Budgets and Credit Cards The Dollar Stretcher by Gary Foreman gary@stretcher.com Gary, I was hoping you can help me solve a problem I have encountered while trying to live on a budget. I have created a budget with a fixed amount that can be spent on certain items, i.e.. entertainment. At times I go over this amount. I charge everything on my credit card, in order to receive a cash back bonus. My bill arrives the month after I overspend. That affects the cash flow for the next month, not the overspent month. I can't figure out how to balance my budget, because my statements do not run on the calendar month like my budget, but it goes from the 11th to the 11th of every month. My problem is applying my budget to real life, because I still want to use my charge card to pay for everything. Can you please help me figure out this problem? I have tried over and over to figure it out and I'm stuck. Celia A budget is meant to be a tool to help you control your finances. And like other tools, finding the best one for the job makes things much easier. You can't use a framing hammer in place of a tack hammer. Budgets work the same way. You need one that's designed to accomplish your goals. There is no one official budget. Celia will want to find or create one that works for her unique situation. Part of that is deciding exactly what she wants to accomplish. Budgets are primarily useful in two ways. One is to stop any spending over a preset amount in a specific area. Another way a budget can be helpful is as a tool that will help you find unnecessary spending. Although Celia doesn't exactly say what she's trying to accomplish, it sounds as if she's hoping that a budget will help her stop spending after she gets to a specific amount. If that is her goal, she'll find it hard to continue to use credit cards. That's because credit cards are designed to make it easy to spend money. Even money that you don't have. That doesn't mean that she should give up. The first thing she needs to recognize is that you're spending money when you make the purchase. Not when you get the bill. The only 'purchase' that you make at billing time is the interest and any annual or late fees that are associated with the credit card. So, instead of depending on her monthly statement, Celia might need to keep a spending record for each category in her budget. When she makes a purchase add it to the list for the appropriate category. When the total for the category is up to the budgeted amount it's time to stop spending for the month. If she really wants her budget to keep her from spending more than she planned the simplest solution would be to ditch the credit card and just go to an envelope system. An envelope system has an separate envelope for each category. At the beginning of the month she'd put the appropriate monthly amount of cash into each envelope. Purchases are made with cash from the envelope. When the money is gone the spending stops until the next month. It sounds as if Celia might be using the credit card statement to tell her where she spent her money each month. If that's the case she might want to change her 'budget month' to begin on the 11th. Or she could ask her credit card company to change her billing cycle. That way her credit card billing and budget periods would coincide. Another possibility would be for Celia to simply adjust this month's budget allocation for any overspending that occurred last month. If she went $10 over her entertainment budget, she'd simply have that much less for entertainment this month. It would require monthly adjustments. And the temptation would be there to continue to carry over-budget expenses from month to month and never really control spending. Celia needs to recognize that a budget is a continually changing thing. She's going to want to adjust the amounts as she learns more about her spending habits and as circumstances change. One final comment. However Celia proceeds, she'll be much more likely to be successful if she keeps it simple. A budget shouldn't be any more complicated than is absolutely necessary. Gary Foreman is a former Certified Financial Planner who currently edits The Dollar Stretcher website ( www.stretcher.com ) and ezines email:( subscribe@stretcher.com ) You'll find hundreds of articles to help you stretch your day and your dollar. Copyright 2002, The Dollar Stretcher, Inc. All rights reserved. Permission granted for use on DrLaura.com More >>

Self-Insurance and Healthcare Costs The Dollar Stretcher by Gary Foreman gary@stretcher.com Dear Gary, I just read an article on "Medical Care for Less". I was wondering how to go about being "self-insured". Could you tell me more about this? How it works? Do you pay monthly premiums? Who do you call to set this up??? Thanks! Molly Molly knows much more about 'self-insurance' than she realizes. In fact, she's already using it. Consider an illustration. She doesn't have insurance to cover her everyday dishes. If one is dropped, she's responsible for living without it or buying a replacement on her own. In fact, it would be silly to have insurance for that type of loss. To understand self-insurance, Molly needs to recognize why it would be silly to insure the loss. The answer is fairly obvious. She can afford to replace a broken plate without anyone's help. But, suppose that she had a valuable set of antique china. She might have insurance to protect her in case of theft or damage. Why is that smart? Because Molly couldn't afford to replace an expensive plate if it were damaged or stolen. That's the gist of self-insurance. We all face potential expenses. Some are big and we choose to buy insurance to cover them. Others are smaller and we decide to handle them ourselves. In effect, we've chosen to "self-insure". Today people feel that they need insurance for every possible expense. The idea that insurance is for losses that we can't afford has gradually been lost. People seem to think that insurance is a way of shifting the cost to someone else. It's not. It's really just putting a large number of people together knowing that only a few will suffer big losses. And with everyone in the group making a small contribution there will be money to pay the few big losses. Small expenses really shouldn't be covered by insurance. Remember Molly's plate. The insurance paperwork would only add to the cost of replacing the plate. Somebody has to pay for the claims adjusters and the people approving and writing checks. In fairness, sometimes an insurance company will get a better price because they're buying large quantities of an item. But in many situations their negotiating skills don't offset the additional expenses. OK, so now that we know what self-insurance is, why would Molly want to choose it? Simple. For the right risks it's actually cheaper to be self-insured. How does Molly become self-insured? She begins by evaluating how big a loss she could afford to handle financially without help. Self-insurance doesn't have to be an all or nothing deal. In fact, it's probably a bad idea for Molly to choose to be completely self-insured for medical expenses. Hospital bills can be painful! She would do better to be self-insured for doctor's visits and still carry a major medical policy that would pay for a trip to the hospital (after a deductible was covered). That way she'd be responsible for the small bills, but would have someone to pick up the big ones if they occur. Next she'll look for an insurance company that offered a policy that would only cover the things that Molly couldn't afford to handle herself. If she's canceling existing coverage, Molly would be wise to set aside the money that would have gone to premium payments. She can expect to need it later to pay for future medical expenses. Before you self-insure, make sure you understand the worst-case situation. Know exactly what you could be facing if you don't have insurance. And don't self-insure unless you have the financial resources to face the risks that you're accepting. Don't risk bankruptcy to avoid an insurance premium. Review your decision regularly. Changing circumstances could mean that you need to go back to having someone else assume the risk. Other insurance areas could provide savings for Molly. Checking deductibles is a good idea. The deductible is the amount that you pay before your insurance begins to cover a loss. Call your insurance agent. Ask them the difference between $250 and $1,000 deductible on your car insurance. In effect, you'd be increasing the amount of self-insurance up to $1,000. Same thing with your homeowner's policy. Self-insurance isn't an automatic solution to the high cost of medical coverage. Under the right circumstances it can help. But it's not a magic pill that brings high costs down. And, remember that self-insurance works better for people who have accumulated some financial resources. If you don't have any savings, self-insurance isn't for you. Gary Foreman is a former Certified Financial Planner who currently edits The Dollar Stretcher website www.stretcher.com You'll find hundreds of time and money saving ideas. Copyright 2002 Dollar Stretcher, Inc. All rights reserved. Permission granted for use on DrLaura.com. More >>

How Much House? The Dollar Stretcher by Gary Foreman gary@stretcher.com Hi Gary, Considering the cost of homes these days, what is a reasonable percentage of a person's salary that should be used for a mortgage payment? And does this percentage include everything needed to run that home (utilities, water, phone, etc.)? Margie Good question! And with the current median selling price of a house being over $185,000 it's an important question, too. In recent years, people say that you can't buy too much house. Common thinking is to buy as much house as you can squeeze into today's budget. Expected increases in housing prices and your salary will make the deal fit better next year than it does today. Yes, both housing prices and wages should go up over the long term. For instance, the Consumer Price Index shows that housing prices have increased about 43% over the last 10 years. Unfortunately, the mortgage is due over the short term. Neighborhood housing prices can drop for a year or two. And not everyone gets a raise each year. In fact, some people lose their jobs. So you can get into a lot of trouble before the long term increases bail you out. OK, so if bigger isn't always better, how expensive a house can Margie afford? Let's start with what people actually do spend. The U.S. Statistical Abstract shows that of all the money we spend, about 33% goes to housing. That would include shelter, maintenance, heating and cooling. So should she plan on spending 33%? Probably not. Maggie will need to consider her family situation. Looking for a new house because you're about to have a baby? Groceries, medical, college savings, daycare could all require a higher percentage of your money than before. And past financial decisions will also affect what Maggie can reasonably afford. Alimony and child support are common issues. In fact, Tierney Foster, a long-time Realtor with Remax in Bradenton, FL won't give a client advice on affordability. She refers them to the lender who will consider their debt ratio and other factors that will affect the calculation. Interest on any debt that you owe will lower the amount that you can safely spend on housing. In real rough terms (depending on your interest rates), for every $8,000 you have in credit card debt you have $100 less to spend on housing each month. And that works out to a house that costs $16,000 less. Remember that you can only spend 100% of your after-tax income without getting into trouble. And you really should be saving a portion of that for things like college education and retirement. If you spend 40% on a house, and another 30% on food and transportation, you won't have enough money to cover everything else. Another problem that Maggie will run into is that housing expenses aren't easily adjusted. If you buy a house that's too expensive there's not much you can do reduce the mortgage payment by 10%. And, if housing consumes too much of your money, it's hard to make it up in other areas. You'll never make up $200 each month by reducing your spending on entertainment! An over-expensive house often puts a family budget in serious jeopardy. Which brings us back to the question of how much house can Margie afford. There are some broad guidelines that she can use. In most cases if she's planning on spending less than 30% of her after-tax income on housing she should be alright. On the high side, if she's approaching 40% she'll need to be very careful. She might want to check out calculators on the internet. Bankrate.com has a good one . They provide financial information and aren't affiliated with anyone in the industry so their advice is neutral. She might also want to check with a mortgage banker or broker and ask their advice on what would be affordable. There is one trick that Margie can use that might prove helpful. She can pretend that she already owns the house that she wants to buy. Estimate how much the new home would cost. Then set aside the difference between that amount and what they're currently spending on housing for a few months. In other words, pretend that she's already paying for the house. She'll pretty quickly find out whether they can comfortably handle the increase. If she finds that she's scrambling while playing pretend, she can expect to be in real trouble if she buys the house. We hope that Margie finds a home that she can love and afford at the same time. Gary is a former Certified Financial Planner who currently edits The Dollar Stretcher website: www.stretcher.com and newsletter: subscribe-dollar-stretcher@ds.xc.org copyright 2002 The Dollar Stretcher, Inc. all rights reserved. Permission granted for use on DrLaura.com More >>

Finding Financial Advisors The Dollar Stretcher by Gary Foreman Dear Dollar Stretcher, A financial corporation offered a class on money and how to properly useit. I sat through their spiel and asked questions. Of course they offer the full array of services from investments to mortgages. All of this soundsgood during the presentation. But it has always been my understanding that no one is willing to do something for you without getting something in return. Can you tell me what you think of these corporations and what they are offering? Is there a catch? How can I tell who is reputable and who is just going to take me for a ride? Thanks. Brent Brent's right. Generally speaking there is no free lunch. Strangers may be willing to give you something, but they do have hopes of getting something back. Teaching a class or hosting a seminar are common and legitimate ways forfinancial institutions to find new clients. Back when I was a broker I even taught a few classes. The hope is to impress your 'students' enough so that they do business with you. What do I think of this firm and class? Impossible to say. Because there is no one right financial firm, broker or planner for everyone. Brent's needs are different than mine. So it would be pointless for me to offer an opinion about the class. But with a little help Brent can answer the question for himself. He can begin by deciding what he's trying to accomplish. Some things arefairly simple. For instance, finding a good deal on auto insurance. Other things, like estimating how much money he'll need for retirement, are more complicated. Next he'll need to determine how much he already knows about the subjectand how much he's willing to learn on his own. He'll face a trade-off. He can save money by becoming more knowledgeable. But, it takes time and effort to gain that knowledge. Brent will find information readily available. Resources that were only available to brokers 20 years ago are now as close as your computer. He'll also find a wealth of books on all areas of money and investments. One rule should guide Brent when making financial decisions. If he doesn't understand an investment, he shouldn't put his money into it. A careful explanation should allow him to understand exactly how his money is expected to make more money. Next Brent needs to find out how the financial firm will be compensated. Generally, they make their money by charging premiums, commissions and fees. You're used to paying premiums on insurance policies. The premium is determined by the insurance company. It is not a set percentage of the coverage. Typically maximum premiums are regulated, but Brent should shop for the lowest price. On investment products he could run into commissions. A commission is a charge that's added to the cost of the securities being purchased or deducted from the proceeds of a sale. It's not a flat percentage but is related to the amount of money involved. There is no standard commission rate. Full service brokers who provide stock trading advice get top dollar. Less service means a lower price. It's up to Brent how to decide how much advice he needs. Fees come in a couple of different disguises. Some are charged when you take a certain action. A common one is the fee for a bounced check. Mutual funds may charge a fee for trading funds within their family. Typically fees are a set, flat amount and are not dependent on the size of the transaction. Many investment managers are compensated through "management fees". Typically they'll charge a preset percentage of the money they control for making the day-to-day investment decisions. Charges are usually between .25% and 1.5%. The fee schedule for any money manager (including mutual funds) should be readily available. With some mutual funds you'll incur a fee if you sell the fund. Those are known as "12b-1 Fees". If Brent hears the phrase "12b-1" he needs to be sure he understands what fees he could trigger later. The financial services industry is creative in finding ways charge you for their work. So Brent will need to dig a bit to find all the premiums, commissions and fees he could be facing. In some products he'll find a combination of the different charges. Generally the company is required to advise you of all expenses before you purchase. But expect to study somefine print to find them. How can Brent find a good advisor? Going to seminars and asking respected friends who they use are good ways. He needs to have realistic expectations. A broker can't afford to spend much time with someone who's going to generate $50 a year in commissions. And that's ok. For transactions that will generate small commissions Brent should be able to use a discount or online broker. And, for a regular investment program, he might be better off choosing a mutual fund. The good news is that there's plenty of help available for just about any financial situation. Hopefully Brent will get just what he needs for a bright future. Gary Foreman is a former Certified Financial Planner who currently editsThe Dollar Stretcher website For a free weekly ezinefull of money saving tips send subscribe@stretcher.com Copyright 2002 Dollar Stretcher, Inc. All rights reserved. Permission granted for use on DrLaura.com More >>

Black Mold The Dollar Stretcher by Gary Foreman gary@stretcher.com Dear Dollar Stretcher, I live in Texas I just got my renewal for my homeowners insurance. Last year I had a payment of $723. It went up to $1,123 for the new year. Their explanation was that it was due to all the claims for black mold. Do you have any ideas on where to look for cheaper insurance? J. F. Wow! That's a 55% increase. And a very good reason to ask what alternatives are available. Unfortunately for JF, it's not as simple as calling around looking for cheaper rates. Let's take a look at black mold, what problems it's causing for the insurance industry and their customers and finally, what JF can do to lower the costs of her insurance. Most homes contain some mold. All it takes is a little moisture and an organic food source. Recently we've learned that newer, more air-tight homes are better for growing mold. And one of the varieties is a 'toxic black mold'. For all you scientists out there it's stachybotrys chartarum. Please don't ask for the pronunciation! Mold is commonly found in homes after the wallboard gets wet. The mold causes a number of problems. Besides being unsightly, it smells and can cause breathing problems for some people. Experts estimate that 10% of the population is allergic to mold. A leaky water pipe or roof is all it takes to start a mold colony. Clean-up can be a large job. The source of the leak must be eliminated. Moldy materials need to be removed or decontaminated. If the moldy area is more than 10 square feet an environmental professional might be consulted. For health reasons some people move out of their homes until the clean-up is completed. Enter the insurance companies. They're seeing many more claims for black mold than in prior years. A 50% increase for some companies. And, it's common to spend $40,000 for a claim. To further complicate things, JF lives in Texas which has been particularly hard hit by the black mold problem. In fact, Texas insurers want to be able to exclude mold coverage from their homeowner's policies. The Texas Department of Insurance is considering the request. Two of the three largest insurers have stopped offering policies that cover water related damages (including mold). The Texas situation highlights the problems faced by insurance regulators. Naturally they want to hold down the cost of insurance. But if they hold prices too low the insurance company will lose money and stop offering insurance in the state. To further complicate matters, there are a number of lawsuits that also drive up costs. Not surprisingly, a visit to the internet will turn up attorneys who are willing to sue on a victim's behalf. One Texas family was awarded $32 million dollars and bulldozed their home. We should all have access to the courts to protect our rights. But more lawsuits and lawyers means greater costs that must be paid either by the insurance companies or their customers. No one ever cleaned mold while sitting in a courtroom. What can JF do? Her choices are fairly limited. The most obvious thing is to check with other insurance companies to see if anyone offers a comparable policy for less money. In Texas the two largest competitors to Allstate have already stopped writing new policies. So JF might have trouble finding a good alternative. Her best bet would be to check with an independent agent who represents a large number of insurance companies. She can also consider dropping coverage for water related damages from her homeowner's policy. That could make a big difference in her bill. Before doing that she needs to understand the risk. If a pipe bursts, she won't have anyone to help pay for damages or repairs. The age and condition of her home should influence her decision. She'll also want to consider her ability to pay for a repair if it's needed. Remember, that the reason for insurance is to cover losses that you can't afford to pay for yourself. I'm not familiar with Texas law, but she might be able to buy coverage that would exclude "additional living expenses". That covers the cost of moving your family out of the home while the clean-up is completed. Don't forget that you might need to move out for other reasons. For instance, a fire. Think through the potential expenses and how you'd handle them. Another option would be to increase her deductible. Yes, that could cost her some money if she had any claim. But it would reduce her insurance bill. One final thought. Although a big premium jump is painful, it's still only $33 per month. JF might be wise to swallow hard, pay the bill and keep the coverage she has. Remember, the $400 she'd save wouldn't go very far in covering a $40,000 clean-up. Gary Foreman is a former Certified Financial Planner who currently edits The Dollar Stretcher website www.stretcher.com and newsletters. You'll find hundreds of articles to help stretch your day and your dollar. Copyright 2002, Dollar Stretcher, Inc. All rights reserved. Permission granted for use on DrLaura.com More >>

Mortgages, Taxes and Bigger Homes The Dollar Stretcher by Gary Foreman gary@stretcher.com Dear Gary, We have very nearly paid off our mortgage! We put a lot of spare money into it because the mortgage had a higher interest rate than any safe investment we could find. But for some personal reasons we would like to have a different house, probably one that is nicer than our current one. My husband says that since interest is tax-deductible, getting a new house makes financial sense especially with today's fairly low interest rates. So he's all for it. To me, as much as I'd like to have a new house, it feels as if we have finally "caught up with our tails" only to begin chasing them again. Can you give us some perspective? Thank you, Rebecca Congratulations, Rebecca! It sure does feel good to own a home without a mortgage. Financial life is much easier without a mortgage payment. On the other hand, she and her husband have a lot of company in wanting a bigger and better home. According the National Association of Home Builders the average home has increased in size from 1,500 square feet in 1970 to 2,265 square feet in 2000. That's a 50% increase in just 30 years. Rebecca's husband isn't the only one to think that the deductibility of mortgage interest makes a more expensive home a good deal financially. But sometimes the 'conventional wisdom' isn't really wise. So let's pull out our calculators and take a look at mortgages, taxes and housing prices. We'll assume that Rebecca is in the highest tax bracket. That would mean she gets the biggest possible benefit from the deductibility of mortgage interest. In 2002 the top bracket is 38.6%. So for every dollar of interest that Rebecca pays the mortgage company her tax bill would be reduced by 38.6 cents. Not such a good deal. In fact she could cut out the middle man and just give a buck to a friend. I'm sure that the friend would be willing to give her 40 cents in return! Is it really that simple? Probably not. There are other factors to consider.Some people would argue that it's still a good deal because of the benefits of using OPM (other people's money). That's an old idea. And one that does indeed work well when prices are increasing. Let's see how it works. Suppose Rebecca buys a house and she's paying a mortgage at 8% per year. But with the tax deduction the true cost of the mortgage is really 4.9%. How did we get the 4.9% figure? To calculate the true cost of your mortgage, first you'll need to know how much your deduction will be worth. To get that multiply the interest rate on the mortgage (in this case 8%) by your tax bracket (38.6%). That works out to 3.1%. Next you'll subtract the deduction rate from the mortgage interest rate to get your true cost to borrow (8.0% minus 3.1% = 4.9%). Now back to OPM. For Rebecca to benefit from the money she borrowed the house would need to appreciate by more than 4.9%. Is that possible? The Office of Federal Housing Enterprise Oversight publishes an index that compares housing prices going back to 1980. For the first quarter of 2002 housing prices across the U.S. had increased by 171% compared to 1980. That works out to about a 4.4% annual increase in price. So it would be close for Rebecca. There were some regional differences. Some areas did quite well for awhile. But others did not. For instance, in the Northeast prices dropped after 1989. Prices didn't return to 1989 levels until 1998. So all housing markets aren't created equal. Even though you can't predict the future, studying the history of your community should give you an idea of how lively the housing market is. As Rebecca has pointed out there are also personal reasons to want a nicer home. And only she can put a value on what a nicer home would mean to her family. Should Rebecca go ahead and buy the bigger house? That's up to her. But if they are going to do it, her husband is right. Low mortgage rates does make it easier. Whatever they decide I hope that they enjoy their home and it's never a financial burden to them. Gary Foreman is a former Certified Financial Planner who currently edits The Dollar Stretcher website: www.stretcher.com You'll find hundreds of practical money saving ideas. Copyright 2002 Dollar Stretcher, Inc. All rights reserved. Permission granted for use on DrLaura.com More >>

Unemployed Bill Crisis The Dollar Stretcher by Gary Foreman Gary, My husband has been out of work for 5 months and the income he did bring in when he was working was double what I currently bring in. Needless to say, my checks and the unemployment are not paying the bills. I am starting to panic because bill collectors are calling daily. I cannot tell them when I can make payments so they continuously call at home and work. I feel like I am going to lose my mind because of this!I am making sure that my house payment is paid, utilities, car insurance, but everything else is getting severely behind. What do I do? Do we have any way of getting out of this mess? Any rights? SS in WA Sounds like SS is in a tight spot. We'll spare SS the obvious advice of cutting unnecessary costs. Let's rather focus on how to handle the mountain of bills. First, it's important to get some breathing room. SS won't make good decisions if she's losing her mind! Begin by asking the collection agencies to stop calling you. Do it in writing. Use a postal method that proves that your correspondence was received. Bill collectors are required by federal law to stop calling you if you ask them. Second, estimate how long the situation will last. Are you looking for a one month solution? Or one that will work for one year? Estimating will mean honestly evaluating hubby's job prospects. Is it realistic to expect him to find a similar paying job in your community? If not, you'll need to make some decisions. Would SS be willing to move to another area and give up her job to replace his lost income? In any case, you'll need some estimate of when income should increase. This may be a good time to evaluate a change in career paths. Sometimes happiness is found in a lower-paying, but less stressful career. Third, SS will want to inventory their bills. How much does it cost each month for the basic necessities? Thankfully, it appears their current income covers the basics. She'll want to look at her bills with an eye towards reducing or eliminating them. Start with the biggest ones: the mortgage and any car payments. SS should check to see if they have credit insurance that could make payments until hubby is employed again. Many consumers forget that they even have it. A simple call to your creditor can tell. Consider refinancing your home. Not just for a lower rate of interest, but also to stretch out the term of the loan. The longer the loan the lower the monthly payment. SS may also want to use the equity in her home to pay off some debts. Especially ones like credit cards that are charging very high rates of interest. Try to negotiate a new loan on your car. Either your current lender or another may be willing to allow you to finance the car over a longer period of time. SS may find that it's best to either sell or even let one car be voluntarily repossessed. A repo could leave her owing money after the car is sold, but at least the monthly payments and cost of insurance would disappear. Now on the smaller monthly bills. SS needs to make a list of all of the bills with the monthly minimums and the interest rate being charged. Contact the people that you owe money. Begin with the biggest bills. Explain the circumstances and offer to pay what you can. Before you contact them know how much you can realistically afford to pay each month. Do not make promises that you won't be able to keep. SS may find that even after talking to her creditors that she can't cover all the monthly minimums. That leaves her with a few choices. One, pay some minimums and let other accounts go unpaid until after hubby returns to work. A second option would be to work with a debt management firm. Often they can get creditors to reduce minimums and interest rates. Usually late fees will be waived. Talk to a couple of companies before choosing one. Ask them to explain what they can do for you and what you'll be charged for the service. A final option is to declare bankruptcy. If job prospects are poor and you simply can't keep up with the minimum payments a bankruptcy could be inevitable. All of these choices will leave marks on your credit history. That can't be helped when you fail to pay bills. It may take up to 10 years before your record is completely clean. But the road to recovery will begin as soon as you take control of the situation and begin making payments at an agreed rate. Let's all hope that SS's husband finds a great job real soon. Gary Foreman is a former financial planner who currently edits The Dollar Stretcher website www.stretcher.com and ezine Copyright 2003 Dollar Stretcher, Inc. All rights reserved. Permission granted for use on DrLaura.com More >>

Mom's Finances The Dollar Stretcher by Gary Foreman gary@stretcher.com Dear Gary, My 70-year-old mother lives alone a few miles away from two of her five daughters. She's fiercely protective of her privacy and independence. However, she cannot handle her money. We think she may have early Alzheimer's. She's always been bad with bouncing checks and having the utilities cut off for non-payment. But now she's much worse. She gets a retirement pension which is about three times as much as her normal monthly expenses, but she's always broke by the 15th of the month. So we're trying to get control of her money. Our plan is to open up a new checking account for her pension to be automatically deposited in that she will not have access to. We're going to change the address on her bills and I will become the bill-payer. We'll give her an allowance of $500 a month for groceries, gas, and other expenses, which I think is very ample for a single person. Whatever doesn't go for her bills will be put aside for an emergency fund and for future medical bills. My sisters are all in agreement that something needs to be done. Now we have to get our mother's cooperation. Natalie S. Natalie's problem is a common one. As people live longer more become frail in their later years and need help with their financial affairs. I'm assuming that Natalie only wants what's best for her mother. The state can't assume that. So they write laws to protect the rightful owner of property. In this case, Natalie's mother. The presumption is that your mom is an adult, it's her money and she should be able to spend (or squander) it anyway that she thinks is appropriate without Natalie's approval. So, the first thing is to get mom's willing agreement. You're walking a tight rope. If she's truly incompetent you might need to force the issue. But, if she's mentally fit, coercing her is just like stealing her money and her freedom. If mom doesn't want to give up control of her money Natalie would need to go to court and prove that she's not mentally capable of handling her affairs. In that case the court will appoint a guardian. Even then there's no guarantee that a relative will become the guardian. And Natalie's relationship with her mother would probably be seriously harmed. If mom is agreeable to getting help from her children the job is much easier. You'll still need to consult an attorney. This is too important to mess up. The simplest solution to making sure that bills get paid would be to have one or two children authorized to write checks on mom's account. Then have the bills sent to the child for payment. Unless a check limit was set at the bank, it would allow the child to write a check for all of the money in the account if they wanted. Avoid joint accounts. Money in a joint checking account legally belongs to everyone listed on the account. So it's possible for mom's money to be taken to pay for a daughter's debts. Natalie could consider a limited power of attorney. That's a legal document that's usually drawn by a lawyer. It could allow one or more of the daughters to act on mom's behalf in certain situations. The problem with a power of attorney is that banks are wary of them. Because they don't want to take a legal risk it's easy for them to reject a power. That way they avoid taking any chance that they're honoring a fake power and helping to steal someone's money. The most complicated but best legal document for this type of situation is something called 'a living trust'. A living trust is a document that any competent adult can have created. They can also change it anytime they want as long as they're alive and still ok mentally. An attorney should write it, but they're not as complicated as you might think. Property is placed under control of the trust. In this case probably mom's checking account and the proceeds from her pension. The trust says how the assets are to be used. Trustees are allowed to act within the authority of the trust. Mom would be the original trustee. And when she's not able, a successor trustee(s) would step in and take over for her. Probably one or more daughters. Natalie and her sisters are in a sensitive position. If mom is truly not competent to take care of herself then getting her help is the right thing to do. And loving children would step in. But being irresponsible doesn't mean that someone is incompetent. And it doesn't give others the right to take control of your property. So children would honor their parents by respecting their freedom and giving only the help that the parent requests. Hopefully Natalie and her sisters will be wise in striking the proper balance to help their mother. Gary Foreman is a former Certified Financial Planner who currently edits The Dollar Stretcher website . You'll find hundreds of articles to help stretch your day and your dollar. Copyright 2002, Dollar Stretcher, Inc. All rights reserved. Permission granted for use on DrLaura.com. More >>

Insuring Your Possessions The Dollar Stretcher by Gary Foreman gary@stretcher.com Gary, When I moved into my new 3 bedroom apartment, the insurance agent asked me questions about my property and said I should increase my coverage from $29,000 to $40,000 (a $2.63 a month increase) based on my belongings (including a lot of antiques). I did as she suggested. Do you think this is a reasonable expense? Also, how do I document my belongings (antique pieces as well as other furniture, accessories, clothes, electronics, food in freezer etc.) in case I would ever have to make a claim? How do they determine the 'costs' to replace my belongings should I ever need to? LB LB doesn't say whether she's purchased or renting her new apartment. If she owns the apartment a standard policy will cover possessions up to 50% of the value of the structure. So if you've insured your home for $100,000, you won't collect more than $50,000 for your possessions. Is 50% enough? Or should LB spend the extra $2.63 per month for additional coverage? The first thing to remember is that you buy insurance to cover losses that you can't afford yourself. So you don't want to be underinsured. Chances are there's a lot of stuff in your home. Furniture, everything hanging on your walls, stuck in your closets and cabinets are all considered household possessions. And, don't forget appliances, clothing and toys, too. The only way to know whether LB can justify the additional coverage is to take an inventory and put a value on her stuff. The list should include prices paid and when the item was purchased. Model numbers should be noted. Pictures or videotapes of the items are also helpful. Don't make it overly complicated and give up on the process. Any information is better than none at all. Guess where necessary. Once LB has totaled the value of her possessions she can talk with the agent about how much coverage she needs. Ask about more than just the total covered. Some categories aren't covered adequately by standard homeowners' policies. Many of us have jewelry or some type of collection. Even though you might not spend that much on any one item, it's possible that the entire collection has a significant value. LB should also ask about exclusions. Are there specific things that your policy won't pay on? Antiques are commonly excluded. So anything over 25 years old would be a problem for LB. It also could exclude any keepsake items. Grandma might not have been wealthy. But some of her things could have appreciated significantly since they were purchased many years ago. Most policies will not pay more than $2,500 for any individual item. Thresholds vary with insurers so ask your agent. Back to the inventory for a moment. It makes it easier to collect on your policy if you suffer a loss. Sit back and try to think of all of the contents of your bedroom. Difficult? Now imagine doing that for every room of the house after a fire or burglary. That's what you'll need to do after a loss. Remember to store your list somewhere outside your home. Keep it at your place of work, safe deposit box or with a friend or relative. If you must keep it in your home, buy a fireproof box or store it in your freezer. Talk to your agent about how much you'd be paid if a loss occurs. Most policies cover your possessions for 'actual cash value'. For instance, your clothing would be valued as 'used' clothing. Nevermind that you'd be hard pressed to replace all of your clothing at thrift store prices. Realistically you'd have to buy some items at full retail. LB might want to consider getting 'replacement cost' coverage. That would pay her enough to buy a new replacement for lost items. But even that doesn't eliminate every problem. Replacement cost doesn't apply to some categories like antiques and collectibles. For antiques, LB will probably need to either be able to demonstrate the value through comparisons to other similar items, or, better still, have an appraisal done. If she has items that are valuable LB might need to get 'agreed value' coverage for them. That's when the company and LB agree on the value of an item now. If it's lost later, that's how much she'll receive for it. Obviously, we hope that LB never needs to collect on her policy. But if the worst happens, we hope that she has the right coverage and the proper documentation to assist in starting over. Gary Foreman is a former Certified Financial Planner who currently edits The Dollar Stretcher website: www.stretcher.com You'll find hundreds of articles to help you live better for less. Copyright 2002, Dollar Stretcher, Inc. All rights reserved. Permission granted for use on DrLaura.com. More >>

Home Business Expose The Dollar Stretcher by Gary Foreman gary@stretcher.com Dear Dollar Stretcher, What can you tell me about a deal of making money on the internet just byhaving your own website and giving free items away for shipping. Thereseems to be a guarantee to get your money back if you are not satisfied orcan't make money on it. Peggy I don't mean to ruin Peggy's dream, but this offer looks like a scam. Butit's better to be disappointed now rather than disappointed and poorerlater. Let's look a little closer at what's being proposed. Peggy will need a website. That's not terribly expensive, but it does costmoney. Unless Peggy knows hypertext coding she'll need to hire someone tocreate the pages for her or, more likely, use templates that the companyhas set up. Using templates is fine, but it will mean that her site won'tbe able to include anything unique to attract visitors. Keeping even a very small website online will cost Peggy $10 or more eachmonth. And she'll probably need to authorize a monthly charge to her creditcard. Once Peggy has a website she'll need to get people to visit it. Having freestuff won't be enough. Just for fun we put "free" into one of the largesearch sites. It returned over 183 million sites! Even paying foradvertising isn't likely to separate Peggy from the competition.Realistically she's going to struggle to attract visitors to her site. But suppose that she does get people to visit. And they do agree to payshipping and handling for the 'free' stuff. How much can the company reallyafford to pay Peggy to give away merchandise? If the offers are good they don't need her. Word-of-mouth will bring peopleto the company website without her help. More likely, the offers aren't really that good. A few years back marketersstarted offering all kinds of items for free on the internet. The catch wasthat many of them had shipping and handling charges that were more than theitem cost locally. So maybe Peggy doesn't do so well and decides to get her money back. A'money-back guarantee' is only as good as the company offering it. Millionsof people have tried to get their money back only to find out that theguarantee was no better than the original offer. We'd hope that the company would stop charging her credit card if Peggyasked them to. But it's not unusual for charges to continue for months evenafter a 'stop' notice has been sent. Why am I so sure that this offer is a scam? There are a couple of reasons.First, the company doesn't appear to want any talents or skills that Peggyhas. Only her checkbook. If it's a job that 'anyone can do' then it won'tpay very well. And, you won't have to invest your money to get the job. Second, the business plan that Peggy is supposed to execute doesn't makesense. How is she going to compete with everyone else to get visitors toher free stuff page? What makes her offer unique and worthwhile? Finally, the company's business plan does make perfect sense. Buy oneserver and connect it to the internet. Set up hundreds of people like Peggywith websites. Charge them each month for web hosting services. Even ifPeggy doesn't make a dime the company will make plenty. Peggy can check out the proposal by doing a little homework. First, findout how much the website will cost to set up and maintain. Ask about anyother start-up expenses that she'll be asked to cover. Then look at the free items that are being offered along with the SHcharges. How do they compare to shopping at your local discount center? Will people want them? Then find out how much she'd make on each free item that's 'given away'. Dothe math to figure out how many items will need to be given away each monthto cover her expenses. Finally, how many visitors would she need to the website to give awayenough items to be profitable? And what will it cost her to attract thatmany people each month? Only if Peggy can work through all of this and determine that the businesslooks reasonable should she go forward with it. Many home businesses arestarted on a shoestring. But it's going to be hard getting to profitabilitywhen you have an initial investment and an ongoing monthly expense. Gary Foreman is a former Certified Financial Planner who currently editsThe Dollar Stretcher website You'll find hundreds ofarticles to help stretch you day and your dollar.Copyright 2002, The Dollar Stretcher Inc. All rights reserved. More >>