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Tips to deal with financial emergencies

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What if a financial emergency, crisis, or sudden need requires more cash than you have available in your savings account? It could be a large medical expense not covered by your health insurance plan, a large down payment on a house, or an extended period of unemployment.

You may be tempted to simply turn to your credit cards to make up the difference. While credit cards may help temporarily bridge the gap in a financial emergency, they are not a long-term crutch. In fact, turning to credit cards can lead to a new crisis, as high-interest debt turns into a monster that can’t be paid down.

What can you do once the special savings account runs out? There may be no magic solution, but there are ways to make the problem more manageable:

  • Talk with trusted friends or relatives, with the goal of eliciting fresh ideas about how best to deal with the emergency. They may come up with an alternate approach that lowers the overall cost.
  • See if the source of the cost (hospital, bank, etc.) is willing to accept an alternate payment plan. For instance, if a large down payment is required, is there any way to reduce it? Or, if you have just been billed for a $30,000 hospital procedure not covered by insurance, will the hospital allow you to work out an installment plan to pay it off? If the answer is yes, watch for special conditions, fees, or excessive interest.
  • Immediately come up with a plan to cut your expenses. Start with the flexible expenses that are nice to have, but are not absolutely necessary. Personal Finance For Beginners In 30 Minutes, Vol. 1 explained how opting for cheaper phones, cable TV service, and cars can potentially save thousands of dollars every year.
  • Start selling stuff. Furniture, antiques, jewelry, musical instruments, and collectibles may be hard to let go of, but they can provide cash in a pinch. Try to establish the fair market value for the items and your target prices before talking with potential buyers.
  • Consider radical approaches, including rethinking your housing and transportation requirements. For instance, renting out property, downsizing living arrangements, or shifting from cars to public transportation can make a huge impact on annual spending.

This post was excerpted from Personal Finance For Beginners In 30 Minutes, Vol. 2, by Ian Lamont. All rights reserved.

How credit ratings agencies “score” you

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A credit report is a document that grades you on your ability to pay your bill. The credit ratings agencies that provide the reports — Experian, TransUnion, and Equifax — gather information from the credit card companies, mortgage lenders, department stores, utilities, and other firms that have provided credit to you in the past. The information they gather is aggregated into what’s called a FICO score, a number between 350 and 850 that reflects your creditworthiness.

People with lower FICO scores are considered less likely to pay their bills. Mortgage, credit card, telecommunications companies and even some utilities may reject their applications, or may charge higher rates and fees.

Among the population at large, relatively few have terrible credit card scores. The following table shows the distribution of FICO scores among people evaluated by one of the credit rating agencies, TransUnion. More than 50% have a FICO score above 700:

Transunion credit ratings agency

How to get a free credit report

Typically, when you apply for a new credit card or mortgage, or want to rent an apartment, the bank, lender, or landlord will run a credit report on you. They want to know if you are likely to pay on time and pay off any debt that you incur.

Wouldn’t it be great to see your credit report? It would allow you to understand your credit profile from the view of banks and other issuers, and identify any potential problems that need to be addressed.

Here’s some good news: You can see your credit report, and it’s free, thanks to federal law. Go to the government-operated website usa.gov and look for the links that direct you to an external site that is the only official location to request reports from the three big agencies. Note that the free reports show many details about your credit history, but do not show your credit score — that is only available for a fee.

Once you get your report, check it carefully. If you see mistakes such as incorrect information about a dispute, unpaid accounts that you never opened, or other people (and their debt) being associated with you, there are processes for having this information removed.

Be on the lookout for situations that might indicate identity theft. You will need to resolve any case of fraud that is wrongly associated with your identity. Further, there are rights you have as a consumer — check out the ftc.gov website to learn more.

This post was excerpted from Personal Finance For Beginners In 30 Minutes, Vol. 1, by Ian Lamont. All rights reserved.

PayPal vs Dwolla

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Paypal vs Dwolla, pros and cons

If you use eBay or have paid someone over the Internet, you’re probably familiar with PayPal. The basic PayPal service lets people pay another PayPal account holder almost instantly. It’s an alternative to paying someone by check, or via cash.

The setup for PayPal and alternative services such as Dwolla is straightforward:

  • Enter your bank account information
  • Wait a few days for the accounts to be connected
  • Confirm that several small electronic funds transfers have taken place — typically a few pennies are deposited into your bank account, which verifies to PayPal, Dwolla, or competing services that the account is yours.
  • Transfer some of your bank funds to the PayPal or Dwolla account. You will be able to use these funds to pay other people who have an account with the same service.

The services have different fee structures:

  • PayPal transfers between private parties are supposed to be free, but business-related transactions are charged a fee that totals about 3% of the transaction.
  • Dwolla doesn’t charge anything for basic transfers, but has fee-based services for priority support and other features.

The services are convenient, and I have used both PayPal and Dwolla for my business. However, there are definite drawbacks:

  • Each service requires both the sending and receiving parties to have active accounts with the same service, and connected bank accounts. This means if you want to pay someone right away, and they don’t have an account, it will take that person at least three or four days to get the account set up and connected with his or her bank. In that time, you could easily write and send a check.
  • Although the services are supposed to be easy to set up, many people have trouble getting their bank accounts connected or performing other basic functions.
  • Because online payment systems have been abused by fraudsters and organized crime, these companies are often overzealous about sudden, unexplained flows of money. PayPal is notorious for freezing legitimate accounts and making it nearly impossible to quickly access frozen funds.

Many people have understandable qualms about trusting their bank information to a Web-based service that will store the data remotely. Conceivably, a lot of money can be instantly lost if passwords and other credentials are stolen.

There are other alternative payment systems (including new virtual currencies like Bitcoin) as well as traditional money transmission services such as Western Union. While these services have features that some people may find useful, they also come with risk and other drawbacks.

This post was excerpted from Personal Finance For Beginners In 30 Minutes, Vol. 1, by Ian Lamont. All rights reserved.

How to limit spending on luxuries

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It may sound easy to limit spending on luxuries, especially if you are someone who doesn’t do much shopping in the first place.

luxury purchase - a new laptop/MacBook ProBut if you have a shopping habit, or a family member who likes to buy luxury items such as high-end laptops or expensive clothes, it’s not so easy. Here are some tactics for taking control of luxury spending:

Set a monthly shopping budget: After determining your income and subtracting rent, food, healthcare, transport, insurance, and other necessities, and setting aside some of the remaining cash for savings and retirement, you should be able to budget the remainder to “other,” including shopping. If shopping is a priority in your life, then allot more — but still stick to the budget. If you need help planning out your monthly shopping budget, consider some of the software tools described in Chapter 4.

Limit shopping trips: My daughter has a thing for shoes. If she steps into a shoe store, there is a 90% chance she is going to leave with a box of new shoes. The easiest way to limit her spending? Reduce the frequency of trips. The second easiest way? Paying with cash — preferably her own!

Use cash: When you use a credit card, you’re using someone else’s coin — usually the bank’s, or the store’s, if it’s a store-issued card. Because the cash is abstracted through plastic and far-off monthly payments, it can seem like you’re not paying anything at the moment of purchase. It’s a mental trick that works against your financial interests. Fortunately, there’s an easy way to counter it: Start paying with cash. The act of handing over a small stack of twenties to buy that fancy-shmancy kitchen gadget sends a pretty clear signal to your brain that your supply of money just got appreciably smaller.

Read the return policy before making a purchase: Think back to any item you’ve bought in the last few months that cost more than $100. Yes, I’m talking about that designer hat that looked good on the store mannequin, but on your head, not so much!

What was the return policy of the store you bought it from? You probably don’t know, or would have to hunt for the receipt and look at the fine print. The next time you make a big purchase, look at the return policy (or ask someone) before you make the purchase … and give preference to merchants who offer the best terms. If you have second thoughts or decide that the hat is not worth it, return it for a refund or store credit before the refund period expires.

This post was excerpted from Personal Finance For Beginners In 30 Minutes, Volume 1:
How to cut expenses, reduce debt, and better align spending & priorities.

Jordan’s credit card problem

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A sobering experience for me occurred a few years ago, when I happened to see the docket at the local small-claims court. It was filled with a long list of banks that had filed suit against people who had stopped paying their credit card bills altogether. Those defendants who showed up had two options: Negotiate with the lender, or watch the magistrate rule in favor of the banks.

Jordan, a fictional character with a credit card problem. If she's not careful she may end up in small claims court.Jordan may end up on the docket if she doesn’t make some changes in her spending habits. She has luxury tastes, but can’t fund them through her middle-class income. She’s resorted to using three credit cards to fund luxury purchases such as fancy shoes and high-end appliances. She hasn’t been able to pay off the amount owed for more than a year.

Now she’s watching things snowball, as unpaid interest and further spending leads to ever-increasing bills and a big credit card problem. Jordan owes $15,500 now, and it’s still climbing. Eventually she won’t be able to meet her minimum monthly payments, which will cause additional penalties to kick in. Failure to make payments will also make it hard to get credit from other sources, including bank loans. If things get particularly bad, she could find herself dealing with the situations described in “What Happens When You Don’t Pay Your Bills” in Chapter 3 of Personal Finance For Beginners In 30 Minutes, Volume 1.

Jordan’s experience is not an uncommon one. According to estimates based on Federal Reserve data and other sources, nearly half (about 60 million) of American households carry a credit card balance that averages over $15,000 per household.

We’ll return to Jordan’s credit card problem in Chapter 3, when I give a big-picture view of debt and discuss practical ways to deal with it.

This post was excerpted from Personal Finance For Beginners In 30 Minutes, Volume 1:
How to cut expenses, reduce debt, and better align spending & priorities
. “Jordan” is a fictional character used to illustrate personal finance concepts and spending patterns.