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Your Personal Finances

 Now that 2010 is one for the history books, it's time to set our sights on 2012. And because what lies ahead for us is unforeseen, it's best to take the necessary actions now to be prepared for the unexpected. Therefore, let's spend a few minutes to go over the "must-do" personal finance actions for 2012.

To Begin, Let Me Ask You 9 Questions:

  1. Do you know your debt-to-income ratio?
  2. Do you know your bank's rating?
  3. Do you have at least 3 to 6 months of savings stashed away for those unexpected emergencies?
  4. Are you taking steps now to help pay for your child's or grandchild's college education?
  5. Are you receiving all the discounts available on your home owner's policy?
  6. Are you taking full advantage of the Zero Percent Capital Gains tax rate this year?
  7. Are you planning to obtain Long-Term Care Insurance?
  8. Do you have an up-to-date Will, Advance health care directive and Power Attorney?
  9. Do you have adequate Life insurance?

If you answered these questions with confidence, then give yourself a pat on the back, you have a high personal financial awareness level. If you faltered on one or two questions, don't worry, considering and acting on these 9 steps for 2012 will get you on the right track.

      9 Steps to Put You On The Right Track

#1 — How to calculate your debt-to-income ratio.

Your debt-to-income ratio reveals your financial soundness. Monitoring your ratio also helps to avoid "creeping indebtedness." If you're seeking to obtain a loan for a home, vehicle or business, lenders look at this ratio when they're considering extending a line of credit.

To calculate your ratio, just follow these three steps:

Step 1. Add up your total monthly gross income. That could include your income from an employer, bonuses, tips, commissions, government benefits, child support, alimony and interest and dividends accruals.

Step 2. Add up your total monthly debt payments. Needless to say, that includes your mortgage payments, your car payments and any minimum payments you make on your credit cards. It does NOT include your taxes or utilities.

Step 3. Divide your debt payments by your monthly income.

According to the University Credit Union, a debt-to-income ratio of 36 percent or less is what most individuals should aim for. It's an indication to lenders that you have disciplined spending habits and are credit-worthy.

Be sure to recalculate your ratio once each year or whenever you face a significant life event, such as a death in the family, a divorce, a change in jobs, etc.

To see the formula, a worksheet example and the various percentage categories you may fall in, visit my Personal Finance Corner webpage by clicking here.

#2 — How to find your bank's safety rating.

In today's economic environment, savers and investors should continue to save and invest prudently. That means seeking the safest and most liquid havens for their money, such as banks with a financial strength rating of B+ or better, 3-month Treasury bills and treasury-only money market funds.

So, how can you find out your bank's rating? Visit TheStreet.com Ratings Screener and enter the name of your bank and the state that it's located. Then you can view its current rating.

#3 — Your Emergency Savings Account.

At any time you could get saddled with unexpected expenses. So you should aim to have at least 3-6 months of income in the bank for those unpredictable times.

One simple way to build a nice nest-egg with little effort: Set up an automatic funds transfer from your checking to your savings account with your financial institution.  

Saving $150 per month at an interest rate of just over 2 percent compounded monthly for the next three years will result in a savings of $5,570.34. And remember you can adjust the amount you're able to save each month to fit your lifestyle.

See table below:

 
Year Ending balance with
$150/mo contributions
1 $1,817.59
2 $3,674.10
3 $5,570.34

#4 — Saving for a college education.

I know in these difficult times it may feel nearly impossible to save for a child's or grandchild's college tuition. But, if the child is young (under the age 8), starting a savings fund now will pay off in the future.

With the average cost of a four-year college education at a public in-state university projected to reach $133,000 by 2025, many parents, grandparents or guardians may find themselves discouraged before a child even begins school.

For those who choose a private education at the elementary or secondary levels, the total cost to educate one child with a four-year degree could reach nearly $190,000 by 2025.

To help parents pay for a child's education from kindergarten through college, I recommend the following tips:

Start planning early.

The sooner parents begin planning for a child's college education, the better. Why? Because the sooner they begin to save, the more time their savings will have to benefit from compound interest.

Parents should aim to save as much as they can even if it's less than $50 per week.  

Consider this ... Parents of a newborn who sock away $200 per month in an account earning at least 3% per year for the next 18 years will amass $57,188.

However, if parents wait until that child enters high school to begin saving, they will have to save over five times that much per month, or $1,125.00, to accumulate $57,188.

Research available grants and scholarships. 

Many colleges have scholarships available for incoming freshmen based on their academic performance or need. Check with the schools you are considering for your child to see what opportunities are available.

So, please help the child establish disciplined study habits from elementary school onward, takes an interest in reading, writing, the sciences or the arts and enjoys focused extra-curricular activities that will enhance their well-being. This will give your child the opportunity to do well academically and will more than likely lead to a GPA and class ranking that's needed to qualify for these academic tuition scholarships

Look at Coverdell Education Savings Accounts (formerly known as Educational IRAs).

Coverdell Education Savings Accounts (ESA) were created to help parents and students save for future educational expenses, covering kindergarten through college. Total contributions for the beneficiary of this account cannot exceed $2,000 in any year, regardless of the number of accounts opened.

Contributions are not deductible. But amounts deposited in the account grow tax-free until dispersed.

Open a 529 Prepaid Tuition Plan for College.

A 529 Prepaid Tuition Plan permits parents to purchase their child's public in-state college education at today's prices.

For example, if parents buy a full year's worth of tuition for their elementary school age child today, 12 years from now their purchase will still be valued at a full year's tuition at a state college or university.

Currently, almost every state, including the District of Columbia, participates in this plan. The value of the savings is backed by the state to meet or exceed yearly, in-state public college tuition inflation.

For more information, visit http://www.collegesavings.org/. Take advantage of this wonderful savings tool as early as possible. If you have a newborn, now is a great time to start.

Consider a 529 College Savings Plan.

Another way to save money for your child's college education is to invest in a 529 College Savings plan. Earnings grow tax-free, and if the child whom the account was set up for decides not to go to college, the proceeds can be used by another family member.

Anyone can contribute to the account. And if the child is fortunate enough to receive financial aid, any money that is unused may be withdrawn penalty free. However, taxes on earnings will be due.

The 529 College Savings Plan can be used to pay for postsecondary education costs at most colleges, universities or other accredited educational institutions either public or privately owned. When parents invest in a 529 college savings plan, they may choose from a variety of investment options offered by the plan.

For more information on 529 College Savings plans, go to http://www.collegesaving.org/.

#5 — Take advantage of home owner's policy discounts.

Step 1. Buy your home and auto policies from the same insurer

Consolidating your home and auto insurance policies offers you a good chance of saving money. Most insurance companies may offer a multi-line discount if you have all your insurance policies with their company.

But, please make certain the health and viability of the insurance company is sound. To check the rating on your insurance company visit:

TheStreet.com Ratings Screener, click on Insurers, enter the name of the insurance company, select the type of insurance it offers and the state. If a rating is available for the company, it will appear on the right hand side of the screen.

Step 2. Strengthen your home's resistance

Discounts on your premium may be available if you've taken steps to make your home more resistant to natural disasters and damaging high winds. Let your insurance agency know if you've retrofitted your home for earthquakes, installed hurricane shutters, or reinforced your roof in general. Also, let them know if you've installed a security system, this may save you money on your premiums as well.

Step 3. 50+ Discounts.

If you are over the age of 50, there may be more affordable insurance for your home and auto available to you through AARP.org.

Step 6. Watch your credit score.

Having a good credit score may help you pay lower insurance premiums. So make certain you maintain a score of at least 740 or better.

#6 — The Zero Percent Capital Gains Tax advantage.

Occasionally, an opportunity comes along that is too good to pass up — and for 2012, that opportunity is with long-term capital gains from the sale of stocks, bonds and mutual funds. If your income tax bracket does not exceed 15% for the 2012 tax year, then you'll be pleasantly surprised to experience no taxes on long-term capital gains. Check with your accountant to make sure.

Take time to review and balance your portfolio. If you have losses in your portfolio, consider selling them. Taking a loss offsets capital gains made in your other portfolio positions.

You can write off or claim your losses up to $3,000 or $1,500 if you're married filing separately. And according to the IRS, if your net capital loss is more than this limit, you can carry the loss forward to later years. All you have to do is Use the Capital Loss Carryover Worksheet available at IRS.gov.

#7- Long-Term Care Insurance.

With the advent of better medical care and medications increasing our longevity, it may behoove us to take steps now to ensure we have enough long-term care insurance.

Long-term care insurance is not for everyone. Purchasing long-term coverage should not render financial hardship on an individual. Those who have significant assets that they wish to preserve for loved ones and not encumber family with nursing home expenses may want to consider long-term care insurance.

If you think this is for you, consult your financial advisor and see if this insurance fits your lifestyle.

#8 — Is your estate in order?

Do you have an up-to-date Will, Advance health care directive and a Power Attorney?

Do you have the necessary legal documents in place so in case of an unexpected emergency your loved ones will have clear and direct orders from you?

The beginning of the year is a good time to review your will, Advance health care directives and Power of Attorney to ensure they are up-to-date and clearly state your wishes. If any of these documents need to be reviewed, updated or established, now is a good time to consult your attorney.

#9 — Life insurance.

Life insurance is a mainstay in personal finance. According to the Life and Health Insurance Foundation for Education, 81% of Americans say they need life insurance, yet only 41% have actually purchased an individual policy.

The question is how do you know if you need it?

If you are responsible for providing in whole or in part financial support to another person, then you probably need life insurance.

You'll want enough coverage so that your spouse and/or dependents will not be left with obligations they will find difficult to settle, and they'll also be able to pay for ongoing and future expenses.

If you feel you may have inadequate life insurance or too much insurance, consider taking steps today to adjust your coverage to fit your life; begin by consulting your financial planner.

For more information, please feel free to visit my webpage here at MoneyandMarkets.com. Just click on the Personal finance corner icon on the top left corner the Money and Markets website or click here.

Remember, personal finance is an integral part of our daily lives. Well managed personal finances require an honest analysis of your current financial position, assessing your short- and long-term financial goals and calculating how to achieve them.

May your personal financial decisions be sound and beneficial for this year and years to come!

Until next time, Amber 


Credit & Debt

Topic 1: Credit Reports and Credit Scores

You should check your credit reports and scores at least once per year.

Your credit report is a detailed history on all of your credit transactions. Each of the three credit reporting agencies, Experian, Equifax and TransUnion maintain this report.

However, your personal credit history may vary per report. So it’s imperative that you check all three credit reports for accuracy because any discrepancies can affect your credit score, which is the single number that aims to summarize your credit history.

Credit scores range from 300 to 850, and the average credit score is 680. If your score is above 720, it means you’re considered a person with very good credit history and in good financial standing. But if your score is below 600, it has the opposite implication.

According to the FDIC, credit scores take into account the following conditions that can both negatively and positively affect your score:

  • Amount of time credit has been established
  • Length of time at your present residence
  • Type of employment
  • Length of time in current employment
  • Late payments
  • Bankruptcies

Your FICO score, developed by Fair Isaac & Co in the late 1950s, is available in three different versions from the three agencies. Most lenders look at all three and use the middle score. To obtain all three credit reports for free simply go to www.AnnualCreditReport.com, or call 877-322-8228.

Plus, to learn more about the three credit report agencies call or visit their websites using the following contact information:

1.) Experian
1-866-200-6020
www.experian.com

2.) Equifax
1-800-685-1111
www.equifax.com

3.) TransUnion
1-800-888-4213
www.transunion.com

Here are a few tips on increasing your credit score:

1.) Pay your bills on time.

2.) Do not apply for credit frequently.

3.) Reduce your credit card balances.

4.) Have some credit (having no or limited credit history will result in a lower score).

5.) Use old credit cards with no balances intermittently. These older cards have a history, a good history if they were used and paid off regularly with no late charges. These older cards help increase your credit score. So make sure to use them to buy small purchases once a year to keep your credit score up.

Also closing an older account prevents you access to a credit line, and that will raise your debt-to-available credit ratio.

You should check your credit reports and scores at least once per year.

Your credit report is a detailed history on all of your credit transactions. Each of the three credit reporting agencies, Experian, Equifax and TransUnion maintain this report.

However, your personal credit history may vary per report. So it’s imperative that you check all three credit reports for accuracy because any discrepancies can affect your credit score, which is the single number that aims to summarize your credit history. Your credit reports are available to you free of charge on the annual basis at http://www.annualcreditreport.com/.

Credit reports can seem long and daunting — don’t try to review all in one day. Make note of anything that seems odd and make phone calls to the credit report agencies to dispute the incorrect information. You may be able to change it; if not, at least there will be a note that you’re disputing it. Also, if you write a letter disputing any discrepancies, it will be permanently appended to your credit report explaining your side of the dispute.

4 Strategies to reduce credit card debt

1.) Make the call. Call every one of your credit card companies and request a lower interest rate. Did you know nearly 60% of consumers who call to request a lower rate actually receive it?

2.) Seek low not high. If you’re known to carry a balance month after month find a credit card with a low APR.

3.) Shop around. Look for a new card with a favorable rate that will allow you to transfer your balances. But, make sure you pay off the balance before the introductory rate expires. And always look for rates that have a 0-2% introductory rate that’s good for at least 6 months to 1 year.

4.) Plan of attack. Attack your higher interest rate balances first and in the interim pay the minimum balance on your lower rate cards, but send double, triple … even quadruple the minimum payments to the higher rate card.

Topic 2: Calculating Your Debt-to-Income Ratio

This may sound obscure, but it’s very important. Your debt-to-income ratio reveals your financial soundness. Monitoring your ratio also helps to avoid “creeping indebtedness.” If you’re seeking to obtain a loan for a home, vehicle or business, lenders look at this ratio when they’re considering extending a line of credit.

To calculate your ratio, just follow these three steps:

Step 1. Add up your total monthly gross income. That could include your income from an employer, bonuses, tips, commissions, government benefits, child support, alimony and interest and dividends accruals.

Step 2. Add up your total monthly debt payments. Needless to say, that includes your mortgage payments, your car payments and any minimum payments you make on your credit cards. It does NOT include your taxes or utilities.

Step 3. Divide your debt payments by your monthly income.
So the formula is:

Total Monthly Debt Payments
÷ Monthly Gross Income
= Debt-to-Income Ratio

Below see a sample debt-to-income table based on a person earning a gross income of $66,000 per year:

Debt

Monthly Payment

Monthly Income (Gross)*

Mortgage

$1,200.00

$5,500.00

Car Note

$450.00

 

Credit Card #1

$40.00

 

Credit Card #2

$35.00

 

Personal Loan

$150.00

 

TOTALS:

$1,875.00

$5,500.00

Debt-to-Income Ratio:

34%

* Monthly Gross Income: Income before taxes and other deductions

       

This person has a debt-to-income ratio of 34 percent, and according to the University Credit Union, a debt-to-income ratio of 36 percent or less is what most individuals should aim for. It’s an indication to lenders that you have disciplined spending habits and are credit-worthy. Here are the other percentage categories according to the University Credit Union:

37 to 42 percent: Your debts appear manageable. But they can get out of control. Start paying them down now. You may still be able to obtain credit cards, but acquiring loans may prove difficult.

43 to 49 percent: Your debt ratio is too high. Financial difficulties may be likely unless you take immediate action.

50 percent or more: Seek professional help promptly to make plans for drastically reducing debt before it’s too late.

Important: Be sure to recalculate your ratio once each year or whenever you face a significant life event, such as a death in the family, a divorce, a change in jobs, etc.

So now you know if you’re on sound financial footing or if your ship is likely to be sinking. (You probably had a good guess anyway, but the Debt-to-Income Ratio confirms it.)

Topic 3: Know Your Personal Assets & Liabilities

Your first step is to know in detail what personal assets and liabilities you have. Preparing the list may take some time at first, but the peace of mind it provides to you and your family is priceless.

Your assets fall into two categories — financial and physical. Financial assets are assets that can be converted to cash easily in a short period of time. Physical assets consist of tangible items you own that have monetary value.

Your liabilities are obligations or debts you’re responsible for re-paying.

Here’s a quick summary of financial assets:

  • Bank accounts
  • Stocks, bonds, and mutual funds
  • Life insurance policies
  • Company pension plans
  • Annuities

Plus, here are the most likely physical assets :

  • Your home
  • Rental properties you own
  • Cars and recreational vehicles
  • Home furnishings
  • Jewelry
  • Antiques
  • Artwork
  • Other Collectibles

Financial liabilities are as follows:

  • Automobile loans
  • Credit card balances and other charge accounts
  • Mortgages and other real estate loans
  • Student loans
  • Personal and business loans

Yes, preparing a list of your personal assets and liabilities can be a tedious process. However, once you do it, your list can be used in innumerable ways.

You can use it to help you settle insurance claims in case of a natural disaster or theft.

You can use it in the settlement of your estate.

And even if you never have to deal with any of these, it will be a very handy tool for you to plan your life!

Please use the table provided below to begin the process. Once you’ve made your list, keep it in a safe and accessible place so you can update it at will.

 

ASSETS

Value ($)

LIABILITIES

Value ($)

1.

       

2.

       

3.

       

4.

       

5.

       

6.

       

7.

       

8.

       

9.

       

10.

       

11.

       

12.

       

13.

       

14.

       

15.

       

16.

       

17.

       

18.

       

19.

       

20.

       

21.

       

22.

       

23.

       

24.

       

25.

       

26.

       

Tip for busy people: Write down all your assets and liabilities. If you don’t know the worth of something, just write the name down and skip the value.

Pull this list out at a later date and spend more time on it. Now, you should have time to look up something you couldn’t value the week before. Maybe you’ll remember something else that needs to go on the list. In a short time, you should be done.

 

WE CARE ABOUT YOU!

Courtesy of Au Glaize Real Estate Co

. - Hope this guide brings you a more prosperous New Year and Life!