Personal Finance Management

How to Save Money

Dollar discipline is a plan that shows how income will be used over a period of time. It helps you cut down on unplanned spending and enables you and your family to use money earned to purchase goods and services you need and want most. Dollar discipline is another way of saying "budget."

Saving from the top means making a savings payment when—or even before—you receive your paycheck, before you buy anything. Paying yourself first guarantees you a source of funds for your family's future goals.

Saving from the bottom means setting funds aside during periods when income exceeds expenses. Money saved from the bottom may also be funds you have learned to live without that become available when certain fixed, but temporary, commitments end, such as a car loan.

If you get in the habit of "saving from the top" and find that from time to time, you can also "save from the bottom," then you're practicing dollar discipline.

Personal Money Management Tips (PDF)

Setting Up a Budget

Identify your goals. Make a list of your goals, both short- and long-term. Short-term will be goals you want to reach within a few weeks or months. Long-term are goals that might take years to save for.

Be realistic. Limit your list to things you can afford. Also, consider the difference between needs and wants. Needs are those items that you must have to survive, such as food, shelter and clothing. Your wants are items such as a new color TV, a stereo system or a tropical getaway. Wants are things you can live without.

Set priorities. Number your goals based on how important they are to you and how soon you will be able to afford them. Keep a record of what you're spending and where. There are two kinds of expenses: fixed and variable. Fixed expenses include housing, taxes, loans and insurance. Variable expenses include food, clothes, utilities and entertainment.

Personal money management consists of identifying your goals, setting priorities, making a plan and keeping a record of your expenses so you can review and evaluate your goals. Remember, a budget is not just a tool to help you live within your income. It is also a means of enabling you to get some of the things you want out of life.

Monthly Budget Chart

Download a copy of Navy Federal's Monthly Budget Chart.

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Types of Credit

Credit lets you make purchases today—such as charging a restaurant meal on your credit card or taking out a loan to buy a car—and pay for them with money earned in the future. It enables you to make purchases when you are lacking ready cash.

Credit is easy to use, but it's not free. The cost of credit will vary depending on the type you choose and the institution from which you obtain it. Credit is granted on the basis of the borrower's character, income, credit rating and collateral.

Credit arrangements can be formal or informal. The three most common types of credit used by consumers are:

Incidental Credit is an informal credit agreement between you and public utility companies (such as power, gas, water, telephone, etc.) and professionals and/or businesses (such as a doctor or dentist). These companies or businesses charge you for their services after they have been used and usually do not charge a fee for the use of credit.

Closed-End Credit is a single-purpose loan such as a consumer or mortgage loan that involves a one-time, lump-sum advance of credit. Credit is advanced for a specific time period. The amount financed, finance charge, schedule of payments and regular monthly payment amounts are agreed upon by the lender and the borrower.

Open-End Credit such as credit cards, lines of credit and cash advance checking accounts can be used repeatedly up to an approved borrowing limit. Monthly repayment options will vary from paying the complete outstanding balance to paying a minimum amount. Additional charges for these types of credit may include annual fees for the credit cards and maintenance/usage fees for lines of credit.

Costs of Credit

To use credit, you will be charged a fee called a finance charge. This charge is determined by the factors involved in the process of granting credit. These include opening, maintaining and collecting accounts, interest charges, insurance protection and miscellaneous expenses. By using credit, you are paying for the convenience and privilege of having it available when you want or need it.

For every closed-end credit transaction, the creditor must tell you the finance charge (the cost of credit as a dollar and cents amount), and the annual percentage rate (APR) (the cost of credit as a yearly percentage rate).

The actual cost of open-end credit will vary depending on which type of credit plan you choose to use (credit card, line of credit). How much you pay will depend on when the finance charge begins and how the balance is computed.

There are three methods of determining the finance charge.

• Adjusted Balance. The finance charge is calculated after payments made during the billing period are subtracted.
• Average Daily Balance. The finance charge is calculated after daily balances are averaged for the billing period.
• Previous Balance. The finance charge is calculated without considering payments made during the billing period. This is the most expensive method. Ask your lender if there is a grace period provision that allows you a 25–30 day period to pay the total balance without having any finance charge accrue. The beginning of the grace period is either the closing date on the bill, the date the purchase was made or the date the purchase was billed to your account.

Shopping for Credit

Credit is available from a variety of sources including banks, credit unions, finance companies, car dealers, retailers and even insurance companies. Each source and type of credit has advantages and disadvantages. To find the best source for your particular need, you should shop and compare. Arm yourself with an understanding of the Truth-In-Lending Act and the terms Finance Charge and Annual Percentage Rate.

Commercial banks are the nation's largest lenders. The cost of credit at a commercial bank varies according to the type and amount of the loan, and the quality of the collateral offered. A new vehicle loan, with the vehicle offered as collateral, usually costs less than a used-vehicle loan or personal loan. Insurance on the life of the borrower costs extra. However, unless the cost of insurance is included in the Annual Percentage Rate, insurance cannot be required nor can it be a determining factor in granting the loan.

Commercial banks are competitive, and the cost of credit and insurance may vary among different banks in the same area.

Finance companies or small-loan companies specialize in personal loans granted on the signature of the borrower or secured by tangible collateral such as a vehicle or furniture. A co-maker can also help secure a loan. Except in Arkansas and the District of Columbia, these loan companies operate under what are known as Small-Loan Laws, which regulate the amount that can be loaned and the maximum interest rates that can be charged.

Generally, the borrower pays one rate of interest up to a certain loan limit and then a lower rate for any amount over the limit, up to the maximum permissible loan size. Insurance is often required and other fees usually charged.

Because most of the business small loan companies do is with borrowers who, through ignorance or urgency, are not able to shop around, loans generally cost more than they do from other sources. The Annual Percentage Rate charged by small loan companies can go as high as 43%.

Credit unions are groups of people who share a common bond (of employment, residence or association) who pool their savings to make credit available to one another at reasonable rates. They are chartered either by the National Credit Union Administration or by the states in which they operate.

Credit unions vary in size from small organizations serving local groups to larger organizations serving worldwide membership, such as Navy Federal. Loans granted to members have low interest rates and often include borrower's life insurance free of charge.

Credit unions grant loans for a variety of purposes, such as computers, cars, boats, mobile homes, appliances, furniture, home improvement projects and mortgages. Because credit unions generally offer lower-cost loans than other sources, they should not be overlooked by people in their fields of membership who are shopping for credit.

Retail sellers and credit card companies offer credit to encourage sales. They extend credit—in effect they grant loans to customers—to enable them to purchase their goods and services without cash. Customers are able to buy what they want, when they want, and pay for it at a later date.

Some "charge accounts," such as those offered by large retail stores and major gas/oil companies, do not charge interest if the balance is paid in full within the grace period following the billing date. If part of the bill is carried forward, a finance charge is usually charged. Other "budget" or "revolving" accounts enable the customer to charge up to a maximum limit and pay the bill in monthly installments. As the balance is reduced, the customer may once again "charge" purchases up to the account's maximum limit.

Instant credit cards, such as those that offer a "line of credit" or "ready cash," give the borrower credit approval in advance. No charge is imposed until the credit is used; then the borrower pays off the loan in monthly installments.

Retailers generally use installment contracts when a relatively large purchase is involved. The customer makes a down payment and agrees to pay off the balance, plus finance charges, in equal monthly payments.

All these plans are good sources of credit as long as they allow the entire bill to be paid off within a prescribed time limit without incurring any finance or carrying charges. However, if the account is repaid in monthly installments, the cost of credit is usually high, with the Annual Percentage Rate ranging from 18% to 36%.

Remember: The "charge" agreement or contract may be signed in a retail store, but it is still a loan. It's just as important to compare Annual Percentage Rates and Finance Charges on this type of credit as it is on a loan from another source.

Life insurance companies are a source of limited credit. Many life insurance policies have what is known as a "loan value," which is the amount the insured can borrow against his own policy. The loan value is determined by the size and type of policy, the age of the insured when the policy was issued and the number of years the policy has been in force. The insurance policy should contain interest rate information and loan value.

Insurance companies encourage, but cannot require, the repayment of such loans. If the policy becomes a claim, the company deducts the amount of the unpaid loan, plus interest due, from the amount it agreed to pay the beneficiary.

Because insurance policy loans temporarily reduce insurance coverage, they may not be the best source of credit. However, these loans do provide a backup source of funds in times of need, and borrowers will not suffer a damaged credit rating if they are not able to repay the loan as planned.

Dos and Don'ts of Using Credit

Before borrowing money or using any form of credit, a wise consumer will remember these simple Dos and Don'ts:

DO

DON'T

shop around for price, quality and credit compare the cost of credit from different types of lending institutions before borrowing money determine the difference, if any, between the "cash" and "credit" price of the merchandise you are buying consider withdrawing money from your savings and paying cash instead of charging read your contract carefully—signed contract copies should be kept in a safe place ask questions—your credit union, attorney or public officials (consumer/better business organizations) are eager to help ask for an explanation of all fees and charges included on your loan documents ask for the APR and finance charges before taking out a loan keep track of how much you "charge" so that your monthly statement won't surprise you try to pay off the full balances on your credit cards each month in order to avoid paying finance charges obtain itemized bills and keep your payment receipts make sure that you do not agree to a "balloon" payment, which is much larger than the other payments avoid impulse buying inquire if there is a penalty for early repayment of a loan

borrow money from an illegal lender or a place that you suspect is not operating completely within the law contract for a 30-month loan for which interest has been included in the payments if you can repay it in 12 months (the cost will be higher despite any interest refund for early repayment) let yourself be pressured into buying life insurance on your loan, unless you are sure that the price is competitive with other sources. (You cannot be denied credit based on whether or not you elect to buy optional loan protection life insurance.) be in a hurry to sign any kind of agreement or contract with anyone sign a contract if it contains blank spaces, or if you don't fully understand it rely on oral promises accept the word of a loan counselor who tells you that all finance companies or banks charge the same rate, but just express it differently; that simply isn't true

Borrowing from Navy Federal

Navy Federal Credit Union provides reasonably priced credit when compared with the credit offered by other financial institutions. Members' savings at Navy Federal are invested primarily in loans to fellow members. Our loan rates include all charges involved in making the loan. In addition, we offer three affordable Payment Protection Plan options to help repay loans if something happens to the borrower.

Link to consumer loans

Determining Your Creditworthiness

Loan officers will evaluate your credit request. Their job is to determine if you are willing and able, now and in the future, to repay your potential debt. A credit decision is based on several factors.

• Character—Will you repay your debts? Lenders will look at your credit history: how much you owe, how often you borrow, do you pay your bills on time, and whether you live within your means.
• Capacity—Are you able to repay the debt? Can you meet your monthly loan payments as well as your other current obligations?
• Collateral (when required)—Is the collateral sufficient to secure your loan? Before you decide to borrow, consider all the factors associated with your purchase (the credit approval officers will). For example, if you decide to purchase a new car, have you also considered the added expense of insurance, maintenance, gas and oil? A car note payment of $250 may seem to be within your budget, but add on these extra expenses and your monthly outlay for a car may be more than you can afford.

Establishing Credit

It is important not to wait until you need credit before you attempt to establish it. If you currently find yourself in a situation where you need credit, you may have no choice but to use a lender that charges high interest rates. Without an established credit history, you may be labeled a risk. There are a variety of methods available to establish credit. But remember, it may take time and persistence.

1. Open a savings and/or checking account at a financial institution that offers credit cards. Set up a systematic savings program—if you can only save $10 a month, start there. After you have maintained a checking or savings account for a period of time (six months or longer), apply for their credit card. Most financial institutions will look at how you have managed your accounts with them when making a credit decision.
2. Take out a small loan. If you can't get a signature loan, ask for a savings-secured loan (available at financial institutions). The institution simply freezes the money in your savings account—where it continues to earn dividends—while you are borrowing their money, usually at the lowest interest rate available.
3. Apply for a department store card. When applying for this type of credit card, try two or three stores because each sets its own criteria for creditworthiness. But remember, each time you apply for credit it will be reported to the credit bureau (credit reporting agency) as an inquiry—too many inquiries about your credit record in a short amount of time will make potential lenders cautious. And department store cards often have high interest rates.
4. Apply for a secured loan using a completely paid-for possession (car, motorcycle, boat, etc.) as collateral.
5. Ask a relative or friend to cosign a loan with you if you cannot get credit on your own—but be sure you can repay the loan before you do.

Credit Protection Laws

To be a knowledgeable consumer in today's marketplace, you must be aware of the credit protection laws and let them work for you.

• The Equal Credit Opportunity Act prohibits the denial of credit because of your sex, race, color, marital status, religion, national origin, age or because you receive public assistance.
• The Fair Credit Reporting Act gives you the right to learn what information is being distributed about you by credit bureaus.
• The Truth-In-Lending Act requires lenders to give you written disclosures of the cost of credit and the terms of repayment before you enter into a credit transaction, including the finance charge and annual percentage rate. It allows easy comparison between different credit card offers.
• The Fair Credit Billing Act establishes procedures for resolving billing errors on your credit card accounts.
• The Fair Debt Collection Practices Act prohibits debt collectors from using unfair or deceptive practices to collect overdue bills that your creditor has forwarded for collection.

Credit Bureau Records

Credit bureaus are clearinghouses for information on consumers' credit use and credit history. They keep records and report them to prospective credit grantors.

There are four types of information that will appear on your credit bureau record.

1. Personal information consisting of your name, birth date, Social Security number, your current and previous addresses and employers.
2. A record of your repayment habits as provided by your creditors. It details the type of account, whether it's joint, individual or authorized user, how long you've had it, whether it has been paid as agreed, and the amount of the monthly payments.
3. Information from public records concerning judgments, tax liens, foreclosures, litigation and bankruptcies.
4. A record is kept for 6 to 24 months of all creditors making inquiries (seeking information) into your credit history. Multiple credit inquiries may be a tip-off to creditors that you are getting in over your head with credit.

You may request a copy of your credit bureau record through the credit reporting agency (check the Yellow Pages). The cost is usually about $8. If you contact the agency within 60 days (longer in some states) of being denied credit, a copy will be sent to you without charge. If you have been denied credit because of information contained in your record, the lender must provide you with the name and address of the credit agency that supplied the credit information. You can also request a free copy of your credit bureau report if you feel you are a victim of fraud. Be sure to check your credit record yearly to be sure no mistakes have been made and before you make any loan requests.

Links to Credit Bureaus

• equifax.com
• experian.com
• transunion.com

Credit Reports & How to Request Them

Title

Credit Card Tips

DO

DON'T

open your billing statements promptly and compare them with receipts you have saved read and understand all information in a credit agreement and make sure all of the blanks are filled in before you sign it draw a line through blank spaces on charge slips above the total so the amount cannot be changed write promptly to the card issuer if any questionable charges appear on your statement. A phone call will not protect your billing rights. sign new or renewed credit cards as soon as you receive them—in ink

sign a blank receipt lend your card to anyone who is not a joint owner or authorized user leave your card or receipts lying around. Destroy all carbons and incorrect receipts; people can steal your account number off them put your card number on the outside of any correspondence where it can be read, such as on a postcard or envelope give your card number over the phone, unless you are certain the company or organization is highly reputable. Ask for information about the offer to be sent to you before you decide to purchase. If the company stalls or refuses to send information, terminate the conversation accept unsolicited credit cards through the mail acquire more than a couple of major credit cards. The low minimum monthly payment on each of many large outstanding balances can get you over your head in debt in a hurry

Questions & Answers

Q. My buddy asked me to cosign a loan for him. Should I?

A. The first thing you need to ask yourself is, "Can I afford this debt if my friend can't or won't pay it?" By cosigning any type of credit agreement (consumer loans, credit cards, etc.) for a family member or friend, you are saying to the lender that you will be completely responsible for the entire debt if the other person fails to repay the loan. In some states, once an account becomes delinquent, creditors can demand repayment from the comaker first, before they even contact the borrower for a payment.

Q. I was in a car accident last year, which resulted in loss of my income for several months. I am now late with all my creditors. I have also incurred medical bills. How can I let my creditors know my financial problems are due to an accident and not negligence?

A. There are two things you can do. First, write to all of your creditors and explain your situation—do not avoid your creditors. Ask for their help in setting up reduced repayment plans. Second, file a statement in your credit bureau record. You may include a statement limited to 100 words of your version of the situation. This statement will become part of your credit report and must be shown to all lenders who request your file. This will at least give you the opportunity to tell your side of the story.

Q. What is secured collateral?

A. A new car on which the lender has a lien is an example of secured collateral. If you fail to repay the loan, the financial institution will claim ownership, repossess the car and sell it to pay off the loan balance; you pay any remaining balance. The key is whether an item has sufficient resale value to the financial institution. Items of little value are furniture, appliances, electronic systems, etc.

Q. I am planning on buying a home in a couple of months and the realtor advised me to get a copy of my credit bureau report before I start shopping around. Why?

A. It's a good idea to review your credit bureau report every two or three years to make certain there are no inaccuracies and omissions. It is especially important to know what is in your credit record before making a major purchase, such as a home or a car. An advance check on the accuracy of your credit file could speed the credit-granting process. If you do find information that is inaccurate, you should write the credit bureau and ask them to investigate and remove any items that cannot be double-checked.

Q. I don't understand why financial institutions all charge different annual percentage rates (APRs) for their credit cards. What is the difference?

A. Each financial institution makes the decision as to what interest rate to charge for its credit cards. As you shop around for the best credit card bargain, consider your charging needs first. If you normally pay off your charge balance at the end of each and every month, look for a card that offers no annual fee, or at least a low annual fee, plus a fully interest-free grace period. The interest rate won't matter to you because you pay your card off in full. On the other hand, if you don't pay the balance off completely each month, look for a card with a low APR.

Q. I saw an ad in the newspaper that said that for $350 I could get my bad credit history erased. This sounds too good to be true. Is it?

A. Yes, because a poor credit history that is accurate cannot be changed. There is nothing that you or any person or any business, such as a credit repair clinic (a company that guarantees to get negative information removed from your credit bureau report and obtain credit cards for you for a fee), can do to require a credit bureau to remove accurate negative information from your record until the reporting period has expired. Any negative information can remain in your file up to seven years, after which it must be removed. Bankruptcy reports are filed for ten years.

Personal Bankruptcy

A bankruptcy report delivers a severe and damaging blow to your credit record. It affects your ability to get credit for long into the future and may prevent you from getting a job, as many prospective employers review credit bureau reports as a condition of employment. A bankruptcy filing will remain on your credit bureau report for as long as 10 years.

Keep in mind that even if you file for bankruptcy, some of your debts may not be forgiven and some of your belongings may be repossessed or sold to pay off existing debt.

Instead of filing, consider other, more positive solutions to your financial problems. Your first telephone call should be to your creditors, asking for their assistance, rather than an attorney.

Personal Money Management Quiz

Download a copy of Navy Federal's Personal Money Management Quiz.

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Types of Counseling

Navy Federal offers free Personal Finance Counseling to assist you with money management. Get help setting up a budget or reallocating your income to accommodate life events, whether planned or unexpected. You don't need to be in debt to take advantage of this free service.

Productive Counseling

We'll guide you as you identify personal financial goals and develop a plan to achieve them. Example: You might want to save for a down payment on a car, but you're having a hard time. We'll show you how to set up a budget and stick to it.

Preventive Counseling

Navy Federal will help you evaluate your current financial status as you develop the money management skills you need to avoid future budget problems. Example: A two-income couple with a baby on the way realizes their financial situation is going to change drastically. We'll help them create a new budget that lets them save to cover the wife's lost income during her maternity leave while allowing them to afford new necessities, such as the baby's food, clothing and childcare.

Remedial Counseling

If you are experiencing a financial crisis, we can help you in a number of ways to regain control of your finances. Example: A recently divorced man is responsible for repaying all of the couple's consumer debts, along with alimony and child support. He feels overwhelmed by debt, with little left over after expenses, but could probably manage if some of his payments were reduced. If he contacts us, we will assist him with a repayment plan on his Navy Federal debt and refer him to a Debt Management Program which will contact his creditors and request that they accept smaller regular payments until his debt is reduced and/or his income increases. NOTE: This is not a bill-paying service. It is made available only to those whose income allows them to make reduced payments after their debt is reorganized, and is not a solution for those who are insolvent.

Help with Your Credit Bureau Report (CBR)

Certified Credit Report Reviewers are on staff at Navy Federal to assist you with an in-depth analysis of your credit bureau report. They offer suggestions to improve your credit rating and advise you on the best ways to prevent identity theft. You are entitled to receive one free copy of your credit bureau report from each of the three reporting agencies (Equifax, Experian and TransUnion) once a year. Get your free copies from www.annualcreditreport.com.