loans and credit

Debt has a bad reputation, and rightly so in most cases. Debt causes problems for people that can make managing their finances extremely difficult. However, there is some debt that is hard to avoid but a necessary part of life for most people. This debt, when managed properly, is actually good debt, and it’s what the credit markets are designed to provide. You should be able to divide your debt into good debt and bad debt and work on eliminating the bad debt and effectively using your good debt.

These three categories of debt should generally be considered good debt. Of course, every person’s financial situation is different is some people shouldn’t be looking to take on even “good” debt right now. For those in a stable financial position, these areas should be considered understandable for carrying debt.

– Home Mortgage: This debt obviously isn’t good for everyone, as we can see from the millions of foreclosures this year. However, home ownership is a worthwhile dream and most people aren’t in a position to pay cash for a home. Mortgage loans are nice because they create a tax write off for homeowners. Managing mortgage debt is vital though, and that’s where so many homeowners and lenders have run into problems over the past two years. To keep your mortgage debt manageable, do the best you can to secure a payment that you can afford without stretching your budget excessively. Save before you pay so that you can make a down payment to reduce your monthly payment. If you can make a 20% down payment, you can save money by not having to purchase Private Mortgage Insurance (PMI). In short, buy only what you can afford.

– Education: An investment in a college education is an investment in yourself and can improve your financial position for the rest of your life. As a parent considering how your children should finance their education, it’s tempting to avoid student loans at all cost. However, student loans are a much more attractive financing option for parents than cashing in retirement accounts or downsizing to a smaller home. The best thing a parent can do is to save what they can while their children are growing and then take advantage of financing available for students, including grants, scholarships, and low-interest loans.

– Auto Loan: Most people will agree that mortgage loans and student loans are understandable debts to carry, but some disagree with car loans being considered good debt. However, many people don’t have thousands of dollars to pay cash for a car without depleting emergency funds, liquidating retirement accounts, and putting themselves in a tough financial position. A car is a necessary item to own for most people, but it’s important to be smart about the car loan you take on. Just because you need a car doesn’t mean it needs to be a deluxe SUV or a sports car. Buy within your means with a car payment that you can afford and make a down payment if possible to reduce your monthly obligation. Shop around and remember that new cars lose between 10 and 20 percent of their value the minute you drive them off the lot.

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Unemployment statistics are in the headlines constantly as more and more people lose their jobs. There is a growing segment of the population though that has remained employed throughout the recession but that is generally unhappy at work. According to surveys conducted earlier this year, 41% of Americans are unsatisfied with their jobs and 66% of Americans are unsatisfied with their pay. Being unhappy at work can make for long days, but it can also lead to problems in areas of your life that aren’t directly related to your job.

Once the job market improves and business start hiring again, many people will be considering a career change. If you’re unsatisfied with your current job, think about the factors that make you dread going to work. Here are some jobs that you might consider if you’re looking for an employment situation with a high level of employee satisfaction:

– Adult Education/Consulting: In many teaching situations, the people listen to you are there because they want to learn something. If you can make the learning process interesting, useful, and fun, you’ll find a great deal of appreciation for the job you’re doing. A recent survey showed that 60% of on-the-job trainers and educators are satisfied with their job. The job requires a positive attitude and a level of comfort when it comes to speaking in front of people.

– Therapy: Therapy is about helping people with problems gain strength in areas of weakness. Many people think of therapists as counselors who give advice and listen to other people’s problems and this is one type of therapy. However, areas like physical therapy, occupational therapy, and speech therapy have seen sustained growth over the past several years and that trend is likely to continue. Many of these types of therapists set their own work schedules and once they are established, they are able to hand-pick the clients that they work with. Nearly 60% of various types of therapists consider their jobs low-stress according to a recent survey.

– Software Development: Developments in technology have opened new doors in the software world and many software developers and architects have the ability to work from home and enjoy flexible schedules during the week. That doesn’t mean that there aren’t deadlines that need to be reached but most software developers feel like they enjoy a high level of independence.

– Entrepreneur: Starting a business of your own can be one of the most challenging undertakings of your career, yet it can also be one of the most rewarding. One of the biggest reasons that so many people start a business of their own is simply to get out of the rat race. No more rush hour traffic, watching the time clock, filling out reports for the HR department, and so many other mundane tasks that people dread about their jobs. It takes someone that can motivate themselves and work with less accountability in order to start and run a successful business. Starting a business can be risky, but many who take the leap find that it’s just what they were looking for in the career satisfaction department.

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A survey recently about what people are doing with their 401K balances when they leave their job revealed disturbing results. Millions of workers make the choice to cash out on their retirement plans when leaving a company, sacrificing the potential for tax-deferred growth, paying IRS penalties, and essentially making the decision to start over on saving for retirement. It’s easy to blame the economy and the tough time people are having making ends meet on this trend, but the survey results have been the same since 2005.

The trends show that young people are the most likely to cash out, probably because balances are smaller and they feel like they have more time to start over and rebuild. However, it’s younger workers who are giving up the most when they cash out thanks to the power of compounding returns. Of workers in their 20’s leaving jobs, 60% currently are cashing out their 401K balances.

Whenever leaving a job with a 401K, you have a choice of what to do with the funds that are fully vested and in your name. The choice you make for your retirement dollars will have a big impact on the lifestyle you’re able to enjoy during your retirement. Here are the choices available, in most cases, when leaving a job with a 401K.

– Cash Out: If you’re under age 59 and a half, the IRS is going to charge you a 10% penalty for cashing out early from your 401K unless you qualify for an exception. In addition to the penalty, taxes will be due on any amount withdrawn from a 401K. Between these two financial consequences, a worker is giving up somewhere between 15 and 40% of their retirement savings to get their hands on the cash today. This is an option that should only be chosen during a time of extreme financial need.

– Rollover to an IRA: About a quarter of workers leaving their jobs roll the money out of their employer-sponsored retirement plan and into another qualified plan. One advantage of a rollover into an IRA is that the rollover is not a taxable event and the money continues to grow on a tax deferred basis. Another is that in an IRA, the investment options are much more diverse than in a 401K, where owners are usually limited to just a few mutual fund choices.

– Rollover to a Qualified Plan: In addition to IRA accounts, some employees roll their 401K balances into the retirement plan with their new employers. Not all 401K plans accept rollovers from other qualified plans so you’ll need to ask your HR department about portability in their 401K plan. The advantage of this type of a rollover is that it keeps your retirement dollars consolidated and avoids overlap concerns. The disadvantage is that the investment options are more limited than in an IRA account.

– Leave It With Old Employer: The final option is that the retirement money that has been saved can be kept in the 401K plan with the old employer. This is easy to do and about a third of all workers leave their 401K behind when they leave their employer. The advantage is that it requires you to do nothing, but many people like to cut all ties with former employers and this option does leave some strings attached. In addition, 401K assets can be frozen occasionally if the company sponsoring the plan goes into bankruptcy.

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One of the most popular mortgage loan products sold to homebuyers in the last few years leading up to the bursting of the housing bubble was the option ARM. This loan allows borrowers to choose between a few payments options during the first several years of the loan, giving homeowners the flexibility to pay what they can afford or to vary their payments from month to month. One of the payment options on many of these loans even allows the borrower to pay less than the monthly interest amount due on the loan, increasing the principal amount owed on the property.

A loan like this works just fine when home values are increasing by a double-digit percentage each year but when home values started to decline, these loans became ticking time bombs on the books of many lending institutions. In total, well over $130 billion worth of ticking time bombs. You would think that these are the homeowners who are now in foreclosure, but the fact is that most of these loans are still out there and will reset to higher payment amounts over the next 18 months, creating a new wave of foreclosures. Here are some areas of concern about option ARMs.

– Negative Amortization: Looking back, it’s easy to wonder what lenders were thinking loaning hundreds of thousands of dollars to borrowers who really couldn’t even afford the minimum payment on the loan. Yet it was such a common practice. This feature allows borrowers to increase the loan balance to a defined cap, usually between 110% and 125% of the original loan value. Once this cap is reached or five years passes, the payment automatically jumps to a normal 30 year fixed mortgage, in some cases doubling the monthly mortgage payment. Only 12% of these loans have had the shock of increasing payments so far, and still 46% of borrowers in these lending products are at least one month late in their payments.

– Little Modification: Loan modification efforts have been a big story in recent months as the government encourages lenders to help homeowners avoid foreclosures. For option ARMs, one of the riskiest categories of mortgage loans, only 3.5% have been modified. The modifications have helped–only 24% of borrowers with modified option ARMs are at least three months delinquent compared to 37% of non-modified ARMs, but without further modification, the unmodified ARMs could create a whirlwind of defaults and foreclosures.

– Geographic Concerns: If you had to guess which states had the highest proportion of Option ARMs outstanding, you probably wouldn’t be surprised at the answer. California, Nevada, Arizona, and Florida account for 75% of all outstanding Option ARMs. These states have seen home values fall by an average of 48% since mid 2006 and as these loans get reset, many homeowners will have no option to refinance and will have little choice but to default.

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Inflation is a big buzzword in the media today as economists and analysts predict when inflation will hit and how severe it might be. Inflation is a general increase in prices and some inflation is normal. Over the past 20 years or so, inflation has averaged between two and three percent every year and a mild rate of inflation is part of a healthy, functioning economy. The late 1970’s and early 1980’s were a time of massive inflation that many people still remember and while most don’t expect upcoming inflation to be that extreme, many wonder just how much inflation we’re likely to experience over the next decade with so much government spending planned for the next couple of years.

Even though inflation seems mild on the surface, there are certain demographics that are experiencing inflation far above the publicized inflation rates. If you’ve put a child through college over the past few years, you’d probably laugh at the idea of inflation being mild, and you’d be right. Here are three categories of people that should be planning for inflation regardless of mild inflationary headlines.

– Parents of Future College Students: There are abundant statistics you can find about the cost of attending college–here are some that might surprise you. Most parents think of college costs and decide that they’ll be able to handle the costs of furthering their child’s education if they stay in-state and attend a public school. When you add up the costs of tuition, fees, room, and board, an in-state public education has still increased by an average of 6.5% over the past 30 years. At that rate, a child who is 12 today will pay over $100,000 for a four year education starting six years from now.

There are a few things parents can do to plan for this growing cost. First, start saving now in a college saving vehicle. There are 529 plans, prepaid tuition plans, education IRAs or even custodial accounts that can be used to start investing for future college costs. Second, look into grants, scholarships, and other forms of financial aid early and plan ahead to qualify. Finally, get a line of credit in place on your home if possible in case financing is difficult to obtain when you need it.

– Retirees: People entering retirement are susceptible to inflation because many are entering a period of time when they will be on a fixed income. Budgeting is difficult when your income is limited because of the danger of burning through savings too quickly. Add to that growing medical costs that come with growing older and every dollar of purchasing power is essential for retirees. On top of that, Congress eliminated Cost of Living Adjustments for 2010 Social Security recipients and there is no guarantee of future adjustments keeping up with inflation.

– Elderly People: With medical advances allowing people to live longer than ever before, a growing number of people will spend some time in nursing homes during their later years. The cost of an extended nursing home stay can be enough to deplete an individual’s savings very quickly, and many long term care insurance policies do not include inflation riders to offset the rising costs of care. Inflation varies from state to state for elder care, but an inflation rider is an important element of any long term care policy, as many states are reporting annual cost increases in excess of 8%–so much for mild inflation!

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After the longest period of economic contraction since 1947, the economy grew at a rate of 3.5% during the third quarter, signaling what many are calling the end of the recession. The stock market responded to the news with a 200 point gain as investors celebrated the return of economic growth, but many question whether the growth is sustainable. Some are calling the quarterly number an economic head-fake and expect that the economy will being to contract again due to the many challenges continuing to face the economy.

There is no doubt that economic headwinds remain in spite of the strong quarterly growth in the economy. Several factors are likely to weigh on the economy for quite some time, including the following:

– Government Spending- One of the major factors driving the growth of the economy has been government spending. Government spending is always a factor in the growth of the economy but it has played a pivotal role over the past several months as lawmakers have tried to jumpstart the economy. Spending on programs like cash for clunkers encouraged consumers to spend on big ticket items, fueling economic growth. Still, even though the government checkbook seems to know no limits, spending can’t continue at its current pace forever.

– Interest Rates- The Fed lowers interest rates in an effort to ease the pressure on the financial system, and in spite of interest rates being at historic lows for the past several months, the economy has struggled mightily. Rates can stay low until inflation becomes a factor, but they can’t stay low forever. Will the economy be able to grow with tighter credit conditions that arise as a result of higher rates? Time will tell.

– Unemployment- The number of Americans continuing to receive unemployment benefits dropped unexpectedly today but there are no false illusions that the unemployment problem is going to be solved anytime soon. For Americans out of work, the fact that the recession might be over means very little, as they remain in depression-like conditions. Hiring numbers remain uninspiring and most companies want to make sure this recovery stays on track before expanding their payrolls again.

– Inflation- The government is flooding the economy with money for various projects across the US, spurring job growth but risking the purchasing power of the dollar at the same time. Some economists expect inflation to remain mild for the next few years, but most predict that it will increase at some point and many think that inflation will be rampant within the next few years. The Fed will have to fight inflation by raising interest rates but they seem content to wait for inflationary signals to appear before formally addressing the potential problem.

In the end, we won’t know for several months whether or not this recovery is sustainable. The GDP number is an important step in the recovery process, but there are still major challenges that need to be addressed that could easily either enhance or derail the recovery we’re seeing signals of today. The above 4 areas will be important to watch closely in the coming quarters if the hope is for a sustainable recovery.

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Since they have been available to investors starting in 1997, Roth IRAs have provided the unique ability to put away after-tax dollars in a retirement account and to withdraw those funds and their market gains tax-free during retirement. Investors lose the tax write-off of contribution to a traditional IRA, but the gain the ability to withdraw money without any tax obligations later in life instead of just putting off taxes until the money is withdrawn. Roth IRAs have grown in popularity as investors have become more educated about their advantages.

One of the limitations of Roth IRAs has always been an income limit that eliminated some individuals from contributing to a Roth IRA. Next year, for the first time, investors will be able to convert their traditional IRAs to Roth IRAs regardless of the income they report to the IRS. However, the converted amount will be taxable as income and could increase an investor’s tax liability for at least a couple of years. Here are some of the considerations you should take into account as you decide whether or not to convert.

– Taxes: The biggest impact in the short term of converting will be taxes. However, the IRS has provided some flexibility for taxpayers to at least spread the tax burden over a couple of years. Those converting can choose to pay the income tax due on their 2010 taxes or to split the amount due between 2011 and 2012. The risk here is that many experts agree that taxes are going up to cover the shortfalls in the national budget and if taxes increase in the next few years, the taxes paid on the converted amount could be at a higher marginal tax rate. The other decision to make around taxes is whether you’d rather bite the bullet and pay taxes now or save the pain of taxes until later. There are several online resources and calculators to help investors see the impact of their decision.

– Timing: As of now, this option will be available for all of 2010, but what is the best time to convert? The answer is that it’s best to convert early in the year. The tax code provides a loophole called “recharicaterization” that allows an individual that converted to a Roth to change their mind and go back to a traditional IRA if they change their mind about the strategy before filing for their 2010 taxes. Essentially, if you convert on the first day of 2010, you have well over a year to determine if it was the right decision to make.

– Expert Advice: Ask your accountant and financial advisor what they would recommend for your situation. A Roth conversion is a great option for many people, but not for everyone. Factors such as your state of residence during retirement and the amount of income you’ll need to live on from your IRA during retirement can have an impact on your decision. Start having these conversations now so that you have time to make the decision that’s right for you.

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If you have ever lost a loved one and been asked to help settle their personal affairs, you will understand that tracking down important financial documents and finding all the assets and liabilities for a loved one can be extremely difficult. Coupled with the emotional pain in losing a loved one, it can become a very frustrating experience. No one likes to imagine their loved ones struggling to follow the messy trail through their financial lives and there are things we can do to make this process much easier for the people we care about most.

A financial notebook is an easy way to organize your financial life. This is something that will put every important piece of your financial puzzle in one place for the people sorting out your affairs. Putting this notebook together will take some time and effort but these are the things to keep in mind to make sure nothing is left out.

– Collect Essential Documents: A financial notebook is only as good as its contents and incomplete or missing documents won’t do a lot of good when people need them. A thorough financial notebook should include bank statements and account numbers, brokerage statements and account numbers, retirement plan documents, trusts, wills, insurance policies, tax returns, and information on any real estate you might own. It’s a good idea to include a personal balance sheet that you update annually showing your breakdown of assets and liabilities. Anyone opening this book should see every aspect of your financial life, so keep it in a safe place!

– Identify Key Contacts: Most people have a mental list of who they call with insurance issues, financial questions, or other items that require professional attention. Put these individuals all on one contact sheet so your loved ones can call through the list, notify them of your passing, and initiate the process of closing accounts and transitioning assets. Some common examples that would typically on a list like this would be doctors, attorneys, accountants, bankers, and financial advisors.

– Update Records Regularly: Making a financial notebook probably seems like a daunting task but once it’s put together, maintaining it is easy. Set aside a few minutes on a Sunday afternoon once a quarter to update statements, make note of any changes, and review information to make sure its current. Some financial documents can change dramatically during a short period of time and others need to be updated much less frequently. Always take the time to review your beneficiaries and make sure they are current and that they’re information is accurate.

– Show Your Loved Ones: Your financial notebook is important and it won’t do you much good if it’s on the top shelf collecting dust. Think about the people in your life you trust the most to handle your affairs when you pass away, and set up a time to sit down with that person and show them your financial notebook. Discuss your wishes with them so they aren’t left to guess the way you’d like your assets to be treated after you’re gone. If there is a charity that you feel strongly about, let them know so that they can look for opportunities to help organizations that you support in your behalf. They will thank you for taking the time to make their difficult job easier.

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The last few months of the year are a great time to review the year we’ve had and plan ahead for 2010. One of the most essentially areas of planning that we should be thinking about over the last two months of the year is tax planning. Many time people fail to think much about tax planning at the end of a year because taxes aren’t filed until several months into the following year. In addition, the holidays are a busy time of year of no one wants to think about tax planning as they’re celebrating with friends and family. However, the decisions you make now can have a big impact on the amount you pay of the refund you receive when you file your taxes next spring.

The tax code is always changing so it’s a good idea to try to stay up to date on where write-offs can be found. Some of these ideas are standbys that can be used every year while others are newer areas in the tax code.

– Contribute To Retirement Accounts: This is something you should be making an effort to do each year, but a tough economy makes each contribution to an IRA or a 401K a little tougher to make. Still, besides the core benefit of having an accumulation of funds to use when you retire, retirement accounts allow a taxpayer to defer the taxes on a portion of their income until later in life. This will reduce your 2009 tax bill and it’s one of the few tax planning areas that can be done after the end of 2009, as contributions for this year can be made anytime before the tax deadline in 2010.

– Go Green: The tax code offers tax credits for a variety of upgrades you can make in your home to make it a more energy efficient property. Consider replacing old appliances or windows. If these are upgrades you plan to make soon anyway, do it before the year ends to take advantage of the tax credit this year.

– Cut Your Losses: If you have investments in taxable accounts that have lost money since you bought them, consider selling before the end of the year. No one likes to make the paper losses permanent by selling, but unless you have strong feelings about that investment recovering in the near future, there’s little reason not to at least get the tax benefit from the loss. The money can be reinvested in something similar, or if you like a particular holding you can buy it back after 30 days without any tax consequences.

– Share the Wealth: 2009 has been a very difficult year for millions of people who have lost jobs, seen their income reduced, lost their homes, or have struggled through the recession financially. Consider making a donation before the end of the year that can help those in need and give you a write off to use in 2010. A donation always goes a long way, and this year gifting strategies will have an especially large impact for those in need.

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A lot of people who have never owned a home before are considering making their first home purchase right now for a few reasons. Prices are as low as they have been in years and in attractive markets all over the nation, houses are on sale. In addition, the $8000 tax credit for first time homebuyers provides a worthwhile incentive to get buyers off the fence and into a home. Ideally, the process of buying a home is one that a buyer should take slowly in order to be fully prepared. Hopefully, first time homebuyers who are looking at houses on the market now have been preparing for their purchase for the past several months.

In a perfect world, you should start planning a first-time home purchase about a year in advance. Here’s a breakdown of the things that need to happen before you should be out looking at specific homes.

– Obtain A Copy Of Your Credit Report: One of the most important numbers for any homeowner is their monthly payment, and this amount will depend on the way your lender feels about you as a credit risk. Errors on your credit report can cost you thousands of dollars in the form of higher mortgage rates and those errors can take months to get corrected.

– Research Mortgage Products: The mortgage world has become a complicated place and there are massive differences between different loan products. It’s hard to determine the type of mortgage that’s right for you if you don’t understand the various options that exist. Your goal should be a fixed-rate mortgage, or at least a mortgage that has a fixed-rate option for at least as long as you plan to stay in the home.

– Determine How Much You Can Afford: There are countless online calculators that can help you determine how much house you can afford based on your income, your savings, your outstanding debt, and other factors. One of the mistakes made by many homeowners buying a few years ago is that they bought as much house as they could qualify for. If your monthly mortgage payment is too high, pretty soon your home will own you and you won’t have the ability to travel, to save for retirement, to cover unforeseen expenses, or to have flexibility with your money.

– Fine-Tune Your Credit Score: When lenders pull your credit report after you apply for a loan, they’ll be looking for a few key factors. First, make sure there are as few late payments as possible. Next, reduce your credit utilization. In other words, if you have $10,000 in credit lines available, make sure you aren’t currently using more than 30% of those funds when you apply for your loan. A lower credit utilization rate is always better in the eyes of a lender. Finally, make sure any errors on your credit report have been resolved.

– Get Pre-Approved: Many people get pre-qualified by a lender without getting an official pre-approval. A pre-approval is a more firm commitment from a lender to extend financing to a buyer. Approaching a seller with a letter of pre-approval will make you a more attractive buyer and could improve the likelihood of your offer being accepted, especially with so many potential buyers struggling to find financing right now.

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