Archive for Financial Literacy
Myth-Busting Your Credit Score
Posted by: | CommentsConsumer credit scoring is commonly misunderstood, but it’s important to understand. Your credit score is a key consideration in loan applications and helps determine the interest rate you’ll pay on those loans. The lower the interest rates on your loans, the more income you’ll have available for retirement savings and other uses. So let’s shed some light on five common misconceptions.
“All credit scores are FICO scores.”
The most widely-used credit score model is FICO (Fair Isaac Corporation). Most lenders do use FICO, but you have three different FICO scores from the three major credit bureaus—Experian, TransUnion, and Equifax. Many lenders use their own credit scoring system, which often includes the FICO score as well as other information. A good place to learn more about credit scoring in general is www.myfico.com.
“Carrying a big balance helps my credit score.”
Not so. It’s true that a history of good debt management gains you a higher score than having no debt at all, but the less outstanding credit you have, especially on credit cards, the better. And paying on time is critical. In fact, if you run up an especially-big credit card bill in any given month, try to pay it off a few days early, because outstanding debt is reported to the credit bureaus at the end of the month.
“Wiping out a delinquent debt will immediately fix my score.”
Unfortunately, negative information on your credit report is slow to disappear—seven years for credit delinquencies and ten years for bankruptcy information. It’s far better to avoid credit trouble in the first place.
“I should close my accounts as I pay each one off.”
Closing accounts can actually hurt your score, because credit bureaus look at your “utilization ratio” of credit used vs. credit available. A closed account has zero dollars available, so it’s better to keep your accounts open and only charge (then pay off) one or two small amounts each year. Another reason to keep accounts open is that your score considers both the average age of all your accounts and the age of the oldest one. If you do want to eliminate a line of credit, call or write the lender to ask that your account be closed “at the cardholder’s request,” with written confirmation.
“I only use cash so my score must be great.”
Unfortunately, no. You must use credit to build credit and demonstrate that you pay your debts. Living on cash only doesn’t establish a payment history, and that could be a problem when you want to buy a house or car.
This One’s No Myth
To maintain a good credit score, pay your bills on time, keep your total debt low in proportion to your available credit, and review your credit report regularly to look for errors. Also remember that it’s not only the number of your credit score that’s important, but also the information contained in your report. Be sure to review your credit report from all three reporting agencies annually at AnnualCreditReport.com.
Your Brain’s Power to Stay the Course
Posted by: | CommentsStudies of the human brain have shown that we actually have two brains. There’s the neocortex, where our higher thought processes take place. Below the neocortex is a primitive brain left over from our distant ancestors. This primitive brain doesn’t think. It reacts. All it cares about is survival. So when danger looms, the primitive brain shuts down the neocortex and enters fight-or-flight mode. This was a good survival strategy in the days when you had to run from saber toothed tigers. It’s still useful if you’re trying to avoid a car accident and have only seconds to react.
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Straight Talk About the Federal Deficit
Posted by: | CommentsWe all know that there’s a huge imbalance between what the government takes in and what it spends, but how did we get in this mess? On this subject the public has been bombarded with misinformation. Let’s look at some facts.
Spending vs. Income
Politicians like to talk about cutting spending. All you have to do is cut spending on the wasteful programs and our deficit will disappear, right? Spending is certainly part of the equation. But revenue is an equally important part.
According to the U.S. Office of Management and Budget, the federal government since the end of World War II has had an average annual “income” (from taxes and other sources) of approximately 18% of our gross domestic product (GDP). At the same time, the government has been busy spending 20% of GDP. You wouldn’t want to run your household checkbook like that, but it works for Uncle Sam.
In 2010 the federal government spent $3.5 trillion. The top three expenses were Social Security (20.4%), defense (20.1%), and Medicare (13.1%). In fifth place was interest payments on the federal debt (5.7%), topping even low-income assistance (5.3%) and unemployment compensation (4.6%).
The economic collapse of 2008 accelerated government spending. Some of this spending was the result of policies that had been set in motion before the collapse. Some was automatic, as more people ran into financial trouble and entered the social safety net. The government spent 20.7% of GDP in 2008. This year it’s estimated that the government will spend 24.3% of GDP, the highest since our all-out effort to defeat Germany and Japan.
On the revenue side, the government took in 17.5% of GDP in 2008. This year it’s likely to be 15.5%. What happened to the government’s income? The stock market and the housing market declined, steeply and quickly, erasing enormous amounts of value. Unemployment and underemployment skyrocketed, holding wages down along with the taxes that workers would have paid on them.
In addition, individual income tax receipts are down considerably following the Bush tax cuts: 10.2% of GDP in 2000, 6.2% in 2010. When you consider that individual income-tax payers provided 41.5% of all federal revenues in 2010, you can imagine the enormous effect of this drop.
Corporate Taxes
As the presidential campaign season heats up, we’re hearing talk about the heavy tax burden on U.S. corporations. Granted, the official tax rate on corporate income, 35%, is one of the highest in the world. Even the effective rate (what companies actually paid) was nearly 28% from 2006-2008.
However, if you look at corporate taxes as a percentage of corporate profit, you see a downward trend. According to the U.S. Department of Commerce, in 2006 corporations paid income taxes equal to 29.4% of their profits. This dropped to 20% in 2009. Tax revenue rose to 22.8% in 2010, but this is still a significant overall decline in just five years.
Why is Corporate America paying less tax as a percentage of their profits? Because the losses that corporations sustained during the economic collapse are helping them now. Businesses do much better tax planning than the average person. Also, businesses can take advantage of such devices as “net operating loss carry-forwards,” in which past losses offset present gains and reduce taxes.
The Bottom Line on the Deficit
At the beginning of this article we asked, how did we get in this mess? In a nutshell, we are spending more while taking in less from taxes. Ultimately, the federal government must find a way to balance cutting expenses and raising taxes. That sounds simple, but few people like paying more taxes or cutting defense spending or assistance programs for retirees or the poor. We will be debating what actions to take to tame the deficit for some time to come. Keep in mind that political statements made in the heat of an election campaign are not necessarily objective or even true. It will help if we can all take a calm, clear look at the deficit and its causes.
Safe At Home: Picking An Identity Theft Protection System
Posted by: | CommentsIdentity theft is not quite the epidemic the media would have you believe, but it is a real threat. The Federal Trade Commission (FTC) estimates that every year up to 9 million Americans have their identities stolen. That means that someone will use your name, your Social Security number or one of the many other numbers that define your life to commit fraud.
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Conquer Debt and Reclaim Your Life
Posted by: | CommentsWe’re all familiar with debt. Few of us can buy a house or a car without help from the bank. But sometimes the bills pile up on us. If your debts seem to run your life, keep in mind that there are ways to fight back. Here are a couple of practical approaches to help you live a debt-free life. All you need is the willpower to start today.
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Be Generous and Smart
Posted by: | CommentsTax-Free Family Gifts
Do you have someone in your family who could use some financial help? Are you able and willing to provide it? Don’t get out your checkbook without first considering the most tax-advantaged way to help. Without research and planning, your generosity could cause you unnecessary taxation. While estate taxes govern taxation on assets after your death, gift taxes govern what you can give away during your lifetime. Let’s examine ways you can help your family without hurting your own finances.
Exclusions and Exemptions
Within current guidelines, you can still give to your family and friends without facing gift taxes—as long as you keep an eye on exclusions and exemptions.
Gift Tax Annual Exclusion – The federal tax law allows you to give up to $13,000 annually (per recipient in 2011) to an unlimited number of individuals—with no tax or reporting obligations.
Gift Splitting – Married couples can gift up to $26,000 (per recipient in 2011) each year using their gift tax annual exclusions.
Lifetime Exemption – The tax law also provides a lifetime gift tax exemption ($5 million in 2011). This allows you to give away as much as a total of $5 million to family and friends over your lifetime without owing any federal gift tax. If you are married, you and your spouse each are entitled to a separate credit. You can use any or all of the credit to offset taxes on gifts, and the amount you have used will not be available to offset taxes on your estate.
This means that gifts made under the $13,000 exclusion will not use up any of your lifetime gift tax exemption. However, any gifts you make over the $13,000 limit per individual, per year, will reduce your lifetime exemption.
Other Options
Beyond those exclusions and exemptions, there are other tax-free ways to help:
Education Savings
Another possibility might be to make tax-free contributions to the 529 college savings plan of a beneficiary. In one year, you may invest as much as $65,000 ($130,000 if you split the gift with your spouse) in a 529 plan. However, that $65,000 will be treated as if it were a series of $13,000 gifts made over five years. As a result, you won’t be able to make any other tax-free gifts to that person during that five-year period.
College Tuition and Medical Expenses
There are no limits on the amount of these expenses you can pay, as long as you give the money directly to the medical provider or the educational institution where the expenses were incurred.
Loans
You can loan money to family members at a lower interest rate than they would have to pay a bank. To avoid gift taxes, it’s important that you follow the required processes and impose the stated interest rate.
Homes
It’s unclear whether letting someone live rent-free in a home you own is considered a “gift” by the IRS, and therefore subject to gift taxes. You could avoid the issue by making them a part-owner in the home.
When to File a Gift Tax Return
A return is generally needed only when you make a gift of more than $13,000 to any person (other than your spouse) in one year. Your gifts can be cash, securities or other property, but as long as their combined value is $13,000 or less per year, per recipient, no federal gift tax applies and you don’t have to file a gift tax return.
Under current law, you won’t have to pay federal gift tax until all taxable gifts made during your lifetime exceed $5 million. You may want to file a gift tax return for a hard-to-value gift, even when a return is not required. Why? If the transfer is adequately disclosed, the IRS has only three years to challenge the valuation. Without the gift tax return, the IRS could dispute the valuation later when your estate tax return is filed (and justification is much more difficult), potentially forcing your family to pay substantial back taxes.
Generous and Smart
Making gifts while you’re still alive can help your family when they need it most—and if you plan wisely it can also help you avoid or minimize future estate taxes. Your financial advisor can help you make smart decisions to benefit your family and friends, while also keeping your own financial goals and taxes in mind.
The Ups and Downs of Interest Rates
Posted by: | CommentsInterest rates go up and interest rates go down—an inevitable part of the economy and financial landscape. What does it mean for your investments? Different types of investments respond to changes in interest rates in different ways. Specifically, there are significant differences in how equity and fixed-income investments (like bonds) respond to fluctuations in interest rates.
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Financial Advisor Alphabet Soup
Posted by: | CommentsWhat all those letters really mean
With so many people tossing around the title “financial advisor”, it can be hard to get a clear understanding of what that means, but sometimes a clue can be found in the credentials the professional has earned. If you’re looking for a financial advisor and doing research online or through friends and relatives, you’ve probably noticed that there are a lot of different acronyms that can appear after someone’s name. There are literally dozens of different credentials that can be earned by financial professionals. While some designate a specialty, others indicate a level of education or an association with a regulatory and disciplinary organization. Before you choose an advisor based on credentials, you need to know what they mean.
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You Can Take It With You
Posted by: | CommentsNo one expects to be the victim of a disaster, but every year, people find themselves in the midst of fires, floods, earthquakes, and other catastrophic events, with little, if any, time to prepare. And, every year, personal and financial records are lost because they can’t be located quickly in an emergency.
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Save or Shred? What to Do with Financial Records
Posted by: | CommentsDo you have boxes of financial records and paperwork stored in a closet? Do you throw away everything as soon as you don’t see a need for it? People tend to fall into two categories—they either save EVERYTHING or they save NOTHING. When it comes to your financial records, it’s important that you save the right things, for the right amount of time, in the right way.
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