September 10th, 2008 — Banking, Money, Personal Finance, credit cards
Hidden fees are nasty little critters that can eat away at your credit card balances, or your checking accounts and you may never be the wiser. If you are stuck wondering where it all goes at the end of the money, it’s time to do some investigating to find out whether or not you are being victimized by hidden fees.
Start with your credit cards, since these are usually the worst offenders. Go through your statement carefully and look for items like credit card insurance, special monthly fees or annual fees. These can easily add up to $250 or more a year, and you may not even realize it. For example, an insurance policy on a credit card typically costs $1.50 per $1000. If you have a $10,000 balance, this means an extra $15 a month. Add that into a monthly fee of $30, and you’re already at $45, and you haven’t actually purchased anything.
Look for a credit card that has no annual fee, and no hidden charges. Transfer your balances over to that card and you could save more than $1000 a year, depending on how many cards you have and the kind of fees that you are paying.
Another big offender is the recurring charge that some services levy against you. Remember that free trial you got a few months ago? The one that would change to $9.95 a month unless you canceled? These services are betting the bank that you won’t remember to call it off, and that you’ll likely forget to do that every month. Before long, you’ve paid out $120 a year.
Go through your checking account statements and your credit card statements and look for these fees. If you’re not actively using the service, take the steps to cancel it. A few of these can really add up over time and you may never even know where the money is going.
Your bank can also be to blame for service fees. Even “free” checking may have a monthly fee that is automatically taken out of your account. Again, go through those statements and look for these fees. If you find them, consider switching to a bank that does not charge high fees, or look for a new checking account that will cost less each month.
Last but not least, if you have a cellphone, chances are you are paying way to much and getting saddled with extra fees. There are per-text-message fees, extra fees for 911 service and a variety of little add-ons. In fact, cellphone companies make an extra $1 billion every single year from these hidden charges. The best answer is to switch to a prepaid plan, but if you want to keep your service, make sure that you are aware of these little fees and budget them in.
Hidden fees are sneaky, but if you take the time to go over your statements you can avoid them. Always read them each month and don’t be afraid to contest a fee that you feel is unfair.
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September 3rd, 2008 — Financial Security, Long Term, Money, Personal Finance, Standard of Living
The news is full of heartbreaking stories about people losing their homes, going bankrupt and facing financial ruin. If you don’t want to be among them, it is time to take a hard look at some steps that you can take to insure yourself against financial ruin. One of the best things that anyone can have is an emergency fund.
Whether you miss a few days at work, lose your job or have an emergency that requires a lot of money, having an emergency fund is a lifesaver. While you can use a credit card as an emergency fund, we generally don’t recommend this, due to high interest rates. That doesn’t mean you should bury your fund in the backyard, but you may want to consider placing it in an interest bearing account to further increase what you have saved.
An emergency fund is not a savings account per se, but rather a fund that you can pull from when things get bad. You don’t need to have $10k socked away, but a few hundred can’t hurt. Here’s an easy guide to help you decide how much money you should have in your emergency fund: Monthly Salary x 3 or Health Insurance Deductible
This means putting aside the equivalent of three months pay. Six is best, but three is attainable by most people. Let’s take a look at a few ways that this kind of emergency fund can come to the rescue:
1. You lose your job.
Unless you qualify for unemployment, this situation is usually pretty dire. If you are in a field where there are not a lot of openings, it can be even worse. If you had an emergency fund with three months of your old salary put away, this would give you breathing room to spend three months looking for a job without feeling any monetary pinch.
2. Your car breaks down.
Let’s say your transmission decides to fall out tomorrow. Could you pay for a full replacement? If not, then an emergency fund is very important. You can use it for just about anything, but auto repairs are one of the most common reasons people use their emergency stash of funds.
3. Your mortgage payment goes up.
If you suddenly switched to a variable rate mortgage, your monthly payments are going to go up. Most have reported anywhere from $20 to $300 a month if not more. That emergency fund will come in handy in bridging the gap until you can either refinance at a lower rate or find a way to make ends meet.
4. You have a health emergency.
Even if you have health insurance – do you have enough money put aside to make the deductible? A lot of people have fallen into the trap of getting a $2500 or even a $10k deductible to make their monthly payments lower. This means that if you had an appendicitis attack today, you’d have to come up with that much money before your insurance takes effect. With an emergency fund, it’s no big deal to make that deductible and get the treatment you need.
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July 21st, 2008 — Budget, Money, Personal Finance, Standard of Living
Right now, it has never been more important to manage your bills and get your finances under control. The economy is going through a particularly rough patch, food and gas prices are going up and it can be pretty hard to make your paycheck stretch each month. If you’re finding it difficult to keep up, now is the time to start making some changes before you get in over your head.
Most people really don’t realize how much they spend every single month. The vast majority of Americans do spend more than they make, and many of these expenditures are for non-essentials. There is one very important thing that everyone should do to determine whether or not they over spending. For a period of one month, keep a log of absolutely everything you buy or pay, from that pack of gum to the bills you pay.
At the end of the month, add up everything to see just how much you spent. Chances are you may be pretty surprised at just how much is going out the door. If you are spending more than you are making, or if you are not putting anything in a savings account or investments, you need to figure out how to cut some of your costs.
Go through your month’s log and split everything up into two columns. The first column should be your essentials, such as rent, utilities, car payment, insurance, phone and groceries - but not eating out. Total all of this column to see how much you have to spend every month.
Now put everything else in the second column and total this one up as well. This will be the amount where you can start cutting some expenses. Go through the list one more time and check off the things you don’t think that you can do without. Put these in a third column. Everything else should be examined in that second column and reevaluated. For example, if you are spending $100 every month eating out, you can easily cut this in half and put $50 aside.
All of these little expenses add up quickly and before long, we’re overspending without even realizing it. Once you have everything divided up into three columns you can determine what kind of budget you want to work with. Your goal should be to put as much money aside as possible.
Once you free up some of that cash, you’ll need to work on creating more income so that you don’t have to live quite so frugally. Consider using this to create another stream of income through an investment or opportunity. This can help free up more money that can be spent on non essentials, or that income can go back into another income stream. If you don’t have any available cash to do this, consider leveraging a loan to create an income stream to take the pressure off of your paycheck. This can really make a difference in how much money you have coming in every month.
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July 3rd, 2008 — Book Review, Debt, Leverage, Money
Marian Snow’s book had a lot of promise. First, it discusses equity harvesting and how to get the maximum amount of equity out of your home without being taxed on it. Second, it discusses how to use that money to make more money. Sounds great on the surface, but this book failed to deliver and ended up being a major disappointment. The subtitle: How to Safely Leverage the Equity Trapped in Your Home and Transform It Into a Constant Flow of Wealth and Security seems a bit macabre now, in the wake of the housing crisis and one wonders how many people are regretting that they ever picked this book up.
Let’s start with first things first. The author is encouraging people to “free” all that nice equity in their homes and put it into something that will actually earn money instead of depreciate. Sounds good – but can be risky if you don’t pick the right investments. Quite honestly, leveraging the roof over your head is never a solid idea, especially if you only have one stream of income. Lose your job – and poof – there goes your house. But, so far, so good with the book.
It’s the next part that lost me. The author wants readers to pull out their equity and invest it into this wonderful, magical tax-free fund that will reap huge rewards, and produce it’s own sunshine and lollipops. (Ok, maybe not the last two.) Keep reading and you’ll find out that this wonderful mythical fund is nothing more than life insurance. The book did provide an interesting study into a theory I’m developing however.
Books that encourage readers to harvest equity and place it into a magical fund usually wait until the absolute last second to reveal it’s nothing more than life insurance. Slap a different title on any one of them and you basically have the same book. That pretty much blew the whole premise for me from that point on. The main problem is that there simply isn’t enough of a return to warrant risking the equity in your home.
Whenever you’re using debt leverage to create a new stream of income, you’ve got to make sure that the return is going to be worth the risk. Given that tax laws could change at any time for insurance funds, this is a hair raising prospect that any smart home owner should avoid – at least for now.
There are dozens of other ways to leverage debt into multiple streams of income and they don’t include life insurance funds. While there is some benefit to investing in these funds, it’s never a good idea to go whole hog. You’ve got to diversify. Any fifth grader that sat through a basic course on financial planning would understand that.
Overall, I cannot recommend this book. It unfortunately gets thrown in the pile with the numerous other books that all promise big returns and end up selling you life insurance – sort to speak.
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June 20th, 2008 — Book Review
There has been a lot of hype surrounding Douglas Andrew’s book, Missed Fortune 101. Many people gushed that it unlocked the secrets to becoming a millionaire, so I went into the book with high hopes. I was pretty disappointed to discover that much of the advice is already well known and let’s face it, a bit on the mundane side. We all know it’s important to have a 401K, but few of us have the potential to turn that into a million dollars.
While the book does serve as a useful guide for those that are just starting out, it kind of defeats the purpose and the target audience. The title itself leads readers to believe it’s written for those of us that are past the starting years and facing the ugly truths of retirement planning. Unless you have absolutely no concept of financial planning, I’m afraid this book will be a bit of a disappointment.
It is well written and the author does have a lot of enthusiasm, which is helpful considering some of the mundane advice that is doled out. Quite honestly, I felt that the author focused far too much on taxation and although I acknowledge that understanding tax law and avoiding overtaxation is important, it’s certainly not going to turn you into a millionaire. You may save a few thousand here or there, but it’s not the silver bullet that the hype built up. That said, there are a few good tips on how to avoid having your savings funds taxed into oblivion, but again, it seems as though the author was missing the point.
My main issue with the book is that it encourages readers to leverage the money from their homes into “special funds.” Finally, it’s revealed that these “special funds” are nothing more than investment grade life insurance policies. Personally, I believe it’s a bad idea to encourage people to endanger their homes with this type of investment, and quite honestly, the returns are not that good to warrant that kind of commitment.
The author encourages readers to build up as much mortgage debt as possible – which may have sounded good at the time, but as the latest news has proven, was really bad advice. Although he did discuss leveraging that into the investments mentioned above, it’s just not a sound enough premise to warrant anyone rushing out to adopt it. In fact, I worry that readers who took this advice to heart may be facing foreclosure right now.
Overall, while the book was well written, it fell horribly, horribly short of its promise. Perhaps if it had a different title, I would have come away with more praise. As it is, the hype is nothing more than that – empty hype that will get you no closer to realizing your dreams of financial independence. In that vein, it’s really not worth your time and there are far better books that cover the basics of dealing with taxes and finding ways to invest your money.
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June 19th, 2008 — Personal Finance
Many of us have been conditioned to think that living debt free is the only way to be. While there is some truth in this statement, if you’re completely debt free and using only cash, you’re hurting your chances of getting a new home, and you may end up in a situation that requires more money than you have without any recourse. Let’s find out why paying with cash is not always the smartest idea.
1. It hurts your credit rating.
You wouldn’t think this would be the case, but you do need to have some debt if you want to build up a credit rating. In some cases, people with absolutely no debt have a credit score in the mid 600’s, while those with two or three cards that they constantly pay on will have a score in the high 700’s. What’s the difference? In order to keep your credit rating high, you are going to need to have a little debt.
We’re not saying go run up ten cards and hope for the best. What we are saying is that having one or two cards with low balances is a great way to keep your credit score high. You’ll be getting the benefit of monthly reports on your credit history and you’ll be building that score up to the point where no one will be able to turn you down for anything.
2. Emergencies happen.
No matter how proud you are of being able to pay cash for everything – what would happen if you woke up tomorrow and discovered that you have a serious brain tumor that needs to be removed right away. The cost of the surgery is more than $300k and you don’t have any insurance. You’ve been paying with cash for years and your credit rating has suffered as a result.
In this situation, you may not be able to get a loan to cover your health costs and while some hospitals will work out a payment plan, they’re going to use your credit score to determine their risks. The problem with emergencies is that you never know when they will happen and they usually cost an arm and a leg. If you don’t have a savings account that is sizeable, you are literally one step away from financial disaster.
3. You won’t be making any extra money.
You know the old saying, it takes money to make money? If you’d like to get some extra income every month, you need to find a way to take advantage of opportunities for multiple streams of income, such as investments. Debt leveraging is one of the best ways to accomplish this since you won’t be using your primary funds for the new opportunity.
While debt has a bad reputation, there are good forms that are necessary if you want to make more money and have good credit. There is such a thing as good debt and if you manage your finances properly, there is no danger in having a little debt.
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