Sunday, March 9, 2008

Spruce Up Your Finances

Stop procrastinating and free yourself of guilt. Take action on something to improve your quality of life in 2008. New Year’s resolutions stem from a residual sense of dissatisfaction with oneself for not giving time and attention to something important, but not urgent.

It is easy to defer unappealing tasks, no matter how important, while working day- to-day on a heavi ly scheduled priority system. Most annual resolves are about not smoking, a more wholesome diet, exercise and more quality time with family.

Those are important for physical and mental health, but generally money is needed to make those things happen. Work on money matters and the word “fun” scarcely ever appear in the same sentence, so it could take a New Year’s resolution to get it done.

Feeling pretty good about one’s ability to be financially independent is important to physical and mental health, relationships and other key elements of life. It is time to review the basics.

Financial Comfort
The definition of financial comfort is an individual one, and everyone must define that goal for themselves and go for it!

Envision your long-term, mid-term and near future. This is not as easy as it sounds. Happiness is usually found by focusing on the present. Also, the longer ahead one tries to project, the more variables there are. That alone can be stressful.

Acknowledging that this is short-term pain for longterm gain is the best way to tackle procrastinated financial planning. With an eye on the “financial comfort” goalpost, start educating yourself and getting into position now.

The path to financial comfort comes from a fairly standard playbook. Most know that income from wages and investments can – if used properly – increase wealth. Combine that with control of expenses, and eventually you will be there. We end up on the sidelines by not being continuously mindful of that. Some people just do not want to think about it.

For better or worse, it is a necessary part of adult existence, like learning to swim or drive; one just has to do it or be ready to accept the consequences.

This is a tough realization for those who have depended on a spouse or life partner to deal with finances, and suddenly ci rcums tances change.

How many stories have been told about someone facing the sudden death or illness of a partner, only to find that they are in financial trouble too? Conversely, a surviving spouse may find they are better off than they thought, but lacking the financial acumen to handle financial assets that were thoughtfully built up over a lifetime.

First Republic Bank Personal Banking Of f ice Manager Diane Slater describes it this way: “We see that quite often it is the death of a spouse or someone has gone to the hospital. Clients come in asking for our assistance. Where is the money? How much is there? Sometimes they don’t know where the safe deposit key is, or if there is one.”

She says these kinds of incidents are less frequent than in the past, but primarily occur with older people. “I think with on-line banking people are becoming astute,” she said, while continuing to stress the importance of open discussion of mutually shared finances.

Knowing this, one must resolve to talk about it and make an effort to learn money basics. Plan a few simple strategies that are akin to physical strength, high-quality equipment and a winning plan in the game of life.
Get Out of Debt and Protect Credit
Credit card debt and personal loans are the invisible dragons that devour income and savings. According to financial advisor and author Jane Bryant Quinn, it is the number one enemy of financial well being at any age.

Check the rate if interest is charged, on all accounts. Pay off the highest-interestrate credit cards first. See if balances can be transferred to lower, or “0” interest rate cards. Leave all but the lowestinterest- rate card at home in a drawer.

“Always be aware of what your credit score is and check it at least once a year. The law allows a free credit report each year,” Slater said.

Check the dates of credit card account origination. Cards held longer term help support your credit rating, so do not close them out before considering all the aspects of your record, even if the rate is not the lowest.

As balances are paid off, close the most recent and the highest rate accounts until you get down to less than about six accounts. Accounts with zero balances still can lower the rating because lenders figure you could decide to borrow at any time.

Remember that too few accounts is not considered a good sign either. Currently three or four with balances of about one-third of the limit would probably give you the best chance to increase your rating. Late mortgage payments are the worst.

It is best to pay accounts as agreed, or within 30 days (in order to avoid interest charges). Do not pay big amounts and then nothing. Also there is a difference in the timing of interest billing. Find out if the interest charge begins on the date of purchase or after 30 days and select cards offering the latter.

If funds are limited and you have to choose among creditors to pay, do not let them all become a little late one at a time or randomly. The idea is to control the reported late payment marks. Probably it is better to confine 30-day “lates” to one or two accounts and pay the rest consistently on time. It is possible you could make a plausible explanation for that.

Which brings up the issue of credit dispute and repair. If you see an error on your report, go to work on rectifying it immediately, as it often takes months to clear up. Letters are better than phone calls. Keep a log of all communication with names and numbers. Keep all documents and letters and the envelopes with post dates.

Al though insuranc e companies advertise peace of mind, there is probably nothing more tedious and depressing than buying insurance or filing a claim. For better or worse it is necessary to be fairly confident of keeping health and possessions protected from major, unforeseen catastrophe.

The insurance market changes and it is a good idea to check coverage on an annual basis. More and more people are selecting major medical plans combined with a health savings account.

A single person could buy coverage with a $1,500 to $3,000 deductible and save up to $2,900 in an account through a bank or a company like Vanguard, according to Williams.

“You assume all your regular expenses and save pretax dollars. You can use them or let them accumulate. They can be used for chiropractic, dental, lasik surgery, acupuncture, and even cosmetic surgery. Most policies won’t pay for those things,” he said.

Many policies sold in the mid-to late 1990s are higher in cost, according to Williams. “Life mortality has increased since then, so some insurance companies have lowered the rates for term life insurance,” Williams explained.

Reading the details of an insurance policy is a form of torture for me, which I formerly avoided. I learned that the time for reading a policy is at purchase, not when one has a claim. I now consider that experience an expensive, real-life financial seminar.

Take the time to investigate and understand what insurance coverage you need, and what you do not need. Shop for benefits and prices, and reevaluate coverage annually. Some insurance products are sold as investments. These require the closest scrutiny.

Compare products from a cost/benefit perspective and consider other plans of action or investments that may provide equivalent benefits. Finally, talk to more than one agent or broker.
Real Estate
Buy a place to live if your life plan allows you to stay in one place for two to five years. (Costs associated with buying and selling will generally set you back in a shorter term.) In spite of the current housing market news, this is a good time to buy. Mortgage loan rates are at record lows and home prices have stabilized or dropped.

“As a homeowner, I am looking myself to sell my home and purchase another,” Danville bank officer Slater said. She wants to move from a two-story to a single level home and thinks the time is right.

Home loan rates for people with good credit who plan to live in the property are as low as 5.875 percent right now. With that rate one might purchase a home priced at $417,000 or less with three percent down.

That means one would need roughly $25,000 cash to close, or an FHA loan or about $33,360. The rate and closing fees are higher for higher priced homes. On the FHA loan, monthly housing expenses would be about $2,928, not including any homeowner association fees, and require monthly income of about $8,000 without other debt to do this.

The reason so many people have made money on their homes is that the house payment, combined with significant tax savings became an enforced savings plan. Then, past skyrocketing appreciation (rising house values) put the bonus money on top.

The right home purchase is a good financial strategy even wi thout the bonus appreciation for financial and numerous ancillary reasons, including control over your own life.

Do not take my word for it. Nobody knows the future, but learn everything possible from a variety of sources and then decide for yourself if it makes sense.

Money, Marriage, Timing
The time to talk about money is before the wedding— and after the wedding and whenever there are important decisions to be made. In other words, this emotional topic needs to be okay for open discussion. If it is not, there is bound to be trouble later.

Each person has an individual attitude toward spending, saving and financial planning. Figure out who will be paying what bills, if you can agree on a mutual strategy and what financial decisions require prior agreement from both parties.

When finances are linked for relationship reasons, the parties have to learn to become comfortable talking about money in a les s emotional, non-judgmental way throughout life.
Use a professional if it makes it easier to communicate. Damien Couture, CFP says, “From my experience, with most of the couples we usually see one or the other pays more attention to it.”

Times have changed and couples who come into a marriage with prior commitments o r goals sometimes maintain “mine, yours and ours accounts.”

There is no standard right or wrong way to handle finances. It is subjective. “It is hard to blanket advise,” Couture commented. “I have five investment tenents for investing: Invest with a plan. Diversify. Invest with a professional and use somebody who can help you. Invest continually. Have patience,” he said.

“New year is a good time to assess your situation. How much are you saving? Find out if you are on track to retire. Most Americans have woefully inadequate savings. Start saving something somewhere, Couture added.

Financial plans must be re-evaluated as life changes and often require 10 to 20-year strategies for each phase.

During an asset building period, when income is ascending and family obligations increase, there are long-term and short-term strategies appropriate to that phase. Later, depending on health, family and job status, most people need to reevaluate strategies at about age 60. Between age 60 and 70 some people transition to a different lifestyle because o f stamina and health changes. Then there are other financial tools, such as estate planning, long-term care insurance and reverse mortgages to learn about, too.
Information compliments of Dana Guzzetti

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