Stash some cash for emergencies

As I mentioned in my last post, I knew the personal finance books I received for Christmas would yield some good fodder this blog. Here's the first interesting tidbit to share.

In The Wall Street Journal Complete Personal Finance Guidebook, Jeff Opdyke recommends stashing a few hundred dollars cash in a very secure spot in your home, just in case the power goes out in your area for an extended period of time. Though M and I have started using cash on a more regular basis, we get that cash from an electronic ATM. Plus, we're still pretty tied to using our debit card to pay for things.

Other than big snowstorms or the occasional flooding, natural disasters are rare in South Jersey, but having some cash around to pay for groceries in an emergency isn't a bad idea. Now I just have to find a secure place in my home to keep it (something I won't be writing about here).

By the way, the Carnival of Personal Finance is up at My Personal Finance Blog. Check it out if you have a chance.

Personal finance books under my Christmas tree

In our house, celebrating Christmas has become a month-long affair. With in-laws and siblings down south, a daughter attending college in Boston, and a blended family in general, M and I have been involved in family gift exchanges the last two weekends. We have three exchanges to go before the year is through (counting Christmas morning).

All the early exchanging makes the holidays a little more hectic , but it has perks. For instance, I've already gotten two things on my gift list: Jane Bryant Quinn's Make the Most of Your Money, and The Wall Street Journal Complete Personal Finance Guidebook, by Jeff Opdyke.

Author, author
Both books are tremendous resources for just about everything personal finance-related, from excellent writers. Jane Bryant Quinn is one of the most well-known personal finance experts around. I interviewed her once for my job, and she's as classy as she is money-smart. (Interesting notes I didn't know about her until now: She helped develop Quicken, the personal finance software I use, and her stepdaughter is Martha Quinn, one of the original MTV video jocks. Source: Wikipedia)

Jeff Opdyke is The WSJ's Love & Money columnist. He doesn't have the long list of credentials of Jane Bryant Quinn, but he has been covering personal finance and investing for The WSJ for more than a decade and has a real knack for clear, non-intimidating finance writing. (Interesting note about him I didn't know: He works for The WSJ but lives in Baton Rouge, Louisiana.)

Everything personal finance
I'm already halfway through the guidebook. It's a "lighter" read than JBQ's book, both in tone and weight. Mr. Opdyke covers all the basics of personal finance, from banking to investing to insurance, in less than 250 pages. My daughter Jess got it for me (because she "admires my passion for finance"), an irony because I think it's ideal for someone like her--young, busy, and just starting out in life. It also has a companion workbook (sold separately).

Ms. Quinn's book has been staring at me from the top of dresser the past two weeks. It covers the same ground as the guidebook and much, much, more, and in greater detail. It's more than two inches thick and 1,000 pages, including appendixes. However, it's well-organized and easy to navigate. Just don't try to stuff it in your special someone's stocking.

For me, perhaps the greatest gift from both of these books: Fodder for an abundance of personal finance ideas and thoughts to share with you here at The Coin Jar in the months ahead.

Private Student Loan Consolidation

Last week I wrote about federal loan consolidation and emphasized the importance of reviewing offers closely. There are two changes I wanted to point out: (1) Educational Loan Company - mentioned as a good baseline for comparing “medium-term” repayment offers – had required a minimum consolidation amount of $20,000; that has been reduced to $10,000. (2) The North Carolina Program, which had offered a 2% rate reduction incentive, offers incentives totaling 2% for on-time payment and an additional .25% reduction for auto payment (2.25% total rate reduction benefit available).


Contrary to popular belief, private loans can be consolidated … Here is what you should know if you have them and are considering consolidation:

• DO NOT consolidate them with federal loans even if they provide the option.

• They can’t be consolidated until you’re out of school and beginning repayment.

• In most cases, consolidating private loans will leave you with a variable rate loan – it will not typically fix your loan rate [like federal consolidation].

• Keep in mind that the best option is often to leave them alone. How to know?

1) Look at the benefits of your current lender. There are only about ten lenders that will consolidate any private loans. Most companies require that you have loans with them to be eligible to consolidate with them. The amount will vary – some will require that you have one or more loans with them – some will require 50% or more of the consolidating amount be with that lender. Researching your lender is a good start …

2) Shop around. As mentioned, there are a few companies that don’t have stipulations in order to use their consolidation/refinance program. Here’s a published list - http://finaid.org/loans/privateconsolidation.phtml. The lender, not the government, dictates the interest rates provided [most are linked to the Prime Rate or LIBOR].


Private loan are credit-based loans [as is the refinancing/consolidation process]. If you had poor credit when getting the loan initially, consolidating them may make sense if you now have better credit and/or a co-signer with good credit. The difference in rate from poor to excellent credit can be as much as 6%+ with some lenders. If you had good credit from the beginning, consolidation is not likely to provide much benefit to you. There are distinct costs to weigh in the decision. All of the criteria used to assess the ‘utility’ of the original loans should be examined when evaluating consolidation options. See my alternative loan article on the OFS website - http://financialsuccess.missouri.edu/altloanselection.pdf - for more detailed information about ‘cost’ considerations such as fees, potential prepayment penalties, borrower benefits, etc.

Good personal finance advice for your ears

I love my iPod. Listening to podcasts of radio shows from Dave Ramsey, Crown Financial Ministries, and Charles Stanley make my hour-long commute to and from work an education rather than just a grind. (In fact, I rarely listen to music.)

I'm going to add another show to my podcast favorites: "The Color of Money" from National Public Radio (NPR). It airs every week on NPR's "Day to Day" show. Michelle Singletary, the personal finance columnist for the Washington Post, is the primary contributor. The segment covers the usual range of topics, from saving for retirement, college, etc. to tips on starting a business.

Maybe the best part about it: It's informative and short, about four minutes long. Plus, with the podcast, no endless NPR fundraising segments to sit through in the fall and spring.

A Penny Saved hosts Carnival
The list of submissions to the weekly Carnival of Personal Finance seems to get longer and longer. This week's carnival is at A Penny Saved, and since there are so many choices, here are a few from the bottom of the list you otherwise may not have seen:

• The pursuit of the perfect savings rate at "My financial journey."
• 13 ways to save on gasoline, at "How to save money" (though you need to live near an Indian reservation for one tip).
• How persistence will make you rich someday, on "Money Smart Life."

Federal Student Loan Consolidation

As the end of the semester is upon us, it seems timely to review the issue of student loan consolidation. This week I’ll address consolidation of federal loans and will address consolidation of private loans next week.

First off, some reminders about some of the recent law changes:
- In-school consolidation is no longer an option. You will need to be out of school in order to be eligible to consolidate.

- You are no longer required to have multiple lenders in order to be able to choose your lender – even if all of your loans are with one lender [i.e., DMU], you are able to shop for the best deal for you.

- You are now unable to consolidate your loans with your spouses’ loans – this was never smart, but is no longer an option.


Other important consolidation considerations:
- You do not want to consolidate Perkins loans [or other loans] if they may be forgiven or repaid by your employer, state, etc. It is ok to consolidate them otherwise.

- If a lender is offering to combine your federal loans with private loans, credit cards, or any other non-federal loan debt, RUN!

- You can AND SHOULD consolidate even if you consolidated prior to take advantage of lower rates. You can always reconsolidate (to combine) loans as long as you have loans to consolidate that haven’t been consolidated prior. As most of you heard last year from me, doing this WILL NOT negatively impact your interest rate. Your overall rate will be a weighted average of your loans rounded up to the nearest 1/8th. For example, if you consolidated $5,000 of loans at 6.8% and $5,000 at 4.8%, you would now have a $10,000 consolidation loan at 5.8% … view resources below to access a calculator to find out your weighted average.

- Some people are afraid to consolidate because their repayment will be extended (thus more interest paid). Keep in mind that you can select the repayment option you want as well as choose to pay whatever amount you want (no legitimate program will assess a penalty for early payoff). Consolidation, however, is the only way to ‘lock’ the rate of otherwise variable rate loans.

“How do I decide where to consolidate – I get so many offers?”
This is perhaps the most important question to address … My experience with consolidation issues over the past several years has drawn me to one primary conclusion – the ‘financially smart’ place to consolidate is not going to be the same for every student; it is largely a factor of how you plan to repay your debt.

(1) If you haven’t borrowed much or plan to repay your debt quickly, you should search for a company that will reward you for doing so. This benefit will normally come as a principal balance credit. For example, Key Bank offers a 5% credit for consolidating with them. Some companies will provide a max credit, as well as other ‘fine print’ caveats, so read the application. While a couple ‘Benjamins’ is nice if this is my situation, if I have a long-term repayment scenario, being enticed by this type of benefit would be a big mistake!

(2) If I find myself in a ‘long-term’ repayment situation (I’m going to define this as 10 years or more of repayment anticipated), the best “deal” for me would be the company that will reduce my interest rate the most. This won’t solely be people that have large debt levels; these will also be individuals that wisely consolidated during the past couple years when rates were at historic lows and they see an opportunity to repay their debt at amazingly low levels and want to minimize that payment while they invest, prepare for homeownership, and focus on other financial goals. Your baseline when comparing rate benefits is to understand that an “average” company will offer a 1.25% reduction (normally .25% reduction for auto pay will be provided along with a 1% reduction in rate for on-time payments [normally of 36-48 months]). As part of the resource links below, I provide links to state programs that provide ‘above average’ benefits, like North Carolina, which offers a 2.25% total benefit for automatic and on-time payments. Information about the programs as well as other information are available below …

(3) The first two scenarios will cover most individuals, however, some individuals will have borrowed too much to pay off quickly; others may be debt averse and don’t want to extend it, so they fall somewhere in between the above two options. In this case, where you plan to repay your debt over an ‘intermediate’ term, review a company that will provide interest rate benefits (these will almost always work out better than the principal credit benefits) where the benefits are offered up front. For example, the Educational Loan Company offers a better than average rate reduction benefits (1.75%), but rather than needing 4 years of on-time payment, .5% of the benefit is up front for auto pay and 1.25% is available after only 24 months of on-time payments.

NOTE. Three things I want to emphasize. (a) These are general guidelines/rules of thumb – run the numbers to see what will make sense for YOUR LOAN SITUATION. (b) Read the applications to see if there are caveats – for example, the principal balance credit by Key Bank is foregone if you defer or forebear the loans during the first 36 months of repayment; Educational Loan Company requires you to be consolidating at least $10,000 total in debt. So read through to make sure the program fits with your situation. Don’t, however, assume that you’re not eligible either. It’s easy to say “I’m not from North Carolina, so I can’t do that” when the reality is that if you’re willing to spend 5 minutes, you can create a connection that will enable you to be eligible for their program. Thus, (c) BE SMART and take a few minutes to figure things out, it will be well worth your time!


*CONSOLIDATION RESOURCES.
- Calculating your loan payment
- Calculating your weighted average
- Consolidation strategies
- Repayment options
- State consolidation programs

* All of these links are available via the OFS site click on the “student issues” button …

Red storm rising for many homeowners

The predictions are coming true. And faster than many financial experts expected.

People are losing their homes. In droves.

"Americans who have stretched themselves financially to buy a home or refinance a mortgage have been falling behind on their loan payments at an unexpectedly rapid pace," The Wall Street Journal recently reported. "The surge in mortgage delinquencies in the past few months is squeezing lenders and unsettling investors world-wide in the $10 trillion U.S. mortgage market.

The article notes that most of the defaults stem from people that had a questionable ability to pay from the start. However, it appears that the trend is spreading to other parts of the mortgage market as well.

A report on ABC's Good Morning America said that more than a million families have lost their homes to foreclosure in the first 11 months of this year. That's up a whopping 43% from the same period a year ago. In the state of Georgia alone, foreclosures have increased 100%.

An early increase
The apparent culprits of much of the foreclosure activity: non-traditional loans, such as interest-only and adjustable rate mortgages. As housing prices soared through 2005, millions of homebuyers took out these mortgages--which have low monthly payments in the beginning, but that can jump substantially after a few years--to keep their home purchase "affordable."

I remember watching a news report about a year ago that cautioned about the risks of all these homebuyers taking out non-traditional loans. The reporter brought up the possibility that, when homeowners' payments increased in three, or four, or five years, we could see many people losing their homes because of an inability to pay.

Well, the increase has come early. For instance, $1.2 trillion in adjustable rate mortgages will adjust upward in the coming months, the Good Morning America report said. The impact on already stretched homeowners is proving to be pretty big.

Evaluate other options
If you've been able to make your monthly payments on an adjustable rate or interest-only mortgage, now's the time to evaluate other options. Consider refinancing to a 30-year fixed-rate mortgage, which currently runs at about a 6% interest rate per year--historically, still a very good deal. You'll surely face some upfront refinancing costs--and make sure there isn't a pricey prepayment penalty in your mortgage contract--but those costs can be worth it over the long run.

However, you may find that going to a fixed-rate loan--even a 30-year one--means you can no longer afford your house. Generally, housing costs (mortgage, interest, taxes, and insurance) should be 25%-35% of your household's monthly net income. If refinancing causes your mortgage payment to eat up 40% or 50% of your net income, you've bitten off more than you can chew.

In that case, it may be time to call your realtor. Which is better than dodging calls from creditors and eventually seeing your family's home auctioned off in a sheriff's sale.

Not too early to think of 2007 personal finance goals

2006 is almost in the books. So what are your personal finance goals for 2007?

More than one-third (37%) of American workers said they plan to pay off credit card debt next year, and a third plan to put a set amount of money into savings each month. That's according to latest Principal Financial Well-Being Index, a survey of U.S. working adults at businesses with 10 to 1,000 employees and sponsored by the Principal Financial Group®.

Those are great goals to have. Add to those starting an emergency cash reserve, or increasing your reserve amount to six months of living expenses. Or keeping better track of how you spend your money. Or making sure you and your family have enough life insurance.

For my wife M and me, I'd like to see us get better at setting and living within our monthly cash budget. We did great our first month in October, but weren't as disciplined in November and through this month so far. Next year, I'd like to shoot to stay within our monthly budget for at least six consecutive months.

I also want to finalize our wills. This was a 2006 goal that I set just a few weeks ago , and I made a good start using my company's online estate planning document service. But I ran into a couple snags, so completing it will have to wait a little longer (sorry, M my sweet!).

Two other big objectives: Paying off the last of our student loans and a personal loan we took when we had CJ Jr. If we reach those goals--a good possibility--then we could start up our kids' college savings contributions again and making extra payments on the mortgage--two things we cut back on when we went to one income last June.

Last, but not least: Buying a highly used but reliable van (with cash, of course). This goal is heavily dependent on whether our family size shows signs of increasing in the next couple months, Lord willing.

Yes, I should have plenty of personal finance experiences to blog about in 2007.

Extended Warranties - Unwarranted?

A lot of electronics will be purchased this holiday season. For those of you that will find yourself in this situation, the inevitable question awaits … “Would you like to purchase our extended warranty?” What do you do …?

What do the experts say … Consumer groups [and common sense] will normally tell you to turn down the urge to accept the offer. A fast-growing $15 billion dollar industry has been built on the likelihood, however, that you’ll succumb to the impulse to say yes. Millions of people each year pay anywhere from 10% to 50% of a product’s original purchase price to extend a warranty. The decision to buy the extended warranty defies the recommendations of most economists, consumer advocates, and product quality experts who warn that the plans rarely benefit consumers and are almost always a waste of money.

What are they … Extended warranties were first introduced as a high-pressure sales tool by large electronics stores in the late 1980s. Now, they are a core product sold by all kinds of retailers and cover a wide range of products. The warranties are technically insurance products where the premium is paid in a lump sum at the time of purchase. Extended warranties generally lengthen the coverage provided by the manufacturer’s warranty on a product. While terms vary dramatically, the plans typically add from one to three years of protection.

How do they work … In terms of service, most warranty providers use third-party contractors to repair broken items, and consumers don’t get to choose who performs a covered repair. Many policies won’t cover accidents or normal wear and tear (the most common causes of breakdowns in common household goods). Most importantly, however, is the fact that the vast majority of extended warranties are never used.

One distinct disadvantage for consumers is its vast difference versus selecting other “insurance-type” products. When buying auto insurance, for example, it’s relatively easy to make an informed purchasing decision by comparing terms and prices among different providers. It’s not nearly as simple a process to comparison shop for an extended warranty at the checkout counter. Not all salespersons are provided a commission for selling the product but be certain that they’re trained to make sure you know about the warranty and its benefits.

By the numbers … Warranty Week, an industry publication, last year estimated that of the $15 billion in premiums charged to consumers in 2004, $7.5 billion went straight into the pockets of the stores that sell warranties. Of the remaining $7.5 billion, it was estimated that only $3 billion was paid in claims by the insurance companies that back the plans (20% payout ratio). Contrast that with the auto insurance industry that paid out $66 in claims for every $100 in premiums during the same year (Insurance Information Institute).

Bottom line … Consumer Reports almost never recommends buying an extended warranty, especially on automobiles. But even Consumer Reports makes exceptions to the rule. Last year, for the first time, they discovered that repairs on some products (namely laptop PCs, treadmills, and plasma TV sets) were common enough and expensive enough that a decently priced extended warranty would make sense. So what does that mean for you? More times than not, an extended warranty is an unnecessary, expensive option – think twice about it when making that purchase this holiday season.

(SOURCE – Washington Post, October 2006)


ADDITIONAL RESOURCES:
- Extended Warranties & Service Contracts (Univ of FL)
- Extended Warranties: Are They Worth Buying? (Univ of KY)
- Take a Hard Look at Extended Warranties (CUNA)

Research: Thinking about money increases selfishness

I didn't have to go far to find an intriguing post in this week's Carnival of Personal Finance, hosted by Money and Values. Just the second one listed, actually.

Laura Young, host of "The Dragon Slayer's Guide to Life" blog, highlights some interesting research featured in the November Science magazine on "The Psychological Consequences of Money." A study conducted by a team from the University of Minnesota shows that just the thought of money tends to make folks more self-centered, selfish, and less willing to help others.

I feel like I've known this fact for years, especially being a sports fan. As the contracts for professional athletes and televising events have gotten bigger, so have the egos and self-centeredness of the players and league executives, across all sports. It's nice to see some solid scientific data to back it up.

A holiday gift for your kids that will last a lifetime

I'm probably missing a marketing opportunity here somewhere.

Occasionally I notice that people find my blog by googling "coin jars." Which got me to thinking, if you're looking for one last small gift to round out your child's holiday goodies, why not consider giving him or her a coin jar?

A search of Amazon.com produces a choice of four kid-friendly coin jars, ranging in price from $12.99 to $49.95. (I'm not counting the Qing porcelain coin vase included in the search results as fit for children. Also, note that two of the jars are virtually identical; one just costs $2 more because it's endorsed by Discovery Channel.) All are electronic, counting the coins as your child puts them in and displaying the total amount saved. One even counts and wraps the change for you.

I like the idea of motivating kids to save by showing them immediately how much their quarters and pennies have added up to. But I also think you get a big bang for the buck with children by dumping a bunch of coins out on the floor and helping them patiently count up their loot (reinforcing their math and money skills along the way). Either way, you're sure to get a "Whoa!" or an "Awright!" when they see the total in the end, which will leave a good impression of the value of saving on their minds.

Granted, an electronic coin jar isn't as fun as TMX Elmo or Nintendo Gameboy Advance. But those gifts will last from maybe a couple weeks to a year. The benefits of being a good saver will have the shelf-life of a lifetime.

Eliminating Debt (Psychological vs. Financial)

Is one way better than another to get rid of debt? The answer to your question will likely differ depending on who you’re asking.

“FINANCIAL” METHOD. Nearly every ‘financial’ person will advise that debts should be paid off in a particular order: start with highest interest rate and move to the lowest interest rate (done by rolling the payment from one debt to another as debts are paid off). While this method makes perfect sense from a mathematical point of view, more and more people are finding that there is another method [often overlooked] that works better on their psyche ...

PSYCHOLOGICAL METHOD. This system of debt repayment, often referred to as the “debt snowball,” organizes one’s debt from the smallest balance to the largest balance. This method is not likely to save the most money or time (as the interest rates are not likely to align in that manner), but many find this approach very empowering and motivating because they see progress quickly. Focusing on the smallest balance first will accomplish this end.

In both of these methods, pay the minimum amount on all debts except for the “focus” debt (smallest balance in psychological method; highest interest rate in financial method); pay as much as possible on the focus debt until it is eliminated and then approach the next debt in the list with similar intensity.

I’m not arguing against the merits of the financial method as outlined above. Obviously, if someone has the discipline to adhere to the plan, you’ll save the most time and the most in interest expenses. The psychological method merely takes a seemingly more “human” approach to finances that suggests that people will be more likely to stick with their ‘financial diet’ if they see some ‘debt pounds’ come off quickly … that is what Personal Finance is all about – doing what works best for you (which very well may be something different than the next person). After all, the point is getting out of debt [the end]; don't get caught up in the means to the end. How you decide to do it is much less important than doing it.

Check out the following Excel spreadsheet if you want to play around with the different methods …

Kids and money, loose change, and turkey leftovers

Carnival of Personal Finance #76 is up at My Financial Journey, with 47 entries. My personal highlights:

Finance-4-Kids gives some tips on how to teach your kids about money. One or two seem a little pie-in-the-sky--I'm not sure how you can "Eliminate fear and greed" in anyone, let alone children--but generally his points are well-taken.

(Incidentally, I've started CJ Jr. putting money in his piggy bank. At two-and-a-half years old, he is more interested in the loud "clunk!" sound from dropping the coins into the pig's belly than the value of saving today for something tomorrow. Hopefully, someday that will change.)

Jenna Coffee at Moneybucks Coffee writes about something dear to my heart, given the name of my blog: what she calls "nuisance money," or the coins at the bottom of her purse and in a jar on the counter. I didn't know Coinstar charged 8.9% for their automated machine to count your pennies (it's also free if you use the money to buy a gift card). Nice work if you can get it.

Finally, here's a post in the spirit of the season that I wish I wrote: What can you learn about money from a turkey dinner? at Money Smart Life. You'll be looking at your Thanksgiving leftovers in a new way.

Calculator gives you the basics for creating a budget

The thought of creating a family budget stops many people dead in their tracks. They look at the stack of bills and receipts on their desk, and suddenly cleaning out the garage is more appealing.

Often the reason is because folks don't know where or how to begin. But when it comes to setting up a budget, you don't have to recreate the wheel--there are any number of tools out there to get you started.

Take the "Ideal Budget" calculator on CNNMoney.com, part of its Money 101 series on the basics of personal finances. The "Ideal Budget" doesn't quite live up to its name in my book, but it's a quick and easy way to give you the basic framework for your own budget.

A broad financial picture
With the Ideal Budget calculator, you first input the amount of your income. Then you enter your expenses, in five broad categories: Housing & Debt, Taxes, Insurance, Savings and Investment, and Living Expenses. The calculator shows the percentage of your income going to each specific category, and provides an "ideal" budget allocation to see if you're spending too much or too little in one area.

It took me all of about 10 minutes to enter my family's information, though admittedly I have most of that information available at my fingertips. If you don't keep track of your expenses regularly or can't remember what you did with your last paystub, it will take you a bit longer.

I liked the fact that the budget was organized into just five expense categories. If you're just starting out making your first budget, simplicity is key. You need to have enough categories to make the personal financial "data" you're gathering and tracking helpful, but not so many that it's an administrative headache.

Not perfect categories
But I question a couple of the specific categories the Ideal Budget uses. For instance, I don't see a whole lot of value in budgeting your taxes. True, taxes are a big expense, but they are what they are. Most people with a steady paycheck or mortgage payment pay the same amount each month. If you're overspending in one category, you wouldn't be reducing your taxes to make up the difference. M and I base our monthly spending plan on after-tax income, which is truer to the actual income we have to spend.

I also don't like grouping Housing & Debt together. Yes, your home mortgage (if you have one) is debt, but it's also an investment--much different than the credit card balance you have for that plasma screen TV, or your new car loan. It's much more revealing to give your consumer (i.e., non-mortgage) debt its own place in your budget, and see just how much of your monthly income it's consuming.

Percentages can be questionable, too
The "Ideal budget allocation" percentages provided with the calculator are helpful. Some of the most common questions folks have about their finances are, "How much should I be spending per month on my house? On groceries? On entertainment? etc.," and the calculator gives a basic idea.

But like the categories themselves, the percentages come with some caveats. The calculator lists 25% as the ideal amount that should go for taxes, an amount which realistically could vary by the individual. It lists just 26% of income going for living expenses, but includes everything from food and clothing to gasoline and utilities. I don't know where the folks from CNNMoney live, but in New Jersey, the cost of living is probably higher than 26 cents of every dollar.

One "Ideal budget allocation" I agree with: 15% for Savings and Investment. That's truly an ideal figure, based on the fact that the U.S. savings rate has been negative for the past year, but one well worth striving for.

A first step worth taking
Judging by the "Ideal Budget," my family's in pretty good shape. We have little debt, so we're well below the 30% ideal allocation in that category. Our living expenses are running about more than a third of our income, which makes me question the cost of my 105-mile roundtrip daily commute--but since I love where I work and where I live, that's probably not changing.

If you've never created a budget before, the Ideal Budget calculator is worth a try. At least you'll get to say, "So that's what a budget looks like...!" But keep its limitations in perspective and think about how you could tailor it to your own needs. Hopefully, it will encourage you to put off cleaning the garage for another week.

How to save $1,000,000 and have your own jet, too

My friend Tim, hero of my recent "Shopping tips from a savvy online bargain hunter" post, proved again that he really knows how to find good deals online. Check out this one he found advertised a couple weeks ago on Dealnews.com for a Cessna Citation Mustang Light Jet from Sam's Club.

Sure, the $2.7 million pricetag might seem a bit steep. But consider that it's $1 million off the list price and comes with a Sam's Club lifetime membership. Chances to be a wise spender like that just don't come around every day. No wonder Sam's Club is already showing the jet as "sold."

High taxes may be the least of your problems

The politicians here in New Jersey are at it again--trying to figure out a way to lower the highest state taxes in the country. Few Jersey residents believe they'll make much headway, as this Philadelphia Inquirer article points out, and I, too, will believe it when I see it.

But if you think that lower taxes will make a big difference in your personal finances, think again. If you're complaining that taxes are too high and are a big reason you don't have enough money to live, you just might be looking at the wrong side of the equation.

It's not the taxes that are killing you

I was struck by this quote at the end of the Inquirer article linked to above:

"I just spent $200 on beauty products and makeup and had to pay $14 in sales tax," said Elisa, a woman shopping in Atlantic County. "I think that's ridiculous. They better start giving us something back or people are going to start moving to states where they have to pay out less money in taxes."

Now I'm trying hard not to rush to judgment. I've been with my wife M when she's bought makeup and I know it can cost a pretty penny (even at our local drugstore). Plus, I know that M wears makeup to look nice, mostly for me, and so I can be held responsible for the lipsticks and eyeliners in her purse. Guilty as charged. (Though she looks beautiful naturally, too--seriously.)

But $200? For makeup? And then complaining about $14 from a 7% state sales tax?

I can't make that kind of logic add up.

Taxes are a good, not great, deal
No one likes a big tax bill. And I've done my share of griping about the big chunk of our family income that goes to our federal and state governments.

But taxes are a fact of life. They pay for things our country and states couldn't do without, like roads, schools, and the protection of our homes and families. In the big scheme of things they might not be a bargain, but they could be considered a pretty good deal.

Being money-wise is less taxing
I don't know if Elisa is rich or poor. I don't know if that $200 in makeup will last her a year or a month. I don't know if she carefully included the expense in her monthly spending plan.

But if she's in a financial mess, I know one thing: Paying $14 less in taxes--or moving to another state with no sales or income tax--isn't going to get her out. Her best chance at financial redemption is to change how she thinks about her money, and how she behaves in regards to it. Save more, spend less, know where every dollar goes. That's taking a wise approach to managing your money.

It's good advice for every person to follow. And come to think of it, for every legislator too.

We've been "crammed!"

That's right, crammed. And I didn't even know it.

"Cramming" is the practice of unethical companies burying charges in the pages of your phone bill for services you never authorized or even used. The charges can range from a few dollars to double-digit amounts--but often not large enough for you to notice and question the total amount of your bill.

My family was fortunate because the charge was small, we picked up on it right away, and it took just one call to get it removed. But others haven't been as lucky. Cramming can mean shelling out quite a few bucks, wasting a lot of time on the phone, and dealing with a big headache.

Getting a name pays off
I discovered we'd been crammed thanks to writing this blog--specifically the "To get better service, get a name" post a few weeks back. I was going to write about my experience following up on a $7.64 "miscellaneous charge" included in our August phone bill from a company named OAN Services, Inc. The charge was for a call from our home phone line to a strange-looking, 9-digit number, one that neither I nor my wife M could recall making.

I called the 800-number provided on the bill for OAN and told their representative that the charge was either a mistake or bogus, and we wouldn't be paying it. The OAN woman briefly tried to explain what it was for--which I still don't know, but it was something having to do with the Internet--but I stood my ground. When she finally said she'd have the charge removed, I dutifully wrote down her first and last name--just like I advise in my post--and confirmed that it had been done a few days later by checking my bill online.

I couldn't recall the woman's name, so I couldn't use the experience for my "Get a name" post. But in looking up OAN on the Internet to try and jog my memory, I discovered that the company's business is scamming people through unauthorized phone charges.

Rip-off reports galore
According to posts on www.ripoffreport.com, OAN billed one person in Illinois $53 for "non-basic service charges." "After calling the numbers provided on the Verizon Bill...we were placed on hold for a period of time, then when we disputed the call they said we had said yes to this service. Verizon would not address this issue, only tell us to call the numbers provided," the Illinois resident said.

"This company is charging me for Directory assistance in Nevada that I never used. My phone Company...said that there was nothing they could do...My charge was $7.14. Imagine multiplying that by all the phones and cell phones in the United States and you have a MULTI_MILLION dollar business," wrote Patti from Missouri.

And blogger Brian Patton had to make five calls and spend a couple hours on the phone to get a $50 charge removed from his bill.

If you're a victim, too
The Federal Trade Commission (FTC) and Federal Communications Commission (FCC) are well aware of cramming. Here are a few tips from the FCC to protect yourself:

• Review your phone bill every month (as you should do with every bill and account statement you receive). Keep an eye out for calls to unfamiliar numbers, or for services that you don't recall ordering or using.


• Make sure you know what service was provided, even for small charges such as $2.00 or $3.00.


• If you can't explain what a charge is for, call your phone company or other service number provided and question its authenticity.


• Keep a record of the telephone services you have authorized and used – including calls to 900-numbers and other types of telephone information services.


• Read the fine print in promotional materials before signing up for telephone or other services to be billed on your phone bill.

If you have been crammed, immediately call the company that charged you and request to have the charges removed. If that doesn't work, you have several options: contact your state Attorney General's office, enlist the help of your local Better Business Bureau, or escalate your complaint to the FTC or FCC. The FTC, in fact, has a special cramming hotline at 202-326-3134.

One theme consistent in "cramming resolution" success stories: Be persistent. It may take several calls and some time, but you should be able to stop it and even have your money refunded.

And if OAN is the one you're after, here's where I reached them: 800-731-7777.

Visit this week's carnival of personal finance
Everybody loves the carnival, and Everybody Loves Your Money is the host of Carnival of Personal Finance #75. The list of personal finance articles seems to grow every week. Here are my favorites:

• It's Just Money: "How much do I say?" The LAMoney Guy struggles to decide whether he should speak up to help his sister and brother-in-law avoid a financial train wreck.
• Art of Money: "Micro-lending and the art of poverty" Jon profiles Muhammad Yunus, who will receive the Nobel Peace Prize in December for making loans to the poor.
• FIRE Finance: "All is well if our HEART is well" Here's an interesting and creative way to think about the things that make for a good retirement.

Negotiating a Lower CC Rate

There have apparently been some 'issues' with registration for the 1-credit Financial Success class. They should [hopefully] be resolved now - there are no prerequisites or requirements for class entry. More info below ...

Negotiating a lower credit card rate:
Any “get out of debt” strategies/plans you come across will consistently tell you to lower your credit card rates. Obviously this is good advice and a no-brainer strategy – if I can repay my credit card debt at 10% instead of 20%, I’ll be better off. What most of these plans leave out is how you go about getting a lower rate on your credit card. Let me share some ideas with you if you find yourself in a high rate CC situation.

1. Call your credit card company and ask for a lower rate. Most have lower rates available to good customers (customers paying on time every month), but they don't volunteer the information ... you have to ask. This is likely to work if your high rate was the result of a missed payment and not a long-term problem.
2. If your card refuses to give you a lower rate, find one that will. Do some homework – there are over 30,000 credit cards out there. In this highly competitive industry, if someone won’t treat you the way you deserve, someone else will. A few websites to search for no-fee, low rate cards [assuming you haven’t already gotten several acceptable offers in the mail] include:
- CardRatings.com
- CardWeb.com
- CreditCards.com
- Index.Credit.Cards

After you’ve done your homework, contact your company to inform them of your offer. Being specific is important, because an offer in hand will create leverage for you. Let them know that you wanted them to have the opportunity to match the competitors offer before you transferred your balance. Ask to speak with a supervisor if necessary. Click here for a sample script.
3. Be prepared to switch. If what you’ve tried to this point hasn’t worked, consider switching to a card that is more interested in your business [willing to work with you]. If you have a card without a balance, call that company first to see if they have a balance transfer special prior to opening a new account.

Call confidently – a 2002 study found that more than half of the people [from a wide variety of credit situations] that called to request a lower credit card rate were granted their request – from an average starting rate of 16% to a lowered rate of 10.47%. I met with a student this afternoon and we talked about her credit card rate and tactics she could explore to try to lower her rate. All of these things above were discussed – the source of these three suggestions to negotiating with your CC …? AMERICAN EXPRESS!


Seats in the 1-Credit courses for spring are filling quickly ...
Financial Survival -- FIN PLN 1183 (Ref #43500) - (68 seats left)
Financial Success -- FIN PLN 4318 (Ref #43587) - (117 seats left)

The "award winning" Financial Tip of the Week is a service of ...
University of Missouri-Columbia
College of Human Environmental Sciences
Department of Personal Financial Planning
Office for Financial Success
Dr. Mark Oleson - OFS Director

New cars may be more affordable, but still don't buy one

Cnnmoney.com ran an article recently that cars are at their most affordable levels since 1980. According to Comerica Bank's "Auto Affordability Index," better productivity in the auto industry combined with intense competition has driven the cost of a new car downward since its high in 1994. Meanwhile, the average family income has risen five percent over the same period.

"It's a pretty happy story for the consumer," Dana Johnson, chief economist at Comerica, is quoted as saying.

Not this consumer. Including finance charges, Comerica estimates the cost of the average passenger vehicle sold in the third quarter of 2006 at $26,500. That's about five percent less than the same period a year before, but still an awful lot of money to pay for something that's going to be worth about half that amount in a year or two.

If you are trying to get your finances on track--working to pay off debt, amass funds for your retirement or your kids' college, build up an emergency cash reserve--then a new car is a sure way to run yourself off the road. Just say no to buying one.

Used cars are a lot better deals than they used to be. I saved a few thousand dollars buying a 1998 Nissan Sentra with 12,000 miles on it eight years ago. It just passed the 170,000-mile mark. Best of all, it's completely paid for, giving M and I the freedom to work on our other financial goals--like trying to move up to a single-family home without mortgaging our life away.

Successful Models in Financial Education

As I sit here in a hotel room in Washington D.C. contemplating what to write about in this week's tip, I think I'll take the opportunity to toot our horn a little bit ...

Since arriving at the University of Missouri about 15 months ago, the Personal Financial Planning Department has been supportive of just about everything I've wanted to do in starting/operating the Office for Financial Success. We've had many rewarding successes along the way - today among those. I was very honored to be invited to D.C. by Freddie Mac to receive two awards that provide national validation to the good things being done at MU.

2006 Successful Models in Financial Education Awards:
Freddie Mac today announced their 2006 successful models within four financial education categories. The OFS was proud to be recognized in two of the four!

* Successful Outreach and Marketing Efforts for Financial Education.
We received the top recognition in this category for our Financial Tip of the Week. Time has only increased the popularity/readership of the tip; the new conversion to a weekly blog has been popular as well.
* Successful Tools or Resources Used in Financial Education Initatives.
We were runner up in this category for our Financial Survival course for college students. The unique 1-credit pass/fail Financial Success course that hasn't even been offered yet (next semester will be the first offering) is already receiving attention.

Seats in the 1-Credit pass/fail courses are filling quickly ...
Financial Survival -- FIN PLN 1183 (Ref #43500) - (<100 seats left)
Financial Success -- FIN PLN 4318 (Topics) (Ref #43587)


The "award winning" Financial Tip of the Week is a service of ...
University of Missouri-Columbia
College of Human Environmental Sciences
Department of Personal Financial Planning
Office for Financial Success
Dr. Mark Oleson - OFS Director

Personal Finance - Educational Resources

It is amazing the amount of resources available in the area of Personal Finance. Some resources are stellar, some are poor, and a whole lot fall in between. My objective this week is to expose you to some of these resources [the better ones]. Keep in mind that this is not an endorsement for any of them – my hope is that you’ll be able to find some that will be beneficial to you [as a teacher, a parent, a student, or whatever situation you find yourself in]. You will find that some of the resources are geared toward beginners; others are geared toward individuals that have a good understanding of beginning personal finance principles … all of these resources [at least the basic information] are available at no cost. This should not be considered an exhaustive list of resources, merely a broad brush stroke. Here are a dozen different resources covering various aspects of personal finance:

* Checkbook Basics
* FDIC - Money Smart
* Florida State - Fundamentals of Financial Planning
* Freddie Mac - Credit Smarts
* MoneySKILL
* MU Extension - Info Sheets
* My Money
* NEFE - Get Smart About Your Money
* NEFE - High School Financial Planning Program
* Practical Money Skills for Life
* Rutgers - Investing for your Future
* Smart Money - Investing 101

The Financial Tip of the Week is a service of:
University of Missouri-Columbia
College of Human Environmental Sciences
Department of Personal Financial Planning
Office for Financial Success
Dr. Mark Oleson - OFS Director

Credit Myths ...

Myth [mith] – noun – an unproved or false collective belief that is used to justify something; any invented story, idea, or concept. In the world of credit, innumerable myths abound. Let’s explore a few …

MYTH. When delinquent accounts, judgments, missed payments and other “negatives” are paid, they will be removed from my report. TRUTH – the information will remain. Your credit file is a credit HISTORY, it will simply reflect that it has been paid [which is obviously better than unpaid].

MYTH. Credit reporting agencies make credit decisions. TRUTH – credit reporting agencies provide information [nothing more] to lenders who make the decisions.

MYTH. Personally viewing my credit report will lower my credit score. HUGE MYTH. TRUTH – viewing my credit report will have no negative bearing on my credit score.

MYTH. In the case of divorce, the divorce decree will always carry more weight than the credit obligations. TRUTH – the credit obligation will override a divorce decree.

MYTH. I need to keep a balance on my credit cards and other debts to build a credit history. TRUTH – credit use and on-time payment are what build a credit history. I can do this and still pay the balance in full each month.

MYTH. Shopping for the best rate for an auto loan or home mortgage is not a good idea because the multiple inquiries will be a negative. TRUTH – while many inquiries can hurt one’s credit, inquiries for auto loans and mortgages will be lumped and treated as one inquiry. Shop for the best deals!

MYTH. While poor credit has obvious financial consequences, it doesn’t really affect anything beyond that. TRUTH – an estimated 70% of employers will review your report prior to a hire. Money problems have been linked to less productivity at work, more missed work days, problems at home, and other “baggage” many employers don’t want.

MYTH. I must give permission for a company to see my credit report. TRUTH – with the exception of an employer, permission is not needed. Just look at the inquiry section of your report and you’ll see a lot of people that “pre-approved” you for a credit offer that you never gave consent to.

MYTH. If I’m responsible with credit, I have no need to review my reports. TRUTH – depending on which study you read, it is estimated that as much as 80% of consumer reports contain errors; about 1/3 of those errors are big enough to result in the denial of credit! Ensuring the information in your report is accurate is ultimately YOUR responsibility.

MYTH. Credit reports are the same from company to company. TRUTH – although most companies will report to all three bureaus (Experian, Equifax, and TransUnion), this was not always the case. Also, the speed at which they update information is not the same. I’ve never seen a scenario where the reports were identical with all three …

MYTH. Credit repair companies can fix my credit problems. TRUTH – most are scams. Most are attempting to either (1) work illegally; or (2) try to fix errors that I can fix myself for no cost. Be careful.

MYTH. Credit is too difficult to understand. TRUTH – everyone can AND SHOULD understand their credit. Schedule an appointment if you need help.

HELPFUL CREDIT RESOURCES.
- Ordering your free credit report(s)
- Credit Scoring - MYFICO
- Improving credit, Disputing errors - OFS Resources

- Register for 1 credit Financial Survival (PFP 1183)
- Register for 1 credit Financial Success (PFP 4318)


The Financial Tip of the Week is a service of:
University of Missouri-Columbia
College of Human Environmental Sciences
Department of Personal Financial Planning
Office for Financial Success
Dr. Mark Oleson - OFS Director

Credit Card Trap Widens

Credit card companies are notorious for many of their “business” tactics. Many consumers [often students] fall prey to various credit card traps. Many of the more common ‘traps’ are well documented – others, not so much … I want to take the opportunity this week to talk about the more common [as well as new] traps. This is not intended to be an exhaustive list. My initial intent was to write about the most recent trap I’ve read about (Trap #10) – as I started, however, I thought it might be also beneficial to remind you about some of the other more common traps as well.

1. FEES. Fees continue to become an ever-so-important part of a credit card companies revenue. The most common fees include: over-the-limit, late payment, convenience check and balance transfer fees. According to Carddata.com, over-the-limit and late fees have risen 138% and 160% respectively over the past 10 years.

2. PENALTY RATES. More and more companies are becoming less forgiving of late payments. Bank of America, Citibank, and other notable card companies currently raise rates to 30%+ for a single missed payment! OUCH.

3. INTRO OFFERS. Most people are aware of the tactic used by companies to lure in customers with a low rate offer for a short period of time – most people aren’t aware of the cards terms once the intro period expires.

4. USING A CARD WHERE YOU’VE TRANSFERRED A BALANCE. If taking advantage of a intro rate or balance transfer “special” be certain not to use the card for other purchases – your payments don’t go to your higher rate purchases, the payment will go to the ‘special rate’ portion of the balance.

5. CONVENIENCE CHECKS. These are awfully enticing – the checks often come made out to you and advertise that you can use them for anything. The catch? Most charge cash advance rates (~20%), most charge an average transaction fee of 3% of your check amount, and you normally will lose your grace period [even if you pay in full at the end of the month]. Not a great deal in most instances.

6. UNIVERSAL DEFAULT CLAUSE. A tactic initiated in recent years that creates penalty rates not only in the instance where you miss a payment with that particular card. In this agreement, the card is entitled to raise your rates even if you miss a payment elsewhere!

7. “YOU’RE PRE-APPROVED”. This ‘announcement’ makes many feel warm and fuzzy. The reality? All this means is that the company has reviewed your credit report and won’t reject your application based on that information. If you apply for the card, you can still be turned down because of insufficient income or other reasons that won’t be reflected within your credit report.

8. BAIT AND SWITCH. I’ve got a credit card that I use to obtain benefits – cash back on gas and other purchases, etc. If someone else were to apply for that card [or any other credit card requiring someone to have excellent or well established credit], instead of being turned down, on the application, there will be a statement where you are essentially giving permission to the CC company to give you their ‘base’ card if you are turned down for the card in which you are applying.

9. DECREASING MINIMUM PAYMENTS. One of the most financially rewarding tactics (for the CC company) is to decrease your required minimum payment as your balance decreases, essentially keeping you in debt longer. This is a smart tactic on their part because many people that can’t afford to pay the balance in full will simply pay the minimum payment. This required payment will decrease over time, extending the repayment period and interest paid over time.

10. NO MISSED PAYMENT PENALTY RATE. I’m sure this heading is perplexing. The idea of an interest rate going up because of missed payments is rational. But is it legal for a rate to go up for someone that doesn’t miss any payments? That’s what I’ve been reading recently. More and more “savvy” consumers in past years have taken advantage of 0% balance transfers, intro offers, and other “deals.” What many consumers saw as a loophole is now beginning to be closed by CC companies. Smart Money magazine wrote of an individual with what most would consider near perfect credit (790 credit score) – never missed a payment, never over the limit … He carried $8,000 on a credit card because he was taking advantage of the 0% rate for life offer. It was obviously quite a shock to open his statement and see a rate of 29.99%! Apparently, his card company viewed him as a higher credit risk because of his debt and thus, according to the card agreement, had the right to bump him to the ‘default rate’ … Normally, default rates are triggered by missed payments, but apparently, high balances can also trigger a default rate [due to higher risk on the part of the company]. A 2005 study by Consumer Action found that 90% of card issuers would use a universal default rate hike if a customer's credit score decreases, 86% would do so if they paid a mortgage or any other loan late. Nearly half (43%) would hit you with universal default if they decide you have too much debt, while 33% would do it for the exact opposite reason: too much credit available. You can see a rate hike even if all you do is get a new credit card (33%) or shop around for a car loan or mortgage (24%). BE CAREFUL – THE CREDIT CARD TRAP IS WIDENING!

*Schedule a financial counseling/planning session at the OFS
*Walk-ins (M/W from 3-5pm) at the Student Success Center

The Financial Tip of the Week is a service of:
University of Missouri-Columbia
College of Human Environmental Sciences
Department of Personal Financial Planning
Office for Financial Success
Dr. Mark Oleson - OFS Director

Pension Protection Act of 2006

Last August, The Pension Protection Act of 2006 was passed, providing many benefits to savers. It was created with an eye on helping to “Protect pension and retirement plan participants and promote individual savings.” In a nutshell [don't worry, we won’t dive into the entire 1,304-page Act today], we’ll focus on five of the prominent areas in the plan …

1. Permanency to retirement plan and savings incentives. Contribution limits to IRAs, 401(k)s, and other workplace savings plans were increased in 2001 but were due to expire in 2010. This legislation makes these increases permanent. It also makes permanent the relatively new Roth 401(k) option which was slow to catch on for fear it would also disappear in 2010.

2. Automatic 401(k) enrollment. The new plan makes it easier for corporations to set up automatic enrollment in 401(k) plans. They can also set the plans to increase contributions automatically over time. I think this is great. If you don’t, you can ‘opt out’ – the issue now is that you may need to opt out of your company plan rather than opting in. In a study of four large companies that made 401(k) enrollment automatic, researchers found that 96% of employees were saving in a 401(k) plan six months after being hired [compared with 43% that were saving after six months prior to the switch to automatic enrollment]. According to the Employee Benefit Research Institute, it is expected that automatic enrollment would increase 401(k) participation from about 66% (currently) of eligible workers to more than 90%. Employers will be able to start contributions at 3% of salary and increase it over time to 6%. “Lifecycle” or “Target Retirement” funds are likely to be the default fund.

3. Deposit your tax refund automatically into an IRA. Starting in 2007, you can directly deposit all or a portion of your federal tax refund into an IRA. Consider this – the average tax refund of $2,400 is more money than the average person now saves for retirement annually!

4. Other IRA Enhancements. Beginning in 2010, it will be possible for anyone to convert eligible workplace savings plans or traditional IRA assets into a Roth IRA [regardless of income]. There are many other enhancements [primarily estate planning-related] which you can read more about below.

5. 529 College Savings Plan benefits are now permanent. The benefits of this college savings tool, established in 1996, were set to expire in 2010. This uncertainty kept many potential parents on the sidelines or in other vehicles because of their uncertain future.

ADDITIONAL RESOURCES.
- White House Pension Act Fact Sheet
- Fidelity Investments
- TIAA-CREF – Pension Protection Act of 2006 Guide


*Schedule a financial counseling/planning session at the OFS
*Walk-ins (M/W from 3-5pm) at the Student Success Center

The Financial Tip of the Week is a service of:
University of Missouri-Columbia
College of Human Environmental Sciences
Department of Personal Financial Planning
Office for Financial Success
Dr. Mark Oleson - OFS Director

8% Rule ...

In an interview earlier this week, I was asked the question of what financial pitfalls most befall college students. I’ve come to the conclusion that I am much more concerned about pride (why students don't come to seek financial assistance than why they do come). Aside from pride, the biggest financial problem I’ve witnessed is student loans. There are a lot of potential factors here: overspending, no budget, borrowing more than can afford to be repaid, having a ‘head in the sand’ approach and not really having a clue about what they owe or anything else about their financial situation, and increasing educational costs, just to name a few.

I want to share a couple of free resources designed to help people evaluate their student loan situation. One uses a needs-based approach, and one uses a rule of thumb to gauge your financial situation.

Financial Path to Graduation.
The Path, developed at Brigham Young University nearly ten years ago, takes a needs-based approach to asking questions to evaluate your situation. Where will my current course of action take me? Will I be able to afford this situation? This process requires a student to evaluate their individual path to determine if it will lead them to firm footing at graduation, as opposed to an all-too-common scenario of owing more than can be afforded. After witnessing the benefits of the program for students, BYU began requiring that students complete The Path prior to being given new loans – the results have been impressive: lower default rate, fewer borrowers, lesser loan amounts … not bad in the current environment of more borrowers and more borrowing. Read more about early results of their Path program.

SLOPE Calculator (8% Rule).
I think when reviewing ones student loan situation that a rule of thumb can also offer insight into the “path” that one is on. A generally accepted rule of thumb in the student loan arena is that one can afford a payment that is 8% or less of your gross income (if you don’t have an idea of what starting salaries are in your field of study, The Path can help). Obviously 8% is a guideline only, 8% for one person may create a hardship (picture someone with a large car payment, credit card debts, etc.) vs. someone with similar student loan debt but no other debts. That is the exact reason I prefer a needs-based approach. The advantage of the 8% rule is it allows me at any stage of my education to take stock in where I am. A really nice tool to help in this process was developed by the Colorado Student Loan Program. The Illinois “Mentor” program uses this tool and provides detailed information about what it is and how it works. It is well worth the few minutes it would require to examine your current student loan borrowing.

- Schedule a financial counseling/planning session
- Walk-in sessions available Mondays/Wednesdays (3-5pm) at the Student Success Center

The Financial Tip of the Week is a service of:
University of Missouri-Columbia
College of Human Environmental Sciences
Department of Personal Financial Planning
Office for Financial Success
Dr. Mark Oleson - OFS Director

Opting Out of Unwanted Credit Card Solicitations

Last week I got an e-mail from a frustrated student. She was ruining her paper shredder destroying all of the credit offers she was inundated with on a daily basis and she was fed up. Probably a familiar cry -- over 6 billion offers entered U.S. households last year alone. Her query – how do I stop them? She referenced the helpful tip on opting out of solicitations, which provided information on stopping unwanted phone solicitations (via state and national ‘do not call’ registries).

Stopping the MADNESS!
Under the Fair Credit Reporting Act (FCRA), credit reporting agencies are permitted to include your name on lists used by creditors or insurers to make firm offers of credit or insurance. What you may not have known is that the FCRA also enables you to “Opt-Out,” which prevents the credit reporting agencies from providing the information contained in your credit file to others [unsolicited offers]. NOTE. This does not keep you from obtaining additional credit, it merely keeps you from receiving pre-approved, unsolicited, and otherwise unwanted offers. If you’re wondering what the benefit(s) of receiving unsolicited offers, you can view the credit reporting agencies report to Congress (pp. 32-40).

How to do it.
There are two good ways to stop the offers [or at least slow them down]:

(1) Go to www.OptOutPrescreen.com (or call 888-5-optout). These are the credit reporting agencies opt in/opt out resources which will stop the agencies from selling your information to direct marketers. You can opt out for a five-year period of permanently. You can always opt back in if you miss the mail. If you use the website provided, you can fill out a brief, simple form to opt out. It will provide a screen with the information you provided that you will need to print, sign, and mail to the address provided in order to permanently opt out. If you don’t do that last step (print, sign, and mail), it will opt you out for the 5 year period instead.

(2) Add your name to the Direct Marketing Associations (DMA) Do Not Mail file. You can access this online – this process costs $1. You can also send a letter or postcard with your name, address and signature to: Mail Preference Service; Direct Marketing Association; PO Box 643; Carmel, NY 10512. The ‘mail method’ also costs $1 [+ postage]. Your name stays on the list for 5 years, and you can re-register at the end of that period.

Credit card companies get consumer information from other sources in addition to those mentioned above, so, while these two methods will considerably slow down credit card offers, the offers won't necessarily stop completely. SORRY.

ADDITIONAL RESOURCES.
Direct Marketing Association FAQ
FCRA Summary
Opt Out/Opt in Online Form
Opt Out FAQ

Schedule a Financial Session with the OFS

The Financial Tip of the Week is a service of:
University of Missouri-Columbia
College of Human Environmental Sciences
Department of Personal Financial Planning
Office for Financial Success
Dr. Mark Oleson - OFS Director

Emergency Funds

“Pay off your debt.” “Max out a Roth IRA.” “Buy a house.” Personal finance professionals bombard us with a litany of things we ought to do in order to achieve financial independence. All of the things that need to be done can become extremely overwhelming. Where’s a person to start? Most tend to agree that the first thing you should do — after meeting basic needs, and while reducing spending — is to start an emergency fund.

What is an emergency fund?
An emergency fund is an easily accessible source of money for use only in case of emergency. Emergencies do not include a new car, a PlayStation, a vacation … [I think you get the idea]. It is for use only in the case of an emergency.

Why do you need an emergency fund?
- A golf ball smashed your windshield.
- Mole problems.
- Job layoff.
- Health problems.
- Because “life” happens.

Insurance is purchased protection to assist with many of life’s emergencies. It won’t, however, cover everything – in addition, there will normally be a required deductible or co-pay as part of the insurance coverage.

People with an emergency fund tend to be in better shape than those without one. Studies show that those without emergency savings are more likely to accumulate debt. It may feel like you can’t afford to have one, but the truth is you can’t afford not to have one. Emergency funds are essential, even for college students. Why? There is a tendency for people that don’t have an emergency fund to turn to credit cards, payday loans [and other forms of debt] to cover the emergency if they don’t have the savings otherwise.

How much is enough?
Though personal finance experts agree emergency funds are necessary, there’s no consensus on how much is enough. Some say you need to save a year’s salary. Others believe $1000 is sufficient. Most advice tends to fall someplace in the middle. My recommendation is to do what will suit you. There is not one right answer. Examine your situation — your income and your needs — to decide how much you should save. I would look at an emergency fund in a vastly different way if I were a tenured professor than if I were self-employed.

What do the “experts” say?
The Wall Street Journal’s Complete Personal Finance Guidebook says: “How much is enough? The answer is different for different people in different situations. For those in careers with a large, ongoing demand or who have relatively strong job security, three months’ worth of expenses is probably enough of a cushion. Those with bigger career demands, such as higher-paid managers and executives or couples who work in the same industry or at the same company, might want nine months to a year’s worth of expenses in the bank.

In You Don’t Have to Be Rich, Jean Chatzky recommends three to six months of living expenses. Your Money or Your Life recommends six months of living expenses, but only once you’ve achieved financial independence.

In Dave Ramsey’s The Total Money Makeover, Ramsey’s very first step is to save $1000 in an emergency fund. Then he advocates eliminating debt; then he recommends building a three- to six-month cushion.

How do you get started?
Starting an emergency fund can be as simple as depositing a little money into a savings account. I think it’s wise to keep your emergency money someplace that’s not too easy to access. In other words, I wouldn’t advise that your funds be kept in your checking account or a savings account that you use regularly. Put it somewhere where the money is easily accessible, but not a regularly used expense account. Many experts suggest money market accounts as the best place to park emergency fund money. I’m a big fan of the high-yield online savings accounts – ones that are FDIC insured with no fees and no minimums. HSBC (hsbcdirect.com), ING (ingdirect.com), and Emigrant Direct (emigrantdirect.com) are all good examples that are currently paying above 5% in some instances. (SOURCE – Get Rich Quick Slowly).

Last Weeks Tip: Vesting

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The Financial Tip of the Week is a service of:
University of Missouri-Columbia
College of Human Environmental Sciences
Department of Personal Financial Planning
Office for Financial Success
Dr. Mark Oleson - OFS Director

Vesting ...

When beginning a job, there are many nuances and intricacies related to the benefits offered through your new employer (elements that should be part of your analysis when evaluating job offers). Among these is the vesting schedule of your retirement plan. What is vesting? Good question …

VESTING is your right of ownership to retirement plan benefits. Your employer determines the vesting schedule for the basic retirement plan, which can be either immediate or delayed. Vesting schedules apply only to employer contributions and earnings on employer contributions. Your contributions (as well as any earnings attributable to your contributions) are always immediately vested, meaning that if you were to leave the company tomorrow, those funds could leave with you.

Immediate Vesting. After you begin your retirement plan, all contributions and earnings vest automatically if it is an immediate vesting plan. The maximum participation requirements for eligibility for a plan with immediate vesting are two years of service and the attainment of age 21, or, for educational institutions, one year of service and the attainment of age 26.

Delayed Vesting. Individuals in delayed vesting plans don't have ownership rights to the contributions (and any earnings on those contributions) made by the employer on their behalf until they meet the vesting requirements. There are two objectives to Delayed Vesting: (1) Reward employees with longer service; and (2) Reduce the cost of providing benefits to employees who leave after only a few years of service.

There are two types of delayed vesting. (1) Cliff Vesting - you work several years and then the employer contribution vests fully at a threshold date. In three-year cliff vesting, for example, none of the client's accumulation would vest during the first two years of participation. But at the end of the third year, the employee's entire accumulation would be 100 percent vested. Under (2) Graded Vesting, in contrast, ownership of retirement benefits accrues in stages -- for example, 20 percent after two years, 40 percent after three years, and so on, until the entire accumulation is completely vested. For employer matching plans, contributions must vest by the end of the third year. To find out more about your vesting schedule, contact your employers benefits department.
(SOURCE – TIAA-CREF)


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The Financial Tip of the Week is a service of:
University of Missouri-Columbia
College of Human Environmental Sciences
Department of Personal Financial Planning
Office for Financial Success
Dr. Mark Oleson - OFS Director

Record Keeping - (What do I keep? How long?)

The following are some general suggestions/guidelines about how long you should keep personal finance and investment records on file (Source - Bankrate.com) ...


Tax Information. Keep returns, canceled checks/receipts, charitable contributions, mortgage interest and other information for 7 years. Why so long? The IRS has 3 years from your filing date to audit your return if it suspects good faith errors. They have 6 years to challenge your return if it thinks you underreported your gross income by 25% or more. There is no time limit if you failed to file or filed a fraudulent return.

IRA Contributions. Keep indefinitely. If you have made a nondeductible contribution, keep the records indefinitely to prove that you already paid tax on this money when the time comes to withdraw.

Retirement/Savings Plan Statements. Keep from one year to permanently. Keep the quarterly statements from 401(k) or other plans until you receive the annual summary ... if everything matches up, you can then toss the quarterly statements. Keep the annual summaries until you retire or close the account.

Bank Records. Keep from one year to permanently. Go through your checks each year, keeping those related to taxes, business expenses, housing, and mortgage payments.

Brokerage Statements. Until you sell the securities. You need the purchase/sales slips from your brokerage or mutual fund to prove whether you have capital gains or losses at tax time.

Bills. Keep from one year to permanently. In most cases, when the canceled check from a paid bill has been returned (or cleared), you can get rid of the bill. Bills for big purchases (jewelry, appliances, cars, furniture, computers, etc.) should be kept in an insurance file for proof of their value in the event of theft/loss or damage.

Credit Card Receipts and Statements: Keep from 45 days to 7 years. Keep your original receipts until you get your monthly statement; toss the receipts if the two match up. Keep the statements for seven years if tax-related expenses are documented.

Paycheck Stubs. Keep for one year. When you receive your annual W-2 form from your employer, make sure the information matches - if it does, toss the stubs, if it doesn't, demand a corrected form.

House. Keep from 6 years to permanently. Keep all records documenting the purchase price and the cost of all permanent improvements (remodeling, additions, and installations). Keep records of expenses incurred in selling and buying the property (legal fees, real estate agents commission) for 6 years after you sell your home. Holding onto these records is important because any improvements you make on your house, as well as expenses in selling it are added to the original purchase price or cost basis. This adds up to a greater profit (capital gain) when you sell your house, thus lowering your capital gains tax.


Additional Resources.
- Recordkeeping for Individuals (IRS Pub. 552)
- Our Family Records (Univ of Wisconsin Extension) - very detailed!
- Record Keeping (Iowa State Univ Extension)


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The 'Latte Factor®' ...

Latte Factor (LAT.ay fak.tur) n. Seemingly insignificant daily purchases that add up to a significant amount of money over time.

The Latte Factor® is perhaps a concept that isn't foreign to you. It was a concept coined by David Bach, author of The Automatic Millionaire. The Latte Factor® is based on the simple idea that all you need to do to finish rich is to look at the small things you spend your money on every day and see whether you could redirect that spending to yourself (as opposed to the more common approach of trying to cut 'big' items from your life OR SIMPLY DOING NOTHING) . Putting aside as little as a few dollars a day for your future rather than spending it on little purchases such as lattes, bottled water, fast food, cigarettes, [plug in whatever your "personal latte" is here] and so on, can really make a difference between accumulating wealth and living paycheck to paycheck.

If you take a closer look at your 'small spending,' you can quickly see the great cost of those small habits. Investing a small habit (such as $5/day, at historical rates of return, ~10%) would yield close to a million dollars in roughly 40 years!

What's your Latte Factor®? Take action!
To get started, identify what your Latte Factor® is. The most beneficial way to do this is to track your spending for a full day. I've provided some links below to assist in the process ... Once you know where your money is going and how much your Latte Factor® is costing you, use the calculator below to see just how much you could save in a few years. You'll be amazed at how much you could be saving.

Even if you make a lot of money, it doesn't necessarily mean you're building wealth. That's because the more we make, the more we tend to spend. I believe that an awareness of our personal Latte Factor® will only help down our paths to "Financial Success" ...


Useful Resources:
- 'Fix the Leak in your Wallet' (USA Today Article)
- Latte Factor® Calculator
- Latte Factor® Worksheet - What is your Latte Factor Worth?
- OFS Budgeting Resources
- Stop Buying Expensive Coffee and Save Calculator