MONEY MANAGEMENT 9

Chapter Eleven: Financial Planning - 11.1 Introduction to Financial Planning

Financial literacy isn't just about coping with debt and digging yourself out of a hole; it's also about financial success and planning for the future. Once you have paid down bad debts like credit card bills, created a budget that helps you make ends meet, and built up an emergency savings fund, it's time to think about financial planning.

Chapter Eleven: Financial Planning - 11.2 Prerequisites

Before you start thinking about financial planning, you should have completed two prerequisites:

1. Build up an emergency savings fund equal to three to six months' worth of living expenses
2. Payoff all debts

You may also want to consider securing adequate insurance. Follow the examples you've read about in chapters one, two and ten in order to meet these important goals.
When you are ready to plan for the future, you'll need to consider these four priorities:

1. Accumulation
2. Retirement
3. Income
4. Actualization

Chapter Eleven: Financial Planning - 11.3 Accumulation

Accumulation is the first step toward retirement planning and includes the years that you work to earn income and build your retirement assets. You make investments designed to accumulate wealth over time. That amount of time can be short or long term, though for the sake of retirement planning, your thinking should be more long-term. Any retirement account you have, whether it's an IRA (Individual Retirement Account), SEP IRA, or 401(k), is an investment.

How to When Choosing an Investment Consider the following factors when selecting an investment:

-Risk: Home prices may rise and fall, so there is a little risk in purchasing a home as an investment. Ultimately though, home values rise over time, so the longer you own a home, the more it will be worth. In the meantime, you get to live in it, which is more than one can say for other kinds of investments.
-Rate of Return: This depends on where you live and what shape your house is in. Some parts of the country see little change, while other areas have skyrocketing home values. Be careful though; those places where home values rise fastest are more prone to subsequent declines in value.
-Liquidity: If you need to access the capital you have built up by making your house payments, you will have to sell the home, which is not always easy and may take many months. If you're really in a hurry to get access to your equity, you can refinance or get a home equity loan relatively easily.
-Diversification: Diversification means (don't put all your eggs in one basket.) A home is a large, single investment, so it shouldn't be your only asset by any means.
-Impact of taxes: Interest you pay on your home mortgage is tax-deductible, so purchasing a home is an excellent opportunity for tax savings.

Risk vs. Return There is an inverse relationship between these two. The greater risk you take, the more your potential return. If you choose a safe investment with low risk, you won't earn as much income.
Rule of 72
In general, dividing the number 72 by your investment's interest rate will give you an estimate of how many years it will take to see your investment value double.
The Formula: 72/interest rate = # years to double
The Results: 6% interest doubles in 12 years, 7% interest doubles in 10.3 years 10% interest doubles in 7.2 years,
FACT: The rule of 72 was devised by Albert Einstein, who called it (the greatest mathematical discovery of all time.)

Chapter Eleven: Financial Planning - 11.4 Retirement

The sooner you start planning for retirement, the better. If you start right away, you won't have to take as many risks to earn enough money to live comfortably in your golden years. You'll also earn more over time if you start sooner.

Retirement Plans

-IRA (Individual retirement account) - this basic form of retirement plan lets you contribute a fixed amount of money each year. The investment earnings are taxable as income only when paid out.
-Roth IRA - This type of IRA allows earnings to be tax-exempt, though your initial contributions aren't. Essentially, with a Roth IRA you pay taxes now, and with a traditional IRA you pay taxes later, when you retire.
-IRA Rollover - This is a tax-free way to move retirement accounts from one plan to another. If you change jobs, you may want to roll over your retirement account to your new employer's plan.
-Roth Conversion - transferring funds from a traditional IRA to a Roth IRA. This allows you to collect benefits tax-free when you retire, but you'll pay more taxes for the current year.
-Pension - a pension is a retirement plan established by a corporation for its workers. They are based on profit sharing, so if the employer declares bankruptcy, the workers may lose their pensions. This is why many pensions are being replaced by safer investments like 401(k)'s
-401(k) - When a worker defers a percentage of his/her salary into an investment fund until retirement. The amount contributed decreases your income, lowering your tax bill in the short term.
-SEP IRA (Simplified Employee Pension) - This is an arrangement that allows an employer to contribute tax-deductible dollars toward an employee's retirement, in addition to the limited amount the employee can contribute.
-TSA (Tax Sheltered Annuity) - A retirement plan for employees of schools and other non-profit organizations. Also called 403(b) plans. Talk to a qualified investment adviser about which plan might be right for you. If your employer provides retirement accounts, you may have the opportunity to talk to a financial adviser when you enroll.

The Cost of Waiting While it's never too late to begin saving for your retirement, the benefits of starting early are truly amazing. Let's say your goal is to have $1,000,000 when you retire. Assuming a 10% annual rate of return, you'd need to contribute $1,147 per year if you start at age 19. By the time you retire, you will have put $53,909 in your retirement fund. But due to compounding interest, you'll have a cool million to spend in retirement. If you were to wait 20 years, until age 39, to start saving for retirement, you'd have to put $8,258 into savings every year to have the same million. And you'll contribute a total of $222,966 to the account.

Annual Account Age Contribution Balance As you can see, you can still build substantial retirement savings even if you start late, but you'll have to contribute far more of your annual income to your retirement accounts. If you start early, you won't have to dig as deep today to meet your goals in the long run.

When Retirement Comes In addition to collecting payouts from your retirement accounts, you may receive Social Security payments when you retire. Depending on your age, you will receive benefits when you are 62, 65, or 67.
Born before 1937 - full benefits at age 62
Born from 1937-1960 - full benefits at age 65
Born after 1960 - full benefits at age 67

Future retirees will need to be decreasingly reliant on Social Security benefits. It's very important to plan your spending in retirement to make your money last. One good goal is to own your home mortgage free by the time you retire; that way you are only responsible for the taxes and insurance on the property, and needn't worry about making a house payment.

Reverse Mortgages Another option for retirees who need extra income is a reverse mortgage, or HECM (Home Equity Conversion Mortgage). A reverse mortgage allows homeowners over age 62 to borrow against the equity in their home per established lending limits and actuary tables (pertaining to the age of the borrower). They may choose to receive a credit line and/or regular tax-free payments every month from the lender, and are only repaid when the last surviving borrower passes away, sells or vacates the home.

To qualify for a reverse mortgage, you are required to meet with a counselor from a HUD-approved housing counseling agency. The counselor will be able to discuss the terms, conditions and options a reverse mortgage may offer you, and answer any questions you might have about the program.

Estate Planning By the time you retire, you will need to have given some thought to estate planning. This includes having an up-to-date will, ensuring that your property will pass to the proper person when you die, and taking steps to avoid inheritance taxes. A living trust or gifting program might help you pass on the wealth you accumulate to the people you designate rather than the government.

Chapter Eleven: Financial Planning - 11.5 Income

As you work toward retirement, income will be a key factor to help you accumulate wealth and contribute to your chosen retirement accounts. As we've said before, it's crucial that you have proper insurance to replace your income should you be rendered unable to work. Also, bear in mind that credit is not a substitute for income. If you find yourself borrowing money to pay for basic living expenses, you may be heading for financial disaster.

Stop, re-examine your budget, and try to find another way to make ends meet without digging yourself deeper in debt. Your income should be helping you prepare for the future and build wealth. If you're taking on high-interest debt to get by, you're only setting yourself up for a greater crisis down the road. Again, credit is not a substitute for income.

Chapter Eleven: Financial Planning - 11.6 Actualization

Actualization is your final goal, the place you strive to reach by engaging in financial planning. Being actualized means you have met your basic needs and can now work on other important goals and personal enrichment.

It's Okay To Be Rich What do you think of people who are rich? Most people assume rich people are greedy, selfish, miserable etc. But that's largely a myth that has been repeated in our culture. Building wealth is an important goal for all of us, and the more we earn, the more secure we can be in our retirement, the more we can give to charity, and the better we can pursue our personal happiness.

This is about changing your attitude toward money; if your feelings about wealth are healthy and positive, your financial situation will be, too.

You can't take it with you Unfortunately, there are a lot of bromides like this one that serve to undermine the financial security of hard-working consumers. No, you can't take it with you, but you can leave it to your loved ones after you've gone. And since we don't really know how long any of us will be around, the best thing we can do for ourselves, our families, and society is to save more, borrow less, and work to be self-sufficient.

Chapter Twelve: Consumer Laws - 12.1 Introduction to Consumer Laws

The good news is that as a consumer, the law is usually on your side. The problem is that you can still be taken advantage of if you don't know your rights. There are many creditors and collectors who take advantage of the average consumer's lack of knowledge in this area.
In this chapter, we'll give you an overview of some of the laws that are in place to protect you as a consumer. The more you know about your rights, the less likely you are to be taken advantage of.

Chapter Twelve: Consumer Laws - 12.2 The Equal Credit Opportunity Act

The Equal Credit Opportunity Act regulates creditors. -(This verbiage answers the test question.) Under this law, it is illegal for creditors to deny your credit because of your gender, race, marital status, age, national origin, religion, or disability. This also forbids creditors from discriminating against you for receiving public assistance.

If you suspect someone has violated this law in considering whether or not to extend credit to you, you can take these actions:

1. Complain to the creditor. Let them know you know your rights under the Equal Credit Opportunity Act and see if they will reconsider their decision.
2. Complain to your state Attorney General (AG). You can usually do this through your state government web site, or you can write a letter to the state Attorney General. If they get enough complaints about a creditor, the AG's office may prosecute the offender.
3. Talk to an attorney about filing a lawsuit in federal court. Only a lawyer can give you qualified legal advice about this course of action.
4. Initiate a class action suit. If you can find enough other parties who have been discriminated against, you can team up and sue for damages. Again, only a licensed attorney can give you legal advice.
5. Report the offense to government regulators. To Whom Do I When reporting a Violation? It is important that you report the violation to the correct government regulatory agency; you might contact one of the following government regulators: Contact:

Chapter Twelve: Consumer Laws - 12.3 The Fair Housing Act

The Fair Housing Act prohibits discrimination on the basis of race, religion, gender, disability, national origin, or familial status when it comes to selling or renting housing. To get more information or to file a complaint, call (800) 669-9777 or write to:
Office of Program Compliance & Disability Rights:

Office of Fair Housing and Equal Opportunity
U.S. Department of Housing and Urban Development
451 7th Street, S.W. Room 5242
Washington, D.C. 20140

Chapter Twelve: Consumer Laws - 12.4 The Fair Credit Billing Act

The Fair Credit Billing Act allows you to dispute any bill that you feel is incorrect. Write to the creditor's address for "billing inquiries" not their general address or the address to which you send your payment. Include your name, address, account number, and a description of the billing error. Your dispute letter must reach the creditor within 60 days after the erroneous bill was mailed to you.

Send your letter by certified mail, return receipt requested. Be sure to keep copies of the receipt, your dispute letter, and any other documents that support your position. After receiving your complaint, the creditor must then respond within 30 days, and resolve the dispute within 90 days. See your book for a sample dispute letter.

Chapter Twelve: Consumer Laws - 12.5 The Fair Credit Reporting Act (FCRA)

This law entitles you to get a free copy of your credit report if you are denied credit because of something in the report. You are also entitled to dispute any information you find that is inaccurate or out of date. Most items must be removed from your credit report after 7 years; some things, like bankruptcy and tax liens, will remain on your credit report for 10 years.

As you may recall, in Chapter 5: Credit Reports and Scores, you read about writing and submitting dispute letters to the credit bureaus. The FCRA requires credit bureaus to correct any outdated, incomplete, or incorrect information that you report within 30 days of your request.
Opt Out The FCRA also allows you to "opt out" of prescreened credit card and insurance offers. Trust us, this is a good idea. Just call 1-888-5-OPTOUT (1-888-567-8688) to opt out.

Chapter Twelve: Consumer Laws - 12.6 The Fair and Accurate Credit Transactions Act (FACTA)

FACTA amends the Fair Credit Reporting Act by extending more protections to consumers.
Under FACTA, you are entitled to a free credit report every year from each of the three major credit bureaus. Visit www.annualcreditreport.com to order your free reports.
FACTA also protects you if you have been the victim of identity theft by prohibiting the credit bureaus from putting fraudulent account information on your report.

Chapter Twelve: Consumer Laws - 12.7 The Truth in Lending Act

This law requires creditors to disclose the costs and terms of any lending agreement to the borrower, and regulates the advertising of credit. This is designed to help you make better-informed decisions about the credit you use. The creditor must provide information about the amount being financed, the amount of the required minimum monthly payment, the total number of monthly payments, and the APR (annual percentage rate). The lender must also give you a three-day period to compare and consider other lending offers and cancel the loan agreement.

Chapter Twelve: Consumer Laws - 12.8 The Fair Debt Collection Practices Act (FDCPA)

This law regulates third-party debt collectors. It does not apply to the original creditor or collectors who work directly for them; the FDCPA kicks in when a third party collection agency is hired or acquires the debt by some other means.
Under the FDCPA, collectors are forbidden from harassing you in any way. It applies a lot of limitations to what debt collectors may do, and these are only a few of them.

Collectors must not:
-Contact you after 9:00 pm or before 8:00 am
-Contact you if you send a written notice telling them to stop
-Contact you at work after you tell them to stop
-Use deception to collect the debt Disclose information about your debt publicly
-Threaten you with legal action that isn't intended
-Use profane or abusive language Report false information to your credit report
Violations of the FDCPA carry serious fines and can entitle you to sue the offending collection agency in civil court.

Chapter Twelve: Consumer Laws - 12.9 Identity Theft Assumption and Deterrence Act

This law makes it a crime when someone fraudulently uses your identifying information, including your name, Social Security number, credit card number, driver's license, account number, or any other piece of identifying information you may have.

There is another law, the Identity Theft Penalty Enhancement Act, which establishes penalties for aggravated identity theft, and adds time to any sentence where identity theft is part of the crime.
Depending on what kind of identifying information is used, identity theft laws may be enforced by the U.S. Secret Service, The Department of Justice, the U.S. Postal Inspection Service, or others.
If you are a victim of identity theft the first place to go is www.ftc.gov/idtheft. This is the Federal Trade Commission's ID Theft web site. They'll give you all the information you need to help you restore your good name. If you don't have web access, you can contact them by phone at 1-877-ID-THEFT. .