19 Personal Finance Tips You Were Never Taught—but Need to Know
We asked half a dozen personal finance experts the best tips they could share that most people are never taught. Here are the money-saving and wealth-creating tips they revealed exclusively for Reader’s Digest.
Taxes can really hurt your retirement
Many of people have tax-deferred investments like 401(k)s on which you pay no taxes until retirement—when tax brackets are assumed to be lower. But retirees are taxed on their retirement income when they start drawing money out of their 401(k)s and IRAs, and they can really take a bite from seniors living on fixed incomes. Warns financial advisor Saranovitz, “You must have a tax-efficient withdrawal strategy from your portfolio.” For example, you could move taxable stock investments into bonds before retiring; buying municipal bonds from your home state could help you avoid paying federal, state, and local taxes.
You don’t have to die to benefit from life insurance
“Nobody ever told me that life insurance could do things for me when I was alive,” admits Kirby Thomas, owner of Life Insurance Today US, a nationwide provider of life insurance for consumers. Some life insurance policies offer an “accelerated benefits” option in which the death benefit is payable while the insured is still alive.
“Possible ‘living benefits’ include terminal illness, critical illness, chronic illness, and critical injury,” explains Thomas. “I recently recommended this option for a woman buying insurance for her 75-year-old mother. By buying a policy with the proper riders, instead of the daughter incurring debt to pay for Mom’s future treatment, the life insurance could be used instead. The death benefit would be reduced by the amount accelerated, and the balance paid to the daughter when she lost her Mom.”
According to Zaino, “Life insurance can be used for replacing a stream of income for a surviving spouse, providing heirs on an estate with liquidity, replacing the value of an asset, paying estate taxes, maximizing your pension or Social Security benefits, college funding for the kids and grandkids, buying out a business partner, protecting a business for the replacement value of a key employee, satisfying debt, funding charitable gifts, providing for a special needs child or adult, equalizing an inheritance, longevity planning, and balancing investment risk.”
Consider life insurance for your children
Although this seems a touchy subject, the reason for having a life insurance policy on a child is about cash accumulation, explains industry pro, Thomas. “Compound interest works best when you have a lot of cash or a lot of time. Kids have a lot of time.
“When buying an Indexed Universal Life Insurance policy for a child, the cost is very low and remains the same over the life of the policy, while the cash continues to grow. The parent owns the cash and can borrow from it. The parent can also assign ownership to the adult child one day, along with the cash, just in time for adult things like a down-payment on a home. Or the child can create retirement income with the policy.”
Building good credit takes a long time, but it can be ruined overnight
If you miss a single payment, it could take seven years to have that black mark removed from your credit report. In the meantime, you could be paying more in interest than you have to for every loan, including your mortgage. According to the credit bureau Equifax, a single missed payment can result in as much as a 90-110 point decrease on a FICO credit score of 780.
Even if you’re responsible about paying bills, an identity thief could ruin your good credit behind your back. Advises Toomey, “Check your credit report often to correct any mistakes and to look for fraud.” Check your credit score and read your credit report for free within minutes.
Asking for your credit limit to be raised can improve your credit score
Keep your credit utilization—the amount of credit you use compared to your credit limit—low to boost your all-important credit, advises Diana. “You can borrow less, or you can ask for a raise in your credit limit.” A recent study from CreditCards.com found that only 28 percent of respondents have ever asked for an increase in their credit limit. However, a whopping 89 percent of those who asked for a credit limit increase received one.
Unless they have a high annual fee, don’t close your old credit cards
“The longer your stable credit history, the better it reflects on your credit score,” explains Diana. “The age of accounts is averaged over all of your credit accounts, so closing an older account that is infrequently used actually harms your credit score in two ways: It lowers your credit limit, which raises your credit utilization; and it lowers your average account age. If you have an old card with a decent credit limit, use it at least annually to keep it open. But don’t forget to pay the bill on time!” Look out for other sneaky things that could lower your credit score.
Don’t ever co-sign a loan
“Co-signing a loan isn’t just vouching for someone’s character,” explains Toomey. “Understand that if the borrower doesn’t pay, then you’re responsible for every single missed payment. If they don’t pay, it’s your credit that will be ruined.” Learn more about how co-signing a loan affects your credit score.
Ask current lenders for a better rate
“Banks, credit unions, and other lenders are keenly aware of their competition,” says Diana of MoneyTips.com. “If your credit score qualifies you for a better rate from another credit card issuer or lender, ask them to match the rate. There’s no downside to asking; the worst they could do is refuse.” Follow these simple tips to negotiate like a pro.
Being debt-free should not be your goal
Says Aliche, creator of the Live Richer Challenge, “People focus on getting out of debt. If they use that money to grow wealth instead of getting rid of debt, they could be debt-free faster. Do you pay off your student loans to get debt-free, or invest money in your business to grow and secure wealth for yourself? If you focus on being debt-free, that’s all you’ll be. If you focus on building wealth, then you can be wealthy and debt-free.”