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Steps to Take Before Buying a Home

With housing prices and mortgage rates at a multi-year low, it is very tempting to purchase a home this year. While the temptation is there, there are a few steps you should take prior to making this big decision.

• Build Up an Emergency Fund. When you own your home, you can no longer call your landlord when something breaks or a plumber needs to be called, because you are that landlord! As a benchmark, you should have the greater of 3 months mortgage payments or $3,000 saved in a low risk, liquid savings account. This money should be easily accessible in case of an emergency. Call your bank and ask about their money market options. You may also want to look into ING's Orange Account. www.ingdirect.com
• Determine a Reasonable Budget. When purchasing a home, you are now responsible for paying those bills that were always covered by the landlord at your rental property. When I received my first water bill, I almost fell over! I had never paid a water bill and was extremely surprised when I received a bill for $120. An expense I had not budgeted for. By laying out your expected costs, you will have a better idea of what to expect and what you can reasonably afford. A few you should include: water bill, home owners insurance, Home Owner's association dues, gardener, repairs, etc.
  
• Just Because You are Approved for a Loan Does Not Mean You Can Afford it. While this falls under budgeting, I think it is important to emphasize this reality. When you are approved for a loan, the bank will look at your income and assets and determine how much they are willing to lend you. Do not be fooled! While you may be approved for a $350,ooo loan, you may comfortably only be able to afford the payment on a $300,000 loan. Make sure you do the math, or have someone do it for you, so you know how much you truly can afford.
• Find a Loan Officer You Can Trust. Like most professionals, loan officers are sales people. They are paid commissions based on the loans they sell you. Whether you have a loan officer you trust or not, you should get quotes from two different loan officers. You will be surprised at the reduction of fees and reduction of interest rates that may occur when you have two people bidding for your business. This is also a good way to ensure that person you trust is really trustworthy. Click HERE for a list of my trusted favorites.

Buying a home is an exciting time. Often your emotions can get in the way of you making it difficult to make a rational decision. Don't let them!! Purchasing a home should be a financial and personal reward, not an expense that feels like a burden.

Pay Off Those High Interest Credit Cards!

It is not difficult to rack up credit card debt. Maybe you had some car trouble that was more than you could afford. Perhaps you are self employed and had a tough month. Or even more likely, there were some items you wanted that you couldn't afford. (Don't worry, we have all done it) So why is it so easy to build debt, but seems almost impossible to pay off? While I cant help you pay off your credit cards, I can give you a few tips on how to pay them off more quickly.

• Call your credit card company and ask them to lower your interest rate: You may be surprised at the result. As long as you have not missed a payment, it is likely that they will review your account and if possible, lower your rate. Let them know you have been a long time customer. If they refuse at first, let them know you are being offered lower rates elsewhere and while you can move, and are tempted to, but you would prefer to stay where you are. Be persistent, but pleasant. If that does not work, there is another option.
• Look for a low balance transfer rate or low interest credit card: There are many online resources to compare credit card rates. My favorite is www.bankrate.com. While your credit score will have an big impact on the rate you are offered, you should explore which options are available to you. If you find a low balance transfer option, there are a few things you should be wary of. 1.) Make sure you know the term for the lower rate- it is usually limited to 6 mos - 1 year. 2.) Ask if there are any stipulations if you do not pay off the entire balance in the specified time- in some cases, the credit card company will charge you a retroactive rate if your balance is not paid off at the end of the term. This can be very costly. 3.) Ask what the balance transfer fee is- Most balance transfers I have encountered charge a 3% balance transfer fee.- This is not a problem, but is something you should be aware of. 4.) Do not miss a payment or make a payment late!- if you do, your interest rate will likely jump up to a very high rate. 5.) Do not make any additional purchases on this card- Typically, any additional purchases you make are charged the regular rate for the card. You do not have the option to pay this balance off first. Since this is the case, this purchase will continue to be charged interest until you have paid off the entire balance transfer!
  
• Determine how much you have charged on which card, and what the corresponding interest rates are: If you have 3 credit cards, one with $10,000 charged, one with $3,000 charged and one with $6,000 charged, do you know which one has the highest interest rate? By examining this, you will have a better idea of what you are working with.

For Example:

Credit Card 1: $10,000 debt with an interest rate of 26%

Credit Card 2: $6,000 debt with an interest rate of 15%
Credit Card 3: $3,000 debt with an interest rate of 9%

• Pay off the card with the highest interest rate first: Once you have identified which card has the highest rate work on paying off the highest interest rate first. While you may be tempted to put the most money towards the card with $3,000 on it, "just to get it paid off", that is not the best option. Rather, you should put more money towards the credit card with the higher interest rate of 26%. While you are paying down the highest interest rate card, make sure you are making the minimum payment on your other cards. Why would I make this recommendation?

$10,000 * 26% = $2,600 of interest you will pay each year

$3,000 * .09% = $270 of interest you will pay in each year

By paying off the highest rate card first, you could save yourself thousands of dollars in interest payments.

While debt can be frustrating, there is often a simple solution to the problem. If you need personalized assistance in building a plan to get your debts paid off, contact Guide My Finances. We are happy to help.

Allocating Your 401k plan

When it comes time to sign up for your company sponsored retirement plan, usually a 401k, it can be extremely confusing trying to translate the enrollment packet. You are being asked a million questions in the foreign language of finance that may as well be Chinese! So how do you determine how much you should be contributing? How do you determine which investments are right for you?

Lets first tackle the first question:
How much should you be contributing to your retirement account? I typically recommend that in order to reach your retirement goals, you should contribute a minimum of 10% and 15% of your income to a retirement account. While this may be ideal, most individuals I meet with are not ready to part with 10-15% of their income. I can tell you "You must think about your future", or "If you don't save now you will never retire", but the truth is, we live in a society that lives for the moment rather than looking into the future.

So...to be more realistic, I recommend you do the following:

• Review your monthly expenses and earnings to determine how much "extra" money you have at the end of the month. (To download a budgeting worksheet CLICK HERE)
  
• Multiply this number by 25%. (If you have $400 left over after your fixed expenses, you will take $400 x .25 = $100)
• This dollar amount is the amount you should start saving towards your retirement.
  

This is just a starting point. Every 3-6 months, you should increase this amount slowly. You may be asking, "Why don't I put the full $400 a month away?". Well, I have found that when people over-commit to their retirement savings, they end up pulling money out of these accounts prematurely resulting in taxes and penalties. By starting small and ramping up slowly, you will adjust to the decrease in "extra" funds and will save more effectively. (Of course if you can afford to save 10-15% of your salary, you should. The more money you save for your retirement, the better chance you have of reaching your retirement goal in a shorter time period.)

So now, Which investments should you choose. This is a hard question to answer because every person is different. While that is the case, I will give you a few good pointers when it comes to choosing.

• Don't chase returns! Very often individuals choose their investments by looking at which fund performed the best in the past. This is not a good strategy. For one, funds with higher returns often carry higher risk. In addition, when a funds performs well in one year, it wont necessarily perform well in the following year.
• Understand your options. Rather than guessing, talk to your 401k professional, do some research, or contact a licensed professional like me. It is important to understand where your money is going and what degree of risk your portfolio is exposed to.
• Take advantage of your plans investment options. If you are not interested in researching your fund options, your plan may offer some options that are based on risk tolerance or a target retirement date. The options are comprised of a variety of investments making them well diversified. Based on your risk tolerance or time horizon, you can choose a suitable diversified investment!

These are just a few strategies. If you need help developing a personal strategy, give me a call and I will be happy to assist you!

*Please remember each investor’s portfolio must be constructed based on the individual’s financial resources, investment goals, risk tolerance, investing time horizon, tax situation and other relevant factors. Please discuss with your investment advisor before implementing an investment plan. This is not a recommendation to by or sell securities or of any particular asset allocation strategy. These investment guidelines are not intended to represent investment advice that is appropriate for all investors.

Tax Free Income, Is It Possible?

I know what you are thinking, "What kind of scam are you pulling?". While the idea of earning interest free of taxes sounds ludicrous, it is not! Let me explain how it works.

• Each year you have the ability to contribute up to $5,000 to this account. ($6,000 if you are over 50 years old)
  
• You have the ability to contribute as little as $25 per month to the account. (I recommend setting up an automatic monthly contribution so you don't have to think about it.)
  
• The account is invested as you see fit (mutual funds, bonds, stocks, etc.)
  
• As the investments perform and interest accumulates, you do not pay taxes on the earnings.
  
• When it comes time to withdraw the funds in the account, you can access them tax free!! *1
  

Sound to good to be true? To see the benefit of tax free growth, here is an example:

• Bob is 30 years old
• He saves $100 a month
• He invests wisely and is able to attain a 10% average rate of return in his account
• At age 65, he has saved $42,000
• Since the account had been growing tax free at 10% the value at age 65 is now $357,752!
• Bob can withdraw the entire $357,752 from the account and will not have to pay any taxes
  

So what is this magic account? The Roth IRA.

Established by the Government and made available in 2008 to encourage individuals to take retirement savings into their own hands. By starting early, and contributing regularly, you will be one step closer to meeting your retirement goals. There are some income limitations*2, but if you are eligible, you should set up a Roth IRA today. For more information about the Roth IRA, contact Guide My Finances at Jackie@GuideMyFinances.com or by calling 619-861-8978.


*1 A qualified distribution is generally a distribution that is made after a 5 taxable year period of participation and that either is made on or after the date the employee attains age 59½, is made after the employee's death, or is attributable to the employee being disabled.


*2 Phaseout of Roth contribution eligibility:
Single: $105,000-$120,000 AGI
Joint: $166,000-$176,000 AGI

You Cant Control Everything!

As a society, we are control freaks. We all wish we had a crystal ball telling us what the future will bring so we can plan accordingly. Unfortunately, this is unrealistic.

Over the last few months I have been flooded with phone calls and emails from clients asking me what to do in this turbulent market. Many had stopped contributing to their retirement and investment accounts and were planning to cash out their investments completely. After talking them off the window ledge, I reminded them of a few key rules to investing:

1. Know your risk tolerance: When allocating a 401k or retirement account, it has been my experience that most individuals choose their investments based on the prior year's return. They look a the past performance and find the two funds that have performed the best. These are the funds they choose. (I am sure this is not you!) What they fail to realize is that more often than not, the funds with the highest one year return is the fund with the highest risk. While there is nothing wrong with risky investments, you need to be honest with yourself about how much risk you are willing to accept. Can you reasonably handle 50% fluctuations in any one year? Do you have enough time to earn back losses in your portfolio if they occur?

2. Diversify, Diversify, Diversify*: This is something we have all heard before. By diversifying your investment, rather than "having all your eggs in one basket", your investment can grow more safely. The key is knowing how to diversify your investment. One rule, which will give you a good idea of where you should be, is the Rule of 100. This rule states that if you take 100 minus your age, you will get the percentage of your portfolio that should be invested in growth with risk while the value representing your age should be invested in growth with safety. As an example, if you are 40 years old, you should have 60% of your portfolio in equities and other risky investments, and 40% of your portfolio in safe investments such as high grade bonds and money markets. When you are young, and have time on your side, you can afford to have your portfolio fluctuate. As you approach retirement, and your time horizon shortens, you will have increasingly less time to earn back any losses you have incurred. It is for this reason that the rule of 100 makes sense!

3. Buy Low and Sell High: This is such a simple concept yet, most people do the complete opposite. Why? Because they let their emotions get in the way. With the market at low levels, we should be increasing our contributions to our retirement and investment accounts. So why are more and more people stopping their contributions and moving their assets to cash? Fear. When will these individuals get back in the market? Likely, after it has rebounded and they feel more comfortable about investing. This is a perfect example of buying high and selling low. Don't let your emotions get in the way of smart investing.

By managing the things you can control, such as your investment choices and investment timing, and not worrying about the things you cant, such as the returns in the market, you will regain a sense of control which, after-all is something we all want!


*Diversification may help reduce, but cannot eliminate, risk of investment losses. Historical performance relative to risk and return points to, but does not guarantee, the same relationship for future performance. There is no assurance that by assuming more risk, you are guaranteed to achieve better results.

This is not a recommendation to buy or sell securities, or of any particular asset allocation strategy. These investment guidelines are not intended to represent investment advice that is appropriate for all investors. Each investor's portfolio must be constructed based on the individual's financial resources, investment goals, risk tolerance, investing time horizon, tax situation and other relevant factors. Please discuss with your financial advisor before implementing an investment plan.

The Benefits of Paying Attention

I have been doing some thinking lately about budgeting. I know, really exciting! Why is it that we cringe when we hear the word budget? We find a million other things to do so we "don't have time" to think about our expenses and where we are spending. While sticking to a budget is difficult, and seemingly unattainable, writing down a list of your fixed expenses can be helpful in determining exactly how much additional money you are spending each month on different things.

A few months ago I sat down and reviewed my expenses from the month before. I was appalled to find that I had spent a ridiculous amount of money eating out. I began thinking of all the things I could have bought with that money- a vacation, a new outfit, a big-screen tv, etc. It made me angry that I had not taken the time to just Pay Attention in the past. Of course, being that I analyze everything, I started to think about all the money I wasted the year before and vowed that I would not eat out ever again!. Of course, that was not realistic. Why? Because no one can quit a spending habit cold turkey! While I still eat out on occasion, reviewing just how much I had been spending has made me more conscious of how often I eat out and how much I spend each time. Although I don't have a written budget in place, I have an idea in my head of how much I don't want to be spending. For me, this is what is more realistic than trying to stick to a strict budget.

We have all heard before that if you write something down, you are more likely to remember it. This is certainly the case with writing down my monthly spending pattern.

As a resource, I have put together an easy to complete budgeting worksheet. Whether you decide to stick to a strict budget, or simply gain awareness of where your money is going, you should find this worksheet helpful.

CLICK HERE TO DOWNLOAD THE WORKSHEET