January 2012 - Your Life for Less

First-Time Home Buyer? 10 Mistakes to Avoid

31. January 2012 · 2 comments · Categories: Housing

US News lists 10 mistakes first-time home buyers should avoid:

1. Not checking your credit report and score

2. Not getting pre-approved

3. Not creating a long-term budget

4. Forgetting about the hidden costs

5. Not using professional help

6. Picking your real estate agent and lender blindly

7. Thinking you’ll get everything on your wish list

8. Not keeping your feelings in check before hiring a home inspector

9. Not researching your neighborhood

10. Not considering the resale value of your home

While I’m currently a renter, I do plan to buy a home in the next few years. A home is the biggest purchase most of us will make in our lifetime. For that reason, it’s a good idea to spend some time thinking about these details.

The process of buying a home is often very emotional for first-time buyers. It’s easy to become attached to a particular home or feature, such as granite counter tops or walk-in closets. Before you even look at properties though, it’s important to get a copy of your credit reports from each of the 3 credit bureaus. You can do this for free once a year at annualcreditreport.com. You should do this about 6 months before you plan to purchase a home. It’s also a good idea to pay $20 to get your FICO credit score, which is the one lenders look at to assess your creditworthiness. These steps ensure that you will be offered a good interest rate on your loan.

When looking at your credit reports, make sure all information is accurate. This includes addresses, credit card accounts and loan balances. If you see an account you don’t recognize, or one that’s older than 7 years, submit a dispute to the credit bureau and also contact the creditor who put the account on your report. Let them know that the debt is not valid. You also want to have at least six months of on-time payments for all of your accounts. When you’re satisfied with your credit reports and score, you’re ready to sit down with lenders to get pre-qualified for a loan.

Just because you’re approved for a $230,000 home doesn’t mean you should buy one for that price. Look at your budget and determine a monthly payment you can comfortably afford. Remember that there are many extra costs involved with a house that you don’t have as a renter. These include: property taxes, regular maintenance, failed appliances, homeowners association dues, and homeowners insurance.

When you find a home you like, it’s important to hire an inspector to vet out any potential problems. He or she will look for issues with construction or mechanical systems and give you a repair estimate. If you decide you still like the house, you’ll need to factor this into the offer you make to the seller. Drive through the neighborhood at different times, day and night, to get a feel for the place you’ll be living. Is the location convenient to your workplace, grocery stores, schools, parks, etc.? Do you feel safe there?

Considering these details will save you from the most common hassles faced by first-time home buyers. By eliminating major issues before moving in, you can ensure a smoother path to your dream home.

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Set It and Forget It: Target-Date Funds for Retirement

28. January 2012 · Write a comment · Categories: Financial Health, Retirement, Trends

We’ve established that the Roth IRA is the best way to save for retirement. Now that we have a “house” (the Roth), what “furniture” (investment funds) should we put inside?

One type of fund that has grown tremendously in the last 5 to 10 years is the target retirement fund. These funds are designed to give you the appropriate mix of stocks, bonds, ETFs (exchange traded funds) and mutual funds based on the number of years until your retirement.

Most investment companies have target funds in five-year increments. Based on your age and the number of years you plan to remain in the workforce, select the fund closest to the year you plan to retire. For example, if you plan to retire in 30 years (2042), choose the 2040 fund.

These accounts are extremely easy to set up — just put all of your money into the fund and the fund manager will take care of the individual investment mix. They offer adequate diversification across a variety of industries and require very little monitoring. My favorite company to use is Vanguard, which has very low fees relative to others in the industry (0.19% vs 1.5% or higher).

These funds are extremely low-maintenance. At the outset, when you’re young and have perhaps 35 to 40 years until you stop working, they are set up to invest heavily in stock-type choices. The fund I use, the Vanguard Target Retirement 2050 Fund, invests in about 90% stocks and 10% bonds at the time of this writing. The mix of funds automatically turns more conservative by increasing the ratio of bonds to stocks as you approach retirement age.

A target retirement fund inside a Roth IRA is an efficient, low-cost way to save for retirement. The strategy is very simple: set it and forget it. You can open a Roth account for as little as $1,000. Set one up today and start putting money away for your future.

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The Best Way to Save for Retirement

25. January 2012 · Write a comment · Categories: Financial Health, Retirement, Trends

Last month in a post about how much you should save for retirement, I talked about the factors you should use to decide how much to save for this stage of your life. Among those factors were: whether you receive an employer match, your own personal calculation for how much you’ll need, and professional recommendations on the subject.

A good recommendation many retirement planners make is that you’ll need at least 80 percent of your current income to live comfortably in retirement. So let’s say you’ve committed to saving a portion of your income for your future. What’s the best way to put that money aside and let it grow over the years?

One of the easiest, most effective ways to save for retirement is to open a Roth IRA. With a Roth, you don’t get an up-front tax break like you do with a regular IRA or 401(k). But every dollar you put into a Roth now is spent tax-free in retirement. Not only are your contributions tax-free, but your earnings are as well.

Roth IRAs are also great from a mental perspective. With a regular IRA, every dollar you put in now will be a lot less than that when you take it out. You’ll be taxed at future tax rates based on your total income during retirement. So that dollar might only be 70 cents, or even 65 cents. But with a Roth IRA, your dollar now is a dollar in the future. In this way, you can psych yourself into saving more for retirement.

Investing in a Roth is a great way to hedge against future income tax increases. At the rate our federal government has been borrowing, tax rates will very likely go up in the future. You can avoid paying higher taxes by paying them at today’s rates and letting your Roth grow tax-free. If you have a 401(k) through your employer, a Roth allows you to balance your tax burden between now and retirement.

Once you have established a Roth IRA, you can withdraw your contributions penalty-free at any time for any reason. You can also withdraw your earnings for certain reasons such as medical expenses greater than 7.5% of adjusted gross income, education expenses or a first-time home purchase (up to $10,000). In this way, a Roth can double as an emergency fund or a savings account, although I recommend setting aside a separate stash of money for these purposes. I even took out a little bit from our emergency fund to set up a Roth account for my wife, knowing that in a bind I could access the money.

A Roth IRA is like a house. In that house you must put furniture — the individual funds that will make up your investment mix. In the next post I’ll talk about one type of fund that’s grown tremendously in recent years, which is my choice to use for retirement savings.

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Saving Money During Your First Job

22. January 2012 · Write a comment · Categories: Career, Financial Health

Humble Savers lists 5 ways to save a portion of your income during your first job:

Start saving
Avoid getting into debt for purchases that fall in value
Challenge yourself – set some ambitious saving and investment goals
Education – don’t stop learning
Protect your most important asset

These are some great recommendations for those just entering the workforce. When I started my first real job after college, I wasn’t used to receiving a steady paycheck every two weeks that was larger than any paycheck I’d received before. I didn’t know anything about investing for retirement, putting aside money for emergencies, or strategies for paying off debt. It was very tempting to “reward” myself by getting some new clothes, furniture, or gadgets.

Luckily, my dad taught me a little about saving as a child and encouraged me to stay out of debt, so I didn’t enter the workforce with crushing levels of debt. I started reading everything I could about personal finance and learned everything I could about how to handle finances.

One of the most important things a new grad can do is to set up an automatic savings plan. Have a portion of your income taken out each month and put into a 401(k) or IRA. If you set this up to happen automatically, you won’t even see the money and thus won’t be tempted to spend it. Because of the power of compound interest, it’s so important to start saving right away. You can think of retirement savings as “paying yourself first”, before the bills and everything else gets paid.

Some types of debt may be necessary because you’re just starting out. A low-interest car loan or mortgage fall into this category. On the other hand, going into debt to acquire the latest gadget or fashion is a bad idea. For this type of purchase, it’s best to save up beforehand to avoid paying a 20% or higher interest rate on your credit card.

Many new grads are burnt out on reading or learning after graduation. But it’s a good idea to educate yourself on the basics such as investing, how loans and interest rates work, and other personal finance topics that are relevant to your situation. A little work now will benefit you tremendously in the long run.

Consider your future needs and wants. Where do you want to be 5 or 10 years down the road? Make a plan to get there, and put it into action.

Your career is your most important asset. Without it, you won’t bring in money to make your future wants and dreams a reality. For this reason, you need to have some level of short- and long-term disability insurance in case you’re unable to work for a period of time. You also need life insurance if you have anyone who depends on your income for survival.

You don’t have to start big. Take just one of these ideas and go from there. Your future self will thank you!

Photo by michaelcrane123

How to Rebuild Your Credit

19. January 2012 · Write a comment · Categories: Credit Cards, Financial Health

In a time where millions of people are looking for work — some for months or years at a time — it’s not always easy to stay on top of mortgage payments, credit card payments or other bills. Sometimes there’s just too much month left at the end of your money. Maybe you’ve fallen behind on a bill or two, and it’s reflected in your credit score.

How do you rebuild your good credit standing after something bad happens? There are a few ways, but my favorite is to start at your credit union.

It’s easy to join a credit union. You qualify based on your geographic location, employment, military service, or some other attribute. The best thing to do is talk to them about opening a small-limit credit card in exchange for putting a deposit in a savings account. Your deposit will normally be a little more than your credit limit to cover the risk the credit union is taking on your behalf. As you use the card and pay off the balance each month, you continue to have access to the credit on your card up to your limit. You’ll start to slowly see your credit score improve. In this scenario, the card you receive is a regular credit card, as opposed to a secured card, which I’ll talk about next.

A secured credit card is the second best way to rebuild your credit. Secured cards have an annual fee — usually around $50 or $60 each year– and limits of up to $1,000. Like the method above, you must put down a cash deposit, and your deposit becomes your credit limit. As you make regular purchases with the card and pay off the balance, your credit will start to slowly improve.

Banks as well as some credit unions offer secured credit cards. The best secured cards don’t have any fees (other than the annual fee) and will graduate to a regular credit card within 12 to 18 months. Also, make sure the card will be reported to each of the 3 credit bureaus. If not, your efforts to improve your score won’t be recognized.

With either of the above methods, make sure your balance never goes above 30% of your available credit. So if you have a $1,000 limit, don’t go above $300. It’s a good idea to be safe by paying the balance in full when the bill comes each month.

To improve your score, you’ll also have to change your spending habits. Start by spending less than you earn. Then, look for ways to cut your daily expenses as well as your monthly expenses. Save the rest for retirement, or put it in your emergency fund. By having a credit card and using it responsibly, you’ll rebuild your credit over time.

When the chips are down, don’t lose hope. Using these methods will have you back on your feet sooner than you think.

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