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Budgeting
I’ve heard a lot lately about creating a spending plan, but do I really need one?
You bet you do. Spending your money without a plan is like traveling cross-country with no map. Without charting your course in advance, you may reach your final destination, but the journey could be filled with unnecessary twists and turns, dead-ends and road blocks.
Thinking of a budget as a road map to financial happiness - instead of a restrictive, binding “spending diet” - helps us see the big picture. One of the main reasons budgets fail is a negative attitude. Stop your stinkin’ thinkin’ and view your spending plan as a way to reach your financial dreams and goals! Budgets aren’t one-size-fits-all; the structure depends on your spending priorities and saving goals. This means you have control of your money, not the other way around … and that’s the very definition of financial freedom.
Tracking your day-to-day spending is an important part of budgeting. Check out tips to help you stay on top of your spending under the "Spending" section and use those tips to build a workable budget that reflects your true needs and priorities, leaving room to reduce debt and save for the future. Let’s get started!
Make it easy by selecting a “canned” budget worksheet as a model; solid options can be found at Bankrate.com, practicalmoneyskills.com, or goodpayer.com. Using the categories you created when you started tracking your spending, add or delete categories in the worksheet to personalize your spending plan. Be sure to include expenses that don’t occur on a monthly basis, like property taxes and insurance, and add a category for paying yourself FIRST. Saving should be part of your monthly budget, not something you do if money is left over.
Use current pay stubs to calculate your average monthly net income. Add other forms of household income, including interest income, bonuses, child support, etc. Once your average monthly income is determined, assign an amount to each expense category. Try to be as realistic as possible; monitoring your spending will help you determine how much to include in each category. (Don’t forget to keep track of cash transactions and reflect them in the appropriate section!)
Subtract your total monthly expenses from your total monthly income. Have money left over? Dump the extra dough in your savings account or use it to reduce debt. Expenses exceed your income? Review your spending and decide where you can cut back. Then do it.
Stick to your new budget for a couple of months, then evaluate and adjust as needed. Remember, this is a fluid plan – as priorities shift and goals change, your budget should follow.
It’s your life, it’s your money and the budget is your tool. Make it work for you!
What is the easiest method to track your spending, especially outside the home?
If only our wallets could talk! If they could, we’d truly know where our money goes and how it’s spent. Unfortunately (or fortunately?), that’s not the case. Tracking day-to-day spending takes diligence, but it’s a critical stepping stone to financial happiness and a building block for other important processes, like creating a budget. Keeping track of purchases allows us to curb wasteful spending and direct our money to true needs and priorities.
While the methods below aren’t one-size-fits-all, they are tried and true tips to help plug the leaks. Find the one that fits your lifestyle and stick with it!
Retain receipts. Drop your receipts in a jar or box nightly (after balancing your checkbook, of course) for a month. At the end of the month, tally those slips and list them in assigned categories; you’ll see some obvious spending patterns emerge.
Put pen to paper. Carry a little notebook and write down everything you spend, down to the penny. This captures even the smallest expenses, such as trips to the vending machine and travel tolls, which can add up quickly.
Go green. Take a cue from past generations and use cash whenever possible. While it’s easy to go overboard with debit or credit cards, we have an emotional attachment to dollars. Create envelopes for your expense categories (i.e. groceries, movies, gas, clothing, eating out) and put a pre-set amount of cash in each envelope. When the envelope is empty, you’re done spending. Period. This system not only helps you monitor outflow, but also helps you stick to the plan!
Save with software. Technically inclined? Computer programs like Quicken and Microsoft Money can help you balance accounts and track expenses electronically. You’ll still need to keep bills and receipts, but these programs compute category spending for you and offer graphs and charts to illustrate where your money goes, among other helpful features. Most programs are relatively inexpensive and user-friendly, too.
Regardless of which tracking method you choose, the key is staying the course long enough to identify spending trends and shift your financial focus to more important goals, like debt deduction or savings.
Consumer Issues
I’m planning to sell my home this summer, but I’m worried about the state of the housing market. How can I make my house more appealing –without spending a fortune - so I can sell it quickly and make a healthy profit?
You’re right; it’s no longer a seller’s market out there, but don’t throw in the towel just yet! There are plenty of ways to build your home’s value and make it stand out in the neighborhood. Here are some tips to make sure your home is in tip-top shape when buyers come callin’.
Focus on the front. Potential buyers will form a first impression of your home from this vantage point. Be sure your trim is painted and the porch is clean and clutter-free. You may also want to paint your front door and spring for new door hardware.
Work hard in the yard. Trim bushes and shrubs, take care of plants and keep your lawn clipped and edged. Have a small yard? Use curving pathways and flower beds instead of straight lines. Curves trick the eye and make an area look bigger.
Open a can. Painting is one of the least expensive ways to change the look of a home. Experts recommend using a neutral color palette because it allows buyers to better visualize their furniture and décor in your home. Just because you like hot pink walls and turquoise trim doesn’t mean buyers will, and that might just be enough reason for them to walk away.
Get cookin’ in the kitchen. The kitchen is one of the most important rooms (if not the most important room) in any home, but an overhaul can cost thousands. Breathe new life into an old kitchen by painting cabinets, adding new hardware and replacing the backsplash.
Say “yes” to clean and “no” to clutter. Wipe down baseboards, windowsills, faucets, switch plates and anything else that collects dust or grime. Pack up knickknacks, collectibles and extra furniture. While you’re at it, go ahead and pack up one third of the stuff in each room; more space means more profit!
Say goodbye to 1970. Remove outdated wallpaper, shag carpet and anything avocado green. If people refer to your home as “retro,” you need to make some changes before putting it on the market.
Shine a little light on the subject. Get rid of old light fixtures and use a consistent style throughout the house. Consider using accent lighting over photos, wall décor or pictures.
Summer is always an expensive gift-giving time for me and my family. It seems like invitations to weddings, baby showers, graduations and birthday parties never end from May to August! Can you suggest some tips to help ease the pain of purchasing for others?
Oh, the cost of being popular! Shelling out your hard-earned cash to celebrate special occasions with family and friends can sometimes overshadow the joy of the occasion itself, can’t it?
You don’t have to be a Scrooge; meaningful, inexpensive gift options can be yours with a little planning. Here are some tips to help you support your loved ones’ happiness and still have some money left over to fund your own!
Learn to say no. Of course you can’t turn down a wedding or party invitation from your brother or best friend, but a former co-worker whom you rarely speak to may merit a pass. Sending a celebratory note or card—rather than a gift—will usually suffice.
Take advantage of the off-season. Always be on the lookout for thoughtful birthday, graduation, wedding and baby gifts. Spread the cost throughout the year by purchasing these items on sale and stashing them away for a later day, so you don’t have to part with a BIG lump sum of cash during the gift-giving season.
Be creative. Some of the most special gifts are from the heart. Are you crafty? Make some scrapbook templates for your favorite graduate. Love kids? Offer the mom-to-be an afternoon of free babysitting. Have a green thumb? Help the birthday girl or boy plant flowers. Give a unique (and cheap!) present by sharing your natural talents.
Do you have any good tips for dealing with the high cost of fuel? With skyrocketing gas prices, my budget is really feeling the pinch.
First, we salute you for evaluating the impact on your budget! Spending plans only work if we adjust them when needed. The price at the pump is painful, isn’t it? Don't smack the messenger, but you may have to cut your spending in other areas (and limit your driving!) to accommodate the higher cost. Carpooling when you can will save money, but we recognize that it’s not always possible or efficient.
Since a gallon of gas is now priced higher than the average latte, we did a bit of research to help you get the most out of each tank-full. Here’s what we found:
Easy does it. Your daily drive isn’t the Daytona 500. Instead of flooring it from a traffic light, accelerate slowly to avoid wasting gas and straining your vehicle.
Slow down. We often feel late-late-late like the rabbit in Alice in Wonderland, but speeding is a very expensive way to drive (even if you don’t get a ticket!). Driving 65 mph instead of 75 mph can improve your car’s fuel economy by up to 10 percent! Slow down and save money.
Clean out your trunk. Remove golf clubs, boxes of books, and other heavy items from your vehicle. Driving around with an extra 100 pounds of junk in your car can significantly reduce its fuel economy.
Check your tires. Keep your tires properly inflated; this will help improve or sustain your gas mileage and protect your tires from wear and tear.
I’ve been told that playing casino games and purchasing lottery tickets is a great way to earn extra cash, sometimes equivalent to a second income. Is this true? What’s your opinion?
Hold the phone! Please remember that casino night and a handful of lottery tickets are options for entertainment, not sources of income. Betting your hard-earned dollars in hopes of earning more is risky business that rarely yields success. Your odds for winning the lottery are about 1 in 12 million … you actually have a significantly better chance of being struck by lightning!
While there’s nothing wrong with calling on Lady Luck every now and then - and supporting Oklahoma education through the lottery - sacrificing your financial goals and obligations isn’t playing responsibly. Remember, few people get rich the easy way, but many people go broke trying.
Afraid you may be in trouble? Learn more about gambling behaviors and resources by visiting the Oklahoma Department of Mental Health and Substance Abuse Services Web site.
Credit and Debt Management
On my way to work, I see several signs advertising the services of credit repair agencies. Is it best to use one of these agencies or can I repair my credit by myself?
“Credit problems? No problem!”
“We can erase your bad credit in 10 days — 100% guaranteed!”
These days, it seems everyone has seen these signs or heard the commercials advertising the services of credit repair companies. While some of these companies are legitimate, many make promises they just can’t keep. Forget the hype - there’s no quick and easy way to erase bad credit.
While repairing your credit isn’t fast or pretty, the truth is, most folks don’t need outside help to turn things around. You can take the same approach the professionals do to clean up your credit, without shelling out your hard-earned cash. Bankrate.com, a popular money management Web site, recommends consumers take this five step approach for do-it-yourself credit repair.
- Place a credit report order. Find out what each of the top three credit bureaus—Equifax, TransUnion and Experian—are saying about you. Ordering all three in tandem allows you to review your full credit history. Since creditors don’t have to report to all three agencies, each credit report may differ.
The Annual Credit Report Service (877-322-8228, www.annualcreditreport.com) will provide one free copy of your credit report from each agency per year as required by the Fair Credit Reporting Act. Equifax, Experian and TransUnion will provide additional copies of your credit report and your credit score for a small fee. Instructions for ordering your report and addressing any errors are available on the Web site.
- Inspect your reports. Odds are you’ll have at least one error on your report; most people do. Credit bureaus generate a report based on information provided by your creditors. They don’t verify the information…that’s your job!
Review your information closely and make a list of items you need to dispute and why. If the negative information on your report is accurate, only time will help you change that. Late payments remain on your report for 7 years and bankruptcies remain for 10. If you want more information about reading and understanding your credit report, click here.
- Tell ‘em about it. Once you’ve identified any errors on your report, it’s now time to dispute them. Your credit bureau should provide you with a dispute form, or you can write a letter. Clearly state the error you’re disputing; you may consider attaching a copy of your credit report with the error highlighted.
Be sure to keep copies for your files and document the date you sent the information and/or spoke with someone on the phone. The credit bureau has 30 days from the time they receive the letter to investigate your dispute. Keep in mind that you may have to work with your creditor to fix the mistake.
If any changes are made to your credit file as a result of your dispute, the credit bureau will send you a free, updated copy of your credit report.
- Knock out debt. Now that your credit history has been cleaned up, it’s time to take a look at your current debt. If you’re having trouble making your payments, be sure to communicate with your creditor or lender. You may be eligible for reduced monthly payments, or you may be able to change due dates to spread out the timing of your monthly bills. It’s also time to look closely at your spending habits. Are you living a lifestyle you can’t really afford? What needs to change?
For tips on paying off debt already accrued, visit the OKMM financial planning page. Paying off debt takes time and dedication; you can do it!
- Be positive. You’ve cleaned up your past credit history and taken aim at your current debt. Now it’s time to focus on building a solid credit future!
The bottom line is this: legitimate credit repair companies do exist, but they can’t work magic. In most cases, you can achieve the same result with a do-it-yourself job. If you still want to use the services of a credit repair agency, avoid for-profit companies that make you pay before services are provided. Consider nonprofit credit counseling services, such as Consumer Credit Counseling Service (www.debthelpnow.com) or the National Foundation for Credit Counseling (www.nfcc.org), and always visit the Better Business Bureau to investigate company complaints before you enter into a business relationship.
Which is more important, saving or paying off credit card debt?
To answer this question, let’s turn to our good friend, mathematics (please don’t stop reading!). If you’re earning 2% interest on your savings and paying 18% interest on your credit card debt, you’ve got a 16% problem.
If the interest you’re paying on credit card debt is higher than what you’ll earn in a savings account, pay off your debt first. That said, don’t completely neglect your savings! While several factors affect how your money grows, one of the most important elements is time. Simply put, the earlier you start saving, the more you’ll earn through the magic of compound interest (click here for details). Also, a cushion in your account will keep you from relying on credit cards or payday loans in a crisis.
Here’s the bottom line: it just doesn’t make sense to pay more interest than you can earn. Use the bulk of your extra money to pay off those pesky credit cards, but make sure you contribute something to savings each month, even if it’s only $50. Once the debt is paid, shift those monthly payments to savings. Since you’re already living without the extra money, you won’t miss it!
Is it really a big deal if I sign up for a store credit card to take advantage of their 10% off special?
It’s tempting to save an additional percentage off your purchase, isn’t it? Unfortunately, that small initial savings isn’t worth it in the long run; each time you open a new credit account, your credit score may be affected.
There are two types of "hits" to your credit: a soft hit and a hard hit. A soft hit occurs when a utility or telephone company checks your credit before opening a service account. This type of hit doesn't affect your credit score. A hard hit occurs when a credit card or mortgage company reviews your credit in order to provide you a direct credit line. This type of hit can, and often does, affect your credit score in a negative way.
The bottom line is this: if you don't need more credit, don't apply for it. Too much “extra” credit can create a temptation to overspend. Just step away from the credit card!
Since it’s so important to know your FICO score, is it safe to give your personal info to one of those credit companies via the Internet to get your score? Are they really free?
Unfortunately, it’s not your FICO score that’s currently offered free of charge. The government requires the three largest credit reporting agencies (Experian, TransUnion and Equifax) to provide American consumers with a free copy of their credit report - not their credit score - yearly.
Don’t trust every credit-related site; be careful and selective. Recommended Web sites like www.myfico.com and www.annualcreditreport.com are popular and secure options for obtaining your credit score. You’ll be prompted to enter your Social Security number and other personal information, but these sites guard your privacy through various security protocols.
I’m paying 22% interest on the credit card I got in college and would like a lower rate. What are my options?
OUCH! There are a couple of ways to lower that astronomical interest rate, which will save you hundreds or more in finance charges. First, pick up the phone and call your current card company to request a lower rate. If you have a solid payment history, chances are they will honor your request and knock off as many points as possible.
Not sure what to say? Follow this sample script to get the ball rolling:
Hi, my name is Lacy. I'm a good customer, and other credit card companies are offering lower APRs. Unless you can lower the interest rate on my card, I'll have to close my account and switch companies. What can you do for me?
If you can’t make headway with the account representative, ask to speak to a manager or call back later to work with someone else. If you’ve exhausted all avenues with your current creditor, pay off and close your account; cut up the card; and seek companies that offer lower rates. Bankrate’s credit card search engine is a good place to start. Remember to read the fine print; often, lower rates are introductory rates, which means the rate is only good for a short period of time before increasing, sometimes substantially.
If your quest for a lower interest rate is successful, a word of caution - a lower rate is not an open invitation to spend more! A better interest rate is important, but it isn’t a substitute for better decision making. Charge responsibly.
I’ve noticed that there are a lot of radio and television commercials advertising various credit and debt counseling services. Are all of these businesses legitimate? How do I tell?
It is confusing, isn’t it? We salute you for recognizing that this is an issue, and for seeking help to regain control of your debt! As a good rule of thumb, look for organizations with the following characteristics (adapted from a related article in The Oklahoman):
- Tax-exempt status. Visit www.irs.gov/eo and click on “Search for Charities” to find out if an organization is tax-exempt.
- Accreditation. The most common agency is the Council on Accreditation, which requires operation under strict quality guidelines.
- Membership in a national industry organization. The National Foundation for Credit Counseling has been the gold standard since the 1960s.
- Better Business Bureau approval. Visit www.bbb.org to see if complaints have been filed against the company.
- Affiliation with the United Way. They’ve been deemed charitable and most likely are active in the community.
- A local office. This allows consumers to develop personal relationships with financial experts through face-to-face interaction and customized counseling.
You can learn more by contacting a non-profit provider, such as Consumer Credit Counseling Service or the National Foundation for Consumer Credit. Bottom line, a trustworthy credit counseling service will be more concerned with helping you get out of debt than in selling you something. You should never feel pressured into a repayment plan or to make a purchase of any kind.
Over the years, I have collected many different credit cards. Some of them are store cards (Lowe’s, Target, etc.) and some are Visa and MasterCard accounts. I only have a balance on one card right now. I would like to close some of these accounts, especially store accounts, but I’ve heard that closing accounts can hurt your credit score. But, I’ve also heard that mortgage companies use your total available credit to compute your ability to pay. So, what are the guidelines and pitfalls in closing credit card accounts?
This is an excellent question. The answer, like many personal finance solutions, depends on your circumstances. In general, closing credit accounts can lower your credit score, because the score is partially based on your ratio of debt to available credit. Closing accounts reduces the amount of open credit you have access to, but haven’t used; this effectively increases your proportion of credit debt. Let’s say you have two credit cards, each with a $1,000 limit, and carry a $300 balance on one of the cards. As such, your debt to available credit ratio is $300/$2,000 (15%). However, if you close the account with no balance, your ratio would increase to $300/$1,000 (30%), doubling your debt proportion. Make sense?
When evaluating your creditworthiness, mortgage lenders consider your total available credit in addition to your credit score and other factors. In the eyes of a mortgage company, access to a large amount of available credit can be a liability, because you could get in over your head after the mortgage is approved. Since new debt may jeopardize your ability to make that mortgage payment, you could be labeled a high-risk borrower.
Now that you know the scoop, which is the right move for you? In this case, the answer depends on your short-term plans related to housing. If you know you’ll be in the market for a new home in the next few years, close your newer accounts, but leave the seasoned accounts alone (closing older accounts makes your credit history appear “young,” which can also hurt your score). Conversely, if you plan to stay in your current home for the foreseeable future and you’re trying to improve or repair your credit score, limit new credit debt; make monthly payments on time and pay more than the minimum amount required to reduce your debt as quickly as possible; and keep accounts open as you pay them off.
Often I find myself overwhelmed when it comes to dealing with my debt. The big picture is often frustrating and leaves me unsure of what to do. Can you give me some tips to help me keep it all in perspective?
First and foremost, don’t panic. Facing your debt can be overwhelming, but it’s absolutely possible to dig yourself out – even if the hole is deep. I commend you for recognizing that this is an issue you must address!
Step 1: Be honest with yourself. Assuming you’re referring to credit card debt, take control by figuring out how you landed in this position. Are you using credit to support a lifestyle you can’t really afford? If so, evaluating how and why you spend will help you manage your spending in the future (so you don’t find yourself in this position again). A realistic monthly budget will allow you to set healthy parameters; to learn more, click here.
Step 2: Know where you stand. Do you know how much you owe, and to whom? Pull statements and call creditors to find out exactly what you’re dealing with. Once you have the facts, create an at-a-glance debt chart that shows the total amount owed, interest rate, minimum monthly payment, and monthly payment due date for each account. If you have a card with a high interest rate, ask your creditor for a rate reduction or transfer your balance to a low-rate card (pay attention to the fine print … some cards only offer a low rate for the first few months). Compare credit card interest rates online at www.bankrate.com or www.cardratings.com.
Step 3: Cease Fire. You can’t pay off your debt if you keep adding to it. Leave your credit cards at home - lock them up, freeze them, whatever works – so they aren’t readily accessible. (Don’t close all your credit accounts, as this can actually hurt your credit score.)
Step 4: Activate your pay-off plan. Select one account and pay as much as you can each month, doubling your payment if possible. Continue to pay the minimum payment on your other accounts. Once the first account is paid off, add that payment to your payment on another account until it’s paid off (keep increasing your payments whenever you can). Continue this process until all accounts have a zero balance. To make more headway, apply all “windfall” funds - birthday money, inheritance, tax refunds - toward your debt.
If you’ve examined your situation and feel that you may need professional help to reclaim your financial power, click here to learn more about dealing with excessive credit debt.
Focusing on one account at a time will help you keep “the big picture” in perspective. You’ve already admitted that you need to make a change; that’s the hardest part. You can do this!
When paying toward debt, what should I attempt to pay off first? The smallest debt or the higher interest rate?
There are several schools of thought on this topic. Some experts recommend paying off the card with the highest interest rate first, because that approach will ultimately save you the most money (in interest). While that logic is sound, I disagree. Let me explain.
When you get down to it, the most important factor in debt reduction is commitment, because it takes discipline to change your spending habits … and it takes time, since you can’t pay off thousands of dollars in debt overnight. A sense of accomplishment will help you stay the course, so I recommend starting with the card that carries the smallest balance. Let that success boost your dedication to becoming debt free!
Financial Services
I’ve noticed that there are a lot of radio and television commercials advertising various credit and debt counseling services. Are all of these businesses legitimate? How do I tell?
It is confusing, isn’t it? We salute you for recognizing that this is an issue, and for seeking help to regain control of your debt! As a good rule of thumb, look for organizations with the following characteristics (adapted from a related article in The Oklahoman):
- Tax-exempt status. Visit www.irs.gov/eo and click on “Search for Charities” to find out if an organization is tax-exempt.
- Accreditation. The most common agency is the Council on Accreditation, which requires operation under strict quality guidelines.
- Membership in a national industry organization. The National Foundation for Credit Counseling has been the gold standard since the 1960s.
- Better Business Bureau approval. Visit www.bbb.org to see if complaints have been filed against the company.
- Affiliation with the United Way. They’ve been deemed charitable and most likely are active in the community.
- A local office. This allows consumers to develop personal relationships with financial experts through face-to-face interaction and customized counseling.
You can learn more by contacting a non-profit provider, such as Consumer Credit Counseling Service or the National Foundation for Consumer Credit. Bottom line, a trustworthy credit counseling service will be more concerned with helping you get out of debt than in selling you something. You should never feel pressured into a repayment plan or to make a purchase of any kind.
Can you explain more about financial planners - what they do, what their rates may be, and how to find a reputable planner (one that won't simply try to sell you more life insurance)?
Simply put, financial planners help you manage your resources and achieve your financial goals, like retirement, education and debt management. Professional planners (and price tags!) aren’t one-size-fits-all; services and costs depend on your situation and special needs.
There’s more to choosing a financial planner than opening the yellow pages and saying “eenie, meenie, minie, moe!” You’re trusting someone with information that’s deeply personal - your finances - so you’ll want to be prepared. First, research your own situation and determine your priorities. Planning to retire in 10-15 years? You’ll want a planner to make sure you’re on target to reach your savings goal, and that your money will last. Got little ones you want to send to college? A planner can help you set up a mix of investments that’ll grow as fast as your kids do. Just starting your career? A planner can offer objective advice to help you set long-term savings goals and build a solid foundation for a lifetime of financial success. The Financial Planning Association’s Web site, www.fpanet.org, offers more information about rates, certification and the specific needs financial planners can help you address.
Now that you know your primary financial focus, it’s time to start shopping for a planner! Ask friends and coworkers for referrals. For more options, visit www.PlannerSearch.org to find local certified financial planners who specialize in your area of need. When you have a few good leads, pick up the phone and ask about credentials, expertise, rates and other information you may want to know before setting an appointment.
Like our bodies and our vehicles, our financial lives need a check-up every now and then. Financial planners can give you guidance, but remember this – ultimately, you are the decision maker. Don’t feel pressured into anything you’re not fully comfortable with, and never hesitate to ask for more information or more time to make a thoughtful choice. It’s your money, and it’s your life. Make the most of both!
On my way to work, I see several signs advertising the services of credit repair agencies. Is it best to use one of these agencies or can I repair my credit by myself?
“Credit problems? No problem!”
“We can erase your bad credit in 10 days — 100% guaranteed!”
These days, it seems everyone has seen these signs or heard the commercials advertising the services of credit repair companies. While some of these companies are legitimate, many make promises they just can’t keep. Forget the hype - there’s no quick and easy way to erase bad credit.
While repairing your credit isn’t fast or pretty, the truth is, most folks don’t need outside help to turn things around. You can take the same approach the professionals do to clean up your credit, without shelling out your hard-earned cash. Bankrate.com, a popular money management Web site, recommends consumers take this five step approach for do-it-yourself credit repair.
- Place a credit report order. Find out what each of the top three credit bureaus—Equifax, TransUnion and Experian—are saying about you. Ordering all three in tandem allows you to review your full credit history. Since creditors don’t have to report to all three agencies, each credit report may differ.
The Annual Credit Report Service (877-322-8228, www.annualcreditreport.com) will provide one free copy of your credit report from each agency per year as required by the Fair Credit Reporting Act. Equifax, Experian and TransUnion will provide additional copies of your credit report and your credit score for a small fee. Instructions for ordering your report and addressing any errors are available on the Web site.
- Inspect your reports. Odds are you’ll have at least one error on your report; most people do. Credit bureaus generate a report based on information provided by your creditors. They don’t verify the information…that’s your job!
Review your information closely and make a list of items you need to dispute and why. If the negative information on your report is accurate, only time will help you change that. Late payments remain on your report for 7 years and bankruptcies remain for 10. If you want more information about reading and understanding your credit report, click here.
- Tell ‘em about it. Once you’ve identified any errors on your report, it’s now time to dispute them. Your credit bureau should provide you with a dispute form, or you can write a letter. Clearly state the error you’re disputing; you may consider attaching a copy of your credit report with the error highlighted.
Be sure to keep copies for your files and document the date you sent the information and/or spoke with someone on the phone. The credit bureau has 30 days from the time they receive the letter to investigate your dispute. Keep in mind that you may have to work with your creditor to fix the mistake.
If any changes are made to your credit file as a result of your dispute, the credit bureau will send you a free, updated copy of your credit report.
- Knock out debt. Now that your credit history has been cleaned up, it’s time to take a look at your current debt. If you’re having trouble making your payments, be sure to communicate with your creditor or lender. You may be eligible for reduced monthly payments, or you may be able to change due dates to spread out the timing of your monthly bills. It’s also time to look closely at your spending habits. Are you living a lifestyle you can’t really afford? What needs to change?
For tips on paying off debt already accrued, visit the OKMM financial planning page. Paying off debt takes time and dedication; you can do it!
- Be positive. You’ve cleaned up your past credit history and taken aim at your current debt. Now it’s time to focus on building a solid credit future!
The bottom line is this: legitimate credit repair companies do exist, but they can’t work magic. In most cases, you can achieve the same result with a do-it-yourself job. If you still want to use the services of a credit repair agency, avoid for-profit companies that make you pay before services are provided. Consider nonprofit credit counseling services, such as Consumer Credit Counseling Service (www.debthelpnow.com) or the National Foundation for Credit Counseling (www.nfcc.org), and always visit the Better Business Bureau to investigate company complaints before you enter into a business relationship.
General Money Management
Now that Christmas is over I should be relieved, but I know I spent too much money (cash and credit) on gifts and entertainment. I don’t want to go through this again in 2008! What can I do?
The holiday season should be a time to relax and reconnect with people we care about, but we usually exhaust and overextend ourselves looking for the perfect gift (and fretting about paying for it!). According to the American Bankers Association, it takes shoppers an average of four months to pay off holiday bills. Why spend one-third of the New Year paying off last year’s goodies?
You can avoid overspending during the holiday season next year – and the inevitable regret that follows – by taking a few simple steps during 2008:
- avoid the stress of paying for gifts all at once by purchasing gifts throughout the year or by setting a monthly savings goal. Decide what you’re really willing and able to spend, and build a gift budget within that framework. Plan to spend $300 on holiday gifts next time? Aim to save $25 each month starting Jan. 1 and your Christmas nest egg will be ready by December.
- evaluate (and edit) your gift list carefully. If you send gifts to distant relatives you rarely see or exchange gifts with friends just because you’ve always done so, now’s the time to consider a change. Maybe they’d like to tighten their holiday budgets, too, but feel obligated to continue the tradition with you! Break the gifting cycle where it’s unnecessary and feels like a burden.
- choose a “cash-only” policy. Shoppers tend to spend more when they pay with credit cards, and less when they use cash.
- get creative. Give something homemade or offer your help with a special project. Draw names or chip-in for group gifts to reduce costs.
- remember that a greeting card or phone call can be as meaningful as a gift. Connecting with others is what the holidays are really about!
If you found yourself relying on credit cards to make it through the holiday season, don’t beat yourself up! Focus on paying off the debt and planning ahead for next year.
My wife’s company rewards their employees with bonuses around Christmas time. In the past, we’ve used this money to pay for gifts or to take the family on a holiday vacation, but we’d like to use the money more wisely this year. Any advice?
Financial freedom is one of the best gifts you can give yourself and your family! Only you know what your current needs and savings priorities are, so there’s no one-size-fits-all answer. However, we can recommend a few places to stash that extra cash that will keep you jolly all year!
Scrap debt. Put your bonus to work as a “debt warrior,” slashing credit card debt and loans with no mercy. Pick your favorite enemy: debt with the highest interest rate or the highest balance. Either way, you’ll be one step closer to winning the war against debt. For inspiration, check out the “debt snowball" approach described on the Consumer Credit page.
Start (or boost) your emergency account. Experts recommend holding three to six months of living expenses in an easy to access savings account. If that amount is intimidating, aim to save at least $1,000 to start. This will cover most minor emergencies, so you don’t have to fall back on credit cards or payday loans when the unexpected happens.
Finance your future. Who doesn’t dream of life after work? No matter how you envision retirement, it’s important to think about how you’ll fund it. Bank your bonuses in a retirement account, like a Roth IRA, and watch your money grow!
Jumpstart your child’s college fund. Higher education is truly the gift that keeps on giving—not to mention, no batteries are required! Contributions to Oklahoma’s 529 College Savings Plan grow tax-free, are state tax deductible up to a certain level, and may be payroll deducted by employers. Visit www.ok4saving.org for more information.
I’m engaged to be married this fall. My fiancé and I were raised with different views regarding money. What can we do to make sure we’re on the same page financially before we tie the knot?
The majority of Americans spend hundreds of hours planning a wedding—what colors to use, who to invite, what kind of cake to serve—but seldom plan for their marriage. So, kudos to you for thinking about your financial future as Mr. and Mrs.!
As part of your prenuptial planning, consider the following tips to help ensure marital—and financial—bliss.
Discuss your goals and values. The majority of financial plans are based on long-term goals, so it’s important to discuss your values and priorities. Work together to develop a family financial plan that reflects those objectives, and put it into practice before you say “I do.”
Review each other’s credit histories. You can’t begin to build your credit future until you understand your credit past. Create a plan of action to eliminate debt you’ve both incurred. Visit www.annualcreditreport.com to order a free copy of your credit report from the three major credit reporting agencies.
Develop spending guidelines. Limit how much money you can spend without first consulting your partner, especially if you have a joint checking account. Set aside money as each spouse’s weekly or monthly “allowance” – money you can spend freely without compromising your goals.
Be honest and communicate. Make finances a part of normal conversation, and when it’s hard to stick to the plan, focus on the positive choices you’re making instead of thinking about what you might be giving up. If you talk about money openly and honestly, you’ll avoid one of the biggest sources of marital stress.
Investing
What’s the difference between a traditional IRA and a Roth IRA? Which is a better investment option?
An IRA, or Individual Retirement Account, is a plan that allows you to contribute a portion of your earned income each year. Currently, the maximum regular contribution per year is $5,000 for an individual and $10,000 for a married couple filing jointly. These limits apply to total annual IRA contributions; in other words, an individual can't contribute $5,000 to a Roth IRA and $5,000 to a traditional IRA in the same year.
While these accounts are similar, the fundamental differences involve the “T” word … taxation. Contributions to a traditional IRA are taken from pre-tax income, and may be tax deductible in the year they're contributed. Funds in a traditional IRA grow tax-deferred; the money is taxed as ordinary income when you take it out at retirement (if you follow the rules). Eligibility to contribute to a traditional IRA depends on your age, and you’ll pay a penalty for withdrawals prior to age 59 1/2, though there are some exceptions to this rule. You have to begin taking funds from a traditional IRA by April of the year after you reach age 70 1/2, even if you don't need to access the money yet. If you need the tax break now or think you'll be in a lower tax bracket at retirement, a traditional IRA may be the right choice for you.
Contributions to a Roth IRA are taken from post-tax dollars - in other words, you've already paid taxes on the earnings - so unlike a traditional IRA, qualified withdrawals from a Roth IRA are tax free (if you follow the rules). You don't have to begin taking funds from a Roth IRA until you're ready, and there’s no age limit to contributions; eligibility depends on income level. If you expect to be in a higher tax bracket when you reach retirement age, a Roth IRA may be a sound investment.
There's a wealth of free information about IRAs available online. You can start by visiting http://money.cnn.com/pf/retirement/index.html, www.fool.com/ira/ira01.htm, or http://www.aarp.org/money/financial_planning/.
Only you can decide what’s right for your budget now and at retirement. A financial advisor can help you explore the implications of these and other options, so you can make informed decisions. No matter which route you take, you’re taking charge of your financial future, and that's something to celebrate!
Who do you think would accumulate more by age 65?
Contributor A: a person who started saving $1,000 a year at age 21, saved for eight years and then completely stopped.
Contributor B: a person who saved $1,000 a year starting at age 29, and continued saving that amount until age 65.
That’s a great question! Generally, the earlier you begin saving and the more money you contribute, the more your money will grow. Using a savings calculator found at MSN Money, we were able to answer your question. Let’s get to it!
Based on the numbers given and assuming an 8 percent interest rate compounded monthly, Contributor B would end up with more money in the bank by age 65 ($200,541) compared to Contributor A ($189,735). However, Contributor A made a much lower total investment ($8,000) when compared to Contributor B ($36,000).
Our advice? Start saving early—and often—and continue to contribute to your retirement plan as long as you can to maximize your retirement savings. To get the most out of your retirement nest egg, consult a licensed financial planner to develop strategies that make sense for you based on your goals.
Kids and Money
My wife is pregnant with our first child, and we’ve already spent loads of money on clothes, blankets, books, etc. I’m worried that once the baby is born, we’ll be broke! Do you have any tips or suggestions to help us save money while getting ready for our little bundle of joy?
First of all, congratulations! There’s no doubt that babies bring great joy to their families, but many times they’re accompanied by empty wallets (and plenty of sleepless nights).
It’s estimated that new moms and dads spend $6,200 on their baby during the first year, buying everything from clothes to car seats to cribs to diapers. Fortunately, with a little planning - and a few helpful tips - you can ease the financial burden … but you’re on your own for those 3 a.m. wake-up calls!
Nix the new. Let’s be honest—baby stuff is so stinkin’ cute! Small clothes, tiny socks, itty bitty hats… it’s easy to get carried away when buying for a baby, and small items can add up fast. You may want to consider consignment shops, garage sales or online sites (ebay.com, craigslist.com, freecycle.org) for a variety of gently used and wallet-friendly items.
Forget fancy furniture. A crib that meets national safety standards is a must. But, do you really need the matching changing table, bookshelf, armoire and hutch? Sure, they’ll all look fabulous in baby’s room, but are they functional or necessary? Join a mom’s group or talk to friends about what you’ll actually need (and use) in a nursery.
Resist the urge to upgrade. Just because you’re having a baby doesn’t mean you immediately need the bigger home next to the elementary school and park (equipped with swings and monkey bars, of course). And, unless you drive a clown car, you probably have enough room to safely transport your precious cargo.
Discuss daycare. If both parents plan to work outside the home after the baby is born, investigate the perks of using an employer-sponsored flexible spending account to pay daycare expenses. Generally, you can pay for up to $5,000 in childcare expenses a year using these accounts, which set aside money from your paycheck pre-tax.
Considering making the transition from working professional to stay-at-home parent? Test the waters by banking your paycheck during pregnancy to see if you can pay your bills, meet your savings goals, and still have a little fun on one income. Even if you find that you’ll both need to keep working, you’ll build a nice nest egg to start a college fund for baby!
You don’t have to break the bank to bring up baby. For more baby budgeting tips, visit www.practicalmoneyskills.com/baby.
My children are 6 and 8 and I really want them to learn about money before they get any older. What can I do?
What a great question! Obviously, you realize that teaching children to respect money early in life shapes their future spending and saving priorities, which could spare them the stress - and other consequences - of financial mismanagement.
Children are very receptive to money management lessons; the key is to make it relevant by talking about money as it applies to daily life. Below is a list of everyday occurrences that can serve as teaching moments.
Grocery shopping. Many parents dread shopping with their children because they never know what will end up in the basket! Make shopping a learning experience by involving your children in the process before you leave for the store. List the items you need and ask your children to help you clip and sort coupons. At the store, engage your children by asking them to compare prices based on product size, function and brand; discuss how these differences relate to the item’s value. This approach teaches kids the importance of comparison shopping.
Commercials. Instead of changing the channel or muting the television, ask your children to identify the advertised products as either a “want” or a “need.” Discuss the difference. Children may think they need a cell phone or iPod, but food, shelter and clothing are needs that must be met before wants are considered.
Household chores. Make a list of duties your children can do to earn an allowance. Then, slowly begin shifting some spending decisions to them. By making their own decisions with earned resources, they’ll quickly learn the value of a dollar and how to spend it wisely. Talk to them about ways people earn income and how a college degree increases lifetime earning potential.
Family decision-making. We make choices constantly. While some decisions are simple (what to have for dinner, what to do on Friday night) and some are much more complicated (where to vacation, when to buy a new car), every choice we make has financial implications. Discuss the decision-making process as a family and encourage kids to share their perspectives. Through your actions, teach your children to spend, share and save. Make sure they know it’s okay to spend hard-earned money, but it’s also important for families to save for the future and to help others through charitable giving and volunteer service.
Want more ideas for teaching your children about money, no matter their age? Visit the Oklahoma Council on Economic Education’s Web site, www.econisok.org, to download a free publication entitled, “How to Raise a Financially Fit Child.”
Saving
I would like to be able to retire someday, but I just can’t seem to save money on a regular basis. How can I ever afford to retire if my monthly spending eats up almost all of my paycheck (or more)? Help!
First of all, you’re not alone in this dilemma. In 2006, the average savings rate in the U.S. was -1%, meaning millions of people were not only failing to add to their savings, but dipping into existing savings to cover expenses! Kudos to you for thinking in advance about retirement and wanting to make small changes today that will largely impact your future. Here are some tips to help you stash cash for a happy retirement.
First, take a look at your lifestyle. Are you living close to (or above) your means? It’s time to have an honest conversation with yourself; is your spending now sacrificing your security later? There’s nothing wrong with wanting a bigger house or clothes that would make Nicole Kidman jealous, but learning to live within your means is the most important financial lesson for anyone at any income level. Ask yourself this question - can I live with a little less now to have a better life later? Of course you can!
Once you’ve decided security in retirement is a higher priority than keeping up with the Joneses, trim the fat in your cash flow. We all have priorities in life, and our spending reflects them. To make sure your spending supports your priorities, turn to the B-word… budget! Some people view budgets as restrictive, but they’re actually tools to help you get what you want.
Be sure your monthly budget includes regular savings. Aim to save 10% of each paycheck, but don’t stress out if that’s unobtainable right now. Put in what you can and increase the amount at every opportunity. The key is making regular savings a habit. Want to know a savings secret? Set up automatic deposit or automatic transfer to your savings account. You can’t spend what you don’t see!
Put windfalls, like birthday money or the upcoming tax rebate, to work for you in a savings or investment account. You’ll be so glad you did. Shiny cars lose value, electronics become obsolete and clothes go out of style, but an investment in a 401 (k) or IRA will be worth much more in the long run.
Transform yourself into a bargain shopper. Saving just $10 per week on something you normally buy (e.g. groceries, fancy coffee) nets over $500 per year! Call your car insurance company to see if you qualify for discounts or a lower rate. If you’ve been a responsible credit card user, ask to have your interest rate lowered. Search eBay, consignment stores or thrift shops to find steals on household items and clothing. Make saving a game and enlist the help of your whole family.
In the end, the biggest factor in your saving success is you! It takes work to make saving a priority, but a sound financial future is well worth the effort.
My kids are 12 and 14, and I haven’t really made college savings a priority. How do I start saving money for college at this stage?
This is the million dollar question for a lot of parents! Ideally, college savings would begin at birth; however, we recognize that’s not a reality for everyone. If you’re part of the group that’s getting a late start, don’t panic—but don’t keep waiting, either. Start saving now! Here’s a plan of action to help you build a college savings nest egg.
First, figure out how much money your child will need; it’s hard to hit a savings goal if you don’t know what it is. Check out www.okcollegestart.org for information about the average cost to attend one of Oklahoma’s many public colleges or universities. While there, encourage your child to create an online account, which allows students to bookmark favorite colleges and build a personal portfolio of grades and applications.
Now that you have a savings goal, there are several ways to build a college fund; shop around to find the plan that’s right for you (check out www.savingforcollege.com to get the ball rolling). Two common methods are described below.
- Contributions to Oklahoma’s 529 College Savings Plan grow tax-free, are state tax deductible up to a certain level, and may be payroll deducted by employers. Additionally, 529 plans have no income requirements or annual contribution limit, and if a beneficiary decides not to attend a post-secondary institution, contributed funds can be transferred to another eligible beneficiary. Visit www.ok4saving.org for more information.
- A Coverdell Education Savings Account (ESA) is another option to consider. An ESA is a trust or custodial account created to fund elementary, secondary and college education expenses. Annual contributions, which grow tax-deferred, are limited to $2,000. Caveats to carefully consider: the amount you can contribute to an ESA is determined by your income level, and the funds must be used by the time the student turns 30, or the earnings become taxable and a penalty is applied.
As a supplement to your savings, encourage your child to apply for as many grants and scholarships as possible. Check out local organizations that sponsor scholarships such as your church and community groups (YMCA, 4-H Club, Kiwanis, Jaycees, Chamber of Commerce, Girl Scouts, Boy Scouts). Remember, scholarships are awarded based on a variety of criteria, including need, merit, residency, family history, skills, hobbies, and athletics. Check out the scholarship search function at www.okcollegestart.org to learn more.
Also, don’t forget about the best deal in town - Oklahoma’s Promise, formerly known as OHLAP. If you meet certain income requirements and your child meets certain academic requirements and stays out of trouble, Oklahoma’s Promise will pay tuition at an Oklahoma public two-year college or four-year university. Students must apply in the 8th, 9th or 10th grade, so don’t miss the boat! Get the details at www.okpromise.org.
Is it better to have all your money in one place?
Assuming you’re talking about savings - not disposable income - the old saying “don’t put all your eggs in one basket” holds true. It’s just too risky to invest all of your savings in one company or industry. The idea is to create a blend of assets that provides the most return for your money. Calculated diversity is the key.
Not sure where to start? Most experts recommend a simple investment mix that can be achieved with the following steps.
1. Start an emergency account to cover unexpected expenses that would otherwise find their way onto a credit card. Experts recommend saving 10% of your income each month until you have enough money to cover 3 to 6 months of expenses. If 10% seems impossible, start at a lower monthly percentage and work your way up. Since an emergency is never planned, put your money somewhere easily accessible, like an interest-bearing savings account or money market account.
2. Whether you’re 25 or 55, retirement should be on your mind. Take advantage of an employer’s 401(k) or other sponsored investment program, especially if they offer matching funds. At minimum, contribute enough to get the full company match - that’s free money!
3. In addition to maximizing your contributions to a matched savings program, make regular contributions to a traditional or Roth IRA. Learn more about these and other investment options and access calculators and other planning tools at http://money.cnn.com/pf/retirement/index.html.
4. Got kids? Consider monthly contributions to the Oklahoma College Savings Plan (OCSP), our state’s 529 plan, for each child. Participation in the OCSP offers several savings perks, including an Oklahoma income tax deduction on contributions and tax-free growth and withdrawals. Visit www.ok4saving.org for more information.
In short, you must create a customized savings plan to fit your long-term goals. A certified financial planner can help you strike the right balance.
What’s the best way to start an emergency fund?
First, congratulations! You’ve recognized the value of taking a very important step to manage credit debt: funding an account to cover unexpected expenses that would otherwise find their way onto a credit card. Although creating an emergency fund takes discipline – and therefore, isn’t easy – the process is simple. Figure out how much you need to save and commit to set aside money each month to reach that goal. Experts recommend saving 10% of your income each month until you have enough money to cover three to six months of expenses. If you can’t save 10% right now, don’t be discouraged; commit to save as much as you can and work your way up to 10%. (The key word is "commit." See the pattern here?) As with any savings plan, consistency is the secret to a healthy “rainy day” fund … save a predetermined amount each month and add any “windfall” money, like bonuses, tax refunds or birthday gifts so you can reach your goal faster.
An emergency is never planned, so put the money where you can reach it quickly, such as an interest-bearing savings account or money market account. Building an emergency fund may seem like a daunting task, but it will allow you the freedom to forego credit should something go awry. Now that’s peace of mind!
Which is more important, saving or paying off credit card debt?
To answer this question, let’s turn to our good friend, mathematics (please don’t stop reading!). If you’re earning 2% interest on your savings and paying 18% interest on your credit card debt, you’ve got a 16% problem.
If the interest you’re paying on credit card debt is higher than what you’ll earn in a savings account, pay off your debt first. That said, don’t completely neglect your savings! While several factors affect how your money grows, one of the most important elements is time. Simply put, the earlier you start saving, the more you’ll earn through the magic of compound interest (click here for details). Also, a cushion in your account will keep you from relying on credit cards or payday loans in a crisis.
Here’s the bottom line: it just doesn’t make sense to pay more interest than you can earn. Use the bulk of your extra money to pay off those pesky credit cards, but make sure you contribute something to savings each month, even if it’s only $50. Once the debt is paid, shift those monthly payments to savings. Since you’re already living without the extra money, you won’t miss it!
Spending
What is the easiest method to track your spending, especially outside the home?
If only our wallets could talk! If they could, we’d truly know where our money goes and how it’s spent. Unfortunately (or fortunately?), that’s not the case. Tracking day-to-day spending takes diligence, but it’s a critical stepping stone to financial happiness and a building block for other important processes, like creating a budget. Keeping track of purchases allows us to curb wasteful spending and direct our money to true needs and priorities.
While the methods below aren’t one-size-fits-all, they are tried and true tips to help plug the leaks. Find the one that fits your lifestyle and stick with it!
Retain receipts. Drop your receipts in a jar or box nightly (after balancing your checkbook, of course) for a month. At the end of the month, tally those slips and list them in assigned categories; you’ll see some obvious spending patterns emerge.
Put pen to paper. Carry a little notebook and write down everything you spend, down to the penny. This captures even the smallest expenses, such as trips to the vending machine and travel tolls, which can add up quickly.
Go green. Take a cue from past generations and use cash whenever possible. While it’s easy to go overboard with debit or credit cards, we have an emotional attachment to dollars. Create envelopes for your expense categories (i.e. groceries, movies, gas, clothing, eating out) and put a pre-set amount of cash in each envelope. When the envelope is empty, you’re done spending. Period. This system not only helps you monitor outflow, but also helps you stick to the plan!
Save with software. Technically inclined? Computer programs like Quicken and Microsoft Money can help you balance accounts and track expenses electronically. You’ll still need to keep bills and receipts, but these programs compute category spending for you and offer graphs and charts to illustrate where your money goes, among other helpful features. Most programs are relatively inexpensive and user-friendly, too.
Regardless of which tracking method you choose, the key is staying the course long enough to identify spending trends and shift your financial focus to more important goals, like debt deduction or savings.
Taxes
I’ve heard that it’s better to have a mortgage for the tax deduction than to pay off a mortgage early. My husband and I have worked very hard to pay off our mortgage in four years. We took out a 30 year note, but plan to pay off this note in April of this year. I’m concerned about the loss of the tax deduction in coming years. Is this going to hurt us in the long run?
If you asked three different financial planners this question, you would probably get three different answers. Several variables determine the best course, such as how long you plan to remain in the home, expected growth (or decline) in property values in your area, and your long-term financial goals, to name a few. While your best move is to discuss your specific situation with an accountant or financial planner, we can offer some information that may be helpful.
Generally, it's always a good idea to minimize your tax liability to the extent legally possible. You want to pay only what you're responsible for - no more and no less. The tricky thing is, like many deductions, a mortgage interest deduction isn’t a "dollar-to-dollar" savings. In other words, if you claim $5,000 per year in mortgage interest, you don’t get to subtract $5,000 directly from your tax liability.
Ultimately, how this decision affects your tax liability depends on the makeup of your tax deductions. If mortgage interest is your biggest deduction, then you may need to earmark some savings specifically for taxes or have additional money withheld from your check to compensate. (A financial professional can help you figure out how much to save. Remember, your goal is to break even ... you don’t want to owe Uncle Sam and you don’t want to get a big refund (which is, essentially, a free loan to the IRS). In most cases, even if you have to set aside tax savings or have more money withheld each month, the money you can save in the long run on monthly mortgage payments and interest will more than make up for it.
Here's the bottom line - a home is most folks' largest asset. Assuming that you plan to stay put for the long haul, owning your home outright is an excellent financial position. No monthly mortgage payment will allow you to save much more for retirement and other long-term goals. The more you save and the sooner you save it, the more compound interest you can earn!