Keep the Information Flowing

Small contributions go a long way. Your donation to Consumer Action, a 501 (c)(3) nonprofit, nonpartisan organization, can help us cover the cost of research, writing, and translation of our materials. To keep our services free for those who need them. Select an amount to give.

---

---

---

---

Published: September 24, 2010
Updated: January 06, 2011

Money Management 1-2-3: TWO: Achieving Financial Goals

The “Money Management 1-2-3: Be Smart about Money All Your Life” series focuses on basic money skills at the beginner, intermediate and advanced level. Achieving Financial Goals focuses on recovering from youthful missteps, managing family finances and insurance issues such as homeowner’s, health and life insurance. Topics include budgeting and money management, insurance, saving and building assets, saving for retirement, renting v. homeownership, homeownership, mortgages and investing.

The way you manage your money in your 30s and 40s will profoundly affect the way you live out your later years. Key goals during this time should be to increase assets, build a retirement nest egg, and protect what you have. To do all that, you’ll also have to avoid the temptation to live a lifestyle beyond your means.

Updating your budget

Your budget, or spending plan, isn’t something set in stone—it needs to change along with your income, expenses and goals. Software and online tools allow you to revise your numbers quickly and easily. You can find many options by doing an Internet search for “budget worksheet” and “budgeting software.”

Make sure your income can comfortably cover your expenses. Don’t forget that savings should always be an “essential” expense in your budget.

If your income goes up, put at least half your raise toward savings. If you have debt other than a mortgage, earmark any windfall (a tax refund or bonus, for example) for repaying these debts.

If you can’t make ends meet because you have too much debt, a credit counselor may be able to help you reduce your monthly payments. To find an accredited non-profit credit counseling agency, contact the National Foundation for Credit Counseling (800-388-2227) or the Association of Independent Consumer Credit Counseling Agencies (800-450-1794).

Taxes

If you meet eligibility guidelines, you may be entitled to the earned income tax credit (EITC), which returns money to low-income workers. You must file a federal income tax return in order to claim the EITC even if your income is so low that you normally would not file. EITC income guidelines change each year. Visit the Internal Revenue Service (IRS) for more information, or call 800-829-1040.

In order to qualify for the EITC, you must have a Social Security number (SSN) for yourself and each of your children. To apply for a number, contact the Social Security Administration, or call 800-772-1213 and ask for Form SS-5.

If you expect to qualify for the EITC in the current tax year, you can ask your employer to include a share of your payment in each paycheck instead of waiting for a tax refund. Fill out IRS Form W-5 and give it to your employer.

If you find out after completing your income tax return that you owe money, do not ignore your debt. Instead, contact the IRS to arrange a payment plan if you cannot pay the entire amount all at once. You will still have to pay late fees and interest. But those who do not make arrangements with the IRS risk having their wages garnished, having a tax lien filed against them, or having valuables and assets seized.

If your tax problem is causing financial difficulty or has not been resolved through normal channels, contact the Taxpayer Advocate Service or 877-777-4778.

Saving for a purpose

First, aim to save three to six months of take-home pay set aside for emergencies. Then focus on saving for other goals.

Here are some tips for making saving easier:

Set up direct transfers on payday from your checking account to your savings account. If you never see the money, you won’t miss it.

Start saving now, even if you can only save a little each week or month. Thanks to compound interest, someone who saves smaller amounts early in life can end up with more money than someone who saves larger amounts later in life.

Take advantage of employer-sponsored savings plans, such as a 401(k), to save for retirement. The money comes out of your check before taxes are calculated, so the reduction in your paycheck will be smaller than the amount you contribute. Many employers also match employee contributions up to a limit—free money for you!

Take advantage of other tax-advantaged accounts, such as a state-sponsored 529 plan for college savings or an individual retirement account (IRA) for retirement savings. There are two kinds of IRA:

• A traditional IRA provides a tax break in the current tax year.
• Contributions to a Roth IRA are taxed now, but withdrawals are tax-free.
• Get IRS Publication 590 for the latest IRA rules.

Save at least 50% of any tax refund, gift, inheritance, or other windfall, or use this amount to reduce credit card debt.

As you make choices about where to put your money, keep timing in mind. Money that you may need soon or suddenly, such as the money in your emergency fund, should be in a liquid (quickly accessible) account. These include savings accounts, money market accounts and short-term certificates of deposit (CDs). Such accounts typically earn very little interest, but your goal here is not growth but safety and liquidity.

CDs earn higher interest than a savings account, but you must commit to leave your money in the account for a specified period, anywhere from a month to five years. If you withdraw the money early, you’ll pay a penalty. Visit Bankrate.com to compare interest rates at different institutions.

Your accounts at any FDIC-insured institution, which includes most banks, and at all federal credit unions are insured up to $250,000 per depositor through 2013. (The coverage may revert to the $100,000 limit on non-retirement accounts in 2014.) Learn more about FDIC insurance and find out which institutions are covered at www.fdic.gov. Credit union members can visit the National Credit Union Association online to get similar information.

U.S. savings bonds are guaranteed by the government, and can be purchased in denominations ranging from $50 to $10,000. You may qualify for tax savings on bonds used to pay for education. For more information visit www.savingsbonds.gov.

Individual development accounts (IDAs) help low-income families save money for education or job training, to buy a home or to start a business. Visit www.idanetwork.org to find local programs.

Choose to Save offers advice on saving for college, a home, and retirement.

If you are on public assistance, ask your benefits counselor how much you can have in savings without endangering your benefits.

Investing

Investing is different from saving. When you save, you put your money in a safe place, where you earn low interest in exchange for a guarantee that you will not lose any of your principal. When you invest, you accept some risk in exchange for the opportunity for greater rewards. Generally speaking, as the opportunity for higher returns increases, so does the risk of losing some or all of your money.

While it might seem tempting to avoid all risk, you will need your savings to grow at least enough to outpace inflation, and more if you want it to last you a lifetime. The key is understanding and managing your risk.

Generally speaking, the longer your investment timeframe and the more you diversify (spread out) your investments, the lower your risk. In other words, investing in 20 different stocks for 20 years is less risky than investing in one single stock for one year.

Many individuals achieve diversification by investing in mutual funds. Mutual funds are portfolios of stocks, bonds and other securities in which the public can buy shares. Each investor shares in the fund’s gains, losses and expenses. You can lose money in mutual funds, too.

If you save for retirement, through your employer or on your own, you will have to make investment choices, so it makes sense to learn at least the basics about investing. The Securities & Exchange Commission Investor website is a good place to start.

Even if you choose to hire a financial planner or other adviser, you should know enough about investing to be able to make educated decisions about advice you are given. Remember, many advisers earn a commission from the investments you purchase, regardless of whether or not your investments do well. There are also fee-only advisers, who provide advice but who do not profit off the purchase of investments.

Renting vs homeownership

In the U.S., the greatest source of wealth for most households is the value of their homes. In addition to building equity (ownership) in their property, homeowners benefit from valuable tax breaks that make buying a home more affordable.

The cost of owning a home includes the monthly mortgage payment, property taxes, insurance, repairs and maintenance. You’ll also need to save up a down payment before you can qualify for a home loan (mortgage).

If you don’t already own a home, consider buying one if you can comfortably afford it, and if you don’t plan to move within the next five years or so.

Learn more by enrolling in a first-time homebuyers class, offered by certified housing counseling programs across the U.S. To find a local housing counseling agency, visit the Department of Housing and Urban Development (HUD) at www.hud.gov/buying and click on “Buying a Home” under “Topic Areas.” Or call HUD at 800-569-4287.

Mortgages

A mortgage is a loan used to purchase property. If you do not repay the loan as promised, the lender can foreclose, or repossess the property.

There are fixed rate mortgages, where the interest rate and the monthly payment stay the same for the length of the loan. And there are variable rate mortgages, which may be more affordable for first-time homebuyers because they start out with a lower introductory rate and payment. Before choosing a variable rate loan, find out how high the interest rate and payment could go and be sure you can afford the increase. A mortgage can last any length of time, but 15 years and 30 years are most common.

Banks, credit unions, mortgage companies and other institutions make mortgage loans. There are also some government agencies, such as the Veterans Administration (VA) and the Federal Housing Administration (FHA), that offer special loan programs that may be easier to qualify for.

Many factors influence a lender’s decision to approve or decline your mortgage application. But in general, the more you have saved for the down payment, the less debt you have, and the higher your credit score, the more likely you are to get the loan.

Learn more at www.hud.gov/buying.

Homeownership

Successful homeownership means:

• Paying your mortgage on time.
• Maintaining sufficient homeowners insurance.
• Paying your property taxes as required.
• Staying current on dues if you are part of a homeowners association.
• Maintaining your home well.
• Being financially prepared for necessary repairs and upgrades.
• Protecting your equity and avoiding foreclosure.

Many homeowners eventually refinance their mortgage or take out a home equity loan (second mortgage). In either case, compare loans carefully, and watch out for loans that contain unfavorable terms (a pre-payment penalty, for example) or low initial payments that jump later to unaffordable levels. Check loan rates at www.bankrate.com, and borrow only from a reputable lender.

While a home equity loan or line of credit can be a good financial choice for home improvements, there are risks. If you can’t repay the loan as promised, you could lose your home. A home equity line of credit (HELOC) can be particularly risky because it functions like a credit card with a very high limit.

At the first sign you may miss a mortgage payment, contact a housing counseling agency for help avoiding foreclosure. Visit HUD website (search for “housing counseling” and your state) or call 800-569-4287.

Insurance

If you don’t have adequate insurance, you could suffer a loss that would be difficult or impossible to recover from.

These are some common types of insurance:

Auto insurance—This coverage protects you and others from financial loss in the event of an accident. Each type of auto coverage (liability or collision, for instance) is priced separately. Most states require drivers to carry a minimum amount of liability insurance. If you have an auto loan, the lender may also require collision and comprehensive coverage.

Renters insurance—If you rent, renters insurance protects you from loss or damage to your possessions due to theft or hazards such as fire or a fallen tree. It also typically includes some liability coverage for accidents and injuries that occur in your home. Renters coverage is relatively inexpensive.

Homeowners insurance—Homeowners insurance covers damage to your home and possessions, and your liability if anyone is injured on your property. Coverage varies—for example, you may not be covered for flood or earthquake damage—so be sure you understand what is included and what isn’t.

Health insurance—If this is not provided through your employer, you may be able to find individual coverage. Depending on your income and assets, you may qualify for health insurance under a federal or state program. If not, try to get coverage under a group plan, such as an association or union. Individual policies are expensive, but you can lower the premium with a higher deductible and copayment (out-of-pocket expenses).

Disability insurance—This insurance replaces a percentage of your income if you are unable to work due to an illness or accident. There is short-term disability and long-term disability insurance. Most employers provide some paid sick leave, and many provide long-term coverage as well. If yours doesn’t, consider purchasing an individual long-term disability policy.

Life insurance—If anyone (a spouse, partner, children or parents, for example) depends on you for financial support, then you should consider buying life insurance, which provides a certain amount of money to your beneficiaries when you die. There is term and cash-value life insurance—term is less expensive, while cash-value includes an investment component.

How much of which types of insurance is needed varies from person to person. Learn more by visiting the Insurance Information Institute website or Consumer Action’s insurance site.

Download File

Money Management 1-2-3: TWO: Achieving Financial Goals
File Name: MM-123 (two).pdf
File Size: 0.13MB

For More Information

Sponsors

Consumer Action’s Managing Money Project

Notes

This publication was funded by Consumer Action’s Managing Money Project, founded with a cy pres award from the Griego v. Rent-A-Center class action settlement.

Filed Under

Money Management   ♦   Mortgages   ♦  

Copyright

© 2010 Consumer Action. Rights Reserved.