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Good Debt, Bad Debt: What’s the Difference?

Here are two questions to ask before incurring debt.

  1. What are the benefits of taking on this debt? Avoiding all debt seems like good advice. But good debt can enhance your financial situation. For instance, loans that fund a college or graduate degree may result in a higher salary. That’s debt with a lasting, tangible benefit.

Likewise, a mortgage for a home or rental property can increase your wealth by providing the opportunity for growth of capital and income.

Good debt can also have secondary advantages, such as the potential for tax deductibility of interest on student loans and home mortgages.

Bad debt, on the other hand, generally strains your cash flow without providing an offsetting advantage.

  1. Does the cost exceed the benefit? As a general rule, good debt provides a return greater than the total amount you’ll end up paying. Caution: Remember that your total outlay will be the stated price plus finance charges. For example, suppose you need to buy a car. A moderately priced vehicle financed with a short-term loan can still have value when the payments end. That falls within the definition of good debt. But with longer terms of five to eight years, your loan might outlast the car. High interest rates and the longer payback period on “stretch” loans can bump your total outlay into bad debt territory.

Credit card debt poses the same peril. Charges you intend to pay back in full at the end of the month may not be a problem. But a restaurant meal, a vacation, or a holiday splurge can get expensive once you include the interest charged when you carry a balance on your credit card.

Good debt or bad? Recognizing the difference can lead to better money management, and a way to improve your financial situation.

Don’t Be Forced Out of a 401(k) From Your Former Job

When you change jobs and abandon vested amounts in your 401(k), your former employer has to follow IRS rules and plan provisions for dealing with your account balance. Pursuant to these guidelines, the 401(k) plan may have a “force-out” provision. That means when your vested balance is less than $5,000, you can be forced to take your money out of the plan.

Your former employer is required to give you advance notice of this rule so you can decide what to do with the money. Your choices are to cash out your account and receive a check, or roll your account balance into an IRA or your new employer’s plan.

What happens if you fail to respond to the notice? If your vested balance is more than $1,000, your former employer must transfer the money to an IRA. For balances under $1,000, you will either get a check or your former employer will open an IRA on your behalf.

Neither outcome is optimal, according to a report by the U.S. Government Accountability Office. If you receive the money, you’ll owe federal income tax. When the balance is transferred to an IRA, account fees may outpace investment returns and your balance will be eroded over time.

Protecting assets you worked for and earned is always a smart move. Call us for assistance.

Financial Tips to Follow When a Spouse Dies

The death of a spouse is emotionally and financially devastating. Making decisions of any kind is difficult when you’re vulnerable and grieving, but having a plan to follow may help. Here are suggestions for dealing with financial tasks.

  • Wait to make major decisions. Put off selling your house, moving in with your grown children, giving everything away, liquidating your investments, or buying new financial products.
  • Get expert help. Ask your attorney to interpret and explain the will and/or applicable law and implement the estate settlement. Talk to your accountant about financial moves and necessary tax documents. Call on your insurance company to help with filing and collecting death benefits.
  • Assemble paperwork. Documents you’ll need include your spouse’s birth certificate, social security card, insurance policies, loan and lease agreements, investment statements, mortgages and deeds, retirement plan information, credit cards and credit card statements, employment and partnership agreements, divorce agreements, funeral directives, safe deposit box information, tax returns, and the death certificate.
  • Determine who must be paid, and when. You’ll need to notify creditors and continue paying mortgages, car loans, credit cards, utilities, and insurance premiums. Notify health insurance companies and the Social Security Administration, and cancel your spouse’s memberships and subscriptions.
  • Alert credit reporting agencies. Request the addition of a “deceased notice” and a “do not issue credit” statement to the decedent’s file. Order credit reports, which will provide a complete record of your spouse’s open credit cards.
  • Determine what payments are due to you, such as insurance proceeds, social security or veteran’s benefits, and pension payouts. File claims where needed.

Prepaid Debit Cards Offer Benefits and Drawbacks

Prepaid debit cards, also known as stored-value cards, can be useful when you lack a traditional checking account. In an increasingly plastic-dependent world, these cards can be substituted for cash, and you can use them to pay for airline tickets, hotel stays, electronics, and groceries. Money is transferred, or “loaded,” to the card and is yours to spend until the card runs out of funds or is reloaded.

Prepaid cards have several advantages over traditional credit and debit cards. For example, if you’re traveling and the card is stolen, losses are limited to the amount on the card. In addition, because your personal banking information isn’t on the card, thieves and con artists can’t extract that data to steal your identity. Another use: Teaching kids how to budget. Some issuers offer instant alerts that monitor card activity, which is a great way for parents to see what their teens are purchasing in real time. If you’re the one who’s prone to overspending, prepaid cards offer a built-in safety net: you can’t spend more than the amount that’s loaded onto the card.

But be aware of the lack of regulatory constraints on the cards. Issuers have great latitude over fees and prepaid cards can get expensive. Depending on the card issuer, you might be charged a fee to activate the card, use it at an ATM machine, check your balance, add more money, or talk to customer support. You might be charged a monthly maintenance fee as well. Before you buy, read the fine print.

Teach Your Children This Vital Skill

Financial literacy is a vital skill in today’s world. Will your children be able to handle their finances when they became adults? Here are tips to help ensure the answer is yes.

Shave spending. Take the weekly allowance to the next level by helping your child develop a budget. Review the results to reinforce good habits.

Stress savings. Even young children can grasp the power of compound interest. A simple example is asking your child to put a dollar in a piggy bank. Offer to pay five percent interest if the money is still there in a week or a month. Make the same offer at the end of the first time period, and pay “interest on the interest” as well.

Introduce investments. Create a portfolio, either real or paper, consisting of shares of one or more stocks or mutual funds. Make a game of charting the investment’s progress on a regular basis.

Cover credit. Take on the role of lender and let your child request an advance on a weekly allowance. Charge interest.

Talk taxes. Use word search or crossword puzzles to teach tax terminology. Consider creating a “Family Economy” game using examples from your own budget.

Lessons in financial responsibility can benefit your children now and in the future. Get them started on the right path.

Do You Have Enough Emergency Savings?

A December 2015 survey by a consumer financial services company showed that 36% of the people who participated said they dealt with their most recent unexpected expense by using savings. Would you be part of that group? Here are tips for starting your “rainy day” fund.

Define how much emergency savings is enough. A good starting point is to plan for your emergency fund to cover three to six months of expenses. Another good starting point: Ask yourself how much you’ll need to cover minimum monthly expenses without resorting to credit cards or lines of credit. Your assessment of an adequate balance will vary based on your financial situation, including the vulnerability of your income. For example, a one-earner household is more vulnerable than a two-earner household when it comes to paychecks, so the one-earner family generally will need to set aside more for emergencies.

Track how much you already have set aside. Include all sources in your accounting. For instance, some companies provide payment for accrued vacation and/or sick leave to laid-off employees. If your company provides this benefit and you maintain significant balances, you may not need as much in an emergency fund to help you weather an unexpected layoff.

Decide whether to pay off bills first. Putting excess cash toward high interest credit card balances might make more sense than funding a savings account that earns a much lower rate of interest.

Keep your funds liquid. Emergency money should be easy to get at. You don’t want to have to sell investments at a potential loss or pay withdrawal penalties in order to cover an unexpected hit to your finances. Look into savings or money market accounts as places to accumulate cash.

Finance

Three Positive Steps to Financial Well-Being

While you’re gathering information to prepare your 2015 tax return, set aside time for a financial review. Here are steps to get started.

  • Compile a year-end list of your assets and debts and compare the list to last year. Are you gaining or losing ground? What actions can you take to improve your financial situation in 2016?
  • Review your insurance. Do you have disability insurance to replace take-home pay if you become incapacitated? What about life insurance – will the benefit provide enough cash to pay your family’s expenses in the event something happens to you or your spouse? Is your home protected with replacement value property insurance? What about insurance for automobile accidents or lawsuits?
  • Update your will and estate plan. What changed during 2015? Did you marry? Divorce? Have a child? Move to a new state? Receive an inheritance? All of these events can affect your planning. This year, you can leave up to $5,450,000 to your heirs with no federal estate tax liability. But that doesn’t mean you can ignore estate planning, which includes expressing your wishes for who will make decisions for you in times of emergencies as well as who will receive your assets.

For more suggestions, call us. We’re here to help.

Wedding Ring

Discuss Money Before You Marry

Couples often enter into marriage without ever having had a serious discussion about financial issues. As a result, they find themselves frequently arguing about money. If you are planning a wedding, here are some steps you can take to get your marriage off to a good financial start. Read more

Finance

Dealing with Finances After the Death of a Spouse

The death of a spouse can be a devastating experience, both emotionally and financially. As the survivor, you’ll have to make important decisions while you’re in what could be the most vulnerable and distracted stage of your life. The suggestions that follow might at least help ease your financial stress. Read more

Money

A Cash Reserve Adds to Your Financial Security

Many of us are living close to our financial limit these days. We pay our bills on time, but there’s not a lot left over. But that’s a dangerous situation. If things go wrong, your financial situation can change very quickly from adequate to critical. Without a cash reserve, you could find yourself in serious trouble. Read more