General Personal Finance Articles

Cheat Sheet / Updated 08-12-2024

If you’re searching for some helpful advice on how to manage your personal finances, congratulations! You’ve found it! If you’re like most Canadians, words like debt, RRSP, and credit score aren’t music to your ears. But no matter how much money you have, or how much you know about personal finance, there are many ways you can take charge of your money to improve your financial health. The following articles show you how, offering tips to help you tackle debt, understand RRSPs, and improve your credit score.

Cheat Sheet / Updated 04-30-2024

There are a few areas on your F.I.R.E. (Financial Independence, Retire Early) journey where you may need a little extra help. In this Cheat Sheet, I suggest some resources for some of the best F.I.R.E. calculators, point out where to find a F.I.R.E.-friendly financial planner, and offer a quick reference for organizing and planning your estate.

Cheat Sheet / Updated 09-05-2023

A lot of financial advice ignores the big picture and focuses narrowly on investing. Because money is not an end in itself but a part of your whole life, connecting your financial goals to the rest of your life is important. You need a broad understanding of personal finance to include all areas of your financial life: spending, taxes, saving and investing, insurance, and planning for major goals such as education, buying a home, and retirement. The following keys to success aren’t a magic elixir, but they can help you get started thinking about the big picture.

Article / Updated 08-31-2023

After you've tapped out all other options, borrowing money to pay for college is your last resort. Your student should exhaust her borrowing options before you consider taking on any debt to pay for her college education. Putting yourself into debt to pay for your child's college education may have disastrous effects on your financial future — after all, there is no such thing as financial aid for your retirement. The best way to fund college costs, if borrowing is necessary, is to have your child borrow the money herself. Through federal student loan programs and financing programs available through various institutions, students have a number of attractive options available to them to finance college costs. Help your student apply for financial aid and exhaust all other resources and options prior to going into debt to pay for her college education. Your child can participate in work-study programs; do part-time work; acquire student loans, grants, and scholarships; attend college part-time while working full-time; or join AmeriCorps, the Peace Corps, or the military, all of which offer financial benefits for education. Tuition borrowing options If you borrow money for your child's college education, consider the list of primary resources: Federal PLUS loan: This loan is the best of all these options. The Parent Loan for Undergraduate Students (PLUS) is a popular, accessible, and reasonably priced loan where parents (with decent credit) can borrow up to the full cost of a dependent student's education minus any other financial aid for which the student qualifies. Repayment must begin within 60 days of receipt, and you may have up to ten years to repay the loan plus interest. For additional information visit the College Board online or call toll-free at 800-891-1253. Home equity line of credit: The interest rate on the loan will be high, and borrowing against your home equity can put your home at risk of foreclosure. 401(k) plan loan: If your 401(k) plan has a loan feature, the maximum amount you can borrow is the lesser of $50,000 or 50 percent of your vested account balance. Contact your 401(k) administrator for details. When you borrow money from your 401(k), that money is no longer invested. Even if you repay interest on this loan, you aren't getting the full benefit of your 401(k) plan investments. Also, the money you pull out of the 401(k) plan as a loan is pre-tax dollars, but the money you repay the loan with is after-tax. Wham! If you change employers while the loan is still outstanding and don't pay the loan in full, it's subject to a 10% early withdrawal penalty and taxation. Double wham! Unsecured loan from your bank: Also known as a signature loan, this loan is often the most expensive. The bank charges a much higher interest rate because no asset, such as a house, is securing this loan. These loans are often difficult to qualify for unless you have impeccable credit. Use the following table to organize possible financial-aid resources. Make a check in the left column if a particular source may be an option to pay for your child's college education, and if so, list the available funds in the column on the right. Tuition Borrowing Options for Parents Potential Option? Source Available Funds Federal PLUS Loan $ Home equity line of credit $ 401(k) plan loan $ Unsecured loan from bank $ Federal student aid programs Federal financial aid programs are intended to make up the difference between what your family can afford to pay and what college costs — and this aid is available to everyone. Although you may feel that your income level is too high and your child isn't eligible for financial aid, most Americans do qualify for aid in some way. With all loans, one of the primary issues to consider is the loan's cost — that is, the interest and any loan acquisition fees. The least expensive loan is general the one with the lowest interest rate. Here's a look at the cheapest federal student aid programs: Perkins loans have the strictest needs-based requirements. A student may borrow up to $5,500 per year, not to exceed $27,500. The current interest rate is 5 percent, and payments don't commence until the student graduates. Subsidized Stafford loans are also needs-based loans. A student may borrow up to $3,500 in the first year of undergraduate studies. This limit increases through college. As of this writing, the interest rate is 6.8 percent per year. The federal government, however, actually pays the interest due on the loan until the student is required to begin making payments six months after graduation. The loan must be paid over ten years. Unsubsidized Stafford loans are not needs based loans. The amount that you may borrow is identical to the Subsidized Stafford loan program if the student is your dependent. If the student is independent, however, he may borrow up to $5,500 initially with the limit increasing through the years of college. The interest rate on this type of loan is 6.8 percent annually, as of this writing. But, the federal government doesn't pay any of the interest on behalf of the student. Repayment begins six months after graduation, and the loan must be repaid over ten years. To get the most recent rates on student loans and detailed instructions on how to obtain these loans, visit the College Board. Setting payment expectations for your college student If you borrow money for your child's college education, communicate the expectations you have regarding paying for college and help your student set reasonable expectations. You may feel very strongly that your child participate in the financial responsibilities involved in obtaining this education. One strategy is to create a collaborative agreement between parent and child: Example of a promissory note for your student's college education. Benefits of the kind of collaborative arrangement include the following: Your child must apply himself and show a good faith effort, or you won't pay anything toward his college education. If your student drops out of school, he's on his own. If your child applies himself and achieves a B average or better, you will repay 80 to 100 percent of the college costs. You don't have to start repaying these loans until six months after your student graduates, which allows you additional time to accumulate funds to repay the debt or to adjust your monthly cash flow in order to be able to more comfortably pay the debts.

Article / Updated 08-31-2023

No matter which analyst’s report you’re reading, you must remember that the analyst’s primary income is coming either from the brokerage house or the large institutional clients that he or she serves. Analysts rate stocks on whether you should consider purchasing them, but no standardized rating system exists. The three most common breakdowns that you can expect to see are shown here. Common Stock Recommendations from Analysts Analysis by Company A vAnalysis by Company B Analysis by Company C Buy Strong buy Recommended list Outperform Buy Trading buy Neutral Hold Market outperformer Underperform Sell Market perform Avoid Market underperformer You can see from this table that you must understand how a company’s analysts rate stocks for that company’s recommendations to have any value. Company A’s Buy recommendation is its highest, but Company B uses Strong buy for its highest rating, and Company C uses Recommended list for its top choice. Merely seeing that a stock is recommended as a Buy by a particular analyst means little if you don’t know which rating system the analyst is using. Unfortunately, when it comes to stock analysts, if the information is free, it’s probably no better than that free lunch you’re always looking to find. Someone has to pay the analyst, and if it isn’t you, you must find out who is footing the bill before you use that advice to make decisions. The best way to use analysts’ reports is to think of them as just one tool in your bucket of trading tools. Analysts are one good way to find out about an industry or a stock, but they’re not the final word about what you need to do. Only your own research using fundamental and technical analysis can help you make your investment decisions. Tracking how a company’s doing Analysts are good resources for finding historical data about how a company or industry is doing. Their reports usually summarize at least five years of data and frequently provide a historical perspective for the industry and the company that goes back many more years. In addition, analysts make projections about the earnings potential of the company they’re analyzing and indicate why they believe those projections by including information about new products being developed or currently being tested at various stages of market development. These reports help you track how a company is doing so you can find the gems that may indicate when to expect a company to break out of a current trading trend. For example, if an analyst covering a pharmaceutical company mentions that a new drug is under consideration by the Food and Drug Administration, you may look for news stories about the status of that drug and monitor the stock for indications that drug approval may soon be announced. Watching the technical charts may help you jump in at just the right time and catch the upward trend as positive news is announced. Stocks usually start to move in advance of news. Providing access to analyst calls In addition to reading reports, you can track companies by listening in on analyst calls. Some calls are sponsored by the companies themselves to review annual or quarterly results, and others are sponsored by independent analysts. Company‐sponsored calls Analyst calls sponsored by companies more often are earnings conference calls primarily for institutional investors and Wall Street analysts. They occur on either a quarterly, semiannual, or annual basis and can be the richest sources of information concerning a company’s fundamentals and future prospects. Senior management, which usually includes the chief executive officer (CEO), president, and chief financial officer (CFO), talks about their financial reports and then answers questions during these calls. The calls sometimes are scheduled to coincide with announcements of major changes in a company’s leadership or other breaking news about the company. After a formal statement, senior management answers questions from analysts. That’s when you usually can get the most up‐to‐date information about the company and how management views its financial performance and projections. Access to these calls used to be limited to professional analysts and institutional investors, but today more than 97 percent of companies that sponsor analyst calls open them to the media and individual investors, according to a survey conducted by the National Investor Relations Institute. This change primarily is credited to the SEC’s Fair Disclosure (FD) Regulation, which requires companies to make public all major announcements that can impact the value of the stock within 24 hours of informing any company outsiders. This rule helps level the information playing field for individual investors. Analysts no longer can count on getting two or three days of lead time on major announcements, which heretofore helped them inform major investors about company news. Often that amount of lead time enabled analysts to recommend buy or sell decisions to their key clients, but that same practice hurt small investors and traders who weren’t privy to the news. Some complain this new rule actually hurt the flow of information because companies clammed up in private conversations with analysts, making it harder for the analysts to write their investigative reports. Since the regulation first took effect in 2000, the fair disclosure rule has helped to level the information playing field. Independent analyst–sponsored calls Firms that provide independent analysis also sponsor calls primarily for their wealthy and institutional clients. During these calls, analysts often discuss breaking news about a company or an industry that they follow. Doing so gives their clients an opportunity to discuss key concerns directly with the analysts. Unless you’re a client, opportunities for listening in on these calls are rare.

Article / Updated 08-23-2023

Investing appears to be complicated and complex. But if you can take some relatively simple concepts to heart and adhere to them, you can greatly increase your success. Here are ten time-tested principles of investing success. Following these principles will pay you big dividends (and capital gains) for many years to come. Regularly save and invest 5 percent to 10 percent of your income Unless you enjoy a large inheritance, you should consistently save 5 percent to 10 percent of the money you’re earning. When should you start doing this? As soon as you begin earning money on a regular basis. Preferably, invest through a retirement savings account to reduce your taxes and ensure your future financial independence. You can reduce both your current federal and state income tax bills (on the contributions) as well as these ongoing bills (on the investment earnings). The exact portion of your income you should be saving is driven by your goals and by your current financial assets and liabilities. Take the time to crunch some numbers to determine how much you should be saving monthly. Understand and use your employee benefits The larger the employer, the more likely it is to offer avenues for you to invest conveniently through payroll deduction, and with possible tax benefits and discounts. Some companies enable you to buy company stock at a reduced price. Often, the most valuable benefit you have is a retirement savings plan, such as a 401(k) plan that enables you to make contributions and save on your current income taxation. Also, after the money is in the account, it can compound and grow over the years and decades without taxation. If you’re self-employed, be sure to establish and use a retirement plan. Also take time to learn about the best investment options available to you — and use them. Thoroughly research before you invest The allure of large expected returns too often is the enticement that gets novices hooked on a particular investment. That’s a whole lot more appealing than researching an investment. But research you must if you want to make an informed decision. Be sure you understand what you’re investing in. Don’t purchase any financial product that you don’t understand. Ask questions and compare what you’re being offered with the best sources I recommend. Beware of purchasing an investment on the basis of an advertisement or a salesperson’s solicitation. Shun investments with high commissions and expenses The cost of the investments you buy is an important variable you can control. All fees must be disclosed in a prospectus, which you should always review before making any investment. Companies that sell their investment products through aggressive sales techniques generally have the worst financial products and the highest fees and commissions. Invest the majority of your long-term money in ownership investments When you’re young, you have plenty of time to let your investments compound and grow. Likewise, you have time to recover from setbacks. So with your long-term money, focus on investments that have appreciation potential, such as stocks, real estate, and your own business. When you invest in bonds or bank accounts, you’re simply lending your money to others and will earn a return that probably won’t keep you ahead of inflation and taxes. Avoid making emotionally based financial decisions Successful investors keep their composure when the going gets tough. You need the ability and wisdom to look beyond the current environment, understanding that it will change in the months and years ahead. You don’t want to panic and sell your stock holdings after a major market correction, for example. In fact, you should consider such an event to be a buying opportunity for stocks. Be especially careful about making important financial decisions after a major life change, such as marriage, the birth of a child, a divorce, job loss, or a death in your family. Make investing decisions based on your plans and needs Your investment decisions should come out of your planning and your overall needs, goals, and desires. This requires looking at your overall financial situation first and then coming up with a comprehensive plan. Don’t be swayed and influenced by the predictive advice offered by various investment pundits or the latest news headlines and concerns. Trust that you know yourself and your financial situation better than anyone else does. Tap information sources with high-quality standards You need to pare down the sources you use to keep up with investing news and the financial markets. Give priority to those that aren’t afraid to take a stand and recommend what’s in your best interests. The public clearly has an appetite for opinion shows; on the political left, you have programs on CNN and MSNBC. On the political right, FOX has some popular conservative opinion shows. Political partisans distort the news rather than report the news, and they prevent you from better understanding what’s really going on so you can make informed decisions. Political partisans overstate the impact that the president and others can have over our economy and financial markets. Stay away from outlets that cater to advertisers or are driven by an ideological agenda. Trust yourself first Look in the mirror. You’ll see the best financial person you can hire and trust. What may be missing is enough education and confidence to make more and better decisions on your own, which this book can assist you with doing. If you need help making a major decision, hire conflict-free advisors who charge a fee for their time. Work in partnership with advisors. Never turn over or abdicate control. Invest in yourself and others Don’t get so wrapped up in making, saving, and investing money that you lose sight of what matters most to you. Invest in your education, your health, and your relationships with family members and friends. Having a lot of money isn’t worth much if you don’t have your health and people with whom to share your life. Give your time and money to causes that better our society and our world.

Article / Updated 08-15-2023

Having a sense of what you own (your assets) and what you owe (your liabilities) is important because it provides some measure of your financial security and your ability to accomplish financial goals such as buying a home, starting a business, or retiring someday. Define net worth Your net worth is quite simply your financial assets (for example, bank and investment accounts) minus your financial liabilities (debts such as student loans and credit-card debt). Net worth does not refer to personal possessions. Your car, clothing, television, computer, and other personal items all have some value, of course. If you need to sell them, you could get something for them on Craigslist or eBay. But the reality is that you're unlikely to accumulate personal items with the expectation of later selling them to finance such personal goals as buying a home, starting a business, retiring, and so forth. After all, these things are investments that decline rapidly in value after purchase and use. Figure what you own: Financial assets To calculate your financial assets, access your bank statements and investment account statements, including retirement accounts and any other documentation that can help you. You may have only one or two accounts, and that's fine. Add up all the values of these accounts to find out what you own. It's common for most young adults to be in the early stages of accumulating assets. This book helps you change and improve upon that. In addition to excluding personal property and possessions because folks don't generally sell those to accomplish their personal and financial goals, you also probably should exclude your home as an asset if you happen to own one. (You can include it if you expect to downsize or to rent in retirement and live off of some of your home's equity.) One exception to something that isn't generally thought of as a financial asset, which you may or may not want to include in this category. Some people have valuable collections of particular items, be they coins, sports memorabilia, or whatever. You can count such collections as assets, but remember that they're only real assets if you'd be willing to sell them and use the proceeds toward one of your goals. Determine what you owe: Financial liabilities Most people accumulate debts and loans during periods in life when their expenditures exceed their income. You may have student loans, an auto loan, and credit-card debts. Access any statements that document your loans and debts and figure out the grand total of what you owe. Net the difference After you total your financial assets and your financial liabilities, you can subtract the latter from the former to arrive at your net worth. Don't worry if you have a small or negative net worth (where you have more debt than assets). There's no point wringing your hands over the results — you can't change history. And, it doesn't matter how you compare with your peers even if we can accurately define exactly who your peers are. This isn't a competition or test. But you can change the direction of your finances in the future and boost your net worth surprisingly fast to work toward accomplishing your personal goals.

Article / Updated 08-02-2023

Accumulating bad debt (consumer debt) by buying things like new living room furniture or a new car that you really can’t afford is like living on a diet of sugar and caffeine: a quick fix with little nutritional value. Borrowing on your credit card to afford an extravagant vacation is detrimental to your long-term financial health. When you use debt for investing in your future, I call it good debt. Borrowing money to pay for an education, to buy real estate, or to invest in a small business is like eating a well-balanced and healthy diet. That’s not to say that you can’t get yourself into trouble when using good debt. Just as you can gorge yourself on too much good food, you can develop financial indigestion from too much good debt. In this article, I mainly help you battle the pervasive problem of consumer debt. Getting rid of your bad debts may be even more difficult than giving up the junk foods you love. But in the long run, you’ll be glad you did; you’ll be financially healthier and emotionally happier. And after you get rid of your high-cost consumer debts, make sure you practice the best way to avoid future credit problems: Don’t borrow with bad debt. Before you decide which debt reduction strategies make sense for you, you must first consider your overall financial situation and assess your alternatives. Using Savings to Reduce Your Consumer Debt Many people build a mental brick wall between their savings and investment accounts and their consumer debt accounts. By failing to view their finances holistically, they simply fall into the habit of looking at these accounts individually. The thought of putting a door in that big brick wall doesn’t occur to them. This article helps you see how your savings can be used to lower your consumer debt. Understanding how you gain If you have the savings to pay off consumer debt, like high-interest credit-card and auto loans, consider doing so. (Make sure you pay off the loans with the highest interest rates first.) Sure, you diminish your savings, but you also reduce your debts. Although your savings and investments may be earning decent returns, the interest you’re paying on your consumer debts is likely higher. Paying off consumer loans on a credit card at, say, 12 percent is like finding an investment with a guaranteed return of 12 percent — tax-free. You would actually need to find an investment that yielded even more — around 18 percent — to net 12 percent after paying taxes on those investment returns in order to justify not paying off your 12 percent loans. The higher your tax bracket, the higher the return you need on your investments to justify keeping high-interest consumer debt. Even if you think that you’re an investing genius and you can earn more on your investments, swallow your ego and pay down your consumer debts anyway. In order to chase that higher potential return from investments, you need to take substantial risk. You may earn more investing in that hot stock tip or that bargain real estate, but you probably won’t. If you use your savings to pay down consumer debts, be careful to leave yourself enough of an emergency cushion. You want to be in a position to withstand an unexpected large expense or temporary loss of income. On the other hand, if you use savings to pay down credit-card debt, you can run your credit-card balances back up in a financial pinch (unless your card gets canceled), or you can turn to a family member or wealthy friend for a low-interest loan. Finding the funds to pay down consumer debts Have you ever reached into the pocket of an old jacket and found a rolled-up $20 bill you forgot you had? Stumbling across some forgotten funds is always a pleasant experience. But before you root through all your closets in search of stray cash to help you pay down that nagging credit-card debt, check out some of these financial jacket pockets you may have overlooked: Borrow against your cash value life insurance policy. If you did business with a life insurance agent, she probably sold you a cash value policy because it pays high commissions to insurance agents. Or perhaps your parents bought one of these policies for you when you were a child. Borrow against the cash value to pay down your debts. (Note: You may want to consider discontinuing your cash value policy altogether and simply withdraw the cash balance.) Sell investments held outside of retirement accounts. Maybe you have some shares of stock or a Treasury bond gathering dust in your safety deposit box. Consider cashing in these investments to pay down your consumer loans. Just be sure to consider the tax consequences of selling these investments. If possible, sell investments that won’t generate a big tax bill. Tap the equity in your home. If you’re a homeowner, you may be able to tap in to your home’s equity, which is the difference between the property’s market value and the outstanding loan balance. You can generally borrow against real estate at a lower interest rate and get a tax deduction, subject to interest deduction limitations. However, you must take care to ensure that you don’t overborrow on your home and risk losing it to foreclosure. Borrow against your employer’s retirement account. Check with your employer’s benefits department to see whether you can borrow against your retirement account balance. The interest rate is usually reasonable. Be careful, though — if you leave or lose your job, you may have to repay the loan within 60 days. Also recognize that you’ll miss out on investment returns on the money borrowed. Lean on family. They know you, love you, realize your shortcomings, and probably won’t be as cold-hearted as some bankers. Money borrowed from family members can have strings attached, of course. Treating the obligation seriously is important. To avoid misunderstandings, write up a simple agreement listing the terms and conditions of the loan. Unless your family members are the worst bankers I know, you’ll probably get a fair interest rate, and your family will have the satisfaction of helping you out. Just don’t forget to pay them back. Decreasing Debt When You Lack Savings If you lack savings to throw at your consumer debts, not surprisingly, you have some work to do. If you’re currently spending all your income (and more!), you need to figure out how you can decrease your spending and/or increase your income. In the meantime, you need to slow the growth of your debt. Reducing your credit card’s interest rate Different credit cards charge different interest rates. So why pay 14, 16, or 18 percent (or more) when you can pay less? The credit-card business is highly competitive. Until you get your debt paid off, slow the growth of your debt by reducing the interest rate you’re paying. Here are sound ways to do that: Apply for a lower-rate credit card. If you’re earning a decent income, you’re not too burdened with debt, and you have a clean credit record, qualifying for lower-rate cards is relatively painless. Some persistence (and cleanup work) may be required if you have income and debt problems or nicks in your credit report. After you’re approved for a new, lower-interest-rate card, you can simply transfer your outstanding balance from your higher-rate card. CreditCards.com’s website carries information on low-interest-rate and no-annual-fee cards (among others, including secured cards). Call the bank(s) that issued your current high-interest-rate credit card(s) and say that you want to cancel your card(s) because you found a competitor that offers no annual fee and a lower interest rate. Your bank may choose to match the terms of the “competitor” rather than lose you as a customer. But be careful with this strategy and consider just paying off or transferring the balance. Canceling the credit card, especially if it’s one you’ve had for a number of years, may lower your credit score in the short-term. While you’re paying down your credit-card balance(s), stop making new charges on cards that have outstanding balances. Many people don’t realize that interest starts to accumulate immediately when they carry a balance. You have no grace period — the 20 or so days you normally have to pay your balance in full without incurring interest charges — if you carry a credit-card balance from month to month. Understanding all credit-card terms and conditions Avoid getting lured into applying for a credit card that hypes an extremely low interest rate. One such card advertised a 1.9 percent rate, but you had to dig into the fine print for the rest of the story. First, any card that offers such a low interest rate will honor that rate only for a short period of time — in this case, six months. After six months, the interest rate skyrocketed to nearly 15 percent. But wait, there’s more: Make just one late payment or exceed your credit limit, and the company raises your interest rate to 19.8 percent (or even 24 percent, 29 percent, or more) and slaps you with a $25 fee — $35 thereafter. If you want a cash advance on your card, you get socked with a fee equal to 3 percent of the amount advanced. (Some banks have even advertised 0 percent interest rates — although that rate generally has applied only to balances transferred from another card, and such cards have been subject to all the other vagaries discussed.) I’m not saying that everyone should avoid this type of card. Such a card may make sense for you if you want to transfer an outstanding balance and then pay off that balance within a matter of months and cancel the card to avoid getting socked with the card’s high fees. If you hunt around for a low-interest-rate credit card, be sure to check out all the terms and conditions. Start by reviewing the uniform rates and terms disclosure, which details the myriad fees and conditions (especially how much your interest rate can increase for missed or late payments). Also, be sure you understand how the future interest rate is determined on cards that charge variable interest rates. Cutting up your credit cards If you have a tendency to live beyond your means by buying on credit, get rid of the culprit — the credit card (and other consumer credit). To kick the habit, a smoker needs to toss all the cigarettes, and an alcoholic needs to get rid of all the booze. Cut up all your credit cards and call the card issuers to cancel your accounts. And when you buy consumer items such as cars and furniture, do not apply for the E-Z credit. The world worked fine back in the years B.C. (Before Credit). Think about it: Just a couple generations ago, credit cards didn’t even exist. People paid with cash and checks — imagine that! You can function without buying anything on a credit card. In certain cases, you may need a card as collateral — such as when renting a car. When you bring back the rental car, however, you can pay with cash or a check. Leave the card at home in the back of your sock drawer or freezer, and pull (or thaw) it out only for the occasional car rental. If you can trust yourself, keep a separate credit card only for new purchases that you know you can absolutely pay in full each month. No one needs three, five, or ten credit cards! You can live with one (and actually none), given the wide acceptance of most cards. Retailers such as department stores and gas stations just love to issue cards. Not only do these cards charge outrageously high interest rates, but they’re also not widely accepted like Visa and MasterCard. Virtually all retailers accept Visa and MasterCard. More credit lines mean more temptation to spend what you can’t afford. If you decide to keep one widely accepted credit card instead of getting rid of them all, be careful. You may be tempted to let debt accumulate and roll over for a month or two, starting up the whole horrible process of running up your consumer debt again. Rather than keeping one credit card, consider getting a debit card. Discovering debit cards: The best of both worlds Credit cards are the main reason today’s consumers are buying more than they can afford. So logic says that one way you can keep your spending in check is to stop using your credit cards. But in a society that’s used to the widely accepted Visa and MasterCard plastic for purchases, changing habits is hard. And you may be legitimately concerned that carrying your checkbook or cash can be a hassle or can be costly if you’re mugged. Debit cards truly offer the best of both worlds. The beauty of the debit card is that it offers you the convenience of making purchases with a piece of plastic without the temptation or ability to run up credit-card debt. Debit cards keep you from spending money you don’t have and help you live within your means. A debit card looks just like a credit card with either the Visa or MasterCard logo. The big difference between debit cards and credit cards is that, as with checks, debit card purchase amounts are deducted electronically from your checking account within days. (Bank ATM cards are also debit cards; however, if they lack a Visa or MasterCard logo, they’re accepted by far fewer merchants.) If you switch to a debit card and you keep your checking account balance low and don’t ordinarily balance your checkbook, you may need to start balancing it. Otherwise, you may face charges for overdrawing your account. Here are some other differences between debit and credit cards: If you pay your credit-card bill in full and on time each month, your credit card gives you free use of the money you owe until it’s time to pay the bill. Debit cards take the money out of your checking account almost immediately. Credit cards make it easier for you to dispute charges for problematic merchandise through the issuing bank. Most banks allow you to dispute charges for up to 60 days after purchase and will credit the disputed amount to your account pending resolution. Most debit cards offer a much shorter window, typically less than one week, for making disputes. Because moving your checking account can be a hassle, see whether your current bank offers Visa or MasterCard debit cards. If your bank doesn’t offer one, shop among the major banks in your area, which are likely to offer the cards. Because such cards come with checking accounts, make sure you do some comparison shopping among the different account features and fees. A number of investment firms offer Visa or MasterCard debit cards with their asset management accounts. Not only can these investment firm “checking accounts” help you break the credit-card overspending habit, but they may also get you thinking about saving and investing your money. One drawback of these accounts is that most of them require higher minimum initial investment amounts. Among brokerages with competitive investment offerings and prices are TD Ameritrade (phone 800-934-4448), Vanguard (phone 800-992-8327), and T. Rowe Price (phone 800-537-1936). Turning to Credit Counseling Agencies Prior to the passage of the 2005 bankruptcy laws, each year hundreds of thousands of debt-burdened consumers sought “counseling” from credit counseling service offices. Now, more than a million people annually get the required counseling. Unfortunately, some people find that the service doesn’t always work the way it’s pitched. Beware biased advice at credit counseling agencies Leona Davis, whose family racked up significant debt due largely to unexpected medical expenses and a reduction in her income, found herself in trouble with too much debt. So she turned to one of the large, nationally promoted credit counseling services, which she heard about through its advertising and marketing materials. The credit counseling agency Davis went to markets itself as a “nonprofit community service.” Davis, like many others I know, found that the “service” was not objective. After her experience, Davis feels that a more appropriate name for the organization she worked with would be the Credit Card Collection Agency. Unbeknownst to Davis and most of the other people who use supposed credit counseling agencies is the fact that the vast majority of their funding comes from the fees that creditors pay them. Most credit counseling agencies collect fees on a commission basis — just as collection agencies do! Their strategy is to place those who come in for help on their “debt management program.” Under this program, counselees like Davis agree to pay a certain amount per month to the agency, which in turn parcels out the money to the various creditors. Because of Davis’s tremendous outstanding consumer debt (it exceeded her annual income), her repayment plan was doomed to failure. Davis managed to make 10 months’ worth of payments, largely because she raided a retirement account for $28,000. Had Davis filed bankruptcy (which she ultimately needed to do), she would’ve been able to keep her retirement money. But Davis’s counselor never discussed the bankruptcy option. “I received no counseling,” says Davis. “Real counselors take the time to understand your situation and offer options. I was offered one solution: a forced payment plan.” Others who have consulted various credit counseling agencies, including one of my research assistants who, undercover, visited an office to seek advice, confirm that some agencies use a cookie-cutter approach to dealing with debt. Such agencies typically recommend that debtors go on a repayment plan that has the consumer pay, say, 3 percent of each outstanding loan balance to the agency, which in turn pays the money to creditors. Unable to keep up with the enormous monthly payments, Davis finally turned to an attorney and filed for bankruptcy — but not before she had unnecessarily lost thousands of dollars because of the biased recommendations. Although credit counseling agencies’ promotional materials and counselors aren’t shy about highlighting the drawbacks to bankruptcy, counselors are reluctant to discuss the negative impact of signing up for a debt payment plan. Davis’s counselor never told her that restructuring her credit-card payments would tarnish her credit reports and scores. The counselor my researcher met with also neglected to mention this important fact. When asked, the counselor was evasive about the debt “management” program’s impact on his credit report. If you’re considering bankruptcy or are otherwise unable to meet your current debt obligations, interview any counseling agency you may be considering working with. Remember that you’re the customer and you should do your homework first and be in control. Don’t allow anyone or any agency to make you feel that they’re in a position of power simply because of your financial troubles. Ask questions and avoid debt management programs Probably the most important question to ask a counseling agency is whether it offers debt management programs (DMPs), whereby you’re put on a repayment plan with your creditors and the agency gets a monthly fee for handling the payments. You do not want to work with an agency offering DMPs because of conflicts of interest. An agency can’t offer objective advice about all your options for dealing with debt, including bankruptcy, if it has a financial incentive to put you on a DMP. The Institute for Financial Literacy is a good agency that doesn’t offer DMPs (phone 866-662-4932). Here are some additional questions that the Federal Trade Commission suggests you ask prospective counseling agencies you may hire: What are your fees? Are there setup and/or monthly fees? Get a specific price quote in writing. What if I can’t afford to pay your fees or make contributions? If an organization won’t help you because you can’t afford to pay, look elsewhere for help. Will I have a formal written agreement or contract with you? Don’t sign anything without reading it first. Make sure all verbal promises are in writing. Are you licensed to offer your services in my state? You should work only with a licensed agency. What are the qualifications of your counselors? Are they accredited or certified by an outside organization? If so, by whom? If not, how are they trained? Try to use an organization whose counselors are trained by a nonaffiliated party. What assurance do I have that information about me (including my address, phone number, and financial information) will be kept confidential and secure? A reputable agency can provide you with a clearly written privacy policy. How are your employees compensated? Are they paid more if I sign up for certain services, if I pay a fee, or if I make a contribution to your organization? Employees who work on an incentive basis are less likely to have your best interests in mind than those who earn a straight salary that isn’t influenced by your choices. Stopping the Spending/Consumer Debt Cycle Regardless of how you deal with paying off your debt, you’re in real danger of falling back into old habits. Backsliding happens not only to people who file bankruptcy but also to those who use savings or home equity to eliminate their debt. Resisting the credit temptation Getting out of debt can be challenging, but I have confidence that you can do it with this book by your side. In addition to eliminating all your credit cards and getting a debit card, the following list provides some additional tactics you can use to limit the influence credit cards hold over your life. Reduce your credit limit. If you choose not to take my advice and get rid of all your credit cards or get a debit card, be sure to keep a lid on your credit card’s credit limit (the maximum balance allowed on your card). You don’t have to accept the increase just because your bank keeps raising your credit limit to reward you for being such a profitable customer. Call your credit-card service’s toll-free phone number and lower your credit limit to a level you’re comfortable with. Replace your credit card with a charge card. A charge card (such as the American Express Card) requires you to pay your balance in full each billing period. You have no credit line or interest charges. Of course, spending more than you can afford to pay when the bill comes due is possible. But you’ll be much less likely to overspend if you know you have to pay in full monthly. Never buy anything on credit that depreciates in value. Meals out, cars, clothing, and shoes all depreciate in value. Don’t buy these things on credit. Borrow money only for sound investments — education, real estate, or your own business, for example. Think in terms of total cost. Everything sounds cheaper in terms of monthly payments — that’s how salespeople entice you into buying things you can’t afford. Take a calculator along, if necessary, to tally up the sticker price, interest charges, and upkeep. The total cost will scare you. It should. Stop the junk mail avalanche. Look at your daily mail — I bet half of it is solicitations and mail-order catalogs. You can save some trees and some time sorting junk mail by removing yourself from most mailing lists. To remove your name from mailing lists, contact the Direct Marketing Association (you can register through its website). To remove your name from the major credit reporting agency lists that are used by credit-card solicitation companies, call 888-567-8688 or online. Also, tell any credit-card companies you keep cards with that you want your account marked to indicate that you don’t want any of your personal information shared with telemarketing firms. Limit what you can spend. Go shopping with a small amount of cash and no plastic or checks. That way, you can spend only what little cash you have with you! Identifying and treating a compulsion No matter how hard they try to break the habit, some people become addicted to spending and accumulating debt. It becomes a chronic problem that starts to interfere with other aspects of their lives and can lead to problems at work and with family and friends. Debtors Anonymous (DA) is a nonprofit organization that provides support (primarily through group meetings) to people trying to break their debt accumulation and spending habits. DA is modeled after the 12-step Alcoholics Anonymous (AA) program. Like AA, Debtors Anonymous works with people from all walks of life and socioeconomic backgrounds. You can find people who are financially on the edge, $100,000-plus income earners, and everybody in between at DA meetings. Even former millionaires join the program. DA has a simple questionnaire that helps determine whether you’re a problem debtor. If you answer “yes” to at least 8 of the following 15 questions, you may be developing or already have a compulsive spending and debt accumulation habit: Are your debts making your home life unhappy? Does the pressure of your debts distract you from your daily work? Are your debts affecting your reputation? Do your debts cause you to think less of yourself? Have you ever given false information in order to obtain credit? Have you ever made unrealistic promises to your creditors? Does the pressure of your debts make you careless when it comes to the welfare of your family? Do you ever fear that your employer, family, or friends will learn the extent of your total indebtedness? When faced with a difficult financial situation, does the prospect of borrowing give you an inordinate feeling of relief? Does the pressure of your debts cause you to have difficulty sleeping? Has the pressure of your debts ever caused you to consider getting drunk? Have you ever borrowed money without giving adequate consideration to the rate of interest you’re required to pay? Do you usually expect a negative response when you’re subject to a credit investigation? Have you ever developed a strict regimen for paying off your debts, only to break it under pressure? Do you justify your debts by telling yourself that you are superior to the “other” people, and when you get your “break,” you’ll be out of debt? To find a Debtors Anonymous (DA) support group in your area, visit the DA website or contact the DA’s national headquarters by phone at 800-421-2383 or 781-453-2743.

Article / Updated 08-02-2023

Many well-intentioned parents want to save for their children’s future educational expenses. The mistake that they often make, however, is putting money in accounts in the child’s name (in so-called custodial accounts) or saving outside retirement accounts in general. The more money you accumulate outside tax-sheltered retirement accounts, the more you will generally end up paying for college costs. Under the current financial needs analysis used by most colleges and universities in awarding “financial aid” (that is, how much of their very high sticker price they will charge you), the value of your retirement plan is not considered to be an asset. Money that you save outside retirement accounts, including money in the child’s name, is counted as an asset and reduces eligibility for financial aid. Also, be aware that your family’s assets, for purposes of financial aid determination, generally include equity in real estate and businesses you own. Although the federal financial aid analysis no longer counts equity in your primary residence as an asset, many private (independent) schools continue to ask parents for this information when they make their own financial aid determinations. Thus, paying down your home mortgage more quickly instead of funding retirement accounts can harm you financially. You may end up paying more for college costs and pay more in taxes. Make it a priority to contribute to your retirement savings plan(s). If you instead save money in a nonretirement account for your children’s college expenses, you will pay higher taxes both on your current income and on the interest and growth of this money. In addition to paying higher taxes, you’ll be expected to pay a higher price for your child’s educational expenses. If you’re sufficiently wealthy that you expect to pay for your children’s full educational costs without applying for financial aid, you can save some on taxes if you invest through custodial accounts. Prior to your child’s reaching age 19, the first $2,100 of interest and dividend income is taxed at your child’s income tax rate rather than yours. After age 19 (for full-time students, it’s those under the age of 24), all income that the investments in your child’s name generate is taxed at your child’s rate. Paying for college If the way in which the financial aid system works effectively encourages you to save in your own retirement accounts, how will you pay for your kid’s education expenses? Here are some ideas and resources: Home equity: You can borrow against your home at a relatively low interest rate, and the interest is generally tax-deductible. Company retirement plans: Some 401(k)s allow borrowing for educational costs. Student loans: Several financial aid programs allow you to borrow at reasonable interest rates. The Unsubsidized Stafford Loans and Parent Loans for Undergraduate Students (PLUS), for example, are available, even when your family isn’t deemed financially needy. Grants and scholarships: Grant programs are available through schools and the government, as well as through independent sources. Complete the Free Application for Federal Student Aid (FAFSA) application to apply for the federal government programs. Grants available through state government programs may require a separate application. Specific colleges and other private organizations — including employers, banks, credit unions, and community groups — also offer grants and scholarships. Work and save: Your child can work and save money during high school and college. In fact, if your child qualifies for financial aid, she’s generally expected to contribute a certain amount to education costs from employment (both during the school year and summer breaks) and from savings. Besides giving your gangly teen a stake in her own future, this training encourages sound personal financial management down the road. Considering educational savings account options You’ll hear about various accounts you can use to invest money for your kid’s future college costs. Tread carefully with these, especially because they can affect future financial aid. The most popular of these accounts are qualified state tuition plans, also known as Section 529 plans. These plans offer a tax-advantaged way to save and invest more than $100,000 per child toward college costs. (Some states allow upward of $300,000 per student.) After you contribute to one of these state-based accounts, the invested funds grow without taxation. Withdrawals are also tax-free provided the funds are used to pay for qualifying higher-education costs (which include college, graduate school, and certain additional expenses of special-needs students). The schools need not be in the same state as the state administering the Section 529 plan. Section 529 plan balances can harm your child’s financial aid chances. Thus, such accounts make the most sense for affluent families who are sure they won’t qualify for any type of financial aid. If you do opt for a 529 plan and intend to apply for financial aid, you should be the owner of the accounts (not your child) to maximize qualifying for financial aid. Investing money earmarked for college Diversified mutual funds and exchange-traded funds, which invest in stocks in the United States and internationally, as well as bonds, are ideal vehicles to use when you invest money earmarked for college. Be sure to choose funds that fit your tax situation if you invest your funds in nonretirement accounts. When your child is young (preschool age), consider investing up to 80 percent of your investment money in stocks (diversified worldwide) with the remainder in bonds. Doing so can maximize the money’s growth potential without taking extraordinary risk. As your child makes his way through the later years of elementary school, you need to begin to make the mix more conservative. Scale back the stock percentage to 50 or 60 percent. Finally, in the years just before the child enters college, reduce the stock portion to no more than 20 percent or so. Some 529s offer target-date-type funds that reduce the stock exposure as target college dates approach so you don’t have to make the adjustments yourself.

Article / Updated 07-27-2023

For a number of years now, it has been argued that young adults are under pressures that lead them to dig deeper into debt than prior generations. The reasons cited for this generational debt have typically included High costs of college: Annual increases in the costs of a college education have far outstripped the increases in general prices of other products and services. The price of some private colleges now is nearly $70,000 per year! Stagnating incomes and job prospects: Most industries and companies compete in an increasingly global economy. And, the Internet has undermined and disrupted numerous retailers and other industries, causing incomes in those businesses to stagnate. High housing costs: The 1990s and most of the 2000s saw rising housing prices, which priced many entry-level buyers out of their local markets. College campus credit-card promotions: The availability and promotion of credit cards is a big problem. Credit cards are tempting to use during college when your income is minimal or nonexistent. On many college and university campuses, banks are allowed, through payment of large fees to the educational institution, to promote their credit cards. This practice and credit cards offering rewards are getting more and more young adults hooked on credit cards at younger ages. More temptations to spend money: Never before have so many temptations existed for spending money through so many outlets. In addition to the ubiquity of places to shop both nearby and online, people are bombarded with ads everywhere. Most of these reasons for incurring generational debt are valid. However, take a look at both sides of the Internet revolution. While it's true that the Internet and associated online companies such as Amazon have disrupted many businesses and industries, consumers who know how to shop wisely have often benefitted in terms of having more goods and services conveniently available to them at lower prices. Also, many technology-related companies have grown and expanded and been able to pay their workers well. You may encounter some or all of these debt traps during your 20s and 30s. Remember that you'll always face things in life that you can and can't control. If you're aware of these land mines and can discern the difference between what you can't control and what you can constructively do to contain your spending and debt, then you're on the right track. If certain venues or situations or people tempt you to overreach, then avoid them.