When it comes to planning for retirement, far too many people feel intimidated or are simply uneducated on the matter. For these reasons, they save next to nothing. In fact, one-third of all Americans have nothing whatsoever set aside for retirement, and half have less than $2,000. This is obviously a recipe for disaster, especially considering that the current U.S. Social Security system is in peril.

If you are among the large percentage of Americans lacking a solid retirement fund, don’t fret. With a little guidance and common sense, you can create a solid retirement portfolio – and you don’t need to be an investing expert to do it.

1. Start Now
Regardless of your age, you should begin investing now if you haven’t yet. Even if you have credit card debt, set something aside into a Roth IRA or your employer’s 401k. It doesn’t have to be a large amount, but a developed investing habit will serve you well once you pay off that pesky debt and have more to save. Plus, the real benefit to long-term tax-deferred investing is the benefit of compound interest. Since you aren’t required to pay taxes on your gains, the interest those gains can earn far exceeds a taxable account.

2. Start Simple
If you’re offered a 401k plan through your employer, take advantage of it, especially if your employer offers to match a percentage of your contributions. An employer match is basically free money to you. Plus, if you contribute the maximum to your 401k ($17,000 for 2012), your employer’s match will take the total annual contribution above this amount.

Furthermore, check if your employer offers a Roth 401k – like the Roth IRA, you can’t deduct contributions into this account, but they will grow tax-free, and you can take withdrawals tax-free during retirement. If you’re only offered a regular 401k, you may want to supplement it with a Roth IRA.

A Roth or traditional IRA is easy to open via a discount broker. To qualify, you must meet income requirements. However, these requirements are waived in most cases if your employer does not offer a retirement plan.

3. Educate Yourself
There’s a good chance you never took an investing course in high school or college. Fortunately, it’s never to late to learn. You already know you need to save money for your golden years, and you’re familiar with the standard vehicles in which to do it: a 401k, a Roth IRA, and a traditional IRA. But do you know how much you’re allowed to contribute annually to each of these accounts? Do you know when you’re allowed to make withdrawals? Do you know in what situations you will and won’t be penalized for making early withdrawals? The answers to these questions will affect which accounts make the most sense for you.

Beyond understanding the vehicles you’ll use to invest, you’ll want to investigate your investment options. First lesson: Keep it simple. In other words, stick to mutual funds. Mutual funds offer an array of advantages for folks who simply don’t have the time or head-space to analyze a slew of individual securities.

The next choice you must make is whether to invest in actively managed funds, which strive to beat a benchmark index like the S&P 500, or index funds that strive to replicate their benchmark index. There are advantages and disadvantages to both. Perhaps the most compelling reason to go with index funds is lower expenses. You’ll typically pay a lot more for an actively managed fund, which can eat away every year at your gains.

4. Evaluate Risk Tolerance
Now that you’ve determined which type of retirement plan or plans you want to invest in, you must decide which specific investments (which mutual funds) to purchase with your contributions. Fortunately, mutual funds – including index funds – offer automatic diversification. However, even after you choose between actively managed funds or index funds, you need to determine how aggressive you want the fund or funds you choose to be. Not only will this be determined by your comfort with taking risk, but also by your age.

For example, if you prefer to play it safe, but have a good 30 years until retirement, you’re going to want to push yourself to take some measure of risk in your retirement portfolio. Perhaps a mix of stocks and bonds via a balanced fund would be best for you. Alternatively, you could purchase an S&P 500 index fund and a conservative bond index fund to strive for a mix of risk and safety via the passive management approach.

On the other hand, if you’re nearing retirement and micro-cap growth stocks are more your style, you may want to tone it down by only allocating a small portion of your portfolio to these and the rest to blue chip stocks and bonds.

Complement this exercise with additional research to find out what level of risk makes sense for your age and the size of your retirement portfolio relative to your goals.

5. Save More Money
Make saving money a state of mind. Simple tips and practices can save a lot in the long-run: Turn off all lights when you’re not in a room, and unplug appliances and electronics when not in use to minimize the constant drain of power. Examine your bills to see where your money goes, and see if you can find ways to trim monthly expenses. Reduce heating and cooling costs by insulating your house and windows, and by lowering or raising your thermostat as appropriate. And always ask yourself if you really need what you want to buy. For example, the $100 you want to spend on new gadgets could eventually generate $1,000 if properly invested.

Next, start couponing. Try it for a month and compare your grocery bills to what they previously were. You can use convenient mobile apps like The Coupon App or you can go with the tried and true Sunday paper ads. If your grocery store still offers double coupon days, don’t miss out. Depending on the amount of food you buy, grocery savings could easily reach or exceed $50 per month. That might not seem like much now, but it could mean tens of thousands more to ultimately pad your retirement.

Final Thoughts
The number of years you have until you retire, how much you’re contributing, your current retirement assets, and your risk tolerance all play a vital role in determining how you’ll want to invest. Figure out approximately how much you’ll need for a nest egg by projecting what your expenses will be when you retire. Based on that, calculate what type of return and contributions you’ll need to get you there. Use a search engine to seek out “online retirement calculators” to help you with this. Also, look into life and long-term care insurance to protect that all-important nest egg in the event of the unexpected.

Getting started and getting the money into a proper savings account is the most important step. Once you’ve gotten your savings off the ground, be sure that your investments are protected and in line with your situation and goals.

Have you begun saving for retirement? If so, can you save more?

Let me be frank: it really doesn’t make much of a difference in the long term if you hold 35% of your portfolio in bonds instead of 32% or 37% or even 40%. Since nobody can predict the future, nobody can know in advance which exact stock/bond mix will prove optimal. Sure, we can draw a few broad generalizations about the fact that holding 60% in bonds will be significantly less risky than holding 20% in bonds, but once you get down to the 34% versus 38% range the differences aren’t nearly so noticeable. It truly doesn’t matter what you choose at that level of granularity, at least not statistically.

Confidence Drives Behavior

So if  optimizing your stock/bond allocation down the the nearest tenth of a percent doesn’t matter, what does? That’s easy: confidence. Confidence in your plan; confidence that you’ve made the right decision; confidence in the fact that you have considered your specific situation and haven’t just invested in a cookie cutter portfolio using generic advice. Mind you, it doesn’t really matter whether the generic advice is actually appropriate or not. The very fact that it is generic will cause many investors to inherently distrust it. And that’s okay. We all like to think our situation is special in some way.

So How Does One Decide On Their Stock/Bond Split?

It’s really not complicated. We’ll start with the old conservative age in bonds rule-of-thumb and then increase or decrease our stock allocation depending on how you answer a few questions about your specific situation. Will the results of this exercise be superior to blindly following one of the aforementioned rules of thumb? Not necessarily. But the fact that you’ve thought about it in a methodical way will at least give you a better understanding of the issues involved and the confidence to implement your plan.

Start with age in bonds. For example, if you are 35 years old you will start with a 35% bond allocation and adjust your allocation according to how you answer the following questions.

Will you have a significant inflation-adjusted pension other than social security in retirement?
If so, your need to take risk has diminished. Decrease your equity allocation by 5%.

Is your portfolio already large compared to what you think you’ll need in retirement?
Again, your need to take risk has diminished. Decrease equity allocation by 5%.

Do you plan to leave a large inheritance to heirs or charity?
If so, you should invest a bit more aggressively. Increase your equity allocation by 5%

Would you describe yourself as a “risk tolerant” investor?
Increase your equity allocation by 5%.

If you owned equities in 2008, how did you react by the market crash?
If you felt comfortable owning equities even while their value depreciated significantly, add 5% to your equity allocation. If you either sold in a panic, thought strongly about selling, or otherwise experienced extreme discomfort it’s a good bet you were investing beyond your risk tolerance. Decrease your equity allocation by 10%.

Do you save more than 25% of your gross pre-tax income?
If so, you stand a very good chance of meeting your goals without taking on quite as much risk. Decrease your equity allocation by 5%.

Do you work in a stable career with little chance of being laid off or otherwise losing your income?
Increase your equity allocation by 5%.

Does longevity run in your family?
If so, there’s a chance your money will have to last a bit longer in retirement. Increase your equity allocation by 5%.

Tally Your Results

Tally your results. What do they reveal about your risk tolerance and need to take risk? Using the above process, your portfolio could range anywhere between age in bonds – 25 or age in bonds + 25. For example, an aggressive 35 year old investor might have as little as 10% of their portfolio in bonds. Likewise, an extremely conservative 35 year old investor might have as much as 60% of their portfolio in bonds. The average investor will likely fall somewhere in the 30-35% range. I would like to add one caveat: regardless of your results on this test, I recommend you never dip below 10% of your portfolio in bonds nor below 10% of your portfolio in stocks. I don’t believe any portfolio should be 100% in anything.

Where do you stand?

Personal Finance Goals

• Increase my net worth by $60,000 - This is a pretty aggressive goal based on my savings rate. I say “based on my savings rate” because I don’t think setting a goal based on earning a positive return on my investments is all that useful. I can’t control what the market does, but I can control how much money I save. If my business does well over the next year and I hit at least 100% of my bonus at work, I just might be able to hit this target. Of course, if the market crashes it probably won’t matter how much I save. On the other hand, if the market shoots up 20% next year, I will hit this goal easily. But I’m not going to worry about that either way. I won’t feel bad if I miss my goal solely because of an uncooperative stock market.
• Fully fund both my 401k and SEP IRA next year - I’ve been fortunate enough to be able to max out my company’s 401k plan both of the last two years and expect to be able to do so in 2012 as well. I will only be able to defer 20% of my self-employment income into my recently-opened SEP IRA, which will put me absolutely nowhere near the maximum contribution for that type of account. So when I say “fully fund my SEP IRA” I mean defer 20% of my self-employment income. This should be a gimme barring any unforeseen disaster I would need to funnel my secondary income towards.
• Fix up the ol’ homestead to prepare it for sale or rental - I want to move. I don’t necessarily see myself being able to sell my condo for a reasonable amount in this market, but I’d like it at least to be in saleable (or rentable) shape by the end of the year. Best case scenario would be to lease it sometime in 2013 while I move to my favorite part of town.

Personal Goals

• Spend at a very minimum 2 weeks this year on another continent – Preferably Asia or South America, but I’m not going to be picky. In reality, I’d rather spend more like an entire month abroad. We’ll see how this goes.
• Do some sort of exercise at least 5 days per week – I’m already doing pretty well on the personal fitness front. I work out at least 2-3 days per week and sometimes hit 4 or even 5. But I’d like to get to the point where I’m working out 5 days per week consistently. This isn’t really a particularly aggressive goal, because even something as quick as an intense 10 minute interval session would count. The point is to do something every day. Walking doesn’t count, but things like playing soccer or basketball after work do.
• Eat better – I already eat a ton of fruits and vegetables, so overall macro nutrition isn’t a problem for me. But I also eat far more junk food than I should, and often after a long day at work I’ll just order a pizza for dinner. I have to cut back on that significantly.

Business Goals

• Break 1,000 RSS subscribers – I’ve been hovering around the 600 RSS subscriber count for almost 6 months now. Most of this is due to the fact that I didn’t aggressively pursue RSS readers in 2011 coupled with not doing any guest posts on larger blogs, which in my experience is one of the best way to build loyal readership. Wanna help me out? Subscribe to my RSS feed!
• Consistently post about 3 times per week – My posting slowed down considerably in the second half of 2011 due to some personal things I won’t get into. But that’s really no excuse. I’m going to post more regularly in 2012. You guys deserve it.
• Write at least 1 quality guest post per month for a popular blog in my niche – Guest posts can be a time sink, but they are still the most effective way I know of to build domain authority, search traffic, and most importantly readership.
• Start a mailing list – Everybody else does this. Why don’t I? Because I’ve been lazy.
• Increase business income by 50% – There’s absolutely no way this is going to happen without creating my own product. I’ve had a few ideas for an ebook I’ve been kicking around in my head for a while now. Speaking of which…
• Write an ebook – I’m just going to do it this year. I may even decide to give it away for free to loyal readers instead of selling it. But I can worry about that after I’ve actually written the damn thing.

But many (if not most) people just don’t want to go it alone for whatever reason. Maybe you don’t trust your judgement or know you’ll probably do something stupid when the market tanks. Or maybe you just don’t care about investing and doing the necessary research sounds worse than a trip to the dentist for you. Fair enough.

I Recommend Fee Only Financial Planners

There are a few different kinds of financial advisors. For reasons I could write a whole series of articles about (and probably will), I mostly just recommend using a fee only financial planner. Fee only financial advisors aren’t compensated with commissions so they have less of an incentive to put you into inappropriate investments just to make a quick buck. There are still conflicts of interests, of course, but they tend to be less several with a fee only financial planner than commission-based planners.

5 Questions To Ask A Prospect Fee Only Financial Planner

So how does one choose between all the fee only financial planners out there? A lot of it comes down to finding somebody you can trust and are personally comfortable with. At a minimum, that means you should do a background check on any advisor you’re thinking of hiring. But besides the basics, here are a few questions I think everybody should ask when interview financial planners in order to get a feel for how well the planner’s approach jives with common-sense investing best practices.

1.) How long have you been in the business?

You want a financial advisor with experience across a wide range of market conditions. Somebody who started their financial planning practice during the last great market crash may be overly-conservative with their asset allocation strategies while somebody who has been around mostly during bull markets might be overly optimistic about future returns. At a minimum, I would want to work with somebody with at least 10 years experience. That’s not to say a less-experienced advisor wouldn’t do just as well, but you have to draw the line somewhere.

2.) What certifications do you have?

There are a ton of different certifications in the financial planning business, some of them more useful than others. One of the most rigorous certifications out there is the Certified Financial Planner (cfp.net) designation. Planners with a CFP designation had to demonstrate their knowledge by years of dedicated study and by passing some pretty difficult tests. Other worthwhile designations are Certified Financial Consultant (ChFC), Chartered Investment Counselor (CIC), and Chartered Financial Analyst (CFA). This is not a complete list, so you should always research the designations earned by every fee only financial planner you interview and then verify with the appropriate designating authority they actually earned the designation they claim to have earned.

3.) How important is controlling investment costs to your investing approach?

If their response is anything other than “very important” run away as fast as you can. All else being equal, a lower-cost mutual fund will beat a comparable higher-cost mutual fund and low-cost diversification is as close to the optimal investment approach as you can get. Any sales pitch along the lines of “costs shouldn’t matter because I can choose superior mutual fund managers and beat the market” is a huge red flag.

4.) What’s your track record?

I prefer index funds, but plenty of individuals and many financial planners prefer active funds. And there’s nothing inherently wrong with that. But if your financial advisor insists on recommending actively managed funds, don’t you want to compare how their picks have panned out in the past? If your financial planner hasn’t been able to at least approximately match the performance of a basket of broad market indices in the past, what makes you think they will be able to do so going forward? And if they can’t do so going forward, you’d be better off in index funds.

5.) How does your investment approach account for taxes?

This isn’t a big deal if all your money is locked away in a 401k, IRA, or other tax-deferred account. But if you’ve got a lot of money in taxable accounts, you’re going to want to make sure your financial planner is investing in the most tax-efficient way possible. Furthermore, you want to make sure your planner is looking at your portfolio as a whole and not just a collection of different budgets. Proper asset location can make a big difference come April 15th.

Obviously, this isn’t an exhaustive list of questions you should ask. For more general info, check out the National Association Of Personal Finance Advisors (NAPFA) and their list of tough questions to ask.

The Definition Of “Afford”

This post was inspired by a post I read on Well Heeled Blog entitled, fittingly enough, “The Definition Of Afford.” In it, WellHeeled outlines what the word “afford” means to her. This post is an attempt to spell out, to myself as much as to anybody else, exactly what the word means to me and how I integrate it into my daily life.

Will This Purchase Improve My Quality Of Life?

This is the most important consideration for me, and it’s all about value. I don’t mind buying something expensive if I’ll get a lot of value out of it. For example, I don’t really watch much TV so I don’t own a big plasma TV. Would it be nice to have a $2000 television? Of course it would. But there’s no way I would get good value out of a purchase like that taking into account how little television I actually watch, so I don’t own one. On the other hand, I do enjoy a nice meal out and don’t hesitate to drop $80 on a good meal every once in a while. I consider a good meal with good company a good bargain at twice the price. And that $5 latte? Screw it, I love coffee! And I’m going to continue wasting money on good coffee, than you very much.

Will This Purchase Enable Me To Meet Long-Term Financial Goals?

Will I have to go into debt to make this purchase? For some things, such as a house, that’s probably unavoidable for most people. But going into debt into debt on its own isn’t enough to disqualify a purchase as “unaffordable.” For example, if the home I buy appreciates in value over the years while my mortgage payment stays the same, I will almost certainly come out ahead versus long-term renting. Similarly, where I live in Atlanta you pretty much have to own a car. Public transportation sucks unless you live and work in very specific areas of town. Thus, most Atlantans simply have to have a car to get to work every day. I think “getting to work” would fall under the “enable me to meet long-term financial goals” category, so the purchase is reasonable. I’m not going to go out and buy a Porsche or anything, but my Toyota was certainly a reasonable and affordable purchase.

Will This Purchase Negatively Affect My Ability To Meet Long-Term Financial Goals?

The flip-side of the above, any purchase that will negatively affect my ability to meet my long-term goals is unaffordable, no matter how small that purchase may be. If that $5 latte was really truly causing me to have to cut my 401k contributions I might have to reconsider. But even in that case, I think the most reasonable solution to that problem is to find a way to earn more money, not cut small expenses from the budget. It’s true cutting recurring expenses can have a positive impact on your bottom line in the short term, but at the cost of a lowered standard of living. Remember, it’s okay to spend money on things that truly make you happy. The trick is knowing which is which.

Put in my concrete terms, my target is to save 30% of my pre-tax earnings every single month. If a purchase makes it so that I won’t be able to save 30% of my pre-tax income, I probably can’t afford it. If not, I usually feel comfortable buying pretty much whatever I want so long as I meet that minimum standard of savings. Even frivolous purchases are fair game at that point.

Am I Buying This For Me Or For Social Status?

I get it: iPhones are cool. They are useful. They make pretty pictures and fun noises. But do I need one? No. Would it improve my quality of life even slightly? Probably not. The only reason I can think of that I would buy an iPhone, realistically, is to be able to say I have an iPhone. Is there anything wrong with that? Not really. And if I’ve already met my 30% savings target, there’s really no harm in buying an expensive gadget. But it’s important to at least see the purchase for what it is, and that’s to buy social acceptance. And yes, despite this example I am going to be buying a smart phone in the near future. It probably won’t be an iPhone, though.

What Is Your Definition of “Afford?”

You are bound to agree with some of what I’ve said and disagree with others, and that’s fine. Everybody has a different idea of what it is to be able to afford a purchase. The exact definition doesn’t matter so much, I don’t think, as the fact that you’ve actually sat down and thought about what’s important to you personally. So what about you? What criteria do you use to judge whether or not a purchase you’re considering is affordable?

Don’t Reach For Yield

The act of downgrading the overall quality of your savings (or portfolio) in order to get a higher yield on your savings is called “reaching for yield,” and it’s often a bad thing. Why? Because in any remotely efficient capital market such as the ones we have in this country, you can’t have more return without risk. When you reach for yield, you increase the probability that your money won’t be there when you need it due to inopportune market losses. While that kind of risk is acceptable for long-term goals, it is absolutely not for short-term goals, much less your emergency fund. Does that mean you should never take on more risk? Of course not. But there’s a time and a place for that. Hint: it’s not with your short-term savings

In general, you should divide your savings into three pots:

Ultra Short-Term Emergency Savings

This is your emergency fund. If your car needed $2000 in repairs tomorrow, this is how you would pay for it. Consequently, it should be money you can get to almost instantly, or at least soon enough so that you can afford to pay off your credit card at the end of the month should you use credit to cover the unexpected expense. For emergency funds, most experts recommend a regular old savings account at your bank or a high-yield savings account online. Personally, I prefer online banking because a.) it’s more convenient and b.) the rates are usually much higher. For example, I use ING Direct for my emergency fund (click here to find out why I chose ING Direct over other higher-yielding online savings accounts). In my opinion, bond funds (even short-term bond funds) are totally inappropriate for emergency savings. There is a school of thought that states this is dead money and entails too high an opportunity cost, but I strongly disagree: better safe than sorry. Unless you have a high net worth and can afford to sell assets at a loss, the negative consequences of risking your emergency fund are too high to bear  for most investors.

You can use a site like Bankrate to find the best bank interest rates on different types of savings accounts.

Intermediate-Term Savings

Do you plan on buying a new car in 5 or 6 years? Saving up for a down-payment on a home in 3 years? Since you more or less know when you’ll need the money and how much you’ll need, you can afford to reach for yield a bit here. Let’s define “intermediate-term” in this case to be any goal over 1 year and less than 8 years away. For these goals, you’re generally best off investing in either high yield FDIC-insured CD’s or bond mutual funds with an average effective duration less than your time horizon. For instance, if you are saving for an expense 6 years down the road you should feel free to invest in a bond fund with an effective duration of less than 6 years, which includes most short- and intermediate-term bond funds. Alternately, you could buy an individual treasury bond directly from the U.S. Treasury at TreasuryDirect.gov and bypass the management expense. You should still stick with high-quality issues here, though, meaning no junk bonds and no stocks (unless you have so much money that it doesn’t matter if you miss your target, in which case all bets are off).

Long-Term Savings

This is your retirement portfolio and other long-term savings for goals 10+ years out. Your long-term savings should probably be equity-oriented within your risk tolerances and anchored by an allocation of high-quality short- or intermediate-term bonds. If you’re going to take risks in an effort to strike it risk, this is the only appropriate portion of your portfolio in which to do it. Go ahead and over-weight small-cap stocks, or emerging market stocks, and maybe even own an individual stock or two and some junk bonds. Don’t go crazy, but you’ve got plenty of time to recover from a few setbacks.

Benefits of Bankruptcy

The obvious benefit of filing bankruptcy is the fact that once a debtor has filed, creditors must immediately cease all collection actions that are pending. If you hire an attorney the moment you inform your creditor you are in the process of filing bankruptcy they must contact your attorney. Stopping the threats and harassment may seem like a huge benefit. While this is definitely on the top of the pros list, you should consider the long-term effects of bankruptcy.

Bankruptcy gives you a chance to start over from scratch. When you do not have debt weighing you down you can make attempts to rebuild your credit in a responsible manner. Studies show that individuals who file bankruptcy minimize their risk of burying themselves in debt again.

The Negative Effects of Bankruptcy

With the good always comes bad. Bankruptcy is not the magical answer to all. It is important to exhaust all of your available options before you choose to file. If you are concerned about the impact bankruptcy has on your credit you definitely have a legitimate concern. Bankruptcy will have a negative impact of your credit record for 7 years from the date your bankruptcy is discharged. It can make it more difficult for you to obtain loans for homes, schooling, cars, a personal loan, or any other revolving credit. Obviously, you will be considered a higher risk and you will have to pay higher interest rates when you are approved for loans.

In some cases, bankruptcy can have an impact on your employment. State and Federal jobs consider your credit history when determining whether you are eligible for employment or advancement. The effects of bankruptcy on employment can be significant. You will need to explain why you filed if the employer asks and in some cases you could be denied the opportunity to advance.

Bankruptcy laws have changed in the last few years. It is no longer a legal filing that erases your debt for good. Consider the advantages and the consequences of filing bankruptcy and make the responsible decision.

• Understand how it works- If you don’t know how your credit score is calculated you are at a distinct disadvantage. Before you can increase your score you have to know what actions help or hurt your score.
• Get your finances in order- We all know the importance of having great credit, however it is impossible to attain this goal if your personal finances are in disarray. If you are dealing with high interest debt, past due accounts or another financial crisis- you need to get a handle on those issues before trying to boost your credit. Once you get your finances in order you can turn your attention to increasing your credit score.
• Use a major credit card (sparingly)- In a world where credit card use has suddenly become taboo, there is still one benefit from using credit. Your credit score tells lenders how you have managed credit in the past, which indicates how you will manage future credit. Without this history on your credit report there may come a time when a credit score will not even be generated. The key is using your credit card responsibly (such as using your card to earn travel rewards points). Do not charge more than you can pay off in full each month. You need to show responsible credit card use, not indebtedness.
• Automate your payments- Paying your bills late will not only hurt your credit but also put you in a position where you have to pay late fees, penalties or higher interest rates. If you have your finances in order there should be no reason for paying your bills late. Take advantage of automated payments and put your bill paying on autopilot. This will ensure your bills get paid on time every month. Late payments have a damaging effect on credit scores. Note: It is imperative you remember what bills are automated to ensure you have the money available when the payments are due, otherwise you may end up paying overdraft fees if payments are returned. Remember also to monitor automated payments to ensure the right amount is being deducted.
• Manage your debt- You don’t have to be debt free to increase your credit score but you will have to pay down debt to decrease your credit utilization. In addition to paying down debt you can also spread your debt around to increase the debt to credit ratio. The amount of debt may be the same, however it is better to have a little debt on several cards, than a lot of debt on one.

Increasing your credit score is a worthwhile endeavor, one that will take some time. Credit scores plummet quickly when you manage your finances poorly however the recovery time is sometimes a bit slower. Be patient and eventually you will be rewarded for managing your credit well.

Home Equity Loans

“Equity” is the difference between your home’s current value and any outstanding debt. If you currently owe $50,000 on an existing mortgage and your house is worth $100,000, you have $50,000 in equity. You may borrow against that amount to consolidate high-interest consumer debt into a single larger balance. Convenience and lower tax-deductible interest are the advantages of home equity loans that are highly touted by hungry lenders.

The obvious drawback, of course, is that default results in the loss of your home. Should you find yourself in dire financial straits before the loan is completely repaid, you cannot completely discharge home equity loans in bankruptcy. As these are secured debts, a court-ordered debt restructuring known as a “Chapter 13” Bankruptcy would be the only way to hold on to your house. A Chapter 13 Bankruptcy is not easy to get, however.

Credit Card Balance Transfers

“Zero percent” interest on amounts transferred from other cards look good at first glance. The catch is that the nonexistent interest is fragile and short-lived. One late payment instantly takes it into double-digit territory. In 6-12 months, it dies a natural death and decomposes into a much nastier number. Use these unsecured debt consolidation loans only if you plan to: 1) accelerate payments to retire your entire debt before the no-interest period expires; or, 2) switch it all to another interest-free card at that time. Still, used wisely these 0% balance transfer credit card offers can save you money.

Unsecured Debt Consolidation Loans

An unsecured debt consolidation loan is the only option for most financially strapped folks. Those burdened by excessive debt are probably so credit-impaired not to qualify for other low-interest options. Unsecured debt consolidation loans have no underlying collateral to secure them. Thus, they feature relatively high interest.

Much longer repayment is the main consumer motivation for these loans. Is it really worth it? Analyze your current situation carefully. Compare existing interest rates against those of a proposed unsecured debt consolidation loan. The longer time required for repayment may be more costly than your current credit contracts. Moreover, any debt reduction obtained via reduced credit balances may be treated as taxable income.

Exhaust all alternatives before assuming the hidden costs of cheap debt consolidation loans. You might be able to accomplish debt relief without excessive interest or encumbering your home. Consumer Credit Counseling Services offers free credit counseling and debt restructuring. Visit cccs.org, or consult your local Yellow Pages. New federal legislation also permits up to 50 percent forgiveness of credit card debt in excess of $10,000. For further details, visit ftc.org.

Note that, of course, it’s often possible to achieve both of the values that are sometimes traded off for each other. They’re listed below only because they’re often pitted against each other — not because they always are done so.

• Debt vs. Freedom. Sometimes debt is necessary for us to achieve things that are good in the long run, but we can’t currently afford out of pocket. For example, a home, an advanced degree, or often even a car. The problem with debt is that it often chains us to certain possessions and assets.

• Security vs. Comfort. Money spent on security is money that could be spent on more immediate desires and luxuries. For example, spending a thousand dollars for a diesel generator is probably not going to be as comfortable as spending the money on a new TV. The same goes with insurance, an emergency fund, and monthly savings. Planning for the future requires sacrificing a little of the present.

• Education vs. “Coasting”. Out of all the trade-offs made in personal finance, this one is probably the most damaging and consistently poor trade off. Many consumers — if not most — choose to coast through their finances without trying to get a systematic financial education. It’s hard work learning how interest rates work, how mortgages work, what the right IRA might be, what live silver prices are, how to diversify a portfolio — but in the long run, learning these and similar topics is absolutely crucial to predictable financial success.

• Short-Term vs. Long-Term. Of all the trade offs made in personal finance, this is the big one — short term versus long term. Should you pay off your car quicker or save for retirement? Buy term or whole life insurance? Get a grad degree, or make do with your current income and education? These questions honestly have no single universal answer, and really depend on the financial values of the person in question.

In the end, understanding economics is essential to learning to master personal finance. The more you master, the more prepared you’ll be for whatever financial situation comes your way.