Your Money Matters
A Consumer Financial Column
Financially Surviving a Job Loss
June 30, 2010
With unemployment remaining high, you don’t have to look too far today to find someone who has lost their job. A disruption in work can happen at any time and without warning. A job loss could result from a company layoff or occur to an individual who tragically becomes unable to work.
A job loss not only can be devastating emotionally but also drastically affect someone financially. Here are a few tips for survival if you have suffered a job loss:
Don’t panic. Your focus needs to be on productive solutions rather than dwelling on worst-case scenarios.
You should be open to seeking new kinds of work but remember what your strengths are. Search for employment choices that are aligned with your passion.
Live within your means. You’ll need to monitor expenses on a weekly basis and focus purchases on necessities like food and shelter.
Don’t eliminate all fun. There are many low-cost or free recreational activities that are available to you.
For those who have not suffered a job loss, planning financially now to survive such an occurrence is critically important. The rule of thumb is that you should have six months of your net income set aside in savings. At a minimum, you need to have three months available. While not easy, here are a few steps you can take to reach the goal of having six months of savings.
Pay yourself first by saving at least 10 percent of your total income every paycheck.
Save a few dollars each day by either reducing daily expenses or putting pocket change aside in a jar, which you’ll ultimately deposit in a bank savings account.
Identify “needs” versus “wants” and only buy the “wants” with your extra cash.
Compare your actual spending against your budget every month and make adjustments as needed.
Focus on eliminating your high-interest debt.
Pay more than the monthly minimum on your credit card bills to reduce the balance you owe faster.
For additional tips and useful tools to financially prepare you for the possibility of a job loss, contact your local banker. While a job loss can stressful and shocking, it doesn’t have to be overwhelming.
Financial help for seniors
June 28, 2010
By Jason Alderman
Senior citizens and others living on a fixed or low income know how difficult it is to make ends meet, especially when costs for essentials like health care, food and energy increase faster than their sources of income.
Here are a few cost-saving benefits available to people on fixed incomes – especially seniors:
Prescription Drug Assistance Programs. Most pharmaceutical companies offer patient assistance programs (PAPs) that provide uninsured and low-income people access to prescription drugs they couldn’t otherwise afford. Ask your doctor, pharmacist or health clinic for details. Other good resources include: Medicare’s alphabetical list of drugs available through PAPs, with links to detailed eligibility information (www.medicare.gov/pap/index.asp); Partnership for Prescription Assistance (www.pparx.org); RxAssist (www.rxassist.org); and NeedyMeds (www.needymeds.com).
Other money-saving ideas for medical expenses include:
- Government-provided programs that help people with limited income and resources pay for medical coverage, including Medicaid and Medicare. For a good round-up of these programs, go to www.medicare.gov and click on “Get Financial Help.”
- Ask your doctor about using lower-cost generic drugs and providing cash discounts for expenses not covered by your insurance.
- Several provisions of the recently signed health care reform bill will gradually reduce Medicare drug costs between now and 2020. For example, this year seniors who reach the so-called “doughnut hole” coverage gap ($2,380 in 2010) will receive a $250 rebate to lessen the financial burden.
Tax advantages. The IRS tax code includes several benefits that target seniors (and often, other lower-income taxpayers), including:
- A higher standard deduction amount for most people who don’t itemize deductions, if they and/or their spouse are over 65 or blind.
- An additional tax credit for lower-income people who are over 65 or disabled and file a 1040 or 1040A tax form. (For full details and eligibility, see IRS Publication 524 at www.irs.gov.)
- Certain home improvements made to accommodate medical conditions or disabilities with a doctor’s recommendation may be deducted if you itemize deductions. Rules are complex, so read IRS Publication 502 at www.irs.gov and consult a tax advisor before claiming such deductions.
- Free tax return preparation assistance and counseling from IRS-trained volunteers is available to people over age 60, as well as low-to-moderate income folks and military families (search “Free Tax Preparation” at www.irs.gov).
- Publication 554 contains additional help for seniors when preparing their tax returns.
Government programs. Many government-sponsored benefits, grants and financial aid programs exist to help seniors, low-income families and others pay their bills, including:
- LIHEAP, the Low-Income Home Energy Assistance Program, which provides grants to help pay utility bills. To see if you qualify, go to www.acf.hhs.gov/programs/ocs/liheap.
- SNAP, the USDA’s Supplemental Nutrition Assistance Program (formerly known as food stamps), helps millions of lower-income Americans buy nutritious food each month. Visit www.fns.usda.gov/snap for qualification requirements.
- Rental assistance for low-income families is available from several U.S. Department of Housing and Urban Development programs as well as other state and local agencies (see www.hud.gov/renting/index.cfm for details).
- Go to www.usa.gov/Citizen/Topics/Benefits.shtml for a comprehensive overview of additional aid programs.
And of course, don’t forget to ask about senior discounts whenever you shop, travel or buy insurance – 10 percent here and there can really add up.
Jason Alderman directs Visa’s financial education programs. To Follow Jason Alderman on Twitter: www.twitter.com/PracticalMoney.
This article is intended to provide general information and should not be considered tax or financial advice. It's always a good idea to consult a tax or financial advisor for specific information on how tax laws apply to you and about your individual financial situation.
When does home remodeling make financial sense?
June 21, 2010
By Jason Alderman
My wife and I survived two major home remodeling projects and we’ve got the battle scars to prove it. Like most people feeling cramped for space – thanks to two growing children in our case – we weighed the plusses and minuses of remodeling versus moving to a larger home. Because we live in a great neighborhood with strong local schools, we ultimately decided to stay put and remodel, but everyone’s case is different.
Here are a few considerations to weigh before you decide to remodel:
Wishes vs. needs. How necessary are the improvements you want? The days when many improvements paid for themselves in increased home value are over for now, especially such strictly cosmetic upgrades as new kitchen cabinets or a bathroom skylight. That doesn’t mean certain projects aren’t worthwhile. For instance:
- Repairing a leaky roof or faulty plumbing might spare you from water or mold damage.
- Installing attic and wall insulation and energy-efficient windows or replacing older appliances and light fixtures will lower utility bills and may be tax-deductible (visit www.energystar.gov for information on tax credits and rebates).
- The IRS allows tax deductions for certain home improvements to accommodate medical conditions or disabilities with a doctor’s recommendation. The rules are complex, so read IRS Publication 502 at www.irs.gov and consult a tax advisor before proceeding.
Budgeting. Gather cost estimates for each job or item and create a chart with columns for high-, medium- and low-cost options. Don’t forget supplies for do-it-yourself projects and always add an extra 20 percent or more for unexpected expenses. If contracted labor is involved, gather three estimates and carefully check references and business licenses. Also, ask about discounts for grouping multiple projects together.
Financing options. Ideally, you’ve already established a home improvement savings plan. But if you’re planning to borrow, proceed with caution. Just a few years ago, home values were skyrocketing and many people took out a home equity loan (HEL) or line of credit (HELOC) to tap their home’s equity.
The real estate market’s collapse left many people owing more than their homes were worth, so now even folks with excellent credit and significant home equity have difficulty finding such financing. Lenders now demand stringent income documentation and have cut back on the debt-to-value percentage they will allow – only 60 or 70 percent or less of the appraised value in some hard-hit areas. So if your existing mortgage is over that amount, you may be out of luck.
Comparison shop. First, ask if your existing lender offers HELs and HELOCs. If so, compare their interest rates, fees and qualification criteria to what other lenders are advertising. Bankrate.com has home equity rate comparison tools for both banks and credit unions (www.bankrate.com/home-equity.aspx and www.bankrate.com/funnel/credit-union); but be forewarned, pickings are slim right now. You might have better luck talking directly to lending officers at local branches.
One important caution: HELs and HELOCs are considered secured debt in which your home is used as collateral for the loan. If you miss payments or default, you could lose your home. If you’re not certain you’ll be able to make the payments (worries about unemployment, prolonged illness, etc.), it’s probably best to forego remodeling until you have sufficient savings.
Jason Alderman directs Visa’s financial education programs. To Follow Jason Alderman on Twitter: www.twitter.com/PracticalMoney.
This article is intended to provide general information and should not be considered tax or financial advice. It's always a good idea to consult a tax or financial advisor for specific information on how tax laws apply to you and about your individual financial situation.
Know when to claim tax credits, deductions
June 14, 2010
By Jason Alderman
Tax credits and tax deductions are two common ways people lower their income tax bills. Although similar in intention, these two tax-reduction methods have fundamental differences and are not interchangeable. Knowing the difference can have a big impact on your bottom line.
Basically, tax credits lower your tax amount, dollar for dollar; whereas tax deductions reduce your taxable income. The ultimate value of a deduction depends on your tax bracket: So, if you’re in the 25 percent tax bracket, $1,000 in deductions might lower your tax bill by $250 (25 percent); but a $1,000 credit can lower your tax bill by the full $1,000, no matter what your tax bracket.
Read on for more differences:
Tax Credits. There are two basic types of tax credits: refundable and non-refundable.
With refundable tax credits, if you owe less in income tax than your eligible tax credit(s), not only do you pay no tax, you actually get a refund for the difference. So for example, if you owe $750 in income tax but have $1,000 in refundable credits, you will receive a $250 refund.
Common refundable credits include: Earned Income Credit for low-income workers; Additional Child Tax Credit for certain people who get less than the full amount of the regular Child Tax Credit; and a credit for those with more than one employer who had too much Social Security tax withheld.
Most tax credits are non-refundable, which means they can’t reduce taxes owed to less than zero (i.e., they can’t generate a refund when the credit amount is greater than taxes owed). Common non-refundable credits include those for: standard child credit; child and dependent care; elderly or disabled people; American Opportunity (an enhanced version of Hope Scholarships – up to 40 percent refundable for most people); lifetime learning; adoption; residential energy efficiency; and retirement savings contributions for low-income families.
Tax Deductions. For many people, it’s more advantageous to take the standard deduction, which is subtracted from gross income to determine taxable income. Others, with large medical, state and local tax, charitable donation and other expenses are better off itemizing deductions.
Common tax deductions include those for: medical and dental expenses exceeding 7.5 percent of adjusted gross income; deductible taxes paid elsewhere (state, local and foreign income tax, property tax, sales tax, etc.); home mortgage points; charitable contributions; casualty and theft losses; and certain education and work-related expenses.
Some miscellaneous deductions, like unreimbursed employee expenses, professional dues, job search expenses and tax preparation fees, must exceed a combined 2 percent of adjusted gross income to be claimed; others, like gambling losses up to the amount of winnings, are not subject to that limit.
You cannot claim a credit and a deduction for the same expense. For example, you may be able to claim work-related tuition as a miscellaneous business expense deduction or as a lifetime learning credit, but not as both.
Eligibility and rules for tax credits and deductions can be extremely complicated and may change from year to year, so refer to the IRS website (www.irs.gov) for details. Or, for online links to background information on the credits and deductions mentioned above, read “Tax Credits and Deductions” at Practical Money Skills for Life, Visa Inc’s free personal financial management program (www.practicalmoneyskills.com/deductions.) (Eric: Need vanity link to Economy 101 article on Tax Credits and Deductions: http://www.practicalmoneyskills.com/foreducators/econ101/201005_tax.php)
Jason Alderman directs Visa’s financial education programs. To Follow Jason Alderman on Twitter: www.twitter.com/PracticalMoney.
This article is intended to provide general information and should not be considered tax or financial advice. It's always a good idea to consult a tax or financial advisor for specific information on how tax laws apply to you and about your individual financial situation.
Tackling your kids’ summer boredom
June 7, 2010
By Jason Alderman
With millions of American schoolchildren starting summer vacation, cries of “I’m bored” will soon ring out across the nation. Swimming lessons and trips to the mall can fill only so many hours. Before you give up and hand over the TV remote, consider some activities that can be productive, safe and fun for kids of all ages.
Teach practical skills. We’ve all had friends who somehow reached adulthood never having washed their own socks or bought groceries. That’s why my wife and I are strong proponents of teaching our kids self sufficiency. We’ve come up with additional jobs they can tackle during vacation for extra spending money, over and above their modest allowances.
Along with routine age-appropriate tasks like washing the car, yard work and babysitting, look for more creative ideas like scrapbooking old photos or weeding through closets for garage sale items. Target activities that not only ease your own workload but also increase the amount of time you can spend together.
Boost financial abilities. As your kids get older, start sharing activities that teach them personal financial management skills. For example:
- Involve them in balancing your checkbook and paying bills. They’ll probably be amazed to learn how much things like utilities, rent/mortgage and groceries cost.
- Enlist their help planning vacations by researching travel costs online, calculating gas mileage, estimating hotel bills, etc.
- When planning a major purchase like a house or car, engage their help researching and comparison shopping, and explain how sales tax, loans and real estate broker commissions work.
Provide safe online activities. Although you don’t want your kids spending all their time online, possessing strong computer skills is vital for today’s students and tomorrow’s employees. Fortunately, there are many family friendly websites where you can steer your children. The American Library Association has a clearinghouse of safe, appropriate websites for kids of all ages (www.ala.org/greatsites). You’ll find math and word games, specialty sites on animals, science, literature, history, current events, the arts and much more.
Some of the better financial education sites I’ve seen are:
- You Are Here, an animated site offered by the Federal Trade Commission, where 5th through 8th graders wander through a virtual “mall,” playing games and learning key consumer concepts such as the impact of advertising, how to spot scams and protect personal information (www.ftc.gov/youarehere).
- Money Smart, a financial education program developed by the Federal Deposit Insurance Corporation that includes contents for young adults (www.fdic.gov/moneysmart).
- MyMoney.gov, the U.S. government’s website dedicated to teaching people of all ages the basics of financial education (www.mymoney.gov).
- Hands on Banking, a free, interactive program from Wells Fargo that teaches financial basics and smart money management skills (www.wellsfargo.com/handsonbanking).
- Financial Soccer, a fast-paced, interactive video game created by Visa Inc. and the Federation Internationale de Football Association, which incorporates soccer’s structure and rules to teach children and young adults the knowledge and tools they’ll need to establish and maintain sound financial habits over a lifetime (www.financialsoccer.com). Financial Soccer is free and can be played online or on CD-ROM.
So, the next time you hear, “I’m bored,” have your checklist ready – just don’t be surprised if they go outside to play instead.
Jason Alderman directs Visa’s financial education programs. To Follow Jason Alderman on Twitter: www.twitter.com/PracticalMoney.
This article is intended to provide general information and should not be considered tax or financial advice. It's always a good idea to consult a tax or financial advisor for specific information on how tax laws apply to you and about your individual financial situation.
Understanding Roth 401(k) plans
May 31, 2010
By Jason Alderman
Ever since Individual Retirement Accounts were introduced in the 1970s, the numbers of tax-advantaged retirement savings options – and participants – have continued to grow. One relatively new alternative that’s gaining popularity is the Roth 401(k) plan.
401(k)s are retirement savings plans set up by employers that allow employees to save for their retirement through automatic payroll deductions. As its name suggests, the Roth 401(k) combines features of a traditional 401(k) with those of a Roth IRA. Employers increasingly have begun offering Roth alternatives, so it’s wise to understand how they work in case you are given the option.
In a traditional 401(k) plan, employee contributions are usually made on a pretax basis; that is, deducted from your pay before federal and state income taxes are calculated. This lowers your taxable income and therefore, your taxes. You don’t pay taxes on these savings or their investment earnings until they’re withdrawn – usually after retirement.
With a Roth 401(k) you contribute after-tax dollars. Although you don’t get an upfront tax break, your account grows tax-free and withdrawals aren’t later taxed, provided you’ve had the account at least five years and are age 59 ½ or older – or have become disabled or die.
A few things to remember:
- The combined 2010 annual limit for employee 401(k) contributions – whether regular and/or Roth – is $16,500 ($22,000 if over 50).
- Roth 401(k) contributions cannot later be converted moved into a regular 401(k), or vice versa.
- Before age 59 ½, all 401(k) withdrawals, whether Roth or regular, may be subject to a 10 percent early withdrawal penalty on the taxable amount. Exceptions may be made for death or disability, catastrophic medical expenses, first-time homebuyer loans and being 55 or older at retirement or job termination. See IRS Publication 575 for details (www.irs.gov).
With either type of 401(k), you must begin taking mandatory minimum distributions from your account after you turn 70 ½, just as you must with a regular IRA. However, you can avoid mandatory withdrawals by converting your Roth 401(k) into a Roth IRA, which has no such requirement. You can also convert a pretax 401(k) into a regular IRA and then into a Roth IRA; but you must pay tax on the converted amount, just as you would with any regular 401(k) withdrawal.
Many people wrestle between Roth and regular 401(k) contributions. A few considerations:
- Will your tax rate be higher now or at retirement? Those in their peak earning years may have a higher marginal tax rate currently than at retirement, whereas those just beginning their careers may see their rates rise over time.
- Many financial experts think future income tax rates will likely climb due to federal budget deficits and increasing demands on Social Security and Medicare.
- The longer you remain invested in a Roth 401(k), the more likely you are to benefit from tax-free account growth.
- Consider where you’ll retire, as many states have low or non-existent income tax.
When it’s not clear which type of 401(k) – or IRA – is best for their particular situation, some people diversify their retirement savings by contributing to both a Roth and a regular 401(k).
Jason Alderman directs Visa’s financial education programs. To Follow Jason Alderman on Twitter: www.twitter.com/PracticalMoney.
This article is intended to provide general information and should not be considered tax or financial advice. It's always a good idea to consult a tax or financial advisor for specific information on how tax laws apply to you and about your individual financial situation.
Online job search tools
May 24, 2010
By Jason Alderman
For those reentering the job market after decades of employment, you should know that the rules have changed considerably since you were last looking for a job. Fifteen years ago, online job sites were in their infancy; now thousands of sites post millions of jobs every year and they’re the most widely used and practical job-hunting tool available.
If online job searching is new to you, here are few hints for navigating the process:
Most large employers – and many smaller companies as well – post job opportunities on their own websites. Typically, you either submit your resume or fill out an online application and the company will reach out if you meet their qualifications. Many sites ask you to open an account so you can be contacted when appropriate jobs become available.
To broaden your search beyond individual companies, there are many job search sites from which to choose. Some target particular career specialties, while others post listings from broader categories. Some list jobs for which employers have paid a posting fee – much as they used to do with newspaper classified ads. Others are job search engines that aggregate job postings from company websites, other job sites, newspapers, recruiters, etc.
Features vary widely from site to site and may include allowing you to:
- Search positions by job title, career level, job type (full-time, part-time, etc.), industry, location, pay range, relevance, key words and age of posting.
- Post your resume or create a profile outlining what you’re looking for.
- Create and save custom searches.
- Set up alerts so you’ll be contacted when new jobs meeting your criteria are posted.
Some robust job sites include services such as resume and cover letter writing assistance, tips for conducting a job search, interview preparation and follow-up advice, salary and cost-of-living calculators and articles by career professionals. There may be fees for some services such as resume assistance.
Most job sites don’t charge to access job listings since fees are paid by employers or advertisers – although some highly specialized sites may charge a fee. Before paying such fees, read the fine print and make sure you fully understand the services provided, since most listings are available free on other sites. Also, beware of sites that make unrealistic promises or that lock you into a service agreement that’s difficult to cancel.
Some of the more popular and user-friendly job search sites include:
- Monster.com (www.monster.com), Careerbuilder.com (www.careerbuilder.com) and YahooHotJobs.com (www.hotjobs.yahoo.com) – three of the largest and most comprehensive sites. Note: YahooHotJobs.com was recently purchased by Monster.com, but for now, it still operates independently.
- USAJOBS.com (www.usajobs.com) – the U.S. Government’s official job site.
- LinkedIn (www.linkedin.com) – a professional networking site that also includes a job search engine.
- Craigslist.org (www.craigslist.org) – primarily local listings.
- TweetMyJOBS (www.tweetmyjobs.com) – a site for Twitter members.
- Hound.com (www.hound.com) – shows jobs from employer websites only.
- Indeed.com (www.indeed.com) – posts jobs from thousands of company career sites and job boards.
- Dice.com (www.dice.com) – targets technology jobs.
Finally, be cautious when posting contact information on job sites because spammers and aggressive marketers have been known to troll these sites for leads. You may want to set up a dedicated email account to help weed out spam.
Jason Alderman directs Visa’s financial education programs. To Follow Jason Alderman on Twitter: www.twitter.com/PracticalMoney.
This article is intended to provide general information and should not be considered tax or financial advice. It's always a good idea to consult a tax or financial advisor for specific information on how tax laws apply to you and about your individual financial situation.
Before ‘I do,’ take these financial vows
May 17, 2010
By Jason Alderman
With wedding season right around the corner, a lot of soon-to-be brides and grooms are frantically nailing down their wedding and honeymoon plans. Before you marry and mingle your finances, be sure to carve out time for some candid conversations about your respective credit histories, your savings and spending philosophies, and your long-term financial goals as a couple.
We’ve all seen statistics about the high percentage of marriages that end in divorce and how money disagreements are the No. 1 cause of marital discord. If you can identify – and diffuse – potential problems, you stand a much better chance of living happily ever after.
Here are a few issues to put on the table:
Outstanding debts. Tally up all your outstanding debts and financial obligations, including student loans, credit card balances, car payments, apartment leases, etc. Be candid about past credit missteps, such as late or skipped payments, foreclosures or anything else that might negatively impact your ability to qualify for new credit together.
Keep in mind that although debts accumulated before marrying remain your own responsibility and shouldn’t impact your spouse’s own credit rating, you will be jointly accountable for any future accounts and debt you take on together.
Credit reports. Because lenders often base credit decisions and loan rates on whichever spouse’s credit score is lower, share each other’s credit reports so there’ll be no surprises. You can each order one free credit report per year from each of the three major credit bureaus at www.annualcreditreport.com.
You might also want to order your credit score to establish a baseline for where your credit stands. You can order your FICO credit score at www.myfico.com. If one or both of you have low scores (say, below 700), you’ll want to boost them before applying for a mortgage or car loan. The resulting lower interest rates could save you thousands of dollars over the life of a loan.
For tips on how to repair – or protect your credit scores, visit What’s My Score, a financial literacy program run by Visa Inc. (www.whatsmyscore.org.) The site also features a free FICO Score Estimator that can help you approximate your score, as well as a more detailed explanation of the differences between credit reports and credit scores.
Align your goals. Nobody expects spouses to share identical views on everything, but you could be headed for trouble if you don’t reach agreements or aren’t willing to compromise on important issues like home ownership, continuing education, starting a family, and when you hope to retire. Premarital counseling is always a good idea, and financial issues should be part of the mix.
Share financial duties. Many couples opt to have one person manage all the finances, from balancing the checkbook to choosing retirement investments. But it’s probably wiser for both to take an active role in all major financial decisions.
Visa’s free personal financial management site, Practical Money Skills for Life, features a practical guide to marriage-related finances that addresses issues such as prenuptial agreements, banking, insurance, budgeting, taxes, estate planning and setting long-term financial goals (www.practicalmoneyskills.com/marriage.)
Start your marriage off on the right foot by sharing an open and honest dialogue about finances.
Jason Alderman directs Visa’s financial education programs. To Follow Jason Alderman on Twitter: www.twitter.com/PracticalMoney.
This article is intended to provide general information and should not be considered tax or financial advice. It's always a good idea to consult a tax or financial advisor for specific information on how tax laws apply to you and about your individual financial situation.
Protect your personal information on vacation
May 10, 2010
By Jason Alderman
This is the time of year when many people finalize their summer vacation plans – confirming travel and lodging reservations, dusting off suitcases and looking for games to occupy the kids on long road trips. Just be sure that when your brain goes into vacation mode, you don’t ignore the same precautions you take during everyday life to protect your personal information.
Here are a few safeguards to keep in mind:
Guard your itinerary. In the old days, police warned against sharing too much information about funerals and marriages in the newspaper, for fear robbers would target empty homes. But these days, many people think nothing of sharing their vacation schedules on social networking sites or in outgoing phone or email messages.
Sure, you might only share your plans with a few friends, but who’s to say they won’t inadvertently pass it along to someone you don’t know? Plus, no matter how carefully you shield your plans, your kids might have no such reservations with their online friends. Consider instituting a family rule that no vacation plans or photos get posted until you’re safely home.
Streamline your wallet. It’s never wise to carry too much information – or cash – in your wallet, but that’s especially true when traveling. Bring two credit or debit cards, in case one inadvertently gets damaged or deactivated by the card issuer because of suspected fraud, but leave the rest at home. Also, never carry your Social Security card or other sensitive papers – leave them safely locked up.
But do carry your health and car insurance identification. Also, photocopy or make a list of your wallet’s contents (and passport, if traveling abroad) and keep it in a secure, locked location, such as a hotel safe; and leave a copy with someone at home you can call in the event your wallet is stolen.
Card precautions. Let the financial institution that issues your credit and debit cards know when and where you’ll be traveling so they can be on guard for unauthorized transactions. While you’re at it, make a list of their toll-free fraud hotlines in case of theft and carry it separately. I also program these phone numbers into my cell phone for quick access.
Beware of card skimming, where dishonest restaurant or store employees use a portable card reader to copy information from your credit or debit card’s magnetic strip. Also avoid using unusual-looking ATMs because they could have an altered card slot and hidden cameras that can be used to steal your account information and password.
Computer precautions. Whenever logging onto the Internet on your laptop at a Wi-Fi hotspot, hotel business center or other public facility whose server may not be encrypted, be extra cautious before doing online banking or other password-protected services.
Safeguard your home. If no one will be house-sitting while you’re away, have your mail held at the post office. Also, suspend newspaper subscriptions and ask a friend to remove fliers, packages or free newspapers.
For more tips on preventing identity theft while traveling, visit the Privacy Rights Clearinghouse (search “vacation” at www.privacyrights.org), the FBI (search “Be Crime Smart” at www.fbi.gov) and the Federal Trade Commission (search “ID Theft” at www.ftc.gov).
Jason Alderman directs Visa’s financial education programs. To Follow Jason Alderman on Twitter: www.twitter.com/PracticalMoney.
This article is intended to provide general information and should not be considered tax or financial advice. It's always a good idea to consult a tax or financial advisor for specific information on how tax laws apply to you and about your individual financial situation.
Wealth Watchers
March 22, 2010
By Jason Alderman
Anyone who’s ever tried to lose a few pounds knows that not every diet works for every person. Similarly, it may take a few tries to find a system for managing your personal finances that you can stick to.
For many people, a simple program called “Wealth Watchers” could be the solution. As its name might imply, Wealth Watchers features the journaling technique popularized by Weight Watchers, where you track every morsel eaten – or in this case, every dollar spent – each day.
The idea is that by carefully monitoring your spending habits, you become more aware of, and more likely to change, behavioral patterns that caused you to overdo it in the first place. The program also places heavy emphasis on the importance of financial education.
Wealth Watchers was born from adversity. Its founder, Alice Wood, was a successful estate-planning attorney whose occupation made her very knowledgeable about personal finance issues. But after sustaining a brain injury during a freak airplane accident, Wood suddenly found she was becoming forgetful, unable to concentrate and prone to making poor financial decisions that later plunged her into debt.
Another byproduct of her accident was unexpected weight gain. Wood notes, “I went to Weight Watchers to help drop the extra pounds, and in one of those ‘lightbulb’ moments, I realized that the solution to both my weight and spending problems lay in the simple, daily discipline of keeping track.”
After developing and practicing the core principles that would come to define Wealth Watchers – such as “spend less than you make” – Wood began sharing her ideas with family members and friends, and eventually with larger groups. Then, in January she published a book entitled “Wealth Watchers: A Simple Program to Help You Spend Less and Save More” (Free Press, $19.95).
The book contains formulas for calculating what it costs to live each month, as well as worksheets to track your daily disposable income (DDI), which is the amount you can safely spend each day without going into debt. “The difference between your DDI goal and your actual average daily total of expenses will show you if you are staying on track,” she explains.
Another feature I like is the “Call to Action for Consumers,” a 16-step roadmap for achieving financial health. A few of those steps people sometimes overlook include:
- Make sure your partner is on board with your goals.
- Define and understand the difference between fixed, semi-fixed and discretionary expenses.
- Know your credit score: If it falls below 700, make it higher. Find tips at www.whatsmyscore.org.
- Set up and strictly follow a bill payment system to avoid late payment charges. Many people find automatic payments from credit card or checking accounts helpful.
- Know your “small leaks” – spending weaknesses that can undermine your goal (e.g., buying unnecessary gadgets).
- Share your goal with others. That’s why so many folks find Weight Watchers meetings helpful.
The bottom line is: Find a system that works for you. For Wood, adapting techniques she learned from Weight Watchers to track and control expenses was the key to her financial recovery.
Jason Alderman directs Visa’s financial education programs. To participate in a free, online Financial Literacy and Education Summit go to www.practicalmoneyskills.com/summit2010.
Understanding Medicare
March 15, 2010
By Jason Alderman
Most people are somewhat familiar with Medicare, since it’s likely they or a family member are already covered by the government-provided health insurance program. But with its alphabet soup of options and complex rules, Medicare can be daunting to the uninitiated.
If you’re approaching 65, here are some Medicare basics you’ll need to know:
Medicare provides benefits to people age 65 and older and those under 65 with certain disabilities or end-stage renal disease. Most people’s initial enrollment period is the seven months beginning three months before the month they turn 65. If you miss that window, you may enroll between January 1 and March 31 each year, with coverage beginning July 1.
Medicare offers numerous plans and coverage options, including:
Part A helps cover in-patient hospital, nursing facility and hospice services, and home health care. Most people pay no monthly premium and are automatically enrolled upon turning 65, or after receiving Social Security disability benefits for 24 months.
Part B helps cover doctor’s services, outpatient care and some preventive services. It’s optional and has a monthly premium. Most people are automatically enrolled at the same time as Part A. To opt out, follow the instructions that accompanied your Medicare card (mailed about three months before your 65th birthday). Weigh opting out carefully because there’s often a sizeable penalty if you enroll later, unless you’re currently covered by an employer’s plan.
Part C (Medicare Advantage) plans are privately run HMO or PPO Medicare plans that provide coverage similar to Parts A and B, but may also include additional benefits such as prescription drugs, dental and vision coverage. In exchange for lower out-of-pocket costs and additional benefits, you’re usually required to use the plan’s provider network, which may be more restrictive than providers you could access through regular Parts A and B.
Part D helps cover prescription drugs. It’s optional and carries a monthly premium. These privately run plans vary widely in terms of cost and medications covered. As with Part B, you may be charged a late-enrollment penalty if you don’t sign up when first eligible and later decide to enroll. If you’re in a Part C plan with drug coverage, you don’t need Part D.
Many people purchase additional Medigap (or Medicare Supplemental) insurance, which is offered by private insurers and follows strict government coverage guidelines. Medigap helps pay for many items not covered by Medicare, including deductibles, copayments, coinsurance and, sometimes, coverage when traveling abroad.
Medigap coverage is already included in Part C Medicare Advantage plans; plus some employers and unions offer it to their retirees. Medigap plans can vary widely in terms of cost, covered benefits and states participating so compare your options carefully.
Understanding and choosing the right Medicare options for your individual situation can be a complicated process. For assistance, call 1-800-633-4227 or visit www.medicare.gov, where you’ll find:
- Helpful publications, including “Medicare & You 2010”
- Tools to compare prescription drug plans, hospitals, nursing homes and Medigap plans in your area
- A resource to find local doctors and other health practitioners who participate in Medicare
- Services covered by various Medicare plans
- Enrollment instructions
Jason Alderman directs Visa’s financial education programs. To participate in a free, online Financial Literacy and Education Summit go to www.practicalmoneyskills.com/summit2010.
Identity thieves’ latest scams
March 8, 2010
By Jason Alderman
If the financial consequences weren’t so damaging, you might almost find humor in how identity theft has butchered the English language in recent years. “Phishing,” “pharming” and “vishing” are just a few ways criminals access personal information they’ll use to open illicit accounts, rent apartments, or even charge medical procedures to someone’s insurance plan.
Unfortunately, every time authorities plug one hole, crafty criminals figure out new ways to trick unsuspecting victims. Some now even steal children’s Social Security numbers, ruining their credit long before they’ve opened a single account.
To protect yourself and your family, beware of these scams:
Phishing: Where you receive an email, purportedly from a trusted source like a government agency or your bank, asking you to supply or confirm account information, log-in IDs or passwords. Legitimate outfits never ask you to verify sensitive information by email (or over the phone). When in doubt, contact the organization yourself. And never click on the link provided within the email – it could take you to a copycat website capable of infecting your computer.
Smishing (for “Short Message Service”): Like phishing, only it uses text messages sent to your cell phone.
Vishing (voice phishing): An automated voice message that directs you to call your bank or credit card company. Under the pretext of clearing up a problem (like theft), you’ll be asked to share personal or account information. Keep a list of company toll-free numbers handy so you can call them directly without fearing you’ve been given bogus information. I also program my banks’ and credit card issuers’ phone numbers – but not account numbers – into my cell phone in case I’m traveling.
Pharming. Where hackers redirect you from a legitimate website to an impostor site to harvest (farm) personal data you’ve been asked to provide. Social networking sites like Facebook and Twitter increasingly are being targeted.
Skimming: Where crooks use an altered ATM slot and cameras to record account information; also, when dishonest store or restaurant employees use a portable card reader to skim credit or debit card information.
Spyware: Illicit software you unknowingly download when you open an email attachment, click on a pop-up window or download a corrupted song or game. The spyware can then record your keystrokes to obtain account information or ferret out confidential information on your computer.
Don’t forget good-old-fashioned pickpocketing, mail theft and rooting through your trash.
To reduce your risk of identity theft, always:
- Shield keypads from the eyes of “shoulder surfers” at stores and ATMs.
- Shred paperwork and receipts containing personal or account information.
- Lock up your Social Security card and unneeded credit cards.
- Carefully scan monthly credit card and bank statements for erroneous charges.
- Monitor your credit reports for errors or fraudulent activity. You can order one free report per year from the three major credit bureaus at www.annualcreditreport.com.
- Refrain from making online purchases from unfamiliar websites; and look for “https” in the address.
These are only a few of the precautions you should routinely take to protect your personal information. For more tips, visit Practical Money Skills for Life, Visa Inc.’s free personal financial management program (www.practicalmoneyskills.com/security).
Jason Alderman directs Visa’s financial education programs. To participate in a free, online Financial Literacy and Education Summit go to www.practicalmoneyskills.com/summit2010.
Credit card reform goes live
February 22, 2010
By Jason Alderman
One major piece of legislation President Obama signed last year was the Credit Card Accountability, Responsibility and Disclosure (CARD) Act, which made fundamental changes to credit card agreements. Some provisions were adopted last summer, but the bulk of them took effect February 22, 2010.
Here’s an overview of a few major changes:
Restrictions on interest rate increases. The annual percentage rate (APR) for interest on new credit card accounts cannot be increased during the first year unless:
- A clearly disclosed introductory period (teaser rate) ends; also, such introductory periods now must be at least six months long;
- It’s a variable-rate (vs. fixed-rate) card and the APR is tied to an index that increases (e.g., U.S. Treasuries);
- You enter a debt repayment workout plan and don’t comply with its terms; or
- You are over 60 days late making at least the minimum monthly payment. Note: the new rules say the previous APR must be restored after you’ve made six months of on-time payments.
More advance notice. After the first year, banks and credit unions that issue credit cards may raise the APR on new transactions, or make other significant account changes, only after providing 45 days’ advance notice. Also, you must be given an opportunity to cancel the card before these changes take effect and pay off the balance at the old rate.
Interest rate review. Every six months, card issuers must review accounts whose interest rates were increased based on market conditions, cardholder creditworthiness or other factors; and, if warranted they must reduce the rate or provide written notice why the increase should still apply. (Effective August 22, 2010.)
Bill and payment timing. Credit card statements must be mailed at least 21 days before the balance is due. Also, payments must be credited as on-time if received by 5 p.m. on the due date.
Order of balances paid. When one card carries balances at different interest rates – such as one rate for purchases and another for balance transfers – payments must be applied to the highest-rate balance first.
Enhanced statements. Credit card statements must clearly post how much you’ve paid in interest and fees for the year, the upcoming due date and potential late fees, and how long it would take to pay off your bill making minimum payments – including total interest charges.
A few other highlights:
- Over-the-limit fees cannot be charged unless you have previously agreed (opted in) to allow charges over your credit limit.
- You cannot be charged additional fees for paying your bill online or by phone.
- Card issuers may no longer factor in average daily balances from a previous billing cycle that wasn’t fully paid off when calculating current interest charges (known as “double-cycle billing”).
- People under 21 must have an adult co-signer in order to open an account unless they can prove their ability to repay their account balance.
To learn more about particular changes to your credit card agreements, contact the bank or credit union issuing your card, or visit www.fdic.gov. In addition, always read mailings from issuers to ensure you’re up-to-date on any account changes.
Jason Alderman directs Visa’s financial education programs. To sign up for a free monthly personal finance e-Newsletter, go to www.practicalmoneyskills.com/newsletter.
Tax deadline approaches
February 15, 2010
By Jason Alderman
April 15 is right around the corner. If a chill just went down your spine, chances are you haven’t yet organized your income tax paperwork, let alone filed your return.
Even if you can’t file or pay your taxes by April 15, it’s vital to at least request an extension by then; otherwise, the penalty on taxes owed increases dramatically – generally an additional 5 percent of taxes owed for each month you’re late, plus interest, up to a maximum penalty of 25 percent.
However, if you file your return or request an extension by April 15, the penalty drops to 0.5 percent per month, plus interest. Contact the IRS early if you won’t be able to pay on time; they may even waive the penalty, depending on your circumstances. Call 800-829-1040 or visit www.irs.gov for more information.
Another way to avoid a penalty: The IRS does accept payment by credit or debit card, with a small convenience fee that is tax deductible. Just be sure you can pay off your credit card balance within a few months, or the interest accrued might exceed the penalty.
Here are several 2009 federal income tax changes to keep in mind as you fill out your return:
New homeowner tax credit. If you bought a home in 2009 and hadn’t owned one during the previous three years, you may be eligible for a credit of up to $8,000; in addition, existing homeowners who bought a new primary residence after November 7, 2009, may also be eligible for a credit of up to $6,500. Eligibility rules and deadlines are complicated, so read “First-Time Homebuyer Credit” at www.irs.gov for details.
New vehicle tax deduction. If you bought a new (not used) car, RV or motorcycle between February 17 and December 31, 2009, you can deduct state and local sales and excise taxes, with certain limitations, even if you don’t itemize deductions. Read “Sales Tax Deduction for Vehicle Purchases” at www.irs.gov for details.
Expanded college tax credit. For 2009 and 2010, Hope Scholarships have been replaced by the more robust American Opportunity Tax Credit. Enhancements include:
- Maximum tax credit increases to $2,500.
- Credits can now be claimed for all four years of undergraduate college, instead of only the first two.
- Those with modified adjusted gross income under $80,000 ($160,000 for joint filers) qualify for the full credit; it phases out between $80,000 and $90,000 ($160,000 to $180,000 for joint filers).
- Lower-income families who owe no taxes may file a return anyway and receive a refund for up to 40 percent of the credit amount, up to $1,000.
- Read “American Opportunity Credit” at www.irs.gov for details.
Unemployment benefits. Up to $2,400 in unemployment benefits is tax-free for 2009.
Numerous free or low-cost tax-preparation services are available to seniors, military and low- and middle-income taxpayers, including:
- IRS-sponsored programs. (Search “Free Tax Preparation” at www.irs.gov).
- AARP volunteers provide free tax preparation to low- and middle-income taxpayers, particularly those over age 60 (www.aarp.org/money/taxaide.)
- Military personnel and their families worldwide can get free assistance through a program overseen by the Armed Forces Tax Council. (Check with your base for details.)
Jason Alderman directs Visa’s financial education programs. To sign up for a free monthly personal finance e-Newsletter, go to www.practicalmoneyskills.com/newsletter.
Don’t count on an inheritance
February 8, 2010
By Jason Alderman
Earlier this decade, headlines blared that trillions of dollars soon would begin changing hands in the largest wealth transfer in history, as depression-era parents began passing along their nest eggs to Baby Boomer offspring. Fast forward a few years and all bets are off.
If you are among those expecting to build your retirement security on the foundation of a robust inheritance, you may want to rethink that strategy. Here are a few reasons why many seniors are revising their estate distribution plans:
Plunging account values. People heavily invested in the stock market saw their retirement account values decline significantly in 2007-2008. Although younger savers still have many years to catch up, it may be difficult for retirees – or those on the verge of retirement – to recover. Many will likely have to draw on their account principal to make ends meet, thereby depleting their savings much more rapidly than planned.
We’re living longer. As average life spans increase, so does the period we’ll need to survive on our retirement savings. On average, today’s 65-year-old man will live until 82; a woman until 85. Many people never imagined their savings would have to last that long and didn’t plan accordingly.
Misguided early retirement. When the market was booming, many people retired early, assuming they could afford the gap before Social Security and Medicare kicked in. But plummeting home equity and 401(k) balances have forced many to aggressively withdraw savings, trim expenses or even return to work.
Government programs are overburdened. Baby Boomers are beginning to use their Social Security and Medicare benefits and far fewer younger workers now fund those programs, so it’s possible that benefits will decrease, premiums will rise or taxes will increase – or a combination of all three; all options will strain fixed incomes.
Skyrocketing healthcare costs. Even if they buy Medicare prescription drug and Medigap coverage, seniors, like everyone else, spend an ever-increasing percentage of income on medical care. Such costs often far outpace benefit cost-of-living increases and interest earned on investments – especially from low-risk investment vehicles many seniors favor.
Tapping home equity. Increasingly, seniors are using reverse mortgages and more traditional home equity lines and loans to draw on home equity for living expenses, thereby lessening their estate’s future value.
Spreading the wealth early. Many seniors help their children and grandchildren pay for high-ticket expenses like home down payments, college and student loans. Although such gifts reduce the eventual value of their estate, there are certain tax advantages (lower estate taxes, state tax deductions for those contributing to a 529 Plan, etc.) – not to mention being able to help loved ones. Just be sure that if you’re the recipient you don’t take such assistance as license to assume additional debt.
Long-term care. Unless they’ve purchased comprehensive long-term care insurance, which is quite expensive, your folks may end up burning through much of their savings should they ever require assisted living. Medicare will only pay for a nursing home once they’ve exhausted most of their assets.
Bottom line: It’s probably risky to depend on an inheritance to provide your financial security.
Jason Alderman directs Visa’s financial education programs. To sign up for a free monthly personal finance e-Newsletter, go to www.practicalmoneyskills.com/newsletter.
Teachable Money Moments for Kids
February 4, 2010
Over the past 18 months, Americans have done a better job learning the basic concepts of money management, according to several studies. But are these important lessons being shared with their children? There is often debate amongst parents as to what their kids should or should not be expected to pay for. While the answers depend on the age of the child and are personal to each family, here are some factors to consider:
First, you will need a child that has their own source of income. Whether it is an allowance or income earned from a job, there needs to be a way for them to pay for items with their own money.
Secondly, a decision should be made as to what lesson is being taught. Some general lessons are:
How to divide money between saving and spending.
Importance of setting a budget and how much things cost.
The decision-making process for prioritizing expenses.
Responsibility and care for purchased items.
Each of these lessons plays a role in determining what children pay for with their own money.
Some examples of what children can pay or help pay for include:
Birthday presents for friends – If a child has been invited to their sixth birthday party in two months, this becomes expensive for the parents. This is a good opportunity to work with a child on setting an overall gift budget for the year, then deciding what to buy and how much to spend on each friend.
Clothes or entertainment – Parents will buy basic clothes and other necessities for their children. The question becomes should the child pay for brand name clothes, or the extra purse, or the extra entertainment out of a pre-set budget?
Lost items – Maybe the parent paid for the original cell phone or hand-held electronic game, but should they pay to replace the item if it is lost due to carelessness?
College tuition – Post-high school education is expensive and parents should consider whether they will require their children to work during college. This may be during school, summer only or simply weekends. It depends on each family’s personal situation.
Vacations – Some families encourage their kids to help contribute to a family vacation or outing. While the children won’t pay for a majority of the expense, this provides the opportunity to teach them the cost of this type of entertainment and share in the decision of how that money is spent while on vacation.
However a parent chooses to do it, allowing children to manage their own money and make financial choices will benefit them tremendously in the future and teach them critical life-long financial habits.
First-time homebuyer tax credit expanded
January 11, 2010
By Jason Alderman
When deciding whether to save for retirement using a traditional or Roth IRA, many people wrestle with the question, “When I retire, will my tax rate be higher or lower than it is today?”
This is a crucial distinction because with a Roth your contributions are taxed today, while withdrawals, including investment earnings, are tax-free at retirement. Conversely, contributing to a traditional IRA lowers your current taxable income; then, in exchange for that present-day favorable tax treatment, you later pay taxes on your balance when it’s withdrawn at retirement.
Some financial experts presume that because your income will likely be lower at retirement, your tax bracket probably will drop as well. Others, more pessimistic about the current economy, predict that record budget deficits could lead to higher future tax rates.
So, how to choose? Despite their more immediate tax burden, Roth IRAs have a couple of longer-term advantages for many folks. For example:
- The younger you are when you start saving in a Roth, the longer your money will compound, tax-free.
- Unlike traditional IRAs, Roth’s have no mandatory minimum annual withdrawals beginning at age 70 ½, so your account can continue to grow tax-free during your lifetime. (Mandatory withdrawals from traditional IRAs were waived for 2009 only.)
- Heirs who inherit a Roth IRA do not pay income tax on withdrawals as they do with an inherited traditional IRA.
Either way, IRAs are still a good vehicle for retirement savings, particularly if you don’t participate in a workplace 401(k) plan. And now, thanks to two tax code changes effective January 1, 2010, you have additional options regarding IRAs.
First, people (single or married) whose modified adjusted gross income (MAGI) exceeds $100,000 can now convert part or all of their existing traditional IRAs – or workplace savings plans from an old employer – into a Roth IRA. Previously, these higher-income folks were excluded from such conversions. (Note that certain MAGI limits do still apply for new Roth contributions. See IRS Publication 590 at www.irs.gov for details.)
Although such conversions may indeed provide long-term tax advantages, they can be difficult to swallow in the short term, since the converted balance is added to your taxable income, thereby increasing your taxes – and possibly boosting you into a higher tax bracket – for the year.
For 2010 conversions only, half of the converted amount will beadded to your 2011 taxable income and half to your 2012 taxable income. Or, if you prefer, you may have the entire amount added to your 2010 taxable income.
As always, you can undo, or “recharacterize,” a conversion later on if needed. For example, if your Roth IRA balance significantly decreased after conversion (as many did after the 2008 stock market crash), you would be taxed on account value that no longer exists; so, you are allowed to undo the conversion and then reconvert at a more favorable time. Recharacterization rules and deadlines are complex, so refer to Publication 590 for details.
Better yet, always consult a tax or investment professional for help weighing your options before making any major changes to your retirement savings habits.
Jason Alderman directs Visa Inc.’s financial education programs. To sign up for a free monthly personal finance e-Newsletter, go to www.practicalmoneyskills.com/newsletter.
