How to Take Advantage of the Low Interest Rates

Interest rates have been at record lows for a while. Actually, they are near zero and have nowhere to go but up. For illustrative purposes, a graph of the 30 year fixed mortgage rate shows that we have gone a long way since the 1980s when the rate was upwards of 17.5%. (Source: Yahoo Finance)

The Federal Reserve has maintained the interest rates low in an effort to stimulate the economy by discouraging saving and encouraging borrowing Chairman Ben Bernanke said last month that while the U.S. economy has improved, it still needs support from the Fed to help lower unemployment. Bernanke says that short-term interest rates will stay near zero until unemployment falls to 6.5 percent. Forecasters expect that won’t happen sooner than 2015. (Source: NPR News)

Do you feel like you should be doing something to take advantage of the interest rates at record low? Probably.

Whether you want to save, spend or invest, consider your options and choose the strategies that best suit your particular financial circumstances. Here are five tips for low-interest-rate periods:

1. Consolidate debt. With interest rates at historic lows, it makes sense to consolidate debt into one low-interest loan. For example, if you have outstanding balances on several credit cards, consider transferring those balances to one credit card with the lowest interest rate. If you qualify, it may be a good time to apply for a home equity line of credit to consolidate debt or make a home improvement.
2. Shop around for credit cards with the best interest rates. You may be able to get one with better terms than the one you are currently using. Or, ask your credit card issuer to lower your interest rate to make it more competitive.
3. Make large purchases now. If you’ve been thinking of making a major purchase like a house or a car, today’s low-interest rates make it a good time to finance big-ticket items. However, make sure you have a good credit record and can pay off the loan before applying.
4. Order a free copy of your credit report. Review the report carefully to verify its accuracy and dispute any errors. Errors in your credit report may affect your credit score, and higher credit scores can mean lower interest rates. If your score is lower than you’d like, pay down your balances and pay bills on time to raise your score. Read more about What to do if you are a victim of identity theft.
5. Keep saving. Just because standard savings accounts aren’t paying a lot of interest now doesn’t mean you should stop saving for your future. Your savings will still accrue, you’ll be less likely to spend it and you know it will be safe. If you can afford to lock up your money for a while, longer-term Certificates of Deposit (CDs) typically pay the highest interest rates. Specifically, Market Linked CDs are an extremely effective and popular solution as they are the only financial product that combines the guaranteed return of your principal and the protection of FDIC Insurance with the potential to earn reasonable rates of return.

In conclusion, although interest rates are at historic lows, it is important to ensure that whatever your strategy is, it makes sense in your particular situation. It’s probably not a great idea to buy an overpriced home now just because mortgage rates are low. Neither is it a good idea to acquire more debt just because it is cheaper to do so.

In any economic environment, the strategy that will ultimately bring you closer to financial freedom is one that focuses on debt elimination and creating tax-free income.

How to Live Within Your Means

You do realize that you have to live within your means because spending more than you earn is unsustainable. Yet you don’t seem to be able to get out of debt.  It feels like you are trapped in the vicious circle of minimum payments, accumulating more debt, paying off some of your debt but then “having” to use credit again… and it starts all over again. Sounds familiar? You are not alone. The average household consumer credit card debt in the US is about $15,422. You do have a choice. You don’t have to try and fund a lifestyle you want but cannot truly afford.

      Distinguish between wants and needs. Our instant gratification culture teaches us that we can have anything. And we can have it now. We are also wired to believe that if we really want something that must mean we need it. And credit cards are the enabler. So to avoid buying unnecessary items, always ask yourself if something is an absolute necessity or something that you think would be nice to have. Create a mental questionnaire that you go through every time you are about to make a purchase. And apply it to everything. With a little bit of practice, this decision process will eventually become second nature and you will be able to apply it in all kinds of situations. You may even discover that there are opportunities for limiting unnecessary expenses in areas that you did not even think about such as groceries for example.

      Know yourself. Not only is your financial situation different than your neighbor’s or friend’s but so is your personality and your ability to “resist temptation”. In terms of spending that is. Even if it may be difficult to admit, you probably know if you are a spender and cannot really accomplish Step 1 above. If that is the case, purposely stay away from shopping temptation, or do not carry your credit cards with you, or come up with whatever works for you to keep your mind occupied and keep you away from trouble.

      Set limits on spending and track your expenses. If you don’t already track your expenses, you should make a priority to do so. It is imperative you have clarity on how much you spend every month on groceries, clothing, paying bills, entertainment etc. Having just a rough idea is not enough. Sometimes what you think you spend in certain categories and what you actually do may be what causes you to live above your means and “supplement” your income with credit. Once you know how much you spend, set a limit on expenses.

     Have an emergency fund. Very often we use credit not for wants but because we have to cover urgent and unexpected expenses. Those are inevitable. Life happens and even if you are very disciplined about sticking to your spending plan, there will be surprises. Therefore, all experts agree that everyone should have at least 3-6 months of living expenses in an emergency fund. Keep in mind, this is the minimum. It is however absolutely mandatory to have an emergency fund if you don’t want to be forced to rely on credit.

      Don’t get caught up in consumerism. Stuff is just stuff. One of the most important ways to ensure you live within your means is to focus on living simply, being happy with less. Remember that the best things in life are free. Reevaluate how you spend your free time. Are you indulging in material possessions to keep up with the Joneses? Take a moment to answer all these questions truthfully. Refocus and find simple and meaningful pleasures that don’t get you in debt. Then you will know you have learned to live within your means.

What do you live within your means? Please share in the comments section below what works and doesn’t work for you and your family.

 

How To Deal With The New Payroll Tax Hike

So by now, most of you have probably already opened your first paycheck for the year and were unpleasantly surprised by the decreased amount of your take-home pay. In case you were living under a rock for the past few months, here is what caused the tax increase. Well, it is not really an increase. There was a temporary tax break (reducing the Social Security Tax rate from 6.2% to 4.2%) that all American workers got for the last couple of years. This temporary tax break was given to us in an effort to stimulate the economy by letting us have more disposable income and was set to expire at the end of 2012.  Congress decided to let the tax break expire and therefore allowing all Americans to effectively lose 2% of their income starting January 2013.  There is a lot of speculation on how this tax hike will affect the economy. Many economists predict that the decrease in money Americans have access to on a monthly basis will lead to economic stagnation; some even go as far as predicting another recession. However, regardless of the impact the tax increase will have on the economy, most of us are now mostly concerned with how to immediately deal with the decrease in income and how it will affect our own budget.

The reality is simple – 2% less income is a lot for most of us. If your annual salary is $50,000, then you are looking at bringing home $1,000 less this year. Here are some of my thoughts I would like to share with my blog readers and my past, current and prospective clients at The Baron Group:

1. Reduce expenses. Of course the most obvious response to a reduction in income would be a reduction in expenses. Think carefully about your spending patterns and see if there is any discretionary spending you can easily reduce. Going out to eat, dry cleaning, daily lattes and buying lunch at work are some of the most obvious ones you can cut or reduce.
2. Go generic. If your budget is already reduced to bare necessities, think if you can save money by buying generic brands as opposed to brand names. You don’t have to immediately look at your groceries list. Realistically, most of us prefer a certain brand of food/drink and even if we can easily see that the ingredients are exactly the same, switching to a generic brand doesn’t happen easily. Instead, consider other household items such as paper towels, cleaning supplies, diapers etc.
3. Don’t reduce retirement savings. Reducing how much you contribute towards your retirement goals may seem like a good way to respond to the tax hike. This couldn’t be further from the truth. Remember with savings you have to always consider the effect of compound interest. Specifically, the amount you chose to not save today will be magnified because you will forgo the benefits of continuously accumulating interest on interest. So, before you decide to reduce your retirement savings contributions, explore every other strategy for cutting expenses. Ideally, you will avoid reducing your retirement savings altogether.
4. Increase debt payments. You may think it is counterintuitive to increase payments when your income is reduced. Not when it comes to debt payments. As you are scrubbing your budget to see where you can find a few extra dollars to respond to the payroll tax hike, you may surprise yourself with reductions increasing 2%. If that is the case, and in an event of any room in the budget, I always recommend increasing debt payments. The sooner you are completely debt free, the closer you get to financial freedom and the realization of your financial goals. (Learn how to Eliminate Debt, including your mortgage in a fraction of the regular time)
5. Deserve a higher raise. Usually 2% of annual income is what the average American receives as an annual raise.  However, since in 2013 this raise will be eaten by the payroll tax hike, maybe now is the best time to really excel and impress at work so you can make a case for an above average increase this year.

How about you? What will you do (have already done) to respond to the payroll tax hike? Please share in the comments section below.

 

13 Sure Ways to Be Broke But Cool… Forever

You know all those personal finance experts who always talk about saving, budgeting, living within your means and being financially independent? They often give advice that although has a desirable future outcome assumes that you save up for stuff, live within your means and are financially responsible. How boring! You only live once. Instead, read below how to be broke but cool.

1. Keep up with the Joneses. Number one rule for being cool is making awesome impression. If your neighbors or friends get something new, you should definitely follow suit. Actually, think if you can get something bigger and better.
2. Finance everything. You can’t afford it? No problem! That’s what credit is for! You are not buying a $30,000 car but committing to only $300 a month payment. For only 5 years. You can totally do this. Why wait to buy the stuff you really want when you can have it now. After all, you have a huge credit limit for a reason.
3. Pay the minimum. When the credit card bills come in, don’t waste all your cash to repay them. There is this really cool concept of minimum payment. It is designed with your comfort in mind so you don’t have to use up all your cash and instead can spend it on some really nice stuff. Oh, and ignore that part about how it will take you 38 years to repay the balance if you only pay the minimum. That’s there just for informational purposes. No biggie.
4. Stay in debt. There is no need to try and get out of debt when almost everyone in the US has debt.  You are in good company. And interest? Well, just focus on that daily interest percentage that your credit card company has listed for you on the statement. When you look at it that way, it doesn’t seem so bad.
5. Buy the biggest house. Buying the biggest and most expensive house you can barely afford is a great way to be cool and broke.  Make sure you have the most lavish décor, high end everything and remodel as soon as possible. You can finance all of that. If you are lucky, your house may even go up in value so you can borrow against the equity and have some more spending money. Now how cool is that?
6. Buy a new car. And do that often. There is nothing like that new car smell. A new car makes you feel and look great. Your car is one of the first things people notice about you so make sure it is fancy so you can make a good impression. Ignore them if people tell you that a car is one of the fastest depreciating assets. They must be jealous of your coolness!
7. Don’t save. Why tie up your cash in a savings account when you could put it to better use? Financial advisors always talk about emergency fund. Do you really need that when you can use a credit card in case of an emergency?
8. Don’t have insurance. Another favorite of financial advisors and all those personal finance folks. After paying for your big house, new car and cool new toys, life insurance just costs too much. Plus what are the chances you die anyways?
9. Follow the latest trends. In fashion, cars, furniture, appliances and gadgets, the trends change all the time. And there is a good reason for it. After all, they are developed after countless hours of research by the consumer goods companies. So by all means, follow the trends! Even if that means renewing your wardrobe and cell phone every season, changing your car every two years and remodeling your kitchen every five years. Remember, that’s what credit is for and trendy is cool!
10. Go on expensive vacations. You work so hard. You deserve it! And you have a huge credit limit on your new card. So why not treat yourself to that exotic vacation you have been thinking about. Make sure you choose the best. Go for luxury whenever you can. Think about the cool pictures you can show! You would really like that 5 star resort in the Caribbean.
11. Don’t think about retirement. Retirement is for old people! You are way too young to think about that. You have plenty of time. You can think about that later. Plus towards the end of your career you will be making much more than today so it only makes sense to start then. Don’t get depressed thinking about getting old. Instead, enjoy your awesome life now.
12. Wait to invest. Same logic as above applies here. Why waste precious dollars today for something that impacts your long-term future? Ok, maybe there is a merit to doing that but you can always start tomorrow. Or next year.
13. Get regular “shopping therapy”. You didn’t know that “shopping therapy” is a scientific term? If you are sad, tired, or bored, go shopping. Coming home with something new will instantly cheer you up and make you feel better. Do it regularly and consistently for best results.

So, live by the above principles and you are guaranteed to look your best, make the best impression and always immediately get what you want. You will know that you have enjoyed life to the fullest and you are guaranteed to be the person everyone envies and wants to be like.

Who cares about not having savings, not being able to retire, living paycheck to paycheck and being broke when you are that cool!

Great Reading on Frugal and Real Christmas

In line with my article from last week on How to Not Overspend This Christmas season, I would like to share with you some really interesting and useful articles I stumbled upon in the last few days. They all relate to the idea of focusing on Christmas for what it is and giving frugal yet thoughtful gifts. It is great reading on frugal and real Christmas.

15 Fantastic Financial Christmas Gift Ideas for Children –  never miss an opportunity to strengthen your kids’ financial education. Instead of indulging in yet another toy, consider giving them useful financial gifts that can keep on giving. Piggy bank, Monopoly, abacus, stock and even Roth IRA are some of the ideas the author suggest that will provide children with a solid financial foundation for the future.

50 Frugal Gifts You Can Give This Christmas is an awesome list of frugal and creative gift ideas.

And my personal favorite post on How Your Family Can Take Back Christmas. It offers creative ideas on how to incorporate unusual gift ideas or even start a new family tradition this Christmas.

What are some great ways your family has found to take back Christmas?

5 Easy Tips on How to Not Overspend This Christmas Season

Have you ever overspent during the Christmas holiday season? You wanted to make everyone happy, see the joy on your children’s faces when they open their gifts, be nice to colleagues and neighbors, and just give during the season of giving. And then you felt anxious, stressed and guilty when you received your credit card bills in January and wish you had not spent as much.  You are not the only one.  Many of us give into the temptation of emotional purchases and end up overspending during the Christmas season.  But with a little planning and a thoughtful approach, you can have a great holiday and make your loved ones happy without breaking the bank or going into debt.

Chase the deals.

The recession has forced merchants both online and offline to adapt to the American shrinking wallet. To compete successfully for your hard earned dollars, almost all online and offline retailers offer plenty of discounts. Watch out for them – comparison shop and match prices. If you are looking for something specific, do your research and wait for an item to go on sale. Unless you are looking at luxury goods that retain their value and are purposely rarely on sale, almost everything else will be at one point discounted.  Especially during the holidays, stores need to move merchandise and increase sales volume. However, be careful not to buy something you did not intend just because it is a great deal.

Set a limit.

An easy way not to give into emotional spending is to set a price limit for gifts. Many large families find it very useful when there are many people to buy gifts for. However, it can be an issue because different family members have different means. So, instead of everyone giving according to their means, discuss and agree with your family members on a specific arrangement that will keep all of you from running into financial trouble. If you have decided to set a price limit on gifts, make sure it fits in the budget of the least wealthy family member.   Or many argue that gifts on Christmas should only be for kids. If you have a large family, it may be useful to agree on a similar approach that will help everyone.  Finally, if your family is not on board to set price limits across the board, set your own limits according to your spending plan and stick to them.

Focus on thoughtful gifts.

A golden rule of frugal gift giving is to be personal and thoughtful.  And how much more meaningful can it get?  Throughout the year, pay attention to what your loved ones need.  They don’t have to necessarily give you hints on what they want for Christmas.  And what you give them doesn’t necessarily have to be on the top of their wish list. But everyone will be touched that you paid attention to what they really need. It could be something very trivial; it doesn’t have to be big to make an impact, as long as it is thoughtful and meaningful, it shows you care.

Be creative.

If you have a creative side, explore it.  Anything homemade and handcrafted is some much more meaningful and touching. Homemade cookies, Christmas tree ornaments, calendars with favorite family pictures are some of the ideas you can explore. Use your imagination and your talent and have fun.  And if you cannot or do not have the time to handcraft a gift, there are always small local stores you could explore. The person you offer this gift to will appreciate you are supporting a local business.

If you have kids, take the Christmas holiday as an opportunity to teach your children about the season of giving. Why not take them to volunteer and show them how rewarding it is to give your time and efforts to help the less fortunate.

Take a deep breath and relax.

Let’s not forget the real meaning of Christmas and God’s great love for us!   Christmas doesn’t have to be filled with the pressures that society puts on us to give gifts to everyone you know.  It can be, but it is also about celebrating God’s love, spending quality time with your family, helping and giving those less fortunate,  and some well-deserved rest.  Think about what Christmas really means to you.  It is you who gets to decide how you want to spend it and how much it costs you.   The rest is consumerism.

Found Money

 

The spending season has officially begun! Feeling a little squeezed already? Black Friday? Cyber Monday? Did you spend more than you budgeted?

Watch the video “FOUND MONEY” below and learn how to save money within your current monthly budget. Couldn’t we all use this? Especially now around the holidays. Enjoy!

Learn How To Save Money Within Your Current Monthly Budget

What Do Diets and Budgets Have In Common

Did you know the US government has a list of the most popular New Year’s resolutions? No, this is not some form of “Big Brother watching” way of keeping track of the goals we set for ourselves but a list of most popular resolutions with links to useful web resources to help achieve them.

To no one’s surprise, a big percentage of the resolutions on the list are related to two coveted outcomes: to be physically and financially healthy.

Most everyone has been taught that one of the main methods to achieve financial health is to create a budget and stick to it. Same goes for physical health – get on a diet and stick to it.

So what do diets and budgets have in common? They don’t work! And let’s face it; they are not any fun either.

They both focus on what you cannot do and cannot have and do not account for surprises. Psychologically, both diets and budgets are ineffective and even potentially damaging to our wellbeing because the sense of restriction and deprivation create feelings of resentment which only destine the plan for failure. I think most of us know all too well the feeling of being motivated to start a diet just to fail a few days or weeks later.

So my suggestion, although it may seem counterintuitive, is to abandon the budget and the diet altogether. By focusing on the big picture and what you can have you will be more likely to be successful in changing your mentality and be better positioned for success.

It is really quite simple:  in case of financial health – spend less than you bring in; and in the case of physical health – the other way around – expand more than you take in. We all fully understand the theory but once when we try to live by those principles we realize that it may be much easier said than done.

Change the way you see saving and spending. Similar to healthy eating, you would be much more successful if you focus on the nutrition you get from your food rather than obsess with counting calories. The recipe is quite simple – eat whole, “clean” foods, cook more at home, eat less “empty” calories and move more. When it comes to your financial health, the principles are similar. Instead of feeling restricted with an unrealistic budget, develop a spending plan based on trends and be prepared and aware of “surprises” that will come along the way. Think about the purchases you make, the state of mind you are in when you make them. Are you an impulsive buyer? Do you have to have all the latest gadgets? A spending plan and a careful analysis of your historical spending will help you answer all those questions truthfully to yourself.

Budgeting and dieting share another similarity. Regardless of how devoted you are to your budget or your diet, life just happens. You will have that piece of scrumptious chocolate cake at the office birthday celebration party just when you have started your “No Sugar” diet. Or you will have to spend hundreds or even thousands on inevitable car repairs. This often creates the feeling of failure and makes us feel like we are not staying on target and not meeting our goals. That’s why an overly detailed budget will set you up for failure when a spending plan will outline the major categories in your spending: monthly bills, living expenses, saving for retirement, vacation, emergency fund etc.

Reexamine your priorities and consider why are you following the diet or budget anyways. Instead of being forced to focus on the restrictions that come with dieting and budgeting, focus on the long term goals and acknowledge progress along the way.

And last but not least, take advantage of all the tools available. There are so many options, from do-it-yourself programs like Mint.com , thru complementary advice from Mymoneyplan.net to customized, comprehensive spending plan you can work on with your advisor, like the ones from Your Family Bank. Whichever one you choose, focus on your goal of financial freedom. The budget is just an imperfect tool to get there and not the goal itself.