Best Deals on Student Loans

I’ve gotten a lot of questions about the FAFSA form lately, as well as the best student loans to get.

Kiplinger.com has a great article on student loans right now.  Some tips shared include:

1. Determine which type of school your family can afford
2. Set a realistic limit on how much debt you can afford
3. Stick with the Federal loan programs - Perkins, Stafford and PLUS loans
4. After you’ve exhausted your options in Federal loans, get a list of lenders from the school, or from FinAid (www.finaid.com)

This is part of a series of articles on paying for college.  Click here to see the full text of this article, Best Deals on College Student Loans.  Click here for last weeks article, Smart Ways to Pay for College. Next weeks article will focus on the best loans for parents.

Tags: saving for college, student loans, college loans

Small Ways to Save Big

Kiplinger.com has a great article on 20 Small Ways to Save Big by Jessica Anderson. 

Tags: saving money, saving crisis

Coping with market fluctuations

You’re probably aware that the stock market fell 400 points last week.  How did you handle the drop?  Did you panic and sell, or did you hold tight?

Market cycles are normal and should be expected.  You shouldn’t allow your emotions to influence your investing decisions.  Remember these important points when making investment decisions:

Diversify to reduce risk.  Spread your investments among various asset classes (stocks, bonds, cash) based on your goals, time frame and risk tolerance.  If your portfolio is properly diversified, a decline in one asset type will be balanced out by a gain in another asset type.

Focus on long term goals and your overall portfolio.  Short term blips are insignificant if you are investing for 10, 20 or 40 years.  In addition, it’s more important how your overall portfolio performs than how each individual investment performs.  Remember, 90% of your investment return is determined by how your portfolio is allocated, rather than the individual investments you choose.

Make market fluctuations work for you.  If you are in the accumulation phase, take adantage of a market drop to buy investments.  Remember the old adage "buy low, sell high"?  The best time to buy low is right after a market drop.  If you are close to retirement, use market fluctuations to evaluate your portfolio for appropriate risk tolerance and diversification.  If the drop in your portfolio was more than you can tolerate, consider rebalancing to an asset mix that is more appropriate for you - however, don’t make any rash decisions; wait a few days and use dollar cost averaging so that you don’t sell low and buy high.

Here are some great articles addressing the market drop last week, and how to handle financial anxiety:

How to cope with financial anxiety

Market misbehavior calls for wary eye, not grounding

Several tax law changes not included on 2006 forms

Be careful if you are preparing your own tax return this year; there are several tax deductions, credits and other provisions that are NOT listed on the tax forms.

The Tax Relief and Health Care Act of 2006 was passed in December 2006, after the IRS completed and printed the tax forms for 2006.  Fortunately, several tax provisions that were scheduled to expire were extended, and several new tax provisions were created by this tax act.  Unfortunately, since the IRS had already printed the tax forms for 2006, these new and extended tax provisions are not included on the forms.

The provisions that will affect most taxpayers are the tuition and fees deduction, teacher-related expenses, and the deduction for sales taxes paid. 

Most tax software will have updated information on these tax provisions, so you should use tax software or see a tax professional to have your taxes prepared this year.  You should not attempt to prepare your return by hand this year, or you could miss a deduction/credit that was passed after the forms were printed.

For more details, see IRS Notice IR-2006-195, or visit the IRS website at www.irs.gov

Tags: income taxes, tax act, tax preparation

50 Ways to Cut Health Care Costs

Just ran across the article 50 Ways to Cut Health Care Costs on CNNMoney’s website. 

As fast as health care costs are rising, I think it’s a good idea to educate yourself about your health care costs and how to cut them.

#3 Pay up front, in cash - I have done this several times, and have gotten a 15% discount as a result.  If it’s a cost that won’t be covered by insurance (because you have a high deductible), then it benefits you to pay up front to get the discount.

#10 Visit a retail health clinic (such as CVS and Walmart) - I haven’t had any reason to do so yet, but it’s nice to know that I have somewhere else to go for poison ivy, the flu, or other small ailments that’s less costly than a visit to the doctor.

#18 Consider an HSA - although these aren’t right for everyone, I have an HSA and love the savings (lower premiums and a tax break).

Click here to read the full article: http://money.cnn.com/popups/2006/moneymag/healthcare/index.html

Beware the High Cost of Payday Loans

I noticed that a payday loan store moved into my neighborhood recently, then I looked around and realized there are several in my area.

This made me wonder… how profitable are these payday loan places, that they are popping up on every street corner? I’ve heard that payday loans charge high interest rates, but I had never really researched this info before now.

Here’s what I found out…

First, if you’re not familiar with payday loans, basically, they are short-term loans, usually in small amounts. Typically, you write a check for the amount of the loan plus fees, and the lender cashes the check on a specified date, usually one to four weeks later.

Here’s an example: you need $100 to pay your bills so you borrow $100 from a payday loan company. You write a check for $115 and leave it with the lender, to be cashed in two weeks. Your fee for that loan is $15 - that is an annual percentage rate (APR) of 391%.

Although the Truth in Lending Act requires lenders to disclose the finance charge, including the APR, many consumers do not understand the true cost of a payday loan. To continue the example above, let’s assume that you can’t pay the $115 when it comes due. The lender allows you to roll the loan over for another two weeks, but you pay another fee each time you do this. If you rollover the loan in the example above three times, your total finance charges would be $60, for a $100 loan. That equates to an APR of more than 1000%!

As you can see from the example this a very costly way to borrow, even when compared to high interest credit cards. If you find yourself in a cash bind, here are some alternatives to payday loans to consider: a personal loan from a bank or credit union, a personal loan from family or friends, a cash advance against your credit card, a cash advance from your employer, etc.

PMI Insurance: New Tax Break Helps with Mortgage Insurance Premiums

Uncle Sam is now going to help you pay your mortgage insurance premiums! 

Mortgage insurance is typically required when home buyers purchase a new home with less than 20 percent down. 

The newest tax legislation allows taxpayers to deduct premiums paid for mortgage insurance.  Mortgage insurance premiums typically range from $50 to $150 per month, which could mean a $600 to $1,800 deduction on your tax return.

This deduction is only available to taxpayers who itemize, but many home owners (especially if you’ve just purchased your home) have enough mortgage insurance, real estate tax, and other deductions to itemize.

Prior to this tax law, only the interest paid on a mortgage was deductible. 

This deduction won’t help everyone.  The deduction will be limited to taxpayers with adjusted gross income below $110,000.

Finally, you’re out of luck if you are already paying mortgage insurance.  This deduction will only apply to mortgage insurance contracts issued in 2007, and it’s set to expire on December 31, 2007.

For more information on the mortgage insurance premium deduction and the tax law, please visit:
http://www.mercurynews.com/mld/mercurynews/business/personal_finance/16217445.htm

Emergency Fund: Why You Need One

As a financial planner, I encourage my clients to have an emergency fund.  This is often met with the following questions:

1.  Why do I need an emergency fund? and
2.  How much should it be?

To answer the first question, you need an emergency fund for the following unexpected expenses or situations:

* Car repairs
* Home repairs or improvements
* Job loss
* Job downsize (forced to work fewer hours)
* Unexpected medical expenses

By having an emergency fund, you won’t be forced to turn to credit cards to pay for these unexpected bills.

The general rule of thumb is to save between three and six months of your living expenses in an emergency fund.  If you have no dependents, good credit, and a steady income, you can probably get by with three months; if you have a fluctuating income or work in a field that is not steady (home construction is a great example right now), you should aim for six months in your emergency fund.

One more thought… you should keep your emergency fund in a high interest money market or CDs (a portion, not all of your emergency fund) to earn a higher interest rate than your checking/savings account.

Are ETFs Right for You?

Exchange traded funds (ETFs) are gaining in popularity, but are they right for you?

ETFs are similar to index funds, but they trade like a stock, meaning they can be bought and sold throughout the day instead of just once a day.

Advantages:

Low cost - ETFs have a lower annual expense than most mutual funds, including most index funds.  According to Morningstar, the average expense ratio for ETFs is 0.30%, compared to 0.35% for no-load index funds, and 0.96% for all mutual funds.

Tax efficient - ETFs don’t have to sell stock positions to meet shareholder redemptions, which cuts down on taxable transactions.  Also, redemptions by large shareholders are paid in kind, protecting investors from unnecessary taxable events.

Disadvantages:

The main disadvantage of ETFs is that they can only be bought through a broker, which means you will pay transaction costs each time you purchase an ETF. 

Conclusion:  ETFs can be a great way to diversify your portfolio, especially if you are making a one-time purchase.  But if you make regular purchases, such as with dollar cost averaging, the transaction costs can end up costing you more than if you had purchased an index mutual fund.

To learn more about ETFs, check out the Exchange Traded Funds Center at Morningstar.  In addition, you can read more about iShare ETFs managed by Barclays Global Investors, or Vanguard’s ETFs.

Put Your Finances on Auto Pilot

I was at a conference recently, and learned a great tip to automate many of my email communications.  After I implemented this tip, I started thinking about all the ways you can automate your finances to help achieve your financial goals. 

So… this week’s tip is a list of ways to put your finances on autopilot:

1.    Invest in your company’s retirement plan.  This is the easiest way to put your savings on autopilot, by far.  And many companies provide a matching contribution, so there’s free money involved as well!

2.    If you don’t have a company retirement plan, setup your own retirement plan (IRA, Roth IRA, SEP IRA and many others) and establish an automatic withdrawal from your bank account to your retirement plan.

3.    Setup an automatic withdrawal from your checking to your savings account to save for emergencies, rainy days, vacations or other short term financial goals.

4.    Setup automatic withdrawals to pay for recurring bills.  This way you won’t ever miss a due date.

5.    Setup automatic withdrawals to pay the minimum on your credit card.  There’s nothing worse than paying a late fee because you didn’t get your credit card payment in on time.  This tip will make sure you always get at least the minimum payment in on time each month.  You can always send in extra money when you want to.

6.    If you’re self employed, transfer a specified amount each month to a savings account until it’s time to send in your quarterly tax payment.  This will be much less painful than coming up with 3 months of estimated taxes at one time.

7.    Adding onto #6, if you’re self employed, consider incorporating your business and putting yourself on the payroll.  Then you will be required to withhold taxes and submit them periodically.

There are many more ways to put your finances on autopilot, but these will get you started.  The important thing is to make it automatic, and painless, so you’ll never miss the money.

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