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Posted under Simple Savings
05/07/2010
IconReverse Mortgages The Dollar Stretcher by Gary Foreman gary@stretcher.com Gary, I am almost 80 years old, a widow, excellent health, no debts, my house is paid off, worth close to $200,000. I live on my social security with a small savings backup, and I manage to make my taxes and maintain a car and live well. My children think I should take out a reverse mortgage and spend the money doing some traveling. As they are all doing well and do not expect or want me to just save the house for them. Are there any pitfalls in this? Betty Yes, Betty, there are some pitfalls. Any time that you put your home up to secure a loan there are dangers. They may be reasonable risks to take, but you need to know them. Let's take a moment to understand reverse mortgages. Then we can better explore the risks and benefits. A reverse mortgage seems strange at first. The purpose of a reverse mortgage is to convert the equity in your home into cash.Like a regular mortgage, you're borrowing against your home. And, when you sell you'll need to repay any balance on the mortgage. But instead of borrowing all the money at the beginning and then paying it back each month, this time you'll borrow a little at a time and not repay the mortgage until the house is sold. In that way it's the reverse of a traditional mortgage. Now the risks. The first problem is that they're somewhat complicated. And that can be a real issue for borrowers as they get older. Betty might understand everything today. But it's not unreasonable to expect that she won't be as sharp mentally in ten years. Then there are expenses much like a regular mortgage. Betty's house will need to be appraised. There will be an origination fee. If Betty does borrow against her home, she needs to maintain enough equity for future needs. Her monthly living expenses could increase faster than her income. Or she might need to move into a nursing home. Her home is her only significant financial asset. She needs to guard it's value carefully. One payout option allows you to take fixed monthly payments for the rest of your life. That does protect you from losing your home during your lifetime. But it also means that you'll only get the fixed income amount. And inflation can shrink fixed income streams. The other disadvantage is that you might not live that long. The mortgage company could be 'buying' your house fairly cheaply. Once Betty takes out a reverse mortgage she can pretty much expect to have it until she sells the home or dies. The reason is simple. She's unlikely to have enough money to pay off the mortgage without selling the home. So what are the benefits to a reverse mortgage? A reverse mortgage would allow Betty to borrow against her equity as often as she likes. She could borrow for a trip or any unmet living expenses. Since she's borrowing the money it's not considered taxable income to her. That can make a reverse mortgage better than selling stocks that have appreciated. Any stock gains will trigger income taxes. If Betty wants to get a reverse mortgage she'll need to meet with a HUD approved counselor before you can get a reverse mortgage. You'll find a list of approved counselors at http://www.hud.gov/offices/hsg/sfh/hcc/hccprof14.cfm Before she actually applies for a loan and incurs those costs, Betty should compare the rates to other sources of cash. The closer to age 62 the easier it is to find other cheaper places to borrow. Betty might want to check out something called the "Home Equity Conversion Mortgage" (HECM). It's a federally insured mortgage. For more information she can call HUD at 1-888-466-3487 She'll need to decide whether she wants a one time payout, the ability to borrow whenever she wants, or a set monthly payout. Single purpose loans are generally the least costly. But over 60% of homeowners choose to use a line of credit type payout. Ultimately the home will be sold. At that time the value of the home will be broken into three parts: the amount borrowed, the costs associated with that borrowing and leftover equity that will go to Betty or her estate. The best way to compare reverse mortgages is to answer three questions about each mortgage. How much money would you get? How much would it cost you? And how much equity would be left when you sell or die? Should Betty use a reverse mortgage? A little travel sounds nice. But she might find a home equity loan a little easier to manage than a reverse mortgage. Gary Foreman is a former Certified Financial Planner who currently edits The Dollar Stretcher website www.stretcher.com copyright 2002, Dollar Stretcher Inc. All rights reserved. Permission granted for use on DrLaura.com More >>

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Posted under Simple Savings
05/07/2010
IconA New Air Conditioner? The Dollar Stretcher by Gary Foreman www.stretcher.com Dear Dollar Stretcher, Our house and the central air conditioner is at least 12-14 years old. Our serviceman has told us that the compressor unit is too small for our house and the original builder should have put in a larger unit. We are considering having the AC unit changed to a new, more energy efficient model that would be the correct size for our house. My question is - where can I get information to compare costs of running the two units, so we can decide if a new unit would be worthwhile, financially? Donna Highland IL For many in the U.S. this has been a scorching summer. Fortunately, about half of all homes have central air conditioning. The bad news is that it does cost money to run them. Central air conditioning and heat pumps rank third in total residential energy usage. Only heat and water heating consume more. Let's take a look at three topics: air conditioner efficiency, selecting the right size air conditioner and buying a new system. An air conditioner's efficiency is measured by it's SEER (Seasonal Energy Efficiency Ratio). The Department of Energy defines SEER as the total cooling in BTU's divided by the watts consumed. A higher SEER indicates a more energy efficient system. Until 1979 the average central home air conditioning system had a SEER of 6.0. In the '90's a minimum standard of 10.0 was set. New, even higher standards, are being debated now. As you might expect, an air conditioner with a higher SEER will cost more. The DOE estimates that a unit with a SEER of 13.0 will cost about 15% more than one with a SEER of 10.0. But that 13.0 unit will provide 30% more cooling per watt consumed. Will a more efficient unit save enough to pay for the increased cost? The DOE thinks so. They figure that operating the 13.0 SEER unit vs. a 10.0 SEER one will save $113 more than the additional cost to purchase it. If you have web access you'll find the DOE's fact sheet on air conditioners at www.eren.doe.gov/erec/factsheets/aircond.html Not for Donna, but if you live in a warmer climate you might even want to consider a higher efficiency unit with an SEER of 15.0 or more. It will cost more, but could pay dividends in areas requiring heavy air conditioning usage. Remember that SEER only measures the efficiency of the air conditioner. It doesn't take into consideration how well your home is insulated, the condition of your ductwork or other factors that affect cooling. Determining the correct size is a harder problem. Air conditioners are rated in Btu's/hour or in 'tons'. A ton is 12,000 Btu's/hour. A bigger air conditioner is not necessarily a better air conditioner. If a unit is too big it will cost more to buy, more to operate and won't do as good a job dehumidifying the air. According to The Consortium for Energy Efficiency (CEE), a national, non-profit public benefits corporation, a properly sized air conditioning system can reduce energy usage by up to 35%. Determining the correct size isn't easy. It's not just a matter of calculating the volume of air that you need to cool. The climate, style of your home, number of windows, amount of insulation, weather stripping and shade as well as other variables all effect the size of the unit needed. It's hard to do the calculation yourself. You really need a professional. In fact, the industry has created a formula that considers all the variables. The easiest way for Donna to get an idea of the correct size is to get three bids on a new system. Not only will that allow her to compare prices, it will also give her three estimates of how big a system is required. Before calling for estimates she should do any insulation upgrades or weather-stripping since that will effect the calculation. She'll also want to check with the local electric company before making a purchase. Many offer rebates when you buy a more energy efficient air conditioner. Don't forget to consider the repair record and the warrantee offered by the manufacturer. Should Donna replace her air conditioner before it quits working? According to the DOE, a 13.0 SEER unit would only reduce the electric bill by $42 per year vs. a 10.0 SEER unit. Of course that's an average. If Donna's unit has a SEER of 8.0 and she replaces it with one at 12.0, she'll reduce her cooling bills by one third. At 12 to 14 years old, the air conditioner is nearing the 15 year average life span. Donna might be wise to start shopping now while she has time to make a careful selection. Even if the new unit doesn't pay for itself right away it could be a wise purchase. Gary Foreman is a former purchasing manager who currently edits The Dollar Stretcher website www.stretcher.com/save.htm Copyright 2002 Dollar Stretcher, Inc. All rights reserved. Permission granted for use on DrLaura.com More >>

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Posted under Simple Savings
05/07/2010
IconFiguring Appliance Electricity Usage The Dollar Stretcher by Gary Foreman gary@stretcher.com Dear Dollar Stretcher, Can you tell me approximately how much it costs to run two box fans for 24 hours a day, 7 days a week? Also, what about a small high velocity floor vfan and long shop style fluorescent bulbs? The barn where we have our injured horse has its electricity connected to the rental house. I paid $30 for the extra use of electricity for the fans for July. They said their bill went from $70 to $170. Of course we have been under a major heat wave and they have two or three window A/C units. But they seem to think it is our fault. Please help. Thank you! Carl A landlord, tenant spat! They sure can get nasty. Fortunately, Carl can use some basic math to help find a reasonable solution to this one. Let's begin by understanding the question. Carl will need to know two things. How many kilowatt hours each item uses and how much does a kilowatt hour cost where he lives. Once he knows that Carl can calculate how much each item will cost to operate. His answers won't be exact, but should be good enough to prevent a shouting match with his tenant. A watt is the standard measure of how much electricity is used. A kilowatt is simply 1,000 watts (kilo = 1,000). A kilowatt hour (kWh) is a kilowatt used for one hour. On most appliances you can find the wattage on it's nameplate. To calculate the kilowatts used by an appliance, divide the wattage by 1,000. So a 200 watt appliance would be 200 divided by 1,000 or 0.2 kilowatts. A 1,500 watt hair dryer would use 1.5 kilowatts. Now let's see if we can figure out how much each item is using and what it costs. To do that we'll need to know the price for a kilowatt hour of electricity. The U.S. average runs about 7 cents per kilowatt hour. Carl can check his electric bill. It will show how much he's paying per kWh. We'll start with the box fans. According to the Central Iowa Power Cooperative the typical box fan is rated at 200 watts. So if a kilowatt costs 7 cents per hour, the fan would cost 20% of that or 1.4 cents per hour. Extend that out to a month and it works out to $10.08 per month if it runs round the clock (1.4 cents x 24 hours x 30 days). Two fans would be about $20 per month. Now for the high velocity floor fan. Carl will need to check the wattage. We found one that consumed 135 watts. So at 0.135 kilowatts per hour that would cost $6.80 per month if used continuously. Carl might find that the fan is rated in horsepower (appropriate in this case!). If so, he can convert. One horsepower is equal to 0.75 kilowatts. Next the lighting. Pacific Gas and Electric estimates that the fluorescent bulbs run about 1 cent per hour for a 4 foot bulb and 2 cents per hour for an 8 foot bulb. So if Carl has an 8 foot bulb he'd consume $14.40 each month. Of course, once he knows the wattage and his electric rates he can do his own calculation. Let's total Carl's electric usage. We've got two box fans at $20, the high velocity fan at $6.80 and $14.40 for the fluorescent lights. Or a total of $41.20 per month. How does that stack up to the tenant's electric usage? The Nebraska Public Power District estimates a window air conditioner (12,000 BTU size) will cost an average of $19.50 per month to operate. So three of them could easily consume $60 in a month. And perhaps much more in a 'heat wave'. One problem with measuring the air conditioner is that it's not continually on. A 1,000 watt unit might only be running 15 minutes per hour on some days. So it's only consuming 250 kilowatts per hour. Of course in a heat wave it might be on almost continuously. And the older and less efficient the unit is, the longer it will stay each hour. So the only way to know for sure would be to watch the unit for an hour or two and notice how many minutes per hour that it's really running and then do the calculation. The bottom line is that both Carl and his tenant are contributing to the $100 increase. Hopefully a little math can lead them to a reasonable compromise. Gary Foreman is a former purchasing manager who edits The Dollar Stretcher website www.stretcher.com and ezine subscribe@stretcher.com Permission granted for use on DrLaura.com Copyright 2002, Dollar Stretcher, Inc. All rights reserved More >>

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Posted under Simple Savings
05/07/2010
IconLow Overhead The Dollar Stretcher by Gary Foreman gary@stretcher.com When I was a boy one local department store had a jingle that featured the repeated chorus of "low overhead, low overhead". They claimed to offer lower prices because they kept their 'overhead' down. If they spent less on rent and other fixed expenses they could make a reasonable profit at a lower price. I was too young to remember which store ran the ads. So I don't know how low their prices were or whether the ads filled the store with expectant shoppers. But I can tell you that the concept is correct. And the same idea applies to our family finances. The lower your 'overhead' is the more likely that you'll avoid financial troubles. Let's see how this works. First, what is 'overhead'? In the retail store it would be the cost of rent, lights, insurance and payroll. Everything it takes to open the store to the public. Your family overhead is made up of all the money that you've committed to spending before the month begins. We'll visit the Smith family for an illustration. How your family compares to theirs isn't important. Just grasp the concept involved. In fact, you might want to jot down your own expenses to see what your 'overhead' figure is. The Smiths have a 30-year, 6% mortgage for $150,000. That requires a payment of $899 per month to cover principal and interest. Like all homeowners they'll need to pay property taxes and insurance. The combined expense adds another $2,400 each year. Or $200 per month. Naturally, the Smiths will need electric, water, sewer and perhaps gas or oil for heating. Some months are worse for heating and air conditioning. But the average is $300 each month. If we total that up, the Smiths have committed to spending $1,399 each month to keep a roof over their heads. Remember that's not including any maintenance, repairs or upgrades. We're just trying to identify how much they've committed to before the month begins. Next, transportation. Like so many of us the Smiths own two cars. Fortunately, they only have one car payment. Their Dodge Caravan will cost them $453 for 48 months. Insurance and registration for both vehicles totals $1,600 a year or another $133 per month. So the cost of owning the two cars is $586 per month. Again, we haven't included the cost of gasoline or repairs. The Smiths also have some credit card debt. They're carrying $8,000 at 14% interest. That costs them $93 each month in interest expense. Despite more than one attempt to quit, Mr. Smith still smokes cigarettes. Not a heavy smoker, but he still goes through a carton every two weeks. Add another $48 a month to the 'overhead' column. Mrs. Smith does her part, too. Each Friday for years she's been going out for lunch with some long-time friends. Usually they pick a moderately priced restaurant, but it still averages $9 per week by the time her portion of the tip is included. So that adds another $36 to our 'overhead'. So how much are the Smiths committed to spending before the month even begins? Their total overhead is $2,162. Next let's see how that affects their finances. First, we'll look at how much income it takes to cover the overhead. The Smiths are in the 27% tax bracket. They also pay 7.65% in Social Security taxes. Fortunately, where they live there's no state or local income tax. To cover the $2,162 in monthly overhead they need to earn $3,308 each month. Or a $39,700 each year. Look at it another way. The Smiths combined income last year was $76,500. So of every dollar they make 52 cents goes to cover expenses that they have very little control over. So what can we learn from the Smiths? Just like the retail store, we need to pay the 'overhead' first. Before we think about rewarding ourselves with new clothes or vacations. The more money needed for overhead, the harder it will be to feed our family, save for retirement, spend money on entertainment or anything else. The question to ask before making any ongoing commitment is do I want to add this monthly expense to my overhead. Is it really more important than all the other things that I'd like to spend money on. Not only was "low overhead" a memorable jingle, it's also a good way to look at your family finances. Gary Foreman is a former Certified Financial Planner who currently edits The Dollar Stretcher website www.stretcher.com You'll find plenty of practical ideas to stretch your day and your budget!copyright 2002, Dollar Stretcher Inc. all rights reserved. Permission granted for use on DrLaura.Com More >>

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Posted under Simple Savings
05/07/2010
Icon401k Employer Contributions The Dollar Stretcher by Gary Foreman gary@stretcher.com Gary, I have a question relating to my 401k. What is your opinion of contributing to this fund if my employer does not match contributions? Two of my coworkers had their financial planners tell them that it isn't worth contributing. Their reasoning is that the amount the employer has matched offsets the amount of the taxes due when it's time to take the money out. Without the employer matching, there isn't this advantage. They suggested that my coworkers invest in IRAs instead. I would be interested in knowing your thoughts about this. Diane Good question! I'm always reluctant to disagree with a financial planner. If they've done their job properly they know a whole lot more about the client and how a particular strategy will affect that client. So I can only speak in general terms. Diane will need to decide whether it makes sense for her specific situation. Of course, that's true with financial advice that's given to others, too. It might be good for them, but not for her. There are three different times where the IRS can tax your retirement savings. The first place is when you make the money. Normally you'll pay taxes on the money you earn this year. Some retirement plans allow you to deduct any contributions from your taxable income. So you avoid paying taxes now. The IRS can also tax your savings during the years that it's invested and earning money. For instance, interest earned by your savings will be counted as ordinary income for tax purposes. That can be a big drag on the growth of your investment. If taxes take 20% of your earnings, a 10% investment return is reduced to 8%. Both 401k and IRA's avoid this problem by letting your money grow without any taxes. The final place that the IRS can tax your retirement savings is when you take the money out of the investment account. As Diane points out, her 401k money will be taxed when she takes it out of the account. Back to her question. Why would the planners suggest an IRA over a 401k? If they're talking about a traditional IRA it can't be the taxes. Because the taxes work the same. You get a deduction today and pay taxes when you withdraw. It could be that they're advocating a Roth IRA as a substitute for the 401k if the employer doesn't contribute. With a Roth IRA you don't deduct contributions from this year's taxes. It does allow the money to grow and be withdrawn without further taxes until you remove the money. But a Roth has lower contribution limits than a 401k. The 401k will allow her to save a greater amount each year. One benefit of a 401k plan that doesn't show up in the numbers is that it doesn't require Diane to take action. Many people will struggle to find money for an IRA and end up not saving anything for retirement. And, it's vital to save for retirement. In real rough terms, for every dollar that you want in annual retirement income you'll need $10 in savings. So if you want an annual income of $40,000 you'll need to save $400,000. This will probably get me in trouble, but it's dangerous to depend too heavily on Social Security. There really isn't any Social Security trust fund despite what the politicians say. The money that's deducted from your paycheck isn't sitting in a bank waiting for you to retire. It's already been spent by other government agencies. All that's left in your account is a government IOU. And to pay that IOU they're counting on tomorrow's workers to continue to pay Social Security taxes. To make matters worse, it won't be too many years before there's only two workers for every retiree. In fact, if a private corporation had this plan there would be calls for a Congressional investigation. Can Diane simply calculate which retirement program will produce more money when she retires? Unfortunately, what Diane assumes about the future will have a major impact on the final answer. Taxes aren't the only variable. To do the calculation, you need to make assumptions about the rate of inflation, the earnings of your investments and the tax rates for every year up until retirement. If you know all that, forget retirement planning and just head for the nearest horse track! She shouldn't the lack of an employer contribution keep her from saving for retirement. A 401k plan with employer contributions can be a great retirement savings tool. But one without can play a role, too. The bottom line is that Diane probably can't know the absolute best answer. The most important thing is that she regularly save for retirement. The worst thing that she could do would be to not have any retirement plan because she's not sure which one is the best. Gary Foreman is a former Certified Financial Planner who currently edits The Dollar Stretcher website www.stretcher.com copyright 2002 Dollar Stretcher, Inc. All rights reserved. Permission granted for use on DrLaura.com More >>

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Posted under Simple Savings
05/07/2010
IconBudgets and Credit Cards The Dollar Stretcher by Gary Foreman gary@stretcher.com Gary, I was hoping you can help me solve a problem I have encountered while trying to live on a budget. I have created a budget with a fixed amount that can be spent on certain items, i.e.. entertainment. At times I go over this amount. I charge everything on my credit card, in order to receive a cash back bonus. My bill arrives the month after I overspend. That affects the cash flow for the next month, not the overspent month. I can't figure out how to balance my budget, because my statements do not run on the calendar month like my budget, but it goes from the 11th to the 11th of every month. My problem is applying my budget to real life, because I still want to use my charge card to pay for everything. Can you please help me figure out this problem? I have tried over and over to figure it out and I'm stuck. Celia A budget is meant to be a tool to help you control your finances. And like other tools, finding the best one for the job makes things much easier. You can't use a framing hammer in place of a tack hammer. Budgets work the same way. You need one that's designed to accomplish your goals. There is no one official budget. Celia will want to find or create one that works for her unique situation. Part of that is deciding exactly what she wants to accomplish. Budgets are primarily useful in two ways. One is to stop any spending over a preset amount in a specific area. Another way a budget can be helpful is as a tool that will help you find unnecessary spending. Although Celia doesn't exactly say what she's trying to accomplish, it sounds as if she's hoping that a budget will help her stop spending after she gets to a specific amount. If that is her goal, she'll find it hard to continue to use credit cards. That's because credit cards are designed to make it easy to spend money. Even money that you don't have. That doesn't mean that she should give up. The first thing she needs to recognize is that you're spending money when you make the purchase. Not when you get the bill. The only 'purchase' that you make at billing time is the interest and any annual or late fees that are associated with the credit card. So, instead of depending on her monthly statement, Celia might need to keep a spending record for each category in her budget. When she makes a purchase add it to the list for the appropriate category. When the total for the category is up to the budgeted amount it's time to stop spending for the month. If she really wants her budget to keep her from spending more than she planned the simplest solution would be to ditch the credit card and just go to an envelope system. An envelope system has an separate envelope for each category. At the beginning of the month she'd put the appropriate monthly amount of cash into each envelope. Purchases are made with cash from the envelope. When the money is gone the spending stops until the next month. It sounds as if Celia might be using the credit card statement to tell her where she spent her money each month. If that's the case she might want to change her 'budget month' to begin on the 11th. Or she could ask her credit card company to change her billing cycle. That way her credit card billing and budget periods would coincide. Another possibility would be for Celia to simply adjust this month's budget allocation for any overspending that occurred last month. If she went $10 over her entertainment budget, she'd simply have that much less for entertainment this month. It would require monthly adjustments. And the temptation would be there to continue to carry over-budget expenses from month to month and never really control spending. Celia needs to recognize that a budget is a continually changing thing. She's going to want to adjust the amounts as she learns more about her spending habits and as circumstances change. One final comment. However Celia proceeds, she'll be much more likely to be successful if she keeps it simple. A budget shouldn't be any more complicated than is absolutely necessary. Gary Foreman is a former Certified Financial Planner who currently edits The Dollar Stretcher website ( www.stretcher.com ) and ezines email:( subscribe@stretcher.com ) You'll find hundreds of articles to help you stretch your day and your dollar. Copyright 2002, The Dollar Stretcher, Inc. All rights reserved. Permission granted for use on DrLaura.com More >>

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Posted under Simple Savings
05/07/2010
IconSelf-Insurance and Healthcare Costs The Dollar Stretcher by Gary Foreman gary@stretcher.com Dear Gary, I just read an article on "Medical Care for Less". I was wondering how to go about being "self-insured". Could you tell me more about this? How it works? Do you pay monthly premiums? Who do you call to set this up??? Thanks! Molly Molly knows much more about 'self-insurance' than she realizes. In fact, she's already using it. Consider an illustration. She doesn't have insurance to cover her everyday dishes. If one is dropped, she's responsible for living without it or buying a replacement on her own. In fact, it would be silly to have insurance for that type of loss. To understand self-insurance, Molly needs to recognize why it would be silly to insure the loss. The answer is fairly obvious. She can afford to replace a broken plate without anyone's help. But, suppose that she had a valuable set of antique china. She might have insurance to protect her in case of theft or damage. Why is that smart? Because Molly couldn't afford to replace an expensive plate if it were damaged or stolen. That's the gist of self-insurance. We all face potential expenses. Some are big and we choose to buy insurance to cover them. Others are smaller and we decide to handle them ourselves. In effect, we've chosen to "self-insure". Today people feel that they need insurance for every possible expense. The idea that insurance is for losses that we can't afford has gradually been lost. People seem to think that insurance is a way of shifting the cost to someone else. It's not. It's really just putting a large number of people together knowing that only a few will suffer big losses. And with everyone in the group making a small contribution there will be money to pay the few big losses. Small expenses really shouldn't be covered by insurance. Remember Molly's plate. The insurance paperwork would only add to the cost of replacing the plate. Somebody has to pay for the claims adjusters and the people approving and writing checks. In fairness, sometimes an insurance company will get a better price because they're buying large quantities of an item. But in many situations their negotiating skills don't offset the additional expenses. OK, so now that we know what self-insurance is, why would Molly want to choose it? Simple. For the right risks it's actually cheaper to be self-insured. How does Molly become self-insured? She begins by evaluating how big a loss she could afford to handle financially without help. Self-insurance doesn't have to be an all or nothing deal. In fact, it's probably a bad idea for Molly to choose to be completely self-insured for medical expenses. Hospital bills can be painful! She would do better to be self-insured for doctor's visits and still carry a major medical policy that would pay for a trip to the hospital (after a deductible was covered). That way she'd be responsible for the small bills, but would have someone to pick up the big ones if they occur. Next she'll look for an insurance company that offered a policy that would only cover the things that Molly couldn't afford to handle herself. If she's canceling existing coverage, Molly would be wise to set aside the money that would have gone to premium payments. She can expect to need it later to pay for future medical expenses. Before you self-insure, make sure you understand the worst-case situation. Know exactly what you could be facing if you don't have insurance. And don't self-insure unless you have the financial resources to face the risks that you're accepting. Don't risk bankruptcy to avoid an insurance premium. Review your decision regularly. Changing circumstances could mean that you need to go back to having someone else assume the risk. Other insurance areas could provide savings for Molly. Checking deductibles is a good idea. The deductible is the amount that you pay before your insurance begins to cover a loss. Call your insurance agent. Ask them the difference between $250 and $1,000 deductible on your car insurance. In effect, you'd be increasing the amount of self-insurance up to $1,000. Same thing with your homeowner's policy. Self-insurance isn't an automatic solution to the high cost of medical coverage. Under the right circumstances it can help. But it's not a magic pill that brings high costs down. And, remember that self-insurance works better for people who have accumulated some financial resources. If you don't have any savings, self-insurance isn't for you. Gary Foreman is a former Certified Financial Planner who currently edits The Dollar Stretcher website www.stretcher.com You'll find hundreds of time and money saving ideas. Copyright 2002 Dollar Stretcher, Inc. All rights reserved. Permission granted for use on DrLaura.com. More >>

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Posted under Simple Savings
05/07/2010
IconHow Much House? The Dollar Stretcher by Gary Foreman gary@stretcher.com Hi Gary, Considering the cost of homes these days, what is a reasonable percentage of a person's salary that should be used for a mortgage payment? And does this percentage include everything needed to run that home (utilities, water, phone, etc.)? Margie Good question! And with the current median selling price of a house being over $185,000 it's an important question, too. In recent years, people say that you can't buy too much house. Common thinking is to buy as much house as you can squeeze into today's budget. Expected increases in housing prices and your salary will make the deal fit better next year than it does today. Yes, both housing prices and wages should go up over the long term. For instance, the Consumer Price Index shows that housing prices have increased about 43% over the last 10 years. Unfortunately, the mortgage is due over the short term. Neighborhood housing prices can drop for a year or two. And not everyone gets a raise each year. In fact, some people lose their jobs. So you can get into a lot of trouble before the long term increases bail you out. OK, so if bigger isn't always better, how expensive a house can Margie afford? Let's start with what people actually do spend. The U.S. Statistical Abstract shows that of all the money we spend, about 33% goes to housing. That would include shelter, maintenance, heating and cooling. So should she plan on spending 33%? Probably not. Maggie will need to consider her family situation. Looking for a new house because you're about to have a baby? Groceries, medical, college savings, daycare could all require a higher percentage of your money than before. And past financial decisions will also affect what Maggie can reasonably afford. Alimony and child support are common issues. In fact, Tierney Foster, a long-time Realtor with Remax in Bradenton, FL won't give a client advice on affordability. She refers them to the lender who will consider their debt ratio and other factors that will affect the calculation. Interest on any debt that you owe will lower the amount that you can safely spend on housing. In real rough terms (depending on your interest rates), for every $8,000 you have in credit card debt you have $100 less to spend on housing each month. And that works out to a house that costs $16,000 less. Remember that you can only spend 100% of your after-tax income without getting into trouble. And you really should be saving a portion of that for things like college education and retirement. If you spend 40% on a house, and another 30% on food and transportation, you won't have enough money to cover everything else. Another problem that Maggie will run into is that housing expenses aren't easily adjusted. If you buy a house that's too expensive there's not much you can do reduce the mortgage payment by 10%. And, if housing consumes too much of your money, it's hard to make it up in other areas. You'll never make up $200 each month by reducing your spending on entertainment! An over-expensive house often puts a family budget in serious jeopardy. Which brings us back to the question of how much house can Margie afford. There are some broad guidelines that she can use. In most cases if she's planning on spending less than 30% of her after-tax income on housing she should be alright. On the high side, if she's approaching 40% she'll need to be very careful. She might want to check out calculators on the internet. Bankrate.com has a good one . They provide financial information and aren't affiliated with anyone in the industry so their advice is neutral. She might also want to check with a mortgage banker or broker and ask their advice on what would be affordable. There is one trick that Margie can use that might prove helpful. She can pretend that she already owns the house that she wants to buy. Estimate how much the new home would cost. Then set aside the difference between that amount and what they're currently spending on housing for a few months. In other words, pretend that she's already paying for the house. She'll pretty quickly find out whether they can comfortably handle the increase. If she finds that she's scrambling while playing pretend, she can expect to be in real trouble if she buys the house. We hope that Margie finds a home that she can love and afford at the same time. Gary is a former Certified Financial Planner who currently edits The Dollar Stretcher website: www.stretcher.com and newsletter: subscribe-dollar-stretcher@ds.xc.org copyright 2002 The Dollar Stretcher, Inc. all rights reserved. Permission granted for use on DrLaura.com More >>

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Posted under Simple Savings
05/07/2010
IconFinding Financial Advisors The Dollar Stretcher by Gary Foreman Dear Dollar Stretcher, A financial corporation offered a class on money and how to properly useit. I sat through their spiel and asked questions. Of course they offer the full array of services from investments to mortgages. All of this soundsgood during the presentation. But it has always been my understanding that no one is willing to do something for you without getting something in return. Can you tell me what you think of these corporations and what they are offering? Is there a catch? How can I tell who is reputable and who is just going to take me for a ride? Thanks. Brent Brent's right. Generally speaking there is no free lunch. Strangers may be willing to give you something, but they do have hopes of getting something back. Teaching a class or hosting a seminar are common and legitimate ways forfinancial institutions to find new clients. Back when I was a broker I even taught a few classes. The hope is to impress your 'students' enough so that they do business with you. What do I think of this firm and class? Impossible to say. Because there is no one right financial firm, broker or planner for everyone. Brent's needs are different than mine. So it would be pointless for me to offer an opinion about the class. But with a little help Brent can answer the question for himself. He can begin by deciding what he's trying to accomplish. Some things arefairly simple. For instance, finding a good deal on auto insurance. Other things, like estimating how much money he'll need for retirement, are more complicated. Next he'll need to determine how much he already knows about the subjectand how much he's willing to learn on his own. He'll face a trade-off. He can save money by becoming more knowledgeable. But, it takes time and effort to gain that knowledge. Brent will find information readily available. Resources that were only available to brokers 20 years ago are now as close as your computer. He'll also find a wealth of books on all areas of money and investments. One rule should guide Brent when making financial decisions. If he doesn't understand an investment, he shouldn't put his money into it. A careful explanation should allow him to understand exactly how his money is expected to make more money. Next Brent needs to find out how the financial firm will be compensated. Generally, they make their money by charging premiums, commissions and fees. You're used to paying premiums on insurance policies. The premium is determined by the insurance company. It is not a set percentage of the coverage. Typically maximum premiums are regulated, but Brent should shop for the lowest price. On investment products he could run into commissions. A commission is a charge that's added to the cost of the securities being purchased or deducted from the proceeds of a sale. It's not a flat percentage but is related to the amount of money involved. There is no standard commission rate. Full service brokers who provide stock trading advice get top dollar. Less service means a lower price. It's up to Brent how to decide how much advice he needs. Fees come in a couple of different disguises. Some are charged when you take a certain action. A common one is the fee for a bounced check. Mutual funds may charge a fee for trading funds within their family. Typically fees are a set, flat amount and are not dependent on the size of the transaction. Many investment managers are compensated through "management fees". Typically they'll charge a preset percentage of the money they control for making the day-to-day investment decisions. Charges are usually between .25% and 1.5%. The fee schedule for any money manager (including mutual funds) should be readily available. With some mutual funds you'll incur a fee if you sell the fund. Those are known as "12b-1 Fees". If Brent hears the phrase "12b-1" he needs to be sure he understands what fees he could trigger later. The financial services industry is creative in finding ways charge you for their work. So Brent will need to dig a bit to find all the premiums, commissions and fees he could be facing. In some products he'll find a combination of the different charges. Generally the company is required to advise you of all expenses before you purchase. But expect to study somefine print to find them. How can Brent find a good advisor? Going to seminars and asking respected friends who they use are good ways. He needs to have realistic expectations. A broker can't afford to spend much time with someone who's going to generate $50 a year in commissions. And that's ok. For transactions that will generate small commissions Brent should be able to use a discount or online broker. And, for a regular investment program, he might be better off choosing a mutual fund. The good news is that there's plenty of help available for just about any financial situation. Hopefully Brent will get just what he needs for a bright future. Gary Foreman is a former Certified Financial Planner who currently editsThe Dollar Stretcher website For a free weekly ezinefull of money saving tips send subscribe@stretcher.com Copyright 2002 Dollar Stretcher, Inc. All rights reserved. Permission granted for use on DrLaura.com More >>

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Posted under Simple Savings
05/07/2010
IconBlack Mold The Dollar Stretcher by Gary Foreman gary@stretcher.com Dear Dollar Stretcher, I live in Texas I just got my renewal for my homeowners insurance. Last year I had a payment of $723. It went up to $1,123 for the new year. Their explanation was that it was due to all the claims for black mold. Do you have any ideas on where to look for cheaper insurance? J. F. Wow! That's a 55% increase. And a very good reason to ask what alternatives are available. Unfortunately for JF, it's not as simple as calling around looking for cheaper rates. Let's take a look at black mold, what problems it's causing for the insurance industry and their customers and finally, what JF can do to lower the costs of her insurance. Most homes contain some mold. All it takes is a little moisture and an organic food source. Recently we've learned that newer, more air-tight homes are better for growing mold. And one of the varieties is a 'toxic black mold'. For all you scientists out there it's stachybotrys chartarum. Please don't ask for the pronunciation! Mold is commonly found in homes after the wallboard gets wet. The mold causes a number of problems. Besides being unsightly, it smells and can cause breathing problems for some people. Experts estimate that 10% of the population is allergic to mold. A leaky water pipe or roof is all it takes to start a mold colony. Clean-up can be a large job. The source of the leak must be eliminated. Moldy materials need to be removed or decontaminated. If the moldy area is more than 10 square feet an environmental professional might be consulted. For health reasons some people move out of their homes until the clean-up is completed. Enter the insurance companies. They're seeing many more claims for black mold than in prior years. A 50% increase for some companies. And, it's common to spend $40,000 for a claim. To further complicate things, JF lives in Texas which has been particularly hard hit by the black mold problem. In fact, Texas insurers want to be able to exclude mold coverage from their homeowner's policies. The Texas Department of Insurance is considering the request. Two of the three largest insurers have stopped offering policies that cover water related damages (including mold). The Texas situation highlights the problems faced by insurance regulators. Naturally they want to hold down the cost of insurance. But if they hold prices too low the insurance company will lose money and stop offering insurance in the state. To further complicate matters, there are a number of lawsuits that also drive up costs. Not surprisingly, a visit to the internet will turn up attorneys who are willing to sue on a victim's behalf. One Texas family was awarded $32 million dollars and bulldozed their home. We should all have access to the courts to protect our rights. But more lawsuits and lawyers means greater costs that must be paid either by the insurance companies or their customers. No one ever cleaned mold while sitting in a courtroom. What can JF do? Her choices are fairly limited. The most obvious thing is to check with other insurance companies to see if anyone offers a comparable policy for less money. In Texas the two largest competitors to Allstate have already stopped writing new policies. So JF might have trouble finding a good alternative. Her best bet would be to check with an independent agent who represents a large number of insurance companies. She can also consider dropping coverage for water related damages from her homeowner's policy. That could make a big difference in her bill. Before doing that she needs to understand the risk. If a pipe bursts, she won't have anyone to help pay for damages or repairs. The age and condition of her home should influence her decision. She'll also want to consider her ability to pay for a repair if it's needed. Remember, that the reason for insurance is to cover losses that you can't afford to pay for yourself. I'm not familiar with Texas law, but she might be able to buy coverage that would exclude "additional living expenses". That covers the cost of moving your family out of the home while the clean-up is completed. Don't forget that you might need to move out for other reasons. For instance, a fire. Think through the potential expenses and how you'd handle them. Another option would be to increase her deductible. Yes, that could cost her some money if she had any claim. But it would reduce her insurance bill. One final thought. Although a big premium jump is painful, it's still only $33 per month. JF might be wise to swallow hard, pay the bill and keep the coverage she has. Remember, the $400 she'd save wouldn't go very far in covering a $40,000 clean-up. Gary Foreman is a former Certified Financial Planner who currently edits The Dollar Stretcher website www.stretcher.com and newsletters. You'll find hundreds of articles to help stretch your day and your dollar. Copyright 2002, Dollar Stretcher, Inc. All rights reserved. Permission granted for use on DrLaura.com More >>

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