There are ways to overcome financial hardships, no matter the situation.

Hardships can affect consumer’s cash today. The recession was hard on consumers and many had to drastically change their ways of life to manage. On top of the financial situation, some consumers suffered other hardships to make matters even worse. For anyone who had difficulties personally and financially, it was a challenge.

For example, Michelle Plumbley, of New Castle, New Jersey, is a homeowner with three children. Four months ago, her husband died of cancer and she was notified that she would no longer be receiving the $2,100 in Social Security benefits to live. Her credit card debt is $18, 000 and comes along with a hefty interest rate. She is debating options and weighing pros and cons for her future.

The solution for a homemaker after tragedy

Plumbley has some options:

• She can contact a debt consolidator and pay $285 a month for 4 years
• She can borrow on her retirement to pay off her debt
• She can sell her home, which she owns in-full, and pay off all debts
• She can downsize to a smaller home, and use the left over money to pay debt

Although there are many options, each one comes with an interesting set of after-effects. For example, she could sell her home and buy a new one, but the leftover funds may just cover her credit card payoff. In addition, the market isn’t at its best position right now to start selling a property, so it may be on the market for a while before the solution comes to fruition.

The expert’s opinion

Steve Bucci, financial expert for Bankrate.com, said that Plumbley has critical decisions to make. First of all, losing $2,100 in monthly income is a drastic change for anyone to manage. The good news for her, though, is that her house is paid for. That could be what saves her from a disastrous outcome. The biggest issue she has to deal with is her credit card debt. Bucci advises her to submit a “letter of hardship” to her credit lending company. Many lenders are more sensitive with cash today because they know the state of people’s finances. To ask for a letter of hardship, consumers need to talk to a manager at their credit lending company and be prepared with a payment plan. Some lenders offer six-month to year-long breaks in payments for qualifying hardship-suffering customers.

The second thing for Plumbley to look into is how to increase her income, or decrease her expenses. To pay off her debt, she needs an additional $400 a month. That averages out to about $13 a day. Bucci suggests all people who owe considerable debt should break it down to manageable amounts and then think strategically about how to handle it.

Thirdly, Plumbley also was considering selling her home and downsizing to a smaller one. Rather than that, Bucci instructs her to look into a home equity line of credit, or HELOC. A HELOC will have a low interest rate and a longer lifespan. That will allow her to pay back the money much easier and at a much lower rate than what her credit card company is currently offering. The one caution with this option, though, is that consumers need to understand that they are exchanging unsecured debt for secured debt with the move. If payments aren’t made on time and the loan defaults, homeowners could potentially lose their property.

Finally, debt consolidation is another possible solution Plumbley could use. Bucci instructs that debt consolidation can help consumers, but only if they are careful what company they use. A legitimate nonprofit credit counseling agency can help a difficult financial situation. The problem is that there are so many unscrupulous companies preying on consumers in financial turmoil. Bucci says, “If a company promises anything that seems outrageous, it probably is…it’s impossible to lift a credit score one-hundred points in a few months.”

Managing debt after a hardship

Managing cash today is difficult, and adding a serious hardship to the mix can mean even more stress. For anyone who finds themselves in this position, the best thing to do is to take stock of what the issue is, what the options are, and then weigh each one out objectively. As Bucci added, “It is very important for those in trouble to remain financially strong and a safe harbor for dependents until they become independent, and perhaps can help you in return.”

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Changing model of retirees

Borrowing money, using savings and family’s financial aid may be necessary for senior citizens moving into retirement homes. Gone are the days of retiring in the comfort of a luxury facility overlooking golf courses and close to shopping malls. In today’s post-recessionary economy, nursing home operators and states are rethinking their decisions. According to home builder Del Webb a new survey is showing that Arizona, Florida, South and North Carolina are where aging baby boomers will be heading.

A new study on retirement

In the past, moving to a warm climate was the priority for those looking to retire but now the concern is primarily financial. The number one fear for seniors is maintaining their cost of living and that is opening the door for more states to attract the retired public. The Del Webb study showed that about 35% plan to move to a new home when they retire and about half plan to relocate to a different state. Samuel Ford, economist for Economy.com, said, “People going into retirement now, or in coming years, have gone through the worst recession since the 40s. Their nest eggs and retirement funds are tapped out or stretched at minimum, and that is causing them to rethink their retirement plan as a whole.”

What retirees want now

For consumers who want to relocate, there are also specific needs. According to a survey conducted by the National Association of Home Builders, those who are fifty-five years and older want the following in a home:

• Maximum storage space
• In-unit washer and dryers
• Easy-open windows
• Garage door openers
• Porches and private patios
• Large bathrooms
• Attached garages

In lieu of these things, they are giving up island work areas, wood burning fireplaces, exercise rooms and separate showers. Hi-tech additions are also no longer a priority. Rose Quint, the NAHB VP for study research, (see http://www.nj.com/business/index.ssf/2010/01/seniors_rethink_their_dream_ho.html) said, “The older buyers are frugal, probably on a fixed income and so expensive tech items are not that big on their lists…Retiring consumers don’t want to rely on borrowing money from families or personal loans to make their monthly budgets. The stress to them isn’t worth it.”

More care included in the home purchase

Another interesting result of the survey is that retiring homeowners want services added to their purchase. John Migliaccio, director of research at MetLife’s Mature Market Institute, said, “Very telling is that the younger group of mature consumers reported enthusiastically that they want services like home maintenance and repair as part of their next home purchase, along with services usually connected to older householders like housekeeping, onsite health care and transportation.” The group also wanted a larger variety of activities and social interaction built into their retirement communities.

Retirement in the future

Overall retirement is changing due to the economic recession. Though it is over, it has left millions of Americans with depleted savings and now they are looking for more cost-efficient areas and situations to retire in. Rather than borrowing money and relying on family help, the baby boomers are opting for cutbacks in retirement. It is telling of how the economy changed public perception and how as a whole society is remembering well the financial difficulties of the market.

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Senior citizens needing money now are worried that Social Security benefits won’t be around for much longer. Studies show that Social Security benefits make up for about 40% of retirees’ income. It’s no secret that many Americans have come to rely on the benefits to pay their monthly bills. Without it, they would be hard-pressed to maintain their current quality of life.

Government experts are saying that the Social Security fund will be tapped out in coming years. They have noted that tax receipts will start to fall short of outlays by 2016 and the long-term surplus of the fund will be drained by 2037. This has been much cause for concern with baby boomers who are quickly approaching the age of retirement and worried about money.

Is the Social Security fund gone?

Though the government admits that the Social Security fund will reach lows in coming years, they insist that benefits will not be eliminated. In fact, the fund will still be able to deliver about 75% of scheduled benefits. In addition, the gap between viable payouts and full payouts isn’t huge. It’s only about 2% of the national wages. That could easily be funded by small tax increases or a reduction in benefits for retirees.

How are benefits calculated?

Many Americans are concerned about the fund and wondering if they should include Social Security benefits in their retirement budget plan, and if so, how much. The answer begins with looking at how the payout is calculated. It’s an algorithm of how long a person worked, adjusting their annual earnings for inflation, averaging the highest 35 paid years of service and then replacing a portion of their average income with monthly payouts. The next factor is the timing. People can claim their full benefits between 65 to 67, or continue to work until they are 70 for maximum benefits.

Studies have shown that in today’s market people normally collect money as soon as they can. In fact, half of all men claim their Social Security benefits by the age of 63. There are some strategies though that can be used to sustain money now that the economy is strained. First, if a spouse retires, the other spouse can claim spousal benefits but continue to work. They can switch to their own benefits when they retire. This is a good strategy because it allows consumers to build up more credits.

Second, when a worker reaches their full retirement age they can claim benefits, but suspend their payments until a later time. That way the value of future payments continues to grow. If the other spouse claims benefits immediately, that allows the other to grow steadily. Both strategies are good ones to have to maximize the payouts consumers are entitled to.

Managing Social Security

Managing Social Security is still an issue for retirement age Americans. Though funds are depleting, the government has tools to build up the Social Security fund. Retirees who need money now have options. It may take some strategizing, but with careful planning they can maximize their benefits.

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When it comes to saving money, consumers are learning to be creative. Not only are they cutting back on big ticket items, now they are scrutinizing small necessary bills. The home is no longer a place where bills are “just paid”, rather everything from electric to phone bills are getting the once over.

One of the biggest drains on any paycheck is the electric bill. Everyone needs it and companies know that. They hike prices to bring in more money. Not that it is totally their fault, however. Oil and commodity prices are increasing and the recession’s effect means that most likely costs will continue to rise. For this reason, consumers are hard-pressed to find new ways of saving when it comes to electricity.

Cut down on costs

According to the Energy Information Administration’s Short-Term Energy Outlook, electricity prices are expected to rise 4.7% this year, and another 3.3% the year after. Finding ways to cut back on usage is the only way consumers will be able to manage the added cost. Here are some ways to streamline electricity costs.

HVAC Inspection. Having an HVAC system inspected is the first way to save electric costs. The ventilation, heat and air conditioning system of a house provide many ways to drain energy. A professional inspection costs anywhere from $50 to $100, however the savings are worth it. For example, if a $75 inspection finds a leaking air duct, it can end up saving hundreds over the lifespan of a machine. For anyone wanting to replace units, going with Energy Star-rated appliances can also bring down costs considerably.

Programmable Thermostats. A programmable thermostat can help reduce energy consumption. Programming it to a lower temperature in winter and higher in the summer is a great way to cut back on costs. Most Americans spend eight to ten hours a day away from the home and don’t need to keep the home regulated at the same temperature they would if they were home. According to a study done by EnergyStar.gov, a programmable thermostat that is regulated for eight-hours a day to a less strenuous temperature can save $180 annually.

Insulating and sealing. An inspector can help find leaks along windows, doors, attics and basements. Simple caulk and weather-stripping are basic tools that are used to cut down energy waste in a home. EnergyStar.gov reports that sealing up leaks and insulating it properly can save up to 20% in electric costs. There is also a 30% energy efficiency federal tax credit of up to $1,500 for improvements.

Time-of-use plans. These are newer plans that some electric companies are now offering. They allow consumers to choose lower rates for energy consumption during their off-peak hours. To even out the package, consumers have to pay more for the peak hours, but for some consumers it can save money. Homeowners are encouraged to study their daily habits and see if the discounts can help them cut costs.

Saving money post-recession

Almost every consumer is looking to save money these days and cutting back on electricity costs is one of the easiest ways to do it. Finding money in today’s difficult financial time means scrutinizing everyday costs and electricity is one of the biggest. It may take some upfront investment of time and money, but in the end a lowered electric bill will make up for the efforts.

Borrowing money for a home purchase has some rules. The world of lending is intricate and anyone who wants funding needs to be able to wade through the many different loan products available. Mortgages are confusing these days and every different type of loan has variables that determine a different overall cost and payment throughout its lifespan. Many mortgage products are an apple-to-apple comparison and a basic education can help consumers make the right decisions for their individual financial situations.

The 30-year fixed mortgage

The most common type of mortgage is the traditional 30-year fixed model. It combines a fixed interest rate with a long-term lifespan. That breaks down payments and makes them manageable for millions of American households. This is the best loan for borrowers who are planning on staying in one house for a long period of time and those who want the stability of a monthly payment that doesn’t change. Though throughout the past few decades this is the type of mortgage that prevailed, in the past five years other more unusual mortgage loans began to take hold. Many experts claim that this is the reason for the lending crash that contributed to the recession. They believe that too many lenders tried to stray from the traditional time-tested 30-year fixed mortgage for the purpose of extending loans to more customers.

The 15-year fixed mortgage

This mortgage is very similar to the 30-year fixed mortgage. The difference is that interest rates on these types of loans traditionally are lower due to banks having a lower long-term risk. Borrowers pay off this type of loan in half as much time as its 30-year counterpart and it grows equity faster as a result. This is a great option for borrowers who want to pay back their mortgages faster. It is also a good option for borrowers who want to refinance their mortgages without extending the term back out to the 30-year model.

1-year ARM

ARM stands for adjustable-rate mortgage. This type of loan has no guaranteed mortgage rate over the course of the loan. There is an introductory rate on these loans that lasts for 1-year. Rates for these loans are significantly lower than those for other types of loans and the term is usually 30 years. For consumers borrowing money short-term, this could be a good option. Buyers who don’t plan on staying in one home for a long time can find lower monthly borrowing costs. It also works well for borrowers with the ability to make higher payments due to larger incomes.

5/1 ARM

The 5/1 ARM is another adjustable-rate mortgage that has a fixed rate for the first five years. After the initial five years, the rate adjusts periodically. Normally these are also 30-year long loans. These types of loans are good for borrowers who plan on selling within five years and want to keep their mortgage payments as low as possible. Again, borrowers with income to sustain higher payments can use these types of mortgages to their advantage. The thing to remember about this loan is that the interest rate is not guaranteed. Buyers benefit from a fall in the interest rate, but are stretched when it rises.

Other types of loans

Prior to the recession, lenders came up with various other loan structures to serve those borrowing money. There is an interest-only mortgage that allows a buyer to pay just the interest and leave the balance untouched. Balloon mortgages offer lower rates, but then require a large sum payment. Assumable mortgages can be transferred from a homeowner to a buyer to eliminate the need for a new mortgage for the sale. All borrowers should talk to a financial expert who specializes in mortgage loans prior to buying. They can assure that the mortgage product they get is truly the best one for their situation.

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Back in February of 2009, President Obama addressed a group of high school students about borrowing money and the housing market. At the time, the market was in crisis and the President decided to fix the foreclosure problem with a program set to turn it all around. Unfortunately, that turnaround never came. One year later, an Economy.com survey shows that only about 750,000 homeowners will have received help since that time. It was projected that between 3 and 4 million would be saved from foreclosure.

Borrowing is the issue

According to Mark Zandi of Economy.com, “The more borrowers who can’t be helped, the more foreclosed properties will be flooding the market. And that means the nation’s housing market, which appeared to recover last summer, could soon take another turn for the worse.”

The predictions for the housing market are not good. Many are looking at signs of how the housing plan by the White House didn’t work as the reason. According to RealtyTrac Inc., a record 2.8 million households were in default last year and that’s up by 20% from the year before. This year they should continue to go up.

Home prices in the mix

Home prices are down by about 30% across the nation, and they are predicted to fall even lower as foreclosures continue to bring neighborhoods’ values down. Zandi added, “It is a very serious threat to the housing market, and still one of the most significant risks to the broader recovery.”

It’s not that Obama doesn’t have time to implement the plan. The goal still is to help homeowners in trouble by modifying their mortgages. So far, by using lowered interest rates and longer repayment periods, the average monthly payment has decreased by $500. The modifications require that homeowners have to make three on-time payments in the temporary modification process, and then they can move to a permanent modification. However, only about 7% of the people who signed up for the program has completed it, according to the Treasury Department.

Who is to blame?

It’s difficult to borrow money these days and homeowners are realizing that modifications are not the sure-fire solutions they were thought to be. So who is to blame for the housing failure? Mortgage companies complain that homeowners are slow, and even hesitant, to get back all necessary paperwork. Housing counselors say that maneuvering the bureaucratic maze of laws and rules is almost impossible. For example, the largest company working through the issue is Bank of America. It has completed less than 2% of the 200,000 borrowers who have applied for the modification program. Rebecca Mairone, bank executive for BOA, said that the bank has started “sending out notaries door-to-door to get signed documents back quickly.”

The final blow to the housing market

Finally, the high unemployment rate is not helping the situation. Unemployment is now at over-10% throughout the nation, and job losses don’t make it easy for people to keep up with payments or qualify for modifications. Cindy Rose of Murietta, California knows this firsthand. She and her husband have seen a huge decline in work and they went to their mortgage company for help. Though they initially got a modification down to $1,700 a month, from $2,650, it only lasted a month. Then they received a confusing letter citing reasons why they were rejected. Rose said, “All these horrible things have happened in the economy and there is nobody there for you.”

The future plan of the administration

When it comes to borrowing money for homes, lenders are still closing doors. The reason is that the market is not yet able to rebound from the recession. Unemployment, along with falling home values, are making things more difficult than anticipated. Only time will tell whether or not 2010 will be the year when the housing market is able to stabilize and turn around.

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Anyone who has run to an ATM for quick cash has put themselves at risk for skimming. Skimming is a new type of thievery in the 21st century. Thieves set up electronic equipment that captures magnetic stripes on your ATM card. It stores your PIN number and then thieves use the information to withdraw money from your account. The technique is used at gas pumps, restaurants, ATM machine kiosks and retailers. Skimming is a growing security concern in 2010.

Avivah Litan, an analyst specializing in fraud detection and prevention at Gartner Research, said, “As economic conditions have worsened, there’s been a noticeable increase in all types of card fraud. But ATM and debit-card fraud is the top area of concern we are hearing about from banks all over the world.” Now that debit card spending is growing, the door is open for more fraud and consumers are warned to be careful with what locations they use to withdraw money and pay for items.

Gas stations the number one security risk

The number one location where skimming is prevalent is at the gas pump. Too many people get their gas on the fly. They pull up and use their cards as a debit card – inputting their PIN number. The problem is that when that PIN is entered, anyone who may have breached security at that location has access to your account. Litan said, “Gas pumps are notorious for skimming because they are produced by only a couple of different manufacturers, and if someone gets the key to one from a disgruntled employee, they can insert a skimming device inside the pump where it can’t be seen.” The safest thing to do is to use a bank card as a credit card when getting gas at a pump.

Use ATMs at bank locations

If you want to get quick cash, go to an ATM located at a bank, rather than one at a convenience store, corner or airport. Darrin Blackford, spokesman for the US Secret Service, said, “A thief has to be able to attach and retrieve a skimming device to use the data it has gathered. That’s much more likely to happen in nonbank settings where there is less traffic and no surveillance cameras.” Your best bet is to stick to bank-attached ATMs, but they aren’t foolproof. Blackford added, “It’s often hard to spot skimmers, but if you notice a change at an ATM you use frequently, such as a color difference in the card reader or a gap where something appears to be glued onto the slot where you inserted your card, that’s a warning sign.” He instructs users to report the machine to the bank immediately.

Watch bank account activity

Another way to protect yourself from ATM skimming is to watch bank accounts vigilantly. Federal law limits liability for fraud on a debit-card to $50, but only if the lost card or theft is reported within two days of the problem. If you don’t report it in time, unauthorized charges could be your responsibility. It’s very important to do a check online of all activity to your account and be sure the charges are authorized. Now that most people are going “paper-less” with their banking, they have access to transactions in “real time.” It makes it much more convenient to keep track of spending and charges to an account.

Keeping accounts safe from skimming

Skimming is a new form of robbery. It involves taking advantage of consumers looking for quick cash at various ATM, gas stations, retail outlets and restaurant locations. To be safe, people need to be aware of the locations they use for withdrawing cash and making purchases.

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The rich have known for years that personal loans can come in the form of mortgages. For example, grocery-store billionaire Ron Burkle has known the secret of finding funding for years. He currently has about $56 million in loans against two properties. High-end home borrowers are growing in the market today and they know that it’s more efficient to take out loans than use other forms of financial support. Robert Maguire, a real-estate tycoon, said, “Home loans are a really good source of cheap capital.” He currently holds $50 million against a host of properties. During the real estate crash he lost control of his company Maguire Properties, Inc., but now he is looking to raise money to turn things around.

Mega-mortgage rates are low

Most high-end borrowers know the key to bringing a return by using mortgages. Their goal is to borrow low and then take the money and invest in something that brings a high return. Like regular home loans, mega-mortgage loans have performed on the same timeline. Post-recession, they were flourishing, but once the market took a serious downturn they diminished in number. Now that the economy is showing signs of a turnaround, they are showing signs of a comeback. Bank of America Corporation is showing a 33% rise in home loans, compared to this time last year. Clients are using the cash to buy other assets like stocks and bonds.

Taxes and mega-mortgages

The way federal tax codes are written is often difficult for mega-mortgage borrowers to manage. Mortgage interest can be deducted, but only up to home borrowings of $1 million. Despite the laws though, tax experts always have ways to maneuver with the least negative impact. David Adamo of Luxury Mortgage Corp., said “If cash is used for investment purposes, the loan interest could be used to reduce taxes on income from the investments.” Using these mega-mortgages as personal loans is still a favorable option for those who know the ins and outs of taxes. The extra effort is worth it though because high-end borrowers note that finding huge amounts of capital other ways can be difficult in a normal recession, much less a depressed one.

Max Azria and the mega-mortgage

Max Azria, CEO of BCBG Max Azria Group took out a $25 million mortgage in April of 2008 on his Los Angeles mansion. According the Moody’s Investors Service, BCBG needed the funding from the loan to carry it through the difficult economy. As a result the company was able to restructure and now that the recession is over, it is improving its own financial position. Accounting professional Samuel M. Brody said, “BCBG Max Azria is one company that understands the weight of using mortgage loans to turn a company around. Without them, many companies would be at a loss for finding necessary funding…it has long been an inside industry secret.”

Using mortgages as collateral

Throughout the recession both individuals and corporations have had a difficult time managing. Being innovative with mortgages has been a trick that mega-mortgage borrowers have used for decades. Using mortgages as personal loans is proving to be a wise option when it comes to finding the collateral companies need. Now that there is a notable turnaround in the market, expect the mega-mortgage to rise in numbers once again.

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The payday loan is a viable option in today’s market. Although a few short years ago the lending world was giving out money freely, things changed after the recession. Lenders were tight-fisted with money due to the huge amount of defaulting loans they had on their hands. While that saved them additional losses, it did little for consumers who were still in need of finding funding to pay bills. Many consumers turned to the payday loan as an option for paying emergency bills. Although these loans traditionally have a much higher rate of interest, if used properly, they can be viable solutions to budget shortfalls.

The payday loan

A payday loan has few requirements for consumers to meet. Normally all a customer needs to apply is to be over 18 years of age, have an active bank account and be employed. Some companies employ other rules, but in general, these are the basics. The application process is simple and quick. If a customer applies online, they usually get an answer regarding their approval within minutes. If they are approved, then the customer is given an amount of cash that is deposited into their bank account within 48 hours, sometimes sooner. The amount they receive is based on their income and can vary greatly between applicants.

When it comes to paying back the loan, it’s just as easy. The loan company will automatically deduct the loan amount and the fee they charged, from the customer’s bank account on a specified date—usually the next payday. The simplicity of these loans is what makes them so popular among consumers. They are quick, convenient and offer necessary cash to those who qualify.

The one downside

There is a downside to payday loans. The loans are meant to last for a very short amount of time and customers who use them this way should find them helpful. If a borrower doesn’t have the money on the specified date though, they can extend repayment to the next payday, but with a huge interest charge. This is where many customers get into trouble. Nancy Mae of Full-Time Lenders, Inc., said, “It’s crucial to pay off the loan and stay within the timeframe created. Customers who use their payday loan as a loan without an end-date end up paying huge fees. Interest on these loans can be as high as 50%.”

The wise way to manage a payday loan

The wise way to manage a payday loan is sticking to the framework created when a consumer first took it out. These types of loans can be especially helpful, but only if they are used in the way they were intended. They were meant to be quick-cash options for borrowers with an emergency shortfall in funding. Mae said, “People who use payday loans effectively are the ones who understand funds will be taken out of their account on the next payday. They are able to budget for it.”

Borrowers who are using these loans primarily because of a time issue, are normally the ones who use them most successfully. Mae added, “Payday loans are a great way to get money now as long as consumers understand that they have to pay it back when the loan is over—normally in two to four weeks.”

Payday loans are helpful if used carefully

Payday loans can be helpful. The problems come in when people don’t commit to paying the money back on the specified date. Loan companies will take the interest payment, but then the total, plus an additional fee is rolled over. The longer they wait to pay the loan, the more of a strain it becomes.

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Finding emergency money isn’t easy, but with the vast amount of tax credits available the government is trying to make it a little simpler. Once you get your income tax liability down, you then can start looking at tax credits. There are a wide variety of them available, but it’s important to remember that they do not create a refund if they exceed your tax liability. Here are some of the most popular tax credits and a little about how to utilize them.

Child tax credit

In general, you can claim a tax credit of $1000 for every under-17 year old child in the household. To calculate your exact credit you need to complete a “Child Tax Credit Worksheet.” Even though this credit could exceed your tax liability, you still may be able to use a portion of it if your income for the year was more than $8,500 and you have three or more children. There may be some limitation on the credit if your income is more than $55,000. This is one of the most common tax credits used and though there is paperwork to fill out, it can help create more savings.

Child and dependent care credit

For anyone who had to hire an outside worker to help with their children or dependents, there could be an additional tax credit. The care you needed to outsource may be considered an expense, even if you only worked outside the house part-time. This credit is claimed on Form 2441 if you file a 1040 and on Form 1040A , Schedule 2. To calculate the amount of the credit, you’ll need to have the amount of the expense, number of dependents who needed provisions, and your income. The actual credit amount is then based on your adjusted gross income.

The adoption credit

Emergency money can also be found using the adoption tax credit. If you adopt a child under the age of 18, there is an adoption credit that can reach a maximum of $11,650. It also is applicable if you adopt a person physically or mentally disabled and incapable of self-care. This credit is used on Form 8839. If your employer provided an adoption expense, then you can exclude that money from your income.

Hybrid vehicle tax credit

If you purchased a hybrid vehicle, there is also a tax credit available. The amount of this credit is dependent on the car’s projected lifetime fuel savings, as dictated by the IRS. The maximum for the credit is $3,400. Only the car’s original purchaser of a new hybrid car can be claimed on this credit and if you leased the car, the leasing company claims the credit.

The retirement plan tax credit

For anyone who contributed to their 401k plan or an IRA there may be a second tax credit to take advantage of. The maximum for this credit is 50% of a contribution up to $2,000. The credit is a good way for people who are vigilant about contributing to their savings, to find even more savings. Those with higher incomes may also qualify for an additional 20% credit. This credit is on Form 8880.

Using the tax credits

Adding to emergency money funds can be easier if you utilize the tax credits available to you. Check with a tax preparer who is well-versed in optimizing tax credits to be sure that you are taking all credits available. The savings can be considerable in minimizing your tax liability.

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Lower four week average shows signs of improvement

Initial unemployment claims are tracked very closely by the Labor Department and analysts. These numbers are gathered and analyzed weekly, but to smooth out statistical highs and lows a four week average is used. The latest average shows a drop in claims to 460,250 compared to the recession high 674,000 recorded last spring. Additionally, the number of people already receiving benefits dropped by 57,000 to 4.9 million. This drop was also better than what analysts had anticipated. The pace of layoffs is more telling to analysts than the actual numbers. The number of people on unemployment remains relatively high, but the pace at which jobs are being cut is definitely slowing.

Federal claims curb some of the enthusiasm

The number of initial claims falling does not tell the whole story, however. States pay for 26 weeks of unemployment typically and the extended benefits beyond that come from the federal government. Some of the drop in the number of people receiving benefits represents a shift from the initial 26 week claims to the federally funded extended benefits. The number of people receiving extended benefits rose by approximately 200,000 in the second week of December compared to the previous week. This was in part due to Congress extending benefits in November. President Obama extended federal unemployment benefits through February, 2010. This move prevents 2 million people from running out of benefits in January, but a total of 3 million people will now run out of federal benefits by March of next year. It is not certain if benefits will be extended beyond March. The state and pace of the economic recovery at that time will have a lot to do with the fed’s decision.

Recovery not happening for everyone

The country is experiencing its worst recession in the past quarter century. The recovery is beginning to happen in general but not everywhere. For example, employers cut the fewest number of jobs in November in more than a year: 11,000. However, the number of new claims rose in Michigan by 8,362 primarily due to continued problems in the auto sector and Michigan’s difficulty diversifying its economy. Michigan is not alone. California, Missouri, Florida, and Iowa also saw increases. Tennessee had the largest decrease in initial claims, 2,972. Several other states experienced decreases as well. The unemployment statistics for December are due out January 08, 2010. Continued strong improvement will bolster confidence for the coming year.

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Lenders are changing their ways

Many consumers are using personal loans to manage their credit cards. With the recent lending crash, many credit card companies are no longer playing fair. Lenders lost billions of dollars throughout the recent recession and their answer to lax lending laws, was to tighten up regulations for existing customers. Though it hardly seems fair that even those with excellent credit are seeing changes in their terms, it is the repercussion of a faltering industry.

Pauline Meiner, of Toledo, Ohio, recently found herself in the midst of the credit card backlash. She’s been a loyal customer of her bank for over fifty years. She has a savings, checking and credit card with her local bank and has never been late on a payment or over-charged on an account. Despite her flawless record, she received a notice from the bank that her interest rate was skyrocketing from a fixed rate of 9% to an adjustable one. This is cause for concern because an adjustable rate means just that—it can change with the Index and market at any time.

The solution for handling credit

For anyone in Meiner’s position, it’s important to understand how to overcome the credit card company’s rules. Credit lenders are going to continue to protect themselves, even if it jeopardizes good customers. Here are three rules to remember when it comes to credit cards:

1. Pay down any balance as quickly as possible
2. Transfer debt to lower fixed-rate accounts
3. Don’t carry a balance from month to month.

These are all important to understand if you are going to master your credit card health. Here is a breakdown of each one.

Pay down balances quickly

The best thing you can do for your credit is to pay down any balance you have as quickly as possible. The longer you have a balance and the longer you carry it, the more money you are handing over to your lender in interest. The credit crash of the recession made good paying customers sparse. For that reason, lenders are trying to generate as much income as possible from their good customers. The best thing any borrower can do is pay down their overall debt. Sometimes low-interest personal loans used to pay off credit card debt are more advantageous than struggling with a big balance.

Transfer debt to lower fixed-rate accounts

It’s important to keep credit on a fixed-rate basis rather than an adjustable one. Lenders are trying to move towards the adjustable rate because it serves them better. Having an adjustable rate allows credit card companies to raise your rate as they see fit. Part of the problem is that in general, the credit market has seen a huge and formerly profitable segment of their customer base disappear. If there is one thing lenders have learned from the recession, it is to deny subprime accounts. Due to the smaller customer pool, they have to make up their money somewhere, and that’s where even the best customers get burned.

Eliminate month-to-month balances

The worst thing you can do with credit is hold a balance from month-to-month. For example, carrying a $2,000 balance and paying only the minimum can mean over a decade of payments for a consumer. That interest rate adds up over time and credit card lending companies make a huge profit. For any customer who wants to cut back, paying off carry-over balances on credit cards is imperative.

Managing credit post-recession

It’s important for every credit card borrower to manage their credit wisely. Now that credit card lenders are no longer lax with lending rules, it’s even more important for consumers to look out for themselves. The three main ways to manage your credit are to pay down balances quickly, look for lower fixed-rate cards and eliminate the habit of carrying balances over. Use savings or personal loans to bring down credit and see how much money you can truly save.

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Everyone was affected by the recession. Times were difficult and regardless of economic status, Americans suffered greatly due to the financial difficulties of 2008-2009. Now that the recession is officially over, many consumers are still trying to return to their normal lives. One of the biggest complaints is that it is difficult to save. Holly Blakefield, economist for BankRate.com said, “When the recession was at its height, people realized that credit wasn’t the savior it was believed to be. What saved most people were liquid assets.”

It’s no secret that “Cash is King.” People are trying harder than ever to build up their coffers for emergencies, stability, and investments. The biggest way consumers can start saving is by looking at their homes. If you are trying to save, look at these ways to monitor your household and make necessary changes. It could mean a more efficient household and more cash in your pocket.

Heating and Cooling Expenses

Some of the biggest energy draws are running a home’s heating and cooling systems. Estimates are showing that 40% of residential energy bills are for either heating or cooling of a house. The best way to tap into that for efficiency is to have a good system for monitoring your temperature. Remember that even if your home is new, that does not mean it’s efficient. Frank O’Brien-Bernini, CEO for Owens Coming, said, “There is a huge gap between what is in the building code and what is needed for optimal energy efficiency.” Consumers have to take matters into their own hands when it comes to making a home efficient.

The primary thing a homeowner can do to help their heating and cooling system is to close up any leaks. Caulk, expandable sealant, weather stripping and foam board can all work together to stop air from escaping. Attics can be the most troublesome. Remember that heat rises and if your attic is windy with a lot of openings, you are losing hot air. That brings the temperature of your house down and, in turn, causes your heat to turn on.

Another tip is to always get your heating and cooling unit checked annually. It may cost $65 for a basic check, but preventative maintenance can pay off in the end. Coming added, “Paying a small fee to have your system checked can be much more inexpensive than waiting and having to replace a unit for thousands.”

Be aware of how much water costs

The next thing to watch out for is your water use. New studies are showing that over 80% of states anticipate having water shortages by the year 2013. This means that most likely there are going to be heftier costs and fines for excessive use. It’s good to get your home in order now, so you don’t find yourself in trouble in the future.

When it comes to water consumption, the best thing to do to conserve is to upgrade to water-efficient fixtures. Use low-flow showerheads. Charlie Szoradi, of Green and Save, said, “A $30 showerhead can save more money than $3,000 worth of solar panels.” It’s an easy fix and the payback is notable. In addition to fixtures, also check out the water heater and make sure the temperature is at 120° F. You can also insulate your water heater pipes to stop heat from escaping.

Electricity plays into Big Costs

The last large contributor to high house costs is electricity. While 40% of household expenses involve heating and cooling, another 40% involve electricity. Experts agree that this is relatively easy to manage though. One of the simplest things to do is replace lightbulbs with CFLs. You can also upgrade appliances to energy-efficient models. Not only are they more efficient, they also save you money. Take advantage of tax breaks, too. Many energy-star rated appliances can reduce your tax liability. Be sure to check with the rules in your case, but in most states you can take the cost, up to $1,500, off on your tax filing.

How to Find Savings

It may sound like a small amount if you end up saving just $40 a month in heat, but over the course of one year, that’s $480. Never underestimate the small changes that bring small savings. In the end, they all add up to notable savings. Take a look at your house and see where energy drains are. It’s the best and fastest way to keep money in your pocket.

Anne Fillmore of Branson, Missouri said, “I had to take out personal loans to make it through the economy during the recession. I don’t want that for my children.” Now that the recession is over, many parents are reflecting and coming up with the same sentiment. People were unprepared for the economic downturn and had a difficult time managing. Since things are on the upswing, more parents are looking for ways to teach their children how to manage money effectively. Fillmore added, “I want my children to be smarter than I was and be prepared.”

What parents can teach children

In the school of hard knocks, there is no such thing as Finance 101. Although children learn a lot of skills in school, there is no such thing as a formal money management system for them to adhere to. The job of educating children on how to handle money is left up to the parents. Here are some topics that should be covered:

• Savings. Parents need to start early with teaching children to save. One expert cites the best way to get the message across is to let the child split up their money into four categories: saving, spending, giving, and taxes. The goal is to create a mock “adult money management system” that reflects what they are going to be going through in years to come.
• Discuss interest and how it works. Opening a bank account can help any child visually see how money grows. The biggest lesson here is that you want to teach the child that saving early takes advantage of compound interest. Of course, you have to gauge how much the child understands, but young teens can understand the mathematics behind compounding amounts over a long period of time. They can see how a few extra years can substantially increase savings.
• Create a budget. The next topic to cover is the budget. Every adult should have a working budget and every child should be privy to the information. Phyllis Silverman, VP of PNC Financial, said, “Children over 13 should know what your bills are like—your mortgage, car, utilities, personal loans and taxes should be discussed…it gives them a way to see how it takes a lot of work to make a household run smoothly.”
• Managing debt. Debt is huge in society and you want to teach your child early on how to manage his or hers. Silverman said, “Everyone has heard the saying ‘We all need credit’, well after the recession the new saying is, ‘We all need good credit.’” The key here is to train your child to create good habits. Things like overspending, not watching interest rates and making payments late should all be discussed. The results of each should be shown to the child so they can see how one late payment can crush their credit score.

These are some tips on how to teach children about finances. The biggest effect can be seen when parents mirror a ‘real life’ financial plan and let the child engage in it on a smaller level.

The future savers of tomorrow

Children are the future, and without empowerment over finances, they could end up in the same predicaments many Americas are in. The best thing to do for children is to teach them early on about mortgage, car, home equity and personal loans, along with interest, savings, and budgeting. A good financial education can serve them well as they grow into the consumers of tomorrow.

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Christmas is here and it can be costly

Many buyers are looking for unsecured personal loans to get them through the holiday season. Despite discounts and specials, consumers are going to have shortfalls in budgeting. The easiest way to manage the holidays is to understand the tactics retailers use to draw you in. Here are some tools they use and how to avoid them.

Debit-card fees

Debit cards are convenient. They act just like credit cards, but they withdraw directly from your savings account. Normally any store that takes credit cards will take your debit card. With debit cards there are no high-interest rates to deal with so many people believe that they are safe buying options. Though it may sound like the easy thing to do, but be sure to check with your bank’s policies regarding transactions.

One thing to check for is your bank’s over-limit purchases procedures. In the past, a debit card would automatically be declined for purchases over the available balance. Banks are changing that policy. Now you can still make an over-limit purchase, but the bank charges you the overage amount and an additional fee that can range anywhere from $25 to $40. If you go to various stores and make numerous over-limit purchases, you can be charged the fee for each one.

If you are making a big purchase, it’s best to pay with credit and then pay the full balance off at the end of the month. Credit cards offer a lot of added protection in terms of identity safety and disputing retailers over charges. If you have to make small purchases and know that you have enough to cover the purchases, then a debit card will work just fine.

Watch out for sales

Everyone knows how sales can attract customers. Black Friday and Cyber Monday are both huge sales days for retailers. Although their specials may sound nice, the reality is that a lot of them are nothing more than ways to get you into the store. Many retailers feature a limited-quantity product and once it is gone, they have a backup product ready. That equitable backup is notably higher in price. If you come to the store with a limited budget from savings or from an unsecured personal loan, you may be disappointed. The best way to protect yourself is to first do some research. Find the item you are looking for online and compare prices at various retail and online outlets. If the item is notably lower at one retailer, it most likely is not worth your time.

The extended warranty

Almost every retailer will try to up-sell you with the extended warranty. Appliances, electronics and machinery are all high-ticket price items. You may be spending thousands on them and retail outlets will try to get a couple extra hundred dollars in special extended warranties. They will tell you how any repairs for a year, for example, will be free of charge. Though extended warranties seem like good ideas, large items normally come with manufacturer warranties already. The best thing to do is do research and find out how long the manufacturer warranty is. Most likely it is at least for one year and it’s free with purchase.

Don’t be fooled by gift cards

Gift cards are convenient. You walk into a store and pay for the card. Then the user can use the card like a limited debit card. Unfortunately more and more companies are attaching fees to gift cards. Some cards come with processing fees, activation fees, expiration dates, transaction fees and inactivity fees. Another concern with gift cards is that according to a recent study, 25% of people who received gift cards, still hadn’t used them a year later.

The easiest way to avoid all the fees is to pay cash. Almost everyone remembers receiving cash in a check from relatives when they were a child and it makes sense to go back to that method of gift-giving. If you need a gift card though, there is a way to avoid fees if you do some research. For example, American Express announced recently that it would no longer impose fees on any gift cards, but it would still charge $3 to $7 to buy one.

Managing during the holidays

Managing sales during the holiday is important. The bottom line is that retailers want to get you into their stores by any means necessary. Competition pushes them to create discount advertisements that work on customers. If you have a limited budget from savings, credit limits or unsecured personal loans, you have to be smart about your spending.

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Managing Business Cash Flow

Cash Flow versus Profit

Cash flow is vastly different than profit. Cash flow is money which is coming into and flowing out of your business bank account or petty cash and may or may not contain profit monies. Profit, on the other hand, is specifically those funds remaining after a project has been paid in full by the customer AND all expenses deducted from that payment for the cost of performing the project. At times, profit will appear in your account well before cash flow occurs.

Cash Flow and Profit Defined

According to Investopedia.com, cash flow is defined as the situation which occurs when “the company’s long-term cash inflows…exceed its long-term cash outflows”, while profit is defined as “a financial benefit that is realized when the amount of revenue gained from a business activity exceeds the expenses, costs and taxes needed to sustain the activity.”

Cash Flow Isn’t a Windfall

When cash flow comes into your business, especially before a job is completed, never view it as a windfall. Financial experts at the website InvestorWords.com’s define a financial windfall as when “money is received which is not expected and is not the result of something the recipient did”. Even though monies may seem to be a windfall, look more closely and you’ll see that seldom do funds meet the above definition of a true windfall. It can be easy to want to use non-windfall funds to upgrade or expand, but unless the money is actually profit, it will be needed to keep the company’s cash flow positive. If a project has not been completed and all expenses paid, you can find yourself spending money which will be needed for materials and other costs of doing business. Don’t set your business up for financial disaster in this way.

Don’t Inflate Your Operating Checking Account

When cash comes in prior to a job being performed, often in the form of a deposit on a contract or as monies paid to purchase materials to perform a job, place those funds in a special business banking account so that they are reserved only for those expenses associated with that specific project. Otherwise, your operating bank account balance can appear artificially inflated. This is also important should someone establish an agreement with your business, providing cash flow, and later cancel. Unless you have the money in a separate bank account to refund the money, based on your business’ refund or cancellation policy, it can be a financial hardship.

Reserve Cash Flow for Expenses

Just as the name implies, cash flow is easy to spend; it tends to want to continue flowing — right out of your hands! It is important to realize that this flow of money must cover daily expenses, payroll, yearly expenses like taxes, and emergency expenses as well as upgrades and expansion. The money flowing in and out of your business really has no relationship to the amount of profit you are earning and this fact must remain in the forefront of your mind as you manage business finances.

Spend Profit Only

After your business has completed a project and all associated expenses have been paid in full, you can determine the exact amount of profit which was earned from that project. The Marketing Guy states on his blog at TheMarketingGuy.files.wordpress.com that “some of us have forgotten how to calculate profit…The first business you started was probably a lemonade stand and nothing has really changed since that.” A simple worksheet which details the cost of a project, such as expenses for material, labor, advertising, and other direct costs, subtracted from the income from that project reveals the true amount of profit earned from the job. That, and only that, is the amount which can be spent for anything other than the cost of performing that job. If you apply cash to other needs, you will almost certainly sabotage the project to which the cash should have been applied.

Invest and Spent Profit Wisely

Once you know your profit amounts, you can choose were to apply those funds. Wise investments to help your company provide a cushion during tough economic times or slow business periods are a wise use of some of your profit. Reinvesting into your business can be smart, too if you need upgraded equipment or an expansion in advertising or staffing. If you have enough profit, investing in sound, well-advised investments such as stocks, bonds, annuities, and other securities can be wise but you should seek the advice of a skilled expert in investments before sinking your profits into these financial vehicles. Above all, keep a prudent reserve of funds from your profits for emergency expenses.

Save your receipts and use installment loans when needed, home-based business owners!

Small business owners are using installment loans to fund their businesses. The recession has affected every consumer, from the individual to the business owner. Fortunately business owners have some leeway in financing and savings. Many small business owners are shelving money away into overseas investment vehicles and using loans to cover expenses.

It’s probably a wise decision to move money into safe accounts overseas, but it is also a growing concern of the IRS. Historically, business owners who transfer money overseas tend to underreport their business income and the IRS is not unaware of the tactic. Studies are showing that there is a serious difference between what a taxpayer should pay and what they end up paying at tax time. In fact, according to Chris Wagner, commissioner of the IRS’ Small Business Operating Division, the total difference on average is about $345 billion annually. He also added that the number is mostly due to small business owners underreporting their revenues.

The Small Business Operating Division

The Small Business Operating Division is responsible for policing the 41 million self-employed taxpayers and nine million small business owners in the U.S. Although there is a lack of jobs in the U.S., this department of the government is not skimping on extra help. By the end of 2009, the Small Business Operating Division is estimated to have an increase of 4,000 more people, which includes 1,100 revenue agents and 1,100 revenue officers. Agents are tasked with investigating criminal violations and officers focus on noncriminal investigations and collections. The groups are working together to close up the underreporting gap in the small business and self-employed sector of the taxpaying public.

In particular, the division will be monitoring people who file a Schedule C. This type of filing is used by the self-employed or sole proprietorship business. Their filings that include deductions for auto use, home office expenses, meals and entertainment will be examined closely in the 2010 tax year.

What Small Business Owners Can Do to Protect Themselves

Let’s face it, small business owners are under a lot of pressure these days. They are working hard to make their companies work smoothly by sorting through payroll, managing installment loans, dealing with vendors, watching inventory and handling promotions. They don’t have time to worry about the IRS coming into the fray. So what can a small business do to protect itself? Prepare!

What to Be Aware of Throughout the Fiscal Year

The main things that catch the attention of auditors are: meals/entertainment, home office deductions, automobile usage and travel. So the simple answer to protecting yourself is to save receipts for all of these categories. When it comes to meals and entertainment, the cut off is $75. Any meal or entertainment deduction over $75 has to have a receipt as proof it was a business expense. The receipt needs to include the date, address, name of the restaurant or entertainment venue, cost, people in the party and the business topic discussed.

Concerning travel and auto, business owners also need to have proof. With travel, that means all bills and checks that were paid and the reason for the travel. With automobile costs it will include having proof of business miles. Many people avoid any audit questions by carrying a tape recorder to record the miles driven and the purpose of the journey. They then transcribe the tapes for any questions. Finally, when dealing with home office expenses, have a diagram of the office involved and a picture with the date clearly visible. This should prove that the owner is working, on that date, in that particular office. There is also a “regular and exclusive” rule when it comes to home offices. If the office is used as anything other than an office, business owners lose their eligibility to deduct for it. All business owners should keep the above records for three years, because that’s how long the IRS has to audit them. For example, a 2010 tax return can be audited through April 15, 2014.

Records and Proof are a Business Owner’s Necessity

In the end, it’s up to the business owner to have records and proof for any deduction he or she wants to make. For the self-employed who are sending money overseas, having records is even more important. Under the FBAR, or Foreign Bank Account Reporting Act, business owners are required to post all savings, including overseas money. For this reason, owners are still encouraged to use the normal tools for paying bills such as installment loans, short term loans or credit cards while they build cash equity. But they are also cautioned to get their records straight, have proof and know the laws of deductions.

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The numbers don't look good. To find debt relief, you may have to pack up and move where the jobs are. (Photo: flickr.com)

If consumers are looking for debt relief, one way to speed up the process is to go to cities heavily focused on creating jobs. According to MarketWatch’s annual survey of where businesses tend to settle and create employment, there are some cities that are far above the rest in job possibilities. The following is a list of the top three locations to visit.

Minneapolis-St. Paul, Minnesota

The Twin Cities have over 10 private and public firms that have totaled over $10 billion in sales. Throughout the recession, both cities have remained strong in commerce and the unemployment rate has remained consistently low. In addition, the Twin Cities have proven to be small-business friendly by earning a top ranking among all metro areas in that grouping.

So why are jobs so plentiful in the area? Douglas Baker, chairman and CEO at Ecolab based in St. Paul stated, “Why is it hard to get people here? Because they expect snow to be blowing in July.” Tom Valerius, VP of recruitment for United Health Group agreed, adding, “You sell them on the job, and then you sell them on the Twin Cities. At the end of the day, the big sell is directed toward the spouse more than the executive.”

The Twin Cities are home to 3M Co., General Mills, Travelers Cos, Bancorp, Medtronic, St. Jude Medical, Target and Best Buy. Andy Bessette, Traveler’s COO, stated, “It’s a very educated workforce. The people here, the school systems, are very good.” For consumers looking for jobs, the Twin Cities are a great place to start. Their large business force makes them relatively impervious to economic fluctuations.

Boston, Massachusetts

Another new entrant to MarketWatch’s survey is Boston. The city has moved up in rankings due to a heavy “concentration of Fortune 1000 and S&P 500 companies.” In addition, Boston remained stable in population growth. Like the Twin Cities, Boston benefits from citizens who have been educated in the city’s wide variety of higher-learning facilities, including Harvard University, Boston University and Massachusetts Institute of Technology.

They also have a wide variety of job openings due to a diversity of companies focused in health care, finance, technology, tourism and education. Tim Sweeney, director of public policy at the Greater Boston Chamber of Commerce, stated, “It really is the skilled workforce that drives these industries. Having that balance has really helped us to sustain the economy.” When consumers in other states are looking for ways to find debt relief, pay bills and handle expenses, Boston’s citizens are somewhat unhampered by the failing economy. A recent poll by the Chamber of Commerce showed that its residents have made small changes to their budgets, but overall have remained fairly stable as the recession has played out.

Denver, Colorado

Finally, the MarketWatch survey showed that Denver, Colorado is another city that has a wide variety of jobs for the unemployed. First Data Corp, building-materials company Pro Build Holds and MWH, a resource manager, are three large privately-held firms that are creating jobs for the population. Although the recession did affect the economy, jobs were mainly stable. As Harold Raminski, stated, “We didn’t have to resort to lay-offs or huge restructurings. We did some quick cut-backs of supplies and were able to rebound…We maintained the same level of hiring also.”

Going Where the Jobs Are

Many consumers are unemployed and having a hard time managing their finances. One of the ways to help the problem is to consider relocating to cities where jobs are plentiful. In particular, it’s the cities where the industries are widely varied that offer the best job possibilities and seem to be the most stable as the economy fluctuates. For people in need of debt relief, relocating may be a viable solution worth exploring.

Credit cards are an important part of consumer finance. Understand them well! (Photo: flickr.com)

Consumers are suffering financially due to the recession and need to know how to manage their credit cards, savings and investment accounts. In today’s society, credit cards are a staple. Their convenience and many uses make them one of the easiest ways of purchasing items. Unfortunately, they are also a very easy way to get into financial trouble if consumers are spending more than they earn. Not using or establishing credit can also be detrimental. Most consumers cannot afford big-ticket items like homes, cars and large appliances without the use of credit. Because of the importance of credit, consumers need to understand how to manage it. Here are types of credit to understand and use wisely.

What is Installment Debt?

Installment debt is what allows consumers to get a 30-year home mortgage at eight percent or a car loan at nine percent. Credit is extended for the item, and then the loan is repaid throughout a set amount of time on an amortization schedule. Monthly payments are a fixed amount over the course of the loan. The loan repayment begins with mostly interest being paid off, but later principal is repaid.

Installment debt can easily be budgeted. Once a consumer knows what their payment is, they can work it into their monthly expenses. Installment debt can be good debt if a consumer earns a higher return on the investment of cash, and then they pay on the installment debt.

Revolving Credit

Revolving lines of credit, also referred to as “open-ended credit,” is available to consumers from Visa, MasterCard, American Express and department stores. When a consumer applies for these cards, they get a standard credit limit based on their credit rating and can use it for purchases. Again, there are monthly payments to consider and some lines of credit also have monthly and annual fees.

Although revolving credit can be convenient, consumers need to understand that paying minimum payments benefits the credit company. Because many credit cards charge rates upwards of 18 percent, it pays for you to not pay more than the minimum. Companies make huge revenues from interest payments. For example, paying the minimum on a $2,000 credit card loan could mean making only interest payments for the next decade.

There are some benefits to revolving credit. Consumers can purchase items they normally couldn’t afford and spread out payments. Unfortunately, many people go overboard with their credit cards and end up in serious financial trouble. Spending more than is coming in is always a dangerous decision, but consistently doing it can mean a quick financial demise.

Using Credit Wisely

Regardless of the type of credit consumers have, they need to use it wisely. One way to do this is to examine every loan agreement and see exactly what the fine print says. Keep track of all rates, balances and fees to understand how much money is truly being used for beneficial purposes and how much is going directly to credit companies.

Eliminating Credit Debt

Some people are opting for completely eliminating credit card debt as a response to the economy. If consumers think this is the route they want to take, they should first evaluate their individual spending habits and see where money drains are. It is relatively simple to track money and where it goes with a little diligent research. Problem areas will show themselves and consumers should immediately find ways to eliminate them. Then, based on current spending habits, consumers should recreate a better budget that allows them to pay off debt on credit cards, pay bills and manage expenses.

Making a household budget and sticking to it can be tough, but you can do it! (Photo: flickr.com)

The necessity, or lack thereof, of household budgeting depends on your personal situation and circumstances. If you are extremely wealthy or if you live alone and your income is more than adequate to cover even irresponsible expenses, then perhaps it would not be worth the effort. However, if your household is large and money is an issue, looking at your household expenses and ways to reduce them can save you at least some money. Moreover, it helps to get everyone accustomed to less wasteful habits around the house. Household budgeting may not be absolutely necessary for everyone, but it can be helpful for anyone.

Setting Goals and Targets

As is the case with more complex financial planning, it is important to clearly define your household budgeting goals and to establish metrics that will enable you to see how well you are doing. The first step is to write down all of your household expenses, both regular expenses (such as utilities, services and grocery costs) and irregular expenses (like periodic maintenance, seasonal and miscellaneous expenses). Once you have all of your regular expenses written down, look back to see how much you actually spent on these expenses previously and set solid goals for reducing these expenditures. Reviewing your past spending also provides you with something to compare against in order to see if your efforts are working or not.

Get the Whole Household Involved

A great deal of household expense stems from personal actions conducted by individual members of the household. For example, if you always turn off the lights when leaving a room but no one else does, then your efforts are likely to be in vain. To produce noticeable savings, everyone living in the household will have to be actively engaged in the money-saving measures. If your household includes children, it is easy to turn the money saving measures into a game or to provide reward-based incentives to get everyone enthusiastically on board with the new measures. Further, once the budgeting goals are defined and ideas for reaching those goals are agreed to, it is important to write it all down and keep this written version of the plan available to all members of the household to serve as a constant reminder.

Separating Discretionary and Non-Discretionary Expenses

While many of your regular household expenses are non-discretionary – like utilities or food – many others are discretionary, from your cable television to having expensive meals at home. Once you have the whole household on board with your expense cutting, you may want to separate the expenses you documented earlier by whether or not they are discretionary and review these matters with the rest of the household. Perhaps there is something included that no one in the household regularly uses, or perhaps there are conflicting opinions about the value of this or that service. This also gives you an opportunity to let the entire household make recommendations about what can be cut out. This will give you a much better idea of what can be cut out and what should stay without dropping any unwelcome surprises on other members of your household.

Sticking to the Plan

Despite the best intentions, many people who start with an aggressive agenda to trim household expenses only stick to it for a few months. A lot of household savings measures require changing deep-seated standing habits, so change is easy to forget if the budgeting initiative is not actively being promoted. This is where the metrics based on previous spending become useful. Perhaps once a month or after the arrival of each bill, your progress should be measured and everyone praised if the goals are being met. Simply drawing up a comprehensive budgeting plan is not enough. The plan has to be constantly reinforced and you have to keep the entire household informed on how well they are doing.