What Are Others Saying…..
I am relatively new with the whole art of blogging and have found myself spending hours upon hours surfing, reading and skimming others blogs. There is a lot of good stuff out there……there is also a lot of garbage. However, there are a number of articles that I have seen in the last week or two that I thought might be worth your reading.
Here they are in no particular order.
- Iowa Floods: Reconsidering Flood Insurance – Do you need flood insurance?
- How to Improve Your Gas Mileage – A few tips and tricks.
- Best Credit Card for Foreign Travel – What cards are best for your next international excursion?
- Eat Healthy on a Budget – Eat great without breaking the bank.
Ok, so I found one more today that I couldn’t resist.
Credit Scores Dropping
It looks like banks and card lenders are have found a new way to protect themselves from high risk borrowers. They are reducing their credit limits. According the the Associated Press this is just one more way banks are trying to protect themselves from more massive losses like those they’ve seen from subprime mortgages.
By reducing your credit limit your credit score is negatively affected. Let me explain. Let’s say your current credit limit is $5,000 and your carrying a $2,000 balance on your card. The credit card company worries that your large outstanding balance may increase your default risk so they reduce your credit limit to $2,500.
By reducing your credit limit they have in turn increased a key ratio used to calculate your FICO score. The ratio they’ve increased is called your credit utilization rate and is found by dividing your current outstanding balance into your total credit limit. In the above situation your credit utilization rate goes from 40% to 80%.
Thankfully banks and card companies must give you at least 15 days notice when they are changing your terms and conditions, but what they don’t have to do is tell you is that this reduction in your credit limit will negatively affect your credit score.
I think the best way to prevent your credit score from dropping is to pay off your outstanding balance every month. First off, if you are not carrying an outstanding balance your card company would most likely not consider you high riskand would have no reason to decrease your limit. Second, even if they were to reduce your limit and you do not carry a balance on your card, your credit utilization rate would remain the same, 0%.
The Debt Hole
Have you ever felt that your “digging” yourself out of debt? I know that might sound a little funny, but that it literally what we are doing. Normally you don’t even realize you’ve started digging the hole. It can start with something as simple as the family car breaking down or the air conditioning going out in the middle of the summer.
There is always on unexpected expense that can’t be covered by the monthly budget and forces us to put the charge on the credit card. Sometimes we just roll it into the 2nd mortgage becuase it’s “tax deductile interest” and we can’t afford not to fix it now.
Although that may be true, I would suggest there are better ways to deal with the unexpected. As almost any financial planner would tell you, GET AN EMERGENCY FUND. Even if you have as little as $500 put away for a rainy day it might be what keeps you from starting to dig that hole.
The problem that occurs is in the following month our budget is already busted because of last month’s surprise charge. So how do we fix it? We don’t pay one of current bills or simply continue to carry a balance on our credit card telling ourselves that “next month we will be able to pay it off and get back on track.” As we all know, next month comes along and another “emergency” expense comes up and the credit card balance continues to grow and our debt hole gets deeper and deeper.
How deep is your debt hole?
Here are a few questions to ask yourself to see if maybe your debt hole is a little deeper than you thought.
- Can I pay off my credit card balances each month?
- Do I skip some bills to pay others?
- If I lost my job today, would I have enough in liquid assets to survive for more than a month?
- Do my spouse and I constantly argue about money?
- Do I receive phone call from creditors about overdue bills?
- Have I postponed medical or dental appointments because I can’t afford them right now?
- Am I using an increasing amount of my monthly income to pay down debt?
Amending a Tax Return
I was recently asked by a family friend if I would be willing to look over their tax return to see if I could tell why they did not receive their stimulus payment. (Not really sure why they asked me, but hey, I guess it’s a compliment).
The first thing, and most obvious thing, that I checked was whether or not they should have received it by now. I just looked at the IRS time line of when stimulus payments were supposed to go out (Stimulus Payment Schedule). Because their original return was submitted on time and their refund came via direct deposit I knew they should have received it by now.
The second thing I check was whether or not they had sufficient qualifying income. According to the “fine print” of the stimulus payments you must have at $3,000 of qualifying income (Qualifying income includes any combination of earned income and certain benefits from Social Security, Veterans Affairs or Railroad Retirement). After reviewing of their original return they only had $1,012 of qualifying income. However, they had an additional $4,000 of income listed on line 21 as “other income”. I found out that this “other income” was actually income from a side business they had started in order to make a little extra income. With that knowledge I now knew that this should actually be categorized as business income (a.k.a. qualifying income) and not other income.
The final thing I had to do was figure out how to file an amended return. After a little searching on the IRS’s website I found the solution. It is actually relatively easy. There is one form, two pages (1040X), that must be filed out and mailed in along with any supporting documentation.
What did I learn from the process…….
- Find a friend to help – Although I am by no means an expert in the area of tax I was able to save them a $400+ charge from H&R Block just to tell them what was wrong and file the amended return.
- Search online for 5 minutes – Literally, it me less than 5 minutes of searching on IRS.gov to find out how so file an amended return.
- If your original return was wrong, amend it – After about one hours worth of work I was able to get them an additional $1,600 in refunds ($900 of stimulus payment and $700 of additional earned income credit)
- Call for help – If you are unsure of whether you are doing something right, give the IRS a call…that is one of the reasons we pay taxes. IRS Help
Free Credit Monitoring
What’s better than a free credit report once a year? Free credit monitoring. According to a class-action lawsuit filed against TransUnion, one of the three major credit bureaus, you can receive either 6 or 9 months of free credit monitoring. Below is what is included in each of the two packages according to the settlement notice.
The six months of credit monitoring services (which retails for
$59.75) include: (1) the ability to lock your credit report so third
parties, such as lenders or other companies, will not be able to access
your credit report without your consent (unless allowed by law); (2)
unlimited daily access to your Trans Union credit report and credit
score; and (3) credit monitoring with a 24-hour email credit notification
service. The nine months of enhanced credit monitoring services
(which retails for $115.50) includes all the services listed above, plus
a suite of insurance scores and a mortgage simulator service.
Are you Eligible?
If you have had an open credit account or an open line of credit from a credit grantor (i.e. automobile loans, bank credit cards, department store credit cards, other retail store credit cards, finance company loans, mortgage loans, and student loans) you are eligible. You must register before September 24, 2008.
Part 4: Comprehensive Physical Damage Coverage
Sometimes referred to as collision coverage, comprehensive physical damage coverage is coverage that pays for damages from any collision, regardless of who is at fault. If the other driver is at fault and has liability coverage, your insurance company should be able to recover losses from the other driver’s insurance company. If the accident does not involve a collision with another vehicle, comprehensive physical damage coverage covers any physical damage to your car. (note: this coverage is for your car and not personal physical injuries.)
One of the easiest and quickest ways to reduce your premium is to not have comprehensive coverage. This is an optional coverage that is not required by law. However, it is also one of the best ways to protect yourself from any serious damage to your car (your fault or not).
One of the best ways to decided whether or not comprehensive coverage is right for you is to see how much your car would cost to replace or repair. A quick search on Kelly Blue Book or N.A.D.A. will give you a current value for your car. If your car value drops below $2,000 it might not be worth the extra money to carry collision coverage; it may be more cost-effective for you to pay repair costs out of your own pocket if the car is in a collision.
Automobile Insurance Explained
Part 1: Liability coverage
Part 2: Medical payment
Part 3: Uninsured/underinsured motorist coverage
Part 4: Comprehensive physical damage coverage (see above)
Part 3: Uninsured/Underinsured Motorist Coverage
Uninsured or underinsured motorist coverage is similar to liability coverage. It covers your costs if you are injured by an uninsured motorist or if you are injured in a hit-and-run accident. It also covers your costs if the other driver’s insurance is insufficient to pay for your expenses (in other words, if the other driver is underinsured).
The reason this coverage is different from liability coverage is that the other driver must be at fault for you to collect on this coverage. It is recommended that you keep your uninsured/underinsured insurance coverage the same level as your liability coverage.
Automobile Insurance Explained
Part 1: Liability coverage
Part 2: Medical payment
Part 3: Uninsured/underinsured motorist coverage (see above)
Part 4: Comprehensive physical damage coverage
Part 2: Medical Payment Coverage
The second part of automobile insurance coverage is medical payment coverage. Medical payment coverage pays for all accident-related medical costs and funeral expenses incurred by you or your family members within three years of an accident. Medical payment coverage also covers policyholders and their family members when in others’ vehicles, or when policyholders and their family members are on foot and hit by a car. The recommended minimum medical payment coverage is $50,000.
Medical payment coverage does not cover all medical expenses, however. For example, it does not cover your medical expenses if you are injured by a vehicle that is not designed for public streets, such as an unlicensed three- or four-wheel all-terrain vehicle. Be sure you know what types of injuries are excluded from your policy.
Automobile Insurance Explained
Part 1: Liability coverage
Part 2: Medical payment (see above)
Part 3: Uninsured/underinsured motorist coverage
Part 4: Comprehensive physical damage coverage
Part 1: Liability Coverage
Liability coverage pays for losses related to bodily injury, property damage, lawsuits, and defense costs. Bodily injury coverage protects against expenses related to deaths or injuries resulting from an accident. Property damage coverage protects against costs for damage to the car or cars involved in an accident, as well as damages to other property (such as fences or fire hydrants). Lawsuit coverage covers losses related to any lawsuit resulting from an accident.
Combined-Limit Coverage
Liability coverage may be listed on your policy as a combined-limit or as a split-limit, depending on the type of insurance you have. Combined-limit insurance lists one maximum amount that the insurance company will pay to cover all types of liabilities in an accident. For example, 300/50. This means the insurance policy will cover up to $300,000 worth of injuries in an accident with no limitations on a per individual basis (see below). However, most policies are written as split-limit policies.
Split-Limit Coverage
Split-limit insurance lists the maximum amount that the insurance company will pay for each of the specific types of liability. If you have a 100/300/50 split-limit insurance policy, it means your limits are $100,000 per person for bodily injury liability coverage, $300,000 per accident for bodily injury liability coverage, and $50,000 per accident for property damage coverage. These dollar amounts are the maximum amounts your insurance company will pay per person or per accident. Should the costs of the accident exceed these limits, you will be responsible for paying the difference.
Example:
If you were to get into an accident the most your insurance policy would cover for the entire accident would be $300,000. However, the max they will pay per person is only $100,000. If the accident involved eight people and all eight people each had $50,000 worth of injuries the insurance policy would only cover the first six people. You would be personally liable for the remaining two. If the accident only involved two people but one of the persons injuries resulted in $150,000 of injuries the insurance policy would only cover the first $100,000 and you would personally liable for the remaining $50,000. In either case the most the insurance policy would pay for property damage is $50,000 total (including all parties involved).
The recommended split-limit minimum liability coverage limits are 100,000 per person and 300,000 per accident with 50,000 for property damage. The combined-limit recommend liability coverage limits are 300,000 per accident with 50,000 property damage.
Automobile Insurance Explained
Part 1: Liability coverage (see above)
Part 2: Medical payment
Part 3: Uninsured/underinsured motorist coverage
Part 4: Comprehensive physical damage coverage
Automobile Insurance Explained
I’m sure we’ve all done. We come home from work, open the mailbox and see a letter from our car insurance company. The first thought that usually comes to mind is “oh great, have they increased my premiums?” Although this is very important when it comes to financial planning I would like to suggest that it is not the first thing we should be looking for when it comes to auto insurance.
Is My Coverage Sufficient?
I would suggest the first and most important thing we look for is whether or not we have sufficient coverage for current situation. When most people take out a car insurance policy the only thing they are worried about is getting the lowest rate possible. I too would agree that the ultimate cost of your policy is very important, but I also believe this to be secondary to the amount of coverage on the policy. As you know, to legally drive your car, you are required by law to carry a minimum level of coverage. However, most experts agree that the minimum coverage required by law is insufficient.
What Do the Numbers Mean?
After understanding the importance of sufficient coverage, we next must understand what the coverage numbers mean. There are basically four different components to automobile insurance that must be understood. (click on each part for a detailed explanation)
Automobile Insurance Explained (see above)
Part 1: Liability coverage
Part 2: Medical payment
Part 3: Uninsured/underinsured motorist coverage
Part 4: Comprehensive physical damage coverage
With a sound understanding of the different components of automobile insurance coverage you are now better able to know if you really are getting a “good deal” with your current policy.
