Archives for December 24, 2018

It’s time for my 14th annual “What I want for Christmas” list. Some wishes from Christmases past have come true:

The major credit bureaus — Equifax, TransUnion and Experian — finally, finally, finally have been forced by law to allow consumers to freeze their credit files at no charge. This will help people protect themselves from having accounts fraudulently opened in their name.

More consumers recognize the need to protect their personal information and are more skeptical when companies or callers ask questions.

And more children are finally being taught a little bit of personal finance in school.

But unfortunately, my Christmas wish list is still really, really long this year. I wish:

• All landline and cellphone companies would offer some kind of technology so customers would have the option to block all calls not coming from a live person — almost all robocalls are unwanted marketing calls or attempts to defraud people. The Federal Communications Commission has said robocalls and telemarketing calls are the No. 1 consumer complaint at the FCC.
• People who buy something on sale would realize they’re not “saving money.” Perhaps they’re spending less than they’d planned. But they’re spending money, not saving it. The retail industry has brainwashed us.
• Regulators or Congress would take the next step in this era of rampant identity theft and require the credit bureaus to freeze people’s credit files by default and not have to request their file be frozen. People could choose to unfreeze them temporarily or permanently, but they’d be automatically frozen at the outset.
• Someone would explore the possibility of virtual or one-time use Social Security numbers.
• The nation’s personal savings rate would return to 10 percent, as it was in 2012, when people were still really nervous about the economy. Now, the personal savings rate is about 6 percent. That is, at least, double from a year ago. In May of 1975, it was 17 percent. So 10 percent isn’t too big of an ask.
• Visa and MasterCard didn’t have policies that prohibit retailers from requiring shoppers to show their driver’s license or other official ID. That’s right — it’s prohibited in their agreements. It would help stop a lot of fraud. Not all. But a lot.
• More merchants would install cameras at the checkout line, as Walmart has done at many self-serve checkouts, right next to the item scanner. You can’t avoid looking straight into the camera. The retail giant uses the cameras to deter fraudulent use of credit and debit cards.
• Motorists had to show proof of insurance to renew their auto registration. And people busted for no insurance would have to pay their premium for a whole year upfront to get their licenses back.
• Banks and other financial companies would care more that some people don’t have computers or don’t want to access their accounts online or through their smartphones.
• People weren’t hired as telephone customer-service workers if they can’t be understood.
• All of us would work harder to educate our friends and relatives about not falling for hoaxes like sweepstakes and “work-at-home opportunities” that involve counterfeit checks.
• Consumers would realize that banks aren’t nonprofits. They are companies that need to make more money than they spend. And they have the right to charge some fees — like monthly maintenance fees — as long as they’re clearly disclosed up front. If you don’t like the fees, take your business elsewhere. There are more than 6,000 banks and about the same number of credit unions.
• Equifax, TransUnion and Experian could not add information — good or bad — to someone’s credit file based solely on his or her name and region. Yes, this happens all of the time, even though Social Security numbers don’t match, dates of birth don’t match, actual addresses don’t match, etc. No other matching information besides the name. How is this allowed?
• Regulators and consumer protection folks could figure out how to really crack down on scams, especially ones targeting seniors, and especially ones that come by way of telephone.
• Banks and retailers would take fraud more seriously. If our credit or debit cards are used fraudulently, somebody pays for it. Ultimately, it’s all of us who pay it in the form of higher prices in stores, reduced customer service and higher bank fees and interest rates.
• The credit bureaus provided consumers their genuine FICO credit scores at no charge anytime they receive a free copy of their credit report. The 2003 federal law that forced the three credit bureaus to provide consumers with their credit report at no charge once a year (if they ask) should be amended to include credit scores.
• Consumers weren’t conditioned to believe the commercials that “for everything else, there’s MasterCard.”
• I could be assured that my sons and pre-school-age niece will live in more prosperous times than I.
• Debit cards carried the same federal protection as credit cards. No matter what your bank says, they don’t. Your bank will do anything to convince you that I’m wrong, but I’m not. Most of the “protections” are voluntary, not mandatory. Ask your bank about what debit card protections are mandated by law, compared with the credit card protections mandated by law. The conversation will probably be short.
• Schools would adopt specific requirements for what they teach about personal finance. They all should teach how to budget money, read an apartment lease and other common contracts, understand compound interest and shop for a mortgage.
• Companies weren’t allowed to advertise scams like 10 percent, no-risk investments.
• Teens and adults could count money correctly and make change in their heads. If your bill is $13.51, for example, you should know you can give the cashier $20.01 with the intention of getting $6.50 in change.
• All consumers who are able would pay their bills on time.
• The U.S. government would learn the same lesson that so many consumers have: Debt is expensive. Occasional debt is OK, but you have to live within your means.
• Merchants weren’t continuing to encourage people — even beg people — to open credit card accounts at the checkout register. Target, Amazon and Sears are big offenders.
• There were more honest people in the world.
• Publicly traded companies weren’t allowed to cite “pro forma” results — otherwise known as the profits they would have had if not for unusual expenses. I’d have more money, too, if both my husband’s truck and my SUV hadn’t died within 11 days of each other, if my big, expensive fridge hadn’t failed after only six years, and if I wasn’t required to take two weeks’ worth of unpaid furlough days each year.
• Annuities were better regulated.
• Companies would be more respectful of our privacy, namely by better guarding our sensitive information, home addresses and phone numbers.
• People wouldn’t whine about being broke even though they lease an expensive SUV worth more than my first house, have a smart TV that links to their Apple Watch and iPhone 10 (X), plus have a cigarette habit that costs them $6 a day.

What’s on your wish list?

Buying a house is one of life’s most exciting milestones. You get to decorate, make the home your own, and set down roots — all while building equity and, ideally, increasing your net worth.

But buying a house is also a really big financial decision, and if you don’t hit some money milestones before you get a mortgage you could end up with a house that’s more a financial burden than a blessing. How can you know if you’re ready to buy a house? Make sure you do these three things first.

1. Save enough a down payment.

When you buy a home, traditionally you’re supposed to have a 20% down payment. That means you have to pay 20% of the price for the house up front, before you can move in. Most people don’t have that much.

If you don’t have 20% to put down on your new home, you’ll have to pay for private mortgage insurance (PMI). PMI usually has an annual cost of around .5% to 1% of the total amount borrowed. If you borrow $300,000, you could end up paying around $3,000 per year in PMI. This PMI doesn’t protect you, even though you pay for it. It protects your lender, because PMI makes sure the lender gets all its money back if it has to foreclose.

You can request to have PMI dropped if you’ve paid down your loan enough that your balance is 80% or less of your home’s market value. And the bank must automatically drop PMI once your loan balance is down to 78% of your home’s value. But it could take years to reach that point, and you’ll be wasting money all the while.

Not only is not having a down payment expensive because of PMI costs, but it’s also really risky. If you don’t put 20% down on your home and real estate values fall, it could be difficult or impossible to refinance or sell because you could end up owing more than your home is worth.

Don’t forget, when you sell your home you may have to pay around 6% commission to realtors, as well as other costs. Without a hefty down payment, there’s a good chance you won’t be able to sell your home for what you owe if you didn’t have a big down payment and you need to move within the first few years of owning the home.

If you couldn’t sell your home for enough to pay off your loan, you’ll need to bring cash to the table from your own pocket to pay off the total you owe. Otherwise you’ll be stuck in the house unless the lender agree to a short sale — which would ruin your credit. You don’t want to be stuck in your home if you need to move, so don’t buy a home without a big down payment under your belt.

2. Have a robust emergency fund.

Being a homeowner comes with a lot of surprise expenses. If you need a new water heater or a new roof, you’re the one on the hook to pay whatever it costs– not your landlord. If you don’t have money set aside for these unexpected emergencies, you could quickly end up in debt.

If you don’t have an emergency fund, you’re taking an enormous risk by buying a home. The problem: If you have a health issue or job setback and your income falls, you may not be able to keep up with paying your mortgage. This could lead to a foreclosure, or when the bank you owe takes back your house, if you can’t sell the home quickly enough once paying the bills becomes impossible.

To make sure you have the cash you need to keep your house — and maintain it — try to save an emergency fund worth three to six months of living expenses. If you do this before you buy a home, you can move in without worries because you’ll have the cash to cover unexpected issues that inevitably arise.

3. Make sure your total housing costs are affordable.

Far too many people in America are house-poor, which means they’re spending too much of their income on their house and don’t have enough left over for other things. You don’t want to be one of them.

It’s important to make sure your total monthly housing costs — including your mortgage, property taxes, utilities, insurance, and homeowner’s association costs — are affordable for you. Generally, most experts say you shouldn’t spend more than 30% of your income on housing, but you may want to keep this percentage even lower if you have other big financial goals you’re working toward.

To make sure you’re able to afford the new house you want to buy, figure out what your all-in costs would be each month, including your mortgage and other housing expenses. If this is more than your current mortgage or rent, do a test-run and try living as though you’re currently making your mortgage payments.

If your total housing costs as a homeowner will be $2,000 monthly and you’re currently paying $1,500 in rent, you’ll want to “make” your mortgage payment by moving the extra $500 monthly into a savings account you don’t touch. Doing this exercise will help you see what your life will be like once you’re making $2,000 mortgage payments. You can decide if this is actually realistic.

Don’t become a homeowner before you’re ready

While this all may seem like a lot to do before buying a home, it’s important to make sure you’re really financially ready. Buying a home is likely the biggest purchase you’ll ever make. And homeownership isn’t always a good investment — as the 2008 real estate crisis taught us. You owe it to yourself to be smart, and doing these three things before you buy is important to make sure your purchase works out in the end.

Given that 40% of U.S. adults don’t have enough savings to cover a mere $400 emergency, the need to ramp up savings efforts is clear across the board. And with a new year about to kick off, many folks are resolving to do better in the savings department once 2019 rolls around. But, perhaps unexpectedly, the age groups most intent on upping their savings are none other than millennials and members of Gen Z. More than half of adults in those age groups will prioritize savings as part of their New Year’s resolutions, according to a new survey from CIT Bank, whereas only about one-third of Gen Xers and baby boomers say the same.

Of course, it’s not a bad idea for Americans of all ages to increase their cash reserves — particularly those who are nowhere close to having a fully loaded emergency fund. If you’re eager to boost your savings in 2019, here are a few tips to get started.

1. Set up automatic transfers

It’s hard to spend money you never see. If you really want to meet your savings goals in 2019, get into the habit of paying yourself first. You can do so by setting up an automatic transfer with your bank so that a portion of each paycheck you collect automatically lands in savings. This way, you won’t be tempted to spend it, and you probably won’t even come to miss it.

2. Cut one larger expense from your budget

When you’re trying to save money, cutting back on any expense in your budget is better than not curbing your spending at all. But if you really want to boost your savings, don’t just skip out on a couple of store-bought coffees a week, or brown-bag your lunch twice a month instead of buying it. Instead, identify one larger expense that you’re willing to live without, and eliminate it. That could mean canceling your $130-a-month cable package, bailing on the personal trainer who charges you $80 an hour, or putting the kibosh on the weekly takeout order that costs you $45, on average. Doing all of these things will have a greater impact than scrounging up $3 here or $8 there, so set some priorities and make one change that’ll really make a difference.

3. Get a side job

Maybe your paycheck isn’t that generous, or the expenses you’re willing to cut don’t do a good enough job of helping you ramp up your savings. If that’s the case, it’s time to consider a side hustle. The beauty of having a second gig is that your earnings from it won’t already be earmarked for existing bills. As such, you should have no problem saving every penny you earn (minus the money that needs to go to the IRS for tax purposes). Even if cutting expenses does do the trick in helping you boost your savings, it never hurts to go the extra mile by getting a second job. And who knows? You might really enjoy spending your spare time dog-sitting, designing websites, or doing whatever it is you choose to do for additional money.

The more money you’re able to save, the more protection you’ll have when a financial emergency strikes. At the same time, you shouldn’t stop saving once your emergency fund is complete. Quite the contrary — once you have three to six months’ worth of living expenses in the bank, your next goal should be to start funding your retirement accounts. In fact, there will pretty much always be a good reason in life to save money, so if doing so isn’t on your list of priorities for 2019, it may be time to change your line of thinking.

Anyone who wants to use their income wisely can benefit from learning how to build a budget and stick to it. Despite the importance of living on a budget, most Americans don’t even have a plan for their money.

If you’re part of the minority, Americans who do actually have a budget, you’re already ahead of the game. But that doesn’t necessarily mean the budgeting process works perfectly. In fact, many budgeters unknowingly make a few common errors that make it harder to succeed in controlling their spending. Here are three of those pervasive and easy-to-make errors.

1. Failing to track your spending before you make your budget.

A friend recently asked me for help with her budget. She came to me with a list of what she wanted to spend on things, and was frustrated she couldn’t keep her spending within the limits she’d set. I asked her about her budgeting process, and she indicated she’d taken her income and divided it up the way she thought make sense.

The problem: She hadn’t tracked her spending first. If you don’t know what you’re currently spending, it’s almost impossible to make a realistic budget. Instead, you’re just making a wishlist of what you want your money to do — but this aspirational budget very likely won’t work in reality.

If you want your budgeting process to be effective, start by tracking all your spending for 30 days, or a month. See how spending compares to your income, where you’re overspending, and where you can make cuts. If you’re currently spending $400 on groceries, it may be realistic to try to clip a few coupons or find a cheaper store to cap food costs at $350 — but if you only allow for $200 for food in your budget, you’re setting yourself up to fail.

You can use apps to track spending — Mint works well if you categorize your transactions — or just load everything into a spreadsheet. Once you know where your money is currently going, you can make a realistic plan for how it can be better allocated to meet your goals.

2. Not leaving wiggle room.

Does your budget allocate every single dollar you earn to a specific purpose, such as saving or groceries or rent or eating out?

If it does, remember that life often doesn’t go as planned. Unexpected expenses pop up all the time, and if you haven’t left yourself a little leeway in your budget, paying them is going to be a challenge.

If you depend on your emergency fund, which is a cash safety net you build for yourself, to pay for these unexpected costs, doing so will leave you consistently depleting your emergency fund. So, instead, build wiggle room into your budget to deal with an out-of-the-ordinary expense, by setting aside “surprise expense” money in your monthly budget.

If you make $5,000 monthly and you account for every dollar, you could have a $100 line-item in your budget for “unexpected expenses.” If you don’t use the $100, just move it to savings at the end of the month.

3. Forgetting about irregular expenses.

Many expenses reoccur monthly, such as rent or mortgage payments and buying groceries. It’s easy to account for those expenses in your budget.

But most people also incur some pretty costly irregular expenses too. These irregular are usually one-offs, like holiday gifts, car or home repairs, or summer camp for your kids.

These irregular expenses could be budget busters if you’re trying to find a few hundred — or a few thousand — in one month’s budget to cover them when they arise. To avoid this situation, incorporate these irregular expenses into your monthly budget. This could mean setting aside $100 monthly into an account that’s intended for car maintenance, or saving $50 a month toward holiday gifts so you have a big pot of cash ready for the festive season.

To identify the irregular expenses you need to save for, look at a calendar and look back at a year’s worth of credit card statements. Make a list of your irregular expenses, along with how much you estimate they’ll cost. Once you know what you need, figure out how much you should be saving every month to cover the expense and build that right into your budget. Remember things like tax season, seasonal vacations and birthday dinners.

Don’t make these budgeting mistakes

If you’ve gone to all the trouble to make a budget, you don’t want mistakes to undermine your efforts to live on it. Now you know how to avoid three of the most common budgeting mistakes, and can rework your own budget to avoid the errors. This is sure to make your budget work better for you.