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Given enough time, even the best planned budgets can start to feel like they’ve sprung a leak somewhere.Sometimes you’ll notice right away (getting halfway through the month and realizing it’s going to be peanut butter sandwiches for lunch every day). Other times it can take a while for imperfections to show (you thought you were going to have more in the vacation fund by now).
When you first start building your budget, a good place to begin is to list all the big expenses – the ones that are impossible to miss. Then it’s time to turn to the little ones that can escape notice – these are the ones that might keep your budget math from working out the way you planned.
Dig out your bank statements. Try to go back at least 6 months, if not a year. Some regular expenses may not occur monthly and can be a surprise if you only used a month or two of bank statements to track spending and build your initial budget. Many times, automatic payments or fees may be charged quarterly or even annually. Read on for some common expenses that might sneak up on you:
Subscriptions and online services – Many of us have subscriptions for software packages or online services. Remember that deal they offered if you paid for a whole year at once? At renewal time, they may charge you for another year unless you cancel.
Memberships – Gym memberships or dues for clubs may be quarterly or annual charges as well, so they might be missed when building your budget.
Protection plans – From credit monitoring to termite protection plans, there are lots of chances to miss an annual or quarterly expense in this category.
Automatic contributions – Many charities now offer automatic contributions. These can be easy to miss when budgeting.
Things you forgot to cancel – Free trials (that require your payment info) won’t be free forever. It’s easy to miss these as well.
Bank fees – Budgeting mishaps can lead to bank fees if your balance dips. Yet another potential surprise.
Automatic deposits – Saving for your future is a great move. Just be sure to know how much is going to be withdrawn and when, so your budget doesn’t feel the pinch.
Oftentimes, when people first make the commitment to create a budget and stick to it, it can be discouraging if it doesn’t seem to be working as expected right away. Try to keep in mind that your budget is a work in progress that will evolve over time. It probably won’t be perfect from the get-go.
As well-intentioned as we might be, we sometimes get in our own way when it comes to improving our financial health. Much like physical health, financial health can be affected by binging, carelessness, or simply not knowing what can cause harm. But there’s a light at the end of the tunnel – as with physical health, it’s possible to reverse the downward trend if you can break your harmful habits.
A household without a budget is like a ship without a rudder, drifting aimlessly and – sooner or later – it might sink or run aground in shallow waters. Small expenses and indulgences can add up to big money over the course of a month or a year. In nearly every household, it might be possible to find some extra money just by cutting back on non-essential spending. A budget is your way of telling yourself that you may be able to have nice things if you’re disciplined about your finances.
Frequent use of credit cards
Credit cards always seem to get picked on when discussing personal finances, and often, they deserve the flack they get. Not having a budget can be a common reason for using credit, contributing to an average credit card debt of over $9,000 for balance-carrying households.[i] At an average interest rate of over 15%, credit card debt is usually the highest interest expense in a household, several times higher than auto loans, home loans, and student loans.[ii] The good news is that with a little discipline, you can start to pay down your credit card debt and help reduce your interest expense.
Mum’s the word
No matter how much income you have, money can be a stressful topic in families. This can lead to one of two potentially harmful habits.
First, talking about the family finances is often simply avoided. Conversations about kids and work and what movie you want to watch happen, but conversations about money can get swept under the rug. Are you a “saver” and your partner a “spender”? Is it the opposite? Maybe you’re both spenders or both savers. Talking (and listening) about yourself and your significant other’s tendencies can be insightful and help avoid conflicts about your finances. If you’re like most households, having an occasional chat about the budget may help keep your family on track with your goals – or help you identify new goals – or maybe set some goals if you don’t have any. Second, financial matters can be confusing – which may cause stress – especially once you get past the basics. This may tempt you to ignore the subject or to think “I’ll get around to it one day”. But getting a budget and a financial strategy in place sooner rather than later may actually help you reduce stress. Think of it as “That’s one thing off my mind now!”
Nearly one quarter of Americans have no emergency savings, according to a recent report.[i]Without an emergency fund, you can imagine that an unexpected expense could send your budget into a tailspin.
With credit card debt at an all-time high and no meaningful savings for many Americans, it’s important to learn how to start and grow your emergency savings. You CAN do this!
4 tips to building your emergency fund
Your credit score helps determine the interest rate you’ll pay for loans, how much credit you’re eligible to receive, and it can even affect other monthly expenses, such as auto or homeowners insurance.Keeping your credit in tip top shape may actually help save you money in some cases. With that in mind, how do you know if it’s a good idea to open a new credit card or to close some credit card accounts? Let’s find out!
Opening Credit Card Accounts
Opening a new credit card isn’t necessarily detrimental to your credit score in the long term, although there may be some potential negatives in the short term. As you might expect, opening a new credit card account will place a new inquiry on your credit report, which could cause a drop in your credit score. Any negative effect due to the inquiry is often temporary, but the long-term effect depends on how you use the account after that (not making minimum payments, carrying a high balance, etc.).
Opening a new credit card account can affect your credit rating in two other ways. The average age of your credit accounts can be lowered since you’ve added a credit account that’s brand new (i.e., the older the account, the better it is for your score). On the plus side, opening a new credit card account can reduce your credit utilization. For example, if you had $5000 in available credit with $2500 in credit card balances, your credit utilization is 50%. Adding another card with $2500 in available credit with the same balance total of $2500 drops your credit utilization to 33%. A lower credit utilization can help your score.
Closing Credit Card Accounts
Closing a credit card account can also affect your credit score, largely due to some of the same considerations for opening new credit card accounts. Generally speaking, closing a credit card account likely won’t help boost your credit score, and doing so could possibly lower your credit score for the same reasons above (lowering the average age of your accounts, increasing your credit utilization, etc.).
First, the positive reasons to close the account: This might be obvious, but closing a credit card account will prevent you from using it. If discipline has been a challenge, instead of closing the account, you might consider simply cutting up the card or placing it in a lockbox.
Second, the negative reasons to close the account: Closing a credit card account when you have outstanding balances on other credit card accounts will raise your credit utilization. A higher credit utilization can cause your credit rating to fall. You’ll also want to consider the average age of all of your accounts, which can play a big role in your credit score. A longer history is better. Closing a credit account that was established long ago can impact your credit score negatively by lowering your average account age.
Fair Isaac, the company responsible for assigning FICO scores, recommends not closing credit card accounts if your goal is to raise or preserve your credit score.¹
Would opening or closing a bank account have any effect on my score?\ Closing a bank account has no effect on your credit rating and normally doesn’t appear on your credit report at all. When you open a bank account, however, your bank may perform a credit inquiry, particularly if you apply for overdraft protection. A hard inquiry (such as an overdraft protection application) can cause a temporary drop in your credit score. Soft inquiries – which are also common for banks – will appear on your credit report but do not affect your credit rating. Banks may also check your report from ChexSystems², a company that reports on consumer bank accounts, including overdraft history and any unresolved balances on closed accounts.3
If you have an adult child who you are still paying some expenses for, or they are studying in college (living either away from you or at home), you could still be held liable for any damage they cause through their own negligence.
They may even have their own car insurance, in their own name, but if your child ends up injuring someone severely and is sued and the policy limits on their car insurance are not enough to cover the judgment, you could still be held liable for damage that the policy didn't cover, depending on the circumstances.
And your car insurance or homeowners insurance won't cover it, meaning you'd have to pay out-of-pocket if your child can not.
That said, aside from car accidents, negligent and or intentional acts that damage someone else's property or injure a third-party could be covered under your homeowners policy and an umbrella policy.
For the purposes of this article, we are talking about mostly an adult child under the age of 25 living at home or away at college. The key factors that would possibly trigger homeowners or umbrella coverage in terms of parents having some liability for their adult child's actions are:
1. Their continued financial support of the child, and/or
2. That the child lives under their roof.
The car insurance issue
There may be occasions when parents of a twenty-year-old reckless driver who is either still living at home or away at college may want to take steps to separate his liability from their own, like:
When you remove a young adult driver from the family policy, you reduce the probability of a claim for property damage, first-party and third-party injuries, and other liabilities that may result from an accident. It would reduce the parents auto insurance premiums and push the liability to the child's Insurance. However, if they are sued for extreme negligence and the award exceeds the policy's liability maximum, the additional award could be on your shoulders if your child doesn't have the personal resources to pay.
Your own car insurance would not cover it and, since its auto-related, the homeowners policy wouldn't cover it either.
The scope of coverage from minor and adult children under their parents' homeowner's policies, with respect to personal property coverage and personal liability coverage, rests on the policy definition of "insured" in the typical policy.
The definition, in pertinent part, includes relatives who are residents of the named insured's household. Children, brothers and sisters, parents and grandparents are examples.
This doesn't mean that your 40 year old daughter who is over for dinner is covered, though, since a visitor is not a resident.
Also, the policy will cover persons under the age of 21 in the care of the named insured (such as a foster child), as well.
The average U.S. household owes over $5,500 in credit card debt,¹ and the average Canadian household owes over $8,500 in consumer debt.²Often, we may not even realize how much that borrowed money is costing us. High interest debt (like credit cards) can slowly suck the life out of your budget.
The average APR for credit cards is over 16% in the U.S.³ and around 19% in Canada.⁴ Think about that for a second. If someone offered you a guaranteed investment that paid 16-19%, you’d probably walk over hot coals to sign the paperwork.
So here’s a mind-bender: Paying down that high interest debt isn’t the same as making a 16-19% return on an investment – it’s better.
Here’s why: A return on a standard investment is taxable, trimming as much as a third so the government can do whatever it is that governments do with the money. Paying down debt that has a 16% interest rate is like making a 20% return – or even higher – because the interest saved is after-tax money.
Like any investment, paying off high interest debt will take time to produce a meaningful return. Your “earnings” will seem low at first. They’ll seem low because they are low. Hang in there. Over time, as the balances go down and more cash is available every month, the benefit will become more apparent.
High Interest vs. Low Balance
We all want to pay off debt, even if we aren’t always vigilant about it. Debt irks us. We know someone is in our pockets. It’s tempting to pay off the small balances first because it’ll be faster to knock them out.
Granted, paying off small balances feels good – especially when it comes to making the last payment. However, the math favors going after the big fish first, the hungry plastic shark that is eating through your wallet, bank account, retirement savings, vacation plans, and everything else.⁵ In time, paying off high interest debt first will free up the money to pay off the small balances, too.
Summing It Up
High interest debt, usually credit cards, can cost you hundreds of dollars per year in interest – and that’s assuming you don’t buy anything else while you pay it off. Paying off your high interest debt first has the potential to save all of that money you’d end up paying in interest. And imagine how much better it might feel to pay off other debts or bolster your financial strategy with the money you save!
Not paying your bills on time can have significant impacts on financial health including accumulating late fees, penalties, and a negative hit on credit scores. But maybe you – or a friend – learned about those consequences the hard way. Most late bill payers fall into 1 of 3 camps: they forget to pay on time, they don’t have enough income, or they have enough income but spend it on other things.
In case you – or your friend – are stuck in 1 of these camps, consider the following tips to help pay the bills on time.
I forget to pay my bills on time.
If this is you, you’re actually in a more advantageous position. There are many easy fixes that can help get you back on track.
If your income doesn’t cover your outgo no matter how diligently you pinch those pennies, it won’t matter what type of bill payment method you use, you’re going to have trouble. If you’re in this situation, there are 2 solutions: increase your earnings or decrease your expenses.
Managing income and expenses takes some practice and persistence, but it is doable! If you find yourself consistently overspending without enough left over to cover your bills, try the following:
$10,000 and Up
*Referring SafeMoney.com Advisor: Jennifer Lang
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