Monthly Archives: April 2016

Ten Financial Tips You Want Your Kids to Know

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Most people learn about finance the hard way through mistakes made from practical experience.  People usually aren’t taught about personal finance in school.  Moreover, parents don’t teach their children the basics either because they don’t understand it themselves, or they don’t take the time to it. So, most of us learn about money as we go through life.  We make purchases, go into debt, and end up with a meager retirement account.  CNN Money reports that 43% of workers surveyed in 2010 said that they have less than $10,000 saved for retirement.  Even with full Social Security benefits, these people will be hard pressed to maintain their pre-retirement lifestyle.  What if they had made better financial decisions earlier in their life?  Perhaps if they were told about some basic financial principles they would be in a better position?  Here are ten basic financial principles that your kids should know to avoid making simple mistakes:

Don’t spend beyond your means.  This is such a basic principle that it would not seem to be worth mentioning; however, it is the key principle to financial success.  Most financial advisors will tell you to pay yourself first by saving 6-10% of your income.  You can only do that if you spend less than you make. So the first and perhaps most important rule of financial success is not to spend beyond your means.

Save for a rainy day.  As soon as you start working, open a savings account as an emergency fund, a rainy day fund.  A rule of thumb is to have a reserve equivalent to six month’s salary in case you are out of work.  If you have an emergency like a major car repair or medical bill, you will need to replenish the fund if you pay your bills using your emergency savings account.

Pay off credit cards monthly.  It is good to have one or two credit cards so that you can establish a credit history; however, make sure to pay off the balance on or before the due date.  Credit card companies charge excessively high interest rates and fees.  If you pay your balance in full, you get to use their money without interest; however, if you are late or make a partial payment you will pay finance charges that are easily avoided.  Also, don’t take a cash advance unless it is for an emergency.  Again, they will charge you cash advance fees and if you don’t pay it off within their promotional period, they will also charge higher finance charges which makes this very expensive.

Open an IRA when you are young and make the maximum annual contribution. The time value of money works wonders when you invest over a long time horizon, bur you must start when you are young.  People who start investing in their early twenties will far outpace those who begin in their thirties or forties.  Those who start late will never catch up because they don’t benefit from the compounding effect on their investment which is also leveraged inside of a tax-deferred account like an IRA.

Fully participate in your company 401k.  If you work for a company that offers a 401k plan, make sure to participate fully, or a least to the level of the company match.  If the company has a matching grant, that is like free money.  It will quickly add to your nest egg, but you must invest or they won’t match it.  Also, just like an IRA, a 401k account is tax advantaged, so the compounding effect will be multiplied as a tax-deferred investment – meaning that you won’t pay any taxes until you withdraw the money in retirement.  Also, only borrow against your 401k plan or withdraw funds if it is an extreme emergency.  You must protect your 401k plan as a retirement plan.  If you leave your employer then roll it over into a self-directed retirement plan, but do not take the money out early to avoid penalties.  Keep your 401k for your retirement.

Buy some universal life insurance in your 20’s.  Universal life insurance is a combination policy that offers both a term life insurance plan and the benefit of a tax deferred savings account inside of the policy.  Everyone will need some life insurance, especially if they are married and have children.  Buying life insurance when you  are young, can reduce the cost of the premium investment and allow the cash value to build up in the account.  If you die unexpectedly, the proceeds will protect your family or pay for your children’s education.  If you live into retirement, you can convert the policy to an annuity to supplement your income.

Buy a house when you can afford one.  Real estate is one of the best investments over a long time horizon, even though the value of real estate has declined during the recession of 2008. Over thirty years, you will likely have an excellent return on your investment in your home, and if you have a mortgage, the interest is tax deductible from your income taxes.   When you buy a home, make sure you work with an experienced Realtor to help with the details and to advise you on making an offer.  If you don’t overpay or borrow more than you can easily afford, then a home in a nice neighborhood is a great investment in addition to a nice place to live and raise a family.

Always make sure you have health insurance.  One of the primary reasons that people go into bankruptcy is because of excessive medical expenses.  The best way to safeguard yourself is to make sure that you have health insurance for you and your family.  Hopefully, your employer will offer a good policy; however, if you are self-employed or working for an employer who doesn’t offer insurance, be sure to obtain an individual policy.  You can not risk being uninsured because the consequences are too great.

Buy good used cars.   Cars are not a good investment, but are necessary for transportation.  If you buy a late-model used car with low mileage, you will have reliable transportation, and avoid the lion’s share of the depreciation loss of a new car which happens right after you drive away from the dealer.  While many people will want the luxury of a new car, you will be far ahead in retirement if you buy good quality used cars and invest the savings in your IRA or 401k.

Get a high-deductible collision policy for your car ($500).   A $500 deductible policy is a good way for most people to balance the cost of insurance and the risk of a collision.  If you are a good driver, you will save enough on lower premiums to self-insure the higher deductible amount.   Save the difference between the cost of a high and low-deductible policy in your rainy day account so it will be there in the event of an accident.

7 Tips on Financial Planning for the Family

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Effective family financial planning is essential to have so that we do not have problems later in life or in times when our financial need exists due to certain reasons. The steps in effective financial planning can be broken into;

1. Incoming and Outgoing Expenses

We will find the financial affairs of the family becomes much easier if we can manage all the income sources and expenses in the family. For example, we need to know how many family members that are on a monthly salary, the overall family expenses ranging from mortgage and car payments, water bills, electricity, telephone, and children’s school expenses.

2. Provide Family Financial Goals

One of the most important measures to move towards financial stability is to determine our needs. In this regard, it will be helpful to determine exactly what we need in life as individuals, couple and families. These financial goals may require short-term and long term goals. However, these goals must be something in the range that we can afford, for example something that we possess within the time frame we have set.

3. Prepare Budget and Estimate Cash Flow

In reality, financial planning becomes more difficult to manage if we do not know how much income we receive each month and what we are actually spending. This information should be provided first, if we want to determine whether we have to increase our revenue or reduce expenses to achieve the financial goal that we have set. Once we list down all the income and expenditure, we can start preparing the budget and see if we have surplus funds that can contribute to our goal.

4. Dividing Income by Priority

The monthly income of an average, happy family should be spent according to priorities in which the family can live in peace and comfort. Normally, expenses for basic needs like food, beverages and clothing require 1/3 of the total monthly family income, another 1/3 for bills and gas while 1/3 more should go to savings or investments for the future.

5. Reduce Dependence on Credit Card Use

In today’s economy, the use of credit card has become a necessity for everyone especially for working adults. If credit card is used wisely, it can be very convenient to the users. However, if it is used without control, it can be a dangerous financial instrument and can lead a consumer into bankruptcy due to the high interest rates charged by the bank..

6. Make Assumptions about the Future

Change is something that presses us out of our comfort zone. As the world changes, so does the economy. When the economy changes, it can affect our finances. All these changes are difficult to avoid. Therefore, we must not only be prepared for a change but to make plans how to deal with it. For example, how to deal with the effects of inflation, rising oil prices, freight vehicle and the increase in toll charges. All these will certainly affect our financial situation.

7. Financial Strategy

For every financial goal that we prepare, we must have a strategy on how to achieve those goals. For example, if we intend to buy a house a year from now, we need to know how much we should provide as a down payment and what resources we can use.

Helpful Financial Tips for New Parents

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It is the most exciting time in your life when you have a new child in the family. This time is also the start of an expensive journey. You can easily spend $250,000 or more raising your child until they turn 18. You need to make smart financial choices from the very beginning to ensure financial stability for your family.

Create a Budget

You need to create a household budget. Before your baby is born, determine how much you will need to spend each month on diapers, baby food and related expenses. Add a few extra dollars each month to your estimate since babies have a lot of needs. Include your estimated expenses into your budget.

As you are creating your budget, determine if there are any expenses you can cut out. Perhaps you can give up that daily coffee or settle for a cell phone plan with less frills. Now is the time to cut down on some of your unnecessary expenses. Once you create your budget, do everything you can to stick with it!

Pay Down on Debt

If you are planning to start a family in the near future, you should start to pay down on some of your debt. Work hard to pay down on your (or your spouse’s) student loan debts. Try to pay off credit cards and other revolving debt. If you have already started your new family, pay more than the minimum payments on this type of debt (add these payments to your budget to help ensure they can be afforded).

Plan for the Future

You are probably not thinking about retirement when you are just starting out in life. It is the last thing on your mind when you have a new baby in the family. However, you should not neglect your retirement fund. It is important to still work to place at least 1/10 of your income in your retirement fund.

Open a college account for your child. It is never to early to start saving money for college. Shop around for college account options in your state that provide you with tax saving benefits. Consider asking relatives and friends to make contributions to your child’s college fund rather than buying them gifts.

Buy Insurance

It is important for you and your spouse to have life insurance. This is not something you want to think about when you are starting a new family, but you should. You will want to make sure that your spouse and children would be in a good position if something where to happen to you. It is also a good idea for you both to purchase disability insurance in case someone becomes sick or injured and is not able to work for a while.

Plan to live within your means

Plan to always live within your means. Do not buy your child the most expensive toys and baby items. Chances are that they will do just fine with moderately priced items. Do not take your family on vacation if it is something you really cannot afford. Wait to buy your dream house until you are in the most ideal position. Do not buy a house or a car if you will be stretching your paycheck to the limit to keep up with those payments.

Financial Tips Before Divorce

Divorce is not a fun process, but sometimes a necessary one. To some, thinking of money concerns after divorce are obvious, to others a small worry, and to many not even considered. This article can help you plan financially before your divorce begins.

Before Divorce
Unfortunately, though it’s legally required, child support is paid about half the time, and half of that is full payment. You or your spouse need to understand the children come first, no matter the reasons for the divorce. If you have custody of the children, come to an agreement with your spouse. If you are paying the child support, make sure it’s paid in full.

Now, before you start breaking away from your spouse, you should also be aware of your property rights. Just like child support, it’s not always considered. If you ignore the division of property, it can cost you a lot of money and assets you have rights to. Because state laws are different on how to handle the division of property, you should contact an attorney.

Here’s another important financial tip: you have more than property – you also have credit cards and bank accounts. Close all your joint accounts, get your own checking account, and also get your own credit cards. While it doesn’t always happen, it can be a nightmare if your spouse charges up your joint accounts. In order to be sure you find them all – as you might have other accounts such as store credit cards – you can get your credit report.

What assets do you have?
Also be aware of all your assets. This includes your house, properties, and cars, but also retirement packages, stocks, tax refunds, loans, artwork, and many other items you bought together.

Hiring a Divorce Lawyer
While your divorce lawyer is essential in making sure your rights are protected, you may also want to hire a financial planner to go over all your assets and incomes. Sometimes you may even want to get a mediator instead of going to divorce court and fighting it out. If you go to court with many disagreements with your spouse, it can cost you plenty of money, not to mention create some headaches.

Be Ready
It’s a misconception often that the wife always gets the kids, or that the husband will make more money. These are slowly changing. However, it’s not uncommon for one spouse to manage most of the finances, if not be the only one who works full-time. You should protect yourself in either case, making sure your agreements for property, bank accounts, and credit lines are changed. You need to protect yourself from your spouse’s debts and hurting your own credit report.