|
CUA Member
While we all have opinions about the economic bailout plan, depending upon how you look at it, the results of our economic condition are no doubt being felt deeply by you and your family.
As a service to our members, Consumers United Association is running a series of articles with information on how to manage personal finances during these times. UThe first in our series is about getting back to basics. Many of the money- management lessons learned by depression-era people still apply to families today. However, family money management has changed drastically since that time due to the availability of credit, and in some cases, the overextension of credit. Since financial institutions will also be getting back to stricter lending requirements, we will start our series with a reminder on these basic money management principles.
Renee Beauregard, Executive Director
|
Build cash reserves - an emergency fund |
|
While a "run on the banks" is not anticipated by anyone, there are other reasons to have emergency cash available. One of those reasons is that credit is tightening. If you tend to use credit to pay for daily expenses, and credit is less available, you may need to pay cash. Cash reserves also help you build an emergency fund to access if you lose your job.
- The rule of thumb is to have at least 3-6 months worth of income set aside in cash.
- Cash should be deposited in an NCUA or FDIC insured account. The new bailout bill from Congress will increase the insured amount from $100,000 to $250,000 per depositor. That means if you have a joint savings account, it will be insured for $500,000. Credit unions are insured by the NCUA and banks by the FDIC.
- Never put cash away in your home - sometimes called the "under the mattress" plan. Fire or theft threaten to destroy your reserves, not to mention concerns about forgetting where you tucked away your cash.
- The toughest part of any savings plan, like an emergency fund, is to "find¨ that extra cash to put aside. However, it is, by far, the most important thing you can do right now. Look for future articles from Consumers United Association for tips on how to cut expenses and put those savings into your emergency fund.
|
Pay down debt |
|
Accelerate your debt payments to pay down your debt as quickly as possible.
- A guideline many experts use for the amount of debt that you can safely carry is called the 20/20 Rule. This rule states that no more than 20% of your income should be spent to pay your mortgage payment and 20% to your other debt for a combined 40%. If your mortgage payment is 30% of your income, then only 10% should be going to other debt. For example, if you make $50,000 per year, your monthly combined debt payments should be no more than $1,666. You may be surprised by the recommended debt limits but these guidelines are effective in helping to get your finances under control. Pay down your non-mortgage debt payments to get you at least to the 20/20 level.
- While paying down debt such as credit cards, be sure to switch over to using cash or a debit card for future purchases. To do this, you will need to set up a budget that will include the amount of cash you normally spend on incidentals.
- In a previous article, CUA offered tips on how to get out of debt as quickly as possible. A link to that article is shown below.
Links related to paying down debt:
CUA Articles on Getting Out of Debt
Do You Have Too Much Debt? Calculate it here.
|
Be conservative with large purchases such as cars and houses |
|
No matter what, people still need transportation and a roof over their heads and now might be a wonderful time to buy your first home if you have excellent credit. Mortgages are still available, contrary to what you have heard on the news, but there are stricter lending requirements and required down payments are generally higher.
- Always know, before you step on a car lot, how much you can afford to pay for a car and which cars are within your budget. Work backwards from the 20/20 rule above to figure out the payment you can afford on a monthly basis. If possible, avoid auto loans of over four years. Auto loans longer than four years often cause you to be "upside down" on your loan - owing more than the resale value of the car ¡V for a long time. This can put you in a financial corner if you need to trade-in the car or if something happens to it. If you cannot afford a four-year (or less) loan payment, it is likely that you are looking at purchasing a car that is out of your price range. There are many auto loan calculators you can use. We have included two in our links below this article.
- Make sure you know if your auto insurance will increase before you buy a car. Auto insurance rates are based, in part, on the auto you buy. Contact your insurance agent and tell him or her which cars you are considering.
- Know how much house you can afford to buy based on a 30-year fixed mortgage (or less) and be very cautious of non-standard mortgage loans such as an Adjustable Rate Mortgage (ARM). ARM's and other loans designed to help you purchase a more expensive home, have been cited as the primary cause of people losing their homes to foreclosure as scheduled payment increases go beyond what the home-owner can afford. Too often, people have obtained these non-standard mortgage loans in order to purchase homes that were not really within their means. Don't let a real estate agent tell you how much you can afford. Click on the financial calculator link below to find a mortgage calculator.
- Although buying is often a better financial choice than renting, buying a home can mean that you will be paying some bills that you are not currently paying as a renter. This includes water, trash collection, sewer, and other services often included in the cost of rent. Know these costs before you purchase your home and be sure that they fit in your monthly budget.
Links to financial calculators:
Auto Loan Calculator from Edmunds
Financial calculators from Bellco Credit Union
Financia l calculators from the Credit Union Association of Colorado
|
Do not touch your retirement funds except to add more |
|
Contact your financial advisor about your particular situation in terms of what to do with the funds you currently have.
- It is more important than ever to leave your retirement funds alone because of shrinking equity in our homes, which many people are counting on for retirement.
- Borrowing against your 401k will make you lose compounded earnings over time. There can also be significant penalties if you don¡¦t pay it back.
- Cashing out investments can cause you to pay significant capital gains taxes in April.
Link to a related article: 401 (k) 'dippers' robbing future to pay now
|
Do not short other extremely important expenses |
|
Shorting certain expenses can end up costing you more later. Do whatever you need to to do ensure that the following expenses are paid.
- Pay your quarterly business taxes and pay the IRS any income taxes you owe by April 15 (or make certain that you make payment arrangements with the IRS). Otherwise, you risk having your bank account levied, which means that the IRS will freeze your entire account. If this happens, you won't be able to pay any bills or access your cash.
- Do not cut your medical insurance or medical payments coverage on your auto insurance in order to save money now. Doing so can put you in very deep financial trouble if you get sick or have an auto accident.
Consumers United Association will send future articles concerning how to cut expenses, find extra money in your budget, make more money, and how to ensure that you are covered when you are retired.
Quick Links... |
|
|
