Avoid some common financial mistakes

This was originally published on Monday, December 19 ,2016 in the Pacific Daily News.  Click here to subscribe to the PDN.

It goes without saying that money is of the utmost importance and, if not dealt with in the right way, could land you in a bad financial situation. What you are today and where you want to be tomorrow are the results of all the financial choices you have made in the past.

The good news is that you can prevent most of these mistakes if you are aware of them. Here are some more common mistakes made:

  • Your mortgage length. The most common mortgage term is 30 years. Many new home owners settle for the 30-year mortgage because the upfront costs are lower. But take some time and really look at your mortgage contract. If you purchased your house with a 30-year mortgage for $250,000 at 8 percent, the total amount you will be paying is $660,000. That is a difference of $410,000 that goes directly to your lender. If you can refinance your home to take advantage of low interest rates, do so, and take a 15-year mortgage instead. If you can’t afford to make higher payments with the 15-year mortgage, try paying half your mortgage every two weeks. At the end of the year you will have made 13 payments instead of 12. By doing this, you can pay your mortgage five to 10 years earlier and save $100,000 or more, depending on your interest rate.
  • Automatic payments. Let’s face it, life is hectic enough. You don’t need to run to the bank to deposit paychecks or run errands at lunch time to pay bills. By automating your finances, you can save time, fuel and the expenses of late fees if you forget to pay your bill on time. Create an automatic payroll deduction with your employer to your checking or savings account so that you ensure you are paid first. Financial institutions make it easy to pay bills or credit cards on line with their online bill-paying services.
  • Not monitoring your credit score/report. Your credit score and report are important because these two items essentially tell potential lenders how well you handle your money. If you are purchasing a home, your credit rating is considered in determining your loan interest rate, and the difference between a poor credit rating and a good rating can be enormous. With a good score, you are offered lower interest rates, which in the end can save you thousands of dollars and sometimes even hundreds of thousands of dollars. Future employers can also look at your score and use it to determine how dependable you are. To keep a good score, pay your credit cards and other debts on time. A good rule of thumb is to use 10 percent to 30 percent of the credit available to you. Check your credit report and score for free three times a year and dispute any odd accounts or mistakes on your report.
  • Not having a will or trust. We never want to think about passing, but not having a will or trust can cause some serious financial issues for your loved ones. Even though you feel that you do not have enough assets or money to pass on, what you do have should stay with your family. A will or trust can also plan for the care of your children upon your death. If a guardian is not named, the state will have to decide who will provide care for your children. Protect your family and your estate by having a will or a trust.
  • Life insurance. Life insurance can assist your family members in covering the cost of your funeral expenses and pay other bills long after you are gone. Not only should you be covered, so should every member of your family. Funerals are expensive no matter how old you are. Life insurance can also help pay for medical bills that may be left behind.

Michael Camacho is president and chief executive officer of Personal Finance Center. He has more than 20 years of experience in retail banking and at financial institutions in Guam and Hawaii. If there is a topic you’d like Michael to cover, please email him at moneymattersguam@yahoo.com and read past columns at the Money Matters blog at www.moneymattersguam.wordpress.com

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Selecting a life insurance beneficiary is important preparation

This was originally published on Monday, April 4 ,2016 in the Pacific Daily News.  Click here to subscribe to the PDN.

Question: I am sixty years old and a widower. I have a mortgage which I am solely responsible for and two adult children. I have a life insurance plan through my employer. If I were to pass, I want my son to inherit my house. I was wondering if it would be possible for a portion of my life insurance to go to my two children and to my mortgage bank to ensure that the payments are made?

Answer: I commend you for taking this matter into consideration before you pass. No one likes thinking about passing on but it is very important to be prepared when it happens. Unfortunately, many families go through some bitter times trying to decide how to carry out their loved one’s final wishes. Sometimes this can cause a rift that cannot be mended. A lot of these disputes can be avoided if specific instructions were left behind. It is important that you understand your insurance policy and the parameters within that policy. When choosing your beneficiary there are several things to consider.

The proper beneficiary — Selecting a beneficiary is a very personal decision. Some people want to ensure that their loved ones have enough money to cover funeral expenses or they may want to ensure that their family can survive after they pass. Yet, some view it as a financial transaction. When choosing a beneficiary ask yourself a few questions. Who will be bearing the costs of your funeral? Who counts on you financially? Take time when choosing your beneficiary. Here are some choices to consider:

  • Family – For most, this is the top of the priority list, especially for those who are financially dependent on you. Family members could include your spouse or partner, children, parents, or siblings. You can choose multiple family members as your beneficiaries. Per stripes means you can designate branches of a family or lineage and the proceeds are divided equally among the beneficiary and/or their surviving children. Let’s say that you named your son and daughter as your beneficiaries and they receive 50 percent each of the proceeds. If your son passes before you, his children will split his 50 percent equally and your daughter still receives her 50 percent. Using the same scenario, if your son had two children, then the proceeds will be divided equally between your son’s children and your daughter. The proceeds will be divided into thirds.
  • Legal guardian – If you are appointing a minor (under 18 years of age) or someone who is not mentally or physically able to care for themselves as your beneficiary, you may be required to name a legal guardian. You do not have to choose the appointed legal guardian; you can request to appoint a guardian of your choice.
  • Estate – You may choose your estate to be your beneficiary. You must have your last will and testament drawn and the executor of your will receive the proceeds from your life insurance policy. The executor will have to carry out the terms of your will. When you name your estate as the beneficiary, it will be the sole beneficiary of your life insurance policy. Talk with your accountant to discuss the taxes associated with your estate becoming your beneficiary.
  • Trust – A trust is a legal agreement that allows a third party, or trustee, to hold assets on behalf of the beneficiary or beneficiaries. You can make the trust your life insurance beneficiary. You can specify the terms of a trust controlling when and to whom distributions may be made. A trust can also protect your estate from your heir’s creditors or from beneficiaries who may not be adept at money management.
  • Charity – You can name a charity to receive some or all of your proceeds.
  • Mortgage – You can make your mortgage institution a beneficiary of your life insurance policy. Be very specific about the amount and account number etc. when doing so.

Michael Camacho is president and chief executive officer of Personal Finance Center. He has more than 20 years of experience in retail banking and at financial institutions in Guam and Hawaii. If there is a topic you’d like Michael to cover, please email him at moneymattersguam@yahoo.com and read past columns at the Money Matters blog at www.moneymattersguam.wordpress.com.

Will or trust?: Different ways to pass on assets

This was originally published on Monday, June 23, 2014, in the Pacific Daily News.  Click here to subscribe to the PDN.

Question: I am starting to think about ways to protect and pass on my assets when I die. I am not sure if a trust or a will is suitable for me. Can you help me understand the difference between the two?

Answer: I applaud you for thinking about your heirs after you pass. A trust or a will is better than not having anything at all. What you choose depends on your situation, how much you have in assets, and how you want to pass along these assets.

There are several ways to guarantee your assets will be passed on to your heirs; you can leave a will or a trust. A trust is a legal entity that can be arranged to specify exactly how and when assets are passed on to the beneficiaries. It can put conditions on how the belongings are divided.

A trust does not replace a will and usually deals only with specific assets; unlike a will that deals with all assets in your estate. A trust has a trustee that oversees the entity. You can be the trustee until your death or you are incapable of performing the task. When that happens, a successor is usually named and the assets usually stay out of court.

Most of the time a trust is used if you have a sizable estate, at least a net worth of $100,000 and you want to decrease the amount of estate taxes or protect your assets from creditors or lawsuits. Trusts are more flexible than wills but usually cost more to set up and are more complicated. Because it is a lot more complicated than a will, using an attorney to set up the trust is necessary.

There are benefits to using trusts. A trust may lower gift and estate taxes, may provide protection from your heirs’ creditors and may prevent having to go to probate court when assets are passed. You can even protect your assets from beneficiaries who do not handle money well. Because minors cannot own property till they are 18, a trust can be set up for them. A trustee manages the property till the child is of age or meets your certain criteria. There are several types of trusts, the major differences are:

• Revocable trusts or a living trust can be revoked or dissolved, or you can change the terms of the trust at any time. Assets in a revocable trust are subject to estate taxes and are treated like any other asset even though the assets usually do not go through probate. A revocable trust usually becomes irrevocable upon the death of the grantor.

• Irrevocable trust usually cannot be changed or dissolved by the grantor once the trust is established. An irrevocable trust is preferred when wanting to reduce the amount of estate taxes when transferred.

Michael Camacho is president and chief executive officer of Personal Finance Center. He has more than 20 years of experience in retail banking and at financial institutions in Guam and Hawaii. If there is a topic you’d like Michael to cover, please email him at moneymattersguam@yahoo.com and read past columns at the Money Matters blog at www.moneymattersguam.wordpress.com.