Accountability - Unavoidable Trait for Personal Financial Success

Michelle came to us one day and she was well over her budget for the month. As usual eating out was her bank breaker. We asked clarifying questions and realized that she eats lunch at 10:30 am and so by 5:00 PM she was starving. She had no time nor energy to cook and so she took the easy route of eating out, which resulted in the imbalance of her monthly budget.

All of us have good intentions. But, life happens and we always take the path of least resistance. For financial success, one quality that is above everything, even knowledge is accountability. Now, there are two types of accountability.

1) Personal Accountability: 

This is when you figure out that you have a problem, analyzes the situation, develops solutions and sticks to the plan irrespective of circumstances. There are several people who have succeeded in life because of self-motivation and personal accountability. If you belong to this category, we want to congratulate you and encourage you to keep up the good works.  Please note that the critical aspect is self-reflection (which is not beating yourself up for your failure), and constant readjustment of action items. Writing down the goals and objectives before the beginning of the month, and journaling throughout the month will help you attain your goals.

2) Accountability Partner/Coach:

Now, if you do not belong to the above category, you need help. You need an accountability partner or a coach. So who exactly is an accountability or financial coach?

He/She is somebody you can trust to mentor you in your financial decision points, help you develop attainable goals, and keep you accountable toward attaining those goals. They should be able to understand your life situation, your income to expense ratio, and has the same vision and value system that you possess. They should lovingly correct you, and at the same time motivate you when you are feeling depressed or overwhelmed.

It is ideal for the person that you select to have personal and professional experience along with the right certifications and educational background. The financial world is challenging to maneuver and the jargon can be overwhelming. You need to have somebody with the heart of teacher who can walk you through the financial concepts, and then hold you accountable.

Hope you find your coach as soon as possible and that you will be well on your way to becoming financially successful.

Saving for College - What Are Your Options

Student debt has reached an astounding 1.3T, and many young graduates are struggling to make a living as a result. Parents and society at large are now coming to grips with this fact and they are contemplating on how to help their children graduate from college without debt. The good news is that there are several ways to help you get started saving now, potentially saving your child (and you) from student loans down the road. However, the channel through which you save is a function of your residency, the age of your child, and a variety of other factors. Here are the options, and we encourage you to work with a financial professional like Mayanah to make the right choice. 

·            529 plans

·            State Funded Prepaid Plans

·            Coverdell Education Savings Accounts

·            Savings accounts, CDs and savings bonds

·            Roth and Traditional IRAs

·            Trust Accounts

The first step is to identify how much it costs to go to college.  The College Board reports that the average annual cost of tuition and fees can range from just over $9,000 annually for in-state residents at public universities, to more than $31,000 per year at private colleges. However, you need to bake in inflation, and relative increase in fees before you can identify an approximate amount.

One option is to use a College Savings Calculator.

529 savings plans

529 savings plan, which is the most education-specific savings plan, is a provision within IRS tax code to utilize tax-free savings for qualified educational expenses like tuition, books, and limited boarding. The new tax plan extends the use of 529 to schools, though we see no added advantage to a majority of people. Non-qualified expenses will incur taxes and a 10% penalty. Please note that the amount invested in 529 plan is after tax dollars, and carry the same risk/return as investing in mutual funds or ETFs. Hence, caution needs to be exercised while selecting the funds.

Some states offer state tax credits and provide matching funds to encourage college savings. However, states like Texas where state tax doesn't exist, this is not an option. Each state has its own 529 plans, and you can choose any state's plan and use it to pay for college in any state. The 529 plan is very advantageous for parents with very young children. But, what if your child is a few years away from going to college? Well, state-funded prepaid plans are for you.

State-Funded Prepaid Plans

Since 529 plan is a function of how the stock market is performing, there is a risk of losing money if your child is closer to going to college. For those in this category, you can enroll in state-funded prepaid plans, and you lock in future increase in price with today's fees. It's no surprise that college tuition rises an average of 5% annually, according to the College Board. So, in essence you are getting approximately 5% return on your savings.  For example, you might pay for eight semesters in today’s dollars, and that will allow you eight semesters in the future, even if the costs at that time are higher.

We highly recommend state-funded plans to also avoid many scams involved in this area. One resource is Texas Promise Funds. So in essence, here are the pros and cons for both 529 and prepaid plans.

Pros:

·         Tax-free growth. However, it can only be used for qualified educational expenses.

·         High contribution rates, generally with no household income limits or age restrictions. 

·         Beneficiary flexibility. The account can be designated, and changed in the future, for the benefit of any individual’s education expenses — even your own.

·         If the parent is the account holder, it is considered a parental asset, with little impact on financial aid awards.

Cons:

·         Since the 529 is dedicated strictly to educational expenses, if your child decides not to go to college, or qualifies for something close to a full ride with scholarships, the money may be unavailable for other purposes. 

·     State-Funded Prepaid Funds are restricted to specific colleges, and especially within the state. So, if your child decides to go to an out-of-state college, then the savings cannot be used.

·     Stock market exposure can impact returns in a down market, particularly if the down market is close to, or at time when you plan to tap the funds. 

Coverdell Educational Savings Account

Education Savings Accounts, or ESAs, is like a 529 plan, but with contribution limitations. Qualified withdrawals are tax-free and, and you can buy a wide variety of investments. But contributions are limited to $2,000 per year, and only until the beneficiary turns 18. And there are income limitations as well.

Although potentially meager in their growth potential, ESAs do offer more flexibility than 529 plans. Qualified expenses in Coverdell accounts can include educational expenses throughout the life of your child, from K-12 all the way through grad school.

Pros:

·         Can be used from K-12 through grad school.

·         High variety of available investments and tax-free growth for qualified expenses.

Cons:

·         Maximum contribution is $2000 per calendar year.

·        The beneficiary changes are not as straightforward as with a 529 account, and can vary by custodian.

Savings Accounts, CDs and Savings Bonds

Even though these are regular options, attractiveness is closer to zero. The return of investment we get through these channels do not keep up with inflation, nor the rise of college expenses. We highly discourage you to stay away from these options.

Pros: 

·         Investment flexibility

Cons:

·            Few, if any, tax benefits and low returns, many times well below the rate of inflation.

Roth and Traditional IRAs

Traditionally IRAs were considered as a retirement vehicle. However, recently, it has also been proven good for educational expenses. You also have the ability to invest in a virtually unrestricted array of stocks, bonds, mutual funds and exchange-traded funds of your choosing, with or without the aid of an investment advisor. Withdrawals from a Roth are allowed penalty free for qualified education expenses, though they will generally be included as income in determining financial aid eligibility. If you are investing in Traditional IRA, you can take a loan against the IRA for college expenses. However, tapping your account for qualified education expenses can permanently hinder your ability to stay on track for your retirement savings goal.

Pros:

·         If your child scores a bunch of scholarships and doesn’t require a lot of financial help, your retirement savings are allowed to stay invested.

Cons:

·    Contribution amounts are limited to annual maximums, and there are income restrictions as well for Roth IRAs.

Trust Accounts

There are 2 trust funds called UTMA (Uniform Transfers to Minors Act) and UGMA (Uniform Gifts to Minors Act). These are traditional accounts where assets are transferred to child’s account, and invested on his behalf until he reaches the “age of trust termination,” as defined by the state in which they live, usually between 18 and 21. However, as soon as they become adults, beneficiaries can do whatever they wish with the proceeds. And because the assets come under the student’s control, the value of the account will likely affect financial aid qualification.

Pros:

·            Flexibility to use the account for more than just college expenses.

·            Some tax advantages to the donor.

Cons:

·         Misuse of funds .

·         Beneficiary can’t be changed.

What is the best option?

 Well, there is no one answer. Usually it is a combination of options that have been explained here, and would be dependent also on the age, and aptitude of the student, as well as the state of residency. However, one thing is for sure. You need to start early. It is always beneficial to consult with a financial coach before you start your savings journey, or to assess where you stand with respect to your goals.

Family Budgeting Software Comparison

Family Budget - How we hate that word! The initial thought that comes to us is one of RESTRICTION. But, those of us who have been using budgets for many years can vouch that it actually provides freedom to spend money without guilt, and know that we will be perfectly fine at the end of the month. However, the question we get asked often is if a software should be used to budget and if so, which one among the hundreds of available apps in the store. So here are our recommendations:

Should you use a software?

The first and most important step is to get started. If using a notebook is more your style, so be it. However once you have got the hang of it, we recommend that you switch to a software quickly. The family budget is never static and changes from month to month. In the long-term it will be very challenging to go back and track your progress.

Which software to use?

There are two options when it comes to software:

1) Microsoft Excel (or Apple Numbers) : If you are proficient in Excel, you can use Excel to develop your budget and track your expenses. One advantage of using Excel is that you can develop custom charts to track your progress. The biggest downside is that it can't be used by multiple people at the same time. We do not highly recommend Excel for your budgeting needs. However, if you would like a copy of an 'Excel Budget', please contact us.

2) Software applications: There are a number of software applications available in the market today. Here are four that are well accepted.

a) EveryDollar - This is the simplest and the fastest budgeting tool in the market today. The developers of this tool claim that you can build a budget in 15 minutes. Moreover, this application forces you to a Zero Dollar Budget, which is critical for your success. The added advantage is that multiple people can access the budget by sharing the username and password. The application has a basic version, which is free and an advanced version, which is $99/year. We highly recommend this tool. We recommend that you start with the free version and switch to the advanced when required. The only downside is the inability to see historical trends on a graphical format.

b) Mint - It is another free app that can be used for budgeting. The biggest advantage is that it can provide historical trends to help project expenses for the upcoming months. Mint is also flexible in changing the categories. The cons of this app are poor customer service and lack of connectivity. There have been times when accounts have actually disappeared.

c) YNAB - It is another budgeting tool, which is renowned for synchronization of accounts. It has education tools included for those who are interested in learning more. The biggest downside is that it has no free version - so it costs money to track your expenses, which is not a good idea. It was also reported that a few customers had security issues with the software, which is a big NO in the financial industry.

d) Personal Capital - We highly recommend Personal Capital for having the big picture regarding your finances. It is an excellent tool to monitor your net worth and personal holding. However, doing daily budgeting is very difficult with this tool. Please note that you will get sales call from Personal Capital once you sign up as they are interested in taking over your investments.

We hope you found this comparison useful. If you need more insight, feel free to contact us or visit our website at anytime.

Financial Coach - Who are they and how do they help?

Financial Coaches are individuals who work with clients to change behavior with respect to money. Coaches are not counselors. They do not judge you for the mistakes you made and dwell on what went wrong in the past, but, rather focus on the future. Just like most athletes, entertainers, and entrepreneurs hire coaches to improve themselves and their ventures, financial coaches can help individuals and families improve their personal financial situation through education, standard practices, guidance, and accountability. They also provide coaching on career, estate planning, insurances, mortgages and any other topics that lead to inflow or outflow of money in a household.

Here are a few ways they can help you, and also a list of what they cannot do for you.

• They help you break the paycheck to paycheck lifestyle - They educate, empower and provide accountability to stick to a proven and agreed plan for you to break the cycle. They will develop a cash flow management plan that works for your household. Remember, they work for you and your success is their success.

• They help you develop your financial number - Well, retirement is not an age anymore. It is a number. They will help you develop that number and work towards attaining the goal. They help you leave a legacy for generations.

• They help you optimize your investments - Since they do not sell any financial products, they can provide you with objective guidance, and will apprise you of the optimized path with minimized risk.

• They help you save money - They review your budgets and identify excessive/unnecessary daily expenses. They will then point out ways to save on your insurance premiums, mortgages, utilities and any other expenses.  

• They help decrease stress in your marriages - They are not marriage counselors. But, since statistics has shown that financial issues are a leading cause of increased  stress in marriages in America, their timely financial help can decrease that stress.

• They help you set up your children's college fund- They can inform you of all the available opportunities towards saving for your children's college, and provide accountability to do the same.

• They help you with career advice - They usually have a large network of recruiters and hiring managers that they can refer you to, in order to boost your career and income.

What they cannot do:

• They do not do any work for you - That is correct. They believe in teaching you how to fish rather than providing you with fish. They are not interested in short term success.

• They do not manage your investments - Remember, financial coaches cannot sell you any products, nor manage those for you. They can guide you, but you have to directly correspond with your investment manager.

• They do not make any calls for you - Again, they teach you how and what to talk to your creditors, banks, collection agencies etc. They even provide role play to boost your confidence. But, they cannot make those calls for you due to liability issues.

• They cannot perform miracles.- If your goal is to have a quick and easy fix, financial coaching is not for you. What they do is change behavior and help you attain financial success in the long term. They believe in changing your family tree forever.

There are countless success stories of those who have gone through financial coaching with us. If you need help, please contact us.

6 Steps to Avoid Credit Report Errors

A credit report is a detailed report of a person's credit history. There are 3 credit bureaus in United States - namely Experian, Equifax and Transunion. These agencies collect information from a variety of sources, to create a report, and assign a numerical value called Credit Score based on their analysis. This report  and the score is critical, if you are planning to borrow money, as lenders rely on the details in the report to determine the applicant's credit-worthiness. 

Credit report mistakes are more common than you think. The Federal Trade Commission's 2013 study revealed that one in 4 (25%) consumers identified errors on their credit report.  It is your responsibility to ensure that your credit report is accurate in every category. If not, you may either have become a victim of an identity theft, or a recipient of a bad loan costing you hundreds of thousands of dollars.

Here are the 5 steps to avoid costly mistakes:

1) Obtain a free copy of your credit report

As a consumer, you are entitled to a free copy of your credit report from all 3 bureaus on a yearly basis through AnnualCreditReport.com. This is the only authorized government website from where to obtain free copies of your credit report and scores.

2) Educate yourselves on various aspects of Credit Reports and Scores

Credit reports and scores are packed with information and you need to learn how to review a report. You also need to educate yourself on how hard and soft inquiries affect your score. This is a service that Mayanah offers to all their clients as part of our coaching.

3) Check for Identity Errors

Identity errors are those that are related to your identity. Common errors are:

• Ones with regard to personal information such as name, address, social security number, phone number, spouse's details etc.
• Additional accounts that third parties might have created as a result of identity theft.
• Mixed accounts, Duplicated accounts or Incorrect accounts - These need to be reviewed very carefully.

4) Check for Reporting Errors

Reporting errors are very common and some of them are:

• Accounts that incorrectly show as late or delinquent
• Accounts shown as open, when they were actually closed
• Same accounts listed multiple times
• Incorrect date of last payment, opened date or delinquent date
• An error in the type of account

5) Check for Balance Errors

These are errors with incorrect credit limits or balance amounts.

6) Take Steps to Fix Error

Ignoring any mistake in the credit report is catastrophic and you need to dispute it ASAP. The best option is to dispute it online.

• Experian Disputes
• Equifax Disputes
• TransUnion Disputes

You can learn more about online disputing at Lendedu.com.

Mayanah Financial Coaching encourages to review your credit report at least annually and fix any errors that might harm you in the future. However, we do not support borrowing to boost the credit score. We are against debt and we empower our clients to live a debt-free life. Contact us to learn more.

12 Steps to Buying Auto Insurance

The purpose of buying insurance is to transfer the risk from us (the consumer) to the insuring agency. In case of auto insurance, it is quite tricky, as it’s a balance between being adequately covered vs. paying a high premium. Here are 12 steps to follow to buy auto insurance:

     1) Learn the terms associated with an auto policy

An auto policy contains several terms critical to your coverage and monthly premium. As a consumer, it is critical to understand those. A synopsis of all the terms can befound at Mayanah Financial Coaching’s Blog.

            2) Identify what influences your rates

For a given coverage, insurance premiums can vary wildly depending on the following 13 factors:

·         Geographic location

·         Gender

·         Age

·         Marital Status

·         Driving Records

·         Driving Experience

·         Vehicle Type

·         Vehicle Use

·         Annual Miles Driven

·         Coverage and Deductibles

·         Claims History

·         Credit History

·         Length of previous insurance coverage

            3) Control the controllable

Based on the above list, some factors like age and location cannot be controlled. However, factors like claims, credit history and coverages can be controlled. Following are the steps to obtain favorable rates

·         Pull your credit report to eliminate scams and incorrect information. You are entitled to a yearly free credit report.

·         Create a list of both at-fault and not-at-fault claims before starting the process. The more the number of at-fault claims, the riskier the provider considers you as a consumer.

·         Continued coverage is critical for favorable rates. If in case, there is a lapse in coverage, please be prepared with the dates and the reason for the lapse.

            4) Check Driving Records

Your driving record defines how safe you are as a driver which affects the rates widely. It is important that your driving records are clean. If you have a major violation like DUI, then your rates can go up 100% or more in some cases. You can also consider the possibility of defensive driving courses to clean up driving records. You can retrieve your driving records at the Department of Public Safety.

            5) Identify the required coverage for you and your family

Required Coverage has two parts – one is mandated by the state and varies from state to state. The second part is based on personal preferences. If coverage is not sufficient in an accident, it can cost you an arm and a leg, and you may also face legal charges if your liability portion is not sufficient to cover the expenses. On the other hand, the best coverage will lead to a huge premium every month. To resolve this challenge, we recommend third party reviews by experts like Mayanah Coaches.

            6) Review your current insurance policy

Identify current coverage and premiums as this will be your baseline in shopping for new rates. If you do not have the policy handy, call the provider and request them to mail you a copy.

            7) Gather quotes from at least 3 providers

Since providers obtain statistical information from different sources, we recommend obtaining quotes from at least 3 providers. If the quotes are not comparable, we recommend to increase the number of quotes. Usually direct sellers like Geico may be cheaper than agency based providers like State Farm or Allstate

            8) Conduct normalized comparison

Since most insurance policies do not use the same coverage criteria, it is important to look at them carefully. We recommend normalizing the data to compare the rates. Mayanah coaches can help you with that.

            9) Identify available discounts

Available discounts vary from provider to provider. However, the best way to identify those is to call them and ask for the applicable discounts. The Department ofMotor Vehicles can provide you a list of common discounts in your area.

            10) Research on providers’ records

           Remember that the purpose of taking an insurance is to have adequate coverage in cases of undesirable events/circumstances. Hence, availability, responsiveness and credibility of insurance companies is very critical. The National Association of Insurance Commissioners can provide details on insurance providers and their records.

             11) Cancel Old policy

Once your new policy is confirmed and in effect, cancel the old one. You need to make sure the coverage of the new one starts before the expiry of the current policy. It is better to pay a day or two of coverage to both providers instead of having a gap in coverage.

            12) Retain and Communicate

Many states require drivers to retain a copy of their insurance in their automobiles. It is also important to send a copy to your lienholder, if you have a lien on your automobile.

We recognize that this process is challenging and we are here to help you at any stage. Please contact Mayanah Coaches at (281) 435-1888 or visit us at www.themayanah.com

Basics of Buying Auto Insurance

Recently we were with a client who was unhappy about the prohibitive cost of auto insurance. 87.4% of US drivers have auto insurance, and most of them share the same sentiments. It is a payment that we make month after month, and it can get frustrating if we have not filed a claim, are a first time auto-owner, or a new driver. Is it worth it? More importantly, many people have no idea what they are buying as coverage.

An insurance is nothing but a transfer of risk. Auto insurance is a contract between you and the insurance company where you pay a fixed amount (called premium), and they cover you for losses as agreed by terms and conditions (called policy). Nerd Wallet reports that the averagedriver overpays by $368 every year. Financial Advisor Magazine reports that Americans overpaid by more than $100B for car insurance in 2016. Are you one of them? If so, you need to know what to include and what not to. 

Here are some terms to become familiar with before shopping for car insurance:

Actual Cash Value: The fair market value of your automobile at the time it was damaged, stolen or destroyed.

Bodily Injury Liability Coverage: Coverage that the insurance pays for automobile accidents that result in bodily injuries to other drivers or pedestrians for which you are legally at fault. This also covers legal defense if you are sued after the accident.

Claim: Formal request made by the insured to the insurance company to cover an incurred loss.

Collision Coverage: Amount paid for damage to your car caused by an impact with another vehicle, or object, or a rollover, after the deductible has been met.

Comprehensive Coverage: Amount paid for damage to your car, after deductible is met, that is caused by hazards other than collision, such as fire, theft, explosion, windstorm, hail, water or contact with an animal.

Deductible: Amount that must be paid out of pocket by the insured, for covered losses, before the insurance company pays a claim.

Depreciation: Financial calculation that insurance companies use to identify the Actual Cash Value of the asset, in the event it is determined to be a total loss.

Exclusions: Items that are specifically denied coverage (ex: normal wear and tear) under the terms of an insurance policy.

Medical Payments Coverage: It is the total amount that the insurance company will pay to cover medical expenses and funeral bills, incurred by you and your passengers, in the event of an accident, regardless of who is at fault.

Personal Injury Protection: It is coverage where your own insurance company pays you and your passengers for medical and funeral expenses in the event of an accident, regardless of who's at fault.

Property Damage Liability Coverage: The amount that covers you, up to the policy limit, for losses that result when you damage or destroy someone else's personal property. This is mandatory for many states.

Uninsured and Underinsured Motorist Coverage: The coverage for injuries you and others suffer when you're involved in an accident with an uninsured driver, or a driver without adequate insurance.

Please refer to Auto Insurance Glossary for more details. It is critical that you understand these terms and conditions to be adequately insured, and to not pay for coverage you don’t need.

Please watch out for the next blog on how and where to buy car insurance.