How to Be Better With Money

September 16, 2016

The NFL season is underway, and I’ve seen more purple in Baltimore recently than I have in months. Everywhere I go, I’m seeing enthusiastic fans getting ready for the upcoming season. Before the first game of the season, fans of every team believe that THIS is the year that their team is going to win the Super Bowl. 31 of 32 fan bases will ultimately be disappointed. But at this time of year, hope springs eternal everywhere (except maybe Cleveland!)

I see the same “Let’s Get Started” level of enthusiasm from people who tell me that they have been a bit of a mess financially in the past but are ready to make progress now. I’ve heard countless people say “I’m bad with money” or “I have no clue what I’m doing financially.” I refuse to believe that they can’t, in a few quick and easy steps, develop lifelong habits that will take them to a place of financial security. I refuse to allow them to speak poorly of their financial habits.

I ask if they have ever played an instrument or a sport or any type of art. Almost everyone has tried something like that at some point in their life. I ask them to go back to their very first day of playing the clarinet or saxophone or whatever it is, and they laugh at just how terrible they were on that first day.

After I get them to talk about how they went from horrific to actually having a clue about what they’re doing, they understand that managing money is merely a skill that they haven’t practiced yet, and today is day 1 of their new talent coming to the surface. At that point, there is an enthusiasm that tells me they are ready. When I see and hear that level of enthusiasm, I know that they are serious about making progress.

The secret to building a foundation of financial success is keeping things simple and automating as much of it as possible. With automation, simplicity and just a little bit of work, managing your personal finances is rather easy.  Here are some steps to take:

Step 1: Get some basic facts together so that you have a starting point. 

  • This financial organizer will help you see the aerial overview of your financial life on one page.  What do you own vs. what do you owe?
  • This expense tracker can help you see how much money comes in during the month and how much goes out. With these two worksheets, you have a lot of useful data, and if you update these quarterly, you will start to see progress.

Step 2: Automate things.  

  • Contribute to your 401(k) at an amount at least up to the company match. Then, enroll in the rate escalator feature to increase your contribution by 1% annually – either on 1/1 or on your anniversary or your birthday. Just pick a day and enroll in it.
  • Open a savings account at a credit union or online bank, one that is NOT where your checking account is and get a direct deposit going there. The amount isn’t important. A $5, $10, or $20/pay deposit will suffice. It’s the momentum that’s important and the speed bump! When you have your savings account at the same bank as your checking account, it’s way too easy to log in and slide money from one account to the other.
  • A great tool for “accidental savings” is the Acorns phone app. It rounds your transactions up to the next dollar (so if pay $1.86 for a coffee, it adds $.14 and slides it over to Acorns, where you can invest in a very conservative portfolio). I “accidentally saved” a couple thousand dollars that were used as a part of my down payment on the house I just bought.

Step 3:  Stay alert and updated.

  • For your credit score, CreditKarma.com and CreditSesame.com are great free tools to stay on top of any changes in your credit file.
  • AnnualCreditReport.com allows you to get a copy of your credit reports at no cost once/year. Make sure that everything there is actually yours!
  • Mint.com can show you on a daily basis all of the transactions in all of your accounts from the prior day. (I launch that app from my phone every morning while I’m still half asleep and before I hop out of bed.) This is a great way to make sure that no one is accessing your accounts without your knowledge.
  • The financial organizer and expense tracker above are excellent tracking tools. Keep a binder full of reports that you can look back on in the future to see where you started and where you are. You’ll be shocked at the progress, and when you see it, you’ll want more of it.

For anyone who has ever said “I’m lousy with money,” I say “You are no longer allowed to say that! EVER!!!” Your new phrase is “I’m always learning to be better with my money.”   With that new phrase and these tools, you can transform your financial life in relatively short order.

5 Ways You’re Wasting Money by Trying to Save It

September 14, 2016

In its purest form, “saving money” means you actually take money that you’ve received or not spent, and you set it toward one of your goals. But sometimes when we try to save money by spending less, it can lead to over-spending. Here are five situations where our best intentions often backfire. Make sure you’re not falling prey!

1. BOGO: Buy one item, get the second half off – it’s so tempting, especially when it come to things like shoes and accessories! But chances are that you’ll end up talking yourself into something that you’re not crazy about just to take advantage of the deal. Plus the store is betting that you will pick a more expensive second item than you originally came to shop for, driving your bill even higher. Suddenly, a $40 purchase turns into $80, and you’re not even sure you like the bonus purchase. BOGO only works when you’re getting something free from buying something that you were planning to purchase anyway, like microwave popcorn or my favorite treat, ice cream.

2. Cheaping out at the parking meter: I know how annoying it is to feed the meter just to pop in for a cup of coffee. But those meter maids are omnipresent, and they are trained to ignore your pleas once they’ve spotted your car at an expired meter, even if you’re standing there with your keys in hand. (Don’t ask me how I know this.) Saving a dollar is NOT worth the $35 or more parking ticket that you’ll end up with when your good parking karma runs out. Feed the meter every time and for enough time.

3. Signing up for retail credit cards for the discount and then not paying them off: It’s one thing if you open the store credit card to get the discount and then pay the balance due in full. That’s smart. But only paying the minimum can negate any money saved due to the high interest rates charged. Whenever I use a store card for the discount, I either get back in line and pay off my balance right there (a lot of stores even accept debit cards for payment!) or I go home and do it online right away.

4. Carrying the wrong cell phone plan. When was the last time you checked your phone plan to make sure you’re using the best one? Carriers are constantly changing their offerings, so double check that you’re still on the plan that’s best for your usage. The last time I checked, I was able to add a gig of data for $5 less than my old plan!

5. Justifying impulse purchases because they’re on sale. Check your closet. How many items are you hanging onto because you haven’t worn them, but feel bad getting rid of them since you spent the money? I’d guess that most of those items were things you picked up and thought, “What the heck? It’s only $12!”

The next time you find yourself cruising the clearance racks, think twice. Is this actually something you need or want? How else could that money be used? Plug it into the Daily Savings calculator and see. Just $5 a day could add six figures to your long-term savings.

Finally, here’s a simple way to save a little extra money that my mom taught me: keep every five dollar bill that comes your way instead of spending it. It’s easier to stay disciplined with this if you have a plan for the savings. My mom uses hers for fun money when my parents travel. That way when she does find a good deal while cruising her favorite Ross store, it’s guilt-free!

 

Don’t Get Blamed For What You Didn’t Do

September 09, 2016

Lately, I’ve become addicted to podcasts. It seems like I always have my headphones on or my Bluetooth speaker going (when no one else is at home) and there’s either a crime, financial or MMA podcast playing. It all started with Serial Podcast and continued with Undisclosed and then Serial Dynasty (later re-named “Truth and Justice”). All of those podcasts started with the Adnan Syed case, when he was convicted of murdering his ex-girlfriend, Hae Min Lee, in Baltimore back in 1999.

As a Baltimore resident, I ever so vaguely recalled that case, but the podcasts took the listeners deep into the details of every aspect of the crime, the trial and everything that’s happened since. The latest news is that Adnan is getting a new trial because it appears to me and the legions of listeners that he did not commit the crime. And one of the major players (Rabia Chaudry) has written a book, and I’m taking my daughter to her book signing in a few days!

All of the podcasts have moved on to other cases, and I’m still listening to all of them in Season 2 or 3 now. The fact that it started with a local case made me dig into all the details a bit more than I might have otherwise. Most of the podcasts deal with someone who is wrongfully imprisoned…or thought to be wrongly imprisoned. I can’t imagine spending 15 or 20 years in prison for a crime I didn’t commit like some of the people profiled in these podcasts. I’m not sure how one finds the strength to carry on with life and not just wallow in despair in situations like these.

While it may not be as dramatic as being in prison for a crime you didn’t commit, there is a serious chance that something in your credit history will be from a situation where you weren’t even remotely involved. This could be something as simple as an address being on your credit report for a place you’ve never lived or as sinister as a full scale premeditated identity theft.  Regardless of where it is on that scale, there are some things you can do on a regular basis to either prevent or minimize the impact of incorrect data impacting your credit report, credit score or quality of life.

Check your credit reports on a regular basis. Through annualcreditreport.com, you can get one free copy of your credit report from Experian, Equifax and TransUnion. If you order Experian in January, Equifax in May and TransUnion in September, you’ll never be more than 4 months away from your next new credit report. When you get your credit report, make sure that all addresses listed are accurate and all accounts and any other names are actually yours. With my name, I almost ALWAYS have 3 or 4 “other Michael Smith” data on my reports so I have to correct my credit report a few times per year.

Stay on top of your credit score. Two great sites that I use, each with an app for smartphones, are Credit Karma and Credit Sesame. Each service (and both are free) will alert you when your credit score changes or if information on your credit report changes.

Recently, I applied for a mortgage in the morning, and I got an alert from Credit Sesame in the afternoon. It was lightning fast! Imagine if someone, not me, had applied for a mortgage in my name in a premeditated identity theft. I would have known well before the theft was fully in place and devastating to my life.

Shred your personal data! When you get a new debit card/credit card, shred the old one. When you get bank or 401(k) statements in the mail, either store them for a few years or scan into a PDF file and shred them. It’s an indictment on where we are are a society that we have to think about stuff like this today, but it’s where we are. Anything that would help a hacker hurt you should be shredded and destroyed before anyone can use it against you.

So if you find yourself in jail for a crime you didn’t commit, start a podcast, and I’ll listen. But if you happen to find yourself not incarcerated wrongfully, protect your identity! As they say, you’re better safe than sorry.

 

 

 

How To Improve and Protect Your Credit

September 08, 2016

One common question I get on our financial helpline is how to increase your credit score. After all, your credit report can impact the interest rates you pay on loans (or whether you can even get a loan at all), your insurance premiums, and even your ability to get a new job. Whether you’re just starting to build a credit history or are rebuilding one, here are some things you can do:

Make sure there are no errors on your credit report. It’s been estimated that about 70% of credit reports have errors on them. It’s bad enough to be penalized for your mistakes. You certainly don’t want to be penalized for someone else’s.

You can get a free copy of each your three credit reports (Experian, Equifax, and Transunion) at AnnualCreditReport.com. (Don’t be fooled by copycat sites that require you to supply a credit card number for the “free” credit report.) Then report any errors you may find that may be hurting your score. Some people even report any negative information since it’ll be removed if the creditor doesn’t respond in time.

Reduce your debt balances. Try not to use more than 30% of the credit available to you on your credit cards. If you’re already above that, try to pay it down.

There is one exception though. If you have an old debt, you might not want to pay it off and just let it fall off your credit report after 7 years. However, just because it’s not on your credit report, doesn’t mean you don’t owe. Unless you’re also past your state’s statute of limitations, the creditor can sue. In addition, be aware that if you make any partial payments or even acknowledge the debt, it can restart that clock for your state.

After you’ve paid off debt, you may not want to close the credit cards since that will reduce your credit available and hence the percentage of your total credit you’re using if you have any balances (even if you pay them off each month). Instead, just shred the card if you’re afraid of using it and keep the account open. If you want to keep using it but don’t like the rewards, you can also convert it to another card with the same bank.

Build a positive credit history. This is the most important step but the one that takes the longest. The main thing is to have credit and make all your payments on time. If you can’t qualify for a regular credit card, see if your bank will let you open a secured credit card that’s backed by a bank deposit. For any credit you do have, set up automatic payments to make sure you don’t miss any payments.

Set up credit monitoring. No matter how many precautions you take, things happen. For example, I once missed a medical bill because they had my address down wrong in their system. Fortunately, my credit monitoring was able to catch it, and I was able to pay it before it hurt my credit. A lot of companies charge for this, but you can get free credit monitoring from sites like Credit Karma and Credit Sesame.

Consider a security freeze. A security freeze can prevent someone from opening credit in your name. Each state has different rules, but you generally just have to pay a one-time nominal fee for each credit bureau. Just know that you’ll need to un-freeze your credit if you want to apply for new credit and then pay to re-freeze it again.

Want more info on this or other financial topics? If you have a question you’d like answered on this blog, feel free to email me  directly. You can also receive my future posts by following me on Twitter and/or subscribing to my posts on the blog home page.

What I Wish I Had Known When I First Started Working

September 06, 2016

I don’t know about all of you, but the older, I get the faster time seems to go by. I feel like yesterday I was babysitting my kid’s friends and today I am watching them graduate from college. After one of my friend’s kids graduated from college, I went to a party celebrating the achievement. While at the party, I was listening to a conversation with my friend’s daughter and her friends, most of whom are also recent college graduates.  Luckily for them, we are in a better job market and almost all of them are either employed or getting ready to start new jobs.

As I listened to their conversation, I started to feel a sense of dread at the direction their conversation was going in. Their discussion was focused on getting paid the most money, moving to a “hot” new city (whatever that means) and what car they are going to buy themselves. I told them that the decisions you make your first working year will lay the foundation of their future financial success or demise – their choice. At that point, I had their undivided attention and I started talking to them about some of the things I wished I would had known when I first started working.

The best job is more than the highest salary. When I looked for my first job, the only thing I considered was the salary. I never stopped and considered that a lower salary that pays more benefits could net me a higher total compensation than a higher salary with crappy healthcare benefits. As you consider your next job, think carefully about the offer. How much will your new employer cover for healthcare benefits?

I also never considered my ability to grow my career. A higher future salary could easily outweigh a lower starting one. Consider how many opportunities you may have to progress in your future organization.

Your location will determine how far your money will go. One of the young women I spoke to was currently working in Georgia and thinking about a lateral career move to New York City. Being from Brooklyn, I told her she has to consider the difference in income and encouraged her to do a paycheck calculator to see what her net pay may look like with a move.  She was shocked at how much her net pay decreased.

Next ,I encouraged her to use a cost of living calculator to compare how far your income will go in one state or city vs. another. She needed almost a $30,000 increase in salary to maintain the same lifestyle she had in a small town in Georgia in New York City. If you are deciding on a move, consider doing a paycheck calculator and a cost of living calculator so you won’t go into sticker shock when you move.

The lower you keep your lifestyle now, the better quality of your lifestyle in the future. Remember that where you live now may not be where you will live in a few years so keep your home expenses to about 25%-30% of your net income so you have money left over for other goals and possibly a move. I pretty much went stupid when I got my first professional job. I convinced myself that I had to look the part and spent thousands on a wardrobe. You can look professional without going broke by shopping for high quality professional clothes at consignment shops.

Fortunately, I kept my old car though. This was probably one of the best decisions I made. I was easily able to make the move for a great career opportunity because I kept my expenses so low. If you end up getting a loan, consider following the 20/4/10 rule – put a 20% down payment, finance for no more than 4 years, and make sure the total monthly vehicle expenses (principal, interest and insurance) are no more than 10% of your gross monthly income.

Understand that good money management equals financial success. I wish I would have prioritized my finances better. I would have created a monthly spending plan that outlines ALL of my spending (including car maintenance, vacations, and gifts), saved 3-6 months of expenses, contributed at least enough to get my 401(k) match and attacked debt sooner. Use calculators like the Debt Blaster to come up with a game plan.

If you’re just starting your career, you have a tremendous opportunity to shape your financial future. Taking these steps before making a financial decision can go a long way to building a lifetime of financial success. You can do it!

 

 

 

What Our Planners Would Tell Someone Just Starting Their Career

September 02, 2016

Last week, I wrote about conversations I had with some newly hired recent college graduates. That post was about steps I talked about with them in our one-on-one coaching sessions   (all good stuff, if I must say so myself…and I must!) After I had written that and before it went live on our blog site, one of our other financial planners sent an email to the planning team to ask what advice they’d give someone starting their career today – a “what would you tell your 22 year old self” kind of email. Here are some of the responses from our planning team along with some of my editorial commentary (in italics):

Create a budget. I despise the word “budget.” I prefer “spending plan.” Figure out how much money is coming in and develop a spending plan that comes in well below the cash inflow.

Create a plan to move up or out of your current position in 3 years to stay relevant and in control of your career and salary. Always improve your skill set and fight for your own career. No one else will do it for you.

Start a side business based on your passion to help accelerate your debt payoff, increase savings and fund other financial goals that your salary might not cover. That side business could turn out to be what becomes your full time pursuit and source of greatest wealth in the long term, but you won’t have that chance if you don’t ever start it.

There is no need to show off to your friends because you are the one that landed the new job with cool title. The people with the flashy cars and lifestyle are usually either getting support from family members or are fueling that lifestyle with lots of debt.

Build friendships with those that are financially like-minded and encourage each other. It’s hard to be the only one that orders water instead of drinks almost every time you go out because you are the only one that has a spending plan. Don’t let peer pressure cause you to lose your spending discipline.

Use the same creative mindset you had in college as it pertains to money. If you could figure out a way to have a great weekend and only spend five bucks back in school, why should it change now that there is income. I joke that I had more cash flow when I was a starving college student than when I was a professional financial planner with a great job.

Get on a plan ASAP to pay off any student loans. It definitely needs to be a part of the budget. A time frame for them to be paid off would be best. Don’t just elect deferment or forbearance because it’s an option. Truth.

Set up an intentional savings account, even if it’s just $25 to start. Set up a transfer of at least $25 a paycheck to get in the habit of seeing how painless it is. Then boost it to get to $2,500 within the next year. An emergency fund can prevent the need to tap into credit cards when the car needs brakes and tires.

Don’t take on a deluxe apartment or mortgage until the student loans have been dealt with. They’re a mortgage in their own right. Live way below your means. Americans spend way too much on housing as a rule.

Get the match at work at the very least if you have student loans and try for 10% or more deferral if you don’t have student loans or after they’re under control. Early saving is HUGE in your financial future.

Be thoughtful about what you spend your money on. You work hard for it. Set a 30 minute weekly money meeting with yourself to go over your finances. Whether you’re just starting out or have been in your career for decades, this is just flat out solid advice.

This is a lot of info, but it’s an especially useful list for recent grads just getting started. The decisions they make now will have a huge impact on the rest of their financial life. My daughter is beginning her senior year of college so in less than a year, she’ll be graduating, and I’ll be printing out this blog post and last week’s to help her get her financial life started in the best way possible.

 

 

4 Financial Moves I’m Glad I Made in My 20s

August 31, 2016

It’s easy to dwell on the shoulda, coulda, woulda’s of our past – those things we wish we’d done differently. But I’m also a big believer in reflecting on what went right! After all, if history is bound to repeat itself, wouldn’t we want the good stuff to repeat as well? So here are the financial moves I made in my earlier years that I would be glad to repeat.

Contributed to the match in my 401(k) since day 1. It’s worth noting that with my first two employers, I actually didn’t get to keep my full match as I left the companies before I was vested, but I still had the money I’d saved to start my nest egg. I also had the established habit of saving as I went on to higher-earning jobs, where I eventually qualified for and got to keep the match. So even if you’re quite certain you won’t be around long enough to keep matching dollars, you should still save enough to earn it. You never know when plans might change, and it’s silly to give up the chance at free money. Isn’t that why we buy lottery tickets?

Aggressively paid off credit card debt. There have been two occasions in my life when I used credit cards to get through times of income challenges. Both times I also reached a point when it was time to pay them off, and I committed to an aggressive monthly payment in order to eradicate the debt as quickly as possible. I also put any windfalls toward the debt, including things like tax refunds (Remember the “stimulus” checks we all received in 2001? Mine went straight to VISA), work bonuses and freelance income. I also made sure my spending reflected my desire to get out of debt and saved the luxuries as my reward for financial dieting. The Financial Finesse Debt Blaster calculator is a great way to make a debt pay-off plan.

Participated in my employee stock purchase plan. I’ve worked for three publicly traded companies that offered employee stock purchase plans, which basically allow employees to buy stock in the company at a discount through payroll deductions. This is another example of free money but was also a fun way to build up some side savings that made me care a little bit more about how my company did beyond just my own job. I never invested more than I could afford to lose, so in all three cases, I was just saving a small amount, but it was worth it to have that little investment nest egg that I could access before retirement. Caution though: make sure that your investment in any one company doesn’t exceed more than 15% of your total investments. If your employer match goes into company stock too, keep an eye on when you may need to diversify out of the stock.

Earned my BODYPUMPTM certification. What the heck does teaching a fitness class have to do with finances? Well, since I became a certified instructor in 2005, I’ve not had to pay for a gym membership, plus I get paid to work out. It’s not a ton of money, but it’s better than paying to work out! I try to make the most of it by transferring 50% of my BODYPUMPTM pay into a separate savings account. I can’t quantify the health benefits of teaching three times per week, but suffice to say, I probably wouldn’t make it to the gym more than once a week if I wasn’t paid to be there, so it’s worth it for the health benefits too.

How about you? What financial moves did you make early on that are paying off today? Please share them with me on Facebook or Twitter.

Did you know you can sign up to receive my blog posts every week, delivered straight to your inbox? Just head over to our blog main page, enter your email address and select which topics or bloggers’ posts you’d like to receive. Obviously I suggest at least ‘Posts from Kelley.’ Thanks for reading!

 

 

Lessons in Car Shopping

August 30, 2016

If you have read any of my posts, you probably know that my family has a “hit me” sign on us every time we get into a car. We have been in two car accidents within four months of each other, and I am honestly not sure what was worse: the accidents or dealing with the insurance companies. After the dust settled, we found ourselves needing two cars. Luckily, we had adjusted to having one car and decided to get only one newer vehicle immediately. This began our car shopping odyssey.

The first thing we did was to contact the car insurance company we filed a claim with to ask for an extension. Surprisingly, they were willing to extend their coverage a few extra days and then they allowed us to use their much lower daily rental rate for an additional two weeks. If you are in a similar situation, contact the insurance representative assigned to you and plead your case. Having a few extra days or even weeks takes the pressure off of having to buy a car immediately.

Next, we decided on our budget and researched websites like  Kelley Blue Book and Edmunds to gauge what type of vehicle we can get with the features we wanted within our car budget.  Next, we reviewed the reliability rating using websites like Consumer Reports. Once we did the research, we were able to narrow down our selection to two types of vehicles. Before heading to the dealer, come up with a budget and research vehicles that fall into your budget so you have a realistic idea of what you can afford to get.

I am sure that there are wonderful car dealerships, but after dealing with high pressure sales tactics, we realized we do not have the time or patience for traditional dealerships so we decided to buy a car through an online dealer. After researching several online dealers, we found that in our case, the fees were cheaper, many had a money back guarantee, you can shop nationally (confirm any fees to transport the vehicle to you) and there was less haggling. We researched consumer complaints using websites like the Better Business Bureau and Yelp.  No matter how great the online dealer may sound, do your due diligence by researching the company online for complaints.

After choosing our dealer, we were assigned a salesperson who did a great job asking us about our needs and wants and sending us vehicles that were within our budget. Within a few days, we selected the vehicle we wanted and after it was inspected and detailed, it was delivered to our doorstep. We were so excited and relieved that our experience was pretty painless – or so we thought.

About a week after getting our vehicle, the car had trouble starting. We took it to a mechanic to have it inspected, something we should had done as soon as we got the vehicle, and we found that it had transmission problems. We contacted the online buying service about the problem, prepared for a battle.

They asked to see the report of repairs the mechanic put together. Less than an hour later, they called us and apologized. They said they used a new mechanic for the inspection, and he obviously did not do a good job. Much to our shock, they immediately offered us three options. They offered to pay for all repairs, give us our money back or search for another vehicle using our full purchase price as the trade-in value.

After careful consideration, we decided to trade the vehicle in and ended up in a better vehicle for a lower price. No matter how great the vehicle initially is working, get it thoroughly inspected while you are in your money back guarantee period. Also, make sure that any guarantees or warranties you were offered is in writing.

Even though our car buying experience did not go exactly as planned, we would still include online car dealers when car shopping again. Don’t limit yourself. As you start to think about buying a car, explore all of your choices to help you find the best vehicle for your needs.

 

Creative Commons Photo Credit: Source

My Advice to Recent College Grads

August 26, 2016

At one of our client sites, I was able to meet with about a dozen new hires, all of whom are very recent college graduates. They are starting their first “real jobs” and want to get their financial lives off on the right foot. During training, it was suggested that they sign up for a one-on-one financial coaching session, and many of them took HR up on that suggestion.

I had a blast during those sessions because most of the kids (yeah, I’ll call them that because I have a daughter roughly the same age) who came in said that they had no idea how to handle their new income. They were fine while in college, working summer jobs or some part-time jobs during school for spending money. But being out in the real world, with real responsibilities like bills to pay and student loans coming out of deferral, was a wee bit scary for many of them.

While they all had different incomes and amounts of student loan debt, there was a lot of common ground with this group.  My daughter is only a year behind them, so I can already see the conversation we are going to have next summer when she lands her first job. In that discussion, I’ll ask her to do a few of the things that came up in the sessions last week.  For recent college graduates or anyone looking to get their financial life started on the right track, here are some principles and tools that I think can help build the foundation of the financial life that should lead to long term financial security.

Spend less than you make and know where your money goes.

Mint is a great free tool to track spending. With the alerts feature, get a text message when you hit your monthly budget for one or two “hot spots“ in your budget (where you think you might overspend). The Mint app on my phone is how I start almost every morning. You can also go old school Excel with this Expense Tracker. However you do it, understand where your money is going and make sure that you spend less than you make.

Automate your savings.

Make sure that you are contributing to your 401(k) in an amount that is equal to or greater than your employer’s match.  If possible, get your contribution plus the match to be 15-20% of your compensation. If you can’t do that right away, enroll in the rate escalator feature of your 401(k) or make it a habit to increase your contribution by 1% every time you get a pay increase.

Set up a savings account in a bank or credit union that isn’t your primary bank. The goal is to create a speed bump between you and your money so that the savings grow all the time. Once the account is set up, get a direct deposit (something small like $10, $20, or $50 per pay so that it’s not a burden) going into that account with each paycheck. That’s going to be your long term emergency fund and perhaps the down payment on your first house.

Always know your credit score.

No one should ever have to pay for their credit score. That’s a sentence that I firmly believe. The good news is that with free services offered by Credit Karma and CreditSesame , you can track your credit score and see your credit reports at any time.  (Checking your own score is NOT going to count as an inquiry and have a negative impact on your score.) Both sites also have great alerts, phone apps and tips for how you can increase your credit score over time.

Pay down debt rapidly. Debt is NOT your friend.

Use this Debt Inventory to keep a record of who you owe and how much. Enter your current debts and save it as “August 2016” debt. Then when you get your next batch of statements, update the sheet and save as “Sept 2016.” Update until they are at $0. Print them out so that you can track the progress you’re making on a monthly basis.

Pay only the minimum on all debts except the one with the highest rate of interest. Circle that one with a red pen and consider it your enemy. Throw every ounce of financial energy you have into eliminating that debt. When it’s gone, lather – rinse – repeat.

As the foundation of a long term secure financial future, these steps will help get you to a place where you’re never really worried about money. While they look very simple (because they ARE!), most people that I meet with are not doing these very basic steps. If you start your career with them, you will get your financial life well ahead of most of America and of your peer group.

 

 

What to Do Before You Lose Your Phone

August 25, 2016

Earlier this year, I wrote about a cell phone case that can protect you from the potential harm of cell phone radiation and allows you to carry up to 3 cards in it. I mentioned one of the downsides as being “the risk of keeping your cards with your phone since if you lose it, you lose your cards too.” Well, after recently leaving my phone/credit cards on a bus, that risk isn’t just theoretical anymore. Here are some ways to protect yourself in case you lose your phone, your wallet, or both:

Make sure you have a password lock on your smartphone. Otherwise, anyone who gets your phone may have access to your personal information, including possibly financial accounts. I minimize the inconvenience of having to constantly unlock it by using a quick swipe pattern instead of a PIN or password.

Keep a backup phone. It can be an old phone that’s not worth much and should be able to be activated quickly without a contract. Ideally, it would be on a different network than your regular phone so you can also use it if you’re in an area where your the latter has poor service. Mine is on Ting, which charges by usage without a contract and uses the Sprint network.

Sign up for Google Voice. Google Voice is a free service that gives you a phone number that you can use to forward calls to other phones (plus Google voice chat) and a voicemail that’s converted into text and is accessible to read or listen to online. This way you can have your calls forwarded to any phone that’s accessible to you (like your backup phone) and have access to any text messages or voicemails you receive. You can then put your Google Voice number on your phone’s lock screen so someone can easily contact you if they find it. It’s also handy to be able to access messages while you’re on a plane or otherwise away from cell service and is quicker than porting your number when you get a new phone.

Use a phone tracking app. The iPhone has “Find My Phone” and Android phones have “Android Device Manager.” I used the Android app to verify that my phone was on the bus. I could also add a password or change my lock screen info, make the phone ring at maximum volume for 5 min, conserve battery power, and even erase all the contents of the phone.

Keep a spare credit card elsewhere. If you lose your credit card(s), you’ll want to cancel them so having another card you can use until you receive the new one(s) is very helpful. In particular, I use one of my spare cards for all auto-payments and never travel with it so if I lose my wallet, I don’t have to worry about updating all those auto-pays (and possibly missing one).

Fortunately, I was eventually able to get my phone back after contacting the bus company. The only cost was a nominal fee for a new debit card and about $20 for using my backup phone. Without taking those precautions, my financial information could have gotten into the wrong hands, or at least I would been without a phone or credit cards for a while. You may never have yours lost or stolen, but as they say, better safe than sorry!

Want more info on this or other financial topics? If you have a question, feel free to email me. You can also receive future blog posts by following me on Twitter and/or subscribing to my posts on the blog home page.

 

 

4 Financial Moves I Wish I’d Made in My 20’s

August 24, 2016

Whenever I have the opportunity to work with an employee who is just starting their career by calling the Financial Helpline to make sure they’re making all the right financial moves, I can’t help but gush a little bit. This simple phone call often sets into motion actions and habits that will legitimately change the course of this person’s life. I often wonder how my life would have been different if I’d had the Financial Helpline to call for unbiased financial guidance from someone who would have given me a straight answer, no strings attached. If I could turn back time, here’s what I’d have done differently:

Joined an HSA plan as soon as it was offered. I still remember the hoopla in the financial services community when health savings accounts were first rolled out, but I didn’t get it. I wasn’t yet a financial planner, so I didn’t fully understand why anyone would sign up for a health insurance plan that could cause them to pay full price for the first couple thousand dollars in healthcare expenses each year, and didn’t even consider signing up. Similar to many people’s logic, I avoided the HSA due to the high-deductible without taking into consideration the fact that my employer was willing to fund some (or all) of that deductible and based on my lack of health issues, I was unlikely to spend even that. By the time I realized the beauty of the HSA, I only had a couple years before it was time to switch to more comprehensive coverage since I knew my costs were going to increase.

Opened and funded a Roth IRA. I’ll never forget the day I stepped into my co-worker Tom’s office and asked him to open a brokerage account for me to begin investing in an index fund with the extra money I had been paying toward my low-interest student loan. Tom looked at me and said, “Are you sure you don’t want to use that money to fund a Roth IRA instead of a taxable account?” I nodded, thinking that I didn’t want to kiss that money goodbye for the next 35 years, so I opted for a regular brokerage account.

I was wrong. Had I instead used that money to fund a Roth IRA, I still would have had access to my deposits without tax or penalty, and I would never have to pay taxes on the growth of my investments after age 59 1/2. When asked by young people about priorities in savings, I never waiver in my answer:

  1. First get the match in your 401k. It’s free money, enough said.
  2. Then max out your HSA. If you don’t need the money tax-free for healthcare expenses, you can access it like a normal retirement account after age 65. It’s also often free money.
  3. Then fund a Roth IRA. While you are still under the income limits and the money has years to grow, take advantage of it.

Created a pet care fund. I adopted my first cat, Hattie May, my senior year of college and over the course of her short 13 year life, I estimate that I spent at least $5,000 on her care. The worst part about this is that I should’ve spent more to take care of her issues, but because I didn’t have money set aside, I skimped. This is something I’ll forever regret and I often wonder if she’d still be alive today if I’d prioritized saving for her costs. Here’s what I should’ve done: find out the cost of pet insurance for annual visits plus emergency care and then instead of buying the insurance, set that amount aside each month into a separate savings account. That way when things did come up, I would’ve had money available and if nothing came up, I wouldn’t be out the money.

Spent less money on cheap clothes. Confession: I engage in retail therapy with the best of them. I just wish I could go back to those early years and made a few less trips to stores like Old Navy and Target, where I succumbed to merchandising brilliance and bought clothes I maybe wore twice. I could’ve re-routed that money toward Hattie’s fund or a Roth IRA. The worst part is that when I went through periods of closet-cleaning during those years, I didn’t receive any tax benefit from donating those clothes as my itemized deductions weren’t high enough to qualify.

What I wish I’d done is put a limit on myself for impulse shopping. I don’t believe in going cold turkey. I do think we can all handle moderation though.

I can’t turn back time, but I can share the wisdom of my mistakes so here’s hoping you can learn from mine. What financial moves do you wish you could do over? Let me know on Facebook or send me a tweet.

Did you know you can sign up to receive my blog posts every week, delivered straight to your inbox? Just head over to our blog main page, enter your email address and select which topics or bloggers’ posts you’d like to receive. Obviously, I suggest at least “Posts from Kelley.” Thanks for reading!

 

What to Consider Before Doing a Vacation Rental by Owner

August 23, 2016

Every year, we do a summer family vacation. This normally involves planning for the “whine factor.” What would my husband and I like to do that we think the kids would like with the least amount of whining?

We settled for a vacation in the mountains around the Tennessee area, visiting underground caverns and waterfalls. As always, I shopped around for the best deal for hotels for a family of four and found vacation rentals by owners to almost always be much cheaper and at the same time giving us more space. We have been using vacation rentals for a few years, and as I talk to friends about our experience, below are some of the things I tell them to consider before choosing a rental property:

What equipment is available for use? We rented a condo for a beach vacation, and I brought everything for the perfect vacation: beach chairs, toys, and towels. Had I asked in advance, I would have found out that the condo owner supplied everything.

In fact, her chairs were better than ours. The owner of the condo even had body boards and large water guns – a huge hit with my kids. Before lugging a bunch of stuff that will just take up space, contact the property point of contact and verify what equipment they have that’s available for use. Also, confirm what kitchen items will be provided, if any, such as utensils, napkins, plates and mugs.

What is the cancellation policy?  What if someone gets sick or there is a weather-related issue? Do you get your deposit back? Can you re-book? Ask for clear details on how long you have to cancel and the policies for emergency cancellations before you book.

Who do you call if you have an emergency? We accidently got locked out of one of our rentals. Luckily, we were able to quickly get back in, but I realized later, I would not have known who to call if there was an emergency. (The owner of our condo was out of the country). Find out in advance who to call if something breaks down.

What do former renters have to say about their stay? Read the reviews. People are NOT shy about telling others what they think of their experience. They will tell you about whether the pictures do not match what the rental actually looks like, the cleanliness of the property, noisy neighbors, slow response time, and basically everything else you need to know to make the most informed decision. I particularly look for comments from parents such as concerns about the property not being child-friendly or having nearby parks.

Vacation rental properties by owner can be a fun way to save money. Do your homework though. Taking the time to thoroughly review them will go a long way into making your vacation as peaceful as possible.

 

 

Managing the High Costs of Your Children’s Sports

August 22, 2016

All over the country during this back-to-school season, American parents are stocking up on school supplies – and on expensive sports equipment and team registration fees. Some are parents of gifted athletes who dream of athletic scholarships. Others just want to give their children the many benefits of regular physical activities or team camaraderie.

As more and more school districts charge families for participation in after school athletic activities, parents find themselves on the hook for an average of $671 annually. In fact, a recent TD Ameritrade survey found that one in five parents spends more than $1000 per child a month on sports activities. What are the consequences? According to the survey, many sports parents are showing greater commitment to their kids’ sports than to their own financial wellbeing:

One third do not contribute regularly to a retirement account;

19 percent have incurred credit card debt from sports costs; and

17 percent plan to work longer or delay retirement.

If you don’t have sports-age kids, it could seem a little nuts! I can tell you from personal experience it adds up. I’ve got one child who plays ice hockey and the other who is on an acrobatic dance team. Both take ice skating lessons.

The participation and lesson fees alone are more than $300 per month. That doesn’t include uniforms, costumes or equipment. However, we manage to keep the costs manageable by doing a few things:

You Can’t Be on Every Team

My kids are 8 and 12. They enjoy their sports, but it’s not reasonable that they play on multiple teams during any given season. Each child gets to pick one team and one additional type of lesson/activity per school term. If they choose a different activity, an existing one has to go.

For example, my son toyed with the idea of playing football this fall. We gave him the choice of sticking with hockey, which he plays now, or trying football for the season. He thought about it and decided to stick with hockey, but it was his choice.

Sports Consignment Shopping

Bats, sticks, pads, helmets, skates, cleats, etc. – all these things can be found used for less than half the cost. There is absolutely no reason to buy most kids’ sports equipment new anyway. Kids outgrow their sports equipment quickly.

Seek out sports consignment shops for big discounts on equipment and clothing. This can save you $500-1000 per season if your child plays an equipment-intensive sport such as football or hockey. When your child grows out of them halfway through the year, trade them in for store credit on a bigger size.

Swap with Friends

No sports consignment shop in your area? Set up your own sports gear swap event with friends or with your schools’ parents association. Each participant who brings an item gets to swap for another item to bring home. See instructions here.  Alternatively, you could set up a “replay” event at school, where you solicit donations of sports gear and then sell them inexpensively, with proceeds going to the team or the school association.

Seek School and Community-Based Options

While the travel baseball team may be right for your baseball-obsessed child who throws a mean curve ball, they can be very expensive. Fortunately, there are other options. For most kids, a local school team or recreational sports sponsored by community organizations like the YMCA offer a balance of learning, competition and reasonable cost.

Volunteer

Giving your time can help defray some costs and is a great way to share your child’s sports experience. You could coach, administer or help raise money for your child’s team. For example, my daughter’s YMCA dance team holds fundraising events throughout the year, which defray most of the costs of their competition entry fees (which would otherwise be close to $1000 per dancer). By volunteering at various events, the dance parents work together to make the program affordable for all the dancers.

Pick a Cheaper Sport?

It’s understandable that the parents of the more than 45 million American children who play sports want their children to succeed at their chosen game. We want our children to pick the activities they love to do and to have fun and grow as people doing them. However, if your child is aiming for a sport which requires a lot of equipment or expensive lessons, make sure it’s something they really, really want to do. If it’s just physical activity they require, consider an organized sport that requires less equipment.

How about you? How much do you spend on your children’s sports? Email me at [email protected] or tweet me at @cynthiameyer_FF.

How This Millennial Couple Bought Their First Home Before They Thought They Were Ready

August 17, 2016

We often discuss planning for obstacles in our financial planning workshops, acknowledging that even the most perfect plans need contingencies. Life happens! So when our director of PR, Danielle, and her husband Adam discovered they were expecting their first child a few years before they had planned to start their family, they obviously had to shift some of their other plans. “Obstacles” aren’t always negative things!

Danielle shared with me that she and Adam had a 3 year plan that included purchasing their first home before having kids, so when they found out they were expecting, the home purchase plan was pushed back. When she announced they were closing on a home less than 7 months after their son was born, I had to know how they worked that out! Here’s what I learned and what we can all learn from prioritizing goals and examining our spending, in an edited interview with Danielle:

Me: When did you and your husband start thinking about buying a house?

Danielle: We’d been talking about buying a home since we got married in 2014 as part of a three-year plan, but when we found out we were having our little boy earlier than we’d planned, buying our first family home became a ‘when we can’ sort of goal that sat on the back burner for about a year. We kept saving but weren’t looking seriously and were even discussing renewing the lease on our apartment when we filed our 2015 income taxes. The straw that broke the camel’s back was our tax guy telling my husband, “You need more kids and a house” to write off as we were paying a ton in taxes. We started our search then.

Me: Did it happen on the timeline that you planned?

Danielle: Surprisingly, it happened before we had planned. We didn’t think we could afford a home or were ready for the responsibility. When we realized that we’d saved enough for the required down payment and could get a pretty low rate because of the current economy, we thought now’s the time!

Me: What were the initial financial moves you made to start the process?

Danielle: We had to get our financial ducks in a row, so to speak. First, we checked our credit scores to see what kind of a rate we could get. My husband works in mortgage, so we had a pretty firm grasp on what we could qualify for and what the best program was for us based on our income and down payment savings.

We crunched the numbers to decide what our maximum monthly payment could be and then after dreaming a bit, settled on what a comfortable payment would be, and started looking. I am SO glad we stuck to the lower amount, even after looking at some awesome homes in our peak price range! We also decided to pay off some credit cards to make sure we could qualify since my husband’s income, being commission-based, could get complicated through the loan process.

Me: Did you make any changes to your spending in order to save for a down payment?

Danielle: Yes! We had been cutting back for about a year prior to looking, like going out to eat less and cutting our cable back from the full package to a basic package while using Netflix instead. I also have a hybrid car, so I started charging it more instead of filling up for more mileage on less money. We cancelled magazine subscriptions we weren’t using, and I cancelled my gym membership because our apartment complex had a pretty nice one on the premises.

My husband and I are pretty impulsive, so saving money is hard for us, but we knew we had to change those habits – especially if we were going to be responsible for a mortgage! We have been working hard to do that and it’s paying off. We also said “NO” a lot more to friends who invited us out for social events. Not only were we trying to save more in general, we were expecting a baby so we knew saving needed to be our number one priority!

Me: What tips or tricks did you learn from working at Financial Finesse that helped in this process?

Danielle: I have learned so much about simple ways to save money that can really equal large amounts of savings. I remember sitting at the counter with my husband and talking about where we could cut back. At first, it felt like nowhere!

But when we really began to break it down, we found hundreds of dollars every month we could save. That was pretty cool. I’ve also learned a lot about using credit wisely and keeping your debt to income ratio balanced, which paid off in the home buying process.

Me: Was there anything you wish you’d known before about buying a house that you have learned?

Danielle: Yes! I didn’t realize how difficult it is to buy a home in a competitive market like Southern California. It was extremely frustrating and at times, I couldn’t help but feel like the industry is pretty biased in some areas.

We were finding it was hard to even get our offers looked at. We were beat on several homes by all-cash offers, which is to be expected. What caught us off guard was that we were being completely overshadowed by offers that were being written by an agent acting as both the selling and buying agent.

This seemed crazy to me. How is this legal? It made it impossible for anyone who wasn’t working with the selling/buying agent to get a look.

When we lost a home we really wanted because the agent held off on even showing our offer to his client in order to give his buying clients a chance to put theirs in first, we learned our lesson and ended up going through the selling agent ourselves on the home we finally did get. As a result, we had to pay our agent outside of contract for all of his work with us AND the selling agent for getting our offer accepted. We were so desperate at that point, we went ahead with it, but if we weren’t needing a home (our lease was up in 3 weeks at this point!) we probably wouldn’t have done it.

Me: How does this change your financial picture going forward?

Danielle: It has helped us lay down our roots to really start planning for our future. We look around our new place and think, “Wow this is ours!” and it feels so good to not be paying someone else’s mortgage! Now that we have a home with a comfortable payment, we are focused on saving for our son’s education, preparing for more children and saving for our retirement someday. It was definitely the right decision for us even though we didn’t anticipate making the move for another year.

Me: What words of advice do you have for other young families who are thinking about buying their first home?

Danielle: Do your research. Don’t rely on what listing agents are sending or telling you. Go to open houses yourself and talk to the agents.

Get a scope of what the seller is looking for. It’s always good to get as much information as you can about what you’re going into. Compare loan rates at different financial institutions and ask about first-time home buyer programs.

Also, don’t skimp out on the inspection! My husband and I spent nearly $1,000 on three different home inspections because we decided to go with a very thorough inspector instead of a cheaper, less thorough one. As a result of what he found, we backed out of two homes that would have ended up being financial nightmares for us down the road.

Finally, start saving now. We didn’t honestly think we could buy a home this soon after having our son, but saving was pretty painless, and it wasn’t nearly as hard as we expected to cut back on things we rarely used anyway. Pick 2-3 small expenses you can cut and start there. You’ll find that it’s kind of fun to see how much you can save every month!

Thank you so much to Danielle for sharing this experience and wisdom! For tips on applying for a mortgage, check out Five Things to Know About Applying for a Mortgage. Now you tell me – what things did you learn as you saved and shopped for your first home? Anything you’d do differently? Please email me, share on our Facebook page or send me a tweet @kclmoneycoach.

 

 

Which Job Offer Should You Take?

August 16, 2016

A few weeks ago, I was having a wonderful conversation with a young woman trying to decide what to do with her life. She recently received multiple job offers in multiple states. I asked her how she was weighing her options. She looked at me as if to say, “Why would you even ask this question” and she replied that she would take the offer that paid the most. I told her that she should focus on the net, not gross amount.

Look at net vs gross paycheck. State taxes vary wildly in the U.S. Some states like Florida and Texas do not tax your income and states like New York and Maryland not only impose tax taxes, but some of their cities also impose taxes. This can take a big bite out of your income. Consider doing a paycheck calculator so you can see how little or how much of your paycheck you get to keep based on what state you live in.

Review the benefits from each company. Not only can taxes take a bite out of your paycheck, so can your benefits. If possible, find out how much the average healthcare premiums are and compare. Taking a job that pays $6,000 more with a $250 per paycheck healthcare premium will eat away the extra money. Ask about other benefits like 401(k) plan matching, contributions to medical savings plans and generous time off as well.

Review cost of living by states. In addition to taxes, consider the daily cost of living, such as housing costs, to see how far your dollars can go. After all, you still want a life. Estimators like CNN’s cost of living calculator can help you compare what income you need to maintain your life style by city.

Potential job growth.  How much room to grow do you have with each opportunity? What programs do they have to help you grow professionally? Will your future organization pay for additional education and certifications?

Don’t just look at the gross salary. Calculate the actual net to you. Taking a few moments to really evaluate job opportunities can go a long way to helping you make the best decision for your future.

 

 

Do You Know the Real Costs of Home Ownership?

August 15, 2016

How much does owning a home really cost? It’s more than you think it will. Owning a home requires more financial resources than just paying the mortgage. You must be prepared to make an ongoing investment in the care of your home. If you are thinking of buying a home or just want to plan better for the costs of keeping up your property, take this quiz to test your home ownership savvy:

1. What kind of damage does a standard homeowner’s insurance policy cover?

a) sewer back up

b) flood

c) termites

d) none of the above

Answer: d  Homeowner’s insurance is designed to cover events that are sudden and accidental, not things that could be prevented with routine maintenance, such as pest control or inspecting a sewer line for tree roots. In addition, standard homeowner’s insurance policies do not cover floods, but flood insurance may be purchased from the National Flood Insurance Program. Many homeowners find this out the hard way after a problem has already occurred.

Review your homeowner’s insurance once a year to make sure you’re covered for your risks. For an additional premium of $50-$400, you may be able to add coverage for certain perils to your standard policy. If you are considering buying in a flood region, keep in mind while flood insurance averages $700 per year, premiums can be exponentially higher if you live in a very high risk area.  Make sure you keep additional cash reserves in the amount of your homeowner’s insurance deductible as part of your emergency fund.

2. The average annual cost of a home repairs and maintenance is:

a) one half of 1 percent of the home’s value

b) 1 to 4 percent of the home’s value

c) $2500

d) $1250

Answer: b  What will you do when the furnace breaks, the roof leaks or you need to replace a washing machine? Don’t forget to look at maintenance costs before leaping into home ownership. For a $250,000 property, that means budgeting $2,500 to $10,000 for home repair and maintenance costs every year.

While it’s difficult to predict what is going to need repair or replacing during the year, count on the fact that something is going to require work. Have a brand new home with new appliances? You can probably get by for the first decade by reserving 1 percent of your home’s value in liquid savings to meet repair/maintenance expenses. Got a 150 year old house? You may find that maintenance and repair costs closer to 4 percent of the home’s value per year.

3. How much more will a mortgage cost if you have fair to good, but not excellent, credit?

a) .25 to 1.5 percent more than the rate of borrowers with high credit scores

b) .25 percent less than the rate for borrowers with high credit scores

c) the same as the rate for borrowers with high credit scores

d) people with fair credit scores will find it very hard to get a mortgage

Answer: a  The average FICO score for U.S. borrowers is good but not excellent, at 695. At current rates, a borrower with that score would pay about  four tenths of a percent more than a borrower in the highest tier of credit scores. According to this calculator for a $200,000 fixed rate 30 year term mortgage, the borrower with the average FICO score would pay $15,768 more in interest over the life of the loan given current rates – about  $44 more per month. Try this mortgage loan comparison tool to compare mortgages.

4. Maintaining the land and gardens surrounding my home is likely to require regular:

a) tree trimming and removal

b) lawn care, such as buying a lawnmower and garden tools or paying a landscaping service

c) investments in plants, bushes and other garden features

d) all of the above

Answer: d  If you have outdoor space, maintaining the lawn and garden is an important component of your home’s value. Doing all the work on the lawn and garden yourself is cost effective, but it will still cost money for equipment, plants and outdoor furniture, so make sure to include that in your annual budget. If you plan to hire help, expect to pay $40-$120 per visit for landscaping and lawn care, depending on where you live and the size of your property. Tree care is not something people can usually do on their own, so if you have large trees, make sure to budget for a tree service. The cost of trimming or removing just one large tree could be as much as $500 to $1000 because of the hazards involved.

5. When buying a home, homeowners generally spend how much on furnishing their new space:

a) $15,147

b) $3,895

c) $5,288

d) $9,733

Answer:  c   According to a National Association of Home Builders study, new home buyers spent $5,288 on furniture in the first year after buying a home built in 2004 or later. Many homebuyers fail to budget for what it will take to turn their house into a home that meets their personal aesthetic. It is unrealistic to think you won’t want to make changes. Expect that you will want to personalize your new space with paint, furniture and accessories and include those costs in your home buying budget.

Do you have questions or comments about the costs of home ownership? Email me at [email protected]. You can also follow me on Twitter @cynthiameyer_FF.

 

 

Should You Buy or Rent?

August 11, 2016

This is a question I recently got on our financial helpline and one that I’m struggling with myself right now. The conventional wisdom is that renting is “throwing money away,” but owning a home also involves throwing away a lot more money than it may seem. One way to see this is by using a “Buy vs Rent” calculator like this one from the NY Times. Not only are you paying interest on the mortgage, there’s also maintenance costs, taxes, the opportunity cost of not being able to invest any extra money you put towards buying, and the transaction costs of buying and selling. Here are some things to consider before making one of the biggest financial decisions of your life:

How long do you plan to stay? For most people, this is probably the single biggest deciding factor. The longer you stay, the more buying usually makes sense because it takes time for the financial benefits to outweigh closing costs and real estate agent commissions, not to mention the risk that the home could actually be worth less when you try to sell it. It’s generally better to rent if you plan to stay less than 3-5 years.

What mortgage rate can you qualify for? To get the best mortgage terms, you typically have to have a credit score of at least 750 and put down 20%. If your credit isn’t so great or if you can’t make much of a down payment, you may want to delay buying until your credit or savings is in better condition.

Where would you invest any extra savings? If you can save more by renting and earn a good return on those savings, renting may be better. For example, if you’re not contributing enough to max your employer’s match, or have high-interest debt to pay down, or are just an aggressive investor, the return on your savings can be quite high.

What’s your tax bracket? The higher your tax bracket is, the more you can save by deducting mortgage interest and property taxes. Just be aware that you only benefit to the extent that these itemized deductions exceed your standard deduction.

How handy are you? As a homeowner, you won’t be able to call the landlord anymore when something needs to be fixed. If you can keep maintenance costs down by doing a lot of your own work or even by being a savvy shopper, buying might be more beneficial.

I’ve been renting, but I’m now considering buying a home. I should be able to qualify for a good mortgage rate and I’m in a moderately high tax bracket. On the other hand, I think I can also earn a decent return on my savings if I rent, and I’m not the most handy person.

The tie-breaker might be how long I would plan to live in my next home, which is a tough call that involves a lot of big life decisions. In the end, the decision to buy or rent often comes down to an emotional one. There’s nothing wrong with that as long as you’re aware and okay with the financial consequences as well.

 

Why Health Savings Accounts Are Such a Great Deal

August 10, 2016

Health savings accounts have been around for several years now, but we still find that there are plenty of people out there who don’t understand how they work or why they can be such a great deal. We are lucky enough to have access to them at Financial Finesse and my colleagues with great health and relatively little expenses simply love the plan. Here’s why: it’s a high-deductible plan connected to a health savings account (HSA), a plan type that is becoming more and more common as traditional insurance premiums continue increasing.

In our case, our company pays lower premiums because we have to spend $3,500 each year before the insurance even begins to cover us. That doesn’t sound like a great deal for us employees though, huh? That’s what a lot of people originally think too. But the other side is that our employer uses the savings to put $2,500 each year into a health savings account for each of us that we can then use to pay that $3,500 deductible. As a result, we would only have to pay an additional $1,000 to reach the deductible, and that’s only after our healthcare costs exceed $2,500.

The best part is that we pay no taxes on this money and unlike FSAs, we get to keep whatever we don’t spend in our account. That doesn’t mean you can take the money and splurge it on a nice vacation (at least not without paying taxes plus a 20% penalty on it). But it does mean you can invest that money in your HSA tax-deferred until age 65, when you can then spend it on retirement without penalty, use it tax-free for medical expenses (which Fidelity estimates will be about $245,000 over the remaining lifetime of a 65-yr old couple without retiree health insurance), or just let it continue to grow tax-deferred.

The interesting thing is that it changes your whole view on health spending. Normally, you probably just go to the doctor when you feel sick and don’t think much about costs since someone else (the insurance company directly and your employer indirectly through higher premiums) is paying. Think about how you’d spend if other areas of your life worked that way (as someone who loves to eat out, I wish my company provided us food insurance). Instead, when the dentist asks when the last time you had your x-rays done, you’re more likely make sure you know the answer before paying for x-rays you don’t need.

Annual wellness visits are free of charge by law. If you rarely get sick, you may not have to spend any money at all while still keeping up on your vital visits (and banking those employer contributions). You can also use your HSA for medical expenses as well as on your spouse and dependents even if they’re not covered on your health insurance plan.

Another thing I love about HSAs is that an individual at my company can also add another $850 to it each year since the limit is $3,350 per year for a single person. If you have the deposits deducted from your paycheck, you also don’t have to pay the 7.5% payroll tax on it. Not even 401(k) contributions let you do that. When you consider that HSAs offer you both pre-tax contributions AND the potential for tax-free withdrawals, there’s an argument for funding it even ahead of your 401(k) (after you’ve maxed the match, obviously) or IRA.

So what’s not to love? Apparently not much. With two caveats: make sure you have at least enough cash on hand to pay each year’s out-of-pocket maximum and if you have latent health conditions like I do, consider switching to a lower-deductible plan when your healthcare needs are projected to grow.

 

 

How to Avoid Hidden Car Costs

August 09, 2016

Experiencing two car accidents in four months has a way of making cars top of mind. As I was discussing this, one of our resident financial planners, Teig, offered great guidance about avoiding the hidden cost of cars. Here are his thoughts:

I really love cars. I bought my first car before I was old enough to drive and read the entire mechanic’s repair manual for it, cover-to-cover. The car was older than I was, a classic ’68 Mustang, and I spent every spare hour for three months repairing the engine, replacing worn out parts, painting, and polishing it up for my 16th birthday. It was a real head turner until a drunk driver plowed into it head-on one night – an event I shouldn’t have survived, and my car certainly didn’t.

Since then, I’ve owned about a dozen great cars, some new, most over 15 years old, some common, and most extremely rare. I’ve always been able to keep my cost of owning these rolling works of art and fine engineering to a minimum by knowing what to maintain and how so I was able to offer Tania some guidance on her questions. I will now pass them along to you, along with a few other money saving and car-life sustaining tips:

At the gas station, choose the fuel recommended by the manufacturer of your vehicle. All cars come with a specific fuel “octane” rating requirement, and filling up with the wrong octane rating can cost you big time. The octane rating is a measurement of the pressure at which fuel combusts (explodes) and is the number you see on different grades of gasoline at the pumps (usually 87, 91, 93).

Since combustion is what drives the engine of your car, you want every little explosion to happen right when it is supposed to for maximum efficiency. The manufacturer knows precisely when your fuel must combust for that efficiency, and they give you the octane number that works best for your car. You can look it up online, it’s in the owner’s manual, or in some cases, it’s printed on the gas cap or inside the gas door. Also, using the wrong octane will cause your engine to run inefficiently, use more fuel than you need, and damage the engine slowly over time – and repairing or replacing an engine will cost you about 10% to 20% of the car’s original value.

If you do decide to put a higher octane fuel than recommended into your tank, you may be spending hundreds of dollars more than you need to per year: According to AAA, the average gas price nationwide right now is $2.20 per gallon for regular, 87 octane, and $2.72 per gallon for premium, 93 octane. That’s a difference of $.52 per gallon. If the average distance driven per car in the U.S. is 15,000 miles, and the average gas mileage is about 21 miles per gallon, then buying premium gasoline when you don’t have to is costing you over $371 per year. Amazingly, that’s almost the average cost of a new set of tires.

Avoid letting your fuel level get below a ¼ tank to avoid damage to the fuel pump.  No matter how clean your gasoline, it still contains some sediment that settles in the bottom of your tank. When you let the tank get low, those sediments can get sucked into the fuel pump and filters, slowing the flow of fuel, causing you to use more of it than you need to use, and damaging the fuel system – all of which drain more money out of your pocket.

Rotate and balance your tires every 5,000 miles. For average drivers, that’s three times a year, and it’s an inexpensive and easy way to get the most value out of your tires. Assuming you maintain them (keep the tire pressure between 32 and 35, depending on your altitude), most tires will last you 30,000 to 40,000 miles so plan to buy a new set every three years or so.

A decent set of tires on my family’s every day drivers typically run between $400 and $600, but shop around as prices do vary wildly. Also, be mindful of the seasons where you live. In Colorado, where I live, buying tires around the first and last snow storms of the year is more expensive since there is usually a rush to change in-and-out of snow tires.

Only use the oil weight and other fluids recommended by your manufacturer.  You don’t necessarily have to go with their suggested brand, but just as with gasoline, using the incorrect type of oil and other fluids will cost you money in damage to your engine over time and lead to costly engine repair. For most vehicles, change the oil every 3,000 to 6,000 miles and other changeable fluids according to the manufacturer’s recommendations.

The Internet is loaded with additional tips for maintaining your vehicle, which can lead to some great financial savings. If you don’t share my enthusiasm for cars, don’t despair. Instead, check out my colleague Erik’s recent blog post on how to give up your automobile completely:  https://www.financialfinesse.com/2016/06/23/would-you-go-carless/