Amplify Financial : FAQs

FAQs

How long should I keep copies of my tax returns?

Generally, you should keep your tax returns and supporting information (i.e., receipts, W-2 forms bank statements) for six to seven years. The IRS has three years to audit a return, or two years after you have paid the tax, whichever is later. However, if income was underreported by at least 25 percent, the IRS can look back six years, and there is no time limit for fraudulent tax returns.

How much money should I keep in a savings account for emergencies?

Many financial professionals suggest that you put away three to six months’ worth of living expenses for emergencies. If you lose your job, or become disabled and don’t have adequate disability insurance, you’ll need that money to pay your regular monthly expenses, such as mortgage payments, insurance premiums, groceries, and car payments, until you can find another job. Without such an emergency fund, a period of unemployment could put your assets at risk. Similarly, if your car breaks down or your spouse has a medical emergency, you’ll want to have the necessary cash to pay bills. You don’t want to be faced with an immediate need for cash, only to discover you don’t have any.

You may have already set up an emergency fund. Did you put the cash in a five-year certificate of deposit (CD) or other long-term investment? In an emergency, you will need to get at those funds immediately. You can certainly pull your money out of a CD early, but you’ll pay a penalty. It’s better to keep some funds more liquid in a traditional savings account, a money market deposit account, or a six-month CD, for example. That way, the cash will be readily available when you need it.

Finally, keep your emergency fund separate from your everyday accounts. You might even want to use a different bank. Unless you are extremely disciplined, you’ll ber tempted to spend those extra funds if you keep them in your checking account. Remember, if you can put off an expense until next week, it is probably not an emergency.

How can I reduce my spending?

To reduce spending, you first need to know where your money goes. Start out by creating a log of your expenses for the past year. Going back over a year’s time will account for seasonal fluctuations and purchases and give you a more accurate average monthly number. Next, categorize the expenses so you can see what you spend and where you spend it.

Expenses generally fall into two categories. Essential expenses are ones you can’t avoid (e.g., rent utilities, groceries, car insurance). Discretionary expenses are ones you choose to incur (e.g., eating out, entertainment, gifts, and videos). Discretionary expenses are the ones over which you will have the most control. Do you buy a lot of books? Try the library instead. Take coffee or lunch to work rather than buy it once you get there. Limit eating out to once a week rather than twice. Quit smoking, or at least begin to cut back on the number of packs you smoke each week.

Although essential expenses are fixed, there may be ways to reduce them. Make sure you shut off the lights and TV when you leave the room. E-mail distant friends and relatives rather than calling them long-distance. Change the oil in you car on a regular basis to avoid more costly repairs due to neglect. Review you insurance policies: Can you save your premiums by taking a nonsmoker discount or increasing your deductibles? Clip the grocery store coupons, always shop from a list, and avoid the impulse items at the end of the aisles.

Pick a realistic goal for your monthly spending reduction and try not to make too many changes all at once. To see how big a difference this can make, do the math. If you start by committing to reduce your spending by $2 a day, that’s $730 a year! Set the saved money aside, perhaps in a savings account for your planned vacation, or use it for a specific purpose, such as reducing debt faster.

Will debt consolidation hurt or help my credit rating?

Debt consolidation can lead to an improvement in your credit rating by making your debt easier to manage. Sometimes, debt consolidation means taking a loan at a lower interest rate to pay off several smaller loans at higher interest rates/ Making one payment instead of many may help you keep your debt under better control, make it easier for you to make timely payments, and this improve your credit rating.

Although managing your debt will improve your credit record in the long run, consolidation can have a more immediate impact. For example, if you have 10 accounts in default on your credit report, your lenders will consider you a bad credit risk. But if you can pay off those accounts with a consolidation loan, you have eliminated the problem. Your new credit report will now show that you cured the defaults and retired the debts. And you have only one open account — your consolidation loan. As long as you stay current on the consolidation loan payments, your credit rating will be viewed more favorably than before.

Remember, your goal is to manage your debt by making your payments more affordable. You can do this by lowering your interest rate or increasing the number of months you have to pay off the debt. There is no point in consolidating if you don’t achieve one or both of these goals — you’ll want to be sure you can afford the consolidation loan and make the payments. Otherwise you’ll end up back where you started.

Although debt consolidation has its advantages, you must recognize that by extending the time to pay off your debt, you will ultimately be paying more in interest charges. Also, once you get a consolidation loan, you should consider closing some of your credit card accounts so that you can’t simply run up your bills again.

A caution about debt consolidation-

Debt consolidation, in its pure form, is taking out one loan to pay off other debts. This is often done to lower interest rates, monthly payments, or both.

These loans can be unsecured bank loans, or secured by assets you offer as collateral – e.g. second mortgages or home equity loans. Secured loans are less risky to lenders, so the interest rates are usually lower than rates on unsecured loans.

The FTC has this to say about debt consolidation:

You may be able to lower your cost of credit by consolidating your debt through a second mortgage or a home equity line of credit. Remember that these loans require you to put up your home as collateral. If you can’t make the payments — or if your payments are late — you could lose your home.

What’s more, the costs of consolidation loans can add up. In addition to interest on the loans, you may have to pay “points”, with one point equal to one percent of the amount you borrow. Still, these loans may provide certain tax advantages that are not available with other kinds of credit.

A quick Googling of “debt consolidation”, however, turns up a seemingly unlimited number of companies that are offering to help consolidate your debt. Proceed with caution. While many legitimate options exist that can help you consolidate your debt, there are also companies that prey on people who are desperate to avoid bankruptcy.

How can I lower the interest rate on my credit card?

One way is to call your existing lender and try to negotiate a lower rate. Often, the threat of losing a customer and the associated income from your finance charges can inspire a card company to accept a lower interest rate and keep the relationship. Negotiation is most effective if you have a stable payment history with the company.

If your present card company won’t negotiate, you can transfer your existing balance to a new lender with a lower rate. Be careful, however, that it isn’t a teaser rate that’s offered for a few months and then will be raised higher than your existing rate. Ask for a clear accounting of what the rate applies to (e.g., balance transfers, new purchases, cash advances), as well as all other card limitations and penalties. Find out if there is a transaction fee before you agree to the transfer.

Keep in mind that lenders are making it increasingly difficult to continuously “surf” for low credit card rates. Some card companies now restrict balance transfers during a set time (e.g., a year) after you sign up. If you try to transfer to another card during that period, you may be retroactively charged a higher rate.

Should I pay cash for a car or finance it?

The least expensive way to buy a car is to pay cash for it, because with cash, you can buy only what you can afford and you avoid paying finance charges associated with a car loan. Nonetheless, the reality is that you may not be able to afford to pay cash for a new car. If you buy a used car with your cash, you may be saving the purchase price and the interest payments. However, you run the risk of potentially higher cost of repairs, and you could also be buying someone else’s car problems.

Conversely, financing your car allows you to pay off other debts with your cash. For example, suppose you have credit card debts charging interest at the rate of 18 percent and you can get a car loan at the rate of 10 percent. Here, it makes good financial sense to use your cash to pay off the debt with the highest interest rate and then take out a car loan at a lower interest rate.

How much will my monthly car payment be?

If you’re financing all or some part of your new car’s cost, and you want to calculate your monthly payment in advance, you will need to know the amount you are financing, the interest rate, and the loan term (i.e., the number if months to full repayment). If you have these three numbers, an inexpensive loan calculator can give you the amount of your payments. You can also get the information from the automobile dealer or your own bank. You can even search the Internet for any of the websites that feature automobile payment calculators.

It is important to remember that the amount you are financing may include taxes, title and registration fees, delivery charges, and add-ons such as extended warranties, service agreements, and credit life insurance. The simplest ways to minimize the amount you are financing are to increase your down payment, shop around for a lower interest rate, or waive optional add-ons. Minimizing the amount you are financing will also minimize your monthly payment. However, be aware that extended terms of up to 72 months are often available when larger amounts are financed, whereas you may only qualify for 48-month financing with a smaller loan. You will usually pay a higher interest rate to get extended terms, but the additional months should lower your payment. Consider this carefully. Six years of payments may outlast the value of your car, and you will pay an additional two years of interest charges.

If you decide to lease a car, your monthly payment may be lower than if you purchased the same vehicle with a minimal down payment. With a lease, you aren’t buying the car – you’re paying only for the depreciation of the car’s value over the period that you plan to use it (plus a lease fee). It is a little more difficult to estimate the monthly payment for a lease because it’s based on the car’s expected depreciation over the lease term. The amount varies, depending on the make and model of the automobile. However, several Internet sites provide lease calculators to estimate your lease payments. You can also ask the car dealership (or lease company) to quote you a payment amount.

How can I get credit if I have no credit history?

It’s the old catch-22. You cannot establish credit history without having credit, and you cannot get credit without a credit history. But if you work at it, this problem can be overcome. While you create a history, be sure your efforts will be reported to the credit bureaus.

Use the credit history of a family member or friend to leverage yourself into credit in your own name. If you are added as a joint party or authorized user to another person’s credit card, the lender may report the account’s payment history on your credit report.

If you have a checking account, ask your bank for overdraft protection (or cash reserve) privileges. With this feature added to your account, you can create credit by writing a check for an amount greater than the balance in your account (but not greater than the limit of your cash reserve line!) Alternatively, ask the bank for a small personal loan. As you repay these debts, you establish a credit history. Make sure the bank reports that history to the credit bureaus.

Secured credit cards are also a good way to get started. Your credit line is secured by your deposit in the bank, minimizing the creditor’s risk. For example, if you deposit $500 in the bank, you get a credit card with a maximum limit of $500. As you use the card and make payments, you establish credit history. These cards have high interest rates, but you goal is to only charge what you can afford to repay. As you repay the debt, you establish a repayment pattern seen by other creditors.

You may qualify for a department store charge card or gas card. Because these cards have lower credit limits and may be used only with the companies that issue them, the lending guidelines may be more liberal than those for major credit cards.

If you still have difficulty obtaining credit in your own name, consider a collateralized or cosigned loan. With a collateralized loan, the item you pledge as collateral (such as a car) minimizes the risk to the credit grantor. With a cosigned loan, your cosigner is equally liable for the balance. Spreading the responsibility for repayment in this fashion minimizes the lender’s risk. Successful repayment of these types of loans can then be used to establish your own credit history.

Should I buy a home or continue renting?

Most people face this question at some time in their lives. Buying a home is part of the American dream. It’s also one of the biggest financial investments you’ll ever make.

One of the main advantages of buying a home is that you build equity in your property. For example, if you paid rent at $1,000 per month for 10 years, you would have spent $120,000 on rent and have nothing to show for it. However, if you had purchased your home and made a $1000 per month mortgage payments for 10 years, you would have paid off a sizable portion of your mortgage. And if you decide to sell your home, you might make a profit.

Before buying a house, remember that your lending institution will want proof that you have money saved for the down payment and closing costs. If your savings won’t cover these costs, you should probably continue to rent for the short term while establishing an ambitious savings plan.

Even though buying allows you to accumulate a valuable asset, renting also has advantages. You may spend less time doing maintenance than if you owned the home, and you could relocate to another home more easily. In addition, you would probably pay less per month for rent than you would for a typical mortgage payment. This would leave you with more money to spend on whatever you choose.

Remember, it’s not easy to buy and own a home. Many people continue to rent throughout their lives. But if you decide to buy a home, start saving now so that someday you will own the home of your dreams.

Should I buy or lease a car?

There is no definitive answer – you must determine which option works best for you. Use these simple guidelines to help you decide.

How long will you keep the car? Leases typically run two to four years. If you like the idea of driving a new car ever few years, consider leasing. If you prefer to keep a car until you drive it into the ground, or like the idea of ownership because it gives you equity in the car, consider buying.

How large of a monthly payment can you afford? When you buy a car, your payments are based on the car’s expected decrease in value over the term of the lease (its depreciation). The lease payments may be low enough to put you behind the wheel of your dream car, without the need to worry about a down payment. Usually, you will only need to come up with your first payment and a security deposit to secure a lease.

How will you treat the car? Analyze you driving habits. A typical lease will include 12,000 to 15,000 miles per year. If you exceed this amount, you may have to pay extra (e.g.,$0.15 per mile) at the end of your lease. Therefore, if you travel great distances for work or intend to take any cross-country trips, buying may be a better option. Also, consider your surroundings. Most lease agreements allow only normal wear and tear. If you know you are tough on your car, or if you live in a neighborhood with only on-street parking, a lease may not be right for you.

Remember, if you lease a car, you must pay for any non-warranty repairs (e.g., a dent in the door), but those repairs benefit the leasing agency, not you. When you buy a car, it’s yours to do with as you please – you decide if the dent in the door gets fixed.

I get a lot of credit card offers. How can I tell which one is best?

Start by carefully reading the advertisement or application you’ve seen or received. It may seem like a lot of jargon, but that fine print contains important information about terms and costs. Here are three points to consider when comparing credit card offers:

Annual percentage rate (APR): What interest rate will apply to outstanding balances? If you plan to carry a balance, it’s especially important to choose a card that has a low APR. But don’t be fooled by a low introductory rate. It may apply for only a few months, and only to balance transfers, not new purchases. It’s essential to understand what rate will apply once the introductory period is over.

Find out, too, if the APR will change over time. If the rate is variable, you can expect it to go up or down periodically because it’s tied to an index (often the prime rate) that changes. If the rate is fixed, it won’t fluctuate, but that doesn’t mean it will stay the same forever. A credit card issuer can change your rate at any time, as long as you’re given written notice 15 days in advance of the rate change. Note: After August, 2009, you must receive written notice of a rate change 45 days in advance. Find out what will happen to your APR if you make a late payment. Some card issuers send your rate skyrocketing if you pay your bill late just one or two times. Note: After February 2010, a creditor generally may only raise the rate on an existing balance if the account is 60 days past due.

Grace period: How long will you have to pay your balance in full before interest starts accruing? If you plan to pay off your balance every month, you’ll want to look for a card that offers a relatively long grace period (e.g., 25 to 30 days).

Fees: What fees will apply? If you plan to pay off your balance every month, avoid signing up for a card that has an annual fee. If you plan to carry a balance, it may be worth paying a fee if the interest rate is low enough. And watch out for hidden transaction costs. Compare the fees you’ll be charged for transferring your balance, using your card to get a cash advance, exceeding your credit limit, or paying your bill late.

Finally, even if you’ve carefully read through the offer, you may still have questions. If so, call the credit card issuer before signing an application.

Are my student-loan payments tax deductible?

The interest portion might be, thank to the student loan interest deduction. The maximum deduction is $2,500. You don’t need to itemize to claim this deduction.

To qualify, you must meet two requirements:

First, the student loan on which you’re paying interest must be one that you incurred to pay college expenses when you were at least a half-time student. This requirement excludes part-time adult learners or other nontraditional students.

Second, you must meet income limits. In 2009, to take the full student loan interest deduction, single filers must have a modified adjusted gross income (MAGI) below $60,000 (below $120,000 for married filing jointly). A partial deduction is available for sing filers with an MAGI between $60,000 and $75,000 (between $120,000 and $150,000 for married filing jointly). These income limits are adjusted annually for inflation.

If you paid over $600 of interest to a single lender on a qualified student loan during the year, you should receive Form 1098-E from your lender, showing the total amount of interest you paid for the year. If not, contact your lender to request this information.

Are my student-loan payments tax deductible?

The interest portion might be, thank to the student loan interest deduction. The maximum deduction is $2,500. You don’t need to itemize to claim this deduction.

To qualify, you must meet two requirements:

First, the student loan on which you’re paying interest must be one that you incurred to pay college expenses when you were at least a half-time student. This requirement excludes part-time adult learners or other nontraditional students.

Second, you must meet income limits. In 2009, to take the full student loan interest deduction, single filers must have a modified adjusted gross income (MAGI) below $60,000 (below $120,000 for married filing jointly). A partial deduction is available for single filers with an MAGI between $60,000 and $75,000 (between $120,000 and $150,000 for married filing jointly). These income limits are adjusted annually for inflation.

If you paid over $600 of interest to a single lender on a qualified student loan during the year, you should receive Form 1098-E from your lender, showing the total amount of interest you paid for the year. If not, contact your lender to request this information.

How will I ever pay off my student loans?

As the cost of post-secondary education continues to increase and you take on further student loan indebtedness to pay for it, you may feel as if you are leaving the ivory tower with a mortgage on your back. You may be surprised to discover that some or all of your indebtedness can be forgiven if you are employed in certain public-service sectors, teach in teacher-shortage areas, or go into the Peace Corps.

If these choices aren’t available to you, you must find a way to budget for you student loan payments. Review you household income and expenses. Can you reduce your spending on entertainment, luxuries, and discretionary items? If so, you can divert these saved funds toward monthly principal prepayment of your student loans, thus shortening the overall repayment term and saving on interest charges. You are always permitted to prepay the principal of student loans, partially or in full, without penalty.

Would consolidating your loans or refinancing your loans make the payment schedule easier? Check with your current lender to see what options you might have.

Are you in a position to take a second, part-time job? The income from this job could be used to reduce your student loan indebtedness. Can you devote a tax refund, gift money or inheritance to principal prepayment? Even infrequent payments of this sort will ultimately reduce your loan balance and save you both time (repaying the debt) and money (the interest on the debt).

Can I refinance my student loan?

Generally, the standard repayment option for student loans involves a fixed monthly payment for a 5 to 10 year term. With increasing tuition costs, however, it’s possible you may graduate with student loan payments that are simply unaffordable. Moreover, if you have multiple student loans, you may be required to make several different monthly payments to different loan servicers. Consolidation of your loans may thus make your debt more manageable.

You can consolidate your federally subsidized student loans through a variety of programs. The process pays off your existing loans with a single new loan. Most consolidation programs offer a variety of repayment options. You can choose an extended payment option, a graduated payment option, or (in some cases) an income-sensitive repayment option.

An extended payment option allows the term for repayment to be as long as 30 years. Although this can dramatically lower your monthly payment, it can also dramatically increase the total cost of the loan. The interest rate may be higher, and the interest charged on any unpaid principal will continue to accrue for a longer period of time. However, as with all consolidation programs, you can make prepayments against principal at any time without penalty.

A graduated payment option starts off with lower monthly payments that increase over the term of the loan. Theoretically, as your income increases, you are better able to afford the higher payments.

An income-sensitive repayment option ties your monthly payments to your income level. The higher your income, the higher the required payment. Conversely, if your income drops, the required monthly payments may be reduced. This option requires you to allow the lender access to your federal tax return information.

Of course, you are always free to explore other refinancing options, such as an equity loan or a loan against a retirement plan. However, you should explore carefully the advantages and disadvantages of these options before pursuing any one of them.

My friend and I share an apartment. Will her renter’s policy cover my possessions?

Unfortunately, renter’s insurance and other homeowner’s insurance policies are designed for single people and traditional families. So when unrelated people share a residence, insurance coverage can be complicated.

Insurance laws on this topic vary from state to state, and policies vary from one company to the next. However, most insurance companies recommend that each tenant maintain a separate renter’s insurance policy to cover his or her personal property.

Some insurance companies do allow multiple roommates to be listed on a single renter’s insurance policy. If your insurance company structures policies in this way, you and your roommate can purchase one renters insurance policy to cover all of your collective possessions.

How much health insurance coverage do I need?

Unless you’re one of the lucky few who can afford to pay all of their medical expenses out of pocket, you need enough health insurance to cover your medical expenses, both anticipated and unanticipated. In addition to routine exams, prescription coverage, and minor illnesses, you need to consider the expense of emergency room visits and the possibility of surgery.

Health insurance is usually sold in take it or leave it¬ packages. Within each package, little to no flexibility exists in terms of coverage, dollar limits, deductibles, or co-payments. The only choice you may have is which package to buy, and that depends on how much you can afford or want to pay.

Employers often offer health insurance as part of their employee benefits package and pay a portion of the premiums. If possible you’ll want to buy coverage through your employer, since it’s less expensive than if you purchased an individual policy on your own.