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Author Archives: Andrew Zumwalt

Six Credit Myths

Hello! The Financial Tip of the Week is back just in time for the cool fall Missouri weather.

There have been some changes at the Personal Financial Planning department at the University of Missouri:

Dr. Robert Weagley, Associate Professor, retired last fall, but he had stayed as chair of the Personal Financial Planning department for one year. After many, many long years of serving the students of the university and the people of Missouri, he has moved on to other pursuits including visiting grandchildren. He can still be reached at his MU email, weagleyr@missouri.edu.

Dr. Michael Guillemette, Assistant Professor, will be moving on to Texas Tech University at the beginning of 2017. He taught many of the personal finance courses in the Personal Financial Planning Department and published much research during his tenure here at MU.

With these changes in personnel, MU has career opportunities!

Here is the link to apply for the Assistant Professor position: https://goo.gl/QozR4c

Here is the link to apply for the department chair position: https://goo.gl/ucew2M

Now, since this is a financial tip, we didn’t want to end it before actually providing a tip. So below, please find six myths about credit. See you next week!

Six Credit Myths

A credit score is a number based on your past credit history used by banks, lenders, landlords, employers and many others to try and predict your future reliability. Your credit score matters, but it’s not always clear what hurts or helps your score. Here are six common myths about credit scores and the related truth.

  1. Myth: Having no credit history is the same as good credit.
    FALSE! While having no credit history is better than having bad credit history, it’s not the same as having a solid track record managing credit. You have to use credit to influence your credit score, and it may be tough to establish credit without a credit history and an established relationship with a financial institution.
  2. Myth: You need to carry a balance in order to improve your credit score.
    FALSE! Carrying a balance from month to month does not improve your score, but it will cause you to pay interest. You can establish credit just as well by paying your charges off each billing cycle.
  3. Myth: Your income is used to calculate your credit score.
    FALSE! Your income is not listed on your credit report and isn’t used to calculate a credit score. However, a lender may ask for proof of income to verify that you can repay a loan.
  4. Myth: You need to pay to view your credit report.
    FALSE! AnnualCreditReport.com provides a free annual credit report from each of the three credit reporting agencies. The site even has it’s own jingle (just make sure you’re only visiting annualcreditreport.com and not falling for other similar catchy ads that later require you to pay for something).
  5. Myth: Paying off and closing an account can help improve your score.
    Partly FALSE! Paying down your debt can help your credit score, but actually closing the credit account can change your percentage of available credit (amount borrowed/total amount available to be borrowed). Lenders prefer to lend to individuals that are not using much of their credit, and they also like to see long credit histories.
  6. Myth: The amount of money you owe alone determines your credit score.
    FALSE! As mentioned in the previous example, lenders review how much of your total credit you have borrowed as a percentage of what you could borrow. This part of the credit score involves your “utilization ratio”, and lower is better. If you are using most of the credit available to you, then lenders may be wary of lending you more money. For example, let’s say you have a credit card with a limit of $1000 and you owe $900. If that same card had a credit limit of $2000 and you still owed the same $900, you’d have a lower ratio (which contributes to a higher credit score).

Use Spring Cleaning to Air Out Your Finances

Many people engage in spring cleaning to clean out the clutter that has accumulated during the winter months. This is a good time to air out your finances as well. If you have had some major life events since the last time you examined your financial life, you might discover some dusty financial accounts that you had forgotten about.

As people age, checking and savings accounts may accumulate. One of the first tasks involved with moving to a new location is to set up accounts with local financial institutions; however, people often forget to close down the accounts at the place they moved away from. Similarly, married couples often open new joint checking and savings accounts, but they may leave old accounts from their single years open. Savers interested in the highest interest rates move their money around as they chase after the highest yielding accounts. They may also leave their old accounts open either due to neglect or on the chance that the account may again be an interest rate leader.

The accumulation of dusty accounts happens with retirement accounts as well. Employees will change jobs and often leave their 401(k) or 403(b) with their former employer. Employees that are quickly climbing the corporate ladders between companies may find themselves with several retirement accounts, each having different rules and investment options. Keeping tabs on each of these accounts and maintaining an overall picture can be daunting.

What are some of the problems with leaving accounts open? First, it makes recordkeeping much more complicated. Receiving multiple statements in the mail at the end of each quarter or month can strain simple recordkeeping systems, especially if the accounts hold negligible amounts of money. Furthermore, multiple accounts can cause headaches at tax time. If you receive an interest statement showing that you earned $25 in interest after you’ve filed your tax return, you will have to amend your return with the complicated and costly 1040X. The $25 interest may cost you upwards of $150 in additional tax preparation fees. Second, you may be charged inactivity fees if your account shows no activity. These fees, ranging from $5 to $10 per month, may slowly eat away at your account balance, until your account turns negative. Thirdly, it may cause headaches for your heirs. If you have a hard time keeping track of your accounts, imagine what your heirs will feel as they try to untangle your financial situation.

So, what to do: As the earth renews itself this spring, take some time to shake out the dust and breathe new life into your financial plans. Step back and examine your entire financial situation. Are you meeting the goals you’ve set for yourself financially? If you haven’t set any goals, now might be a good time to set some after you’ve organized your financial life. If you have multiple old checking and saving accounts, decide if you really need them and close the unneeded accounts. Consolidate your accounts so that your financial situation becomes less stressful and easier to manage. If you have multiple retirement accounts, you might want to consider rolling them into your current employer’s retirement plan or into your own retirement account at an independent financial institution. Take some time to review your will and other end-of-life documents. If situations have changed since the last time you updated the documents, draft and sign new documents reflecting your current situation.

Taking care of these details now will likely make the financial aspect of your life less stressful for you throughout the year.

Podcasts for your Thanksgiving Holiday Drive

AAA Travel predicts that 46.9 million Americans will travel 50 miles or more Thanksgiving weekend, the highest amount since 2007. For this Financial Tip, I would like to share my favorite pastime while driving: listening to podcasts.

What is a podcast:

A podcast is usually episodic media, generally audio, that is either delivered to your media player or downloaded from the Internet. Podcasts have an advantage over radio in that the content can be consumed on the listener’s schedule.

How to listen to podcasts:

If you have a smartphone, listening to podcasts is incredibly easy. For Apple phones, iTunes can serve as your podcast manager. For Android phones, there are several apps that can download, manage, and play your podcasts. The Verge recently posted a review of Android podcasting apps.

If you don’t have a smartphone, you can still listen to podcasts. If you have an mp3 player, many podcast websites will allow you to download the podcast files, and you can manually load them into the player. If you don’t have an mp3 player, you can still download the files and burn them onto a CD for playback in your car’s CD player. If your car doesn’t have a CD player, you could record the podcast onto cassette tapes for playback in your car’s tape deck.

Below is a list of my favorite financial and/or economic podcasts:

NPR’s Planet Money

From the NPR Planet Money website: “Imagine you could call up a friend and say, “Meet me at the bar and tell me what’s going on with the economy.” Now imagine that’s actually a fun evening. That’s what we’re going for at Planet Money.” The podcasts delivers content in a narrative format as the reporters interview relevant people and explore the topic of the episode. Podcasts are also short, about 15 minutes, which gives enough time to explore a topic and not overly bore the listener. The Planet Money team have produced over 650 episodes; some of the topics include:

Why Coke cost a nickel for 70 years
The tale of the onion king
The signature
The power of free
The Hydrox resurrection
The afterlife of a T-shirt
Two radio guys walk into a bar

The Planet Money team have also created several series that allow for more depth. Their most famous series follows the creation of a T-shirt. They interviewed cotton farmers in the Southern United States, workers in the yarn factories of Indonesia and T-shirt factories of Bangladesh, cargo ship captains, and more.

Freakonomics

Freakonomics was made famous by the 2009 book, “Freakonomics: A Rogue Economist Explores the Hidden Side of Everything.” Authors Steven D. Levitt and Stephen J. Dubner explore the use of economics to explain unintended consequences and examine topics generally not associated with economics. More books followed, but Freakonomics also spread to radio and podcasts in partnership with WNYC. The Freakonomics podcast also uses the narrative format that allows for easier listening.

Freakonomics podcasts are longer, generally 45 minutes or so. Recent podcasts included:

Should everyone be in a rock band
How to save $1 billion without even trying
How to win a Nobel prize
How did the belt win
The president of Harvard will see you now
The dangers of safety

EconTalk

From the website: The weekly talk show features one-on-one discussions with an eclectic mix of authors, professors, Nobel Laureates, entrepreneurs, leaders of charities and businesses, and people on the street. The emphases are on using topical books and the news to illustrate economic principles. Exploring how economics emerges in practice is a primary theme.

Compared to the prior two podcasts, the host of EconTalk, Russ Roberts, interviews one guest for about 60-75 minutes. Below is a list of interesting episodes from the podcasts almost ten year history:

Mike Munger on milk: why is milk really at the back of the store? Is it really a conspiracy?
Tim O’reilly on technology and work: discussion on the early days of the internet, how technology has changed work, and the poetry of Elizabeth Bishop.
Emily Oster on pregnancy, causation, and expecting better: Oster discusses her review of the medical literature concerning pregnancy.
Brendan O’Donohoe on potato chips and salty snacks: a look behind the scenes at how chips are made and sold in retail stores.
Joseph Stiglitz on inequality: Nobel Laureate Joseph Stiglitz discusses the increase in inequality and his prescriptions for changing the economy.
John Bogle on investing: John Bogle, founder of the Vanguard Group, discusses the early history of index funds and the disconnection between direct and indirect investors.

Marketplace by American Public Media

You may be familiar with Marketplace from your local NPR station; the show is also available as a podcast! In addition, other shows within the Marketplace brand are available:

*Descriptions from the Marketplace website
Marketplace: The flagship program examines what the day in money delivered, through stories, conversations, newsworthy numbers and more.
Marketplace Weekend: A relaxed yet informative look at where the economy collides with real life. It’s everything from the paycheck to the personal.
Marketplace Wealth & Poverty: Where class, income inequality and the growing wealth gap intersect
Marketplace Tech: An examination of the business behind the technology that’s obsessing us and changing our lives.

Listener beware: The podcasts I’ve specifically listed above are sponsored by nonprofits or not for profits. They generally do not have products to sell, but they may ask for a monetary donation. Other podcasts may be advertising channels for additional products or services. Famous radio personalities (Clark Howard, Dave Ramsey, etc…) have ported their radio shows to the podcast format for easier consumption. Several financial professionals have started their own podcast ventures. Be sure to research a product or service mentioned on a podcast before purchasing it.

From the faculty at the Personal Financial Planning Department at the University of Missouri, we wish you and your family a great Thanksgiving holiday. Hopefully some of the podcasts mentioned above will make your Thanksgiving drive feel a little shorter this year.

Retirement Planning Tips

I had the opportunity to attend a conference this week focused on employer sponsored retirement plans. I was excited to write the tip for this week; the conference has been a great resource for interesting retirement planning tips in the past. Sadly, there weren’t many exciting and new ideas to share. The conference focused on many of the same topics from prior years:

  • Defined benefit pension plans are disappearing.
  • Most Americans aren’t saving enough for retirement in their employer sponsored plans.
  • Most enrollees in employer sponsored plans are ‘delegators’ that want someone else to figure out retirement savings.
  • More plans are using automatic features to help their employees start, increase, and invest their savings.

As I reviewed these topics, I was reminded of my financial tip from last year about these ideas. The information is still relevant (perhaps even more relevant given the growing importance of retirement planning and the aging of the baby boomers).

While last year’s tip is still useful, there were some interesting conference ideas that were relatively new.

  • More states (California, Connecticut, Illinois, Indiana, and others) are requiring that employers offer retirement plans or the employer must fund new retirement plans established for private employees and managed by the states.
  • More studies are reporting that lump sum payments, where individuals cash out their retirement savings, are detrimental to an individual’s retirement. The movement to ban or at least restrict lump sum payments is growing stronger.
  • As mentioned above, automatic options in employer sponsored plans are becoming more common. These are the automatic enrollment (and reenrollment) and escalation (see my article from last year for more info). However, plans are starting to consider automatic options to help employees withdraw income. Plans are considering automatically converting an employee’s retirement savings into an annuity to avoid a lump sum payout and reckless withdrawals from the plan.
  • Some employer retirement plans are struggling to reach out to Millennials. Traditional channels are not as effective. Millennials will also change employers much more frequently than previous generations, so their retirement planning options will need to reflect this change.

Our Financial Tips of the Week are generally uplifting, and I feel this one isn’t, so I would like to end on an upbeat note.

National Save for Retirement Week is October 19-25, 2015. If you haven’t reviewed your retirement planning efforts recently, you might reserve an hour or two that week to review your retirement goals and options. If you have a light schedule that week, you might also consider reviewing your estate plan as the week is also National Estate Planning Awareness Week.

2015 Tax Filing Season Tips

I usually write a post about this time every year talking about the changes to the tax code, especially as people file their prior year taxes. 2014 is very similar to 2013 with the slight addition of the Affordable Care Act. So, below I’ve listed some old tips and new tips for the current tax season.

Affordable Care Act Quick Summary

Health care: individual responsibility. You must either:

  • Indicate on your 2014 federal income tax return that you, your spouse (if filing jointly), and your dependents had health care coverage throughout 2014 (all you have to do is check a box);
  • Claim an exemption from the health care coverage requirement for some or all of 2014 and attach Form 8965 to your return; or
  • Make a shared responsibility payment if, for any month in 2014, you, your spouse (if filing jointly), or your dependents did not have coverage and do not qualify for a coverage exemption.

Premium tax credit. You may be eligible to claim the premium tax credit if you, your spouse, or a dependent enrolled in health insurance through the Health Insurance Marketplace.

Advance payments of the premium tax credit. Advance payments of the premium tax credit may have been made to a health insurer to help pay for the insurance coverage of you, your spouse, or your dependent. If advance payments of the premium tax credit were made, you must file a 2014 return and Form 8962.

There is a great deal more nuance about the Affordable Care Act, but the above sentences summarize it nicely. If you are looking for more information, the IRS has a website full of information. However, if you prefer a more relaxed reading of the tax implications of the Affordable Care Act, I recommend Publication 5157, the resource that IRS created for individuals that volunteer to help others with their taxes. It covers most of the topics in a narrative form that I find easier to read than the regular Publication 17 or the instructions for the individual forms.

Use a Volunteer Income Tax Assistance (VITA) site or a Tax Counseling for the Elderly (TCE) site

These free federal and state tax assistance sites help prepare and file returns for their target audiences. VITA focuses on people who make $53,000 or less. TCE focus on people over 60 years of age. To find the VITA or TCE site near you, visit the IRS locator tool; if you’re looking for sites in Columbia, view our times and locations online. If you are looking for the online alternative to a free tax preparation site, the myfreetaxes.com website can help prepare free federal and state tax returns for people with incomes of less than $60,000.

File a tax return even if you are not required to

There are three excellent reasons to file a tax return even if you do not have a filing requirement:

First, you might get a refund! You may be able to receive a refund of income taxes withheld from your paycheck or pension; this is money that was withheld to pay tax, but no tax is actually due on the return. Also, there are several refundable tax credits that can generate a refund even if you have no tax to offset with the credit. Some examples include the Earned Income Credit, the Additional Child Tax Credit, and the American Opportunity Credit. You can read more about these refundable credits by clicking the links above.

Second, you can lower the chance that the IRS will audit you later. The statute of limitations for a tax return is generally three years from the latter of the due date of the return or the date the return was actually filed. If a taxpayer omitted over 25% of their gross income, then the limitation is extended to six years. If the taxpayer files a fraudulent return, the statute never expires. The statute also never expires if you never file an income tax return. If your income is low enough that you do not need to file, then it is extremely unlikely that the IRS would later request that you pay tax. However, by just filing a simple tax return, the statute of limitation starts to run out, and the extremely unlikely chance that the IRS will request that you pay tax will become a 0% chance (unless you committed fraud).

Finally, you may uncover situations where your identity is stolen. If you are not required to file because of a known circumstance (unemployed, receiving only Social Security income, too young to work, etc.), identity thieves that have your name and Social Security number may file a return with you listed as a spouse or dependent. I recently had an older client whose return was rejected by the IRS because a return had already been filed for that tax year with her listed as a spouse; however, her husband had died several years earlier. Thieves had guessed that she would not file a return and filed a fraudulent return listing her as a spouse. I helped the client prepare a Form 14039 Identity Theft Affidavit that she could file with her paper return alerting the IRS to the fraud. To help combat this theft, the IRS issues Identity Protection PINs that the taxpayer must file with their return. These PINs provide greater security by requiring another layer of authentication before the return is processed. The IRS is piloting a program to provide this extra security to all taxpayers.

Collect your tax documents in one place

This tip is simple, but many clients come to the tax site missing a document. Forgetting a W2, photo ID, 1099 INT, last year’s property or real estate tax receipts, etc… is common. Putting a folder or large envelope where you open your mail can help organize the documents before you have your taxes prepared. If you receive electronic documents, print them out and place them in the folder or envelope.

Never spend your refund before it arrives

Most refunds arrive in client’s accounts quickly. Some, however, take much longer. The IRS is very concerned about fraud, so some returns may be subject to more intense scrutiny. Spending your refund before it arrives in your bank account (or in your mailbox) may leave you in a precarious financial position. This could include paying high rates of interest on a short term loan or even having the collateral on your loans repossessed or sold.

If choosing Direct Deposit, triple check your routing and account number

If you or your tax preparer mistypes your routing or account number on your tax return, then the IRS will likely try to deposit your refund in a bank account that does not exist. In this case, the IRS will usually try to deposit the money several times. If the account does not exist, the money will be returned to the IRS, and a paper check will be mailed to the taxpayer. However, it is possible to mistype your routing and account numbers and have the money deposited in an account that does exist that is not your account. If this very unlikely event occurs, there is no formal system for retrieving the money. From the website: IRS assumes no responsibility for taxpayer error. I find it good to repeat that: IRS assumes no responsibility for taxpayer error.

Your public pension may not be taxed in MO

If you are receiving a public pension from any local, state, or federal entity, you may not have to pay MO state tax on the income. This includes PSRS/PEERS, MOSERS, LAGERS, the University of Missouri, and even public plans from other states. See the MO Department of Revenue webpage for more details.

As always I welcome your feedback. I would also be interested in your tax time tips. What would you like to share?