Tag Archives: Baron Group

How to Live Within Your Means

5 Feb

how to live within your meansYou 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.

 

5 Easy Tips on How to Not Overspend This Christmas Season

1 Dec

how to not overspend this christmasHave 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

27 Nov

 

spendingThe 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 to Do If You Are a Victim of Identity Theft

26 Oct spending

In my recent post What You Need to Know About Identity Theft  I’ve discussed the types of identity theft, the maximum liability in case of identity theft and various identity theft scams.

While it is useful to have that information, most of us think we will never have to deal with identity theft. I certainly hope this is the case for all of you but in the event of identity theft this article will go over what to do if you are a victim of identity theft.

How to Detect Identity Theft

If you are a victim of identity theft it is crucial that you take action right away. The sooner you act, the more likely it is you will contain the damage and be able to save time, money and frustration.

It is important to be able to recognize the below major signs of identity theft:

Unauthorized purchases and accounts – probably the most obvious. Look out  for unauthorized accounts, charges, transactions.

Missing mail  – make sure you keep track of all monthly statements, bills and anything else containing your personal information that you usually receive in the mail. Watch for missing: credit card bills, bank statements, boxes of new checks, tax forms, tax refund checks, social security checks and statements.

Lost belongings – if your wallet containing credit cards, IDs etc. is ever stolen it is best to assume that your identity is at risk and take actions.

Collection calls – you know  if you start receiving calls  from collection agencies or worse, the IRS, about debts you have not incurred, that someone has assumed your identity.

How Can You Repair Your Credit AFTER Identity Theft

There is life after identity theft!

Here is what you can do to help repair your credit after you have become victim of identity theft.

Write to the credit bureaus – Send a letter to each of the three credit reporting agencies. This letter is often referred to as Identity Theft Report. It needs to include:

  1. Clear statement that you’re a victim of identity theft and that you are writing to request that all fraudulent information be removed from  your report.
  2. Reference to any calls made to place a fraud alert on your file
  3. Specific details about what needs to be removed. A copy of your credit report could be useful.
  4. Copies of any police reports filed and/or any additional documents which can support your case.

Send your letter by Certified mail Return Receipts Requested. The addresses of the fraud divisions for the three credit reporting agencies are:

EQUIFAX

PO Box 740256

Atlanta, GA 30374

EXPERIAN

PO Box 9556

Allen, TX 9556

TRANSUNION

PO Box 6790

Fullerton, CA 92834

According to Fair Credit Reporting Act (FCRA), the credit bureaus are obligated by law to do the following:

Block all allegedly fraudulent information from appearing on your credit report.

Investigate the fraudulent information you have reported. They must inform the companies that originally reported the information that you are disputing the charges. Those companies in turn must investigate the charges and report their findings to the credit reporting agencies.

More Steps to Help You Recover from Identity Theft

Unfortunately, the process of repairing your identity can be a lengthy one, so here are some additional steps to take in order to reclaim your credit and identity.

As soon as you realize you have become a victim of identity theft you should:

–          File a police report

–          Put a fraud alert on your credit report

–          Notify all accounts of possible fraud and identity theft

–          Close or at least put a freeze on all compromised accounts

–          Consider changing the username and password

–          Follow the quoted steps outlined on the FTC website at http://www.ftc.gov/opa/2002/02/idtheft.shtm

If you find that you’re a victim of ID theft, the FTC urges you to:

  1. Contact the fraud departments of each of the three major credit bureaus and report the theft. Ask that a “fraud alert” be placed on your file and that no new credit be granted without your approval.
  • Equifax: 1.800.525.6285
  • Experian: 1.888.397.3742
  • Trans Union: 1.800.680.7289
  1. For any accounts that have been fraudulently accessed or opened, contact the security department of the appropriate creditor or financial institution. Close these accounts. Put passwords (not your mother’s maiden name or Social Security number) on any new accounts you open.
  2. File a report with local police or the police where the identity theft took place. Get the report number or a copy of the report in case the bank, credit card company or others need proof of the crime later.
  3. Call the ID Theft Clearinghouse toll-free at 1.877.ID.THEFT (1.877.438.4338) to report the theft. Counselors will take your complaint and advise you on how to deal with the credit-related problems that could result from ID theft. The Identity Theft Hotline and the ID Theft Website (www.ftc.gov/idtheft) give you one place to report the theft to the federal government and receive helpful information.

Were you ever a victim of identity theft? Did you ever have to go through any of the above steps? Do you have other tips on what to do if you are a victim of identity theft.

Share with us  your experiences below.

The Intangible Costs of Long Term Care

28 Aug

Since the dawn of time the circle of care for most families usually follows a very predictable pattern: parents take care of children when they are little and then when parents are old, the children take care of them. Little has changed in that arrangement throughout the centuries and most of us are prepared for that and expect it. It is only natural. Part of life. Expression of responsibility and devotion to our parents.

We all are fully aware that there are also significant costs associated with long term care. Genworth Financial, one of the largest financial institutions specializing in long term care, has been publishing for nearly a decade now their annual Cost of Care Survey covering nearly 15,300 long term care providers in 437 regions nationwide. This report is particularly useful for Americans who need to plan for the potential cost of this type of care.

The entire cost however is not only financial and spans much further than the impact it has on the family’s finances. To assess the true impact of long term care on its providers and recipients, Genworth conducted a survey of more than 800 consumers with personal involvement in a long term care event lasting more than 30 days. The results of the study are published in a report called Beyond Dollars: The True Impact of Long Term Caring.

The study divides the parties involved in four self-explanatory categories:

– care recipients

– primary caregivers and secondary caregivers – usually spouses, siblings, children or in-      laws

– broader community – religious organizations, community non-profits, friends and neighbors.

The Care Recipient Perspective:

When someone experiences a debilitating health event – short term or long-term – that may require them to be dependent on others, to dip into savings or stop working, the effects can be significant. There are obvious consequences and new circumstances, other impacts are unseen, but real nonetheless.

For example, 42% of the care recipients said that they felt stress with their spouse and 35% reported stress with their children. When it comes to financial impact, 88% said their household income was reduced by an average 34% due to their long tern care event and a whopping 63% reduced their savings by almost 70%. As far as out-of pocket costs are concerned, the study found that on average care recipients spend $14,000 out-of-pocket for their own care and that does not even include the cost of facility care. It is difficult to think about the possibility of needing long term care and 49% of care recipients report that they had not considered the possibility of ever needing it. Yet, 29% required care for 3 or more years and 37% has to move into a family member’s home for an extended period of time.

The report cites participants in the study:

“My wife had to be available 24/7. She also became my chauffeur and needed to help me shower and dress – to help me move at all, really. It impacted her freedom and her lifestyle.”

“I think my son and daughter worried that I would want to move in with them so they could take care of me. Fact is, I didn’t. It was the elephant in the room for the longest time. I have always valued my independence. That doesn’t change with age. But I inevitably ended up needing their help. I am grateful and don’t know what I would have done without them, but it definitely altered their way of living and mine.”

The Primary Caregiver Perspective:

Being the main caregiver has serious impacts on both the emotional and financial well-being of an individual and their family. Juggling time, career, family and finances are the most prevalent stress points, but they are only part of the personal and emotional issues that make providing Long Term Care (LTC) expensive on so many levels for the primary caregiver and their family.

One of the most significant issues with long term care is that it is in most cases an arrangement for considerable amount of time. 43% of the primary caregivers surveyed reported that the care recipient resided in their home for more than 3 years. And 57% of primary caregivers provide care for longer than 16 hours per week. So it is not surpsising that such extended care has a direct impact on the primary caregiver’s life – from their relationships, finances and health to their career and social interactions. Over a third of surveyed caregivers reported direct negative consequences to their own careers resulting from the responsibilities to a care recipient. Many of these family members worked fewer hours with repeated absences. And nearly 20% reported a direct loss of career opportunities. Additionally, 44% had to work fewer hours and 48% lost a job, changed shifts or missed career opportunities.

The relationship and emotional impacts are also present for the primary caregivers. 44% report an increase in stress with their spouse and 23% experienced an increase in stress with their children.

In the words of the study participants themselves:

“In theory, I believed I could take care of my Mom, keep up with her home, and take care of my family, my kids and myself. In reality, I’m running Mom to her doctor appointments and my kids to school and sporting events and sleepovers. I am constantly torn, feeling guilty that I’m not doing enough for anyone, including taking care of myself these days.”

“Caring for my dad has left me with much less time to spend with my own daughter… With three generations living together, there is a whole new set of rules to live by and a new set of frustrations for everyone.”

“I am an only child, and my mother’s plan was to have me care for her. She became ill during the worst financial crisis of our lifetime…She is better now, after 11 months. But I am broke.”

The Caregiver’s Family Perspective:

Spouses, children, in laws and siblings of primary and secondary caregivers are also very much impacted in a long term care situation. Very often the family dynamics changes significantly. Supporting a care recipient requires time, commitment and care beyond physical needs. A spouse may resent the intrusion and withdrawal of attention they are used to receiving.

Additionally, children feel neglected when parents have to tend to their grandparents. Also, financially, college and retirement savings contributions suffer as a result of the changing focus and the increased need to cover long term care expenses.

In the words of the study participants themselves:

“I can’t attend to my children like I used to do anymore because of the care I have to give to my mother… The kids seem to act up more in school or their grades are not as good as they once were.”

“Less time for activities. Homework is stressful if there are things going on with Mom, Dad or Grandmother, and we have to hurry sometimes.”

Plan Ahead

So how can we minimize the impact of long term care? The answer seems very simple yet very few of the surveyed participants in the study have done so: PLAN AHEAD.

More than half of the respondents (55%) reported that their greatest fear regarding a long term care illness or event was being a burden on their family. In fact, they reported being five times more concerned about being a burden than dying.

Although the issue is a top concern, many are still not engaging in open conversations about potential long term care expenses, the costs or the types of care they would prefer or may need in the future. More than 90% surveyed have not talked about critical long term care issues with their spouse/partner, aging parents or adult children.

First step in planning is talk to your family.

Once you have decided what would be the best course of action if a potential need for long term care arises, meet with your trusted financial advisor and explore your options for long term care solutions.

Til Debt Do Us Part

9 Aug

We have all heard the statistics – 50% of marriages in the US end in divorce. It’s a shocking and a very discouraging statistic and one that has not changed much in the past three decades, according to recent data from the National Survey of Family Growth (NSFG). Marriage counselors and divorce attorneys will confirm that most couples list financial issues as a significant cause for their failing marriage. Especially in difficult economic times as the present, arguments over money can really bring most couples to at least alienation, if not worse. And without a doubt, one of the worst offenders from the money troubles category is debt. It is stressful and overwhelming.

But with the right approach, it can be managed.

Forget the blame. It does not matter much whether you are working towards repaying debt that you have accumulated together as a married couple or debt that one of you brought into the marriage. Concentrating on the fact that one of you brought more debt to the marriage is not productive and will not help repay those debts faster. Pointing the finger will not get you far either. Instead of thinking “Your debts will ruin us. You should really repay those debts as fast as possible!” say :” Let’s see what we can do to repay the debts as fast as possible so we can concentrate on our long term financial goals”. Remember you are now a team. Your spouse is not the enemy, debt is!

Create your family’s financial plan together. No goal is successful without a plan. This is particularly true when your goal is to be financially free and repay your debts. To create a plan which will be followed by both partners, it needs to include input from both of you. Your family’s financial plan needs to be realistic and something you could follow with your partner long term. Remember that your family’s financial plan is not something set in stone and is an ever evolving plan that helps you get on the right track.

Choose the right person to manage the finances. Although in some families both partners are very financially savvy and frugal, in most couples one partner is naturally more inclined to be a saver and planner than the other. Sometimes opposites attract and it is not uncommon for two individuals who are on the very end of the financial management spectrum to form a successful union. If one of you is naturally more inclined to being a better money manager, it is an easy choice to delegate managing the finances to that person.

Practice common sense debt management. It is really quite simple – live within your means (below your means is even better), save, create a financial plan and follow it. For more detailed discussion on common sense debt management, see my previous post Do’s and Don’ts When Getting Out of Debt.

Be transparent and communicate. It is not always easy to try and explain to your partner why it is important for you to buy a certain thing. It is very normal to have different priorities and disagree on discretional spending but one of the worst things a couple can do is lie to each other about spending and acquiring more debt. If you feel like you need to hide your purchases and are unable to explain them to your partner, then maybe that purchase is a case of emotional spending versus something you really need. When tackling debt, you and your spouse, as a family should be a united front and keep the lines of communication open. Being transparent will give you an opportunity to identify if there is a need for your financial plan to be adjusted.

Being debt free is much more than just a goal. It’s a way of life that can make a ton of difference in your family dynamics.

So, don’t be a statistic! Don’t let debt ruin your marriage!

The Parents Dilemma – Saving for College or Retirement

30 Jul

Should we save for college or should we save for retirement?

Whether your little ones are in diapers or about to head off to college, if you are a parent you have probably asked yourself this question over and over.

The hefty price tag of higher education seems to be increasing every year. According to the College Board, the average fees for four years at a private college is now more than $150,000 — including $38,589 for the 2012-13 school year. Even going to your state’s university, it costs close to half that total at an average of $17,131 a year. As a result most graduates have amassed significant amounts of student loan debt by the time they enter the workforce. You don’t want that for your children. You want to give them the best start in life, right?  After all, good parents are selfless and ready to sacrifice anything for the wellbeing of their babies.

Most experts agree than when it comes to deciding between saving for college or retirement, just wanting the best for our little ones should not be the deciding factor as emotional reasoning should not be applied to this all important decision. This is of course not to say that you should not save for college. It is essential to approach the college saving decision rationally, and carefully balance saving for college with working towards the remainder of your family’s financial goals such as being debt free and being 100% certain that you are going to be able to retire comfortably and when you want.

As parents we learn to juggle so much and here are a few considerations to keep in mind while balancing college and retirement savings.

When in doubt, choose retirement. Reasons are simple and not necessarily selfish. Unlike college education, loans, scholarships and financial aid are not available to finance retirement. As a parent, you might think your most important financial duty is to pay for your children’s education. You’d be wrong. Saving enough money for your own retirement is even more crucial.   Your Family Bank® is a concept that might allow you to a accomplish both. You can have a plan to safely and securely plan for college and have a tax-free source of retirement income simply by redirecting your current spending.  In addition, if you fail to save enough and are not able to retire comfortably, you may in your old age become a burden on those same children whom you tried to protect from being overwhelmed with debt.

Start early. Remember your best friends – time and compound interest. Give them a chance to do their magic by starting saving for college early. If you open a college fund when your child is born and invest $100 every month until it is time to pay tuition bills, assuming a 5% return on investment, in 18 years, the balance will be $35,000. While this may not be enough to cover all college expenses, it is at least something to get started.  It all depends on how much of the total higher education expenses you have decided you are going to cover.

Set expectations and communicate them with your children. This is a very personal decision and it depends on both your financial situation and your parental approach but however much you are going to contribute, make sure you set the expectations and communicate them to your children so they know what to expect. You may decide that you are going to pay for undergraduate degrees only and anything in addition (Master’s, MBA, Professional degree) your child will have to finance on their own. Perhaps you only cover tuition and encourage a part-time job or loans to finance the rest. Instill the right values in your children, encourage them to recognize the value of education and strive to be the best. There are plenty of merit based scholarships for students with good grades and high scores on standardized tests.

Get grandparents and relatives involved. Leverage the thoughtfulness and generosity of grandparents and relatives and suggest that instead of buying toys and cute new outfits for holidays and birthdays they contribute some or all of the money they ordinarily spend to the child’s college fund. Again, this is a personal decision and it depends on values and priorities but even if could get a few relatives on board, with time and compound interest on your side, you may be able to help cover a semester or two.

Consider the tax implications. Even if you end up financing some of the education expenses with loans, remember that there is a student loan tax deduction. You may deduct up to $2,500 per year in the interest paid on student loans if your modified adjusted gross income is less than $70,000 if you are single or less that $145,000 if you are married filing jointly. This deduction can be taken for the life of the loan.

Also, you may be able to take two federal tax credits – the American Opportunity Tax Credit and Lifetime Learning Credit – in the years you pay tuition.  Make sure you work with your tax professional to see if those apply to you.

Have a customized plan in place. College savings and retirement savings are not mutually exclusive and do not have to become the parental catch 22. Many factors play a role – when do you expect to retire, when are your children expected to head off to college, how many do you have, and are they likely to attend expensive private schools or the state college. With the average American paying $0.56-$0.64 of every dollar they earn on interest expense and taxes, it can be a challenge.  Your Family Bank® is one possibility that can allow you to plan for college and have a tax-free source of income during your retirement years.  Many times you can put this plan in place by spending no more than you are already spending now.  We do this by redirecting money normally lost to debt, interest and taxes back into your bank and ensure that your dollar gains a positive rate of return every day.  There are so many strategies to consider and the good news is that with the right financial plan in place it is possible to do both and strike a balance.

And at the end, you may be able to admire your Ivy League graduates without having to move in with them.

How to Take Advantage of This Zombie Economy

18 Jul

It has already been almost four years since the beginning of the Great Depression in 2008 and the economic reports do not seem to get more encouraging. Actually for a while we were feeling hopeful that a recovery is well on its way when towards the end of 2011 and into the first quarter of 2012 unemployment figures were lower, more jobs were added and home prices were slightly rising. The revival was however short-lived when in the second quarter of 2012 the growth rate of the economy slowed down again and the number of jobs added in June was only 80,000 after 77,000 added in May and 68,000 in June making the second quarter the worst in two years.

It’s discouraging, to say the least and it feels like the US economy is moving in a slow zombie like state.

With interest rates at all time lows, companies holding back on hiring and low consumer confidence, is all hope dead? Not quite.

Experts expect things to pick up after the election. And until then there are ways to take advantage of the zombie like economy and revive your financial health. You can even profit from the recession. Feel free to let me know if you can think of anything else.

 

Take advantage of the historically low interest rates – this is probably the most obvious one as low interest rates equal cheap loans.

            Refinance your home mortgageIf you haven’t already done so, get in touch with your current lender or shop around for the best combination of rates and costs of refinancing. If currently the rate on your loan is higher than 4.5% and you are able to qualify for a refinance at 4% or lower, take advantage of the savings. Do not forget to calculate the total cost of the refinance and compare that to the monthly savings so you can estimate how long it would take to recoup the cost of the refinance. A few hundred dollars a month can go a long way. Recently, I stumbled upon this blog post which discusses How Often Should You Refinance Your Primary Home Mortgage? It makes some excellent points.

Repay your credit card debts faster – Very often credit card rates are variable and based on Prime plus a certain percentage depending on your credit score. Since the Prime rate is at an all times low of 3.25%, chances are your variable credit rates are as low as they can be meaning the more you repay every month, the more you pay towards principal. Aim at paying more than the minimum payment.

Also, if you have above average credit, you are probably seeing quite a few zero percent transfer offers from credit card companies. Take advantage of those offers by transferring higher rate credit card balances but be disciplined and know the date by which the accounts need to be repaid before the interest rate defaults back to a high rate. Just make sure you do not add more debts.

Take advantage of deals – weak consumer confidence and low consumer spending is not helping corporate profits as more Americans prefer to save any disposable income or repay debt. Desperate companies are trying to lure consumers by offering significant discounts. Of course, refrain from spending just because prices are low but if there was something you need to buy, be patient and wait for the right deal.

If you have subscribed to discount websites like Groupon and LivingSocial, take advantage of the deals they offer. Just make sure you do not fall prey of the “how fun” mentality when you receive the daily emails. Do you really need that pottery class or bungee jump lesson? Even if they come at a 60% discount.

Most importantly, if you are in the market for a new car, home electronics, appliances or any major items that you really need, chances are if you do your research, shop around and are patient enough to find the best deal, you will able to take advantage of significant discounts.

Take advantage of distressed properties – It is quite unfortunate that there are so many foreclosures out there but if you are on the market for a home, now may be a great time to buy. Whether you are looking at a foreclosure, a fixer upper or a regular sale, chances are you will get a great deal. Historically low property prices coupled with unprecedented low interest rates make becoming a property owner very attractive. Plus you will take advantage of the tax deductable mortgage interest. Just remember that you do not have to borrow the maximum amount a bank qualifies you for.

So even in this zombie like economy there are ways to revive your financial health. What are you doing to take advantage of this economy?

Do’s and Don’ts When Getting Out of Debt

12 Jul

A significant part of my practice at the Baron Group is helping families get out of debt. Without a doubt, being debt-free is not only a requirement for financial freedom but also in most cases what is needed to be able to achieve financial goals and be able to retire.

The unfortunate reality is that so many of us, even the most financially disciplined ones are forced at one time of our life or another to take on debt due to unforeseen circumstances, very often urgent, such as job loss, medical emergencies, funeral expenses etc. And once there is too much debt we all know what happens – higher interest rates which then make it difficult to repay, inability to take advantage of the current lower interest rates environment in order to refinance a home mortgage for example… and it really becomes a vicious circle that it is difficult to get out of.

However, if getting out of debt is approached with a methodical plan which is followed diligently, then being debt-free could become a reality sooner than you had hoped for.

Below I have listed the 5 most important Do’s and the 5 most important Dont’s when it comes to getting out of debt.

DOs:

  1. DO Check your credit report

Begin by obtaining a consumer credit report. First, make certain the information reported is accurate and also use it as a guideline to accomplish the second very important step – set a budget.

  1. DO Make a budget

Once you have identified all debts from the step above, then compare those against all sources of monthly income and set a budget. It really helps to list all income and expenses and figure out what the difference is. Then identify the debt with highest interest rate and create a plan to repay that debt first, then the one with the second highest interest rate etc. Be systematic and precise in your approach! Also, be realistic! This will make the difference between succeeding and failing to follow your budget.

  1. DO Stick to your budget

Even if you create the most efficient budget, it would not mean much if you do not stick to it and are unable to follow. Your budget will probably mean a more frugal lifestyle than what you are used to but keep reminding yourself that it is a temporary solution so you can accomplish your long term financial goals. Think of the day when you will be debt-free and focus on that. Because sticking to your budget is really what will put your on the road to financial freedom.

  1. DO Use tools to find savings

The good news is that sticking to your budget may not be so difficult because there is a strong chance that there currently are ways within your own accounts. There is variety of tools to help you accomplish that. From Personal Finance software like Quicken thru completely free online resources like Mint.com to more robust and comprehensive tools like Your Family Bank®, the help is there, so take advantage of it.

  1. DO Beware of “Get Out of Debt” Companies

While sometimes it is indeed possible to renegotiate credit terms beware of companies that promise you miracles. In my over 20 years of experience, I have not seen credit card companies lower interest rates drastically just because you asked them to do so. If the promises those “Get out of Debt Fast” companies make seem too good to be true, they probably are.

DON’Ts

  1. DON’T Incur more debt to get out of debt

In some cases it makes sense to transfer balances from high interest rates accounts in order to take advantage of zero interest balance transfer option but beware of the zero interest expiration date and include that in your long term budget. But it is important to note that this makes sense to do between already existing accounts. It is rarely prudent to open new credit card accounts in order to repay existing ones. Remember, you goal is to break the vicious cycle, not to keep turning within it!

  1. DON’T Cash out a 401(k) to get out of debt

Liquidating a 401(k) account is an option when separating from an employer but it is rarely a smart choice to make considering the early withdrawal penalty incurred by anyone who is younger than 59 ½(usually 10% of the balance) and the income taxes that will need to be paid on that transaction (depending on your tax bracket it could be anywhere up to 35%). Not to mention the interest lost over time if the account is rolled over to another 401(k) or an IRA. As a rule of thumb, think of cashing out a 401(k) as a very last resort when all other options have been exhausted. A plan to get out of debt usually doest not qualify for a life and each situation when you should resort to such drastic measures.

  1. DON’T live in denial

Ignoring the reality is never the answer regardless of how unsettling the truth can be. Just being satisfied with the status quo will not help you achieve your financial goals. Creating a financial plan and following it, even if it means some sacrifices along the way is what is going to help you get debt free. Doing nothing will only make your debtors richer.

  1. DON’T be late

Sometimes even small mistakes can cost a lot. These days credit cards companies are quite unforgiving when it comes to late payments. Paying a bill late will, in most cases, automatically trigger an interest rate increase which will then set back your efforts and keep you further away from accomplishing your goals. Keep meticulous track of payment due dates, setup for automatic payments, do make all efforts not to be late on payments.

  1. DON’T forget your Emergency Savings Fund

Following your financial plan to get out of debt should not come at the expense of your emergency savings fund. Do not liquidate your savings to repay debt and even when you are in the midst of aggressively repaying debt, continue saving. The monthly amount doesn’t have to be huge, as long as you keep adding to your piggy bank.

Getting out of debt takes a good plan, determination to follow it and it may mean sacrificing some “wants” and “nice to have”s… But it is all worth it!

Best of luck!

7 Threats To Your Retirement When All You Have Is a 401K Plan

22 Jun

Less than a week ago, US News posted an article in the Smarter Investor section titled 7 Threats To Your Retirement. While the article thoroughly discusses some of the threats to retirement, such as switching jobs, early retirement and lump sum distributions, which are indeed valid threats to the average American’s ability to retire comfortably, the author seems to focus more on the issues facing employees with defined benefit plans.

The reality is that a large percentage of Americans these days are not going to enjoy the security of pensions when they retire as less and less employers offer defined benefit plans (i.e. traditional pensions) and more and more employers offer defined contributions plans(i.e. 401Ks) with a tiny match, if any… Therefore to me, the real issue to discuss is

What are the 7 threats to your retirement when all you have is a 401K?

A little bit of history can help us understand the current reality…

In 1974 when The Employment Retirement Income Security Act gave formal approval to employee-funded savings plans via a pronouncement that became the Internal Revenue Service Sec. 401(k). By 1981, regulations had been issued and the 401(k) plan formalized.
Johnson Companies quickly introduced the first 401(k) plan. It was designed to give employees another way to save. Theoretically, it would provide a way for workers to supplement their pensions with additional, tax-deferred personal savings. These plans differed from their predecessors, where employees received a defined benefit, and came to be known as defined contribution plans, because the amount put into the plan is defined but the amount that comes out is variable.

As time has passed, companies have replaced their defined benefit plans with defined contribution plans. It saves money for the companies, as they are no longer responsible for providing income to retired employees. Today, most employees think of their defined contribution plans as “pension plans,” but real pension plans come with a guarantee. So what is the result of the DC plan experiment?

Defined contribution plans are often for most Americans the closest thing to a pension plan. One with a few pitfalls which pose a threat to retirement and make planning for it that much more important and also challenging.

  • 401K plan contribution is too voluntary – Every employee gets to choose how much, if at all, they are going to contribute to their 401K plan. Very often young employees find a myriad of what seems at the time legitimate excuses to postpone contributing to a 401K plan. It is not unusual for college graduates to be heavily burdened by student loan debts which they are repaying well into their 30s and therefore not contributing or contributing very little to their defined contribution plans.  The investors who fall in this category don’t start thinking about retirement planning into their 40s at which point they have lost the benefit of time and now have to contribute much more than if they had started contributing in their 30s.
  • Often employees use the loan option as an ATM – The loan options on most 401K plans allow for access to quick cash but unfortunately can put the accumulation of wealth in the nest egg at risk. As a matter of fact, close to 30% of people who have the option of a 401K loan have already taken advantage of it.  Without a doubt, having the ability to take a loan against the vested portion of the 401K can come in very handy in a situation of an emergency when savings only cannot cover the need. However, it is possible to ignore the disadvantages of borrowing from the retirement nest egg such as fees, possibility of hurting the credit score in the event of default and most importantly the opportunity cost of 401K loan. Or in other words, how much of a tax-deferred growth are you giving up by taking the money out of the fund.
  • When compared to traditional pension accounts, it is really a pay cut for workers – The logic here is quite simple, yet this is one of the most significant disadvantages of defined contribution pension plans. Compared to the few lucky ones who are still offered defined benefit plans by their employers, the majority of Americans who only rely on a 401K take in essence a pay cut in order to contribute to the plan. According to the Social Security Administration, the National Average Wage index for 2010 is $41,673. If one were to contribute the maximum 401K deferral amount per IRS regulations of $16,500, that represents a whopping 40% of income.
  • There are no guarantees – This is really a continuationof the previous point. Unfortunately, even saving a significant percentage of annual income, and thus forgoing the ability to spend it now, there is no guarantee that the securities or funds in the plan will not fall in value and therefore make it imperative for the employee to continue working. The worst is that this market risk does not end at retirement.
  • Fee Structures no matter what–  Another issue to consider is that al though the investor is exposed to market risk discussed above, the mutual fund provider, the custodian, the clearing firm, the transfer agency and a myriad of other functionaries get paid their fees even if the stock market falls.
  • Possibility of making bad decisions – Defined Contribution plan participants are responsible for choosing their own investments. While some might argue that this option empowers employees, the truth is that most investors are not that great at picking investments. This is not necessarily due to lack of knowledge. Same is true for professional fund managers. For example, The Vanguard S&P 500 which is the most famous index fun in the United States marketplace, failed to match the performance of the benchmark index as of December 31, 2011.
  • Timing is everything – Bottom line, the success of any 401K plan depends on timing more than anything. Financial markets do rise and fall and if one has the luck to be in the markets when they are rising, fortunate enough to make enough money to cover the numerous expenses associated with retirement and astute enough to pull all the money of the market before the next recession, then the 401K plan might indeed help to cover the cost of retirement.

So what is the conclusion?

 

While 401K plans are not all doom and gloom, it is imperative that they are a part of a well though out financial plan. Just like with any other investment decision, your individual overall investment goals need to be evaluated in order to determine the most effective investment strategy. Although certain general rules apply, there is never a “one size fits all” answer when it comes to investing. Your advisor will help you determine the most favorable strategy in your particular case.

Best of luck!!

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