When it comes to protecting your assets, you probably know that you need insurance. There are different insurance policies available, designed to protect your assets in a number of situations. Most policies include some kind of liability coverage. From auto insurance, to homeowner’s insurance, you want to protect yourself in the even that someone is hurt and you are found at fault. The liability coverage with these policies pays for injuries to others, and can even provide protection if you are sued.

But what happens if you reach your limit of liability coverage with your other insurance policies? What happens then? You don’t want to have to pay out of pocket, so it makes sense to have extra coverage. This is where umbrella insurance comes in.

What is Umbrella Insurance?

Do you need umbrella insurance?

The point of umbrella insurance is to provide you with extra liability coverage. Most umbrella policies are for between $1 million and $5 million of coverage. Realize, too, that this coverage doesn’t take effect until after your other coverages have been exhausted. So, if you are in a car accident, and you have $500,000 of liability coverage on your policy, your umbrella policy wouldn’t pay out until after the $500,000 was taken care of. If you have $2 million in umbrella coverage, and the person who you hit settles for $1.5 million, the first $500,000 is covered by your auto policy. The remaining $1 million is covered by the umbrella policy.

Umbrella coverage is designed to provide an extra layer of protection in liability cases. It’s possible to buy policies that include, home, auto, watercraft, motorcycle, and other situations. Talk to your insurance agent about the possibilities, and make sure you are clear about what you want covered. Business umbrella/liability insurance will probably need to be purchases separately, and you should check into a home business endorsement if you want protection for your home business.

How Much Will You Pay for Umbrella Insurance?

The cost for umbrella insurance varies, according to different factors, including how much coverage you want. One of the common policy costs is about $150 a year, plus $50 for every additional $1 million in coverage. You can actually get $10 million or more in coverage, if you are willing to pay for it.

Many insurance companies can add umbrella insurance to your package, and the policy is added to your current premiums. If you are worried about paying the umbrella insurance premium, it’s usually possible to increase your homeowner’s deductible, or some other deductible, in order to drop your regular premium to offset the cost of the umbrella insurance.

Who Should Buy Umbrella Insurance?

If are concerned about protecting your assets, umbrella insurance might be right for you. Consider your financial situation. Do you have a large amount of assets? Are there risks to you from the possibility of someone getting hurt on your property? Many people with trampolines or pools choose to buy umbrella insurance because of the increased chance of injury. Someone who is known for wealth might also want umbrella insurance, since more assets can sometimes be an incentive for others to sue. Carefully consider your financial situation, and decide whether umbrella insurance makes sense for you.

Photo credit: Helga Weber

Related Articles:

1. Interesting Things Your Car Insurance Policy Covers
2. Why You Need Renter’s Insurance
3. When Should You Drop Full Coverage Auto Insurance To Just Liability?

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The numbers are staggering. According to the Council for Disability Awareness (CDA) “over one in four of today’s 20-year-olds will become disabled before they retire.” The average length of disability is a frighteningly long 31.2 months.

But despite these statistics, many individuals—as many as 67% of private sector workers according to the CDA —have a big hole in their financial planning: a lack of disability insurance.

Here is what you need to know about disability insurance to make certain that you will be covered if you are unable to work.

Disability insurance is more important than you think

1. Disability insurance covers a portion of your income. Generally, you can expect to see about 60% of your lost income through disability benefits. While it is possible to purchase additional policies in order to increase that percentage, you will not be able to replace all of your lost income. After all, insurers want to see that you have an incentive to get back to work.

Even if you are covered with disability insurance, it’s important that you also keep your emergency fund healthy. Together, they should be able to help you financially weather a disability claim.

2. All workers need disability insurance. The commonly held belief about disability insurance is that most disabilities are caused by accidents. It can be easy to think that working in an office environment means that you are immune to the sorts of issues that can cause you to become disabled. But most long-term absences from work are caused by illness, like pneumonia, cancer, or heart disease. So even if the most strenuous thing you do at work is operate the copy machine, you still need to have disability insurance.

3. Disability insurance through your employer does not necessarily cover as much as you might need. While most workers get their disability insurance through their employers, it’s important to remember that this might not be enough coverage. This is because most employers only offer short-term disability insurance, which will only cover you for up to five or ten years. If you find yourself permanently disabled, this will not be enough.

The other potential issue with employer-provided coverage comes when the employer is paying your premiums. When they do that, you are responsible for paying the taxes on the benefits. You will need to determine if your benefits minus the taxes will cover enough of your income for you and your family to get by. If not, plan on getting supplemental coverage.

4. If you cannot get insurance through your job, there are other options. If you are a member of a professional association, you often have the opportunity to purchase a policy through a group plan. This generally means that you do not need to worry about underwriting for pre-existing conditions, and that your premiums may be lower than if you purchase an individual policy. However, if you leave the profession, you may not be able to keep your coverage.

Buying an individual policy will be more expensive than getting your disability insurance through work and a group plan, but it does give you the opportunity to shop around to several different insurers.

5. Make sure you get “own occupation” disability insurance. There are some policies that are known as “any occupation.” This means that in order for you to see benefits, you need to be unable to do any work at all. But an “own occupation” policy will pay you benefits if you are unable to do the job you trained for, even if you could technically still be running a cashier or greeting customers at the local big box store.

6. If you are purchasing your own policy, remember that not everyone can easily qualify. Just like other insurance policies, disability insurance will often include a medical exclusion rider for any pre-existing conditions you have. For example, if you have a history of back problems, you should be able to get a disability insurance policy that covers any other disability—but the policy will not cover your lost income if it is your back that causes you to miss work. That said, it is important to be covered, even if you have a pre-existing condition. (some plans will cover pre-existing conditions, but only with

It can also be somewhat difficult to find a policy depending on your occupation. Both the self-employed and those who work in potentially risky jobs (like construction or factory work) will have more trouble convincing an insurance company to underwrite them. It is not impossible, however. Freelancers, consultants and small business owners will often have to provide at least three years of income records on order to find an insurer, as income can otherwise be difficult to verify. As for those in more risky professions, know that you will likely have to pay more for premiums—but it will be worth the money.

The Bottom Line

Most people have life and health insurance and think that they’re covered. But in order to make sure you are truly taking care of yourself and your family, you need to have insurance in place in case of disability. Better safe than sorry.

Photo credit: ItzaFineDay

Related Articles:

1. What to Ask Your HR Department About Life, Health, and Disability Insurance
2. 5 Types of Insurance You Need
3. Kiplinger’s Sponsors Free Long Term Care Advice

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It’s been a week since FaceBook’s eponymous IPO, and as an innocent bystander*, all I can say is, “Wow!”

*At this time, it’s tough to determine who is and isn’t an innocent bystander with the FaceBook IPO. I didn’t buy any individual shares of FaceBook, but it’s possible I have some exposure via some mutual funds I own, because many shares were purchased by funds and other institutional level buyers.

OK, that out of the way, I think there are some important takeaways the common investor can learn from FaceBook. Here are a few of my observations about the FaceBook IPO.

Did you buy FaceBook on the IPO?

1. The little investor is always last in line for IPOs. IPOs are interesting events and a lot of wealth is created and lost during these initial stock offerings, but let’s get one thing clear – they never favor individual investors. They favor the company going public and the underwriters who help them take their stock into the market. I think Warren Buffet said it best when he was asked about investing in FaceBooks’s IPO:

“The idea that something coming out…that’s being offered with significant commissions, all kinds of publicity, the seller electing the time to sell, is going to be the best single investment that I can make in the world among thousands of choices is mathematically impossible,” said Buffett.

The big institutions and underwriters will always have the first dibs on buying and selling shares of stocks, which means even if you get it right after the stock goes public, you are making your trade based on what someone else is willing to sell for – so they are either taking money off the table, or you are making them an offer they can’t refuse. In either case, you aren’t getting value, you’re paying a premium. In the case of FaceBook, shares immediately jumped 10% at the open, which means many of the initial sellers made an immediate 10% gain on their investment, while those buying into the IPO were buying in at an already inflated price compared to the announced offering price.

2. Individual investors don’t have access to the same information available to the big investors. FaceBook’s IPO is already under investigation regarding whether or not they broke securities laws by giving larger clients access to information they didn’t make public to all investors. The claim is that in the week leading up to the IPO, a FaceBook executive told the underwriters to cut Q2 earnings forecasts based on weaker than expected data. There is no problem with sharing data, as long as it is made available to everyone at the same time. But if they only gave the information to the big investors, then individual traders are left holding the bag. More on this topic.

3. Beware of the hype. The initial price estimates for FaceBook stock were in the $28-$35 range. In the week leading up to the IPO, the price estimate was adjusted to $34-$38 per share, finally settling in at the top end of the range.  In addition, FaceBook increased the number of shares they were offering by 25%. They were able to both raise the IPO price and the number of available shares due to the strong demand for FaceBook stock. This came about due in part to the press hyping the IPO, and because many investors were looking to hit a home run. The price increase and larger number of outstanding shares dramatically changed the landscape for the value of each outstanding share and the last minute changes played a large role in the quick rise and subsequent fall of the stock price directly after the IPO.

4. Buy for the long term – not the IPO jump. A lot of people who bought FaceBook hoping for an initial jump in the offering price were likely very pleased – as FaceBook jumped 10% almost immediately after it began trading. But they were probably only happy for about five hours, because share prices dropped right afterward, finally closing the first day of trading slightly above the offering price. FaceBook shares quickly dropped under the initial offering price on the second day of trading, and continue to trade lower than the IPO price. Those who bought for the flip are happy if they got out of the trade in the first few hours, but those who gambled on a larger rise or who got greedy, got burned. The lesson learned here is that you don’t buy into an IPO hoping to flip it in hours or days. Take some time to review past IPOs in various industries to see how volatile they were within the first few hours, days, and weeks of trading (bonus points for researching the performance of recent tech IPOs). Unless you have some inside information (which is illegal), then you are almost always better off buying for the long haul, or waiting on the sideline for things to stabilize. And if you are buying for the long haul, buying slightly above or below the offering price won’t matter that much in the end.

5. Greed can burn you. There is nothing wrong with wanting to make money – that is the point of investing. The problem comes when greed causes poor judgment – like someone trying to hit a home run, and gambling their child’s college fund on FaceBook stock, even though they said they weren’t sure it was a good bet. I hope they weren’t able to place the trade, or if they did, that they were able to get out without much of a loss. Investing in IPOs can often be a gamble, so if you do it, invest with your mad money – not money you need for your retirement or college fund.

There is Much More to Come

This isn’t an indictment of FaceBook or their stock. FaceBook is going to be around for a long time, and this is just the beginning of what should be one of the hottest and most talked about stocks for the next few years. I’m sure we will see a lot of volatility, some ups and downs, and plenty of opportunities for people to make and lose a lot of money. And that’s great – that is what capitalism and the stock markets are all about. But right now, FaceBook stock probably isn’t for the average investor, who is usually better off sticking with index funds and mutual funds for the majority of his or her investments. I’m going to keep watching FaceBook stock, but only from the sidelines.

Related Articles:

1. Why I’m Not Buying FaceBook Stock
2. How to Tell if an Option is In the Money
3. How to Calculate the Yield on Cost of a Dividend Stock

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This past Christmas my sister called me to let me know that her boyfriend of several years proposed to her. They have been dating for a long time and everyone in our family likes him, so we were all excited for them. They are planning on having their wedding next summer because my sister just graduated from college and he has one year left. The long engagement should give them plenty of time to find and book a good venue, finalize the invitation list, and make all the necessary plans that come with a wedding. There is a lot to do, but with over a year to plan, they should have plenty of time to pull it off.

how much should a wedding cost?

Wedding planning is a lot of work, but it can be fun too – my mom and sister have already started looking at dresses, pricing venues, looking at invitations, and doing lots of other fun things. I’m sure that with this much time to plan, they will be able to have a beautiful wedding without breaking the bank.

My mom is visiting us this week and naturally, the topic of weddings came up. My mom asked my wife and I how much certain parts of our wedding cost (we were married almost six years ago, so we have fairly recent experience with the topic). Truth be told, my wife and I don’t remember how much everything cost, because her parents paid a large part of it, and I don’t think we listed everything out once it was all said and done.

How Much Should a Wedding Cost?

There is no one size-fits-all wedding — they come in all shapes and sizes, with large black tie events, and small casual affairs. The Knot.com recently released a report on 2011 weddings, which listed the average wedding cost at $27,000. While I’m not sure exactly how much our wedding cost, I know it was somewhere in that ballpark, and maybe a little lower.

Weddings are such a personal event that you can’t really use one person’s wedding budget as a guide for your wedding. Each person values certain aspects of the wedding differently, making each wedding and its associated costs as unique as the couple being wed. In my opinion, the best way to go is to spend money on those things which are most important to you, and find ways to save on the areas which aren’t as important. You can also save a lot of money by involving friends and family, booking in advance, using coupons, and a being creative with scheduling, substituting more expensive options for less expensive options, etc.

My biggest piece of advice would be not to go into debt for a wedding. I understand that weddings are one of the most important days you will have, but starting a married life in debt is an added pressure newlyweds don’t need. It’s more important to have a day where you can relax and have fun, and enjoy the moment without having to worry about having the debt hanging over you for months, or years to come.

What are your thoughts – how much should a wedding cost?

Photo credit: Caucas’

Related Articles:

1. Wedding Tips – Involve Your Family and Friends
2. Have a Beautiful Wedding on a Tight Budget
3. How to Calculate the Yield on Cost of a Dividend Stock

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My sister recently graduated from college and my family all made the trek to watch her receive her diploma. She graduated from Gannon University in Erie, PA, which was out of state for all of us. My parents and younger brother live in  Texas, I live in the greater Chicago area, and my older brother lives in Southern California. The Texas side of the family decided to fly out, but Erie was in driving distance for me so my plan was to drive. When my older brother was researching airline ticket prices, he found out it was cheaper for him to fly into Chicago than into Erie (which is common for regional airports), so we decided to make a trip out of it and do the 8+ hour drive together. It was fun to catch up with my brother since he lives in California and we don’t get to see each other frequently.

We had a solid day’s drive ahead of us for each leg of the trip, so I decided to take my car in before we hit the road. Here are some tips before you hit the open road for your next road trip:

What you need to know before hitting the open road

Get Your Vehicle Serviced

Before I took off on the road trip, I took my car in to get an oil change, tire balance and rotation, and an alignment – all of which are good for improving mileage per gallon, reducing wear and tear, and extending the life of your tires and vehicle. I do most of my service at national chains (in this case, FirseStone) because that is where I bought my tires – which is good for free balancing and rotation for the life of the tires. I also bought a lifetime alignment there, which was a great deal and something I rec0mmend looking into. A few years ago my car slid on some ice and bumped into a curb. I was only traveling around 5 mph as I was accelerating from a stop sign, so there was no damage to my car. However, it did knock my alignment out of balance. The cost for a lifetime alignment was roughly double the cost of a one time alignment, so it was a no-brainer to buy the lifetime alignment (I’ve used it about once per year since I bought it).

I also use FireStone because they perform an inspection each time I get my oil changed, top up fluids, make sure the tire pressure is good, etc. All of these things are good to do before hitting the road on a long trip.

MPG Claims Aren’t Always as Advertised

Sometimes they are better!  There has been a lot of talk about how many cars don’t get the miles per gallon average that manufacturers claim on the window sticker (part of this has to do with car manufacturer’s engineering their vehicles for the testing standards set forth by the EPA). So depending on your driving habits, you may experience a better or worse MPG than what is stated on your window sticker.

I bought my Mazda 3 new over 6 years ago and the stated mileage was 26 town, and 31 highway. Thats not bad mileage for the year the vehicle was manufactured (the Mazda 3 now gets around 40 mpg on the highway). During the trip we had several stretches where we exceeded the highway MPG, with tanks of gas averaging 34 and 35 mpg. I was impressed to beat the stated highway MPG by 10%, especially for a 6 year old car.

We didn’t do anything special on the trip either – other than use cruise control at 75 mph for most of the stretches where we got the excellent mpg (the stated speed limit was 70; I often drive five over and set the cruise control when driving on the highways if the weather is clear, which it was). Limiting your speed to only five over the limit is usually enough to avoid a speeding ticket.

Related: How to improve your gas mileage.

Book Lodging Early

My brother and I went to a college graduation, which meant there were hundreds of more people in town that weekend. We planned early and booked our hotel room well in advance, and we got good rates for the area and the hotel class we stayed in. While we were checking in I overheard the hotel receptionist tell someone on the phone that almost all hotels in the area sell out during the spring through fall months. I never would have guessed that for a city the size of Erie, but then again, you don’t always think about those things when you plan a trip. Plan early, and make sure you get a hotel that fits your dates, is conveniently located, and fits your budget.

Related: How to get a good deal at Priceline.

Paying for Everything

It’s always a good idea to notify your credit card company if you are planning a trip – this will help prevent your card from being frozen by accident. Some companies are good about notifying you if they suspect something, which is cool, while others may just shut off your card without warning. It’s also good to discuss splitting the tab if you are sharing the road trip with someone. My brother and I switched off on buying gas and snacks on the road, which worked out well. I have no idea if either one of us paid more or less than the other person, but it felt right, so in the end, that’s all that matters.

Here are a few recent articles from around the web: Carnival of Financial Camaraderie, Totally Money Blog Carnival, Insurance Claims And Issues: The Risk of Risk, Self Directed Investing For Retirement Carnival – Bear Market Rally is Over.

Photo credit: Adam Foster | Codefor

Related Articles:

1. 7 Mobile Apps for Use on Your Next Road Trip
2. Is It Ethical to Use Your Business Computer for Personal Use?
3. Save Time, Money, and Your Marriage for Under $300

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It’s only been a few weeks since many people rushed to file their taxes before the tax deadline in April. Were you surprised this year at how much you got back from the government? Or did you end up paying a lot of extra tax instead of getting a refund?

Being on either end of the spectrum — massive refund or massive tax liability — isn’t a good place to be. No one wants to owe the government a ton of money, but letting Uncle Sam sit on thousands of dollars over a given year isn’t wise either. If you found yourself in either of these camps you need to look at adjusting your tax withholding in order to eliminate the gap between what you paid in tax and what you were supposed to pay.

How to Adjust Tax Withholding

Making adjustments to how much tax is taken out of your paychecks is an inexact science that involves tweaking the withholdings on your Form W-4. You can make these adjustments at any time during the year. You can also adjust your withholdings as many times as you want (or as often as your human resources department will put up with).

Use Form W-4 to adjust how much tax you want withheld from your paycheck

To change the amount of tax withheld, you can use the Personal Allowances Worksheet in the middle of the first page on Form W-4. (There is also a more detailed worksheet on the back that helps you figure in your deductions if you itemize your taxes, see form.) Calculate your allowances based on your current situation and be sure to carry that number down to Line 5 on the first page. Fill in the rest of your information and pass it on to your payroll or HR department, whichever handles the processing of W-4 forms.

Caution: Don’t Make Huge Adjustments

Calculating your personal allowances should help you get relatively close to even with the government. You might owe a little or get back a little on a refund. The goal is to avoid the huge refunds and huge tax liabilities.

However, don’t overreact if you ended up with a huge tax liability or refund this year. Tweaking your allowances and withholdings should be done incrementally. If you had 8 allowances last year, don’t drop it to 0 this year because you don’t know exactly what that would do to your paycheck. Take small steps and see how much extra tax is taken from your check (or isn’t, if you’re trying to reduce a massive refund). You’ll be more capable of adjusting to your new paycheck and monthly income with small steps than jumping in with both feet.

The IRS also has a very useful (albeit somewhat complicated) calculator that helps you adjust your withholdings for the rest of the year to avoid tax problems.

When to Adjust Your Tax Withholding

Including receiving a surprise — good or bad — when you file your taxes, are there other reasons to change your tax withholdings?

Huge Tax Liability

The most critical issue that requires a tax withholding change is a big tax liability. There is nothing worse than having the government inform you that you owe them a few thousand dollars. For many cash strapped families, this can be devastating.

Big Tax Refund

Some people prefer to get huge refunds because they use that money to pay down debt or take a trip. From a financial standpoint, you are better off having an extra $300 in your pocket every month than getting $3,600 back at tax time. You can save, invest, or pay down debt faster when you get the money each month. However, this does require financial discipline. (You’d be better off leaving things as they are if you would just blow that extra $300 every month.)

Significant Life Change

Getting married? Just have a new baby? Paying mortgage interest for the first time? All of these big life changes can significantly alter your tax liability. Recalculate your personal allowances each time a new life change happens.

Don’t Forget State Withholding, Too

It is easy to think of the Federal government as the only place you need to make tax changes with, but all of the above holds true for your state tax withholding as well. You could give yourself a big monthly income boost by cutting your tax refunds in half from both the Federal and state governments and getting the extra cash each month instead.

Related Articles:

1. When Will I Get My Tax Refund?
2. Newlyweds and Taxes…
3. Refund Anticipation Loans Suck

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Your mailbox is full of bills and you’re starting to receive phone calls from debt collectors. You know that you need to get your financial house in order, but it seems like you never have enough money to make it through the month, let alone pay down your debts. Digging yourself out of debt may seem impossible, but it can be done. Here is what you need to do to prioritize your bills and get yourself debt-free:

Sit down with all of the bills at once.

prioritize how you pay off debt

In some ways, this is the most difficult step. Seeing all the numbers in black and white can feel overwhelming. But recording your monthly outflow—including due dates, fees and interest rates—is necessary before you figure out how to tackle the payments.

Make a budget.

Once you know how much you owe each month and when, you can figure out how much of your income is needed to pay your bills. If you do not make enough money to cover all of your monthly bills, then you need to start prioritizing what you pay. At the top of the list should be the bare necessities: mortgage or rent, utilities, food, and transportation. With these things in place, you know that you can safely keep a roof over your head and continue working. Any money left over after these necessities are met should go to your other debts.

Prioritizing

After you have covered what you need, it’s tough to know which debts to work on next. While not paying some debts can lead to serious consequences, others offer you some leeway. It’s also important to know your rights.

If you are already being hounded by debt collectors, know that you have rights under the Fair Debt Collection Practices Act (FDCPA). You do not have to put up with harassing behavior, contact at your place of work, or abusive language.

Here are the debts you must pay, in order from the most to least important, as well as a breakdown of what you can expect from each one:

1. Child support. Since these payments are mandated by the courts, failure to pay child support can land you in jail. If you are having difficulty paying child support, you can petition the court to modify your payment. However, that process can take some time and you are not guaranteed a modification.

2. Taxes. Non-payment of property or income tax can lead to the government seizing your home and/or garnishing your wages. Don’t let it come to that. If one of your debts is to the IRS, call them and find out if you can negotiate your payment. While the IRS will not forgive your debt, you can generally work with them to find a solution that will work for you.

3. Student Loans. While student loan debt offers you a great deal of leeway, it’s important to remember that the government can try to collect on defaulted loans in ways that are not available to typical collections agencies. For example, the federal government can take any income tax refunds you receive until the debt is paid, garnish your wages, and potentially take federal benefits like Social Security retirement.

If you are having trouble paying your bills, call and ask to have your student loan put on deferment. It will give you breathing room and keep your tax refund safe.

4. Credit Card bills. Paying the minimum on these will keep creditors at bay, but it will also keep you in debt for a long time. However, these bills should be lower priority than those that keep a roof over your head. Also, though credit cards do not advertise this, they will work with card-holders who are having trouble paying. They would rather you call and explain your situation and ask for a temporary change in your minimum payment, or even a short deferment, than have you simply not pay them.

5. Medical bills. The medical community recognizes the high cost of health care and most hospitals have a financial office that will work with you. For example, my son had to have a minor procedure at a children’s hospital when he was 7 months old. Our insurance covered 90% of the $7000 procedure, but we still had to pay $700. The hospital is allowing us to pay $50 per month without interest for up to 18 months, which will give us more than enough time to pay off the debt.

If you have high medical bills, talk to the hospital about how to make payments over time.

Strategies

Even if you know which bills to pay first in terms of potential consequences, it can still be confusing to know what to pay and when. There are two major strategies for debt payoff: Dave Ramsey’s Debt Snowball, and Suze Orman’s Highest Rate First strategy.

The Debt Snowball

This approach might not be the best mathematically, but it offers a great psychological boost to anyone who needs to know they are making progress. Ramsey suggests that you pay the minimum on all of your debts except for whichever one has the lowest balance. Send however much you can to that low balance debt until it is paid off. Then, send that same amount, plus the minimum you were already paying, to the next lowest balance debt. When that is paid off, send the combined amount from the first two to the next lowest, and so on.

The benefit of this approach is that it allows you to see your progress. Each month, you are still sending the same amount of money to all of your bills, but you are seeing them killed off one by one.

Since you are paying in order of low-to-high balance, rather than paying based on how high your interest is, you may find that you end up spending more overall, however. This is why Suze Orman suggests you use her strategy.

Highest Rate First Strategy

In this case, you list your bills in descending order of interest rates. You will send the minimum amount to everything but the highest rate, and send whatever extra you can to that one. By doing this, you will minimize the interest you will pay over the life of the loans. Once you’ve paid off your highest interest rate debt, move on the next, and then the next.

While this approach makes more sense mathematically, it can get a little discouraging to feel as though progress is very slow. Finding a way to track your progress—like with a debt payoff thermometer that you post in your home—can help to make this strategy feel more exciting.

The Bottom Line

The main thing to remember when prioritizing your debts is that any strategy is better than none. Be proactive by contacting your lenders, and find ways to motivate yourself to pay down your debts. Your consistency will pay off.

Photo credit: Alan Cleaver

Related Articles:

1. The Debt Snowball Method for Reducing Debt
2. Is Dave Ramsey’s Debt Snowball the Best Way to Pay Off Debt?
3. When to Think Twice About Paying Down Your Debt

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One way you might end up with a retirement account is by inheriting an IRA. If a loved one passes and leaves you the assets in an IRA, you can use these assets to your advantage. However, it’s important to realize that there are some interesting rules about how an IRA is passed on — and how you can withdraw money from it.

Beneficiaries

There are many rules when inheriting an IRA

The first, and most important step is to understand the rules about beneficiaries. In this case, the beneficiary’s relationship to the deceased person has a major impact on how the IRA is treated, including whether or not you can continue making contributions to the account, and how and when you can (or must) make withdrawals from it.

Spousal IRA inheritance. The easiest transition is when a spouse is the inheritor. You can choose to designate yourself as the owner, or as a beneficiary. By choosing to name yourself as the owner, you can roll the IRA over into your own IRA – at which point it becomes yours and all the normal traditional or Roth rules will apply to it (contributions, withdrawals, and other rules).

You may also choose to own the account as a beneficiary. This allows you, as a spouse, to withdraw from the IRA with no 10% penalty. For some of those who are not 59 1/2, it can be a good idea to continue to own the IRA as beneficiary so that there is access to the money. Realize, though, that if the IRA is a Roth, the five-year rule applies to when the original owner opened the account. Withdraw before the five-year rule is met, and you could pay income tax (but not a 10% penalty) on the withdrawal.

Non-spousal IRA inheritance. Non-spouse beneficiaries also receive the ability to withdraw without a 10% penalty, no matter their age. However, they have to start taking distributions by December 31 of the year after inheriting. Withdrawals and required minimum distributions can become complicated when you inherit an IRA from someone who wasn’t your spouse. Here is a good explanation from SmartMoney.com. You may also find it helpful to seek professional assistance from a financial advisor or tax pro.

Rules are also different if an estate is involved. An IRA that benefits the estate has to be entirely withdrawn within five years. The exception is if the deceased was already taking required minimum distributions; distributions are then figured based on what the deceased would have been taking.

Realize that the beneficiaries named on the IRA forms trump whatever is in the will. If no beneficiaries are named, the IRA is transferred using whatever rules the custodian has for the occasion.

Transferring Inherited IRAs

When an inherited IRA is transferred from one custodian to another, you need to do what is called a “trustee-to-trustee” transfer. If you don’t do this step right, it can look like you withdrew all of the money — and it can cost you. If you aren’t the spouse, the IRA has to be retitled. This process, for inherited IRAs, requires that you include the name of the original owner and your own name. So it would be worded as: “Name of Original Owner, deceased, inherited IRA for the benefit of Name of Heir, beneficiary.”

It’s a big name, but important. You can also split an IRA, and you should do so if there are multiple beneficiaries. Each beneficiary should receive his or her own inherited IRA for the proper amount. That way, you avoid problems down the road, and each beneficiary is responsible for his or her own inherited IRA.

There are a number of rules associated with inherited IRAs (See IRS Pub 590 for full details), and it’s a good idea to have a knowledgeable attorney or advisor help you with the transfer, and help explain your options. Spouses have more options, and it’s a good idea to get advice before you do anything with an inherited IRA.

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