The ‘Big 4′

Question:

I am 27 years old. I earn $31,000 per year. I just got my MBA and am in lots of debt from student loans. Please help me construct a budget where I can save at least $50 per month. My current budget is: rent $601; car note $375; car insurance: $142 every two months; electric, water, Direct TV: $150; food, etc. $200. I am strapped, and the student loan payments have not started at an estimated $301 per month! Please help. Thanks! – Poor Graduate

Answer:

Congratulations! An MBA from TMMU (Take My Money University) is an honor. You should be proud of the achievement. The unfortunate part is that now you’re getting your doctorate from the school of hard knocks.

Today’s lesson is one that high schools and colleges don’t teach. We’ll learn that it’s hard to repay debt, and there’s a limit to the amount of debt you can take on. So let’s start today’s class.

Your idea of creating a budget is right on. The first thing to recognize about a budget is that it is not a straitjacket. Rather, it’s a tool to tell you what’s happening so that you can decide what changes need to be made.

Generally, there are four big expense areas. These four items are: housing (about 35 percent of your budget), auto (15 percent), food (15 percent) and debt (10 percent). Among them, they account for 75 percent of your take-home pay.

The other 25 percent is needed for medical expenses, clothing, entertainment, cell phone, Internet, gifts, travel, etc. These smaller categories will not throw most people’s finances seriously out of control, nor will they be the solution to any big financial problem.

Now, let’s look at your budget. Your income is $31,000 per year, $25,800 after federal income, Medicare and FICA taxes. About $2,150 per month.

So how do your expenses line up with your income?

1. Housing (rent plus utilities): $751 or 35 percent per month. That’s right at the maximum.
2. Auto expenses (car plus insurance): $446 per month. Add a tank of gas and a little maintenance, and you’re at $525 per month or 24 percent. That’s too high by 9 percentage points.
3. Food: $200 per month. That’s 9 percent of your income. Just about where it should be. (Add food, housing and auto, and you’ve already spent 68 percent of your money each month. It’s easy to see how you’re pushing against your limit, even before beginning to repay student loans.) Now on to the last of the big four categories:
4. Debt: The $301 per month for student loans is another 14 percent of your take home pay.

When added to the rest of the Big Four, there’s just not enough money left for everything else. So what can you do? You’ve got three possible options. Increase income, reduce expenses or get some, or all, of the student loans forgiven.

If you want to increase your income, you’ll need another $300 per month in after-tax income to get your budget to balance and pay off the student loans (without any extra for savings). That means you’re looking for roughly a 15 percent pay raise.

Given that, cutting expenses is the most likely solution. The big expenses are home or auto. Taking in a roommate or refinancing your car are possibilities. Refinancing your student loans could also help.

Finally, you can see if you qualify for any student loan forgiveness. To qualify, you’d need to:

1. Perform volunteer work.
2. Perform military service.
3. Teach or practice medicine in certain types of communities.
4. Meet other criteria specified by the forgiveness program.

Note that bankruptcy will not help. Generally, student loans are not dismissed in a bankruptcy proceeding.

There’s a lesson in this for all of us. Just because you can borrow money for college doesn’t mean that you’ll have the ability to pay it back. Look at starting salaries in your chosen field. A ballpark rule is not to borrow more than you expect to make in your first year after graduation.

Class dismissed!

By Gary Foreman (CreditCards.com)

Tags: budget, debt plan, Student Loans

21.Jul.10 Budgeting, Debt Management, Financial Planning, Organization Comments (0)

10 Financial Spring Cleaning Tips

Take these steps to renew, review, refresh and regrow your finances:

You probably have a little money stashed around the house and don’t even know it. But forget turning over those couch cushions and going through old coat pockets. Instead, try a little financial spring cleaning. Here are 10 ways you can find a little extra cash and get more mileage out of the money you do have. And you don’t even have to battle the dust bunnies:

1. Get rid of clutter. Just as spring is a good time to clean out your closets, it’s also a good time to go through your finances and toss out the things that no longer fit your life, says Gary Foreman, editor of frugality-minded Web site The Dollar Stretcher.

Foreman and his family were using one of the inexpensive movie download services so much that they dropped one of their expensive cable subscriptions. “It was rare that we were watching it,” Foreman says.

His tip: “I go through the financial statements and look at them like they’re closets,” he says. Ask: What am I not really using anymore?

2. Sweep away those winter bills. Warmer weather is here, so if you’re still shoveling those leftover Christmas bills, it’s a good time to get rid of them, says Foreman.

One way to handle them is to strategize a one-time idea to make some extra money, such as a garage sale, online sale or even volunteering for overtime at work, he says.

Or just put yourself on a more stringent payment plan. And you can use an online credit card calculator to see how quickly you can deep-six that debt. What you gain financially: peace of mind and a huge amount of interest that you won’t be paying every month.

3. Organize for next year’s taxes. One task to make it easier: create a folder (paper or on computer), to hold all of the charitable deductions you make throughout the year, says Linda Sherry, director of national priorities for Consumer Action, a Washington, D.C.-based advocacy group.  Those deductions add up fast, “and it can be difficult to follow up later,” she says.

You can do the same for other spending categories that you need to track throughout the year. And some banks offer software that makes the task easy, she says.

And don’t forget your withholdings. If you were substantially over or under for 2009, this is also a great time to adjust your withholdings for next year.

4. Play with the techno-toys. One thing that can make your life easier: alerts to tell you when you’re approaching your preset limits on credit and debit cards, says Sherry. Often you have the choice of setting them to reach you by e-mail or text message, and they are “tremendously helpful,” she says. By avoiding going over your limits, you bypass having to pay extra fees.

5. Put your savings on autopilot. Set up an automatic draft to your savings account, “even if it’s just $10 a month,” says Barbara Stanny, author of “Overcoming Underearning: A Five-Step Plan to a Richer Life.”

It’s as easy as going to your bank’s Web site and arranging to have the money automatically transferred every month from your checking account or payroll deposit, she says.

Don’t worry about interest rates — they’re pitiful today — but look for a savings account “that has no charges,” Stanny advises.

Planning something special in your future, such as a vacation or new car? Open an account just for that, says Stanny, who says a friend of hers is doing this to save for a dream purchase: a boat. Even saving just a little at a time, “it’s amazing how fast it adds up,” she says.

6 . Scope out your credit cards and credit report. You’re entitled to at least three free copies each year — one from each of the three major credit reporting agencies — TransUnion, Experian and Equifax. Get them for free at AnnualCreditReport.com, the government-mandated site. If you want your credit score, expect to pay for it. Don’t fall for gimmicks from companies that require you to buy a service before getting your so-called free score.

These days, credit reports are being used for everything from setting insurance rates to evaluating job candidates. So making sure your report is accurate can save you some money.

Also, 2009 was a tumultuous year for credit cards. Check the interest rates, credit limits and any rewards programs tied to your plastic. While canceling credit cards can hurt your credit score, you may want to shelve the cards with high APRs and pay down balances on cards with low credit limits to increase your credit utilization ratio. The lower your ratio, the better your credit score. Cash in your rewards, or if your rewards program isn’t working for you, check out other rewards cards that better suit your lifestyle.

7. Check those beneficiaries. Some financial accounts (insurance policies, too) don’t pass through your will, even if you have one. Instead, the assets go directly to the beneficiaries you named when you opened the account or bought the policy.

Over the years, life changes. You get married, divorced, have kids, etc. But too often, you forget to revisit those beneficiary selections. That means if the worst happens, the money in that bank account you opened in college, pre-spouse and kids, could still go to Aunt Edna or your ex.

So take a look at each of your financial accounts and insurance policies to make sure that the money will go where you need it to go now — not where you wanted it to go years ago.

8. Revisit your insurance. The past few years have been a bumpy financial ride for everyone. If your circumstances have changed (cars, job, home or home value), have you changed your insurance too? If not, you could be carrying too much (too expensive) or too little (risky if you have to make a claim). Spring is a great time to take a quick look and make sure that your coverage is, as Goldilocks said, “just right.”

9. Clean house. You know those old household white elephants that have been around so long you don’t even see them anymore? Bad financial habits or outdated decisions are just like that. Lurking on the edge of your life, they take up space and resources without offering much in return. But spring is a great time to examine your financial “big picture” and clear out what isn’t working for you.

Look at the reasons behind your current financial situation, says Foreman. For instance, “is there a reason you’re always carrying $3,000 on your credit cards?” he asks. Or do you need to be a two-car family? And are those family cars you bought then the best ones to meet your needs now?

With this step, you might find that you want to cut spending, increase your income or some combination of the two.

The secret to getting the most out of this one: take off the blinders and really look at everything to find out what is (and isn’t) working for you financially.

10. Think about getting outside. Just as physical spring cleaning gives you a chance to bring the outside in and vice versa, financial spring cleaning has a fun side, too, says Foreman.

“Now’s a good time to start thinking, ‘What are you going to do for a vacation this year?’” he says. And from “stay-cations” to weekend and long-weekend getaways, there are plenty of economical alternatives to the old standard 14-day sojourn.

And a little advance planning can give you a financial advantage. Says Foreman, “You can get information on the Internet, send for a brochure,” and salt away a little money for whatever you choose.

By Dana Dratch

Published: March 24, 2010 on CreditCards.com

Tags: Credit Cards, Organization, Tips

01.Apr.10 Budgeting, Credit Card Debt, Organization, Taxes Comments (0)

What Records to Keep

Organizing your financial records can also give you a firmer grasp of your finances, so you have a better idea of what you can afford, says professional organizer Julie Morgenstern, author of “Organizing From the Inside Out.” Who knows? You may even end up with some extra cash. “About 70 percent of my clients find money,” Morgenstern says. “They’ll find checks that didn’t get deposited, bank accounts they forgot about or medical bills that they can file to get reimbursement from their insurance company.”

We talked to Morgenstern and other experts to get their top tips on which records to toss, which ones to keep and the best ways to store and organize it all.

Step 1: Toss what you can

A lot of what you’ve got stashed in those piles of paperwork and in your overflowing file cabinets can probably be pitched. Just make sure you protect your identity by shredding anything that contains more personal information than you can find in the phone book. Among the records you can purge:

Receipts. You can throw away receipts for most purchases pretty quickly, especially if you paid with cash. If you paid with a debit or credit card, keep those receipts in an envelope or on a receipt stand (basically, a nail on a base) until you’ve checked to make sure your bank or credit card statement is accurate. The only receipts you really need to keep longer are those for home improvements and major purchases (to get the warranty or prove their value in the event of loss or damage) and those you need for tax purposes. Of course, if there’s a chance you might want to bring back that expensive new coat or pair of shoes, you should hang onto to those receipts as well, at least until the return period is up.

Credit card statements. Most experts say you can toss monthly statements once you’ve checked them for accuracy, unless they’re your only record of a tax-related transaction. If you end up needing a statement for some reason, most banks archive them for you online.

Junk mail. Throw away investment and bank brochures you’ve already read, pre-approved credit offers and catalogs or magazines more than 3 months old. (If they’ve been around that long, you’re never going to read them.) Be ruthless when it comes to invitations to past events, offers you’re not ready to act on immediately and old greeting cards, unless they contain a special handwritten message.

Step 2: Sort and organize

Once you’ve purged, separate must-keep papers into three categories: those you need to keep for one calendar year, those you need to keep for a longer period and hard-to-replace documents like birth and marriage certificates. (See chart: What records to keep, how long to keep them.) Then decide on a home for each. “Just make your system as simple as possible so you actually use it,” says Brandi Kajino, a home office consultant in Vancouver, Wash. “You can have a beautiful filing cabinet but if it’s empty, that’s not helping you.”

Documents you’ll keep for a year. These records are best kept in a filing cabinet or box that’s easy to access, organizers say. Create folders with topics such as pay stubs, bank statements, utilities, phone and auto bills. This is also the place to keep tax-related receipts for business expenses and charitable contributions. If you hate filing or you’re short on space, try an accordion file or a set of stacked letter boxes, Kajino says.

Long-term storage. Most organizers recommend clearing out your files after you do your taxes and placing your return and other documents in a box or bin labeled with the year. To keep them safe and dry, choose a plastic container with a lid. Wondering how long to keep your returns? The IRS has three years to audit you if it discovers good-faith errors; six if you significantly under-reported your income. But many experts say if you have the space, the safest strategy is to keep them forever. “You just never know when you’re going to have to go back and prove something,” says Michael Tonkovic, a director in PricewaterhouseCoopers’ Washington National Tax Services group. “Let’s say you worked for a pizza parlor when you were in college and when it comes time for you to be paid Social Security, you don’t see those wages on your wage statement for Social Security. One way to prove that is if you kept that tax return and W2.” Another scenario: Your employer or tax accountant is being audited for fraud committed 10 years ago. (There’s no time limit if fraud is suspected.) Chances are, the IRS is going to want to see your returns as part of its investigation.

Vital documents. Records such as marriage and birth certificates, passports, Social Security cards, wills, death certificates and titles should be kept in a very safe place. Some experts say a safety deposit box is best, though it might be tough to access at odd hours, and if you die, the box may be sealed. Another good option: a fire and waterproof box or cabinet. Either way, make sure you keep copies of these documents in a separate location. Don’t forget to include a household inventory or video, and a list of all of your important accounts.

Step 3: Stay on top of it

Now that you’ve created a system, the key is to actually use it. Some tips:

Create a home financial center. Choose a single place where you will open bank statements, pay bills and file documents. Your computer, shredder and scanner should be nearby. The best location, says Morgenstern, is where papers naturally accumulate. “If your papers are all over the kitchen counter and your office is upstairs, you have to move your office to the kitchen,” she says. “You need to work where you gravitate because you’re never going to retrain yourself.” That may mean clearing out a cabinet or investing in a rolling file cart.

Plan for incoming paper. To prevent piles from forming again, have a plan for how you will handle mail as it comes in. Kajino recommends a few folders or letter boxes with labels such as “action” for papers you need act on, “data entry” for phone numbers or receipts and “read and review” for newsletters and articles you want to read.

Set home office hours. Whether you spend a little time each night or two hours every Saturday morning, pick a regular time to pay bills and file your financial statements, then put it on your calendar and stick to it. “It should be the same day and time of day every week,” Morgenstern says. “You can’t just do it when you’re in the mood or when you have spare time. Neither of those ever occurs.” Plan to invest a minimum of an hour a week.

Go digital. Check with your bank to set up online bill pay saving them there instead of in paper form. The IRS considers electronic documents to be as good as paper. Just make sure you encrypt the files and store backup copies on a USB flash drive, a CD, a DVD, a portable hard drive or with a Web-based storage service.

MD Tip: MoneyDesktop makes it easy for you to track spending, reconcile your bank statements and eliminate extraneous paper.

By Michelle Crouch, Via CreditCards.com
Published: March 15, 2010

22.Mar.10 Organization, Taxes Comments (0)