October 10, 2005

3 Money Rules of Thumb

by: Kimberly Lankford

1. Close Credit Accounts You No Longer Use

Verdict: Thumbs down.

Assuming your history with those accounts is good, cut up those cards, but keep the accounts open so you don't hurt your credit score.

When lenders decide whether to extend credit, they look at how much of your available credit you're already using - poetically called your utilisation ratio.

Let's say you have five credit cards, each with a RM10,000 limit, and your total balance is RM6,000. That gives you a utilisation ratio of 12 percents - not bad, in the eyes of lenders. But if you close four of those accounts, your ratio suddenly jumps to 60 percents - not good.

"You haven't borrowed an additional cent but on paper it looks as if you're closer to being overextended". Ideally, you should keep your utilisation ratio below 50 percents.

2. Buying a Car is Always Cheaper Than Leasing

Verdict: Thumbs down.

It depends on your driving habits, the car you're considering and what else you could do with the money.

One big benefit of leasing is that you can keep more money in your pocket. You don't need a down payment, and your monthly note is lower - nearly half as much on some luxury models. Invest the difference, and you could come out ahead.

For a fee, you can get software to compare leasing costs to buying costs on the internet.

In general, if you buy a new vehicle as soon as your old one is paid off, leasing can save your money. Buying is better deal if you tend to hang on to your car.

3. Set up an Emergency Fund to Cover Three to Six Months of Expenses

Verdict: Thumbs up.

You might be able to get by with a smaller stash - say, two or three months of expenses - as long as you have a low interest home equity line of credit. When calculating your expenses, don't forget to include the deductible on your car or homeowners insurance policy, whichever amount is higher.

The idea is to keep enough cash on hand so that you don't have to sell shares or rack up credit card debt if you have an emergency- but not so much that you lose out on the higher returns you can earn on longer-term investments.

Emergency money needs to be safe and accessible, which means keeping it in a bank money-market account or a money-market fund with cheque-writing privileges.

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