Financial literacy...not just for bookworms

In a recent report referenced by Southern Methodist University, in a study called “Economic Factors and the Debt Management Industry” by Richard Briesch PhD, 41 percent of households give themselves a C, D, or F in financial literacy.

That’s not good.

What’s your level of financial literacy?

1. 57 percent of households do not have a budget. DMB Financial starts every engagement with clients by jointly developing a budget. Knowing where you are, where you begin, is the first step towards better financial literacy.
2. 32 percent of households admit they have no savings. DMB Financial helps you set up an independent savings account at an FDIC insured institution. This is your savings account. It holds your savings. Creating a savings mechanism is a critical. It gives you the tools to make good financial decisions. You have a budget and, over time, develop a healthy savings amount. Now you just have to put that plan into action.
3. 77 percent of households admit they’re saving less this year than they saved last year. Even in tough economic times, with a good budget and the right savings plan, you can improve your savings situation over last year. The average DMB Financial client is saving over $700 a month by the time they graduate our debt settlement program! That’s amazing, especially considering the average income is around $50,000 a year.
4. There is no long-term plan for wealth creation. Rich people have financial plans, investments, and advisors. Are financial plans, investments, and advisors only for rich people? Or, are those people rich because they have a financial plan, investments, and advisors! Many graduating DMB Financial clients transition to our partner’s financial planning services. They start retirement savings, college funds, and some even start buying stocks and bonds. In just a few short years they go from being buried in debt to having a plan that gets them to $100,000 in the bank or more. Hello retirement. Hello paying for kids’ college. Hello new home.

Financial literacy isn’t something just for the rich and famous. DMB Financial enters every client into its 36-month financial literacy series of email newsletters. We partner with a major financial planning service. They provide our clients with free financial planning consultations to help identify their goals, their dreams, and put a plan in place to reach them.

Get out of debt. Then create wealth. Come join the financial literate!

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For a free debt analysis and preliminary budget, call a Program Consultant at (866) 869-6959. You’ve got nothing to lose, except the debt.

This article is for informational and educational purposes only.  It is not intended to provide legal, tax or financial analysis.  Please consult your attorney, accountant or tax advisor if you have legal, financial planning, or tax related questions.

Times are tough, which means more individuals will find themselves requesting financial help from a family member. Before you consider writing a check for a family bailout, take steps to help protect yourself and your relationships. The more you can do to clarify your agreement and establish guidelines for repayment, the better off you will both be.

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Know the risks of intra-family lending

Family loans can put relationships at risk by creating an imbalance of power. The lender can feel unfairly treated if the borrower fails to repay or appears to lead an extravagant lifestyle. The borrower may resent the demands of a repayment schedule and the extra financial scrutiny that is tacked onto a family loan. Both parties need to be aware that borrowed money can quickly become the elephant in the room, creating rifts in families.

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Put it in writing

If you decide to go through with a family loan, as the lender, it’s up to you to determine the terms of the arrangement. Both sides benefit when a signed written contract is established. As the lender, you should create a schedule of monthly payments and the level of interest, if any, that is applied to the principal. That way, the borrower understands your expectations for repayment and you have something to point to if the terms are not met.

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Consider a third-party middleman

You don’t have to go it alone. There are companies out there that administer family loans for a fee. With this kind of arrangement, you determine whatever interest rate you’d like to charge, but the borrower will also be required to pay the administrative loan fees, which can add up rather quickly. You may consider this a small price to pay for the reassurance that your private loan is repaid through monthly payments that are conveniently and automatically deducted from a checking account. Third-party loan administration beats having to drop hints about a late payment at the next family gathering. If the amount being loaned is significant and you want an airtight agreement, consult a lawyer to draw up paperwork — but prepare yourself for an uphill emotional and legal battle if your beloved borrower defaults.

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Avoid tax problems

If you keep your loan under $10,000, the IRS won’t meddle in your family loan. But once the dollar amount exceeds this threshold, your family loan is a public matter that is subject to income tax. As the lender, you will be required to report earned interest as taxable income. If the borrower defaults on the loan, he or she may be responsible for income taxes on the balance. Talk to a tax specialist and determine your tax obligation to help avoid trouble.

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Only lend what you can afford to lose

Even if your family loan has been drawn up with legal paperwork, it can be difficult to follow through on agreed-upon default procedures when family is at stake. Therefore, lend only what you can reasonably afford to lose. Still, you should do what you can to require repayment by outlining your expectations if payments stop or other trouble arises.—
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Get advice from a neutral financial expert

A financial advisor can help you determine whether you can afford to extend a loan to a family member with no guarantee of repayment. A financial advisor is also a great resource to help borrowers gain better control of their spending and avoid the problems that put them in their dire situation in the first place.

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This column is for informational purposes only. The information may not be suitable for every situation and should not be relied on without the advice of your tax, legal and/or financial advisors. Neither Ameriprise Financial nor its financial advisors provide tax or legal advice. Consult with qualified tax and legal advisors about your tax and legal situation. This column was prepared by Ameriprise Financial.

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Financial planning services and investments offered through Ameriprise Financial Services, Inc., Member FINRA & SIPC.

© 2009 Ameriprise Financial, Inc. All rights reserved.

File # 82763

3/09

If retirement is in your plans during the next two-to-three years, it is clear that the dramatic market downturn that started in late 2007 could not have come at a worse time. Like many in this situation, you may have found that your retirement nest egg is worth less than it once was, maybe a lot less. Can you still salvage your original plans for retirement?

It is possible, but it may take a bit more work to determine how you can make it happen. Some changes to your initial retirement strategy may be in order to recover some of the losses in your retirement savings. One lesson of today’s market environment is that the closer you get to your dreams/goals (whether for retirement, college or any other major goal) it may be wise to reduce the portion of your portfolio invested in the stock market.

Today’s reality may be reduced retirement savings compared to what you might have expected a few years ago. You also may want to consider other steps that will allow you to maintain your plans for retirement, possibly with some minor modifications. Consider the following options, or combine some of the strategies together.

Boost your ongoing retirement plan contributions

One solution to combat low investment returns is to start saving more money. For example, if you were investing $250 per month in an IRA and at one time estimated you could earn 10 percent per year, you might consider that to be an unrealistic return expectation in today’s environment. If you adjust your return assumption to a more attainable 7 percent per year, you would need to make monthly contributions of $300 to accumulate a comparable amount of savings after ten years. If your expectations for investment returns are more conservative given recent market performance, making larger contributions can help overcome some of the difference.

Revisit the timing of your retirement

One reality for many individuals is that your retirement may need to be delayed and you may need to work longer. This can be beneficial by allowing you to continue earning income and accumulate additional retirement savings before you actually retire.

Alternatively, you can consider taking on part-time employment or consulting work to help supplement your income to decrease the amount of money you need from your retirement savings.

Reconsider the cost of your retirement

What were your plans for retirement? Did they involve significant expenses for a new retirement home or vacations on a regular basis? Did you envision a life of relative luxury in retirement? It might be necessary to scale back your plans if your retirement portfolio has been losing ground in recent years. If you can’t make up your losses by the time you leave the workforce, it is important to revisit your retirement income and what you can afford to withdraw from your savings. Avoid taking too much money out of your savings in the early years of retirement and risking a potential shortfall as you grow older. Some ways to cut your monthly expenses include: refinancing your mortgage (if you have not paid off the loan on a house), downsizing your home and cutting back on extravagances such as high priced vacations or daily lattes at Starbucks.

Become a tax-efficient investor and spender

Managing your retirement assets in a tax-efficient way can make a significant difference. For example, many retirees forget that withdrawals from their workplace retirement savings are almost always taxable, at their ordinary income tax rate. But if you have dollars saved in a taxable account (investments that are not in a tax-deferred savings vehicle), those should be tapped first when you retire. There is likely to be little or no tax on withdrawals. At the same time, dollars in tax-advantaged accounts (like IRAs or your workplace plan) can continue to grow in value with no current tax impact. This should help you stretch the value of your nest egg, especially when nest eggs are decreasing in size. A financial planner can help you work toward your retirement goals.

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This column is for informational purposes only. The information may not be suitable for every situation and should not be relied on without the advice of your tax, legal and/or financial advisors. Neither Ameriprise Financial nor its financial advisors provide tax or legal advice. Consult with qualified tax and legal advisors about your tax and legal situation. This column was prepared by Ameriprise Financial.

Financial planning services and investments offered through Ameriprise Financial Services, Inc., Member FINRA & SIPC.

© 2009 Ameriprise Financial, Inc. All rights reserved.

File # 84848

6/09

As DMB clients bring closure to their debt settlement programs and move to the next chapter in their lives, many will begin the arduous task of, once again, juggling debt. The trick is keeping it in check.

Don’t avoid the B-word

The best way to start reducing debt is to set up a budget. It’s not a punishment; it’s a way of knowing exactly where your money goes. You’ll simply need to add up your income and subtract your expenses, then set up a plan.

But don’t lie to yourself. Be honest about your spending habits and you’ll end up with a more realistic budget. You can find a good article about budgeting on DMB’s web site under Tools & Resources / Articles of Interest.

What’s your plan?

Use your budget to help you plan your debt-reduction/management strategy. List all of your debts, from the highest interest rate to the lowest. Aggressively pay down the highest-rate balances while making on-time minimum payments on the others. Your budget will dictate how much you can dedicate to paying down your balances each month.

Here are some other tips:

• Consider using savings to pay off debt.
• Use extra cash—bonuses, extra paychecks, winnings—to pay down debts.
• Volunteer to work overtime, or get a second job.
• If you can’t earn more money, you’ll need to spend less, it’s that simple.

Face up to your credit cards

Once you’re out of debt, how can you stay that way? Of course, stick to your budget. In addition, figure out how to deal with credit cards, which most likely got you into this mess in the first place. Cut up all but one of your cards, the one with the lowest interest rate. Use that card only for emergencies and start using a “debit card”. If you do continue to use your credit cards, pay the balance in full every month and avoid interest charges. Lastly, don’t be tempted by sale items you don’t need.

DMB Financial encourages its clients to embrace those disciplines that will help them avoid the pitfalls of accumulating unmanageable levels of debt in their lives. However, whatever you do, don’t give up. Remember, you didn’t get into debt overnight. Getting out of debt takes time and patience, but the rewards are well worth it down the road.