In abbreviated form, here is some of the top Spending Smart money advice as you get your financial house in order this year.
Credit. Common sense might suggest that if you have more credit accounts open, you have more ability to get into debt trouble and not pay your bills on time. But that’s not the way scoring formulas look at it.
Instead of looking at how much credit you have, and completely ignoring how much money you earn, scoring systems look at your “credit utilization,” how much of your available credit you’re actually using at any given time. Using less than 10 percent of your available credit is ideal.
Check your credit reports once a year from each of the big three credit agencies, Experian, Equifax and TransUnion. Check those reports for free at annualcreditreport.com, or call 877-322-8228.
Information from your reports is funneled into a formula that spits out a three-digit credit score, a shorthand way for lenders to assess your reports. Credit scores are simply a numerical snapshot, usually ranging from 300 to 900, of what’s contained in your reports that day.
FICO is the brand of score most commonly used by lenders, and one you must pay to access at myfico.com.
Handing over the money reins. Perhaps the most heart-rending feedback from readers last year was in response to a column about taking away money management from elderly relatives or friends.
Warning signs include piles of unopened bills, compulsive purchases from TV shopping networks, rampant spending on lottery tickets and giving away money to sketchy charities.
Initiate a discussion with the elderly person, and assemble a financial inventory.
That includes names and contact information for the elderly person’s financial institutions and professionals, including phone numbers and online logins and passwords.
Make sure that a will and financial power of attorney are current, and know where to find important papers — birth certificates, insurance policies, tax returns.
Consolidate accounts, automate bill-paying and monitor their accounts online.
Food shopping. Money-saving grocery tips abound. But one reigns supreme: stockpiling. Buy multiples when it’s cheap; few or none when it’s full price. What’s cheap? Half-price.
Car affordability. As the average price of new cars tops $31,000, many consumers try to reconcile their bank account balances with their desire for new-car smell, asking: “How much car can I afford?” Here are some rules of thumb to keep car costs reasonable.
Rule of 20/4/10, meaning a 20 percent down payment, a loan term of four years or less and payments plus auto insurance not to exceed 10 percent of gross income. Other rules are stricter: Never buy a new car, pay cash and make sure the total current value of all your vehicles, including boats, motorcycles and snowmobiles, etc., is less than half your gross annual household income. Find current values online at such sites as kbb.com.
Emergency money. The advice sounds so simple — build cash savings to deal with life’s unexpected expenses. But many people don’t. They’ll say it’s because they don’t have the money. Maybe. But sometimes it’s because they don’t have a good enough reason. Here are a few.
You’ll avoid putting charges for “emergencies” on a credit card and paying finance charges. If you have cash, you can choose higher insurance deductibles, significantly and permanently lowering your annual insurance costs.
A robust emergency fund can help compensate for losing a job, bridging the financial gap until you can get income flowing again. Having a pile of cash can provide peace of mind, a feeling of control and options.
Does loyalty pay? You might think that sticking with your auto insurer year after year breeds good will and maybe even lower rates. But the opposite can be true.
In a relatively new tactic, some insurers are jacking up car insurance rates on loyal customers who, faced with higher rates, are less likely to shop around for a better deal and take their business elsewhere. Insurers call it price optimization. Consumer advocates call it a lousy practice. The issue will probably continue to develop this year, but the takeaway is tried-and-true advice regardless of price optimization: Regularly shop around your insurance coverages to make sure you’re not overpaying.
Paying debt. It’s a burning question in personal finance: Which debts should consumers pay off first, ones with the highest interest rates or the smallest amounts? The answer is highest interest rates if you’re mathematically inclined or have no doubt you will pay off all debt. But if you need some encouragement, paying small debts first will give you a feeling of quick accomplishment.
Insurance. This is another area of confusion for consumers. Insurance — auto, home, life — is one of the best spending categories for consumers to save money. It requires understanding the insurance and regularly shopping for better deals.
Among the fundamental questions is, should I buy term life insurance or permanent insurance? Here’s a rule of thumb: Buy term life insurance.
Only buy pricey permanent insurance — whole life, universal life and variable life — if you fully understand the policy, its costs, its rate of return and exactly why you need it instead of term.
Who needs life insurance? People who have others depending on their work income.Gregory Karp, the author of “Living Rich by Spending Smart,” writes for the Chicago Tribune. Readers may send him email at firstname.lastname@example.org.