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Are you falling behind?

Sep 08, 2014 | | Comments (3)

siblingsMore than half of Americans—56 percent—say they’re falling behind financially, according to a new national survey by the Pew Research Center.

That’s not surprising, given that a recent Census Bureau study concluded that most Americans are worse off financially than they were before the recession, despite gains in the stock market and home prices.

Which is why Donna Freedman’s latest piece for Get Rich Slowly, “Why I voluntarily slashed my salary,” is a timely read.

Like the rest of us who wrote for MSN Money, Donna faced a big drop in income when the site pulled the plug on original content. Rather than try to recoup what she’d lost, though, Donna made a conscious decision to live on a lot less.

Donna’s situation is Donna’s. Yours is probably quite different. But I’m always inspired reading what she has to say about the benefits of a more frugal, conscious life.

That doesn’t mean I think that status quo is okay. The ever-widening gap between rich and poor is not okay. The huge debts young people take on to get educated is not okay.  The fact that most people’s finances can be seriously and permanently upended–by a layoff, a divorce, a death in the family–is not okay.

It’s also not okay to keep blaming individuals for what are clearly huge economic trends. Overspending on credit cards did not trigger the Great Recession.

But if you’re living with less, Job One is figuring out how to make that work, at least for now. Job Two may be pushing for change.

 

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Q&A: Repairing your credit score

Sep 08, 2014 | | Comments (0)

Dear Liz: After a divorce, I had to start my life over at 62. I got three credit cards. Somehow, I failed to see the online bills for one of them and neglected to pay it. The company didn’t contact me until three months had passed. I got a letter saying the small balance ($130) was forgiven and the card had been canceled. I was shocked. I made several calls but was told nothing could be done. Now one of the credit bureaus has my score at 640. I’m a reliable person and always pay my bills on time. This was a great oversight. Is there anything else I can do?

Answer: Even seemingly small missteps can have outsized effects on your credit scores. Missing even one payment can knock more than 100 points off good scores.

And as you’ve learned, creditors tend not to be sympathetic to the idea that you didn’t pay because you didn’t see the bills. You’re expected to know when your bills are due and pay them. A quick phone call or visit to the credit issuer’s website would have told you what you owed.
Fortunately, you still have the other two cards. Those should help you rehabilitate your credit scores as long as you use them properly and you don’t cause any further damage.

Before another day passes, set up automatic payments for both accounts. You typically can choose to have one of three amounts taken every month from your checking account: the minimum payment, the full balance or a dollar amount that you specify. Ideally, you would choose to pay off the full balance each month, since carrying a balance won’t help your scores and will cause you to pay unnecessary interest.

Mark the dates of the automatic payments on your calendar and set up alerts to make sure that there’s enough money in your checking account on that day.

Use both of your cards lightly but regularly, charging small amounts each month. Don’t use more than about 30% of your available credit — less is better. To rehabilitate your credit scores even faster, consider adding an installment loan to your credit mix, if you don’t already have one. Mortgages, car loans and personal loans are examples of installment loans.

Finally, make sure you don’t fall behind on any other bills or let any account, such as a medical bill, fall into collections. Another black mark would just extend the time it takes to rebuild your scores.

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Dear Liz: I am 64 and happily, gratefully receiving early Social Security benefits. My wife is 59, and when she turns 62 she will get half of my $1,650 monthly benefit. My question, though, is this: If she starts getting half of my benefit at 62, can she later switch to her own benefit? If she can get spousal benefits at 62 and switch to her own benefit when it maxes out at age 70, then starting early would be a no-brainer.

Answer: Yes it would, but that’s not how Social Security works.

First, your wife will not receive an amount equal to half of your check if she applies for spousal benefits before her own full retirement age, which is 66. Instead, she would be locked into a significantly discounted amount — closer to 35% of your benefit than 50% if she applies at 62. She also would lose the option of switching to her own benefit later. The “claim now, claim more later” strategy of starting with spousal benefits and then switching to one’s own benefit isn’t available to those who start early.

You’ve already left a lot of money on the table by starting benefits before you reached your own full retirement age. Having her begin benefits prematurely would just compound the problem. Remember too that when one of you dies, the other will have to live perhaps for many years on a single check. It makes sense to make sure that check is as large as it can possibly be.

AARP has excellent information on its site about Social Security claiming strategies, as well as a calculator that can help you see how much it pays to wait. Please educate yourselves before making a decision that you, or she, could live to regret.

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Dear Liz: I recently retired and started my own consulting business, which is doing very well. My question is on taxes. I have been told that I must pay quarterly taxes, but I have no idea if I will make $10 this month or $10,000. How do I estimate my income if I have no idea? Can I just wait till the end of the year and figure it out then?

Answer: You don’t want to do that. If you owe a significant amount at the end of the year, you’ll owe a substantial penalty on top of your tax bill.

The good news: The IRS requires you to figure your estimated quarterly taxes, not your “guesstimated” taxes. You’ll make the calculations based on what you actually earned that quarter, not what you expect to earn in the upcoming quarter.

Tax software programs such as TurboTax and TaxAct can help you make the calculations, but you’d be smart to hire a tax pro with experience advising small-business owners. The pro will have ideas about how to minimize and manage your tax bill. He or she also will be available to answer the many questions you’ll have about taxes, incorporation and other matters as your business grows. If you should be audited, a tax professional such as an enrolled agent or a certified public accountant would be able to represent you. (Even the most avid do-it-yourselfer should understand that representing yourself in an audit is not a good idea.)

You can get referrals from the National Assn. of Enrolled Agents at http://www.naea.org and the American Institute of CPAs at http://www.aicpa.org.

Categories : Q&A, Taxes
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Dear Liz: A friend of mine has told me that he thinks that I can apply for spousal benefits at my full retirement age and hold off getting my Social Security under my own work record until I am 70. Here is the scenario: My husband is 77 and has been collecting Social Security since he was 62. He continues to work. I will be 66 in November and I am still working. I plan to take Social Security at age 70. Can I apply for spousal benefits and receive an amount equal to half of what my husband receives from the age of 66 until I turn 70 and then apply under my own account at age 70 and receive my maximum benefit at that age? My friend feels strongly that this can be done, but I called Social Security and explained it clearly (or at least I thought I did) to them and they said that this could not be done. Then I went into the Social Security website and looked under “Spousal Benefits,” but the wording did not clearly say that this couldn’t be done.

Answer: What you’re describing is the “claim now, claim more later” strategy that can boost a couple’s lifetime Social Security by tens of thousands of dollars. It’s one of the approaches outlined in AARP’s excellent primer, “How to Maximize Your Social Security Benefits,” which you’ll find on its site, http://www.aarp.org, along with a calculator to help you understand how different claiming strategies could affect what you get.

These strategies capitalize on the fact that delaying the start of Social Security benefits results in substantially larger checks for life. In the case of two-earner couples, the “claim now, claim more later” strategy allows one spouse the option of getting checks (the spousal benefit) for a few years while allowing her own benefit to grow to its maximum.

As long as you wait until your own full retirement age to apply for spousal benefits, and your spouse is already receiving benefits, then you should be allowed to switch to your own benefit when it maxes out at age 70. If your spouse weren’t receiving benefits yet, but had reached his full retirement age, he could file for benefits and immediately suspend his application (“file and suspend”) so that you would be eligible for spousal benefits and his own benefit could continue to grow.

It’s not clear why you would have been told otherwise, since this isn’t exactly a secret strategy. But not all Social Security employees are equally informed. Sometimes calling back and asking your question again of another representative will result in a different or more complete answer.

When you file for benefits, make clear on the form that you are restricting your application to the spousal benefit only and aren’t collecting your own retirement benefit

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