October 20th, 2011, by

Q: Which is a better option: debt management or debt settlement?


A: First, let’s define those terms.

“Debt settlement” means getting your creditor to accept less than you owe. So, for example, you might have a debt of $10,000. You save up $5,000 and offer the cash to your creditor to settle your debt. Depending on how old the debt is, the creditor may accept your offer, because cash today is better than hoping you will make monthly payments in the future. Of course, it’s not always that easy; and you may not be able to get the creditor to reduce your debt by as much as 50%. But, you can try. The best way to get a deal is to have cash. One other thing to remember is that any forgiven debt is taxable.

I’m not a fan of debt settlement companies, which promise to negotiate with your creditors on your behalf to reduce your debts. But, such services often come at a high price. Debt settlement companies can typically cost several thousands of dollars. In many cases, working with such companies can also ruin your credit history. Essentially, the companies will tell you to stop paying your debts for several months so that you can stockpile some cash. In the meantime, your credit history is getting trashed because you aren’t paying anything.

Here’s some good news about debt relief services. Effective Oct. 27, 2010, for-profit companies that sell debt relief services over the telephone are banned from charging upfront fees before they settle or reduce your credit card or other unsecured debt. The rule covers telemarketers of for-profit debt relief services, including credit counseling, debt settlement and debt negotiation services. It does not cover non-profit firms, but does cover companies that falsely claim non-profit status.

“Debt management” is a better option, because you work with your creditors to come up with a payment plan. If you can’t do this on your own, or you’re too stressed to do it, find a good non-profit credit-counseling agency. You can go to the National Foundation for Credit Counseling Web site and search for an agency near you.

Typically, you pay a fee of about $50 to set up a payment plan. Depending on your income, you might also be charged a monthly fee of between $25 and $35 for the agency to handle your payments to creditors. Still, that’s a far cry from what a debt settlement company will charge with far less results.

A good agency can work with your creditors to reduce the interest rate and eliminate some fees and penalties. It may take you three to five years to pay off the debt, but you won’t have spent several thousand dollars paying a debt settlement company with money that could have gone toward your debts.

October 17th, 2011, by

Q: To secure a commercial loan (church), I was asked to put $25,000 in a CD for the length of the loan. How can I avoid paying taxes on the interest for that CD that’s in my name?

Griffin, GA

A: The short answer is you can’t avoid paying taxes on the interest you earn on the certificate of deposit. And frankly, you shouldn’t try. If you earn the interest, you are obligated to pay taxes on that money.

If you recall, scripture says, in Matthew 22:21: “Then he said to them, ‘Give back to Caesar what is Caesar’s, and to God what is God’s.’” (Today’s New International Version.) In other words, pay back to the government what it says you owe. You can find information about the interest you earned on the 1099-INT that your financial institution should send you.

But, depending on how long you have to hold that money in a CD, how much are we really talking about? CD rates are pretty low these days. A five-year CD is paying less than 2%, according to the national average reported by Bankrate.com. In a year, you might earn roughly $500 in interest income on the CD.

Your interest income is taxed at your marginal tax rate. This is the rate of the highest tax bracket you fall into. So, if you’re in the 35% tax bracket, your interest income will be taxed at 35%. That means that you’re looking at a tax bill of about $175 on the interest income. That’s hardly enough to try and mess with the IRS and risk penalty and fees.

But, you could reduce your tax liability by getting help from a good tax professional. You may be able to reduce your overall tax bill, depending on any deductions and credits you are entitled to receive.

October 13th, 2011, by

Q: My wife and I are newly separated and have some personal loans from family and friends, no more than $2,000 in old credit card debt and no assets. We are seeking a service to help us develop a strategy to guide us on how to rebuild our credit and a payment schedule on our personal loans.

A: First, before the separation ends in divorce, I hope you have tried counseling.

If all hope is lost, then I hope you both have hired good attorneys. You need to draw up a separation agreement so that it’s clear who will be responsible for which debt.

It doesn’t sound like you have a ton of debt, so it should be easy to set up a debt payment plan to get everyone paid. Most importantly, contact your creditors, even your family and friends, and let them know you are trying to work though a plan to pay them back.

Go to the site of the National Foundation for Credit Counseling. There, you can find a non-profit credit counselor to help deal with at least the credit card debt. Whatever you do, stay away from companies promising to get rid of your debt. They will just charge you an outrageous amount of money to do what you can do on your own.

October 11th, 2011, by

Q: When I receive a prospectus in the mail, I just throw it in the garbage. What should I be looking for when I receive these booklets?

Hazel Park, MI

A: It’s important you understand what a prospectus is and how it can help investors. The Securities and Exchange Commission (SEC) requires companies to file a prospectus that is intended to provide details about an investment offering being sold to the public. A prospectus will contain important facts for investors.

What you are probably getting is a prospectus from your mutual funds. The SEC requires fund companies to provide a copy of their prospectus to shareholders after they purchase shares. According to the SEC, there are two kinds of prospectuses: a statutory prospectus and a summary prospectus. The statutory prospectus is long. The summary prospectus is just a few pages long and contains key information about a fund.

Before tossing the prospectuses, look through them, because you’ll find some key information, including the fund’s investment objectives or goals, its strategies for achieving those goals and risks of investing in the fund. Most importantly—and this is, at the very least, the information you want to regularly check—both types of the prospectuses will include information about the fund’s fees, expenses and past performance.

October 6th, 2011, by
Q: My mother recently lost her husband due to a short illness. They had not lived together for over l5 years. My dad left unpaid credit card debt. My mother was unaware that he had applied for these credit cards, and she never signed as a co-applicant. Will she be responsible for these debts?
Albuquerque, NM

A: In some states, if the spouse benefited from whatever was purchased on those credit cards, she or he could be liable for the debt.
But, since your mother was separated from her husband for so long, and she did not co-sign on any of the debt, she is not likely to be responsible for any of the debt. However, contact an attorney with experience dealing with creditors, especially if your mother lives in a community property state.
Your father’s estate is still responsible for the debt. Of course, if there is no money, the credit issuers won’t get anything. Don’t let a creditor guilt-trip your mother into paying the debts if she’s not liable (and some might).
I would also get your mother’s credit reports from all three of the credit bureaus to make sure that, at some point, the debt wasn’t put in her name. It’s possible your father could have put her name on the applications. If he did that without her knowledge, you should have her fill out a police report and tell them she was the victim of identity theft.

To get free copies of the reports go to annualcreditreport.com.

October 2nd, 2011, by
Q: Why isn’t the basic knowledge about money management taught throughout grade school and at the college level? There’s an old book entitled The Richest Man in Babylon that suggests society would be better off if folks knew more basic principles about money.Richmond

A: One of my favorite personal finance books is The Richest Man in Babylon by George S. Clason. When I launched my Color of Money Book Club for The Washington Post in 2002, Clason’s book was my first selection.

The Richest Man in Babylon started out in 1926 as a series of pamphlets on thriftiness and financial planning, using parables set in ancient Babylon. Through fictional characters, Clason tells stories about acquiring wealth and avoiding unnecessary debt. For example, there’s a parable about a man deep in debt, which could easily translate to the many people today overwhelmed with credit card debt. As one character says: “He who spends more than he earns is sowing the winds of needless self-indulgence from which he is sure to reap the whirlwinds of trouble and humiliation.”

As for personal finance education in schools, there are a number of groups advocating the addition of such courses to the high school and college curricula. For example, there is The Jumpstart Coalition, which is a national coalition of organizations dedicated to improving the financial literacy in pre-kindergarten through college.

Clearly, with so many financial decisions to make, it’s important that children learn how to handle their money before making huge money mistakes. The number of states that now mandate that students take an economics course as a high school graduation requirement increased from 17 in 2007 to 21 in 2009, according to the most recent report from the Council for Economic Education. Only 19 states require the testing of student knowledge in economics.

You may be happy to know that there has been significant movement in the number of states that now require students to take a personal finance course (or that personal finance be included in an economics course), according to the council’s report.

The number of schools requiring some personal finance course as a high school graduation requirement increased from seven in 2007 to 13 in 2009. But these 13 states make up only 31% of the entire U.S. population, which means almost 70% of American K-12 students are not receiving the needed education in this important area, the council said in releasing its data.

Here’s my take. Financial literacy really ought to start in the home. There is where your children will learn the financial values that will carry them through adulthood. Even If personal finance is required in my kid’s school, it’s not likely she will be encouraged to tithe. She may not be taught that charity comes first. She may be taught that there is good debt and bad debt. I’m teaching my children that there is no such thing as good debt, only debt.

Still, it’s important to get schools to teach personal finance, because the reality is many students won’t learn it at home.

September 29th, 2011, by

Q: My husband and I would like to talk to someone that can take a look at our complete financial health and advise us on what we should do. How do we identify someone like that?

We don’t want someone whose primary interest is to see how much money we could spend on his or her products. We make very good money, but seriously live from paycheck to paycheck, always robbing Peter to pay Paul. We have some serious debt and don’t know how to begin to get from under it. We’re lost, and it’s getting darker.

LaPlata, MD

A: I believe that it helps to hire a financial planner to help you clarify your financial goals. But, you need to understand what an adviser really does. Some may help you develop a budget; but a planner—a good one—will mostly help you look at your big financial picture—your debts, taxes, retirement savings, college savings for your children, estate planning and insurance needs.

One of the best ways to find a financial planner is to ask around and get recommendations. Find someone in your circle who has used a planner. You can also find a planner through the Financial Planning Association. To find a fee-only planner, you might first check with The National Association of Personal Financial Advisors (or call 800-366-2732), which is the professional association of fee-only financial planners. You can also check with the Certified Financial Planner Board of Standards, Inc. (or call toll-free at 888-237-6275).

For a basic financial plan, you might pay about $800 to $1,200. Some planners may charge less; but either way, you’re talking about an outlay of some cash for a plan if you decide to hire a financial adviser that charges by the hour. Financial advisers earn their money in a variety of ways. Fee-only planners don’t earn fees or commissions on the products, investments or recommendations they make. Instead, they are paid an hourly fee, annual retainer or percentage of assets managed.

Planners can be paid on commission. There is no charge for the planner’s advice or preparation of a financial plan, but they are paid based on selling you certain financial products. Of course, you have to be careful about advisers that are paid based only on what they sell to you. You could be steered to higher-cost products that generate higher commissions. Planners can also be paid a fee and commission.

Whichever way you go, just be sure you fully understand how your financial planner is paid.

But, here’s the thing. Right now, what you need is someone to help you budget and set up a debt repayment plan. You have to be sure you have the money to invest and pay your bills. You need to build up an emergency fund. You need to stop living from paycheck to paycheck; otherwise you are investing money you can’t afford to lose.

You may not need a financial planner right now. Instead I would recommend you go to the National Foundation for Credit Counseling and talk to a credit counselor working for a nonprofit credit counseling agency. You certainly need to invest and assess your insurance needs, etc. You should be saving for retirement, and a financial planner can help you do that. However, you have to first get a handle on your budget. The expertise you need right now is someone who can help you stop living paycheck to paycheck and use that good money you are earning to plan a better financial future.

September 27th, 2011, by

Q: What are the best tips for financial planning in today’s unstable job market?

A: With talk of a possible double dip recession, a lot of people are worried about their jobs.

According to the U.S. Bureau of Labor Statistics, there was no job growth in August. The unemployment rate held steady at 9.1%, representing 14 million unemployed people, and that’s not counting the people who have stopped looking for work.

The number of persons employed part time for economic reasons (sometimes referred to as involuntary part-time workers) rose from 8.4 million to 8.8 million in August, the Labor Department reported. These individuals were working part time because their hours had been cut back or because they were unable to find a full-time job.

So, what do I tell people who are worried they will join the ranks of the unemployed?

I tell them to prepare for the worst and hope for the best. Specifically, you have to do the following:

• If there was ever a time to have a budget, this is it. You can’t control your expenses unless you really have a handle on how money is going out of your house.

• Cut your expenses. Even if you have a steady job, it’s a good time to go over your budget and see what things you can cut.

• You’ve got to finally set up that emergency fund. If you lose your job, how long could you survive without a paycheck? For many people, it’s not even a month. Start by putting away whatever you can and increase it as you cut things from your budget. You know this. Now do it. Make it a goal to save, at a minimum, three months of living expenses.

And, this means more than your rent/mortgage and transportation costs. Add up what it costs to run your household for a month, including insurance payments, cable, cell phone expenses, etc.; then multiply that times three. Once you hit that goal, push yourself to save six months of living expenses. If you have a nice-paying job that would be hard to replace, then be more aggressive and save enough in your emergency fund that would allow you to live up to 12 months without a paycheck. You could be without a job for a long time. The number of long-term unemployed (those who are jobless for 27 weeks and more) remained at 6 million, accounting for 42.9% of the unemployed, according to the Labor Department.

• If you are hearing rumblings that your employer may be laying off people, you need to really become aggressive in saving money. If you’re in debt, and you’ve been making extra payments to dig yourself out of that debt, you may even want to pull back a little on that plan. Pay the regular monthly payments on the debt; but, anything extra you were paying should go into your emergency fund, so you can stockpile some cash.

• Find different income streams. Try to figure out how you might earn some money should you be laid off. If you’re a teacher, can you tutor? If you’re a good writer, find people who need help with their résumé or cover letters. While you hold on to your day job, look for other ways you can earn money.

I don’t want you to operate your finances out of fear, but I do encourage you to prepare yourself in case the worst happens and you lose your job.

September 22nd, 2011, by
Q: What’s the difference between CDs and savings accounts? How can I figure out which one is better suited for my needs? 

A: With a savings deposit account, the financial institution holds your money and promises to pay you a certain interest rate. Right now, the rates on traditional savings accounts are pitifully low, at less than 1%.

If you are in search of a savings or checking account with the best rates, check out Bankrate.com’s 2010 High-Yield Checking Study. Bankrate surveyed more than 200 banks and credit unions to find the best high-yield checking accounts across the country.

Now, a CD (“Certificate of Deposit”) is a different type of deposit account with a bank or thrift institution. It typically offers a higher rate of interest than a regular savings account. If you are looking for a low-risk way to save your money, you should consider a CD.

In a CD, you are investing your money over a fixed period of time, such as six months, one year or five years. The financial institution will pay you interest. When you cash in or redeem your CD, you receive the money you originally invested plus any accrued interest. The risk with a CD is that if you need to pull out your money early, you have to pay an early withdrawal penalty or forfeit a portion of the interest you earned.

Before picking a CD, the Securities and Exchange Commission offers these tips:

  • Ask yourself if the CD is right for you, because you may not earn as much compared with investing in stocks and bonds. The principal concern for individuals investing in CDs is inflation risk, which is the chance that inflation will outpace and erode returns over time.
  • Confirm the maturity date on your CD. Many individuals fail to do this and are later shocked to learn that they’ve tied up their money for 5, 10 or even 20 years.
  • Confirm the interest rate you’ll receive and how you’ll be paid. You should receive a disclosure document that tells you the interest rate on your CD and whether the rate is fixed or variable.
  • Be sure to find out how much you’ll have to pay if you cash in your CD before maturity.

I believe you need to keep some cash in a savings account. You need to have quick access to your money in case of an emergency. And, a CD can be a good addition to your overall investment portfolio if you decide you want some of your money to be at low risk.


September 20th, 2011, by

Q: It’s my first time applying for a credit card. How do I know which one is the best one for me?

A: First, you should know there are a lot of new laws to protect credit card users. So, before you get a card, I want you to know what protections you have.

Go to the “Credit Card” section of the Federal Reserve’s Web site to get some basic information about your rights. Armed with this information, you can then figure out which card best suits your needs.

Most importantly, you need to understand the terms and fees of any credit card offer. For example, your credit card can have several different interest rates depending on how you use the card. For credit cards, the interest rates are stated as a yearly rate, called the “annual percentage rate” or APR. You can have different APRs—one for cash advances and another for new purchases. Or, your card may have a lower APR during an introductory period and then the rate may jump after that period ends. Look at the penalty APR, which kicks in if, for example, you pay your bill late.

Obviously, you want to find a credit card with the lowest APR; but, with most cards, if you pay your bill in full every month, you won’t pay any interest. Credit card issuers may also offer a combination of fixed and variable rates.

Many credit cards have fees. Because of recent changes in credit card protections for consumers, many more card issuers are charging annual fees. You may particularly find annual fees on a credit card that offers rewards, such as free airline miles. However, take careful note as to how much you have purchased on the card to get those free miles.

Use the Federal Reserve’s Consumer Credit Card Agreements Search to get an idea of the types of credit card terms and conditions that are out there. This tool can help you compare various offers.


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