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Dr. Don's 10 tips for better money management

By , Ph.D., CFA •

Is your life getting a bit complicated? Check out these 10 tips for simplifying and saving a few bucks.

1. Put together a monthly spending plan.
Don't call it a budget. People hate to diet and hate to budget. Call it a spending plan. Hundreds of people write me each year with credit problems. The root of the problem, barring some cataclysmic event in their lives, is that they aren't living within their means. A monthly spending plan puts you in charge of where the money goes. That's a great first step toward controlling your finances. Creating wealth to meet your future goals, like college for the children or a comfortable retirement for you, starts with investing. Investing means not spending all of this year's income. If you're spending more than you make, you don't have money to invest for the future. You may have to dig yourself out of debt first before you can start investing, but once those credit cards are paid off, think of what you can do with the money you're not spending on interest. Consumer Credit Counseling Services offers worksheets that you can access online to develop a spending plan. Alternately, your computer may have come with money management software as part of its software bundle.

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2. Write a will (or review your existing will).
You know you should have one. None of us are immortal. I like the idea that I'm directing the action from the hereafter. can give you details about the can- and can't-do's. The process of drafting a will should help determine if you should attempt to avoid probate, help you decide if you want to set up a living trust, and clarify some estate planning issues.

3. List your accounts, insurance policies and other important documents.
Does your spouse know about all of your brokerage accounts, bank accounts, insurance policies and safe-deposit box? Does he or she know where you keep a copy of your will, too? Great! Now what if one of your children had to try and pull all this information together? You don't want them to have to find out about a forgotten account by notification from an unclaimed property firm. They could always go to, but it would be a whole lot easier and more timely if you write it all down and tell your spouse and children where you keep the list.

4. Maximize your 401(k), 403(b), IRA or Roth IRA contributions (Review).
If your company matches part of your 401(k) contributions and you're not contributing up to the limit of the company match, then make this the year that you do. Pay attention to how that money is invested. If you don't feel you have enough choices in your retirement account, lobby your plan administrator for more choices. That's especially true if you are paying sales loads to invest in the mutual funds. Do you remember who the beneficiary is on the account? If it's your ex, and you don't want it to be, make the change now.

5. Check your credit report.
Checking your report annually is $9 well spent. Equifax is the only one of the three major credit-reporting bureaus that can both accept your request and deliver the report online. Reviewing the report for inaccuracies will protect your credit rating. Making sure no one is opening accounts using your name and Social Security number can also help protect you against identity theft.

6. Close one credit card account.
While reviewing your credit report, you may notice a card or two that you had forgotten about. Closing down those accounts doesn't count for this item. I want you to close something that you're going to miss at least a little. Would you rather have four Visa and MasterCard accounts, each with a $500 limit, or two accounts, each with a $1,000 limit? (Adjust the amounts so the example makes sense for your financial situation.) If you must have a Macy's, Bloomingdale's, JCPenny, Sears, etc. charge account to receive notices about sales and promotions, then pick another account to close. Here's how to cancel a credit card.

7. Know your marginal tax rates.
Your marginal tax rate is the percentage of income that goes to pay taxes on your next dollar of income. You can have a marginal rate for both state and federal income taxes. If you're having a tax professional do your taxes this year, ask them to tell you your marginal rate(s). If you do it yourself, you'll figure it out while you're doing your taxes. Knowing your marginal rate helps you determine the after-tax cost of debt on your mortgage, figure out your taxable equivalent yield on municipal bonds, and help you realize why a tax-deductible home equity loan can make sense vs. a non-deductible car loan.

8. Determine if you can cancel the PMI policy on your mortgage.
Homeowners hate paying private mortgage insurance (PMI). Recent legislation requires lenders to cancel PMI when the loan-to-value (LTV) gets below 78 percent. Unfortunately, that's only for mortgages financed after July 29, 1998, and the value used is the appraised value at the origination of the mortgage. But any homeowner, regardless of when he financed his mortgage, can request PMI cancellation when the LTV gets to 80 percent.

If your home's value has appreciated, the LTV can get below 80 percent years faster than the way the law allows lenders to calculate LTV. You shouldn't have to refinance to get rid of the PMI, but your current lender isn't champing at the bit to help you drop the policy. Most homeowners can do a reasonable job of estimating their home's appraised value. Divide the loan balance by the appraised value to find the LTV.

Example: LB/AV = LTV $90,000/$119,000 = 75.6 percent

You will pay for the costs of a professional appraisal so if the LTV you calculated is still in the 80s you may want to wait before requesting PMI cancellation. You also need to be current in your payments and have a strong payment history to request cancellation. See this Bankrate article for additional information.

If you have an FHA or VA loan, this advice won't work for you since government-insured FHA and VA loans require mortgage insurance for the life of the loan.

9. Plan for your children's college education.
My daughter thinks she wants to be a Florida Gator. She could make a worse choice, as any Gator would tell you. As a Nittany Lion, I can think of a better choice. (Please, no e-mails from avid college football fans.) Regardless of her choice, college savings plans have come a long way from plain vanilla state-sponsored pre-paid tuition plans. What's available in your state is just a click away.

10. Invest some human capital in your community.
We all want to live in a great community. Volunteering in your community will help you reach that goal.

Don't know where to go? Click here.

11. Allow for some spontaneous consumption.

There's more to life than bills and work. Put together a list of things you've always wanted to do. Then do one or two of the legal ones and see how you feel.


-- Updated: Nov. 19, 2002


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