New Financial Habits in the Post-Recession Age

If you’re like many, you’ve spent the past few years scrimping and saving. These are great habits to keep, even if your financial situation has improved. 

If you still haven’t taken those steps, you might want to think about making these changes:

Restart your finances with a thorough financial plan. If you’ve lost a job or have been struggling to get control of your debt, savings or investments, plan a visit now with a Certified Financial Planner™ professional. At the meeting you can also examine spending patterns and the emotional drivers behind many of your financial decisions. If you don’t have a planner in mind, the Financial Planning Association has a website where you can search by location and specific planning issues.

Create a budget. If you’ve never tracked your spending before, make a commitment to do so for at least two months as you pull together financial statements, income sources and your bills. Start separating all your expenses into both fixed (amounts that don’t change) and variable (amounts that may change, such as restaurant meals, gasoline expenditures and entertainment expenses). Take into account any major expenses that are coming up within the year. Total your monthly income and expenses and then start identifying the expenses that you can trim and figure out whether you can direct the money you save to spending or debt. Congratulations! You’ve created your first budget. Also, don’t ignore planning for perks and vacations and make sure you plan ahead for big expenditures, such as cars and retirement.

Go cash or debit. Return credit cards to their correct status—a way to afford emergencies. Debit cards with a bankcard logo are typically welcome at most stores where credit cards are accepted. This way, you pay cash without carrying cash. If you don’t have such a card, you can probably get one from your bank or credit union to replace your traditional ATM card, but remember to tell them to limit your buying power to the cash balance in your account. Also check to make sure what protections exist on that card if it is lost or stolen and if they will forgive the balance in the event of the cardholder’s death. Be aware that some banks freeze your underlying checking account for your debit card until a dispute regarding an item purchased with a stolen card is resolved.

Live off lists. Yes, everyone makes shopping lists from time to time so they don’t forget to bring home milk and bananas. But the advantage of making very detailed shopping lists for everything—preferably on one page—is that it’s really a good way to keep impulse spending down. If, for example, you have a week of unexpected expenses (car repair, home repair, unexpected fees for your child at school), you can see what real priority items are and what you might be able to do without.

Set a schedule for checking your credit report. This is not so much a spending issue as a way to monitor the ongoing safety of your accounts and your borrowing status. You have three credit reports to check—TransUnion, Equifax and Experian—and you have the right to get all three of these for free once a year. The best way to do this is to request each report at staggered points during the year at annualcreditreport.com, which is the only guaranteed free site to order these reports. If any credit report site requests a credit card number before it surrenders a report, chances are good that you’ll be paying for that “free” report. Why should you stagger your reports? Because the same information travels between each agency and if there is an error or security breach, you may catch it faster if you’re checking throughout the year rather than at one time only.

Comparison shop at your desk. Shopping online has its own risks, including paying expensive shipping fees and overspending with a simple click among them. However, using the Internet to browse and compare prices can save time, gasoline and money. Websites like eBay, Amazon or mySimon.com can help you determine general price ranges for gifts you need that are sold online. Once you have those ranges, get on the phone and determine whether you can buy the same items more affordably at retailers close to home.

Don’t shop without coupons and discount codes. You don’t have to buy a newspaper to get coupons anymore. If you know particular stores where you’ll shop, sign up for their email lists. You’ll start receiving coupons and news of specials on a regular basis. If you buy particular products regularly, go to the manufacturer’s website and see if you can sign up for regular discounts online and in the mail. Also, if you do shop online, sites like BradsDeals.com and CouponCabin.com have promotional codes that you can type in for discounts before you hit the “total” button on an order. Usually, these codes will cover free shipping, but they might also buy additional discounts on an order. Never complete an online order without searching for a promotional code.

This article was submitted by the Financial Planning Association, the membership organization for the financial planning community. FPA members are dedicated to supporting the financial planning process in order to help people achieve their goals and dreams. Submission of this article does not imply an endorsement or recommendation of the Financial Resource Center site.

Why Your Hobby May Be Taxed

Here are eight questions that will help determine if your activity is a hobby or a business:

1. Is the purpose of your activity to make a profit? Generally, your activity is considered a business if you expect to earn a profit.
2. Do you participate in your activity just for fun? Hobbies, also called not-for-profit activities, are those activities that are not pursued for profit.
3. Do you depend on income from the activity? If so, your activity is likely considered a business.
4. Have you changed methods of operation to improve profitability? If so, your hobby may actually be a business.
5. Do you have the knowledge you need to turn your activity into a successful business? People who carry out hobbies just for fun often don’t have the business acumen to turn their not-for-profit activity into a profitable business venture.
6. Have you made a profit in similar activities in the past? This may mean your activity is a business instead of a not-for-profit hobby. An activity carries a profit if it makes a profit in at least three of the last five tax years, including the current year—or at least two of the last seven years for activities that consist primarily of breeding, showing, training or racing horses.
7. Does the activity make a profit in some years? Even if your activity does not make a profit every year, it still may be considered a business.
8. Do you expect to make a profit in the future from the appreciation of assets used in the activity? This indicates your activity may be a business rather than a hobby.

If your activity is not carried on for profit, allowable deductions cannot exceed the gross receipts for the activity. If you are conducting a trade or business you may deduct your ordinary and necessary expenses.

More information about not-for-profit activities is available in Publication 535, Business Expenses, available on the IRS website or by calling 800-TAX-FORM (800-829-3676).

Millionaire Secrets to Success

Patience and hard work aren’t all you need to reach financial success. We’ve got some secrets from self-made millionaires to help you make your own fortune:

• Set some clear goals. You’ve got to dream big if you want to succeed on a large scale. Don’t be afraid of your ambitions. Start with a list of what you want to achieve this year, and then select the one goal that would have the greatest positive impact on your life, something you feel real passion for. Then get to work.
• Educate yourself about money. Even if you don’t have your sights set on becoming the next Warren Buffett, a good understanding of finance will help you set priorities and make decisions about spending, investments, and savings. Immerse yourself in all the information you can find about the field that interests you. Knowledge is power.
• Think of yourself as your own CEO. Whether you work for a boss or for yourself, view your career and success as your own. That means taking full responsibility for what happens to you—your decisions, failures, and triumphs. It also means putting all your energy into your goals. Motivational guru Brian Tracy advises taking the “40+” approach: You work 40 hours a week for survival, but that’s only the beginning. Every minute you devote past that 40 hours is devoted to your success.
• Serve other people. Structure your goals so they’re not just about you. You’ll earn support from the people whose help you need by showing them how your achievements will benefit them—and you’ll feel better about yourself than you would if you concentrate only on what’s in it for you.
• Learn to sell yourself. Whatever you create, you have to sell to someone else. You’ll need to understand sales and marketing no matter what industry you’re in. But at the same time, you have to sell others on your abilities. Be honest and reliable so customers, investors, and other important stakeholders know they can trust you to take care of them.

How much is enough homeowner’s insurance?

How much is enough homeowner’s insurance? We’ve got some useful tips to help you figure it out.

You need enough insurance to cover the following:

• The structure of your home
• Your personal possessions
• The cost of additional living expenses if your home is damaged and you have to live elsewhere during repairs
• Your liability to others

The structure— You need enough insurance to cover the cost of rebuilding your home at current construction costs. Don’t include the cost of the land, and don’t base your rebuilding costs on the price you paid for your home. The cost of rebuilding could be more or less than the price you paid or could sell it for today.

Some lenders require you to buy homeowner’s insurance to cover the amount of your mortgage. If the limit of your insurance policy is based on your mortgage, make sure it’s enough to cover the cost of rebuilding. (If your mortgage is paid off, don’t cancel your homeowner’s policy. Homeowner’s insurance protects your investment in your home.)

For a quick estimate of the amount of insurance you need, multiply the total square footage of your home by local building costs per square foot. To find out construction costs in your community, call your local real estate agent, builders’ association or insurance agent.

Factors that will determine the cost of rebuilding your home:

• Local construction costs
• The square footage of the structure
• The type of exterior wall construction — frame, masonry (brick or stone) or veneer
• The style of the house (ranch, colonial)
• The number of bathrooms and other rooms
• The type of roof and materials used
• Other structures on the premises such as garages and sheds
• Fireplaces, exterior trim, and other special features like arched windows
• Whether the house, or parts of it like the kitchen, were custom built
• Improvements to your home — adding a second bathroom, enlarging the kitchen, or other additions that have added value to your home

Standard homeowner’s policies provide coverage for disasters such as damage due to fire, lightning, hail, explosions and theft. They do not cover floods, earthquakes or damage caused by lack of routine maintenance. Flood insurance is available from the Federal Insurance Administration and earthquake coverage is available from private insurance companies or, in California, also through the California Earthquake Authority.

Replacement cost policies — Most policies cover replacement cost for damage to the structure. A replacement cost policy pays for the repair or replacement of damaged property with materials of similar kind and quality. There is no deduction for depreciation, the decrease in value due to age, wear and tear, and other factors. If you purchase a flood insurance policy, coverage for the structure is available on a replacement cost basis.

Guaranteed or extended replacement cost coverage — After a major hurricane or a tornado, building materials and construction workers are often in great demand. This can push rebuilding costs above homeowner’s policy limits, leaving you without enough money to cover the bill. To protect against such a situation, you can buy a policy that pays more than the policy limits.

An extended replacement cost policy will pay an extra 20 percent or more above the limits, depending on the insurance company. A guaranteed replacement cost policy will pay whatever it costs to rebuild your home as it was before the fire or other disaster.

Building codes — Building codes are updated periodically and may have changed significantly since your home was built. If your home is badly damaged, you may be required to rebuild your home to meet new building codes. Generally, homeowner’s insurance policies (even a guaranteed replacement cost policy) won’t pay for the extra expense of rebuilding to code. Many insurance companies offer an Ordinance or Law endorsement that pays a specified amount toward these costs. (An endorsement is a form attached to an insurance policy that changes what the policy covers.)

Inflation guard — Consider adding an inflation guard clause to your policy. This automatically adjusts the dwelling limit when you renew your policy to reflect current construction costs in your area.

Older homes — If you own an older home, you may not be able to buy a replacement cost policy. Instead, you may have to buy a modified replacement cost policy. This means that instead of repairing or replacing features typical of older homes, like plaster walls and wooden floors, with similar materials, the policy will pay for repairs using the standard building materials and construction techniques in use today.

Insurance companies differ greatly in how they insure older homes. Some won’t insure older homes for the replacement cost because of the expense of re-creating special features like wall and ceiling moldings and carvings. Other companies will insure older homes for the replacement cost as long as the dwelling is in good condition.

If you can’t insure your home for the replacement cost or choose not to do so, make sure the limits of the policy are high enough to provide you with a house of acceptable size and quality.

Your personal possessions — Most homeowner’s insurance policies provide coverage for your personal possessions for approximately 50% to 70% of the amount of insurance you have on the structure or “dwelling” of your home. The limits of the policy typically appear on the Declarations Page under Section I, Coverages, A. Dwelling.

To determine if this is enough coverage, you need to conduct a home inventory. This is a detailed list of everything you own and information related to the cost to replace these items if they were stolen or destroyed by a disaster such as a fire. If you think you need more coverage, contact your agent or insurance company representative and ask for higher limits for your personal possessions.

Replacement Cost or Actual Cash Value — You can insure your possessions in two ways. You can either insure your belongings for their actual cash value or their replacement cost.

A cash value policy pays the cost to replace your belongings minus depreciation. A replacement cost policy, on the other hand, reimburses you for the cost to replace the item.

Suppose, for example, a fire destroys a 10-year-old TV set in your living room. If you have a replacement cost policy for the contents of your home, the insurance company will pay to replace the TV set with a new one. If you have an actual cash value policy, it will pay only a percentage of the cost of a new TV set because the TV has been used for 10 years and is worth a lot less than its original cost. Some replacement cost policies also replace the item and deliver it to you. Generally, the price of replacement cost coverage is about 10% more than actual cash value.

If you need a flood insurance policy, you can purchase flood insurance for your belongings. It is only available, however, on an actual cash value basis.

Insuring expensive items with floaters/endorsements — There may be limits on how much coverage you get for expensive items such as jewelry, silverware, and furs. Generally, there is a limit on jewelry for $1,000 to $2,000. You should ask your agent or look it up in your policy. This information is in Section I, Personal Property, Special Limits of Liability. Insurance companies may also place a limit on what they’ll pay for computers.

If the limits are too low, consider buying a special personal property floater or an endorsement. These allow you to insure these items individually or as a collection. With floaters and endorsements, there is no deductible. You are charged a premium based on what the item (or collection) is, where you live and its dollar value.

You can determine the value by providing your agent with a recent receipt or getting the item or collection appraised.

Additional living expenses after a disaster — This is a very important feature of a standard homeowner’s insurance policy. This pays the additional costs of temporarily living away from your home if you can’t live in it due to a fire, severe storm or other insured disaster. It covers hotel bills, restaurant meals and other living expenses incurred while your home is being rebuilt.

Coverage for additional living expenses differs from company to company. Many policies provide coverage for about 20% of the insurance on your house. Some companies will even sell you a policy that provides you with an unlimited amount of loss of use coverage, for a limited amount of time.

If you rent out part of your house, this coverage also reimburses you for the rent that you would have collected from your tenant if your home had not been destroyed.

You should talk to your agent or company to make sure you know exactly how much coverage you have and how long the coverage will be in effect. In most cases, you can increase this coverage for an additional premium.

Liability to others — This part of your policy covers you against lawsuits for bodily injury or property damage that you or family members cause to other people. It also pays for damage caused by pets. It pays for both the cost of defending you in court and for any damages a court rules you must pay.

Generally, most homeowner’s insurance policies provide a minimum of $100,000 worth of liability insurance, but higher amounts are available. Increasingly, it is recommended that homeowner’s consider purchasing at least $300,000 to $500,000 worth of coverage of liability protection.

Umbrella or Excess Liability — You should buy enough liability insurance to protect your assets. If you own property and/or have investments and savings that are worth more than the liability limits in your policy, you may consider purchasing an excess liability or umbrella policy.

Umbrella or excess liability policies provide extra coverage. They start to pay after you have used up the liability insurance in your underlying home (or auto) policy. An umbrella policy is not part of your homeowner’s policy. You have to purchase it separately. In addition to providing a higher dollar amount, they offer broader coverage. You are covered for libel, slander, and invasion of privacy. These things are not covered under standard homeowner’s or auto policies.

The cost of an umbrella policy depends on how much underlying insurance you have and the kind of risk you represent. The greater the underlying liability coverage is, the cheaper the policy is. This is because you would be the less likely to need the additional insurance. Most companies will require a minimum of $300,000 on your home and your car, if you own one.

This article was submitted by the Insurance Information Institute, an organization that provides facts and assistance free of charge to the media, individuals and organizations. Submission of this article does not imply an endorsement or recommendation of the Financial Resource Center site.

What to Know about Home Office Deductions

With technology making it easier than ever for people to operate a business out of their house, many taxpayers may be able to take a home office deduction when filing their 2013 federal tax return next year.

Here are five important things the IRS wants you to know about claiming the home office deduction.

1. Generally, in order to claim a business deduction for your home, you must use part of your home exclusively and regularly:

• As your principal place of business, or
• As a place to meet or deal with patients, clients or customers in the normal course of your business, or
• In the case of a separate structure which is not attached to your home, it must be used in connection with your trade or business
• For certain storage use, rental use or daycare-facility use, you are required to use the property regularly but not exclusively.

2. Generally, the amount you can deduct depends on the percentage of your home that you used for business. Your deduction for certain expenses will be limited if your gross income from your business is less than your total business expenses.

3. There are special rules for qualified daycare providers and for persons storing business inventory or product samples.

4. If you are self-employed, use Form 8829, Expenses for Business Use of Your Home, to figure your home office deduction. Report the deduction on line 30 of Schedule C, Form 1040.

5. Different rules apply to claiming the home office deduction if you are an employee. For example, the regular and exclusive business use must be for the convenience of your employer.

For more information see IRS Publication 587, Business Use of Your Home or by calling 800-TAX-FORM (800-829-3676).

Five Ways to Spot a Fake IRS Email

Be on the lookout for email scams circulating that fraudulently use the Internal Revenue Service name or logo as a lure – all to trick you into giving up personal and financial information. The scammers can then use your information (such as your Social Security number, bank account or credit card numbers) to commit identity theft and steal your money.

Here are five things the IRS wants you to know about phishing scams.

1. The IRS does not send unsolicited email about a person’s tax account or ask for detailed personal and financial information via email.

2. The IRS never asks taxpayers for their PIN numbers, passwords or similar secret access information for their credit card, bank or other financial accounts.

3. If you receive an email from someone claiming to be the IRS or directing you to an IRS site:

Do not reply to the message.
Do not open any attachments. Attachments may contain malicious code that will infect your computer.
Do not click on any links. If you clicked on links in a suspicious email or phishing website and entered confidential information, visit IRS.gov and enter the search term ‘identity theft’ for more information and resources to help.

4. You can help shut down these schemes and prevent others from being victimized. If you receive a suspicious email that claims to come from the IRS, you can forward that email to a special IRS mailbox, phishing@irs.gov. You can forward the message as received or provide the Internet header of the email. The Internet header has additional information to help us locate the sender.

5. Remember, the official IRS website is http://www.irs.gov. Don’t be confused or misled by sites claiming to be the IRS but end in .com, .net, .org or other designations instead of .gov.

Money Don’ts

Sometimes the difference between being eternally broke and financially comfortable is just a few simple things you shouldn’t do. Avoid these basic money mistakes:

• Not tracking your spending – Pay attention to where your money goes. Your credit card statement will help you do this, but don’t forget all the incidentals you pay cash for. With this data, you’ll find it easier to stick to your budget. And speaking of budgets …
• Not setting up a budget (and sticking to it) – This advice may seem really basic, but many smart people don’t take it seriously. Figure out how much money you realistically need to pay bills and buy needed supplies for a week or month, and don’t go over it.
• No emergency fund – Set aside some money for emergencies, and don’t touch it for any other reason. Ten or 20 dollars a month can add up, especially if it’s growing interest.
• Not shopping around – Take the time to look for the best prices and avoid those impulse buys. Stock up on essentials on sale, and always look for opportunities to negotiate a better deal.
• Borrowing too much money – Don’t put more on your credit card than you can pay off at the end of the month. Resist the urge to buy more house than you can afford, and don’t be seduced by reward programs that entice you to buy extravagances in order to get bonus points.
• Not watching your credit rating – Know your credit score so you can avoid problems when you really need to borrow money. Make sure all the information is correct, and watch out for signs that your identity has been stolen.