Have you ever wondered what kind of impact a foreclosure, short sale, or bankruptcy would have on your credit score? Well, wonder no more…

According to a recent report from VantageScore Solutions, which is a credit scoring company created by the “big three” (Equifax, Experian, and TransUnion), here’s what you can expect:

• Short sale = 120-130 points
• Foreclosure = 140-150 points
• Bankruptcy = 355-365 points

Apparently loan modifications, where late payments and penalties are rolled into the mortgage balance, can actually have a small beneficial impact on your credit score.

Note that your VantageScore isn’t the same as your FICO credit score. VantageScores range from 501 (subprime) to 950 (superprime), whereas FICO scores range from 300-850.

Despite these differences, the numbers above can give you an idea of the relative impact of the different scenarios. Moreover, your VantageScore is being used by an increased number of lenders, particularly large mortgage lenders.

If you’re curious about your “real” FICO credit score, you can take a free peek at it by signing up for a free trial with MyFICO.

Source: Baltimore Sun via Clark Howard

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Today I want to share with you one of my recent home projects… Frugal and effective DIY garage kayak racks.

As I’ve continued down the path of voluntary frugality, I’ve gotten more and more interested in DIY projects of all kinds. Whether or not you’re handy around the house, most frugal homeowners eventually jump on the DIY bandwagon.

Benefits of doing it yourself

1. You control the quality. When you do it yourself, you’re in complete control of the quality of workmanship. I know some folks are very particular, and others who just want to hurry up and get it done. DIY gives you the power to do everything according to your own standards. I naturally tend toward anal retentive, but my increased focus on time management is helping me find that healthy balance between quality and time spent.
2. You control the effectiveness. As with any project that you tackle yourself, the solution you create will be as effective as you want it to be. I am a stickler for effective equipment. Store bought products rarely meet my needs precisely, so DIY allows me to design something that’s perfect for my personal situation.
3. You control the cost. This is a big one… We all know that I love to save those greenbacks. When you DIY, you can decide exactly how much to spend in light of your desired quality and functionality.
4. You learn as you go. When you start tackling your own home projects, you might be rather ignorant. By the time you finish, however, you’ll be well on your way to becoming a handyman. And being a handyman is, well… Handy!
5. You can take pride in the job. I do 95% of my work with my mind, so few things give me more pleasure than getting my hands dirty with some physical labor. I grew up in the country with livestock, a wood stove for heat, and acres of mowing, so… Doing some actual labor makes me feel like I’m home again. And few mental jobs can rival the pride you have when you lay your eyes upon a finished project — at least not for me.

I’m sure there are more benefits, but will stop at five.

While there are benefits to store-bought solutions, there’s rarely a “one size fits all” solution that fits my needs precisely, so I prefer DIY over store bought whenever possible.

A real-life example: kayak racks

I recently decided that I needed some kayak racks in the garage. As it turns out, my solution took more time to conceptualize than to implement. The design is incredibly simple, but perfectly effective. Like I said above… I’m pretty proud of this project.

The materials:

Keep in mind that I made two sets of racks, so I had to double the materials and costs listed below.

• 2 x bungee cords – Just normal bungees will do. I used 2′ cords, but you can use whatever length you need for your situation.
• 2 x 16×11 L shaped brackets – Get the kind with holes for mounting as well as holes in the end for attaching the bungees.
• 2 x 2″ eye bolt screws – I recommend the closed eye hooks so the bungees are less apt to slip.
• 6 x 2-1/2″ wood screws – A lengthy screws provides more support.

Total cost of materials from Lowe’s was around $18 per rack set. Since I built two, I spent about $36.

The tools:

Before starting, you’ll need the following tools.

• Power drill
• Tape Measure
• Pencil
• Stud Finder
• Screwdriver
• Carpenters level

The process:

Obviously, you don’t have to follow this exact method… Remember, it’s your project, so feel free to make whatever changes you like.

1. Decide where you want your kayaks to go, and remember to measure for length. Remember to space your brackets to provide sufficient support, and also be sure to line them up on studs. Once you decide on a spot, use your pencil and level to mark where the tops of the L-brackets should be. Also be sure to mark where the holes in the L-brackets are so you can drill pilot holes.
2. Drill the pilot holes for the L-bracket support screws using a drill bit slightly smaller in diameter than your screws.
3. Drill the holes for the eye bolt screws in a place that will allow the bungees to wrap around the boat and attach to the eye hole loop. The goal here is to position the bungees such that they’ll hold the boat in place on the L-brackets.
4. Screw your L-brackets securely into place with wood screws through each anchor hole in each. Before you screw in that 2nd bracket, double check to be sure everything is level… Then screw it in too.
5. Screw your eye hole screws into their respective holes.
6. Now load your boat onto the L-brackets and stretch the bungee cords from the tip of each bracket to the corresponding eye bolt screw. Voíla! You’ve now finished your very own DIY garage kayak racks for very little money and very little labor.

Here’s a picture of the finished product…

If you’re looking for kayak racks, I highly recommend this design.

If not, I hope that I’ve at least provided a bit of inspiration for tackling other projects around your house. Good luck!

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This is just a quick note to remind you that the good folks at Lending Club are still offering a $25 signup bonus* just for opening a Lending Club account.

Here’s how it works…

1. Visit Lending Club using a link in this post
2. Open and activate a lender account
3. The $25 will be automatically deposited in your account shortly thereafter

That’s it. Note that there are some eligibility requirements for opening a Lending Club account (must be 18, certain states excluded, etc.), but those should quickly become apparent when you click through.

*Note: The signup page won’t say anything about the bonus, but they’ll be able to track and credit you using the special link in this post.

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I recently ran across an interesting letter to the editor in Time Magazine, and thought it would make good fodder for discussion. For background, this letter was written in response to an article by Joel Stein titled “The Week of Living Cheaply.”

Here’s an excerpt from the letter:

“Coupons are the worst kind of junk mail and a terrible waste of paper in our green economy — never mind the time waster they are in the saving, sorting, filing and waiting at the checkout counter. Think of the p.r. coup for the company that announces, “No more coupons!” I, for one, would buy that product on principle.”

To be fair (to Stein), he’s not quite so militant about things in his article. He also makes a good point near the end of his article about the value of haggling or, as he puts it, mumbling “Can you do a little better?” Nonetheless, he clearly places himself squarely in the “no coupon” camp.

So… What do you think? I’ve gone on record in the past saying that we’re not big into coupons. Sure, we’ll use ‘em if we have ‘em, but we don’t go out of our way to track them down. What about you?

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Last month was a bit of an adventure with our seven year old cat. He ran away (something he’s never done) and we were worried sick. Once we got him back, we spent some money on keeping him healthy.

In addition to taking him to the vet for a check up, we also got him updated on his rabies shot. I couldn’t have imagined the true costs of being a pet owner when we first adopted him. I thought it would be cheap and easy to take care of an animal, but that’s not always the case.

If you’re thinking of adopting a pet, please read this article. It’s my hope that pets get adopted into ‘forever homes’ and that both parties happy. Unfortunately, many pets are dropped off at shelters because the owners couldn’t handle the financial responsibilities.

How much does it cost to own a pet?

Some people don’t realize the total costs of maintaining their pets. They may only think of food and the occasional visit to the vet. Being a pet owner, I can tell you that unexpected things will happen even if your pet is relatively healthy.

If you’re still interested in getting a pet, you should first check out how much it costs to care for a pet. The ASPCA looked at the first year costs of some common animals people have as pets and shared the numbers:

• Fish: $235
• Bird: $270
• Guinea Pig: $705
• Rabbit: $1,055
• Cat: $1,035
• Medium Sized Dog: $1,580

Speaking of the ASPCA, shelter animals can make wonderful pets for your home. Don’t think that they are the throwaways. My family went to the local shelter years ago and they were able to find a kitten with the particular temperament they were looking for. He was very people friendly and loved to snuggle up to you when you fell asleep.

Have a pet emergency fund

It’s important to plan ahead and save money up for your pet. Look at the numbers the SPCA has and budget for your pet’s care. You may want to set aside a dedicated savings account for your pet, or you could add that amount into your emergency fund and keep it in one big account.

We all want to be responsible pet owners, but you have to realize that while love and attention are the main ways to care, you still have to have money. The last thing I’m sure you want is to be forced into an economic euthanasia.

Tips for saving on vet care

While pets are never free to take care of, there are ways you can make it more affordable. The key to saving money on taking care of your pet(s) is not to be frugal, not cheap.

Find an affordable vet you can trust

I’ve had my cat since I was in college and was on a very tight budget. I managed to care for him on my limited budget by utilizing my local animal shelter’s low cost pet clinic. There are shelters around the country that offer this service.

The catch with these cheap clinics is that often have odd hours (whenever they can get volunteers), are based on your income (my shelter was $42k or less), and offer limited services. The shelter I used in Virginia covered my cat’s needs (shots, annual checkups, and flea control) and was incredibly inexpensive. I paid about $15 for an office visit and $12 for his rabies shot.

If you don’t qualify for a low cost clinic at the SPCA, some pet stores have clinics, like Banfield at PetSmart. They offer more services and have regular office hours. The quality can vary with the clinics, so check around before you choose.

Once I finished school and had a higher income, I went ahead and found a vet with more convenient hours and a good reputation with my pet owner friends. I’m happy with my current veterinarian and my cat is doing well.

Schedule regular check-ups

Don’t skimp on getting your pet’s annual checkup. Preventive care can save you money in the long run, as you can catch ailments earlier. Keep careful records of your pet’s inoculations and other health-care services. If you move somewhere else or switch vets, make sure you can provide this information to avoid duplication and/or mis-diagnosis.

This past spring, my cat started urinating blood. We went to our veterinarian, but it hadn’t improved even after a few visits. I took my cat to get another vet to second opinion based on a friend’s passionate recommendation.

When I arrived, I gave the new office a copy of the records I had and the contact info for my original vet. They were able to diagnosis and treat him without spending a fortune on another complete round of tests.

Try some DIY grooming

Depending on your pet, this may be a great idea or a huge stress. Getting my cat nail caps at the vet was too much money and not enough reward. Instead, I bought a Pedi-Paw (or something like it) and I trim his nails as needed. After he got used to the routine, it hasn’t been too bad.

Bathing your dog can be messy, but it also save you some money. If you’re not really in the mood to give your dog a bath, do what my dad did and offer your kids money to do it. It’ll help teach responsibility and earn them some spending cash. Who knows, maybe they can start a side business and do it for the neighborhood.

The big take away is look if the grooming service is worth it to you and budget accordingly.

Consider pet health insurance or a pet care plan

Just like people, pets can have health insurance. Not all policies are equal, though. Some policies can save you some money, but be sure to double-check the fine print. You have to run the numbers and see if pet insurance is a good deal for you. If you want to get pet insurance, some popular companies include:

• VPI
• ASPCA
• Pets Best

I think a wellness plan might be a better fit if you find pet health insurance to be too expensive. Many offices offer a package, so ask your vet what their wellness plan is. Having a wellness plan for your puppy or kitten can save you some money during that expensive first year.

Your thoughts?

I love being a pet owner, but I can now understand why my mom was so hesitant with getting a pet. She made us wait until our family budget could afford handle it, and I’m glad she did.

If you’re a pet owner, what tips would you give to potential pet owners? What unexpected expenses have you incurred? What unexpected benefits have you received at a pet owner?

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As a followup to my earlier post about high deductible health plans, I’m curious if you guys have any recommendations when it comes to health savings account (HSA) custodians. My employer has picked one, but their terms aren’t great (too many fees) so I’m thinking of looking elsewhere.

As I noted previously, you’re free to use whoever you want as an HSA custodian. The only downside is that I won’t be able to have the contributions withheld from pre-tax dollars if I don’t use my employer’s preferred HSA custodian. Instead, I’ll have to wait until the end of the yeat to deduct our contributions.

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‘Tis the season… For open enrollment. This year, my employer is really pushing the high deductible health plan, so I spent the weekend poring over the plan documents. Today I thought I’d share what I learned.

Lower premiums

The primary draw of the high deductible health plan are the low premiums. In 2010, the regular PPO plan that we’re accustomed to will cost in the neighborhood of $440/month for our family. In contrast, the high deductible plan will run roughly $70/month.

In other words, if we opt for the high deductible plan, we’ll save $370/month in premiums. That’s a total savings of $4440 per year. Not too shabby. But at what cost?

Higher deductible

It should come as no surprise that a high deductible health plan has a relatively high deductible. In our case, the family deductible would be $3000 ($1500 for individuals). The PPO, on the other hand, has a $900 family deductible ($300 for individuals).

Coverage comparison

Aside from the difference in deductible, the coverage of the two plans is quite comparable. Both plans use the same network, so we’d have access to the same collection of physicians either way.

For “everyday” doctor visits, the PPO has a $20 copay for regular office visits. With the high deductible plan, our insurance would cover 90% of the network rate, subject to our deductible. Beyond that, the coverage is virtually identical, though the high deductible plan has a higher “stop loss” limit ($6000 vs. $2000 for family coverage).

As I noted above, both plans utilize the same network of doctors, and both entitle us to the same reduced rates that have been negotiated by the insurer. Thus, the primary difference really does appear to be

In terms of pharmaceuticals, the coverage would be similar. Instead of calling for a $10 (generic) or $25 (name brand) copay, the high deductible plan would cover 90% of the cost of our prescriptions, again subject to our deductible.

Health savings account (HSA)

If we opt for the high deductible plan, we’ll be eligible for a health savings account (HSA). Like the FSA, the HSA provides provides a tax break on qualified medical expenses.

Not to be confused with a flexible spending account (FSA), however, the HSA has higher limits ($6150 for a family in 2010) and is not subject to the “use it or lost it” provision.

Another key difference is that we’ll be able to invest the funds in the HSA in much the same way we can invest the money in our IRAs. My employer has selected an HSA custodian, but we’re actually free to use anyone we want.

If we choose to go with a different provider our contributions won’t be made with pre-tax dollars, but we’ll still be able to deduct them at the end of the year, and we’ll still be able to make tax-free withdrawals to cover qualified expenses.

One final bit of information is that my employer is offering a one time “seed” contribution to jumpstart our HSA. This amount will count against our annual contribution limit, but it’s free money.

Making a choice

After reading through all of the paperwork, it seems like we’d be fools not to take the high deductible plan. After all, we’d realize an immediate savings of $370/month or $4440/year. Even after paying the deductible, we’ll be $1440 ahead (not counting the HSA seed money).

It’s also worth noting that the physician and pharmaceutical copays are actually a good bit higher than 10% in most cases (e.g., the $20/visit copay is more like 20-25% of the negotiated rate). Thus, once we’ve met our deductible, we’ll actually be catching a bit of a break on these costs.

As of right now, it looks like we’ll be going with the high deductible plan. Assuming we move ahead with this, my intention is to max out the HSA and start building up a stockpile of cash for medical expenses.

Since the HSA isn’t tied to my employer, and we can also carry the money forward and invest it as we see fit, there’s really no downside to overshooting our current needs.

What am I missing?

Okay, here’s where you come in… This high deductible plan almost sounds too good to be true. What am I missing? Do you have a high deductible plan? Why or why not? And if you do have a high deductible plan, have you run into any nasty surprises?

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Did you know that you have to pay back the homebuyer tax credit if you claim it and then sell your house (or otherwise stop using it as your principal residence) within the next three years? I didn’t, but apparently that’s the case. Here’s the scoop straight from the IRS:

Q: When must I pay back the credit for the home I purchased in 2009?

A: Generally, there is no requirement to pay back the credit for a principal residence purchased in 2009. The obligation to repay the credit on a home purchased in 2009 arises only if the home ceases to be your principal residence within 36 months from the date of purchase. The full amount of the credit received becomes due on the return for the year the home ceased being your principal residence. (source)

Note that there are no exceptions for military personnel who are deployed and sell their home. If they move out during deployment but retain ownership, the deployment “may be” considered a temporary absence such that the home can technically remain their primary residence.

If you find yourself subject to the recapture provision, you are required to repay the credit in full as “additional tax” when you file your Federal income tax return for that year. See IRS Form 5405 for additional details.

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This is a guest post from Craig Ford of Money Help for Christians. If you like what you see here, please consider subscribing to his RSS feed.

When evaluating purchases, some folks are just so enamored with the price. They think a good deal is all about price. I used to think the lower the price the better, so I guess you could call me a recovering price addict. However, I’m coming to realize a good deal can only be found when one factors in both the price and the value of an item.

Consider the following fictional conversation:

Low Price Lover: “I got a great deal on my new bike!”

Person Concerned with Value: “Really? That bike looks like a piece of junk that could break if you sat on it.”

Low Price Lover: “Hey man, don’t dis’ my bike! Most bikes I looked at cost over a hundred dollars and this one was only $35. I got it for 65% less than every other bike I saw.”

Person Concerned with Value: “You just bought $35 worth of junk.”

Admittedly, this conversation over-emphasizes the boasting of the “low price lover.” However, the larger point still stands — any of us can become so enamored by price that we completely neglect to factor in the value or true worth of an item.

What is a “good deal”?

Getting a good deal means getting something that has a higher value for a lower than average price. At a minimum, every buyer should be sure that as the price for an item increases, so does the true value of the product. A purchase where price and value are comparable would be neither a good deal nor a bad deal. So what we’re really interested in is the value/dollar ratio.

When value lags behind price: a bad deal

Instances in which the price of a certain item is high, but the value is not, represent a bad deal. You’re spending more money without getting anything extra in return. If you want some examples of high price/low value items, look no further than the SkyMall Magazine next time you fly. There are some pretty outrageous prices for standard items. The bottom line is that it’s possible to get something for a really low price and still get a bad deal.

When price lags behind value: the good deal

The ultimate “good deal” occurs when you you get a high value item for a low price. In other words, the money that you spend winds up giving you more value per dollar, such that you’re maximizing that value/dollar ratio.

What are the best ways to get a good deal?

• Shop second hand stores. Some folks love name brands. When you shop second hand you can still get the value of a name brand without the associated price increase.
• Shop garage sales. Garage sales are filled with things that no longer appeal to their owners. In many cases, however, the items are still as valuable as ever. As a result, it’s possible to find like-new products at garage sales.
• Shop off season. Who wants to buy shorts in September? You do! When you buy off-season, you can typically buy items for anywhere between 50-85% off. Now that is a great deal.
• Inform the sales associate. When I bought my last computer, I started by simply telling the the sales rep that I was looking for a computer. After he showed me a few computers, I specified that I was looking for a good deal, and he then showed a number of items that had been deeply discounted for various reasons. Remember, as long as it fits your needs, and the value exceeds the price, you’re getting a good deal.
• Anticipate your needs. The more time you have available to purchase your item, the more likely you are to find a good deal. For example, if you know in advance that you need new running shoes, you have time to shop around and a great deal. If, however, you head out the night before a big race, you’ll be forced to buy whatever is available regardless of price.
• Look online. You can find some great prices online. If you’re not comfortable shopping online, then at least make some price comparisons and then ask a local store for a price match.
• Be creative. You can get a great deal if you find a way to share a product or even if you find a different item that will fill the same needs. When making a purchase, you might also consider asking if the store will throw in something extra.
• Inform friends and associates. If you are hunting for a particular item, be sure to let those around you know. It’s amazing the number of times someone has an item they are willing to sell (and even give away) for practically nothing. Take advantage of your networking groups.
• Check out non-traditional shopping outlets. Craigslist and eBay are both great places to find a good deal . Find a flea market around.
• Use cash. When purchasing items — especially from individuals — nothing makes them more anxious to make the sale than a flash of cash. They know if they make the sale there will be no hassles or problems with getting paid, so don’t be afraid to make an offer accompanied by a fistful of cash.

Any more ideas?

Do you have any additional tips/strategies for getting get a good deal?

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Back in April of 2009, I was already mad at my debt. It wasn’t until I conjured up the idea of tabulating how much interest I was paying, however, that my eyes were finally opened to the enormous power my debt had over my ability to retain my own hard earned money!

Here is the story of what pushed me over the edge and ignited an unquenchable fire that will burn hot until that glorious day when our last debt obligation is finally met…

The backstory

Already four months into our Debt Free Adventure, I was working tirelessly to gain control over our monthly cash flow. I was angry at our debt, and consumed with the idea of establishing disciplined management over our monthly expenditures. This was not easy.

Because neither my wife nor I were experienced budgeters, getting a handle on ‘where every dollar was going’ was not something that came naturally to us. Maybe you can relate.

Being sick of our paycheck-to-paycheck lifestyle gave us a lot of motivation, but we needed more. We were committed to budgeting, but I knew it would be hard to sustain the necessary level of intensity and passion. After all, changing our relationship with money was akin to reinventing your golf swing.

Regardless, we knew it was essential if we were ever going to master our money. So I set off in search of the necessary motivation. Then one happy day in April, I found it!

I discovered how much my debt cost

I’m not talking about how much my payments were. I’m talking about how much my debt was costing me. How much I was paying each and every month for someone to lend me money. What if that money was no longer vanishing into the silk pockets of banking geniuses? What if it was going straight into my pocket and staying there?

To find and sustain the necessary passion, all I needed to do was calculate how much money I was paying in interest every month, print the amount off in HUGE NUMBERS, and stick it on my fridge. Every month it makes me mad. Every month I strive to make that number go down as much as possible.

Want to know what’s even better? This simple exercise will help bring the whole family on board. Show the number to everyone, and explain how this amount can be yours every single month if you can just buckle down get out of debt. From that day forward, everyone will see that number on the fridge — every month.

This simple idea helped us develop a lasting financial philosophy to apply to our family finances. A financial mission statement of sorts to embody the spirit of our Debt Free Adventure — “sacrifice now to benefit later.” Think of it kind of like the more popular but less cool, “Live like no one else, so you can live like no one else.”

Your homework

That’s right… I’m assigning homework. Don’t worry, it’s easy, and it won’t be graded. Well, I won’t be grading you… I can’t promise the same for Nickel.

Do yourself a solid and set aside 30-60 minutes to complete the following:

1. Write out a list of all debts on which you are paying interest (or will be paying interest, like that six months “same as cash” couch that you bought). For whatever reason, the simple act of writing it down and having a physical copy is much more powerful than creating a spreadsheet.
2. Identify the interest rate of each debt and record them on your list. You shouldn’t need this for the calculation, but it’s good to see those numbers staring you in the face.
3. Record the actual amount of interest paid last month for each and every one of your debts. In other words, separate the principal from the interest and record the latter.
4. Add all of your interest payments together to discover exactly how much your debt is costing you.
5. Get mad at how much your debt is costing you. The goal here is to inspire a lifestyle change resulting in increased financial discipline.
6. Repeat this exercise every month and watch your progress. This will help remind you of how much your debt costs you, and watching that number shrink will help you stay motivated.

Although I started this exercise in April of 2009, I didn’t realize how powerful it was until I did it again six months later. I now intend to do this every month until I am completely debt free.

I know that I told you do this by hand, and you should — at least at first. Over time, however, you should be able to transition to a spreadsheet to more easily track your progress. If you have any clever ideas for a spreadsheet template, please let me know. Better yet, whip something up and drop me a line.

Spread the word

If you already have a handle on all of this stuff… Awesome! Now go help someone else see the light. I know you know someone who needs your help. You’re probably thinking of them right now, so… Go help!

My goal is to get each and every debtor that I run into to complete this exercise as soon as possible. I’m going to be like that annoying buddy of yours who sells Quixtar or Herbalife and will never let a conversation go by without bringing it up. Why? Because I know it will help people.

Make no mistake about it… I want this to become the next personal finance phenomenon. Hopefully, this article and simple homework assignment will inspire you to pursue a debt free life. It worked for me, so please give it a try.

It’s already catching on!

Here’s a quick list of others who have already experienced the power of this exercise:

• Interest Amount Paid – Establish a Proper Relationship with Your Debt – My attempt at working this calculation
• How much Interest are YOU Paying? – My second calculation, sixth months later… Notice how it is $58 less!
• Do You Know How Much Interest You Are Paying Each Month? – Patrick says you should, “get ready to be shocked!”
• How Much Interest Do I Pay? TOO MUCH! – MyJourney said his calculations made him “sick to [his] stomach!”

Now it’s your turn… If you just want to go through the exercise, print off your amounts, and stick them to your fridge… Great. Please let us know about it in the comments. If you are a PF Blogger, go through the exercise, and write a post about it… Maybe I can talk Nickel into adding your post to the list above.

However you do it… Just make sure you do it.

In closing

Think of it this way… That money can either flow out of your wallet OR into your pocket. Which do you prefer? The choice is yours!

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Related Articles at fivecentnickel.com:

» Steps to Early Retirement
» Weekly Roundup – 07/28/06
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» Money Poll #22: Current Debt Load
» Current Debt Load Poll Results
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» Debt Reduction: Penny Wise and Pound Foolish
» Debt Reduction on a Grand Scale

Last week I contacted Ally Bank with a last minute change of heart. I had intended to roll our 12 month CD into a 5 year CD upon expiration, but had second thoughts when I saw that Series I Savings Bonds are more attractive than CD rates.

I actually contacted Ally on the renewal date and was thus able to get the money back out without any penalties. I did, however, notice that our “available balance” was lower than our actual balance.

When I asked about the discrepancy, I was told that we hadn’t sent in our signature cards, and were thus subject to backup withholding. Backup withholding? I wasn’t even sure exactly what that is.

I’ve seen the term many times over the years, but have always checked the box saying that I’m not subject to it. I’ve always known that backup withholding is a special form of income tax withholding, but I never really knew when it applied.

What is backup withholding?

Investment income is not typically subject to regular income tax withholding, but it may be subject to backup withholding to ensure that the IRS gets their money. In general terms, most payments that are reported on Form 1099 are potentially subject to backup withholding.

The backup withholding rate is currently 28%, which means that Ally withheld 28% of our interest earned. This amount will be sent to the IRS on our behalf, and will be reported on our 1099-INT at the end of the year.

Since it’s relatively late in the year, and the amount in question isn’t huge, this isn’t a big deal. Sure, we’ll lose the ability to immediately reinvest our interest, but it will be applied to our tax bill when it comes time to file 2009 taxes.

Who is subject to backup withholding?

According to the IRS (but boiled down into plain English) backup withholding applies if any of the following apply:

• You have not given the payer your Tax ID number,
• You have not certified to the payer that this number is correct,
• The IRS has notified the payer than the number is incorrect,
• The IRS has notified the payer to begin withholding because you have not reported all such income in the past, or
• You have not certified that you are not subject to backup withholding

I’m guessing that it’s this last point that tripped us up. I have no idea what the Ally Bank signature cards look like, but I’d be willing to bet that they have a checkbox to certify that you’re not subject to backup withholding.

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This is just a quick followup to yesterday’s post about Series I Savings Bonds. As I noted in that post, you are limited to purchasing $5k of these bonds in electronic and paper form each year for an annual total of $10k (per Social Security number).

Assuming that you max out, this means that you’ll be the proud new owner of bonds in two forms. Yuck. The good news is that you can convert your paper bonds into electronic form. The TreasuryDirect website explains how. In short:

1. Open a TreasuryDirect account (if you don’t have one)
2. Notify them using the “Contact Us” that you want to convert paper bonds
3. Wait for an e-mail saying your account has been prepared for conversions
4. Login to your TreasuryDirect account and click “My Converted Bonds”
5. Click “Manage Direct” and then select “How to Convert My Paper Bonds”

From there, just follow the instructions and you’ll be home free. I’m still not sure why they have separate limits for paper and electronic bonds, but it is what it is. At least you don’t have to hang onto the paper bonds if you don’t want to.

Note that I haven’t completed this process myself (yet), but I will be doing so soon, and will post more details when that happens. In the mean time, if you have any tips, please weigh in.

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Related Articles at fivecentnickel.com:

» What are Series I Savings Bonds?
» CitiBank’s “All-Electronic” Program Sure Involves a lot of Paper
» Treasury Securities: A Survey of What’s Available
» Investment Performance: Stocks vs. Bonds
» Series I Savings Bonds Now Paying 3.36%
» 401(k) Changes to Encourage Saving
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Buying a house is probably the biggest purchase that most people will ever make. Given what’s at stake, you want to be sure you’re not buying a lemon. If you’re buying an existing home, a home inspection can save you from getting a house that needs costly repairs from either owner’s neglect or old age.

Even if you’re looking at new construction, however, you should hire an inspector to make sure everything was done correctly during the construction process. Don’t rely on the codes inspectors, as they’re often in a hurry and might miss something important. Paying for a home inspection is a small price to pay for peace of mind.

Finding a home inspector you can trust

I’m a big fan of calling around for recommendations as it’s hard to gauge a home inspector from an ad in the phone book or online. You can start by asking your realtor for recommendations and/or comments on home inspectors. Also check with any friends that have bought a house and find out how they liked their inspector.

I’m primarily interested in how thorough the inspector is and whether or not they’ll take the time to explain the results to me. If your friends are open, you might also consider asking them about the price. While you’re not necessarily looking at the lowest price, you don’t want to overpay for your home inspection and break your budget.

Home inspection prices vary according to region and building size. I’ve found that estimated costs in my area are typically $300-$450.

Ask questions

After you have a list of names, go ahead and call the inspectors. While making small talk, ask questions concerning the inspection and their qualifications. Any qualified professional will expect these types of questions and won’t be offended.

If you’re looking for solid questions to ask the potential home inspector, the Department of Housing and Urban Development has a nice resource. I found the questions helpful when calling.

• What does your inspection cover and how much does it cost?
• Are you specifically experienced in residential inspection?
• Do you maintain membership in a professional home inspector association?

Some states, such as North Carolina, have a license for home inspectors, but others don’t. If your state doesn’t have a license requirement, ask the home inspector if they’re a member of the American Society of Home Inspectors. Verify by check with the association yourself. It pays to be diligent.

Be there during the inspection

It’s always a good idea to be present during the inspection. That way the inspector can not only review the results, but they can also point out any particularly problematic areas. Just don’t get in the inspector’s way.

What does a typical home inspection include?

The standard home inspector’s report will cover the condition of the home’s heating system; central air conditioning system (temperature permitting); interior plumbing and electrical systems; the roof, attic and visible insulation; walls, ceilings, floors, windows and doors; the foundation, basement and structural components.

Source: American Society of Home Inspectors

Make the most of your time by taking notes and paying attention during the inspection. When you receive your report from the inspector, review anything that you don’t understand. You may not have the technical expertise, so take advantage of the fact that you’re paying them to help you.

Have you been through a home inspection?

If you’ve had a home inspected, how did it go? Was the inspector helpful? Did the inspector help you avoid a costly repair? Do you have any tips to share?

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Last week I noted that Series I Savings Bonds are now paying 3.36% (current as of 11/09). Given current CD rates, this makes them a rather attractive alternative to bank CDs. That being said, a lot of people aren’t familiar with them, and are thus unlikely to use them.

What is a Series I Savings Bond?

Series I Savings Bonds (also referred to as “I Bonds”) are a low-risk, inflation-indexed savings instrument issued by the Federal government. Unlike CDs, which have a fixed interest rate, I Bond rates are adjust semi-annually based on the prevailing inflation rate, in May and November.

The I Bond rates is actually made up of two components, a fixed rate that sticks with the bond over its lifetime and a variable rate that changes every six months based on the Consumer Price Index (CPI).

How to Purchase I Bonds

You can purchase I Bonds in one of two forms: electronic or paper. Electronic purchases are done via TreasuryDirect, whereas paper bonds can be purchased (with no fee) from most banks.

The primary limitation with I Bonds is that you can only purchase $5k worth of them (per format, so $10k total) per calendar year per social security number. The good news is that you can convert your paper bonds into electronic format following the purchase.

Electronic I Bonds can actually be purchased in any amount between $25-$5k, whereas paper bonds are issued in denominations of $50, $75, $100, $200, $500, $1000, and $5000.

Advantages of I Bonds

Aside from providing inflation protection, I Bonds offer some tax advantages, as well. For starters, the interest accrues within the bond itself, so you are not taxed on the proceeds until you choose to redeem the bond (more below).

A second tax advantage is that I Bonds are not subject to state income tax, such that the tax equivalent yield is actually higher than that of an equivalent, fully taxable investment.

Note: Jim also made the excellent point in the comments that interest on I Bonds (as well as EE Bonds) is tax-free if used for college tuition (with some restrictions; details).

Redeeming I Bonds

I Bonds have to be held for a minimum of one year before they can be redeemed, and they cannot be transferred through market sales. In other words, once you buy one, your money is locked in for 12 months. Period.

You can redeem your I Bonds between 1-5 years after purchase for a three month interest penalty. After five years, you can redeem your I Bonds without a penalty. If left untouched, your I Bonds will continue to earn interest for up to 30 years.

Are I Bonds right for you?

The answer to this question will depend on your circumstances, but I’m of the opinion that I Bonds can be a great alternative to CDs. The reason for this is that they provide inflation protection and they also offer a few tax advantages (noted above) as compared to CDs.

Look at it this way… If you buy one today and have to break it in a year, you’ll have earned a little better than 2.5% after paying the three month penalty (assuming rates remain the same). In the mean time, if inflation kicks up, so will your interest rate.

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Related Articles at fivecentnickel.com:

» Converting Paper Savings Bonds to Electronic Form With SmartExchange
» Series I Savings Bonds Now Paying 3.36%
» Treasury Securities: A Survey of What’s Available
» What is Backup Withholding?
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» Alternatives to High Yield Online Savings Accounts
» Investment Advice: Ignore the Noise
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I’ve received several comments/e-mails asking about whether Congress has decided to make the first time homebuyer tax credit retroactive. If you saw my previous article, you’ll know that Congress has extended the first time homebuyer credit and added a new $6500 credit for existing homeowners.

Is the homebuyer tax credit retroactive… or not?

From everything that I’ve heard, the answer is that it will not be made retroactive. While this might not seem fair, the undelrying logic makes sense… Since the goal is to stimulate sales going forward, it makes no sense to hand out credits to people who have already bought. The likely effective date of the new credit will be December 1, 2009.

The bigger question is whether not the $6500 tax credit will be enough to push existing homeowners into the market for homes and mortgages. Even if it does, I’m not convinced that it will have much of an impact for anyone other than realtors. After all, for every homeowner that goes looking for a house, there will be one more house on the market.

Can you use the $6500 credit to buy a second home?

The only exception to this one-for-one swap will be if people want to use the credit to buy a second home. The primary limitation here is that the new home has to serve as your primary residence. I’m not sure how they’ll enforce this, but it seems like you could buy and move into a new home while keeping your old one as a rental property.

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Related Articles at fivecentnickel.com:

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This just in… The House of Representatives has voted to extend — and expand — the first time homebuyer tax credit.

Extending the $8000 credit, adding a $6500 credit

According to the NY Times:

The bill extends an $8,000 tax credit for first-time home buyers that was due to expire on Nov. 30, making it available to those who have a contract before May 1 on a primary residence priced at up to $800,000. The bill also creates a new credit of up to $6,500 for existing homeowners who buy a new residence if they have lived in their current one for at least five of the last eight years.

The income limits for the homebuyer tax credit are also going up, from $75k/$150k for individuals/couples to $125k/$225k. Beyond that, the credit phases out. This extension/expansion is projected to cost nearly $11B.

Extending unemployment benefits

This bill also extends unemployment benefits, as follows:

The measure [also] provides up to 14 weeks of additional assistance to unemployed people who have exhausted their state and federal benefits, but up to 20 additional weeks to those in about 26 states with unemployment rates exceeding 8.5 percent.

The President is expected to sign this bill into law as early as tomorrow (Friday). Also if you’re in the market for a mortgage, you can compare current mortgage rates here.

Thoughts?

Source: NY Times

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Related Articles at fivecentnickel.com:

» Did Congress Make the Homebuyer Tax Credit Retroactive?
» $15,000 Homebuyer Tax Credit
» $15,000 Homebuyer Tax Credit Dropped from Stimulus Package
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» First Time Homebuyer Tax Credit Followup
» $15,000 Homebuyer’s Tax Credit is Back on the Table
» Refundable vs. Non-Refundable Income Tax Credits
» $7500 First Time Homebuyer Tax Credit

As October came to a close, things were still going well with my Lending Club investments. The one loan that has gone bad has stayed bad, but everything else is being paid on time.

Even with that delinquency, however, my “High Risk” portfolio is back in the black, as I’ve earned more than enough in interest to cover the loan that I lost. Assuming things keep going as they are, that one bad loan will soon be a distant memory.

During October, a couple of borrowers paid off their loans early, so I’ve re-deployed that cash (along with some additional funds that I’ve added to my account). At the end of the month, I had 148 active loans with a net annualized return of 11.82%.

From here on out, I’m planning more of the same… I’ll be steadily adding money every month, and reinvesting the repayments as they come in. If you’ve been investing with Lending Club, I’d love for you to share your experiences in the comments section, below.

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If you don’t control your money, your money will control you. Today let’s focus on getting control over the cost of auto repair and maintenance.

The cost of owning a car

Here’s a look at all the budget categories you may want consider when attempting to nail down your auto expenses:

1. Purchase price – payment (cash and/or financing and interest) to acquire the vehicle
2. Taxes – paid when you buy or sell the vehicle
3. Fuel – the gasoline/fuel you need to make the vehicle run
4. Insurance – all levels auto insurance including personal liability, collision, comprehensive, roadside assistance, etc
5. Tags and registration – state vehicle registration, license plates, and renewal tags
6. Repair and maintenance – tires, oil changes, and all other repairs and maintenance necessary to keep your vehicle operational

Today we’ll set aside the first five categories and focus solely on budgeting for repairs and maintenance.

Benefits of controlling these costs

Many of the benefits of controlling your auto maintenance costs are similar to those you experience when gaining control over any area of your money, so let’s focus on those that are specific to the topic. Proper budgeting for auto repair and maintenance will allow you to:

• Have a better relationship and better communication with your auto mechanic
• Prepare/plan better so you don’t have to race to get oil changes before your next trip
• Reduce your maintenance expenses going forward
• Relax in the knowledge that you’re prepared

You can achieve all of these things simply by setting aside enough money to cover your expenses. That way you won’t have to stress or worry about where the money is coming from — if it can be found at all.

A simple, average amount

Before we try to determine specific dollar amounts for your individual situation, let’s talk about a simple, average amount that people can start with. If you want a detailed break down of costs for your exact vehicle and situation… Scroll down to the next section.

Earlier this week, I spoke with my trusted auto mechanic — Sam — about how much the average person should budget for auto repair and maintenance. These are the numbers he gave me:

On average $1,200 per year per vehicle, is a great place to start. This means $100 per month for each vehicle.

Remember that these numbers are averages, so… While there will always be exceptions to the rule, this amount should cover “typical” maintenance expenses. Of course, it’s important to actually have this money set aside so you can spend it in a lump sum if necessary.

Robert Espe, a frequent DebtFreeAdventure, says the he budgets $2,000/car per year, and also reminds us that although there is no exact answer that will work for everyone.

Figure out your total cost of ownership

For all you fellow geeks out there who want to nail down costs to the exact penny… This section is for you! Rather than guessing at or estimating monthly amounts, use this information to figure out exactly how much it will cost you to purchase, own, operate, and maintain your vehicle over the entire life of ownership.

Here are a few tools to help you figure out exactly how much you are spending to help you get an idea of how much you need to budget:

• The Total Cost of Ownership Calculator from Edmunds
• The Car Operating Cost Calculator

The Edmunds tool is only for current car models, whereas the other one works regardless of your situation. Also note that these tools are very comprehensive, even taking into account depreciation. I recommend setting aside some time and playing around with these calculators so you can nail down the real cost of owning and maintaining each of your vehicles.

What about you?

Do you budget for automotive expenses? If so, how much do you set aside for these expenses each month?

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This is just a quick note to say the new Series I U.S. Savings Bond interest rates have been released. I haven’t written much (anything?) about savings bonds in the past, but I’m planning on changing that in the near future.

In the mean time, I’ll just say this… The interest rate on Series I bonds is made up of a fixed rate component and an inflation component. Rates are updated twice a year, in May and November.

The latest update saw the fixed component increase from 0.10% to 0.3% and the inflation component went from 0% to 3.06%. In other words, they’re now offering a total return 3.36%, which compares favorably with prevailing CD rates.

For a bit of background, Series I bonds can be cashed in after a minimum of 1 year. If you break them between 1-5 years, there is a penalty of three months of interest. After five years, there is no penalty. More info here.

Source: TreasuryDirect and Bargaineering

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Related Articles at fivecentnickel.com:

» Converting Paper Savings Bonds to Electronic Form With SmartExchange
» What are Series I Savings Bonds?
» Treasury Securities: A Survey of What’s Available
» What is Backup Withholding?
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» Making Sense of Tax Efficient Money Funds
» Investment Performance: Stocks vs. Bonds
» Investment Advice: Ignore the Noise

This is a guest post from Adam Jusko, founder of IndexCreditCards.com, a credit card information site where you can compare credit card offers. Please consider following Adam on Twitter for quick credit tips and opinions.

As the founder of a website about credit cards, I’m sometimes asked by financial reporters what advice I’d give to people trying to get out of debt. This used to stump me a bit, because the only true answer is “spend less than you earn and pay down your debt.” But of course, it’s not that easy.

Just as weight loss requires a certain psychological change that goes beyond “burn more calories than you eat,” so too does debt reduction. In fact, when climbing out of debt, you can adapt many of the same strategies used for successful weight loss. Let’s look at a few to see how you can put yourself on a financial diet that will lead to debt loss:

• Take it slow to build new habits – If you’ve ever heard the term “yo-yo dieting,” you know that it’s common for people to lose weight quickly, then put all that weight back on again once the “diet” is over. Why? Because it was a short-term fix, not a permanent change in behavior. The same is true of debt. You can put yourself on a complete financial sacrifice program to pay down your debt quickly, but once the debt is paid, you’ll feel deprived and you won’t have new habits to sustain you over the long haul. So, take it slow. Create a debt reduction program that requires real change in financial behavior but not a program that is such a shock to the system that you’ll never be able to maintain it.
• Make it public (at least somewhat) – A common goal-setting tactic for weight loss (and other goals as well) is to tell someone about the goal you’ve set. Doing so achieves a few worthy objectives: (1) friends & family understand changes in your behavior, (2) they encourage you toward your goal, and (3) you feel more committed because you want the praise that comes with success (or want to avoid admitting failure, depending on what motivates you). It may not be fun to tell of your debt, but people that care about you want to help you reach your goals. So tell ‘em.
• Cut down on sweets – Weight loss isn’t without sacrifice, and neither is debt reduction. If you want to lose weight, you have to lay off the cupcakes (or at least cut down on them). If you want to get out of debt, you have to lay off the new purse or new cell phone or new whatever-it-is-that-you-LOVE-to-spend-money-on (or at least cut down on them). Obvious, but still worth mentioning.
• Exercise – Obviously it’s good for losing weight, but getting out of debt? Yep. You’re more likely to be overweight if you’re in debt, and vice versa. Why? We could talk about endorphins and depression and all sorts of possible reasons, but in the end it doesn’t matter. Exercise is good for everything. Don’t believe me? Here’s at least one study that backs up the positive effects of dieting, which include increasing wealth.
• Use small rewards – Whether it’s losing weight or getting out of debt, it’s hard to wait until you reach your ultimate goal to celebrate. So, don’t wait. Set small goals along the way and reward yourself for staying on the right path. Just don’t make your reward a big money splurge that defeats earlier efforts. One suggestion: coffee with a friend who supports your efforts and will give you the pat on the back you need.

Like weight loss, debt reduction ain’t easy. It takes sacrifice, there’s no way around it. But using small strategies to support your larger goal will help you through the slog and to the other side — where you know a happier life is waiting for you.

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I just ran across an interesting article about Disney receiving the go-ahead from China’s central government to build a new theme park in Shanghai. Current estimates are that the new park will cost close to $4B and will open in five to six years. I can only imagine how thrilled Disney is at being given access to such a huge market.

And now… Eight recent articles that caught my eye…

• Conduct a Financial Fire Drill
• Seven Zen Principles to Guide Your Money and Your Life
• The Good, the Bad, and the Ugly of Annuities
• Our Journey to Debt Freedom: Cresting the Hill
• Create a Home Inventory and Save Your Stuff
• Can You Buy Your Way Out of the Rat Race?
• Ten Tricks for Staying Warm This Winter Without Huge Energy Bills
• How to Budget for Lump Sum Payments

That’s it for now. Have a great week.

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In December, we’ll be celebrating our 3 year anniversary. Our little tradition so far has been taking a vacation. Since we’re getting a townhouse a month before our vacation, however, we’re scaling back a bit this year. After talking with some friends about saving money on travel, I have some more tips to share.

Planning ahead and looking at the total costs of going on vacation can help you control your spending. Some people spend frivolously on vacation and then wonder where their money went. Like everything, prioritize your spending.

My husband and I like to have memorable trips, and love taking pictures as our main mementos. Some people like grabbing gifts and other like to spend money on food. Pick one or two areas where you want to splurge and cut back on the rest. It is possible to have a good time on vacation and not spend a lot of money.

While I share some things that have worked well for us and our friends, see if you can add some more tips in the comments. I’d love for everyone’s next vacation to be both fun and frugal.

Getting a car rental for the trip

We usually have a rental car for the trip. We’d like to avoid wear and tear on our cars since we usually drive some distance. We also like the option of turning in the rental car if there is a problem and exchanging it for another. It’s less hassle than finding a shop while out of town and getting a repair made.

Last year we tried renting a car through Priceline, and it worked well for us. We started low with a bid of$11/day. We then slowly raised that number until we got an offer. We ended up getting a mid-size car for $14/day plus tax.

Before going to pick up the rental I checked with my car insurance company to see if they provide rental car coverage. Our policy, like many others, will transfer all our liability and collision coverage to a rental driven in place of our own car.

If you’ve ever priced insurance at the rental counter, you know free insurance coverage is a huge savings. If you’re planning on renting with a credit card, you should also check to see if the card issuer offers any sort of insurance coverage.

Eating on road trips

If you’re driving to destination, I suggest packing plenty of snacks and drinks for the trip. This will save you from impulsively buying expensive snacks at gas stations and also cut down on stopping for breaks on the road. We also estimate our trip time and plan for a longer lunch stop to eat and relax. Using Google Maps, we can usually find a nice local spot that’s affordable.

Saving money on airfare

Friends of mine recommend using Kayak to compare airfares. It saves them time aggregating the best fares from several top sites at once. One friend is currently out in Oregon visiting family and friends — she got two cross-country tickets for $149 total! Her tip is to plan ahead and check repeatedly as prices change constantly.

If you’re also considering smaller, budget airlines, Nora Dunn (a world traveler) suggests using Which Budget to see if you can find better rates.

Packing for a vacation

If you’re flying, pack light to avoid luggage fees from the airlines. Call your airline ahead of time to find out about their baggage policy and fees. Travel expert Anne McAlpin’s “Pack it Up” has some wonderful tips on packing your carry on bag and for airport security.

• Keep your clothes basic and choose outfits that work interchangeably with your shoes and accessories. If you’re traveling during the winter season, bring items to layer. If you’re traveling during warmer weather, McAlpin suggests getting some clothes made of natural fabrics.
• Take inexpensive jewelry with you when you travel. Leave your nice pieces at home. The exception, of course, is your wedding ring.
• Go easy on shoes. Make sure you have comfortable walking shoes, dress shoes for nice dinner, and possibly sandals.
• Bring dryer sheets to de-static your knit items and help keep your luggage smelling fresh.
• Take a photo of what you’ve packed in case the airline loses your luggage. It can be hard to remember who’s bag had what.
• If you like to pack lots of clothes, consider getting compression bags. They can save you space and reduce your luggage count (but not weight).
• Don’t stress out over getting luggage insurance. You may already be covered by the airline, your credit card (if you bought the tickets with it), or your homeowner’s insurance.

Making the most of your hotel

We again used Priceline to bid on a comfortable hotel near Disney World and ended up paying 1/3 of their regular prices. When we placed our bid, we requested a three star or higher property, and low-balled our price. We got accepted on our first bid (maybe we should’ve bid lower!) and wound up near both Universal Studios and a friend who lives just outside of Orlando — knowing a local person can be an invaluable resource.

When you get to the hotel, be pleasant with the staff and ask them for some local recommendations for places to eat. I use to work as a front desk clerk while in college, and I loved to help tourists discover local spots. Doing this can both save money and help you find a memorable place to eat. I would also ask the concierge (if they have one) for some smaller events that are happening around town.

Cutting your expenses home

If nobody will be in your house when you’re away, go ahead and unplug some appliances such as your microwave, toaster oven, computer, and stereo. Our electric company, Progress Energy, notes that “up to 75 percent of the energy used in home offices is consumed when the electronics are plugged in, but not in use.” You might also want to change your thermostat you’re out of town.

Your thoughts

Do you have any further suggestions for planning a fun and fugal vacation?

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Consumer Reports recently released their 2009 listing of the most and least reliable cars. Whenever these rankings come out, I look at them with a bit of morbid curiosity. I’m mostly interested in seeing how far down the list the domestic carmakers

Looking at overall brand reliability, Japanese imports clearly rule the roost, whereas domestic brands are generally well down the list. Here’s the rundown:

• Scion
• Honda
• Toyota
• Infiniti
• Acura
• Mitsubishi
• Lexus
• Hyundai
• Porsche
• Mercury
• Saab
• Subaru
• Suzuki
• Kia
• Mazda
• Ford
• Nissan
• Volvo
• Buick
• Lincoln
• Volkswagen
• Pontiac
• Mercedes-Benz
• Audi
• Chevrolet
• BMW
• Mini
• GMC
• Saturn
• Jeep
• Dodge
• Cadillac
• Chrysler

Of course, these rankings are based on the average predicted reliability ratings of all models for each brand. It’s thus important to keep a couple of things in mind here…

First, the reliability ratings might not be entirely accurate, as there isn’t a whole lot to go on when making predictions for new models. In some cases, these predictions are based on data from just a single year.

Second, companies at the high end aren’t immune from producing a dud, whereas some at the low end actually have a decent model or two. For example, the Toyota Tundra is (slightly) below average despite coming from the 3rd best maker, whereas the Dodge Caliber is (again, slightly) above average despite coming from the 3rd worst maker.

CR points out that, “as a group, inexpensive small cars and midsized family sedans are the most reliable.” They also made clear that the difference between the best and worst models is dramatic. In fact, the Volkswagen Touareg (worst) is 27 times more likely to have problems than the top-ranked Honda Insight.

Interestingly, five of the top eight most reliable family cars were hybrids. The NY Times “Wheels” blog inquired about this surprising (at least to some) result, but CR held their ground.

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Are you in the market for a discount broker? If so, you might want to check out OptionsHouse. They’re currently offering 100 free trades for new customers.

Here’s the scoop:

New customers are eligible for this special offer after opening a new OptionsHouse account with a minimum of $3,000. You must apply for the commission-free trade offer by inputting promotion code FREE100 when opening the account. New accounts receive 100 commission-free trades for each stock or option trade executed within 60 days of funding the new account.

Pretty easy… New customers, $3000 minimum, use promo code FREE100. Once you use up your free trades, you can make stock trades for just $2.95/each and options trades for $9.95/each.

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As time goes by and taxpayers see less and less personal benefit from the bank bailouts, tensions are on the rise. People are starting to ask more and more questions. People are starting to question what caused all the problems we are facing today. People are wondering if there is another way, a better way.

I am one of those people.

What caused the current credit crisis?

Did banks overextend credit and employ substandard lending practices? Did individuals get carried away and accept more credit than they should have accepted? Maybe we just plain lost our way and let our abundance get the better of us across the board.

Regardless of cause, many feel the financial sector is hanging them out to dry. While taxpayers bailout failing financial institutions with their paychecks, banks have been raking them over the coals in preparation for the CARD Act of 2009. So much so that our elected officials are stepping in to bump of the date of its passing.

Has the credit crisis changed the rules we have to play by? Has it changed the rules we have to live by?

Who is responsible?

Are we as individuals personally responsible for our behavior today? Many contend that, over the last few decades, our principles have deteriorated. Is this same general lack of personal responsibility spilling over into business, resulting in corruption… Or has it always been this way?

What about the banks? Banks have received a tremendous amount of bailout money, but have done little to help restart the economy. Instead, they’ve been holding the money and posting huge quarterly profits. As more and more homes go into foreclosure, their profits increase.

Is some of this bailout money filtering back down to the taxpayers? Not really. As banks profited, loans dropped. Have they refunded the bailout money with all of these profits? Not entirely. Some banks have refunded in full, some have refunded in part, and others have not refunded at all. Here is a great resource to help you track which banks have refunded and which have not.

Personally, I’m amazed at what’s happening. The public has been called upon to fund the unprecedented bailouts of private industry and maintain high levels of consumption to sustain the economy, all while being asked to live with ever-increasing credit card rates, fees, and an inability to refinance troubled mortgages.

As far as I’m concerned, the banking industry must be absolutely brilliant to have pulled this off. I am truly in awe as I watch all of this unfold before my eyes. Banks have definitely not been making friendly with the American public, and people have just been taking it. Perhaps the American public is finally be ready for a change!

Can we live without credit cards?

Given all the unfriendly changes in the credit card world, what about living without credit cards altogether? Can we possibly do it?

People are resilient. I think you’d be surprised by what you could do if you absolutely had to. If things spiral downward, and we find ourselves facing a devalued dollar and ever-increasing unemployment, how would we react?

My best guess is that most of us would react just like folks did back in the 1930s. We’d band together and do what needs to be done to get by. And perhaps most importantly, we’d start living within our means. So why put some pressure on ourselves and take those steps regardless?

I think this pressure is good for us.

There are many examples in nature where pressure provides us with a precious bounty. Coal left under pressure gives us diamonds. When certain fruits are exposed to pressure they yield precious oils. And history shows us how pressure and fear of failure are some of the best motivators in the financial matters of both businesses and individuals.

And since we (as individuals) aren’t going to a bailout… Let’s focus on bailing ourselves out!

Real world ways to curb the use of credit

• Are you borrowing for wants or needs? Did you need that 2,500 square foot house, or could you have made due with 1,500 and a much lower mortgage payment? Did you need that brand new Chevy Silverado, or should you have gone with a 3 year old truck in solid shape? Did you need that Jet Ski? How about that new 50″ plasma HDTV? If you truly need to borrow money, then borrow it… I’m just asking you to reevaluate your needs against your wants.
• Reduce your available credit. How much credit do you have at your disposal? And how much do we really need? Get a free credit report from AnnualCreditReport.com. Next, go through your report(s) and figure out your total credit limits. I’m betting you’ll be surprised by the high amounts. If you cannot stop using credit, or just plain don’t want to, try cutting back to just one or two cards. Do you really need more than that?
• Change the way you think. If I asked how you would buy a car, most would answer, “Get a loan.” If I asked how you would buy a house, most would answer, “Get a mortgage.” What about TVs? What about furniture? What about college? Loans. Loans. Loans. Why do we automatically think we have to borrow money to buy things? Is this a trained response? We need to reduce our standard of living so we can get out of debt and save for future purchases… Then pay cash. Change the way you think. Start today.
• Reduce your standard of living. Live below your means. Spend less than you earn. You may be sick of hearing these phrases, but they work. Maybe it’s time we start living them. Doing so will eventually allow us to save pay down debt and save.
• Pay down debt. Once you’ve brought your standard of living back into check, follow through on that spirit of discipline by paying off your existing debt. Doing so will empower you. Don’t believe me? Try it out for yourself.
• Save Money. Now that you’re spending less than you’re earning and paying off debt, you’ll be able to save more money for future purchases. Pretty soon, paying cash for your next car will be a reality. Remember, by saving money, you reduce your risk. The more money you have saved, the better buffer you have against emergencies… Which means you’ll no longer need a credit card for an emergency!
• Use your debit card. If you are used to using your credit card for everyday purchases, start using your debit card instead. I promise that you’ll hardly notice a difference, but you’ll become more deliberate in your spending. Many will argue the superiority of credit over debit for reasons like purchase coverage and rewards. In my experience, however, these things hardly make a difference in everyday life. In light of the pros and cons of each, I would choose debit every time.
• Pay cash. Now that you’ve saved up some money, start using. Paying in cash has been linked to reduced spending rates. In fact, it’s argued that handing over cash actually elicits brain function that mimics pain. Paying with cash will also give you better deals when you go to purchase goods and services. For example, medical bills paid with cash can often be reduced because it eliminates the practitioner’s need to file an insurance claim or pay credit processing fees. Also… When you spend cash, you can only spend what you have!

In closing…

Remember… If you don’t agree with industry and/or business practices, your best course of action is often to simply stop using their products. The same is true for the financial industry. Reevaluate your priorities, change the way you think, pay down debt, save your money, and start using cash and/or debit for more of your purchases. You have a voice, don’t be afraid to use it!

No one makes changes for us… We must make them for ourselves, and go from there.

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Interest rates are very, very low right now. On top of that, the first “rung” on our CD ladder is coming up for renewal next week. We should be rolling that money into a new five year CD, but is that a good idea given current CD rates?

When we first started our CD ladder (Novemeber 2008), we bought a one, two, three, four, and five year CD. Rates topped at out 5.15% for the five year CD, and our overall average was 4.66%.

Fast forward to today… We’re now looking at 3.35% APY for a five year CD at the same bank — nearly 2% lower. On the surface, we should probably run away kicking an screaming, but when you dig deeper, the situation isn’t too bad.

If we roll that lowest rung into a new five year CD, the average rate will dip to a bit under 4.50%, which still isn’t too shabby. The big concern, of course, is that interest rates will spike and we’ll be locked in at a low rate. Then again, we can escape with “just” a six month interest rate penalty.

In other words, if we can hang on for a year or so, our effective interest rate would be roughly half the current rate (around 1.70%). If we make it for 18 months, we’d take home 2/3 (just under 2.25%), and so on.

When viewed in that context, the situation isn’t nearly so bleak. If rates jump, we can simply break the CD and re-deploy our cash. Sure, we’ll give up some interest earnings, but our money will still have performed on par with prevailing high yield savings rates, so we’re not risking much.

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Not quite a year ago, I reported that Congress was considering suspending the required minimum distribution (RMD) requirement for retirees. The reason for this is that the stock market had just collapsed, and they didn’t want retirees being forced to liquidate holdings at the bottom.

While Congress ultimately acted, it was a classic case of too little, too late. What I mean by this is that they did wind up suspending the RMD, but they did so for 2009 instead of 2008.

What is the RMD?

Just to remind you, the RMD is the minimum amount that retirement account holders must withdraw from their tax-deferred accounts when they hit the age of 70-1/2. Your RMD is based on what was in your account on the last day of the previous year, so…

If the market tanks, you’ll need to withdraw a disproportionately large amount from your account

Should you skip your RMD?

To me, the issue of whether or not you should skip your RMD in 2009 hinges on your circumstances. If you need the money to get by, then you don’t have much of a choice.

If, on the other hand, you don’t have a compelling need, you should seriously consider leaving the money in place. Tax-deferred retirement accounts are powerful tools. By leaving your money in place, you’ll avoid paying additional taxes this year, and your investments will have even more time to recover.

If you’ve already taken your RMD in 2009 and wish you hadn’t, you might be in luck. As long as you get the money back into your IRA within 60 days, you can “undo” the withdrawal.

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Taxes are a huge consideration when planning for retirement. As you’re building up your nest egg, one of the big decisions that you’ll face is whether you should put your money in a traditional, tax-deferred account or a Roth-style account.

Of course, we don’t all face this dilemma. After all, access to Roth IRA accounts is limited by income (but see here and here), and access to a Roth 401(k) or Roth 403(b) is limited by whether or not your employer offers one. Many don’t, even if they offer tax-deferred versions of these accounts.

But what if you do have access to Roth accounts? How do you decide where to put your money? What follows is a quick overview of the major issues.

The tax deferred option

One of the biggest arguments in favor of using tax deferred accounts is that you’ll get your tax savings up front. These guaranteed savings can help those with limited means save/invest more money than they might have otherwise.

Taking an immediate tax break might also be a good option if you’re in a relatively high tax bracket. After all, if your income falls in retirement, you’ll have dodged higher taxes during your earning years in favor of lower taxes in retirement.

But what if tax rates increase dramatically between now and retirement? Even if you fall to a lower bracket, the applicable rate might wind up being higher. In that case, you’d have traded lower taxes during your earning years for higher taxes in retirement.

Another downside to tax-deferred accounts is that they effectively convert capital gains (currently tax at a favorable rate) into regular income. This is a very important fact to consider when deciding where to hold certain investment types.

The Roth option

Roth accounts make the promise of completely tax free withdrawals in the future in return for paying your taxes right now. This is a particularly good option if you expect to be paying higher taxes in retirement than you are right now.

Another risk that you’re running by using a Roth account is that Congress might change the rules. I currently view this as rather unlikely, but consider (for example) what would happen if we would adopt something like the Fair Tax between now and when you retire…

In such a case, you would have paid full income tax on your Roth contributions, and then you would be taxed again in retirement when you spend this money. Double taxation. Yuck.

What are we doing?

So how have we solved the problem? As with all things that involve uncertainty in the investing world, we’ve decided to diversify our risks. I honestly have no idea what will happen with tax rates going forward, and I can only project what our income might look like in retirement.

In view of these uncertainties, we’re taking advantage of both tax-deferred and Roth investment accounts. In doing this, it’ll be impossible for us to be 100% right, but we also won’t be 100% wrong. Given that we have both account flavors (not to mention a taxable investment account) at our disposal, we’ve given a lot of thought as to optimal asset locations.

In short, we keep our most tax inefficient investments in retirement accounts, with those with the highest expected rate of return in Roth accounts. Our taxable account, on the other hand, is loaded up with tax efficient investments.

What about you? If given the choice, how would you proceed?

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Things are moving along with regard to our new townhouse. We have approximately 5-6 weeks to get ready for our move to the new place. I’m excited and ready to leave the apartment.

I thought it might be helpful to share our to-do list for others that are planning to move. I’m sure many of you have some moving tips of your own to add in the comments. I’m used to moving, but it’s still a bit of an adjustment for my husband.

Things to do before we move

Notify landlord/leasing office of the move date. Our yearly lease was up in September and we’ve been going month-to-month with the apartment complex. We gave a date for moving out, and we have some leeway to extend it if necessary mainly due to apartments being empty.

Notify current employers to take some time off. Since I work from home, this isn’t a huge issue. My husband has plenty of time saved to take off from work, and his manager knows about the move. Once we get a solid schedule, he’ll inform the company. He’ll probably just take a day or two off.

Get a few estimates from truck rental companies. Since this will be a local move, it’s going to be much cheaper than some of my past moves. We got rate quotes from different moving companies to get an idea of how much to set aside. I estimated using the truck for an entire day.

• U-Haul: They charge $19.95 plus $7 for a hand truck and $0.89/mile for a 10′ truck.
• Penske: This was the most expensive company, with a quote of $79.95 plus $10 for a hand truck and $0.99/mile for a 12′ truck.
• Budget: They charge $19.99 plus $15 for a hand truck and $0.89/mile for a 10′ truck.
• Ryder: They charge $54.00 with 500 miles included for a 12′-14′ truck. No estimate for the hand truck.

Go to the post office. I need to go grab a change-of-address package to have our mail sent to the new place. I’ll do this 2 weeks before the move to see if I can get a coupon for the move.

Get started with packing. I usually pick up some boxes from a local grocery store. We’re off to a great start and our goal is to do two boxes/day until we’re done.

Clean apartment to get deposit back. I’m enlisting my sister-in-law to help me clean the apartment from top to bottom. I’m hoping (but not counting on) getting some money back so we can add it to our emergency fund.

Switch our utilities. We have to schedule disconnection of all utility services at our current apartment and have them hooked up at the new place when we move. We’ll also have to open an account with the gas company for the town house. While we’re at it, I’m going to check and see if we can get a better deal on our cable TV.

Closing Thoughts

That’s our plan for now. We’re hoping it will be simple and smooth. Am I forgetting anything major? Do you have advice on how make this move go smooth?

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A common criticism of mutual funds is that many fund families have a relatively high minimum investment, often in the $1000-$3000 range. Thus, it can be difficult for someone who is just starting out to build a diversified mutual fund portfolio.

While it’s no secret that I’m a huge fan of The Vanguard Group, I thought I’d point that Schwab has reduced the minimum initial investment on their mutual funds to $100 each. Their expenses ratios are also very competitive. For example, the S&P 500 and Total Stock Market Funds weigh in at 0.09%

If you’re looking to get started investing, but the high minimum investments have been scaring you off, then you should definitely check out Schwab Funds. And no, they didn’t pay me to say this.

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This is a guest post from Kyle of Suburban Dollar. If you like what you see here, please consider subscribing to his RSS feed.

Lets face it, one of our biggest expenses outside of our mortgages is the cost of keeping our bellies full. Unfortunately, eating is a necessity. We have to get food, and most of us aren’t willing to eat other peoples garbage.

There are tons of ways you can save money on groceries like growing a garden, clipping coupons, buying bulk, and tracking cyclical prices. While these are all great ways to reduce your costs they should all be parts of a bigger plan.

Plans are the keys to success in just about everything we do. Football teams plan for the next game, architects draw up plans to build a skyscraper, and you should plan your meals in advance to save you time and money.

Here are the steps you should take weekly or monthly to maximize your savings and save some time.

Plan your meals

This is the first and most important step. Sit down and plan out your meals for the next week, two weeks, or month. This should include both the main course and the side(s). If you make your lunches every day and cook breakfast, make sure you include those meals in the plan.

By the time you are finished you should have a list of at least seven days of meals that should look something like this:

Make a list

Now you need to sit down with your plan and write down every ingredient you will need throughout the week to make you meals. Be sure to include any staples you may need like bread, milk, orange juice, or cereal. This is why planning your meals in advance is so great. You can easily make a list of everything you need for the week and not have to worry about forgetting anything.

Check it twice

Now that you have a list the first thing you should do is go through the list and determine what you already have. Go through your fridge, freezer, and pantry. Mark off every item you already own and don’t need to buy. This will help you eliminate duplicate purchases.

Find the deals

For the remaining items on your list start researching the best prices available in your area. This usually means looking through the Sunday circulars to find the best bargain for your buck. Once you have located the best deals, circle them and stack your circulars up. You won’t need to drive all over town to get the best deals, just take the circulars to Wal-Mart and have them do a price match.

Hunt for coupons

This might take you a little bit of time, but coupons are free money so get to work. Online coupons are all the rage these days, and both stores and manufacturers are getting in on the game. I like to sit down with my list and find as many coupons as possible. I scour the internet for any coupons related to those products, print them off, and take them with me.

Go alone, shop swiftly

Now you just need to load up your coupons, circulars, list, and money. Head off to the store, but go alone. You already know what you need, and bringing another person will only distract you. Move swiftly through your list picking up only those items you have identified as needs. I say swiftly because the longer you linger, the more time you have to be tempted by ads and wandering thoughts.

Once you get to the checkout line, put your stuff on the belt, but leave anything you want to price match until the end. Put the circulars on these items so your intentions are clear. Finally, pay your bill and get out of Dodge.

Closing thoughts

If you actually take a bit of time to sit down and go through each of these steps, you’re guaranteed to save yourself both time at the store and money in your pocket. An added benefit is you get to prevent the inevitable question… “What are we going to have for dinner tonight, dear?”

Do you have any tips for planning meals in advance?

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The topic of safe withdrawal rates is critically important to retirees. Earlier this week we talked about retirement withdrawal strategies, but that was a discussion of how to access your money rather than how much money you can safely distribute per year.

What’s a “safe” withdrawal rate?

While there are no easy answers, the stakes couldn’t be higher. If you pick a number that’s too high, you’ll run out of money before you run out of time. If, on the other hand, you pick a number that’s too low, you’ll wind up leading an unnecessarily ascetic lifestyle, ultimately dying with a huge pile of cash.

If you ask around you’re get a variety of answers. By far the most common one that you’ll run across is the 4% rule. In short, this rule holds that you can “safely” withdraw an inflation-adjusted 4% of your nest egg from the year that you retire onward.

Of course, the topic of safe withdrawal rates is very complex, and the reality is that “it depends.” In other words, it depends on your time horizon, the composition of your investment portfolio, whether or not you retire into a collapsing stock market, and so on.

The only thing that we can say for certain is that higher returns will better support whatever withdrawal rate you settle on. But how can you boost your returns without appreciably increasing your risk? Well… What would you say if I told you that the average investor can easily increase their returns by 1% per year while taking on virtually no additional risk?

Maximizing returns by minimizing expenses

Sounds too good to be true, right? After all, 1% can make a huge difference in the size of your nest egg, but there is (typically) no such thing as a free lunch. Well, consider the following.

The average expense ratio for actively managed mutual funds is in the neighborhood of 1.5%. On top of that, numerous studies have revealed that the majority of actively managed funds underperform their target indices, sometimes by a lot. Why? Mostly because of the added expense of the fund manager.

In contrast, index mutual funds (or equivalent ETFs) have dirt cheap expense ratios (often in the 0.1-0.2% range), thereby allowing them to essentially match the returns of their target indices.

So how can you increase your returns without taking on more risk? Simple. Keep a close eye on expenses. Instead of overpaying for underperformance, focus on constructing a portfolio with using high quality, low cost investment vehicles. Of course, this is often easier said than done.

For example, you might have a fee-laden 401(k) with limited options. Sure, you could lobby your employer for changes, but they might resist. In that case, your best option might be to simply contribute enough to get your employer’s match and then focus on investing outside of your 401(k), where you’ll have complete control.

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Not quite a year ago, we started building a CD ladder. We’re building a five year ladder, and that first rung is nearly up for renewal. I’ve thus been looking around for the best CD rates.

In doing so, I ran across the ten day CD rate guarantee at Ally Bank. In short, if you open a CD with Ally and the rates go up within the first ten days, they’ll automatically increase your rate to the higher level.

When you fund your CD within ten days of opening or renewing your Ally account, you automatically get the best rate we offer during that time period.

This isn’t a huge deal, but it’s nice to know that you won’t have any regrets about locking in your rate a few days before they raise them. Since our CDs are already at Ally (formerly GMAC Bank), and since their rates are still near the top, we’ll be leaving the money in place and just changing the term.

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As you may already know, this week is National Save for Retirement Week. In that spirit, I want to spend some time today discussing the peace brought on by having a sound financial plan.

It should come as no surprise that planning for the future and saving for retirement can bring a great deal of peace to those who do it. Unfortunately, many Americans are so mired in debt that they can’t make any progress toward their long term goals.

You don’t have to have $500k in the bank to achieve financial peace. All you need is a solid financial plan. This will serve as a springboard for eliminating debt, building your savings, and getting you back on the road to a comfortable retirement.

“A clear vision, backed by definite plans, gives you a tremendous feeling of confidence and personal power.”

-Brian Tracy

Financial peace may be closer than you think…

When I say “financial peace,” what comes to mind?

You may have answered with one or more of the following:

• No more creditors calling
• No credit card debt
• A paid off mortgage
• Freedom from overdue bills
• A bunch of money in the bank
• Maxed out retirement contributions
• A diversified investment portfolio, etc., etc., etc…

While all of these are necessary pieces of the financial peace puzzle, most of them will probably take awhile to achieve. Wouldn’t it be cool if you could gain a great measure of financial peace in just a week or two?

Actually… If you follow the simple outline below, you will very quickly find yourself on solid footing and on your way to increased financial peace and prosperity.

The uneasiness of financial uncertainty

Only a fool thinks he can properly plan for everything. Much the same, it is foolish for us to walk through life with no financial plan at all.

“Life is full of uncertainties. Future investment earnings and interest and inflation rates are not known to anybody. However, I can guarantee you one thing… Those who put an investment program in place will have a lot more money when they come to retire than those who never get around to it.”

-Noel Whittaker

Consider the runner. Though he can never prepare for all the “what ifs” a race may bring, there are a few things that he can be certain of. For example, he cannot control the weather, but he can be prepared for different types of weather. He cannot control the length of the race, but he can know how long the race is and prepare accordingly. He can pace himself based on his knowledge and preparation and, at the very least, save enough of his energy to reach the finish line.

It’s much the same with our finances. We can never plan for every situation that may befall us, and only a fool would try to do this. What we can do is start with a few basics, take inventory of what we have, decide where we want to go, and develop a plan to get us there.

Once you finish planning, you still have to execute your plan to reach your goal, but… Once you have that plan, you can rest easy knowing that now it’s just a matter of follow through. There is peace in planning!

A simple plan for achieving financial peace

Does planning overwhelm you? Then start simple and refine things over time. Remember that “a journey of a thousand miles begins with a single step!”

Use the following outline to start forming your plan to gain control and peace over your financial situation:

• Get to know your debt and get angry. You’re never going to formulate a plan until your establish a proper relationship with your debt. One of the best things I ever did was to figure out how much interest I was paying on my debt. Simply take an inventory of your loans, and calculate how much interest you pay toward your debts each and every month. Once you figure out how much money you’re paying in interest, you’ll be motivated to move on to step two.
• Focus on needs and stop spending foolishly. Sure, you’ve made bad decisions in the past, but that’s behind you now. Start differentiating between needs and wants, stop buying things you don’t need, and focus your available funds on true necessities. Take it one step further by applying wisdom to your necessities. Food is a great example. Instead of simply buying everything you want, employ these grocery hacks to help cut corners.
• Start an emergency fund. Sell unneeded items, stop going out to eat, use your grocery savings from step two and save at least $1,000 as quickly as possible. This step can be accomplished much faster than you think, and will bring you a great deal of security and peace all by itself… And it only gets better from here!
• Keep a spending journal. Do this. Don’t skip it. I’m serious. If you’re like me, then even now you’re probably making excuses as to why you don’t need to do this. Knock it off. Keeping a spending journal is the cornerstone of living on a spending plan (a.k.a., a budget.) The cool thing about a spending journal is that it’s way easier to start than a budget. A budget is a living document that will take months to get into working order, but you can successfully implement a spending journal right now! Stop making excuses, get a small notebook, and keep it on you at all times. I carry mine in my man purse. Yeah you read that right… I carry a man purse – get over it.
• Start budgeting. As I mentioned above, this is something that will take time, so don’t feel like you need to master it in your first go-round. Now that you’ll be keeping a spending journal, this will be much easier than you think. Begin with a very simple budget and tweak it both in accuracy and completeness as the days go by.
• Repay high interest debt with your new found excess. Trust me. If you’ve followed the steps from above you will have quite a bit of extra money each month to help repay your debt much faster than expected. Whatever you do, don’t be tempted to spend it! Instead, use it to repay your debt ASAP. If you’re like me and you find it necessary to save while focusing on debt repayment then you can follow the 75/25 debt repayment and savings plan. Die hard Dave Ramsey fans will disagree, but this has proven to be a wise choice for my wife and I several times over.
• Build your emergency fund to 3-9 months worth of expenses. Now that your high interest debt is gone, you’ll want to build up your emergency fund. My wife and I plan to save enough to cover 6 months worth of expenses. You’ll want to keep this money in a place where you can easily access it, like a high yield savings account. This money is not an investment. Rather, it should be viewed as personal emergency insurance against unexpected events.
• Begin saving for retirement. Once consumer debt is gone and you’ve built up your emergency fund, use your newly developed financial discipline to begin saving for retirement.

There… Doesn’t that feel good?

“A clear vision, backed by definite plans, gives you a tremendous feeling of confidence and personal power.”

-Brian Tracy

Even though you haven’t saved a dime more than you had before creating your plan, you can walk away from this article with confidence, optimism, and a new found measure of financial peace concerning your future.

One last piece of advice – make sure you follow through!

Now that you have proper direction, all you need is determination, patience, and a little hard work. It’s amazing how a simple plan can have such a huge impact!

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The latest issue of Time Magazine featured an article that was very critical of the 401(k) system. In it, they argued that “the 401(k) is a lousy idea, a financial flop, a rotten repository for our retirement reserves.”

Why all the hate?

So just what is it that Time hates about 401(k) plans? For starters, 401(k) plans were never intended to replace traditional pensions. Rather, they were created as an executive perk. Over time, however, their existence allowed many employers to kill off their pension plans.

401(k) plans have also come under fire because:

• Not enough people participate in their employer’s 401(k) plan
• Of those who do participate, many don’t contribute enough
• Many participants invest too conservatively
• Others invest too aggressively

The problem here is that these things aren’t unique to 401(k) plans. Rather, criticisms such as a lack of participation, saving too little, and inappropriate allocations can be leveled at most investment vehicles, including traditional and Roth IRAs, taxable investment accounts, etc.

Beyond this, people choose whether or not they will participate, they choose how much they will set aside, and they choose their investments. If some people wind up making bad decisions, should everyone be forced to give up their 401(k)? Not in my book.

Don’t get me wrong, there are certainly a number of bad 401(k) plans out there. Some of these have very limited investment choices, others have exorbitant fees, and so on. But advocating that we should “retire the 401(k)” is throwing the baby out with the bathwater.

What are the alternatives?

Yes, it sucks that juicy pension plans have largely disappeared, but that’s the reality. With traditional, employer-run pension plans out of the picture, what other options do we have? Well…

The article advocates for guaranteed investment accounts that would essentially function as “retirement insurance.” Every pay period, you’d contribute a fixed percentage of your paycheck and, upon retirement, you’d collect a guaranteed monthly check based on your final salary.

An advantage of such plans, whether they are backed by the government or a private entity, is that they would follow you from job-to-job. You would also be free to invest in addition to these plans, though (presumably) things like tax-deferred 401(k) plans would be off the table.

Setting aside the possible disadvantages of such plans, it’s important to keep in mind that there’s nothing stopping private companies from introducing these sorts of things whether or not the 401(k) still exists. In fact, there are great many annuity products already out there that fill a similar need.

In the end, I’m trying to figure out why killing off the 401(k) is a good idea. Yes, I realize that not everyone has access to them, and that some people can afford to contribute more than others. Given all the challenges associated with saving enough for retirement, however, it seems to me that taking options off the table would be a step backward.

What do you think?

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In honor of National Save for Retirement Week, I wanted to take a minute to point out some excellent books about investing. Truth be told, I thoroughly enjoy reading about money and finance, but I’m a bit of a freak when it comes to these things.

With that in mind, here are three great books that would make an excellent “short course” in investing for the future:

The Bogleheads’ Guide to Investing

Written by Taylor Larimore, Mel Lindauer, and Michael LeBoeuf, this is an excellent introduction to investing which is broken in two main parts. Chapters 1-16 comprise Part I (Essentials of Successful Investing), which covers topics such as:

» Leading a sound financial lifestyle
» The importance of starting early and investing regularly
» The ins and outs of stock, bonds, ETFs, mutual funds, etc.
» Protecting yourself against inflation
» Asset allocation (in simple terms)
» How to invest for college
» How to manage a windfall
» Whether or not you need a financial planner

Chapters 17-23 comprise Part II (Follow-Through Strategies to Keep You on Target), which covers topics such as:

» Tracking your progress and rebalancing
» Mastering your emotions and ignoring the “noise”
» Making you money last longer than you do
» Protecting your assets with insurance
» Estate planning

All in all, this is a very well-rounded book on investing.

The Four Pillars of Investing

Written by William Bernstein, this book turns things up a notch when it comes to educating you about investing. The content is broken into five sections, including:

» Pillar One: The Theory of Investing (Chapters 1-4)
» Pillar Two: The History of Investing (Chapters 5-6)
» Pillar Three: The Psychology of Investing (Chapters 7-8)
» Pillar Four: The Business of Investing (Chapters 9-11)
» Investment Strategy: Assembling the Four Pillars (Chapters 12-15)

For those that aren’t familiar with him, Bernstein is an excellent writer who manages to make otherwise dry topics quite interesting.

The Intelligent Asset Allocator

This is another book by William Bernstein. What can I say? I’m a fan. In truth, “Bogleheads” and “Four Pillars” will provide you with rather thorough coverage of investment-related topics, and might be plenty for the average investor. If you’ve read both of them and are looking for more, then…

“The Intelligent Asset Allocator” isn’t a light read, but Bernstein once again keeps things interesting. This book drills down into portfolio theory, tackling such issues as risk vs. return, asset class correlations, how to properly construct an investment portfolio, how to implement and maintain your plan, etc.

Other options

There are, of course, many other excellent books about finance and investing out there. For example, if you’re more interested in the psychological side of the equation, and getting your head straight when it comes to longer term goals, you might be interested in “Your Money or Your Life.”

Another books that looks promising is “The Bogleheads’ Guide to Retirement Planning.” I haven’t read it (yet), but the reviews are excellent, and it appears to delve into a number of retirement-specific topics.

Finally, I’d be remiss if I didn’t point out Bernstein’s latest book, “The Investor’s Manifesto.” While this books isn’t due out until November 2009, you can pre-order it through Amazon. You can also check out the first couple of chapters for free via Bernstein’s website.

What are your favorite books about finance/investing?

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Two years ago, our tax preparer suggested we take advantage of tax breaks like IRAs and home ownership. We then looked at our options and started working on our IRAs. Buying a house just for a tax break wasn’t what we wanted, so we paid down our debt and saved some money on the side for our upcoming town house purchase.

We did, however, realize that we needed to be more informed when it comes to taxes, and to (legally) maximize any tax breaks we can get. If you’ve read much about taxes, you’ll no doubt have seen the terms “exemption” and “deduction.” Today, I’m going to talk a bit about what these terms mean, and why they matter.

Exemptions vs. deductions

First off, exemptions and reductions both reduce your taxable income, which is a good thing. Exemptions are specified amounts by which you reduce your taxable income — just for being you! For 2009, federal income tax exemptions (either personal or for dependents) are $3,650 each.

There are adjusted gross income (AGI) limits beyond which the exemptions are phased out. The specific limits vary depending on your filing status.

• Single: $166,800
• Married (Filing Separately): $125,000
• Head of Household: $208,500
• Married (Filing Jointly): $250,000

Income tax deductions, on the other hand, are actual expenses that you’ve paid during the tax year that you can claim against your taxable income. Some examples of expenses you can deduct are alimony, moving expenses, and charitable contributions.

Personal exemptions vs. dependent exemptions

As you may know, you can claim one exemption for yourself as long as you’re not claimed a dependent on someone else’s taxes. You can also claim an exemption for your spouse if you file a joint return.

Beyond this, you can claim an exemption for each person that you claim as a dependent — provided you meet the requirements. If you claim a child as a dependent for your taxes, then the relationship must pass a five part test:

• Age: Are they 18 or under? If they are a full time student, that increases to 23 or under.
• Relationship: They should be a member of your family such as your child, stepchild, sibling, or decedent of any of them.
• Support: The child cannot provide more than half of their own support.
• Residency: The child being claimed must have lived with your for the majority of the year, with some exceptions.
• Special test: Only one person can claim a qualifying child. You can’t divide the tax exemption. The IRS has rules to determine who gets the exemption if the parents can’t agree.

Besides claiming a child, there is an exemption for a qualifying relative. There are 4 tests that must be met to claim this exemption:

• Not a qualifying child: This simply means they can’t fall under the qualifying child rules if you are to claim the relative exemption.
• Member of household/family member: This is a residency based test to determine if they’re a member of your household. In some cases, such as relationships created by marriage, the relative may not have to live with you to qualify. Check with IRS Publication 501 for more details.
• Gross Income: The qualifying relative must have less than $3,500 in gross income during the tax year.
• Support: You have to provide more than half their total support. There are special rules if multiple people contribute more than 50% of the total support in aggregate, but no one individual does so.

Be honest with your answers and you’ll be able to claim the exemptions to which you’re legally entitled.

Standard vs. itemized deductions

When it comes to income tax deductions, you can either claim the so-called standard deduction, or you can itemize your deductions. You cannot do both. Obviously, you should choose the option that results in a lower tax bill.

In short, you should claim the standard deduction if you don’t have much in the way of itemized deductions. The standard deductions for most people are:

• Single/Married (Filing Separately): $5,700
• Head of Household: $8,350
• Married (Filing Jointly): $11,400

You can qualify for a higher standard deduction if you’re 65 or older or blind. Check IRS Publication 501 for more details. If you’re considering itemizing your deductions, take a look at Topic 500 – Itemized Deductions on the IRS website. It covers possible deductions for the following expenses and more:

• Medical and dental expenses
• State and local taxes
• Home mortgage points
• Interest expense
• Charitable contributions
• Business expenses
• Educational expenses

Closing thoughts

I’ve done my best to ensure that the above listed amounts are current (for tax year 2009), but you should always double-check to make sure that you’re working with valid information. You should also check with the IRS itself, or a qualified tax professional, to get answers relevant to your specific circumstances.

With that said, I’m curious to see how many of you file your own taxes. We did it ourselves last year, and we’re plan on doing it again this upcoming tax season.

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This is a guest post from Mike Piper, author of Investing Made Simple and proprietor of The Oblivious Investor. If you like what you see here, please consider subscribing to his RSS feed.

The Roth IRA vs. Traditional IRA question gets a lot of press, and that makes sense. By choosing correctly, you can significantly reduce the total taxes you’ll pay over your lifetime.

In a similar fashion, you can reduce your overall tax burden by planning your withdrawals strategically. That is, once you’re retired, how should you order your distributions? Should you take money out of your Roth first? Your 401(k)? Some combination of both?

The strategy: fill the lower tax brackets

The overall goal with planning your withdrawals is to take sufficient distributions from tax-deferred accounts to fill up the low tax brackets. The reasoning is that it’s better to pay 10% or 15% in taxes now rather than wait, take all the money out over the course of just a few years, and have the distributions bump you up into a higher tax bracket.

In fact, it can sometimes make sense to take distributions even if you don’t need the money to cover living expenses. (If that’s the case, it’s likely a good idea to use them for a Roth conversion, if you’re eligible.)

How about an example?

Martha and Mark are retired, and they’re both 60 years old (so they’re not yet receiving social security). Between interest income and Martha’s freelance writing work, they earn $13,000 over the course of the year. They only need $30,000 to cover their living expenses. They could take the extra $17,000 out of a taxable account, Martha’s Roth IRA, or out of Mark’s traditional IRA.

What should they do?

Without knowing the rest of the details of their situation, it’s impossible to say with absolute certainty what they should do. But the following analysis should provide a decent starting point.

Due to the standard deduction and personal exemptions, a married couple’s first $17,900 of income is free from income taxes. So it’s a no-brainer that they should take at least $4,900 ($17,900 minus their $13,000 of other income) from their traditional IRA because it’ll be entirely tax free.

They still need to come up with another $12,100 to pay their bills. If Mark and Martha expect their tax bracket to be above 10% later in retirement (e.g., due to social security or required minimum distributions from their tax-deferred accounts), it makes sense to take that from the traditional IRA as well, thereby paying tax at 10% now rather than at a higher rate later.

[Note: Because of the 10% tax, they'll have to take out $13,444 in order to have $12,100 left to pay bills.]

And by the same reasoning, it’s likely a good idea to take an additional $3,255 distribution from their traditional IRA in order to fill out the 10% tax bracket. They can then move that money into a Roth IRA, thereby paying tax at their 10% rate now and avoiding tax at a higher rate later.

In fact, if Mark and Martha expect to be in (or above) the 25% tax bracket later in retirement, it’s probably a good idea for them to take another $51,200 out of their traditional IRA and move it into a Roth, thereby filling out their 15% tax bracket this year as well.

Social security income complicates matters

Once an investor begins receiving social security income, things become more complicated, and the benefits of tax planning increase even further. The reason for the additional complexity is that, as your income proceeds through the 15% bracket, the portion of your social security income that is subject to income tax increases as well.

By strategically planning which accounts you take money out of each year, you can reduce the tax on both your retirement account distributions and on your social security income.

Takeaway lesson

Making small adjustments to your plans could potentially save you thousands of dollars in taxes each year. Unless you have a tax adviser who plays an active role in planning your finances (that is, he/she does more than just prepare your tax returns), it’s essential to have a solid understanding of taxation.

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Guess what? Today marks the beginning of National Save for Retirement Week. Did you know that over half of all workers in the United States have less than $25,000 in total savings and investments?

While these stats include a lot of younger workers, we can do much, much better when it comes to preparing for the future. With that in mind, we’ll be featuring a good bit of retirement-related content here this week.

And now… Some recent articles that caught my eye:

• Money Tips I Learned From Poker
• How to Prepare for the Demise of the Dollar
• Ten Critical Money Management Skills Your Kids Need
• Why You Should Keep Contributing to Your 401(k)
• Living Below Your Means Does Not Mean Living Poorly
• Who Has the Time (or Money) for Deals?
• Fifteen Things More Important Than Money
• Why Dollar Cost Averaging is Popular

That’s it for now. Have a great week!

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The cover story on this month’s Money Magazine asks “What would you do with $1000?” We’ve talked in the past about what you’d do with a major windfall, but I thought it would be interesting to take a look at your options with a smaller windfall.

Here are Money’s suggestions:

• Build up your emergency fund
• Spend five hours with a financial planner
• Buy a top-notch mutual fund*
• Upgrade your appliances
• Join a gym/hire a personal trainer
• Pay down credit card debt
• Update your estate documents
• Teach your kids about investing
• Invest in your career (training, etc.)

In our case, we’d either sock it away in our taxable investment account (we already max out our retirement accounts) or use it to pay down our mortgage. Other solid options that they didn’t list include charity, opening/funding an IRA, preventative maintenance on your house or car, planting shade trees around your house, and so on. Or maybe… Use it for something fun.

Now it’s your turn…

What would you do if $1000 fell into your lap today?

*Note: Money mentions several funds that have low minimum investments, including the Schwab index funds, whose minimums have been dropped to $100. I also like the Vanguard Star Fund for creating a diversified portfolio with as little as $1000.

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The art of salary negotiation is a touchy but crucial matter that rarely receives adequate attention. With all the economic certainty that we’ve been facing, many people have increasingly focused on reducing expenses and leading a frugal lifestyle. There are, however, two sides to the “spend less than you earn” coin…

When is the last time you stumbled across proper techniques for negotiating your salary and increasing your top line? While frugality is an important component of a healthy financial lifestyle, salary negotiation is also an important skill to master.

Think about how much time, money, and energy you’ve spent earning a college degree, sculpting the perfect resume, seeking employment, and interviewing for countless positions. Given this investment, why not spend a bit of time properly preparing to negotiate your pay?

Consider the following scenario…

You walk into a prospective employer’s office. You’re dressed to impress, portfolio and resume firmly in hand. You meet Mr. Employer, make some small talk, and answer the typical cheesy interview questions to ensure you’re the best candidate for the position. And then…

WHAM! You’re asked, “So… What sort of salary are you looking for?”

What do you do?

Rather than freeze and stumble around for the right number you should follow the first rule of salary negotiations which states: there is one time and only one time to discuss your salary expectations, and this IS NOT IT! Sidestep the question like your life depends on it!

Jack Chapman, leading career consultant and author of “Negotiating Your Salary: How to Make $1000 a Minute,” suggests two essential rules.

Two must-follow rules for salary negotiation

1. Discuss money only after they’re ready to hire you.

This rule applies to the Human Resources screening interview, as well as the main interview(s). Anytime someone asks something like “What is your current/previous salary?” or “How much do you want to make?” — dodge them.

Why? If your past salary was too low, you run the risk getting a lowball offer. Conversely, if it was too high, you might blow past what they’re willing to pay. A premature disclosure of your previous salary undermines your bargaining power.

FYI: Focusing on salary during the interview process is the employer’s way of getting the most competent person for the least amount of money. Don’t relinquish key information early in the process.

In order to evade the question, you need to respond confidently, but remember… There’s a fine line between confident and cocky — make sure you don’t cross it!

Here are a few examples of what to say:

• “I’m sure we can come to a good salary agreement if I’m the right person for the job, so let’s make sure I am!”
• “Well, so far the job seems to have the right amount of responsibility for me, and I’m sure you pay a fair salary, so let’s hold off on the salary talk until you know you want me. What other areas can we discuss?”

Do this for the first and second requests alike, but if they continue to probe, you’ll have to defuse the situation. If things get tense or awkward, try softening your statements with one of the following:

• “I get anxious when talking about money.”
• “When we discuss money, I’m afraid that I’ll be screened out or boxed in so could we hold off on that?”
• “I’ve noticed that we’ve come back to salary again. While I’m happy to talk about money, I’m not sure why we need to discuss it now.”

If this doesn’t work, and they insist that you divulge your salary requirements, you can cave in, but it’s not recommended.

Now that you’ve positioned yourself for optimal negotiation by side-stepping their requests, you’ll want to make sure you follow the second rule…

2. Make them go first!

Because you’re so awesome, the job offer is now on table and — if you exercised your skills from above — your salary requirements are still unknown. After the job has been offered, the salary talk could come next, last, or somewhere in between.

Regardless of when the topic comes up, as soon as Mr. Employer asks “How much would it take to get you to come aboard?” Do whatever you can to avoid answering with a number!

Instead… Make them go first! Once again, why would you want to risk being too high or too low. You never want to price yourself out of the job, nor do you want to undercut your true value.

Nine times out of ten, they’ll already have a budget set aside for the position. In most cases, it will actually be a range, and you want to land at the high end. At this point, your goal is to find out exactly what that range is!

Reply with one of the following:

• “I’m sure you have something budgeted for this position, what’s your range?”
• “I have an idea of the market, so let’s start with your range.”

If you can get them to divulge their range, then you have them exactly where you want them. As soon as you know your target, start giving them solid reasons why you should be near the top of the range. And remember… If they’ve offered you the job, chances are they think you belong there too!

One final strategy

I’ll leave you with the most surprising and unnatural yet most effective tactic:

SILENCE.

For example: Let’s say they extend an offer, saying “We can offer you $XX,XXX/year and would like for you to start as soon as possible.”

What should you do?

NOTHING! Repeat the offer in a quizzical tone “$XX,XXX?” and sit in silence for 30 seconds or so. This could very likely make them squirm, wiggle, or feel uncomfortable enough to up the ante without your ever really responding to the first offer.

I actually gave this advice to my buddy Fred when he was on his way to an interview a few years back, and it worked! Fred was offered the job, but remained silent when the first number was given. He said that after about 10 seconds of silence, the prospective employer came back with, “Well, we could go higher if that isn’t going to work for you.”

Fred ended up getting $5,000/year more than originally offered! I’m still trying to get him to give me a cut of that since it was my advice that got him the money!

Closing thoughts

Remember… I’ve only highlighted a few of the most powerful concepts introduced in Chapman’s book. He actually covers much more, including how to get raises, and how to arm yourself with industry salary standards to justify the salary you deserve.

I highly recommend this book. It has empowered me tremendously, and I’m confident that it can do the same for you. It’s an easy read, and if you insist on working for other people, it will be a very helpful tool.

What are some of the salary negotiation tactics that have worked for you?

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Do you have a Flexible Spending Account (FSA)? We do, and we love it. Every year, my employer lets us set aside up to $5k in pre-tax dollars to pay for healthcare expenses that aren’t covered by insurance. This includes co-pays, deductibles, prescriptions, orthodontia, vision care, etc.

Well… The Senate Finance Committee has just approved healthcare legislation that would dramatically reduce the value of this perk. More specifically, they’re talking about instituting a $2500 annual cap on FSA contributions that would not be indexed to inflation. As things currently stand, FSA contribution limits are determined by individual employers.

What do you think?

Is this a big deal, or much ado about nothing? My view is that, while standardizing the contribution limits across employers isn’t all that egregious, $2500 is on the low side, and I hate it when Congress fails to index these sorts of things to inflation.

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We’ve talked in the past about the merits of index funds vs. ETFs. Today I wanted to highlight the views of one my favorite financial authors, William Bernstein.

In his book “The Intelligent Asset Allocator,” Bernstein said the following about ETFs in general, and SPDRs (i.e., ETFs that track the S&P 500) in particular:

“They have both advantages and disadvantages relative to a conventional index fund. On the plus side, they can be traded throughout the day, as opposed to a conventional fund, which is priced only at the end of the trading day. SPDRs do not generate appreciable capital gains and are thus slightly more tax-efficient than conventional S&P index funds. On the other hand, the purchase and sale of an ETF incurs both commissions and spreads, and so is slightly more expensive to own. Also, ETFs reinvest dividends only quarterly, and thus will suffer a slight performance drag relative to a conventional fund, which continuously reinvests its dividends. On the whole, unless you are an active trader, ETFs hold no real advantage over a conventional index fund.”

Well said. One thing that I would add is that, while ETFs are subject to brokerage commissions, they typically have lower expense ratios, and thus have marginally lower ongoing costs to own.

As for us, all of our stock and bond investments are in an index fund of some sort. We’ve considered ETFs, but we got started back before they were widely available, and have decided to stay the course.

According to Vanguard, you can convert index fund shares into ETFs without incurring taxes, even if you do this in a taxable account. We haven’t bothered to do this, in part because we now qualify for Admiral shares (which have a very low expense ratio) in several accounts, and would thus gain very little by switching to ETFs.

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It’s widely recognized that the transaction costs incurred by investors are made up of two primary components: brokerage fees (i.e., commissions), and the bid-ask spread. While most people are familiar with brokerage fees, fewer people are familiar with the concept of the bid-ask spread.

The bid-ask spread, sometimes referred to as the bid-offer spread, refers to the difference between the prevailing price at which you could sell a particular investment (the bid price) and the price at which you could buy it (the ask price). In other words, we’re talking about the highest price that a buyer is willing to pay for an asset, and the lowest price that a seller is willing to accept.

The difference between the bid price and the ask price is the referred to as the “spread,” and it goes to the so-called “market maker.” Market makers are firms that provide market liquidity and help to smooth out buyer/seller imbalances (and ultimately profit) by standing ready to buy assets at the bid price and to sell them at the ask price.

The reason that he bid-ask spread matters to people like you and me is that whenever you make a trade, you’re instantaneously “in the hole” by a small amount, even before we consider brokerage fees. It’s worth noting that the bid-ask spread is typically larger on thinly-traded (i.e., relatively illiquid) investments such as micro-cap stocks as compared to more widely traded (i.e., relatively liquid) investments.

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Big news this week… We went ahead and locked in our mortgage interest rate. My husband called the lender on Wednesday, and we’ve since faxed back the agreement. We’re locking in our 30 year fixed rate mortgage at a 5% interest rate with a 1.017% origination fee.

To be honest, I’ve been anxiously watching our lender’s site and counting the days until our closing date. I was worried that mortgage rates would go up before we locked. Fortunately they didn’t, so we have one less thing to stress over about.

What is an interest rate lock?

A rate lock is an agreement with your lender to fix your interest for a limited time period. Locking in your rate keeps the terms of your agreement consistent prior to close. Your lender won’t increase your interest rate for a limited period of time, though they also won’t decrease it if rates fall.

While I’ve read that some lenders charge a fee locking your rate, we found that pretty much everyone offered to lock our rate for free. If your lender tries to charge a fee, ask if they’ll waive it. And, as always, the terms of your should get the terms of your agreement in writing.

Why lock your interest rate?

Interest rates change constantly, so it’s possible that the rate you were first quoted will rise (or fall) between prior to closing. If rates increase and you haven’t locked, you’re mortgage payment will increase — perhaps to the point where you can no longer afford the payments.

On the flip side, you may have to settle for the locked rate even if the interest rates go down. Be aware, though, that some lenders offer the option to “float down” your rate if it drops significantly. In our case, our lender will split the difference if the interest rate drops to 4.5% or lower prior to closing.

When should you lock your interest rate?

There’s no concrete answer to this question. If you think that interest rates will rise in the near future, you should lock your rate. In our case, the interest rate was 5.25% when we first applied for our mortgage. It then went up a bit in the summer, but it’s now down to 5% for our FHA loan.

In 2008, the average rate was 6.1% for a 30-year fixed rate mortgage. Since no one can predict the future, you’ll have to weigh your options carefully before you decide. You can compare current mortgage rates here.

In case you’re curious about mortgage rate trends, ShopRate has a widget that track weekly average mortgages rates. You can also check prevailing mortgage rates at Money Rates. Since rates are pretty low right now, we went ahead and locked.

Closing thoughts

Personally, I can’t wait for this whole process to be over. I’ve never read so many forms and studied so many educational guides before. Did you feel like this as you were going through the home buying process? Do you have a rate-locking stories to share?

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Are you and your significant other a “money match”? My wife and I have very similar money habits, but many other couples apparently don’t. In fact, according to researchers at the University of Pennsylvania:

“Surveys of married adults suggest that opposites attract when it comes to emotional reactions toward spending. That is, ‘tightwads,’ who generally spend less than they would ideally like to spend, and ’spendthrifts,’ who generally spend more than they would ideally like to spend, tend to marry each other…”

The reason for this, they say, is an innate tendency to prefer mates who possess characteristics that are dissimilar from those that we deplore in ourselves. Hmmm, interesting.

Since money is a frequent cause of marital discord, we all know where this is headed, right? According to the authors:

“In spite of this complementary attraction, spendthrift/tightwad differences within a marriage predict conflict over finances, which in turn predict diminished marital well-being.”

So… Back to the original question. Are you and your significant other on the same page when it comes to spending and saving? If not, has it created any friction in your relationship? And how have you dealt with it?

Source: UPenn.edu via MSN/Money

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Earlier this week, ING Direct announced a new promotion aimed at generating more deposits. Dubbed the “Added Value” CD, they are offering a 12 month CD that pays a 0.15% premium over and above their standard rate. As of right now, that means you’ll get 2.25% APY vs. the standard 2.10% APY.

The catch here is that you have to fund the CD with “new money” that is transferred in from elsewhere. And before you try to get clever and circumvent the rules, keep in mind that they are defining “new money” as deposits over and above your balance as of October 7th, 2009.

In other words… You can’t qualify by simply transferring your money out and then back in. Nonetheless, if you’re looking for a safe place to park you cash for the next year or so, you could do a lot worse than 2.25% APY at a bank like ING Direct. In fact, this ranks amongst the highest 12 month CD rates that are currently available.

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A reader named Hannah recently wrote in to ask about current 0% balance transfer offers. It seems that she took advantage of a 12 month offer last November, and is now looking for another to extend her 0% promo period with a new offer.

Unfortunately, credit card issuers have gotten increasingly stingy with their offers over the past year or so. Most of those twelve month offers have become six month offers, and pretty much all of them now come with fees attached.

While these offers have gotten considerably less attractive, they’re still a great deal when viewed in the context of prevailing credit card interest rates. So… What’s the best deal currently available?

Twelve month offers making a comeback?

A week or so ago, I got an e-mail announcing that the 0% promo period on the Discover American Flag has been increased from six to twelve months. While that sounds like great news, it’s important to note that they’ve also increased the balance transfer fee from 3% to 5%. Thus, it’s not quite as nice as it sounds. Nonetheless, depending on your situation, this could still be a worthwhile option.

Six month balance transfers abound (sorta)

It wasn’t too long ago that I had a list of over 40 great 0% balance transfer offers. That list has now dwindled to fewer than ten and, as noted above, the terms have deteriorated. Pretty much all of them are six month offers, and pretty much all of them have a 3% transfer fee.

Once again, this isn’t great, but it’s arguably better than paying 20% or more on your credit card debt. In case you’re interested, here are four such offers:

• Discover More Card
• Discover Miles Card
• Discover Monogram Card
• Citi Platinum Select Card (+ 0% on purchases!)

If you know of any particularly attractive 0% balance transfer offers, please share the details in the comments.

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Is it really necessary to buy software programs to clean and/or protect your Windows computer? And either way… Which ones should you use?

“Yesterday it worked, today it is not working, Windows is like that.”

-Margaret Segall

Why take advice from me?

Though I do not speak of it often I am an Information Technology Manager (a.k.a. “computer guy”) by trade, and have been cleaning and maintaining desktop PCs, laptops, and servers for almost 10 years now. What have I learned? A ton…

But rather than bore you with a lot of useless information, today I will focus on one topic that you do care about: How to maintain the speed and cleanliness of your computer using nothing but free software.

As you may well know I carefully filter all of my spending decisions, so my preference for free software should come as no surprise. While there are certain programs that must be purchased, the ones needed to clean and maintain your computer do not have to fall into that category. In fact, I have found that free software is 100% effective when it comes to cleaning computers.

Today my goal is to give non-techies a quick, easy, and free way to clean and maintaing their own PCs. Who knows, this could even be the start of a new career for you!!!

All the cool kids use Firefox

I will start with a maintenance tip since prevention is always the best medicine — use Firefox as your Internet browser. This it is your single best defense against getting infected with viruses, spyware, malware, etc.

I recommend Firefox not only because the majority of spyware, malware, and viruses out there today are developed to exploit the security holes in Internet Explorer (IE), but also because it provides a superior browsing experience to that of IE.

If you are already infected to the point where you have time to go knit a sweater between mouse clicks, you can clean it yourself – for free – using the arsenal of geek love below.

Five free products you need

Here is a brief description of the products you will need as well as a link to each:

• Firefox – As noted above, this is a free Internet browser that has been taking market share from IE for years now. The majority of IT professionals use Firefox as their default browser, so be wise and use what the geeks-in-the-know use.
• MalwareBytes Anti-Malware – A free and extremely effective spyware/malware removal program that I install on every computer in my home and in my corporate network. Another free option (which I haven’t used, so I can’t vouch for it) is SuperAntiSpyware. Why not pay for one of the “professional” spyware removal programs? Because you don’t need to.
• Avast Antivirus – Hallelujah… A full featured antivirus software for free! The free edition is only intended for non-commercial and home use, so make sure you meet those requirements. Two other popular (and free) options are Grisoft AVG Free and Avira AntiVir.
• Ccleaner – This cool little freebie offers an easy way to clean unnecessary temp files and also provides a registry clean up tool. It does a lot of things that many PC technicians used to have to do manually, and has been an invaluable tool in my IT apps arsenal.
• Defraggler – Use this tool last… After you have already installed and employed all the previous programs. Made by the same company as Ccleaner, Defraggler will help speed up your PC by defragmenting the files on your hard drive. I use it because it is superior to the built-in Windows defrag utility. I suggest setting up a monthly automatic defrag (to run while you’re sleeping) for best results.

Don’t forget… Now that you’ve cleaned your PC, make sure you start using Firefox as your default browser!

Now don’t be selfish

If this post did help you clean up your PC, be kind and pass it along to friends, family, and coworkers, you computer technician, you. Heck, after awhile, you may even be able to start charging people to do this for them. Don’t say I never gave you any useful, income-generating ideas!

Happy cleaning!

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As September came to a close, I was enjoying an 11.98% net annualized return with Lending Club. Once again, I spent the month expanding my holdings beyond my original “High Risk” and “Low Risk” test portfolios. My overall rate of return has slipped a bit as the loans I’ve been investing in recently are, on average, higher quality than my original holdings.

At the end of the month, I had 133 notes outstanding, and all but one are performing as expected. That one exception is the same note that has been problematic from the start. In fact, that borrower has yet to make a single payment, and the loan has now been sent to collections. Thankfully that note is only worth $25, so it’s won’t hurt my overall portfolio too much.

Speaking of collections… Lending Club is hosting a “Credit and Collections” webinar tomorrow (Thursday) evening at 7PM Eastern. If you can’t listen in live, you should be able to access the archive at some point in the near future.

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