Other Financial Topics of Interest

Credit Cards: Tips on Managing Your Debt

More than two-thirds of credit card users carry a balance month to month. While your goal is to pay off the debt entirely, until you can, take note of the following suggestions:

• Get the lowest interest rate available. For a list of low rate and no fee issuers go to CardTrak. If you are presently paying 18 percent and you switch to a card with 9 percent, you have saved 50 percent of the interest you would have had to pay.
• Pay your bill the day you receive it. Most credit cards have a grace period. As long as you pay your bill in full by the due date, interest will not be charged.
• Pay attention to billing cycles. Make sure your card bills on a 30-day cycle. If the card offers a 24-day cycle you will be billed 14 times during a year rather than 12!

Three methods Banks Use to Determine Interest Calculations

1. The Average Daily Balance Method: This method is most commonly used by bankers. The issuer divides up the year into 30-day periods known as billing cycles. On the last day of each billing cycle, the issuer mails the bill. If you owe $500 and you pay the entire amount by the due date, no interest will be charged. If you leave even $1 unpaid, expect to pay the interest charges on the average daily balance. In this case your balance would be $500 for 25 days of the billing cycle, and $1 for the last five days, resulting in the average daily balance of $417.
2. Previous Balance Method: Many free cards use this method. This method takes the balance owed at the end of the previous month, and your interest is charged on that balance no matter what you have paid since then.
3. Two-Cycle Billing: This method is the most costly of the three calculations. The card holder must pay off the entire card balance for two consecutive months or get charged for two months of interest. For example, you paid off your balance in August but did not pay off your balance in September. The issuer would then charge you interest for both months.

Read the Fine Print

If a credit card company is offering an extremely low interest rate it may be too good to be true.

Read the fine print for the following disclosures:

• Interest rates. Examine the back of your statement which shows the different methods of calculating interest. The interest calculation that is being applied to your outstanding balance, is found on the front of your statement
• Low introductory offers. If you transfer the balance of your high interest credit card to a card offering low interest, read the fine print. Look to see if a high transfer fee will be charged. Most important, prior to charging new purchases, make sure that the same low interest rate will be applied. Some issuers charge a higher interest rate for new purchases.

Secured Card

If you are denied a regular credit card apply for a secured card. The issuer will require that you provide collateral by depositing money into a special savings account. The card holder may then charge up to the amount deposited. The cardholder would be billed monthly to reimburse the account. People who have misused credit cards in the past, may use the secured card to demonstrate that they can handle making monthly payments. In the future, issuers of regular credit cards may be more willing to offer a card with a low limit.

• • Debit Card (also known as an ATM Card). If you find it difficult controlling
• your credit card spending, you may want to consider using a debit card. Limiting your access to credit is a smart move whether you are a binge shopper or a model of self-control.
• • Ask your credit card company for a better deal. Due to the competition you
• may be able to lower your interest rate or eliminate your annual fee. Call today!
• • Don't use your credit card for a cash advance. Using your credit card at an ATM

is more expensive than charging regular purchases. Usually interest is higher on
cash advances and there could be a service fee attached to the transaction.

For additional information on credit cards go to: credit.com or bankrate.com

Tips on avoiding credit card pitfalls

• Use no more than three credit cards. All cards should charge no annual fee and provide a grace period for payment without incurring finance charges.
• Keep a monthly list of every item you charge to your credit card during the card's billing period. Every time you charge an item, record it on the list and update the total. Keep the list with your monthly bills and treat that total just as you do your monthly rent, as a "must pay" on a certain date.
• Do not charge anything to the credit card unless you have the cash with which to pay for it.
• Avoid late charges. Say you are paid on the 1st and your credit card payment is due on the fifth. Prior to paying the bill you will need to deposit the paycheck. To avoid being hit with a late charge and interest charges, send in the minimum payment on the day you receive the statement. Then submit the balance as soon as you can cover the check, preferably within the grace period.
• Credit cards are to be used as a method of convenience. They should not be considered a means of financing a purchase over several months to a year.
• Set a spending ceiling and then never spend more than that amount on anything without taking time to think about making the purchase. Once you have established the financial limit, do not permit yourself to buy anything for that amount or more without first leaving the store and giving yourself 48 hours to think about it. By giving your self a cooling off period, you allow yourself a chance to decide rationally whether the purchase really is necessary.

Banking Fees

Bank fees can be high. Account costs can add up to $200 a year if the required minimum balance is not maintained. The convenience of using ATMs can be costly. The average bank fee for making a withdrawal is $1.50. If the transaction is made at another lending institution, an additional fee will be charged for up to $3.

Compare Bank Services on the Internet

When looking for a new bank, use the Internet to compare fees, interest rates and minimum deposit requirements. Enter the banks and credit unions name into any Internet search engine and compare the services. If you plan to use the ATM frequently, make sure the bank has convenient locations. The more relationships you have with your bank, the greater your chances of getting price breaks on the services they offer. Be sure to ask if you're entitled to any discounts.
The following provides information for the use of an ATM card
ATM usage tips: http://www.mastercard.com/us/personal/en/cardholderservices/atmlocations/atm_safetytips.html

Pay off higher interest debt first

If you have a sum of money that you are deciding whether to invest or repay debt, it may be to your advantage to pay off the debt the highest interest rate. More information may be found at financenter.com

What is the Debt-to-income ratio?

When applying for private or alternative educational loans, the application refers to eligibility being based on the debt-to-income ratio. To figure this out add up the amount you pay each month on rent/mortgage, auto loans, student loans and the minimum monthly payments on credit cards. To get the percentage, divide this total by your monthly income before taxes. The industry standard for manageable debt is 38%. If you are much higher than this percentage you may not qualify for an alternative loan.

Credit Reports

How do I receive a credit report? There are three major credit reporting agencies:

Major Credit Reporting Agencies

Equifax (800) 685-1111
Experian (800) 682-7654
TransUnion (800) 888-4213

The Federal Trade Commission's Fair Credit Reporting Act and the FACT Act allow you to request a free credit file disclosure, commonly called a credit report, once every 12 months from each of the nationwide consumer credit reporting companies: Equifax, Experian and TransUnion.

Want a Free Annual Credit Report? The Only Official Website is annualcreditreport.com

 How to read your Credit Report

Click here for a detailed example of a credit report.

Credit bureaus have a reputation for making mistakes. Because so much rides on a credit agency's evaluation of your credit history, it is essential to check your credit report thoroughly before applying for a major loan. If you find an error, write to the credit agency immediately. The credit agency will investigate the discrepancy which takes 30 days.

Insurance Policies

The most common types of insurance are:

• Auto Insurance
• Health Insurance
• Life Insurance
• Homeowners Insurance
• Umbrella Liability Insurance
• Health Insurance

There are two basic types of health insurance:

• Indemnity insurance, also called "fee-for-service," provides the greatest freedom and flexibility than managed care. You can select the doctor, hospital, or laboratory of your choice. The health plan has an annual deductible before insurance coverage begins. Then you pay a co-pay of normally 20% of the bill, the insurance company pays 80%. Plans vary in coverage of preventative care, prescriptions, and psychotherapy. The out of pocket cost is higher than managed care.
• Managed care with a health maintenance organization (HMO) has no deductibles. Co-payments are fixed and low, normally $15 or less. Preventive care, drugs and mental health treatment are usually covered. You may select your doctors from a list of providers who have contracts with your HMO. The medical services must be authorized through the plan. Use of non-authorized providers or non-authorized care will not be covered by your HMO.

People who are not comfortable with the restrictions of the HMO, may select a hybrid plan that blends the HMO and indemnity coverage. This plan is a point-of-service plan (POS). The cost is kept low by using a network of doctors and hospitals that have contracts with your insurance company. If you select a doctor out of the network, a higher deductible and co-pay will be charged.

There are many health insurance companies. A comparison of what options and costs will best meet your needs is to carefully read the descriptive materials provided by the insurance companies and question anything that is not clear.
For additional reading on heath insurance: http://money.cnn.com/pf/101/lessons/16/index.html

Life Insurance

If you are single and have no dependents you probably do not need life insurance. However, if you have family members who are supported by your earnings you need to consider the impact that your death may have on the money coming in. There are four questions that you should consider:

1. Do I need life insurance?

• If you or your spouse were to suddenly die, would your family be financially capable of carrying on? To determine if the income would cover the family's expenses, subtract the total monthly income from the monthly living expenses. If the remaining amount is a positive number, your survivors would have enough money to cover the basics living expenses. If there is a shortfall, then you need to determine the amount that a life insurance policy should be applied for.

2. How much will I need?

• Unexpected tragedy affects people in different ways. Life insurance provides policies that cover family's expenses for one, two or eight years. Most advisors will tell you to purchase six to eight times your annual salary. The length of time needs to be determined for the need of your family's financial security.
• The rule of thumb is, approximately $100,000 in insurance, for every $500 of monthly income required. As an example, your household expenses are $3,000 a month. Divide $3,000 by $500 and get 6, so your insurance policy should be in the amount of 6 x $100,000, or $600,000. This amount would be the sum of money that your beneficiaries can invest to generate enough income to cover your expenses without withdrawing from the principal. If you're monthly expenses are $3,000 that is $36,000 a year. Assuming the interest rate of 6% you would need $600,000 to produce $36,000 a year. As the survivors are using only the interest earned, the principal balance would remain as your nest egg.

3. How long will I need it?

• Life insurance was not intended to fill a permanent need. As the years go on, the money that you are building up in your retirement plan, savings, and the mortgage you're paying off to pay for your home are factors that will continue to change how much life insurance you will need. By the time that you are 65 years old you should not need life insurance.

4. What type of life insurance policy do I need?

• There are three types of life insurance policies: Term, Whole and Universal.
• Term life insurance is the most commonly used as it is a just-in case policy for a finite length of time that you need financial security. The policies are not too expensive because the insurance company will most likely not be paying a death benefit.
• Whole life or universal policy, the insurance company will most certainly be paying a death benefit or a "cash out". The two policies have cash values, so if you decide not to keep it, or if you suddenly needed the money while you were alive you could receive the cash value of the policy. The commission paid to insurance brokers is substantial.
• Once your family determines how much insurance you really need and can afford, then contact insurance companies to get quotes to compare the best-priced policies. Make sure that you compare the prices with at least three of the providers. You will be surprised how much they can differ.

How do you find the lowest cost for insurance? Internet searches are an excellent resource. Below are a few companies to begin your search:

Master Quote
Insurance Quote Services
Term Quote
Quote Smith

For additional reading on life insurance may be viewed at: http://money.cnn.com/pf/101/lessons/20/index.html

Auto Insurance

All drivers in the state of California are required by law to be financially responsible whenever you drive. Auto liability insurance is the most common means of providing coverage.

The minimum requirements to be insured with auto insurance are provided on the website of the California Department of Motor Vehicles (DMV).

Auto insurers generally bill every six months but monthly payments are also an option.

The cost of auto insurance varies and how much you pay in premiums is based on a combination of factors, including:

• • How much coverage you need
• • What kind of coverage you should have
• • How large a deductible to pay
• • Your driving record
• • Theft and safety statistics of your auto
• • Accident statistics in the area where you live
• • How many miles you drive annually
• • Other drivers on your policy

Tips on reducing the cost of auto insurance

• Premiums may be lowered by limiting how much coverage you obtain or eliminating unnecessary coverage. Listed below are areas that may be adjusted through your insurance agent:
• Liability. Insurance is the business of paying for the transfer of risk. Auto insurers will gladly cut you a break on your premiums if you share in the risk. One way to do this is to limit the maximum amount of potential liability the insurer will face.
• Deductible. Another way to share in the risk: Increase your deductible. Paying a higher deductible --- $500 instead of $250, for example -- means you pay more upfront when you file a claim. If you decide to be insured on a small deductible, expect to pay a larger premium.
• Safety and theft. Another way to lower your premium includes buying a vehicle with a reputation for safety and low theft. If your car is equipped with air bags, automatic seat belts and/or a car alarm, you will receive additional discounts in your insurance.
• Low Mileage. Discounts are made for annual, low mileage. The fewer miles you drive lessen the chance of being in an accident.

Shopping for Auto Insurance

Premiums vary widely between insurance companies. Insurance also varies by the city that you live in. Large metropolitan areas, such as San Francisco, have varying accident and theft statistics, both of which affect your premiums.

You can buy auto insurance from an insurance agent or on the Web. You may want to do comparison shopping of premiums by contacting the major insurers first, or using an aggregation service such as Progressive, Quotesmith or InsWeb. You may be surprised to find out how widely premium quotes can vary.

Shopping for auto insurance isn't only about finding the lowest premiums. You should also consider: the financial stability of the insurer. Visit the Web sites of Moody's Investors Service to check on your insurer's financial strength and ability to pay its claims. Inexpensive premiums doesn't necessarily mean a great deal if the insurer isn't able to pay its claims or stretches out its claims-processing time because of financial problems. Aim for an insurer that has at least a single-A rating. Consumer complaints are filed with the National Association of Insurance Commissioners (NAIC) and stored on their database indexes.

For additional reading on auto insurance: http://money.cnn.com/pf/101/lessons/22/index.html

Home Owners Insurance

Homeowner's insurance, also called property insurance, protects you from damages to your:

• • Dwelling: home, garage or other buildings on your property.
• • Personal property (furnishing and other belongings),
• • Liability accidents that happen on your property for which you are held responsible
• • Living expenses: if you have to leave your home while it is being repaired for a claim.

Like any other type of insurance, you pay a premium to buy a homeowner's insurance policy. An insurance company bases your premiums on: claims in your area, your claims history, value of your home, deductible that you will pay before the insurer pays your claim, and safety measures such as, installing a fire detector, sprinkler system and alarm systems.

Be sure to read your policy carefully to see what perils are covered and what are excluded. Damage from storms, lightning, fire and smoke is generally covered in a basic homeowner's insurance policy, but damage from earthquakes or floods are generally excluded. You will need a separate policy for earthquake insurance. If you have any questions concerning policy coverage, exclusions or limits, contact the insurance agent or company that sold you the policy or your mortgage lender.

For more information on homeowners insurance see: http://money.cnn.com/pf/101/lessons/19/index.html

Umbrella policy

An umbrella policy is supplemental insurance, which covers expenses when your basic policy has paid its limit on your claims.

While you may be confident that you won't face a large claim, an umbrella policy is useful in protecting you from potential financial catastrophe. Examples of what an umbrella policy covers are:

• • Your homeowner's insurance policy has $500,000 for coverage for dwelling and property damage. Any amounts that exceed that claim limit would have to be paid by you.
• • Protection in liability coverage. A liability lawsuit against you could potentially be a major drain on your assets. Umbrella insurance can protect you.

Umbrella insurance is sold as a separate policy from your basic policy. The average cost for $1 million of excess-liability coverage costs between $150 and $300. Each additional $1 million of coverage is less than $100.

Retirement

Investing in Time. When it comes to money for retirement, time is the most important factor in the growth process. The earlier you invest your money, the more time it has to grow. The amount you will have accumulated when retirement comes will determine what kind of lifestyle you will then be able to afford. An example of investing as early as possible is shown below:
• If you are 45 years old and start investing $100 a month into a retirement account that averages a 10% return, you will have $71,880 by age sixty-five.
• If at 35, you begin investing $100 into a retirement account, you will have $206,440 by sixty-five.
• If you can start saving $100 a month at age 25, you will have $555,454 by age sixty-five.
The point being, time plays an essential role in building your future wealth. Saving for retirement must be done sooner than later. The sooner you get started, the more money you save, results in the power of compounding which will build your retirement fund. The following provides information on the different types of retirement plans.
Pre-Tax Retirement Accounts - There are two types of accounts:
• An employer sponsored plan is provided by the company that you work for. Plans are normally a 401(k) or 403(k).
• The individual plan is provided by yourself in the form of an "IRA."

Employee-Sponsored Plan:

The most popular retirement plan that is provided by employers is the 401(k) plan or the 403(k) plan.

• A 401(k) plan (named after the tax code) is a program that any company can enter into and offer to their employees.
• A 403(k) is a plan that is for people who work in a non-profit organization such as a hospital, university, or research organization.

Smaller companies may offer a SIMPLE plan, SEP-IRA, Keogh Plan or a Defined Contribution plan.

All of these plans are employer defined contribution plans which are deducted from your paycheck, before taxes, and deposited directly into your retirement account. Employees normally have an option of how they want to invest their retirement account through mutual funds, stock, bonds and/or money market accounts. The plans allow you to contribute a percentage of your annual salary, usually to the maximum of 15 percent.

For additional reading on 401(k) and 403(k) plans go to: http://money.cnn.com/pf/101/lessons/23/

An IRA is an Individual Retirement Account. The maximum annual contribution is $3,000. IRA accounts are contributed to by taxable income. There are certain tax laws that apply to people who are contributing to an employee sponsored plan. With the exception of a Roth IRA, you do not pay any taxes on your IRA until you withdraw the funds during retirement. Withdrawal without penalty begins at the age of 59½.

There are three types of plans that offer different benefits:

• • Tax-deductible: Eligibility is determined by maximum income requirement. Withdrawals are taxed as income.
• • Nondeductible: Every one who has earned income may open this type of IRA. Withdrawals are taxed as income.
• • Roth: Eligibility is determined by maximum income requirements. Withdrawals are tax-free and penalty free. Program is more flexible than deductible and non-deductible.

IRA accounts are one of several retirement accounts allowed by the IRS to provide tax-deferral or other tax advantages. A tax-deferred investment is one in which some or all taxes are paid at a future date, rather than in the year the investment produces income. IRA's allow tax-deferral on growth, contributions, or both.

Many people choose Roth IRA due to there flexibility, over traditional IRAs. A benefit of a traditional IRA is that you pay taxes when you're retired. Since your tax rate is likely to be lower when you're retired, this saves you some money.

For additional reading on IRA's go to: http://www.smartmoney.com/retirement/roth the website provides an informative side-by-side comparison of the different IRA accounts.

The Importance of Maxing out Your Retirement Plan

The maximum allowable amount that you can contribute to your retirement plan is the amount that you should be putting in! This is called "maxing out" your retirement account.

An example of why it is important is shown below:

Two women worked in the same company for 35 years. Nancy retired with $750,000 while Sue held a little less than $300,000. Nancy maxed out her retirement option and put away the full 15 percent. She knew that during the first couple months the income adjustment would be difficult but after that, she really wouldn't notice. On the other hand, Sue decided that she would just contribute the 4 percent that their company offered and with every pay raise she received, she would increase her contribution. Raises came and she never raised her contribution over the 4 percent. She spent the money on new cars, vacations and college costs. Now she will be retiring from one company, only to be looking for another job, perhaps having to work an additional 15 years.

Point being: The most important thing that you can do to create a secure financial future is to put away as much as you can today! Financial planners use the rule of thumb that 70 percent of current annual salary is what is expected to be annual income during retirement. Begin your retirement plan now!

Additional Retirement Information 

A three-step retirement plan

The American Savings Educational Council has created a calculator to "ballpark" the basic idea of the savings you'll need when you retire.