money management 101, understanding money management basics and best practices


for consumers in over their heads the realization that their monthly income is increasingly exceeded by their bill payments is usually a traumatic one in many cases years can pass before people consider drastic measures like filing bankruptcy both financial and emotional issues come into play in one of the most difficult and painful yet potentially beneficial decisions with bankruptcy certain types of debts can be completely eliminated or discharged debts that typically can be discharged include credit card medical auto utilities and rent debts that may not be cancelled generally include child support alimony student loans taxes and court order damages for example drunk driving settlements eliminating your debt also allows you to start working towards your financial goals depending on the amount of debt you have outstanding relative to your income you may need a decade or more to pay it all off filing bankruptcy needless to say has a number of drawbacks first bankruptcy appears on your credit report for up to 10 years so you'll have difficulty obtaining credit especially in the years immediately following your filing however if you already have problems on your credit report because of late payments or a failure to pay previous debts the damage has already been done and without savings you're probably not going to be making major purchases such as a home in the next several years anyway if you do file bankruptcy getting credit in the future is still possible you may be able to obtain a secured credit card which requires you to deposit money in a bank account equal to the credit limit on your credit card of course you'll be better off without the temptation of any credit cards and better served with a debit card also know that if you can hold down a stable job most creditors will be willing to give you loans within a few years if you're filing bankruptcy almost all lenders ignore bankruptcy after five to seven years and finally most people find that filing bankruptcy causes emotional stress admitting that your personal income can't keep pace with your debt obligations is a painful thing to do although filing bankruptcy clears the decks of debt and gives you a fresh financial start feeling a profound sense of failure and sometimes shame is common despite the increasing incidence of bankruptcy bankruptcy filers are reluctant to talk about it with others including family and friends another part of the emotional side of filing bankruptcy is that you must open your personal financial affairs to court scrutiny and court control during the several months it takes to administer a bankruptcy accord appointed bankruptcy trustee oversees your case and tries to recover as much of your property as possible to satisfy the creditors those to whom you owe money some people also feel that they are shirking responsibility by filing for bankruptcy so if you file for bankruptcy don't feel bad about not paying back the bank the nice merchants from whom you bought the merchandise have already been paid charge-offs the banker's term for taking the loss on debt that you discharged through bankruptcy are the banker's cost which is another reason why the interest rate is so high on credit cards and why you shouldn't borrow on credit cards regardless of how you deal with paying off your debt you're in real danger of falling back into old habits backsliding happens not only to people who file bankruptcy but also to those who use savings or home equity to eliminate their debt this section speaks to that risk and tells you what to do about it getting out of debt can be challenging but i have confidence that you can do it with my tips and advice in addition to the ideas such as eliminating all your credit cards and getting a debit card the following list provides some additional tactics you can use to limit the influence credit cards hold over your life reduce your credit limit if you're not going to take the advice i give you and get rid of all your credit cards or secure a debit card be sure to keep a lid on your credit card's credit limit the maximum balance allowed on your card you don't have to accept the increase just because your bank keeps raising your credit limit to reward you for being such a profitable customer call your credit card services toll-free phone number and lower your credit limit to a level you're comfortable with replace your credit card with a charge card a charge card such as the american express card requires you to pay your balance in full each billing period you have no credit line or interest charges of course spending more than you can afford to pay when the bill comes due is possible but you'll be much less likely to overspend if you know you have to pay in full monthly never buy anything on credit that depreciates in value meals out cars clothing and shoes all depreciate in value never buy these things on credit borrow money only for sound investments education real estate or your own business for example think in terms of total cost everything sounds cheaper in terms of monthly payments that's how salespeople entice you into buying things you can't afford take a calculator along if necessary to tally up the sticker price interest charges and upkeep the total cost will scare you it should stop the junk mail avalanche look at your daily mail you can save some trees and time sorting junk mail by removing yourself from most mailing lists limit what you can spend go shopping with a small amount of cash and no plastic or checks that way you can spend only what little cash you have with you no matter how hard they try to break the habit some people become addicted to spending and accumulating debt it becomes a chronic problem that starts to interfere with other aspects of their lives financial problems can lead to problems at work and with family and friends making wise investments doesn't have to be complicated however many investors get bogged down in the morass of the thousands of investment choices out there and the often conflicting perspectives on how to invest before you select a specific investment first determine your investment needs and goals why are you saving money what are you going to use it for you don't need to earmark every dollar but you should set some major objectives establishing objectives is important because the expected use of the money helps you determine how long to invest it and that in turn helps you determine which investments to choose the risk level of your investments should factor in your time frame and your comfort level investing in high-risk vehicles doesn't make sense if you'll have to spend all your profits on stress-induced medical bills for example suppose you've been accumulating money for a down payment on a home you want to buy in a few years you can't afford much risk with that money you're going to need that money sooner rather than later putting that money in the stock market then is probably not a wise move the stock market can drop a lot in a year or over several consecutive years so stocks are probably too risky a place to invest money you plan to use soon perhaps you're saving toward a longer term goal such as retirement that's 20 or 30 years away in this case you're in a position to make riskier investments because your holdings have more time to bounce back from temporary losses or setbacks you may want to consider investing in growth investments such as stocks in a retirement account that you leave alone for 20 years or longer you can tolerate year-to-year volatility in the market you have time on your side for a moment forget all the buzzwords jargon and product names you've heard tossed around in the investment world in many cases they're only meant to obscure what an investment really is and to hide the hefty fees and commissions the investment world is really just as simple you have only two major investment choices you can be a lender or an owner you're a lender when you invest your money in a bank certificate of deposit cd a treasury bill or a bond issued by a company like general motors for example in each case you lend your money to an organization a bank the federal government or gm you're paid an agreed upon rate of interest for lending your money the organization also promises to have your original investment the principal returned to you on a specific date getting paid all the interest in addition to your original investment as promised is the best that can happen with a lending investment given that the investment landscape is littered with carcasses of failed investments this is not a result to take for granted the worst that can happen with a lending investment is that you don't get everything you're promised promises can be broken under extenuating circumstances when a company goes bankrupt for example you can lose all or part of your original investment another risk associated with lending investments is that even though you get what you were promised the ravages of inflation may make your money worth less it has less purchasing power than you thought it would some conservative-minded investors make the common mistake of thinking that they are diversifying their long-term investment money by buying several bonds some cds and an annuity the problem however is that all these investments pay a relatively low fixed rate of return that's exposed to the vagaries of inflation a final drawback to lending investments is that you don't share in the success of the organization to which you lend your money if the company doubles or triples in size and profits your principal and interest rate don't double or triple in size along with it they stay the same of course such success should ensure that you get your promised interest and principle you're an owner when you invest your money in an asset such as a company or real estate that has the ability to generate earnings or profits suppose that you own 100 shares of verizon communication stock with billions of shares of stock outstanding verizon is a mighty big company your 100 shares represent a tiny piece of it what do you get for your small slice of verizon as a stockholder although you don't get free calling you do share in the profits of a company in the form of annual dividends and an increase you hope in the stock price if the company grows and becomes more profitable of course you receive these benefits if things are going well if verizon's business declines your stock may be worth less real estate is another one of my favorite financially rewarding and time-honored ownership investments real estate can produce profits when it's rented out for more than the expense of owning the property or sold at a price higher than what you paid for it the value of real estate depends not only on the particulars of the individual property but also on the health and performance of the local economy when companies in the community are growing and more jobs are being produced at higher wages real estate often does well when local employers are laying people off and excess housing is sitting vacant because of previous overbuilding rent and property values are likely to fall finally many americans have also built substantial wealth through small business according to forbes magazine more of the united states and the world's wealthiest individuals have built their wealth through their stake in small businesses than through any other vehicle small business is the engine that drives much of our economic growth although firms with fewer than 20 employees account for about one quarter of all employees such small firms were responsible for nearly half of all new jobs created in the past two decades you can participate in small business in a variety of ways you can start your own business buy and operate an existing business or simply invest in promising small businesses many investors have a simplistic understanding of what risk means and how to apply it to their investment decisions for example when compared to the yoyo motions of the stock market a bank savings account may seem like a less risky place to put your money over the long term however the stock market usually beats the rate of inflation while the interest rate on a savings account does not thus if you're saving your money for a long-term goal like retirement a savings account can be a riskier place to put your money before you invest ask yourself these questions what am i saving and investing this money for in other words what's my goal what is my timeline for this investment when will i use this money what is the historical volatility of the investment i'm considering and does that suit my comfort level and timeline for this investment after you answer these questions you'll have a better understanding of risk and you'll be able to match your savings goals to their most appropriate investment vehicles the risk with ownership investments is the short-term fluctuations in their value during the last century stocks declined on average by more than 10 percent in one particular year every five years drops in stock prices of more than 20 percent occurred on average once every 10 years real estate prices suffer similar periodic setbacks therefore in order to earn those generous long-term returns from ownership investments like stocks and real estate you must be willing to tolerate volatility you absolutely should not put all your money in the stock or real estate market you should not invest your emergency money or money you expect to use within the next five years in such volatile investments the shorter the time period that you have for holding your money in an investment the less likely that growth oriented investments like stocks will beat out lending type investments like bonds despite what professors teach in the nation's leading business and finance graduate school programs low-risk investments that almost certainly lead to high returns are available paying off consumer debt if you're paying 10 14 or 18 interest on an outstanding credit card or other consumer loan pay it off before investing to get a comparable return through other investment vehicles after the government takes its share of your profits you'd have to start a new career as a loan shark if between federal and state taxes you're in a 33 tax bracket and you're paying 12 percent interest on consumer debt you'd need to annually earn a whopping 18 percent on your investments pre-tax to justify not paying off the debt when your only source of funds for paying off debt is a small emergency reserve equal to a few months living expenses paying off your debt may involve some risk tap into your emergency reserves only if you have a backup source for example the ability to borrow from a willing family member or against a retirement account balance investing in your health eat healthy exercise and relax investing in friends and family invest time and effort in improving your relationships with loved ones investing in personal and career development pick up a new hobby improve your communication skills or read widely take an adult education course or go back to school for a degree your investment should lead to greater happiness and perhaps even higher paychecks diversification is one of the most powerful investment concepts it refers to saving your eggs or investments in different baskets diversification requires you to place your money in different investments with returns that are not completely correlated this is a fancy way of saying that when some of your investments are down in value odds are that others are up in value to decrease the chances of all of your investments getting clobbered at the same time you must put your money in different types of investments such as bonds stocks real estate and small business you can further diversify your investments by investing in domestic as well as international markets within a given class of investments such as stocks investing in different types of stocks that perform well under various economic conditions is important for this reason mutual funds which are diversified portfolios of securities such as stocks or bonds are a highly useful investment vehicle when you buy into a mutual fund your money is pooled with the money of many others and invested in a vast array of stocks or bonds you can look at the benefits of diversification in two ways diversification reduces the volatility in the value of your whole portfolio in other words your portfolio can achieve the same rate of return that a single investment can provide with less fluctuation in value diversification allows you to obtain a higher rate of return for a given level of risk keep in mind that no one no matter whom he works for or what credentials he has can guarantee returns on an investment you can do good research and get lucky but no one is free from the risk of losing money diversification allows you to hedge the risk of your investments because the future can't be predicted diversifying your money into different investments is safer thousands of firms sell investments and manage money banks mutual fund companies securities brokerage firms and even insurance companies all vy for your dollars just to make matters more complicated each industry plays in the other's backyards you can find mutual fund companies that offer securities brokerage insurance firms that are in the mutual fund business and mutual fund companies that offer bank-like accounts and services you may benefit from this competition and one-stop shopping convenience on the other hand some firms are novices at particular businesses and count on some people's shopping by brand name recognition make sure that you do business with a firm that offers the best value investments in comparison to their competitors value is the combination of performance including service and cost given the level of risk that you're comfortable with you want investments that offer higher rates of return but you don't want to have to pay a small fortune for them commissions management fees maintenance fees and other charges can turn a high performance investment into a mediocre or poor one also look for a firm that employs representatives who don't have an inherent self-interest in steering you into a particular type of investment this criterion has nothing to do with whether an investment firm hires polite well-educated or well-dressed people the most important factor is the way the company compensates its employees if the investment firm's personnel are paid on commission pass on that firm give preference to investing firms that don't tempt their employees to push one investment over another in order to generate more fees mutual funds are an ideal investment vehicle for most investors no load mutual fund companies are firms through which you can invest in mutual funds without paying sales commissions in other words every dollar you invest goes to work in the mutual funds you choose nothing is siphoned off to pay sales commissions in other words no matter which brokerage firm an investor did business with the cost of the firm's services was set and the level of commissions was high competition inevitably resulted in more and better choices many new brokerage firms that didn't do business the old way opened they were dubbed discount brokers because the fees they charged customers were substantially lower than what brokers charged under the old fixed fee system even more important than saving customers money discount brokers established a vastly improved compensation system that greatly reduced conflicts of interest discount brokers generally pay the salaries of their brokers the term discount broker is actually not an enlightening one it's certainly true that this new breed of brokerage firm saves you lots of money when you invest you can easily save 50 to 80 percent through the major discount brokers but these firms investments are not on sale or second rate discount brokers are simply brokers without major conflicts of interest of course like any other for-profit enterprise they're in business to make money but they're much less likely to steer you wrong for their own benefit be careful of discount brokers selling load mutual funds the worst places to invest are those that charge you a lot have mediocre or poor performing investments and have major conflicts of interest the prime conflict of interest arises when investment firms pay their brokers commissions on the basis of what and how much they sell the result the investment firms sell lots of stuff that pays fat commissions and they churn or cause a rapid turnover of your account because each transaction has a fee the more you buy and sell the more money they make financial consultants also known as stock brokers financial planners and others who sell investment products can have enormous conflicts of interest when recommending strategies and specific investment products commissions and other financial incentives can't help but skew the advice of even the most earnest and otherwise well-intentioned salespeople if you like the idea of spreading your money around you may want to invest through a number of different firms with a discount brokerage account you can eat your cake and have it too you can diversify across different mutual fund companies through one brokerage firm however you'll pay small transaction fees on some of your purchases and sales of funds unless you work in the industry you may find insurance to be a dreadfully boring topic most people associate insurance with disease death and disaster and would rather do just about anything other than review or spend money on insurance but because you won't want to deal with money hassles when you're coping with catastrophes illness disability death fires floods earthquakes and so on you have to secure insurance well before you need it insurance is probably the most misunderstood and least monitored area of personal finance most people are overwhelmed by all the jargon and sales and policy statements thus they pay more than necessary for their policies and fail to get coverage through the best companies law one insure for the big stuff don't sweat the small stuff the point of insurance is to protect against losses that would be financially catastrophic to you not to smooth out the bumps of everyday life you should insure against what could be a huge financial loss for you or your dependents the price of insurance isn't cheap but it is relatively small in comparison to the potential total loss from a financial catastrophe the beauty of insurance is that it spreads risk over millions of other people should your home burn to the ground paying the rebuilding cost out of your own pocket probably would be a financial catastrophe if you have insurance the premiums paid by you and all the other homeowners collectively can easily pay the bills think for a moment about what your most valuable assets are also consider potential large expenses perhaps they include the following future income during your working years your most valuable asset is probably your future earnings if you were disabled and unable to work what would you live on long-term disability insurance exists to help you handle this type of situation if you have a family that's financially dependent on your earnings how would your family manage if you died life insurance can fill the monetary void left by your death business if you're a business owner what would happen if you were sued for hundreds of thousands of dollars or a million dollars or more for negligence in some work that you messed up liability insurance can bail you out health in this age of soaring medical costs you can easily rack up a hundred thousand dollar hospital bill in short order major medical health insurance coverage helps you handle such expenses and yet a surprising number of people don't carry any health insurance particularly those who work in small businesses psychologically buying insurance coverage for the little things that are more likely to occur is tempting you don't want to feel like you're wasting your insurance dollars you want to get some of your money back darn it you're more likely to get into a fender bender with your car or have a package lost in the mail then you are to lose your home to fire or suffer a long-term disability but if the fender bender costs 500 which you end up paying out of your pocket because you took my advice to take a high deductible or the postal service loses a package worth fifty dollars or a hundred dollars you won't be facing a financial disaster on the other hand if you lose your ability to earn an income because of a disability or if you're sued for a million dollars and you're not insured against such catastrophes not only will you be extremely unhappy but you'll also face financial ruin i agree that the odds of this happening are quite low but the risk is there the problem is that you just don't know what or when bad luck may befall you and don't make the mistake of thinking that you can figure the odds better than the insurance companies can the insurance companies predict the probability of you're making a claim large or small with a great deal of accuracy they employ armies of number-crunching actuaries to calculate the odds of bad things happening and the frequency of current policyholders making particular types of claims the companies then price their policies accordingly so buying or not buying insurance based on your perception of the likelihood of needing the coverage is foolish insurance companies aren't stupid in fact they're ruthlessly smart when insurance companies price policies they look at a number of factors to determine the likelihood of your filing a claim most insurance policies have deductibles the maximum amount you must pay in the event of a loss before your insurance coverage kicks in on many policies such as auto and homeowners renters coverage most folks opt for a 100 to 250 deductible here are two benefits to taking a higher deductible you save premium dollars year in and year out you can enjoy the lower cost of an insurance policy with a high deductible you don't have the hassles of filing small claims filing an insurance claim can be an aggravating experience that takes hours of time in some cases you may even have your claim denied after jumping through all the necessary hoops getting your due may require prolonged haggling when you have low deductibles you may file more claims although this doesn't necessarily mean that you'll get more money after filing more claims you may be rewarded with higher premiums in addition to the headache you get from preparing all those blasted forms filing more claims may even cause cancellation of your coverage you pay a lot of money in taxes probably more than you realize believe it or not few people know just how much they pay in taxes each year most people remember only whether they received a refund or owed money on their return but when you file your tax return all you're doing is settling up with tax authorities over the amount of taxes you paid during the year versus the total tax that you owe based on your income and deductions some people feel lucky when they get a refund but all a refund really indicates is that you overpaid in taxes during the year you should have had this money in your own account all along if you're consistently getting big refunds you need to pay less tax throughout the year fill out a simple tax form the w-4 to determine how much you should be paying in taxes throughout the year you can obtain a w-4 through your employer's payroll department if you're self-employed you can obtain form 1040 es by calling the irs at 800 tax form 800-829-3676 or visiting its website at www.irs.gov instead of focusing on whether you're going to get a refund when you complete your annual tax return you should concentrate on the total taxes you pay to find out the total taxes you pay you need to get out your federal and state tax returns on each of those returns is a line that shows the total tax if you add up the totals from your federal and state tax returns you'll probably see one of your largest expenses understanding the tax system is the key to reducing your tax burden if you don't you'll surely pay more taxes than necessary your tax ignorance can lead to mistakes which can be costly if the irs and state government catch your underpayment errors with the proliferation of computerized information and data tracking discovering mistakes has never been easier the tax system like other public policy is built around incentives to encourage desirable behavior and activity home ownership for example is considered desirable because it encourages people to take more responsibility for maintaining buildings and neighborhoods clean orderly neighborhoods are often the result of home ownership therefore the government offers all sorts of tax perks to encourage people to buy homes not all people follow the path the government encourages after all it's a free country however the fewer desirable activities you engage in the more you pay in taxes if you understand the options you can choose the ones that meet your needs as you approach different stages of your financial life when it comes to taxes not all income is treated equally this fact is far from self-evident if you work for an employer and earn a constant salary during the course of a year a steady and equal amount of federal and state taxes is deducted from each paycheck thus it appears as though all that earned income is being taxed equally in reality however you pay less tax on your first dollars of earnings and more tax on your last dollars of earnings for example if you're single and your taxable income totals forty five thousand dollars during two thousand six you pay federal tax at the rate of ten percent on the first seven thousand five hundred fifty dollars of taxable income fifteen percent on income between seven thousand five hundred fifty dollars and thirty thousand six hundred fifty dollars and twenty five percent on income from thirty thousand six hundred fifty dollars up to forty five thousand dollars your marginal tax rate is the rate of tax you pay on your last or so-called highest dollars of income in the example of a single person with taxable income of forty five thousand dollars that person's federal marginal tax rate is 25 percent marginal tax rates are a powerful concept your marginal tax rate allows you to quickly calculate the additional taxes you'd have to pay on additional income conversely you can delight in quantifying the amount of taxes you save by reducing your taxable income either by decreasing your income or by increasing your deductions as you're probably already painfully aware you pay not only federal income taxes but also state income taxes your total marginal rate includes your federal and state tax rates you can look up your state tax rate in your current state income tax preparation booklet taxable income is the amount of income on which you actually pay income taxes the following reasons explain why you don't pay taxes on your total income not all income is taxable for example you pay federal tax on the interest you earn on a bank savings account but not on the interest you earn from municipal bonds some income such as from stock dividends and long-term capital gains is taxed at lower rates you get to subtract deductions from your income some deductions are available just for being a living breathing human being people over age 65 and those who are blind get a slightly higher deduction other expenses such as mortgage interest and property taxes are deductible in the event that these so-called itemized deductions exceed the standard deductions when you contribute to qualified retirement plans you also effectively get a deduction you


Leave a Reply

Your email address will not be published.