Why you should open a Roth IRA now

I recently wrote an article for Interest.com on 5 reasons you should open a Roth IRA now.

Aside from a checking account, it is by far the single best account to have and the best way to save. It’s an Individual Retirement Account that not only provides you with tax-free income in retirement but offers you a lot of flexibility to make penalty-free withdrawals between now and then.

At a time when Americans lack not only retirement savings but emergency savings, the Roth is great because it lets you pull double duty by saving for both in one place.

In a perfect world, you’d never touch the money in a retirement account until your working days are over.

But in these economic times people don’t often have a choice. Everything from layoffs to medical bills can put a pinch on everyone.

If you have to tap most retirement funds, it can get quite expensive.

Withdraw money from a 401(k) or traditional IRA before you reach 59½, and you’ll be hit with a 10% penalty and have to pay income taxes on whatever you take out.

If you need $5,000, for example, you might have to actually withdraw $6,500 because of those penalties and taxes.

That’s not the case with a Roth IRA.

You can withdraw contributions anytime, for any reason, without paying any penalties or taxes.

That’s one of the reasons Mari Adam of Adam Financial Associates in Boca Raton, Fla., says that opening a Roth IRA is one of the best financial moves you can make.

If you’re like most Americans, you’re probably lacking in both your emergency and retirement savings.

So if you have to play catch-up, using a Roth as part of your emergency fund lets you do both simultaneously.

“It gives you flexibility to where if you need it in an emergency or for something important, you can access the principal for any reason tax-free and penalty-free,” Adam says.

Second, a Roth can help you save for college bills and a down payment on a home. This is especially important if you’re young and haven’t yet bought your first home because you can withdraw up to $10,000 to put towards a down payment and not pay any taxes or penalties.

Some parents are using Roth IRAs to hold some of their kids’ college education funds because the contributions can be withdrawns at no cost whenever the money is needed.

They can also tap the earnings and the 10% penalty is waived if it goes to cover a qualified higher education expense. This includes college tuition or expenses for you, your spouse, your child or grandchild.

A Roth IRA is also one of the greatest tax breaks you’ll ever get from Uncle Sam because your earnings can grow tax-free and be withdrawn tax-free in retirement.

Think about it: Your money can grow for decades, and you’ll never be taxed on it.

At 59½ years old, you can start withdrawing from this jackpot when all your friends with traditional IRAs have to pay taxes on every dollar they touch.

If you’re 30 years old and max out your Roth IRA to the current limit for 30 years and average an 8% return, you’ll have $608,000.

If you used the 4% rule, that would provide $24,000 a year, tax-free.

If you were in the 15% tax bracket, and had to pay taxes on your withdrawals, it would be about the equivalent of $30,000 per year.

Of course, contributions to Roth IRAs must be made with after-tax earnings.

This is one of the biggest differences between a traditional IRA and a Roth IRA.

With a traditional IRA, contributions (up to the $5,000 limit or $6,000 if you’re over 50) can be deducted from your earnings, lowering your income tax bill for that year.

But unless you’re in a higher tax bracket, you really wouldn’t see much savings with a traditional IRA anyway.

If you’re in the 25% tax bracket and contributed $5,000 to a traditional IRA this year, you could save up to $1,250 in federal income taxes.

But would you actually save and invest that difference?

Probably not. If you’re like the majority of Americans, it would be absorbed into your annual spending on things like dining out, clothes and cell phone bills.

With the Roth, you won’t save any money in taxes now, but you’ll be able to grow that money for decades and never pay taxes on any of it.

Finally, with a traditional IRA, you must start making withdrawals by age 70½.

There is no such requirement for Roth IRAs. You’d be lucky to be in this situation, but you can hold this tax-free money indefinitely and pass it on to your heirs.


 

Be smart with inheritance money

According to the AARP, one fifth of all baby boomer households have received an inheritance and the average inheritance is $64,000. Another 15% are expected to receive an inheritance in the future.

While inheritances are usually financial blessings, financial advisors say that many recipients don’t manage them properly. A study by Ohio State University’s Center for Human Resource Research found that adults who receive inheritances typically only save half of it.

I recently wrote an article for Quicken.com about smart ways to spend your inheritance. Susan Bradley, CFP and founder of the Sudden Money Institute, said that whether it’s an inheritance, lottery winnings or a settlement, many people blow money that they didn’t have to work for.

“It’s likely a once-in-a-lifetime opportunity to make your life more secure and enjoy a little more financial freedom. You have to use it wisely because once it’s gone, it’s gone,” she said.

The first thing you should do when you receive an inheritance is sit on it a while.

Bill Hammer, a Certified Financial Planner and co-founder of the Hammer Wealth Group, said age isn’t always a factor. He has seen 50-year-olds “make 20-year-old decisions” when they receive large sums of money from inheritances. Hammer said the first step to avoiding making bad knee-jerk decisions is to simply sit on the money for a few months.

“Most people will have that money spent in their mind before it even hits the account. Don’t do anything with it initially. It’s a psychological thing. People make better decisions when they wait a few months,” said Hammer.

Bradley said because people don’t have to work and sweat for inheritance money, they often view it as easy money and are more inclined to blow it.

“It’s likely a once-in-a-lifetime opportunity to make your life more secure and enjoy a little more financial freedom. You have to use it wisely because once it’s gone, it’s gone,” she said.

Next, consider paying down any high interest debt you may have.

Mari Adam, President of Adam Financial Associates in Boca Raton, Fla., recommends you first put the money in a safe interest-bearing FDIC-insured account until you’ve had time to plan how you’re going to allocate and use the money. Although you’d be taking on some risk, another option would be to park it in a brokerage account and invest in some dividend-paying Blue Chip stocks.

If you’re struggling with high-interest debt such as credit card debt, one of your first moves should be to allocate at least a part of your inheritance to pay it down. Carrying a $5,000 credit card balance at a 15% interest rate can cost you up to $750 per year in interest. If you inherited $20,000 and paid off that balance, you’d be saving yourself the interest every year.

“Having less debt is always better. When you pay down debt you’re getting a guaranteed return on your investment,” said Hammer.

You should also consider paying down any high-interest student loan debt or a car loan, assuming the rate is above 6%.

While it might be tempting to pay off a mortgage, Hammer said it may not be the best use of the funds, especially if you’re paying 4% or less on a fixed loan. That’s because you may be able to earn more on your sum by investing it.

“If the spread is very close, you should just pay down the debt. But if you can make 8% on your money and your mortgage is at 4%, you might want to hold off on paying it down,” he said.

If you don’t have high interest debt, or if you’ve got some money left over after paying it down, save for your retirement and your child’s education.

After paying down debt, a wise use of inheritance funds would be to put it towards your own retirement or your child’s education fund. Because of the long-term power of compounding, a large supplemental contribution can have a big impact later down the line. Bradley said while saving consistently over time is the key to having enough for retirement, a lump sum surge can make things so much easier.

“If you’re typically putting away $100 per month towards your child’s education fund and inherit $20,000 and put $10,000 towards that, you have advanced years in those savings,” she said.

Let’s say you were to take $5,000 of inheritance money and put it in a Roth IRA. If that were to grow at a modest 6%, it would be worth over $16,000 in twenty years and more than $28,000 in thirty years.

Hammer said that while it’s critical to save for your child’s education, it should come after retirement funding. That’s because while you can always use Roth IRA retirement funds to put towards education, you can’t use education funds to cover yourself in retirement. If you need to pull money out of an ESA or 529 plan, you could be hit with a 10% penalty and taxes. Contributions to a Roth IRA can be withdrawn at any time for any reason without penalty.

“If you’re not sure, I’d err on the side of retirement and start putting away money there,” said Hammer.

Finally, if you’re determined to have a little fund, consider investing it and splurging off a small portion of the earnings.

There’s nothing necessarily wrong with enjoying and playing with some of your inheritance money if you’ve taken care of high-interest debt and other financial priorities. If the amount is large enough, you could invest most of the money then use a portion of your earnings for fun.

For instance, if you were to inherit $200,000 and could earn a 5% return on it, that would generate $10,000 per year in income. It’s not enough to quit your job but it could certainly provide a little extra spending money during the year.

Better yet, reinvest half of that and enjoy an extra $5,000 per year in “fun” money. That annual or monthly distribution you take would also grow as your original sum and reinvestments. In the fifth year of your investment, it would be producing more than $12,155 in annual income.

“You want to try to leave [the principal] as a cushion that you can use your entire life,” said Adam. “You can hopefully earn dividends and draw income off it indefinitely.”

 

 

Earn higher yields in dividend paying stocks

With yields on savings accounts and CDs remaining at pathetic levels, I still think the only way to earn decent money with short term cash these days is in dividend-paying stocks.

When my only choice is to earn a measly 1%, I’ll take a risk in stocks if I can earn a 3-5% dividend.

I recently wrote for Interest.com about how dividend-paying stocks can offer higher yields than CDs.

Of course, the big drawback is that the money you invest in stock isn’t FDIC-insured like it is when you put it in a bank.

The value of your shares can go down, and we don’t have to tell you how volatile the equity markets are. For all you know, the stock market could take a 5% nosedive next week, and the value of your stock could go with it.

But you can minimize the risk and anxiety by considering the beta value of the shares before you buy.

It’s a common measurement of how volatile a stock is compared to the overall market.

A beta below 1 indicates that a stock’s price moves less than the market average, while anything above 1 indicates the stock moves more than the market average.

It means the smartest place to put your money is in companies that have a long record of paying substantial dividends and a beta lower than 1.

And you can minimize some of your risk by sticking with old Blue Chip stocks. Many of these companies have been around longer than we Gen Xers have and have solid balance sheets and a history of raising dividends.

Some good picks could include:

  • Verizon, the communications giant, is paying a whopping 5.05% dividend yield and a beta of 0.54.
  • The Coca-Cola Co. pays a more moderate 2.89% dividend but with an even lower beta of 0.53.
  • ExxonMobil Corp. is the world’s largest oil company with a dividend yield of 2.17% and a beta of 0.50.
  • Procter & Gamble, a huge maker of everything from laundry detergent to pet food, offers a dividend yield of 3.12% with the lowest beta of the bunch at 0.45.

Also:

Be aware that share price and dividend yields move in opposite directions. So, as share price increases, the dividend yield will decrease.

Companies can also cut their dividends anytime. But solid payers such as the companies mentioned here have decades-long records of increasing dividends.

Investing in shares with high dividend yields also provides some protection against falling share prices.

Let’s say you invested in AT&T, and the stock price fell 2% over the next year. You’d still come out ahead because of the 5.54% dividend you were paid.

In fact, you’d still out-earn the return on any CD you can buy.

Once I’ve been in a position for a while and I’m ahead by a few points I set a stop-loss order to minimize my loss in case the market tanks. Ordinarily you wouldn’t do this with long term investments but since we’re talking about investing short or mid-term cash here, you

After all, it’s probably better to walk away with just 2% in a year than to lose 6% and have to hold the stock another year or take a loss.

You can build in an extra level of protection against falling share prices by using stop-loss orders.

That’s where you tell your broker, or set your computerized trading program, to sell a specific company’s shares if their price ever falls to a predetermined amount.

Say you buy an attractive stock at $30 per share with a 5.5% dividend. You know you’re taking on some risk, but under no circumstances are you willing to lose more than 10% of your principal.

If you set a stop-loss order at $27, you can fully protect 90% of your principal and limit your risk to a 10% loss.

Losing 10% of your money hurts, but it’s still better than losing 15%, 20% or more. And no matter how stable a stock appears, there is always a risk that you can lose money.

After you’ve held your stock for six months or so and are hopefully up a few percentage points, you can increase your stop-loss limit.

At some point, you’ll hopefully be able to use your stop-loss orders to guarantee a profit rather than minimize losses.

Let’s say you bought a great dividend-paying stock at $30 a share last year and it’s now $35 a share.

You’re already up 16% in share price alone. There’s no point about risking principal now, especially since you bought with the intention of earning that 5.5% dividend.

So if you want an extra piece of mind, maybe you put in a stop-loss order at $32.50. Even if the stock nosedives one morning, you’ll still make 8% on the deal, plus all the dividends you’ve earned in the meantime.

The risk with setting stop-loss orders too high is that your stock will sell off in regular market fluctuations.

You don’t want to buy a stock at $30 then immediately set a stop-loss order at $29. There’s a good chance that, in the course of a week or two, it could hit that price.

Seeking a higher yield in dividend stocks doesn’t require you to lock up your principal for decades, but you should expect to hold onto these shares for at least the next few years.

Remember that there is no such thing as a “risk-free” stock. All stocks can decline in value, and past performance is never an indicator of future expectations.

 

How much should you be putting away every month for retirement?

When I recently wrote about knowing your retirement goal number, I received a lot of feedback via email, blog comments and comments on Linkedin.

Some were positive, some were negative. Some implied that there are jut too many factors to calculate that number. While that might be true it shouldn’t stop anyone from at least trying to figure out how much you need in retirement. Even if that’s 40 years away and so many things can change between now and then, having a number gives you a goal to aim for.

Most importantly, having that number lets you work backwards to figure out how much you should be putting away now every month towards retirement.

Where do people start? And how can a regular Joe or Jane sitting at home come up with a rough number to find out how much they need to be saving now?

I recently wrote a story for Interest.com that breaks that down into four step system to calculate your monthly retirement savings.

Step 1. Estimate how much you’ll need per month in retirement

Start with you income. You’ll want to have an average of how much you make annually throughout your working life.

You might be making $40,000 a year now, but by the time you retire 20 years from now, you might be making $70,000 a year.

So, your average annual income might end up around $55,000 a year.

When you retire, you hopefully will have paid off your house, won’t be supporting kids and will have fewer expenses than you do now.

But most experts agree you need to replace at least 60% of your pre-retirement income to continue your lifestyle.

That’s $33,000 a year, or $2,750 a month in today’s dollars.

But you’ll also have to account for inflation, which typically runs 3% a year. So, to have the same purchasing power of $33,000 in 25 years, you’ll actually need $69,000 or $5,750 a month.

Step 2. See how much you can expect from Social Security.

Now that you have an estimate of how much you’ll need every month, see how much you might get from Social Security.

Visit the Social Security benefits estimator to estimate how much you’ll receive.

It will give you three numbers based on whether you plan to start collecting benefits at age 62, 67 or 70.

The longer you wait to start collecting, the more you’ll get per month. If you collect at age 62, you could receive up to 45% less than if you wait until you’re 70.

Of course, a lot depends on how much you pay into the system. As your income rises over the next 10, 20 or 30 years, so will your benefits.

You also have to remember that things are a little shaky with Social Security. If you’re under 40, a lot can happen between now and retirement.

There’s a good chance they’ll raise the retirement age or reduce benefits. They could do both. It’s likely that the system will also pay a smaller cost-of-living adjustment.

Take a look at the four changes that might be in store for Social Security that I recently wrote about.

To be safe, you might want to anticipate receiving 10% less than what’s stated on the estimator.

So, if the estimator says you’ll receive $3,000 a month when you turn 67, let’s change that to a $2,700 monthly benefit.

Step 3. Find your gap and how much you need to fill it

You need to find out how much of a difference you have between what you can expect with Social Security and what you need in retirement.

In the old days, Social Security benefits might have covered most of your needs, but today you’ll be lucky if it covers half.

Sure, you might be able to pinch pennies and scrimp by on your Social Security payment, but is that really how you want to spend your golden years?

In the example above, you’ll need to come up with approximately $3,000 a month of your own money to meet your retirement goal’s monthly income.

That’s still a lot of money, but it’s better than trying to come up with the full amount.

This is when you need to take advantage of the 4% rule.

It says you can take out 4% of your savings the first year of retirement and the same amount, adjusted for inflation, each year after that.

In theory, your money should last 30 years.

Using the 4% rule, to come up with $3,000 a month or $36,000 a year, you’ll need to have $900,000 socked away.

That’s a whopping number, but remember you have 25 years to reach that goal. And even if you don’t meet it (you likely won’t), you’ll still want to come as close to that number as possible.

It won’t be the end of the world if you don’t make that number.

Since Social Security will be covering almost half of your retirement income, failure to make that goal will have a smaller impact than you might imagine.

Say you only end up with $600,000 by the time you retire. That’s a whopping 33% less than you were aiming for, but it will only represent about a 16% reduction in your retirement income.

In any case, you want to get as close to your goal as possible. Saving regularly, often and early can help you grow your nest egg through compounding.

Step 4: Work backwards to figure out how much you need to save each month.

Finally, take that big number and deduct for any retirement savings you already have. So, if you have $40,000 socked away already, you’ll aim to put away $860,000 by the time you retire.

If you have 25 years to go and assume that your fund will grow at the historical stock market average of 8% a year, you’ll need to put away $7,500 a year.

That’s $625 a month.

Of course, all of these variables could change, especially your return.

If you socked away $625 a month and averaged a 9% return, you’d end up with over $1 million. Or you’d have $724,000 if you averaged only 7%.

Interest.com’s Savings Goal Calculator makes these kind of calculations easy.

Just remember that a lot of things can change over the years, but you need to have a target to work with.

Would you introduce your teens to credit cards?

I recently wrote an article for Interest.com about introducing your kids to credit cards.

When I’ve covered this in the past, I’ve often heard mixed reactions on the idea.

On the one hand, there are some who say it’s a horrific idea to ever introduce teenagers to credit cards. On the other, there’s the thought that by introducing them to credit cards under supervision and educating them on the dangers, it will help them handle credit cards responsibly when they’re old enough to get their own.

For many young people, a credit card is one of the only ways to start building their credit. You can tell them to avoid credit cards but at some point they’re going to get one. According to the 2010 Survey of Consumer Payment Choice, Americans hold an estimated 609.8 million credit cards with the average credit card holder having 3.5 cards. And the average age of which a consumer under 35 obtained their first credit card was age 21.

If you do introduce your child to credit cards, at what age do you do it?

The steps I highlight in the article include:

  • Giving them a crash course in credit.
  • Starting them out with a prepaid debit card.
  • Graduating them to a checking or savings account with a debit card.
  • Taking the training wheels off and getting them a real credit card.

Of course, the first step is probably one of the most important. Many teens (as well as many adults) don’t realize the devastating consequences of buying things on credit and making the mininum payments.

Some teens don’t understand that when you charge stuff on a credit card, a bill comes due at the end of the month. Even fewer teens understand interest and how it is calculated.

Review one of your credit card statements with them.

Explain the different elements such as interest rates, interest charges and minimum amount due.

Then have them play with an online debt calculator to figure out how long it would take to pay off your balance with just the minimum payment.

Next, have them plug in the cost of an item they want at a card’s interest rate to see how much it could truly end up costing to buy it on credit.

Throw in some big numbers and use it as a financial version of a “scared straight” program. Show them how a $100 shopping trip to the mall can turn into a $250 one with interest and late charges.

Illustrate the dark side of credit cards, and don’t be scared to instill in them a financially healthy fear of interest charges, unnecessary fees and runaway debt.

What would you do? Introduce them now as a high school senior? Wait for them to go to college? Never bring up the matter and tell them to never get a credit card?

Read the full article at Interest.com.

 

Earn 6% to 18% by lending money to strangers

I recently wrote an article for Interest.com on how peer-to-peer lending offers double-digit returns with some work and a little risk.

Ordinarily, the idea of loaning money to perfect strangers would sound absurd. But in today’s environment of pathetically-low interest rates where your only safe option is to earn 2% in a CD, you might want to take a look. Every saver out there is looking for alternatives these days.

Basically, through web sites like Prosper.com and Lendingclub.com you can invest in short-term loans to borrowers seeking money for everything from home improvements and eye surgery to paying off credit cards and starting a business.

At these sites, the investors (potentially you in this case) are the lenders and can earn anywhere from 6% to 18%, even taking into account losses from bad loans that are never repaid.

Loans range from one to five years and borrowers are assigned a credit score to gauge how risky their loan might be.

At Prosper, credit ratings range from AA to HR.

As of February 2012, AA loans, which have a weighted average credit score of 808, have an actual loss rate of only 2.41% and a seasoned return of 5.18%. But those high-risk HR loans, which have an average credit score of 668, have an actual loss rate of 11.04% and a seasoned return of 17.71%.

Since most note defaults occur at five to nine months of age, Prosper uses “seasoned returns” to define those aged 10 months or more.

Lending Club uses “net annualized return” as a measure of return and includes notes three months and older.

At Lending Club, those returns currently range from 5.83% for Grade A notes to 12.4% for Grade G notes.

If you have $20,000 to invest and would rather not go through the hassle of picking loans, Lending Club will offer you a preselected pool of 800 notes.

According to their site, every single investor with 800 or more notes has had positive returns. Almost 92% of them have had returns between 6% and 18%.

The cool thing about these sites is that instead of investing in just one loan, you can spread your money across multiple loans to spread and minimize your risk.

Instead of loaning your $1,000 to one single person, you might loan $50 to 20 different borrowers.

You can also lend to people in different rating categories. You might have 35% of your investment in AA loans, another 35% in B loans and then 30% in higher-risk D loans.

By spreading your investment, you’re minimizing the risk. So, if some of your loans default, and it’s highly likely that a couple will, you won’t lose all of your principle.

The idea is that the losses you suffer in the higher-risk categories will be offset by the more reliable payments in the low-risk categories.

Lenders have pointed out this downside: Borrowers with the highest credit rating often pay off their loans early.

So, while you may have had a pool of 36-month notes earning 6.6%, half of them could end up paying it off in a year, dragging down your total return by a few points.

P-2-P lending could be risky but may be worth it considering you can make a lot more than you would in a CD. If you need to back out and get your money, you can sell your notes on a market platform at each of the sites.

You’ll also have to first make sure you qualify to become an investor.

At both sites you must be 18 years of age and have a valid Social Security number and checking or savings bank account. The minimum investment to open an account is $25.

Lending Club has “State and Financial Suitability” conditions. You must reside in one of the 28 states where peer-to-peer lending is legal, have a gross annual income of at least $70,000 and a net worth (not including your home) of at least $70,000.

You may also not purchase notes in an amount in excess of 10% of your net worth.

Read the full article at Interest.com.

 

New tax laws and changes for 2012

I recently wrote an article for Quicken.com on new tax deductions and limits for 2012.

From higher tax bracket thresholds and standard deductions to an extension of the Social Security tax holiday, there are a number of new tax laws and adjustments in 2012. Here are just a few:

Higher federal income tax-bracket thresholds

A number of tax changes in 2012 have been due to standard inflation-related adjustments.

First, the federal income tax thresholds have risen for each filing status across the board. The threshold separating the 15% and 25% tax brackets is now $35,350 for singles and $70,700 for married couples, up from the 2011 amounts of $34,501 for singles and $69,001 for couples.

The jump from the 25% bracket to the 28% bracket is now $85,650 for singles and $142,700 for married couples. That’s up from $83,601 for singles and $139,351 for married couples.

Higher standard deductions and personal exemptions

There are also higher standard deductions. For singles it is now $5,950, up from $5,800 in 2011. Married couples can also squeak out $300 more on their standard deduction which is now set at $11,900.

Each personal and dependent exemption is now worth $3,800, one hundred dollars more than it was in 2011.

It really doesn’t amount to much (a savings of $37.50 for singles and $75 for married couples) but when it comes to handing over your money to Uncle Sam, every dollar counts.

Possibility of no patch for the AMT

The Tax Policy Center estimates that up to 31 million taxpayers will be exposed to a possible Alternative Minimum Tax this year because the annual patch has not yet been put in place to raise exemption levels.

Basically, you are required to calculate your taxes two ways and pay the larger of two amounts. This was originally created 40 years ago to stop the wealthy from getting massive tax breaks but it is now hitting a lot of middle-class taxpayers. In 2011, a single taxpayer and married couple triggered the AMT exemption at $48,450 and $74,450, respectively.

As of now, unless the patch is reinstated for 2012, the new exemption levels will fall back to $33,750 for singles and $45,000 for married couples.

Read the entire article at Quicken.com.

 

Lending to your child

I recently wrote an article for HSH.com on being your child’s mortgage lender.

As it is becoming more difficult for people in their 20s and 30s to qualify for mortgages due to higher lending standards and bigger down payment requirements, some of their baby boomer parents are stepping in to help.

According to Walter Molony, a spokesman for the National Association of Realtors, “26 percent of first-time homebuyers received a gift from a relative and 7 percent borrowed money from a relative.”

With yields on CDs and T Bills so low, some parents can even make a little profit and find it to be a decent investment. If they most they can earn on a T Bill is 3% and their child can’t get a mortgage because they don’t have the down payment, the parent can lend to the child at a rate of 5%.

If it is something you decide to do, you’ll have to honestly evaluate your child’s credit worthiness and their ability to make the payments on time.

Mari Adam, president of Adam Financial Associates in Boca Raton, Fla., said with so much risk involved, you shouldn’t agree to anything on a handshake.

“Unless this is a gift, you need to treat your child like you would any other borrower,” says Adam. “You need to go through all the formalities and treat it as a business deal.”

Read the full article at HSH.com.

 

 

 

 

8 tricks up your auto dealer’s sleeve

Interest.com recently ran my article highlighting 8 tricks up your auto dealer’s sleeve.

One of their top tricks is to prey on your lack of information:

There’s nothing a dealer loves more than an uninformed consumer who’s going to negotiate a purchase based on nothing more than the car or truck’s sticker price.

You need to work from the wholesale price the dealer paid and the average transaction price, which are usually thousands of dollars less than the sticker price.

You want to be the smart buyer who pays a little less than the average transaction price, not the one who pays a little more.

Edmunds.com or Kelley Blue Book are the places to find the critical information you need.

Another one of the most common tricks is to lure you into a deal with low monthly payments. You need to run the numbers on your own and understand that a low monthly payment does not always mean it’s the best deal because they could be doing it by extending the terms:

Don’t tell them, because they’ll use that number to sell you a more expensive car or truck than you may have wanted and maximize the dealership’s profits on your sale.

The salesperson will figure out the most you can possibly spend by dragging out the payments for as long as possible and still hit that payment.

He or she will then show you cars and trucks in that price range, which is often higher than what you wanted to spend, while reassuring you that this fine vehicle is within your budget.

Let’s say you came in to buy a compact sedan that cost about $20,000 but let slip that you could afford a payment of $450 a month.

The salesperson immediately recognizes that a 60- or 72-month loan would allow you to buy a $25,000 midsize sedan and your payment would still be about $450 a month — and that is what he or she will try to sell you.

The bigger sticker price, and longer loan, both mean more money for the dealership.

For the full scoop on the 8 tricks up your auto dealer’s sleeve, read the full article here.

Why you want to start an emergency fund today

I recently wrote an article for Mint.com on why you need an emergency fund.

An emergency fund is simply money that you keep for when stuff happens. Go through life long enough and bad things will happen. The air conditioner unit in your house could break down and you may need $2,500 to replace it. You may need $430 for a new alternator in your car. You may wake up with a tooth pain and need an $800 root canal procedure. Or even worse than all of these things, you could lose your job and be out of work for two months.

William Hammer, Jr., CFP, Vice President of Wealth Management for Vanderbilt Partners, said an emergency fund can prevent an emotional struggle from becoming a financial one.

“It’s not that the odds of something terrible happening are that great. It’s that the hardships could be devastating if you don’t have the money. An emergency fund is a piece of mind,” said Hammer.

Most financial experts say you should aim to have six months of living expenses put away. That’s often unattainable for many people so aim for three. And if you can’t do three then do what you can. The point is that you always want to have something put away for emergencies. Keep this money in a high-yield online savings or money market account and have it tied to your checking account so you can access it when needed.

Mari Adam, Certified Financial Planner and president of Adam Financial Associates, said while six months is ideal, it can be a little out of reach for most people. She said three might suffice for many and if you can’t meet that, then “something” is always better than nothing.

“Even one month is better than nothing. You need to have something put away to handle emergencies. Some people say they can’t save up six months worth, so they get frustrated and quit,” she said.

You’re not alone if you don’t yet have an adequate emergency fund. According to a 2011 survey by the National Foundation for Credit Counseling, 64% of Americans don’t have enough cash on-hand to handle a $1,000 emergency. Start one now because when you don’t have funds in place your only option may be to turn to debt.

“Most people will turn to credit cards or a home equity line of credit, if they’re lucky enough to have one when you consider where home prices are at,” said Adam Koos, CFP, President and Founder of Libertas Wealth Management.

The problem with relying on debt is you start accruing interest on whatever problem you had. If you’re tapping a credit card with a 20% interest rate to cover that $1,000 car repair and carry that debt for a year, that problem will now cost you $1,200 instead. Koos said you can “be your own credit card” by saving up the money to begin with.