CFP Board eNewsletter
February 2009
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CFP Board eNewsletter |
| If You’re Jobless, Remember You’re Not Helpless |
It’s said that misery loves company, but when you’ve lost your job, being one of 11 million out-of-work Americans is cold comfort. With the unemployment rate now 7.6 percent and threatening to go higher, a new job might be as hard to find as a qualified home buyer. If you are one of the many unfortunate unemployed, your first instinct may be to panic, then to sink into depression as dark and deep as the economic hole our nation seems to be in. My advice, as a CERTIFIED FINANCIAL PLANNER™ practitioner and Consumer Advocate to CFP Board, is resist the natural inclination to bunker down, shut your eyes, and turn off the lights. You are going to need to keep your eyes wide open, looking clearly and realistically to outside sources of help, as well to your own resources. Let’s start with reaching out. You need to talk to your ex-, or soon to be ex-employer, to understand exactly what benefits and assistance are available to you. Are you eligible for any benefits, such as unpaid sick leave, continued health care coverage through COBRA, programs for displaced workers or job search assistance? If it was the economy and not you that led to the elimination of your job, be sure to ask your boss for some reference letters; he or she may be pretty busy with similar requests, so you might offer to write the letters yourself for his or her signature. Your full-time job now is to identify, then find, your next job. If your former job wasn’t great—not exactly what you wanted to do and not what you needed (and deserved) to be paid—now is the time to get ready for the right job. Whom do you need to talk to? Start by gathering information from people who work in your targeted field before you actually apply for a job. What skills do you need to acquire or brush up on to take that next step? Where, and how, do you need to live to be available for that next opportunity? Do you need to relocate? Do you need to downsize? Don’t forget to keep your family up-to-date about your situation. If you were previously working so hard there was no time for family meetings, now is the time to hold frequent and regular talks around the kitchen table. Enlist your family’s support for your efforts; telling them how you will go about finding another job will make you accountable and thereby more motivated. Children will want to know how your job loss impacts them: does this mean a move or new school? Will their activities with their friends be affected? Be optimistic, but also be factual and specific. Don’t sugarcoat the situation. Make sure the family understands the need for some belt-tightening. Ask them for their ideas on how the family can work together to get through this time. Ask your spouse and kids to be your job scouts and champion marketers. The other day I had lunch with a colleague who handed me not one, but two, cards with her out-of-work husband’s number and email. “I think he can help you,” she said, “or someone else you may know.” Be realistic—the job search is going to take time. CFP® professionals are now recommending you have reserves to carry you through six to eight months, rather than three. For those who have been living paycheck to paycheck, this advice may seem like being told to “close the barn door after the horse is out,” so some additional horse-finding measures may be necessary. You’re looking around, you’re talking to others, but you’ve also got to look to yourself. This is the time to know your financial numbers inside and out. What does it cost you to live each month? Of those expenses, which are fixed (must be paid in a given amount), which are variable but nondiscretionary, and which are purely discretionary? Focus on the last two categories, and consider this: every $10 you can cut from your budget is equivalent to approximately $12 - $20 of earnings. When you have no outside income, you can at least “pay yourself” by slashing your expenses. If you have fixed expenses—the rent or the mortgage, the auto loan, credit card minimums—that cannot be cut and cannot be paid in the short term, talk to your creditors. Explain your unemployment situation and ask if alternative payment arrangements might be considered. Here is where being one of millions of newly unemployed may help. Your creditors are quite aware of what is going on in the economy and know, too, that we all have to work together to recover. Finally, seek professional advice, particularly if you are thinking of making any big changes—moving, selling assets, dropping insurance coverage, defaulting on debt—as a result of losing your income. To find a financial planning professional qualified by experience, education, and ethical standards, go to CFP Board’s Web site www.CFP.net where you can search for a CERTIFIED FINANCIAL PLANNER™ professional in good standing and close to where you live. Your friends and family can give you sympathy and encouragement, but a CFP® professional can help you look clearly and realistically at what you have and what you need to get back to financial stability.
Eleanor Blayney, CFP®
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Survey: Are You Building a Cash Reserve as a Possible Buffer in Case You Lose Your Job? |
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In the December 2008 edition of It’s Your Turn, we asked our readers to describe the main focus of their 2009 financial plan. It turns out they are serious about lightening their debt load—42 percent said they plan to reduce debt. Increasing savings came in a strong second, with 33 percent of the responses. Another 19 percent said they were selecting investments and 6 percent will focus on retirement planning.
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What You Need to Know About Bankruptcy |
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In 2007, more than a million people filed for personal bankruptcy, a 30% increase over the previous 12-month period, according to statistics compiled by the Consumer Bankruptcy Project. Americans aged 55 and older have experienced the sharpest rise in filings. And, as the credit crunch has piled further pressure on consumer finances, the number of individuals declaring bankruptcy has no doubt increased even more since the Consumer Bankruptcy Project survey was carried out. But bankruptcy is not an easy—or a pleasant—fix for financial problems. If you are thinking about filing for bankruptcy, here are some things to keep in mind. According to a 2006 survey by the National Foundation for Credit Counseling (NFCC), the number-one reason that consumers declared bankruptcy was “poor money management [and] excessive spending.” Other common reasons for filing can include reduced income or unemployment as well as health problems, divorce, or business setbacks. But the fact that lack of financial know-how topped the list suggests that consumers can greatly improve their chances of staying out of bankruptcy court by brushing up on the basics of personal finance. In many cases, better financial decision-making can make all the difference. That’s why Michael Rubin, CFP®, founder of the Portsmouth, N.H.-based financial education firm Total Candor and author of Beyond Paycheck to Paycheck, says bankruptcy “should always be the last choice. It’s not a silver bullet to get you out of short-term hardship. You should exhaust all other possibilities first before declaring bankruptcy, because the pain inflicted is real. Bankruptcy is not just going to wipe out your debts; it’s going to take most of your assets with it.” There are two basic forms of bankruptcy that affect consumers, both named after the chapters of the Bankruptcy Code in which they are described. Individuals file for Chapter 7 bankruptcy, also known as “liquidation,” when they can demonstrate that they are unable to pay their bills. A court process is then initiated to forgive most debts. Under Chapter 7, filers relinquish their remaining assets, if any, in exchange for the discharge of their debts. Not all debts are forgiven, however; back taxes, student loans, child support, and alimony, among others, must all still be paid off. Different states may allow certain assets to be protected, so consult an attorney to determine which exemptions are available in your state. A Chapter 7 bankruptcy remains on your credit record for a full decade. The Web site of the U.S. Federal Judiciary features a section with complete details on what Chapter 7 bankruptcy is and how to file for it. Chapter 13 bankruptcy, also known as “individual debt adjustment,” allows individuals to create a plan to pay off some of their debts, typically over a period of up to five years. Under Chapter 13, filers may retain more of their assets, such as their primary home, in exchange for an agreement to pay what they owe in regular installments. Debts are rescheduled rather than written off. But, Rubin points out, “you have to really believe the amounts to be repaid are achievable. If you don’t think you will be able to make the payments, then Chapter 13 is not going to work. You would be better off declaring Chapter 7.” A Chapter 13 filing remains on your credit score for seven years. The Web site of the U.S. Federal Judiciary features a section with complete details on what Chapter 13 bankruptcy is and how to file for it. To qualify for either Chapter 7 or Chapter 13, consumers must first take part in credit-counseling sessions provided by an approved credit-counseling agency. In fact, credit counseling can be part of a strategy to avoid having to declare bankruptcy in the first place. “If you think you are in financial trouble, talk to a credit-counseling agency,” Rubin suggests. “Prioritize your debt by paying off the highest-interest debts first. Try to work out different payment plans with your creditors. Try everything you can to avoid bankruptcy.” A credit counselor can work with you to put together a customized plan to get out of debt. For more information on credit counseling and how to find an agency in your state, see Is Credit Counseling Right for You? in the July 2007 issue of It’s Your Turn. The NFCC’s Member Agency Locator enables you to search for credit-counseling agencies by Zip Code. If you do decide to declare bankruptcy, it is vital to start the process of rebuilding your credit right away. “Your credit score will drop significantly and it will become much more difficult in the near-term to borrow,” Rubin says. “You will be paying much higher interest rates for much smaller amounts.” Rubin suggests starting small, with something like a secured credit card, which is backed by a savings account that the card issuer uses as collateral. One way to re-establish a healthy payment history is to use the card to make small purchases and then pay off the balance on the card in full every month. Other essential steps include creating a budget, starting an emergency fund, and ensuring that all your other bills are paid on time. For more tips on how to improve your credit rating, see The Credit Report Repair Kit in the December 2007 issue of It’s Your Turn. “What you don’t want to do after a bankruptcy is disappear” from the radar of financial institutions, Rubin says. “You want to do anything you can to show that you are a better credit risk and a more financially savvy consumer. By appropriately managing your money, you can solidify your debt management skills. Let financial institutions see that you are performing well on paying your bills, so that you will be in a much better position when the bankruptcy is a distant part of your credit history.” To make sure you get the fresh start you are entitled to after a bankruptcy, Rubin suggests monitoring your credit report. Periodic checks on your report will tell you if your debts have been wiped clean; if they haven’t, you can take the necessary steps to set the record straight. For information on how to track your credit and obtain a free copy of your credit report, see How to Keep Score of Your Credit in the September 2008 issue of It’s Your Turn. Bankruptcy is a complex legal and financial process, so always consult a legal professional before making any decisions. The Web site of the National Association of Consumer Bankruptcy Attorneys (NACBA) features a Bankruptcy Attorney Finder that allows users to locate attorneys by state. If you would like some professional financial advice, you can locate a CFP® professional in your vicinity through the Search for a CERTIFIED FINANCIAL PLANNER™ Professional page on CFP Board’s Web site. Online Resources National Association of Consumer Bankruptcy Attorneys (NACBA) NACBA is a national organization dedicated to serving the needs of consumer bankruptcy attorneys and protecting the rights of consumer debtors in bankruptcy. National Foundation for Credit Counseling (NFCC) The NFCC comprises over 100 non-profit member agencies and more than 900 local offices across the country, many of which are part of the Consumer Credit Counseling Service.
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To Refinance or Not To Refinance? |
The credit crunch has prompted a lot more people to pay much closer attention to their mortgages. But even so, a study commissioned last year by Bankrate.com found that 26% of Americans were still not quite sure which type of home loan they had. The good news is this is an improvement over 2007, when 34% of respondents said they didn’t know which type of mortgage they had. The number is still too high, though, especially at a time when mortgage rates are comparatively low and homeowners might benefit from refinancing (or renegotiating) their loans. So here is a quick overview of what to consider when answering the big question: To refinance or not to refinance? As mortgage rates have fallen over the past few months, there has been a corresponding spike in the number of homeowners looking to refinance, according to the Mortgage Bankers Association. But before deciding whether to refinance, you must first know what type of loan you have. There are two basic kinds of mortgages: adjustable-rate mortgages (ARMs), which feature interest rates that rise and fall with the rate set by the Federal Reserve, and fixed-rate mortgages, which feature interest rates that remain the same for the life of the loan. Each type of mortgage has its own advantages and disadvantages. For an overview of how ARMs and fixed-rate mortgages work, see The Meaning of Mortgages I: The Basics in the November 2007 issue of It’s Your Turn. Borrowers may consider refinancing to free up extra cash by lowering their monthly payments. Or they may want to move from an ARM into a fixed-rate mortgage to eliminate the risk that their ARM payments might adjust upwards again. Jumps in ARM payments are part of the reason that home foreclosures have increased so dramatically since the credit crunch hit. Although interest rates have fallen in recent months, lenders have also become more cautious. To get the best rate, homeowners need to have a rock-solid credit record. Plus, they typically need to have at least 20% equity in their homes in order to refinance at all. (Your equity is equal to the value of your house minus the outstanding amount of your mortgage.) “Rates are lower than they have been for several years, so it’s a great time to refinance,” says Bob Glovsky, CFP®, president of Mintz Levin Financial Advisors in Boston and chair-elect of CFP Board’s Board of Directors. “But lending is more restrictive, too. If your credit rating is not great, you may not be able to improve your situation. One thing to do is pull your credit report, clean it up, see if there are any mistakes. That might put you in a better position. If not, it may take time to improve your credit score”—and thereby improve your chances of getting a better interest rate. For information on how to track your credit and obtain a free copy of your credit report, see How to Keep Score of Your Credit in the September 2008 issue of It’s Your Turn. For tips on how to improve your credit rating, see The Credit Report Repair Kit in the December 2007 issue of It’s Your Turn. If you are able to find a more competitive rate, the next step, according to Alan Goldfarb, CFP®, director of financial strategies at Weaver and Tidwell Financial Advisors in Dallas and a member of CFP Board’s Board of Directors, is to “do the math. The biggest questions are: What can I afford to pay? How long do I plan to stay in the house? Look at the break-even point. If you pay $1,000 a month, for example, and can refinance to $800 a month, you will save $200 a month. If the cost of refinancing is $5,000, it will take just over two years to reach the break-even point [the point at which the cost of refinancing is met by savings on monthly payments]. Are you staying in the house that long? Are the savings big enough to warrant the change?” When doing the math, Goldfarb warns, beware of extra costs—like application fees, attorney’s fees, credit checks, appraisals, and other closing costs—that might make refinancing less cost-effective. “If you do refinance, watch out for penalties for prepaying,” says Goldfarb, referring to the amount lenders may charge if you pay off all or part of your mortgage early. “Be sure you know what kind of prepayment you can make and what, if any, penalties there are if you want to refinance. That’s what makes refinancing expensive.” Goldfarb also suggests knowing exactly what you’re paying every month. “A monthly payment could be made up of the mortgage principal [the amount you actually borrowed] and interest, personal mortgage insurance (PMI), property taxes, home owner’s insurance, all in the same payment,” he says. “Separate these things out. If you have more than 20% equity in your home, you may not even need PMI anymore so that will save some dollars. It pays to be aware of these things.” So, while it’s true that credit may well be more difficult to come by these days, “that doesn’t mean people shouldn’t try to refinance,” says Glovsky. “Work with a broker; shop around. If you can lock in an interest rate of 5%, that’s pretty cheap money. What have you got lose? Nothing.” If you would like some professional advice on refinancing, you can locate a CFP® professional in your vicinity through the Search for a CERTIFIED FINANCIAL PLANNER™ Professional page on CFP Board’s Web site. Online Resources It’s Your Turn published a three-part series with basic information on mortgages as well as an article with tips on managing home equity: The Meaning of Mortgages I: The Basics The Meaning of Mortgages II: Getting the Credit You Deserve The Meaning of Mortgages III: Reasons to Refinance Bankrate.com features Will you save by refinancing your mortgage?, which can help you calculate and compare payments to determine whether refinancing might make sense for you. The Mortgage Bankers Association’s Home Loan Learning Center has a wealth of information on mortgages and buying a home.
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Financial Alerts |
Not All CDs Are Created Equal
Sandwich Generation Caught in the Middle Read more financial alerts.
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About This eNewsletter |
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CFP Board's "It's Your Turn" eNewsletter is sent monthly to those who have subscribed through CFP Board's Web site, www.CFP.net/learn. CFP Board exists to make people aware of the benefits of financial planning and to encourage people to seek out individuals who can help them apply the financial planning process to improve their financial lives. This eNewsletter is designed to provide information about financial planning, financial planning tools and resources, consumer alerts and more. Suggestions and feedback are welcome at mail@CFPBoard.org.
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