ELFS: The Defining Moment

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Defining Moment #1

Your Money Will Never Be Worth More than It Is Today.

Every financial institution understands the power of money. They also understand the term “the velocity of money.” Money that doesn’t move or have velocity is like money that is stuffed in a mattress; it doesn’t create wealth or profits. To give you an example, the average bank in the United States spends a dollar about five and a half times. They take money, and it is not even their money, that is deposited in their bank and lends it to other people. These people who borrowed the money make payments back to the bank and pay interest. The bank then takes those monthly payments and lends that money out again, over and over. This process continues repetitively about five times on each dollar they touch. The collection of interest alone is very profitable for the bank. But they understand one rule that creates more profit for them than just collecting interest. They understand that MONEY WILL NEVER BE WORTH MORE THAN IT IS TODAY. Due to inflation the buying power of a dollar decreases over time. The buying power of $1,000.00 today with a 3% inflation factor built in will have the buying power of only $412.00 in 30 years. The banks and lending institutions understand this clearly. They may even encourage you to make additional monthly payments on the money they lent you. The banks are in a win-win situation. If you don’t make additional payments they will collect more interest over time. If you do make additional payments they will take that money and spend it five and a half times thus increasing their profits. Money will never be worth more than it is today.

If we apply this defining moment to our everyday lives the lesson becomes more apparent. According to the Government Accountability Office (GAO) and David Walker1, the Comptroller General of the United States, American households have spent more money than they took home the first time since 1934, during The Great Depression (footnote David Walker 6/30/07). The average American’s ability to hang on to today’s money, the money that has the most buying power, is being sent to someone else in the form of debt payments. A greater number of Americans are becoming more deeply concerned about the increasing costs of health care, housing, taxes, energy cost and rising college tuition for their children. The average Americans find themselves in the dilemma of caring for their children and caring for their aging parents. The ability for Americans to save “today’s” dollars has all but diminished. The traditional approach to family financial affairs cannot continue down the same path. It must change, and the sooner the better.

What is really needed is more financial literacy. Our government should not be expected to take an active role in addressing family fiscal problems. Typically the government does not respond to problems until they reach crisis proportions.

It is important to understand that “your money will never be worth more than it is today”, is a defining moment in itself. Yet it will impact the other nine defining moments that we will discuss. But alone, by itself, let’s talk about this and how it may impact your thought process in your everyday life.

Inflation

I remember when I was younger pulling into a gas station in my two-ton ‘59 Ford and purchasing gas for 19 cents a gallon. If that is not amazing enough, an attendant would come out and pump the gas for me, check my oil, clean my windshield and then politely thank me for my two dollar purchase. There is a lesson there. Not only has inflation adjusted the price of things we purchase today but on a second front, it has diminished customer service, professionalism and direct customer contact. Our society changed in the 1960’s and we created a whole generation of “What’s in it for me” and “I want it now” folks. Companies marketing to this group focused on “making it faster” and “making it cheaper.” In the 70’s we lived the lesson of inflation first hand. Mortgage and interest rates skyrocketed into the 20% range and political leadership declined. We learned the hard way inflation has a direct correlation to the buying power of our future dollars. Unfortunately this caused more Americans at that time to become more dependent on government programs and this created another cycle of costs that was passed on to the taxpayer. What we must understand is that inflation is a double-edged sword. It creates higher prices (less buying power per dollar) and fewer services (pumping your own gas).

Let’s take a look at an example of how inflation can eat away at your buying power. A thousand dollars today with a three percent inflation rate calculated per year will have only $744.00 dollars of buying power in ten years. This means you will need $1,344.00 in ten years to have the same buying power of $1,000.00 today. In 20 years at 3% inflation that $1,000.00 will have only $554.00 of buying power and in 30 years only $412.00. In that 30th year you will need $2,427.00 to have the same buying power as $1,000.00 today. Inflation should be an informed concern of every American because it will impact their everyday lives.

We should also be concerned about inflation at another level. The debt level of the Federal Government is currently in the fifteen trillion dollar range. At current interest rates the government is paying millions of dollars an hour just on the interest on its debt.2 That is $866,666 a minute, $14,444.00 per second just in interest. Most of this debt is owned by foreign nations and if interest rates go up, as a country we are in trouble. David Walker, the Comptroller General of the United States, alluded to this on his website and said, “The United States is on a burning platform with no exit strategies.” He went on to say, “The status quo is not an option. We face large and growing structural deficits largely due to known demographic trends.” Furthermore, he stated that “To balance the government budget by 2040 may require cutting the total federal budget by 60% or raising federal taxes to two times today’s level.”3

These are not good options that will undoubtedly direct more of your future dollars away from you, your family and more toward the Federal Government.

If you own a home and have a mortgage on it you are probably the proud recipient of a lot of junk mail. Much of this mail is from financial institutions who want to inform you that making additional payments on your mortgage is a good thing. For whom it is a good thing is not clear. So let me ask you one question. Would you like to make more house payments now with dollars that will never be worth more than they are today? If your mortgage payment is $1,000.00 per month, do you want make more payments now when your money has the buying power of $1,000.00 or make more payments later when the buying power of that money is $412.00 thirty years from now ($1,000.00, 3% inflation rate for 30 years)? What you need to understand is that the value of your home is going to go up or down no matter what your monthly payment is. I want to live in the nicest house I can with the least amount of monthly payment in today’s dollars. By making additional payments or paying cash up front for my house, I have used the most expensive buying power dollars I could to do this. At the same time by using today’s money to make additional payments I have made the banks and mortgage companies very happy. Remember they are in a win-win situation.

SEM

There may be times in our lives when it would make sense to fund the things we want in life with someone else’s money (SEM) i.e., banks, credit card companies, mortgage companies or financial institutions. We do this all the time with our homes, cars and education costs. The reality is that if we do this we are going to have to pay a premium (interest) to someone for the use of their money. There are good ways and there are wrong ways to use someone else’s money in your life. For many Americans it has become too easy to use someone else’s money for the wrong reasons. Today some Americans are drowning in monthly payments for the luxury of using this type of money. I do see a purpose for using someone else’s money (SEM) when it involves reasonable interest rates, a long-term commitment and a hard asset, such as a house or other real estate, as collateral.

Velocity of Money

If you were to dig a hole in your backyard and bury ten thousand dollars in it and cover it up, what would happen? Ten years later you could dig it up and you would still have ten thousand dollars in currency, but that money would have less buying power than it did ten years ago. Money sitting still by itself, with no movement, gains nothing. Velocity of Money should also not be confused with investing money, such as in stocks and bonds. In investing the hope is that your money will increase in volume. If you continually get positive rates of return from investing in the market, that growth in your money could offset the decreasing buying power and future taxes that you will be facing in the future. It is always good to remember that in investing the only person at risk of losing is you. You will always be approached by people promising you higher rates of return. Ask yourself, who is at risk you or the person making the recommendations?

So what is the Velocity of Money? Let’s use an example of a bank. Typically a bank will spend one dollar about five and a half times. They will take money from savings accounts and CD’s and lend that money to someone else. The person who borrowed the money pays the bank back plus interest. The bank takes the payment they received from that loan and they lend it to someone else. Now the bank has two monthly payments coming in, plus interest and they lend that money out again. This process goes on about five and one half times. They have created the Velocity of Money that can cycle a dollar through this process many times. We need to pay attention to the fact that the banks have accomplished this feat without using any of their money but rather by using the money that we deposited in their bank.

By understanding how a bank creates the velocity of money, it becomes clear why banks and lending institutions urge you to make additional monthly payments. These businesses understand one thing, that money will never be worth more than it is today (buying power) and the faster money comes in the faster they can spend it five and a half times. Much of the marketing from these companies emphasize the importance of paying off your loans as soon as you can. Everyone would love to be debt-free but at what cost to our buying power? The banks and lending institutions clearly understand that money will never be worth more than it is today due to inflation and the velocity of money creates wealth for them. They are in a win- win situation. They can collect money from you via extra or additional loan payments and spend that money faster or collect interest and principle payments as they come due. Having the ability to spend a dollar more than once is the definition of velocity of money. Once again, this is different than getting a rate of return on your money.

In my travels across the country I have had the opportunity to discuss “the velocity of money” with thousands of people. As always, the goal of these discussions is to encourage people to think, not simply to be told what to think. Being told what to think is void of ideas and creativity. Many times I like to engage people in things that they need to understand so I walk them through a lesson in life and the velocity of money.

If I am addressing a group of people I will ask someone to lend me twenty dollars. Someone is always kind enough to oblige me and I tell the rest of the people to get out their wallets and purses because we are going to play an exciting game. I will hold up the twenty dollars I have just borrowed and sell it to the first person who can give me a ten dollar bill. This exchange usually happens rather quickly. I ask the person who just purchased a twenty dollar bill for a ten, “How do you feel?” Their response is usually favorable. Now I am holding a ten dollar bill and I say I would like to sell the ten dollars for a five dollar bill. This trade also takes little or no time to accomplish. I ask that person how they feel. They typically feel pretty good also. Now I want to sell the five dollar bill I have from that transaction for a one dollar bill. This happens quickly because everyone is beginning to learn how the game works. I am left holding a one dollar bill and I ask, “Now that you know how to play the game, I have a pocket full of twenty dollar bills, do you want to play again?” Of course everyone wants to play again because now they understand how to play the game. I take the one dollar bill I have left and return it to the person I borrowed the twenty dollars from and ask them how they feel. Not so good, right? I note that I gained three new friends at the expense of one. Now I ask, “Where is our big winner?” Usually the person who bought the twenty dollars for ten dollars jumps up. Wrong! You see he did well but only doubled his money, the person who paid one dollar for five dollars did much better, five times what they paid out.

What is more important in this lesson is that three people learned how it felt to be the bank, buying and selling money. They all felt pretty good and made good money. They all realized it was easy to do once they knew how to do it. They all wanted to be in the banking business now. On the surface, they all understood the lesson I presented but I need to take them a layer deeper in their thought process. What is really going on is that the banks and lending institutions are distributing thirty five dollars (a twenty, a ten and a five) for nineteen dollars (twenty dollar borrowed and had one dollar left) and they are collecting interest on the thirty five dollars from the twenty dollars that was not theirs in the first place. They have created something out of nothing. The velocity of money and interest collected pays for the nineteen dollars they borrowed and much, much more. Every dollar collected by a bank has a future value attached to it.

Unfortunately most of us are caught up in the other side of their game of paying interest. Unknowingly, many people are so caught up in debt and interest payments that it is ruining their lives. Their ability to use “today’s” dollars that have the most buying power is gone because those dollars are going to someone else.

LUC

Another aspect of this lesson is that the people who had Liquidity, Use and Control (LUC) of their money were able to take advantage of an opportunity when it came along. They had the money to buy the twenty dollars for ten, ten dollars for five and the five dollars for one. All too often people have all their money tied up in other areas. They have prepaid this or over funded that, to a point where if they need money for a real opportunity, they can’t get to their money. Ask yourself a question, “How often does opportunity knock and how long will it wait for you?”

LOC

As for the poor person I borrowed the twenty dollars from, he suffered a “lost opportunity cost.” Not only did he lose nineteen of today’s dollars but also the ability to earn money from the nineteen dollars forever. On a daily basis many people give away a lot of their money unknowingly and unnecessarily. This problem is compound when they also lose the ability to earn money on that money and negates any opportunity to create velocity of money.

Defining Moment #2  

This May Be the Lowest Tax Bracket You Will Ever Be In.

“We are heading for a future where we will have to double federal taxes or cut federal spending by 60%”⁴

-David Walker, Comptroller General of the United States

The rapidly changing demographics of our country are going to impact everyone’s lives in our nation.  It can no longer be expected that the United States can dictate from the pulpit the direction and course of the world as a whole.   Simply believing we are a great nation will not continue to make us one.  To compete and survive we will have to change and that change may not come easy.  We may have to rid ourselves of some of our contempt, political self- righteousness, and the need to blame someone for our lack of competition in a global economy.  Although the United States will remain a powerful nation our ability to change will be our measuring stick in the future.

“As a nation we have already made promises to coming generations of retirees that we will be unable to fulfill.”⁵

-Alan Greenspan

As you are reading these words the U.S. Federal Government is continuing to spend $1.35 for every dollar it takes in from tax revenues.  The debt in our nation is growing at one million dollars an hour, six hundred and ninety thousand dollars a minute and that is just the interest on that debt.  According to the Government Accountability Office (GAO) the Federal Government fiscal burden in the year 2000 was $20.4 trillion dollars.   Today that burden has expanded to nearly $50 trillion dollars.  What does that mean to every person  in  the  United  States?    

Well, in order to pay for this government burden every person in the country would have to pay about $156,000.00.  For every full-time worker that comes to around $375,000.00 or for every household $411,000.00. The purpose of telling you this is not to scare you but rather to make you aware that all  the conditions  are  in  place  for  everyone’s  taxes  to increase. Traditional thinking professionals may be willing to avoid this problem that is out there right now until it becomes a crisis for you.  Then it is simply too late to react to the problem.

Future taxes that you pay will be one of the largest transfers of your money that you will ever make.  The size and amount of future taxes has not yet been determined but we do know that government debt will be a large determining factor.  Another issue in the future tax equation is that the labor force in the United States will continue to decline. We already know that from a percentage standpoint, there will be fewer taxpaying workers than there are retirees who are and will   be   on  government   programs   (Social   Security,   Medicare, Medicaid, etc.) and they will be living longer.

So let’s do the math.  We have a declining workforce in the United States.   We have an aging population living longer on government programs.  We have a government that spends $1.35 for every dollar of revenue they take in.  We have $50 trillion dollars in future government fiscal burdens.   Unfortunately the only source of revenue for the Federal Government comes from collecting taxes. From the government’s standpoint, do you think they are going to lower  taxes  or  raise  taxes,  increase  or  decrease  government benefits?

“Closing the long-term fiscal gap would require real average annual economic growth in the double digit range every year for the next 75 years.  The U.S. economy grew an average 3.2 percent in the 1990’s.”⁶

-David Walker, Comptroller General of the United States

Imagine now, if you can, your future savings and retirement money being taxed at two times today’s levels.  Once again this is an estimate from the government’s GAO.  Traditional thinkers and the so called experts from the government are now telling us that in order to survive in the future where we will all be living longer we must save more money now.  I imagine if I could spend $1.35 for every dollar I get like the government does, I’d be ok.  But I can’t.  From the government’s own study it reveals that the personal savings rate in the U.S. has declined.  In fact this is the least amount of personal savings recorded since 1934, during The Great Depression.   The idea of someone saving more now so they can pay higher taxes in the future is a game I do not necessarily want to play.

©2012 Wealth & Wisdom Institute.

Credit score changes will affect millions

CNBC.com staff | @CNBC

Friday, 8 Aug 2014 | 9:15 AM ETCNBC.com

Courtney Keating | iStock | Getty Images

 

Changes are coming to the FICO credit-scoring system, potentially allowing millions of people to take out loans.
The Wall Street Journal reported that Fair Isaac, which produces the FICO score, will no longer include failures to pay bills when calculating a score if the issue has since been resolved. The tabulation also will take unpaid medical bills less into account, according to the Journal.
 
These changes—which are meant to stimulate consumer lending—are the result of discussions between Fair Isaac, the Consumer Financial Protection Bureau, and lenders, the Journal reported.


Out of the 106.5 million Americans with a payment collection on their report, 9.4 million had no current balance, which means their credit scores will be bolstered by the new system, according to the Journal. Still, not everyone supports the changes.

"A lot of people really just can't handle credit—you're not really helping them by allowing them to dig themselves into debt," Howard Strong, a California lawyer specializing in consumer-protection class-action lawsuits, told the Journal. "It's like a sharp knife—if you don't know how to use it, you can cut yourself."

 
—By CNBC

Does Obamacare foster early retirement?

By Michael Foster • Bankrate.com

 

While the Affordable Care Act, or Obamacare, remains a controversial topic in the political arena, many Americans are assessing how it might impact their retirement plans. After all, health insurance coverage is one reason why many people stick with their jobs until they reach age 65, when they're finally eligible for Medicare.

It turns out that an unexpected side effect of the law is that it's enabling some people to consider early retirement. In fact, a recent Bankrate poll found that 23 percent of Americans would retire early if they could get affordable health insurance outside of their jobs, while just 8 percent would not. Two-thirds of Americans said health care availability would make no difference in their retirement date.





Before the law went into effect, it was often difficult and expensive to find an insurer willing to provide coverage for older adults -- especially those with pre-existing conditions. Now the coverage is easy to get, regardless of existing ailments, and government subsidies help make it affordable for low-income earners, and even for those with moderate incomes. Federal appeals courts recently issued conflicting rulings on the legalities of the subsidies, but the issue is not likely to be decided until mid-2015. In the meantime, the subsidies will be available again in the next enrollment period.

For example, in New York state, a couple with a paid-off house and investments that yield $35,000 in annual taxable income would end up paying about $210 per month for health care after receiving the equivalent of about $520 a month in subsidies from the government.

Pre-existing conditions no longer a factor

Former accountant and financial adviser David Wright retired at 55, obtaining insurance for himself and his wife on an exchange in California. "Before the law, I was paying $800 per month for a $4,000 deductible. Now I pay $700 per month with a $5,000 deductible. Otherwise, the coverage is the same," he says.
For Wright, the lower price wasn't as important as getting insurance in the first place. "In my early 50s, I was trying to retire but kept getting turned down by insurance companies because I have adult-onset asthma. After Obamacare, I had no problem getting insurance," he says.





Certified Financial Planner professional Erik Carter of Financial Finesse says the availability of health care makes it easier to walk away from a job. "Simply put, many employees we work with have radically changed their retirement planning because of the health care law," he says.

Carter doesn't believe this is changing most Americans' retirement plans, but it is creating new possibilities for some. "A lot of people were staying in their jobs for the health insurance. Now that they don't have to, they're looking at ways to get investment income earlier and not rely on their job," he says. "This is a big win for people in their late 50s and early 60s who may have enough savings to retire but stick around for the health insurance."

Tax credits help lower costs

Carter says early retirees can more easily qualify for health insurance subsidies. "The law also incentivizes people to have more money in accounts other than a pretax 401(k)," he adds.
Currently, individuals earning between $11,490 and $45,960 may qualify for lower premiums when buying insurance on an exchange. The range for qualifying couples is $15,510 to $62,040. Any withdrawals from pretax accounts such as traditional IRAs and 401(k)s are taxed at ordinary rates. But withdrawals from accounts such as Roth IRAs and Roth 401(k)s don't count toward income since they are purchased with money that has already been taxed.
"Tax-free money makes it easier to qualify for the new health insurance subsidies," says Carter.
But that's a two-edged sword, he adds. "Because the health care subsidies are not asset-tested, this means a lot of retirees who don't qualify for Medicare can manipulate their investment income to fall below the threshold for Obamacare subsidies by moving money between taxable and nontaxable retirement accounts, and you'll have more people collecting subsidies than initially projected." That would likely put more strain on the health care system, he says.

Insurance more affordable for some

Missouri-based nurse Stephanie Payne is retiring this year to focus on writing about end-of-life care. "I was a nurse for 30 years, saved in my IRA and kept a close eye on my finances. I wanted to retire two years ago, but I couldn't afford it then. Getting health insurance on my own would have cost $1,200 a month. Now, my health insurance is $500 per month for the same deductible and coverage," she says.

Although Payne says she had enough passive income to pay for her basic needs a long time ago, she was stuck in her job for years because health care was too expensive. "I couldn't afford to pay that much for health insurance, so I kept working. In my job, my copay was $219 per month, and an extra $1,000 per month out of pocket just wasn't doable."
Although her health insurance costs are set to rise by nearly $300 per month when she leaves her job, Payne says she can afford that. "I won't use my car as much, so I'll save on gas, which will help. I'm also going to downsize my lifestyle," she says.
For Payne, the best part of being able to retire early is that she will get to move. "It's been a dream to move to Oregon for quite a long time and I can do that now."

Read more: http://www.bankrate.com/finance/retirement/does-obamacare-foster-early-retirement.aspx#ixzz39Qwxxfa9
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5 renovations that can alter home insurance

 

Renovating? Remodel insurance, too

 

Planning a home renovation can involve fun activities such as designing a new floor plan or picking fixtures and paint colors. Having a heart-to-heart with your home insurance carrier may not be part of your preparations. But it should be.
"A renovation may affect the value of your home or the liability issues," says Don Griffin, vice president of personal lines at the Property Casualty Insurers Association. "Anything that changes the structure or use of the property can change your policy."
Many house improvements that boost your home's value could render your home insurance coverage inadequate and leave you vulnerable to losses. Other upgrades may trigger lower premiums -- savings you don't want to miss simply because you didn't call your insurer.
"When making improvements to your house, it's a good time to have an insurance conversation to get enough coverage and possibly discounts," says Richard Hutchinson, a general manager at Progressive Insurance.
Here's how five common home upgrades or repairs can affect your homeowners insurance policy, both positively and negatively.

New roof

A new roof may not be the sexiest home improvement, but it sure can save a lot of cash when it comes to homeowners insurance, cutting your premiums by 10 percent to 20 percent, says Jim Towns, an Allstate Insurance agency owner in Illinois.
"The roof is probably the single biggest factor affecting your policy," he says. "That's where the majority of losses due to snow, wind, hail and rain occur."
Some homeowners can get even bigger discounts if they live in hurricane-, wind- or hail-prone states and their new roof employs special loss-mitigation measures, such as hurricane straps, waterproofing or the very best shingles, says Brad Lemons, a vice president with Nationwide Insurance. To guarantee discounts, make sure to get a contractor's documentation that the upgrades are up to the strictest codes.
"It will vary company to company and state to state," he says.
While most home policies cover roofs, some insurers use depreciation schedules based on the age of the roof to determine how much protection you get, says Hutchinson. If it's too old, some policies won't cover it at all. But the newer the roof, the more the insurer will spend to replace it.

New pool

A pool may make you the most popular house on the block, but it means your home is the riskiest, too, from an insurance standpoint.
"This is what our industry calls an 'attractive nuisance,'" says Griffin. "Everyone in the neighborhood wants to play in your pool. It increases your exposure to loss."
The standard policy usually comes with $100,000 in personal liability protection, which would cover medical costs for a person injured in your pool and any legal expenses if you're sued. However, an insurer may recommend that a pool owner opt for at least $500,000 in liability coverage, which would cost more, says Hutchinson.
The insurer also may require a fence around the pool with a lock to cover the newly built liability, he says. If the pool has a diving board or slide, it will be considered an even greater potential hazard. Hot tubs bring added danger, but the risk can be mitigated with covers and locks.
"The ratio between fun and risk is high," Hutchinson says. "The cool stuff will cost you more."
Also, don't forget to increase your homeowners coverage amount to compensate for the value of the pool, he says.

Office for a home business

Say you want to go full time making reclaimed-wood furniture at home for your Etsy site. Will your home insurance cover the assets of your newfound business? It depends on their value.
Most homeowners policies protect equipment for home-based businesses, but only up to about $2,500, says Hutchinson. That might not be enough for a business owner who uses specialized machinery or stores large amounts of supplies or inventory. Fortunately, you may need to just bolster your existing policy.
"It could be as simple as adding a rider or endorsement," says Lemons, using two words for policy amendments. "Or, depending on the complexity of the business, you may have to purchase an additional business policy."
That's particularly true if your business is the type that creates heavier foot traffic in your home -- such as piano lessons or private yoga sessions. The risk increases that you could be sued by a client or customer.
The good news: If your business doesn't bring visitors to your home and requires little equipment or supplies outside of a basic computer, your existing home policy should do the trick. But it's best to call your insurer first to make sure.

More living space

Sometimes a home needs to grow to accommodate an expanding family. That can mean adding more livable square footage where none existed before, such as in a dank basement or humid attic above the garage. In other instances, a new addition may be in order.
Your insurance will need to be altered to account for the value of the new space, in case a catastrophe strikes. "If you add 1,000 square feet to a home, it could add anywhere from $100 per square foot or more to your home," says Hutchinson.
Let your insurer know about any major addition even before you begin, says Towns. "Say you put on a room addition and three-quarters of the way through, a fire destroys it," he says. "You want that to be covered."
You may need to consider other types of coverage for the newly built-out areas of your home. A finished basement with new carpet, drywall and insulation may need water backup coverage if the sump pump is located there, says Towns.
And if you plan to rent out the new space, you'll need landlord coverage, says Hutchinson.
"Insurers view renters as higher risk than the people who own and occupy," he says.

Kitchen and bath upgrades

Sometimes nothing can give a house the facelift it needs quite like making over a kitchen into a chef's dream or a master bathroom into a spa sanctuary. But unless you give your home insurance a makeover, too, the renovation may be at risk.
For example, say your insurer based your coverage on a kitchen with laminate countertops and generic cabinets. But then you spend $40,000 on granite countertops, custom cabinets and top-of-the-line appliances. Would your existing coverage be sufficient to rebuild your remodeled kitchen after a disaster?
"Most often the answer is no because people don't keep up (their policy) with the additions and alterations they are doing," says Lemons. "And they don't realize it until after a loss."
He recommends not only calling your insurer about the renovation but also providing records and photos to validate what you've had done. Your premium most likely will go up because your home is worth more.
One small bonus: Your contractor may upgrade the home's electrical or plumbing systems during a kitchen or bath renovation, especially in older homes. So, you could wind up with an insurance discount, says Towns, and that should offset some of the increased coverage costs.

Though upgrades may bring higher insurance costs, you might easily find lots of ways to save.

Read more: http://www.bankrate.com/finance/insurance/renovations-home-insurance-1.aspx#ixzz38h8Sjlvm
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Building a solid nest egg: It's location, location, location

Sharon Epperson | @sharon_epperson

 

Image source: Jason York | E+ | Getty Images

Saving enough money for retirement is the first step toward building your nest egg, but just as important is where you invest that money.
When it comes to investing your retirement dollars, consider not only your asset allocation, but also asset location. Should put your money in a taxable or nontaxable account? Should you set up a traditional or Roth IRA?

Millions of Americans use IRAs to save for retirement. While the majority of retirement savers have traditional IRAs, Roth IRAs—only available since 1998—have grown in popularity. New research shows savers contribute more readily to Roth IRAs than traditional IRAs, with more than 7 in 10 new Roth IRAs opened exclusively with contributions.

In contrast, traditional IRAs are largely created through rollovers from employer-sponsored retirement plans, according to new data from the Investment Company Institute.

<p>Retirement planning: The number one mistake</p> <p>Ron Carson, founder and CEO of Carson Wealth Management Group, and a member of the CNBC Financial Advisor Council says too many people fail to make a retirement plan. He explains why a plan is important and how to get started.</p> 

Still many Americans may not understand the differences between traditional and Roth IRAs to determine which accounts may be best for them. Here are some key points to keep in mind:

Differences between traditional and Roth IRAs
Traditional IRAs offer the benefit of tax deferred growth since contributions are generally made with before-tax dollars and you don't pay taxes on that money until you take it out. Contributions are deductible, unless you are covered under an employer-retirement-plan and your income exceeds certain limits, but anyone can make a nondeductible IRA contribution. You're taxed at your ordinary income tax rate on the money when you take the money out. Distributions of nondeductible contributions are not taxable.

Roth IRAs are another terrific way to save and invest for retirement. But they work a bit differently. The benefit to a Roth is tax-free growth. You make after-tax contributions and earnings grow tax-free. Unlike regular IRAs, your contributions can be withdrawn tax free at any time. Earnings from a Roth account can also be withdrawn tax-free after age 59½, as long as you have held a Roth IRA for five years. You an also withdraw up to $10,000 for a first time home purchase before age 59½.

Income and contribution limits
 
Contributions to traditional and Roth IRAs are the same: $5,500 this year or $6,500 for those 50 or older.
Anyone under age 70½ with eligible compensation, such as wages, can contribute to a traditional IRA, but there are income limits if you are covered under an employer retirement plan and you want to take a tax deduction on your contributions. For married couples filing jointly, the income limits for deductible IRA contributions start at $96,000 (for a fully deductible IRA) and ends at $116,000 (for a partial deduction); for single filers it's $60,000 to $70,000. The closer you get to the end of the range, the lower the amount you are able to deduct.

"There is no age limit on Roth IRA contributions. You can contribute as long as you have eligible compensation, and your income does not exceed certain amounts," notes retirement expert Denise Appleby. The income limits for Roth IRAs are much higher, making them attractive to many higher income savers. Individuals filing as single and making less than $114,000 this year and married couples who make less than $181,000 and file taxes jointly are eligible to contribute the full amount to a Roth IRA. "The eligible contribution is reduced as the income gets closer to $129,000 for single filers and $191,000 for married-filing jointly. No contribution is allowed if income exceeds these amounts," Appleby said.


Why contribute to a Roth IRA 
 
If you're deciding between contributing to a deductible IRA and Roth IRA, there a several things to keep in mind.
Roth IRAs are a great location for the assets of many savers, particularly if you think you may need to tap into those funds at some point before retirement because you can withdraw contributions from a Roth IRA tax-free at any time.


But even if you plan to keep your money earmarked for retirement, there are several reasons why Roth IRAs make sense. If you think you'll be in a higher tax bracket when you retire, especially if you're a younger worker and have yet to reach your peak earning years, then a Roth IRA is better than a traditional IRA from a tax standpoint. Also, you don't have to take required minimum distributions from a Roth IRA at age 70½ like you do from a traditional IRA. A Roth IRA is also a great estate planning tool, since you can leave the account to your heirs and stretch out distributions tax free.

On the other hand, if you think your income tax bracket will be much lower when you retire than it is now, you may be better off taking the upfront tax deduction of a traditional IRA. If you think your income tax bracket will be the same when you retire, then it's almost a wash for income tax purposes. But again, with a Roth, you aren't subject to minimum distributions and if you leave a Roth behind when you die, your heirs can stretch out their own income free tax distributions.

—By CNBC's Sharon Epperson

Debt addiction: Red is not the new black

Shopaholics beware

DaVida Plummer, special to CNBC.com

Monday, 7 Jul 2014 | 12:00 AM ET

"It's on sale." "I can't resist." "We can pay it off little by little on credit." It's the American way, right?
If you were to stand still in the middle of any popular department store and just listen to the voices all around, you are likely to hear these popular phrases. For some the urge to buy is an occasional impulse; for others this chatter might very well support a diagnosis of compulsive buying disorder.

Shopaholic or shopping addict?

Ivanko Brnjakovic | iStock | Getty Images

Hidden among the throngs of shoppers are people who can't stop themselves—even if they want to. You hear the term shopaholic used all the time on sitcoms or on reality shows where men and women drop thousands of dollars on one item to keep up with what's trending. While this behavior may be funny or entertaining to watch, it's no joke: Shopaholics suffer from a compulsive disorder that results in major debt.

"Nearly 7 percent of Americans are categorized as compulsive buyers. That's roughly 20 million people."

A search for the term "compulsive buying" in the PubMed/MEDLINE database maintained by the National Center for Biotechnology Information, U.S. National Library of Medicine shows there are 200-plus recently published journal works on the subject. One such article, cited in the "American Journal on Addictions," reveals that nearly 7 percent of Americans are categorized as compulsive buyers. That's roughly 20 million people.
One of the faces in that number is Andrea Gresser, a 45-year-old stay-at-home mom who said she has hit rock bottom. "Things are just coming to light," she said. "I was busted for shoplifting twice, and I'm working with a counselor."
Gresser also explained how difficult it is to stop. "I have been fighting this my whole adult life," she said. "It's like a death sentence—keeping secret [my] online shopping and trying to pay off thousands on credit cards."


Gresser described her plight as a desperate cycle of euphoric buying followed by deep remorse. "I am constantly trying to fill a hole that I just can't fill," she said. "I literally have so much at home that I've forgotten what I've purchased, and there's jewelry that I've bought, then returned."
Gresser said she knows she's causing pain for her spouse but can't stop herself. "When your husband says he's worried about money and you know you're the cause of the problem but still go back out and shop again, well, it just stinks," she admitted.

Terrence Shulman, founder of the Shulman Center for Compulsive Theft, Spending and Hoarding and author of "Bought Out and $pent! Recovery from Compulsive $hopping and $pending," counsels people like Gresser, who struggle with impulse control, compulsive spending and debt addiction.
He attributes the increase in compulsive shopping to the ease of purchasing items via mobile and WiFi, and through TV shopping channels, where you can make a purchase with the click of your remote control. Gresser agreed: "Shopping is just in your face, with all of the advertising in stores, at the supermarket, even at garage sales."

Take a debt quiz

Wavebreak | iStock | Getty Images

So how do you know when loving to shop and treating yourself to a new pair of shoes has crossed the line to become a full-blown addiction that is wreaking havoc on your finances? Take a debt quiz, for starters. Debtors Anonymous (DA), a peer-based recovery program, outlines these key warning signs:

1. You have a "live for today, don't worry about tomorrow" attitude. In some ways, that may describe a free spirit, but not if the person is moving from aisle to aisle and store to store bagging up merchandise without worrying about personal finances—i.e. account balances, monthly expenses, loan interest rates, fees, fines and contractual obligations.
2. You frequently don't return borrowed items. This Debtors Anonymous warning sign may seem innocent enough: frequently borrowing items such as books, pens or small amounts of money from friends and co-workers and failing to return them. It is something everyone may have done once or twice before, but it, too, is a warning sign when the behavior is habitual.
3. It is hard for you to meet basic financial obligations. A shopaholic will hit the stores before sitting down to pay reoccurring expenses such as rent, utilities, childcare and food. A compulsive spender may knowingly skip paying any one of those items to purchase a desirable consumer good.
4. You love buying things on credit vs. cash. Debt addicts live in chaos and drama around money. Many use one credit card to pay another. They live from paycheck to paycheck, and they overwork, yet don't make enough to cover expenses. They also suffer from unwarranted inhibition and embarrassment in what should be normal discussions of money.
5. Your closet is full of new clothing with tags attached. This is a sure sign of compulsive shopping: Being unable to pass up a "good deal," making impulsive purchases and leaving the price tags on clothes so they can be returned, and not using the items you've purchased.
   

Why do people overspend?

So are some people more susceptible to compulsive spending than others? Research suggests that compulsive spending overlaps with other compulsive disorders, like hoarding, gambling and drinking. Shulman counsels people of all backgrounds on the topic, claiming that the issues driving compulsive behavior are complex.
"Some overshopping and overspending is connected to the need to compensate for some loss or lack in the life of the shopaholic." In other cases, he said, compulsive spenders have been overindulged or spoiled materially. Often, they had poor role models and this dynamic continued into their adulthood.

There are different patterns of overshopping and overspending. For example, there is bulimic shopping, described as excessive buying and returning; image shopping; bargain shopping; co-dependent shopping, defined as buying more for others than oneself; the uncontrollable urge to have the best item, which is called trophy shopping; and collector shopping. And then there are those who spend more on experiences—such as vacations, dining out and entertainment—than things.

"The United States is a bad role model, carrying a debt of 17 trillion dollars. What are we to think?" -Terrence Shulman, founder, The Shulman Center for Compulsive Theft, Spending and Hoarding

Americans have been working harder for less money over the years, so many spend to justify the hard work but then they get into debt and have to work harder and so on, Shulman said. "The United States is a bad role model, carrying a national debt of 17 trillion dollars," he observed. "What are we to think? Well, maybe it's not that bad—everyone's doing it, everyone's taking on debt. Even defaulting on loans and mortgages doesn't seem that bad—even smart!"
According to Shulman, there will always be a certain segment of the population who are "bon vivants," able to shop, eat, gamble and drink a lot but not necessarily be addicted to those behaviors. But the hallmarks of addiction include a steady or sharp increase in the behavior over time, loss of control, increasing negative consequences and loss of jobs and relationships.
Dr. Kit Yarrow, a consumer psychologist and author of "Decoding the New Consumer Mind," said that people who overspend get a boost in mood and are using the compulsive behavior to feel less stressed. "It's served a purpose," she said. "But in the end, those boosts can push dependency, so people must find healthy ways to boost their moods—like exercise, good relationships and fun experiences—and they have to frequently remind themselves of the rewards."

How to battle the buying

So what should consumers do?
"Admitting you have a problem is the first step to recovery," said Shulman, adding that compulsive spending is "not unlike any other psychological disorder, [and] people can't just will themselves to stop." Once you've conquered that, he suggests the following:

• Seek out and read books on the topic of shopping addiction.
• Seek out professional help with a counselor or therapist who specializes in treating shopping addiction. Join and attend a support group (local, phone or online) such as Debtors Anonymous.
• Avoid stores, TV shopping and/or Internet shopping for the time being, and have others help you by holding your credit cards, blocking TV shopping channels and websites. Also avoid people who encourage you to shop.
• Fill time with healthy people and activities.

Debtors Anonymous utilizes tools—including meetings, sponsorships and pressure-relief action plans—to help members resolve debt and establish savings. But in order to seek insurance coverage, the patient must be diagnosed as having an underlying compulsive disorder.
Clinicians are quick to clarify that debt addiction isn't an illness recognized by "The Diagnostic and Statistical Manual of Mental Disorders," published by the American Psychiatric Association. That's an important distinction, because the insurance industry uses DSM as a claim qualifier.
Yarrow adds that "spending as a compulsion may not be a diagnostic category, but support groups and self-help programs are surfacing all across the country, and that's what most people need—support, reassurance, structure and a plan to follow."
 


—By DaVida Plummer, special to CNBC.com

7 real retirement worries to focus on

By Karen Haywood Queen • Bankrate.com

7 retirement worries to dread

Whether your retirement is months, years or decades away, you probably have a long list of retirement worries. Will Social Security survive? Will the stock market crash? Should you pay off your mortgage? Should you pay for your children's college costs? Will your children ever launch?
Worrying isn't always bad. After all, it can help you focus on improving your retirement prospects. But are you worried about the right things? Bankrate looks at seven retirement issues that you might be stewing about that don't matter ... at least not as much as these other, much more troubling, issues.

Will Social Security be around?

What you're worried about: Social Security won't be around to pay any of your retirement.
What you should be concerned about instead: Pick the right age for you and your spouse to begin drawing Social Security.
"I don't think you should be worried about Social Security going away," says Kevin Bourke, Certified Financial Planner professional at Bourke Wealth Management in Santa Barbara, Calif.
Instead, you need to think about the best age for you and your spouse to begin collecting Social Security. You don't necessarily want to begin drawing Social Security at the youngest age you're eligible to do so, Bourke cautions.
"People take it early and they take a reduced amount," he says. Often, the husband begins taking Social Security as soon as he's eligible, which seems like a good idea. "The problem is, 25 or 30 years later he's going to be dead, (and) the wife is going to be 90 and getting much less compared to what she would be getting had he waited until the full retirement age."

How can I afford my children's college?

What you're worried about: You want to help your kids by paying for college, co-signing loans or bailing them out in general.
What you should be concerned about instead: Fund your retirement.
"How will you retire if you drain your cash to fund Junior's archaeology degree at an expensive private school?" asks Jayne Di Vincenzo, president of Lions Bridge Financial in Newport News, Va. "If you have to pick, make sure you're OK for retirement first. People in their 30s sometimes pick their kids' education instead of themselves, thinking, 'I'll make up for this later.'"
The longer you wait, the tougher it is to catch up. Remember, your kids have years to work -- you don't, Bourke says. "I see people put themselves in financial jeopardy because they want so badly to help their children financially that they end up harming themselves."

 

How big of a legacy can I leave?

What you're worried about: You want to leave a sufficient estate to your kids.
What you should be concerned about instead: Name the correct beneficiaries on your retirement and life insurance accounts.
Beneficiary designations are often wrong, Bourke says. "I had a new client who owns an annuity. I asked her who the beneficiary is and she said, 'My four children, one quarter each.' I said, 'Let's call the annuity company to be sure.' It turns out three-fourths were going to one daughter and the other quarter was going to a niece."
How does this happen? "The paperwork gets filled out wrong," Bourke says. "Somebody drops the ball. People ignore their beneficiaries and disinherit their own children."

 

Should I get out of the market?

What you're worried about: The winner of the last or next election might affect your retirement accounts.
What you should be concerned about instead: Invest regularly by dollar-cost averaging regardless of external events over which you have no control. As you get older, you can dial down risk by balancing your investments.
"I had several clients pull out of the stock market because of who won the presidential election," Di Vincenzo says. "Those clients have hurt themselves because the markets have had a good run. You need to avoid emotional investments."

Should I pay off the mortgage?

What you're worried about: You want to pay off the mortgage before you retire.
What you should be concerned about instead: Do you have enough money to pay for property taxes, maintenance and general retirement expenses for the next 25 to 30 years?
"In a low mortgage interest environment, it doesn't make sense to pay off your mortgage," Di Vincenzo says. "When you can earn 4 (percent), 5 (percent) or 6 percent in a corporate bond fund and you're paying only 2.75 percent on your home mortgage and you get a tax deduction -- the math doesn't add up.
"I have seen people pull out a lump sum to pay off their mortgage. It hurts people who are on the borderline of having enough resources to get through retirement. I hate to see people end up with a reverse mortgage."

Will the stock market tank?

What you're worried about: The stock market will crash, and you'll lose all your savings.
What you should be concerned about instead: Your money will shrink instead of grow, indexed to inflation, because you've invested too conservatively.
"Inflation is superlow right now, but it's not likely to stay that low," says Certified Financial Planner professional Cathy Curtis of Curtis Financial Planning. "But you may be getting only 0.2 percent interest on your bank account. That's not a good strategy unless you're very wealthy. A lot of people are afraid of the market and they're missing out on market rallies."
Allocating your assets in a mix of aggressive and conservative investments will help contain volatility and will enable your investments to grow.

How can I afford long-term care insurance?

What you're worried about: Long-term care insurance is too expensive, or you'll never use it.
What you should be concerned about instead: Will you need long-term care?
"It's something people should think about in their 50s -- either buying some kind of long-term care insurance or self-insuring to make sure they keep not only their quality of life but get the kind of care they need," Curtis says.
"A lot of people don't believe that will happen to them," she adds. "They've been healthy their whole lives."
New products include hybrid life insurance and long-term care insurance in one policy with lump-sum coverage, usable in monthly increments, Di Vincenzo says. If you don't use the policy, your heirs would get a life insurance payout, she says.

Read more: http://www.bankrate.com/system/util/print.aspx?p=/finance/retirement/real-retirement-worries-1.aspx&s=br3&c=retirement&t=story&e=1&v=1#ixzz36kady9v3
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