Thursday, June 10, 2010

Getting Back on Track & Saving Money

This is my column from June 7.

Aren't you tired of seeing surveys where Americans say they aren't keeping up with their financial obligations?

How about this one from TD Ameritrade: Some 57% of those surveyed said they were behind in their retirement savings.

Although TD Ameritrade's survey has suggestions for investors, many of these press releases fail to mention that there are a number of things you can do to improve your financial condition that aren't terribly complicated.

The majority of these polls are designed for folks like myself, who are often more attracted to bad news than positive developments. It's like a moth circling a streetlight. It works nearly every time, even though it's common knowledge that most Americans are hurting financially.

Midyear is a good time to take some action. Here's where you can start:

Avoid the Sucker Credit Bait.

The first and most important thing is to stop falling for the sucker bait that banks are giving us on credit.

The best credit isn't necessarily based on the lowest-rate card or the best introductory offer. If you have a no-fee card that you pay back within the grace period, the credit is pretty much free. Even better is a card with a fee that pays you back.

If you can live within your means and aim for a monthly payment that you can cover in full every month, that's the absolute best use of credit. Of course, that means spending less and avoiding discretionary purchases you can do without. Each month take a look at your bill and do a quick audit. What was on your statement that you didn't need?

Monitor Your Deductibles, Adjust Your Insurance.

With insurance, it's the biggest risks you want to cover -- home damage, autos totaled, catastrophic health costs -- not the little stuff. That means living with deductibles you can afford.
My rule of thumb is having money in the bank to cover deductibles on all of my policies. In general, the higher the out-of-pocket cost you assume, the lower the premium.

My family carries a $1,000 deductible on auto and home policies. I've placed coverage with one insurer to save even more. Our second car is 15 years old, so years ago I dropped collision and comprehensive coverage, leaving only liability, which is essential.

On our major medical policy, we carry a high deductible ($5,950 this year) to keep premiums down. Because I'm self employed, I put money in a savings account to cover the out-of-pocket costs.

The other option is to put that money into a health-savings account, which is funded with tax-deductible contributions. If you don't use the money in the account for health bills, it can compound tax deferred. It's yours to keep.

With this high-deductible approach, you can cover your largest costs and save thousands. Yet this approach only works if you have sufficient savings to cover your out-of-pocket costs. On the car and home insurance, if you can live with not fixing minor storm damage or fender dents, you can save even more.

Health insurance bills, on the other hand, need to be paid. The drawback here is that by yourself you have little or no negotiating power. Find a high-deductible insurer who will "reprice" health bills that you have to pay.

That means if the health provider is within an insurer's network, they will apply a discount to your statement before you pay (for amounts under your deductible).

Also keep in mind that in addition to major medical, you'll need disability insurance and life insurance if you have dependents. You have a far greater likelihood of becoming disabled than dying during your working years. This is essential if you're self employed.

The sweetest deals I've found on disability and life are through group pricing. In many cases, I found the best prices from my college alumni association. Trade and professional groups also offer low-cost policies.

It's All About Saving.

I know how tough it is to save when you don't have money coming in the door or your monthly bills exceed your income.

Obscured in all of the dour economic news is a time-tested reality: You can always adjust your spending to your income and start saving money. Do you need cable TV? Can you cook more meals at home? Can you automatically invest more in your 401(k)?

The beauty of auditing and paring down expenses is that this process creates savings. That's money you can put into an emergency money-market fund, which will help you keep up when bad times come around and fund your own recovery plan when things perk up.

John F. Wasik is author of The Cul-de-Sac Syndrome: Turning Around the Unsustainable American Dream.

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