4 Keys to Getting Out of Debt

It is so much easier to get into debt than it is to get out of debt. You’ve already signed up for years of payments and tons of interest. Those factors make it really hard to just change your mind today and be out of debt tomorrow – regardless of what debt reduction methods you use.

Nonetheless if you have decided to finally get out of debt there are some key things you need to do to be successful with your plan.

Key Factors to Getting Out of Debt

Here are four things you must starting doing today in order to get out of debt as quickly as possible.

1. Spend less than you earn.

The absolutely most critical thing you must do to get out of debt is the most simple one: spend less than you earn.

You have to stop the bleeding before you can begin to heal. If you are still spending more than you earn it doesn’t matter how creative you get with your debt, you are never going to pay it off and only continue adding to the balance. Even if you just have an extra dollar left over each month, you are ahead of the person that made $1 million and spent $1 million plus a dollar.

There is no mathematical way to get out of debt if you are still adding to your overall debt amount. It is impossible. You can’t get out of a hole by digging further; that’s what spending more than you earn does to you. If you pay off $1,000 but charge $1,100 on your credit card, you are headed in the wrong direction.

Every other factor starts here. How you get to spending less than you earn is up to you. Some people take on strict budgets, some people just stop spending money. Whatever works for you is fine, just make sure you aren’t spending more than you make each week or month.

2. Don’t miss a payment.

After you have stopped the bleeding by spending less than you earn, you want to make sure you don’t get hit with any surprise fees by missing a payment. Not only will credit card companies hit you with a late fee, they will also jack your interest rate up to the max which is usually well above 20%. Even if your debt isn’t to a credit card, missing a payment will result in fees and penalties that keep you in debt.

3. Don’t add more debt.

I’ve already mentioned that spending more than you earn will add to your debt load. Don’t do that, but heed this warning as well: Don’t take on any new major debt, either.

That means don’t go out and buy a new car with an amazing 0.9% interest rate. Don’t open a new store credit card. Don’t open up a home equity line of credit. Don’t do anything that is going to extend a new line of credit to you no matter how amazing the rate is.

Again, you can’t get out of debt by adding more to it. The only exception to this is if you are consolidating your debts down to a lower rate – but you really have to know what you are doing to make this a successful strategy.

4. Work a debt payoff plan.

Lastly, you have to work some sort of plan in regards to paying off your debt. You won’t find a lot of success by randomly deciding to send in extra principal payments on your balances each month.

There are differing views as to which debt payoff plan is the best – some believe paying off the lowest balance is best, others say paying off the highest interest rate is best – but in the end it really doesn’t matter.

Mathematically speaking paying off the highest interest rate debt will lead to you paying the least amount of interest, but as long as you are working some plan it doesn’t really matter. Get a plan together, work the plan, and pay off your debt.

Are you paying off debt? How are you doing it, and how what would you recommend to others? Leave a comment!

---

What is a Good Credit Score for Buying a House?

Getting a mortgage today is still difficult. Guidelines are tight, and credit scores matter more than ever. Before applying for a mortgage, there are a few things you need to know about credit scores.

Acceptable Mortgage Credit Ranges

Believe it or not, there’s no single (or simple) answer here! The credit score range varies depending upon which mortgage agency is funding the loan, the type of loan you’re applying for, and also on specific lender guidelines.

On conventional fixed rate mortgages, the ones typically handled through either Fannie Mae or Freddie Mac, the minimum acceptable credit score is generally 620. On a conventional adjustable rate mortgage (ARM), it’s generally 640 as a minimum.

For loans insured by the Federal Housing Administration (FHA), the absolute minimum credit score is 500. You’ll need a minimum score of 580 in order to qualify for maximum financing (96.5% of the purchase price of the home). Between 500 and 579 you can qualify for a mortgage of up to 90% of the property value.

It’s important to remember that these are the minimum scores of the mortgage agencies. The individual lenders you’ll be working with may have credit score minimums that are set at higher levels.

Getting the Best Rates and Loan Terms

Mortgage lenders price loans using a matrix based on a mix of risk factors that includes loan-to-value ratio (mortgage loan amount divided by property value), credit scores, loan amount and debt-to-income ratios. They may even have different requirements based on geography.

Generally speaking, the higher your credit score, the more likely you’ll be to get approved and with the lowest interest rates and most flexible terms. There are thresholds above which your credit qualifies as “good”, “very good”, or “excellent”.

Depending on the lender and loan program, excellent credit scores can begin anywhere between 700 and 750. If you’re above those thresholds, you’ll generally get the best loan pricing available.

Refinances Can Be More Flexible

Largely due to the decline in property values in recent years, most lenders are offering “streamline refinances”, which are basically mortgages without so much of the usual documentation required. They generally work best for homeowners who are doing a simple rate and term refinance, so credit scores aren’t as much of a factor.

Not all refinances qualify as streamline refinances either, and that’s where credit score requirements re-enter the picture. For example, the game changes if you want to consolidate existing first and second mortgages into a new first mortgage. Another example is when you want to refinance a bank mortgage with a Fannie Mae or Freddie Mac loan. The usual credit score requirements are likely to apply in these cases.

Non-Traditional Credit

Some borrowers have no credit scores, and there are mortgages for them as well. It’s referred to as “non-traditional credit”, which is to say that it’s for people who either don’t have credit from the usual sources, like mortgages, installment loans or credit cards. Because there’s no credit, there are no credit scores.

Sometimes a non-traditional credit report can be ordered that will show your payment history (but no credit scores) from third parties, like utility and insurance companies. This option however is not available in all situations.

If not, you generally will have to produce evidence in the form of canceled checks for your rent and two or three other sources, like utilities or insurance payments. The canceled check requirement will typically call for you to provide evidence of on time payments for up to two years. If you go this route, be sure you have all 24 months worth of canceled checks. If you’re missing even one the lender may assume that you paid late that month.

An important note here is that non-traditional credit is not an option for borrowers with low credit scores. They’re strictly for people who have no credit scores at all.

Getting a Mortgage With a Lower Credit Score

Generally speaking, if you’re below the credit score minimum requirements you will not be able to get a mortgage. If you’re in the “fair” or “average” range (620-700 for conventional or 500-579 for FHA) you’ll most likely be able to get a loan, but it will have higher rates and less generous terms.

As mentioned above, FHA limits loan amounts to 90% of property value in the 500-579 range, but conventional loans have their own restrictions. You may similarly be restricted on your loan-to-value (90% or less) or your ability to take a second mortgage, but your interest rate will likely be higher as well. Lower credit scores may also restrict you to lower debt-to-income ratios, which will have the effect of decreasing the loan amount you can take.

There are two ways to get around the lower credit score issue. One is to work to improve your credit score, and the other is to have “compensating factors”.

Compensating factors is a mortgage industry term for components of your borrower profile that are strong enough to offset weaknesses in other areas. If your credit scores are below the most desirable range, you may not be able to improve your loan pricing, but compensating factors could mean the difference between an approval and a decline.

Typical compensating factors include:

• A large down payment (usually 20% or more)
• Cash reserves after closing, equal to six months or more of your new house payment
• Buying less house than you can afford (giving low debt-to-income ratios)

In today’s difficult mortgage lending environment, it’s usually best to do both — improve your credit score and have compensating factors. It’s a tall order, but one that will benefit you for many years in your home.

Have you recently had credit score issue with your mortgage application? Leave a comment!

---

Getting Short-term Health Insurance Policies

No one should ever be without health insurance coverage, not even if it’s just for a few months. A single large medical situation can leave you saddled with tens of thousands of dollars in medical bills. And what if you lose your job?

There is a way to deal with this, short of super expensive COBRA plans. Short-term health insurance policies can give you the coverage you need for anywhere from a few weeks to a few months.

Where is it available, and how long will it last?

Not all health insurance companies offer short-term health insurance policies in all states. You’ll need to check with the various providers to see which states they do offer the plans in.

Short-term health insurance policies generally run from 30 to one year, which depends on the state you’re living in. The length of time for the plans will also depend on the insurance company you’re working with.

Why you might need a short-term health insurance policy?

Short-term health insurance policies are a potential solution anytime you’re facing a temporary loss of health insurance coverage.

The most common situation is the loss of a job, but there are many others that could create the need. For example, if you leave your job to go take a new job, it’s common for the coverage at the new company to have a waiting period. 60 to 90 days is pretty typical, and while that may seem like a short period of time, it can be forever if you have no health insurance coverage. A single significant medical situation could cost tens of thousands of dollars.

Some other situations might include recent college graduates, who don’t find employment immediately after graduation, or those who are close to retirement but not yet eligible for Medicare.

Why not just go with COBRA coverage?

Most of us assume that if we lost coverage under an employer sponsored health insurance plan that we’d just switch to COBRA coverage until we get a new job and join the new employer’s benefit plan. That sounds good—until you actually have to do it!

COBRA plans are expensive, as in really expensive! They can be as large as a typical house payment. For one thing, once you go to a COBRA plan, you immediately lose the employer subsidy. If your employer was paying 50% of your monthly premium, a $500 premium will turn into $1,000 the first month after separation. And once the plan moves from your benefits administrator to the COBRA administrator, they can add a fee of up to 15% on top — now your health insurance is up to $1,150 per month.

Here’s something else: One of the ways people try to lower health insurance premiums is by raising their deductibles. But the problem with COBRA is that once you’re separated from your employer, your deductible will be locked in at what it was when you were still employed. You won’t be able to raise the deductible — or change anything else for that matter — to lower the premium costs specific to COBRA.

How much will it cost?

I ran some price comparisons on the Assurant website, and came up with two price quotes. Each is for a family of four, with a husband and wife — each 40 years old — and two dependent children. The quotes were for plans covering six month in my zip code. (Note: the price quote you get and the number of months available under the plans will vary depending on where you live.)

The first plan included a $1,000 per family deductible, an 80% coinsurance provision, and an out-of-pocket maximum of $5,000.* The plan includes a lifetime maximum of $2 million and prescription drug coverage. Monthly premium: $573.

The second plan included a $2,500 per family deductible, an 80% coinsurance provision, and an out-of-pocket maximum of $5,000.* The plan includes a lifetime maximum of $2 million and prescription drug coverage. Monthly premium: $396.

*Under this example, you will pay the first $1,000 of any claim, and be responsible for 20% of any charges above the deductible, up to $20,000 in medical charges, which means a maximum of $4,000. The $1,000 deductible, plus the maximum $4,000, equals the $5,000 out of pocket maximum. This is typical to nearly all health insurance plans of all kinds regardless of provider.

Two Major Drawbacks

In investigating the plans above there were two major drawbacks that were immediately evident. The first was that virtually all charges are subject to deductible, co-insurance and maximum out-of-pocket maximum provisions. Unlike permanent plans, there are no immediate benefits, such as preventative maintenance or doctor visits for minor illnesses and injuries in which you pay an upfront co-payment and the insurance company pays the rest. You will have to pay all first dollar expenses.

The second has to do with pre-existing conditions, and it’s pretty stiff. Excluded are any treatments involving a condition which either developed or you received treatment for in the previous five years. The coverage would be effective only for new health conditions or injuries, not ongoing therapies.

Considering the above, short-term coverage would be most effective for those in good health and having no pre-existing conditions. Still, it could be worth having even if you have pre-existing conditions in the event that you were hit with the onset of a new medical condition or injury while covered.

Have you ever had a short-term health insurance policy? Were you satisfied with it?

Have you ever tried Health Savings Accounts? They might be an option if you are looking for health insurance alternatives.

---

How to Rollover Your 401k into an IRA

When you leave your employer you usually remember to clean out your desk, grab all your personal photos, and take your box of stuff home with you. Unfortunately one of the most valuable assets you have to your name is often left behind: your 401k.

You don’t lose control of your 401k, the account is still yours. However, you forget to check in to rebalance your portfolio and over time your asset allocation is out of whack. Or worse, you forget about the account entirely and you never access the funds held within it.

Moving your 401k is not terribly difficult to do. Many people rollover their old 401k to their new employer-sponsored 401k plan. While this is a valid option, it doesn’t give you maximum control that you get from rolling the funds into a new Traditional IRA or Roth IRA. Your new employer’s 401k is still run by the company, and your fund selections are limited to what they offer their employees. In contrast an IRA can be moved to any brokerage of your choosing – and if you don’t like the options at the one you select originally, you can move it again.

6 Steps to Rollover a 401k to an IRA

Here is how to rollover your 401k in six easy steps:

1. Terminate Your Employment Officially

You cannot touch your 401k account at your old employer until you are officially no longer employed at the company. This seems like a simple task, but getting the proper documentation to your Human Resources department as well as to the company managing the 401k account can be a frustrating task. If you try to rollover your 401k before you are no longer an official employee, nothing will happen.

Ask for copies of important documents detailing the end of your tenure at the company and communication sent to the 401k management company. If there are any issues along the way, you will be able to fax the forms directly to the investment company without your old HR department needing to be involved.

2. Get Rollover Forms

While you are getting copies of your termination of employment, be sure to get the proper rollover forms that you will need. The goal is to avoid having to go back and forth between your old HR department and old 401k plan company after you are no longer employed with the company. Knocking everything out up front, or at least getting the forms you need, will save you many follow up phone calls and frustration.

3. Identify Brokerage Firm and Open New IRA

You need a place for your old 401k’s investments to land, which means you need to identify a new brokerage firm. Pick a firm that will meet your investment needs. A large mutual fund company such as Vanguard can provide you access to their low-cost mutual funds. If you plan to dump your investments into a target retirement fund, that may be a good fit.

Alternatively if you want a more diverse range of options such as individual stocks and bonds, mutual funds, and ETFs you want to look at a discount or full service brokerage firm.

Once you have identified where you want to open your IRA, take the necessary steps to open the account first before beginning your rollover.

4. Verify Brokerage Rollover Needs

After you open your IRA, or during the process, figure out what specific steps they need you to take to roll your 401k over to them. The process should be fairly similar from company to company, but you need to take the specific steps they ask of you to ensure a smooth transition.

5. Fill Out Rollover Forms

Next you simply fill out the rollover forms your previous employer provided you. You may have the option to withdraw the funds from your 401k and re-deposit them into a new IRA yourself. Avoid this option and choose to do a direct rollover. If you withdraw the funds yourself you can make mistakes along the way (or simply take too long to open the new IRA) and the withdrawal will be classified as an unqualified distribution from your 401k. You’ll pay a early withdrawal penalty plus income taxes to the IRS.

With a direct rollover your investments are made payable (or transferred) directly to the new investment firm. It’s essentially where the 401k plan writes a check directly to the new investment firm rather than putting your name on the “payable to” line.

6. Wait for Funds, Make Changes

After you submit the appropriate paperwork, wait a few weeks before checking to see if your funds arrived. Your old 401k provider may drag their feet in processing your request because they don’t want to see your funds – that they earn fees off of – leave their management.

But don’t wait too long. If your new IRA company doesn’t receive the funds after two weeks, follow back up through the appropriate channels. If for some reason your receive a check in the mail in your name rather than the new brokerage name, immediately forward it on. You have 60 days from withdrawing the funds to reinvest them to avoid IRS taxes and fees.

After the funds are deposited, be sure to invest them according to your asset allocation plan. Your new IRA should fit into your total retirement plan rather than being invested as a single entity.

Bonus Step: A Tax-Free Retirement

The above steps will assist you in rolling over a 401k to a Traditional IRA. In retirement you will pay income taxes on the funds you withdraw. If you are looking to grow your nest egg and never pay taxes in retirement, you need to rollover to a Roth IRA.

You can’t rollover directly from a 401k to a Roth IRA, but you can still end up with a Roth IRA. Simply follow the steps above and then convert your Traditional IRA to a Roth IRA. You’ll be able to enjoy retirement tax-free!

What questions do you have about rolling over your 401k? Meet us in the comments!

---

Investing for High Income Earners

Some time ago I wrote about investing on a budget. Now I’m going to write about the opposite end of the spectrum: Investing for High Income Earners.

Although I am admittedly more familiar with the first scenario, here are some of the considerations for high income investors. As always, meet with the appropriate expert prior to making any important financial decisions.

Managed Investments

When I wrote about investing on a budget, I indicated that broker-free investing with a large “do it yourself” type brokerage house such as Vanguard may be ideal. When you have more money to invest, however, you may wish to pursue a more sophisticated investment strategy.

One major consideration is whether you would be better off leaving a professional broker or financial planner handle your investments for you rather than attempting to do it yourself. If you want to be an active investor, it would take a lot of time and expertise to learn the necessary skills to make your personal investing be worth your while. Perhaps you would be better off earning money doing what you do best (i.e. your day job, assuming it does not involve investing), and instead diverting some of that money into a professional’s services.

Note: If the Great Recession has taught us anything, it’s that you ultimately are responsible for your own financial decisions. In other words, even if you have a trusted broker, it’s important to make sure you and your finances are adequately protected.

Individual Stocks

When you’re investing on a budget, I tend to believe that individual stocks are a poor choice because there’s simply not enough money to properly diversify. The trading fees also start to add up if you’re not trading a large amount of shares. If you’re a high income investor, however, then perhaps you can pick some individual stocks to go after as part of your overall financial plan.

Reducing Taxes

When you’re a high income investor, you might be precluded from receiving certain tax breaks or phased out of others (debt on student loans comes to mind). At the same time, you’ll be paying higher taxes, so your incentive to reduce taxes is perhaps even higher than the average citizen. Perhaps you may wish to consider purchasing real property whose interest likely is tax deductible. This might even include an investment property, if applicable.

Alternatively, perhaps you should start a business and contribute to an employee’s retirement as a way of reducing your own tax exposure. (Again, check with your accountant or another financial planning or tax professional to make sure this would apply for you.) A solo 401(k) if you’re a business owner may also make sense.

In some instances, you can also potentially write off gambling losses, alimony payments (hopefully not applicable, and note that child support is generally tax-neutral), and interest payments on investments purchased “on the margin.” Finally, consider investing in “tax-managed” or tax-beneficial funds such as certain classes of bonds.

How High Income Earners Can Earn More Than Low Income Earners

Aside from the obvious investments such as expensive art and real estate that the average person would likely be precluded from investing in, I have also read that there are actually classes or types of investments that individuals below a certain income level may not even be legally allowed to invest in (“for their own safety”), that high income earners would conversely be able to make. For instance, I remember reading in the book “Rich Dad, Poor Dad” that the SEC barred investors below a certain income threshold (called non “accredited” or “non-sophisticated” investors), from investing in certain types/classes of more “risky” investments.

Conclusion

Although there are different considerations when you’re investing as a high income earner, the basics still apply as well. You still need to diversify, pay yourself first, properly allocate risk, and determine that you’re saving enough each month to achieve your investment and retirement goals.

What other advice would you have for investors with high incomes? Leave a comment!

---

4 Ways to Maximize Travel Reward Credit Cards

I’m a big fan of responsible credit card use. I personally prefer cash back rewards because I can spend cash on anything I want.

But I know a lot of people that prefer to rack up travel reward points with their credit cards. I’m okay with that, but you really have to be careful to maximize the benefit of choosing reward points over straight cash. Here are some tips to keep you on track.

1. Accept Flexible Travel Plans

One of the best ways to stretch your travel reward points is to place a healthy dose of flexibility into your travel plans.

Being flexible on trip dates or end locations can really be beneficial in stretching those points as far as you can. Want to go to Myrtle Beach in March? The hotels participating in your rewards program will likely be booked well in advance at high rates for Spring Break. If you could be flexible and end up at another beach nearby in the middle of April you are likely to see lower point costs for those hotels.

In other words: It is really difficult to get a bargain if you are stuck on going to a certain location at a certain time.

2. Consider Total Travel Costs

Another important factor of using your travel rewards is to consider the overall cost of the trip.

Sure you might be able to get two free nights at a nice hotel in Hawaii, but if you’re flying from Boston and plan to stay an additional four nights you’ll still be paying a ton of money out of pocket just in airfare and those extra hotel nights.

Consider things like:

• Airfare
• Additional hotel night costs
• Eating out 2-3 meals per day if your accommodations are not all-inclusive
• Sightseeing costs
• Travel costs between airports and hotel – cab fares can easily add an extra $100 to your trip

If you got the rewards card specifically to fund a trip to Hawaii and knew it would cost more, fine. But if you just want to take a nice vacation while using your points just remember to consider the cost of the trip you’ll end up paying.

3. Target Trips You Value

The bottom line is don’t settle. If you really prefer to stay in nicer hotels that cost 30,000 points per night, don’t waste time blowing 10,000 points on a lesser hotel. You will likely be underwhelmed with your accommodations and spend a chunk of your “relaxing” vacation thinking about how you should have upgraded to something nicer.

Either wait until you have the points or the money saved up to take the trip you really want to take.

4. Use the Travel Rewards Credit Card While on Your Trip

My last tip for you should be something that I hope is fairly obvious. Most travel credit card programs give you especially high rewards when you utilize companies within their network. Companies such as hotels, airlines, and car rental firms. You’re going on a trip and will likely be spending some of your own funds on the trip with firms like these. Make sure when you do that you utilize that same travel card so you can rack up additional rewards for later use.

Obviously you have to be careful in targeting these in-network travel partners. If you’ll get reward points for using a partner airline, but end up paying $200 extra for the flight, you will probably be better off not going after the points.

Be smart about it, and know your reward program inside and out. Only then can you make wise decisions as you try to maximize your credit card’s travel reward points.

How do you save money with credit cards? Leave a comment!

---

How Waiting to Invest Could Crush Your Retirement

As a general rule of thumb, procrastination is not a good idea. You’re waiting to do something that deep down you know you really should get started on. You delay on the important class paper. You delay on having the tough conversation with a friend. And naturally, you want to delay beginning to save for retirement.

It’s completely understandable. Retirement is a long way off and investing for your golden years isn’t cut and dry. There are so many factors to consider: pay taxes now with a Roth IRA or pay them in retirement with a Traditional IRA? Where should I open an account? How much should I be saving? When can I retire? It’s like trying to apply for a job without having understood the 15 page job description.

So you put it off. You wait another year. You avoid making significant changes in your life because change is painful even if it is good for you. But just like you burned the midnight oil finishing that paper or how you felt after you had that tough conversation with that friend, delaying your retirement investing can crush your retirement dreams.

Why Waiting to Invest Hurts Your Retirement

It can be daunting to get started investing for retirement, but waiting can crush your grand retirement plans.

Let Compound Growth Work for You

By delaying your retirement saving you are reducing the amount of time that compound growth has to assist you in your portfolio’s growth to retirement. How important is compound growth?

If you start saving for retirement at age 25 and save $5,000 per year into a Roth IRA for 10 years, never contribute again, and earn a consistent 7% return until you turn 65, you will end up with $642,796. If you delay starting until age 35 and save $5,000 every year until your retirement age of 65 while earning the same 7% return, you end up with $585,479. Even though you contributed 3 times as much in the second scenario ($150,000 vs. $50,000) you end up with $57,317 less.

Catch Up Contributions Won’t Save You

In Traditional IRA and Roth IRA accounts you are given the ability to contribute extra money each year once you hit age 50. But the catch up contribution is only $1,000 more bumping up your total contributions to $6,000 in those types of accounts. (You only get to put in an extra $500 in your 401k as well.) That $6,000 contribution from age 50 to your retirement at age 65 only boosts your account value up to $612,366 (assuming you earn the same 7% return). You put in an extra $10,000 in contributions and are still behind you would have if you had started early and only saved for 10 years.

How to Stop Procrastinating on Retirement Saving

Found some motivation and want to get started? Kicking off your retirement investing doesn’t have to be complicated:

Research Account Types and Open One

Before you can put money into an account, you have to have an account open with a brokerage firm. Your choice of brokerage firm will depend on what type of an account you want to open: a Traditional IRA, a Roth IRA, or a taxable investment account. Learn the differences between all of the accounts and open your account.

Set Up Automatic Contributions

One of the single most powerful things you can do to ensure successful retirement account growth is to set up automatic payments into the account every month. Your brokerage firm will gladly set up a plan to automatically take a certain amount of money out of a checking or savings account every month. Automatic contributions take the emotions out of investing and help you keep your investing plan on track.

Select Investments

Once you put money into your account you need to decide which investments to place the funds into. The easiest choice is a target retirement mutual fund that will automatically adjust the asset allocation to be less risky as you get older. Instead of having to balance between stock and bond mutual funds, the target retirement fund makes those choices for you.

Don’t delay. Not only do you not have an excuse to not get started (investing companies make it incredibly simple), but delaying will ruin your retirement dreams. Get started saving for retirement today.

Have you delayed saving for retirement? Why? Leave a comment!

---

Avoidable Disasters: Don’t Go Without Insurance

There is an insurance product for just about anything you can imagine: health insurance when you get sick, auto insurance for when someone hits your car, and life insurance to help your family if you die unexpectedly.

But all those different insurance policies can really add up on the monthly budget. It can be easy to look at all the costs and decide to go without insurance on certain items just to save money. However, that decision can be financially devastating if you don’t have insurance at your biggest point of need for insurance.

Potential Disasters from Procrastinating on Insurance

All it takes is one emergency to ruin your finances for years, decades, or forever. Here are a few scenarios where skipping insurance just doesn’t make sense:

Health Insurance

The high cost of health insurance is a hot topic in the United States. Legislation passed by Congress a few years ago to cover more Americans is under attack, and employers are stuck with ever increasing premiums for their employees. If you have to buy insurance on your own the cost of premiums can be hundreds if not thousands of dollars.

However, going without health insurance can destroy your finances. All it takes is a medical emergency requiring an extended stay in the hospital to see your bill hit hundreds of thousands or millions of dollars. Even cutting your insurance down to a catastrophic-only policy is better than going without insurance at all. Until the healthcare cost issue is solved in the United States, going without health insurance is just too risky.

Auto Insurance

If you drive a vehicle, you are required to have insurance on the vehicle. It is easy to think “I’m a good driver, I don’t need car insurance”, but state legislation doesn’t see it that way. Every state requires you to have to minimum liability coverage to be able to drive your vehicle. But even this minimum insurance won’t do you much good if you hit someone and injury them significantly (or cause a lot of damage to their vehicle). The biggest risk isn’t necessarily the damage done to the vehicle, but liability if someone sues you as the result of an accident.

Homeowner or Renters Insurance

Could you afford to replace your home and all of the items inside of it? If your answer is no, you need homeowners or renter’s insurance. If you own a home you are contractually obligated by your mortgage company to carry insurance because they know you won’t be able to pay off the mortgage in cash if your home is destroyed.

As a renter it can be easy to think you won’t need insurance to cover your belongings because you’re always safe. While you aren’t always required to have renter’s insurance, you really should have it. Renter’s insurance is cheap – $20 or less per month – and protects you not only from your mistakes, but of those of your neighbors. You might not light your apartment on fire, but your neighbor might leave the stove on all day and destroy the entire complex.

Life Insurance

Of all these insurance types, life insurance is the easiest to drop safely. However, your ability to go without life insurance depends on your family’s situation. Life insurance is designed to provide a financial windfall to your family if you die in critical years where going without your income would be devastating. If you are a single income family, the person earning the single income should have life insurance at the bare minimum. If that income is suddenly removed, your family would be devastated. However, as you get older and your financial situation becomes more solid (i.e. you have a substantial retirement nest egg, you own your home, your kids are out of college and living on their own, etc.) then life insurance becomes less of a necessity.

Don’t Go Without Insurance

As you can see, going without insurance can be financially devastating. If you find yourself in a financial pinch, try to find other areas of your budget to cut before your insurance. Cut cable, entertainment, eating out . . . any “luxuries” of modern life should go before you cut your critical insurance policies.

What pieces of insurance are you lacking? Why? Leave a comment!

---

My 2 Biggest Money Mistakes and How You Can Avoid Them

One of my goals in life is to avoid making significant money mistakes that set me back financially. However, I’ve made my fair share of mistakes that have cost me dearly. Here are some of the biggest financial mistakes I’ve made, and how you can avoid them. Learn from my mistakes so you don’t have to experience these problems on your own.

Buying a House at the Wrong Time

By far my most significant money mistake was buying a house. I’m not saying owning a home is a bad idea – not at all since I’ve since purchased another one! – but that it is such a serious commitment that really have to be sure you’re making the right decision.

In my situation, my wife and I bought a house at a very young age: I was 23 and she was 22. We had received some money and saved up on our own to be able to put a 5% payment down. The house was in a new development where there were about 5 different floor plans. The standard cookie cutter neighborhood. We got a 2nd mortgage for the remaining 15% we couldn’t put down to get to the 20% down payment.

All of that would have been fine because we paid off the second mortgage within 3 years with a very aggressive pay down plan – you can find similar plans. If we had lived there for a long period of time, it would have been great. We thought we would live in that city, in that state, for many years to come. But less than 4 years after signing the papers, we were packing up the moving truck to move back closer to our families. We went from being 6 hours away to about 2 hours away.

It also helps to mention we bought the house at the peak of the housing market, but unlike others who planned to flip their homes, we seriously intended to live there for a long time. We just couldn’t see into the future well enough to know we weren’t going to live in that state for more than 5 years. As a result we lost almost all of the equity we built up in the house. But I’m not complaining – at least we avoided foreclosure and were able to sell about 3 months after we moved away.

Buying a “Cool” Car

My second dumb money move was to buy a car in high school that I could modify to be “cool”. While I’m still a car guy at heart, I still smack my forehead when I think about what I did. I had originally planned to buy an early 90s Mitsubishi Eclipse. They were cheap, easy to modify, and I liked the look. I saved up my cash and all was going as planned until my parents talked to their insurance agent about coverage. It turns out these cars were death traps because they were cheap and easy to modify. Teenagers would buy them, make them fast, and wreck them with catastrophic results, so the insurance rates were insane.

Disheartened, my parents then surprised me by saying they wanted me to have an incredibly safe car. They knew I was still a car guy, and ended up letting me buy (with their assistance to keep me alive) a 1995 BMW 318is with 128,000 miles on it. I was thrilled. Are you kidding me? I’m driving a bimmer (Note: It’s bimmer for the cars, and beamer for the motorcycles. Pet peeve!). Of course what I quickly discovered was BMW stands for “Break My Wallet,” especially as a high school student working at the movie theater (talk about breaking the budget).

The car was safe as can be, but parts were expensive. And of course I wanted to modify it, so I bought some sport shocks and springs and had the genius idea to install them myself with a buddy. Why pay a certified mechanic $300 to install them? We could do this! Of course we installed them wrong, they eventually went out, and oh yea, I forgot to get an alignment with the new suspension . . . so I shredded a pair of tires very quickly because of how off the alignment was. It was one bad money decision that led to another significant cost that led to another significant cost. Horrible money decision, even though I loved that car.

What are your biggest money mistakes? What money lessons can we learn from you?

---

The High Cost of Procrastinating on Your Debt

Sometimes debt is unavoidable. You weren’t financially prepared, something came up, and you had to spend more than you had. Other times, debt is completely avoidable. You saw something you wanted, you didn’t save up for it, and you purchased it on credit. Any way you cut it, debt isn’t a good thing to have. You are paying interest – spending more money – on something already in your possession. The faster you pay off your debt, the better your financial position becomes.

But our debts can seem overwhelming at times. The monthly or annual amount needed to put a dent into your debt can seem to be so much that you will never achieve debt freedom. Yet procrastinating on your debt is not the answer . . . the cost is simply too high!

Why Procrastinating on Debt isn’t the Answer

Procrastinating is easy to do on any task that we think is uncomfortable or requires a lot of work. But while procrastinating on that paper in college only cost you a loss of sleep the night before it was due, delaying on your debt has far higher consequences.

Here are a few costs to consider:

• Interest. The biggest cost of not paying off your debt is the interest you pay to finance your previous purchases. You spent more than you had, and that comes at a cost. Depending on what you purchased and which financing method you chose, you could be paying anywhere from 5% to 20% in interest. That interest represents a huge sum of money if you delay in paying off your debt.
• Stuck in neutral. If you aren’t focused on paying off your debt, you aren’t moving forward. At least if you are paying the minimum payments then you aren’t moving backwards, but you don’t want to remain stuck in neutral forever. By having to spend extra money on debt interest, you aren’t able to save, invest, and plan for your future. You’re stuck dealing with past poor decisions!

The Cost of Minimum Payments

One of the ways you can trick yourself into thinking you are making progress on your debt when you really aren’t is to just pay the minimum payment. Minimum payments are just that – the absolute minimum payment you can make while still making small dents in your debt. A $10,000 credit card balance with a 15% interest rate and 2% minimum payment would take 32 years to pay off. During that time you would pay $15,580 in interest – more than the original debt. Even with a 5% minimum payment you would pay $3,330 in interest and need 15.5 years to pay off the debt. Minimum payments are one of the ultimate ways to procrastinate on your debt; don’t fall for the trick!

How to Avoid Delaying on Debt Payoff

Just like getting that surge of motivation a few days before that big paper is due, maybe you’ve had a surge of motivation to pay off your debt. Here are a few ways to avoid further delay on getting out of debt:

• Don’t miss a payment. Missing a payment or even paying a few days late can skyrocket your interest rate and cause a huge number of fees on your account. The first thing to do is to make sure you are not missing any payments. An easy way to do this is to set up your debt minimum payments to automatically be paid every month.
• Spend less than you earn. After you make sure you aren’t going to get hit with late fees, it is time to increase the amount of money you have available to pay off your debts. That means spending less than you earn (even if you live in a big city) and cutting back in as many areas that you can. If you can cut back for a few months or years, you could pay off your debts completely.
• Do a debt snowball. Once you know how much extra money you have every month, you can start a debt snowball. Pay off your lowest balance debt first, then roll the minimum payment you would have paid on that debt into the next smallest debt. Roll that money forward until you are debt free.

Have you experienced the high cost of procrastinating on debt? What are you going to do about it? Leave a comment!

---

Page 41 of 190« First«...102030...3940414243...506070...»Last »