Credit Cave

Taxation has been a hot topic for as long as civilizations have existed. Where there is a government there is a taxation of the people for services provided.

The problem is that many people are easily, and increasingly, disaffected by the lack of tax-funded services provided such as health and education. As a result, many people have tried to either reduce their tax bills legally or evade their obligation to pay taxes illegally.

Defining tax avoidance and evasion.

• Tax avoidance - minimizing your taxes within legally working within the bounds of tax legislation to reduce tax
• Tax evasion - taking illegal measures to evade paying tax, punishable by law

Most people on an average salary will simply pay out what they owe to the IRS, get it over and done with and then get on with life. Others take reducing their tax bill a lot more seriously and go as far as setting up fake corporations, banking offshore in tax-free havens and even becoming a citizen in another country.

Will Rogers, the famed American humorist, put it nicely:

“The income tax has made more liars out of the American people than golf has. Even when you make a tax form out on the level, you don’t know when it’s through if you are a crook or a martyr.”

So without further ado, here’s a list of 9 huge tax frauds from around the world.

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Every day hundreds of thousands of people have their identity stolen by criminals who then go on to use it to purchase goods and services fraudulently. In some cases the first time you learn about it is when your credit card company calls to ask why you just purchased a new computer in Jakarta.

What types of identity theft are there?
We will be mostly focusing on financial identity theft in this piece; however, it is widely accepted that there are 4 main and distinct types of identity theft:

1. Financial Identity Theft - thief steals and uses another person’s SSN, credit card.
2. Criminal Identity Theft - criminal identifies himself as another when arrested for crime.
3. Identity Cloning - a criminal assumes another person’s identity.
4. Commercial Identity Theft - a new business could use the trading name of another business to get credit.

What qualifies as a security breach?
In the broadest sense a security breach can be defined as an instance when a secure server or computer is compromised by illegally surmounting or bypassing existing security measures, exposing the data stored on the computer to those without permission to access it.

When are you told about a breach of security?
Many security breaches are made public long after they occur simply because the perpetrator has been capable of gaining access to a system without detection. Therefore, it is imperative that you keep a close eye on your accounts and credit cards and be ever vigilant for fraudulent activity.

Sadly this list is only scratching the tip of the financial identity theft iceberg; nearly every day there are more cases of large scale financial security theft made public. Those cases listed below are just a few of many.

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Many people are sometimes able to avoid bankruptcy by negotiating a settlement with their credit card companies. On occasion when your finances are in tough shape you may find yourself negotiating a lump sump debt settlement on your credit card. To achieve such a settlement, a lawyer or credit counseling agency may also assist. However, I would highly advise you try a debt repayment plan first, as this will affect your credit score.

These settlements can save you thousands of dollars in interest and possibly in principle as well.

A simple argument that is weighed by the credit card company plays out as follows:

1. So they might agree to a settlement with you. Suddenly, your mountain of debt has been greatly reduced! Congratulations, but be warned life is not entirely green on this side of the fence
2. Your credit card company has to write off a portion of your debt and they have to account for this in their financials.
3. They also have reporting agreements in place with credit monitoring agencies. When they write off that remaining balance, that write off will go on your credit history as bad debt.
4. That Bad Debt note will stay on your credit history for seven years.
5. You can add an explanatory note to your credit report, but it will not change the fact that you have cost a company a bad debt.

When possible you are usually better off trying to negotiate a payment plan that includes a reduction in interest rates. This has the benefit of allowing the credit card company to recover their principle without reporting a lump sum payment bad debt write off.

Under these plans you can typically pay the balance down faster if you have the money, further reducing your actual interest costs.

Regardless of the credit rating implications a lump sum settlement can be the right course of action to take. If you do not have the money, you do not have the money and not too much can change that. Odds are that if you are at this stage you already have some credit issues to concern yourself with and so the blight on your credit may not be insurmountable, but you should understand that it is similar in principle to a foreclosure, repossession or even a bankruptcy and that will take effort to overcome.

Many people do not build a budget. They receive bills in, make payments and maybe check their bank account to be sure they have enough to cover the payment. They might push some money into a 401k or an IRA. Too many people do not plan and never get around to making improvements in their financial situation. In essence they are living from paycheck to paycheck and probably dipping into their arranged bank overdraft in the interim.

Why is a budget necessary?

Some of us are not blessed with the natural ability to manage our finances while others are gifted with it. If you have not been managing yourself like a business then you are most probably wasting money on things you simply have no need for. Developing your own budget should be a priority that will help you become much more financially stable in the years to come. It will help you identify what you spend on, what you need to spend on and what you shouldn’t spend on. Even the best finance bloggers out there have problems, JD over at GetRichSlowly has identified his comic book spending as a problem!

How do you build your budget?

You have to look at building a budget as continual cycle of improvement. It can be similar to physical training. You picture what you want your body to look like, make some assessments of your current state, make a rough plan, analyze it, start to work out, and then review your results and make adjustments as necessary.

Set a Goal

For instance, I want to pay off my debt in 3 years and save up $500,000 in 5-10 years. Or perhaps you would like to pay down your outstanding mortgage faster than you currently are in order to increase the amount of money you are left with every month. Another goal could be repaying debt. Whatever you do, get a goal.

Collect Financial Facts

I owe $50,000 in credit cards and loans and $100,000 on a mortgage. I earn $50,000 per year. Your next port of call is working out what your monthly expenses, as well as monthly incomings.

Build the Budget

List out in a timeline fashion the order that your expenses and income will occur over the period you want to consider. A spreadsheet is the best way to do this as many of the items will be very repetitive. You can easily copy and paste the first months details into the next 3 and 6 months and year. Add the quarterly and yearly expense details and then copy the year to the next 3 and then 5 and ten years. Make smaller changes for the events that will occur further out and you will have a budget.

So three years at $50k per year paid entirely to debt (with no interest) will pay off debt. $50k to savings will total $500k in 10 years etc. Here is a list of bills you should include in your budget:

• Electricity
• Heating - how much does it cost for oil, coal and wood to heat your home?
• Food - what do you spend on groceries and dining out?
• Entertainment - what do you spend on TV, magazine subscriptions etc?
• Communications - how much do you spend on phone call and mobile phones?

Analyze the budget

If I had no other expenses at my current rate of earnings I could pay off my debt in three years, but I have other expenses so I need to change my goal or find a way to earn more money. Plus, I pay interest on my debt, so that is another expense. In addition, I will need to replace my car in 4 years. So I will need to earn an additional $25k per year for the first three years to achieve my first goal or find more ways to save money. That higher rate will get me to my savings goal in approximately 8-9 years after my debt is paid so in those years I will need to earn an additional $25k.

Implement the Budget

Now you start to execute. You pay down the debt one month at a time. You earn money each month. You take the opportunities to insure that you come in on track to realize your goal. You do not deviate from the path as much as possible. Whatever happens, keep yourself motivated on the end goal!

Review and Improve

Then you compare your actual checking/savings and investment account activity to your simple spreadsheet with your budget. Ideally type in the actual numbers in the spreadsheet each month as they happen so that you can compare the progress and trends.

Each Quarter you should sit down and note any items that came up in the last three months that created positive results and negative results. Every 6 months you should make adjustments to accommodate those opportunities and challenges, and every year you should entirely review and redraft your budget to stay on track.

It happens to everyone. Your credit card interest goes up. Its a fact of life almost as certain as the tides.

Just because you have stellar credit does not mean that a bank or finance company will not test your boundaries. They will move your interest rate up often times just to see if you are paying attention.

Then there are the other reasons for rate increases. General interest rate rises as tracked on the LIBOR or through Prime Rates. Missed or late credit card payments. Too many over draft fees. Your balance gets to high for the credit card companies to keep that warm feeling about your ability to pay, so they raise your rates.

Take Steps to Lower Your Interest Rate

It is certain that if you do nothing, you will pay a higher rate. You have nothing to lose from trying to lower your rate.

1. The best way to proceed is to pay off the balance. This isn’t always possible, but this is the best way to avoid interest rate increases.
2. Call your credit card company and simply ask for a lower rate. Many credit card companies are waiting for your call. They do not want to lose your business as they make too much money from you. So their call center employees often have scripts or transfer lines standing by awaiting a call with a request to lower the rate. Use this Option!
3. Transfer your balance to another account with a lower rate.
4. If you are going to miss a payment, go over your credit limit or any other event that might trigger a negative check on your credit, call your credit card company. Tell them the situation and tell them what you are doing to address it. They may only take note of it in their system, but that note could be valuable for you when someone is confronted with a decision to raise your rate later.

The bottom line is that you do not have to suffer the rising rates. You can act and you can get your rate lowered. The old saying, “Nothing ventured, nothing gained,” applies both to you and the credit card company. You won’t gain savings if you don’t try and lower your rate, and they won’t gain more profits if they don’t try to bump up your rates every now and then to see if you are paying attention.

Sometimes when we think about debt we think directly of some small country in Africa with public debt over 100% GDP, but we shouldn’t be so hasty to look elsewhere. Debt is a problem that rings true very, very close to home.

We are going to list a few of the world’s top debtors in terms of both their public debt and consumer debt. The figures are equally as surprising as they are horrifying.

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C - Credentials

First be warned that this is a very very difficult area to review. Credentials mean very little for financial planners as anyone can call themselves a financial planner.

To get past this, we must ask and investigate a candidates years of financial expertise. We need to learn if they hold any university or college degrees. Then we should determine if they have any certifications and investigate what those certifications are.

Warning! It is not difficult to print off a fancy certificate with stock paper from OfficeMax, frame it and hang it on a wall, and the same goes for degrees, so check in on the university if you have never heard of it before.

Consider that a CFP is one of the best amongst Certified Financial Planners, the training, testing and education to obtain a CFP is more rigorous than obtaining a CPA for Accountants.
Finally, if they indicate that they have a designation of RIA or IAR, here is what you will need to know.

• An IAR is an investment adviser representative and they are Independent Contractors. They may be employed by RIA’s. (Kind of like a Real Estate Broker working for a Real Estate Agent.)
• An RIA is a registered investment adviser and they own their own firms.

Either way ask them how many clients they have. A high number of clients is an indication of a successful planner or adviser.

Conclusion

That wraps our quick review of Choosing a Financial Planner.  We have looked at what to consider in regards to the candidates Ethics, their Money Incentives and now we have concluded with their Credentials.

After we have reviewed our potential Financial Advisers Ethics(See the Opening Article Titled When it Comes to Financial Advisers Follow EMC Squared), we must now consider the financial motivations that motivate our financial planner.

M - Money
Once you have the full disclosure then you need to follow the money. You need to understand your financial planners monetary motivations.

1. How do they make money from helping you?
2. Do they earn an investment commission from investment companies, banks, insurance companies or some other group? If they push your money into an account. The last thing you want is a financial planner that might benefit from churning through your investments continually finding a slightly better investment, but charging your actual earnings away in commissions and trading fees.
3. Do they earn money per transaction? - This could lead to a planner that may churn your investments in and out of securities, receiving a transaction, but not helping you earn more money.

Look for Fee based advisers or planners and insure that you have the specific services you will receive detailed in writing to include:

• How many times per year will you meet?
• Who will meet with you (The adviser, a junior representative, a secretary, a call center rep, no one)?
• Will you meet face to face?

There are three areas to consider when choosing a Financial Planner. A financial planner will get access to your life and certain details that you probably will never give to anyone else other than your spouse, not even the tax collector or revenue agent. So it makes much more sense to choose a financial planner very carefully.

There are three areas that do not require an Einstein to cover. So think EMC, and covers the aspects of Ethics, Money and Credentials.

Today we will cover Ethics

E - Ethics

1. If the financial planner is in the states ask for and check their CRD Number (Central Registry depository Number), then look them up on NASD.org.
2. Look for client complaints and potential resolutions if any to those complaints.
3. Check with state securities commisioners or with insurance commissioners.
4. Due a criminal records search because criminals can get a securities license.
5. Request a full written and signed disclosure that identifies all of their compensation and potential conflicts of interest.
• Consider these closely as they may be worth knowing but not necessarily a disqualifier.

That covers the Ethics aspect of choosing a Financial Planner. It is probably one of the most import portions as you will need to trust this person. Next time we will follow the Money, which corresponds to giving us a gauge for how much we can trust the person based on the alignment of their goals with or against our own.

An informative audio on “Spend to save” credit cards, the ones which round off your purchase to the next dollar. Learn about what to look for in a good “spend to save” credit card scheme.