Category: General

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Not all debt is created equal

Death and taxes. Inevitable facts of life, right? What if I were to add debt to that famous duo? Death, taxes, and debt. It may not have the same ring to it, but for most of us, debt is just as sure a thing.

But is all debt bad? Sure, we’ve all made some bad financial decisions. Maybe you’ve recovered from yours, or maybe you’re still paying off that tropical getaway charged to your Visa. Or regretting that brand-new car smell you had to have instead of hitting up the used car section.

The thing about that new car is that it depreciates and loses its charm over time. Unlike debt. It arguably never has charm and it definitely does not depreciate. It’s the gift that keeps on giving. Or as Charles Stross put it: “Only debt is forever.”

It sounds almost romantic, doesn’t it? But as with romance, there’s a good way and a bad way to go about debt. Let’s start with the good way.

Good Debt

If you use debt correctly, you can increase your income and net worth and not break the bank.

Education

Probably nothing else is engrained in us as much when we’re growing up as the value of a good education.

A university education in the US is not cheap. And you don’t have to look far to see that student debt is growing fast in our country. However, if you’re going to have debt, let it be for something that’s worth it in the long run and does actually keep on giving:

  • A Georgetown University study found that the difference in earnings between a college grad and a high school grad can reach 1 million dollars over a lifetime. We can safely say that college grads typically earn more over their lifetime than high school grads.
  • Student loans normally have low interest rates, especially federal student loans

Mortgage

Hands down this is one of the scariest and largest purchases you’ll ever make. Financial implications and numbers aside, it’s where you will live and create memories. I walk into my backyard and see countless barbecues and birthday parties already. And I’m a relatively new homeowner. I can’t even begin to imagine the memories my house will hold ten or fifteen years down the line.

And while I still may be paying the mortgage on my house, it is good debt.

  • A home, be it a condo, house, or even a rental property that someone will call home, is an investment that will potentially appreciate in value over time. Be in debt now so your initial investment is worth more later.
  • Also, mortgage interest rates tend to be lower than interest rates for other types of debt.

Small business loans

Maybe you dream about opening up your own business. A small business is a risky venture, but if it goes well, it can drastically increase your future earnings.

Unless you have a rich uncle, however, you’ll likely need some assistance getting started. Good news!

  • SBA loans typically have lower down payments and interest rates, and flexible overhead requirements.
  • Get informed about all the available options for small business owners and entrepreneurs before making a decision.

Those forms of debt that can give you more money in the long run. But as I’ve said before, not all debt is created equal.

Bad Debt

The common denominator with debt from student loans, mortgages, and small businesses is the return those investments can give you.

Your student education will hopefully help you get more and better employment opportunities.

Your mortgage will give you real estate whose value increases over time.

Your small business loan will ideally lead to a successful business.

Let’s flip the coin now to bad debt. You have nothing to show for bad debt except for the fact that you’ve spent a significant amount of money. These types of debt typically carry high interest rates, making it hard for the borrower to pay back in a timely manner. Remember that tropical getaway that you put on your Visa? You’re not the only one.

Credit card debt

This is probably the most common form of bad debt in the United States.

With an average APR at 16.86% and average balance of $6,348, credit card debt is never kind to consumers. In fact, in 2018 alone, Americans paid 13% more in credit card interest and fees than in 2017.

Have I thrown out enough scary numbers to get your attention? Let me clarify that credit cards are not a bad thing. Many have great points and rewards programs that enable us to fly with points, get gift cards to restaurants and stores, and even get discounts and credit towards hotels and lodging. (Do you see there are other ways to get that tropical getaway?)

The key is to keep yourself from carrying a balance. That’s when interest gets charged and things get ugly. If you’d like to take advantage of the perks to wine and dine, shop, and travel (and who wouldn’t . . .), pay your statement balance off in full every month.

Payday loans

If you thought credit cards were bad, meet the devil himself. Payday loans have exceptionally high interest rates. A typical two-week payday loan will charge $15 for every $100 borrowed. This is like having an APR of 400%. Enough said. Avoid these if you can.

Auto loans

We all love the new car smell, but the truth is that as soon as you drive your new car off the dealership parking lot, it has lost value. Well, okay, unless it’s a collectible. I love old collectible cars, but if you’re like me, chances are you just gawk at them on the freeway when they hum past you and that’s as far as it goes.

We know cars are a depreciating asset, but if you live in California, chances are you need a car. You’ve got to drive to work, take your kids to school, mutter something under your breath at the guy who just cut you off . . . yep, that’s life. So, what can we do?

  • If you have a good credit score, interest rates on a new vehicle are relatively low. Those rates will increase for a used car, but they’re still lower than most credit cards out there.
  • Make sure you don’t purchase a vehicle that’s going to take you 6 or 7 years to pay off. You’ll end up paying more interest and you may end up owing more than what the car is worth. Think simple and practical.

Enduring, powerful, and feared by many. I’m talking about debt here, friends. It is a fact of life but it doesn’t have to control your life. Know the difference between good and bad debt and make the most out of your credit card. Even if you’ve made bad money decisions in the past, it’s never too late to change your habits.

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Valid reasons to cash out on your 401(k)

Man working on laptop

Man working on laptopMaybe you’ve changed jobs and forgotten about that 401(k) along with the names of your old coworkers’ kids. Or maybe you haven’t quite forgotten about it, but you thought it was best not to touch it. But life happens, right? As much as we’d all like to save money for the golden years and retire like royalty, as the one and only Mick Jagger put it, “You can’t always get what you want.”

I’m going to go into reasons why you may not want to touch the money in your 401(k). And then I’ll talk about reasons that may justify it. You’ll notice I don’t mention a dream vacation to the Northern Lights, even if you love adventures and dream of going there as much as I do. Life is short, but there are other means to get to northern Europe. But we can talk about that later over a cup of coffee (which by the way I hear is incredible in that region).

Dream vacations aside, I always prefer to hear the bad news first and end on a high note. So, let’s go into the reasons why you may not want to touch that 401(k). Drumroll, please . . .

(By the way, this is meant to be a general overview, but let’s face it: this stuff is confusing. I don’t cover every single tax law, so I urge you to consult a tax professional before you make any big decision.)

The Not-so-good: Reasons why you shouldn’t cash in on your 401(k)

Finger with sharpie drawing of a person

1. All withdrawals from a 401(k) are taxed as ordinary income, based on your tax bracket. If you make $100,000 per year from your job and you cash out the 401(k) worth $50,000 from your old employer, you will now be taxed on $150,000 instead of $100,000. Depending on your situation, this additional income may or may not put you in a higher tax bracket.

2. You will have to pay a 10% early withdrawal penalty to the IRS if you’re under 59.5 years old. This is in addition to the taxes that you owe on the withdrawal.

3. You will have to pay a mandatory 20% federal tax withholding if you take from a 401(k), whether you owe that much or not. If you overpay, you will receive a refund after you file your taxes at the end of the tax year. I’ve met a lot of people who confuse the 401(k) with Traditional IRAs. In Traditional IRAs, we can choose if we want to withhold taxes and the amount we want to withhold. We don’t get a choice if we cash out a 401(k). It’s 20% no matter what.

4. Your retirement will take a hit and it will become harder and harder to make up a savings deficit as you get older because essentially, you’ll have less time. Here are a few scenarios to give you an idea:

Scenario 1: If you’ve saved $50,000 by the time you’re 40 years old and you’re looking to retire at 65, assuming contributions of $881.07 per month and an interest rate of 7%, you will have amassed $1mm by the time you retire.

Scenario 2: If you cash out your 401(k) and don’t start saving until you’re 45, you will need to save $1,919.66/month in order for your account balance to be at $1mm by the time you’re 65.

Scenario 3: If you start with nothing at age 45 and contribute the same as you did before ($881.07/month), your account balance is projected to be $458,973 at age 65. This is a difference of $541,027 . . . all because you cashed out $50,000 and missed 5 years of contributions and compounded interest! Now if you cashed out the $50,000 at 40 but continued to save $881.07/month, your projected account balance at 65 is $713,730. This is still a difference of $286,270!

Do you need that cup of coffee yet? Stick with me. Now we’re getting to reasons that would warrant you cashing in on that 401(k).

Money at your disposal!! Not bad for a first pro, right? OK I know, it’s more complicated than that. I just wanted your eyes to light up for a brief moment.

 

Reasons why you may want to cash in on your 401(k)

Lady shrugging her sholders

Reason #1: You need to pay off or pay down debt that’s crippling you financially.

Medical Debt

And back to reality we go! Medical debt is no joke. Did you know one million medical bankruptcies are filed a year in our country? But we’re not here to talk about why. Let’s talk about how to avoid that situation.

Disability

I know a dentist who spends $3,000 a month on disability insurance. His, neck, arms, wrists, and hands are so important that if something were to happen to them, he’d have to close his practice and say goodbye to his patients of 30+ years. That’s a lot of money to pay every month for a big what-if, but he’d be taken care of should something ever happen.

If you’re like most of us, you don’t plan for accidents that would leave you disabled. (And have you ever thought about how much your wrists are worth? OK, I digress.) The point is, disability insurance probably isn’t even on your radar, is it? But that doesn’t mean we can’t become disabled. What if something were to happen to you that prevented you from doing your job?

Yep. You could cash in on that 401(k) to get you by. Let’s go to the nuts and bolts, shall we?

If you’re disabled, you may qualify for an exemption to the 10% IRS early withdrawal penalty. OK, one piece of good news! In the event of a disability, that’s one con of cashing in on your retirement that may not apply to you. But you know that the IRS has this condition laid out in very specific terms. You wouldn’t expect anything less from Uncle Sam, would you? According to the IRS, “…an individual shall be considered to be disabled if he is unable to engage in any substantial gainful activity by reason of any medically determinable physical or mental impairment which can be expected to result in death or to be of long-continued and indefinite duration. An individual shall not be considered to be disabled unless he furnishes proof of the existence thereof . . ..” You need a signed statement from your physician as proof.

If you’re like most of the population and don’t have disability insurance, or if it’s not enough to pay the monthly bills, this can go a long way towards getting you back on your feet.

You are still responsible for paying taxes on it though. (Go back to the Not-so-good section above for more on this.)

Other Medical Debt

Thankfully, not all trips to the hospital have to end in lifelong disabilities. But these days, they do tend to end up in astronomical medical bills.

I read a story about a woman who got stung by a bee and wound up with a $12,000 bill for her trip to the emergency room. A bee sting. $12,000. Ouch on so many levels. And if you’re grappling with something more than a bee sting and strict insurance policies, you could be facing thousands more in debt.

If you ever find yourself in this situation, you will not have to pay the 10% IRS early withdrawal penalty as long as your unreimbursed medical expenses exceed 10% of your adjusted gross income. I truly hope you don’t get to this point, but if you do, this may help you avoid having to declare bankruptcy.

Credit Card or Personal Loan Debt

Credit card changing hands

So maybe you have credit card debt because of medical bills. Or maybe because you took that dream vacation to see the Northern Lights. (Sigh.) I have some European friends who will take out loans every year to take a month-long vacation somewhere. (Let’s not even talk about how Europeans get a minimum of 25 days of vacation every year, nor how most Americans don’t even use up their even fewer vacation days.)

Whatever the reason may be, if you have high interest credit card or personal loan debt, cashing out on your 401(k) may be a good idea.

Average credit card interest rates are between 13-15%. If you fail to make on-time payments, the average interest rate jumps to 27-29%! You don’t have to be a finance expert to see that paying off that kind of debt will take a long time and a ridiculous amount of money. I’ve described one scenario in case you’re like me and like examples to better understand things:

Scenario: Let’s say you have a balance of $5,000 and an interest rate of 15%. According to the Bankrate calculator, if you make minimum payments of $100/month (or 2% of the balance), it will take you 27.5 years to pay it all off. In the end, you would have spent a total of $12,517.52 to pay off $5,000 of debt! In this scenario, it probably would’ve been a good idea to pay the penalties and taxes of cashing in on your 401(k) to use it to pay off your credit card balance. Any extra can be used to build up your emergency fund so hopefully you don’t go back into credit card debt in the future.

And in case you were wondering, the average credit card debt in 2018 is $5,700. If you’re not sure whether your debt merits cashing in on your 401(k), speak with a professional and learn how to save money while paying off credit card debt here.

Also keep in mind that your credit score affects your interest rates. You can learn ways to improve your credit score for the future so you don’t fall victim to the bank and ridiculous interest rates. We know the house always wins, but they don’t have to win THAT much.

Reason #2: You may be in a lower tax bracket right now.

Since none of the money in a 401(k) has been taxed, you will have to pay taxes whenever you withdraw the money. None of us has a crystal ball, but if you think taxes will be higher by the time you retire AND there’s a justifiable reason to pull out that money, then you might potentially save a little bit in taxes.

Scenario: Let’s say you were making $120,000/year before taxes and you were putting away 10% of your paycheck to the 401(k), so $12,000/year. To simplify things, we’ll assume that there are no other deductions, exemptions, or credits. In this scenario, you will have to pay taxes on $108,000. Based on the 2018 tax brackets, you would be in the 24% federal tax bracket. Got it?

OK, now things get a little gloomy. There are cutbacks at the company, etc. and you are laid off at the beginning of the year. You’ve received one paycheck of $10,000 (before taxes) and contributed $1,000 to your 401(k) so far in the year. Assuming you didn’t work for the rest of the year, you will have to pay taxes on $9,000 which equates to the 10% federal tax bracket. Since all 401(k) withdrawals are taxed, everything you pull out will be added to your income for the year. The 24% tax bracket in 2018 maxes out at $157,500. If you want to remain in the 24% tax bracket, you can potentially pull out $148,500 ($157,500 – $9,000). If you want to pay taxes at 22%, which maxes out at $82,500, you can potentially pull out $73,500. Of course, things are never super straight-forward, especially when we’re dealing with the IRS, so make sure you consult a tax professional.

And remember, if you’re under 59.5 years old, you may have to pay an additional 10% IRS early withdrawal penalty. (There are some exemptions, so again I urge you to consult a professional.)

Reason #3: You don’t have a job and need to pay the bills.

Man sitting on couch with head in hand

Yay! Life doesn’t care that you’re unemployed and you get to pay your bills! (Please note the sarcasm oozing through my fingers as I type this.) Obviously, this will give you instant cash to pay your monthly bills and hopefully, it will last until you find your next job.

You will ideally have an emergency fund consisting of 6 to 12 months of living expenses. If you don’t have any liquid assets and can’t or don’t want to borrow money from family/friends (this can be awkward and lead to more problems you don’t need), then this is pretty much a necessity. This is a great example of why saving towards an emergency fund should always be a top priority.

In Conclusion . . .

Let me be clear that I’m not trying to convince you to cash in on your 401(k). My goal is to inform you, share some experiences, and help all of us make better, more informed decisions. Things are never black and white. (In fact, the Northern Lights are blue, green, yellow, pink . . . my apologies, again I digress.)

Explore all your options and consult a tax professional who knows your complete financial situation. I hope this has helped you evaluate your options and if you ever want to discuss any of this over a cup of coffee, I’m an email or phone call away.

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Student loan forgiveness program guide

fireworks by the water

fireworks by the water

For many, student loans represent a significant investment in an individual’s future. Borrowing to complete an undergraduate, graduate, or professional degree program is often the only means to pay for the cost of higher education, as the price tag continues to increase at public and private institutions alike.

Currently, more than 44 million Americans have outstanding student loan debt, totaling over $1.4 trillion among them, and these figures make it hard to fathom how student loan balances will ever be paid off.

Fortunately, some student loan borrowers have access to valuable forgiveness programs that offset the burden of paying for student debt over the course of several years. In this guide, borrowers can learn about what student loan forgiveness is, the available student loan forgiveness programs, caveats to forgiveness, and how private student loans are impacted.

What Is Student Loan Forgiveness?

Student loan forgiveness is the process of having outstanding loan balances canceled after a period of on-time, consistent monthly payments. Whether in full or in part, student loan forgiveness means that a borrower has the slate wiped clean and there is no longer an obligation to repay a remaining balance.

The cancellation of student loan debts takes place through the borrower’s student loan servicer, but the federal government via the Department of Education takes on the financial responsibility of student loan forgiveness. Students may be eligible for loan forgiveness based on their employment, their career field, or their selected repayment program.

Student Loan Forgiveness Programs

There are several student loan forgiveness programs available to qualified borrowers through the Department of Education, including Public Service Loan Forgiveness, Teacher Loan Forgiveness, Income-Driven Repayment Forgiveness, and Perkins Loan Cancellation.

Public Service Loan Forgiveness

Under the Public Service Loan Forgiveness program, also referred to as PSLF, individuals who borrowed federal student loans to help pay for their education who work in a public service position may have outstanding balances forgiven after a period of ten years of repayment. The program started in 2007 and is made available to qualifying workers, like teachers, military personnel, nurses, and firefighters, who hold a job in a non-profit organization or the government.

To qualify, borrowers must have worked in a qualifying field for at least ten years and made payments on their federal student loans for at least the same amount of time. Employment with a qualified organization must be full-time, which means at least 30 hours per week. At this time, only federal direct loans are eligible for PSLF, but a consolidation of other types of loans may indirectly provide loan forgiveness to some qualified borrowers. After the 120th payment is made, borrowers may submit an application to their federal student loan servicer.

Teacher Loan Forgiveness

Individuals who borrowed to help pay for their college degree may qualify for teacher loan forgiveness through the Department of Education. Through the teacher loan forgiveness program, borrowers who work as teachers on a full-time basis may qualify to have up to $17,500 in direct or Stafford student loans forgiven. Eligible teachers must work in a low-income public elementary or secondary school, and they must have worked in that environment consecutively for the last five years.

While direct and Stafford loans are eligible for the teacher loan forgiveness program, borrowers must have taken out their first loans on or after October 1, 1998. Borrowers who believe they are eligible for teacher loan forgiveness may submit an application directly to their student loan servicer after the five years of consecutive, qualifying employment is complete.

Forgiveness Via Income-Drive Repayment

The federal government also offers student loan forgiveness to borrowers who elect to participate in an income-driven repayment program. Through these repayment options, which include income-based, income-contingent, Pay As You Earn and Revised Pay As You Earn, a borrower’s monthly student loan payment is capped as a percentage of monthly discretionary income, recalculated each year.

At the end of the repayment term, either 20 or 25 years, the remaining balance is automatically forgiven so long as borrowers have made consistent, on-time payments. To apply, borrowers must contact their federal student loan servicer directly to ensure they are on the most appropriate repayment program and are ultimately eligible for income-driven repayment forgiveness.

Perkins Loan Cancellation

Certain borrowers who show an exceptional financial need at the time of applying for federal financial aid may qualify for Federal Perkins Loans. These loans are low-interest federal student loans made available to both graduate and undergraduate students, up to certain limits. Perkins loans are only offered through participating schools, and the college or university offering the loan is the student’s lender, not the federal government.

Borrowers with Perkins Loans who work in certain types of public service or certain occupations may qualify to have a percentage of the loan canceled after each year of employment. Perkins Loan cancellation is currently offered to volunteers in the Peace Corps or ACTION program, teachers, members of the U.S. armed forces, nurses or medical technicians, law enforcement, Head Start workers, child or family services workers, and professional providers of early intervention services. To apply for Perkins Loan cancellation, borrowers must contact the school from which the original loan was acquired.

Special Considerations and Drawbacks

While student loan forgiveness can ease the burden of large student loan balances, there are caveats. First, student loan forgiveness tied to an income-driven repayment plan has certain tax implications for borrowers. At the time outstanding loan balances are forgiven, a borrower is taxed on that amount as income.

As an example, for an individual with a 25% income tax rate who has $30,000 in student loan debt forgiven may owe $7,500 in income tax the year the balance is canceled. Fortunately, borrowers who qualify for Public Service Loan Forgiveness, Teacher Loan forgiveness, or Perkins Loan cancellation are not taxed on any balance forgiven.

Additionally, borrowers who plan to utilize a federal student loan forgiveness program are susceptible to legislative changes that could severely impact their chances of being released from obligations. In recent months, student loan forgiveness for all current programs has been debated in Congress, leaving some borrowers weary of banking on forgiveness as part of their long-term financial plan.

There is no prediction that can be made as to what will take place with any of the student loan forgiveness programs, but borrowers should be aware that any or all of these benefits may disappear in the future, leaving the responsibility to repay student loans fully on their shoulders.

Finally, student loan borrowers who plan to use student loan forgiveness through PSLF or teacher loan forgiveness often work in career fields that offer lower earning potential over a lifetime. Taking a smaller annual income is beneficial in qualifying for loan forgiveness, but it may lead to challenges in setting aside savings for long-term financial goals.

Each loan forgiveness program requires years of on-time payments before loan balances are forgiven, so it is important for borrowers to weigh the pros and cons of career decisions in advance.

Forgiveness for Private Student Loans?

All student loan forgiveness programs mentioned in this guide are relevant for student loan borrowers who have federal student loans, or those originally provided through the Department of Education.

Private student loans offered by financial institutions not tied to the federal government do not currently qualify for student loan forgiveness under any federal program. There are, however, rare instances where student loans provided by private lenders may be canceled.

Borrowers may be able to have private student loans discharged through bankruptcy proceedings, but only when they are able to prove that the monthly payment will impose an undue hardship for an extended period of time. Each bankruptcy court varies by state, and this means that the tests used to evaluate undue hardship also varied greatly.

Generally speaking, if a borrower is unable to maintain a minimal standard of living for himself or his dependents based on income and expenses, including private student loan payments, a discharge through bankruptcy may be possible.

For student loan borrowers who currently have federal student loan debt, the idea to refinance into private student loans may be appealing. This is because most private student loan lenders offer extended repayment plans and variable interest rates that seem lower at the onset of a loan refinance, saving borrowers money on their monthly payment as well as on the total cost of borrowing over time.

However, because private student loan lenders do not offer any respite to borrowers by way of loan forgiveness over time, individuals should carefully consider their options with their federal student loans before opting to refinance with a private lender.

Overall, federal student loan forgiveness can be a smart strategy for borrowers who plan to work in a certain career field or select an income-driven repayment plan after graduation. When consecutive, on-time payments are made to eligible federal student loans, forgiveness can be a light at the end of a long tunnel.

However, borrowers need to be aware of the caveats of federal student loan forgiveness, including tax implications, uncertainty about the viability of forgiveness programs, and the need to take lower-income positions before relying heavily on a forgiveness program to repay student loan debt.

 

 

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Aretha Franklin didn’t have a will. What can we learn?

Probate spelled out with Scrabble

Probate spelled out with Scrabble

Aretha Franklin had a net worth of $80 million at the time of her death. Yet despite her fame, wealth, and lawyer’s attempts, she left no will or trust. She was divorced with four grown children, one who has special needs.

What are the consequences of leaving no will or trust for your loved ones?

If we look at Franklin’s case, it could mean that her four children won’t receive the inheritances as she wished, family squabbles over who feels entitled to what may delay payments, her estate could receive a large tax bill, it will have to address royalties and copyrights, and all this information will go public.

What’s more, if we look at the case of Prince, another accomplished artist who left no will, it’s been over two years since his death and his heirs have still not received anything from his estate.

Here is the issue: None of us knows when we’re going to die. And while we may not have the worth of Aretha Franklin or Prince, we surely don’t want what we do have being spent away on unnecessary court proceedings and legal fees.

So . . . what do you do?

Sitting on question mark

1. Get a will, at the very least.

This can prevent disputes among heirs. It names an executor of the will and guardian in the case of minor children. Keep in mind, however, that even with a will in place, the estate must go through probate in order to transfer property to beneficiaries.

2. Or get a living trust.

In the case of Franklin, this could have minimized the estate’s tax burden, retained privacy, passed assets to the heirs quickly, and prevented family disputes. Done correctly, a living trust avoids probate.

3. Set up a special needs trust for a disabled child.

This trust is not subject to probate court and allows your child to receive both your funds and governmental benefits.

Of course, everyone’s situation is different. Consult an estate attorney to figure out what is best for you and your family.

Nobody likes this process. It forces us to answer some tough questions, confront some rough realities, and put it all on paper. That may be why only 42% of US adults currently have a will or living trust. They think they’re going to live well into their 80s or 90s and that there’s plenty of time. But here’s the cold, hard truth: we don’t know when we’re going to die. Why not get a will or trust done now? When your time comes, whenever that may be, your loved ones will be grateful you did.

 

 

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7 ways to save money while paying back credit card debt

Picture of MasterCard

Picture of MasterCard

Excessive credit card debt can put a hold to anyone’s finances. At the worst of times, you may be forced to put your life on hold. At the best of times, it’s an annoying thorn in your side. It can be a costly problem above all. There are many ways to pay off credit card debt. The question is how to pay off credit card debt without going broke. It’s not easy, but it is possible to do it and save money.

It can be done in several different ways. Each method requires you to be resourceful and smart about your spending, and there’s a good chance that success could improve your credit. In the following sections, I’ll outline a few tips to help you save money when you pay off your credit cards.

The Debt Avalanche Method

The debt avalanche method prioritizes paying off high-interest debt. It can cover multiple credit card accounts. If successful, you can minimize interest costs and pay off debt in a shorter time frame. It’s a very popular tactic.

First, list out the balance, minimum monthly payment, and interest rate of each outstanding credit card account. Make sure to list them in order of highest to lowest interest rate. Next, start adding up the minimum payments for a total minimum payment amount for each month across all accounts. With this number in mind, take a look at your personal budget and figure out how much extra you can pay on your credit card debt. Try to come up with as much as you can, but don’t overextend yourself.

Moving forward, you would pay the minimum on each credit card account. With that extra money from your budget, you would make a larger payment on the credit card at the top of the list with the highest interest rate. After paying that account off, you would repeat the procedure with the next highest-interest credit card. By prioritizing high-interest debt, you minimize the impact of capitalization across multiple credit card accounts. This saves you money!

The Debt Snowball Method

Hand holding twenty dollar bills

The debt snowball method is basically a counterpart to the avalanche method, but there’s a key difference. It prioritizes paying off low-balance debt as opposed to high-interest debt. Some people argue about whether this saves more money than the avalanche method, but it still might be helpful depending on your budget.

The snowball method is implemented in the same way as the avalanche method. However, you would put the account with the lowest balance at the top of the list. Any extra money you have is devoted to paying off the credit card with the lowest balance. After it’s paid off, you would repeat with the next lowest-balance credit card. Some people prefer this method because it can knock out a low-balance account quickly. Then you don’t have to worry about it moving forward.

Balance Transfers

It may sound crazy that saving money on credit card debt involves opening up another credit card, but it can make sense for individuals with great credit. A balance transfer credit card is a special product that allows you to transfer old credit card debt to a new account. This account comes with a low- or no-APR introductory deal. After transferring a balance, you have a window where interest capitalizes at a lower rate. This makes it easier to pay off the debt. Paying off your debt sooner and the lower interest rate should help you save money.

There are certain credit cards that are specifically designed for balance transfers. These cards may have a period of 0 percent APR for 6 to 18 months. The main incentive is to transfer as much of your debt as possible onto this card and pay it off within the promotional period. It’s important to pay off your debt before the deal is up. If you can’t do this, then you’ll be stuck paying interest again on the balance. A balance transfer is most effective if you can eliminate your debt wholesale (or most of it) within the introductory period.

Consolidate Your Debt

Credit cards in back pocket

Some consumers can save money if they choose to consolidate credit card debt with a personal loan. You can pay off all credit card balances with a debt consolidation loan. Then you are left with installment loan debt and regular monthly payments at a new interest rate. If you can get a rate reduction, then you should save money at the end of repayment – so long as you don’t miss any payments. If you succeed with this, then you may also build up your credit.

However, there are a few caveats. Only borrowers with good to excellent credit have a better chance at getting a lower interest rate. Second, you need to remember that your debt doesn’t just disappear after consolidating. You’re on the hook for installment debt. If you can’t pay this off, then you may find yourself in a worse situation at the end of the day.

Make Weekly Payments

Most of us pay credit card bills once each month, but consider making smaller payments on a weekly basis instead. There are a couple of reasons for doing this. If you check out your bill each week, then you’re less likely to mess up and miss a payment. There is also less room for interest to capitalize which should save money. Paying weekly also gives you the chance to keep a closer eye on your budget; you might even learn a thing or two about your spending habits.

Put Lump Sums to Work

If you get a lump sum of cash (like a tax refund), then you may want to put that towards your credit card debt. It may be tempting to spend that extra cash on something fun, but you will get more long-term value from paying down debt. If you can put more cash towards your balance, then you’ll stand to save on interest costs down the road. If you’re loaded with credit card debt, then you should plan to knock off a chunk of it whenever you get a cash windfall.

Negotiate Lower Rates

Believe it or not, some credit card companies will negotiate and lower interest rates. If you’ve been making your payments on time for a long time, then you might be able to reduce your rate. You may have to speak with several people before this happens, but it’s not as uncommon as you may think.

If you don’t have a great history of making on-time payments, this might not be an option. You can revisit this idea from time to time, but it shouldn’t be something to bank on. There’s no guarantee even if you have a great track record.

 

 

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Build your credit from scratch

credit card next to green blocks

credit card next to green blocks

Build your Credit from Scratch

 

Think of your credit like your financial resume. And whether you’re applying for a new house, car or just a new cell phone plan, experience is the most important thing.

While that simple fact puts a lot of pressure on your financial past, the good news is that if you’re starting from scratch, building credit doesn’t have to be complicated. And improving your credit doesn’t have to be a headache either. Take some simple steps now so that a globe-trotting vacation or low insurance rate becomes more than just a pipe dream.

1. Get a credit card

fingers holding credit card

I know what you’re thinking. I want a good credit card, but that’s impossible with no credit. Actually, banks and credit unions have options just for you.

Secured credit cards require a cash deposit as collateral, but are great options for credit newbies. Try to find one that reports to all three credit agencies and that doesn’t charge an annual fee.

A cosigner on a credit card can increase your chances of qualifying for one. Talk to your family members and see if someone will back you. Keep in mind that person will be responsible for paying the balance if you don’t.

Become an authorized user on someone else’s credit card. As with a cosigner, he or she will be responsible for the balance, but there is less pressure on you to open up your own card.

2. Take out a loan.

Again, I know what you’re thinking. I’m one step ahead of you.

Credit builder loans from credit unions are designed for people wanting to build their credit. The money lent to you is placed into an account where you can’t touch it until you’ve paid it back. Traditional loans give you the money up front, but with credit builder loans, they give you the money at the end of the loan term.

Student loans do have one benefit aside from facilitating our higher education: they build our credit. And with over 44 million Americans dealing with student debt, it’s good to know an added bonus exists.

Car loans are another great alternative if you make those timely car payments every month. Granted, paying in cash will save you on interest, but it won’t build your credit.

3. Pay your rent and utilities on time.

cell phone with credit card fields

Services like RentTrack and PayYourRent report your timely rent payments to the three credit agencies to help you build your credit. (In some cases, landlords will report this information, but if they don’t, these services are available.)

Also ask your utility companies if they can report your payments, too.

What else should I know?

• Any account needs to stay open for at least six months in order for you to have a credit score.

• Don’t confuse a credit score with a credit report. A credit report is a list of your financial history that is used to determine your credit score.

Your credit is important! Even if you don’t have any current plans to buy a house or a car, you won’t be able to make up for lost time as quickly as you may like. A few easy steps now will make a difference in the future.

 

 

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Improve your credit score

faces with checkmarks

faces with checkmarks

Improve Your Credit Score

 

True or false: Your income influences your credit score.

I know what some of you are thinking. A lender looks at your income to see how much you can borrow, but that’s another story. What about that three-digit score?

False. Your income doesn’t influence your credit score.

If you answered differently, you’re not alone. In fact, many Americans don’t quite understand what factors determine their credit score and how to improve it.

What most of us do know is that a high credit score helps us get lower interest rates, avoid deposits on utilities and cell phones, and obtain faster approval on new loans and rentals. All of us can understand those benefits, so let’s explore how to enjoy them, shall we?

Important Steps to Raise Your Credit Score

1.  Reduce Credit Card Debt
Do you have a high credit limit? That’s great, but not as great if your credit card balance is also high. Combine all your credit card balances and compare them to your combined credit limit. It should be at 30% or less.

Are your balances high right now? That’s okay! Work on getting them down and your credit score can quickly reflect those efforts.

2.  Pay Bills on Time

calculator next to invoices

This is a big factor. We’re not just talking about your credit card payments, but all your bills. While not all of them are reflected on your credit report, they will be if they’re not paid on time. That department store card that you only use at Christmas? The fine from your local library? Don’t let those seemingly insignificant charges get the best of you. All it takes is one late payment to drop your score.

3.  Keep Old Credit Cards Open
You don’t use that credit card anymore, so you may think it’s best to close it. Think again! If you close a credit card, over time it will be removed from your credit report, which will reduce your credit age. (Being old in credit years is a good thing!) Lenders want to see experience with managing credit, and the older your credit age is, the more experienced you are.

Also keep in mind that if you close a credit card, you’ll reduce your available credit. Remember that 30% figure I gave in tip #1? If you close a credit card with a credit of $3,000, you’re reducing your credit limit by $3,000. Keep it open and you’ll have more wiggle room with your credit card balances.

This same principle applies to old debt. Think about that car or house you finally paid off. Just because you paid it off doesn’t mean you want it off your credit report.

4.  Keep those Credit Inquiries to a Minimum
This doesn’t mean your checking your credit will hurt your score. That’s considered a “soft inquiry.” A “hard inquiry” is made by a potential lender because you’re applying for credit. A couple of them won’t hurt you, but more than that in a short period of time could cost you points.

The good news? Inquiries are erased from your credit report after 24 months.

5.  Keep an Eye on your Credit Report

working at a desk with a laptop

I could probably write a whole other blog about identity theft, but most of us know how rampant it is. What’s even scarier is that you may be a victim and not even know it. And what’s worse, you may not even experience the consequences until years later when a collections agency starts calling you for something you know you never opened.

So how do I check my credit?

You can request a free copy of your credit report from each of three major credit reporting agencies – Equifax®, Experian®, and TransUnion® – once each year at AnnualCreditReport.com or call toll-free 1-877-322-8228. You’re also entitled to see your credit report within 60 days of being denied credit, or if you’re on welfare, unemployed, or your report is inaccurate. It’s smart to request a credit report from each of the three credit reporting agencies and to review them carefully, as each one may contain inconsistent information or inaccuracies. If you spot an error, request a dispute form from the agency within 30 days of receiving your report.

If you have a credit card, you most likely have access to your credit score for free.

Even if you’re not looking to open a line of credit right now, you can take steps to ensure you’re set for when that day comes. At the very least, protect yourself against identity theft by staying up to date. It’s free and relatively easy and the truth is, you can’t afford not to do it.

 

 

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Facts about Peace Corps student loan forgiveness

Facts about Peace Corps student loan forgiveness

 

The Peace Corps has long held a reputation for allowing young people to see the world while giving back to local communities. Through this government-run program, volunteers are placed in far-flung locations for an initial period of two years. These volunteers work in a variety of fields, from education, to business, to technology, to agriculture, and the environment.

Most people join the Peace Corps after college graduation, leading to an important question: how can volunteers pay back their student loans while working abroad for a small stipend? While there are options for deferring student loans while in the Peace Corps, there is another way for college grads to pay off their student loans: through loan cancellation or forgiveness. Read on to learn facts about student loan forgiveness for Peace Corps volunteers.

Peace Corps Student Loan Cancellation Program

The Peace Corps has a student loan forgiveness program that can cancel up to 70% of a particular type of student loan debt. 15% per year of this student loan debt is forgiven after you have completed two years of service with the Peace Corps, with an additional 20% cancelled after your third and fourth years. Ultimately, you can have up to 70% of this type of debt forgiven — but there are a few catches.

Student Loan Cancellation Only Applies to Perkins Loans

First, this loan forgiveness only applies to Perkins loans, a type of federal loan that is available only to students with “exceptional financial need.” Perkins loans are relatively limited; undergraduate students can take out up to $5,500 per year (up to $27,500 total), while graduate students can borrow up to $8,000 per year. The total that a student can borrow between undergraduate and graduate loans is $60,000. Because Peace Corps student loan forgiveness only applies to this specific type of loan, it will not be helpful to anyone who has Stafford loans, PLUS loans, or private student loans. While Peace Corps volunteers can take advantage of generous student loan deferment programs, the interest on all private loans and unsubsidized federal student loans will continue to accrue through the deferral period.

Eligibility is Strictly Calculated

Second, when determining years of service for loan forgiveness programs, the entire calendar year must be spent in service to qualify. Training is excluded from this calculation. In a typical scenario, a Peace Corps volunteer spends three months in training before being moved to the field for a two-year commitment. Only the two years in actual service count towards student loan forgiveness — and they must be two full years (365 days per year). Partial years — even 364 days — will not count towards cancellation. A volunteer cannot get partial credit or a pro-rated cancellation if they do not serve a full year.

Consolidation Renders You Ineligible

Third, if you consolidate your Perkins loans with other student loans, you will no longer be eligible for loan cancellation through the Peace Corps program. This may be a particularly harsh surprise for someone who took advantage of the many consolidation offers available to recent college grads. If you plan to serve in the Peace Corps, avoid consolidating your student loans to take advantage of this program.

Public Service Student Loan Forgiveness Program

In addition to the Peace Corps student loan cancellation program, Peace Corps volunteers may be eligible to participate in the federal student loan forgiveness plan. This program requires borrowers to be employed in public service — including the Peace Corps. After participants make 120 qualifying federal student loan payments, their student loan debt will be forgiven.

As with the Peace Corps cancellation program, the Public Service Student Loan Forgiveness program has a catch: making 120 consecutive on-time monthly payments in full. Peace Corps volunteers are only given a small monthly stipend, not a regular salary. Unless their student loans are very low or their parents or another person can make the payments on their behalf, they will most likely not be able to participate in this program.

Joining the Peace Corps is an incredible opportunity for many recent college grads and others. However, the options for having student loans cancelled or forgiven through service in the Peace Corps may be limited by the requirements and restrictions placed on each separate program. Volunteers are eligible to have their federal student loans fully deferred for up to three years, which may give you the ability to take on the exciting challenge of serving in the Peace Corps.

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Why you shouldn’t save your passwords in your browser

Screen with username and password box

Screen with username and password box

Why You Shouldn’t Save Your Passwords in Your Browser

 

In light of the recent Facebook/Cambridge Analytica drama, I believe it’s important to highlight another less publicized issue that unfolded a few months ago.

How many passwords do you have? Email accounts, online banking, music streaming, social media … whether you use one password or ten, it turns out how you save it is just as important as the password itself.

We are now in a time where data has surpassed oil as the most valuable resource in the world.

While many rely on their Internet browser to remember their passwords, a recent scandal in a niche online community reveals we shouldn’t be so quick to rely on our browsers anymore. Here’s what happened, and here is how to protect yourself.

Magnifying glass with one's and zero's

How One Company Revealed Just How Vulnerable We Are

One thing that clients don’t know about me is that I love flight simulation and aviation in general. There’s nothing better than being able to execute a gate-to-gate real world flight plan from LAX to JFK in a virtual Boeing 737-800 or Airbus A320, or exploring the beautiful terrain of the Pacific Northwest in a Bell 407 helicopter.

But in order to fly high fidelity versions of these aircraft, you have to purchase add-on software from various developers. Imagine downloading that add-on and your anti-virus software sends you a warning that it detects suspicious malware. In some cases, people didn’t even receive notice of or realize what had happened. But those who did wanted answers.

It turns out that FlightSimLabs (FSLabs) included a password dump tool in their installer, which is essentially a tool to extract all the passwords saved in your Internet browser.

This malware was intended to target pirates. FSLabs claims it discarded all information that didn’t match pirated serial numbers previously singled out. But all the data was sent unencrypted, and all the passwords from the Internet browser were obtained, not just those of the user. In short, this was incredibly illegal.

So while the intentions of FSLabs may have been honest, many are criticizing their aggressive approach.

And many more are realizing that Internet browsers are not the safest place to keep our passwords.

 

Now take a moment and think of all those passwords you use. You may think that the flight sim market is a small one and has nothing to do with you, but the truth is that it exposes the vulnerability of our information.

If FSLabs can do it, why can’t others? Is it just a matter of time until more do?

 

So, what are your options to protect your information?

Keyboard locked with chain

The Top 5 Password Managers and Generators

You can find detailed information about each option, but here’s a quick rundown:

1. LastPass

  • My personal choice and the most popular of the 5 provided here
  • Autofill option plugs in your information on websites, saving you precious time
  • Stores digital records (i.e. insurance cards, memberships, etc.) in one place
  • Free and premium options, depending on your needs

 

2. Dashlane

  • LastPass’ closest competitor
  • Autofill option plugs in your information on websites, saving you precious time
  • Bulk password changer can change many passwords instantaneously in the event of a data breach
  • Free and premium options, depending on your needs

 

3. RoboForm

  • Ability to gain emergency access
  • Autofill option plugs in your information on websites, saving you precious time
  • Email customer support available 24/7/365
  • Free and premium options, depending on your needs

 

4. KeePass

  • More suited for the technologically-savvy user
  • Open source so anyone can investigate it for weaknesses
  • Multiple-user support
  • Free option only

 

5. Sticky Password

  • Made by people behind AVG Antivirus
  • Autofill option plugs in your information on websites, saving you precious time
  • Excellent browser support: 16 browsers on all 4 major platforms
  • Free, premium, and lifetime options available

 

There are excellent options available to keep your data secure. Take your time exploring them and rest assured that your personal information can be protected for very little or no money. In this day and age, that means everything.

 

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Top 8 estate planning mistakes

Two people sitting at a table signing paperwork

Top 8 Estate Planning Mistakes

 

Perhaps you have heard the expression:

“If you fail to plan then you plan to fail.”

This statement was never truer than for estate planning. By some accounts, 70% of adult Americans have no will or trust in place for their loves ones. Furthermore, others who initially did prepare an estate plan have failed to update it in light of changing circumstances in their lives.

You can benefit from avoiding the 8 most common estate planning mistakes that I have seen people make.

1. FAILURE TO PRESERVE YOUR INHERITANCE FOR YOUR GRANDCHILDREN SHOULD YOUR SON/DAUGHTER DIE AND THEIR SURVIVING SPOUSE REMARRY

You need to take steps in drafting your estate plan to assure that your assets are distributed to your grandchildren should your son/daughter die and not left to your daughter-in-law/son-in-law who could eventually remarry and end up using your inheritance with the new wife/husband and his/her step kids – all of whom have no familial relationship to you.

2. FAILURE TO AVOID A GUARDIANSHIP PROCEEDING FOR YOUR CHILDREN

 

If you have children, have you considered who would raise them if for some reason you or their other parent couldn’t. While this is not an easy subject to contemplate, having a guardian arrangement spelled out as part of your estate plan will ensure they will be properly cared for by someone you trust and have chosen. A legal guardian is a person who is given the legal authority and responsibility to take care of your children’s needs, such as providing food, education, medical care, dental care and shelter. If you have minor children it is imperative to have a plan in place to protect them in the event you cannot.

3. FAILURE TO PUT YOUR REAL PROPERTY BACK IN AN EXISTING TRUST AFTER A REFINANCING

Did you know that most home refinancings require that your home be transferred out of a living trust back to your own name(s), at least until after the new lender has recorded its new mortgage or deed of trust on the property? The problem is that is most cases, no one ever thinks to transfer your real property back into the trust. This failure can result in an unforeseen probate of your home at the death of the second spouse.

4. FAILURE TO ENSURE THAT YOUR ASSETS ARE DISTRIBUTED THE WAY YOU WANT AND NOT PURSUANT TO THE GOVERNMENT’S DEFAULT PLAN FOR YOU

Everyone has an estate plan. It is either the one we have created or the default so-called Plan B of the state in which we live. In our experience, it is very unlikely that a state’s default plan is what clients would really want. State laws vary, but generally they have it set for the assets go outright to the closest family members. Whom a state considers to be “closest” can be complicated in non nuclear families. Non family members, like an unmarried partner, will not receive any of the assets. This failure to act could cause family member fights over their inheritance.

5. HAVING A WILL MEANS YOU HAVE A TICKET TO ATTEND THE DREADED PROBATE PROCESS, WHICH COSTS YOUR FAMILY TIME AND MONEY

 

Having only a will is a just ticket to participate in the dreaded probate process costing your family time and money. Additionally, for those who don’t have a will, their assets will probably have to go through the intestate (“no will”) proceeding. Either of these scenarios will require that your assets go through probate before they can be fully distributed to the heirs. Probate proceedings vary from state to state, but many view the time, cost, and loss of privacy and control that come with probate as unnecessary evils which can – and should be – avoided.

6. AN OLDER PERSON HOLDING TITLE TO THEIR REAL ESTATE IN JOINT TENANCY WITH A CHILD OR GRANDCHILD

Many older people add an adult child (or grandchild) to the title of their assets (especially their home) as a joint owner in order to avoid probate. However, this type of jointly titled property can create all kinds of problems, including:

  • When a joint owner is added, the original owner loses control
  • Jointly owned assets are exposed to the joint owner’s possible misuse of them
  • Part of these assets could be lost to the joint owner’s creditors
  • The assets could become part of a joint owner’s divorce proceedings

7. FAILURE TO PROTECT FAMILY MEMBERS WITH DRUG, ALCOHOL, OR GAMBLING ISSUES

 

Many parents with a trust fear that an inheritance left to a child may be lost because of poor money handling skills or a drug, alcohol or gambling addiction of their children. With a living trust, you can instruct the successor trustee to retain a person’s inheritance in trust and instruct the trustee to make payments, as needed, directly to third parties for rent, insurance, car payments, etc. to keep it out of their hands.

8. FAILURE TO HAVE POWERS OF ATTORNEY FOR UNMARRIED ADULT CHILDREN

Let’s say you have a college student or a young adult over 18 who is unmarried. They are no longer minors that you have the legal authority to make decisions for. The law now classifies them as adults with the legal right to privacy. If they have not prepared a Power of Attorney (“POA”), problems could arise if they are out of the country or incapacitated with matters such as:

  • Driver’s license or vehicle registration renewals
  • Registration/admission for college
  • Tax return filing
  • Banking transactions
  • Ongoing legal matters (e.g., pending lawsuit from that fender-bender a few months back or speaking with child’s landlord)
  • Jury duty summons
  • Passport renewal

I often urge clients to prod their adult children to draft POA on or around their 18th birthdays. So don’t forget a POA and make it one of the most important things on your to-do list.

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