How to Dispute a Credit Card Charge

Has someone charged three hundred dollars at Critter Fritters when you don't even have a pet? Did the carpet company install a fuchsia shag instead of a beige berber? What do you do when you find charges on your credit card that you didn't make? What are your rights when it comes to a charge that you did make but are withholding payment on because goods and services weren't delivered as promised? During a lifetime of credit use, the chances of one or the other happening are pretty good. Know ahead of time what your rights and responsibilities are.

Disputing Fraudulent Charges

You can rest a little easier knowing that federal law is on your side. The Fair Credit Billing Act limits cardholders' responsibility for unauthorized charges to $50. If you do become aware of a credit card charge you didn't make, here's what you should do:

1. Call the credit card issuer immediately and explain what's happened. Provide all of the information you might have about how the card or card number may have been misused.
2. Be sure to review not only the current statement, but recent statements as well, for any additional unauthorized charges.
3. Be prepared to sign a form confirming that you did not make the charges.
4. If you haven't received confirmation (in writing or by phone) from the card issuer within a reasonable amount of time, contact the company again to make sure the charges have, in fact, been removed.
5. Stop using the card.
6. Check your other credit cards to make sure they have not been accessed.
7. Once the charge is removed, be sure to check your credit report with the three major credit bureaus (TransUnion, Equifax and Experian) to verify that your record has been updated and to see if any other fraudulent activity has taken place on your accounts.The Fair and Accurate Credit Transaction Act (FACTA) allows for all consumers to receive a free copy of their credit report from each of the three credit reporting bureaus every 12 months. Reports can be ordered through www.annualcreditreport.com or by calling 877-322-8228. You will not be able to receive a free report by contacting the credit bureaus directly.
8. Ask the credit card company to issue you a new credit card.
9. Throughout the process, keep a record of all phone conversations and the names of the representatives you spoke with. Also keep all letters, statements and other documentation together.

Disputing Charges When You're Dissatisfied

Let's say you paid for something with your credit card and now you want to withhold payment because you feel the product or service wasn't delivered as promised. Maybe you paid for roof repairs and it's still raining in your living room. Maybe you bought a new chair that collapsed as soon as you sat down. Here are the steps you'll usually have to take to resolve your issue:

1. Contact the merchant first. Many merchants are willing to replace an item, make a repair, perform a service again, or refund your money. Document your phone call and follow it up with a letter to the merchant confirming the details of the conversation.
2. If the merchant is unwilling to work with you, contact your credit card issuer as soon as possible. The card representative will need some basic information, such as the date and amount of the charge and why you wish to dispute it. Inform him or her of any attempts you've made to resolve the issue directly with the merchant.
3. Follow any instructions the credit card company gives you. For example, the representative may ask you to write a letter explaining the situation, or might want you to forward a copy of the letter you wrote to the merchant.

Every card issuer has its own procedure for handling disputes with merchants. You'll get more detailed information when you call your credit card company.

Whether you're dealing with an unauthorized credit card charge or one that you feel is unjustified, time is of the essence. Contact your credit card issuer as soon as you find your card missing or notice a mysterious charge on your statement. Likewise, contact the merchant as soon as you realize a product is defective, a service hasn't been performed as promised, or your bill is inaccurate. Diligence and good record keeping improve your chances for a satisfactory resolution.

The Fair Trade Commission (FTC) provides more information and tips for handling credit card disputes.

Credit Counseling Can Help You Deal with Your Debt

If you're deep in debt, you may feel like you're all alone. In reality, there are millions of consumers who, despite their best intentions, are in the same boat. Fortunately, there are professional credit counselors who can help you manage your debt and get your finances back on track.

Counselors Offer Help and Hope

Credit counseling is an option for consumers who want to repay their debt (as opposed to filing bankruptcy). The process typically begins with a discussion (in person, by phone, or via mail or the Internet) about your overall financial picture, including how much money you owe and to whom. You will likely discuss how you got into the situation you're in, with the goal of determining how you can avoid the problem in the future. For example, if you got behind on your bill payments because you got laid off, the counselor may encourage you to start building an emergency cash reserve when you're back on your feet.

You'll also go over your options for dealing with your current situation, one of which might be participation in a debt management plan administered by the credit counseling organization. Under a debt management plan, the organization negotiates with your creditors to accept reduced payments, eliminate or reduce finance charges, waive late and over-the-limit fees, and bring your account current. Some creditors do all these things, some do a few of them, and others do none, all depending on their internal policies. You then make one payment to the credit counseling organization each month, which it disburses to your various creditors. (This is not a consolidation loan.)

Different credit counseling organizations have different procedures, guidelines and fees. If you work with an organization that is a member of the nonprofit National Foundation for Credit Counseling (NFCC), counseling is usually free. Participation in a debt management plan may require a nominal set-up fee, but is more commonly limited to an average monthly fee of $14. Why so inexpensive? Because credit counselors don't rely on your fees alone to keep them in business; they receive a large portion of their funding from the creditors they mail payments to each month.

Is Credit Counseling Right for You?

If you're at the end of your rope, a credit counselor can provide the support you need. Participation in a debt management plan can mean you don't have to deal with (or dodge) calls from creditors and you don't have to juggle a stack of bills each month. Some organizations even help you reestablish credit once you've paid off your debt.

Of course, all of this does not come without a cost. Participation in a debt management plan can mean a "black mark" on your credit report because creditors are not receiving payments according to the terms of the original agreement. In reality, this may not be a reason not to participate -- if you're not able to make full and timely payments on your own, then you're going to end up with a mark on your credit report anyway.

For some, a debt management plan feels confining. You may have to live according to a fairly tight budget in order to make the monthly payment, and all your credit accounts (except, in some cases, one) might have to be closed.

And keep in mind that a debt management plan is not a quick fix. It takes many people three to five years to pay off their debt.

Many, if not most, of the counseling agencies that are members of the NFCC go by the name of Consumer Credit Counseling Service. Because there are so many different credit counseling organizations out there (some, members of the NFCC, and some not), be sure to ask about all applicable fees (for counseling and for participation in a debt management plan) before you sign up for services. Understand exactly what you're getting and what it's going to cost you. If you're interested, ask the organization about their education program. Some offices offer free personal finance classes.

Remember, you don't have to deal with bill problems all by yourself. For many consumers drowning in debt, credit counseling is the lifeline that helps them keep their head above water.

Manage Your Debt and Avoid Money Troubles

Good Debt, Bad Debt

Stories like the one above are not at all unusual. But not all debt is created equal. Some kinds of debt are actually OK:

• Your mortgage. Your home loan may very well be your biggest debt. But the interest you pay on your mortgage provides you with a tax deduction. Plus, over time you typically build equity in your property, which can be leveraged via a home equity loan or line of credit.
• Your student loans. Could you have gotten where you are in your career without your degree? Would you be earning what you are today without having gone to college? As burdensome as they can be, your student loans are probably worth every bit of work it takes to repay them. (And student loan interest may also be tax deductible.)

Some debt to minimize:

• Your auto loan. If you need a car and can't afford to pay cash, you'll need an auto loan. On the bright side, successful repayment of a significant debt like a car loan will help you build a positive credit record. Nonetheless, try to repay your car loan as quickly as your budget allows.
• Credit card balances. Credit can be a great financial tool, but with interest rates sometimes exceeding 20 percent, be careful how you use it. Typically, credit card debt becomes a problem when it takes you longer than three months to pay off your purchases.

How Much Debt Is Too Much?

A good rule of thumb is that your debt-to-income ratio (all your outstanding monthly debt payments including rent or mortgage) divided by your monthly gross income should not exceed 36-40 percent. For example, if your gross monthly income is $5,000, your total monthly debt payments (including rent or mortgage) shouldn't be more than $2,000. Most lenders will use this equation in deciding whether to extend you credit (though some lenders allow a larger debt-to-income ratio than others).

Ultimately, the appropriate amount of debt for you is what you feel comfortable with, not what any lender says you can afford. If debt keeps you awake at night or keeps you from reaching your other financial goals (like saving for retirement, buying a home or paying for your kids' education), then you've got too much debt. The less indebted you are to others, the more freedom you have.

Commit to Getting Out of Debt

Follow these guidelines for designing, and sticking to, a debt management plan:

1. Decide to do it. If your debt weighs you down and causes you stress, then commit to change things.
2. Create a plan. Create a budget so you know where your money goes and then devote all extra funds to paying down debt. Start with the debt that carries the highest interest rate first. Once you've paid that off, devote the extra money to the next highest-rate debt, and so on. As you pay off the balances, you may want to consider closing unnecessary accounts.
3. Change your habits. If you're a compulsive shopper or have a particular weakness (restaurants, jewelry, electronics), recognize it and make every effort to change the behavior and avoid temptation. Once you're out of debt, it will take ongoing effort to stay there.
4. Assess your situation. Keep track of your spending and your credit card balances every month. Look at your credit report to be sure it is accurate. Will it be a barrier to buying a car, a home or refinancing? Order copies of your credit report from each of the three credit reporting bureaus (Equifax, Experian, and TransUnion), as each may have a different version. The Fair and Accurate Credit Transaction Act (FACTA) allows for all consumers to receive a free copy of their credit report from each of the three credit reporting bureaus every 12 months. Reports can be ordered through www.annualcreditreport.com or by calling 877-322-8228. You will not be able to receive a free report by contacting the credit bureaus directly. (Unless you have been denied credit based on information obtained by a lender from the credit bureau.)
5. Stick to your plan. Making the decision to get out of debt is half the battle. If you stay committed, you'll succeed.

A Good Credit Report Gives You More Financial Muscle

If you thought you got the last report card of your life when you graduated from school, you might be surprised to find that you're being graded right now - on how you pay your bills. Just the way a good report card got you into the school or job you wanted, a good credit report can help you get the things you want now - a credit card, a mortgage or other loan, better terms on the money you borrow, an apartment, even a job.

Since good credit is such a valuable financial tool, you'll want to protect yours so that it's there for you when you need it someday.

How to Get Your Credit Report

Checking your credit report every year is a good idea; you can catch errors or fraudulent activity before they get out of hand. If you're planning to borrow money for a big purchase like a car or home, check your credit about six months before applying for the loan. Cleaning up or repairing your credit can take a minimum of 30 days and often much longer, so you'll want to know early if your report is less than glowing.

The three major credit bureaus that keep track of your credit history are Equifax, TransUnion and Experian. Lenders report your payment activity to the bureaus and are allowed to request and review credit reports when they are considering granting credit.

One credit report is usually all you need if you just want to get a general idea of how you rate. However, since the information in each of the three reports can vary, you should order one from all three bureaus if you want to know exactly what each one is reporting.

The Fair and Accurate Credit Transaction Act (FACTA) allows for all consumers to receive a free copy of their credit report from each of the three credit reporting bureaus every 12 months. Reports can be ordered through www.annualcreditreport.com or by calling 877-322-8228. You will not be able to receive these free annual reports by contacting the credit bureaus directly. However, if you've been denied credit within the last 60 days, you may be entitled to receive copies of your credit reports. Find out which of the three bureaus was used by your lender, and then contact that bureau for your report.

Experian
Equifax
TransUnion

P.O. Box 9532
P.O. Box 740241
P.O. Box 6790

Allen, TX 75013
Atlanta, GA 30374
Fullerton, CA 92834

(888) 397-3742
(800) 685-1111
(800) 680-7289

http://www.experian.com/
http://www.equifax.com/
http://www.transunion.com/

When you receive your report, review the following pieces of information for accuracy.

• Identifying information, such as your name, date of birth, current and previous addresses, Social Security number, current and previous employers, and your spouse's name.
• Credit information, such as accounts or loans you have open, outstanding balances, credit limits, and payment history.
• Public record information, such as bankruptcies, tax liens, and judgments (for example, child support payments you must make).
• Credit inquiries that indicate you recently applied for new credit. (Lots of recent inquiries, unless they're obviously related to shopping for the best terms on a loan, are considered a warning sign to lenders that you may be having money troubles.)

In general, negatives on your credit report would include:

• Any account in collections.
• Any court account (for example: liens, judgments, personal bankruptcies).
• Any items showing one or more late payments.
• Excessive creditor inquiries.

How to Clean Up Your Report

There are credit repair agencies that charge handsomely for the service of cleaning up your credit report, but according to the Federal Trade Commission (FTC), many of them make false claims. Besides, there's no need to hire someone to do what you can easily do yourself.

If your credit report is inaccurate, write to each credit bureau and include the following information:

• Your complete name.
• Your complete mailing address.
• Your birth date.
• Your Social Security number.
• The name and account number of the creditor and item you are disputing.
• The exact reason why you disagree with the information being reported.
• Your signature.

Include a copy of your original credit report with the letter, but keep copies of both for your records. You should receive a new, corrected credit report from the credit bureau after 30 days. If you haven't heard anything from them within that time frame, follow up with a second letter.

Just because your credit report works behind the scenes, don't forget to give it the attention it deserves. A good grade in "credit" is worth working for.

Financial Calculators Provide Quick Answers for Credit Card Users

Don't know which credit card is right for you? Not sure of the best approach to paying off your debt? Online financial calculators can answer these questions and many more. And they're fast and easy to use -- a big plus if you aren't great with numbers.

What Can Financial Calculators Tell You?

There are calculators for finding the answers to everything from "How much life insurance do I need?" to "How big of a mortgage can I afford?" With respect to credit cards, here are the fundamental questions a financial calculator can answer:

1. What impact do different interest rates have on my unpaid card balance?
2. What will it take (in monthly payments) to pay off my debt in a specific amount of time?
3. How long will it take to pay off my debt making a specific monthly payment?
4. Which is better, a higher-cost card that offers airline miles for dollars spent, or a lower-cost card that doesn't offer mileage?
5. Am I better off choosing a card with a lower interest rate or one with no annual fee?
6. Should I consolidate my debts?

To use the calculators, you'll need to come prepared with some key bits of information. For example, to find out what it will take for you to pay off your debt, you'll need to know how much you owe, what you plan to pay each month, what your interest rate is, whether you have an annual fee and how much it is, and in how many months you would like to be debt-free.

The calculation will then reveal how much you need to pay each month in order to get out of debt in the desired time frame. That number will change if the interest rate or your target date changes. That's the great thing about online financial calculators -- they give you the opportunity to change a figure here and there to compare scenarios.

Online financial calculators are great tools, but financial decisions aren't always black and white. While the numbers may clearly tell you to go one way, other considerations may suggest you go another. Be sure to think about all the factors that are important to you before making a choice. And if you do decide to implement a strategy to reduce your debt, be sure to also develop a plan for increasing your savings. Now that's a calculation that's fun to run!

You can find calculators at most financial Web sites. Just by entering the key words "financial calculators" in your favorite search engine, you can probably find what you need. Here are two to get started with: Yahoo Finance and Bankrate.com

Reputation, Not Just Rates, Important When Choosing a Credit Card

With so many credit card issuers clamoring to get their plastic in your pocket, how do you decide which offer to accept? You might think that the choice boils down to the best rates and lowest fees, but the lender's reputation - for fair prices, clear and upfront disclosures, and truly helpful customer service - is just as important as the credit terms. So how do you know which companies are reputable and which aren't?

You'd Better Shop Around If You Want a Card You Can Count On

Ask the same questions for every credit card you consider. If you're not happy with the answers for a particular company, don't do business with it.

• Have you heard of the company before?
• Do any of your friends or family use a card issued by this company?
• Does the company have a Web site? (Most reputable credit card companies do.)
• Does the company's Web site or promotional literature outline all of the card's key terms? (Such as the APR, annual fees, cash advance rates and fees, late and over-the-limit fees and grace period.)
• Are the finance charges, fees and other terms in line with other cards' costs and terms?
• Can you quickly and easily reach a live customer service representative when you call the company? (Try calling before you accept the card.)
• Can the representative answer all your questions to your satisfaction?

Card Issuer's Site and Sound Reveal a Lot

You can learn a lot about a credit card issuer on the Internet. First of all, if a company doesn't have a website, think twice about doing business with it. E-commerce has become such an accepted way of doing business; red flags should go up for any company that isn't online.

Assuming you do make it to a card issuer's website, be on the lookout for any signs that the company may not be on the up-and-up. Does the site have a professional look and feel? Is key information easy to find? Are credit card costs and terms displayed clearly?

Don't stop at the website. Call the card issuer's customer service line. Is your call answered promptly? Does the representative sound professional? Does he or she answer all of your questions directly?

If you feel uneasy about any part of your experience with the company, move on to another card issuer. With so many options out there, it's better to be safe than sorry.

Beware of Extra Fees for Card and Card Products

It's typical for credit card issuers to try to sell additional products or services to their cardholders. While most issuers are upfront about their products and prices, it's not unheard of for a particularly aggressive marketer to charge you for a product like credit protection (which is a type of insurance that pays the minimum payment on your credit card if you become ill or unemployed) that you didn't purchase or that you cancelled.

Another thing to be aware of is a company that requires you to pay a fee before it will send you the credit card. In most cases, you should refuse the card and look elsewhere for credit. If, however, you're having a difficult time establishing credit, you may not have a lot of options. In that case, check and double-check to make sure that the card issuer asking for the fee is a highly reputable one. Otherwise, you just might lose your money.

Federal Law Protects Consumers' Rights

Credit card companies are required by federal law to spell out all of the costs associated with the credit you are granted. This information should be included in any credit card offer you receive and on the back of the monthly statements. If you can't find information about a card's fees, be sure to talk to a company representative until you're satisfied. If that still doesn't reassure you, walk away and look into other credit card offers.

If you think you've been misled or deceived by a credit card company, you should immediately contact the Federal Trade Commission's Consumer Response Center at 877-FTC-HELP (382-4357).

When you give a credit card company your business, you're casting a vote of confidence. Make sure the company you choose deserves your business and your trust.

How to Choose the Right Credit Card

Once you've decided what you want in a card, choosing the best one is just a matter of comparing offers. You can narrow down your options by answering three questions.

Do you plan to pay off the card each month or carry a balance?

• If you plan to carry a balance from month to month (even if you don't plan on it but past behavior indicates you probably will), make a low annual percentage rate (APR) the single essential feature for any card you choose. APR is the annual cost of using the credit. The annual fee may also be a consideration, but if your balance is large enough (and the difference in interest rates is great enough), the savings you get from a lower interest rate would likely more than make up for it.
• If you won't be carrying a balance, the interest rate won't be important, so look for a card with no annual fee.
• Understand the difference between a credit card and a charge card before accepting either. A charge card does not allow you to carry a balance - you have to pay off your purchases in full every month - and charges you an annual fee in exchange for a variety of benefits, such as frequent flier miles or traveler's checks.

Do you need a reasonable long-term interest rate or the lowest introductory rate possible?

• If you plan to transfer a large balance from another card and pay it off over a short period, look for the lowest and longest-lasting "teaser" rate. Teaser rates typically last from three to nine months.
• If you're not sure you can pay off your balance during the intro period, or if you plan to use the card and carry a balance in the future, you may be better off choosing a card with a decent long-term rate than picking a card with an ultra-low teaser rate that skyrockets later on.

Do you want your card to offer special incentives, rewards or services?

• If you're going to use credit anyway, look for a card that gives something back. For instance, if you like to travel, consider a card that awards you with airline miles for making purchases or carrying a balance. If you plan to buy a car soon, you might find a card that offers a discount on a particular make of vehicle. There are also cards that offer points to be used to purchase all sorts of things at a discount. In other words, there's probably a card that offers some incentive or reward that would be useful to you.
• Don't spend money or carry a balance just to get the "prize." The important thing to remember with incentive cards is that you're spending real money to get those miles, gifts and discounts. If you also pay interest on your charges, you may end up spending more on that "free" plane ticket than you would have if you had bought it directly.

Now that you've answered the most important questions, you can shred the card offers that don't meet all your credit criteria, compare the terms (like interest rates, late fees and grace period) on the offers you have left, and choose the ideal card for you.

Establishing Credit in 3 Steps

There are lots of reasons why you might be looking to establish or re-establish credit. Maybe you're a recent college grad, a newly arrived immigrant, or someone who just went through a divorce. Or perhaps your dog used to eat your mail, causing you to pay your bills late...or not at all. Whatever the case, there are a few things you can do to establish credit even if you don't currently have any credit cards or loans.

Step 1: Open an Account

Open an account, preferably a checking account. By paying bills via check and not overdrawing your account, you begin to prove that you may be a good credit risk. Keep your monthly statements as proof that you're a good money manager.

Step 2: Get a Secured Credit Card

Secured debt is backed by some form of collateral (usually a savings account with the same institution that grants you the credit). The money deposited with the lender sits untouched unless you miss a payment or file bankruptcy, in which case the credit union or bank may be able to seize the assets in your account. This account gives the credit union or bank the confidence to take a "risk" on someone who doesn't have an established credit history.

"... there are plenty of companies that offer secured credit cards with no application fee"Don't be persuaded to pay a high fee just to gain access to a credit card -- there are plenty of credit unions and banks that offer secured cards with no application fee. Go to Consumer Action for information about building credit with secured cards, and to get a current list of available secured credit cards. If you have trouble getting a secured card on your own, as a last resort consider having one of your family members with good credit cosign your credit card application. Be aware that if you miss a payment, the credit union or bank would demand payment from your cosigner, guaranteeing, at the very least, a strained relationship between you and your family member.

Not everyone qualifies for a secured card. If you've filed bankruptcy recently, you may be rejected.

Step 3: Document Your Payments

"... you may be able to prove your creditworthiness by providing proof of timely bill payments."If you're already paying rent, utility bills, childcare expenses, student loans and so on, you may be able to prove your creditworthiness by providing proof of timely bill payments. Keep good records and ask for letters of recommendation from the individuals and businesses you make payments to. Then use them, plus proof of income, to convince a prospective lender that you are responsible enough to pay your bills in full and on time and would be a good credit customer.

A Few Final Words of Advice...

• Be patient. It takes time to establish credit.
• Always shop around for the right deal.
• Learn about credit products and terms, and your rights and responsibilities as a borrower. The best way to avoid being taken advantage of is by being well informed.
• Once you do get a credit card, make only small purchases on it -- ones you're absolutely sure you can repay on time.

Intro to Credit Cards

Unbiased Financial Information Provided by Financial Finesse

If you're like most consumers, you're eager to get a credit card. That's understandable -- they offer convenience (no need to carry around wads of cash), enable you to take advantage of opportunities (that TV you've been looking at just went on sale and you don't have your checkbook with you), and can get you through emergencies (try giving the tow truck driver an IOU when your car breaks down on the highway). Establishing credit is also a must if you plan to ever borrow money to buy a car or home. However, credit can also get you into trouble. At best, credit cards can make it difficult to stick to a budget. At worst, they can tempt you to overspend to the point of not being able to pay your bills. To enjoy the benefits of credit and avoid the potential pitfalls, you need to understand the basics of getting, using and managing a credit card.

Do You Want a Credit Card or a Charge Card?

With a traditional "credit" card, you charge items on your account and receive a bill later, which you have the option to pay in full or in part (at least as much as the "minimum payment due"). If you don't pay the account in full, the remaining balance will carry over to the next month and you'll be charged interest on it. This is referred to as revolving credit.

The other type of card, often referred to as a "charge" card, doesn't allow you to carry a balance from month to month; you have to pay off the total balance when you get your bill. These cards offer the convenience of plastic without the danger of getting into debt or paying high interest charges.

Both kinds of cards are offered under a variety of labels (gold, platinum, premier, and the like), each one offering different features and benefits. The gold and platinum types of cards are typically offered to consumers who have an excellent credit history.

Know Terms to Compare Card Offers

All credit cards come with a set of terms. These are, in essence, the "rules" for using the card. The terms must be disclosed in the card application literature; they're also on the back of every statement. Some of the most important terms you should be aware of are the interest rate, annual percentage rate, due date, grace period (the interest-free period of time between when you make a purchase and when you pay for it), cash advance rates and fees, the late fee and the over-the-limit fee. Always read the card terms carefully before you apply.

Don't Be Surprised by the Costs of Credit

Any credit card that allows a balance to be carried from month to month has an annual percentage rate (APR). The APR is a measure of the total yearly cost of credit (interest plus other charges). The periodic rate is the rate applied to your account balance to determine your finance charge for each billing period. Many cards also charge an annual membership fee that can range from $25 to $50, or more for gold, platinum and other "premium" cards. There will also be other fees for taking cash advances, making late payments and exceeding your credit limit.

Your Credit Limit Is What You Can Spend, Not What You Should Spend

Your credit limit is the maximum you are allowed to charge on your card, and is based on your financial background and credit history. If your balance exceeds your credit limit, you'll be assessed an extra fee each month until you pay off enough of your balance to bring it back down below the limit. To manage credit successfully, you need to make the distinction between the credit limit and the amount of credit you can afford. Just because the credit card issuer grants you a thousand-dollar limit doesn't mean you can afford it or should use it.

Choose a Card According to Your Payment Habits

Different cards fit different needs. Some charge lower interest rates but may carry an annual fee. These would be a good choice if you tend to carry a balance (the savings you get from the lower interest rate may exceed the annual fee). Many cards charge higher interest rates but don't impose an annual fee. These would be a better choice if you pay off your balance every month (if you don't carry a balance, you're not affected by the interest rate). Other cards offer rewards for certain levels of usage. These rewards (frequent flier miles or rebates for example) may be attractive to people who travel often for business.

Use Cards with Care to Protect Your Credit Rating

Using credit wisely means:

• Controlling your spending.
• Paying your bills promptly.
• Paying more than the minimum amount due.
• Keeping copies of your receipts and checking them against your monthly bill.
• Keeping a list of all your account numbers in case cards are lost or stolen.
• Guarding against card fraud and identity theft by cutting up your old cards and shredding statements and unwanted credit card offers.

How To Create a Budget

Creating a budget may not sound like the most exciting thing in
the world to do, but it is vital in keeping your financial house in
order. Before you begin to create your budget it is important to
realize that in order to be successful you have to provide as much
detailed information as possible. Ultimately, the end result will be
able to show where your money is coming from, how much is there and
where it is all going.

Here's How:

1. Gather every financial statement you can.
   This includes bank statements, investment accounts, recent utility
   bills and any information regarding a source of income or expense. The
   key for this process is to create a monthly average so the more
   information you can dig up the better.

2. Record all of your sources of income.
   If you are self-employed or have any outside sources of income be sure
   to record these as well. If your income is in the form of a regular
   paycheck where taxes are automatically deducted then using the net
   income, or take home pay, amount is fine. Record this total income as a
   monthly amount.

3. Create a list of monthly expenses.
   Write down a list of all the expected expenses you plan on incurring
   over the course of a month. This includes a mortgage payment, car
   payments, auto insurance, groceries, utilities, entertainment, dry
   cleaning, auto insurance, retirement or college savings and essentially
   everything you spend money on.

4. Break expenses into two categories: fixed and variable.
   Fixed expenses are those that stay relatively the same each month and
   are required parts of your way of living. They included expenses such
   as your mortgage or rent, car payments, cable and/or internet service,
   trash pickup, credit card payments and so on. These expenses for the
   most part are essential yet not likely to change in the budget.
   
   
   Variable expenses are the type that will change from month to
   month and include items such as groceries, gasoline, entertainment,
   eating out and gifts to name a few. This category will be important
   when making adjustments.

5. Total your monthly income and monthly expenses.
   If your end result shows more income than expenses you are off to a
   good start. This means you can prioritize this excess to areas of your
   budget such as retirement savings or paying more on credit cards to
   eliminate that debt faster. If you are showing a higher expense column
   than income it means some changes will have to be made.

6. Make adjustments to expenses.
   If you have accurately identified and listed all of your expenses the
   ultimate goal would be to have your income and expense columns to be
   equal. This means all of your income is accounted for and budgeted for
   a specific expense.
   
   
   If you are in a situation where expenses are higher than
   income you should look at your variable expenses to find areas to cut.
   Since these expenses are typically essential it should be easy to shave
   a few dollars in a few areas to bring you closer to your income.

7. Review your budget monthly.
   It is important to review your budget on a regular basis to make sure
   you are staying on track. After the first month take a minute to sit
   down and compare the actual expenses versus what you had created in the
   budget. This will show you where you did well and where you may need to
   improve.

Budget Isn't a Bad Word

When you hear the word “budget”, what does it mean do you? If you’re
like most people, you probably think of it as an unpleasant activity
that means you have to financially deprive yourself. This couldn’t be
further from the truth, yet this is the typical reason that most
budgets fail.

Think of it as Managing Money

Your budget isn’t created to make your life miserable; it is simply
a guide to help you manage your money. We all have income, and we all
have expenses, and without proper allocation of the money something may
fall short. The goal when creating a budget is to lay the foundation
for allocating what portion of your income is required to cover each
expense.

A Budget is Like a Recipe

If you are going to bake a cake from scratch, you’ll probably want
to use a recipe to ensure it bakes properly and tastes delicious. A
recipe is simply a list of required ingredients along with the
quantity, followed by instructions on how to add them together. If the
recipe is followed properly, you will be rewarded with a tasty final
product.

Your personal finances aren’t much different. Your income is the sum
of ingredients, and your expenses are the quantities to use, while the
budget tells you how to put it all together. With a cake recipe, if
you’re short an egg or put in too much flower, the cake will not taste
right or even bake properly at all. The same goes for your finances. If
you spend too much money on one expense it may make you short on
another expense, which would yield results that are less than expected.

Take Control of Your Money

When you create a budget, you take control of your money so that it
doesn’t control you. Don’t let the negative image of a budget making
your life miserable keep you from taking control. You can still enjoy
yourself and even include discretionary or “fun money” in your budget.
The goal is to simply create an outline for your money that puts you in
control so that it doesn’t control you.

Ten Ways To Cut the Cost of Your Homeowner's Insurance

Have you noticed that the cost of your homeowner's insurance coverage
has increased significantly over the last several years? Policies that
cost $325 just a couple of years ago are often two to three times that
amount now, putting the squeeze on many homeowners' budgets. Here are
ten ways to minimize the cost of your homeowner's insurance.

1. Raise Your Homeowner's Insurance Deductible
   

   Your deductible is the amount of risk you agree to accept before the
   insurance company starts paying on a claim. With the cost of
   homeowner's insurance escalating, it no longer makes sense to let the
   insurance company assume all the risk. If you have a low deductible of
   $50 to $100, consider raising it to at least $500 to $1,000. You could
   save up to 25% on your premiums.

   
   Some companies are offering deductibles equal to 1% of the insured
   value of your home ($1,000 deductible on a $100,000 home). It that
   seems like a lot of money to pay in the event of a claim, consider
   this: the trends in homeowner's insurance are for insurance companies
   to severely penalize customers who file one or more small claims. Often
   the premiums are jacked way up or the policy is cancelled, and when the
   customer looks elsewhere for coverage, they may find it costs them
   three times what they were paying. We should change our perception that
   insurance of any type is intended to cover all of our expenses when we
   incur a claim. Those days are over. Think of insurance as risk sharing.
   How much risk are you willing to assume?

   
   

2. Combine Your Homeowner's Insurance and Auto Insurance Policies
   

   
   Consider buying your homeowner's and auto insurance policies from a
   company that offers both. Some companies offer discounts of 5 to 15% if
   you buy both types of coverage from them. Check around and make sure
   the price is lower than buying the two policies from two different
   companies before making this move.
   

   
   

3. Ask About Other Homeowner's Insurance Discounts
   

   Make sure you're receiving all the discounts for which you're
   eligible. For example, discounts exist for smoke detectors, deadbolt
   locks, security or fire alarm systems, fire extinguishers in the home,
   etc. If you're over 55 and retired, you may qualify for an additional
   10% discount.
   

   
   

4. Don't Buy Homeowners's Insurance Coverage You Don't Need
   

   It makes no sense to buy insurance to protect yourself against risks
   you are unlikely to encounter; for example, earthquake coverage in a
   non-earthquake zone, or a jewelry floater to your policy if you don't
   own expensive jewelry.
   

   
   

5. Make Your Home a Better Insurance Risk
   

   Ask your insurance agent what you can do to make your home less
   expensive to insure. Making changes that reduce the risk of damage in
   windstorms and other natural disasters is one example. Another is
   updating old wiring or heating systems, which may reduce your risk of
   fires and therefore reduce your premiums.
   

   
   

6. Know What Your Homeowner's Insurance Policy Covers
   

   Your home is your biggest investment. Make sure it's adequately
   protected from risks you cannot afford to cover yourself and that it
   covers any home improvements you've made, major purchases, and
   increased costs of rebuilding.
   

   
   

7. Keep Your Insurance Coverages Up To Date
   

   Once a year, before your homeowner's insurance policy is due to
   renew, dig out the current policy, read through all the details, and
   call your insurance agent to discuss any changes in your situation that
   occurred during the year.

   
   
   

8. Avoid Risks That Insurers Shun
   

   
   Insurers are shying away from some risks. For instance, owning certain
   types of dogs (Rottweilers, Doberman Pinschers, Pit Bulls), can limit
   or void your policy. Owning a swimming pool or a trampoline can
   increase your cost of coverage. Read all the fine print in your policy
   under the "Conditions and Coverages" sections so you know all the
   things that are excluded from coverage. You may opt to buy additional
   coverage to protect yourself from certain exposures.
   

   
   

9. Improve Your Credit Score
   

   Insurance companies are increasingly using credit information to
   price insurance policies. Don't have too many open credit accounts,
   don't charge close to the limits on your credit cards, and pay all your
   bills on time to keep your credit score healthy.
   

   
   
   

10. Shop Around for Homeowner's Insurance
    

    Shop around for homeowner's insurance rates but keep in mind that
    you may be receiving a longevity discount if you've been with your
    current insurer for several years. Typical discounts are 5% if you've
    been with the company for three to five years, and 10% for six years or
    more. Get quotes from three agents, and take any longevity discounts
    with your current insurer into consideration when you compare prices.
    Your state insurance department may have rate comparison information
    available for your state. See www.consumeraction.gov/insurance.shtml.
    Before you switch insurers, heck out their financial health at
    www.ambest.com or www.standardandpoor.com.

Save Money on Your Home Expenses

You can easily save thousands of dollars a year with very little
effort by following even a few of the cost-saving measures in the "Save Money"
series. The more money-saving measures you adopt, the more money you'll
save. Potential savings will vary, depending on your personal
situation. See the links to the right for more money-saving ideas.

Save Money On Your Mortgage

• Consider
  refinancing your mortgage. For every $10,000 of your mortgage loan, 1/2
  % difference in the interest rate saves you over $40/year or
  $3.40/month in interest expense. A $100,000 loan at 9 1/2% refinanced
  at 7 1/2% saves $142/month or $1,704/year, for a total of $50,991 over
  the life of a 30-year mortgage. Potential Money Savings: $1,700/yr.

• 
  For even more dramatic long-term savings, consider a 15-year mortgage
  rather than a 30-year mortgage. A $100,000 mortgage at 9 1/2% over 15
  years saves $114,747 over the life of the loan compared to a 30-year
  mortgage at the same interest rate. At 7 1/2%, the savings between a
  30-year and 15-year mortgage of $100,000 would be $84,854. A 9% loan of
  $100,000, refinanced for 15 years at 7 1/2% would add $86/month to your
  payment but would save you a whopping $135,845 over the life of the
  loan. Potential Money Savings: $84,000-136,000
• You
  can achieve similar results by paying an extra principal payment on
  your 30-year loan each month. (In the early years of a loan, the
  principal portion of your payment is very small. On a 30-year $100,000
  loan at 7 1/2%, the monthly principal payment in the first several
  years is approximately $75 to $85/month).Potential Money Savings: $85,000-136,000.

• Still another way to achieve these results is to pay one half of your monthly mortgage every two weeks. Potential Money Savings: $85,000-136,000.

Save Money On Utilities - Electricity

• Install
  the new type of fluorescent bulbs in lights you leave on for long
  periods. They provide four times as much light and last ten times
  longer than incandescent bulbs. Potential Money Savings: $10-$50/yr.

• 
  Lower the temperature on your hot water heater to between 110 and 120
  degrees. It's not necessary to have it any hotter and wastes energy. Potential Money Savings: $20-40/yr.

• Find
  out if your utility company offers free energy audits, where they
  inspect your home for energy effectiveness and recommend inexpensive
  ways to cut energy costs, such as insulating hot water heaters,
  weather-stripping, etc. Just insulating your hot water heater could
  save you $25 a year. Potential Money Savings: $50/yr.

• 
  Set thermostats no higher than 68 degrees in winter and no lower than
  78 degrees in summer. Turn your heat down even further at night or when
  you're not home (unless you have a heat pump, which operates more
  efficiently at one consistent setting). Each extra degree in winter can
  increase heating costs by 3%. In summer, each degree can raise cooling
  costs by 6%. Potential Money Savings: $325 to $500/yr.

• Cut
  back on the use of your clothes dryer. Not only is it a big energy
  drain, it can also suck heated air out of your house very quickly in
  winter. Hang clothes on a clothes rack to dry and use the dryer for
  towels and other heavy items. Potential Money Savings: $25-50/yr.

• Use your microwave instead of your oven whenever possible and save up to 50% in energy costs for cooking. Potential Savings: $50/yr.

• Save Money On Utilities - Water

• Always do full
  loads of laundry. A typical full load uses about 21 gallons of water. A
  small load uses 14 gallons. Several small loads use considerably more
  water than one or two large loads. Over the course of a year, this adds
  up. Potential Money Savings: $25-$125/yr.

• Run
  your dishwasher only when you have a full load. Let the dishes air-dry
  instead of using the heat cycle. An average dishwasher costs $60 to
  $100 per year to run. Potential Money Savings: $35-55/yr.
• Fix running toilets or leaking faucets promptly. A continuously running toilet can use more than 8,000 gallons of water a year. Potential Money Savings: $25-125/yr.
• Install
  flow restricting shower heads. A family of four can save 8,000 to
  12,000 gallons of water a year. You not only save on the cost of the
  water, but also the cost of heating it. Potential Money Savings: $100-$300/yr.$
• Add
  fabric softener to your laundry at the appropriate point in the cycle
  instead of adding it at the end and running another rinse cycle, which
  can use up to 10 extra gallons of water. Figure out how much time it
  takes your washer to reach the rinse cycle, and set a timer so you can
  add softener at the right time. Potential Savings: $25-100/yr.
• Use warm or cold water for washing clothes, and always rinse in cold water. Potential Savings: $50/yr.

Save Money On Utilities - Other

Stick
to basic phone service. Extra services like call waiting and call
forwarding can almost double your costs for phone services. Potential Savings: $168/yr.

If
you can live without cable television, you can save between $300 and
$600 per year. If you can't live without it, get basic service only.
You can rent a lot of movies for the extra $150 to $600 per year you
pay for movie channels like HBO, Showtime, etc. Potential Money Savings: $144-700/yr.

Plant
perennial flowers instead of annuals. You incur a one time cost and
enjoy the flowers for years, with little additional effort or money.
Annuals, on the other hand, require an outlay of cash and effort every
year. Potential Money Savings: $100-$300/yr.

If
you live in a cold region of the country, heating costs are a major
expense. Tips on shaving some significant savings off your heating bill
are covered in Save Money on Heating Costs.

The Fees Involved in Buying a Home

When buying a home, most people focus on how much it costs and what
interest rate they can get on the loan. While that is certainly very
important, the other fees that come with buying a home are often
overlooked. Here is a list of the most common fees involved when buying
a home.

• Private mortgage insurance: If you only provide a small down
  payment, you may be required to purchase private mortgage insurance.
  Sometimes this means you are required to pay a full year’s worth at
  time of purchase, or it will be rolled into your monthly payment.
  
  
  
  
• Homeowner’s insurance: When borrowing money to purchase
  a home, insurance is required. In many cases, this means buying a
  policy before closing on the home.
  
  
  
  
• Title insurance: This insurance covers you in the
  unlikely case that the person who sold you the house didn’t actually
  own it or if information on the title was false.
  
  
  
  
• Appraisal fees: An appraisal is needed so that a current fair market value for your home can be established for tax purposes.
  
  
  
  
• Escrow fees: During the closing process, an escrow
  account will usually hold the money while the buyer and seller finalize
  the agreement. In addition, you’ll probably have a portion of your
  monthly mortgage payment go into escrow in order to pay for property
  taxes and insurance.
  
  
  
  
• Points or origination fees: An origination fee is paid
  to the bank or lender for their services in creating the loan. A point
  is 1 percent of the loan, and is often worked into the total cost of
  the loan.
  
  
  
  
• Credit report fees: In order to secure a loan, the lender will require a verified credit report.
  
  
  
  
• Document preparation fees: The lender or broker will usually have a fee to cover the preparation of the required documents for the loan.
  
  
  
  
• Survey fee: If an existing survey of the land cannot be
  obtained, a new survey will have to be conducted in order to determine
  exact boundaries of the property.
  
  
  
• Pest or mold inspection: While not generally required
  for a brand new home, the purchase of an older home may require an
  inspection for pests such as termites as well as mold. This requirement
  can vary by location.
  
  
  
  
• Property taxes: In some cases, you may owe some
  property taxes immediately if the seller has already paid taxes for a
  time period where you will be the owner. Also, there may be other
  municipal taxes or fees for sewer or water that need to be taken care
  of.
  
  
  
  
• State recording fees: Depending on where you live, there may be a fee required for recording and holding the information regarding the sale.
  

Keep in mind that not all of these fees will always apply. Some may
be waived or paid for by the lender or seller. Even so, it is important
that you understand what the fees are and who is responsible for paying
them before finalizing the purchase of your new home.

How Much Home Can You Afford?

When the time is right to purchase a home, the first question you
need to be able to answer is how of a home you can afford. Knowing the
answer to this question will allow you to focus your search on homes
within the correct price range even before applying for a mortgage.

Debt-to-Income Ratio

The most important factor that lenders use as a rule of thumb for
how much you can borrow is the debt-to-income ratio. This ratio takes
into account a mortgage payment plus your other personal debt you are
carrying such as car loans, credit card debt and student loans. The
ratio is expressed in a percentage of how much of your income is being
used to make debt payments.

The typical guideline used by most lenders is a ratio of 36% as the
upper limit. Ratios above this may carry a higher interest rate or be
denied altogether. Lenders also like to see that generally no more than
28% be dedicated to all housing expenses.

Calculating Your Debt-to-Income Ratio

The first thing you need to do is determine your gross monthly
income. This is the income before taxes and other expenses are taken
out. If you are married and will be applying for the loan jointly you
should add together both incomes. Then take this number and multiply it
by 0.36. For example, if you and your spouse have a combined gross
monthly income of $7,000:

$7,000 x 0.36 = $2,520

This means that your total monthly debt payments should be no more than $2,520, mortgage payment included.

The next step is to determine your total non-mortgage debt payments
such as monthly credit card or car payments. For this example we will
assume your monthly debt payments come to $950. Computing the maximum
mortgage payment:

$2,520 - $950 = $1,570

From this example we have determined that the most home you can
reasonably afford is one with a mortgage payment of $1,590 which would
include property taxes, insurance and possibly private mortgage
insurance.

Remember, This is Only a Rule of Thumb

It is important to remember that just because the bank will lend up
to that amount doesn’t mean that is what you can truly afford. This is
simply a guideline you can use when shopping for a home so you are
concentrating on homes that are within your price range. In reality
your specific situation will dictate what type of home and mortgage
payment will be best for you.

How can I determine which IRA is best for me?

People often wonder what type of IRA is best. Both the Traditional
and Roth IRAs have significant tax advantages, but in some situations
one may be better than the other. Since we can't predict what taxes
will be like 20 years from now, if you have the ability to contribute
to both types of IRAs, that might be a good idea. By diversifying your
tax liabilities, you can be prepared for any significant changes in tax
rates by the time you reach retirement.

Answer:

Traditional IRA

The benefit of a Traditional IRA
is that the contributions you make can be tax-deductible in the year
that you make the contribution. That means if you make a $4,000
contribution into a Traditional IRA this year, you can reduce your
current taxable income by $4,000. For individuals who are in a higher
tax bracket, this can be a reasonable savings.

Since the contributions are done on a pre-tax basis, that means you
will be taxed in the future when you withdraw money from the IRA. This
money is then taxed as ordinary income. If you expect to be in a lower
tax bracket when you retire, this means you see the greatest tax
benefits from a Traditional IRA. Keep in mind that you must begin
taking required minimum distributions at age 70 ½.

Roth IRA

You can think of a Roth IRA as the opposite of a Traditional IRA in
terms of taxation. With a Roth IRA, your contributions are made on an
after-tax basis, which means there is no current tax benefit to you
when you make a contribution. Unlike a Traditional IRA, you can make
qualified distributions from the Roth IRA tax free. This typically
benefits those who expect to be in a higher tax bracket upon retirement.

Additionally, Roth IRAs do not require that you take required
distributions upon reaching age 70 ½. This can be increasingly
important as people are living and working longer. Also keep in mind
that there are income limitations that may prohibit higher income
individuals to participate in a Roth. These income limits are slated to
be lifted in the year 2010.

Finding a Lost Pension

Have you worked for a company that entitled you to a
pension benefit that has since gone out of business and wonder how to
collect your money? It may seem impossible to track down the old
pension provider but there is a valuable resource available to the
public in the form of the Pension Benefit Guaranty Corporation.

You can contact the PBGC in a number of ways:

By Mail:

The Pension Benefit Guaranty Corporation

Missing Participant Program

1200 K Street N.W.

Washington, DC 20005-4026



By Phone:

(800) 326-LOST



By Internet:

www.pbgc.gov

When you do contact the Pension Benefit Guaranty Corporation it is
important to have as much information as possible that can help them
track down your benefit. You will want to provide them with your full
name, address, phone number, social security number, date of birth and
the name and location of the employer in question. Additionally, if you
have any documents from the plan itself be sure to include the
nine-digit Employer Identification Number (EIN) and the three-digit
plan identification number.

How can I determine which IRA is best for me?

People often wonder what type of IRA is best. Both the Traditional
and Roth IRAs have significant tax advantages, but in some situations
one may be better than the other. Since we can't predict what taxes
will be like 20 years from now, if you have the ability to contribute
to both types of IRAs, that might be a good idea. By diversifying your
tax liabilities, you can be prepared for any significant changes in tax
rates by the time you reach retirement.

Answer:

Traditional IRA

The benefit of a Traditional IRA
is that the contributions you make can be tax-deductible in the year
that you make the contribution. That means if you make a $4,000
contribution into a Traditional IRA this year, you can reduce your
current taxable income by $4,000. For individuals who are in a higher
tax bracket, this can be a reasonable savings.

Since the contributions are done on a pre-tax basis, that means you
will be taxed in the future when you withdraw money from the IRA. This
money is then taxed as ordinary income. If you expect to be in a lower
tax bracket when you retire, this means you see the greatest tax
benefits from a Traditional IRA. Keep in mind that you must begin
taking required minimum distributions at age 70 ½.

Roth IRA

You can think of a Roth IRA as the opposite of a Traditional IRA in
terms of taxation. With a Roth IRA, your contributions are made on an
after-tax basis, which means there is no current tax benefit to you
when you make a contribution. Unlike a Traditional IRA, you can make
qualified distributions from the Roth IRA tax free. This typically
benefits those who expect to be in a higher tax bracket upon retirement.

Additionally, Roth IRAs do not require that you take required
distributions upon reaching age 70 ½. This can be increasingly
important as people are living and working longer. Also keep in mind
that there are income limitations that may prohibit higher income
individuals to participate in a Roth. These income limits are slated to
be lifted in the year 2010.

What is a Traditional IRA and Who Should Have One?

A traditional IRA (individual retirement account) is an account that
is used to save pre-tax dollars for use in retirement. An IRA can be
opened at a variety of places such as a brokerage, mutual fund company,
or even at your local bank. The money in the account can generally be
invested in stocks, bonds, mutual funds, or CDs, subject to the
availability of products within your account.

The Pre-Tax Advantage

The primary benefit of a traditional IRA is that in most cases, the
contributions are made on a pre-tax basis. This means that when you
deposit money into the IRA, you can deduct that amount from your
taxable income. This results in paying less income tax for the year.
For 2007, the maximum contribution to a traditional IRA is $4,000, and
$5,000 if you are age 50 or older.

In addition to receiving the tax deduction up front, the money in
the account grows tax-deferred. Any interest or capital gains from the
investments are not taxed when the gains are realized. Instead, they
are deferred until money is withdrawn from the IRA, at which point the
money is taxed as ordinary income.

Eligibility Requirements

Anyone with earned income is eligible to open a traditional IRA, but
there are some restrictions as to who can deduct the contributions.
There are income limits that are used to determine how much of the
contributions are deductible, if any at all.

If you are currently covered by a retirement plan at work in 2007,
deductibility for traditional IRA contributions are phased out if your
modified adjusted gross income is:

• More than $83,000 but less than $103,000 if married and filing a joint return
  
  
  
• More than $52,000 but less than $62,000 for a single individual or head of household
  
  
  
• Less than $10,000 for a married individual filing a separate return
  

If you live with your spouse or file a joint return, and your spouse
is covered by a retirement plan at work but you are not, the deduction
is phased out if your modified adjusted gross income is more than
$156,000 but less than $166,000.

Distribution Requirements

One of the potential disadvantages of a traditional IRA is the
forced distribution that must begin at age 70 ½. Even if you don’t need
the money, if you do not take at least the required minimum
distribution (RMD) each year, you are subject to stiff penalties. In
addition, withdrawals made prior to turning age 59 ½ are subject to an
early withdrawal penalty in addition to taxes owed.

Is a Traditional IRA Right for You?

If your employer doesn’t offer a retirement plan, then a traditional
IRA is generally your best option for saving pre-tax money for
retirement. Keep in mind that depending on whether or not you’re
married and if your spouse is covered by a retirement plan at work, you
may be subject to income limitations.

For many people, once they reach retirement, they find themselves in
a lower tax bracket than when they were employed. This means you
receive a greater tax break on the contributions during your working
years, and later in life when you are not working and withdraw this
money, it is taxed at a lower rate. Unfortunately, it is impossible to
predict what will happen to tax rates in the future, which is why it is
important to have multiple sources of retirement savings.

What is a 401(k) Plan?

Don’t let the cryptic name of the plan confuse you, these plans are
actually fairly easy to understand. A 401(k) is a retirement plan
offered by some employers in the United States. The plan received the
name from the section of Internal Revenue Code it was named after.

Tax Benefits

One of the largest benefits of a 401(k) plan is how contributions
are made on a pre-tax basis. As an employee, you are allowed to make
pre-tax contributions through salary deferral into the plan. Since
these contributions are done on a pre-tax basis, you do not pay any
current income tax on the money that is deferred into the plan.

In addition to reducing your tax liability through contributions,
the money that is saved in the plan can earn interest and continue to
grow tax-deferred. You are only taxed on the money you withdraw from
the plan at a later date as ordinary income.

The Employer Match

Some companies offer an additional benefit in these plans in the
form of a company match. This means your employer will contribute
additional money into your plan that matches a portion of your
contributions. Some employers match dollar-for-dollar up to a certain
percentage of pay while others match a specified percentage of your
contribution.

In addition, the company may have a vesting schedule in place that
requires you to work for the company for a given length of time before
you can collect the matched money. The vesting period can be on a
graduated scale or a one-time length of service requirement.

Investment Choices

A 401(k) plan allows you to invest money for retirement in a number
of ways. These may include mutual funds that invest in the stock, bond
or money markets, annuities or guaranteed investment pools, company
stock or even self-directed brokerage accounts. Most plans will offer a
selection of various investment options that will allow you to create a
suitable retirement portfolio.

Withdrawals

Money can generally be withdrawn from a 401(k) on five different occasions:

• Termination of employment
  
• Disability
  
• Reaching age 59 ½ (or 55 in some cases)
  
• Retirement
  
• Death

It is important to note that in some cases if money is withdrawn
from these accounts before reaching age 59 ½ the IRS will issue a 10%
early withdrawal penalty. Outside of the five qualified distribution
events you may be able to access a portion of your money if your plan
allows loans.