Financial

Americans are getting the message. The personal savings rate for Americans in 2009 was the highest it has been in 16 years. We’ve learned we can’t depend on the banks or the government for funds; we have to depend on ourselves. Saving for retirement or a big purchase is great, but it all starts with having an emergency savings fund.

Continuing our Financial Resolutions this week, here’s why it is crucial to have an emergency savings fund and how to get started saving.

Why it is so important

Avoid Debt – Many people see credit cards as the answer to emergencies that arise. They charge unexpected expenses like car and home repair on credit cards. Then they are left worrying how to pay the bill. But if you have a rainy day fund, you don’t have to worry about it. Paying with savings keeps you from going into debt and accruing interest and fees on top of all the money you owe.

Gain peace of mind – Avoiding debt is a great practical reason to have an emergency fund. But even more important, is the psychological reason. Having a financial safety cushion gives you peace of mind and lets you sleep at night without financial worry. It also allows you the opportunity to make better decisions without feeling you are in a pressure cooker. If an unexpected home repair arises, you can fix it right instead of just patching it. Or if you lose your job, you can afford to wait for the right job instead of just taking any job.

How to get started

Start the habit – Having an emergency fund is about creating a saving habit. The first step is to setup a separate account and then start funding it. Don’t worry about how much. Literally start with just $10 a week. Even that small amount leads to $500 a year. Imagine if you tripled that or more.

Make it automated – Nearly every bank or credit union now offers online banking. You can simply set up an automatic transfer every week or every pay period from your checking account to your rainy day fund. This takes all the hassle out of saving.

Look for more savings – Once you have started the habit and made it automatic, start looking for ways to save more. What can you change in your budget to leave you with more savings? If you don’t watch all the cable channels you have, can you change your plan and save an extra $20 a month? How about earning more money? Can you sell items you no longer need? Or offer to babysit for extra cash? Don’t focus on the amount, focus on the quantity. Twenty dollars a month is no big deal, but in a year its $240.

Reach for a goal – You have set the gears in motion and now you can start working towards a goal. You can start small with $1000. Once you reach that, aim for one month’s expenses. Your next goal should be three month’s expenses, and your ultimate rainy day fund goal should be six to nine months of expenses. If you are a family with one wage earner, it is even more important to have a large emergency fund.

Once you get your emergency fund all set, you can start working on long term saving like retirement and your kid’s college education. Join us again next Monday to learn how to retire with more funds than grey hair.

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The New Year is here and so are New Year’s resolutions. One of the most popular resolutions for 2010 is to get in shape – financial shape that is. Wwe are kicking off a Financial Resolutions series this week. Join us every Monday in January. We will be tackling your money concerns and offering you tips on how to get ahead in 2010.

Opening the series, is the most requested topic – getting out of debt. Americans carry nearly 1 trillion – that’s right trillion dollars in credit card debt, with the average household owing nearly $9,000. These are staggering statistics. So here are some tips to help get out of debt and avoid becoming a statistic.

Face the Facts

When asked how much they owe, the majority of people with credit card debt underestimate their total debt. They pay the minimum payment of each bill and avoid looking at their total balance or total debt. That’s like driving with no road signs. You have no idea how far or fast you have to drive.

Calendars are on sale now, so buy a large monthly view calendar. Then collect all your credit card bills and input all their info on the calendar. Write when they are due, the minimum payment, total due and interest rate. Now on one easy to read piece of paper you have your entire debt picture. Take a good look at it. How scary is it? How committed are you to getting the balances to zero?

Change Your Behavior

Paying down debt is a process. It is not something you do in a day. To be successful long term, you have to change your habits and behavior. The reason you got into debt is spending. So you have to stop spending and start saving to pay off your debt. Think about it like stopping smoking.

Stop hanging out with spenders – A smoker trying to quit does not hang out with smokers. So if you are trying to stop spending, avoid friends and situations where you will be tempted to spend. That means no cocktails and dinner with the girls every Friday or no three day weekend trip just because you have MLK off. You don’t need to stick a Getting Out of Debt sticker to your forehead. Just tell people that you love spending time with them but your goal for 2010 is to stick to a budget and you have exceeded your entertainment/shopping/vacation budget for the month.

Find a new habit – Many smokers start chewing gum instead of smoking cigarettes. You should find a new habit to substitute other costly ones. Stopping at Starbucks on the way to work because you can’t make good coffee at home? Try McDonald’s, their McCafe’s are cheaper but still good. Love buying books or going to the movies, discover your local library. Honestly, I hadn’t been for nearly a decade and was amazed at the selection and easy at home access to the catalog where I can make reservations for items online. You get the idea. Don’t stop doing something, just find a cheaper or free alternative.

Start Paying it Down

Once you face your debt and start changing your behaviors to preserve more funds to pay down your debt, you are ready to choose a pay off strategy. There really is no right or wrong way to pay off debt. It is a personal choice.

If you are a more logical person, you would opt to pay off the credit card with the highest interest rate first and then work your way down.

If you are a more emotional person, and you need more reinforcement and encouragement, pay off the credit card with the least balance. You will feel that sense of accomplishment and will be energized to continue.

If you need to improve your credit score, pay off the credit card where you are at or near the credit limit. This will help your credit utilization ratio which accounts for a third of your credit score.

Consumer Reports offers a more thorough overview of payoff strategies: http://www.consumerreports.org/cro/money/credit-loan/how-to-pay-down-your-debt/overview/index.htm

Once you get out of debt, you want to avoid any new debt. And the best way to avoid it is to have an emergency fund. Join us again next Monday to learn the importance of an emergency fund and how to set one up.

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Are you looking forward to February? Yes, it’ll be nice to get flowers from your honey on Valentine’s Day. But even better is getting credit card reform from Uncle Sam. The Credit Card Accountability Responsibility and Disclosure Act or Credit CARD Act for short was signed into law this spring and most of it goes into effect next February. It is the most wide ranging credit card reform we have ever had and it couldn’t have come at a better time.

Wondering what all the reforms mean to you and the cards in your wallet? Here’s what to expect.

Rates

The most important part of the new law will be its rules on rates. However, the key to taking advantage of all these benefits is to make sure you pay your bills on time. If you’re not a good customer the bank will not be nice in return.

1. Retroactive rate increases or universal default are now banned.
2. There can be no rate increases in the first year unless you have a promotional rate.
3. If you have a standard fixed rate, your rate stays the same for the life of your balance.
4. You have to be notified of future rate increases to your standard fixed rate at least 45 days in advance. AND the rate increase would only apply to new purchases not your existing balance.

Payments

1. Before issuing new cards or raising limits, banks must consider your ability to make the payments. Credit will not be as easy to come by as before.
2. Payments will be due at the same day and time each month.
3. Your payments will be applied to your highest interest rate first.

Fees

1. Over the limit fees can only be charged once per month and only if you have opted in to this fee. If not, your transaction will simply be declined and you will have no fee.
2. Penalty fees such as late fees must be reasonable as deemed by the Federal Reserve Board.
3. Your finance charges must be based on your current balance not your previous balance.

College Students

1. No more free T-shirts. Credit card companies can no longer offer any freebies or other incentives to young consumers for filling out a credit card application.
2. Everyone one under the age of 21 must have a co-signor unless they can provide proof of their own independent income.
3. Marketing by mail and on campus will be limited.

A Good Resource

Consumer Reports has put together an easy to read overview of all the changes on their Credit Card Reform website.

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Mass Mutual Life Insurance is offering free life insurance policies for working parents. This special program, called LifeBridge, entitles each family to a $50,000 life insurance policy to cover the children in case of parents’ death. Mass Mutual will pay the premiums on the policy. They company is planning on giving away $1 billion in life insurance in this program.

Parents must be in good health, employed and earning less than $40,000 a year. To see if you qualify and to apply online visit Mass Mutual Life Insurance LifeBridge.

There are also local sign-up opportunities as well. I couldn’t find a national list, just one for Atlanta. Massachusetts Mutual Life Insurance will take applications Sept. 28 at Ben Hill United o Church, 2099 Fairburn Rd., from 10 a.m. to 2 p.m. Those interested must call ahead of time to make an appointment for Sept. 28 with Corliss Simmons at 404-344-0618 or Jennifer Washington at 770-551-3407.

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Sitting on an airplane you find out the person next two you paid twice as much for their seat and the person behind paid 20% less than you. This variable pricing for the same service is nothing new in the airline industry or the travel industry as whole for that matter. However this variable pricing called price optimization by financial analysts may be coming to a bank near you.

Banks have lost a lot of money recently and they are looking for ways to make more money. One new way is variable pricing for loans. It used to be that a good credit score paired with a good debt ratio and job history meant X% rate.  The rate was the same for everyone with the same favorable characteristics. Now that is no longer the case. Banks are looking into price optimization scenarios on loans and other financial rates. So you can pay more than someone with a similar financial history.

Just like airlines getting more from business travelers than leisure travelers, banks are looking into ways to figure out which customer is willing to pay more for the same loan. If you already have a relationship with the bank, they might even use that against you. Smart Money magazine has a good article on this new pricing at banks and it is definitely worth a read. According to the article “Some banks are coming up with different rates for as many as 20,000 customer segments — defined by variables like location, loan type, transaction history and banking habits. Prefer to apply at your local branch? A computer may decide you’ll typically accept higher rates than those who apply online or by phone.”

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