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The One Simple Habit That Can Help You Enjoy a Great Financial Future

June 26, 2017 debtmanagement

Do you want to work until you’re 67 ½?

We didn’t think so.

You’d probably prefer to retire early and this is possible, even if you’re currently close to dead broke.

The answer is to create one simple habit – planning ahead.

What statistics tell us

People who said they thought about retirement “a lot,” or even “a little” – got to retirement age with twice the amount of money as people who didn’t plan for retirement. This is according to a study done in 2007 by the Pension Research Council.

Here’s another fascinating statistic. Parents who had a plan as to how they would pay for their kids’ college education ended up saving 76% more than parents who saved for their child’s’ education but didn’t have an actual plan. This is according to Sally Mae’s 2016 report How America Saves for College 2016.

And a study done in 2015 by the Center for Financial Services Innovation (CFSI) found that U.S. families who plan for big emergency expenses were 10 times as likely to be healthy financially as those that don’t.

Financial health defined

How did the CFSI define financial health? It defined it as having retirement savings and an emergency fund, high credit scores, a sustainable debt load, and property, health, and life, insurance.

People who do plan don’t focus just on long-term goals, either. They also plan and save for near-term expenses such as those that will come up in the next week, or the next six months. The fact is that you can’t dream about having a future free of debt if you don’t first have a plan for paying tomorrow’s bills.

If you can’t plan because you’re too worried

If you’re so broke you’re having a hard time just coping with today’s expenses, it’s hard to plan. In fact, according to two college professors – one from Harvard and the other from Princeton – our brains are wired in such a way that we tend to make matters worse when we don’t have enough of what we require.

If you’re having a tough time making ends meet, you will be so focused on solving today’s problems you’ll actually have less mental energy available for much else. This preoccupation actually makes it more likely that you’ll forget things and make mistakes because you’re so preoccupied with immediate problems. For example, some people take out high-interest loans that make it even tougher for them to pay their next month’s bills. In fact, believe it or not, if you’re preoccupied with financial problems, your IQ can drop by as many as 13 points, which is about equivalent to being up all night. In addition, this can have a negative effect on our ability to control our impulses and resist temptation.

Find some breathing room

The two professors mentioned above have also said we need “slack,” or time that can lessen our cognitive loads. If you’re time-strapped, this could mean keeping open a couple of 30-minute slots during the day to deal with unexpected events. If you are financially strapped, “slack” means creating at least a small emergency fund. Having just a couple of hundred dollars put away could cover an insurance deductible or a car repair. But what’s really important is that this can ease the mental strain that comes from living from payday to payday.

Develop the saving habit

Once you’ve developed some slack in your financial life, you need to develop the habit of saving. What financial advisors say is that we need to pay ourselves first. This means saving some money each month or each payday before paying your bills. Households that are financially healthy often use other plans for saving money, such as banking all of one spouse’s income while living on the other’s. Other people say their tax refunds, bonuses, or money gifts.

The important thing is that just doing it’s more important than how you do it. Once you develop the savings habit, you can then begin planning – even if it’s for just a few weeks ahead.

In summary

Many financial articles stress that it’s important to not overspend today so you can be saving for the future. However, what people most often need is to save and plan for the near-future. When you do this, you should find it much easier to manage the long term.

Just Married? Here’s 4 Things to do About Personal Finances

June 19, 2017 debtmanagement

Tackle these issues first

You may find it difficult at least early on to agree on everything having to do with personal finances. But It’s possible to minimize – if not eliminate – the stress over finances is to tackle the important issues early on. Here are four administrative and financial tasks you should resolve fairly quickly so that you can get back to enjoying your marriage.

1. Decide how you will handle bank accounts

You may want to combine your checking and savings accounts but no rule says you have to. What’s important is to talk about your preferences to make sure your bills get paid when they’re due. If you decide to keep your finances separate, you will need to set up a new account to cover your common expenses. Sit down, list the expenses you’ll both need to contribute to, such as housing, utilities, and groceries. Then, figure out how to split these costs. You might split them equally or on a proportional basis depending on your incomes. Once you determine this, your final step should be to set up automatic transfers of these amounts to the new joint account.

2. Agree on your financial terms both short- and long-term

If you already haven’t done it, then now is the time for you and your spouse to compare your income, debt load, spending habits and credit scores. It’s particularly important to discuss the joint goals you should be working on. For example, if one of your goals is to buy a home together then massive debt or poor credit could stop you. If this is the case, you may need to make a credit repair or plan to pay off your debts – maybe with the help of a consumer financial counselor or a certified financial planner. In addition, you should develop the habit of talking about your other priorities as well. Issues you might want to discuss include whether you’re putting enough away for retirement or how much you want to spend on vacations.

3. Update your beneficiaries

Your idea of wedded bliss might not be to sit down and do a bunch of paperwork but if you just got married, expect there will be a lot. And one of the first things you need to do is update your life insurance policy’s beneficiaries (if you have one), as well as your retirement accounts. If you die, federal law dictates that your spouse will get whatever is in your 401(k) unless the surviving partner has signed a waiver.

If you have an individual retirement account, you can name anyone as your beneficiary. But suppose you live in a state with community property laws (California, Arizona, Louisiana, Idaho, New Mexico, Nevada, Washington, Texas, and Wisconsin), and get a divorce. In this case any property you purchased during the marriage must be split equally regardless of who acquired it.

Each of you will also need to fill out a new W-4 at work. This is because getting married will probably change your tax rate. You both will need to fill out a new W-4 form so that your employer will begin withholding the right amount of income tax. You also need to decide which filing tax status will be best. Now, you’re married, you’ll probably want to file jointly as this may mean paying less taxes. However, circumstances may determine that filing separately could be best.

4. Discuss a postnuptial agreement

It’s possible you may want to have a prenuptial agreement though this can turn into a real sticking point. A better idea is to create a postnuptial agreement which will determine how assets are divided in the case of death or divorce. The difference between it and a prenup is that a postnuptial agreement can be created any time during the marriage. The reason to do this is because if you don’t have such an agreement, then your state’s laws will determine who owns what, and this may not be what you had wanted.

A postnuptial agreement is especially useful if you live in one of the community property states listed above. It can be also an especially good idea if one of you have children from a previous marriage or relationship. It can also be a good idea if one of you are anticipating a big inheritance or if there is a large disparity in your incomes. If this is the case, one of you may have an interest in keeping certain of your assets separate, or identifying how – in the event of divorce – you and your spouse would split shared property.

In conclusion

Sitting down and talking about finances shortly after your marriage may not be one of your most pleasant tasks. However, addressing these four issues early on can save a lot of arguments and disagreements later on. Plus, you may find it’s easy to agree on most of these.

Tips for Making a Debt Management Plan Work

May 30, 2017 debtmanagement

Being deeply in debt is no fun at all. You’re probably receiving calls from your lenders, or worse, yet from debt collectors. You may be lying awake nights worrying, and even suffering health problems caused by the stress of dealing with your debts.

One solution that’s helped many people is consumer credit counseling. If you’re lucky, there’s a good, non-profit consumer credit counseling agency near where you live. (Note: To see if one is near you, go to the National Foundation for Credit Counseling’s website and click the link Find An NFCC Agency.). Otherwise, you may have to find an online source. Just make sure it’s a non-profit, has been reviewed by certified credit counselors and offers its services either free or at low cost.

What to expect from your credit counselor

A credit counselor will first review your overall financial picture. He or she may then help you prepare a budget designed to get your debts under control and paid off. If it turns out a budget isn’t the answer, you will be offered a debt management plan.

Don’t be fooled by the term debt management plan (DMP). Its goal isn’t just to help you manage your debt, it’s to get it paid off.

The way it works is that your credit counselor negotiates with your lenders to get your interest rates reduced or frozen and any fees waived so that your monthly payments will be more manageable. Then, instead of paying your creditors you pay the credit counseling agency each month until all of your debts have been paid off. This service may cost you $25 to $35 a month, and the process will take four to five years depending on the size of your debt.

Understand the downsides

It’s important to know the downsides of a DMP before choosing this option. The biggest of these is that once your lenders learn you are in a debt management plan, they will most likely close your accounts. You could be left with no credit cards save the one you might be allowed to keep to use in the event of an emergency.

You’ve already read the second biggest downside, which is the amount of time it takes to complete a DMP. Five years is a long time and things can change, including your financial situation. Many people who start a DMP never complete theirs for this reason.

Make sure you can afford the monthly payment

Once your credit counselor creates your DMP, take a hard look at the monthly payment required. It needs to be something you can easily afford because if you can’t, you’re doomed to fail. Be honest with your counselor. If you believe you would have a hard time making the suggested monthly payment, tell your counselor this. She or he should be able to redo your DMP to get to a monthly payment that would be easier for you to make.

Get everything in writing

If you choose a DMP, make sure you get it in writing. Don’t rely on any verbal promises. The credit counseling agency should provide you with a contract containing all the pertinent information including your monthly payment, the fees, and how long it will take to complete the plan.

Continue making your payments

You need to continue making payments until your lenders have accepted your credit counselor’s proposal. If you can’t make all of your payments, try to at least pay something on them. If this is impossible, call your lenders and let them know you’ve enrolled in a DMP. Most will work with you. Keep paying as much as you can until you’re certain they’ve accepted your DMP. The critical thing here is to communicate with your lenders.

When to make your first monthly payment

Don’t make your first monthly payment to the credit counseling agency until you’re sure your lenders have accepted your DMP. Don’t take your credit counseling agency’s word for this. Contact each of your lenders to make sure they’ve accepted your DMP and verify they understand its terms.

Continue paying your other bills

All of your debts won’t be included in your DMP. For example, it won’t include secured debts like your mortgage or automobile loan, and your utilities. It’s important to know which debts are included in your DMP and which aren’t. Continue paying on the ones that aren’t. You should find it easier to make these payments now that you have just the one affordable monthly payment on your other debts.

Make sure your payments were received

Your credit counseling agency should provide you with a statement each month. It’s almost certain that the statement will be accurate but you should check with your creditors to ensure that they have received the agreed-upon payments. This is especially important in the first few months. In fact, you may want to call them instead of waiting for monthly statements from each of them.

In conclusion

If you’re truly committed to getting out of debt, a debt management plan can be a good solution. Just make sure you understand both the pluses and minuses before signing up for one. If you choose to go this route, make all of your payments and on time. Fail to do this, and you’ll end up in more trouble than before you signed up for the plan.

Here’s Why to Have a Date With Your Money

May 24, 2017 debtmanagement

Do you think of your money as a friend or an enemy?

You really should think of it as a friend. After all, would an enemy pay your rent or mortgage? Would an enemy buy you a car or pay your utilities?

Money is not only a friend, it has superpowers. It can take you on vacations and even give you peace of mind.

Given the fact it’s such a good friend, why not ask it out on a date?

Have a recurring date

Get out your calendar and set a recurring date. This could be as frequently as once a month or just once a quarter. The idea here is to set aside time to brainstorm things you could do with your current cash flow to have more money. If you implant an idea about money in your subconscious, it will go to work in the background analyzing opportunities. It’s likely that you’ll notice and remember articles on investing. You might spot the opportunity for a business venture. You’ll find this happens almost automatically once you have that recurring date in place.

What to do pre-date

This may sound silly but you should dress up just as you would for any date. Put on your makeup or comb your hair and put on a nice shirt. The trick is to make this feel like a special occasion. Then, set your intentions for the next couple of hours. For example, you might say, “I am putting my finances in order, and I’m going to think creatively about money.”

Next, set aside a limited amount of time. It would be a mistake to spend many hours pouring over your bills and end up feeling lost and overwhelmed. Three hours could be a good place to start.

Turn off your phone and maybe play some soft music to get in the mood.

Finally, make a list of the tasks that you want to perform that day.

The date itself

The first thing you need to do for your money date is assemble all your personal monthly and household expenses. Take a look at the previous month. What was your largest expenses? Do you foresee a big expense coming up in the future like a dental bill or car repair?

Check your transactions – credit cards, PayPal, checking account, purchases on Amazon, direct debits, etc. Mistakes can happen so look for overcharging or purchases that weren’t yours.
Think about your financial goals. You say you don’t have any yet? Then, sit down and define some. Is your goal to pay off your mortgage, save for a big trip, or a sabbatical year? It’s critical to visualize these goals and then track your progress.

Do you have stuff that doesn’t bring you any joy? If there’s something you haven’t used for 6-plus months, think about getting rid of it. You could donate, sell, or trash it.

Are there services like that health club membership you no longer use? Either cancel them or call the providers to see if you can get a better deal.

Think about side hustles or what you could do to earn extra money. We understand that Uber and Lyft can be good ways to do this, and that driving for Jimmy John’s can mean big money.

Look for things you can automate. Do you have an expense tracking app? Two of the best of these are Mint and Toshi. How about your bank? Does it offer options you have not yet used like automatic bill paying?

Finally, check out your investments to see if they need rebalancing. If you have not yet started investing, get to it.

Why hav a long-term relationship with your money

You don’t want your money date to be a one-night stand. It’s important to create a long-term relationship by doing things like reading money books. Keep in mind that you need to both enjoy and appreciate your money. Choose an activity or an item that you want to spend your money on that will give you a lot of pleasure. You’ll have more money coming so treat yourself to something like new athletic shoes or an expensive dinner with a loved one. It won’t exhaust your checking account if you do it just once a month, and it will enhance your life.

Lastly, pick a money or success goal for the upcoming month. This could be something as small as packing healthy food for your lunch instead of eating out. Or it might be something as big as a new outfit.

In conclusion

Having a recurring date with your money can be a very good thing. It can help you focus on your finances now and set your brain to working on them subconsciously. Your life and your money will thank you.

Three Common Mistakes That Can Trash Your Credit and How to Fix Them

May 18, 2017 debtmanagement

However, there are other things you could do that will trash your credit practically instantly. The problem is that these are actions that can seem to make good sense at the time but can have consequences that are tough to foresee. Here are three of them and what you could do to limit or undue the damage.

Taking money out of your 401(k)

It can be tempting to cash out your 401(k) to pay off your debts or to make a down payment on your first house. But it can be a mistake to even withdraw small amounts, and the younger you are, the worse the damage is. The mistake here is misunderstanding that when you cash out even a portion of your 401(k) this triggers penalties and taxes that can eat up as much as $500 for every $1000 you withdraw. All you have to do is click a button and the money is gone, and with it goes all the tax-deferred gains it could’ve earned going forward..

The downside is any you withdraw from your 401(k) isn’t earning tax-deferred returns any longer. Plus, those returns can’t earn returns any longer. When you the keep money in your 401(k), compounding works miracles. But when you withdraw money, it works against you, and what it costs you only grows worse over time.

So, the way to undo the damage is easy. Never withdraw money from your 401(k) – until you’re ready to retire.

Missing a credit card payment

The problem with credit card payments is that they’re just so darn easy to forget. You’re busy, life is hectic, the credit card statement disappears under the sofa, and so the bill doesn’t get paid. You figure that’s not a problem. You think you’ll catch up next time and all you’ll just get hit with a late fee. Better think again. If there’s a payment where you’re 30 days or more late this could drop your credit score by 100 points or even more. You could go from having good to poor credit, and even end up getting hit with higher interest rates.

In addition, the odds become greater that you’ll be turned down for credit. Recovering from this can take up to three years, and the damage it dues can go well beyond your credit accounts. In fact, an investigation done by Consumer Reports found that people who had “good” credit may be paying hundreds of dollars a year more for their auto insurance than those with “excellent” credit. This means the penalty for having “poor” credit could be $1000 or more.

The way to eliminate the damage from missing a credit card payment is to pay your bill late but before the account is 30 days overdue. This will turn things into a non-event.

Failing to file your income taxes

Owing a great deal of money to the IRS is very bad. It’s even worse if you don’t file a return when you owe money. If you don’t pay your taxes on time, there will be a penalty of 0.5% per month of the unpaid amount. If you fail to file, the penalty is 10 times that or 5% per month. Plus you’ll owe interest on your balance.

How can the IRS tell what you owe if you don’t file a return? It can sort of “Frankenstein monster” one together based on information from financial institutions, other government agencies, and employers. It will then pursue you relentlessly for what it believes you owe. The IRS can put liens on your home, seize your bank accounts, and your wages,, and even file criminal charges against you.

How can you restrict the damage from failing to file a return? File your missing returns and pay whatever portion of the debt you can. Then, work with the IRS to set up an installment plan for the rest.