December 29, 2013

A year’s worth of financial wisdom

Some of the top money advice from 2013.

By Gregory Karp
Chicago Tribune

Credit reports, taking away the checkbook from Grandma and the No. 1 supermarket shopping tip you need to know.

That’s a sampling of hot financial topics this year, along with debt-paying tactics, building an emergency fund and figuring out how much car you can afford.

Some of the top money advice from 2013:

CREDIT

It’s no surprise that credit reports and scores are issues that generate lots of questions. That’s certainly because credit reporting is not only an important consumer topic, but also a confusing and counterintuitive one.

For example, common sense might suggest that if you have more credit accounts open, you have more ability to get into debt trouble and not pay your bills on time. But that’s not the way scoring formulas look at it.

Instead of looking at how much credit you have, and completely ignoring how much money you earn, scoring systems look at your “credit utilization,” how much of your available credit you’re actually using at any given time. Using less than 10 percent of your available credit is ideal.

Check your credit reports once a year from each of the big three credit agencies, Experian, Equifax and TransUnion. Check those reports for free at annualcreditreport.com, or call (877) 322-8228.

Information from your reports is funneled into a formula that spits out a three-digit credit score, a shorthand way for lenders to assess your reports. Credit scores are simply a numerical snapshot, usually ranging from 300 to 900, of what’s contained in your reports that day.

FICO is the brand of score most commonly used by lenders, and one you must pay to access at myfico.com. Get other brands of scores, which is fine for a simple check-in, for free at such sites as creditkarma.com and quizzle.com. You will have to supply your Social Security number. Ignore sales pitches for credit monitoring.

HANDING OVER THE MONEY REINS

Taking away money management responsibilities from elderly relatives or friends is a delicate and emotional subject under the best of circumstances.

Warning signs include piles of unopened bills, compulsive purchases from TV shopping networks, rampant spending on lottery tickets and giving away money to sketchy charities.

Initiate a discussion with the elderly person, and assemble a financial inventory.

That includes names and contact information for the elderly person’s financial institutions and professionals, including phone numbers and online logins and passwords.

Make sure that a will and financial power of attorney are current, and know where to find important papers – birth certificates, insurance policies, tax returns.

Consolidate accounts, automate bill-paying and monitor their accounts online.

FOOD SHOPPING

Money-saving grocery tips abound. But one reigns supreme: stockpiling. Buy multiples when it’s cheap; few or none when it’s full price. What’s cheap? Half-price.

Car affordability. As the average price of new cars tops $31,000, many consumers try to reconcile their bank account balances with their desire for new-car smell, asking: “How much car can I afford?” Here are some rules of thumb to keep car costs reasonable.

Rule of 20/4/10, meaning a 20 percent down payment, a loan term of four years or less and payments plus auto insurance not to exceed 10 percent of gross income. Other rules are stricter: Never buy a new car, pay cash and make sure the total current value of all your vehicles, including boats, motorcycles and snowmobiles, etc., is less than half your gross annual household income. Find current values online at such sites as kbb.com.

EMERGENCY MONEY

The advice sounds so simple: Build cash savings to deal with life’s unexpected expenses. But many people don’t. They’ll say it’s because they don’t have the money. Maybe.

But sometimes it’s because they don’t have a good enough reason. Here are a few.

You’ll avoid putting charges for “emergencies” on a credit card and paying finance charges. If you have cash, you can choose higher insurance deductibles, significantly and permanently lowering your annual insurance costs.

A robust emergency fund can help compensate for losing a job, bridging the financial gap until you can get income flowing again. Having a pile of cash can provide peace of mind, a feeling of control and options.

For example, if you have no money, perhaps you will decide against buying an airline ticket to visit a sick relative or say no to an operation that could save your pet’s life. Having extra cash sometimes means you won’t make regrettable money decisions.

PAYING DEBT

It’s a burning question in personal finance: Which debts should consumers pay off first, ones with the highest interest rates or the smallest amounts?

The answer is highest interest rates if you’re mathematically inclined or have no doubt you will pay off all debt. But if you need some encouragement, paying small debts first will give you a feeling of quick accomplishment.

INSURANCE

This is another area of confusion for consumers, and a topic that brings irate missives from insurance sellers. Insurance – auto, home, life – is one of the best spending categories for consumers to save money. It requires understanding the insurance and regularly shopping for better deals.

Among the fundamental questions is, should I buy term life insurance or permanent insurance? Here’s a rule of thumb: Buy term life insurance.

Only buy pricey permanent insurance – whole life, universal life and variable life – if you fully understand the policy, its costs, its rate of return and exactly why you need it instead of term.

Who needs life insurance? People who have others depending on their work income.

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