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Credit Utilization Ratio

Credit Utilization Ratios (CUR) – We used this term in an earlier article about credit scores and how they are calculated. The three major credit bureaus all factor in the amount of credit you have available and how much of that available credit you are utilizing or using. In most cases, this makes up about 30% of your total credit score so it is an important thing to keep up with.

To find out your credit utilization simply divide your credit card balance by your credit limit then multiply by 100. For example, if you have a total credit limit of $10,000 on all of your cards and your total balances on the cards are $1,000, you have a low CUR of 10%. This will increase your credit score and lenders will love you. If on the other hand, you have total balances of $8,000, you have a high CUR of 80%. This could not only hurt your credit score but lenders will be very leery of extending additional credit to you. In fact, having a CUR of greater than 30% can start to negatively affect your credit.

Also, be aware that car loans or a mortgages are calculated based your original loan. For example, if your original car loan was for $20,000 and your current balance is $10,000 then your CUR will be 50%, whereas if you owe $18,000 it will be 90%.

The credit bureaus tend to look at your CUR in two parts. First, it scores the credit utilization for each of your credit cards separately. Then, it calculates your overall credit utilization, that is, the total of all your credit card balances compared to your total credit limits. So before applying for more credit, get your balances as low as possible and allow yourself enough time for changes to be reflected in your credit score. Remember, creditors may not report changes immediately. ps!

Minding Your Money: 5 Easy Ways to Lower Your Credit Score

Sometimes you start out to do the right thing – save some money or simplify your life – but many of the options you choose can also result in lowering your credit score. And this may mean paying a higher interest rate or getting less favorable terms if you want to make a big purchase such as a home or a car in the near future. So be on the lookout and be aware that the following behaviors could have negative consequences:

  1.  Applying for more credit. While it may sound frugal to open a department store credit card and receive an instant discount on your purchase, it often does not help you in the long run because the savings may not be worth the ding to your credit score. Any new credit applications are a hard inquiry on your credit report, which can lower your score. And the same is true for gas cards, new auto insurance, and cell phone plans where they check your credit. All of these could result in savings but they could also ding your credit score so weigh the pros and cons.
  2. Keeping a zero balance. Because we are at the mercy of the credit bureaus, many of the rules they have to build and maintain a high credit score are really counterintuitive to staying totally debt free and this is one of those instances. When a small amount is owed, the remaining credit on your card is factored into your credit utilization ratios (how much of your available credit you are using) while cards with no balance don’t count. So you can actually boost your score by having a small amount of debt while having none may lower it.
  3. Closing a credit card account. Everyone is trying to get out of debt these days so once you get there give yourself a big pat on the back but resist the urge to cut up your card and close your account, especially if is one of your oldest cards. One of the factors that the credit bureaus look at to determine your credit score is the length of your credit history and closing an older account could result in another ding to your credit score
  4. Keeping a high balance. While tough economic times may result in higher credit usage be aware that the amount you owe on your accounts makes up about 30% of your credit score. When you use only a small amount of the total credit you have available, such as 10% – 30%, lenders consider you to be a low credit risk and are more willing to lend to you and give you more favorable terms so always keep your totals as low as possible, but not zero (see #2 above).
  5. Negotiating a lower APR. Who wouldn’t like to lower their rate, however this sometimes results in the credit card company also lowering your credit limit. While on the surface this may not seem like a bad thing, what this does is it reduces the total amount of credit you have available and if you are using more than 30% of your available credit this could ding your credit score (see #4 above).

A Get Out of Debt Plan Ain’t Sexy…But

Having a get-out-of-debt plan ain’t sexy but it can have a huge impact on your future. If you don’t already have a plan, the best time to get started is NOW. Instead of waiting until the New Year, start now and beat the crowd. Sure it’s tempting to think that it will be magically easier in January than it is now but that’s not always your best option. In the meantime, you continue to pile up debt which only makes your situation more difficult.

So start the year off right with a plan that you have already started to implement. I know it’s difficult with all of things you want to do and buy during the holidays but try to step back and put things in perspective. Once you have a plan in place, you know what you have available to spend without busting your budget and putting your future goals on hold.

And to help you get started my new book, Squeeze the Most Out of Your Money, has a whole chapter devoted to debt reduction, and for a limited time you can download my 7-step plan to formulate a get-out-of-debt plan for free when you sign up for my mailing list.

Briefly, my 7-step plan includes:

  1. Putting an end to charging because you can never hope to get out if you keep charging,
  2. Making a real commitment to do what it takes to get out of debt and this may entail some sacrifices at least in the short-term.
  3. Reviewing your spending plan to see how much you have available to put toward paying off your debt.
  4. Creating a detailed picture of your current situation. In other words, how much debt you owe and who you owe it to.
  5. Negotiating with your creditors. This doesn’t always work but when it does, it can save you a lot.
  6. Deciding on a debt payoff strategy. The two main strategies that I advocate are paying off the creditor with the highest interest rate or the one with the lowest balance first. The key is once you decide on a strategy to stick with it.
  7. Implement your plan, monitor your progress, and celebrate your successes.

Don’t forget, sign up for mailing list and download the Squeeze Your Money 7-Step Plan to get-out-of-debt for free then let me know how your plan is going. ps!

My 5-Step Remedy to Avoid a New Year’s Debt Hangover

With high un- and underemployment many people are looking for ways to get through the holidays with less. If you’re considering going into debt to make up the difference, remember debt is just a temporary fix that will come back to haunt you in the New Year. Instead consider options that let you enjoy the holidays and start the New Year without a debt hangover. Here’s my 5-step remedy to squeeze the most out of your money and enjoy a debt-free holiday: (Caution: This remedy may be a little hard to swallow at times but it is good for your wealth!)

 Step 1:  Start with the end in mind. Make a conscious decision that going into  debt will not be a part of your celebration. In fact, hide your credit cards and pretend they don’t exist.

Step 2:  Determine how much money you really have available to spend during the holidays. Look at your income and expenses to see what is available. If you’re not happy with the amount you find, look for places where you can cut back, at least for a couple of months. Or consider looking for a part-time holiday job. In either case, the amount you have is what you have. Here are a couple of articles I found on Bankrate.com with even more suggestions to save money for the holidays –  http://www.bankrate.com/finance/personal-finance/7-uncommon-ways-to-save-for-the-holidays-3.aspx and http://www.bankrate.com/finance/personal-finance/10-ways-to-save-500-or-more-1.aspx.

 Step 3:  Get ‘buy ins’ from your family and friends.  The taboo on talking about money is slowing lifting so talk to your family and friends. Tell them about your decision to have a debt-free holiday and the reasons you are doing it. Getting your circle of family and friends to agree and possibly even follow suit or at least set different expectations about what they will receive from you during the holidays can make the process smoother and more enjoyable for all. Even kids can be amazingly resilient if they know the reasons why so don’t keep them in the dark either.

 Step 4:  Get creative. Depending on how much money you found in Step 2, you may really need to get creative. But before you think it’s impossible, think back to the olden days when people had a lot less and they still managed to enjoy the holidays. There are so many low cost possibilities so use your imagination. Here are 10 suggestions to get you started:

  • Use layaway for gifts so you can pay as you go.
  • Draw names in your circle and give one nice gift.
  • Set gift amount limits.
  • Give homemade gift certificates for gifts of your time or talents or even special favors for the kids such as staying up one hour after bedtime.
  • Get crafty and make gifts for your circle members.
  • Share expenses – invite friends and family over for pot lucks.
  • Plan family projects, games etc. that everyone can participate in. We are often so busy that we just don’t have the time to really enjoy our families.
  • Encourage your kids to do extra jobs to earn money for gifts or things they want.
  • Give to others – donate old toys and clothes or volunteer at a shelter. This is a great gift that you can give to others and it only costs a little of your time.
  • Celebrate the spirit of the holiday. So many of us have moved so far away from the real purpose and made it about material things. Use this opportunity to really reconnect with the true meaning of the holidays and keep the spirit alive all year.

Step 5:  Plan for the holidays all year long. I’m a big fan of planning for large purchases and I consider the holidays a large purchase. Once you have an idea of what you want to spend for the holidays, plan to set aside a portion of that each month in a special account like a high-yield savings account. INGDirect.com and           SmartyPig.com are just two examples that don’t require a minimum deposit to get started. Then when the holidays roll around again, you will have the dollars to spend anyway you like.

Remember, it’s not written in stone that you have to go into debt to enjoy the holidays so just say no! ps!

The Wage Gender Gap Could Cost You $2 Million

The financial consequences of Working While Female (WWF) can add up to a lot of  missed opportunities.

For all of us who are guilty of WWF we already know we earn less then men with the same job. Studies show that on average women earn 77 cents for every male dollar, and while that may not sound so bad in and of itself, have you ever wondered what that could add up to over your lifetime?

Well, according to the article “Gender Wage Gap: Are you paid as much as a man if he had your job?” by Evelyn Murph, the president of the WAGE Project and E.J. Graff, a resident scholar at the Brandeis Women’s Studies Research Center, the gender wage gap could cost you big time. Although this information is a couple of years old, I think it bears repeating:

  • If you’re a young woman who graduated last summer from high school, you will earn $700,000 less than the young man standing in line with you to get his diploma over your working life.
  • If you graduated from college, you’ll lose $1.2 million compared to the man getting his degree along with you.
  • If you graduated from law school, medical school, or got an MBA last summer, you’ll lose $2 million over your lifetime.

So you may be asking, why worry about this issue now? And what can you really do about it? It has been this way since the beginning of time. Well, call me the eternal optimist, but I believe that just because something has always existed one way that doesn’t necessarily mean that it has to continue that way. And, until you recognize a problem and it hits home, there isn’t much incentive to fix it. So consider this, the missing money in your paycheck could represent food you can’t buy, credit cards you can’t pay off, lessons your children won’t have, and retirement savings that you will never have the opportunity to enjoy. So this is not just one woman’s problem, it belongs to all of us.
One fix to gain some headway is to be proactive and practice the art of salary negotiation beginning with your first job and every job thereafter. As women, we are sometimes timid about negotiating a salary, but guys do it all the time and that is one of the reasons why they stay ahead of us when it comes to pay.

My question to you: Why do you think the gender wage gap still exists? Here are some explanations that have been given over the years. The gender wage gap exists because:

  1. Women aren’t as well educated as men
  2. Women leave the workforce to have babies
  3.  Women choose low paying jobs
  4. Discrimination

What you think? Do you agree or disagree with the explanations above and what we should do about it? Remember, our actions today will not only affect us, but the generations of women that come after us. No pressure here. ps!

Love and Money Infidelity

There is a new buzz word for a very old problem – financial infidelity.

Financial indelibility is basically keeping money secrets from your significant other. It can range from hiding an occasional purchase from your partner to secretly gambling away retirement investments, and it doesn’t take a genius to figure out that keeping money secrets in a marriage is not a good thing no matter how well rationalized.

Some of the common reasons people give for engaging in financial infidelity include:

  • A lack of trust in their spouse
  • Feeling they are entitled to get the things they want
  • Feeling that they are not entitled to buy things for themselves so they lie about it
  • To avoid a fight because every time they talk about money it turns into an argument
  • Revenge – to get back at a spouse for something they did or didn’t do

Because financial infidelity affects your finances as well as your relationship, many people believe it is actually worse than cheating because it can not only ruin your relationship but your bank account as well and leave you financially strapped for a very long time. So how can you protect your relationship? Here are three basic strategies to keep you and your spouse from falling into financial infidelity trap:

  1. Have regular money discussions.  Money issues are one of the leading causes of divorce so couples who can talk about money – their goals, their ideas about managing money, their concerns, and disappointments have a much better chance of creating a successful relationship. The problem is, many couples find it difficult to talk about money so they keep secrets. However, since secrets have a way of eventually coming out, by not talking to your partner, you could be risking your entire relationship for some unimportant stuff. Instead, try scheduling regular ‘money dates’ with your partner to talk about money. Find a quiet time and place to talk, and then discuss one issue at time. Listen to each other and give each other time to respond. If you are unsure how to start, start with the Love & Money Quiz and make it a fun conversation. Then discuss an area of concern and why it is so important to you on your next ‘money date.’
  2.  Have a ‘mad money’ allowance. Set a dollar amount that each of you can spend any way you like (typically $50-$200/mo.) so that you don’t have to sneak around every time you want to buy something or go out.
  3. Manage your money together. While you don’t have to do everything together, each of you should know your financial situation at all times. It’s okay to trust each other, but take the time to check in on occasion to stay up to date. Some important activities include opening and paying bills, creating a budget, and periodic reviews of your investments.

Don’t put your relationship at risk instead look for constructive ways to work through money issues with your partner. It can not only bring you closer together, but it can help you build a relationship that will endure through good and bad times. ps!

 P.S. Read more about financial infidelity in Bonnie Eaker-Weil’s book, Financial Infidelity: Seven Steps to Conquering the #1 Relationship Wrecker  

Be on the Lookout for Self-Defeating Behaviors

“Good judgment comes from experience. Experience comes from bad judgment. But that doesn’t mean that you can’t skip a step and learn from the mistakes of others.” ps!

Self-defeating behaviors are easy to fall into because they often seem very logical, however following them can make it difficult for you to ever reach your goals. So be aware, self-defeating behaviors can be very dangerous to your wealth. The good news is, you can avoid many of them by just being aware that they exist.

To help you learn to recognize them, here are five common self-defeating behaviors to be on the lookout for:

  1. Counting on future earnings to pay present debt. We all expect to earn more money in the future so the self-defeating behavior here is that we trick ourselves into believing that the debt we rack up today doesn’t matter that much because we can take care of it in the future when we are earning more money. The problem is, if you don’t change your spending habits now, a bigger paycheck will only lead to bigger wants and needs, and you will end up with even more debt in the future.
  2. Using feelings versus reality to make spending decisions. Emotional spending can get you into trouble. One of the best ways to keep yourself firmly planted in reality is to plan your spending based on your priorities. Creating a budget that includes ’mad money’ that you can spend anyway you like and money for your goals as well as household expenses is a great way to create flexibility in your budget and stay on track.
  3. Trying to keep up with the Joneses. Sometimes having more stuff than someone else is about winning or being better, and sometimes it’s about feeling that you deserve to have whatever you want because you work so hard. Whatever the case, if you can’t afford it or if it comes at the expense of other goals you really want, learn to let it go.
  4. Thinking you are too busy to M.I.N.D. your money. You work hard for your money and not paying attention to your finances is a disaster waiting to happen. Instead remember to:
  • M –    Manage your money: Take responsibility for your financial future and take the time to manage your money. Once you set up a system, you can do a good job of managing your money in just a few hours a month.
  • I -      Invest in things you know and things that grow: There are no quick fixes so stay away from the ‘hot tips.’ Do your research and look for investments you understand, and make sure you know the costs, and the risks before investing. Work on building your wealth by investing in assets that you believe will increase in value over time. (Note: That doesn’t include shoes, but it might include shoe companies.)
  • N -    Never give up your power: Since you will have to live with the result, always be an active participant in financial decisions that affect you. It’s okay to have advisors or other people to perform many of the tasks associated with managing your money, but you should always have the final say.
  • D – Don’t stop learning and educating yourself: Things are always changing and the more you know, the easier it will be to manage and grow your money. Plan weekly activities you can do to continuously upgrade your skills. Participating in money-related activities such as attending classes, watching TV programs, or reading books, magazines, and newspapers is an easy way to grow your skills.

Stop and recognize the importance of minding your money today so that YOU, and not someone else, will be in control of your future!

  • 5. Ignoring your goals, or worse yet, not setting any. Believing that you have plenty of time to save and prepare for the future is both dangerous and wasteful. This type of thinking puts more pressure on you to do well in the future. And it is a simple fact that the earlier you start investing, the less money you need to reach your goals. For example, if your goal is to accumulate one million dollars by age 65 for retirement, and you start at age 20, you only need to save a little more than $200 a month if you earn just 8%. But if you wait until age 40 to start saving, you will need to save more than a $1,000 a month to achieve the same goal because you will have less time to take advantage of the power of compounding.

Always be on the lookout for self-defeating behaviors. They can pop up when you least expect it. If you find yourself falling into one of them, don’t hesitate, take steps to get out immediately! ps!

What’s Your Net Worth?

To chart a path to financial independence, you need to know where you are now.

The best tool to determine your starting point is a net worth statement. Your net worth is essentially a snapshot of your general financial condition at a given point in time. As you increase your net worth, your overall wealth base also increases so it is a good idea to set goals to increase your net worth each year.

Your net worth consists of everything you own minus everything you owe. To calculate your net worth, add up everything you own (assets) and subtract everything you owe (liabilities). The result is your net worth.

 

Assets include cash on hand (checking accounts, savings, certificates of deposit (CDs)) stocks, bonds, mutual funds, your house and cars, the cash value of life insurance policies, retirement plans, annuities, real estate and business interests, household furnishings, antiques, jewelry, coins, and artwork. In other words, anything of value you own that could be sold. When estimating the value of your assets, don’t worry if you don’t have the exact dollar amounts. Simply write down the amount you think you could reasonably sell each item for today or the ‘fair market value.’ 

Liabilities include outstanding loans (student, auto, installment), mortgages, credit cards, unpaid bills (medical, utilities, etc.), and taxes you owe (income tax, real estate taxes, etc.).

If you have more assets than liabilities, you have a positive net worth, and that’s a good thing. It means that you have a good base to start with. If on the other hand, your liabilities are greater than your assets, you have a negative net worth, and while that is not the best thing, it’s important to know so that you can determine areas you need to work on to grow your net worth and your wealth.

Once you complete your net worth statement, consider any changes that might be occurring in the next year that could impact it, and then project your net worth for the coming year. For example, paying off a current debt will decrease your liabilities and increase your overall net worth. After you factor in all of the possible changes, set a goal to increase your net worth, either by a specific dollar amount or a percentage and develop a plan to get there. This last step is important because it means that you are being proactive in managing your money and setting goals to increase your wealth.

Common ways to increase your net worth include increasing your savings, increasing the return on your investments, decreasing your debt, or a combination of these so look for ways to incorporate these strategies into your overall financial plan.

Remember, conducting a net worth analysis each year not only points out where you are but it gives you a consistent way to track your wealth as it grows! ps!

Click here to calculate your net worth

Building Wealth With IRAs

One of the easiest ways to increase your wealth is through the use of tax-deferred accounts. You do not pay taxes on tax-deferred investments while they are growing and, as a result, they grow faster. Employer sponsored retirement plans like 401(k)s are one example of tax-deferred accounts, and IRAs are another. While you may or may not have access to an employer sponsored retirement plan, everyone with earned income is eligible to set up an IRA.
IRAs are a type of account that you fund with your choice of investments. There are two basic types of IRAs: Traditional and Roth. Deciding which type of account to open can be a difficult decision and one answer does not fit all. Each type of IRA account can have very different financial consequences both now and in the future so get as much information as possible before you decide. Here are some IRA basics to help you decide which one is best for you:

Traditional IRAs
• There are no income limits for eligibility. Anyone with earned income can set up a traditional IRA.
• Depending on your income and your eligibility to participate in an employer sponsored retirement plan, your contributions may be tax deductible. In general, singles with incomes of less than $65,000 and couples filing jointly with incomes of less than $109,000 are eligible to deduct their contributions. Note: Income limits for couples increase to $176,000 if they are not eligible to participate in an employer sponsored plan.
• Contributions must stop at age 70 1/2.
• Withdrawals are required at age 70 1/2, and withdrawals before age 59 1/2 may incur a 10% penalty. Taxes are due in the year withdrawals are made.

Roth IRAs
• Eligibility to set up a Roth IRA is limited based on your income. They are available to single-filers earning less than $120,000 a year or couples earning less than $176,000 annually.
• You can make contributions beyond age 70 1/2 however your contributions are never tax deductible.
• There is no mandatory distribution age. Your contributions can remain in your account indefinitely.
• Principal contributions (money you put in) can be withdrawn at any time without penalty.
• Withdrawals (including principal and earnings) are 100% tax free if you follow the rules and regulations – a benefit that could mean thousands of dollars in future tax savings.
Choosing to invest in an IRA is not just a good idea, it can help your money grow faster, and save money on your taxes as well

Note: Contribution limits for both IRAs in 2011 is $5,000 and $6,000 for those over age 50. In the future, contribution limits will increase based on the rate of inflation. While you can split your contributions between the two types of IRAs, your total contribution in both types cannot exceed the current contribution limits.

Essential Planning: Documents to Prepare and Review

Estate planning is not just for the rich or older people. It’s for anyone who wants to make life easier for those they leave behind or those who must take care of them in the event that they are unable to care for themselves. In addition, proper planning can reduce or eliminate court and probate costs, taxes, and delays in processing your requests.

Here is a checklist of six common documents to prepare and items to review:

  • Prepare a will.  At a minimum, your will should include any special requests regarding your final arrangements, a list of your assets and who you want them to go to, and the names of the individuals you want to be the guardians of any minor children. Be sure to follow the rules mandated by your state so that your will can withstand any challenges.
  • Prepare a living will. This document tells your doctors exactly what kind of care you do and do not want to receive if you’re terminally ill and/or incapacitated.
  • Prepare a durable power of attorney for health care and your finances. This document names the person who will make medical and financial decisions for you in case you are unable to do so. 
  • Review the ownership of your assets. What type of assets do you have and how are they titled? There are three basic ways that you can own property: in your individual name, in joint names with others, and through contract rights. Whether or not a particular asset that you own at the time of your death will need to be probated will depend entirely upon how it is titled. So review your assets and determine if they are titled appropriately for your situation. If not, make changes now.
  • Review the beneficiaries on your retirement accounts and life insurance policies. Make sure that they list the people that you want them to go to. Unlike many other assets, these will go directly to the named beneficiaries at the time of your death so it is very important to keep these up to date.
  • Investigate whether a trust would be beneficial. Trusts are legal arrangements that let you put conditions on how and when your assets will be distributed upon your death. They also allow you to reduce your estate and gift taxes and to distribute assets to your heirs without the cost, delay, and publicity of the probate court, which administers wills. Some trusts even allow for greater protection of your assets from creditors and lawsuits.

Finally, discuss your estate plans with your heirs to help prevent future disputes and confusion. Keep originals of your important papers and instructions in a secure location, like a safety deposit box or leave them with your attorney. And keep a copy in a location that is easily accessible, like a filing cabinet. Then let people you trust, know where to find these documents in case of an emergency. ps!

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