How to Strategically Manage Your Debt

Debt. Funny how four little letters can feel so dirty. Most of us have it in one shape or another, but none of us like to talk about it. Debt can get us into trouble, especially if it is unplanned and uncontrolled. And some of us can’t help but feel out of control when it comes to our debt. Whether the debt is big or small, owing money can be uncomfortable and stressful, regardless of your financial status. What we often forget is that debt can also be a tool commonly used to get ahead, whether it is borrowing for education, for business or for a home that we assume will appreciate over time. 

Of course, debt can be extremely dangerous and detrimental to your financial success if you aren’t careful and diligent about managing it. But if you are, debt doesn’t have to be all bad; in fact, it can even help you reap some serious rewards.
There are strategic ways to approach debt so that it works to your advantage, as long as you are disciplined enough to follow the rules. To help you control and leverage your debt -- and not the other way around -- we have highlighted the main categories of debt and some of the key dos and don’ts of using it.

Credit Card Debt

The average household with credit card debt owes just over $15,000. And according to the FINRA Investor Education Foundation, 60 percent of women carry a credit card balance. It is easy to let credit card debt get out of hand if we aren’t mindful about it. But with some simple strategies, you can gain, rather than lose, from your credit card debt. Here’s what you need to do:
— Shop around. Plenty of sites (try creditcards.com or nerdwallet.com) are trying to make money by referring you to creditors and keep you coming back with a variety of resources and information. They also help you narrow down choices based on a variety of criteria you can customize.

— Negotiate with creditors. Yes, it takes a time commitment and potential frustration dealing with multiple representatives, but the benefits (including better rewards, lower rates, waived fees and higher credit limits) can be worth it.

— Leverage the payment cycle. If you charge something the day before your statement closes, you get an interest-free period of 20 to 25 days to pay it off. But if you wait until the day after your statement closes, then you can get an extended interest-free period of up to 55 days.

— Take advantage of store card offers. Big retailers often offer big discounts on purchases if you open a credit account with them and continue to use their card in the future. This can mean serious savings, as long as you pay off the balance in full on time, every time. However, there are more flexible store cards offered by banks that can allow you to get discounts at a variety of retailers instead of just one.

— Use your cards regularly. Doing so -- and making payments on time, of course -- will boost your credit score and encourage your creditors to automatically increase your credit limit, helping even more. It will also help you rack up rewards faster.

— Reap your rewards. Too many people neglect to actually cash in on their available rewards (which can include travel discounts, cash back, concierge services and more). Check your card’s website for details on their particular program and make sure you don’t miss out.

— Consider a balance transfer. If you are currently nearing the end of a promotional rate period and won’t be able to pay off your total balance in time, or if you are already paying high interest on an existing balance, consider transferring it to another card in exchange for a lower rate. This can buy you extra time to pay off your balance and save you a lot in interest payments. Watch out for balance transfer fees, though, and do the math first.
On the other hand, it is important that you never miss a credit card payment and try not to use up too much of your available credit. Missed payments are the biggest threat to your credit score, followed by a high credit-utilization ratio (under 30 percent is ideal). To help avoid potential trouble.

Student Loan Debt

Today, two-thirds of American students graduate with student loan debt, and the average grad leaves school with more than $26,000 of debt, according to the Institute for College Access & Success. Student loan debt can seem overwhelming, especially when the average post-grad job in 2013 only pays around $45,000 a year. However, with its relatively low interest rates and tax-deductible interest, student loan debt is generally considered to be a “good debt.” Here’s what you need to know to manage it strategically:
— Map out career and income goals along with a loan repayment schedule early. Think of it like a business plan with a break-even projection and future profit estimates. This will help you budget accordingly and stay motivated to make that borrowed education pay off sooner than later.

— Pay private loans first and federal loans second, in order of interest rate (high to low).

— Understand your repayment options. You may be able to pay a lesser amount based on your current income or even have your debt forgiven in some cases.

— Teach or serve your community to save. If you are willing to be strategic about your career path, you can have as much as $17,500 of your loans forgiven through the Teacher Loan Forgiveness program or have the balance of your debt forgiven after 120 payments through the Public Service Loan Forgiveness program.

— Take advantage of loan rewards programs. You can potentially pay off your debt faster just by making your regular purchases.

— Remember your tax deduction. You can deduct up to $2,500 (in 2013) or the total amount you paid in student loan interest (whichever is less, as long as your income is below the IRS limits), saving you money on your tax bill.
If you’re looking to simplify and potentially lower your payments, consider consolidating. Be careful, though. If you aren’t going through the government’s loan servicer, you will likely get stuck paying fees that cost you more in the long run. You also might lose certain benefits offered by your original lender. Before deciding, review this consolidation checklist.
Just like with your credit card, missing a student loan payment can result in fees and penalties that make it harder for you to qualify for other loans, like a mortgage. And if you can afford it, don’t defer your payments. It’ll cost you more in accrued interest, and it’ll take you longer to get out of debt. If you’re having trouble making payments, call your lender and explain your situation. They are much more likely to help you if you are proactive and honest.

Mortgage Debt

The average household today owes over $147,000 in mortgage debt, according to the Federal Reserve. And while some argue that the traditional American dream of owning a home is more of an unrealistic fantasy these days, for those who can afford it, homeownership is still one of the best long-term investments, especially with interest rates at historic lows (approximately 3.5 percent for a 15 year and 4.5 percent for a 30 year).
— Keep your housing expense ratio in check. As a general guideline, your monthly mortgage payment, including principal, interest, real estate taxes and homeowners insurance, should not exceed 28 percent of your gross monthly income. To calculate your housing-expense ratio, multiply your annual salary by 0.28, then divide by 12 (months).

— Go with a 15-year fixed mortgage if possible. It will cost you more per month than a 30-year, interest-only or adjustable loan, but you will pay off the debt much sooner and save big money in the long run that you can invest toward other goals.

— Consider an adjustable-rate mortgage (ARM) with a low initial interest rate and monthly payment if you are sure you will only be in your home for less than five years. You can save significant money that can (and should) go towards other goals. If there is a chance you might stay in your home longer, an ARM can be too risky.

— Take advantage of tax deductions. Interest paid on mortgage debt on your primary or second home is tax deductible. Points are also deductible. Check with a tax expert for personalized guidance and to maximize your savings.

— Do the math to see if refinancing makes sense. You might be able to lower your interest rate and monthly payment, but it also means extending the length of your loan and paying thousands of dollars in closing costs in many cases. However, if you plan to stay in your home longer than it takes to break even on a refinance, it can be worth it.


Remember that multiple types of credit inquiries can raise a red flag to lenders, so don’t apply for other loans when you’re home shopping. Once you find the home you love, put at least 20 percent down. Otherwise, you have to pay private mortgage insurance (PMI). If you can’t afford to put down 20 percent, you can’t afford that home and should steer clear of it.






HELOC Debt

A home equity line of credit (HELOC) is an option for homeowners willing to use their home’s equity as collateral in exchange for liquidity. Because homes are typically a person’s greatest asset, only use a HELOC to pay for capital investments that add value, such as home improvements, financing other real estate investments, education or business financing. Here’s how to get the most out of your HELOC:
— Understand the differences between a HELOC and a home equity loan.

— Shop around. A good place to start is with your current lender, but you might be able to research a better deal.

— Read all the fine print on loan fees, interest rate, repayment terms and any potential limitations and risks. Most HELOCs come with a variable interest rate, so you need to be prepared for fluctuating monthly payments. Some lenders offer a low, fixed promotional interest rate for a period of time (that eventually adjusts to a higher, variable rate) or a fixed rate in exchange for a higher monthly payment.

— Know that you have the right to cancel. Federal law gives you three days to reconsider a signed credit agreement and cancel the deal without penalty. You can cancel for any reason, but only for loans on your primary home, not a vacation or second home.
Avoid using a HELOC for emergencies if possible (unless a high-interest credit card is your only other option) and don’t use a HELOC to consolidate debt if you aren’t prepared to stop living beyond your means. In some cases, a HELOC can easily enable more overspending leading to serious trouble, including bankruptcy. Don’t give in to the temptation to use a HELOC to buy things that will likely depreciate in value (cars, vacations, clothes or furniture). And don’t forget  to deduct your HELOC interest up to $100,000 come tax time.

Car Loan Debt

If you’re someone who is tempted to buy cars and wants to maximize your savings in the short term (and ideally invest the difference!), leasing a car is the way to go. But if you’re committed to driving the same car for five or more years, buying may be for you. Here’s what you need to know before taking out a car loan:
— Be armed when going to the dealer. Dealers are eager to make extra money by getting you into a loan through their own lenders and pushing a higher rate on you based on their determination of your credit score. Know your credit score from each of the three credit bureaus and research third-party loan options ahead of time. You can get a free, comprehensive report each year at annualcreditreport.com. Print out your credit report and a few offers to bring with you to the dealer to help negotiate and save money.

— Be wary of add-ons. Remember, dealers make the majority of their money by selling credit insurance, extended warranties and other “extras” that aren’t really necessary.

— Pay more each month if possible. If you don’t have other, higher-interest debt weighing you down and you have a comfortable emergency fund, you should set up automatic, bi-weekly loan payments. Specify that the extra money should be applied to your loan principal rather than future interest.

— Consider gap insurance. From the moment you drive a car off the lot, your car insurance is likely inadequate in the event you suffered a total loss from an accident or theft. If you paid cash for your car or have significant equity in it, you don’t need gap insurance, but in many cases, it can be a smart investment for financial protection.

Though it may be tempting, don’t finance a new car, as depreciation is the greatest in the first few years of a car’s life. And before you take out a car loan, make sure your total debt (from mortgage and credit cards, etc.) doesn’t exceed 36 percent of your gross annual income.
In most cases, refinancing a car loan isn’t a smart bet. Excessive fees typically cancel out any short-term savings. The rare exception to this rule is if you happen to have the means to pay more per month in exchange for a shorter loan term, which can save you significant interest.

Investment Debt

Just as banks can lend you money if you have equity in your home, your brokerage firm can lend you money against the value of certain stocks, bonds and mutual funds in your portfolio. This is known as a margin loan. Here’s what you need to do before taking on investment debt:
— Understand the risks. Borrowing on margin is not for the amateur investor. Margin can result in losing more than your original investment. However, you could also boost your return significantly.

— Only consider margin if your marginable portfolio is diversified enough and large enough (relative to the level of margin debt) to help reduce risk. In this case, margin can be a convenient, flexible and low-cost borrowing tool to leverage your investments.

— Opt for margin over other debt if you can. Margin interest rates are typically lower than credit cards and unsecured personal loans, plus there’s no set repayment schedule with a margin loan. Margin interest may be tax deductible if you use the margin to purchase taxable investments. Consult a tax professional about your individual situation.
Don’t borrow the max. Investors can generally borrow up to 50 percent of the purchase price of marginable investments, but pushing the limits can be extremely risky. A decline in the value of securities purchased on margin can require you to provide additional funds to the lending brokerage firm within a short time to avoid the forced sale of those securities or other securities in your account. And remember to double-check your firm’s margin policies, as they can differ between firms.

10 Ways to Increase the Value of Your Home

In a dour housing market, wouldn't it be nice to know that your remodeling project would pay off when you went to sell the property? Remodeling Magazine evaluated the top remodeling projects, how the cost-to-value has changed since the housing market implosion, and which projects are still worth the investment. Using the magazine's "Cost Vs. Value Report for 2008-2009," let's look at some of the best projects you can undertake and recoup the majority of your cost.

Upscale Projects

• Siding Replacement (fiber-cement or foam-backed vinyl). With the economic slump, home buyers aren't being dazzled by bells and whistles as much as they are improvements that will ensure lower repair and utility bills. Although replacing current siding with fiber-cement has lost value from 2007, it still nets an astonishing 87% ROI. If you prefer a foam-backed vinyl product replacement instead, you can still look to recoup 80% of your cost.
• Window Replacement (vinyl or wood).  Windows are not only an aesthetic feature. For most homeowners, they represent one of the easiest ways to lower home heating and cooling bills. By replacing your current windows with more efficient vinyl or wood ones, you can save on your utility bills, attract future home buyers and net a nearly 80% (vinyl) or 77% (wood) return on your investment.
• Bathroom Remodel.  Depending on the size and amenities of your desired bathroom, you could expect to pay over $50,000 to tear out walls, repair joists and wall studs, change structural elements and make major layout changes, such as switching a toilet and shower. However big the price tag, you can still expect to recoup nearly 71% of the cost (which would be $36,400 if you have a $50K bill) when you go to sell. This project increased its value since 2007, while its sister project – adding a complete bathroom – fell in value.
• Major Kitchen Remodel. Kitchens are typically the most frequently used room in a home, so it makes sense that investing money here is going to pay off when it comes time to sell. While a major kitchen renovation is usually the most time-consuming and expensive home improvement job (averaging more than $110,000), it's also one of the most profitable. Regardless of the size of your financial layout, you can expect to get a nearly 71% ROI.
• Deck Addition (composite product). With families cutting their entertainment budgets, they're spending more time at home, so it makes sense that adding a deck (composite, not wood) is a good investment. You can plan on recouping 63% of your total job cost to boost your home's value by nearly $24,000 if you paid the average job cost of $37,000.

Mid-Range Projects

While all of the mid-range projects dropped in value versus cost since 2007, there are still numerous projects that will net you a significant ROI. Here are a few of the best bets for your money:

• Deck Addition (wood). If your bank balance can't swing the higher price tag that comes with composite decking, you may still be able to afford a wood addition on to your home. While a wood deck would cost you, on average, in the neighborhood of $10,000, the resale value it will add to your home is more than $8,600 – an 81.8% return on your investment.
• Siding Replacement (vinyl). Fiber-cement or foam-banked vinyl are often more preferable siding upgrades, but getting vinyl siding replacements instead is still a good choice. You can recoup nearly 81% of your cost which, if the job cost you more than $10,000, means you could add more than $8,200 to your home's value.
• Minor Kitchen Remodel. With belt-tightening in style, people are turning to minor kitchen improvement projects instead of major overhauls. It turns out that that choice is not only frugal, but financially wise. While major kitchen remodeling jobs can still, on average, return a nice 70% ROI for homeowners, minor kitchen remodeling jobs net an even higher 79.5% return.
• Attic Bedroom.  Anytime you can add bedrooms, you're going to add to the overall value – and listed purchase price – to your home. If your attic's dimensions allow you to convert it to a bedroom, you may want to consider investing the money to do so. You'll add some sleeping space and net a nice 74% return when a new buyer puts your home under contract.
• Basement Remodel. If you're fortunate enough to live in an area with a water table high enough to permit basements, you should think about squeezing all the value you can out of it. By remodeling and finishing a previously-unfinished basement you can expect to get nearly 73% of your investment returned with a higher list price, come time to sell.

Conclusion

If you have savings or access to reasonably-priced credit, it's worth it to consider home improvement projects that will produce the best return for your time and money. Make sure you work with a reputable, licensed contractor (to avoid costly errors or budget overruns), and before you undertake any project it's a good idea to check and see if it could significantly increase your property tax bill.

While it may still make sense in the long-run to undertake the project and add overall value to your home, you may need to make a few budgetary changes so that you don't get caught off-guard when the tax bill comes.

Seven Steps to a Sound Retirement

There are seven keys to a lot of things in life. There are seven steps to heaven and seven types of intelligence and seven habits of effective leaders.

Now we have seven steps to retirement planning courtesy of the Society of Actuaries, which just released a 64-page report with the not-so-consumer friendly title "Segmenting the Middle Market: Retirement Risks and Solutions Phase II Report."

"Retirement financial planning requires a methodical approach that identifies and quantifies each important component that affects the asset accumulation, income management and product selection/investment decision processes," according to the report, which was sponsored by the society's committee on post-retirement needs and risk and written by Noel Abkemeier of Milliman.

Not surprisingly Abkemeier says this approach is especially important for middle income Americans who likely have less than $100,000 set aside for retirement. So what are those steps?

1. Quantify assets and net worth
The first order of business is taking a tally of all that you own — your financial and non-financial assets, including your home and a self-owned business, and all that you owe. Your home, given that it might be your largest asset, could play an especially important part in your retirement, according to Abkemeier.
And at minimum, you should evaluate the many ways you can create income from your home, such as selling and renting; selling and moving in with family; taking out a home-equity loan; renting out a room or rooms; taking a reverse mortgage; and paying off your mortgage.
Another point that sometimes gets lost in the fray is that assets have to be converted into income and income streams need to be converted into assets. "When we think of assets and income, we need to remember that assets can be converted to a monthly income and that retirement savings are important as a generator of monthly income or spending power," according to SOA's report. "Likewise, income streams like pensions have a value comparable to an asset."
One reason retirement planning is so difficult, according to SOA, is that many people are not able to readily think about assets and income with equivalent values and how to make a translation between the two. Assets often seem like a lot of money, particularly when people forget that they will be using them to meet regular expenses.
Consider, for instance, the notion that $100,000 in retirement savings might translate into just $4,000 per year in retirement income.

2. Quantify risk coverage
Take stock of all the insurance that you might already have or need — health, disability, life, auto and homeowners. In addition, consider whether you might need long-term-care insurance, especially in light of the cost associated with long-term care and the very real possibility that you might need some assistance at some point in your life.
According to the report, those households with limited assets, say less than $200,000 in financial assets, may need to spend down their assets and rely on Medicaid, while those with more than $2 million in financial assets can cover long-term-care costs out of pocket. But those households with assets in between $200,000 and $2 million should include long-term care insurance in their plan, according to the SOA. And the best time to buy such insurance is in the late preretirement years.
The SOA also notes in its report the possible need for life insurance, the death benefit of which can be used for bequests or to provide income to a surviving spouse. Life insurance premiums can be expensive if you're getting on in years. That's why the SOA report suggests that you continue "existing preretirement coverages during the retirement period."
Of note, there will soon be many policies that combine long-term-care insurance with life insurance and annuities.

3. Compare expenditure needs against anticipated income
The thing about retirement is that it's filled with expenses, which according to the SOA report "can be thought of as the minimum needed to sustain a standard of living, plus extra for nonrecurring needs and amounts to help meet dreams." What's more, those expenses are likely to change over time.
So, to make your retirement plan work in reality you first have to make it work on paper. You need to compare whether you'll have enough guaranteed income to cover your essential living expenses, including food, housing and health-insurance premiums, at the point of retirement and then compare what amount of income you'll need to cover your discretionary expenses, such as travel and the like (if those are indeed what you might consider discretionary expenses).
Your guaranteed sources of income include Social Security, and possibly a pension and annuity. Your not-so-guaranteed sources of income include earnings from work, income from assets such as capital gains, dividends, interest, and rental property.
No doubt, as you go about the process of matching income to expenses, you might find yourself having to revise your discretionary expenses, especially if there aren't enough guaranteed sources of income to meet essential expenses.

4. Compare amounts needed in retirement against total assets
So here's where your math skills (or your Google search skills) might come into play. Besides calculating your income and expenses at the point of retirement, you need to figure out whether your funds will last throughout retirement. In other words, you need to calculate the net present value of your expenses throughout retirement.
Now truth be told finding the present value of your expenses is a bit tricky, especially since there are many factors that can affect how much is really needed, including the date of your retirement, inflation rates, gross and after-tax investment returns and your life expectancy.
But the bottom line is this: If, after crunching the numbers, the present value of your expenses is greater than the present value of your assets you've got some adjustments to make. And the good news is that there are plenty of adjustments that you can make.
You could, for instance, delay the date of your retirement or return to work or work part-time. Those actions might be enough to offset the difference. In addition, you might consider trimming your expenses or consider a more tax-efficient income drawdown plan.

5. Categorize assets
The SOA also recommends that assets be grouped to fund early, mid and late phases of retirement. Thus, assets for early retirement should be liquid, while mid-retirement assets should include intermediate-term investments such as laddered five-to-10-year Treasury bonds, TIPS, laddered fixed-interest deferred annuities, balanced investment portfolios, income-oriented equities, variable annuities, and the like. And late retirement assets include longevity insurance, TIPS, balanced portfolios, growth and income portfolios, laddered income annuities, deferred variable annuities and life insurance.

6. Relate investments to investing capabilities and portfolio size
This should come as no surprise; the SOA recommends that you invest only in things that are suitable, relative to your risk tolerance, investment knowledge and the capacity of the portfolio to accommodate volatility. "In short, a retiree should not invest beyond his investment skills, including those of his adviser," the SOA report stated.

7. Keep the plan current
This too might be a bit obvious, but retirement-income plans must not be built and set on a shelf. The plan is a point-in-time analysis that must be reviewed on a regular basis.
Consider, for instance, just some of the things that could change in one year, according to the SOA. Health status or health-care costs could change; your life expectancy might change; your investment returns and inflation might be quite different than your assumptions; and your employment status and expected retirement date might change.

What's more, you might suffer the loss of a spouse through death or divorce, or perhaps you might not be able to live independently any longer, or perhaps you might need to sell your house or unexpectedly care for dependents, or change your inheritance plans.

Said Abkemeier: "You want to keep your plan current. You need to tie everything together and go back to the start of the process each year. You want to enjoy retirement, but you don't want to be at rest."

8 Ways Your Upbringing Can Affect Your Money Habits

Whether we realize it or not, how we were raised has a tremendous impact on how we make decisions as adults. Sometimes the results are positive, certainly. But other times the results are detrimental to our well-being, especially when it comes to our financial health. This doesn’t mean that we can just blame mom or dad (or both) for our money mistakes and leave it at that. But once we understand the root of our bad habits we can take ownership of them and make a conscious effort to change them. 

Here are eight common parenting behaviors that can negatively influence your money habits and what you can do to overcome them. Let the therapy session begin.

Your Parents Were Very Frugal

The behavior: Whether they needed to keep a tight budget, were trying to teach you a lesson or were choosing to put themselves first financially, they seemed to deny you of everything you wanted as a kid.
The influence: You overspend to compensate. Binge spending often occurs in response to feeling deprived as a child. Haven’t we all heard the story about the strict parents whose kid rebelled and went hog-wild? Perhaps you are acting out with your money choices because of your parents’ frugality.
The solution: Talk to your parents about the reasons for their choices. There may be more to their decision than you understood when you were young. Regardless, know that your real revenge for childhood deprivation is financial prosperity. Channel that inner rebel as best you can to save instead of spend. If your will isn’t strong enough to stop overspending, force yourself to by setting up automatic savings plans whenever possible.
And don’t let the cycle continue: If you have kids, make sure you include them in the reasoning for being careful with money so that they can learn the benefits of saving and not feel resentful.

Your Parents Spoiled You

The behavior: Perhaps your parents were deprived as children themselves, and in response, they chose to overspend on you. You grew up living a life of abundance and not wanting for anything.
The influence: You feel entitled to have a luxurious lifestyle. Kids who are spoiled can often grow up to expect that they can — and should — still have whatever they want. The problem is that you might not have the income to support your ability to live large, which can lead to racking up unnecessary debt.
The solution: Shift your sense of entitlement from having a lot of “stuff” now to having financial freedom later. Challenge yourself to see what it’s like to live modestly and then put any savings towards more important goals like buying a home, a comfortable retirement or starting a family. Set up automatic retirement contributions to force yourself to make better money decisions for your future.

Your Parents Were Extremely Charitable

The behavior: Perhaps they grew up poor or experienced some kind of trauma firsthand. In response, they chose to invest their time and money in causes that they were passionate about.
The influence: Your heart is in the right place, and so were your parents’. But you may give more money away than you can really afford to out of guilt or obligation. Whether you feel obligated to because of your parents’ experience or want to match their generosity, you can’t seem to say “no” to most charitable appeals. Charity is a wonderful and noble concept, but it is easy to let your emotions get the best of you, which can result in saying “yes” too often and donating more than you can actually afford.
The solution: Decide which causes are most important to you and make a charitable gift budget now that is within your means for next year. This budget should include a little extra room for unexpected appeals that you may want to support. Then set up automatic payments through your bank to the charities of choice, either monthly or annually, depending on what you can comfortably afford, and let the charities know what to expect. This way, you know what you are giving and give ahead of time and you won’t be as tempted to give too much based on emotion and impulse.

Your Parents Never Taught You About Money

The behavior: This is a very common problem and often due to the subconscious perpetuation of their own parents’ lack of financial education. Money has a notorious reputation for being dirty and taboo to talk about. And of course women have a long history of being kept in the dark when it came to the household finances. So generations of parents have avoided discussing money matters with their children out of ignorance or preference.
The influence: You are money foolish — and probably in a variety of ways, whether it is overspending, undersaving or avoiding investing and/or financial planning in general. You have no foundation of knowledge when it comes to money management, so you are left to (hopefully) learn from your mistakes.
The solution: Get educated. Being a DailyWorth subscriber is a great start. You can also take it a step further by hiring an experienced, qualified financial advisor who can offer you personalized guidance, get you on the right track to achieve your goals, and, ideally, educate you at the same time. Get referrals from family and friends and interview several candidates until you find one you like and trust. If you have kids of your own, make it a priority to talk to them about money and involve them in your financial planning activities so they can break the cycle.

Your Parents Badmouthed the Stock Market

The behavior: Whether they lived through the Great Depression, took a big hit during the Great Recession or made bad stock-picking decisions in the past, they have chosen to put their money in the safest place possible … under the bed.
The influence: You avoid investing in stocks altogether. This may seem a safe choice, but the reality is that you need to grow your money as much as possible in order to have a fighting chance at a comfortable retirement. That leaves you with few options other than investing in the stock market and real estate.
The solution: Be careful and strategic with your investing decisions. This means doing sufficient research and asking questions, if necessary, to make sure you know what you’re getting into and whether it’s appropriate for your objectives and risk tolerance. You also need to make sure that your total investment portfolio is well-diversified so you don’t subject yourself to any unnecessary risk.

Your Parents Lived Large

The behavior: Maybe they were compensating for being deprived as kids or they felt the need to keep up with the Joneses. Whatever the reason, your parents spoiled themselves and probably spent more than they should.
 
The influence: You live beyond your means, too. As much as we try to avoid turning into our parents, it often happens. Growing up in a home where your role models lived a lavish lifestyle would make it particularly challenging for you to adopt a modest one. The unfortunate result is that you are likely not just trying to keep up with the Joneses, but with your parents as well.
The solution: If you can’t go as far as physically removing yourself from an environment that tempts you too much to overspend, then you need to put constraints in place to force yourself not to. That means setting up automatic transfers to save money you would otherwise spend and dedicating an account and debit card just for discretionary spending with no overdraft protection.

Your Mother Was Dependent

The behavior: Whether she married one man of means or multiple men, your mom was taken care of and did not have to worry about money. (At least, as far as you know.)
The influence: You too are expecting Prince Charming. Why should you have to struggle if your mom didn’t have to? This subconscious question commonly results in procrastination and irresponsible money behavior because, in the back of your mind, you assume that someone will eventually save you financially.
The solution: Wake up from this unrealistic fairytale! Stop waiting to be saved and instead, save yourself. The end result will be much more satisfying, and you can take pride in being a model of financial independence and inspiration to your own children and others.


Your Parents Divorced

The behavior: This is an unfortunate reality for so many families and a major contributor to all kinds of psychological issues in kids, including those that fuel poor money decisions.
The influence: You are determined to live happily ever after. This isn’t necessarily a bad thing, but it can also lead you to jump into marriage, buy a house and start a family prematurely or for the wrong reasons. That can easily lead to living beyond your means, racking up debt, enduring financial stress — and can ultimately result in divorce. The vicious cycle continues.
The solution: Make a commitment to always be financially independent even if you do marry or are already married. This means maintaining your own separate accounts for spending, saving and investing and making it a priority in your relationship to contribute to your own personal retirement account as much as possible (even if you are not the breadwinner in your relationship or have left the workforce to be a caretaker). If you happen to significantly outearn your potential mate, you may also want to consider a prenuptial agreement as a practical, protective measure.

Could You Cut Your Spending by $1,000 a Month?

As a newspaper columnist in Detroit, Brian J. O'Connor didn't feel like he had much job security. "My paper had been sold, which automatically makes everybody nervous, and clearly Detroit was not doing well," O'Connor says of the bleak period in October 2009 when he launched his money-saving experiment.

That experiment involved cutting $1,000 a month from his budget, largely by focusing on recurring expenses. "Partly I wanted to fail as much as succeed because I wanted to illustrate how tough it can be if you really have to make big cuts in a family budget," O'Connor, 53, says. If parents went to work in the morning and came home unemployed, or suddenly lost overtime pay - as many workers did in Detroit during the recession - then they similarly needed to immediately transform their spending in order to stay afloat, he says.

His series of humorous columns on the experiment were so popular that he turned them into a book, "The $1,000 Challenge: How One Family Slashed Its Budget Without Moving Under a Bridge or Living on Government Cheese," which will be released this week.

Trimming $1,000 a month, which he managed to do, might sound overly ambitious, but O'Connor says that's the point. "It had to be a high-wire act, or there'd be nothing at stake," he says, adding that even cutting a grand each month wouldn't be enough for him, his wife and his son to survive if he suddenly lost his job. Still, it would be a start.

Ready to replicate O'Connor's strategy? Here are five categories where you're most likely to gin up some serious savings.

1. Phone, cable and Internet

"The easiest savings I got was cutting the utilities," O'Connor says. After spending an afternoon making a handful of calls to his cable, phone and Internet provider, he slimmed down his bundle of charges by about $140 per month. Part of that was removing services he didn't need, such as a $15 monthly charge that allowed him to use his cellphone as a modem (he forgot to cancel that service after a vacation), and a third-party voice messaging service on his home phone.

He trimmed down his cable service to a 200 channel package, which generated about $30 in savings. When he similarly downgraded his Internet service based on the amount of data his family actually used, the provider rebated him for the previous two months, since he had been paying for a more expensive data plan than he needed.

The total savings came to $140 a month plus $653.80 in refunds, temporary discounts and a $200 gift card. "That's more than a month's worth of groceries plus ongoing savings for just a couple hours on the phone," O'Connor says.

"Some of it was just dumb, which is a recurring theme in the book," O'Connor says. In other words, if he had paid attention to his bills, he would have had the charges removed long ago. But it's easy to never get around to it, or to overlook those superfluous expenses. That's why O'Connor recommends taking a close look at every household bill once a month, so you can eliminate the services you don't even realize you're paying for.

2. Unusual expenses

Do you have an oddball expense that's eating away at your bank account each month? For some people, it might be an expensive hobby; for O'Connor, it was his 30-year-old boat. It was costing him several hundred dollars in repairs some months. He saved almost $100 a month by creating a separate annual fund that served as a cushion for boat-related expenses, instead of scrambling to come up with the money whenever something broke.

3. Child care

If your employer offers flexible spending accounts, you can set aside pre-tax dollars to pay for health care, child care and commuting costs, up to certain limits. O'Connor saved more than $100 a month by paying for his son's speech therapy through a flexible health spending account. He points out that for two working parents, taking advantage of child care flexible spending accounts can also make a big dent in monthly expenses.

4. Home

Refinancing when interest rates are low can help reduce monthly mortgage payments. When O'Connor refinanced, he opted to slightly increase his monthly payment so he could switch to a 15-year mortgage and make sure his home was paid off prior to retirement. For monthly savings, O'Connor drilled into his home maintenance spending. He cut $60 a month by stopping maid service and an extra $10 from regular home maintenance.

5. Groceries

Food shopping is an area ripe for savings, since it's easy to overspend on name-brand pasta sauce, organic apples and prepared meals. O'Connor invested some time into comparison shopping and coupon hunting - on his first trip under his new regime, he spent 2.5 hours at the grocery store -- but it paid off. "You spend 10 minutes walking up and down the frozen meat aisle looking for the special on frozen turkey breast," he says.

Subsequent trips, though, did not take nearly as long because he developed his system (and gained familiarity with the store's placements). He saved about $40 for the month, and he didn't feel like he was sacrificing much. "Store-brand tomatoes don't feel any different to me than premium," he says.

Still, it's hard to spend the time to maximize deals every week, O'Connor acknowledges, especially with two working parents. He and his wife have to skip their coupon-maximizing efforts some weeks, especially when one of them is traveling for work.

The biggest takeaway from O'Connor's $1,000 challenge is to focus on recurring expenses, because when you cut them once, you keep them off the books the following months, too. So if you do nothing else this month, make a few calls to your cable, Internet and phone provider.