If you are tired of being in debt, a “credit-free” life might sound appealing. All you have to do is pay off all of your debts, cut up your credit cards, close any other accounts, and get yourself completely off the credit grid. Then you can live within your means in a completely cash-based system. Being credit-free has plenty of perks, but it also has complications you need to understand if you are thinking about making the transition. Advantages of Being Credit-Free One of the biggest perks of not having any credit-related accounts is that you do not have to pay interest or make debt payments, which frees up your money, giving you greater discretionary spending ability. For example, the typical household credit card debt of $7,000 at a 15% interest rate costs over $1,000 per year in interest. If you are not carrying that debt, the $1,000 will be available for you to spend or save as you like. People who tend to overspend on credit cards will reap financial rewards from being credit-free because it becomes impossible to overspend. When you do not have credit, the decision of whether or not to buy something is not tied only to emotion, but also to how much money you have available in your wallet or your bank account. In addition to the financial advantages, you also have emotional perks. Being in debt is stressful because you spend your time and energy worrying about making payments or working extra hard to get out of debt. Many people feel a sense of freedom when they live credit-free. Disadvantages of Living Without Credit The main disadvantage of living without credit is that you will not have a credit score. Because your credit score is derived from data in your credit report, you will not have a score at all if your report is empty. This may make it difficult if you ever decide to get credit again, to buy a car or house for example. Also, insurance companies and employers sometimes check credit scores as well, and you may run into difficulties with them if you do not have a score. The other disadvantage of living without access to credit is that you do not have the ability borrow on credit to use as a financial safety net. You need to build up significant savings to be your new safety net, and sometimes it is hard to know exactly how much money you will need to have saved. Tips for Making a Credit-Free Life Work for You
  1. Get out of debt as quickly as possible once you have made the decision to live credit-free. Stop buying anything on credit, and start making more than the minimum payments, focusing on paying off one account at a time. Close accounts once they are paid off.

  2. Build up an emergency fund of three to six months of basic living expenses. If you lose your job, you will not have credit cards to fall back on to make ends meet. Your emergency fund can also cover unexpected expenses, like car repairs. If you ever have to use money from the fund, replenish it as soon as you can.

  3. Use long-term budgeting strategies for major expenses. Think forward to your anticipated expenses in the coming year, like vacations, home repairs, or holiday gifts, and set money aside for these expenses every month. Use the same strategy to save up to buy your next car, or even a house.

  4. Consider keeping one credit card account open, but completely unused, if you feel it necessary to maintain a credit score. This open account will continue to appear on your credit report and generate a credit score for you. However, be aware that you may need make an occasional small purchase (and pay it off immediately) to keep the credit card issuer from closing the account due to inactivity.

Living a ‘Credit-Free’ Life

View Resource Living a ‘Credit-Free’ Life
When you own a home and need additional cash flow, a reverse mortgage is one way to get it. A reverse mortgage allows you to tap into your home equity, which is the money your home is worth, without having to sell your home. It is called a reverse mortgage because rather than you sending a check to the bank each month, the bank sends a check to you every month. Alternately, some reverse mortgages are set up so the bank gives you a lump sum when you first get the mortgage, or you have a line of credit that you can draw from as you need money. You can use the money for any purpose, including supplementing retirement income, making home improvements, or paying for health care expenses. Before you consider getting a reverse mortgage, it is important to understand exactly how it works. The basic idea is that a bank lends you part of your home equity for as long as you are living in the home. The money lent to you accrues interest each month, but you do not need to make any payments back to the bank until you sell your home, stop using it as your primary residence, or die. At that point, the reverse mortgage is due in full. Most borrowers end up using the proceeds from selling the home to pay back the reverse mortgage. Eligibility requirements to get a reverse mortgage Advantages of reverse mortgages When you are living on a fixed income during retirement, a reverse mortgage has a few facets that make it very appealing. If these advantages fit with your desires, you may be a good candidate for a reverse mortgage. Disadvantages of reverse mortgages Before you jump into getting a reverse mortgage, you need understand the disadvantages of this financial decision. It can have serious repercussions, not only for you but also for your family and heirs.

Is a Reverse Mortgage Right for You?

View Resource Is a Reverse Mortgage Right for You?
When you are borrowing money, one of the main numbers to consider is the annual percentage rate, typically abbreviated as APR. The APR is the percent of the borrowed amount that you are expected to pay each year in interest and fees, spread over the life of the loan. The APR is slightly different from the interest rate because the APR also includes required introductory fees in the calculation. For example, on a mortgage, you have loan origination fees and closing fees that you must pay to get the loan. The APR helps you understand how these fees affect your total costs, assuming you keep the loan for the full repayment term. If there are no introductory fees, the APR is the same as the annual interest rate on the loan. Types of APR APRs come in two main types: fixed and variable. A fixed APR does not change on a regular basis, but a variable APR will adjust depending on market factors. Some loans, especially credit cards, can have several different types of APRs. These include:

Calculating Annual Percentage Rates

View Resource Calculating Annual Percentage Rates
Consumer reporting agencies, sometimes abbreviated CRAs and also known as credit bureaus, collect credit information about individuals and sell this information to third parties upon request. In the United States, the three main consumer reporting agencies are Equifax, TransUnion, and Experian. Each of these companies maintains an ongoing file for you called a credit report. Your credit report contains: How to get your credit report When you apply for a loan, the lender will usually purchase a copy of your credit report from at least one of the credit bureaus to get more information about how well you have managed credit in the past. This information helps the lender decide whether to issue you a new loan and what interest rate to charge. Insurance companies, employers, and landlords also often use your credit report to make decisions. Therefore, it is important for you to know how to get your credit report. United States law allows you to get a free copy of your credit report from each of the three major credit bureaus (Equifax, TransUnion, and Experian) every year. To get this free credit report, go to AnnualCreditReport.com or call or call (877) 322-8228. While other websites and services may advertise free reports, you often have to sign up for a service to get these reports. Protect yourself from scams by only using AnnualCreditReport.com to get your credit report.

Consumer Reporting Agencies

View Resource Consumer Reporting Agencies
On any loan, your monthly payment is divided between two purposes. First, part of the payment is used to cover the interest that has accrued on your balance since you made your last payment. Second, any remaining portion of your payment goes toward reducing your loan balance. Because of this, once you have paid the interest for a month, any extra money you add to your monthly payment will go directly toward reducing your loan balance. This can save you a lot of money in the long run. Most of your savings comes from the fact that your interest payment for every future month on your payment plan will be less than it would have been if you hadn’t made the extra payment. Especially if you still have 20 years or more left on your mortgage, that’s lots of months when you can save money on interest. And the less interest you pay, the more of your regular monthly payment will go toward paying down principal. The effects really do snowball, often to significant end results. Example of Saving Money by Adding to Monthly Payments A concrete example can help illustrate how the savings adds up. Let’s say that you just took out a mortgage for $240,000 at 4% annual interest, with a repayment term of 30 years (or 360 monthly payments). Based on these numbers, your lender would calculate a monthly principal and interest payment of $1,145.80. When you send your first payment of $1,145.80, your lender first covers the accrued interest. An annual interest rate of 4% is a monthly interest rate of 0.33%. Your loan balance is $240,000, so you would owe $240,000 x .00333333, or $800, in interest. Once that has been paid, the remaining $345.80 reduces your loan balance, so you now only owe the bank $239,654.20. The next month, you will only owe $798.85 in interest because your balance is lower, so you pay $346.95 toward principal and have a new loan balance of $239,307.25. After 360 payments, you will have paid a total of $172,486.82 in interest. Now, say that you decided to make an extra mortgage payment of $200 every month. Your first month, you will pay the $800 in interest but pay off $545.80 of your loan balance, leaving you owing $239,454.20. The following month, your interest payment will be down to $798.18 (67 cents less than if you hadn’t made the extra payment), and you will pay $547.62 of your loan balance, reducing it to $238,906.59. If you continue this, you will pay off the mortgage 88 months early. The best part is that you will have only paid $124,979.70 in interest, for savings of $47,507.12. That’s a big result from a relatively small monthly difference.

Add to Your Monthly Payment and Save Money

View Resource Add to Your Monthly Payment and Save Money
Your debt-to-income ratio (DTI) is the percent of your gross monthly income that goes toward required debt payments. This number allows potential lenders to see at a glance whether you are likely to be able to afford additional debt payments. Types of Debt-to-Income Ratios Calculating Your Debt-to-Income Ratios Start by determining your gross monthly income, which is your income before taxes and deductions. You can either divide your annual income by 12, multiply your bi-weekly income by 2.17, or multiply your weekly income by 4.33. If you are planning to purchase a home jointly with your spouse, do the same calculations for your spouse’s income and add the results together to get your total household income. Add up all of your potential housing payments for the home you are looking to buy. This includes not only the mortgage principal and interest, but also monthly costs for homeowner’s insurance, mortgage insurance, and property taxes. Then also list your other debt payments, which may include car loan or lease payments, student loan payments, minimum credit card payments, and all other monthly debt payments that appear on your credit report. Calculate your front-end DTI ratio by dividing your housing payments by your monthly income. Calculate your back-end DTI ratio by dividing your total of all debt payments by your monthly income. What if Your Debt-to-Income Ratio is Too High? Lenders vary in the specific DTI ratios they are looking for, but in general, lenders want to see a maximum front-end ratio somewhere between 28% and 31% and a maximum back-end ratio somewhere between 36% and 43%, depending on the lender and loan program. If your ratio is too high, some of these strategies could help you qualify:

Understanding Your Debt-to-Income Ratio

View Resource Understanding Your Debt-to-Income Ratio
Most households plan to live on their regular income, which usually comes in the form of a monthly or weekly paycheck. However, there are always the occasional windfalls when you receive a large amount of money that you may not have been expecting. Some common lump sums come from inheritances, bonuses at work, tax refunds, court settlements, or the sale of investments. If you receive a lump sum of money, it’s important to consider how you can use it to achieve your financial and personal goals. Pay down debt: One of the best long-term investments you can make is to pay off high-interest debt now. This is especially true of credit card debt, which is likely costing you between 10% and 15% a year, which is much more than you can reliably make by investing your money. Even if you can’t completely pay off a credit card, even just paying down the balance makes a big difference by reducing your interest costs each month going forward so you can pay off the credit card faster. Build your emergency fund: Every household should have at least $1,000 saved in an easily accessed emergency fund. That way, if urgent expenses arise, like a car repair, home repair, or need to travel, you have the money available and won’t have to turn to credit cards to cover the cost. Also, to protect against job loss, you should ideally have 3-6 months of basic living expenses saved to cover the regular bills while you look for other work. Save and invest: If you are in a good place financially right now, then it is time to consider how you can make your lump sum of money grow to support you better in the future. Some options in this category include: Treat yourself: Even if you use most of the lump sum for one of the above purposes, consider holding back at least a little of it to spend on something that you have wanted for a long time. Perhaps you have wanted a new TV, new furniture, a vacation, or even just a weekend trip. Spending some money on yourself can give you an emotional boost rather than feeling resentful that you didn’t get to use the windfall you received.

What to Do With a Lump Sum of Money

View Resource What to Do With a Lump Sum of Money
Online shopping has become increasingly common in recent years as a convenient alternative to going out to stores. However, the time and energy you save by shopping online could be lost if you fall victim to identity theft due to a misstep in your online shopping habits. Your first rule when shopping online is only to shop through websites you trust. If you have not heard of a particular shopping site, look for information about it through a search engine to help you figure out whether it has a good or bad reputation. Then, rather than following a link from an email or social media post, go directly to the website where you want to make the purchase. Some sophisticated hackers make dummy websites that look like the real ones, but will steal the information you enter. Wherever you end up shopping, use these tips to help you protect yourself and your sensitive information:

Shopping Safely Online

View Resource Shopping Safely Online
For the small businessperson, number crunching can be mind numbing. However, becoming conversant with a few core concepts can help you get an accurate view of how well your firm is doing. One of the most useful of these concepts is financial ratios. Use and Limitations of Financial Ratios Ratios can tell you how your company is doing, by depicting relationships among your financial statements. The comparisons are useful for determining how well your business is performing, and spotting indicators that show where it is strong and where it is weak. Uses Ratios are important for you to know about because people who can financially impact your business rely on them, including bankers, investors, creditors, and business analysts. If you need financing or a loan — and at some point many businesses do — your company’s financial ratios will likely come into play. A financial ratio analysis can help potential investors make a decision about the long-term profitability of your company and as an investment opportunity. They are useful for your creditors as well when they are trying to decide if it is wise to extend you more time to pay or to allow you to buy further supplies or services from them. These ratios are also a very handy tool for you and your management team to gain an understanding of how well you are doing in your local market or compared to others in the industry as a whole. A ratio is a comparison based solely on a mathematical analysis of proportions, so the size of the firm does not matter. Doing these calculations lets you easily examine relationships between categories on your financial statements and then measure them. This means it is a practical way for large and small companies to compare data. When you can compare your company, whatever size it is, to others across industries, you can more quickly spot strong and weak points and measure your progress. It can help you adapt your company efforts to make the most of current trends. Limitations We base ratios on raw mathematical data, and they are relevant only for the period covered and the data found in the originating financial statements. They are also subject to the accounting methods used. This gives them power, but it also limits their usefulness. Ratios do not give you all the information you need for major decisions. Ratios will never replace experience. They are a tool and not a replacement for, a skilled, adept business owner. They do not include intangibles such as a once-in-a-lifetime chance to move ahead, the vagaries of the current marketplace or the interplay of your management team or other industry power brokers. In many cases, one lone financial ratio does not paint the picture that several can combined and analyzed. Just about any item on financial statements can produce a ratio, but some offer more insight to the small business owner. Essential ratios are liquidity, asset turnover, financial leverage, and profitability. Liquidity Ratios Liquidity ratios reveal whether your company can meet its short-term expenses, which makes them of particular interest to your creditors. The current ratio is a common liquidity ratio. Its equation is: Current ratio = Current Assets/Current Liabilities A high current ratio is attractive to creditors because it shows that, if they choose to do business with you, their risk is low. On the other hand, your shareholders will prefer that you keep a lower current ratio because this indicates that you are keeping your assets at work in growing the business. Two other liquidity ratios commonly used are the quick ratio and cash ratio. The quick ratio makes the calculation more accurate if you have inventory that is hard to liquidate. That equation is: Quick Ratio = (Current Assets – Inventory)/ Current Liabilities There is also a conservative way to calculate liquidity ratios, which is helpful when trying to figure a company’s ability to pay its current liabilities immediately. Here is the cash ratio equation: Cash Ratio = (Cash + Marketable Securities)/Current Liabilities Asset Turnover Ratios It is important to track how efficient your company is at using its assets to generate income. This is the purpose of asset turnover ratios, also called efficiency ratios. These ratios look at the timeframe involved in collecting cash from your customers or how long it takes you to convert your inventory into sales. These are often used with profitability ratios to tell how well a firm is doing. There are a number of equations used for this ratio, including receivables turnover, average collection period, inventory turnover and inventory period. Financial Leverage Ratios If you want to know what the long-term prospects are for your company, you look at financial leverage ratios. These measure the extent that your firm is using long-term debt. It measures your overall debt load and then compares it with your assets or your equity. This shows you how much of your company belongs to you, or to your shareholders, and how much to your creditors. When you or your shareholders own most of the assets, the company is called less leveraged. When creditors own the majority of assets, the firm is referred to as highly leveraged. The two most basic equations for this are: Debt Ratio = Total Debt/Total Assets Debt-to-Equity Ratio = Total Debt/Total Equity Profitability Ratios Profitability ratios measure the success of your business in generating profits. They focus on return on investment, or ROI, from inventory and other types of assets. Investors and creditors are very interested in these numbers. It helps them to analyze resource and asset data to judge ROI and determine if the company is making enough profit from its operations. That is why these ratios get examined in conjunction with asset turnover ratios. There are numerous equations used for these ratios, including gross profit margin, return on assets and return on equity. The bottom line: All these numbers and calculations can be hard to grasp at first go-around. It might also seem they are remote from the day-to-day operations of your business. However, looking at what the pure numbers tell you, with the help of a skilled accountant or financial advisor, can help you make sensible, realistic changes today so your company will prosper in the future.

Financial Ratios

View Resource Financial Ratios
Winter can provide a rude awakening to the state of your bank account when your first energy bill of the season comes in. Especially in parts of the country that often have freezing temperatures outside, keeping your home comfortable can come at a high cost. Thankfully, there are several strategies you can use to reduce the amount of energy you use and keep your gas and electric bills under control this winter. Choose your standard thermostat setting carefully You don’t need to keep your home at a balmy 72 degrees all winter long. The U.S. Department of Energy recommends setting your thermostat to no more than 68 degrees while you are at home and awake. This temperature should feel comfortable if you are wearing a sweater and socks or slippers, and you can also use a throw blanket to help stay warm while you are relaxing. Turn the heat down at night Toss an extra blanket or two on your bed and dial back the thermostat overnight to avoid wasting money keeping your whole house warm when all you really need is a warm bed. Most people will be perfectly comfortable with the temperature as low as at 60 degrees. In fact, research shows that you sleep better in a cool room, somewhere between 60 and 67 degrees. If you want to wake up to a warm house, consider getting a programmable thermostat so you can set the heat to turn back on an hour before you need to wake up. Consider supplementing with space heaters If you spend most of your time in one room of your home, it can be wasteful to heat your whole home to a comfortable temperature. Instead, turn down the thermostat a few degrees and use a space heater to maintain the temperature you want in the room where you are spending time. A space heater is also a good way to keep an infant’s room warm overnight while you allow the rest of the house to get cold. Insulate your home Proper insulation and air sealing will help you keep warm air in your home while the cold air stays out. If you own your home, invest a bit of money this year in improving your insulation, and it will pay you back with lower energy bills. Attic insulation is especially important, and you can also save a lot of money by caulking and weather-stripping your windows. If you are renting, you can use door socks to help seal drafty windows or doors, and take them with you to your next place when you move. Manage windows to your advantage Your windows can be both a liability and an asset for keeping your house warm during the winter. Close your drapes at night to provide extra insulation and keep cold air out. During the day, though, you should open drapes if it is sunny outside. The sun can actually work to warm your home, especially through windows that face the south, which gets the most direct sunlight. Use fans to even out temperatures A basic science lesson will teach you that hot air rises, but unfortunately, you don’t feel much of the air in the top half of a room. You can actually put your ceiling fan to work bringing that hot air gently down to even out the temperature. Flip the switch on the fan so it turns in a clockwise direction at low speed, which will gently push air down without creating a wind chill.

Keep Your Winter Energy Bills Under Control

View Resource Keep Your Winter Energy Bills Under Control