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Budgeting

Use Your Personal Talents to Get Ahead

If you begin to feel overwhelmed by all of the personal finance suggestions you hear, don't give up! Instead, think of ways you can use your personal talents to achieve the same objectives.

I recently met with "Sharon" who told me that she was never successful following all of the suggestions and rules related to budgeting. She isn't a highly quantitative or detail-oriented person, so all of the expense tracking requirements were difficult for her.

Rather than giving up, Sharon thought of ways she could achieve the same objective using different approaches that were a better fit for her.

She loves to create to-do lists, and gets motivated by checking each item off her list. So Sharon decided to convert her budget into a to-do list with check boxes next to each item.

Her monthly budget now consists of several check boxes that remind her when bills are due, and some additional check boxes that address one or two spending categories that she is trying to manage more carefully. She also has one check box to review her checking account once per month to make sure she is spending less than she brings in.

Is this a traditional budgeting approach? No. But does it satisfy the primary objectives of budgeting and help Sharon stay on track and get ahead? Absolutely.

So take personal finance suggestions and rules for what they are worth: starting points. Then apply them in ways that leverage your talents and maximize your chances of success. Be creative and don't be afraid to try personalized approaches that are a little unorthodox. Like Sharon, you may discover that reaching your financial objectives can be easy and fun.

Don't Forget Those Periodic Expenses

The first time you establish a household budget, you will discover that some of your expenses are easier to remember and estimate than others. The ones that are easiest are those that occur every month in the exact same amount, like rent or cell phone bills. You probably know those expenses by heart.

The ones that can be the most challenging are periodic expenses that occur only a few times per year, or maybe not at all depending on how things go. Car maintenance is a good example. You can probably estimate simple routine maintenance, like oil changes, without too much difficulty if you drive the same amount of mileage each year. But it's tough to anticipate non-routine maintenance. In some years, you might not need any extra maintenance. But in other years, you may need a new set of tires, or electrical or exhaust or belt work. And the timing of these expenses are difficult to predict.

Rather than ignoring these types of periodic expenses, a better approach is to include them in your budget using a reasonable estimate. Base your estimate on an average that you have spent over the past few years, and then break it down into an equivalent monthly expense.

As an example, say you have spent an average of $900 per year on non-routine car maintenance over the past few years. You could budget $75 each month and leave the excess in a savings account if it isn't needed in that month. Over time, these savings will allow you to fund non-routine maintenance expenses as they occur, even though you can't anticipate the timing exactly.

Vacations are another common example of a periodic expense. Most of us hope that we will take a vacation sometime during the year, but aren't certain about the exact timing or amount of the expense. You can follow the same approach as with car maintenance: reflect a reasonable amount each month in your budget, and set it aside until it is actually needed.

One way to jog your memory of these types of periodic expenses is to review your checking account or credit card statements for the past year. It's also helpful to work on your budget for at least 3 months. By the third month you probably will have remembered and reflected all of the important expenses in your budget, even the periodic ones.

Want to Improve Your Budget? Start With Your Income

Many people believe budgeting is just about cutting expenses. That way of thinking not only overlooks a lot of financial opportunities, but it also can be a recipe for failure. Lots of budgets fail when a person becomes overly focused on cut-cut-cutting their expenses, especially the ones that bring the most enjoyment and value.

Successful budgeting involves managing your household cash flow, which includes your income as well as your expenses. In fact, income is often a more powerful budgeting lever than expenses, because most households can grow their income by more than they can cut their expenses over time.

There are lots of ways to grow your income, but one of the most straightforward approaches is to secure a raise. Note that I didn't say it was easy - getting a raise can require performance, timing, courage, tact, and perhaps a bit of good fortune too. But it requires less time and effort than most other options.

If you are self-employed, you can secure a raise too, by increasing your prices or broadening your customer base or offerings.

If your job performance has been excellent but you haven't gotten a raise in a while, consider asking for one at your next review, especially if your employer is doing well financially and your role is important to their success.

Even a modest raise can greatly improve your budget. Say you make $5,000 per month and save about $250 of it each month. If you secure a 5% raise, you may be able to increase your savings by 50% or more, even if you want to spend some of the raise on new things.

That's powerful leverage: a 5% raise leading to a 50%+ boost in savings. This is why it's important to focus on both income and expense opportunities when you budget. Be sure to think "grow-grow-grow" at least as often as you think "cut-cut-cut.

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Goal-Setting

Take One Step

Are you feeling stuck with your finances? Try taking just one small step forward this week toward your goals.

Your first step should be SHORT-TERM and EASY to accomplish! Nobody is grading you, so there's no penalty for easy tasks or extra credit for difficult ones. The objective is to build some forward momentum, feel a sense of accomplishment, and generate enough positive energy to set a second step once the first one is successfully completed.

Feeling like you are living paycheck-to-paycheck and not getting ahead? Your one step could be to cut out a single $10 expenditure and deposit the $10 into a savings account.

Concerned that you aren't saving for retirement? Your one step might be to visit your employer's HR department and gather information on signing up for its 401(k) or 403(b) retirement plan.

Confused by your student loan repayment options? Your one step might be to read about the options on the Department of Education's web site.

Sometimes get behind on paperwork and miss the deadline to pay bills? Your one step could be to ask your bank for a tutorial on how to set up auto bill pay.

These steps are all different, they have a couple of things in common. First, they can be accomplished in less than 30 minutes over the course of one week. Second, once accomplished, they logically lead to another step that can be completed in a similar timeframe.

And that's how big financial goals are often realized: by taking a series of small, straightforward steps over time until you reach your goal.

Don't wait! Take a step this week.

Form a Support Team to Help You Achieve Financial Goals

Do you often set financial goals but then struggle to follow through and achieve them? If so, consider forming a support team to help you stay on track.

A support team is a small number of close friends or family members who are willing to help you stick to your plans. You can pick anyone you like as long as they will be truly supportive and won't undermine your efforts in any way.

Just the act of communicating your goals to other people can boost your chances of success. That's because your motivation to succeed automatically increases when one you push your dreams out into the open. It's easy for secrets to remain unfulfilled, but you won't want public goals to stall.

A support team provides two valuable functions. The first is accountability. Your support team should check in with you weekly to see if you are on track and are tackling any roadblocks that come up along the way. The second is encouragement. Your team should lift you up when you're down and remind you that you can do it.

There aren't many financial goals that can't be achieved through your own persistent effort, coupled with timely and caring accountability and encouragement.

Support teams can be as low-tech or high-tech as you want. A low-tech solution could be a small group of friends who understand your goals and agree to check in with you weekly. A high-tech solution may be a web-based app that handles some of the communications and check ins for you automatically. (StickK is one example.)

The specific approach you choose is less important than the people you choose. Their positive attitude and commitment to your success are the critical factors.

One great thing about support teams is that they are free. So why not give one a try? Experiment with one for your next financial goal and see how it improves the outcome.

Worry Less and Investigate More

I am regularly approached by individuals and couples who express worry over a financial issue that may impact their household. For some, I can tell that the burden of worry has been weighing on them for some time. But more often than not, they haven't used worry as a catalyst for investigation and action. Instead, they just continue to worry!

That's a shame, because it's possible - even likely - that a little research and action can clarify the issue and reduce the worry considerably.

One example that immediately comes to mind is the worry that parents feel over the cost of their child's college education. A parent recently shared with me her worry that she had prepared too much for her child's education, and the amount she had saved would make her household ineligible for financial aid. But I learned that she had never researched how a household's expected family contribution (EFC) is determined for financial aid purposes. I suggested that she take a few simple steps to see if her worries are well grounded. For example, she could use an EFC calculator to better understand how much her family may be expected to contribute, and could read a good financial aid book to learn more about how financial aid is determined (I like the Princeton Review series).

By doing so, she would see that some parental accounts, like IRA's, may have no impact at all on EFC, while other parental accounts, like taxable investment or savings accounts, may have an impact of only 5% or less of the balance. Her family's EFC may be considerably less than she imagined.

These simple steps would take her just a couple of weekends to complete, yet could go a long way toward alleviating her worries.

So if you find yourself burdened with worry over a financial issue, try to redirect that energy toward a simple action plan that can help you clarify the magnitude of the issue. You may find that you have been worrying needlessly, and that you can proactively manage the issue moving forward.

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Credit Management

Know What Does - and Doesn't - Impact Your Credit Score

Managing your credit is a very important personal finance activity, given the range of influential parties that can access your credit file. Lenders, current and prospective employers, landlords, utility companies, and insurance providers may all form an opinion of you based on your credit report and score.

Given the stakes involved, it is critical to understand what does - and doesn't - impact your credit score. You want to focus your credit management efforts on the areas that matter most.

Let's start with the areas that do have an impact. The information you see in the Accounts, Public Records, and Inquiries sections of your credit report can all influence your score. In particular, all of the following items flow into your credit score:

Open account details, including your balance and payment history, plus some of the key characteristics of the account, such as the type of loan and the credit limit. The number and mix of open accounts also have an impact.
Closed account details, but only if the account had derogatory history, such as late payments or collections.
Public records, such as a bankruptcy filing, judgment, or tax lien, whether they are still outstanding or satisfied.
"Hard" inquiries that have occurred over the past 12 months. Hard inquiries are ones where you have asked a lender for credit.

This list explains why it is so important to maintain positive activity on your open accounts, dispute or resolve any accounts that show negative activity, and limit your requests for credit.

Next, let's review the areas that don't have an impact:

On-time payments made to a landlord, medical provider, or utility company. These service providers will generally only report late payments.
Closed account details, if the account was in good standing.
Certain open account details, including the monthly payment amount and high balance.
Your demographic information, such as your age, gender, ethnicity, education, marital status, address, income, or employer.

This list can help you prioritize your credit building activities. For example, you need to manage your payments to landlords, medical providers, and utility companies to proactively avoid having any negative information flow onto your credit report. Also, you need to think twice before closing an account in good standing, since it will no longer have a positive impact on your score. In some cases it may be more advantageous to keep the account open, or in the case of an installment loan that matures, re-open a comparable account.

But you don't need to actively manage your demographic information, unless it is clearly wrong. For example, the name, address, and Social Security number on your credit report should all be correct. If not, you should notify each of the three national credit bureaus and ask them to correct the information. You can do this online or in writing.

Credit management should be part of your regular personal finance routine. To make it as easy as possible, focus your efforts on the activities that will have the greatest impact on your score.

Don't Believe This Credit Card Myth

True or false: carrying over a credit card balance month-to-month is better for your credit score than paying off your balance?

The answer is 'false,' but many people I speak with believe that they need to carry a balance in order to improve their credit score.

Don't believe that myth! Paying off you balance in full each month is likely to be better for your credit score and will be much cheaper too.

Your credit activity is still reported to the national credit bureaus when you pay off your balance in full. Your activity will demonstrate that you are using credit responsibly and always paying on time, which are the biggest drivers of a high credit score.

Paying off your balance in full has two other important advantages. First, it probably means that you are careful with your charges and keep your current month's balance low. A low balance translates to a higher credit score, because the scoring system (called FICO) penalizes a high balance in relation to your credit card limit.

Second, it saves you a lot of money. If you pay off your balance in full each month, you will never be charged any interest or other financing charges. Credit card interest can really hurt you financially over time. For example, it can cause you to pay 40% or more for an item than if you had paid it off right away.

So don't hesitate to pay off your card balance in full each month. It will improve your credit score and your finances. And if you form a habit of saving the money you used to pay in interest, you will steadily get ahead and move toward your financial goals.

Automate Payments to Protect Your Credit

Your payment history is the single most important contributor to your credit score. Do you always pay on time? Your credit will increase. Have you made even a single late payment? Your credit will fall and the late payment will negatively impact your score for years. The impact will be more severe if the late payment leads to a collection.

Sometimes late payments are the result of financial difficulties within a household, but often they are simply due to forgetfulness. People just get busy and forget to pay their credit card or utility bill.

Lenders and utility companies are not very forgiving when it comes to forgetfulness. They are becoming more aggressive at reporting late payments to the credit bureaus and assigning an account to a collection agency, even after a short period of time.

You can protect yourself and your credit by automating payments. This involves using the online bill pay tool provided by your bank to establish a calendar of future payments.

For your credit cards, automate a payment equal to the minimum payment due. This will keep you current. You can then make a second manual payment each month to pay any additional amount you wish on top of the minimum.

For your utility bills, investigate whether your utility companies will charge you a level amount each month. The electric and gas utilities typically call this a "budget billing" arrangement. Then automate payments for these level amounts.

And don't forget to automate your cell phone bill payment. Cell phone providers are especially aggressive at sending your bill to collections, which can cause your credit score to drop over 100 points.

The main challenge with this approach is to make sure that you always have enough money in your checking account to fund the automatic payments. You can make this easier by spreading the payments out over the course of a month to correspond to the timing of your paycheck deposits.

Taking these simple steps will ensure that you always pay on time, which, in turn, will protect your credit score and help it to steadily increase.

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Debt Management

Do Your Homework Before Consolidating Student Loans

Remember the discipline you established in college to complete research assignments and study for exams? Be sure to use that same discipline to research the consequences of student loan consolidation before you make a decision.

Consolidation is being offered both by the federal government and private loan consolidators. It sounds convenient: you need to make fewer payments and keep track of fewer loans.

But be careful. Your decision to consolidate may have unintended consequences.

There are at least 5 potential snags that can result from student loan consolidation.

1. You could lose federal protections. Federal student loans include valuable protections and benefits, including the following:

Deferment and forbearance options.
Multiple repayment options, some of which can reduce your monthly payment to $0.
Multiple forgiveness options.
Ways to rehabilitate defaulted loans.
Cancellation benefits if you die or become totally disabled.

But if you consolidate your federal student loans into a private loan offered by a private loan consolidator, you will lose these protections and benefits.

2. You could lose attractive forgiveness opportunities. Perkins loans are a particular type of federal loan offered through colleges. They offer special forgiveness opportunities. For example, 100% of the loan may be forgiven if you have an occupation such as these:

Firefighter.
Law enforcement or corrections officer.
Nurse or medical technician.
Librarian or speech pathologist at a school.
Attorney at a public defender's office
Staff member of a prekindergarten or child care program.
Teacher of math, science, foreign language, or special education.

However, you will lose this forgiveness opportunity if you consolidate your Perkins loans.

3. You could become ineligible for some repayment plans. Federal loans offer multiple repayment options. Some of the options are called income-driven plans, because your monthly payment is set based on your household income and family size. Two popular income-driven plans are Income-Based Repayment (IBR) and Pay As You Earn (PAYE). With IBR and PAYE, your monthly payment won't exceed 10-15% of your discretionary income.

But if you have Parent PLUS loans and consolidate them with other federal loans, you will become ineligible for IBR and PAYE.

4. You could restart the clock on Public Service Loan Forgiveness (PSLF). The federal government offers several loan forgiveness programs, including PSLF. PSLF is an attractive opportunity for people working for a wide variety of public service organizations, such as nonprofits, government agencies (federal, state, or local), hospitals, schools, police/fire stations, correctional facilities, and others. Your remaining loan balance may be forgiven if you work for one of these organizations for 10 years. There are a couple of stipulations, however:

The loans must be direct loans, which is the latest loan origination method for federal student loans.
You must make qualifying on-time payments through one of several repayment plans.

If your loans aren't direct loans, you should consolidate them into a direct loan in order to qualify for the program.

But if you already have direct loans and make qualifying payments toward PSLF, you should not consolidate them. Consolidation will wipe out those qualifying payments and restart the clock on PSLF. In other words, you will need to make 10 more years of qualifying payments on the new consolidation loan!

5. Your interest rate will remain the same. Some people think that consolidating student loans is like refinancing a mortgage or auto loan. When you refinance, you convert an existing loan with a higher interest rate into a new loan with a lower interest rate, thereby reducing your interest payments.

Federal loan consolidation doesn't work like that. When you consolidate, your new interest rate is simply the weighted average of the interest rates on your old loans. This is true even if the current interest rate on new federal student loans is lower than the rates on your loans.

Consolidation is a complicated topic, but I hope this overview can help you avoid the most common unintended consequences.

Student Loan Refinancing Offers: Proceed With Caution

If you have student loans, odds are that you have seen or received an offer to refinance them. It's a growing industry that is being built up in response to the record amount of debt held by current and former students.

The federal government has offered a basic refinancing option for a while, called consolidation. It doesn't reduce your interest rate, but can simplify your bill paying process and make you eligible for certain loan forgiveness options. As I've mentioned before, it's important to carefully consider the consequences of federal loan consolidation before you make any decisions.

What's newer and growing is the industry to provide private loan consolidation and refinancing services. The firms in this industry take different forms: lending firms that provide new loans themselves, middle-men that connect you with lending firms, and service firms that consolidate federal loans for you, for example.

Regardless of the form they take, you should carefully evaluate what you are getting and giving up. This may require some digging on your part, since ads typically only highlight what you are getting.

For example, if you refinance your federal loans into a private loan, you will give up important federal protections and benefits, which may be more valuable to you than a lower interest rate. You may also pay sizable fees on top of the fees you already paid when you originated your loans.

Also be aware that some practices in this industry are predatory. I recently encountered a service firm that offered to consolidate federal loans (something you can do for free) and charged $500 per year for the service. The fees were only revealed in the fine print of the contract.

Don't assume that these firms are student loan experts or have your best interests in mind. Protect yourself by doing your own independent research and asking lots of questions. Only proceed once you fully understand the pros and cons.

Manage Your Federal and Private Student Loans Differently

Are your student loans federal or private? If you aren't sure, you're not alone. But once you know, you may be able to manage them differently to your advantage.

As background, there are two types of issuers of student loans. The first is the federal government, which has issued different types of loans over the years, including Stafford loans, Perkins loans, and Direct loans. The second are private lenders, such as banks and state agencies.

Federal loans have unique benefits that most private loans lack, including forgiveness, cancellation, deferment, forbearance, and multiple repayment plans. But they also have some unique quirks, such as the inability to refinance within the federal loan system in order to take advantage of lower interest rates.

As a result of these benefits and quirks, it may be advantageous for you to manage your federal and private loans differently. Here are three examples:

1. If you currently have a low monthly payment on your federal loans (perhaps because you have entered into an Income-Driven Repayment plan or opted for temporary deferment), you may wish to make extra payments toward your private loans if your budget allows. Check with your private loan issuer first to ensure that there are no prepayment penalties and that your prepayment can be applied entirely to principal.

2. If interest rates have decreased and your credit score has improved, you may be able to refinance your private loans into a new loan at a lower rate. (Caveat: if you refinance your federal loans into a private loan, you will lose all of the federal benefits described above.) Or, if you have access to a low rate loan like a home equity loan, you could consider prepaying either your private or federal loans, whichever has the highest interest rate.

3. If you are considering life insurance, you may wish to include your private loan balance in the amount of insurance you purchase. Federal loans are cancelled upon your death, but private loans might not be cancelled. The life insurance can pay off your private loans so that your heirs aren't burdened by your debt.

How can you tell whether a loan is federal or private? The best way is to log into the National Student Loan Data System, which will list all of your federal loans but none of your private loans. If other student loans appear on your credit report, then you will know that those loans are private. You can access your credit report for free by using AnnualCreditReport.

You can't tell whether a loan is federal or private by looking at the servicer. The same servicer may be handling federal and private loans.

So take a few minutes to distinguish between your federal and private loans. You may be able to manage them differently to your advantage.

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Preparing for Emergencies

An Emergency Fund and Insurance Play Different Roles In Your Emergency Plan

In order to prepare for financial emergencies, you will want to have a smart solution to respond to all sorts of unexpected events - both large and small.

Your solution will probably involve more than an emergency fund alone. An emergency fund is a dedicated source of funds that you can use if something unexpected occurs. Examples might include unexpected car repairs, medical bills, tax bills, a reduction in work hours, or even a short job layoff. Having an emergency fund allows you to pay for these unexpected events in a timely manner without having to resort to credit cards or other savings. This enables you to get through the event without increasing your debt, hurting your credit score, or compromising other important financial goals in your life.

But an emergency fund has limitations. Most people can't afford to save indefinitely into an emergency fund because they must also make progress on other goals, like a home purchase, college education, or retirement.

This means that an emergency fund might be big enough to handle small to medium-sized emergencies, like the examples listed above, but not big enough to handle large emergencies. Examples of large emergencies might include the disability or death of the main breadwinner in a household, the injury to others in a car accident, or a major medical procedure and recovery period.

This is where insurance can play its own role to help you prepare for emergencies. It can help you handle financial emergencies that are too big for a typical emergency fund.

Insurance companies are generally able to protect you from large losses while charging you a relatively small amount. They can do this because they insure many people, and only a few will actually experience a big loss. They use the profits from many customers to fund the losses of a few.

Common insurance policies that protect you from big losses include property and casualty insurance (auto, renters, and homeowners policies, for instance), disability insurance, life insurance, and health insurance. The cost and complexity of these policies can vary greatly, so it is important to do research, understand the terms and conditions, and get multiple quotes before you buy.

Many people have only partially prepared for emergencies. They may have an emergency fund but no insurance. Or they may have insurance but no emergency fund. Or they may have both, but in insufficient amounts. In all of these cases, they don't have a complete solution to respond to emergencies large and small.

So if you have a goal to become better prepared for financial emergencies, consider the ways that an emergency fund and insurance can work together to form a more complete solution. Each one plays an important but unique role in your ability to respond to unexpected events.

Ways to Stretch Your Emergency Fund Dollars

One common and effective way to prepare for emergencies is to create an emergency fund. An emergency fund provides cash when the unexpected occurs, so that you don't have to tap into more costly resources like a credit card or retirement plan balance.

Emergencies, by their very nature, can be expensive. You often have to make quick decisions without the benefit of much research or information. And monitoring the cost isn't usually a top concern.

But you can reduce the cost of emergencies, and stretch your emergency fund dollars, by anticipating certain types of emergencies and identifying affordable solutions ahead of time.

An example is a trip to the emergency room. Over the past few years, many health plans have dramatically increased the cost of an emergency room visit by imposing large co-payments and deductible requirements. You could speak to your primary care physician and plan provider beforehand to identify lower cost alternatives. For instance, a local urgent care facility may be able to handle routine emergencies for the cost of a non-preventative trip to the doctor's office. You could identify local facilities that are in your network and check them out to see if you are comfortable with them. Then, if a routine emergency like a sprain or broken bone occurs, you already have a plan in place to respond to the situation quickly and affordably.

Another example is an emergency car repair. Fewer people have a trusted mechanic these days, since cars are more reliable and require less maintenance. But if your car breaks down, a trip to the dealer or an unknown mechanic might prove to be very expensive. Instead, you could look for a local shop ahead of time, read online reviews, visit the shop, and even ask for referrals. You could also try them out on a simple repair like an oil change, tire rotation, or new battery. Then you will have a qualified and affordable mechanic in your contact list if a breakdown occurs.

Other examples that are similar to a car repair are emergency home repairs. It's a good idea to identify a trusted and affordable plumber, electrician, and carpenter before you encounter a home emergency.

Even a major emergency like a job layoff can be made more affordable by identifying acceptable backups to some of the large costs in your budget. If the unexpected occurs, you can shift to these backup options more quickly than if you hadn't done any planning in advance.

So if your goal is to establish an emergency fund, think beyond the fund itself. Also consider how you can respond to common emergencies in ways that are both appropriate and affordable.

Basic Estate Documents: the Third Pillar of an Emergency Plan

Previously I described how an emergency fund and insurance form the core of an emergency plan. An emergency fund addresses small to medium-sized financial emergencies, while insurance covers large financial emergencies.

Basic estate documents are the 3rd pillar of an emergency plan. These documents address emergencies in different ways than an emergency fund or insurance.

Many people hold the opinion that estate documents are just for old or wealthy individuals. This isn't accurate. While some estate planning techniques are only used by wealthy families, other ones are more broadly relevant to younger individuals without significant wealth. I will highlight five examples below:

1. Will. A will is a legal document that expresses your wishes if you were to die. It is broadly relevant because it allows parents of young children to name a legal guardian for each child. This information will be used by your county's family and probate court to make a final guardianship decision.

2. Power of attorney for healthcare decisions. This document, also called a health care proxy, is a legal document that allows you to name someone who will be authorized to make healthcare decisions for you if you are unable to make them for yourself. It has no effect if you are competent to make your own healthcare decisions. It is broadly relevant because many people live alone and far away from any direct family members. It can give you peace of mind that someone nearby will be authorized to make healthcare decisions for you if you ever face an emergency that leaves you temporarily incapacitated.

3. Power of attorney for financial decisions. This legal document operates the same way as a healthcare proxy, but just for financial decisions. For example, the person you name in the document will be authorized to access your bank accounts and pay your bills if you are unable to perform these tasks yourself. As with the healthcare proxy, it can be designed to have no effect if you are able to make financial decisions yourself.

4. Living will. This document acts as a complement to a healthcare proxy. It allows you to express how you want end-of-life decisions to be made. This will help the person you name in your healthcare proxy to make the most appropriate decisions for you, and will provide guidance to the doctors and hospital giving you care.

5. Revocable trust for life insurance. Many parents of young children will want to own a life insurance policy as part of their emergency plan. But sometimes it isn't easy to identify an appropriate beneficiary of the policy. (The beneficiary is the person who will receive the benefit once the policy pays out.) For example, young children aren't an appropriate choice, because they aren't mature enough to handle a large sum of money. In this case, a trust can be established that will act as the beneficiary of your policy. A trust is a legal document that provides instructions on how you want the life insurance proceeds to be managed. It can specify portions to be paid out each year for living expenses, and portions to be retained for future college expenses, for instance. A person you name, called the trustee, will be legally responsible for following your wishes.

All of these documents require the help of a licensed attorney. If you don't know of a good attorney to call, you could ask friends or colleagues for referrals. Or you could call the Massachusetts Bar Association's Lawyer Referral Service at 617-654-0400.

These are standard documents and should not be expensive to draft. A good attorney will be happy to give you an estimate of the cost before any work is done.

These documents will help you prepare for potential emergencies, such as situations where you become temporarily incapacitated or die. And they perform functions that an emergency fund and insurance can't perform. So as you put together your own emergency plan, remember to include all three pillars in your approach.

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Fraud and Identity Theft

Avoid These Common Fraud Tactics

Our police department has highlighted a number of fraud tactics that have victimized local residents recently. Keep them in mind so that you don't become a victim yourself!

1. Door-to-door solicitors. A common tactic here is someone posing as a contractor who is "finishing up some work on the next street over." The person claims that he can do a project for you very cheaply because there are supplies left over from the other job site. The person asks for a deposit of a few hundred dollars and promises to return with the crew and supplies. But in reality he will take off with your money and never return.

Lesson: don't do business with solicitors you don't know.

2. Phone calls demanding money. One example of this is a caller who claims to be from the IRS. She demands immediate payment for a tax-related penalty or else you will be taken to court.

Lesson: the IRS will never contact you over the phone to demand a tax payment. Ignore these calls.

3. Emails demanding money. This could be triggered by visiting or using an unauthorized music/movie file sharing service on your computer, for example. You receive an email telling you to make an immediate payment or else you will face penalties for wrongdoing.

Lesson: never make a payment based on an unsolicited email.

4. Request for payment in advance of a windfall. This is another type of email scam where you are contacted by a foreign national who wants to transfer a large sum of money into the United States. To do this, he first needs access to your bank account. Once the money is wired into your account, he promises to give you a percentage. In reality, your bank account will be drained of its assets.

Lesson: never respond to a payment scheme based on an unsolicited email.

5. Social media pleas. An example of this type of fraud is a social media posting from a friend saying that she is detained in customs and needs $1,000 to be released.

Lesson: your friend's social media account has probably been hacked. Call your friend directly. Don't send any money without speaking with her first.

6. Theft from friends or family. This is perhaps the saddest case, and is often due to drug or alcohol dependency. Someone close to you looks for opportunities to steal cash, jewelry, or blank checks. The checks may be removed from the middle of your check book so that you don't notice the problem for a while.

Lesson: be alert to unusual behavior from people you know, and use common sense when they are in your home.

Use a Security Freeze to Deter Identity Theft

Identity theft is an ever-present risk. It can stem from tactics that are both low-tech (stolen mail or garbage, fraudulent phone calls) and high-tech (stolen passwords, data breaches). One way to minimize the impact of identity theft on your credit report is to request a security freeze.

A security freeze essentially locks your credit report. Nobody can access your report without your approval, other than your existing lenders.

This means that if someone tries to open a credit card or loan in your name, the lender will first contact you to confirm your identity. You can then alert the lender that the request is not legitimate.

If you want to open a credit card or loan on your own, your lender will ask you to "unfreeze" your report so that they can complete your credit request. You can control the amount of time that your report is unfrozen, and can provide your lender with a specific access code so that nobody else can gain access.

A security freeze is permanent, unlike fraud alerts, which are temporary. A security freeze will remain active until you choose to disable it.

To put a security freeze on your credit report, you will need to visit the web sites of each of the three national credit reporting agencies: Transunion, Equifax, and Experian. Look for links to their security freeze pages, which will provide instructions on how to put the freeze in place.

A security freeze is only effective if you complete the process for all three bureaus. Also, if you are married, keep in mind that you will need to complete the process twice: once for you and once for your spouse.

For Massachusetts residents, the cost is $5 per bureau, or $15 total for all three bureaus. This is a one-time fee, so it is a lot less expensive than ongoing fees charged by the credit bureaus for ongoing credit monitoring services.

A security freeze can be a bit inconvenient if you request credit frequently. That's because you will need to take steps to unfreeze your reports, which takes 10-15 minutes and costs $5 per bureau. Your total amount of effort will vary by the type of credit you request. Credit card companies will generally ask you to unfreeze only one report, but mortgage lenders will likely require you to unfreeze all three.

But it can be a good solution for people who don't request credit very often, especially those who worry about the possible impact of identity theft. It can provide peace-of-mind to know that fraudulent people or organizations are not able to access your credit file without your knowledge.

Sounds Too Good to be True? It Probably Is!

You've heard the old adage before: "if it sounds too good to be true, it probably is." But sometimes, in financial decision-making, we suspend that common wisdom, and it can eventually lead to trouble.

So, it can't hurt to provide a reminder every once in a while. Be on the lookout for these two types of financial offers, and evaluate them thoroughly and skeptically before proceeding.

1. High return investment "opportunities" with little or no risk. There is a fixed relationship between risk and return: low risk financial products will deliver a low expected return, and high risk ones will need to provide a high expected return. That's just good common sense, isn't it? But investors, even sophisticated ones, regularly get taken in by the allure of high return, low risk products. One recent example was the Bernie Madoff ponzi scheme, which duped many wealthy, sophisticated, highly educated investors by offering the prospect of high returns at low risk.

2. Costly services provided for "free." Another common sense rule-of-thumb is that companies cannot provide expensive services at little or no cost. They need to cover their expenses and make a profit somehow, even when it isn't obvious to you. But some firms use the prospect of free services to entice customers, and only reveal their actual costs later, when it is difficult or expensive to terminate the service. One recent example that I encountered was a student loan repayment service that claimed to help graduates consolidate loans and enter a repayment plan. Hidden in the fine print was the disclosure that they will charge customers every month for the life of the loan. This could total thousands of dollars, all for a service that students can perform for free on their own.

Alarm bells should sound whenever you are presented with one of these two "opportunities." Always depend on your good common sense. And never lose sight of the adage "if it sounds too good to be true, it probably is."

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Saving and Investing

Understand Your Social Security Benefits, Even if You are Younger

If you are younger, it's easy to overlook your Social Security retirement benefits. After all, retirement may be a long way off, and you may feel that the system won't be robust enough by then to provide you with meaningful benefits.

But it's important to pay attention to your benefits, even if you are younger. There are two reasons why:

1. Your Social Security retirement benefits will probably be the single largest contributor to your household income once you retire.

Most of us will need to rely on Social Security and our own retirement savings (in a 401(k), 403(b), IRA, or other retirement account) for our retirement income. Unless your earned income is high or you are a disciplined saver during your working years, Social Security may end up being a larger contributor than your own savings.

2. The Social Security Administration (SSA) uses your wages to determine your benefits. They sometimes make mistakes. You should double-check their figures to make sure you receive all of the benefits you deserve.

It's easy to review your benefits. The SSA offers an online service called "My Social Security Account" (http://www.socialsecurity.gov/myaccount/) that displays your latest Social Security statement. The statement lists the amount of monthly income you are eligible to receive in retirement, as well as the wage figures that were used to determine your benefit.

You can also get a copy of your Social Security statement by visiting your local SSA office.

In addition to reviewing the facts and figures in the statement, take a minute to calculate the percentage of your current income that Social Security will replace. For example, say you earn $5,000 per month and the statement indicates you will receive $2,000 per month in benefits. That means that Social Security will replace only 40% of your pre-retirement income in retirement. Could you live on 40% of your current income once you retire? Probably not. This may give you an added incentive to maintain - or even increase - your regular contributions to a retirement savings account, so that someday these savings can supplement your Social Security benefits.

You may be skeptical that you will ever receive a meaningful Social Security benefit. And your skepticism isn't unfounded. The SSA currently pays out more in benefits than it receives in payroll taxes, and it will lack the resources to pay out full benefits by 2037 unless reforms are made to the system. If you are concerned, you may want to check out the "Social Security Predictor" tool that was created by the Financial Planning Association and a Social Security policy expert, David M. Walker (http://www.SocialSecurityPredictor.org). The tool predicts whether you will receive your full benefits and whether your benefits will impacted by reforms that are under consideration.

Social Security benefits are critical to your financial future. Take a little time this year to learn more about the system, review your statement, and renew your commitment to saving regularly on your own.

The Power of a Smart Car Purchase

It's very important to make smart car purchase decisions that result in an affordable car and a loan that won't go upside-down. (See our Infographics for more details.)

But you may wonder if it's worth all the trouble. After all, it takes more time and effort to deliberately target, buy, and maintain an affordable car than it takes to go to a showroom and pick up the car that's been on your wish list.

I wondered the same thing, so I ran some numbers. And I was startled to see the results. In fact, the numbers were so big that I had to go back and double-check them.

I found that a single smart car purchase could deliver over 4 years of retirement income to you later in life! That's a remarkable return on investment considering a smart car purchase requires only a few hours of preparation. If you repeat the process a few times during your working years, the total benefit could be substantially greater.

Let's consider the hypothetical example of Jim, age 30, who earns $50,000 per year. He takes the time to make a smart car purchase, which saves him $950 up front and $60 per month in lower loan payment, fuel, and maintenance costs. He deposits these savings into a Roth IRA account that earns 8% per year.

After 4 years, his loan is fully paid off. At that point, he makes another smart decision to keep the car instead of opting for his usual habit of trading it in. Since he is now debt-free, he deposits the $290 per month car payment he had been making into the account too. After 10 years, Jim decides to buy a new car, and no longer deposits any money into the Roth account.

Many years later, at age 65, Jim decides to retire. He reviews his Roth balance and is pleased to see that it is over $195,000 - all because he made a smart car purchase and kept his car running strong for 10 years. Combined with his Social Security benefit, this balance will provide 4.5 years of retirement income. Given that a typical retirement period is 30 years, Jim addressed 15% of his total retirement horizon before ever needing to tap his other retirement savings in a workplace 401(k) plan. He's way ahead of his former co-workers who didn't make such smart car purchase decisions in their working years.

If you are struggling to save as much as you would like for important financial goals like retirement, look beyond your 401(k) toward less traditional places, including your garage. Your car choices represent a very large potential source of savings for you, and all it takes is a little extra effort.

Investment Advice is Slowly Becoming Accessible to All

Historically investment advice has been accessible only to the wealthy. This is because the financial professionals who provide the advice - called investment advisors - typically only seek clients who have large enough incomes and investment assets to support substantial fees for the advice. People with modest incomes and assets have been relegated to DIY status or forced to select among prepackaged investment products like asset allocation funds or target date funds.

Thankfully there is a new trend that will make investment advice accessible to all - an automated investment advisor - which uses computer algorithms to propose and manage an investment portfolio for you, at dramatically lower cost and asset minimums than a traditional investment advisor.

These automated investment advisors provide three key services:

Propose a well diversified portfolio based on your goals, age, and other factors.
Construct the portfolio exclusively from low cost investment products, which are dramatically less expensive than the investment products used by many traditional investment advisors.
Manage your portfolio on an ongoing basis, mainly by maintaining your target asset allocation, attempting to make smart tax decisions, and handling additional contributions.

They do all this for only a small advisory fee and very low asset minimums, thereby making the service much cheaper and more accessible than a traditional investment advisor. In fact, some automated investment advisors don't charge any advisory fee or impose any asset minimum.

Two types of companies are active in this space. The first are newer, smaller companies that are entirely focused on providing automated investment advice. Two examples are Betterment and Wealthfront. The second are large, well established companies that see automated investment advice as a growth opportunity. An example is the Schwab Intelligent Portfolios service.

One disadvantage of these services is that they can only manage portfolios in a taxable account or an IRA account. They can't manage portfolios in an employer-sponsored retirement account like a 401(k). But one workaround could be to request advice for a portfolio in an IRA account and then apply the advice yourself to your 401(k).

Automated investment advice is a fairly new trend, but it is worth following. Do some research and evaluate whether it could be a good fit for you. It has the potential to help many people who have modest incomes and assets and don't have the confidence or time to pursue DIY investing.

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Home Ownership

Use Your Borrowing Capacity as a Guide Toward Home Ownership

If you are thinking about buying your first home in the next 6-12 months, one of the first things to do is to estimate your borrowing capacity. This is the amount a lender may be willing to provide you for a mortgage.

Why not just get pre-approved so that you can have an exact amount instead of an estimate? There are a couple of reasons. First, a pre-approval will lead to a "hard" inquiry appearing on your credit report, which can have a small negative impact on your credit score. Second, the pre-approval may expire if your timeframe is still 6-12 months away. Pre-approvals are more appropriate when you are starting to actively shop for homes.

Instead, ask a lender at a local bank or credit union to provide you with an informal estimate. The loan officer will be able to give you more accurate information if you bring a summary of your income, credit score, and monthly payments on credit cards or loans. If your student loans are in deferment, also bring an estimate of your likely payment once the loans come out of deferment.

An estimate of your borrowing capacity is valuable in two ways:

1. It will help you begin to target certain homes and neighborhoods. It isn't very productive to spend time looking at homes and neighborhoods that are way below or above your borrowing capacity.

2. The resulting monthly payment will help you begin to prepare for the impact of a home purchase on your budget. You will also want to estimate other related monthly expenses, such as property tax, homeowners insurance, private mortgage insurance (PMI), and HOA fees (if any).

Armed with this information, you will be able to make a better plan for the next 6-12 months. For example, you can begin to attend open houses in your target price range to see what your dollar brings, and expand your target neighborhoods if necessary. You can also make changes to your budget to accommodate the new monthly expenses that you anticipate. And you can address other suggestions that the loan officer may give you, such as preparing for a down payment and closing costs, or increasing your credit score.

The more information you gather early on in the home buying process, the more efficient and productive the process will be for you. Good luck!

Home Ownership is Still Achievable in Today's Housing Market

Home prices have been steadily increasing for the past few years, which has been welcome news for existing homeowners but an ever-growing obstacle for people looking to buy their first home.

Fortunately, people with modest incomes are still finding ways to make it happen. Here's how some are doing it:

1. They have gotten themselves prepared financially. They have worked hard, sometimes for 2+ years, to build up the four pillars of homeownership: a higher income, credit score and savings, and lower debt. This allows them to put more down and to borrow more at a lower rate, enabling them to support a higher purchase price. (For more on the four pillars, see our Infographics.)

2. They take advantage of resources. Financial resources aren't just available to the poor; some programs are open to families earning up to our area's median income. An example is the One Mortgage, which is a high-quality, low-cost mortgage offered by a state agency called Massachusetts Housing Partnership.

3. They are flexible. They don't give up when they become priced out of a particular area. Instead, they broaden their horizons to new towns and neighborhoods. Yes, there are trade-offs, but you may discover that a new neighborhood can offer unique qualities and benefits, too.

4. They are determined. It's not easy to buy a home in Massachusetts on a modest income. Setbacks, such as rejected offers and financing complications, are common. But successful homebuyers view these setbacks as temporary, and they maintain the drive to realize their dream.

Do you share their dream? If so, you can make it happen too, even in today's housing market. It just takes preparation, resources, flexibility, and determination.

Consider the One Mortgage Before You Buy a Home

Before you select any financial product, it's always a good idea to shop around. That way, you ensure that you are getting the best value and set of features and services.

For people with modest incomes who are looking to buy a home, I suggest that they put the One Mortgage on their mortgage shopping list.

The One Mortgage is offered by an agency called the Massachusetts Housing Partnership (MHP). One of MHP's objectives is to make home ownership affordable to families with modest incomes. The One Mortgage is available to first-time home buyers who earn up to 100% of our area's median income (AMI), and special subsidies are available to those who earn up to 80% of AMI. You can compare your income to the AMI for your county by visiting: www.mhp.net/uploads/resources/one__income_limits.pdf

The value and features of the One Mortgage are hard to beat:

Low fixed interest rate. The rate is competitive and you will not face the risk of your interest rate increasing in the future.
Low closing costs. Closing costs are substantially less than for some other mortgages, which could save you thousands. Plus, participating lenders may give you an additional discount of $300-$500 at closing.
No private mortgage insurance (PMI). PMI is generally required if you put down less than 20% on a home. The insurance can cause both your closing costs and ongoing monthly payments to increase substantially. PMI is waived for the One Mortgage.
Interest payment subsidy. Your monthly mortgage payment will consist of interest and principal repayment. If your income is less than 80% of AMI, the One Mortgage will subsidize a portion of your interest payment for the first 7 years.
Achievable credit standard. The minimum credit score is 660, which is achievable for most home buyers and lower than some other mortgage products for a comparable interest rate.

So if you are looking to buy a home, always consider multiple mortgage options but put the One Mortgage on your list. The money you save could help you achieve other important financial goals down the road.

To learn more, check out: www.mhp.net/homeownership/homebuyer/one_mortgage.php

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