MONEY MATTERS

Part I College Series: What is college education really worth

February 22nd, 2012, 9:29 am by dtova

These days, getting a college degree and landing a high paying job right out of college is becoming virtually unheard of. Ironically, many families don’t qualify for financial aid because they “make too much” yet live paycheck to paycheck. On top of that, many parents won’t qualify for private loans because of damaged credit. It’s a scary prospect.

As a result, more and more families are shifting their college conversations from getting a college education at all costs to exploring more affordable options.

One option is for the student to attend a two-year community college, then transfer to a four-year college. According to the College Board, tuition and fees at a two-year college average only 36.2 percent of the average four-year public college tuition and fee.

Rod Thirion, Department of Business chair at Pikes Peak Community College, the lowest cost provider in the area, says the vast majority of business students have the absolute mindset to transfer to a four-year school. PPCC has transferability agreements with several four-year schools, including the University of Colorado at Colorado Springs, Regis, Colorado State University-Pueblo, Colorado Technical University and Colorado State University-Fort Collins.

Thirion’s advice for students: “Know the entire cost up front, which means finding out now what really interests you and determining if credits are transferrable.” He cites a student he recently met with who spent over $40,000 on an associate degree only to find out that the credits were not transferrable. For this reason, he advises students to seek regionally accredited colleges, whose credits will transfer to most schools.

So how much should you spend?

Paying for your child’s college is about how much you can afford without compromising your own goals. Whatever you do, do NOT empty your retirement savings to pay for college. Your kids have options (work, borrow money or attend a less expensive school) – you have more limited options when it comes to your retirement. Have a frank discussion with your kids now and set realistic expectations.

How much is reasonable to borrow?

On average, students graduate with $25,000 in debt, not including credit card debt! Don’t borrow too much. It’s virtually impossible to get student loans discharged in a bankruptcy and the government can garnish your wages until the debt is paid off.

I like this rule of thumb: One-third of the money should come from scholarships, one third from savings and the remainder from loans. A word of caution to students: Never borrow more than you expect to earn the first year after graduation. So if you want to be a social worker, there is no reason to rack up $100,000 in student loans.

I heartily endorse the following opinion. Harvey Meldrum, founder of Meldrum Financial LLC, told InvestmentNews.com, “When someone doesn’t even know what they want to do, $50,000 a year is a very expensive experiment to find out. Don’t get sucked into buying a really expensive decal for your car.”

The bottom line: We tend to seek instant gratification, then worry about the price tag later. Unless you want this dark cloud of debt looming over you for the rest of your life, know your education price tag and have a plan to pay for it on the front end.

Mystified by money and want to improve your financial effectiveness? Denisa Tova CFP®, CDFA, MBA is a Colorado Springs-based Certified Financial Planner and a Certified Divorce Financial Analyst. Contact her at DenisaTova.com or email denisa.tova@gazette.com.

Posted in: College Planning • Cost of college • Paying for college | Post a Comment »

Before you say YES to Rent-to-Own arrangement

February 19th, 2012, 2:36 pm by dtova

Currently, there is a large inventory of houses for sale where the sellers are attempting to sell their home through the short sale process.

Christine Chiaro with Re/Max Properties says, “If the seller’s bank does approve the seller to use the short sale process, it’s still not an easy fix for the seller who owes more on his house than what the current market value is. Although a short sale is less damaging to a seller’s credit than a foreclosure is, there are still some serious, negative consequences to the seller’s credit.”

That’s why more homeowners looking to sell are turning to rent-to-own agreements.

Here is the skinny on rent-to-own agreements. A prospective buyer rents a home with the option of buying it at the end of the lease term (generally three to five years) at a pre-determined purchase price. The homeowner gets a paying tenant instead of a property sitting idly on the market, and a prospective homebuyer with less than stellar credit gets a shot at owning a home at a later date.

Sounds like a win/win, but is it really? You decide.

The tenant adds an extra payment above and beyond the rent amount, and thereby is putting money toward his down payment to purchase. For example, if the rent is $1,500 per month and the renter pays $1,600 per month, that extra $100 is applied towards the renter’s future down payment to purchase the house. The catch: The buyer is typically obligated to buy when the lease expires; otherwise the extra cash is forfeited – unless your contract states otherwise.

Here is where it can get a little sticky for the seller, too.

“A lease option can be dangerous for sellers too as there have been many legal battles over the buyer/tenant ‘test driving’ the house and ending up not liking something about the house and then opts out of buying it in the end – or their financing never came through,” Chiaro says. She recommends that an attorney prepare the lease option agreement. If a real estate agent writes it, Chiaro said the agreement should be reviewed by an attorney before the seller and buyer sign.

If the renter does have a change of heart about buying, the seller would have to go through the listing process again. The seller can also be disadvantaged if the home’s value rises more than expected but he or she has locked in the value of the home at the time the contract was signed.

So buyers, before you sign on the dotted line:

1) Consult with an attorney or real estate agent; this one goes for the seller as well.

2) You will want to make sure the house isn’t in foreclosure or a short sale.

3) Take your time to find out if you like the neighborhood.

4) Have the home inspected.

You contract should have a provision for the various “what ifs” including the seller’s foreclosure or short sale.

I’ll close with a word to the wise for home renters who hope to become buyers. Start cleaning up your credit right away to make sure that when your lease expires, you will actually qualify to purchase the home.

Posted in: Uncategorized • Rent-to-Own Agreements | Post a Comment »

How to find and claim lost or forgotten dollars

February 10th, 2012, 9:49 am by dtova

It’s never wise to lose track of your money, but in these challenging economic times it’s more important than ever to know where your money is. Perhaps you have money that you don’t even know about. So called “found money” can exist in many forms, and here are some tips on how to search out and reclaim yours.

Life insurance

Each year, thousands of people leave life insurance benefits on the table. State regulators estimate that a whopping one billion dollars worth of unclaimed death benefits languish in the coffers of the life insurance companies.

The problem? Many times, people with life insurance policies don’t necessarily share that information with their beneficiaries. If your grandpa tucked away his policy somewhere and neglected to tell anyone, how could you claim the money without knowing of its whereabouts? Or it could be your own ancient policy that you never dusted off and have no idea what it’s worth.

Put on your detective hat and track down that old life insurance policy.

Discover which life insurance company has the policy. Dig out your cancelled checks or bank statements to determine the recipient of all those insurance premiums paid out over the years. Once you determine which insurance company issued the policy, call them as soon as possible.

If you can’t figure out which insurance company has the policy, contact the MIB (Medical Information Bureau, not “Men in Black”). It’s a national database that collects information from persons applying for life insurance. MIB offers a service to locate lost policies, www.policylocator.com.

Another avenue of discovery is to contact the insurance commissioner in the state in which the policy was most likely bought.

If it is a policy belonging to your dearly departed relative that you’ve tracked down , claim your money by submitting a completed claim form accompanied by a certified copy of the death certificate.

Recently I received an email from a reader asking what happens to the unclaimed bucks, which prompted me to do some research. I found out that the insurance company holds onto the funds until it has reason to believe that no one will collect it (between three to five years). The funds are then transferred to the state as unclaimed property.

The Colorado State Treasurer’s division tasked to find the unclaimed property’s rightful owners is called The Great Colorado Payback (colorado.gov/treasury/gcp). It currently has a list of more than 1.7 million names of people or business entities that need to come in and could claim a windfall.

Missing money from other sources

If you have lost or forgotten about a bank or investment account, IRA or a refund check, or forgot to claim your security deposit, see if your name is on the list www.missingmoney.com.

Once you spot your name, contact the unclaimed property office. You will be asked to prove your identity (social security number, list of current and previous addresses, etc.). If there is a match, you will be asked to file a claim.

Found money can be much more than the coins you find under the sofa cushions. All it takes to discover this hidden treasure is determination and an inquiring mind. Good luck on your treasure hunt – after all, it’s your money!

Posted in: Life Insurance • life insurance claim; finding lost life insurance policy; | Post a Comment »

Answering your Questions about all things money

February 4th, 2012, 12:18 pm by dtova

Question: We want to make an improvement to our home and wonder what is the best way to pay for it. Should we borrow money from our 401(k) or take out a home equity line of credit?

- Carla S., Monument

Answer: Ask yourself: How affordable is this project and what will you have to give up to pay for it> How soon will you pay it off?

As far as how to pay for the project, I suggest that you save up for it. Probably not what you want to hear since you didn’t include this option in your question. Borrowing money has its costs; so unless you’re in a hurry, consider delaying the project until you can save up for it.

A 401(k) loan is a bad idea for a home improvement project as that money is meant to be for retirement. Borrowed money won’t earn you any interest and if you lose your job, you’ll have to pay it back fairly quickly. Then what? Borrow again?

A home equity line of credit is preferable. Because interest on home equity lines is generally deductible you will generate tax savings, which is not the case with interest on 401(k) loans.

Question: I am 25 years old, single and work full-time. Where should I invest my money? I am nervous about the stock market.

- Tom B., Colorado Springs

Answer: I understand. The stock market’s ups and downs can hit a nerve, even in a normally resilient person in their twenties.

But at 25, you have plenty of time to recover from any stock market lows. The only way you will grow your money is by investing it in a mix of stocks and bonds. To determine the percentage you should have in stocks, subtract your age from the number 100. Based on this rule of thumb, a 25-year-old should have 75 percent invested in stocks.

If you have an earned income, the best place to save for retirement would be a Roth IRA account.

If you don’t want to pick stocks, financial institutions that offer IRAs have “prepackaged” investment options, such as Target Date Funds that auto adjust with your age. It takes the guesswork out of it.

The bottom line is, putting money into a conservative savings vehicle such as a CD is good in the short run but it won’t pave your way to retirement.

Question: I am a college student and struggle to save money. I work part-time and blow through my paycheck quickly. I want to learn how to invest my money.

- Shauna N., Colorado Springs

Answer: Many college students are in the same boat; they blow through their money before they have a chance to invest it. Add to this credit card debt and a gigantic student loan, and you are heading for a disaster when you graduate.

I suggest that you open up an investment account such as a Roth IRA and sign up for automatic investing from your paycheck. That way the money gets invested before you have a chance to spend it on short-term desires instead of investing it in your long-term future.

Posted in: Budgeting • Debt Management | Post a Comment »

How to tell if you have too much debt

January 27th, 2012, 7:05 am by dtova

By now your New Year’s hangover, if you had one, is long gone. But what about your debt hangover?

Whether the debt includes your mortgage, a car or student loan, your credit card or all of the above, there is an acceptable threshold. But once you go cross that threshold, you are officially in over your head.

Determining if you have too much debt depends on who you ask:

Lenders look at your debt-to-income (DTI) ratio, which measures how much debt you have compared to your income. If your pre-tax monthly income is $4,000 and your total debt repayment is $1,200; your DTI is 30 percent. That means you spend 30 percent of your gross income repaying debt.

Lenders use this number to determine how capable you are of handling additional debt. The lower your DTI, the more likely it is that you will be able to borrow more money. A good, safe DTI is 36 percent or lower, anything over 40 percent is a red flag.

We are talking about all debt – the good, the bad and the downright ugly.

Good debt helps you to fund an investment such as a mortgage. When you make payments, you are building equity in your home and getting a tax deduction. A college loan is another good example as you are investing in your future.

Bad debt is when you buy stuff with high interest rate cards and carry a balance.

To throw another monkey wrench into the works, the way our credit score is calculated actually rewards you for utilizing bad debt. The credit score companies consider the utilization ratio, which tracks the usage of your credit cards. Assuming you pay off balances monthly, frequent use of your cards raises the utilization score, which in turn improves your overall score. So, if you put purchases such as clothing and groceries on your credit card, be sure to pay off the balances every month.

Another red flag is habitual use of good debt to pay off bad debt. This masks the fact that you are not treating the underlying symptoms of having too much debt.

Let’s break down the individual debt level guidelines and talk about what’s considered a safe level for each debt category.

Your mortgage: Your total house payment, including insurance, taxes and utilities should not exceed 40 percent of your before-tax monthly pay.

Your student loans: A prudent goal is to graduate from college with a total debt that does not exceed your anticipated first year salary. So a student planning to be a social worker should hopefully graduate with a lot less student loans than a grad student aspiring to be an architect.

Your credit cardsL Monthly credit card balances are simply not a good idea. If you must have a balance, keep it below 30 percent of your available credit.

Your car loan: A good rule of thumb is to have a car payment that is no more than 8 percent of your monthly income and much less if you have other debt.

Good, bad or somewhere in between, too much of any kind of debt is not a good thing, so rein it in!

Posted in: Debt Management • Good debt • Lending money to friends and family; non business bad debt • What's too much debt? | Post a Comment »

Answering your Questions about a foreclosure recovery

January 18th, 2012, 9:46 am by dtova

Question: We had to let our home go into foreclosure last year. What’s the best and quickest way to rebuild our credit?

- Ryan C., Colorado Springs

Answer: While a foreclosure can leave long-lasting scars on your credit, for some people this becomes the only option for financial survival.

Foreclosure stays on your credit report for seven years and can lower your credit score up to 200 points. The catalyst for foreclosure is three or more missed mortgage payments, so your credit score begins its downward spiral before the foreclosure is finalized.

Ironically, people with a lower credit score see a smaller impact to their score than those with a higher FICO score. That’s because you can only go so low.

Here are some tips to rebuild your credit:

Accentuate the positive. Start establishing a positive credit history right away. With the passage of time the foreclosure looks less significant and your credit score improves.

Make careful financial choices post-foreclosure. Before proceeding, determine if it will positively impact your credit.

Understand what caused the foreclosure. If you lost your home because you made bad money choices (and that’s not necessary Ryan’s case), you need to start changing your behavior; otherwise you will end up right where you started.

Live within your means. Stick with a budget. Even if your foreclosure was a result of a sudden loss of income, you still need to learn to live on what you have.

Pay your bills on time. Credit card and car payments automatically appear on your credit report. Strive to have a good rent payment history. Why? Because when you apply for another loan, your lender will assign weight to how you handled your credit since the foreclosure.

Some people can apply for another home loan within three years while others have to wait longer. It varies from lender to lender. Work with a mortgage lender from day one and develop a plan to get into your next home. Also, the sooner you become credit-worthy, the sooner you will be able to apply for another home loan. Saving up your next down payment will speed up the process.

When you are ready to buy another home, give yourself ample time to get pre-qualified to avoid any last-minute surprises in your credit report.

Question: Is it a good idea to apply for a credit card and use it after a foreclosure? Would it hurt our credit more?

- Ann P., Colorado Springs

Answer: Using a credit card and paying the balance in full every month will help restore the sheen to your tarnished credit. As a matter of fact, you should responsibly manage two to three accounts, such as your credit cards and a car loan. This will show a lender your ability to manage debt responsibly.

Foreclosure is a huge bump in the road but it’s not insurmountable. Your road map out of foreclosure includes the following directions. Manage your credit responsibly from day one, stay employed (I realize it’s not always up to you), live within your means, and save up for a down payment. That will have you in your next house in no time.

Posted in: Credit • Foreclosure • Foreclosure recovery | Post a Comment »

Find out if it’s worth fighting for your home

January 12th, 2012, 1:10 pm by dtova

Many families still struggle to make house payments, and falling behind on house payments can be very costly. It can damage your credit score, and you could even lose your home.

If you’re having a problem, you must deal with it soon; the longer you wait, the harder it’ll be to catch up. Before you walk away from your home, here are some ways to determine if it’s worth the fight:

Figure out if you can truly afford your home. You can do this yourself or with the help of a debt counselor or financial planner. The Federal Department of Housing and Urban Development (HUD) lists counseling agencies that offer advice at little or no cost. Another source of help is the Colorado Foreclosure Hotline, 1- 877- 601- HOPE (4673).

Add up your bills, trim discretionary expenses and determine what you can afford. If you are able to catch up but need to modify the terms of your loan, look into these options:

Work with a debt counselor on a debt repayment plan based on your budget. The counselor negotiates directly with your creditors to lower your interest rates and reduce payments. Your debt payments are consolidated into one payment that your debt counselor distributes to your creditors each month.

Only one or two payments behind? See if your lender would either add those payments to the mortgage balance or add a portion of your missed payments to future payments.

Finally, look into a loan modification program. The recently announced improved Home Loan Modification Program (“HARP II”) should make it possible for many homeowners with upside-down mortgages to qualify. Lenders are still working out the details, but they should be your first stop to see if you’d qualify. Make sure you can afford modified payments because if your budget can’t support even that, why bother?

Obviously, if your income was reduced because of a job loss or divorce, you can’t refinance. If you are making mortgage payments with your credit card, and getting into a deeper debt hole, you may need to let your home go.

If you decide you can’t afford to keep your home but can’t sell it, foreclosure is not your only option. In fact, it should be your very last option.

Consider a short sale. This means selling your home for less than you owe, with the lender forgiving the rest of your loan. To find out if you qualify, consult with a Realtor who specializes in distressed properties.

If you pursue any of these options you will most likely take a hit to your credit. But when you can barely afford to cover basic living needs, your priority should be to get caught up and not add to your debt even if it means temporarily damaging your credit score.

Posted in: Foreclosure • Homebuying • Short sale • foreclosure • loan modification • Short sale | Post a Comment »

Make a financial resolution and stick with it!

January 6th, 2012, 2:36 pm by dtova

So, have you given up on your new year’s resolution yet? Whether it’s losing weight or getting out of debt, we are all guilty of resolving to do something in the new year then failing to reach our goal.

Because we want instant gratification, we set unrealistic goals and go to extremes. Instead of resolving to lose excess weight by starting to work out and changing eating habits, we go for the jugular – shed 50 pounds in a month by drinking only green vegetable juice. This sort of plan only sets you up to fail, and may even set you back.

The same applies to financial goals. I had a client who was adamant about helping her daughter with college expenses even if it meant postponing her own retirement. If I had prepared a financial plan that ignored her wishes, it would never have been implemented.

My point? The key to turning any goal into reality is balance. My friends, we are human beings, not robots. With that in mind, here are guidelines to help you stick with your resolutions:

Don’t be vague

For example, simply resolving to get out of debt is too vague. If you want to get a handle on your debt once and for all, you need to change your money habits, which means altering your behavior. We are talking a complete paradigm shift, which can’t be done overnight. You could put yourself on a “starvation budget” and pay off your debt in a month, but unless you change your spending habits, you will find yourself sinking back into your hole of debt.

Keep it simple by nailing it down

Want to get out of debt? Decide which piece of the debt you want to pay off and by when. Have too much credit card debt? Start with the credit card with the lowest balance and give yourself a due date. Place a visual reminder where you can see it to track your progress. Then knock out the next one. Want to save more money? Nail it down to how much more and what you are saving for. Then sign up for automatic savings from your paycheck. It’s as simple as that.

Celebrate small victories

Paid off your first credit card? Managed to save an extra 5 percent from your paycheck? Treat your family to a movie but don’t charge it to the credit card you just paid off!

Don’t keep your goals to yourself

In order to succeed you need an accountability partner, so share your resolutions with your family and close friends. If you’re comfortable with sharing your goals in public, Wesabe.com is an online community where you can discuss your finances with others. You can set goals and spending targets and share them with the community. The best part, it’s free.

Being positive helps

Instead of articulating your goals as something you are giving up, put a positive spin on it. Present it to your family as a great opportunity to realize your dreams when you reach your goal.

Lastly, don’t give up after the first time you fail. It can take weeks to form a new habit and months to change a behavior. Remember that you are NOT a failure if you break a resolution; it’s what you do about it going forward that counts.

Posted in: Uncategorized • Turn your financial resolution into reality | Post a Comment »

2012 brings changes for your dollars, both good and not so good

December 31st, 2011, 12:00 pm by dtova

With another year under our belt, let’s look at the changes 2012 will bring to your wallet.

Retirement benefits

The amount that you can stash into your IRAs will not change. This means you can still put in $5,000 per year if you are under age 50 and sock away an extra $1,000 if you are 50 or older. That’s a combined limit for Roth IRA and Traditional IRA.

There is good news for your 401(k)s. You can put an extra $500 into your 401(k) if you are under 50 (for a total of $17,000 per year). The extra contribution for someone age 50 or older remains at $5,500, the same as last year. This new limit also applies to 403(b) plans, the government’s Thrift Savings Plan and some 457 plans.

Your 401(k) fees will be more transparent. Starting this month, your 401(k) statements should make it easier to figure out how much you are paying in fees.

Social Security

The new year brings Social Security checks with slightly higher amounts on them. Seniors and others collecting Social Security benefits will receive a 3.6 percent cost of living boost.

Your taxes in 2012

Most of the changes, made to keep up with inflation, will impact almost everyone. Changes include:

- Personal and dependent exemptions will go up by $100, to $3,800.

- Standard deductions will go up by $300 (to $11,900) for married joint filers, up $150 (to $5,950) for single and married filing separately filers, and up $200 (to $8,700) for heads of household.

- Earned income tax credit increases to $5,891 (up from $5,751 in 2011).

- Tax-bracket thresholds will widen for each filing status.

- Income phase-out levels for married couples to write off certain items, such as student loan interest and Roth IRA contributions, will increase.

You can check out a complete list of changes on the IRS website (www.irs.gov).

New credit report is more revealing

The creeping effect of the “tell all” society will now encompass finances. Soon some of your lenders will be able to discover your deepest, darkest financial secrets.

CoreLogic introduced a credit report that reveals much more information about us than the other three credit reports. It will list financial faux pas such as evictions, missed rent payments, child support judgments, payday loan applications and your repayment history, property tax liens and any late payments on your homeowner’s association dues.

While this report will not replace the traditional credit reports, it will supplement them. CoreLogic partnered with FICO, the credit score provider, to create a consumer score based on the new data. The company says that it’s not spying on people; but rather compiling information already available in public records.

The CoreScore credit report is already available to all types of lenders. But the new credit score should be available in March and only to mortgage lenders at first.

Obviously the CoreScore credit report can work both ways. It can showcase some of your good financial habits, such as paying the rent on time, that don’t show up on your traditional credit report. But the flip side is that it also displays your bad credit decisions, giving you added incentive to be careful with your financial footprint.

Change is definitely in the air when it comes to your finances, but we all know that change is inevitable. What you do about it will help to determine whether 2012 is fiscally fit or a financial fiasco.

Posted in: Credit • Debt Management • Retirement Planning • Tax Planning • 2012 changes to your money; retirement plan contributions in 2012; your taxes in 2012; new credit score reveals more about you | Post a Comment »

Which is the lesser of two evils: bankruptcy or debt management plan?

December 24th, 2011, 9:51 am by dtova

Question: Please compare the differences in credit impact between bankruptcy (Chapter 7 or 13) and a debt management plan.

- Mark R., Colorado Springs

Answer: Let’s take a look at how each of these options work.

Debt management plan

You work with a debt counselor on a plan that is based on your budget. Your bills are consolidated into one monthly payment, which your debt counselor forwards to your creditors. The counselor negotiates directly with your creditors to work out better terms such as lower interest rates and no late fees.

This is different than working with a debt settlement company, which negotiates with your creditors to forgive part of your debt. Under a debt management plan, you actually repay the full amount of the debt.

Chapter 13 bankruptcy

This is also called a debt repayment plan because you work out a deal with the trustee to repay your debts over three to five years under more favorable terms (lower interest rate and lower principal amount). And you get to keep all of your property.

An individual who had a drop in income and just needs to restructure his debts may use this.

Chapter 7 bankruptcy

In this instance, most of your debts are completely wiped out (discharged) within a few months. But you have to give up most of your property to the trustee, who sells it to pay off your creditors.

People in a deep financial hardship generally pursue this type of bankruptcy.

Now, here is how the creditors look at each option.

A debt management plan will appear in your credit report. But that alone will not damage your credit score, unless the lender notes your account as “late.” It could also happen if your “middle man” sends a payment in late or if the lender views a lower interest rate as less than a full payment.

That’s why you need to research to be sure you are working with a reputable agency.

It’s easy to see why bankruptcy hits your credit the hardest. Under bankruptcy, your creditors receive a few cents on a dollar at best. With a debt management plan, they have a chance of getting all of their money back.

A Chapter 7 bankruptcy remains on your report for 10 years from the date of your filing, and your credit score will fall by 200 to 250 points. It will take you some time to rebuild your damaged credit.

A Chapter 13 bankruptcy remains on your report for seven years.

A debt management plan will be removed as soon as repayment is complete, which makes it the least damaging of the options outlined.

These are tough times and many people are faced with financial problems big and small. If you find yourself in a financial predicament such as the ones we have covered here, your best bet is to take a proactive approach. Admit your problem, seek a solution and live up to your commitments; you’ll thank yourself for years to come.

Posted in: Bankruptcy • Debt Management • Debt management plan versus bankruptcy | Post a Comment »