Preparing Your Child For Life

There are many steps that you can take to help set your child up for a more successful future, and some of them may not even cost you anything. Whether you have a young child or a college student there are always things that can be done to help set them on the best trajectory for success. My absolute favorite is helping to build their credit score.

Your credit score is an absolutely crucial part of being an adult. Whether you are applying for an apartment, trying to buy a car or purchasing a home your credit score is going to be a significant factor. Here is the issue, time is your greatest asset when building your credit score. As every young person knows it takes years to build your credit. In fact, one of the biggest factors that contributes to your credit score is length of credit history. Starting early is imperative.

By having a joint credit card with your child as an authorized user you can give them a serious head start on building their credit score. Every time you have a balance and pay it off on time (always being sure to pay off the balance every month) you are lengthening and improving their credit history. Most all credit card companies will allow you to add a minor as an authorized user on a credit card, so if you start when the child is young they can have the credit score of a 30 year old as a college student. If you want to spice things up even more, adding them as a user on all of your cards only compounds the benefit by having more on time payments.

In addition, once your child is in college this is a great way to start teaching them some adult responsibilities. In my opinion, the education system does a very poor job of preparing our youth for life after school, from a financial perspective. Kids don’t understand insurance, mortgages, credit scores and many don’t even know how to write a check. Forcing them to consider their credit score, and having them monitor statements so that they can see the interest costs associated with not paying off the entire balance on their card every month, can only help.

If you’re looking for a simple, and free, way to really give your kids a head start on life this is a no brainer. I promise that when your child goes to buy their first home and their credit score is already over 700 you’re going to be getting a thank you call.

For more information on the services that we offer please visit www.austinwealthsolutions.com.

Cody A. Austin

Austin Wealth Solutions

Insurance Tips & Tricks

I’ll be honest, I know insurance isn’t a very exciting topic. That being said, proper coverage is vitally important to your overall financial well being. If you happen to be underinsured in even one area, and have a claim, the financial consequences can be catastrophic. My hope is that this content at least encourages you to take a moment to review your insurance to ensure that you don’t have any significant gaps in coverage.

When reviewing your auto insurance the first thing to check out is your liability limits. Your liability coverage is going to be what pays for the damages incurred by the other party when you’re in an accident. The state of Ohio by law requires you to carry minimum limits of 25/50/25 ($25k per person for injury/$50k per total accident for injury/$25k for property damage). I would highly encourage far higher rates than this. Say for example that you cause an accident and someone needs life flighted for medical care. That flight alone could very well cost close to your $25k maximum amount of coverage, and they haven’t even received medical care yet. If they then rack up tens of thousands in medical bills those expenses are coming back on you as the one who caused the accident. They have every legal right to sue you for those expenses, putting your assets and financial well being in serious danger. As a general rule I recommend, at a minimum, liability limits of 100/300/100. If you have significant assets I would advise even higher limits than that.

When we talk about auto insurance the other two major coverages often discussed are comprehensive and collision coverage. Both of these coverages are specific to the repair of your own vehicle. Comprehensive coverage pays to repair or replace your covered vehicle that was damaged by anything other than collision with another vehicle. Examples of covered losses under comprehensive coverage include fire, theft, wind, hail, flood and striking an animal. Collision coverage on the other hand covers repair or replacement of your vehicle after collision with another vehicle.

When looking for ways to reduce the cost of your auto insurance the deductibles on your comprehensive and collision coverage are the easiest ways. Your deductible is the amount that you owe in the event of an accident before coverage kicks in and takes over. So if you have a $500 deductible you will owe the first $500 and then your insurance will cover any additional repair costs. People often like to have very low deductibles, even as low as $0, which greatly increases your insurance premiums. If you have planned ahead and have an emergency fund set aside (savings account for emergencies) then you can easily cover a larger deductible in the event of an accident. Increasing your deductible from $0 to $1,000 can have a very significant impact on your insurance premiums. One important thing to note; if you have a loan on your vehicle the loan company is likely going to require that you carry both comprehensive and collision coverage. It makes sense, if you total a vehicle that you owe them money on they want to be sure that they get paid through your insurance.

On the home insurance side I mainly want to hit on some optional coverages that I believe are very important. First, check your liability limits here as well, I recommend $300k at a minimum. Next is guaranteed replacement. Guaranteed replacement means that your insurance policy will completely rebuild your home in the event of a total loss, most often from a fire, no matter what the cost. If your policy does not have guaranteed replacement cost then there is usually a specified amount that the insurance company is going to pay you for your house. If that doesn’t cover the cost to rebuild it then tough luck, you’re on your own. Finally is back up sewer and drain coverage. If you have your basement finished at all then this is an absolute necessity. We’ve all had a friend or family member who has had their pipes back up into their house. This stuff happens fairly often, and most basic policies provide no coverage without adding it.

As I mentioned previously my hope that this article at least prompts you to review your current coverages. A very significant portion of the public is underinsured, and they don’t fully understand the consequences. Your insurance agent will be more than happy to review coverages with you, and may even recommend some coverages that are important to you that I didn’t mention.

For more information on the services that we offer please visit www.austinwealthsolutions.com.

Cody A. Austin

Austin Wealth Solutions

Home Buying

We’re officially into home buying season, and with that comes an influx of questions regarding the process of purchasing or building a home. Some of the key factors to understand when attempting to qualify for a favorable mortgage include knowing the different types of mortgages, private mortgage insurance (PMI), down payments, loan-to- value ratio, credit scores, and debt to income ratio. We will break these down in further detail to help make sure you’re as prepared as possible when the time comes to begin shopping for a new home.

There are many different types of mortgages, but for this discussion I’m going to focus on conventional vs FHA as these are two of the most common. A conventional mortgage is going to be your traditional mortgage. Most of them require a 20% down payment (80% loan-to-value as we will discuss later), a strong credit score (generally at least a 620, but sometimes higher) and a strong income history. In exchange for meeting all of these requirements buyers are rewarded with lower interest rates, with the lowest rates generally being offered to those with a credit score over 760.

Borrowers who do not meet all of the requirements for a conventional mortgage aren’t necessarily excluded from being able to purchase a home. Many may be eligible for what is called an FHA loan. FHA loans are loans insured by the US Federal Housing Administration. These loans allow for a much lower down payment, often as low as 3.5, and have a much lower minimum credit score of 580. This all sounds great, but in exchange for these lower requirements borrowers are required to carry private mortgage insurance, commonly referred to as PMI. PMI is insurance on the mortgage which covers the lender if the borrower were to default. The cost generally runs between .5% and 1% of the loan amount, which doesn’t sound like much but can really add up over the duration of the loan. For example, if you were to put 3.5% down on a $200,000 home with a PMI cost of .75% you will have paid over $12,000 in PMI premiums before you are eligible to have the PMI removed.

There is often a lot of confusion regarding loan-to-value ratio (LTV) vs down payments. The LTV ratio refers to the amount of your mortgage in relation to the market value (appraised value) of the home. So if your LTV ratio is 100% that means that your loan amount is equal to the value of your home. For most conventional mortgages banks want to see the LTV ratio at 80%, so your down payment is going to be the amount needed to get down to that point. As an example, if you purchase a house for $95k and the appraised value is $100k then your LTV is at 95%. In order to get to the golden 80% mark you will then need to put 15% down. Debt to income ratio is another critical mortgage factor, and is the measure of your payments on all forms of debt that you have vs your income. It is also sometimes a difficult factor to prepare for as the standards may vary from bank to bank. As a starting place for your preparations, 28% on the front end (just your mortgage payment vs your income) and 36-43% on the back end (all debt payments vs your income) seem to be very common standards that lenders are using.

Here’s the hard part, in some cases actively trying to improve one of these factors can have a negative impact on another. As an example, if you were to pay off a piece of debt to improve your debt to income ratio your credit score may actually take a dip in the short term. The key is to keep in mind that making strong long-term strong financial decisions is going to improve your overall eligibility for a favorable mortgage when the time finally comes to purchase a new home.

For more information on the services that we offer please visit www.austinwealthsolutions.com.

Cody A. Austin

Austin Wealth Solutions

Budgeting

Anytime someone comes into my office, and their major pain point is budgeting, food is the first place I start. On one hand, we are fortunate to live in an age where food is readily available to us. With a quick phone call, or even an order placed online, a pizza is on its way to our door. On the other hand, this immediate access to food means we often take advantage of these amenities far more often than we intend to, and more often than we would like to admit.

In 1960 about 75% of the average American family food budget was spent on groceries to be prepared in the home, with just 25% of that budget being spent on eating out. Eating out was generally reserved for special occasions or celebrations. Fast forward to today and we have officially crossed the tipping point. In 2014, more money was spent on food outside of the home than on food to be prepared inside the home.

Your first thought is likely “but my family only eats three or four meals outside of the home each week, and a couple of those are just fast food”. That may be so, but if you start doing the math you will realize how quickly eating out really does add up. Let’s say for example that a family of four had fast food twice and had a sit down meal twice. The fast food meals likely cost that family roughly $25 a piece, with the sit down meals running $50 or more a piece, depending on drinks, dessert etc. That comes out to $150 per week, or more shockingly $7,800 per year. And that doesn’t even count eating out for lunch at work once or twice a week, which we are all guilty of from time to time. Without even realizing it our family spent $150 on four meals, while our other 17 meals, plus snacks, were covered by a $200 grocery bill (average family of four). Shocking right?

Next comes gas stations and convenience stores. The same theory applies here, simplicity and convenience win us over. I recently met with a friend of mine and his wife who wanted some advice on budgeting. After going through their budget for the previous year, I found that their huge set back was gas station stops. It might have only been a pop here and a bag of chips there, but over the course of a year they had spent about $1,000 on just snacks while on the move.

Some financial planners will advise you to live on as tight of a budget as humanly possible (trust me, I’ve eaten plenty of Ramen), sacrificing joy in favor of building a financial nest egg. I try to take a slightly more moderate approach, recommending that individuals try to make conscious financial decisions. Take time to recognize choices that are taking a significant toll on your finances, and then tone them down. I find that people are far more likely to see long-term success if they take smaller, achievable steps. Maybe you set a goal to eat out only once or twice per week. I think you’ll be shocked at the difference that this will make in your overall financial health.

For more information on the services that we offer please visit www.austinwealthsolutions.com.

Cody A. Austin

Austin Wealth Solutions