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Emilie is a prolific blogger, and influencer inspiring millennial women to live financially, physically, and professionally fit lives. She writes about overcoming debt, while balancing trying to eat healthy, stay fit, and have a little fun along the way. She is a politics major turned data engineer who graduated from Princeton University in 2015.  She currently lives in North Carolina with her college sweetheart Casey who is currently stationed at Fort Bragg. She enjoys eating food, cuddling with her dog, and binge watching HGTV.

Financial Planning Series: Basic Income Tax Plannin

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New to financial planning? Start with the overview. Then understand cashflow, learn about insurance planning and risk management, or pump up your investment planning.

As your income and investments grow, so will your tax responsibility. After all, Uncle Sam wants a little bit of your good fortune too! There are a few tips and tricks to lowering your tax responsibility though and they can really help you out when it comes time to file. However, you don’t want to wait until April 14th to start looking for deductions. You’ll need to start sheltering some of your funds before the end of the year to qualify for them.

Here’s what you need to know when it comes to basic tax planning:

Plan Your Deductions

You have a choice between standard and itemized deductions when it comes to determining your taxable income. A standard deduction is pretty straightforward, it’s a dollar amount set by that government that you can claim without calculating any expenses that typically make up an allowed deduction. Itemized deductions on the other hand are just what they sound like, an itemized accounting of actual expenses allowed for deductions. If your expenses over the year are more than the standard deduction amount, you’ll want to go with itemized deductions. You’ll pay less tax and get a larger refund.

One thing to keep in mind though, itemized deductions require proof of expenses so you’ll need receipts and any other documentation showing these expenses or they won’t be allowed. If you believe that the itemized deductions will work in your favor, be sure to set up a good filing system for holding on to your receipts. Regardless of which deduction method you choose, it’s always a good idea to hold on to receipts so that you can make a better decision come tax time.

Retirement Savings

Retirement accounts are a great way to reduce your taxes as well as have income for the future. A qualified individual retirement plan can create a tax shelter of income that is not taxed. For instance, at a 25% income tax rate, depositing $15,000 into a qualified retirement plan can save you $3,750 on your tax return and you won’t pay taxes on your deposit until the money is withdrawn. If you wait until the required age for withdrawal, you’ll even avoid paying most of the taxes on these deposits. There is a maximum allowance for yearly deposits into these accounts though so be sure you know what the limit is for the fund you select.

Other Savings That Are Tax-Sheltered

There are a few other options for saving money and getting deductions that allow you to defer or even avoid paying taxes altogether.

Health Savings Accounts including medical savings accounts and flexible spending accounts can be funded by you or your employer, or both. Both contributions and withdrawals are tax-free.

529 College Plans are funded with after-tax deposits and qualifying withdrawals are also tax-free. The 529 Plan allows you to choose with a prepaid tuition plan or an education savings plan.

Dependent Care Savings are flexible spending plans focused on helping you pay for childcare while you are working. They are held in separate fund and qualifying deposits and withdrawals are tax-free.

Keep in mind though that any withdrawals made from these accounts that are not for a qualifying expense are taxable at the time of withdrawal.

Tax Credits

Be sure to look for tax credits that apply to your financial situation; they’ll help reduce your tax and can even give you a refund. A few to look for include:

Earned Income Tax Credit is for low-income earners. Your annual earnings, filing status, and number of dependents will determine if you qualify.

Child and Dependent Care Credit helps cover childcare and/or disabled dependent care when you are working.

American Opportunity Credit helps cover some of the costs associate with post-secondary education during the first 4 years of college. There is a maximum credit of $2500 per student and 40% of the credit is refundable.

 

Financial Planning Series – Investment Planning

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New to financial planning? Start with the overview. Then understand cashflow and learn about insurance planning and risk management.

Investment Planning is one of the best things you can do to set yourself up for financial success. And the sooner you get started, the better off you’ll be when it’s time to use some of those funds for retirement living. But getting started can be confusing and overwhelming. Let’s break it down a little to help you feel more confident about getting started.

What is the purpose of your investments?

No doubt you have several short-term financial planning goals that might include a big vacation or down-payment for a house, but investment planning is best for long-term goals like retirement. Keep that in mind as you create your investment plan.

Allocating Your Assets

The younger you are when you start investing, the more risk you are able to take because you have a longer time to make up any losses and increase your funds. A good way to allocate your investment assets is with 70% stocks and 30% bonds.

Stocks can be both in the US stock market and the international stock market, so split your investments to 50% in each.

It’s good to divide your bond investments as well into 50% Treasury Inflation-Protected Securities (TIPS) and 50% in intermediate-term nominal US Treasury bonds.

Your overall allocation should look something like this:

35% – US stock market

35% – International stock market

15% TIPS

15% Nominal US Treasury bonds

It’s good to keep your investments at this split throughout your lifetime, keeping in mind that as you get closer to retirement you’ll want to keep a few years worth of cash easily accessible. The invested portion of your funds can stay at this same allocation.

Investment Selection

While the above may seem complicated, it’s not as difficult as you may think. All of these asset allocations can be accomplished with just four funds, all through Vanguard.

This gives you a nice mix of both low and high risk investments. If you hold your investments directly with Vanguard, there are no commissions to pay for buying and selling so your expense for each fund is anywhere from .05% to 20%. These funds provide a great way to allocate your investment account for very little money.

Why This Allocation?

There isn’t an exact science to investing and there are no “rules” about how much you need to invest and where, but this kind of split will give you good access to the stock market which is where your long-term financial growth will come from.

For the stock portion of your investments, a 50-50 split allows you to maximize your diversification while investing both in the US and internationally.

The bond investments of your portfolio are less about providing returns and more about offering protection when the stock market is down. Choosing US Treasury bonds are safe and guaranteed, providing peace of mind if the stock market is experiencing some lows.

Maintaining for the Future

Keeping your investment percentages static will allow for the most growth, versus changing your investment allocations year after year. Over the long-term you’ll see the most growth by just maintaining this balance.

With that said though, you’ll want to keep an eye on your investments and keep an open mind about possible changes you may want to make if you see an area not performing as well as you’d like for an extended period of time. You may also find that you need to make adjustments based on your own personal circumstances.

Getting started with investment planning doesn’t have to be difficult, the most important thing is to just start investing and grow your investment funds over time. The sooner you get started, the better financial shape you’ll be in when retirement comes around.

Learn more about financial planning by reading up on tax planning.

Financial Planning Series: Insurance Planning and Risk Management

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New to financial planning? Start with the overview. Then understand cashflow. 

While preparing for the future and your retirement may not be at the top of your to-do list when you’re young, it’s the best time to do it. The more years you have to invest in your retirement, the better off you’ll be when you get there. And insurance planning and risk management should be at the top of your to-do list.

When it comes to insurance, you want to make sure your family will be well provided for if something should happen to you, but you also want to plan for your own needs. Let’s take a look at what you need.

Life Insurance

Let’s hope your family never needs this, but if they do, a life insurance policy will provide much need income for your loved ones. Not only will it help them survive without your income, it will also help to provide for funeral expenses and your financial liabilities. Plus the benefits are tax-free. The younger you are when you apply for life insurance, the better rate you’ll pay. Waiting until your older to get life insurance will only increase your premiums. Look for a term policy and reevaluate your financial needs regularly so you can increase your coverage if need be.

Disability/Long-Term Care Insurance

Should you ever become disabled (temporarily or permanently) through an accident or illness, disability insurance will help to replace your lost income. It provides immediate cash flow to help you maintain your lifestyle and cover additional expenses resulting from your disability. Likewise, long-term care insurance will cover expenses and cash flow for daily living should you require longer care or need in-home nursing, rehabilitation, or a memory care facility. Everyone should have this, but if you can only afford it for one spouse, women are more likely to need it then men as they tend to live longer.

Homeowner’s or Renter’s Insurance

If you buy a house, your mortgage company will require you to have a homeowner’s insurance policy to cover the financial loss should you experience a break-in, fire, or natural disaster destroying your home and your belongings. But if you rent, your personal belongings are not covered under your landlord’s insurance policy. Be sure to have your own policy just in case of a disaster or theft.

Auto Insurance

Most states require you to have auto insurance if you drive and will ask for proof of insurance when you get or renew your driver’s license. But cover yourself a little better than the minimum standards just in case you’re ever in an accident. You’ll need liability coverage for both personal and property damages, personal injury protection, collision coverage to cover any damage to your car, comprehensive coverage in case you have a different type of accident (like a tree falling on your car), and uninsured motorist coverage in case you are hit by someone who does not have insurance and can’t pay for the damages.

Now that we’ve covered insurance needs, let’s talk about your risk management.

First of all, what is risk management?

Basically it’s identifying and analyzing how much risk certain investments have, will they grow and by how much. It occurs everywhere in the financial world including stocks, bonds and even insurance (determining how much you need and if you will actually need it). It is not a perfect science so mistakes will be made, but it’s about making informed decisions with the information you have.

How does it affect you?

Simple, it involves making decisions based on your future needs (or what you think they will be) and the financial situation you are working towards. When it comes to investing, you are able to take higher risks with your money when you are younger, leading to a higher return on your funds, because you have more time to invest. The older you get and the closer you get to retirement, the less risk you’ll want to take because you don’t want to lose a significant portion of your savings and not be able to rebuild.

Insurance planning and risk management involving your investments are a great place to start your financial planning from the ground up. Looking at these items will help you build a strong foundation for increasing your investments and making sure you’re covered for any unexpected events.

Learn more about financial planning by reading more on investment planning.

Financial Planning Series: Cash Flow Analysis and Budgeting

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New to financial planning? Start with the overview. 

How confident are you about your financial future? If you’re not sure, you’re not alone. Research suggests that only one in three Americans have a budget that they work with to manage their finances. Taking control of your spending habits and creating a plan to save and invest is the best way to gain financial security and freedom. If you’re not working with a budget, you need to be. If you’ve never budgeted before, don’t worry, this step-by-step will help you.

The first step is to determine your cash flow; that is to say how much money is coming in and going out. Your total income is the amount left over after taxes and deductions like 401(k) contributions. If you’re self-employed or you’re paid on a commission basis, take a look at the past four to six months of income to get a monthly estimate.

Now list all of your fixed expenses, the things that are non-negotiable like school loans, car payments, mortgage or rent, and food. Also list any essential utilities like electricity, gas, water; your cable bill is not included as essential.

Don’t forget things you pay annually or semi-annually like auto insurance and repairs (oil changes, new tires, etc.), and property taxes. If you have pets, don’t leave out annual vet exams. It might be a smart decision to start thinking about investing in an affordable pet insurance! Take the amount you pay each year and divide it by 12; this is the amount you need to budget monthly.

Next up is variable and non-essential expenses. This would include items like going out to dinner, cell phone bill, cable bill, monthly or yearly membership fees and subscriptions. If you would still like to enjoy these simple pleasures, YourBestDeals.com can give you discounts. Make sure to create a category for “extras” that you usually don’t remember buying or add into your budget like trips to the local coffee shop.

If you’re not sure how much you’re spending on these things, it’s a good idea to figure it out. You may be surprised. Go through your bank records for the last three months and calculate how much you’ve spent on small, non-essential expenses. You may find areas that are large financial drains where you can cut back. Take what you think is a reasonable amount to spend on these non-essentials and add them into your budget.

The last step is to figure out what’s left. When you take your after-tax income and deduct all your fixed and variable expenses, what’s left is money that can be put toward your financial goals like saving, insurance, and retirement.

Saving should definitely be a higher priority than spending so if what’s left isn’t enough to put something aside each month, you may want to review where your money is going and find more ways to cut back.

Now that you have a budget in place, you’ll want to review it regularly, once a month or so, until you’re certain that it’s working for you. A good rule of budgeting is the 50/30/20 rule which says that 50% of your income should be put towards your fixed expenses, 30% towards variable expenses, and 20% towards saving and investing. If you can manage to work within these parameters for your budget, you should be off to a good start for your financial future.

Learn more about financial planning by understanding insurance and risk management. 

Financial Planning Series: Financial Planning Overview

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Building a successful financial plan can be confusing and overwhelming. Especially if you don’t know what you need to know or even what questions you should ask. I’ve got you covered! Over the next several weeks we’ll be taking a look at the many important ingredients to a successful financial plan.

Before we get started though, let’s take a look at the overview and figure out what ingredients your financial plan needs.

Cash Flow Analysis – Analyzing your monthly and yearly cash flow is an important factor for every other aspect of your financial plan. After all, you won’t know how to budget, how much you can invest, and how to plan for retirement without knowing how much money you have coming in and going out. Understanding your cash flow, both now and for the future, will help you make well-formed decisions for your finances.

Want all the details? Learn more on Cashflow Analysis here.

Budgeting – If you don’t yet work with a monthly and yearly budget, we’ll be talking about why it’s important, how to create one, and how to stick with the budget you create. Knowing where and how you have to spend your money, finding ways to save, and planning for the future will help you make decisions about how much you can really afford to invest instead of just guessing and hoping for the best.

Insurance Planning – We all know that we need health insurance to cover medical expenses and vision and dental insurance to get our annual checkups, but what about other types of insurance. Do you know if you need life insurance? Do you know the difference between term and whole life insurance? What about long-term care insurance? We’ll be taking a look at the different types of insurance policies you may have not considered yet but should to make sure that you and your family are well protected.

Get all the deets on Insurance Planning by reading more.

Risk Management – What does “risk management” even mean? And what does it have to do with you and your investments? We’ll take a look at the different types of risk so that you can determine, based on your financial goals, how much risk you should be willing to take with your money and why.

Investment Planning – When thinking about investing money for the future, the choices can be overwhelming. And how do you know if you’re making wise decisions? We’ll take a look at what it all means and how to create an investment strategy that will give you confidence in your financial future.

Basic Income Tax Planning – The downside to increasing your net worth is that you have to pay more taxes. What do you need to know when tax time comes around? Should you hire a professional or can you handle it yourself? Are there ways to reduce the amount of tax you’ll have to pay? All these questions and more will be answered to help you get ready for Uncle Sam’s annual request for payment.

Retirement Planning – At some point, you’ll no doubt want to retire. And you may even want to retire early. How will you know when you can retire and still be able to maintain your lifestyle for the remainder of your life? And how do you create a financial plan to help you get there? And what happens if an unexpected financial emergency arises after retirement? Don’t fret, I’ll have all the answers for you.

Estate Planning – In your final stages of life, you’ll want to make sure that everything you’ve worked so hard for is there to protect and help your loved ones when you’re gone. Do you need estate planning? Is it something you can do yourself or are you better off hiring a professional? What happens to your business if you have one? And your savings, trusts, and investments, who gets them? You may not think you need estate planning yet, but it’s never too soon to start thinking about it and building towards your plan.

The Financial Planning Series is coming soon so be on the lookout for all of these great topics so you can feel secure in your financial future.

 

What Does It Mean When Your Financial Advisor is a Fiduciary?

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Choosing a financial advisor can be one of the biggest decisions you’ll ever make. It’s important to choose one that is a good fit for you and your financial goals. You’ll want to interview several before making a decision about who you want to work with. And one of the most important things you need to know is whether or not they are a fiduciary. Most people though, don’t know to even ask this question of advisors they are interviewing. Here’s what you need to know . . .

The word fiduciary basically means “trust”, especially in a relationship between a trustee and a beneficiary. With a financial advisor, it means they are legally and ethically obligated to act in his or her clients’ best financial interest, even if it means less or no compensation for them.

In a survey of 200 independent financial advisors regarding their fiduciary standard, there were a few surprising results.

  • 80% of the advisors surveyed consider themselves to be fiduciaries. But over 80% of those considering themselves to be fiduciaries disagreed with the statement “Fiduciary oversight is applied consistently to all my clients.” The key word being “consistently”.
  • And 75% of those surveyed said that acting in their client’s best interest defines them as a fiduciary.

Most advisors though agree and understand that acting in their clients’ best interests is the definition of the fiduciary standard.

The fiduciary standard was established as part of the Investment Advisors Act of 1940. Advisors can be regulated by the SEC or state security regulators, but both require them to uphold the fiduciary standard, specifying that an advisor must place their client’s best interest above their own and that investment advice is given based on accurate and complete information.

It’s important to understand that a financial advisor who is a fiduciary is different than a stockbroker. The biggest difference is that stockbrokers don’t have to be held to the same fiduciary standards and they often offer investment advice that will benefit them as well, including forms of compensation and commission. Stockbrokers can market themselves by many different titles, including financial advisor, so it’s important to ask.

A few titles to know and understand are:

Investment Advisor – they follow the Investment Advisors Act of 1940, they are required to be certified and they are regulated. They are also held to a higher standard, including fiduciary duty. They use a number of titles including Investment Manager, Wealth Manager, and Portfolio Manager.

Stockbroker – they are subjected to lower legal standards, but they are licensed and they are also regulated by the SEC and state regulators. Most call themselves Financial Advisors or Wealth Managers and they usually work for large Wall Street brokerage firms.

Dual Registration – this title can be a little confusing and misleading because many financial advisors today serve as both Investment Advisors and Stockbrokers. Most people working for large brokerage firms fall under this category and which title they decide to work under depends on how much they want to make on any given day. The biggest issue for potential clients is that dual registrants are held to the lower legal standard of the stockbroker.

To be sure your hiring someone who has your best interest in mind, check their website for their disclosure information and ask important questions like:

  • “Will you be serving as my fiduciary?”
  • “Are you legally obligated to protect my best interests?”
  • “Will my account be an advisory account or a brokerage account?”

Doing your homework before hiring an advisor will help you to make sure that your interests are protected.

 

Questions to Ask Your Financial Advisor

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Finding a financial advisor can be difficult, especially if you haven’t worked with one before and don’t know what to ask. Even if you already have an advisor, it’s always good to check in with them and make sure you understand what kind of service they’re providing.

When looking for a good advisor, it’s first important to make sure you know what you’re expectations are. Do you want someone to handle all of your investments, prepare your financial documents like wills, trusts, and even do your taxes, or do you just want someone to give you some advice and suggestions? Maybe your expectations are somewhere in between. Before you can hire the right person for your needs, you have to know what those needs are.

Now that you’ve done that, it’s time to start interviewing a few advisors and find someone who you feel that you can trust to handle your financial needs. Here are a few questions to ask potential advisors to make sure you’re getting the information you need.

What’s your background?

Look for a Certified Financial Planner (CFP), not brokers or insurance agents. You want to make sure the person you hire has the right qualifications to do the job.

How much experience do you have?

Are you looking for someone young who knows all the new information available and can handle your finances for years to come, or do you want someone older who has seen difficult economic situations and has the experience to navigate their way through them?

Do you accept fiduciary responsibility?

This may sound like a complicated legal term, but the bottom line is that it means they are making decisions based on what’s best for you not based on any bonuses or advantages they may receive. They should be willing to accept this responsibility through a written statement that they sign for you.

What services do you provide?

You’ll want to make sure you’re hiring someone who provides all the services you’re looking for. Do they offer retirement and estate planning? Insurance? Can they manage your investment accounts? Do they offer advice on planning that you can use to manage your own funds? Make sure you know what you’re hiring them to do.

How do you charge?

This is something you’ll definitely want to have a clear understanding of. Do they charge a fee for each individual service? Or do they charge a percentage of the funds they are investing? You may need to do some calculations on your own to determine which is better for you.

Do you offer different investments based on your clients risk factors?

You’ll need to have an understanding of your risk tolerance. For instance, if you’re young and won’t be retiring for more than 20 years, you may have a higher risk tolerance for your funds. If you’re older and close to retirement, you may not want to take as many risks with your finances. Different investments come with different risk tolerances so you’ll want to make sure you hire someone who can work with yours.

What kind of investments and planning do you recommend?

Different advisors will have different answers to this question. Make sure you work with someone whose answer matches your needs. Someone who recommends a variety is probably your best option. Look for things like real estate investments, bonds, index funds, and money markets. Someone who thinks about short-term investing as well as long-term investing is looking at the big picture of your financial future.

Lastly, get recommendations from friends and family of people they trust to work with and make sure whoever you hire is reviewing and evaluating your needs on a yearly basis as your financial situation will change over time.

Poverty vs Frugality – It’s All About Mindset

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While you may think that being frugal is the same thing as being poor or never having enough money, but that’s actually not true.  There’s a big difference between the two and it has nothing to do with how much money you have in the bank.  Instead, it has everything to do with your mindset.

You’re not alone in your situation. Look around you; people everywhere are living on a tight budget. And they all have the same choice to make that you do, decide that you’re “poor” and feel sorry for yourself, or know that you can make choices from where you and make the best of your situation.  While your financial situation may be challenging, you always have a choice as to how you respond to it.

What does the word “poverty” bring to mind? Homeless people begging on the street corner and eating at soup kitchens.  Or living in a rundown home and always having dirty and tattered clothes.

The key to it all is how you let your thoughts control you.  See for yourself:

  • “I never have enough” or “I have everything I need”
  • “We can’t afford to buy that” or “We choose not to buy that because other things are more important”
  • “How will we ever manage until payday” or “We’re challenged to figure out how make it to payday”

Can you see the difference?  It’s all in how you control your thoughts.  With the wrong mindset, you’ll never have enough and you’ll never be content.  You’ll always be wishing you had more.  A poverty mindset comes from being fearful that you’ll never have enough so you feel helpless to fix your situation.

But having a frugal mindset means you make “choices” about how you spend your money. This puts you in control of your financial situation and how you spend your money.  Instead of experiencing “fear”, you feel “challenged”, as if you have an obstacle to deal with.  Being in control is a much different mindset to feeling helpless, all with the same amount of money in the bank.

“Choosing” to budget and live on less gives you a sense of control. You are more careful about the choices you make with your money, but they are still your choices.  Your “wants” don’t have to be met right away. You can wait until you’ve taken care of your “needs”.  Instead of impulse shopping and spending your entire paycheck in a weekend, you make better choices and buy only what you need then take care of your other responsibilities like rent and utility bills.

Choosing to live on less means you’re in complete control of how and when to spend your money. This allows you to make better financial decisions about the best ways to provide for your family; even if you’re a little jealous of what other people are buying.

Even if you make a good living, choosing to spend frugally and saving money whenever you can could possibly be the difference between carrying a lot of debt and living debt-free.  And isn’t that a better way to live?

Choose a better mindset when it comes to your financial situation.  The difference is feeling helpless and out of control or feeling smart about your choices even though you sometimes feel challenged.

Important Items Your Budget Needs

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Hopefully, you already have a budget and you’re working with it every month. But you may find that you’re coming up a little short. That may be due to that fact that you’re leaving off some important items that you didn’t consider when you created that budget.  And if you have too many unplanned expenses, your budget could be going sideways quickly.

Usually, these items aren’t left off intentional, they just seem so minor that the get overlooked. Here are a few things that you might need to add to your budget to make it work:

Subscriptions

If you love Amazon and shop there frequently, you probably have a Prime membership. And since you only pay your membership fee once a year, you probably didn’t add it into your budget. But you need to include that $99 fee along with any other services and subscriptions you may only pay once a year like magazines, Spotify, or Netflix. And of course, don’t forget your monthly memberships like the gym and monthly subscription boxes. If it’s something you only pay once a year, figure out the monthly cost by dividing the total by 12 then set that amount aside each month starting now to cover next year’s expense.

Special Occasions

Birthdays only come around once a year as well so you may not be including those in your budget. But if you have more than one gift to buy in a month, it can really spread you thin that month.  Go back and take a look at what you spent on gifts last year, who you bought for and an average of what you spent. Then, divide the total by 12 to get an amount to put in your monthly budget. Do this for holiday shopping as well so you don’t end up with a huge credit card bill in January.

Car

Your monthly car payment is most likely in your budget, but did you remember to add in gas and tolls?  How about oil changes, new tires, safety inspections, and any other regular maintenance costs?  These items are easy to forget because they don’t come up that often. But they do add up so add a line for routine car maintenance to your monthly budget.

New Clothes

If you are a parent, you know that your kids grow quickly and always seem to need new clothes so you probably have a budget line for them. But what about you? If you don’t shop for yourself too often and like to shop sales, you’ve probably neglected to add these costs to your budget. In addition to new clothes, you’ll need to buy necessities like undergarments and socks.  And don’t forget new shoes!

Fun

You work hard for your money so you deserve to treat yourself once in a while. Maybe it’s dinner at your favorite restaurant or tools for a new DIY project.  Add “Fun Money” to your budget and treat yourself to something you enjoy.

Pets

Your fur babies have expenses too. They need food, toys, treats, and annual vet visits.  If you go on vacation, you might have to hire a pet sitter or board your pets. Add a “Pet” line to your budget then estimate your yearly costs so you can break them down into a monthly budget line item. And keep track of your actual expenses so you know what to budget for next year.

Understanding Your Credit Score

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Having a great credit score can mean lower credit card and loan interest rates, the ability to acquire new credit, and even better job opportunities.  A good score can save you money over time and provide you a better lifestyle.  But what do they mean?

Credit scores show your financial responsibility and accountability. Banks, credit card companies, utility companies, employers, and land lords want to see a good score so they know that you are responsible with your money.  Other factors like income and work history will play into a company’s decision to extend credit, but you may still be denied if your credit score is low.

There are a few things you should be able to understand about your credit score.

Negative information on your credit report can stay there for up 7 years and bankruptcies can stay for up to 10 years. Even if you’ve paid off a debt, the information usually remains.  However, once a debt is paid, the creditor doesn’t have much reason to care whether the information is on your report or not so disputing can result in the information being removed, raising your score.

What do credit score numbers mean?

750 – 850: A- Excellent

700 – 749: B- Very Good

660 – 699: C- Average

580 – 659: D- Poor

300 – 579: F- Worst

Your history of payments (how frequently or infrequently and the amount) along with the overall amount of your debt are the two biggest factors to determining your credit score. Revolving credit debt (credit cards) account for more points against you than personal debt (loans).

Your credit score includes:

  • The number of times you’ve paid late and the amount of time they were late (30, 60, 90 days or more)
  • The type of accounts you have and how long you’ve had them
  • Your total amount of debt
  • Any public records like collections or lawsuits

By law, you are entitled to a free copy of your credit report each year from the three credit reporting agencies. Although in most cases, this report does not include your credit score, that’s typically an additional fee.

You can maintain or improve your credit score by keeping your accounts open and paying them on time. The longer you’re in good standing with your accounts, the better your score.

Surprisingly, closing your accounts can have a negative impact on your score, especially if the account is paid in full and always on time.  If you no longer need a credit card, pay it off but don’t close it.  The available credit line with no balance will improve your score.

How do you improve a low score?

By making a few simple adjustments, your score can start to increase within just a few months.

If you do have negative accounts on your credit, the best thing you can do is start adding as many positive accounts and paying down as much debt as possible.

  • Pay your credit card, loan, and utility bills on time.
  • Keep your accounts open and in good standing
  • Pay off any collections then dispute them and have them removed

It’s a good idea to take a look at your credit report at least once a year so you can fix any mistakes by writing a letter to the credit bureau.

Something to be aware of, the higher your credit score the more impact a late payment will have on it so keep your payments current.

Improving your score is not impossible; it just takes some effort, time, and persistence to improve it.  Once you do, keep up with your payments and review your report annually for any mistakes.