lot of guidelines base it off of if you lost work. It used to be that it would take about 3 months to find work again, but as we know that isn't always the case. So the correct amount for you is all about your comfort level, and how much you would be willing to give up if you lost your source of income. Use your budget as a guide to figure out an amount for you.

Where will I find money for an emergency fund?
  The same place you find money for anything else! If you were in debt and paid it off, then that's an easy place to look for money. Take those payments and put them to your emergency fund. Ideally you are already budgeting money for savings. You can find money in all sorts of places if you make it a priority.

What should I do with the money? 
   I'm not a financial planner so I can't tell you what to do, but I can give you ideas. Don't put it in your mattress or anything like that (although it is a good idea to have cash on hand...), put it someplace it can make some interest. However, don't put it someplace that isn't liquid. By that I mean don't stick it into your 401k or CD's or stocks. You need it to be in something that you can access at any moment without penalty. A good option is a savings account or a money market account. Check with your bank or a financial planner for more options.

Can I use the money in my account for other things?
   It's your money, I can't tell you what to do with it. What I can tell you though is if you use your emergency fund to pay for a vacation, and then you have an emergency you probably will wish you didn't go on a vacation. Think in terms of how long it will take to regain all the money you use, and never deplete the whole account on something other than an emergency.

What do I do once I have my emergency fund?
  Whatever you want to do with your money, some suggestions are funding your retirement to the max, saving for a down payment on a house, saving for a child's college education, investing, or saving for a major purchase. It all depends on what your personal priorities are.

Join me next week for more on emergency funds.

Monday Money Sense- Staying out of Debt

For more on this series, click here.

I know I said I was going to start a series on how to build up a money reserve, but I figured it might be important to first discuss how to stay out of debt. The last thing you want once you are free from debt is to end up shackled right to it again. So here's a little crash course on staying out of debt.

• Good and Bad Debt. There are two kinds of debt: good and bad. Good debt would be classified as mainly things such as a mortgage, student loans, and if necessary car loans. Bad debt is credit cards, store cards,  personal loans, etc. The main difference between the two is that with good debt you gain something with long term value and with bad debt you generally gain something for short term happiness. A good way to know if something is worth the debt you will incur is to figure out how much it will cost when the interest over time. For example, you are probably willing to pay the interest on a home loan because you will have a place to live and you have an asset in home. You probably think the interest on a student loan is worth it because it allows you to gain education and hopefully increase your earning power. You probably won't be willing to pay interest on a candy bar or a movie. 
• Whenever you can, pay for something outright. This applies to "good" debt and big ticket items. You should always pay for regular purchases in full. If you have enough money saved, and a good reserve it is better to pay for things in full. Cars are a prime example of this. Cars depreciate the moment you drive off the lot, so it can become very easy to become upside down in a car loan. It would be better to buy a used car that you can pay in full for than to buy a brand new car that you end up with a large loan for. At the very least make a large down payment and opt for shorter terms. The same is true when you want to remodel your home or buy a big ticket item. Financing may seem like a good idea, but inevitably you will pay double the amount it cost in interest, and you generally will not make that much in interest if it stays in your bank account and you may not make back the amount of money you put into (with interest) it if you sell it. There are reasons why one would choose a loan over paying in full, but they need to be carefully selected, usually after consultation with a financial expert.
• Using a Credit Card Properly. Believe or not there is a correct way to use a credit card. The correct way is to pay off your balance in full before you have to pay interest. You shouldn't buy anything that you can't pay for from your bank account right then. You need to still stick to your budget. There are many advantages to using credit wisely. Your credit score will increase. You may also acquire some sort of points for a reward program. For example, my husband and I have a credit card that offers 1% of every purchase as payment to our mortgage. Used wisely this can be a great benefit as it will help to pay down our mortgage faster just from making our regular purchases. Used unwisely and we end up losing all the benefit in interest payments. 
•  If you can't control yourself, don't use it. If you know that the moment credit cards are in your hand you will use them, then don't. I would recommend a cash system where you can't spend more than you have budgeted for the month. I wouldn't even use debit/check cards. Once you can live by a budget, you may be able to then slowly work toward using a credit card in the right way. Until then it would be better to just do without.
• Have a financial reserve! Most people end up back in debt because they fall on hard times or end up having to pay a large amount of money for an unforeseen event (air conditioner breaks, car breaks down, medical bills, etc.). I will begin a series on this next week.

So basically, think! Think before you buy, think before you take out a loan, think about the true cost, think if it is worth it!

Do you have any tips or tricks your family uses to stay out of debt? I'd love to hear them! Please comment below!

Monday Money Sense- How's it going?

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It's been about a month since I started this series, so I thought I would take the opportunity to take a break and see how everyone is doing?

Have you:

1. Stopped spending more than you make?
2. Established a budget?
3. Created a debt pay-down plan?
4. Started kicking your debt pay-down into high gear? 

So which step are you on? How is it going? Have you been surprised by any of the results of the steps?

Remember, this is a slow and tedious road, but don't give up! Keep in mind that this is temporary, and eventually you will no longer be in bondage to your debt, and think how great that will feel.

Please feel free to comment and let me know how you are doing! Join me next week as we begin a series on emergency (aka rainy day) funds.

Monday Money Sense- Needs vs. Wants and Good, Better, Best

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Step Four- Truly looking at your needs versus wants.
We've been talking about getting out of debt. We've learned what it means to live within our means and did an exercise to see if we really are living within our means. We've created a budget. We've created our debt pay-down plan. Is there anything more we can do to pay down debt faster? The answer is YES! The solution: looking at our needs versus our wants.

I suppose some of you out there are wondering why I did not start the series with this. The reason is I think it is more important to have a reality check about the amount of debt one is acquiring first. Once some one realizes they are spending more than they are earning they will automatically (hopefully...) cut down on some "wants." Then when they plan their budget they will cut back more. This section is not about choosing between the simple needs versus wants, but the harder ones out there. For example, we all know we need food, clothing, shelter, etc. We all know that we want internet, cable, iphones, tvs, wiis, movies, etc. But when we truly look at our needs versus wants we can kick our debt payback into high gear. It means cutting back even when it's completely within your budget to get it. Let's look at some scenarios and I want you to pick an answer to each, then we will discuss.

1. Your baby has outgrown his/her 3-6 month clothing. Do you: A) Go to the mall and buy some clothes from Baby Gap, B) Go to Target or Walmart and buy clothes, C) Check out the clearance rack and consignment stores?
2. It's your spouse's birthday. What will you do about his/her cake? A) Go to a baker to have a professionally made cake, B) Buy it from your local grocery store, C) Make one at home
3. It's your preschooler's birthday party. Do you: A) Book Chuck E Cheese and invite all the children they know from school, church, soccer, and daycare, B) Have a party at a local park and invite their entire class, C) Have a party at home and invite their close friends and family?
4. A movie you want to see is coming to theaters. Do you: A) Go see it in theaters, B) Wait for it to come on DVD and then buy/rent it, C) rent it from the library or from Redbox?

So, it's fairly obvious that there is a good (A), better(B), and best(C) to each of these.   Let's start with number 1. Your baby needs clothing, but your baby doesn't need name brand clothing. You can save a ton of money just by buying from a large retailer like Walmart or Target, and you can save more from buying from the clearance rack or a consignment store. Remember most baby clothes only get worn a few times before they grow out of them.  Moving on to number 2, you love your spouse and you want them to have a great day. However, it is not a need for them to have a cake, but there is a way to make the day special without going overboard. Your spouse doesn't need a fancy cake, so consider a store bought, and if your really daring consider baking your own (from scratch is even better!). Most adults love any cake and will love that you cared enough to bake it for them, and it will save you tons to do it this way. Number 3 is again more of a want than need, but I know how hard it would  be to tell a child they can't have a birthday party. So again don't go overboard. A small party at home is usually cheaper (and easier) than having to deal with 70 kids at Chuck E Cheese. And finally number 4, which is clearly a want, but a want that you can have for free or cheap if you can be patient. Ticket prices are expensive, and nothing is worse than seeing a movie paying $20 for a ticket and snacks and realizing the movie stinks. If you wait for it to come out on DVD you can, in most cases, rent it from your local library or go to Redbox and only risk $1.

So what does this have to do with debt? Well imagine the savings of moving from a good category (A) category to a better (B) category (or from a better to a best). If you took that money (which you've already budgeted for) and apply it towards your debt you will be working toward paying off your debt sooner and paying less in interest in the long run. Move from an good to a best category and that is even more savings. You could easily find $10-$20 (or more!) a month to put toward debt! It's not a change to your budget or debt pay-down plan, it's just an extra little burst to it.

This week before you spend any money think "is there a way I can get this cheaper?" or "Do I really need this item now or can I wait until I can get it cheaper?" or "Do I need to spend money on this at all?"

Be sure to check out some of my other series for ideas on ways to find those extra ways to save money.

A fun website I found.

So I was reading Real Simple magazine (my favorite magazine) the other day, and they had a review of a pretty awesome website. It's called Quizzle and it is by the makers of Quicken Loans.
So why do I like it?

• Free credit report every 6 months from Experian
• Free credit score every 6 months
• Money Tools and calculators
• Did I mention it's free?

I looked into it, and the main reason it is free is because they have lots of little services you can pay for (credit monitoring, identity protection, credit boot camp, extra score reports, etc.), but you don't have to buy any of it. It's not a free trial, and you don't enter in your credit card information.

So go check it out!
*Remember you can always request your free annual report from each of the three major bureaus HERE.*

Money Sense- Step three of getting out of debt

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Step Three- Creating a Debt Pay-down Plan
 Even if you are living within your means and have created a budget, you will not get out of debt unless you come up with a plan to do so. Below are the steps to create that plan.

1. If you haven't done so already, lock up your cards. One popular way is to freeze your cards in ice. Do whatever you need to do to stop using them.
2. Collect information on all current debts. You will need current balance, minimum payment, current payment being paid, and interest rate.
3. Head over to this calculator and enter in all of your debts. I'd enter all debts including credit cards, loans, student loans, lines of credit, mortgages, car loans, personal loans, etc. The reason I include "good" debts like student loans and mortgages is to show you how much time you can cut out of paying debts, however it is entirely your choice on paying down these debts sooner than their terms based on personal preference or circumstances (for example you may not want to pay off your mortgage if you know you will move in a year). 
4. Click the submit button. You will see the results of a roll-over plan. The basis of the roll-over plan is once you pay off one debt, you roll-over the payment from that debt to another debt. 
5. Play around with the additional payments section. Enter in different values of money into the extra monthly payment. Press the submit button again and see how they affect the results. You may be surprised how much an extra $5, $10, $20, or more a month could do.
6. Play around with the one-time payment section. This is a good section for unexpected sums of money such as bonuses, inheritance, or gifts. You can look at the detailed section to see where it places the payment.
7. Play around with the assumptions. It assumes you want to pay down the highest interest rate first. The reason for this is to save you money in interest over the long run. You can also choose to pay off the lowest balance first. This is a good choice if you need to see results to stay motivated. The final option is shortest to longest payoff period. This one is very similar to paying to lowest balance first. The only difference in this one is if for some reason a card has a higher minimum payment ratio you will end up paying it off faster than one with a smaller balance. 
8. Play around with the interest on savings. This will show you what you will make on the money once you pay off the debt and put the same amount in savings. 5% is an average, your interest will vary depending on how aggressive or conservative you are about your savings.
9. Make a decision on all the options. (Whether you want to add more to your minimum payments, add a lump sum payment, and which order of pay-off you prefer)
10. Print (ctrl + p) the page.
11. Voila! You now have a debt pay-off plan!
12. Return to it regularly to update and adjust. You'll want to come back if you ever receive a lump-sum of money, if your interest rates go up, or if you can find more money in your budget to add to your monthly payments.

Monday Money Sense- Step Two of Getting Out of Debt.

Last week we discussed becoming honest with ourselves about how much money is coming in and going out. Today we will move on to steps two and three.
Step Two-Establish a Budget
During last week's exercise, you laid the foundations for creating a budget by looking realistically at your income and expenses.Using that information you can now create a budget.

• Go here for a simple printable budget worksheet in pdf format. You can also choose to create your own on a computer program such as excel, or search the internet for other templates.
• Choose a time period for your budget (weekly, monthly, bi-monthly). I like doing a monthly budget, but you can choose whichever is easiest for you to realistically track based on your pay schedule and/or bill schedule.   
• Fill it in using the information you gathered from last week (and taking into account any changes you've made or want to make in your lifestyle since doing the exercise last week).
• Use it as a guideline for purchases/bills throughout the week throughout the week.
• At the end of your specified time period, evaluate your budget. Did you spend more than you budgeted in certain areas? All areas? Did you spend less in a certain area? Several areas?
• Use what you learned to create your next budget. Remember though that you can only spend as much as you make. 

One tip I have is budget money for fun things. It is hard to feel successful about getting out of debt if you feel like you never get to do anything fun. It doesn't have to be a lot of money. Even $10-$20 can be enough money to do something fun (picnics and parks anyone?), it may not be what you currently are accustomed to, but remember you are now living within your means and changing your spending habits.

I hope you'll take some time this week to create your budget if you don't already have one or tweak your budget if you already do . Join me next week as we create a debt pay down schedule.

Monday Money Sense

The First Step to Getting Out of Debt

Step One-Live within your means. I can tell you tons of tips for how to pay down debt, but it would not do you any good if you spend more than you make. Unfortunately, most people don't realize they are spending more than they make! This happens because many people can afford their minimum payments on their credit cards and live paycheck to paycheck, but without much thought add a little to their overall debt each month by charging away. So in order to really see how much is coming in and how much is going out we are going to do an exercise to find out. This will take a little bit of time and effort (and a calculator would probably be useful as well), but it will help you to be really honest with yourself on how much is really coming in and going out. Don't guess or round, be exact as possible and you will get the best picture of your money.

1. Gather 12 months worth of statements for all bank accounts and all credit cards. 
2. Head over to this online calculator and start entering in the info it asks for. For each category go through every statement for the amount.
3. You'll notice some things you do not pay for monthly. To figure these items out, find out how much you pay for them a year and then divide by 12. For example, perhaps you only pay your home insurance once a year. To find out the monthly amount take the yearly premium and divide by 12. Another example would be car insurance that you may pay twice a year. Add the two payments together and divide by twelve.
4. You'll also notice somethings are not the same every month (in fact a lot aren't!). To figure these out you will add together all instances of the item and divide by 12. These items will be things such as groceries, gas, eating out, entertainment, etc. Be real honest with yourself even if that means adding up every single time you ate out the last 12 months.
5. Press the "Get Honest!" button, the calculator will now tell you if you are spending more than you bring in or vice versa.

Now that you know you can do something about it! I recommend if you have any credit card debt, lock up those cards right now (or freeze them in a block of ice or any place where it will take effort to get them out to use), so you won't get into any more debt! Now that you know you can start thinking of ways to cut back.

We'll discuss many ways to cut back and get rid of the debt you already have in the future, so come back every Monday for some more Money Sense.