by Jean Miller | Accounting News, CPA, News, Resources, Retirement, Tax, Tax Planning - Individual, Technology
A new scoring model from Fair Isaac Corp., the company behind the FICO score, is set to be implemented later this year by Equifax and other major credit bureaus. The popular score is commonly used by lenders to determine your eligibility and interest rate for certain loans. Read on to find out if it could affect you.
Consumers in Debt
The new model, FICO 10, will start incorporating consumers’ debt levels into its tabulation, which could cause a decrease in score for some overextended consumers, particularly those who have both personal loans and rising debt. This change is speculated to create greater divide to scores in the 600s. If your score is in the 600s and you’re making payments on time and hacking away at debt, your score could increase. On the other hand, if you’re struggling to pay off debt and missing payments, your score could go down.
Combat Credit Card Spending
FICO 10 will give more consideration to how consumers have changed their payment history in the previous two years, benefitting individuals who are making progress in paying off debt and judging more harshly those who show increasing financial strain. Currently, credit card utilization, which is the percent of your available credit lines you’re using, accounts for 30% of your score, but it could become even more important in FICO 10. The goal is to keep your utilization as low as possible, so be sure to pay balances in full each month or at least keep the balances low. One option to paying off credit card debt is to consolidate it by taking out a personal loan, but this only works if you use that loan to pay off debt while refraining from piling new debt on your credit cards.
Create a Monthly Budget
Because delinquent payments will carry greater weight in the new model, it’s crucial to pay bills on time, so if missing payments is a habit or even an occasional slip-up, you’ll want to be more mindful of this. The best way to keep up with payments is to create a monthly budget. This will not only help with keeping payments at the forefront of your mind (and on your calendar), but you’ll have a better overall picture of your finances and whether or not you’re overspending. Also consider enrolling in autopay, with your loan or credit card payments automatically taken from your bank account at the same time each month.
Though banks and lenders decide which credit model they’ll use, Fair Isaac claims that FICO is used in 90% of all lending decisions, so take the next few months to make changes that will start cutting away at high interest rate debt and provide better overall financial wellness.
by Pete McAllister | Accounting News, Estate Planning - Individual, News, Resources, Retirement, Tax, Tax Planning - Individual
Even those of us who have the best intentions with our money can fall victim to bad financial habits, which can cause unnecessary stress and anxiety. Some of the most common bad habits we fall into include:
- Impulse spending
- Not budgeting (or not sticking to a budget)
- Spending more than you earn
- Relying on credit cards
- Falling into the trap of convenience
Breaking bad financial habits takes time, intention, and effort. Below are some ideas for starting better habits to get your money to work for you.
Start an Emergency Savings Account
This isn’t anything you haven’t been told before, but if you want to quit the cycle of credit card debt, you’re going to need a savings account to fall back on in times of financial hardship or unforeseen costs. Start with a goal of saving $1,000 specifically for emergencies, so next time your car needs work, for example, you’ll have the funds to pay for it rather than sinking farther into credit card debt.
Budget
Nothing says “taking control of my money” like creating a budget that works for you. When you assign a purpose to every dollar, not only are you actively monitoring your income and spending habits, but you’re avoiding debt and reaching your financial goals more quickly. The trick is sticking to it. It’s important to track your spending monthly, and revisit your budget at the beginning of each month, adjusting as needed with the goal of spending less than you bring in. If you know you have a bigger expense coming up later that month, or even in a few months, you’ll have a big picture of your finances and you can begin to make a plan for saving. You can also decide what your priorities will be for that month, and start saving toward your goals.
Make a Plan to Get Out of Debt
Credit cards, student loans, and car payments eat into your budget, and limit the amount of money you can put toward retirement and other financial goals. In short, debt limits your choices.
One popular and time-tested method of getting out of debt is often referred to as the snowball method. You start by paying off the smallest debt, then once that’s paid off, you add that monthly payment toward the next smallest debt until that one’s paid off. For example, if your smallest debt is a doctor bill for $200 and you make arrangements to pay $50 per month until it’s paid off, for the next four months you’ll pay that $50 to your doctor’s office while paying the minimum on every other debt. Once the doctor bill is paid in full, you add that $50 to the monthly payment of your next smallest debt while continuing to pay the minimum on your other larger debts. As each debt is paid off, you’re adding more to the next debt and building momentum until even your largest debt is paid off.
Save for the Future and Start Investing
Once you set up an emergency savings account and pay off your debt, you can begin to save more aggressively. The first step is to bulk up your emergency savings fund to the equivalent of six months of living expenses so you’ll have something to fall back on in case of a major unexpected life event, such as a job loss. Once this is accomplished, you can grow your wealth by investing your money. You’ll need to work with a financial planner to help advise you in investments and diversify your portfolio.
Stay Focused
It’s easy to get off track and lose focus when paying off debt, keeping on track with your budget, and saving for the future, so it helps to have some goals in mind. Whether your goals include a vacation home on a tropical island, paying for you child’s college education, or achieving early retirement (or maybe all three), keep these goals at the forefront of your mind whenever you lose steam. You can even create a vision board and put it someplace where you’ll see it every day, reminding you that good financial habits will pay off in the end.
If you have questions on setting healthy financial goals or would like to discuss your 2019 tax return, please feel free to email me at [email protected] or call 317.549.3091.
by Pete McAllister | Accounting News, News, Tax, Tax Planning - Individual
A new year is upon us, and many individuals use that as an opportunity to start fresh on aspects of their life: their workout routines, eating habits, social calendars and often times their finances. Studies have shown that financial resolutions may pay off more than their fitness counterparts, but having a specific action plan is a vital part to ensuring those resolutions are met.
Below is the beginning of a three part series where we will outline 12 smart money strategies for 2018, one for each month.
JANUARY
To start the year off right, think about saving. January’s strategy is to automate your contributions to savings. Although more and more Americans are contributing to 401(k)’s or IRA’s as auto-enrollment by companies increases, automating deposits to retirement and savings accounts will help you reach goals before retirement.
If you are not already contributing to a retirement fund, start planning for your future and talk to someone in your payroll department about automatic contributions to a 401(k). Or, if that is not offered at your place of work, find a reputable brokerage firm and set up an IRA, using your bank or the broker’s online features for automatic contributions on payday.
If you already have a retirement fund, consider increasing your contributions in the new year, even by just $20 each paycheck. Assuming you start contributing by at least age 35 and receive a 7% return, increasing contributions by $40 each bi-weekly paycheck could land you with an additional $110,218 in your 401(k) by age 65.
While you’re taking the time to look over retirement contributions, consider setting up automated transfers to a savings account for more current goals or dreams, such as a vacation, a house, a new car or just an emergency fund. Setting up automations on payday will help you begin to live without the money and put funds away toward your future rather than hoping there’s enough left at the end of the month to save.
FEBRUARY
Month two is all about budgeting or creating a realistic spending plan for yourself. Studies have shown that only about 35% of workers follow a firm spending plan, while around 44% of workers could be classified as impulsive spenders who often have credit card debt and are living paycheck to paycheck.
A great start is to track your spending for 30 days to see where your money is going, then consider where you can cut down or save more to develop a realistic plan that fits your life. A simple budgeting plan is to allocate 20% of your paycheck to savings, 30% to “entertainment” spending and 50% to necessary spending such as housing and bills. There are also more detailed spending plans, both paper and digital, that help you specifically allocate all of your funds to categories such as utilities, rent/mortgage, groceries, savings, other loans or debt and more. However you decide to budget, having a plan for your money each month can help you have more peace of mind and put you on track to a financially freer life.
MARCH
In March, try tackling your credit card debt. One option is to explore ways to lower your interest rate(s). Some balance-transfer credit cards offer special 0% promotional rates for the first 12-18 months. If you think you can pay off the transferred balance before this promotional period concludes, these are a great option to drastically lower your interest. Another viable option is to consolidate your credit card debt to a personal loan with a lower interest rate.
If you are without credit card debt but do have a card, make sure you are making the most of whatever rewards your card offers. Look for cards that offer rewards that match your spending habits (flight points, cash back, etc.) and make sure you understand exactly how the rewards work so you can take full advantage. And, if you current card has annual fees, consider calling to request those be waived or lowered since a study showed that 82% of individuals who asked had annual fees reduced or waived completely.
APRIL
Since tax day is in April, this month is all about taking advantage of your tax refund if you receive one. According to the IRS, the average income tax refund in 2016 was $2,795, but use whatever money you might receive wisely.
If you do receive a refund, putting that money toward any high interest debt you may have should be the top consideration, whether that’s school loans, credit card debt, a home loan or more. If you are debt free, consider starting an emergency fund, putting that money toward a retirement fund, putting the money into a specific saving fund (house, car, etc.) or investing in a course or seminar that will help you to advance in your career.
If you do get a large refund though, that likely means that you are overpaying on your taxes throughout the year. Although many people enjoy getting a large check from the IRS every spring, having that money available to you during the year allows you to pay down more debt or invest, so consider updating your W-4 withholding information with your employer. With the passage of the new tax laws, there is a chance you may have to update this form anyway so now is an ideal time to ensure you’re not giving the IRS money you could be using throughout the year.
Stay tuned for parts 2 and 3 of the Smart Money Series in the coming months.
