When it’s time to cash in your AAdvantage miles for an award flight, you’ll want to understand how to make your rewards go farther. Here’s everything you need to know to get the most out of all those hard-earned miles. Award types Before we dig into the details of American Airlines’ various award charts; one important caveat: The...
Alisha McDarris is a writer at NerdWallet. Email: email@example.com.
The article Your Guide to the American Airlines Award Chart originally appeared on NerdWallet. [...]
If you’re a recent graduate, the last thing you want to think about is the past, right? It’s all about the future.
However, if you took out student loans, the time to look back is now (actually, it probably should have been sooner, but let’s not quibble over semantics).
If you’re like most grads, you took out multiple student loans over your four(ish)-year career as a college student — consumers with educational debt had an average of 3.7 student loans, according to a 2017 Experian report.
Unfortunately, 11.4% of aggregate student debt was 90 or more days delinquent or in default in the fourth quarter of 2018, according to the Federal Reserve. That means there are a lot of people not paying their student loans on time — or perhaps at all.
But you won’t be one of them, right?
You just need a little help figuring out who you owe… and how much… and when it’s due.
Oh, and how long before these loans are paid off and out of your life (spoiler alert: you might get a temporary reprieve on payments if your loan has a grace period).
Fortunately, you have The Penny Hoarder to help you organize your student loan debt in way to pay it off in a timely, cost-effective way so you can get back to that future thinking.
How Much Do I Owe in Student Loans?
It would be nice if you could put a simple, smallish figure down on paper and be done.
But student loans can get complicated, and you should have all the essential information before you formulate a plan of attack for paying them off.
We’ve come up with the list of questions you should be able to answer about both your federal and private student loans to truly know how much you owe. That could mean a few trips to the interwebs, a close reading of your loan agreement and/or a call to your lender. Let’s get started.
1. Who Is My Student Loan Servicer?
There’s no sense in knowing how much you owe if you don’t know who you owe it to, right?
Federal Student Loans
Dig out your FAFSA (Free Application for Federal Student Aid) login and password to sign onto studentloans.gov. Here you will find a list with your federal student loans.
Each entry will also indicate the company hired by the federal government to service the loan — look for names like Navient, Great Lakes or FedLoan, three commonly used loan servicers. Any further interaction in regards to your loan should go through your loan servicer.
If you need more info about your loans — such as when your loan was disbursed — log into the National Student Loan Data System (NSLDS.ed.gov).
“Use that same federal student aid login and password to login,” said Heather Jarvis, a North Carolina attorney who specializes in student loans. “That site is much less formatted and is less easy to read than studentloans.gov, but it does have more information.”
Private Student Loans
Private student loans are more difficult to track — especially if you accepted them without much thought as a 17-year-old … and you lost any paperwork four moves ago … and your loan’s been sold.
If you’re at a total loss for who to contact, start with your alma mater.
“The college admissions office is going to know who paid the tuition,” said Melinda Opperman, executive vice president of credit.org. She recommended asking for a duplicate copy of the loan agreement, which the college should have in its records.
“If they can’t provide that, at least [ask for] the phone numbers of who to get in touch with,” Opperman said.
No luck with your college? There’s one more source that will have your private loan info: your credit report, which you can order online for free from annualcreditreport.com.
“Look for all the education loans listed on your credit report, and then compare the loans on your credit report to the loans that you’ve identified as federal,” Jarvis said. “If there are any loans on your credit report that are not on studentloans.gov, it’s because they’re private student loans.
“And your credit report will list the name of the lender.”
2. What Is the Principal Amount?
Regardless of the type of loan, it’s important to know two things about the principal:
What is the amount you initially borrowed?
What is the current amount of principal you owe?
If you’ve made any payments toward your loan, you should be aware of whether the payments were going toward interest or principal. These totals should reflect that. Knowing both the initial loan amount and current principal will be important for calculating interest.
Federal Student Loans
The fed’s information about your loan balance could be up 120 days old, so you should contact the lender directly for the updated amount.
Private Student Loans
For private loans, it’s best to contact the lender directly for the current principal, although your most recent statement should also have this information.
3. What Is the Interest Rate?
Knowing the interest rates can help you prioritize which loans to tackle first. Paying off in order of the highest to lowest interest using the debt avalanche method will save you money in interest over the long term.
Federal Student Loans
The feds don’t consider your college career collectively — each academic year you start anew. The same goes for your interest rates.
“The interest rates set for federal student loans are set annually for the upcoming academic year, and they’re not always the same from one year to the next,” Jarvis said. “So people might have a variety of interest rates.”
The good news about federal loans? Unless the loans were issued before 2006, your interest rate will be fixed. So that rate will remain the same over the life of the loan.
Private Student Loans
Private student loans are less likely to have fixed interest rates, so you’ll have a little more homework to do with them.
“Often, private loans are at variable interest rates, so they can change over time,” Jarvis said. “Everyone who has a private loan at a variable rate should know a couple of things: They should know how often the rate changes and they should know whether there’s any cap on how high the rate can go.”
Making an extra payment—using a tax refund, perhaps—lowers the amount of interest you pay over the life of the loan. Specify to your lender that the extra money should be applied to your loan balance.
If your interest rate seems really high, that’s probably because it was based on your credit score — and lack of credit worthiness as a college student. Once you have a career with a steady income, you may consider refinancing your loans since you could qualify for lower interest rates.
4. What Are My Payment Plan Options?
Now that you know the amount you owe and the interest rate, you should find out how to start paying it off.
Ask your lenders what the estimated payoff dates are to help set your goals and prioritize payments.
Federal Student Loans
If you let the government decide, it will automatically base your payments on the standard 10-year loan repayment plan. But that isn’t your only option.
“Folks tend to have the misunderstanding that they have a monthly payment that’s the required payment on a student loan,” Jarvis said. “And with federal student loans, that’s not the case.”
If you’re unable to make the proposed amount, you have four main options for lower payments that take your income and expenses into account:
Income-Based Repayment Plan (IBR)
Income-Contingent Repayment Plan (ICR)
Pay as You Earn (PAYE)
Revised Pay as You Earn (RPAYE)
You can learn more details about income-driven repayment plans in this article, but Opperman warns that these plans come with conditions that you should discuss with your lending service provider before you sign.
“When the student starts making smaller payments, it’s going to take significantly longer for them to pay,” she said. “And the balance may be growing — much like what happened for some people with the to [...]
Life insurance is one of those touchy subjects no one likes to talk about, let alone research or recognize its existence. In a world that’s all about living your best life, life insurance just doesn’t fit.
We’re here to tell you that not only is it OK to talk about life insurance, but finding the right type of policy can provide you with peace of mind.
One option to consider is whole life insurance.
What Is Whole Life Insurance, and How Does Cash Value Work?
So what is whole life insurance?
Whole life insurance is a type of permanent life insurance that pays out a benefit to the individual(s) you list as the recipients for your policy when you die.
But part of your policy goes toward a cash value component, which is basically a tax-deferred savings account you can take advantage of later in life.
You can use the cash value to:
Pay your premiums.
Take out loans at lower interest rates than you’d get from a bank.
Supplement your income, especially in retirement.
Create a new investment portfolio.
Whole life insurance is a guaranteed payout that you can’t outlive. Your beneficiaries will receive the payout upon your death unless you fail to make payments or cancel your policy (and pay expensive cancellation costs), or if your cause of death is excluded in your policy.
When you die, your heirs receive the listed death benefit — but not the cash value that rose while you were alive and making payments. Any remaining cash value goes to the insurance company, so it’s a benefit to take advantage of while you’re still alive.
Term vs. Whole Life Insurance
The biggest difference between term and whole life insurance policies is the amount of time that you are covered.
Term life insurance provides coverage for specific amounts of time, usually for set periods of anywhere from five to 30 years. But whole life insurance, as discussed above, is going to pay out eventually when you die as long as your premiums are paid.
When you choose term life insurance, you can get more coverage for lower premiums. Why? Because you’ll likely outlive your term, and the insurance company won’t have to pay out a death benefit. It also has no cash value.
Most people choose a set term life insurance, knowing they are paying a low premium purely on a policy that’s solely for financial protection in the case of their untimely death. If you look at it from a purely insurance standpoint, it’s like buying car insurance your whole life but never using it because you were never in a car wreck.
Many term life insurance policies allow you to convert your policy to whole life insurance, but you’ll typically pay a costly fee. Try to do your homework first and stick with the policy you pick.
Your premiums for personal whole life insurance are considered a personal expense, so they aren’t tax-deductible.
5 Types of Whole Life Insurance Policies
There are five main types of whole life insurance. Here’s a brief overview:
Traditional whole life insurance: Your premiums stay the same as long as you keep making them.
Single premium whole life insurance: One large lump payment you make upfront takes care of this policy.
Limited whole life insurance: You pick a set period, such as 20 years, for this whole life insurance option. You’ll still be insured your whole life, but you’ll only make payments during the set period, which means your payments are higher than they would be for traditional whole life insurance.
Modified premium whole life insurance: You pay lower premiums upfront, but they get more expensive as you age.
Survivorship life insurance: These policies allow you to insure two people and are popular among spouses. The catch? It pays out only after both policyholders have died. The benefit? It’s less expensive than paying for two separate whole life insurance policies.
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What Happens When a Whole Life Insurance Policy Lapses or Is Surrendered?
A whole life insurance policy lapses when the policyholder stops making monthly premium payments on time. The life insurance contract is labeled as no longer active, and the cash value built up on the policy is surrendered. Death benefits will no longer be paid out for these surrendered policies.
Some companies allow policyholders to restart their policies within a certain grace period and get their lapsed payments paid within this time frame. Read the fine print to make sure you understand the rules of your whole life insurance policy lapse clause. Typically, reinstatements cost more than one month’s premium payment.
Whole Life Insurance Pros and Cons
When you’re deciding whether a whole life insurance policy works for you, you have to weigh the pros and cons. The hard part? Decide what works best for you in your current financial situation while also weighing what works best in the long term for your beneficiaries.
What’s Good About Whole Life Insurance
Whole life insurance is appealing for several reasons, including:
It’s guaranteed and permanent. That means your beneficiary will receive a payout upon your death, no matter when you die, as long as you’ve made your payments and your cause of death isn’t excluded from the policy.
It’s a good option if you have dependents who will need a source of income after you die. The guaranteed payout makes it an appealing option for people with a disabled child, for example.
Your payments are usually fixed throughout the life of the policy. There are options to choose limited whole life insurance policies that have a set term limit or policies that change once you turn 65.
You can take advantage of the cash value while you’re still alive. Just keep in mind that the cash value takes a long time to build up, meaning you’ll likely be much older before you can take advantage of this benefit.
What’s Bad About Whole Life Insurance
Here are a few drawbacks to consider if you’re thinking about whole life insurance:
Higher premiums: You pay more for the guaranteed payout and lifelong coverage than you would for a term life policy.
The cash value is lost upon your death. While some people make the case that whole life insurance can be used as a long-term personal finance retirement planning tool, the fact that money is lost when you die doesn’t help this argument.
You’ll pay large fees to cancel the policy and withdraw the cash value. You’ll also pay income taxes on any earnings on the policy beyond what you paid for your premiums.
How to Choose Between Whole Life Insurance vs. Term Insurance
We get it. This is a difficult task no matter what. Life insurance company terms and conditions and the products and services they offer are complicated and difficult to digest. But here’s a quick summary of when to consider whole life insurance vs. term insurance.
Consider term insurance if:
You want to replace your income during a specific amount of time, e.g., while you’re raising children, paying off your mortgage, etc.
Need the lowest pre [...]
If you want a truly unique travel experience on your next trip, consider bypassing the international hotel chains and corporate tour companies. Instead, opt for leaning on the locals. The internet is full of peer-to-peer networks that can connect visitors with residents who are willing to share their home, couch, backyard, car and even their...
Meghan Coyle is a writer at NerdWallet. Email: firstname.lastname@example.org.
The article Beyond Airbnb: Your Guide to Peer-to-Peer Travel Platforms originally appeared on NerdWallet. [...]
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If you’re anything like me, you’re perpetually swinging between vowing to cut all unnecessary spending cold turkey and humming “Treat Yo’self” as you order your third UberEats meal in 12 hours.
Which one you’re doing depends on the day — and how long it’s been since your last paycheck.
The result: a pitiful savings account balance, scrimping to pay the minimum on your credit card and feeling like you’re still living paycheck to paycheck even though your income has come a long way since your first job out of college.
You know there is a way to solve this problem. You know that if you just create a budget — and by some miracle, stick to it — you could finally get the financial freedom everyone else seems to have already figured out.
You also know budgeting is a buzzkill.
But if you give it a genuine shot, we promise that we will, too. We’re in this together.
How to Budget in 4 Easy Steps
Creating a budget doesn’t have to be a grueling process. If you take some time to prepare and learn how to budget in a way that makes the most sense for your lifestyle, you can start on the road toward controlling your personal finances in no time.
We’ve laid out exactly what you need to do in four pretty simple steps.
Step 1: Know How Much You Make and Spend
Before you can make a budget that works, you need to know your numbers. We like to focus on a monthly budget, since most bills are due once a month.
Exporting your statements to a spreadsheet or using highlighters on printed statements can help you see patterns in your income and spending habits.
Log in to your bank account online, and grab your last couple months’ worth of bank statements. While you’re at it, grab your credit card statements, too.
How to Figure Your Monthly Income
First, write down your monthly income.
This should be your take-home pay for the month. That’s the money you earn minus deductions for taxes, Medicare, Social Security, health insurance contributions and allocations to retirement accounts like your 401(k) or Roth IRA.
This is easy if you have a full-time, salaried job. If you are paid by commission, work hourly or have some other kind of irregular income (like freelancing), use an average of the last six months to get a rough idea.
Self-employed budgeters can benefit by taking a step back each quarter to examine their income. “If you’re paying quarterly taxes anyway, you have this natural stopping point to look,” says Lillian Karabaic, CEO of Oh My Dollar! “It’s a good way to check on the health of your business.”
But don’t just stop there. Add any extra money that comes in from your side hustles. Child support payments. Recurring bonuses or stipends. Financial aid payments. Include it all.
How to Figure Your Monthly Expenses
Your next step is the painful part: It’s time to log your monthly expenses.
Start with the recurring monthly stuff, which may include:
Your rent or mortgage
Cell phone bill Internet, cable TV and other monthly subscriptions (think: Netflix and Spotify)
Don’t forget to include non-monthly but recurring expenses, like the following:
Vehicle registration fees
Credit card fees
Professional association dues
Annual subscription renewals
To incorporate these non-monthly but regular expenses into your monthly budget, add up the total cost for a year, then divide that number by 12 to find out how much they cost each month, according to Bridget Todd, COO of The Financial Gym.
“You might open a separate bank account for your annual expenses,” Todd said. “Then when the bills come, you don’t have to adjust your spending. It’s similar to saving for Christmas shopping” throughout the year.
From here, you’ll want to start adding up your discretionary expenses. Analyze your spending habits. How much are you spending on shopping, eating out and drinks with friends?
To get a full picture, you can put these things in categories. For example, movies, concerts and museum visits can all go under entertainment. Your gym membership, yoga membership and the drop-in rate on that one CrossFit class can all go under fitness.
Look at a few months of statements to get an average for this part, too. That will give you a more accurate picture of your finances.
Step 2: Set Your Financial Goals
If you’re going to succeed at this budgeting game, you need to have an idea of what you’re hoping to accomplish.
It can be a simple short-term savings goal like funding a vacation with your college besties. Or a long-term one, like learning to budget so your kid can go to college without student loan debt. And don’t forget about funding your retirement savings goal.
Set a goal, and make it a motivating one — your financial plan could be the only thing that stops you from swiping your debit card to buy yet another pair of shoes this weekend.
Next, get your priorities in order — literally. Write them down in order from most to least important to get an idea of where you want your money to go.
You might not get your priorities right the first time, and that’s ok. It’s challenging to choose one option over another, and if the first list doesn’t work well, you can always rework it. Work to find a balance between “fun” and “responsible” spending.
If you see any areas where your spending is out of line with your goals, now’s the time to fix it by outlining a new budget that directs more of your income to your top priorities.
I take it a step further and mix my financial goals with my personal ones.
For example, I tend to overspend on restaurant meals. But budgeting less for eating out means I cook more healthy meals at home, so I save while staying on track to accomplish my weight loss goals, too. Then, I can use the money I save to build up my emergency fund or pay down debt a bit faster and continue toward my goal of becoming debt-free.
Step 3: Find Your Favorite Budgeting Method
Once you have a complete picture of your finances, it’s time to pick the budgeting method that works best for you. The one you choose will depend on how much time and energy you have to devote to it.
If you feel comfortable creating an old-fashioned budget worksheet in Excel, you can do that. We’ve got a few super simple ideas you can try if charts make your eyes glaze over.
But even after you’ve picked your favorite budgeting method, don’t be afraid to bend it a little to fit your financial situation.
You don’t have to spend several hours each month working on a budget. The easiest way to budget is to grab a pen and paper and simply write down how much you make and how much you need to spend on the essentials — like housing, utilities, food and debt repayment. You save the rest.
When you make a budget, keeping it on a sheet of paper somewhere visible to you will remind you to rein in your spending.
That’s it. You’re done.
Need a little more motivation than a blank sheet of paper? Here are five ideas for creating a bullet journal budget.
The zero-based budget takes the bare-bones budget one step further. The goal here is to get to zero at the end of each month. It helps you account for each dollar on the way.
Write down how much you make, and divide it to cover all your bills, savings and discretionary spending until you hit $0 at the end of the month.
Although this plan encourages you to get down to nothing, the idea isn’t to spend without regard; it’s to make sure every dollar goes exactly where you intend for it to go every month.
This takes all the guesswork out of deciding which expenses should stay in your budget and which ones need to go.
With the 50/20/30 plan, 50% of your money goes to essential expenses like housing, utilities and your car payment. From there, 20% will go to financial goals like savings and investments. The final 30% is yours to spend [...]
Catching a wave after your flight? If you’re planning to bring your own surfboard to your destination, you could face some hefty checked bag fees that usually can’t be avoided, even with an airline-branded credit card that offers free checked baggage. Let’s cut to the chase: The best airlines for surfers are American Airlines and Alaska...
Meghan Coyle is a writer at NerdWallet. Email: email@example.com.
The article Surf’s Up, Wheels Up: Your Guide to Airlines’ Surfboard Fees originally appeared on NerdWallet. [...]
When you’re trying to decide between a Roth IRA vs. 401(k), the personal finance gods often have an easy answer for you: Do both, they decree.
Well, that’s easy if you’re swimming in so much cash that you can go on a retirement savings binge — yet don’t earn enough to disqualify you from contributing to a Roth IRA.
In 2019, someone under age 50 would need to contribute $25,000 to reach the limits for both retirement accounts. Mere chump change, right?
We get it: Most of us don’t have the resources to max out both a Roth IRA and a 401(k).
So when you decide how to allocate your retirement dollars, you have to make tough choices.
What Is a Roth IRA?
A Roth IRA is a type of individual retirement account. That means you, Dear Reader, as an individual, open the account — whether it’s a Roth IRA or a traditional IRA — and decide how to allocate your investments.
What makes a Roth IRA unique compared with traditional IRAs and most 401(k)s is that you fund it with money you’ve already paid taxes on. That means that when you withdraw it, typically once you’ve reached age 59 ½ and have had the account for at least five years, the money is yours tax-free.
Another sweet feature of Roth IRAs: While you generally have to wait to access your earnings, your contributions are yours to take at any time. While we’d never recommend taking money out of a retirement account unless absolutely necessary — and no, a dream wedding or vacation doesn’t count — your Roth IRA contributions can be a source you tap in an emergency.
What Is a 401(k)?
A 401(k) is a retirement account that’s sponsored by an employer. You can’t open a 401(k) on your own.
Unlike a Roth IRA, a traditional 401(k) is tax-deferred. That means you invest part of your paycheck before you’ve paid taxes on it and then pay taxes when you withdraw money in retirement.
A growing number of companies are now offering a Roth 401(k) option, which shares most of the same rules as a traditional 401(k) but is funded like a Roth IRA, with money that’s already been taxed.
What makes a 401(k) — either kind — especially attractive is that many employers will match your contributions — in whole or in part — up to a certain percentage of your earnings.
Whatever the amount, it’s basically free money to pad your retirement savings.
Roth IRA vs. 401(k): The Ultimate Showdown
At this point, the Roth IRA vs. 401(k) question is probably sounding complicated, because they both have some pretty sweet features. Now let’s see how they compare across six categories.
1. Who’s Eligible?
While anyone can open a regular old investment account, not everyone can open a Roth IRA or 401(k). Here are the requirements.
You don’t need a traditional job to contribute to any type of IRA, but you do need taxable income. A salary, wages, tips, bonuses, and freelance and self-employment income all count. If you’re married but don’t work, your spouse can also set up a spousal Roth IRA for you.
While you can fund a traditional IRA no matter how much you earn, a Roth IRA has income limits. (We’ll get to the contribution limits next.)
For single people, or if you’re head of household or married filing separately:
If your income is under $122,000, you can contribute the maximum amount.
If your income is between $122,000 and $136,999, you can contribute an amount that becomes gradually less the higher your income.
If your income is $137,000 or higher, you’re not eligible.
If you’re married filing jointly:
If your combined income is under $193,000, you can contribute the maximum amount.
If your combined income is between $193,000 and $202,999, you can contribute an amount that becomes gradually less the higher your income.
If your income is $203,000 or higher, you’re not eligible.
To contribute to a 401(k), you have to work for an employer that offers a 401(k). However, your employer can exclude you from participating in its 401(k) for certain reasons, such as if you’re under 21 or have worked for the company for less than a year.
Unlike a Roth IRA, a 401(k) has no income limits.
2. How Much Can You Contribute?
Both a Roth IRA and a 401(k) have limits on how much you can contribute — but the limits are much higher for a 401(k).
The maximum contribution for 2019 is $6,000 if you’re under age 50, or $7,000 if you’re 50 or older. The limits are the same for traditional IRAs. Note that if you have both a Roth and traditional IRA, your total contributions to both accounts can’t be higher than $6,000, or $7,000 if you’re over 50.
You can contribute up to $19,000 to your 401(k) if you’re under 50, or $25,000 if you’re 50 or older.
Your employer can contribute up to $37,000 or 100% of your salary, whichever is less. But hold up, money bags: The most common employer match is 50% of your contributions up to 6% of your salary.
Your employer may also make you wait to access the money it’s putting in your account, which is known as vesting. The money you contribute will always be yours, but if you leave your job before the vesting period is up, you may not be able to take the money your employer matched with you.
3. How Do the Tax Breaks Compare?
Taxes are a major factor when you’re considering a Roth IRA vs. 401(k). Here are some key differences in how the accounts are taxed.
If you were hoping to beef up your tax refund, a Roth IRA will leave you disappointed. But remember: Once you withdraw that money at age 59 ½, as long as you’ve had the account for at least five years, it’s all yours tax-free.
Suppose you earn $50,000 and contribute $5,000 to a traditional 401(k). Your taxable income for the year is now $45,000. Because you get the tax break upfront with most 401(k)s, you’ll pay taxes when you withdraw your money.
Because you fund a Roth 401(k) with after-tax dollars, it won’t change your taxable income, but you can withdraw your money tax-free when you retire.
If you expect to pay taxes in a higher bracket once you reach age 59 ½ or if you think tax rates in general will increase, maxing out your Roth IRA is smart because you lock in a lower tax rate.
4. How Do You Invest?
A Roth IRA will give you more flexibility to choose your own investments, but a 401(k) gets points for convenience.
You can open a Roth IRA through a brokerage firm or a robo-advising service. You could set it up in person if you opt for a brokerage with a brick-and-mortar location or by applying online.
You can invest your Roth IRA money however you want — in mutual funds, individual stocks, bonds and annuities.
If you prefer to choose your own investments, you’ll want to open a brokerage account. Consult with a financial adviser if you aren’t sure what investments to choose. If you prefer a set-it-and-forget-it approach, you’ll probably prefer a robo-adviser, which uses super-smart software, instead of humans, to manage your investments.
You can set up automatic transfers from your bank to make investing more convenient.
If your employer offers a 401(k), you may have to sign up for it or you may be automatically enrolled. Most companies let you enroll when you’re hired, though some smaller companies will make you wait as much as a year.
Once you’ve signed up, you’ll have to decide how much to invest and what you want to invest in. Your investment options will be limited compared with your options for a Roth IRA, but you can usually choose from several categories of mutual funds.
You can change the amount you’re contributing and your investment allocations at any time.
Find lower-cost mutual fund options by checking the fee disclosure statement, which your 401(k) plan is required to send you every year.
5. When Can You Withdraw Your Money?
Your retirement accounts aren’t supposed to be a source of quick cash, so the rules around withdrawing money can get complicated.
In general, the [...]
Saving money is all well and good in theory.
It’s pretty hard to argue having more cash in your pocket could ever be a bad thing.
But what are you saving for? After all, money is just a tool. If you don’t have solid financial goals, all those hoarded pennies might end up floating in limbo when they could be put to good use.
Figuring out where your money should go might seem daunting, but it’s actually a lot of fun.
You get to analyze your own priorities and decide exactly what you think you should do with your hard-earned cash.
Talk about adulting, right?
But to make the most of your money, follow a few best practices while setting your goals.
After all, even if something seems like exactly what you want right now, it might not be in future-you’s best interest. And you’re playing the long game… that’s why they’re called goals!
What to Do Before You Start Writing Your Financial Goals
To keep yourself from deciding your financial goals are “buy the coolest toys and cars, get deeply into debt and watch my credit score plummet” — all super easy to do — we’ve compiled this guide.
It’ll help you set goals and create smart priorities for your money.
That way, however you decide to spend your truly discretionary income, you won’t leave the 10-years-from-now version of you in the lurch.
First Things First: How Much Money Do You Have?
You can’t decide on your short- or long-term financial goals if you don’t know how much money you have or where it’s going.
And if you’re operating without a budget, it can be easy to run out of money well before you run out of expenses — even if you know exactly how much is in your paycheck.
So sit down and take a good, hard look at all of your financial info.
A ton of great digital apps can help you do this — here are our favorite budgeting apps — but it can be as simple as a spreadsheet or even a good, old-fashioned piece of paper. It just takes two steps:
Figure out how much money you have. It might be in checking or savings accounts, including long-term accounts like IRAs. Or, it might be wrapped up in investments or physical assets, like your paid-off car.
Assess any debts you have. Do you keep a revolving credit card balance? Do you pay a mortgage each month? Are your student loans still hanging around?
Take the full amount of money you owe and subtract it from the total amount you have, which you discovered in step one. The difference between the two is your net worth.
That’s the total amount of money you have to your name.
If it seems like a lot, cool. Hang tight and don’t let it burn a hole in your pocket. We’re not done yet.
If it seems like… not a lot, well, you’re about to fix that. Keep reading.
Create a Budget
Once you’ve learned your net worth, you need to start thinking about a working budget.
This will essentially be a document with your total monthly income at the top and a list of all the expenses you need to pay for every month.
And I do mean all of the expenses — that $4.99 recurring monthly payment for your student-discounted Spotify account definitely counts.
Your expenses probably include rent, electricity, cable or internet, a cell phone plan, various insurance policies, groceries, gas and transportation; and other looser categories like charitable giving, entertainment and travel.
Print out the last two or three months of statements from your credit and debit cards and categorize every expense. You can often find ways to save by discovering patterns in your spending habits.
It’ll depend on your individual case — for instance, I totally have “wine” as a budget line item.
See? It’s all about priorities.
Start by listing how much you actually spent in each category last month. Subtract your total expenses from your total income. The difference should be equal to the amount of money left sitting in your bank account at month’s end.
It’s also the money you can use toward your long-term financial goals.
Want the number to be bigger? Go back through your budget and figure out where you can afford to make cuts. Maybe you can ditch the cable bill and decide between Netflix or Hulu, or replace one takeout lunch with a packed version.
You don’t need to abandon the idea of having a life (and enjoying it), but there are ways to make budgetary adjustments that work for you.
Set the numbers you’re willing to spend in each category, and stick to them.
Congratulations. You’re in control of your money.
Now you can figure out exactly what you want to do with it.
How to Set Your Financial Goals
Before you run off to the cool-expensive-stuff store, hold on a second.
Your financial goals should be (mostly) in this order:
Build an emergency fund.
Pay down debt.
Plan for retirement.
Set short-term and long-term financial goals.
We say “mostly” because it’s ultimately up to you to decide in which order you want to accomplish them.
Many experts suggest making sure you have an emergency fund in place before aggressively going after your debt.
But if you’re hemorrhaging money on sky-high interest charges, you might not have much expendable cash to put toward savings.
That means you’ll pay the interest for a lot longer — and pay a lot more of it — if you wait to pay it down until you have a solid emergency fund saved up.
1. Build an Emergency Fund
Finding money to sock away each month can be tough, but just starting with $10 or $25 of each paycheck can help.
You can make the process a lot easier by automating your savings. Or you can have money from each paycheck automatically sent to a separate account you won’t touch.
You also get to decide the size of your emergency fund, but a good rule of thumb is to accumulate three to six times the total of your monthly living expenses. Good thing your budget’s already set up so you know exactly what that number is, right?
You might try to get away with a smaller emergency fund — even $1,000 is a better cushion than nothing. But if you lose your job, you still need to be able to eat and make rent.
2. Pay Down Debt
Now, let’s move on to repaying debt. Why’s it so important, anyway?
Because you’re hemorrhaging money on interest charges you could be applying toward your goals instead.
So even though becoming debt-free seems like a big expense and sacrifice right now, you’re doing yourself a huge financial favor in the long run.
There’s lots of great information out there about how to pay off debt, but it’s really a pretty simple operation: You need to put every single penny you can spare toward your debts until they disappear.
One method is known as the debt avalanche method, which involves paying off debt with the highest interest rates first, thereby reducing the overall amount you’ll shell out for interest.
For example, if you have a $1,500 revolving balance on a credit card with a 20% APR, it gets priority over your $14,000, 5%-interest car loan — even though the second number is so much bigger.
If you’re motivated by quick wins, the debt snowball method may be a good fit for you. It involves paying off one loan balance at a time, starting with the smallest balance first.
Make a list of your debts and (ideally) don’t spend any of your spare money on anything but paying them off until the number after every account reads “$0.” Trust me, the day when you become debt-free will be well worth the effort.
As a bonus, if your credit score could be better, repaying revolving debt will also help you repair it — just in case some of your goals (like buying a home) depend upon your credit report not sucking.
3. Plan for Retirement
All right, you’re all set in case of an emergency and you’re living debt-free.
Congratulations! We’re almost done with the hard part, I promise.
But there’s one more very important long-term financial goal you most definitely want to keep in mind: retirement.
Did you know almost half of Americans have abs [...]
Housing prices are on the rise with no signs of slowing down.
Since 2011, single-family home prices have climbed 42%. That means a house that cost $200,000 eight years ago would now cost $284,000.
With rising home prices and inflation, growing student loan debt and stagnant wages, the dream of homeownership is becoming more challenging for each generation.
But it’s not impossible.
How to Buy a House: 9 Steps for First-Time Buyers
While the road to buying a house has become more riddled with potholes and speed bumps, it’s still one you can navigate with the right savings plan, a decent credit score and a little professional guidance.
Think you’re ready to embark on your homebuying quest? Here’s how to buy a house in nine simple steps.
1. Whip Your Credit Score Into Shape
A strong credit score is crucial to securing a low interest rate on your mortgage.
Over 30 years, the most common length of a mortgage, paying just 1 percentage point more in interest could cost you big time. For example, if you bought a house with a $200,000 fixed-rate 30-year mortgage at 5% interest, you’d pay an extra $40,000 in interest over 30 years than you would have at 4%.
At a minimum, your credit score should be 620. Some mortgage lenders may approve you for a loan if your score is under 620, but prepare for astronomical interest rates and larger down payment requirements. An above-average credit score falls within the 680 to 740 range. Anything above 740 will secure you the best interest rates available.
If you have poor credit, don’t rush to buy a house just yet. You can improve your credit score over time by paying off debts (especially credit cards), lowering your credit utilization and diversifying your credit portfolio responsibly.
Paying off debt is especially important because lenders look at your debt-to-income ratio, which is your monthly debt obligations (including your estimated future mortgage payment) divided by your pretax monthly income. Lenders look for a debt-to-income ratio of 43% or lower.
2. Save for a Down Payment
Saving for a down payment while also paying off debts is challenging, but if you want to be a homebuyer, you’ll need to do both.
The age-old wisdom is that you need to save 20% for a down payment. But with the median home sale price at $232,700 as of February 2019, that would make the average 20% down payment $46,540. And in 2019, most first-time homebuyers do not have that kind of cash lying around.
In recent years, it has become more common to put as little as 10%, 5% or even 3.5% down. FHA loans, which are popular among first-time buyers (this millennial included), require only 3.5% down when your credit score is above 580.
VA loans, reserved for members of the military, veterans and some surviving spouses, require no money down but typically require a funding fee of 2.15%, which can be financed into the loan.
There are benefits to putting 20% down, however. When you put 20% down, you usually avoid having to carry private mortgage insurance, or PMI.
I currently have the luxury of paying more than $200 a month for PMI, and it is the most useless expense in my entire budget. My lender would, of course, disagree because PMI protects them in the event that I stop making my payments.
VA loans do not require PMI even if you put 0% down.
A larger down payment can also make your offer more attractive in a competitive market.
3. Figure Out Your Price Range
How much house you can afford and how much you should actually spend on a house may be two vastly different numbers.
The golden rule: Never set your sights on a house that you could afford — but that will cause you to make other sacrifices you’re not jazzed about, like cutting vacations or ruling out education.
Similarly, if you or your significant other (if you’re buying with a partner) both work, but one of you is considering a career change that could result in less income or becoming a stay-at-home parent, you should not budget using your current combined income.
Be conservative. Your home shouldn’t cost more than three to five times your annual income, but if any part of you that suspects your income may decrease in the next 10 years, stay closer to three times your income than five.
Housing expenses — including your mortgage payment, homeowners insurance and property taxes — generally should not exceed 30% of your monthly income.
4. Get Preapproved for a Mortgage
Before shopping for houses, you should shop for a lender. You can compare mortgage rates online and interview prospective lenders to find the best deal.
Ask friends, family and your real estate agent (if you already have one) for recommendations and try your own financial institution, but ultimately, go with the lender that will offer you the best interest rate on your home loan.
Then ask that lender for a preapproval letter. This is different from being prequalified. Lenders can typically prequalify you with just a few data points that they don’t verify to give you a ballpark range of the loan amount and interest rate they might offer.
But a preapproval letter is an official document that says the lender is committed to giving you a loan, assuming nothing changes in your finances. Getting preapproval takes more work, because the lender will send all of your financial documents (W-2s, pay stubs, tax returns, etc.) to an underwriter for verification.
A lender may preapprove you for a higher amount than you’ve budgeted for. Remember: Just because they are willing to give you that much does not mean you have to spend that much.
5. Hire a Real Estate Agent
The beauty of the homebuying process is that the seller will typically pay your real estate agent fees, so hiring an agent doesn’t cost you a thing, though some sellers may lower the price slightly if you purchase without an agent.
Ask family members and friends for recommendations, and always hire a buyer’s agent. These homebuying tips include several recommendations for hiring a good real estate agent who will find you the best deal on your dream home.
6. Shop for Your Dream Home
This is the most exciting step. Now you can actually set foot inside of homes and envision your life inside them. Visit open houses and go on private tours with your real estate agent, but also research houses on your own on sites like Zillow and Trulia.
But don’t be distracted by fresh paint and that hot tub in the backyard. When you’re house hunting, have a sharp eye for what really matters. If possible, bring along friends or family who know what to look for in a new house.
Cosmetic things like ugly carpet and questionable wallpaper can be changed relatively cheaply. The structural components are what you should be most concerned with. Some things to look for when you tour a home:
How’s the plumbing? Can you get hot water fast? What’s the water pressure like? Do you notice any leaks or signs of water damage? Does the basement show signs of flooding?
Is the foundation solid? Or are there issues that might require costly repairs?
How old are the appliances? Will they need to be replaced soon?
What about the exterior? When was the roof last done? Is the siding in good shape? Are the windows going to drive up your energy bill?
What’s the neighborhood like? Do you feel safe where this house is? Is there a lot of noisy traffic? Is it conveniently located near restaurants, shopping, hospitals and parks? If you have or want children, are there good schools nearby?
7. Make an Offer They Can’t Refuse
Once you have found a house that fits your needs and is within your budget, you and your real estate agent will submit an offer. Be prepared to negotiate the purchase price, especially if you envision needing to do some remodeling.
Your real estate agent likely has a number of tricks up their sleeves to make your offer more appealing — but then, so does everybody else’s agent.
The seller may make a counteroffer. You ca [...]