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Monday, August 3, 2009

Budget Tip: Don't Forget the Roth IRA When Planning for College

There are several good investment tools for saving for college.  Several of these plans have some definite tax advantages.   Many states offer tax deductions for 529 plans and the investment earnings for 529 plans and Coverdale accounts are tax free.  The Coverdale account can even be used to pay for private elementary and high school.  In the mix of savings plans available for college many people overlook one of the most obvious savings tools, the Roth IRA.

Most people only think of the Roth IRA as a retirement account, and that is its primary function.  Sadly, many families have to choose between college savings and retirement savings.  The advantage to the Roth IRA is that it allows for both, and in some scenarios can save parents money.  Since the Roth IRA is paid for with after tax dollars, the principle (amount out of pocket invested) can be withdrawn at any time for college with no penalty.  There are two benefits to using a Roth IRA for college savings.

  • It allows a taxpayer to save above the amount allowed by other college plans and still take advantage of tax free earnings.  An individual can save up to $4,000.00 a year in a Roth IRA and not pay taxes on any earnings.
  • It bypasses withdrawal penalties of college savings plans if the student earns sufficient scholarships to cover their college expenses.

If you use a plan like the 529 plans and your child does not need that money because of scholarships you have three options.  You can pass that money to a sibling or, if there is no sibling, use the money yourself to go back to school.  If neither of these options is available, you can withdraw the money with a 15% interest penalty.  With the amount of Interest earned over an eighteen year span that could be a lot of money.  If the savings is in a Roth IRA, that money can now be designated as retirement savings and nothing needs to be done because it is already in a tax advantaged retirement account.  If your child needs some of all of your principle for college, the interest earned can help you get caught up on retirement savings once your child's college expenses are paid for.

While not intended as a primary college savings vehicle, consider a Roth IRA as one of the tools you can use to save for your child college education.  Take full advantage of the benefit that the Roth can offer for your child, as well as the possible future benefits it may hold for you as well.

Saturday, August 1, 2009

Is Debt Consolidation Right for You?

In an economic recession the excesses of consumer spending can be a burden to many people. Debts that were easily managed when a steady income was flowing in become overwhelming when a job is lost or income is cut.  As a result many people look to debt consolidation programs to make their economic burdens a little lighter.  For a debt consolidation program to be truly effective, there are several things that the consumer should know.

The most important thing to consider when looking at debt consolidation is the reputation of the debt consolidation company.  There are legitimate debt consolidation companies that work in the best interest of the consumer.  There are also those companies that charge large upfront fees and pass them off as the first debt payment.  There are several debt consolidation providers that are for profit companies that claim to represent non-profit companies when in fact they own the non-profit company.  The consumer must do research on the ethical behavior of any company that is considered for a debt consolidation program.

Debt consolidation does not elevate the responsibility for the incurred debt.  What debt consolidation does do is work to lower interest rates and lengthen the term (length of time to repay) of the debt to lower the monthly payment.  The idea is to free up income that is being put toward debt for other, more urgent, purposes.  For those who have suffered the loss of income due to job loss or wage reduction, the lowering of monthly debt payments could be the difference in being able to provide for the essentials or facing bankruptcy.  Before one considers debt consolidation as a means of simply lowering monthly debt payments, there are some things to consider.  Debt consolidation will have a negative impact on credit scores.  By entering into a debt consolidation agreement future creditors are given the message that the consumer has gotten into trouble before and it could happen again.  Furthermore, debt consolidation may increase the amount of money repaid to satisfy the debt.  Even if the interest rate is lowered, the length of time to repay the loan is extended so less of the monthly payment is being applied to the debt principle.

One thing debt consolidation does not address is the reason that the consumer is in the position to need such a program.  Debt is a symptom of a problem not the problem itself.  Many people who enter into debt consolidation programs end up deeper in debt because the do not close lines of credit or credit card accounts.  Any reputable debt consolidation company will counsel their clients in methods to eliminate the habits that led to their debt.

Debt consolidation, while a potentially useful tool, is not for everyone.  Before entering into any debt consolidation or elimination program a consumer must research the type of program to use, the company, the pros and cons of the program, and they must examine their own habits to determine why they are in the position to need the program.  For some the preferred course of action is to keep the present debt arrangement and find ways to add to the amount of principle paid.  For others debt consolidation could be the right answer to the problems they face.

Saturday, July 11, 2009

Common Sense Tips For Saving Money

There are many ways that we can save money in our household budget. How big can this be? Well, if you work a forty hour week and you are able to save forty dollars a week you have just given yourself the equivalent of a one dollar an hour raise. That is $2080.00 dollars a year. Here are some quick and easy ways to save money.

Clip Coupons

This is a oldy but a goody, and with the Internet a new avenue for finding coupons that you can use is at your fingertips. Don't forget the god old Sunday newspaper. If you don't get the Sunday paper, or if there is a coupon for something you buy every week, ask friends and family for their unused coupons. Use websites like to print on-line coupons. I printed a two dollar off two boxes coupon for a particular brand of cereal. At four dollars a box, I wouldn't buy one, let alone two. When I got to the store I was presently surprised to find that a flavor of this cereal which I liked was marked down to $1.79 per box on a closeout special. The store honored my coupon so I effectively bought each box for seventy nine cents.

I also use U-Promise coupons. You must register your grocery store loyalty card. If you e-clip a coupon an activate it, U-Promise will put that money into a savings fund for your child's college.

Create A Menu Before You Shop

Plan your weekly meals before you shop for grocery items. That way you no exactly what to buy and can save money by mot indulging in impulse buying or "maybe I can use that this week" decisions. Planning you menu around your weekly coupons is an even easier way to save money.

Cook a Little Extra and Create a Leftover Meal

Don't throw away leftovers. Leftovers make great bag lunches, are great for pot-luck dinner nights, or as heat and eat snacks. I invested in a vacuum sealer, and have more than recouped my money by taking leftovers with me to work. We seal individual servings and when we have accumulated enough of them in our freezer, we have a pot-luck dinner night where everybody makes their own menu with what is available. You can find vacuum sealers now on ebay for very low prices. My brother even found my $99.00 model at a thrift store for $5.00. Needless to say, his leftovers are even more cost effective than mine are. Vacuum sealers are also great if you or someone in your family hunt, fish,or grow a vegetable garden.

Get a Freezer

This is another item that you may be able to buy used. Having a freezer allows you to buy meat in bulk and gives you a place to store extras from your garden, fish,game, and even the leftovers.

These are just a few ways that you can save money. I will post future blogs with more tips. Until then, happy savings.

Tuesday, July 7, 2009

Never Spend a Single, Turning Spare Change into Real Savings

How many people have an old jar that they empty their change into at the end of the day. Change, you know. That jingling stuff that ends up in your pocket or the bottom of your purse after you break a one. Judging by the nearly fifteen dollars of it I have picked up off the ground at the gas pumps this year, some people have ceased to consider it money. The change jar is a time tested method to accumulate savings, but let me give my spin to this technique. Instead of saving the change from each one you break, try saving the change from each five that you break.

Wait, lets not go to extremes here. No, lets. I like to observe people. Observation is one of the key learning skills. One thing that I have observed, especially from men, is that when we break a five at the store the ones that we receive in change go into our pocket not back into our wallet. Women tend to treat their ones in a similar manner. I observed a man at Wal-Mart several months ago pay for a coke at the counter with a five and ,on cue ,when he was handed his change it went into his pocket. That same man was in the check-out line at the Dollar Tree next door a few minutes later and instead of pulling out the change (which would have more than covered his purchase) he pulled out another five. I laughed, and then I realized I did the same thing. Once money leaves my wallet and goes into my pocket, it is forgotten.

From that day on, when I break a five I intentionally put the change in my pocket and forget it. My pockets are emptied into my change jar every afternoon. My expectation is to pay for Christmas in full with my spare change. I must admit, I did not come up with this idea. I met a man in Florida who has done this with his wife for years. In one three year period of time he saved enough to by a beautiful, slightly used, bass tracker bass boat for cash.

If you are one of those people who have stopped spending cash, opting instead for debit cards, there are a lot of banks that offer cards that round every purchase to the nearest dollar and deposit the change directly into a savings account. That is "change" you can believe in.

Monday, July 6, 2009

Creating a Monthly Home Budget

A monthly home budget is a guideline that allows you to anticipate you monthly expenses by spending your income on paper before the month begins. A good home budget is essential for any successful personal finance plan and is the first step in getting control over your money instead of letting your money control you. A home budget is easy to set up by using last months income and expenses as a starting point. If you are a worker that gets paid on commission or with tips (a variable income employee) it might be necessary to average several months of income before nailing down your budget. After that, the process is basically the same.

A Monthly Spending Journal

It is helpful when setting up a budget to keep a journal of expenses for several months. This will allow you to see trends in your spending and allow you to have an idea of how much money to allocate to the different categories of your budget. Simply keep a small steno pad with you and each time you spend money record it. The size of the transaction does not matter. You want to see where each dollar in a given month is spent. The results will often times shock you.

Categorize Your Spending

The best way to categorize your spending is by using a budget form. There are several websites that will allow you to download a budget template for free. I have found them in word documents as well as excel files and they work great. One word of warning, don't allocate money to a category just because the category is there. A generic budget form is designed to accommodate multiple users with a wide range of spending habits. Use only those that apply to you. For instance, it would be silly to allocate money to daycare if you are a single person with no children. Categories will be separated by the main spending category and possibly several sub-categories. For instance your housing category may look like this.

  • Mortgage ________
  • Insurance ________
  • Utilities
Electric _______
Water/sewer _______
Gas ______

You get the idea?

Budget Guidelines

A budget guideline is a suggested percentage of your income that should be allocated to each category. The budget guideline I use looks like this

Percentage of Income

Expense Description

Gross income
10% God/church

Net Spendable Income(net income minus 10% of gross)

35% Housing
10% Utilities
18% Transportation
10% Food
2% Clothing / Attire
5% Misc. (eg Phone, Internet)
5% Medical Expenses
5% Other Debt
6% Savings
4% Entertainment

In my guideline ten percent of my income is allocated for tithe to my local church. Since I am Christian and a minister, I make this a priority in my life. I understand that each person that reads this may not feel the same way, but I do encourage giving because it puts money into its proper perspective. There are wonderful charities that do good work if you do not have a particular religious conviction. Note, this guideline is set up for tithing on gross income. To determine net spendable income subtract the tithe from the net income and the remaining amount is net spendable income. These guidelines can be adjusted for your own personal needs. If you only spend 20% of NSI on housing, the remaining 15% can be added to another category, preferably savings.

Now You Are Ready!

That is basically all that is involved in creating a home budget. Now you are ready to begin the process of taking control of your finances. This is a trial and error process so let me encourage you, if at first you make some mistakes, don't get discouraged. I teach this stuff all the time and I still make mistakes. Below is a simple sample budget for you to begin with. Good luck.

Basic Budgeting Worksheet

Total Monthly Income

- Taxes, Health Ins. & Other Payroll Deductions $__________
- Savings, 401K, etc. $__________
= Total Monthly 'Spendable' Income



Housing Expenses

Monthly Payments

Rent or Mtg. $__________
Utilities $__________
Insurance (set $ aside each month if paid annually) $__________
Repairs (set $ aside for future expenses) $__________
Taxes (set $ aside if paid annually) $__________
= Total


Car Expenses

Loan Payment(s) $__________
Gas $__________
Insurance (set $ aside if paid annually) $__________
Maintenance & Repairs (set $ aside for future expenses) $__________
= Total



Creditor #1_____________ Balance_________ $__________
Creditor #2_____________ Balance_________ $__________
Creditor #3_____________ Balance_________ $__________
Creditor #4_____________ Balance_________ $__________
(figure more on back if needed)

= Total



(Set $ aside each month for annual expenses, such as Ins.)

Church Tithes & Offerings $__________
Other Charitable Contributions $__________
Groceries, Lunches, Meals Out $__________
Childcare $__________
School Tuition/Supplies $__________
Medical Bills and CoPays $__________
Prescription Medicines $__________
Pet Supplies & Vet Exams $__________
Entertainment, Cable, Video Rentals $__________
Club Dues (Homeowner's Assoc., Fitness, etc...) $__________
Newspaper, Magazine Subscriptions $__________
Clothing $__________
Haircuts $__________
Gifts $__________
Cash $__________
Other (continue on back if needed) $__________
= Total


Monthly Expense Totals

Housing $__________
Car $__________
Debts $__________
Miscellaneous $__________
= Total Expenses $__________


Monthly Surplus or Shortage

(Total Spendable Income minus Total Expenses) $______________

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