Monday, June 22, 2009
There are three main credit agencies that gather financial information on individuals and then make that information available to lenders to help them determine whether to make a loan to someone. The information they compile includes a great deal of basic data such as age, Social Security number, current and previous addresses, employers and marital status. They also get information on your borrowing history from places you have borrowed such as with credit card issuers, mortgage lenders and others. Your credit report probably includes all the credit relationships you have, date established, maximum allowed credit, current balances and payment history.
Indications of a solid credit history:
• Some, but not extensive borrowing.
• Prompt payment of monthly bills.
• Paying down balances over time.
• Steady employment.
Items that can hurt your credit report:
• Filing for bankruptcy.
• Too many credit cards.
• Too many applications for credit.
• Late payments.
• Increasing credit card balances.
• Several credit cards with balances close to their limits.
Lenders will use a credit report, along with evaluating your capacity to repay, your character and any collateral in making decisions to lend you money. Many lenders also take these same issues into account in deciding what interest rate to charge or type of loan to offer.
It is important to make sure your credit report is accurate and up to date. A federal law enables you to receive a free credit report once a year. You can get this free report by using the website – www.annualcreditreport.com. You can also get copies by calling the credit agencies, but there may be a small charge unless you have recently been denied credit.
• TransUnion – 800/888-4213
• Experian – 888/397-3742
• Equifax – 800/997-2493
If you see an error on the report, be sure to contact the credit agency in writing. Tell them of the error and ask that it be corrected. Negative information generally remains in your credit report for seven years and bankruptcies may remain for 10 years. However, most lenders pay particular attention to your most recent couple of years of activity.
Being aware of your credit report, making sure it is accurate, working to improve your credit characteristics, and understanding the importance of your report can all help you ensure that credit will be there when you need it.
Thursday, June 18, 2009
A downloadable spreadsheet that runs in MS Excel – functional and easy to use. It advertises being able to set up a budget in 10 minutes and maintain it with two 10-minute sessions a month. Creator Charlie Park originally built it for his own use, saying he couldn’t afford a commercial program (like MS Money or Intuit’s Quicken). Download at pearbudget.com.
A downloadable, Windows-based program, SimpleD Budget was created by programmer Soichi Hayashi for his wife. It has charts and visual aids to see where you’re at on expenses and income versus the amount you’ve budgeted. When setting up the program it offers templates for various stages of life (college student, parent, etc) that provide different categories for expenses. Download at dsbudget.sourceforge.net.
A web-based budget tool, My Spending Plan can be managed by different people at different locations. Offered by the American Homeownership Association, it offers more than just budgeting; you can also set up reminders about bills. However, the site includes commercial promotions, and because it is online, it operates slower than the downloadable programs. Also, the tool is in the beta stage, so it’s a work in progress. Sign up at myspendingplan.com.
Microsoft Office Personal Budget Template
A downloadable spreadsheet that runs in MS Excel – a very basic budget, so it’s very easy to use. Microsoft offers several choices. The simplest is the ‘personal budget’ in which you can track expenses and income for a year on one page, but there is also a personal monthly budget (which provides detail for one month only, not a year), a family monthly budget, and a number of other budgets for things such as job expenses, events, a garden, a wedding, and marketing. There’s also a personal financial statement (which is a good idea to have so you can track your net worth). Download at office.microsoft.com/. Search for ‘personal budget.’
It’s worthwhile to take a look at them all – it may be helpful to build a budget using the categories of one system, then use, for example, SimpleD to track the spending.
Of course, there are other, less technology heavy systems. A spiral notebook and a pen and calculator are one. The envelope method is another. The envelope method goes like this: get a separate envelope for different household expenses such as housing, food, travel, etc., allocate expenses to the different categories according to your income, put the allocated money in its respective envelope, and then use the money from a particular envelope to pay the corresponding bills. The envelope system was designed for cash – actual money would go in the envelope. But you could modify the system so that you just write the amount of money assigned to each category (envelope) on the outside, then subtract that money from the balance. Then when you get to zero, you’d have to quit spending in that category or 'move' money from another envelope.
Wednesday, June 10, 2009
Tools for Saving
The simplest way to begin earning money on your savings is to open a savings account at a financial institution. You can take advantage of compound interest, with no risk.
Financial institutions offer a variety of savings accounts, each of which pays a different interest rate. You can choose to use these typical accounts to save for the near future or for years down the road.
Types of Savings Accounts
Savings account (in general)
- Access your money at any time
- Earn interest
- Move money easily from one account to another.
- Have your savings insured by the FDIC or NCUA up to $250,000.
Money market savings account
- Earn interest.
- Pay no fees if you maintain a minimum balance.
- May offer check-writing services.
- Have your savings insured by the FDIC or NCUA up to $250,000
Certificate of deposit (CD)
- Earn interest during the term (three months, six months, etc.).
- Must leave the deposit in the account for the entire term to avoid an early-withdrawal penalty
- Receive the principal and interest at the end of the term.
- Have your savings insured by the FDIC or NCUA up to $250,000.
Tools for Investing
Investing is not a get-rich-quick scheme. Smart investors take a long-term view, putting money into investments regularly and keeping it invested for five, 10, 15, 20 or more years.
Stocks—Owning Part of a Company
Stocks. Shares of stock may be acquired on an organized exchange such as the Nasdaq or New York Stock Exchange, through a stock-broker, over the counter or by direct purchase in some cases. When you buy stock, you become a part owner of the company and are known as a stockholder, or shareholder. Stockholders can make money in two ways—receiving dividend payments and selling stock that has appreciated. A dividend is an income distribution by a corporation to its shareholders, usually made quarterly. Stock appreciation is an increase in the value of stock in the company, generally based on its ability to make money and pay a dividend. However, if the company doesn't perform as expected, the stock's value may go down.
There is no guarantee you will make money as a stockholder. In purchasing shares of stock, you take a risk on the company making a profit and paying a dividend or seeing the value of its stock go up. Before investing in a company, learn about its past financial performance, management, products and how the stock has been valued in the past. Learn what the experts say about the company and the relationship of its financial performance and stock price. Successful investors are well informed.
Stock options. Some companies offer employees stock options, which they can use to buy stock in the company at a fixed price. For example, your employer, Wally's Widgets, offers a stock-option plan, and its stock is valued at $30 a share. The stock-option price is set at $40 a share. As part of your compensation for meeting company goals and contributing to increased profits, you receive options to purchase 100 shares. Over time the value of the Wally's Widgets shares appreciates to $50 a share. You may now want to exercise your stock options and purchase the shares valued at $50 for $40.
Bonds—Lending Your Money
Bonds. When you buy bonds, you are lending money to a federal or state agency, municipality or other issuer, such as a corporation. A bond is like an IOU. The issuer promises to pay a stated rate of interest during the life of the bond and repay the entire face value when the bond comes due, or reaches maturity. The interest a bond pays is based primarily on the credit quality of the issuer and current interest rates. Firms like Moody's Investor Service and Standard & Poor's rate bonds. With corporate bonds, the company's bond rating is based on its financial picture. The rating for municipal bonds is based on the creditworthiness of the governmental or other public entity that issues it. Issuers with the greatest likelihood of paying back the money have the highest ratings, and their bonds will pay an investor a lower interest rate. Remember, the lower the risk, the lower the expected return.
A bond may be sold at face value (called par) or at a premium or discount. For example, when prevailing interest rates are lower than the bond's stated rate, the selling price of the bond rises above its face value. It is sold at a premium. Conversely, when prevailing interest rates are higher than the bond's stated rate, the selling price of the bond is discounted below face value. When bonds are purchased, they may be held to maturity or traded.
Treasury bonds, bills and notes. The bonds the U.S. Treasury issues are sold to pay for an array of government activities and are backed by the full faith and credit of the federal government. Treasury bonds are securities with terms of more than 10 years. Interest is paid semiannually. The U.S. government also issues securities known as Treasury bills and notes. Treasury bills are short-term securities with maturities of three months, six months or one year. They are sold at a discount from their face value, and the difference between the cost and what you are paid at maturity is the interest you earn. Treasury notes are interest-bearing securities with maturities ranging from two to 10 years. Interest payments are made every six months. Inflation-indexed securities offer investors a chance to buy a security that keeps pace with inflation. Interest is paid on the inflation-adjusted principal.
Bonds, bills and notes are sold in increments of $1,000.
Savings bonds. U.S. savings bonds are government-issued and government-backed. There are different types of savings bonds, each with slightly different features and advantages. Series I bonds are indexed for inflation. The earnings rate on this type of bond combines a fixed rate of return with the annualized rate of inflation. Savings bonds can be purchased in denominations ranging from $50 to $10,000.
Some government-issued bonds offer special tax advantages. There is no state or local income tax on the interest earned from Treasury and savings bonds. And in most cases, interest earned from municipal bonds is exempt from federal and state income tax. Typically, higher income investors buy these bonds for their tax benefits.
Mutual Funds—Investing in Many Companies
Mutual funds are established to invest many people's money in many firms. When you buy mutual fund shares, you become a shareholder of a fund that has invested in many other companies. By diversifying, a mutual fund spreads risk across numerous companies rather than relying on just one to perform well. Mutual funds have varying degrees of risk. They also have costs associated with owning them, such as management fees, that will vary depending on the type of investments the fund makes.
Before investing in a mutual fund, learn about its past performance, the companies it invests in, how it is managed and the fees investors are charged. Learn what the experts say about the fund and its competitors.
Remember, when investing in stocks, bonds and mutual funds:
- Find good information to help you make informed decisions.
- Make sure you know and understand all the costs associated with buying, selling and managing your investments.
- Beware of investments that seem too good to be true; they probably are
How Much Extra Savings Is a Tax-Deferred Investment Worth?
If you pay taxes, which most of us do, a tax-deferred investment will be worth the amount you invest multiplied by the tax rate you pay. For example, if your federal tax rate is 15 percent and you invest $3,000 in an IRA, you'll save $450 in taxes. So in effect, you will have spent only $2,550 for a $3,000 investment on which you will earn money. A good wealth-creation plan maximizes tax-deferred investments.
Monday, June 1, 2009
Bob is 35 and works for a manufacturing company. He looked at his finances and realized that at the rate he was going, there wouldn't be enough money to meet his family's financial goals. So he chose to embark on a personal wealth-creation strategy. Bob began by learning the language of wealth creation to understand the meaning of assets, liabilities and net worth. They make up this very important formula: Assets – Liabilities = Net Worth.
A wealth-creating asset is a possession that generally increases in value or provides a return such as a savings account, retirement plan, stocks, bonds, or a house. Some possessions like a car, TV, boat or clothes are assets but they do not create wealth because they don’t earn interest or rise in value.
A liability, also called debt, is money you owe such as a home mortgage, credit card balances, car loan, hospital and other medical bills.
Net worth is the difference between your assets and liabilities. Your net worth is your wealth!
Most people who have built wealth didn't do so overnight. They got wealthy by setting goals and striving to reach them. Bob set two short-term goals: (1) to save and invest enough in four years to have $6,000 for a down payment on a house, and (2) to pay off his $3,000 credit card debt within two years. Bob also set two long-term goals: (1) to save and invest enough to have $25,000 in 15 years for his children's college education, and (2) to have $5,000 a month to live on when he retires in 30 years.
A personal wealth-creation strategy is based on specific goals that are realistic and have time frames (like Wyoming Saves).
Develop a Budget and Live by It
When it comes to finances, people generally fall into the following groups. Where do you fit in?
Planners control their financial affairs. They budget to save.
Strugglers have trouble keeping their heads above rough financial waters. They find it difficult to budget to save.
Deniers refuse to see that they're in financial trouble. So they don't see a need to budget to save.
Impulsives seek immediate gratification. They spend today and let tomorrow take care of itself. They couldn't care less about budgeting to save.
Knowing what kind of financial manager you are will help determine what changes to make. To maximize your wealth-creating ability, you want to be a planner, like Betty.
Betty is a single parent with one child. "I have to budget in order to live on my modest income. I have a little notebook I use to track where every dime goes. Saving is very important to me. When my son was born, I started investing every month in a mutual fund for his college education. I am proud to say that I control my future. I have bought my own home and provided for my son, and I've never bounced a check. You must have common sense regarding money!"
Lynne, by contrast, is a struggler. Lynne has a good job, makes good money and lives a pretty comfortable life, but her bankbook tells a different story. She has no savings or investments, owns no property and has no plans for retirement. Plus, she's got a lot of credit card debt, lives from paycheck to paycheck and doesn't budget.
You can choose to be like Lynne, or you can follow Betty's road to wealth creation by learning to budget and save.
A budget allows you to:
- Understand where your money goes.
- Ensure you don't spend more than you make.
- Find uses for your money that will increase your wealth.
- Calculate your monthly income.
- Track your daily expenses.
- Determine how much you spend on monthly bills.