Plan Well, Retire Well

Two Reasons to Think about Xmas in July

sweedler@illinois.edu(Kathy Sweedler) — 2012-07-26T10:52:00+05:00

Do you know what happens in less than 22 weeks? It's Xmas! That means we have less than 154 shopping days left. You're probably wondering why I would bring this up in July. Well, for two reasons:

When we plan ahead for occasions that require extra money, we can save for expenses rather than using credit, which can be costly. Now is a great time to plan for holiday expenses, no matter which holiday you're celebrating.

Do you know how much you spend during the holiday season? Now might be a good time to estimate costs. Don't forget that the holidays involve more costs than just gifts. Sometimes holidays can mean more money spent on food, travel, and other related costs.

For a handy guide to estimating costs, you can download for free "Control Your Holiday Credit Card Debt."

Let's say that you estimate your holiday costs are $500. Is that a reasonable amount to save? It's easier to decide if you know how much you need to save each week. We have 22 weeks 'til Xmas, therefore, you'd need to save $23 a week. Does that sound reasonable or do you need to adjust your plans?

With time on your side, you can adjust your costs, if needed. Here are some ideas:

Watch for sales and spend less;
Make gifts;
Give the gift of time or services;
Talk to extended family members about changing gift giving patterns. Perhaps names can be drawn so that fewer gifts are given by each person.

What if want to start saving now for a summer vacation next July? The same technique can help. You have 12 months to save. Let's say you want $1200 for your vacation – that would be $100 a month or approximately $25 a week.

You may want to have a special savings account to deposit money for long-term goals. This will allow you to check your progress. For example, by the end of January you would need $600 saved for your vacation goal. You can check on your progress during the year and know if you need to adjust your goal or spending habits as you go.

Planning ahead gives you flexibility to adjust plans, save up for expenses, and avoid using credit. This is a good reason to think about Xmas in July! What is my other reason for talking about it now? Perhaps by visualizing snowy weather and festivities, it will help us all manage with the summer heat. Stay cool!

Market-linked CDs: The Details are Important!

sweedler@illinois.edu(Kathy Sweedler) — 2012-07-21T08:35:00+05:00

Just when you think you know the basics of saving and investing, something new comes along! Many of us have think of a Certificate of Deposit (CD) as a completely safe investment – guaranteed to provide a certain amount of return and insured by the government. And, while that is still true for many CDs, market-linked CDs are different.

While market-linked certificate of deposits have been around for a while, they're now being marketed more aggressively, according to a recent FDIC news article. The return on a market-linked CD is tied to an index such as a stock market like the S&P 500. If you are considering investing in a market-linked CD, be sure you understand ALL the details of the investment. Here are some questions you need to ask:

1) Is the amount you invest (the principal amount of the CD) insured by the FDIC?

The FDIC insures deposit accounts such as checking and saving accounts up to $250,000 per depositor, per insured bank for each account ownership category. But this is only for accounts where the principal amount is guaranteed by the bank. If you could lose some of your original investment (such as when you invest in a stock mutual fund), then it will not be insured by the FDIC. You might lose all of your investment if the bank failed.

2) When will the CD mature?

We often think of CDs of having maturities in 1, 2, or 5 years. But market-linked CDs are considered long-term commitments and may not mature for 20 years. If you pull your money early, there can be significant early-withdrawal penalty fees. Ask about these penalty fees too.

3) How will the return on the CD be calculated?

Be sure you understand how the return is calculated as it may be complex. It may not be as simple as your return goes up the same as the return on market index; instead, it may be percentage of the increase. And, your return may also go down if the market index goes down.

4) Is it possible that I might not earn any interest on a market-linked CD?

Yes, it is possible if the index performs poorly, depending on the terms set by the financial institution offering the market-linked CD. Be sure to ask!

A market-linked CD may or may not be a good investment choice for you. Do be aware that a market-linked CD is significantly different than a regular Certificate of Deposit. Be sure to ask questions so that you can decide if it is a good choice for you.

Cool Your Home and Save Money Too

sweedler@illinois.edu(Kathy Sweedler) — 2012-07-20T14:09:00+05:00

My utility bills go way up in the hot summer months. Part of the cost increase is probably because my three college-age sons come home for the summer, but part of it is also our desire to keep our home cool. One hot evening recently I was motivated to rethink our household habits to try and find ways to keep our home cool and save money. The Environmental Protection Agency (EPA) has some good suggestions that I found helpful, and I hope you do too.

First, change to more efficient light bulbs. Energy Star qualified (such as CFLs and LEDs) produce about 75% less heat than incandescent bulbs. Thus, when you use Energy Star qualified light bulbs you use less energy to light your home AND less energy to cool your home. This is a definite win-win during our hot summers.

Next, raise your thermostat setting when you leave your home. I love having a programmable thermostat that I can set for a higher temperature when I leave for work as well as being able to cool our home down a few degrees by the time I return home.

Sometimes feeling cooler is as good as cooling your home. Fans create a cooling breeze. If you raise your thermostat by only two degrees and use your ceiling fan, you can lower your cooling costs by up to 14%, according to the EPA.

Do you have a room facing west that the afternoon sun tends to heat up? I do, and that's why I planted a deciduous tree to block the sun rays in the summer. Another option is to close curtains or shades on the sunny windows to block some of the heat from coming into your home.

If you haven't checked your air conditioner filter lately, now is the time to check your filter. Dirty filters can make it hard for your air conditioner to work efficiently. Follow the manufacturer's instructions on how often to change or clean your air conditioner filter.

This tip may seem obvious but you now have "my permission" to not cook dinner tonight! Reduce oven time to help keep your home cool. Consider alternative meals such as salads or using your microwave oven to cook.

And, last but not least, plug duct system leaks. Make sure cooled air is getting where you want it and not leaking out through poor connections. Seal duct work and insulate all ducts that you can access. Make sure duct connections at vents and registers are well-sealed where they meet floors and walls as well. Many homes could benefit from this home improvement. In fact, this might be a good task for home-for-the-summer sons and daughters ....

These seven tips for keeping our homes cool are relatively simple to implement. Do you realize that the average home spends almost 20% of its utility bill on cooling, according to the EPA? That means that a change in habits can mean a real change in how much we spend to cool our home. I challenge you to pick a tip or two or three, and see if it makes a difference.

If you have an energy and money saving tip you'd like to share, please click on the "Leave a comment" link below. This hot weather is predicted to last and I'd appreciate new ways to keep my home cool!

What to do when you fall behind: Student loan default and how to deal with it

sweedler@illinois.edu(Kathy Sweedler) — 2012-07-13T11:35:00+05:00

This is the fourth post in a series about student loans by guest blogger Sharon Cabeen. Sharon is director of financial literacy program operations with TG. You can reach her at (800) 252-9743, ext. 6781, or by email at sharon.cabeen@tgslc.org. Additional information about TG can be found online at www.tgslc.org.

Thanks, Sharon, for providing this useful information for our readers.

People go to college for many reasons – seeking new experiences and friendships, expanding their knowledge of the world, and, of course, enhancing their career options. For all the varied aims new college students may have, however, we can be sure they're not aiming for damaged economic prospects.

No one enters college with the thought, "I hope I default on my student loans one day."

Sadly, many student loan borrowers reach that destination despite never setting out to travel there. The reasons students default are nearly as varied as the students themselves: they may be struggling to find work after leaving school; they may be poorly organized, misplacing (or even failing to open) correspondence from their loan holders or servicers; they may have poorly understood their repayment obligation to begin with; or they may simply not have the money.

Consequences of default

Whatever the reason, failing to meet your repayment obligation can have unpleasant consequences. Even missing one or more payment deadlines will place a borrower's loan into delinquent status, potentially causing:

Damaged credit, making it difficult to take out a car loan, obtain a mortgage loan, or even get approval on an apartment lease; and
Increased costs, including late fees and the potential for increased interest rates.

If your student loan is delinquent for more than nine months, the loan is in default. Defaulting on a student loan has serious consequences, and may cause any (and many) of the following:

The full amount of the outstanding balance will automatically become due and payable;
Collection costs will be added to the balance due;
The default will be reported to all nationwide consumer reporting agencies;
The borrower will no longer be eligible for any federal student aid;
The borrower may lose access to transcripts and academic records;
The borrower may be subject to administrative wage garnishment, meaning money will be deducted directly from his or her paycheck, without consent;
The borrower may forfeit any tax refunds; and
In some states, the borrower may be subject to loss of lottery winnings, disbursements made by state authorities, or professional licenses, until the situation is resolved.

What now? Dealing with default

If you find yourself in default, don't give up! There are things you can do to improve the situation. In order to get back on track, you should:

Contact the holder or servicer of your defaulted loan, which may be your student loan guarantor or the Department of Education. Your loan holder or servicer can counsel you about the best options for resolving your default. If you don't know your loan holder or servicer, you can find them by accessing the National Student Loan Data System at www.nslds.ed.gov.
Establish a new repayment agreement by:
Rehabilitating your defaulted loan(s). You can do this by making nine consecutive, on-time, full, voluntary monthly payments to the holder of each defaulted loan(s).
Consolidating your defaulted loan(s) and making three consecutive, on-time, full, voluntary monthly payments to the holder of each defaulted loan(s).
Stick to your repayment agreement. To get out of default, you must re-establish a good habit of making your student loan payments on time and in full.

One more thing: if you're still a student and need additional financial aid, you can also reinstate your eligibility for federal student aid by making six consecutive, on-time, full, voluntary monthly payments to the holder of each defaulted loan(s). If you pursue this option, remember to apply for aid as early as possible. By having your financial aid application on file, your school can award your loan as soon as your eligibility for federal student aid is reinstated.

For more information

For more information about each of these options, visit TG's Repaying Defaulted Loans page.

Retirement: A Personal Decision

chank@illinois.edu(Karen Chan) — 2012-06-28T12:45:00+05:00

As many of you know, I have been writing and teaching about retirement planning for years. It's familiar territory for me. But it was a very different animal when I recently wrestled with my personal decision about whether now was the time for me to retire from the University.

I'm going to spoil the suspense and tell you the ending up front: I am retiring from University of Illinois Extension as of June 30. I hope to continue to do personal finance education, and even to be an occasional guest blogger here on Plan Well – Retire Well. But my duties as Consumer Economics educator will be over at the end of this week.

For this last post, I decided to talk with you about the kinds of information that helped me make this decision. There is much that is uncertain: how investments will perform in the future, how long my husband will continue to work, how much income I will be able to generate from my work as an independent financial educator, and what the future inflation rate will be, to name a few. But there was a lot of other information that was available to me. I tried to make good use of all of it when making this life-changing decision.

I didn't accumulate this knowledge and information overnight. So even if you think retirement is a few years away, start thinking about the information you will need to make an informed decision.

Here are some of the specific things I have done to fully understand my financial situation and how different decisions would change it:

I track my monthly and annual expenses. I started doing this long before the online programs and mobile apps were available so I download all my transactions from my bank and credit card accounts using a software program. I run reports to see how much I spend in various categories, how much we're really saving, and to see how those numbers vary from one year to the next.
I listed the major upcoming expenses I have planned, such as a new car or repairs to the house, and estimated those costs. I have planned where that money will come from.
I estimated what my expenses will be after retirement.
I evaluated when to begin claiming Social Security benefits, which will be reduced due to the fact that I will also receive a pension for government work where I did not pay into Social Security. Because I am subject to that reduction, I used the special WEP calculator on the Social security website instead of the usual benefit calculator to estimate my benefits.
I do a net worth statement at least once a year so I know the value of my assets and liabilities.
I compared my expected income and expenses, and projected when and how much I will need to withdraw from on savings to fill the gaps
I studied the research on sustainable withdrawal rates and have an idea of how much I can withdraw from my savings and investments each year and have some assurance that my money will last as long as I will.
I know the rules for my pension. I read and re-read all the information available about it. I attended educational sessions about my benefits. I also had an individual counseling session with a representative of the retirement system to be sure I understood what would happen under various scenarios.

The decision about when to retire is a very individual one. And it isn't all about the finances. I also weighed the burden of a long commute, my desire to do some things that I can no longer do in my current position, and some quirks about my pension plan that meant I should either leave now or be certain I would work another two or three years.

There are many uncertainties, and I have re-evaluated this decision more than once. But at least I know I made an informed decision. Now it's time to move on.

I have thoroughly enjoyed writing for the Plan Well – Retire Well blog. I hope you have enjoyed my posts, and maybe picked up some useful tips along the way. And I hope to be back, at least from time to time, to share the new things I'll be learning.

Thanks for listening.

Tax Tips in the Summer

sweedler@illinois.edu(Kathy Sweedler) — 2012-06-25T13:02:00+05:00

Don't do well under pressure? Find it hard to think about saving money for retirement after the holiday season? Well, then now is the time to plan for taxes!

While it may seem like an odd season to plan for taxes, the summer can be timely. Here are some financial strategies that may help you when you sit down to pay taxes in April 2013 IF you do them now.

Tax Folder for 2012: If you haven't already done so, set-up a file folder for all tax-related information for 2012. Then, when you have a receipt or other paperwork that you want to find in April, you will have a designated place to put it now.

Save Receipts for Charitable Donations: Many of us use the summer to clean out closets, garages and basements. When you donate that "good but not useful to you stuff" to a charitable organization, you may qualify for a tax deduction. Charitable contributions are deductible only if you itemize deductions on Form 1040, Schedule A. You will need written documentation for donations worth $250 or more. See IRS Publication 526, Charitable Contributions for more details.

Tax Credit for Summer Camps: Do you have a child less than 13 years of age and do you work or are looking for work? Then you may qualify for a tax credit for care for your children, including summer camps. The cost of day camp may count as an expense; however, expenses for overnight camps do not qualify.

In fact, whether your childcare provider is a sitter at your home or a daycare facility outside the home, you'll get some tax benefit if you qualify for the credit. The Child and Dependent Care Credit is available for expenses incurred during the summer and throughout the rest of the year. The credit can be up to 35 percent of your qualifying expenses, depending on your income. For more information check out IRS Publication 503, Child and Dependent Care Expenses.

Save for Retirement: I find it easier to think about saving for retirement in the summer than in February! If you do too, now is a good time to consider increasing your contribution to a tax-advantaged savings plan either at work or in an IRA. Increasing your savings for retirement NOW means that you will gain in April at tax-paying time. For more information, view IRA Basics.

For more information about tax publications or questions, visit www.irs.gov or call for forms at 800-TAX-FORM (800-829-3676.)

What to Expect When You Check Your Credit History by Phone

chank@illinois.edu(Karen Chan) — 2012-06-22T12:07:00+05:00

Last month, I obtained my credit report from two of the three nationwide credit reporting agencies online and wrote about that experience in my May 18 post. Today, I requested the third one by phone so that I could compare that with the online process.

Many financial experts recommend requesting your credit report by phone, and my experience confirmed that thinking. While I had to answer a number of security questions for the online reports, I only had to provide identification information for the phone request.

To order your credit report by phone, call 1-877-322-8228. Even though there are three major credit reporting agencies, you request your report using one, centralized system.

English Only

The automated phone request service is in English only. The online request service is also only in English. According to a 2006 news release from Consumers Union (the publisher of Consumer Reports), the credit reporting agencies have taken the position that the law requiring them to provide free annual credit reports did not require them to provide the service in other languages. For individuals who are not fluent in English or who are uncomfortable with automated phone systems, the other option is to complete a printed form and mail it in. At least that way, you can take your time and get someone to help you with the instructions.

The Phone Experience

The phone request system is completed automated. For me, it worked without a hitch. It carefully repeats each piece of information you provide and asks you to confirm whether it understood you correctly. For example, when I had to state and then spell my first name, it captured that information correctly. Of course, my first name is only five letters so it may not be as challenging as a longer name.

I placed the call from my office; if I had called from my home, the process would have been even more streamlined. It begins by telling you that your report(s) will be mailed within 15 days, that you will be asked to enter information it needs to complete the request, and that you should not hang up until instructed to do so. Then the inquiries began. I was asked to say or enter:

Whether I had a home phone
If so, was I calling from my home phone.
If calling from a different phone, what is the home phone number.
What is the number in my street address, such as 5555 if my address is 5555 Home Avenue.
My zip code

The system then "spoke" the last name for the person it had on record at that address, and asked me to confirm if that was correct. The, it "spoke" the first name – which was not me. I was prompted to speak and spell my first name. This was the first item for which I could not enter my responses using the numbers on the phone; I had to speak my response.

There were a few more questions before my request was completed:

Have I lived at my current address for 2 years or more?
Enter my Social Security number.
Do I want the report to display only last 4 digits of my Social Security number, for security purposes?
Enter my birthdate
Do I want a printout designed for the visually impaired?
From which of the three nationwide credit reporting agencies do I wish to receive a report: Equifax, Experian, and/or Transunion?

While it took several minutes to work my way through the request, the system was easy to understand. If I entered something wrong, it was easy to correct since I was asked to confirm each piece of information before moving on to the next item. The instructions were clearly spoken, although it had a little trouble pronouncing my last name and the name of the town where I live.

This was a very different experience from requesting my credit reports online. It was easier because I did not have to answer any security questions, but someone who hates automated phone systems might be turned off by it.

Whichever way you prefer to check your history, please take advantage of your right to obtain a copy of your credit report from each of the three credit reporting agencies each year.

Lessons Learned from a Savings and Lending Group in Southern Sierra Leone

mcnamar1@illinois.edu(Paul McNamara) — 2012-06-19T20:33:00+05:00

In January 2012, as part of my ACES in Sierra Leone Study Abroad course, our University of Illinois students worked with World Vision of Sierra Leone to assess their project to develop inland valley rice swamps and farmer groups since the war ended. Sierra Leone suffered a horrific 11 year-long civil war through the 1990s but since 2002 the country has been working to rebuild, heal, and get the economy going.

As a part of the World Vision work in southern Sierra Leone we learned about their use of savings and lending groups to build trust among community members and to build some assets. Even a small amount of funds, on the order of $10, can make a huge difference in the life of a family in rural Sierra Leone. The way the savings and lending groups works is that each week the group has a meeting (a group consists of between 15 and 30 people) and each member contributes about 50 cents per week. The money is deposited into a wooden lock box with three padlocks on it: one controlled by the World Vision development facilitator; one by a teacher; and one by another local leader. This way all three people need to be in the same place for anyone in the group to access the money and no one person can divert the funds without others knowing about it.

Contributing weekly to build savings gives the group members an asset base and it also provides a sort of insurance, like an emergency fund. One group member related about how having access to the fund helped when his wife had an emergency hospitalization. This man said if the group funds were not available he would have had to sell a bag of cocoa at a very low price to a middle-man, thereby losing much of its value. Another person said the funds allowed a low-cost loan that permitted their family to pay school fees. The savings and lending group also helped create group cohesion and the group reported they are building plans to do agricultural businesses together with rice production and marketing.

What are some lessons we can take from the savings and lending group? First, save regularly! Even if it is a little amount. Little bits add up and accumulate into useful amounts. Second, check your insurance. For the savings and lending group members, their funds served first as a kind of insurance for health expenses and other unforeseen expenses. Third, build up your emergency fund. Finance experts recommend having between 3 and 6 months of funds in a readily accessible form saved. Last, check your credit. Make sure you have access to credit in order to make a needed large purchase such as a home or car or to take advantage of a small-business opportunity.

The people in the Sierra Leonean village along the dusty and bumpy road between Segbwema and Kono give us an inspiring example of building financial assets through workable, small steps.

College Debt in the News -- What's Your View?

sweedler@illinois.edu(Kathy Sweedler) — 2012-06-11T09:15:00+05:00

College seniors who graduated in 2010 carried an average of $25,250 in student loan debt, according to The Project on Student Debt.

CNN Money reports that the average cost of a wedding is more than $27,000.

And, the average cost of a new car is $30,303, as reported by Forbes.

Let's think about this. What's the worth of each of these items – college education, wedding, and new car – 10 years down the road?

While the current economy has been extremely difficult for young adults looking for work, having a college education does increase a person's odds of finding employment. Nearly half of all recent high school graduates are looking for full-time employment, according to a Rutgers' University study.

In contrast the underemployment rate (including those who would prefer more hours of work or who have given up looking for work) is about 19% for recent young college graduates.

19% underemployment is not good news but it's much better than almost 50%!

College student loan debt has been in the news headlines lately. What are your thoughts about it?

Checking my credit report -- oops!

sweedler@illinois.edu(Kathy Sweedler) — 2012-05-24T15:30:00+05:00

In the last Plan Well, Retire Well blog post Karen talked about how to access your credit report online. Well, sometimes when we check our reports we discover interesting things!

Some young adults may find that they don't have much of a credit history. If this is you, you may want to consider applying for a credit card -- and using it wisely -- in order to establish a credit history. However, with today's tight credit market, I'm hearing from many 20 year olds that they're having trouble being approved for a credit card. Here are some options to consider if you're turned down for a credit card:

apply for a credit card from a different financial institution;
apply for a credit card at a store that you like to shop at;
if you have a phone or utility bill, be sure that it is in your name (and not always in your roommate's name);
consider asking your parents to co-sign on a loan; or
ask your financial institution about a secured credit card.

Others who check their credit report may find that they need to improve their credit history. Remember, a poor credit history can affect your life in many ways including insurance rates, car loan interest rates, and utility deposits. Here are three important steps that you can take:

1. Always pay as agreed.

Make at least the minimum payment due each month and never be late. Delinquent payments and payments that don't meet at least the minimum contractual amount will have the most immediate, negative impact on your credit report and credit scores.

2. Keep your balances low.

Keeping your balances low as compared to your available credit limits is a sign of good credit management and shows lenders you are a good credit risk. Your utilization rate, also called your balance?to?limit ratio is a key component to credit scores.

3. Apply for credit wisely.

Do not apply for multiple accounts in a short period of time. Taking on large amounts of debt in a short time is a sign of high credit risk. Apply for credit when you need it, and only in the amount you need. Just because credit is offered, doesn't mean you have to accept it.

If you have information on your credit report that is wrong, you have the right to have it corrected. Follow the instructions given in the credit report to correct inaccurate information. Keep written documentation of information you send to the credit bureaus.

Remember to check your credit report annually, go to www.annualcreditreport.com

For more information on managing your credit history and credit cards, go to University of Illinois Extension's website, Credit Card Smarts