Financial Tip of the Week

Avoid overdraft fees by keeping a set minimum balance in your checking account at all times. If you choose to use overdraft protection (usually a line of credit or savings account connected to your checking account), know the fees. Although there are fees associated with overdraft protection, the fees are much less than if you are charged the higher non-sufficient funds fees.

“If I Had Only Known”: Learning to Take Charge of Your Finances as a Single Adult

“If I had only known….” is a phrase that has been repeated multiple times in the recent months from Wall Street to main street America. The wide-spread credit and housing crises continue to unfold market fluctuations, housing downturns, and in some cases, bankruptcies and foreclosures impacting Americans and global economies. Many are disheartened with a feeling of fear that permeates the atmosphere. Greed has reared its ugly head, and now, we are facing a crisis that is epic in proportion. According to Alan Greenspan, the U.S. is suffering a "once-in-a century" type of financial crisis.

Now is the time to act. The last thing you want to think is “If I had only known…” after it’s too late. As a single adult, one of the benefits of learning now is to the same secret to successful saving and investing…START EARLY! Don’t wait until you’re married, have a job that pays more, or any other “significant start” in life to get your finances in order – the time to start is now, regardless of where you are on your life’s journey. The way we manage our financial household can even have a larger impact on the global economy.

The single years provide a unique time in life for further education and personal development. Personal finance should be a part of that foundation you are laying for your future and it will have lasting effects. The following are three basic financial principles to start working on today:

Be Debt Free

There are many benefits and freedoms we enjoy from being debt free. Many people don’t realize that your credit score can not only affect the ability to get loans and the interest rates you will pay, but it could also be the deciding factor for future employment. Many employers today pull credit reports during the hiring process because they see credit reports as an indicator of your integrity and trustworthiness. Keep in mind that some professions which require a security clearance require a good credit score. A poor credit history can put your future career in jeopardy.

Realize there are long-lasting consequences of poor credit. For example, bankruptcy stays on your credit report for the next 10 years. Even missing just one payment on a credit card will show on your credit report for years and will have a negative impact on your score. Also, when the time does come for marriage, be aware that you are not only taking your spouse’s name but also their credit history. Once joint accounts are opened and a joint credit history is established, your credit becomes one as well. Chose wisely!

Now is the time to take charge of your finances and become debt free regardless of your marital status. Make a list of all your debts; write down the balance owed and the interest rate, then decide which debt you will pay off first. You can either choose to pay the debt with the highest balance or the highest interest rate first. Either way, if you learn to pay more than the minimum monthly payment, you’ll be surprised how quickly you can reduce the debt. Know that regardless of your marital status, being debt free offers many freedoms and prevents many communication problems in future relationships. Start today!

Spend Wisely

We’ve all heard “spend less than you earn”, but we find that in today’s fast paced world where mixed messages and targeted marketing is the norm, it is hard to focus on the difference between our needs and desires. It often seems that everything becomes a need: the newest, the fastest, the best. In a time when credit is instant to obtain and where every shopping venue accepts plastic, we can purchase anything we want with the touch of a button and the swipe of a card. However, this doesn’t mean we can afford it.

Several years ago, I was teaching a financial counseling class where a handful of the students were from Spain. During a discussion about some required reading, one of the Spanish students raised her hand and said, “We cannot relate to your American spending habits. If we want something in our country, we save for it or go without”. I quickly realized we see the world through our own experience; it is important to realize that regardless of the marketing techniques or sales schemes, our spending habits are learned behaviors. Recognize the principle of sacrifice in your spending habits especially as a single adult. As an old country song states "We've been so busy keepin' up with the Joneses, four car garage and we're still building on, maybe it's time we got back to the basics of love"^[1]. If you want something, save for it.

First, make a list of your goals. Where do you want to be next year? In 5 years? In 10 years? In 20 years? Record your goals then recognize the financial obligations you will need in order to achieve them. Some will be short-term while others will take longer to obtain. When you have written down your goals, you will be better able to distinguish between your needs and your wants. This will help you stay motivated as you begin to make changes financially. You will also want to include a savings for unexpected and/or unplanned events. We know that regardless of our continual effort to plan the future, we can’t always anticipate what the future will hold and therefore, we need to save for the unexpected, both good and bad.

Next, there are three things to do to get a handle on your finances:

1. Record everything you spend for three months.
2. Look at the data you have gathered and decide where you can cut costs and save.
3. Create a spending plan and follow through to realign your spending habits to meet your goals.

Regardless of where you are in your education or professional pursuits, you can save and need to begin today. If you can learn to manage a $500 budget, you will be able to manage a $5 million budget.

Save for the Future

Saving today for something tomorrow might seem too far off and difficult, but the benefit is great. An advantage to youth is time. Money makes money; the principle of the time value of money rewards those who save now for the future. For example, if you were to start at the age of 25 saving $150/month invested at 8%, you would have over half a million dollars by the age of 65! If you decide to wait until 45 to start saving, assuming everything stays the same, you will only have $88,000 in the same account. The secret to saving and investing is to start young and save often!

To stay motivated and encourage saving, keep your list of goals where you can see them. These goals should be specific plans for saving, such as a car, down payment on a house, education, or a wedding. Categorize your goals according to the proper time horizon: short-term (1 to 2 years), mid-term (3 to 5 years), and long-term (more than 5 years). Each time category should be invested in the proper investment vehicle. Speak to a financial planner or a trusted and knowledgeable friend or family member about your appropriate investment mix. It is also wise to get two or three opinions to make sure you are comfortable with the investment mix and appropriate advice.

There are also specific saving vehicles to utilize during various stages of life. For example, a Roth IRA is a great tax saving vehicle for those who have a long-term time horizon and are currently in a low tax bracket. The money in a Roth IRA goes in after-tax and comes out with tax-free earnings. Another benefit is that you can use the principle at any time without incurring a penalty.

For shorter-term goals, separating money into various savings accounts helps you stay focused on the specific goal and encourages saving. Automatic monthly or bi-monthly deductions can be a fool proof way to help you remember to pay yourself first. No matter how you save or what vehicles you use to save – Do it!

Conclusion

The single years can provide a unique time to practice the principles of sound financial management. Remember the time to start is now and it’s never too early to start taking responsibility for your finances by getting out of debt, spending wisely, and saving for your future.

---

[1] Country singer Waylon Jennings's 1977 song "Luckenbach, Texas (Back to the Basics of Love)"

Money Talks!

My 3 favorite things to talk about are 1) Money 2) Politics 3) Religion. I've quickly come to the realization that I'm a lone ranger, hence the reason for the lack of dinner invitations! ;) But I also realize that money is something that we can't ignore and not discuss. It's not going to go away, even if we do decide to stick our heads in the sand and pretend everything will be okay.

So how do you start talking about money? First, realize that it's not a taboo. Just like Sex in the City has made talking about sex acceptable, it's about time we start talking about money. One of my favorite places to start a discussion about money online is at Geezeo. Check out the confession booth, question and answer area and jump into talking about money.

Protect your identity: Be aware of social networking scams

Recently, there has been a series of deployed military families that have been victimized by compromised personal data given through social networking sites. Be careful with sharing significant personal data when connecting through these social sites.

The most recent scam involves identity thieves and imposters using social networking sites to contact relatives of deployed U.S. military personnel, most specifically grandparents. The impostor advises the grandparents that he is returning home on leave from Iraq and asks the grandparents to keep his presence secret so he can surprise his parents. A short time later, the grandparents are again contacted and the impostor advises them that he and a friend are stranded with a broken down car. The imposter then asks the grandparents to wire a significant amount of money to cover the cost of the repairs.

Always be cautious of the personal information you chose to share on these social networking to ensure that no exploitable information is available. Always verify the identity of anyone who contacts you to share personal information, pin numbers, social security numbers, or fund transfers. Do not act on your impulse, check with your financial institution to ensure unauthorized individuals do not have access to your accounts. Always know who is on the other end of the line.

Financial Tip of the Week: Overdraft Protection

Avoid overdraft fees by keeping a set minimum balance in your checking account at all times. If you choose to use overdraft protection (usually a line of credit or savings account connected to your checking account), know the fees. Although there are fees associated with overdraft protection, the fees are much less than if you are charged the higher non-sufficient funds fees.

Military Tips while Deployed

So my day job is teaching financial education to the military. I have the privilege and honor of serving an incredible audience. This post is specifically for service members who are preparing or in deployed locations.

The first is the Savings Deposit program (SDP). SDP is a one of a kind, which can only be utilized by deployed service members while in theater. This program allows service members to deposit up to $10,000 in a savings account that earns 10 percent annually (compounded quarterly). To be eligible, the service member must meet the criteria and start the program with the finance office in the deployed location. For more info, go to: http://www.dfas.mil/militarypay/woundedwarriorpay/savingsdepositprogramsdp.html

Secondly, if you are young and deployed and have extra cash, consider putting the funds into a tax-free Roth account. If you used deployed (tax-free) money in a Roth, then you will never be paying taxes on that money (assuming you use it for the specified purpose). Roth IRA earnings are also tax free for education and for a first time home purchase. Remember that for 2009, you can only put $5,000 into a Roth with a $1,000 catch up contribution for those over 50. (Here’s a good break down of the differences between a Roth and an IRA http://www.fool.com/money/allaboutiras/allaboutiras03.htm).

Finally, once you’ve maxed SDP, the Roth IRA, I would also suggest you max your Thrift Savings Plan (TSP). TSP is the federal government’s 401(K)-style plan. You can place pre-tax contributions up to $16,500 in 2009 into your TSP account, unless you are in a combat zone. The combat zone tax exclusion for 2009 is up to $49,000 including bonuses & combat pay!! That’s a great way to get jump start on your retirement. Oh and note, tax-exempt contributions will not be taxable even after withdrawals!! You can’t beat this deal for a retirement tax advantage. TSP offers a choice of six low cost funds, including 2 bond funds (G&F), 3 stock funds (C,S,&I), and lifecycle funds (L). For more info on the combat zone tax exclusion go to: http://www.tsp.gov/forms/tspbk08.pdf (see page 9) or see www.tsp.gov

And as always, get a second opinion for your specific financial situation. Military members can call Military OneSource (www.militaryonesource.com) 24/7, 365 days a year at no charge. They have financial counselors and planners to help you with your specific situation. Best wishes and thank you for giving all of us back at home the privilege of freedom.

Quick Tips: Ideas to Walk Away & Save

Here are some quick tips, which may help put purchasing decisions into perspective:

* If you find something you want to buy and can’t live without, walk away from the purchase. If you still desperately want it 24 hours, have thought through whether you can afford it, if it’s for a good price, etc – then go back and purchase it. But if you’ve already forgotten about it, then you have your answer. This goes for a $2 checkout register purchase or a $300 clothing purchase.
* Freeze your credit card in a bucket of water. If by the time the credit card is completely and naturally thawed out (no cheating here), then you can get it. This is your “cool-down” period.
* Bring a fiscally conservative family member to help you shop. They will tell you the honest truth: whether that outfit really looks good on you – or if it’s a waste of money.
* Stick to a shopping list, and don’t waste time browsing! And, as my boss currently reminded me, use coupons!
* Limit your exposure to advertising. Scientific studies have shown that the more we’re exposed to advertising – whether it be on TV, in magazines, etc – the more likely we are to buy.
* Start an internet wish list by saving the URLs of the items that you would love to buy. If you use the book-marked pages, then you won’t forget the items you desperately want even if it takes you two or four weeks to save up the money for the purchase. (And quite honestly, if you do forget about the purchase, then I think you’ve already answered your own question about whether you really wanted it…)
* Collect your spare change or start an electronic savings account that pulls a small amount from your checking every week. Use that money as a “fun” account. Anything goes, but once the money is gone, you have to start saving again to make that next purchase

With this in mind, you can stick to your spending plan. I used to tell my college students, “If you can learn to manage a $500, you can manage $5 million”. It worked for Warren Buffet and it can work for you. Learn to manage what you have now and as more is given to you, you will have the knowledge and skills to manage the larger income.

The habits you create now, whether you are a struggling college student or a newly minted graduate, will be the habits that remain with you throughout your life As one of my favorite mentors says, “It’s not how much money you make, it’s how much money you keep.”