Can it be another year is nearly over?
Typically in the last weeks of December, I like to reflect on my personal financial life. I take stock (sorry, just like that pun) of whether I followed all the advice I got during the year from my financial adviser. (I did.)
OK, I did 75 percent of what she told me to do.
Year-end is also a time to catch up on what’s happened in personal finance. Here’s a rundown of some noteworthy money matters from 2005:
New bankruptcy rules. It’s now harder to declare yourself broke. Under the new law that went into effect this year, debtors have to meet a means test to be eligible for Chapter 7. Under the old bankruptcy rules, most people decided for themselves which type of bankruptcy they wanted to file. And most chose Chapter 7, where you can generally wipe out all your unsecured debt. Now more people may have to file a Chapter 13 bankruptcy, in which you have to pay back some of your debts.
Credit reports became free to everybody. It used to be only residents in seven states could get their credit reports for free. Everyone is now entitled to get free credit reports once every 12 months from the three nationwide credit bureaus – TransUnion, Experian and Equifax. To order your free credit reports so you can look out for fraudulent accounts or charges go to www.annualcreditreport.com or call 877-322-8228.
Please be aware there are impostor Web sites out there. Only the online site I just mentioned is authorized by the federal government to provide the free annual credit report you are entitled to under the new law.
Minimum credit card payments increased across the board. Federal regulators ordered credit card issuers to increase the minimum monthly payments consumers have to make. The regulators want the banks and other financial institutions to require that cardholders cover at least 1 percent of their outstanding balance each month. This is in addition to any finance charges or fees owed.
Why the change? See next year-end development.
Savings rate falls below zero. In October, the U.S. Department of Commerce reported a negative national personal savings rate of 0.7 percent. That means people are spending more than they make by using credit cards, borrowing against the equity in their homes, tapping their savings or selling assets, such as stocks. “Americans are not saving as much as they used to and this spells potential disaster (in) the future,” said Phillip Fournier, vice president of Legacy Advisors, an investment management and financial planning firm based in McLean, Va.
I once had a reader ask me if it was OK to take out a home equity line of credit instead of creating an emergency savings fund. His theory was if he got into financial trouble, he could just draw down on the line of credit.
He could do that.
But the point of having a savings cushion is so that it can carry you through a financial disaster or hardship using your own money – not borrowed funds. That line of credit the reader wanted to establish should be his second line of defense, not his first. As a goal, save enough to cover at least three months of living expenses. Six months is even better.
Investing in lifecycle mutual funds was up. Assets in lifecycle funds have more than doubled since 2000, making it one of the fastest-growing parts of the mutual fund world. Lifecycle funds were added this year to the federal government’s Thrift Savings Plan and the funds have become a huge hit.
Lifecycle funds are a way to diversify your retirement savings plan by relying on professionally determined investment mixes that are tailored to when you think you will need the money.
Surveys show people often don’t change their asset allocations once they sign up for a retirement plan because they don’t know what to do.
Investing in a lifecycle fund is essentially like putting your retirement account on automatic pilot – except there is a pilot, it’s just not you.
And we all know that saving for retirement is going to be important since there is a projected shortfall in Social Security in the near future.
Seventy years ago this year, President Franklin D. Roosevelt signed the Social Security Act. And thankfully this past year, President Bush was pushed back from making a change to the Social Security safety net by creating personal accounts. It was a plan that had lots of problems.
Seventy years later the need is still great for a social safety net.
In signing Social Security into law, Roosevelt said: “We can never insure 100 percent of the population against 100 percent of the hazards and vicissitudes of life, but we have tried to frame a law which will give some measure of protection to the average citizen and to his family against the loss of a job and against poverty-ridden old age.”
If time is money, I hope in 2006 you’ll take the time to learn more about personal finance.
Washington Post Writers Group
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