Author: roger-varner

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Track Your Spending

In these uncertain economic times, it is especially wise for individuals to have their finances under control. For most, to live within one’s means is to spend less than one takes in. Seems simple enough. Most people know how much money they bring in but not as many know where it is goes. According to a recent survey, fewer than 50 percent of Americans have a budget and one in five don’t have a good idea of how much they spend on housing, food and entertainment.1 It is much easier to control how one spends in comparison to how much one makes.

 
The first step to controlling your spending is to determine how much you are currently spending. Tracking expenses could be as simple as recording all expenditures in a journal which has a date, amount, establishment, and description of each purchase. Manually tracking expenses on paper may fit the needs of some, but there are software packages out there that will do this much faster and more accurately. 
 
The different software packages vary from those installed on the computer, such as MS Money or Quicken, to those that are free online and use the cloud, Mint.com or FinanceWorks. With smart phones becoming more common, using an online service might be more beneficial and convenient as it allows you to enter purchases from the phone as you make them. Otherwise, keep receipts and dedicate a specific day of the week and time to enter them. Keeping a routine will greatly increase the chance of successfully sticking with it as compared to those who enter them from time to time when they remember it. 
 
Rebecca Cardwell, Director of Community Relations at the UVa Community Credit Union,  suggests you “begin by tracking for three months” which will give a good baseline. She also believes that “commitment is one of the hardest parts” of tracking spending.   Set a goal of three months and provide a small incentive to yourself if you reach it. Understanding where your money is going is the foundation to nearly all other personal financing matters, so it is important you follow through on tracking.
 
When setting up the software, you have to decide which categories to choose from when assigning expenses. Rebecca Cardwell believes, “start more detailed and then phase to less detail” when it comes to categories and “be sure to separate eating out from eating in.” An example of increasing the detail could be that instead of using the category “transportation” to capture all transportation expenses, break that down further to car loan, car insurance, car maintenance, fuel, transportation, and other. As time goes by, some categories that you find are being used more than others may need to be further broken down while those that go unused can be eliminated.
 
During the process of tracking their spending, many people are surprised by how much money they spend on certain items. Whether it is what you spend on vending machines, eating out, or iTunes downloads, little charges can add up to serious change. By having details on spending habits, these spending leaks, as Caldwell refers to them, can be identified. Then you can decide if the benefit you are getting is worth the expense. As Rebecca Caldwell says, “it’s all about choices.”
 
Choosing what categories to spend money on leads into the next financial step, which is establishing a budget. The UVa Community Credit Union provides educational classes to help individuals learn and understand these basic financial skills. With just under 5,000 students going through their educational program last year, it is something to consider if you want to learn more on this topic. The credit union industry lobbied hard for the Virginia educational requirements that all high school diploma recipients be required to take a personal finance class as part of their k-12 education.  While the future generation may have a better understanding of personal finances, it is never too late to learn and help shake off some of those nasty financial habits picked up over the years.
 
1 The National Foundation for Credit Counseling. (2012) The 2012 Consumer Financial Literacy Survey. Washington, DC: Retrieved from http://www.nfcc.org/newsroom/FinancialLiteracy/files2012/FLS2012FINALREPORT0402late.pdf
 
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Inflation

There is a saying that the only two things inevitable in the world are death and taxes. A close runner up taking the bronze medal would have to be inflation. 

Inflation is defined as a general increase in prices and fall in the purchasing value of money. The Bureau of Labor Statistics tries to measure inflation with the use of the consumer price index (CPI), which is a weighted average for a basket of goods and services the average American urban consumer consumes. 
 
Many Americans can still remember the high rates of inflation of the 1970s into the early 1980s where the cost of nearly everything from groceries to gas to automobiles went up year after year at rates in excess of ten percent a year, putting a strain on the family budget. With the current federal budget deficits and national debt level reaching new heights, there are those who predict an increase in the inflation rate. There are some steps to help protect you and your family from inflation.
 
A dollar today is worth more than a dollar tomorrow so preserving the purchasing power of today’s dollar is important. There are investments that are considered traditional stores of value, which would include items such as gold, real estate, and stocks. Gold in recent months traded as high as $1,800 an ounce, which means a relatively small amount of gold can store a relatively large amount of value that can fit into home safes. 
 
Real estate, such as a home, is a good investment as it serves two purposes: A hedge against inflation and providing shelter to live in and call home. While the price of homes is closely correlated to interest rates, which usually move in the same direction as inflation, the benefit comes from the reduced risk exposure to rent rates. Rents will go up in an environment of high inflation, but the fixed rate mortgage on a home stays the same regardless of inflation. The average American household spends roughly 30 percent of its income on the mortgage. Buying a home will lock in 30 percent of their expenses from the effects of inflation.
 
Stocks are another good investment to protect against inflation. While businesses also will see an increase in the cost of their goods, business that are able to pass that cost onto consumers who will be in the best shape to preserve the purchasing power of the investment. These businesses are those whose core concentration are in commodities such as oil, grains or metals, which allow them to have pricing power even in an inflationary period. 
 
Decreasing one’s spending is another way to help weather the effects of inflation. Spending can’t be measured simply in terms of dollars, as inflation will have its hand in this. Rather it should be measured in the amount of goods or services you purchase. The number of gallons of gasoline filled into the car tank, kilowatts of power the home uses, number of nights spent in a hotel, or the meals eaten out are a measurement of one’s spending habits. Looking for ways to decrease these spending numbers can help when inflation drives up the prices. 
 
Buying a more fuel efficient or reliable car, replacing the 15 year-old electric hot water heater, taking more local trips to parks for recreation, and learning how to enjoy cooking at home will reduce the goods and services consumed. 
 
Ben Franklin once said, “An ounce of prevention is worth a pound of cure.” Conducting routine maintenance on the car, home and even one’s body can keep them operating in tip-top performance and efficiency. Cars can gain increased miles per gallon simply by keeping the tires properly inflated and the oil changed. A home’s heating and air ventilation systems work more efficiently by changing the air filters and having them checked out once a year by a technician. Exercising and getting a yearly physical can reduce health care expenses and by diagnosing a problem earlier when it is less costly to correct. 
 
Inflation is a necessary evil in a modern capitalistic economy for economic growth. While it is the Federal Reserve’s mission to keep inflation at a low stable rate, you should still be proactive to take steps to protect yourself from the negative side effects of inflation. Before liquidating the retirement account to buy a pot of gold, be sure to speak with a financial adviser for investment advice.
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Five Errors When Reporting Taxes

The Internal Revenue Service (IRS) and its agents are not known for their soft and compassionate side. Most people view the IRS as the agency you don’t mess around with and for good reason. The IRS is part of the Treasury Department and has been given legal abilities to ensure that their job of collecting taxes for the federal government is carried out. The deadline for filing federal tax returns this year was extended by the IRS to April 17th which is only days away. Those who have put off filing their tax returns will be scurrying at the last minute to avoid penalties for filing late. When taxes are done hastily, many filers will make some common errors that will cost them by increasing the likelihood of an audit or subjecting them to penalties. There are five common mistakes you should know about to reduce the likelihood of falling for these pitfalls.

The IRS uses a tax ID number to identify a person or entity. For most people this number is their Social Security number, which the IRS then uses to tie the financial world of that person together. In addition, many tax credits are tied to the tax ID number with one of the most common being the Child Tax credit. It is a common error of entering in the wrong tax ID number or not one at all, which will flag the return for a closer look. In the case of a Child Tax credit, a blank or incorrect number could allow the IRS to disallow the credit being claimed.  Take the time to review these tax ID numbers to be sure they are accurate.

Another common error on tax returns is simple math miscalculation. There are many addition and subtraction calculations in the process of determining a tax liability or refund. With each step is the possibility that an incorrect key will be pushed or a math mistake will occur. With the increased usage of online tax preparation software, the chances of math miscalculation are reduced but at the same time the chance of keying errors rises. If filing on paper, be sure to double-check the math. If using software, be sure to double-check that the number on the screen matches your statement. 
 
Overlooking unearned income is another error that is common among filers. Remember the first common error regarding the tax ID number? The IRS uses this to know just how much money was earned on your w-2s and 1099 forms such as 1099-INT or 1099-DIV. These statements should be collected and used to complete your 1040 form. Omitting this additional income won’t slip by the IRS, as they know about it already and that only increases the likelihood of an audit due to account discrepancies. When receiving tax forms from the various financial institutions, be sure to set them aside for tax preparation instead of throwing them away or filing them.
 
It is a common mistake for filers to fudge the numbers. This is where the filer believes they spent the money and wants to claim it as a deduction but they aren’t sure of the true number. Without complete and accurate records, many filers will guess or, even worse, inflate the figure in the hope of getting the credit. The IRS is not about guesses or hunches, as they will require the filer prove everything they are trying to claim. Take the time to dig up the records to provide an accurate number and if you are unable to uncover all of the records, only deduct those that can be proven. This type of error comes with some steep penalties that add up fast, so why risk it.
 
The last common error is forgetting to sign the return. Your signature is required at the end of the 1040, which states that you are declaring the return to be complete and true to the best of your knowledge. The IRS requires this so they know the filer’s part is done and that the filer is responsible for the return should the IRS find anything wrong with it. While not likely to cost the filer money besides postage, not signing a return will drastically increase the time it takes for the return to be processed. When the return is finalized and complete, be sure to sign it before mailing it out.
 
These common errors can result in costly mistakes when filing tax returns. Take the time to review your return, as a little bit of time spent now will save headaches and possibly money later. And, as always, be sure to check with a professional tax advisor if you have any questions or wish to receive tax help.
 
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Earthquake Insurance

Many Virginians can remember where they were at 1:51 pm on August 23, 2011. That is when Virginia was rocked with its largest earthquake in a century. The epicenter was located outside of Mineral in Louisa County, but it could be felt along the east coast from Georgia to Canada.  When the shaking began, the idea that it may be the result of an earthquake was not the first thing that came to mind.  After all, our region is not known for earthquakes like California or Alaska. 

However, after the shaking stopped, people began looking around to see what, if any, damage had been done to surrounding structures including their own homes. Those who unfortunately found damage to their homes also found out that normal homeowner insurance policies do not cover earthquake related damages. In order to be covered for earthquake losses, an earthquake insurance endorsement must be added to the home policy or a separate earthquake insurance policy needs to be purchased on the side. Insurance companies received a flood of calls with questions in regard to earthquake insurance after the earthquake, so much so that insurers put a freeze on issuing new earthquake policies after the quake and many wouldn’t lift the freeze for 30, 60, or 90 days.
 
Virginia earthquake insurance is not a big segment of the insurance industry, accounting for barely $10 million in premiums in 2009 and covering just two percent of Virginia homes. Even in an earthquake prone area like California, only about 1 in 8 homeowners are covered from earthquake loss. Earthquake insurance normally covers damage from shaking or trembling of the earth, but routinely excludes losses caused by landslides, erosion, tsunami, or volcanic eruption, even if an earthquake caused them to happen.
 
Earthquake insurance deductibles work differently that traditional deductibles in that there is not a dollar amount assigned to them. Instead, the deductible is a percentage of the insured amount. Usually two percent is the lowest deductible an insurance company is willing to extend, so if the home is worth $200,000 and has $200,000 coverage then there would be a $4,000 out-of-pocket deductible for the homeowner to pay before the insurance company begins to cover losses. Two percent deductible is on the low end, with policies routinely going up to 10, 15 or 20 percent. On this same home, that 20 percent deductible turns into $40,000 the homeowner pays first before insurance kicks in.
 
The level of deductible greatly swings the premium on earthquake insurance. Premiums could start at $0. 50 per $1,000 insured and go up from there as the deductible falls. Premiums in Virginia are roughly a sixth of that for the same coverage in California, where earthquake insurance is more common. In addition to location, deductible percentage and coverage amount, the construction of the structure also will have an impact on the premium. Earthquakes tend to damage masonry buildings, especially unreinforced masonry than their lumber-built counterparts. A brick home may pay roughly 20-80 percent more due to the increased likelihood of an insurance claim. 
 
What is the likelihood of another sizeable earthquake striking Virginia? Virginia is considered to have a moderate earthquake risk in that there is a 10-20 percent chance of a magnitude 4. 75 or higher on the Richter scale every hundred years. With this reading area being close in proximity to the Central Virginia Seismic Zone, which generated last year’s quake, there is a good chance that it would be felt here.
 
In determining if earthquake insurance should be added to the existing home insurance, homeowners need to balance their risk level with the premium price. If you wish to discuss earthquake insurance in more detail, please contact your current home insurer who should be happy to answer your questions.  Since the earthquake occurred less than a year ago, they no doubt are well versed on the subject!
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The Importance of Estate Planning

300Many people believe that estate planning is only for the wealthy. A person who owns real estate, stocks, bonds or personal effects has an estate. Everyone should have a will, as it dictates how and by whom one’s final wishes are carried out when it comes to their estate. Nobody expects to die today or tomorrow, as death is always seen as far off in the future. The thought of one’s own mortality is not something that people like to think about, as if by ignoring it somehow reduces its likelihood. What happens if someone was to die without planning for it?

 
In Virginia, if someone dies intestate or without a will, a court decides how and to whom assets of the deceased will be distributed. There are some accounts, such as life insurance and 401(k)s, which have a set beneficiary so they have a little bit of planning already built in. The remaining items will be distributed according to law, which may differ from the requests of the decease. The order goes first to a spouse unless there are children from a former marriage. If there is no spouse, then it passes to the children or to the descendants of the children. If there is no spouse or children then it passes to the parents. If the parents are deceased, it then goes to the siblings or descendants of the siblings. If the court still cannot find a relative by this point, then half will go to the closest maternal relative and half to the closest paternal relative. 
 
The courts are not always the fastest at distributing estates, as notices have to be sent and searches must be made. By creating a will, one decides which assets go to whom, how it will be distributed and when. This takes the decision out of the courts and puts it into the individual’s hands. The will determines who administers the process of distributing assets.  The problem is that not everything in an estate is measured in dollars.  For example, if parents were to die without a will and were survived by young children, the courts will decide who receives guardianship of the children. The parents could have made their wishes known in their will about who they want to raise their children in the event of their demise. Children will have a hard enough time dealing with the loss of their parents. Why add to it by leaving an uncertain future ahead of them as different family members fight for custody for months or years to come?
 
Many times problems can also arise within a family as to who gets what as far as personal effects. Having a will can create order to what otherwise can become an unorganized chaos of grab and take before the courts have an opportunity to step in. People are more willing to accept the written words of a will that embodies the final requests of the deceased compared to accounts of “he/she/they said I could have it.” This is particularly important for items such as family heirlooms in which many members of the family are vying to possess it.
 
Taxes should be considered when planning one’s estate, especially should the estate consist of a large sum of money, as estate taxes can be as high as 55 percent. This amount varies year by year, but the majority of Americans are excused from estate taxes, as there is normally an exemption for the first few million of the estate, but this too varies year by year. 
 
Many websites will try and sell cookie-cutter will templates so you can create your own will, but be wary of these. The ability to talk to an individual to hear what and how you wish to leave your estate can lead to a personalized and more accurate will than a template could provide. In addition a will that is drawn up in person with competent legal advice is likely to hold up better in a court of law should it be challenged. If you do seek out legal advice, choose individuals whose primary practice is estate planning, as they will be the most versed on the subject and able to do the work in the shortest amount of time, which is important when you pay by the hour.
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Mortgage Interest Deduction

The Constitution was amended in 1913 to include the sixteenth amendment, enabling Congress to levy a tax on incomes from any source. Certain tax rules were first put in place that enabled the deduction of expenses, namely interest on debt payments. Herein lies the birth of the present day mortgage interest deduction to the IRS code that has survived for nearly a century. In the beginning, federal income taxes only applied to the top one percent, but this has been broadened to encompass more Americans. 

 
The American dream is built on the notion of a home ownership society. The mortgage interest deduction has certainly helped bring the cost of home ownership down, enabling more of society to participate in the dream. It does this by giving a homeowner the ability to deduct the interest expense on their home from their income to arrive at a lower tax liability. This translates into an average tax savings of over $3,000 dollars a year. However, the tax savings to the homeowner is also seen as an expense or cost to the federal government. With Washington currently borrowing thirty six cents of every dollar it spends, there has been an increased focus on cost saving measures. That has included the elimination of the mortgage interest deduction, which equates to roughly $100 billion dollars a year.
 
The critics of the mortgage interest deduction see it as being a perk for the rich and encourage Congress to eliminate it. However, it should be noted that the one million dollar upper limit on mortgage deductions limits its impact on the rich and ensures that it is not abused. With 75 million homeowners in America, more than half of them take the mortgage interest deduction demonstrating that it benefits more than simply the rich. Currently homeowners pay between 80 to 90 percent of all federal income taxes, but with the elimination of the deduction that rate shoots up to nearly 95 percent. 
 
Eliminating the mortgage interest deduction would result in some quick cash for Washington but it would have negative consequences.  It is estimated that home values in America would decrease by 15 percent, as it would become more expensive to own a home. After the recent real estate downturn many homes became underwater, where the home’s value is worth less than the loan on it. Now imagine homes across America decreasing an additional 15 percent. How many more underwater homes would that create? The consequence of decreased home values will hit each community as many local governments are funded by local property taxes. Many local budgets have already been cut to the bone with the recent real estate downturn, but how would they cut an additional 15 percent of their budget?
 
Congress is currently looking at extending the payroll tax cut for an additional ten months as it would put an additional $1,000 a year in a worker’s hand that otherwise would be put into entitlement trust funds. Rhetoric flies as to how much that money means to a worker and questionnaires of what would you do with an extra $40/week are circulating on the Internet. Many homeowners would look at the elimination of the mortgage interest deduction as a tax increase of over $3,000 a year and would be hit hard as they would need to find $120/week elsewhere to cut back on. To cut over $3,000 is no easy feat when you consider that the average yearly grocery bill for two people is $2,694, the average family’s annual entertainment expense is $2,698, and the average family’s car payment is $3,269. The other option would be to sell one’s home, which would push more and more Americans into rentership and continue the recent decline in America’s homeownership rate.  
 
Mortgage interest deduction has been part of the tax system from the beginning and a very popular component of it. The effect of eliminating it in one fell swoop would have across the board consequences from local economies to the national economy. The damage it would cause the already fragile real estate industry could easily push America into a recession. 
 
While the idea of eliminating the mortgage interest deduction is being thrown around for cost savings, the political and economic implications of doing so should greatly outweigh the savings. While the deduction is approaching its 100th birthday, its time may soon be coming as Congress wrestles with record deficits. 
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Threats of Identity Theft Through Social Networking Sites

Social networking and media has become a part of nearly everyone’s life with sites such as Facebook.com, Twitter.com or Linkined.com.  Having an online profile allows for easy communication among friends, family and business associates.  The sites create an almost intranet feeling experience where nearly all needs of the user can be met without leaving the social site.  While many people understand that the act of surfing the web has a threat of identity theft, these cyber hangouts create a false sense of security that everyone is on there for the same reason—for social contact. 

Identity thieves are on the search for any useful identifying information about a perspective user.  Social Security numbers, date of births, present mailing address and phone numbers are the prime information they are after.  This information does not have to be obtained from the same source, as they may store it in a database while continuing to gather a user’s overall identity profile from multiple sites and sources.  This information can be used to create a credit facility in the user’s name without their knowledge and then max it out leaving the user to deal with the mess.  Other information that may not seem critical can be used for other purposes, such as answering security questions to financial institutions the user already has assets in or credit with.  This information could be something as simple as the user’s dog’s name, the high school they attended or their mother’s maiden name. 
 
Information can be obtained from users who have little to no privacy security features turned on, which allows anyone with a computer to take a glimpse into their personal lives.  
 
Users should turn on the privacy features that restrict access to their information to only users and members that the profile owner knows and trusts with the access.  Identity thieves have been known to create fake accounts and trying to befriend/follow/link to users in an attempt to by-pass the privacy features the users have set and begin viewing information on their profile.  Do not accept an invite from someone that is unknown to the user no matter what his or her profile picture may look like.  These fake account users may then send a message containing a link or file with the intent of infecting the computer with spyware and/or malware.  The link may also direct the user to a phishing website that emulates another website that requires the user to enter their username and password into.  
The phishing website will connect the user to their website and log them in while collecting their sign-in information along the way.  Be sure to look at the top of the browser to confirm that the website’s address is the intended one.  With the login information identity thieves can login and obtain all the information that the user has uploaded to the site either in the profile, inside of messages, or in notes.  Users also tend to use the same passwords for multiple sites or passwords that are similar.  Identity thieves will try to use this login information to access additional sites such as email accounts or to give their password cracking software an incredible head start.  
 
Social websites, just like the rest of the Internet, is full of identity thieves that are on the lookout for easy targets.  Be mindful of what information is divulged onto social sites and that every possible security measure be taken.  Being informed and proactive about security threats can be just as important and effective as having security software. Couple an informed user with modern security software, and identity thieves are likely to move to the next potential target.
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Savings Strategies

In today’s economy, having an emergency savings account can help you sleep a little better at night knowing it provides you with a fiscal security net. Saving for emergencies doesn’t have to be difficult as there are many ways to do so without altering your lifestyle all that much.  Here are 13 simple tips to build up your savings account. 

Automatic Savings and Bill Pay. 
Set up an automatic draw on your checking account to be transferred into the savings account. This way you can think of it as paying a bill. You don’t even have to remember to do this each month as financial institutions make it easy to setup this service online through their bill pay option. 
 
Pay Yourself When a Debt Service Ends. 
Once you pay off a car or a payment plan, continue to pay that debt service amount into your savings account. Your standard of living already assumes that money is spoken for each month so this gives you a good opportunity to sweep those funds into savings.
 
No Impulse Buying. 
Many of us are guilty of going into a store and walking out with an item or items that we had no intention to buy. These impulse buys can add up and many times are for items we don’t need. Before making a purchase, make it a rule to “sleep on it” so you’ll know if it is something that is really needed or if the impulse moment has passed.
 
Keep the Plastic at Home. 
Having a credit card in our wallet enables us to think about purchasing items as if we had the entire credit limit in our hand. Those who use credit cards to make purchases have been found to spend more than if they had to pay by other means. Credit cards makes it too easy to spend money that one doesn’t have so keep them at home and use them only when absolutely necessary.
 
Budget the Fun. 
Cutting fun out of your life to maximize savings can lead to a dull lifestyle.  Entertainment provides benefits for both our mental health and state of mind and it keeps our life from being too dull. Budgeting for entertainment expenses enables you to be proactive in the amount you spend and avoid a lapse in judgment to just have fun no matter the price.
 
Keep the Right Money Mix. 
Many checking accounts don’t pay interest. Tally up two months of expenses and that should be the upper limit balance to be kept in a non-interest bearing checking account. Transfer the excess amount into a higher yielding savings account where those excess funds can earn interest. 
 
Save the Small Purchases for Larger Ones. 
To see savings in action and the benefit it holds, try this exercise. Identify a small routine splurge, such as an energy drink, and try to forgo it in exchange for something larger, such as tickets to a sporting event. Keep track of each small splurge that you gave up and once they total the price of those Cavalier basketball tickets, use your savings to enjoy the game!
 
Reward Saving Benchmarks. 
To provide an incentive for saving, reward yourself when you reach a specific saving benchmark. For example, make a rule that for every thousand dollars saved, you can spend a hundred dollars guilt free on whatever you wish. 
 
Cut Back on the Window Shopping. 
Window shopping leads to impulse buying so remove the temptation. Go to stores to make purchases based on a predetermined list.
 
Respect the Savings.
Think of the savings account as someone you care about. Don’t abuse it by making excuses to spend the money on non-emergency items. If you want the money there for when you need it the most, be sure to respect it by keeping it as an emergency fund only.
 
Add a Little Buffer.  
Financial institutions make it so easy now to do every conceivable financial transaction through one firm. This can make our lives easier but can also make it a little too easy to think of the emergency savings as just another source of funds for that big television. By keeping the emergency savings in a different financial institution, you can establish a buffer of two or three days for a money transfer and that will give you time to rethink your purchase.
 
Enjoy the Power of Compounding. 
Albert Einstein once said, “The strongest force in the universe is compounding interest.” The ability to generate interest off of previously earned interest can generate a snowball effect of interest gain. Time is a major component of compounding interest. The sooner you begin to save, the more of an impact it will have.
 
Make Saving Mandatory. 
Add savings to the list of “death and paying taxes” as inevitable items you must do in your life. This way it becomes an item that you accept as something that you must contribute towards but you get to reap all of the benefits.
 
Hopefully these saving ideas will help you create an easy to follow savings plan to establishing that elusive emergency fund that we all should have. 
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A Common Money Dilemma: Payoff or Invest?

Personal finance can be defined as all financial decisions and activities of an individual, including budgeting, insurance, savings, investing, and debt servicing among other things. It’s been said that money makes the world go round and yet personal finance is something many learn from their parents and friends, through word of mouth, or tidbits of information found in fine publications such as this. Recently Virginia has required that financial literacy be part of the high school curriculum that all students must complete before graduation. By learning financial decision-making skills early, they will be better prepared to tackle some of the common money dilemmas that adults face every day.

 
One such dilemma is—do I pay off a credit card or fund my 401(k) with my excess funds? The answer is not simple and varies from person to person depending on their circumstances. However, there are some steps you can take to figure out which option is best for you.
 
The first step is to gather the information on all the variables. These include the interest rate on the credit card, any company 401(k) matching details, the historical return of a diversified 401(k) plan, yearly salary, and personal tax bracket rate. 
 
Keeping that in mind, let’s create a scenario to demonstrate how to determine which answer makes the most financial sense for you. 
 
Today the average American credit card carries an interest rate of about 14 percent so we will use that as the credit card interest variable. Companies vary greatly on their 401(k) matching programs, as some will match 100 percent on the first three percent the employee puts in while another may match 50 percent on the first six percent the employee contributes. For the sake of our scenario, we will use a company match of 50 percent on the first five percent the employee contributes as the variable in this calculation. The performance of 401(k)s will vary year by year depending on market conditions, but using the historical average of eight percent return in a given year will provide a good rate of return over the long term. This person will have an income of $48,000 per year or $4,000 per month in gross salary. The personal tax bracket in this scenario will be 30 percent, which will be the combined federal and state taxes. 
 
With these variables one can compute the monthly payment of each choice. The 401(k) will have five percent of the monthly income ($4,000) that translates to $200 a month, with a company match of $100 for a total of $300 a month into the 401(k) plan. The credit card option has to be paid with after-tax income or take-home pay so the same $200 a month becomes $140 a month after-taxes that can be applied toward the credit card. From the beginning it would seem like the $300 a month of increased assets is preferable to the $140 decrease in debt. This is where the different rates of interest come into play, as there is a time value of money consideration. 
 
The 401(k) option of $300 a month for 3 years (or 36 months) growing at eight percent a year calculated monthly results in a 401(k) balance of $12,161. Should there have been zero growth in the market, however, the balance would only have been $10,800 and even lower should there have been negative growth. To get to a number that is comparable to the other option we will then calculate the after-tax balance to be $8,512 by taxing the $12,161. 
 
The credit card option of $140 extra a month applied to the balance over 36 months would result in a savings of $6,219 via a $5,040 reduction in the balance and $1,179 in reduced interest. These savings are guaranteed and not market dependent but may vary if the interest rate on the card changes. While this result shows that over a three-year period the 401(k) option results in a larger balance than the credit card savings, over the long run the higher rate of the credit card interest will overtake the 401(k)’s rate of return. For this example the credit card option would overtake the 401(k) during the 134th month and then proceed to outpace the 401(k). 
 
In our scenarios, this individual would be better off to apply the extra funds at their disposal towards paying off the high interest rate credit card and then shifting to the 401(k) when the credit card is paid off. There are many variables in these calculations so the decision outcome may differ, but educating oneself in personal finance always will result in a positive value through the knowledge gained. Seeking the advice of a financial advisor is always recommended if you are not sure of your calculations or simply want a second opinion.
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It’s Time To Put Your Fiscal House In Order

When discussing personal investments, stocks, bonds and 401(k)s come to mind. It’s true—these are definitely considered investments, but the largest investment that an American family has tends to be their home. The difference between your home’s current value and the balance of any liens against it represents your home’s equity. It is this equity that can be borrowed against or accumulated by either paying down the liens/loans or enjoying the appreciation that homes have traditionally experienced over the long run.

 
The equity in a home is not liquid like money in a savings account, as it is more difficult to access and sometimes requires the sale of the home to access all of it. While selling a home to acquire its equity might sound extreme, under some circumstances, such as the onset of retirement and downsizing to a home that can be bought outright, it may be an appealing idea.
 
The ability to own a home outright also can be accelerated by applying a little extra toward the principal with each mortgage payment. A good way to do this is to round the mortgage payment to a higher number, so if your mortgage is $1,267, you pay $1,300. This extra thirty-three dollars a month can result in significant savings over the term of the loan through the reduction in compounding interest. Be sure to check your monthly statements, however, to confirm that the extra payments are being applied to principal and not simply being credited to the escrow account.
 
It is important to know the terms of your mortgage including the interest rate, current balance and estimated maturity date. Understanding these terms allows homeowners to keep their eyes out for the potential to refinance. Lenders today have tougher loan-to-value requirements than in the past and this criteria has been the largest hurdle to refinancing.  If the current value of the home meets the loan-to-value requirements then serious thought should be given to the savings that today’s low interest rates are mostly likely to create over the original mortgage rate. Even with closing costs factored in, it is possible to refinance at a lower interest rate and receive a lower monthly payment or the same monthly payment but a closer maturity date. 
 
Trying to refinance and then finding out that your credit score is undesirable will halt the process or lead to higher interest rates. Checking personal credit scores and histories are something that should be done even if applying for a loan is not on the horizon. Clearing up incorrect information or correcting poor credit takes time but starting as early as possible leads to a quicker resolution and better credit score. The three credit reporting agencies are Trans Union, Experian and Equifax. Congress has mandated that individuals be allowed a free copy of their credit report, but not their credit score, from each agency once every 365 days, www.annualcreditreport.com. Be wary of other sites that claim to give free credit reports and scores as their fine print usually requires a subscription to a paid service that they will waive for the first month or two but later will show up on a credit card statement and may go unnoticed for months.
 
In addition to principal and interest, a mortgage payment usually consists of escrowed items such as home insurance premiums, private mortgage insurance premiums and real estate taxes. It is a good idea to review these amounts to determine if there is any saving potential.
 
Shop around for home insurance once a year or two to be sure that the rate being paid is competitive and if it is not, consider switching home insurers. Private mortgage insurance (PMI) is usually required on loans that were originated with greater than 80 percent loan to value. This monthly payment can be cancelled once a homeowner has paid the loan down more than 20 percent or when the home has appreciated to the point where the loan represents less than 80 percent of the current home’s value. 
 
The lender will require an appraisal paid by the homeowner to confirm the home’s current value, but the savings can be recouped in a few months. Real estate taxes are assessed on the home’s value at a set rate determined by the home’s locality. While the rate is not negotiable, the home’s value is and can be done during the assessment period. The locality will notify the homeowner of the assessed value and instructions on how to appeal if the homeowner does not agree. This requires that the homeowner make the case that their home is being over valued and to cite facts in support of their claim. 
 
Mortgage payments tend to be a family’s largest monthly expense but they should also be looked at as an investment. It’s important to take an active role in the management of your home investment as a little bit of savings in this category really adds up. So when considering your portfolio of personal investments, be sure to include your home in the mix as it properly belongs there.