Personal Finance Blog

Tips And Stories To Help You With Managing Money

Don’t Let Mistakes Sabotage Your Retirement

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Protect Your Retirement FundsThe time to start planning for retirement is long before retirement becomes an immediate issue. And avoiding the pitfalls that trip up many Americans in their pursuit of financially healthy retirement years is essential. A recent Wall Street Journal column by Veronica Dagher posted five such mistakes.

Watch Your IRA Accounts

Don’t be complacent about your 401(k). Many employees who simply have their employer deduct the maximum possible amount to a 401(k) without asking any questions may be missing out on more productive alternatives, according to financial experts. In some instances, the fees charged by an investor’s 401(k) may be excessive. Investing in another alternative, such as a Roth individual retirement account could offer more choices and lower fees. Look at the entire financial picture before making decisions.

Careful Planning

Have a plan. Random decisions on retirement maybe counterproductive. There is the temptation to live in the moment, making decisions “on the fly.” Over the course of the usual working career, that could result in savings that will fall short when the job is done and retirement income has to cover all the bases. Start with small goals, if necessary, such as putting 5 percent of gross income into savings each month, then increase gradually until you are saving 15 percent, and do it within a year if possible. A pattern of constantly shorting the savings cushion seldom can be reversed as retirement looms.

Cut Back Expenditures

Think seriously of scaling back now. Downsizing your home and boosting savings often are two sides of the same coin, the experts suggest. Putting on blinders and delaying such moves until suddenly the 60s are upon you is a sure-fire way to ensure unpleasant surprises when the time comes. Thinking you still have time to reduce spending when retirement is just a few years away may result in too-tight budgets that complicate retirement for too many. As age inevitably takes a toll, you could be unpleasantly surprised to find that illness or other complications end your working days prematurely. Such seemingly small things as eating out less often and reducing optional spending will help you be prepared for living on less.

Consider Who You Are Bank Rolling

Resist the temptation to sacrifice your retirement security to pay for your kids’ college. When the offspring walk off with a diploma, you may find yourselves in the mid-50s. In some instances, the kids go into careers debt-free, but Mom and Pop suddenly find they are facing retirement without an adequate cushion. Although the urge to help the children get a higher education is hard to resist, if it isn’t financially feasible it may mean that those children will be called on to help you make it through retirement. Alternatives are paying only a pre-determined portion of the higher education costs or encouraging your students to get their education at a state or community college, if possible. Look ahead when they are still in public school. Save if you can while children are small to help alleviate the stress when you are suddenly faced with tuition and other costs. Encourage the kind of scholastic achievement that can lead to scholarships and other assistance.

Recognize Your Limitations

Don’t be fooled into thinking you will live forever. The plans you made for retirement can quickly go awry if one of the partners dies before you expected he or she would. Many a widow, particularly if there are still children at home, has been forced to sell the family home and retrench spending to the point of penury. Term life insurance for both partners is the most feasible way to avoid this kind of financial shock. Finding out the hard way that you are under-insured is a double-whammy for a surviving partner mourning a loss. A will should be prepared well before anything but a tragic accident could be expected to take either of the partners. Both spouses should be well informed about family financial realities and decisions should be made, as nearly as possible, well in advance.

Charting a course for something as tenuous as retirement is tricky, but those who are realistically preparing for the eventuality will be least likely to find themselves swamped when it comes.

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Tax Strategies For The Self-Employed

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Are you prepared for tax season? Have you thought of using a (SEP-IRA) Self Employed Pension plan to help you reduce your tax liability and prepare for retirement?

In the past five years, job losses in the United States have given people incentives to start their own businesses. These self employed people have become successful financially and have never really been forced to think about how they are going to manage paying their own taxes. With additional money coming in, they need a tax strategy to help them plan for retirement.

The formula they might use in saving for taxes needs to benefit them the most in the long run. You could use the strategy of saving 25%-35% and just leaving the money in a savings account. This will earn you very little interest over the course of a year.

One very good tax strategy is to set up an account that is established as Self Employed Pension or SEP-IRA. These accounts will provide you a reduction in your net earnings and allow your money to grow through investments.

So what is a SEP-IRA? A SEP-IRA is an account set up at banks, insurance companies or financial institutions. You are allowed to make cash contributions up to a set limit per year. You need to check with your tax specialist about the amount limits for your situation. For 2011, the contributions cannot go over $49,000.

When you lower your net earnings from your business, you lower your tax liability. The net earnings from your business is your gross income minus allowable business deductions. This determines your taxable income. Contributions to SEP plans are an allowable deduction.

Setting up this type of account helps you in two ways. You reduce your net earnings and you are able to start contributing to your own retirement plan. Both of these benefits can save you thousands of dollars in the long run and with a good investment strategy for your cash contributions, you stand to earn money on your investments over time.

If you are new to being self-employed and want a good strategy to help you build your assets, consider using an SEP-IRA. You can set these up and contribute to them up until the date your taxes are due. Discuss this tax strategy with your tax preparer and determine if this would help your personal tax situation.

This article is meant as a guide for your education. Please counsel with your tax preparer before taking any action. For the government description of SEP-IRAs, please visit: http://www.irs.gov/pub/irs-pdf/p560.pdf

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Big Break For Small Business Suppliers

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An exciting new opportunity has been created for small business owners. The ability to offer their products or services to large corporations is a big boost to businesses that would otherwise not be able to even put their foot in the doors of big companies.

Supplier Connection, a program recently put into effect by the U.S. Small Business Administration is a program offered by the IBM foundation and was created as a way to improve part of the Obama administration’s American Supplier Initiative. The public-private effort involves 15 major corporations that are willing to consider ordering supplies and services from the small businesses registered with them. The corporations collectively have more than $300 billion in purchasing power.

It is expected that the initiative will grow small businesses, create new jobs and add strength and diversity to America’s supply sources, said SBA administrator Karen Mills.
“While it is clear that becoming a corporate supplier can lead to business growth, breaking in can be a challenge for small businesses,” she said.

The administration recently sent letters to more than 50,000 small businesses outlining the new program and providing tools to smooth entry into the process. Supplier Connection is available to interested small business owners and registration is free online. There, they are able to register their company name and include details about what kind of products they offer. The hope is to provide small business owners an opportunity to become suppliers to larger corporations.

Among the 15 companies that have signed on to the program are Wells Fargo, UPS, Pfizer, Office Depot, Kellogg’s, John Deere, J P Morgan Chase, Dell, Facebook, CitiGroup, Caterpillar, AMD, AT&T, Bank of America and Caterpillar. They have agreed to look at the services and products of small businesses that register online. They then will determine which services or products warrant their financial investment. Small businesses can learn to supply large corporations with their unique offerings.

Small business owners often have no idea how to connect with large corporations and thus never get the chance to get contracts with corporations who have large amounts of capital. This free service can help pull small companies that have real potential into the mainstream of American business and put them on the road to success. The new revenues coming from a business relationship with successful corporations may prove just the needed edge to grow revenue to new levels. On the other side of the coin, the corporations that are purchasing goods and services will have better insights on the pulse of emerging businesses. Everyone wins.

Small businesses connect with business checks suppliers for ordering discounts.

Do I Need to Get a Job to Get a Credit Card?

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We all know the importance of a good credit score. Its benefits range from getting the best loan and credit card terms to being able to rent a home without a security deposit, lease a car and get hired for certain financial or government jobs. However, many of us aren’t so sure how the Federal Reserve’s new rules concerning household income affects stay-at-home spouses’ access to credit cards and thereby their ability to build credit under their own names as well. So what say we take a closer look at the matter?

The rule
In a move altering a long-held credit card underwriting practice, the Fed a year ago announced a final rule mandating that individual (and not household) income is to be used for the purpose of evaluating a credit card applicant’s worthiness. According to a press release issued by the nation’s central bank, “credit card applications generally cannot request a consumer’s ‘household income’ because that term is too vague to allow issuers to properly evaluate the consumer’s ability to pay. Instead, issuers must consider the consumer’s individual income or salary.” This rule change, one of a series made to clarify the implementation of the 2009 Credit CARD Act, took effect on October 1.

The reasoning
The Fed proposed and ultimately adopted this rule in order to create a more logical system of credit card underwriting, where one’s access to credit is a function of only his own ability to pay back what he owes, and thereby ultimately lower the incidence of overleveraging. Credit card overleveraging ran rampant in the run-up to the Great Recession, primarily because an imbalanced system was in place. While income was being considered on the household level, debt obligations were considered individually, which meant that one’s living situation had the potential to mask a lack of disposable income.

For example, a consumer with no income of his own but $150,000 in annual household income and $15,000 in outstanding student loans might on the surface appear to be a good candidate for a credit card with a $10,000 credit line. But what if that consumer’s wife also had $1 million in debt? The couple would have no disposable income and would therefore be extremely unqualified for the aforementioned credit card, though the card’s issuer would have no way of knowing. The bottom line therefore is that you simply cannot evaluate a credit card applicant without knowing exactly how much available cash he or she has. The Fed’s individual income requirement allows this by forcing an apples-to-apples comparison of assets and liabilities.

Your move
But does this new rule also cut certain demographics, namely stay-at-home spouses, off from credit? That is the question that most people are asking, and the answer is no. In fact, such people have two options when it comes to getting a credit card.

Option 1: Some credit card companies offer joint applications, allowing couples to use household income as well as household debts and liabilities in applying for a shared credit card account, for which both parties will be held legally responsible. Finding such an issuer therefore represents a good way for stay-at-home parents to both maintain their spending power and keep positive information flowing into their major credit reports each month.

Option 2: While someone who doesn’t have steady income for one reason or another might not be able to independently qualify for an unsecured credit card any longer, anyone with at least $200 in cash and a valid Social Security Number can indeed still gain access to credit by opening a secured credit card. Secured credit cards offer what amounts to guaranteed approval because they require a cash deposit (hence the $200) that serves the dual purpose of acting as your credit line and ensuring that issuers don’t have to worry about whether or not consumers will pay off their balances. Secured cards also report to the major credit bureaus on a monthly basis and are, in fact, indistinguishable from unsecured cards on your credit reports.

While neither of these options might be perfect for some people, it should give everyone peace of mind knowing that banks are now making smarter decisions across the board and that stay at-home-parents still have means of building and maintaining credit should complications arise in terms of either their marriage or the health of their significant other.

The author of this guest article is Odysseas Papadimitriou, CEO of Card Hub, a website that assists consumers in finding the best credit card deals.

Mutual Funds For Dummies

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Mutual funds are an investment vehicle that is made up of a pool of funds.  The funds are then invested by professional manager(s) in a variety of companies. The funds can include securities, stocks, bonds, equities and other investments. The benefits of mutual funds for the small investor is a diversified portfolio which would be hard (if not impossible) to create with a small amount of capital. The investor’s money is invested in many different companies which can mitigate  investment risks. This allows individuals to avoid putting all of their “eggs in one basket.” Usually people don’t have large sums of money to invest so by pooling money and investing as a team, their buying power is greater than if they invested by themselves.

Each mutual fund has professional managers that manage the pool of the funds. When researching which mutual funds to invest in, it is wise to look at the length of time the managers have been managing the fund. Those that have been doing it for many years, obviously have more experience that is measured by the various performance related graphs.

Asset Allocation

The new investor will have difficulty deciding what funds to invest in unless they have some guidance and understand how to interpret the data provided to them. Everyone has a different goal in mind when investing. Some general guidelines are to make equal investments in each type of funds. There are four types of mutual funds: Large Cap Funds, Mid Cap Funds, Small Cap Funds and International Funds. Equally investing in each type of fund can help to reduce the volatility of the markets.

Researching Mutual Funds

Mutual Fund Growth Chart
ING Funds Performance - Click For Larger View

Technology has made finding good funds to invest in much simpler than you might think. All of the fund performance data is collected and shown in a variety of ways.

The performance of the fund over time can be compared with the S&P 500 index. This index began in 1957. The S&P 500 index shows the top 500 large cap stocks. These companies have growth stocks and value stocks. The index is considered a “bellweather” of the United States economy.

The companies in the S&P 500 index are chosen by a committee to represent the industries in the U.S. economy. It has a wide variety of industry sectors included in it. The consumer discretionary sector includes companies like Home Depot, Lowe’s, Best Buy, Macy’s, Kohls, MacDonalds and Starbucks. Consumer Staples include Clorox, Walmart, Coca Cola and Walgreens. The energy sector includes companies like Exxon, Chevron, Hess Corporation and Haliburton Co. The financial sector includes companies like Citi Group, Etrade, Wells Fargo, Morgan Stanley and American Express. Health care, industrials, information technology, materials, telecommunications and utilities are the remaining sectors of companies listed in the S&P 500.

You can see the performance of every mutual fund compared to the performance of the S&P 500. You can also see the growth of a $10,000 investment over a 10 year period of time. This data can help you make guided choices and increase your chances of financial growth.

This information is meant to help you improve your knowledge about investing in mutual funds. There is no guarantee of your success in investing. You need to make sure you research the funds you want to invest in and see if they match your investing strategies and your tolerance of risk.

Purchasing mutual funds can be done online and doesn’t require you writing out checks.

Sherry Tingley