February 2011 - MONEY SMART

Timely updates and reminders on personal money management. Seeing to it that you always have the up-to-the-minute information you need to win the game.
February 27, 2011

Everyone wants to be both debt-free and financially secure, but how do you prioritize the two? Is it best to hold-off with aggressive saving until you are debt-free? Or is having a savings cushion more important than getting rid of debt?  It’s critical to pay down your debt, but it’s critical to create a plan that will build your bank accounts as well. To be smart about accomplishing both goals, you need to carefully prioritize your saving and debt-reduction efforts. Unless you have a very good reason not to, I recommend that you adhere to the following priority sequence:

1.       Stop using credit cards and pay only the minimum payments until step four is reached.

2.       Aggressively save for an emergency fund starting with at least one month’s expenses. This will create a cash cushion for emergencies rather than needing to pull out the credit card.

3.       If an employer will match contributions to the company 401(k) plan, save the amount necessary to get the full matching dollars.

4.       Allocate 50% of savings to an emergency fund, and 50% to debt reduction until four to six months’ of living expenses are covered in the emergency fund; four months for a two-income family, six months for one income.

5.       Now focus on eliminating all debt except for home and car loans.

6.       Build up annual savings until the maximum tax-deferred savings allowed by IRS guidelines is reached. Once you reach this point and are saving as much as you can pre-tax, throw a party and reward yourself with something very special. You’ve earned it!

7.       Pay off any car loans, then start saving $250 a month in a new car fund.

8.       Increase saving to at least 15% of pre-tax income. Save for home ownership If not currently in a home. Homeowners should also accelerate mortgage payments and continue until it is paid off. Also, during times when fixed-interest rates such as CDs have fallen below 3.5%, be aware that making extra mortgage payments provide a better after-tax return on your money.

9.       Families with children might want to start a specific education fund based on the child’s abilities, needs and desires.  (Please read “Paying for an Education” in chapter eight of Money Smart to see if this is something you should do.)

Small monthly changes can have a huge impact on savings and debt reduction, especially when you follow the right sequence. Be smart in setting your priorities and your Spending and Saving Plan will put you on the path to financial freedom in no time

February 20, 2011

It is certainly possible that a four-year academic education can offer a better life through superior jobs, more money, and a life-enriching experience. But is it necessary? Is it worth the crippling debt-loads parents and students must often take on these days in order to get it? Most importantly, is it the best route to a successful and happy life for your kid? Many parents automatically assume that their children should go to college. Yet college dropout rates in this country are nothing short of disastrous, and that doesn’t begin to count all of the students who end up graduating even though they should never have gone in the first place.

A college education is no longer the end-all-be-all of education, nor is it a guarantee of success. There is no end to the number of careers and self-employment opportunities that do not require such an education and that can provide both a very good income and a very satisfying life. Obviously some fields require the standard academic route. If you want to be a doctor, lawyer, scientist, engineer, teacher, or architect, for example, it’s the only way to go. However, in my experience, many employers now value the skill set more than the proven ability to be taught. They no longer have the time or the money to invest in teaching the skills they need. They want people who will be productive the minute they walk through the door.

These skills can be acquired in more places than in a four-year academic institution. It may mean a two-year degree, an online degree or certification, trade or technical schooling, real-world work experience, or any combination of these. These alternatives may end up costing a lot less than a regular four-year college education and also provide a better entrance to the work force. Maybe the best path for your kid is to start his or her own small business. Although challenging, small business ownership is historically one of the most rewarding routes to both financial and personal success.

It so happens that the subject of whether or not to send a child to college is one I faced personally. My youngest son, Dan, is extremely bright and was designing video games in high school thirty years ago, back when they essentially didn’t even exist yet. His mother and I thought that he should go to college. Well Dan didn’t exactly see it that way. His college experience lasted a grand total of about two weeks, after which he pretty much cut every class, flunked out royally, and never went back. Dan knew college wasn’t for him and it was his life and his future and he wasn’t going back.

Don’t feel sorry for Dan. He went on to become one of what the techies call the “Masters of the Universe,” and is currently the “Architect” of a cutting-edge startup cloud software firm. Every time you use the Internet, or even your cell phone, Dan has probably been there somewhere. For Dan, the non-college route was his path to a very successful career. Best of all, he loves what he does.

In telling you this story I am by no means suggesting that your kid follow Dan’s path. Each person is unique, as should be his or her path in life. Is college necessary? It shouldn’t be an automatic yes, what it should be is a discussion between you and your child to try and find the right answer.

February 8, 2011

Insurance. It seems like there is an insurance policy for everything these days. Although it is important to have insurance for your family’s future, many of the available policies are a waste of money. Here are 10 of the most common offers you will encounter and should try to avoid.

Life insurance for children– The purpose of life insurance is to cover the living expenses of the people who depend on you should you die. Unless you have a major child star on your hands, nobody is depending on their children for income. Millions of these policies are in existence. The people who sold them should be ashamed of themselves.

Warranty insurance and maintenance policies or programs– These policies cover repairs that are not covered by the warranty that comes with the product. The odds are in your favor if you opt to skip the insurance and just cover the expense should it arise.

Mortgage protection life insurance– The idea behind these policies is that your home will be fully paid off should you die. If you think about it this is really no different than life insurance, the only difference being that the premium will be a lot higher, sometimes by as much as 200% more. If you feel you want this type of coverage, increase the size of your term-life policy. It’s a lot cheaper way to go and offers more flexibility for your family to use the money should something happen to you.

Credit card theft insurance Federal law limits consumer credit card liability for unauthorized charges to $50. These types of insurance are normally pure scams. The FTC (Federal Trade Commission) singles out credit card theft insurance as the biggest type of scam out there today. But there is a loophole. The $50 liability limit does not include debit cards (nor does credit card theft insurance). Most financial institutions also cover you on your debit cards but, to be sure, call and find out. If they do not cover you, move your money to an institution that does.

Identity theft insurance– For the most part, these plans do not reimburse you for the money you lost, just for the expenses incurred if your identity is stolen, such as phone calls, copying fees, and lost wages. By and large they probably aren’t worth it.

Credit life insurance/credit card balance insurance These policies pay off your credit debt if you die. This is that same situation where the premiums are ridiculously high compared to term-life insurance rates. This is another attempt to play on your emotions or take advantage of your good will toward your family.

Trip insurance– Such insurance reimburses you should you be forced to cancel a planned trip, etc. This is almost surely a losing proposition. Insure this risk yourself by being willing to cover any amount(s) that might be lost.

Flight insurance– This is extra life insurance in case you’re killed in a plane crash. Do you have any idea how few people are killed in the world this way each year versus the number of passenger trips taken? This is a terrible deal. Pass on it.

Travel life insurance– Travel life insurance pays you should you die while traveling. It preys on people’s fears and is just one more bad deal. If you need life insurance, you should already have the appropriate policy in place. Betting that if you die during your trip your family can get more money is a bad bet, given the rates involved. Also, you’d be surprised at the loopholes in these deals regarding how much you’ll get and whether you’ll even get paid at all.

Wedding insurance– This covers the added cost that might occur should the wedding be postponed due to illness on the part of the bride or groom, missing vendors, damage to the reception site should the place not have its own insurance, etc. Once again, the insurance company will have done its homework. What is covered, and the rates charged, makes it a winner for the company, not you, even given all of the marketing and selling expenses the insurer pays out. By the way, these policies do not pay off if either the bride or the groom changes her or his mind.

Insurance is important, but be money smart and don’t waste your hard earned money on these expensive and ultimately useless policies.

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