Thursday, February 25, 2010

Personal Finance a comprehensive approach

The health of your credit score is incredibly important to your finances for a number of reasons. To begin with good credit scores are exactly what banks are looking for when deciding whether or not they will lend you money. More often than not insurance brokers or landlords often look into your credit when determining whether or not to choose you as a potential client or possible tenant. This article will describe to you a number of ways of improving your credit score and will assist with your personal finance basics.

With all of the recent doom and gloom in the financial markets, it’s easy to get discouraged about your own financial situation. But here’s some good news for a change. While personal finance may seem complicated, it really boils down to 4 good habits that can make the difference between going broke or building up your net worth each month

Save money, Avoid Debt, Invest and Don't lose it Here's an edited version of a Mint article on 12 ways to improving your financial fitness

Just as with achieving a balanced diet or maintaining a regular exercise regimen, getting your financial house in order is easier said than done. What’s that they say about the best laid plans?

Know what you spend

The first step to growing your money is knowing your money. Just by seeing that you spent $432 one month dining out with your friends, or that you went to Starbucks 37 times, you’ll change your spending habits for the better.

Stick to a budget

Most of us really only have 1-2 “problem” areas. Maybe it’s shopping, maybe its electronics. Once you know how much you typically spend, set a budget 15-25% lower. If you try to cut too hard too fast, you’ll never be able to stick to it.

Find a checking account that pays interest

“Free” checking isn’t exactly free. Sure you get free checks and no account fees, but most checking accounts pay no interest - zero, nothing. Meanwhile, the banks are loaning your money out in the form of mortgages or business loans at 7-8% interest. That’s how banks work. If you don’t have a checking account that pays interest, you’re being ripped off. Consider switching your account to one of the many that allow your money to work for you such as an E*Trade Max-Rate Checking Account (2.9% APY on accounts over $5K) or an HSBC Online Payment Account (2.25% APY, open an account with as little as $1).

Find a savings account that pays 3%+ interest

The average US savings account only pays about 0.5% interest. With inflation at 2-3%, you’re actually losing purchasing power each year. Find a high-yield savings account, money market fund, or CD that pays more such as WaMu Free Checking and Savings (3.75% APY, open with WaMu Free Checking) or E*Trade Max-Rate Savings (3.3% APY, open with as little as $1).

Pay Your Bills On Time

The reason why this is first on my list is because this is likely the most important rule to follow when trying to boost your credit score. If you visit a bank and want to apply for a home mortgage the first thing the bank will search for is if you regularly make bill payments when they are due. These bills include everything from your cable, home or cell phone, credit card or any other types of bills. Your credit score will directly reflect if you pay for, miss or are late on your bills. If they discover that you always miss or are late for payments, there is a good chance they will not approve you for the loan.

Helpful advice so you will make every bill payment:

-Create a new checking account and allocate enough cash at the beginning of each month for your bills so you always have enough.

-Create automated email reminders a few days prior to when your bills are due.

-Create automatic payments through your online banking.

-Keep a written calendar of when each bill is due. Update and check it regularly.

-Purchase everything possible with cash. Not having a credit card means one less bill to forget.

Never Let Bills Go To Collections

This may seem very simple but these collection agency's exist because thousands of people allow their unpaid bills to go this far. You can't forget about your bills. Your bills won't just disappear. If just one of your unpaid bills go to collections you will have to pay surcharges, major interest and your credit rating will be tarnished.

Keep Credit Card Balances Low

The most simple of personal finance basics is if you must use a credit card, keep the balance at zero or as low as possible. The less of your available credit you use the better. The number that most reflects your credit score the most recent balance on your statement. Even if you pay your bill in full every month you should never exceed more than 30% of your available credit. The less you use the better.

Use Old Your Credit Cards

This may seem a bit odd but try not to switch from one credit card company to the next. If you jump around and continually open and close credit cards your credit score can be adversely affected. If you can use the credit card you got when you were 20 and stay with it. If you primarily use a different credit card, attempt to keep your old

Avoid debt

Know your credit score and correct your credit report

Your credit score determines the interest rate lenders will charge on your credit cards, mortgage, student loan, or car loan. That means any mistakes in your credit report can cost you tens of thousands of dollars over your lifetime. Unfortunately, 79% of all credit reports have an error, and 25% have an error serious enough to deny you access to credit.

Eliminate late fees

About 35% of your credit score is determined by on-time payment. If you’re late on a credit card payment, it could cost you much, much more than the $29 late fee - if you let it go more than 60 days, it can affect your credit score and cost you thousands.

Don’t pay credit card finance charges

The average American carries $8,500 in credit card debt. At a minimum payment of $100 a month, it takes 6.7 years, and $4,257 in extra finance charges before you’re in the clear. If you carry a balance, one way to get some temporary relief is through a balance transfer. The best way out of this quagmire is to pay down your highest interest card first, or look for a balance transfer card such as the Citi® Diamond Preferred® Card (0% Balance Transfer APR for up to 12 months, no annual fee, 3% transfer fee) or the Chase Platinum Visa® Card (0% Balance Transfer APR for up to 12 months, no annual fee, 3% transfer fee but no more than $99).

Get a credit card that pays you

Visa and MasterCard typically charge retailers 2-3% of each purchase you make. As a consumer, you can get a cut of those fees in the form of cash back rewards. Don’t settle for a card that pays less than 1%. A typical household can get as much as $300 a year back just for buying what it was going to buy anyway.


Contribute to an IRA or 401k

Invest $100 a month in a tax-deferred account like an IRA or 401k, and at a growth rate of 10%, in 30 years you’d have $380k. In a regular taxable account (assuming 20% annual taxes), you’d only have $229k. That’s a $151k difference.

Start investing and keep investing

Two simple steps can put you ahead of 99% of your peers. First, have your employer automatically deduct from your paycheck to mutual fund account. Second, grow that money in an index fund.

Don’t lose it

Create an Emergency Fund

An emergency fund helps protect you against all of life’s ups and downs, whether they be car repairs, job loss, or a leaky roof. If you’re young, single and have no mortgage, strive for about 3 months expenses, or ballpark around $10,000. If you have a house, kids, or both, strive for 6 months

expenses, or around $20,000 - $30,000 for the average family. Be sure to keep your emergency fund in a high-yield savings account so that it continues to grow.

Protect yourself with insurance

The right insurance depends greatly on your age and whether you have a family. If you’re in your 20’s, you need renter’s insurance - it’s typically around $150 a year and covers theft and fire. If you have a family, you need life insurance, health insurance, and disability insurance.

Do you have a retirement plan?

At work, you probably have the opportunity to do some ‘forced saving’ via provident fund deduction. The ones in the public sector have are guaranteed to some pension amount. “Planning for a comfortable retirement is a must. Both private and public sector employees have to fix a post-retirement monthly expense and see how to get there. When you start a New Year, check whether you can add some more money to the retirement plan. Open a public provident fund and start by earmarking as much as Rs 500 per month,” said Swapan Das, a certified financial planner.

For those who don’t have a retirement plan yet, computing the amount to be required after retirement is a starting point. After considering inflation, one can build your retirement corpus using systematic investment plans (SIPs) and other long-term growth-oriented products, according to Bajaj Capital.

It is important to also ensure adequate post-retirement income is through safe investments.

Reviewing your insurance needs

Reviewing ones’ life insurance and disability insurance needs is very important. As one moves through his/her career, life and disability insurance needs continue to change. “Give some thought as to how much protection you really need and compare it with the coverage you now get through your employer’s benefit package.

It needn’t always be more. Consider whether you need less life insurance, and whether your needs would be better satisfied by term or life insurance. Do not forget to review your disability insurance coverage,” said Rakesh Jha, director of MoneyTime Advisors.

How to reduce your debt burden?

The next thing one can do is to update debt reduction goals. Most of us have some sort of a debt: marriage debt, personal loans, car loans or home loans. A simple trick like saving Rs 800 in a recurring deposit account can fetch you around

Rs 10,000 at the end of the year. If you can control the temptation of spending the Rs 10,000, you can easily pay off a portion of some debt. “Take a few minutes now to set new savings goals for 2010. Reset how much you plan to pay on your personal loans, debts and home mortgage accounts. Can you repay a portion of the principal? That will help you reduce interest as well as the repayment period. If you have some money at your disposal, talk to your financial adviser to decide whether paying some extra EMI on your home loan or adding that money to your retirement corpus is more suitable,” said Anil Rego, chief executive officer of South India-based wealth advisory firm Right Horizons.

Too many plans can spoil it all

Avoid making too many resolutions. Resolutions are meant to be kept and too many of them may confuse. “One has to be cautious about setting unrealistic financial goals. Take this opportunity to restate your financial resolutions clearly for the New Year. Maintain a checklist to keep track of how you are doing throughout the year. Don’t make too many resolutions. If credit card debt is eating into your income for some time now, no point saving money via mutual funds. First, look at how you can lighten the credit card debt,” said Srikanth Meenakshi, director at Chennai-based Wealth India Financial Services.

To sum up

1) Find out where your money is really going – While this seems basic, it is the cornerstone to much of the advice from professional financial advisors and is the activity that can jumpstart sound spending habits.

Result – Increased awareness about your spending decisions

2) Identify and change at least one reckless spending habit – Most of us know it’s not easy to change behavior – especially ones that provide instant gratification like those daily $4 lattes. But by eliminating or replacing just one –you can save a substantial amount of money.

Result – Better control, understand, and curb impulsive purchases.

3) Pay your bills online – With multiple bills to pay, at different times during the month, it’s hard to keep up. By scheduling payments online, bills get paid in a timely manner and without having to write out individual checks or getting dinged with late fees.

Result – Spend less time paying bills and more time doing things that are important to you.

4) Set up an emergency fund – Sock away money every month to ensure that you are financially prepared in case the unexpected happens. Even a small amount each month can add up to a lot over time.

Result – Peace of mind knowing that you and your loved ones are prepared.

5) Use personal finance software – Using a program like Quicken enables you to see all your finances in one place and truly gain control over your spending habits. You can view and manage multiple accounts, pay bills, prepare for taxes and more.

Result – Organize your life and control your financial well being.

6) Create a budget – Create expense categories that reflect where your money is going, (e.g, rent, groceries, entertainment). Then determine where you can spend less per category – so that you can put that money into savings or investments.

Result – Get out of debt, stay out of debt and start planning for the future.

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