Good Debt vs. Bad Debt

Debt plays a big role in personal finance in the United States. But if its not used correctly it can lead to personal financial disaster. Some financial advisers suggest avoiding debt completely and proclaim it to be evil. However, if you are smart about debt it can actually help you increase your wealth.

Here are some of the differences between good debt and bad debt.

Good Debt:

• Used to buy things that can increase your net worth (real estate, a small business)
• Frees up your cash every month to invest in high interest savings accounts (as long as you pay off your entire balance each month and do not pay interest charges).
  
• Rewards each of your transactions with points or cash back
• Used to pay for education that increases your earning potential (student loan for a law degree).
  

Bad Debt:

• Decreases the value of your net worth.
  
• Eats up your monthly cash flow with interest charges.
  
• Used to purchase depreciating items that you can't currently afford (computers, cars, clothes, dining out, vacations).
  

If you are using a credit card on a regular basis, you need to make sure that you have cash to back up every dollar that you spend on a credit card. Remember, you are using the card as a tool to build equity, not to purchase things that you can't afford.

401K vs. Extra Mortgage Payment

If you find yourself with some excess income these days, you may be wondering whether you should put more money into your 401K or pay off your home mortgage faster.

Which is better?

From a purely financial perspective, if you have a low, fixed mortgage rate you are better off putting money into your 401K account. There are 2 reasons for this:

1. Any extra money you put into your house will have already been taxed. That means that your money has already lost 20% of its value before you are able to use it to pay down your mortgage. 401K contributions are pre-tax, meaning the money goes into your 401k account before any taxes are removed from your paycheck.
   
2. Your 401K will likely earn more than what you pay in interest on your house. Let's say your mortgage rate is 6%. Even at a conservative 8%, your 401k will out-earn what you pay in interest by 2%.
   

However, this doesn't necessarily mean its a bad idea to pay off your house early. You will most likely still save thousands of dollars in interest payments. Moreover, you will eliminate a high monthly debt responsibility. This is a nice scenario if you happen to find yourself without a job for an extended period.

Although both scenarios make financial sense, putting extra money into your 401k will probably give you the most bang for your buck.

Stay Away from Tax Refunds!

April 17th is tax day this year. But if you're getting a refund then you've been giving away money.

Although getting a check for $1000 in April from the IRS may feel pretty good, its nothing more than the IRS paying you back for a zero interest loan that you've given them all year. You're much better off keeping that money yourself and placing it in a high interest savings account.

Always charge someone to use your money!!

The best situation is to finish the year owing the IRS a small amount of money. If you don't withhold enough money during the year, you may be subject to IRS penalties, so be careful not to underpay too much.

If you manage your money well, its actually better to owe the IRS a little bit of money than to get a big refund.

Top 5 Cash Back Credit Cards

If you have the discipline to pay off your entire credit card balance every month, cash back credit cards are a great way to get the most out of your money. You earn a percentage of every dollar you spend in the form of a cash payment. Plus, you can keep your own cash in a high interest savings account until your credit card bill is due.

Here are the top 5 cash back credit cards:

1. Emigrant Direct - 1.40% cash back Platinum MasterCard
   
2. American Express One - 1% deposited monthly into a high interest savings account.
   
3. Chase Freedom Visa - 3% on groceries, gas and quick-service restaurants plus 1% on everything else.
4. Citi Dividend MasterCard - Earn 2% cash back on purchases at supermarkets, drugstores, gas stations, convenience stores, and utilities including cable, plus 1% on all other purchases
5. Capitol One No Hassle - 1% cash back on purchases plus 25% annual bonus on cash earned.
   

Just make sure to pay off those balances or you'll never see a benefit from these cards.

The Dangers of an Adjustable Rate Mortgage

The rise in mortgage foreclosures received a lot of attention lately in the media. However, anyone with a little financial common sense could have seen this coming years ago. If you keep playing the adjustable rate mortgage game, eventually your going to get caught standing without a chair.

The hook works like this. Your mortgage broker asks if you plan on moving in the next five years. If you answer yes, then your broker will recommend that you get a 5 year ARM. You'll have a lower interest rate for the first five years, and before your mortgage adjust to a higher rate, you will have sold your house for more than you paid and you'll be on to a new mortgage in a new house.

This works great as long as house prices continue to rise. However, if the value of houses begins to fall, as they have been for the past couple of years, then you will most likely end up in a very uncomfortable position. In a worst case scenario, you could end up losing your house.

Many people today are in a lot of trouble because their mortgages have adjusted to a higher interest rate, causing their monthly payments to rise. At the same time, the value of their house has fallen and can't be sold quickly. Some people are in a position where the debt owed on their mortgage is more than the house is worth.

When it comes to your own home, it is almost always wiser to chose a fixed rate mortgage. Although interest rates on fixed rate mortgages can be higher for the first few years, they do not change throughout the life of the loan. If you choose a 30 year mortgage, your monthly payment will be the same for the next 30 years. This allows you to avoid unexpected rises in interest rates and puts you and your family in a more secure position.

5 Reasons Not to Carry Cash

Do you still go to the bank every Friday to cash your check? If you do, you're probably costing yourself a lot of time and money. These days, nearly everyone accepts credit or debit cards as payment forms. And if you do need cash, there's an ATM on nearly every corner. There's nothing wrong with carrying around a little bit of cash in case of an emergency, but its time to break the habit of keeping a lot of cash in your wallet. Here are 5 reasons why not to carry cash:

1. You can't earn interest on cash - The cash in your wallet is losing value by the second. Why not keep it in a high interest savings account and make it work for you.
   
2. You won't earn any rewards points on purchases - Many credit and debit cards offer points or cash back rewards on all purchases. There's nothing wrong with using other people's money as long as you don't carry a balance and pay interest charges.
   
3. Its harder to track your spending - Using cash makes it much more difficult to track your spending and maintain a tight control over your finances. Card companies will allow you to download all of your transactions into a program like Money or Quicken so that you know where your money is going.
   
4. Coins get lost - When you use cash, you typically get coins back as change. If you are like most people, you either lose coins in your car or around the house or they pile up in a jar for 3 years losing value.
   
5. Security - Lost or stolen cash will likely never be seen again. This is not always the case with credit cards. A lost credit card can easily be canceled and replaced before any unauthorized charges are made. Furthermore, unauthorized transactions on a stolen credit card can be credited back to your account.
   

Last Year You Gave Away $500!!

Ever wonder how much money you give away by not putting your money in the right place?

Here's a quick little calculation for you.

Lets say you have $10,000 dollars in savings and you keep it in a standard bank savings account that pays an average of .25% APR. After one year, your investment earned a mere $25.

Now, lets say you keep that same $10,000 savings in a high-interest online savings account that pays 5% APR. In this case, you would have earned an extra $500 at the end of the year. That's a pretty nice sum of money.

If you haven't spent time thinking about where you are keeping your money, now is the time. You can't afford to keep giving money away.

Do You Know Where Your Money Goes?

Knowing where your money goes is an essential part of successfully managing your personal finances. If you don't track your spending, you have may have no idea where your money is going. Chances are you are probably spending more than you realize on things you may not need.

The best way to track your spending is to start using a software program like Quicken or Microsoft Money. These are inexpensive programs that will run on just about any PC. You will have the option of putting every dollar you spend into categories like food, gasoline, electricity, ....etc. You can set up ledgers for multiple accounts including checking, savings, credit card, and investments.

After a couple of months, you will start to get a better idea of where your money is going. I found that I was spending much more on dining out than I every realized. Changing my habits enabled me to save hundreds of dollars every month.

Do yourself a favor and set up your finances in Quicken or Microsoft Money. You'll gain much more control over your finances and you'll be able to pinpoint areas where you can save money.

Improve your Credit Score and Lower your Auto Premium

Like it or not, your credit score is becoming an important factor in your personal financial management.

Insurance agencies have been using credit scores to determine whether or not they will insure your Automobile and how much they will charge. A low credit score can lead to higher premiums, even if you have a perfect driving record.

Credit scores can be improved by paying off outstanding debts, paying your bills on time, and reducing the amount of debt you carry. If your credit score improves, be sure to let your auto insurer know and ask for a reduced premium.

Last day to make IRA contributions for 2006

April 17th is the last day to make IRA contributions for 2006. IRA (Individual Retirement Account) contributions can be a great way to reduce your taxable income and realize a tax savings for the year.

Remember, IRA contributions are not taxed until they are withdrawn during retirement (if you withdraw any money before you are 59 1/2 then you will be subject to an early withdrawal penalty).

For 2006, if you are under 50 you can contribute up to $4,000 annually. People 50 and over can contribute $5000.

IRA's can be opened through any broker. If you are a do-it-yourselfer, you can open an IRA online through Etrade, Fidelity, or Schwab.

Many of these companies offer low-cost, no-load funds for you to invest in.

Top 5 Internet Savings Accounts - 5.00% APR

Internet savings accounts have become a great way to get the most out of your savings. Many are paying Annual Percentage Rates (APR) of over 5%. If you keep $5000 in the account, you will earn around $20 a month in interest - light years better than a regular bank savings account.

Here are my top 5 internet savings accounts:

1. AM Trust Direct - APR 5.36%
   
2. Etrade - APR 5.05% - No other company offers a suite of products like Etrade.
   
3. Emigrant Direct - APR 5.05%
4. HSBC Direct - APR 5.05% (Pays 6% promotional rate through April 30 for new customers)
   
5. Capital One - APR 5%

As always, these rates are subject to change at any time. However, they have been hovering over 5% for over a year now. Enjoy your new money.

5 Steps to Having More Cash Each Month

Managing your money correctly can make a huge difference in how much cash you have available at the end of each month. If you manage it correctly, you will end up with more money without working any more hours.

Here are five things you can do to make your money work for you:

1. Contribute to a 401k plan - If your company offers you a 401k match, you are foolish not to take it. Its free money. Many companies will pay you at least 50 cents for every dollar you contribute. Even if you invest all of your 401k money in a money market account, you are still doing better. Furthermore, it lowers your taxable income for the year, meaning you pay less taxes on the money you make.
   
2. Open an internet savings account - Its time to get over your fears of internet banking and start raking in the cash. Banks such as Etrade and Emigrant Direct offer no-minimum savings accounts that pay over 5.00% annually. All you need to do is link the savings account to your regular checking account and you can move money back and forth electronically whenever you wish.
   
3. Earn cash back or points on your credit card - Many credit cards now offer cash back or rewards points for using their card for purchases. Take advantage of this. Its another way to get free money. Just make sure you pay off your balance each month before you start accumulating interest charges, otherwise you won't reap the benefits of these offers. Furthermore, you can use your new high-interest savings account to earn interest off of the money you've borrowed from your credit card each month.
   
4. Sign up for autopay for your monthly bills - Many companies now offer discounts for signing up to automatically pay your bills each month.
   
5. Bundle your services - Take advantage of companies that allow you to bundle your phone, television, and internet services onto one bill. You may not be able to work with all of your favorite services providers, but you will save money.
   

That's it. Stick to these methods and you'll put more money in your pocket every month.