Maximizing Benefit of Tax Refunds

March 15, 2011

Debt Reduction Services Inc suggests a sensible approach to using your tax refundIt’s tax return time. Many households are receiving tax refunds now or will over the next month or so., but too often, these refunds – which can amount to several thousands of dollars – are spent on consumer goods. Such emotion-based consumer spending typically has no significant impact on the household’s net worth or financial stability. Instead, it tends to perpetuate the mindless spending cycle that keeps too many American households stuck in the rut of paycheck-to-paycheck living.

Here is what we and other financial experts suggest such households ought to consider doing with their refunds instead:

  1. Set aside 25% of the refund for consumer spending, if the head(s) of the household feels “the urge to splurge.” This may help to satisfy the primal spender within.
  2. Add 25% of the refund to the household’s emergency fund. This should be held in accounts that are fairly liquid (or easily accessible). A savings account is a standard option, though its rates tend to hover somewhere between the average inflation rate and zero. Other possibilities include Certificates of Deposit that earn a little more interest than savings accounts. Money market accounts are also decent options, as well as interest earning online savings accounts. Rarely will you find an account that offers quick access to your cash but pays interest above the current rate of inflation.
  3. Use another 25% of the refund to pay down debts. Either send it to the account charging the highest interest rate or to the account with the smallest balance. Where I differ from many financial experts is that I also suggest that you consider paying down your mortgage debt. Even though there currently are tax incentives connected to mortgage debt, debt is still debt. Until a mortgage is paid off, the home owner’s freedom (to move, to rent out the home, etc.) is restricted, just as with any other type of debt.
  4. Lastly, use the final 25% to add to long-term retirement investments, including 401(k)s, 403(b)s and Individual Retirement Accounts.

Although some of these suggestions might not be relevant to some households, the remaining suggestions probably are.

Please feel free to share your own successes and experiences with your tax refunds.

Todd

Todd Christensen
Director of Education
www.NationalFinancialEducationCenter.org
Facebook: MoneyDay2Day
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Published in: on March 15, 2011 at 10:53 am  Leave a Comment  
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Correcting Credit Report Errors from Defunct Creditors

March 9, 2011

Having taught nearly 500 personal finance classes since 2004 to over 8,000 individuals, it’s not often that I get a question about course topics that I haven’t heard before. I love it when I do, though, and that’s exactly what happened last week at a local housing authority. Here is the question:

What can I do if the title loan company to which I once owed money but have paid off in full has gone out of business but is still listed on my credit report with money owing?

At first, it sounded completely new, but in the end, much of the method for dealing with this situation goes back to the typical process for correcting one’s credit report. Here are the suggestions that we, as a class, came up with:

  1. First, dispute the credit report error online through each of the thee national credit bureaus.
  2. If that doesn’t work, call the company using the phone number listed on the credit report. Attempt to correct the problem directly with the title loan company’s representative.
  3. If these attempts fail, try looking up the company on the state’s Secretary of State’s business entity search website. The business listing should include, even if the company has gone out of business, an owner or board member to contact (likely a mailing address). Make contact with a request for information on how to address accounting errors.

These same suggestions apply to similar situations involving other defunct creditors listed on one’s credit report, including, for example, debt collectors, banks and credit unions.

If you’ve had success dealing with such situations in other ways, please feel free to share them here for the benefit of others.

Have a fantastic day!

Todd

Todd Christensen
Director of Education
www.NationalFinancialEducationCenter.org
Facebook: MoneyDay2Day
Twitter: Day2DayMoney

Defining PovertyThink

January 7, 2010

I read this past week of efforts in many countries to eradicate poverty by, as some have phrased it, “paying the poor.” The generic term for such programs is “conditional cash transfers” (CCTs), meaning that the government essentially pays cash to families in poverty that meet certain criteria, such as keeping their children in school, having regular preventative medical check ups, and attending workshops on financial skills and disease prevention.

Reportedly, the CCTs can have a widespread positive impact on reducing the income gap between the wealthiest and the poorest in that country. Today’s topic, though, is not about the pros and cons of CCTs or whether we should implement one in the US. Rather, I’d like to address the less tangible side of poverty: PovertyThink, if you will.

Financial Evolution and PovertyThink-National Financial Education Center at Debt Reduction Services IncI would describe PovertyThink as a set of beliefs, attitudes, and accepted presumptions held by individuals of ALL  income levels that prohibit them from implementing, or cause them to  take action contrary to, wisely money management behaviors, particularly with regards to building a satisfactory positive financial net worth in a capital-base economy.

Please do not misunderstand my statement. I am not referring to poverty (deficiency of money, goods or means of support) as being a choice. I am talking about people of ANY income level that subscribe (usually subconciously) to PovertyThink as a view of the financial world and, consequently, who fail to achieve financial success or independence.

Following are possible indicators of the presence of PovertyThink:

  1. Blaming others, particularly banks and creditors, for your financial woes. After all, you reason, they are the ones who have sabotaged your finances by charging ridiculously high penalty fees for bounced checks, late payments, and/or other mistakes.
  2. A strong distaste for the rich. In your mind, being rich is driving luxury vehicles; vacationing at luxury resorts; living in large homes; having mountain retreats or ocean-side cabins; having a garage full of motorcycles, ATVs, or snowmobiles; dressing in designer outfits and suits; and be able to buy just about anything else you want. You feel that those who are rich probably don’t deserve, and certainly don’t appreciate, what they have.
  3. Obsessing over the lifestyles of the rich. In spite of your feelings about the rich, you are often prone to obsess about their lifestyles and dream about what you would do if you were “rich.”
  4. PovertyThinkers play the lottery, mistakenly believing it to be their best shot at wealthPlaying the lottery. You play the lottery because it offers you the best chance of becoming rich. You feel that  the lottery is a way to become rich without having to financially injure anyone else on your way to the top, as the rich often do.
  5. Believing that finances should be fair. You hold to the belief that life should be fair for everyone and that the riches of the world should be equally available to, in not downright divided among, everyone. It galls you as completely unfair to think that the “rich” have it all and you don’t. After all, you believe that the harder a person works, the more they deserve to be rich, regardless of what they do for a living or what they contribute to society. And since you work harder than the wealthy you see on television, you feel you are just as deserving of riches as anyone.

On the surface, these beliefs seem harmless enough. In fact, #3 and maybe even #4 seem to you to be attitudes that should actually motivate someone towards financial success. So how do these points above, collectively identified as PovertyThink, actually do more financial harm than good? Let’s address them one at a time:

  1. Blaming others gets us no where. Blaming the umpire or referee for a bad call, in fact, can get you thrown out of the game.  Blaming others for our financial woes just means that we’re throwing ourselves out of the financial game. What should we do, by contrast? Accept responsibility for (and the consequences of) our mistakes. This may mean additional fees, high interest rates, and more work for us in the short term. However, once we recognize that we often get ourselves into financial troubles, we also recognize that we are responsible (and capable) of getting ourselves out of them. No one else wants us to succeed like we do. It’s time to hunker down and approach our financial challenges with more focus, patience and wisdom. Lashing out only turns would-be friends to long-term foes.
  2. Beware of misconceptions regarding what it means to be rich and what it means to be wealthyThose who dislike the rich the most are often those who want to become rich the most themselves. Unfortunately, they also usually have a warped sense of what it means to be rich. For those in the grips of PovertyThink, being rich is a lifestyle or a certain amount of income. If someone earns, say, $100,000 a year, well, they may be defined by a PovertyThinker as rich. It’s considered whether the same person earning $100,000 a year is spending $110,000 a year, is deep in credit card debt, or is staring foreclosure in the face because they can’t take care of their mortgage payment. The same could be said (and often is true) for a large percentage of people who drive the fancy cars, live in the opulent neighborhoods, and dress and accessorize themselves in the most expensive fashions. PovertyThinkers assume that the rich are greedy and have oppressed others while they earned their riches. The irony is that those who live the luxurious lifestyles tend to have noticeably smaller net worths as a percentage of their income than most millionaires, who buy used, American-made cars and live in modest homes. This PovertyThink tenant is, therefore, based upon inaccurate assumptions.
  3. PovertyThinkers are often seen buying or reading magazines about celebrity lifestyles. They know what brands of clothing celebrities wear, what types of vehicles they drive, where they vacation, which celebrities have their children in a private school and where that school is located, etc. Because many of the truly wealthy typically shun the spotlight, there is no magazine that gives an accurate description of what a real millionaire’s lifestyle is like. So, PovertyThinkers use transitive arguments to equate celebrities (who tend to earn large sums of money) with millionaires (who, outside of their primary residence, have a net worth of $1M or more in assets such as investments, accounts, business ownership, and real estate). Unfortunately, not all celebrities are (or stay) millionaires, and only a very small percentage of millionaires ascribe much importance to the extravagant lifestyles of many celebrities.
  4. Every week, we can read of or watch on television the report of the latest multi-million dollar lottery winner somewhere in the US. PovertyThinkers will see a dream come true for the winner, because they think in terms of amounts and dollars. In reality, many lottery winners (even some of the multi-million dollar jackpot winners) end up spending and/or giving away ALL of their winnings within a few years. Some huge jackpot winners have notoriously ended up living in trailer parks or with family members because they did not have a true appreciation of how much money they had won. They figured that since they were millionaires, they could give away or spend whatever amount they chose. They soon learn, though, that even a million dollars is a finite sum.
  5. The idea that reward should be directly tied to effort is not new, though it is pervasive. “Johnny got an A for effort.” However, it is a fundamental reality that effort is only one of several factors that our society rewards financially. Others include competence, creativity, productivity, personal affinity, loyalty, and on and on. To base someone’s financial compensation solely upon effort is to deny the importance of the other factors. Such an inflexible practice would lead to stagnation in productivity and innovation. Unfortunately, PovertyThinkers who fixate on the importance of effort tend to shun or ignore opportunities around them to solve problems and create solutions that could otherwise lead them toward greater compensation and reward. Developing an entrepreneurial work ethic or style, even if one works as an employee for someone else, creates an entirely new way of considering the value of work as it relates to their income.

So what’s the answer for PovertyThinkers? Since becoming a financial educator, I’ve always felt that the formula for personal finance success has more to do with motivation than with numbers, math, or school grades.  PovertyThinkers, if left to themselves, often have to hit rock bottom or experience some other sort of life changing event before taking the decision to make changes. Otherwise, not surprisingly since this is coming from a financial educator, I believe education is key. Whether through workshops, webinars, conversations, or reading materials, learning about others who have broken the PovertyThink cycle and learning how they did so can provide the hope and belief that makes such individual progress possible.

Such stories are not hard to find. Most of us just don’t look for them or don’t recognize them in the context of breaking the PovertyThink cycle. A large percentage of rags-to-riches stories (excluding lottery winners and those who inherit their money) are case studies in overcoming PovertyThink.

Have a fantastic day!

Todd

Todd Christensen
Director of Education
www.NationalFinancialEducationCenter.org
Facebook: MoneyDay2Day
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Published in: on January 13, 2011 at 11:45 am  Leave a Comment  
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Lottery vs. Stock Market: Aren’t They Both Risky?

January 8, 2010

With the media broadcasting the faces of names of this week’s Mega Millions lottery jackpot winners at every opportunity, I believe today is an appropriate time to address a question (though sometimes hidden as a statement) I’ve heard many times.

When talking about the importance of saving for emergencies and investing for long-term goals (including retirement), I’ve heard many people state that investing in the stock market is so risky that they believe spending money on a lottery ticket is a better investment.

First of all, let’s clarify the MISNOMER before addressing the LACK OF REASONING:

Investing in the stock market has to do with RISK.

Buying a lottery ticket has to do with CHANCE.

CHANCE IS NOT THE SAME AS RISK.

You may be able to increase chance, but you can NEVER impact it.

By the choices we make, we can have a significant impact on the outcome of risky situations, including investing in the stock market. We choose the timing, the stocks or funds, the amounts invested, and the timing of when we withdraw the funds. Each choice (which we can improve with experience and education) has a direct impact on how much our investment grows or shrinks.

We have virtually NO impact on situations involving chance. No matter what is written in books meant to take more money from lottery players’ wallets, the only way to improve one’s chances in the lottery is to continuously buy more lottery tickets.

Getting you to buy more lottery tickets is exactly what the government, schools administrators, the lottery corporation, the media, and even convenience stores want. After all, just here in Idaho, here’s what these organizations received in profit from the Idaho Lottery in 2010 alone:

  1. State Government (public schools, permanent building fund, and Idaho Bond Levy Equalization Fund): $35,000,000 ($35 Million)
  2. Retailers that sell the tickets: $8,400,000 ($8.4 Million)
  3. The Idaho Lottery corporation that administers the products: $4,200,000 ($4.2 Million)
  4. Media outlets, such as television and radio stations, that collect marketing and advertising fees for promoting the lottery: $2,800,000 ($2.8 Million)

These are probably pretty typical percentages for state lotteries around the country. Not one of these organizations, that collectively touch the lives of every citizen in the state, has a financial incentive to curb lottery ticket purchases. It’s just too easy to say, “Play responsibly” and then turn back to collecting their share of the profits. They’re not easy to find, but some media outlets (particularly newspapers and financial education sites) have done reports on former lottery winners and what their lives are like now. See http://on-msn.com/gmqjtKhttp://abcn.ws/eHXkzY, and http://read.bi/hUTY7M.

Rather than equating the lottery with stock market investing (which, for anyone with the patience and skill of delaying gratification, is almost a sure bet to receiving more money in the long run than you invest), let’s rather put it in terms of numbers:

THE LOTTERY IS A TAX ON PEOPLE WHO ARE BAD AT MATH!!!

There you have it. The reality is that people overwhelmingly lose money playing the lottery. Even “winners” of the $1,000 secondary prizes usually spend that much in tickets every year or two, so they don’t even break even.

Compare the odds of winning the Powerball (http://www.powerball.com/powerball/pb_prizes.asp) and the National Weather Services’ statistics on annual lightning strike deaths and injuries (www.lightningsafety.noaa.gov/medical.htm), then figure out your annual likelihood of being struck by lightning in a country of 300,000,000 residents.

If you have trouble figuring out that your chances of winning the Powerball are 1 in 195 million for one-time players (or 1 in 3.7 million annually for weekly one-ticket players), stay away from buying lottery tickets based solely upon the principle cited above.

Statistics say that about 540 in 300,000,000 Americans are injured each year by lightning strikes (about 60 additional are killed). That’s an annual statistic of about 1 in 555,555 Americans. That means that left up to chance, you are about as likely to be injured by lightning SEVEN times in one year as you are to win the Powerball jackpot playing one ticket a week for a year.

But that’s not a fair comparison. You can greatly minimize the likelihood of being struck by lightning by staying indoors during storms. Being struck by lightning is a risk, not a chance.

So, the next time you’ve been struck by lightning six times in a twelve-month period, perhaps then you’ll should feel lucky enough to play the lottery. Otherwise, keep your money and place it into a slightly risky but exponentially more rewarding investment, and you’ll end up much better off financially in the long run.

Have a fantastic day!

Todd

Todd Christensen
Director of Education
www.NationalFinancialEducationCenter.org
Facebook: MoneyDay2Day
Twitter: Day2DayMoney

Published in: on January 7, 2011 at 1:35 pm  Leave a Comment  
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Debt Repayment Options Made Simple

December 20, 2010

One of the most talked about, written about and thought about financial topics in this country is, and has been since its founding, the best way to get out of debt (and then, hopefully, stay out of debt). Yet for all of the tongue wagging, ink wasting, and energy squandering on this endeavor, most American still have an extremely poor, if not completely mistaken, idea of what options they have available to them when they are ready to repay excessive consumer debts.

So, below you’ll find my unofficial “The American Consumer’s Guide to Debt Repayment Options: the Abbreviated (and just about all-you-ever-needed-to-know) Version.” I have listed them in order of their typical impact upon an individual’s credit history and personal finances, from least to greatest, according to  my own opinion:

  1. Pay your debts off on your own
    Minimum Payments Option: Make only the minimum payments requested by your creditors, and it’s quite possible that you’ll need 15 to 25 years to get out of debt – assuming you never use your credit cards again! NOTE: This is universally accepted by financial experts as a poor choice since minimum payments are designed to maximize interest (profits) from your own pockets to those of your creditors.
    Level Payments Option: Never pay less than this month’s minimum payments, even as creditors begin to request a smaller and smaller minimum payment because of a decreasing total balance. NOTE: Realistically, this could have many consumers out of credit card debt in just 5 to 6 years without any direct impact on current household spending levels.
    Extra Payments Option: Use the “Level Payment Option,” but add an extra $25 to $50 (or more) to the payment for the account with the highest interest rate (or, also not a bad choice, the account with the smallest total balance). NOTE: Many such consumers can pay off a $5,000 credit card debt this way in just 3 years!
    Equity Loan Option: Borrow money against the equity in your home or other asset and pay down your credit card debt. NOTE: On paper, this seems like a no brainer, since such loans are often at low interest rates and can have definite tax advantages to them. The problem for many (actually most) who choose this option is that within one or two years, those credit card balances that they paid off with their home equity loan will creep back up to their original amounts, meaning now the consumer will be dealing with the same credit card debts AND be at risk of losing their home because of the additional home equity loan. This is NOT the best option UNLESS the consumer has made a total commitment to budgeting their expenses and reining in any expensive or impulsive lifestyle issues.
  2. Debt Management Program:  A  modified repayment plan available through nonprofit credit counseling agencies (disclaimer: I am employed by one such – see AICCCA.org for a list of nonprofit agencies nationwide). Such programs, known by their acronym of DMPs, target high interest rates and penalty fees. Credit counselors work with creditors to lower the consumer’s interest rates and/or cease any recurring penalty fees. While the debts themselves are not consolidated, the consumer makes just one payment per month to the credit counseling agency, which turns around and disperses the payments to creditors according to accepted repayment proposals. NOTE: Depending upon the consumer’s current credit history, there may be an initial drop in credit score due to the fact that accounts on DMPs must be closed to further usage, which may have a detrimental impact on the consumer’s credit usage ratio. However, FICO has not considered credit counseling as a direct factor in its credit scoring model since 1999, and on-time monthly payments have the greatest impact on credit scores. At the end of the DMP (which cannot last longer than 5 years), creditors should remove any notations on the consumer’s credit report referring to their participation in a DMP, thus leaving no lasting indication of DMP activity. Finally, while consumers can often work directly with a creditor to put into action a DMP for one solitary account, consumers with more than one account will usually find that their creditors are unwilling to provide interest rate concessions unless all of the consumer’s other creditors are also committing to them. That’s were the nonprofit agencies play such an important role.
  3. Consolidation Loan: This option allows consumers to replace multiple smaller debts with one large debt (and, consequently, many monthly payments with just one). NOTE: First, if you’re struggling to repay your debts, you likely have less-than-perfect credit, which means you won’t qualify for a consolidation loan at anything less than an astronomical interest rate. Even consumers who somehow find an affordable consolidation rate are then subject to same temptation as those who use home equity to pay down debts: to recharge those same credit cards back up to unmanageable levels due to poor money management plans and habits.
  4. Borrowing from Retirement: Some retirement plans allow the individual to borrow money or to outright withdraw invested money from their retirement account. There are usually extensive penalty fees associated with some of these options. NOTE: At the very least, the consumer who chooses this option becomes subject to the temptation to recharge their cards back to their original balances, just as the consumer who uses a home equity loan or a consolidation loan.
  5. Debt Settlement: You offer to pay the creditor less than what they say you owe them. Debt settlement can be done directly between the creditor and the consumer, or the consumer may contract with a third-party negotiator (which may even be an attorney) to pursue a settlement. NOTE: Now we’re getting serious. Debt settlement means, by definition, that you have no intention to repay in full the debts that you owe. Such intentions brought to fruition form the basis of a poor credit reputation that is circulated by consumer reporting agencies among potential lenders for the next seven years. Additionally,  fees from third-party negotiators can tally up to 25% or more of the original debt, leaving the consumer still having to pay a total of 80% to 95% or more of the original debt owed.
  6. Personal Bankruptcy: Generally considered the final option where consumer debt is concerned, a chapter 7 or chapter 13 bankruptcy provides legal protections to consumers who are overwhelmed by their debts to such an extent that their creditors are threatening (or actually beginning) to take away all or portions of the consumer’s assets. Assets may include, for example, a home, vehicles, or even income. NOTE: No one enjoys going through bankruptcy. It’s not a pleasant experience. While our own statistics show that there is a fairly significant amount of recidivism among filers (close to 20% have filed before and 3% have filed at least two cases of bankruptcy before their current case), most people end up in bankruptcy due to job loss (about 40%), poor money management (25%) or excessive medical expenses (19%). Going through bankruptcy likely means giving up a portion of control over your own finances and even some of your assets. The consumer’s creditors receive so little of the amount they’re owed that bankruptcy has a solidly negative impact on a consumer’s credit for 7 years and remains on their credit reports for 10 years.

I’m sure there are other, more creative, debt repayment options out there, so I invite you to share those of which you are aware.

Have a fantastic day!

Todd

Todd Christensen
Director of Education
www.NationalFinancialEducationCenter.org
Facebook: MoneyDay2Day
Twitter: Day2DayMoney

Paradigm Shift in Personal Finance Attitudes: Millionaire Lifestyles

December 10, 2010

National Financial Education Center at Debt Reduction Services Inc-Personal Finance Evolution from Debt to WealthI generally have the pleasure of facilitating three to seven personal finance classes each week, usually around the Treasure Valley of southwest Idaho. Many of those classes are for high school students in an economics or a personal finance course.

Inevitably, whether I’m discussing budgeting, credit, avoiding debt, or effective consumer spending behaviors, questions or comments come up about wanting to be rich.

In a previous post (“What It Means to Be Rich“), I discussed what I believe is a good definition of wealth, as well as some important tips for reaching the level of being wealthy. Today, though, I’d like to share thoughts about the “millionaire lifestyle” that so many of our youth (and many in our adult population) so desperately want to live. Thanks to the extravagance of many in the entertainment, professional athletics, and other high-profile industries trumpeted in magazines and publications proclaiming themselves to be the luminaries of and guides to the lifestyles to which we, as patriotic American consumers, ought to aspire, many young people have a warped sense of who the wealthy are and how the overwhelming majority of them live.

To many of the students in the classes I visit, wealth is all about spending. There is little concept of how the wealth was created or of the finite characteristic of wealth. Too often, wealth is only for fulfilling today’s appetites for thrills, frills, and glitz designed to attract attention.

Such a view of wealth discredits the hundreds of thousands of millionaires who, typical of most in their group, have spent decades dedicating themselves to their business, their employment, their investments, and the management of their own money in order to reach such an achievement. And when they wake up one morning, look over their finances, and discover that, not including their primary residence, they have a net worth of over a million dollars, they do not then go out and begin buying fancy cars and designer clothing. It is not their habit.

One of my favorite series of books that help to enlighten us on the “secret” lifestyles of the rich is the “Millionaire Next Door” books by Thomas Stanley and William Danko. They may not be the most compelling of readings, but the substance of their surveys should shake long-held, though misguided, attitudes and beliefs too many of us and our children cling to.

Some of the most interesting findings:

  1. Most millionaires never purchase new cars. They buy and drive used cars.
  2. Most millionaires have never spent more than $55,000 (in 2010 dollars) on a new car.
  3. Most millionaires live in homes worth less than $300,000 (in 2010 dollars)
  4. The most common make and model of a millionaire’s primary mode of transportation back in 1996 was a used Ford Taurus, not a Mercedes or a Lexus or a BMW.

High school students in my personal finance workshops get a kick out of that last one, especially when I ask who, in the class, drives a Ford Taurus. It seems there’s always at least one or two, so I congratulate them as likely being on their way to becoming a millionaire.

My hope is that eventually, we can collectively teach our young people to value life as an experience and not as a race to collect and show off as much superfluous STUFF as our incomes will permit.

Todd Christensen
Director of Education
www.NationalFinancialEducationCenter.org
Education@NationalFinancialEducationCenter.org
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Published in: on December 10, 2010 at 12:10 pm  Leave a Comment  
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Myth or Reality: The Credit Reporting and Scoring Systems Unfairly Hurt Low-income Individuals

December 2, 2010

Relationship of Credit and Income: by National Financial Education Center at Debt Reduction Services IncI’ve frequently heard from participants in my “Credit and the Interest Insomniac” workshops, as we discuss credit reports and scores and they have a real dollar-value impact on household finances, that it is not fair that individuals with less income have to pay higher interest rates. This is especially true when we I show how an individual with poor credit would pay $2,000 to $4,000 more annually for the same house as an individual with excellent credit. Participants assume that the person with poor credit is a low-income individual and the one with excellent credit is a high-income individual.

My response to this is direct and simple: income is not a factor in the credit scoring models used by most lenders. In fact, income is not found anywhere on an individual’s credit report (also known as a credit file, a credit record, or as their credit history). In simplistic terms, the five factors of a credit score are 1) whether or not you at least make your minimum payment on time each month, 2) whether or not you’ve maxed out your credit accounts, 3) how old your credit accounts are, 4) whether or not you’re applying for a lot of new credit accounts, and 5) the variety of credit accounts you have, such as credit cards, mortgage, auto loan, store card, etc.

Nowhere in these factors will you find income. Individuals with low-income, who properly use and repay the limited credit accounts they may qualify for, can build very decent credit. Conversely, high-income individuals who overspend and then abuse their credit cards can end up with a terrible credit score. On an individual basis, income has no direct or indirect impact on credit scores.

Key to Good Credit Is NOT Higher Income: National Financial Education Center at Debt Reduction Services IncThat said, we do have to acknowledge the reality side of this topic: credit bureaus and, consequently, creditors are able to generalize an income range for individuals of a given credit report profile. Essentially, they can determine the likelihood that a group of individuals who meet certain credit report criteria has a certain annual household income. The key words here are “likelihood” and “group.” It’s not a perfect formula, and certain data on a credit report indicate a corresponding income level for the group as a whole, not individually. However, there will certainly be individual variances.

So what can we take from this? Well, we at the National Financial Education Center at Debt Reduction Services Inc continually preach personal responsibility when it comes to personal finances. This is the case again here. In short: responsibly use whatever credit you have, whether it’s a small amount limited by low-income levels or whether it’s nearly unlimited because of being from a high income household. Credit scores depend much more upon what you DO with the credit you have than with HOW MUCH credit you have.

Todd Christensen
Director of Education
www.NationalFinancialEducationCenter.org
Education@NationalFinancialEducationCenter.org
Facebook: MoneyDay2Day
Twitter: Day2DayMoney

Published in: on December 2, 2010 at 10:01 am  Leave a Comment  
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To Bank or Not to Bank? Is THAT the real question?

December 1, 2010

National Financial Education Center at Debt Reduction Services Inc-Advantages of Bank AccountsI recently met with a couple who were dead set against ever having a checking account again. It’s not that they didn’t understand the value of a checking account but that they had gotten themselves into trouble writing checks for more money than their account had. They have decided to use cash only or, only if required in the future, use a prepaid card. For them, seeing their money was the only way of knowing how much they had left to spend until the next paycheck.

Their plight underscores the challenge that many couples face. How can you get two adults to work together on responsibly spending and tracking day-to-day household and personal expenses? They seemed to have a legitimate concern for how two people could manage one bank account. Just one bounced check fee, let alone five or six during difficult times, is enough to discourage many couples from moving from a cash only system to becoming a banked household.

I think the issue for such couples is less one of whether or not they should have a bank account but how they should approach the day-to-day management of their homes. Here’s my take on the situation:

Being banked is ALWAYS better than being unbanked.

Having a bank or credit union accounts (checking or savings) can go a long way to preventing the heartbreakingly tragic situations that could come by losing a pocketful of cash or having the cash stolen from your home or off your person. Such events happen, and when cash is involved, there is no getting it back…EVER.

The challenge for many couples who have fled from checking accounts is setting up a proper system for managing their money on a day-to-day basis. Here are a couple of simple solutions that don’t even involve checking accounts. They DO require you to set up one or more savings accounts, which generally have no monthly fees but do have restrictions on how many withdrawals you can take during a month:

  1. At bare minimum, set up one savings account. Deposit your payroll or SSI check into the savings account at no cost (even better, have it deposited directly into the account by your employer/the government). Withdraw only the cash you need each week. To avoid additional fees, do NOT apply for an ATM card associated with the account. If you do get an ATM card, make sure you NEVER use an ATM that charges you a fee. This scenario will save you any check cashing fees you’ve been paying without a bank account. These fees may be anywhere from $3 to $30 per month. That may not seem like much, but that’s about $40 to $360 a year. Plus you have a security of having your money in an account insured by the US Government. Even if your bank or credit union failed, your money would be guaranteed for up to $200,000.
  2. Set up multiple savings accounts, such as: 1) General expenses, 2) Groceries, 3) Leisure/Entertainment, 4) Medium-term expenses like vacations, appliances or furniture replacement, and car repairs, and 5) Personal expenses. Set up an automatic monthly transfer from your General expenses savings account to each of the other accounts.  Automating these transfers ensures that you avoid spending money in your General account that should be destined for other expenses.

If you don’t use a checking account, you’ll likely need to purchase several Money Orders every month for bills. Five money orders through the US Post Office for monthly bills will likely cost you $5-$6 each month. That’s $60 to $72 per year, not including postage for mailing the MOs.

National Financial Education Center at Debt Reduction Services Inc-Real Dollar Advantages of Checking AccountsAs these indirect costs of being unbanked add up, you can see the real dollar value of opening and responsibly using a checking account. If you’re still worried you’d end up bouncing checks, don’t be afraid to go into your bank or credit union and ask for help. You’ll usually find the staff willing to help educate you and guide you in your efforts to develop effective checking management skills. Plus, you can usually check with a local nonprofit credit counseling agency like Debt Reduction Services Inc. for help.

And remember to shop around for the right financial institution to work with. Find a bank or credit union that has fees (or lack there of) that fit your situation. You’ll likely want to work with one that has a physical location close to your home and/or your place of work. Visit the branch and get a feel for how you’re treated. If you feel like you’re just an intrusion into their work, find another bank or credit union close by.

After several months (or perhaps a year) of properly managing your savings account(s), you’ll find that your bank or credit union will be more likely to open a checking account for you, even if you’ve had a less-than-stellar record with them previously. However, at that point, just remember that you’ll need to develop the checking account-specific skill of managing a checkbook register. Spending plans, as always, will also be key to success.

Please let me know if you have your own simple banking success story to share of moving from a cash-only household to one using a bank or credit union account.

Best wishes,

Todd

Todd Christensen
Director of Education
www.NationalFinancialEducationCenter.org
Facebook: MoneyDay2Day
Twitter: Day2DayMoney

Published in: on December 1, 2010 at 4:29 pm  Leave a Comment  

7 Tips for Keeping You in the Black this Black Friday

November 23, 2010Keeping your own finances in the black this Black Friday

If you’re a Black Friday junkie, before you head out the door this Friday morning (likely EARLY Friday morning), please consider the following 7 suggestions for keeping your own finances in the black:

  1. Have a simple financing plan in place. There will be WAY more cool and attractive stuff on sale than you could possibly afford, so you’ll need to decide AHEAD OF TIME for whom you are purchasing the items, and how much you’re willing to spend for each person on your list. Create a simple chart with the names of gift recipients down the left hand column and the amounts you’re planning to spend on them in the right hand column. If you want to be more detailed, you could split the “Amount” column into two, with “planned amount” in the middle and “Absolute Maximum” amount on the right. Aim to spend no more than the middle amount, but commit now NEVER to exceed the right hand amount.
  2. Leave the cards (credit and debit) and the checkbook at home. You can’t overspend if all you’ve got is cash.
  3. Take a shopping buddy… but NOT JUST ANY shopping buddy. Go with the friend, family member or neighbor with whom you enjoy spending time but who will also keep you on financial track. Verbally commit to each other to stay within your stated spending limits.
  4. Budget for your Black Friday breakfast or brunch. Many make this meal part of their holiday traditions (in fact, for many, if may be the first time since consuming the Thanksgiving meal 20 hours or so earlier that they’re even able to eat). Just make sure you have a limit, you know restaurant’s price range, and you stick to your plan.
  5. Compare prices online: Make sure you know how much competitors are listing the items on your want list for. Check out their web sites. Of course, you have to take shipping and handling costs into account.
  6. Think in dollars, NOT percentages. Forget the sale signs. “75% off” doesn’t mean anything to your purse or wallet. The reality is NOT how much you’re saving but how much you’re spending. Remember that sales come and sales go. What’s “hot,” “in” and “cool” this year will be next year’s forgotten fad. However, you only get to spend the dollars in your wallet once. After that, they’re gone, and they’re not coming back. Make sure you’re spending them on your own priorities and not what the stores are telling you your priorities should be.
  7. Make your Christmas about the people in your life rather than the “stuff” you’re buying for them. We all know that relationships are more important than things, yet too often we get caught up year-after-year in buying and consuming. This year, get creative by spending MORE TIME with the important people in your life and spending LESS MONEY for stuff that will sooner or later likely end up in the attic, garage, or, worse, the dump just taking up space.

I wish you all a Happy Thanksgiving, Happy Holidays, and (although still a few days early by my standards, but if you can’t beat ’em…) a very Merry Christmas!

Todd Christensen
Director of Education
www.NationalFinancialEducationCenter.org
Facebook: MoneyDay2Day
Twitter: Day2DayMoney

Santa’s Not Comin’ to Town Quite Yet

November 15, 2010

I’ve always thought that Thanksgiving gets the short end of the stick when it comes to fall holidays. Christmas seems to invade stores almost as soon as kids are back on the school playgrounds after summer. Maybe that’s why I love Thanksgiving some much. It hasn’t been (and hopefully never will be) commercialized. Hopefully it stays the most home-centered of gatherings of our society.

Additional Thanksgiving expenses on decorations, travel, and entertaining can add upStill, just because it’s not been co-opted by Madison Avenue doesn’t mean we don’t, as a nation, spend a lot of additional money on the holiday. Thanksgiving generally means extra expenses in:

  • Travel: If you’re flying to your destination, you’ll generally spend anywhere between 10% and 50% less if you DON’T travel the day before Thanksgiving and the Sunday AFTER Thanksgiving.
    TIP: Consider flying out TWO days before the holiday and coming home on Friday.
  • Meals: Often, a portion of the extra money we spend on Thanksgiving meals can be recouped by enjoying leftover turkey sandwiches for a week or two afterwards.
    TIP: To make leftovers easier to deal with, separate them into smaller portions, place them in freezer bags, and pack into the freezer. That way, you won’t have to pull huge portions out of the freezer to use all at once.
  • Decorations: After travel, decoration expenses can be considered to be the most expensive “optional” expense of Thanksgiving. Whether it’s new Thanksgiving-themed plates and serving dishes, front door wreathes, pewter turkey-shaped napkin holders, or other household ornamentation highlighting the joys of fall, a spendthrift household could easily lay down an extra $200 or $300 each Turkey Day in making their dinner more festive.
    TIP: If children or grandchildren are available, use their pictures or artwork to decorate the house. Back a small photo of a family member with some construction paper and tie them around the napkin as a holder.
  • Entertainment: More and more families are deciding to spend the afternoon or evening of Thanksgiving at the movie theater. Whether Hollywood pushed for it or reacted to it, the demand is definitely there. That’s why many blockbuster movies often debut on Thanksgiving Day or that weekend.
    TIP:  Games at home can be more affordable and usually much more interactive, but if you insist on going to a movie, make the decision to skip the high-priced treats. After all, you’ll probably still be feeling as stuffed as the turkey was just a few hours before.

Have a wonderful, safe, and happy Thanksgiving Day and holiday season!

Todd Christensen
Director of Education
www.NationalFinancialEducationCenter.org
Facebook: MoneyDay2Day
Twitter: Day2DayMoney