Financial Freedom 4 All

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Investing 2006: Benefiting from Medicare Prescription Drug Benefits

With 2006 coming next week, excitement builds over the idea of starting over and making resolutions. Finances and investing are usually high on the list for New Year's resolutions. One of the big changes in 2006, for seniors, is the new Medicare Prescription Drug Benefit. This will be a great boost for seniors who struggle to pay for medications. While I am not sure how long this will be a viable program, I know that it will certainly help me with my retirement (never mind my age). As with every government big spending program, there are winners (companies and their investors) and losers (usually the taxpayers). Since you are likely to be on the loser's list if you are not a senior (you are a taxpayer, right?), why not make the best of the opportunity and add yourself to the winner's list as well (as an investor).

So, which companies stand to have gains do to the program? Obviously, they are drug makers. However, do not just think that any drug maker will suffice. There are specific drug makers that will do much better, as well as certain drug makers that will be worse off. So who will it be? Well, to understand that you need to understand prescriptions.

Fortunately for me, I read my prescription benefits, and my wife used to work in a pharmacy. In pharmaceuticals, there are typically three types of categories for drug coverage: non-formulary, formulary, and generic. These categories rank from worst to best in pricing coverage. Essentially, forumulary drugs are name brand drugs that are covered due to deals between insurers and pharmaceutical companies. They get a good price because they send volume. Obviously, non-formulary drugs are name brand drugs that are not on that list. Beyond that, you have cheap, generic drugs that are created after patents for name brand leaders expire.

You should understand that name brand drugs (formulary and non-formulary) cost more than generic drugs. But, there is a reason why new drugs are made: 1) to get a new patent that makes pharmaceutical money, and 2) because the new drug has more benefits than the generic drugs. So, people will tend to purchase generic drugs when they cannot afford name brand, especially when they lack sufficient coverage. That means that the formulary drugs on the Medicare Prescription Drug Benefit program will get a boost in sales.

So, picking a few companies that make drugs on the formulary list, and happen to be targeted towards seniors, we will stand a good chance at a nice return.

Companies that stand to gain (focused on cancer, Alzheimer's, and HIV/AIDS):

  • Bristol-Myers

  • Johnson & Johnson

  • Roche Holding AG

  • Abbott Laboratories

  • Norvantis

  • Sanofi-Aventis

Companies that stand to lose (focused on product marketing rather than product differentiation):

  • Pfizer Inc

  • Merck & Co.

  • Eli Lilly & Co.

  • AstraZeneca PLC

In any event, watch pharmas closely, they are risky because of heavy litigation. However, nothing ventured, nothing gained.



What is a FICO Score?

One of the first problems faced when attempting to improve finances is understanding how credit works. If we do not understand how something works, we typically misuse it; this is typically the case when it comes to credit. By misusing credit, we get into debt. When we get into debt, we become discouraged. And when we become discouraged, we may fall behind on our payments. Knowing what a FICO score is, how a FICO score is calculated, and knowing what your FICO score is will help you in your journey to financial prosperity.

So what is a FICO Score?

Well, a FICO score is simply a rating used by creditors to determine the financial risk involved with extending credit to a borrower. However, a FICO Score is not just any credit rating, it is specific. The FICO Score was developed by Fair Isaac Corporation to create a standard method for evaluating credit. It takes into account your credit report(s), and creates a score based upon your credit history. Older items have less impact than newer items. The three major credit reporting bureaus (Experian, TransUnion, and Equifax) use FICO scores. It is important to remember that you will have three different FICO scores, as each is calculated from the credit report from the three respective credit bureaus.

How is a FICO score Calculated

First and foremost, your FICO score is calculated from your credit reports. The information in your credit report is then given a weight, and is evaluated to determine your FICO score.

What Information is in a Credit Report

  • Personal Information (For identifying, not used to determine scores)

    • Full Name

    • Date of Birth

    • Social Security Number

    • Current Address

  • Accounts Summary (For each open line of credit)

    • Account Type (Mortgage, Loan, Credit Card, etc.)

    • Company (The creditor)

    • Account Number

    • Balance (May not be accurate if account activity is high)

    • Negative Items (A flag for whether there are problems)

  • Inquiries (Credit inquiries from the last two years)

    • Date of inquiry

    • Requestor (Company that made the inquiry)

  • Negative Items

    • Account Type

    • Company

    • Status (e.g. Pays as agreed)

    • Delinquincy (e.g. 30 days past due)

    • Negative Description

How does my FICO Score Effect Me?

If you have a higher FICO score (720+) you can get better rates on loans, mortgages, and credit cards. If you have a lower FICO score (620-) you will get worse rates on loans, mortgages, and credit cards. This can make a significant financial impact on you. For instance, every one percent of interest is about $100 per month per $100,000 borrowed on a 30 year fixed-rate mortgage. Someone with poor credit may be paying hundreds of dollars more per month than someone with the same debts but with better credit. That is hundreds of dollars per month that can be saved and/or invested for a house, vacation, retirement, and/or gifts.

How do I Check my FICO Score?

The best place to check is right from the horses mouth, the Fair Isaac Corporation. They have a website that is absolutely wonderful for check your FICO score called MyFICO. This is not free, mind you (Last I checked it was about $20), but it is a good investment in your financial future. They also have simulators that can give you an estimate to how performing certain actions (making your payments on time for 3 months, paying down your credit card debt, getting a new auto loan) will impact your FICO score.

How Can I Improve my FICO Score?

Well, there are many things that you can do to improve your FICO score:

  • Make your payments on time

  • Pay off delinquent debts

  • Pay down revolving credit (credit cards, store cards, etc)

  • Have few credit inquiries

  • Have a good debt-to-credit ratio (Don't max out your credit cards)

  • Seek the help of a lawyer to remove negative items from your credit report

I really hope this has been helpful. Your understanding of credit can really make or break your journey to financial prosperity.



Another New Layout

I though it was time for another new theme. As you can tell, I use Blogger here, and it is difficult to stand out when you use it. I went in search of some different templates, and I found some nice ones, but I started to see them being used more and more. So, I created my own. Blogger Template Tags are not difficult by any means, but they do become quite ugly and difficult to manage.

In any event, I do not think that anyone else will have this template without a great deal of effort. I really like the template, too, because it is simple markup, and the style is completely seperate, so I can reuse the template and have a completely different look. Further, I have put in some features that are like other blogging softwares.

Anyhow, there should be any major changes for a long while, but there will be minor changes to the template here and there, as it is not 100% to my liking, and some of the menu links are not functional, yet.



How to Make One Million Dollars

For some reason, I was taking a look at, and I saw a link titled, How to Make $1M. Well, obviously, I thought it may be interesting. So, I clicked.

It was refreshing, because it was reinforcement. Basically, it is a hook, line, and sinker discussion on becoming wealthy. He starts off by listing easy ways to get rich (inherit wealth, marry into wealth, win the lottery, or win a lawsuit). Then, he steps back to reality and discusses a sure bet (put $5 per day into a 10% investment, and you will have one million dollars in 42 years). So, these are the two extremes in getting rich (Quick 'n' easy and slow 'n' steady). Finally, he discusses becoming an entrepreneur and short circuiting the slow 'n' steady in order to do it more quickly.

So, it hits home. Come up with a slow 'n' steady way to get to your goal (Plan A). Then, find some way to do it much more quickly and try doing this while still working on Plan A (Plan B). I have had this discussion with a couple of lawyer buddies of mine, and they had recently turned their Plan B into a business that seems to be doing very well. They took the McDonald's approach to learning a business and then starting one.



Saving Money on Auto Insurance

One of those expenses that we hate to pay when we don't seem to need it is auto insurance. But, it is great to have when we do need it. Further, in many states, it is against the law to drive without auto insurance. That does not mean that you should pay too much, however. Consider how much money you could save per year, if you paid just $50 per month. That is $600 for the year. You could save that money and earn interest on it. The results can be staggering.

I recently turned 25, so I am awaiting the great savings that occur when you reach that milestone. Whether you have reached that milestone, or not, you might be paying too much. There are a couple of things you can do to lower your auto insurance costs:

  1. Have a better driving record (don't speed, don't get in a wreck)

  2. Take a defensive driving course

  3. Bundle homeowners insurance with auto insurance

  4. reduce your coverage and/or raise your deductable (this would be your decision, not mine)

  5. Shop for better insurance

The choice is up to you; you have options. Following are some links to various places that you can receive free quotes for auto insurance. Who knows, maybe you could save some money.

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The Benefits of Flexible Spending Accounts

Getting treated for illnesses is becoming more expensive, each year. Further, if you are regularly on perscriptions, this is not cheap either. Employers are doing their best to offset high healthcare costs, but they have to pass on the cost, at some point. With many employers, the option has been to have higher deductables, as well as, having employees bare more of the premium costs. When you pay more of the premium, you do so with pre-tax funds. Wouldn't it be great if you could do the same thing for medical expenses not covered by insurance (e.g. deductables, prescriptions, elective surgeries)? Today, with most employers, you can. The answer is a flexible spending account, or FSA.

What is an FSA? It is a way to set aside money, pre-tax, for medical expenses not covered by insurance. Essentially, you have to decide on some amount of money, annually, that you would like set aside. No one can do this for you. You may know of upcoming surgeries, recurring prescriptions, or your deductible that you can reference to get a ball park figure. Another benefit to this is that you do not have to wait for the payroll deductions in order to use the funds. For example, let's say that you elect to have $1,200 deducted from your payroll for your FSA ($100 per month), over the course of the year. If in February you decide that you would like to get lasik vision correction, you can use the entire $1,200 to pay for that in February, rather than waiting until the funds have been deducted. So, that is like interest-free money (better than getting that surgery financed). Also (and employers probably like to make this known), if you use all of your funds for the year, and then leave the employ of the company, you do not have to repay the benefits (the employer takes the hit). However, there are some downsides. The main downside is that you can not roll the funds over. So, if you only use $800 of the $1,200, then your employer gets to keep the remaining $400 (the advantage they receive for the risk of letting you use funds early). In addition, you loose the flexibility of using the deducted funds for other expenses, if you do not need them for medical reimbursement.

There are significant tax benefits involved with FSAs. Since it is a pre-tax payroll deduction, any funds diverted reduce your adjusted gross income, which may have the benefit of moving you to a lower tax bracket. Also, since the funds are pre-tax, you never pay taxes on these funds. As an example, if you have $100 deducted per pay period, and you are in the 35% tax bracket, you only notice about $65 difference in your net income (take home pay). Many will tell you this is free money (I won't, because it was your money in the first place, but that is a different subject).

Now, if you have an FSA with excess funds, and you are approaching the end of the year (like we are right now), you can stock up on over the count medicines, get a new pair of prescription glasses, pre order disposable contact lenses and cleaning supplies, or look for items that you have not been reimbursed for already. So, if at this time, you realize that you have not spent all of the funds in your FSA, there is hope.

Also, many employers have options in their FSAs for child care expenses. If they are offered, the funds are seperated (so, you can not use funds set aside for medical expenses to cover day care for your child, or vice versa). Also, these funds are for child care expenses related to your job. So, you can not use these funds to have a babysitter watch your children for a night out on the town.

All in all, FSAs are great tools for you, if they are available. Consider your expenses wisely, and see what advantages are available. I know that I will be getting lasik vision correction next year. It is a great investment, because I spend over $300 a year on glasses, and about $100 year on contacts. My employer, as well as many others, do not provide vision insurance any longer (our medical does qualify us for $5 vision checkups, however). So, each year I go without correcting my vision is money down the drain. I expect a return on this investment within two years, and it will be made easier because of my FSA.

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Grocery Coupons

There are two things to do in order to make your financial situation better: 1) spend less, or 2) earn more. You could also do some combination of the two. While you cannot always go and ask your boss for a raise, you can evaluate your spending. Again, if you are going the spend less, you have two decisions: 1) give up some things, or 2) find less expensive alternatives. Coupons allow you to do the latter.

There are many great places where you can find coupons. The Sunday newspapers usually have an abundant amount of coupons, as well as ads for local store sales. You may want to see what types of offers your local stores have. For example, all the local stores, for me, offer double coupons up to $1.00.

There are other great places that you can find coupons, as well. Many times, you can find coupons in the store next to the goods. Sometimes, you can find coupons in the packaging of the items. Manufacturers sometimes have printable coupons on their websites. Further there are great websites that offer coupons, as well.

CouponBar Free Grocery Coupons

Take a look at coupons, and always use them (if you were already going to purchase that item, or an equivalent item that would cost more, otherwise).



Carnivals for the Week of December 5th, 2005

Carnival of Personal Finance #25 is being hosted by Sarah at Frugal Underground.

Carnival of Debt Reduction #12 is being hosted at Free Money Finance.

Have a great week!


Sharing Services, Saving Serious Cash

Who ever said that you had to give up some of the nice things in your life to be frugal? It sure wasn't me. Do you have cellular phone or satellite service? Do you have family or friends that also want to save money? There are a couple of ways that you can share some services to save quite a bit of cash. If that sounds interesting, then here is a frugal living tip just for you.

Almost all cellular carriers offer family plans these days. The standard plan is $9.99/month for each additional phone you add to the plan. My wife and I have the lowest family plan from Cingular Wireless. Even so, with Cingular's Rollover, we have a considerable amount of minutes left over each month. How much? About half. Now, I already let you in on the secret from Cingular Wireless about finding discounted service fees... how would you like to save even more? I thought you would. Do you have a family member or a friend whom you talk with frequently that would also like to save some money? Add them to your plan, split the bill. How you split it is up to you. Obviously, there are some trust factors involved, so be wary if trust is fleeting.

You can do the same thing with satellite television services. Many times, you pay $5/month to add an extra receiver to your plan. This is an advantage compared to cable television. Since the service is wirelss to your dish, you can move it. Find a friend or family member who wants to save money, and have them buy their own dish, and get the receiver through your plan, and split the monthly bill. Again, trust comes into play, as well as working out programming selections.

My sister-in-law's family does this with her husbands parents. The beauty of their arrangement is that one of them carries the cellular service, while the other carries the satellite television service. So, they do not keep track of sending each other money, they just pay their bill as it comes it, and they get two great services for just slightly over the price of one.

Do you have any services that you could expand this idea apon?


New Layout

I decided it was time for a new design for Financial Freedom 4 All. The theme before was just a modified verion of one of the standard Blogger templates. It looked a bit odd to me, and it seemed to break AdSence link groups in the sidebar. I found this new theme that I like. It seems professional and appropriate. Also, the AdSence link group works in the sidebar. Also, I have taken a couple of hints from successfully monetized blogs and made some changes. Hopefully, the changes are for the better, and I can implement them on some other blogs, like Mystery Money.


The Advantages of Credit Unions

Some of you may be familiar with credit unions, others may not. I was going through some olds posts that were submitted to the Carnival of Personal Finance, and I ran across a post that discusses discounts that are available to employees and students of certain organizations. The example was for Cingular Wireless (if you go there, it is under "Employee Benefits" on the left section). With this deal, you can save around 15% on your monthly plan. I checked it out, and my school doesn't have the benefit (I know my employer doesn't, we only have 14 employees). So, I wanted to see what benefits I did have. One of them happened to be a credit union.

Credit unions are financial institutions, similar to banks, but they are not-for-profit. In order to become a customer you have to become a member, which means that you are a part "owner" of the credit union. Since it is a not-for-profit, its goal is to provide the best service to its members, which are analogous to shareholders. Many of the same types of employees work at credit unions as do banks. The board of directors works for free (they have a vested interest, as they are also members). This all means low overhead, and profits are passed on to members. So, credit unions usually pay out slightly higher interest on accounts that they offer. Further, credit unions offer interest on accounts that typically do not earn interest at banks, like checking accounts (banks do offer interest, but for high balances; credit unions offer it in almost all cases). Also, they usually offer slightly lower interest on loans (recent auto loans can be an exception, depending on your credit).

I decided to check out my credit union at work. To become a member, you have to open an account (become a member) with a minimum of $25. I can get automatic deposits through payroll deduction, and the account is not tied to my checking account (very good for the undisciplined). Now, the good part. I checked out the interest rates for auto-loans. I have two vehicles that are from the 2002 model year, one carries a balance around $12900, and the other for $8084, with interest rates of 13.75% and 13.25%, respectively. Obviously, I did not get these vehicles with the grand zero percent plans that have been offered. My credit union bases interest rates for vehicles off of the model year and the term length on the loan. For 2002 models, the rates are 5.75% for 24-months, 6.25% for 36-months, 6.50% for 48-months and over, and 6.75% for 72-months.

I have had each of the vehicles for less than a year, with the more expensive one at a 72-month term. I decided that I wanted to accomplish two things: 1) get a lower monthly payment, and 2) get a shorter term. So, I decided to get each vehicle on a new four year term which would make the more expensive vehicle paid off over a year sooner, and the cheaper vehicle paid off about six months sooner. Both vehicles would be financed at 6.5%, which is less than half the interest rate than before. This seems perfectly feasible. I figured it up, and if I pay down each vehicle by about $1,000 and get them refinanced through the credit union for four years, I will save over $70/month, and have them paid off sooner.

Take a look at some of the often overlooked benefits of your employer and/or school. You could begin saving considerably more money. Coupled with this, my auto insurance is going to be cut in half early next year because my wife and I will be over 25, and I will have the last speeding ticket off my record. Overall, I will probably be able to reduce my living expenses by 30% without getting rid of anything at all.



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