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Boost Your Daily Routine with These 3 Financial Habits

November 11, 2019

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Agnes Medina

Agnes Medina

Senior Marketing Director

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Is a personal loan a good idea?

September 9, 2019
Is a personal loan a good idea?
September 9, 2019

Life is full of surprises – many of which cost money.

If you’ve just used up your emergency fund to cover your last catastrophe, then what if a new surprise arrives before you’ve replenished your savings?

Using a credit card can be an expensive option, so you might be leery of adding debt with a high interest rate. However, you can’t let the ship sink either. What can you do?

A personal loan is an alternative in a cash-crunch crisis, but you’ll need to know a bit about how it works before signing on the bottom line.

A personal loan is an unsecured loan. The loan rate and approval are based on your credit history and the amount borrowed. Much like a credit card account, you don’t have to put up a car or house as collateral on the loan. But one area where a personal loan differs from a credit card is that it’s not a revolving line of credit. Your loan is funded in a lump sum and once you pay down the balance you won’t be able to access more credit from that loan. Your loan will be closed once you’ve paid off the balance.

The payment terms for a personal loan can be a short duration. Typically, loan terms range between 2-7 years.[i] If the loan amount is relatively large, this can mean large payments as well, without the flexibility you have with a credit card in regard to choosing your monthly payment amount.

An advantage over using a personal loan instead of a credit card is that interest rates for personal loans can be lower than you might find with credit cards. But many personal loans are plagued by fees, which can range from application fees to closing fees. These can add a significant cost to the loan even if the interest rate looks attractive. It’s important to shop around to compare the full cost of the loan if you choose to use a personal loan to navigate a cash crunch. You also might find that some fees (but not all) can be negotiated. (Hint: This may be true with certain credit cards as well.)

Before you borrow, make sure you understand the interest rate for the loan. Personal loans can be fixed rate or the rate might be variable. In that case, low rates can turn into high rates if interest rates continue to rise.

It’s also important to know the difference between a personal loan and a payday loan. Consider yourself warned – payday loans are a different type of loan, and may be an extremely expensive way to borrow. The Federal Trade Commission recommends you explore alternatives.[ii]

So if you need a personal loan to cover an emergency, your bank or credit union might be a good place to start your search.

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[i] https://www.nerdwallet.com/blog/loans/personal-loan-calculator/
[ii] https://www.consumer.ftc.gov/articles/0097-payday-loans

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How to save for a big purchase

September 3, 2019
How to save for a big purchase
September 3, 2019

It’s no secret that life is full of surprises. Surprises that can cost money.

Sometimes, a lot of money. They have the potential to throw a monkey wrench into your savings strategy, especially if you have to resort to using credit to get through an emergency. In many households, a budget covers everyday spending, including clothes, eating out, groceries, utilities, electronics, online games, and a myriad of odds and ends we need.

Sometimes, though, there may be something on the horizon that you want to purchase (like that all-inclusive trip to Cancun for your second honeymoon), or something you may need to purchase (like that 10-years-overdue bathroom remodel).

How do you get there if you have a budget for the everyday things you need, you’re setting aside money in your emergency fund, and you’re saving for retirement?

Make a goal
The way to get there is to make a plan. Let’s say you’ve got a teenager who’s going to be driving soon. Maybe you’d like to purchase a new (to him) car for his 16th birthday. You’ve done the math and decided you can put $3,000 towards the best vehicle you can find for the price (at least it will get him to his job and around town, right?). You have 1 year to save but the planning starts now.

There are 52 weeks in a year, which makes the math simple. As an estimate, you’ll need to put aside about $60 per week. (The actual number is $57.69 – $3,000 divided by 52). If you get paid weekly, put this amount aside before you buy that $6 latte or spend the $10 for extra lives in that new phone game. The last thing you want to do is create debt with small things piling up, while you’re trying to save for something bigger.

Make your savings goal realistic
You might surprise yourself by how much you can save when you have a goal in mind. Saving isn’t a magic trick, however, it’s based on discipline and math. There may be goals that seem out of reach – at least in the short-term – so you may have to adjust your goal. Let’s say you decide you want to spend a little more on the car, maybe $4,000, since your son has been working hard and making good grades. You’ve crunched the numbers but all you can really spare is the original $60 per week. You’d need to find only another $17 per week to make the more expensive car happen. If you don’t want to add to your debt, you might need to put that purchase off unless you can find a way to raise more money, like having a garage sale or picking up some overtime hours.

Hide the money from yourself
It might sound silly but it works. Money “saved” in your regular savings or checking account may be in harm’s way. Unless you’re extremely careful, it’s almost guaranteed to disappear – but not like what happens in a magic show, where the magician can always bring the volunteer back. Instead, find a safe place for your savings – a place where it can’t be spent “accidentally”, whether it’s a cookie jar or a special savings account you open specifically to fund your goal.

Pay yourself first
When you get paid, fund your savings account set up for your goal purchase first. After you’ve put this money aside, go ahead and pay some bills and buy yourself that latte if you really want to, although you may have to get by with a small rather than an extra large.

Saving up instead of piling on more credit card debt may be a much less costly way (by avoiding credit card interest) to enjoy the things you want, even if it means you’ll have to wait a bit.

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The return of – dun, dun, dun – Consumer Debt

August 19, 2019
The return of – dun, dun, dun – Consumer Debt
August 19, 2019

It might sound like a bad monster movie title, but the return of consumer debt is a growing concern.

A recent New York Times article details the rise of consumer debt, which has reached a new peak and now exceeds the record-breaking $12.68 trillion of consumer debt we had collectively back in 2008. In 2017, after a sharp decline followed by a rise as consumer sentiment improved, we reached a new peak of $12.73 trillion.[i]

A trillion is a big number. Numbers measured in trillions (that’s 1,000 billion, or 1,000,000 million – yes, that’s correct!) can seem abstract and difficult to relate to in our own individual situations.

While big numbers can be hard to grasp, dates are easy. 2008 is when the economy crashed, due in part to an unmanageable amount of debt.

Good debt and bad debt
Mortgage debt still makes up the majority of consumer debt, currently 68% of the total.[ii] But student loans are a category on the rise, currently more than doubling their percentage of total consumer debt when compared to 2008 figures.[iii] Coupled with a healthier economy, these new levels of consumer debt may not be a strong concern yet, but the impact of debt on individual households is often more palpable than the big-picture view of economists. Debt has a way of creeping up on families.

It’s common to hear references to “good debt”, usually when discussing real estate loans. In most cases, mortgage interest is tax deductible, helping to reduce the effective interest rate. However, if a household has too much debt, none of it feels like good debt. In fact, some people pass on home ownership altogether, investing their surplus income and living in more affordable rented apartments – instead of taking on the fluctuating cost of a house and its seemingly never-ending mortgage payments.

Credit card debt
Assuming that a mortgage and an auto loan are necessary evils for your household to work, and that student loans may pay dividends in the form of higher earning power, credit card debt deserves some closer scrutiny. The average American household owes over $15,000 in credit card debt,[iv] more than a quarter of the median household income. The average interest rate for credit cards varies depending on the type of card (rewards cards can be higher). But overall, American households are paying an average of 14.87% APR for the privilege of borrowing money to spend.[v]

That level of debt requires a sizeable payment each month. Guess what the monthly credit card interest for credit card debt of $15,000 at an interest rate of 15% would be? $187.50! (That number will go down as the balance decreases.) If your monthly payment is on the lower end, your debt won’t go down very quickly though. In fact, at $200 per month paid towards credit cards, the average household would be paying off that credit card debt for nearly 19 years, with a total interest cost of almost $30,000 – all from a $15,000 starting balance! (Hint: You can find financial calculators online to help you figure out how much it really costs to borrow money.)

You may not be trillions in debt (even though it might feel like it), but the first step to getting your debt under control is often to understand what its long-term effects might be on your family’s financial health. Formulating a strategy to tackle debt and sticking to it is the key to defeating your personal debt monsters.

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[i], [ii] & [iii] https://www.nytimes.com/2017/05/17/business/dealbook/household-debt-united-states.html
[iv] & [v] https://www.nerdwallet.com/blog/average-credit-card-debt-household/

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Which Debt Should You Pay Off First?

August 12, 2019
Which Debt Should You Pay Off First?
August 12, 2019

American combined consumer debt now exceeds $13 trillion.¹ That’s a stack of dollar bills nearly 900,000 miles high.²

Here’s the breakdown:

  • Credit cards: $931 billion
  • Auto loans: $1.22 trillion
  • Student loans: $1.38 trillion
  • Mortgages: $8.88 trillion
  • Any type of debt: $13.15 trillion

Nearly every type of debt can interfere with your financial goals, making you feel like a hamster on a wheel – constantly running but never actually getting anywhere. If you’ve been trying to dig yourself out of a debt hole, it’s time to take a break and look at the bigger picture.

Did you know there are often advantages to paying off certain types of debt before other types? What the simple list above doesn’t include is the average interest rates or any tax benefits to a given type of debt, which can change your priorities. Let’s check them out!

Credit Cards
Credit card interest rates now average over 17%, and interest rates are on the rise.³ For most households, credit card debt is the place to start – stop spending on credit and start making extra payments whenever possible. Think of it as an investment in your future!

Auto Loans
Interest rates for auto loans are usually much lower than credit card debt, often under 5% on newer loans. Interest rates aren’t the only consideration for auto loans though. New cars depreciate nearly 20% in the first year. In years 2 and 3, you can expect the value to drop another 15% each year. The moral of the story is that cars are a terrible investment but offer great utility. There’s also no tax benefit for auto loan interest. Eliminating debt as fast as possible on a rapidly depreciating asset is a sound decision.

Student Loans
Like auto loans, student loans are usually in the range of 5% to 10% interest. While interest rates are similar to car loans, student loan interest is often tax deductible, which can lower your effective rate. Auto loans can usually be paid off faster than student loan debt, allowing more cash flow to apply to student debt, emergency funds, or other needs.

Mortgage Debt
In many cases, mortgage debt is the last type of debt to pay down. Mortgage rates are usually lower than the interest rates for credit card debt, auto loans, or student loans, and the interest is usually tax deductible. If mortgage debt keeps you awake at night, paying off other types of debt first will give you greater cash flow each month so you can begin paying down your mortgage.

When you’ve paid off your other debt and are ready to start tackling your mortgage, try paying bi-monthly (every two weeks). This simple strategy has the effect of adding one extra mortgage payment each year, reducing a 30-year loan term by several years. Because the payments are spread out instead of making one (large) 13th payment, it’s likely you won’t even notice the extra expense.

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Sources: ¹ El Issa, Erin. “2017 American Household Credit Card Debt Study.” NerdWallet, 2018, https://nerd.me/2ht7SZg. ² “Grasping Large Numbers.” The Endowment for Human Development, 2018, https://bit.ly/1o7Yasq. ³ “Current Credit Card Interest Rates.” Bankrate, 7.11.2018, https://bit.ly/2zGcwzM.

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Avoid these unhealthy financial habits

August 5, 2019
Avoid these unhealthy financial habits
August 5, 2019

As well-intentioned as we might be, we sometimes get in our own way when it comes to improving our financial health.

Much like physical health, financial health can be affected by binging, carelessness, or simply not knowing what can cause harm. But there’s a light at the end of the tunnel – as with physical health, it’s possible to reverse the downward trend if you can break your harmful habits.

Not budgeting
A household without a budget is like a ship without a rudder, drifting aimlessly and – sooner or later – it might sink or run aground in shallow waters. Small expenses and indulgences can add up to big money over the course of a month or a year. In nearly every household, it might be possible to find some extra money just by cutting back on non-essential spending. A budget is your way of telling yourself that you may be able to have nice things if you’re disciplined about your finances.

Frequent use of credit cards
Credit cards always seem to get picked on when discussing personal finances, and often, they deserve the flack they get. Not having a budget can be a common reason for using credit, contributing to an average credit card debt of over $9,000 for balance-carrying households.[i] At an average interest rate of over 15%, credit card debt is usually the highest interest expense in a household, several times higher than auto loans, home loans, and student loans.[ii] The good news is that with a little discipline, you can start to pay down your credit card debt and help reduce your interest expense.

Mum’s the word
No matter how much income you have, money can be a stressful topic in families. This can lead to one of two potentially harmful habits.

First, talking about the family finances is often simply avoided. Conversations about kids and work and what movie you want to watch happen, but conversations about money can get swept under the rug. Are you a “saver” and your partner a “spender”? Is it the opposite? Maybe you’re both spenders or both savers. Talking (and listening) about yourself and your significant other’s tendencies can be insightful and help avoid conflicts about your finances. If you’re like most households, having an occasional chat about the budget may help keep your family on track with your goals – or help you identify new goals – or maybe set some goals if you don’t have any. Second, financial matters can be confusing – which may cause stress – especially once you get past the basics. This may tempt you to ignore the subject or to think “I’ll get around to it one day”. But getting a budget and a financial strategy in place sooner rather than later may actually help you reduce stress. Think of it as “That’s one thing off my mind now!”

Taking the time to understand your money situation and getting a budget in place is the first step to put your financial house in order. As you learn more and apply changes – even small ones – you might see your efforts start to make a difference!

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[i] https://www.valuepenguin.com/average-credit-card-debt
[ii] https://www.fool.com/taxes/2018/04/22/how-much-does-the-average-american-pay-in-taxes.aspx

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Why You Should Pay Off High-Interest Debt First

Why You Should Pay Off High-Interest Debt First

The average U.S. household owes over $5,500 in credit card debt.¹

Often, we may not even realize how much that borrowed money is costing us. High interest debt (like credit cards) can slowly suck the life out of your budget.

The average APR for credit cards is over 16% in the U.S.² Think about that for a second. If someone offered you a guaranteed investment that paid 16%, you’d probably walk over hot coals to sign the paperwork.

So here’s a mind-bender: Paying down that high interest debt isn’t the same as making a 16% return on an investment – it’s better.

Here’s why: A return on a standard investment is taxable, trimming as much as a third so the government can do whatever it is that governments do with the money. Paying down debt that has a 16% interest rate is like making a 20% return – or even higher – because the interest saved is after-tax money.

Like any investment, paying off high interest debt will take time to produce a meaningful return. Your “earnings” will seem low at first. They’ll seem low because they are low. Hang in there. Over time, as the balances go down and more cash is available every month, the benefit will become more apparent.

High Interest vs. Low Balance
We all want to pay off debt, even if we aren’t always vigilant about it. Debt irks us. We know someone is in our pockets. It’s tempting to pay off the small balances first because it’ll be faster to knock them out.

Granted, paying off small balances feels good – especially when it comes to making the last payment. However, the math favors going after the big fish first, the hungry plastic shark that is eating through your wallet, bank account, retirement savings, vacation plans, and everything else.³ In time, paying off high interest debt first will free up the money to pay off the small balances, too.

Summing It Up
High interest debt, usually credit cards, can cost you hundreds of dollars per year in interest – and that’s assuming you don’t buy anything else while you pay it off. Paying off your high interest debt first has the potential to save all of that money you’d end up paying in interest. And imagine how much better it might feel to pay off other debts or bolster your financial strategy with the money you save!

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Sources: ¹ Frankel, Matthew. “Here’s the average American’s credit card debt — and how to get yours under control.” USA TODAY, 1.25.2017, https://usat.ly/2LkHX4n. ² Dilworth, Kelly. “Rate survey: Average card APR remains at 16.15 percent.” creditcards.com, 11.21.2017, https://bit.ly/2kbCRv3. ³ Berger, Bob. “Debt Snowball Versus Debt Avalanche: What The Academic Research Shows.” Forbes, 7.20.2017, https://bit.ly/2x9Q1lN.

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Is a balance transfer worth it?

July 22, 2019
Is a balance transfer worth it?
July 22, 2019

If you have established credit, you’ve probably received some offers in the mail for a balance transfer with “rates as low as 0%”.

But don’t get too excited yet. That 0% rate won’t last. You’re also likely to find there’s a one-time balance transfer fee of 3% to 5% of the transferred amount.[i] We all know the fine print matters – a lot – but let’s look at some other considerations.

What is a balance transfer?
To attract new customers, credit card companies often send offers inviting credit card holders to transfer a balance to their company. These offers may have teaser or introductory rates, which can help reduce overall interest costs.

Teaser rate vs. the real interest rate
After the teaser rate expires, the real interest rate is going to apply. The first thing to check is if it’s higher or lower than your current interest rate. If it’s higher, you probably don’t need to read the rest of the offer and you can toss it in the shredder. But if you think you can pay the balance off before the introductory rate expires, taking the offer might make sense. However, if your balance is small, a focused approach to paying off your existing card without transferring the balance might serve you better than opening a new credit account. If – after the introductory rate expires – the interest rate is lower than what you’re paying now, it’s worth reading the offer further.

The balance transfer fee
Many balance transfers have a one-time balance transfer fee of up to 5% of the transferred amount. That can add up quickly. On a transfer of $10,000, the transfer fee could be $300 to $500, which may be enough to make you think twice. However, the offer still might have value if what you’re paying in interest currently works out to be more.

Monthly payments
The real savings with balance transfer offers becomes evident if you transfer to a lower rate card but maintain the same payment amount (or even better, a higher amount). If you were paying the minimum or just over the minimum on the old card and continue to pay just the minimum with the new card, the balance might still linger for a long time. However, if you were paying $200 per month on the old card and you continue with a $200 per month payment on the new card at a lower interest rate, the balance will go down faster, which could save you money in interest.

For example, if you transfer a $10,000 balance from a 15% card to a new card with a 0% APR for 12 months and a 12% APR thereafter, while keeping the same monthly payment of $200, you would save nearly $3,800 in interest charges. Even if the new card has a 3% balance transfer fee, the savings would still be $3,500.[ii] Not too bad. If you’re considering a balance transfer offer, use an online calculator to make the math easier. Also, be aware that you might be able to negotiate the offer, perhaps earning a lower balance transfer fee (or no fee at all) or a lower interest rate. It costs nothing to ask!

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[i] https://creditcards.usnews.com/articles/when-are-balance-transfer-fees-worth-it
[ii] https://www.creditcards.com/calculators/balance-transfer/

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Allowance for Kids: Is It Still a Good Idea?

Allowance for Kids: Is It Still a Good Idea?

Perusing the search engine results for “allowance for kids” reveals something telling: The top results can’t seem to agree with each other.

Some finance articles quote experts or outspoken parents hailing an allowance, stating it teaches kids financial responsibility. Others argue that simply awarding an allowance (whether in exchange for doing chores around the house or not) instills nothing in children about managing money. They say that having an honest conversation about money and finances with your kids is a better solution.

According to a recent poll, the average allowance for kids age 4 to 14 is just under $9 per week, about $450 per year.¹ By age 14, the average allowance is over $12 per week. Some studies indicate that, in most cases, very little of a child’s allowance is saved. As parents, we may not have needed a study to figure that one out – but if your child is consistently out of money by Wednesday, how do you help them learn the lesson of saving so they don’t always end up “broke” (and potentially asking you for more money at the end of the week)?

There’s an app for that.
Part of the modern challenge in teaching kids about money is that cash isn’t king anymore. Today, we use credit and debit cards for the majority of our spending – and there is an ever-increasing movement toward online shopping and making payments with your phone using apps like Apple Pay, Android Pay, or Samsung Pay.

This is great for the way we live our modern, fast-paced lives, but what if technology could help us teach more complex financial concepts than a simple allowance can – concepts like how compound interest on savings works or what interest costs for debt look like? As it happens, a new breed of personal finance apps for families promises this kind of functionality. Just look at the App Store!

Money habits are formed as early as age 7.² If an allowance can teach kids about saving, compound interest, loan interest, and budgeting – with a little help from technology – perhaps the future holds a digital world where the two sides of the allowance debate can finally agree. As to whether your kids’ allowance should be paid upon completion of chores or not… Well, that’s up to you and how long your Saturday to-do list is!

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Sources: ¹ Nova, Annie. “Here’s how much the typical kid gets in allowance each year.” CNBC, 1.4.2018, https://cnb.cx/2E6hBic. ² Kobliner, Beth. “Money habits are set by age 7. Teach your kids the value of a dollar now.” PBS, 4.5.2018, https://to.pbs.org/2GBrjuI.

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Term or Perm? Life Insurance: A Quick Review

July 15, 2019
Term or Perm? Life Insurance: A Quick Review
July 15, 2019

Navigating the world of life insurance can be a daunting task.

Even more daunting can be figuring out what policy is best for you. Let’s break down the differences between a couple of the more common life insurance policies, so you can focus on an even more daunting task – what your family’s going to have for dinner tonight!

Term Life Insurance
A Term life insurance policy covers an individual for a specific period of time – the most common term lengths being 10, 20, or 30 years. The main advantage of this type of policy is that it generally can cost the consumer less than a permanent insurance policy, because it might be shorter than a permanent policy.

There’s a small downside to term policies, and it’s found right in the name: term policy. This kind of life insurance policy does have an expiration date. While you may have the option to convert to a whole or permanent life insurance policy through a conversion rider or you may choose to extend your policy, you may find yourself needing to go through the underwriting process again. Life insurance premiums tend to rise the older you get, so the term policy premium you paid when you first got your policy at, say, 30 years old has the potential to be very different from the ones you’d pay at 50 or 60 years old.

The goal of a term policy is to pay the lowest premiums possible, because by the time the term expires, your family will no longer need the insurance. The primary thing to keep in mind is to choose a term length that covers the years you plan to work prior to retirement. This way, your family members (or beneficiaries) would be taken care of financially if something were to happen to you.

If this doesn’t sound like the right kind of policy for you, there’s another option…

Permanent Life Insurance
Contrary to term life insurance, permanent life insurance provides lifelong coverage, as long as you pay your premiums. And contrary to term life insurance, permanent life insurance can be more complex because of its many parts and therefore harder to understand and know what choices are right for you. This insurance policy – which also can be known as “universal” or “whole” – provides coverage for ongoing needs such as caring for family members, a spouse that needs coverage after retirement, or paying off any debts of the deceased.

Another great benefit a perm policy offers is cash accumulation. As premiums are paid over time, the money is allocated to an investment account from which the individual can borrow or withdraw the funds for emergencies, illness, retirement, or other unexpected needs. Because this policy provides lifelong coverage and access to cash in emergencies, most permanent policies are more expensive than term policies.

There are some key things to keep in mind if you’re considering a Cash Value Life Insurance Policy: It is important to remember that loans and withdrawals will reduce the policy value and death benefit dollar for dollar. Additionally, withdrawals are subject to partial surrender charges if they occur during a surrender charge period. Loans are made at interest. Loans may also result in the need to add additional premiums into the policy to avoid a lapse of the policy. In the event that the policy lapses, all policy surrenders and loans are considered distributions and, to the extent that the distributions exceed the premiums paid (cost basis), they are subject to taxation as ordinary income. Lastly, all references to loans assume that the contract remains in force, qualifies as life insurance and is not a modified endowment contract (MEC). Loans from a MEC will generally be taxable and, if taken prior to age 59½, may be subject to a 10% tax penalty.

And don’t worry too much about the hard to understand parts. A financial professional can give you an idea of what a well-tailored permanent life insurance policy may look like for you and your unique situation.

How Much Does the Average Consumer Need?
Unless you have millions of dollars in assets and make over $250,000 a year, most of your insurance coverage needs may be met through a simple term policy. However, if you have a child that needs ongoing care due to illness or disability, if you need coverage for your retirement, or if you anticipate needing to cover emergency expenses, it may be in your best interest to purchase a permanent life insurance policy.

No matter where you are in life, you should consider purchasing some life insurance coverage. Many employers will actually offer this policy as part of their benefits package. If you are lucky enough to work for an employer who does this, take advantage of it, but be sure to examine the policy closely to make sure you’re getting the right amount of coverage. If you don’t work for a company that offers life insurance, don’t worry, you still may be able to get great coverage at a relatively inexpensive rate. Just make sure to do your research, consider your options, and make an informed decision for you and your family.

Now, what’s it going to be? Order a pizza or make breakfast for dinner? Choices, choices…

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What to Do First If You Receive an Inheritance

What to Do First If You Receive an Inheritance

In many households, nearly every penny is already accounted for even before it’s earned.

The typical household budget that covers the cost of raising a family, making loan payments, and saving for retirement usually doesn’t leave much room for extra spending on daydream items. However, occasionally families may come into an inheritance, you might receive a big bonus at work, or benefit from some other sort of windfall.

If you ever inherit a chunk of money (or large asset) or receive a large payout, it may be tempting to splurge on that red convertible you’ve been drooling over or book that dream trip to Hawaii you’ve always wanted to take. Unfortunately for many, though, newly-found money has the potential to disappear quickly with nothing to show for it, if you don’t have a strategy in place to handle it.

If you do receive some sort of large bonus – congratulations! But take a deep breath and consider these situations first – before you call your travel agent.

Taxes or Other Expenses
If you get a large sum of money unexpectedly, the first thing you might want to do is pull out your bucket list and see what you can check off first. But before you start spending, the reality is you’ll need to put aside some money for taxes. You may want to check with an expert – an accountant or financial advisor may have some ideas on how to reduce your liability as well.

If you suddenly own a new house or car as part of an inheritance, one thing that you may not have considered is how much it will cost to hang on to them. If you want to keep them, you’ll need to cover maintenance, insurance, and you may even need to fulfill loan payments if they aren’t paid off yet.

Pay Down Debt
If you have any debt, you’d have a hard time finding a better place to put your money once you’ve set aside some for taxes or other expenses that might be involved. It may be helpful to target debt in this order:

  1. Credit card debt: These are often the highest interest rate debt and usually don’t have any tax benefit. Pay these off first.
  2. Personal loans: Pay these off next. You and your friend/family member will be glad you knocked these out!
  3. Auto loans: Interest rates on auto loans are lower than credit cards, but cars depreciate rapidly – very rapidly. If you can avoid it, you don’t want to pay interest on a rapidly depreciating asset. Pay off the car as quickly as possible.
  4. College loans: College loans often have tax-deductible interest but there is no physical asset you can convert to cash – there’s just the loan.
  5. Home loans: Most home loans are also tax-deductible. Since your home value is likely appreciating over time, you may be better off putting your money elsewhere rather than paying off the home loan early.

Fund Your Emergency Account
Before you buy that red convertible, put aside some money for a rainy day. This could be liquid funds – like a separate savings account.

Save for Retirement
Once the taxes are covered, you’ve paid down your debt, and funded your emergency account, now is the time to put some money away towards retirement. Work with your financial professional to help create the best strategy for you and your family.

Fund That College Fund
If you have kids and haven’t had a chance to save all you’d like towards their education, setting aside some money for this comes next. Again, your financial professional can recommend the best strategy for this scenario.

Treat Yourself
NOW you’re ready to go bury your toes in the sand and enjoy some new experiences! Maybe you and the family have always wanted to visit a themed resort park or vacation on a tropical island. If you’ve taken care of business responsibly with the items above and still have some cash left over – go ahead! Treat yourself!

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World Financial Group, Inc., its affiliated companies and its independent associates do not offer tax and legal advice. Please consult with your personal tax and/or legal professional for further guidance.

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Common Financial Potholes

June 17, 2019
Common Financial Potholes
June 17, 2019

The journey to financial independence can feel a bit like driving around with your entire retirement fund stashed in the open-air bed of a pickup truck.

Every dollar bill is at the mercy of the elements. Think of an unforeseen medical emergency as a pop-up windstorm that whips a few thousand dollars out of the truck bed. And that time your refrigerator gave out on you? That’s swerving to avoid a landslide as it tumbles down the mountain. There goes another $1,000.

Emergencies like a case of appendicitis or suddenly needing a place to store your groceries usually arrive unannounced and can’t always be avoided. But there are a few scenarios you can bypass, especially when you know they’re coming.

These scenarios are the potholes on the road to financial independence. When you’re driving along and see a particularly nasty pothole through your windshield, it just makes sense to avoid it.

Here are some common potholes to avoid on your financial journey.

Excessive or Frivolous Spending
A job loss or a sudden, large expense can change your cash flow quickly, making you wish you still had some of the money you spent on… well, what did you spend it on, anyway? That’s exactly the trouble. We often spend on small indulgences without calculating how much those indulgences cost when they’re added up. Unless it’s an emergency, big expenses can be easier to control. It’s the small expenses that can cost the most.

Recurring Payments
Somewhere along the line, businesses started charging monthly subscriptions or membership fees for their products or service. These can be useful. You might not want to shell out $2,000 all at once for home gym equipment, but spending $40/month at your local gym fits in your budget. However, unused subscriptions and memberships create their own credit potholes. If money is tight or you’re prioritizing your spending, take a look at your subscriptions and memberships. Cancel the ones that you’re not using or enjoying.

New Cars
Most people love the smell of a new car, particularly if it’s a car they own. Ownership is strange in regard to cars, however. In most cases, the bank holds the title until the car is paid off. In the interim, the car has depreciated by 25% in the first year and by nearly 50% after 3 years.*

What often happens is that we trade the car after a few years in exchange for something that has that new car smell – and we’ve never seen the title for the first car. We never owned it outright. In this chain of transactions, each car has taxes and registration fees, interest is paid on a depreciating asset, and car dealers are making money on both sides of the trade when we bring in our old car to exchange for a new one.

Unless you have a business reason to have the latest model, it’s less expensive to stop trading cars. Think of your no-longer-new car as a great deal on a used car – and once it’s paid off, there’s more money to put each month towards your retirement.

To sum up, you may already have the best shocks on your financial vehicle (i.e., a well-tailored financial strategy), but slamming into unnecessary potholes could damage what you’ve already built. Don’t damage your potential to go further for longer – avoid those common financial potholes.

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Source: Lewerer, Greg. “Car Depreciation: How Much Have You Lost?” Trusted Choice, https://bit.ly/1LtV7aP.

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You Can’t Take It With You

June 12, 2019
You Can’t Take It With You
June 12, 2019

A LinkedIn study found that Millennials are likely to change jobs 4 times in their first 10 years out of college.*

That equates to landing a new job roughly every 2.5 years by age 32!

So if you’re feeling the itch to leave your current job and head out for a new adventure in the workforce, the experience you’ve gained along the way will go with you. You may have made some great business connections too, and gotten some fabulous on-the-job-training. All of these things will “travel well” to a new job.

But there’s one thing you can’t take with you: An employer-supplied life insurance policy. While the price is right at “free” for many of these policies, there are several drawbacks that may deter you from relying on them solely for coverage.

1. An employer-provided policy turns in its two weeks notice when you do. Since your employer owns the policy – not you – your coverage will end when you leave that job. And unless you’re walking right into another employment opportunity where you’re offered the same type and amount of coverage, you might experience gaps or a total loss of coverage in an area where you had it before. When you’re not depending on an employer to provide your only life insurance coverage, you can change jobs as often as you please without the worry of the rug being pulled out from under you.

2. The employer policy is touted as ‘one size fits most.’ But it’s not likely that a group policy offered through an employer will be tailored to you and your unique needs. There may be no room for you to chime in and request certain features or a rider you’re interested in. However, when you build your own policy around your individual needs, you can get the right coverage that suits who you are and where you’d like to go on your financial journey.

3. An employer policy may not offer enough to cover your family. What amount of coverage is your employer offering? When you’re first starting out in your career, a $50,000 or even a $25,000 employer-provided policy might sound like a lot. But how far would that benefit really go to protect your family, cover funeral costs, or help with daily expenses if something were to happen to you?

Whether or not your 5-year plan includes 5 different jobs (or 5 entirely unrelated career paths), with a well-tailored policy that you own independent of your employment situation – you have the potential for a little more freedom and security in your financial strategy. And you won’t be starting from square one just because you’re starting a new opportunity.

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Source: Long, Heather. “The new normal: 4 job changes by the time you’re 32.” CNN Money, https://cnnmon.ie/1RRxCfl.

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Handling Debt Efficiently – Until It’s Gone

Handling Debt Efficiently – Until It’s Gone

It’s no secret that making purchases on credit cards will result in paying more for those items over time if you’re paying interest charges from month-to-month.

Despite this well-known fact, credit card debt is at an all-time high, rising another 3% this past year.¹ The average American now owes over $6,300 in credit card debt. For households, the number is much higher, at nearly $16,000 per household.² Add in an average mortgage of over $200,000, plus nearly $25,000 of non-mortgage debt (car loans, college loans, or other loans) and the molehill really is starting to look like a mountain.

The good news? You have the potential to handle your debt efficiently and deal with a molehill-sized molehill instead of a mountain-sized one.

Focus on the easiest target first.
Some types of debt don’t have an easy solution. While it’s possible to sell your home and find more affordable housing, actually following through with this might not be a great option. Selling your home is a huge decision and one that comes with expenses associated with the sale – it’s possible to lose money. Unless you find yourself with a job loss or similar long-term setback, often the best solution to paying down debt is to go after higher interest debt first. Then examine ways to cut your housing costs last.

Freeze your spending (literally, if it helps).
Due to its higher interest rate, credit card debt is usually the first thing to tackle when you decide to start eliminating debt. Let’s be honest, most of us might not even know where that money goes, but our credit card statement is a monthly reminder that it went somewhere. If credit card balances are a problem in your household, the first step is to cut back on your purchases made with credit, or stop paying with credit altogether. Some people cut up their cards to enforce discipline. Ever heard the recommendation to freeze your cards in a block of ice as a visual reminder of your commitment to quit credit? Another thing to do is to remove your card information from online shopping sites to help ensure you don’t make mindless purchases.

Set payment goals.
Paying the minimum amount on your credit card keeps the credit card company happy for 2 reasons. First, they’re happy that you made a payment on time. Second, they’re happy if you’re only paying the minimum because you might never pay off the balance, so they can keep collecting interest indefinitely. Reducing or stopping your spending with credit was the first step. The second step is to pay more than the minimum so that those balances start going down. Examine your budget to see where there’s room to reduce spending further, which will allow you to make higher payments on your credit cards and other types of debt. In most households, an honest look at the bank statement will reveal at least a few ways you might free up some money each month.

Have a sale. To get a jump-start if money is still tight, you might want to turn some unused household items into cash. Having a community yard sale or selling your items online can turn your dust collectors into cash that you can then use toward reducing your balances.

Transfer balances prudently.
Consider balance transfers for small balances with high interest rates that you think you’ll be able to pay off quickly. Transferring that balance to a lower interest or no interest card can save on interest costs, freeing up more money to pay down the balances. The interest rates on balance transfers don’t stay low forever, however – typically for a year or less – so it’s important to make sure you can pay transferred balances off quickly. Also, check if there’s a balance transfer fee. Depending on the fee, moving those funds might not make sense.

Don’t punish yourself.
Getting serious about paying down debt may seem to require draconian measures. But there likely isn’t a need to just stay home eating tuna fish sandwiches with all the lights turned off. Often, all that’s required is an adjustment of old spending habits. If your drive home takes you past a mall where it would be too tempting to “just pick a little something up”, take a different route home. But it’s important to have a small treat occasionally as well. If you’re making progress on your debt, you deserve to reward yourself sometimes. All within your budget, of course!

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Sources: ¹ Sullivan, Bob. “State of Credit: 2017.” Experian, 1.11.2018, https://bit.ly/2mrjH58. ² El Issa, Erin. “2017 American Household Credit Card Debt Study.” NerdWallet, 2017, https://nerd.me/2ht7SZg.

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Top Reasons Why People Buy Term Life Insurance

Top Reasons Why People Buy Term Life Insurance

These days, most families are two-income households.

That describes 61.9% of U.S. families as of 2017.¹ If that describes your family (and the odds are good), do you have a strategy in place to cover your financial obligations with just one income if you or your spouse were to unexpectedly pass away?

Wow. That’s a real conversation-opener, isn’t it? It’s not easy to think about what might happen if one income suddenly disappeared. (It might seem like more fun to have a root canal than to think about that.) But having the right coverage “just in case” is worth considering. It’ll give you some reassurance and let you get back to the fun stuff… like not thinking about having a root canal.

If you’re interested in finding out more about Term insurance and how it may help with your family’s financial obligations, read on…

Some Basics about Term Insurance
Many of life’s financial commitments have a set end date. Mortgages are 15 to 30 years. Kids grow up and (eventually) start providing for themselves. Term life insurance may be a great option since you can choose a coverage length that lines up with the length of your ongoing financial commitments. Ideally, the term of the policy will end around the same time those large financial obligations are paid off. Term policies also may be a good choice because in many cases, they may be the most economical solution for getting the protection a family needs.

As great as term policies can be, here are a couple of things to keep in mind: a term policy won’t help cover financial commitments if you or your spouse simply lose your job. And term policies have a set (level) premium during the length of the initial period. Generally, term policies can be continued after the term expires, but at a much higher rate.

The following are some situations where a Term policy may help.

Pay Final Expenses
Funeral and burial costs can be upwards of $10,000.² However, many families might not have that amount handy in available cash. Covering basic final expenses can be a real burden, especially if the death of a spouse comes out of the blue. If one income is suddenly gone, it could mean the surviving spouse would need to use credit or liquidate assets to cover final expenses. As you would probably agree, neither of these are attractive options. A term life insurance policy can cover final expenses, leaving one less worry for your family.

Pay Off Debt
The average household in the U.S. is carrying nearly $140,000 in debt.³ For households with a large mortgage balance, the debt figures could be much higher. Couple that with a median household income of under $60,000,⁴ and it’s clear that many families would be in trouble if one income is lost.

Term life insurance can be closely matched to the length of your mortgage, which helps to ensure that your family won’t lose their home at an already difficult time.

But what about car payments, credit card balances, and other debt? These other debt obligations that your family is currently meeting with either one or two incomes can be put to bed with a well-planned term life policy.

Income Protection
Even if you’ve planned for final expenses and purchased enough life insurance coverage to pay off your household debt, life can present many other costs of just… living. If you pass unexpectedly, the bills will keep rolling in for anyone you leave behind – especially if you have young children. Those day-to-day living costs and unexpected expenses can seem to multiply in ways that defy mathematical concepts. (You know – like that school field trip to the aquarium that no one mentioned until the night before.) The death benefit of a term life insurance policy may help, for a time, fill in the income gap created by the unfortunate passing of a breadwinner.

But Wait, There’s More… There are term life insurance policies available that can provide other benefits as well, including living benefits that may help keep medical expenses from wreaking havoc on your family’s financial plan if you become critically ill. One note about the living benefits policies, though: If the critical and chronic illness features are used, the face value of the policy is reduced. It’s important to consider whether a reduction in the death benefit would be a good alternative to using savings planned for other purposes.

In some cases, policies with built-in living benefits may cost more than a standard term policy but may still cost less than permanent insurance policies! And because a term policy is in force only during the years when your family needs the most protection, premiums can be lower than for other types of life insurance.

Term life insurance can provide income protection to help keep your family’s financial situation solid, and help things stay as “normal” as they can be after a loss.

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Sources: ¹ United States Department of Labor. “Employment Characteristics of Families Summary.” Bureau of Labor Statistics, 4.19.2018, https://bit.ly/2kSHDvm. ² “Funeral Costs: How Much Does an Average Funeral Cost?” Parting, 9.14.2017, https://bit.ly/2isoHUC. ³ Sun, Leo. “A Foolish Take: Here’s how much debt the average U.S. household owes.” USA Today, 11.18.2017, https://usat.ly/2hJ7lah. ⁴ Loudenback, Tanza. “Middle-class Americans made more money last year than ever before.” Business Insider, 9.12.2017, https://read.bi/2f3ey3F.

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Why You Should Care About Insurable Interest

May 6, 2019
Why You Should Care About Insurable Interest
May 6, 2019

First of all, what is insurable interest?

It’s simply the stake you have in something that is being insured – and that the amount of insurance coverage for whatever is being insured is not more than your potential loss.

To say things could become a bit awkward might be an understatement if your insurable interest isn’t considered before you’re deep into the planning phase of a project or before you’ve signed some papers, like a title or a loan.

It’s better for your sanity to understand insurable interest beforehand. Where the issue of insurable interest often arises is in auto insurance. Let’s look at an example.

Let’s say you have a car that’s worth $5,000. $5,000 is the maximum amount of money you would lose if the car is stolen or damaged – and $5,000 would be the most you could insure the car for. $5,000 is your insurable interest.

In the above example, you own the car, so you have an insurable interest in it. By the same token, you can’t insure your neighbor’s car. If your neighbor’s car was stolen or damaged, you wouldn’t suffer any financial loss because it wasn’t your car.

Here’s where it might get a little tricky and why it’s important to understand insurable interest. Let’s say you have a young driver in the house, a teenager, and it’s time for him to get mobile. He’s been saving up his lawn-mowing money for two years and finally bought the (used) car of his dreams.

You might have considered adding your son’s car to your auto policy to save money – you’ve heard how much it can cost for a teen driver to buy their own policy. Sounds like a good plan, right? However, the problem with this strategy is that you don’t have an insurable interest in your son’s car. He bought it, and it’s registered to him.

You might find an insurance sales rep who will write the policy. But there’s a risk the policy won’t make it through underwriting and – more importantly – if there’s a claim with that car, the claim might not be covered because you didn’t have an insurable interest in it. If you want to put that car on your auto insurance policy, the car needs to be registered to the named insured on the policy – you.

Insurable Interest And Lenders
If you have a mortgage or an auto loan, your lender is probably listed on your policy. Both you and the lender have an insurable interest in the house or the car. Over time, as the loan is paid down, you’ll have a greater insurable interest and the lender’s insurable interest will become smaller. (Hint: When your loan is paid off, ask your agent to remove the lender from the policy to avoid any confusion or delays if you have a claim someday.)

Does Ownership Create Insurable Interest?
Good question. It might seem like ownership and insurable interest are equivalent – they often occur simultaneously. But there are times when you can have an insurable interest in something without being an owner.

Life insurance is a great example of having an insurable interest without ownership. You can’t own a person – but if a person dies, you may experience a financial loss. However, just as you can’t insure your neighbor’s car, you can’t purchase a life insurance policy on your neighbor, either. You’d have to be able to demonstrate your potential loss if your neighbor passed away. And no it doesn’t count if they never returned those hedge clippers they borrowed from you last spring.

So now you know all about insurable interest. While insurable interest requirements may seem inconvenient at times, the rules are there to protect you and to help keep rates lower for everyone. Without insurable interest requirements, the door is open to fraud, speculation, or even malicious behavior. A little inconvenience seems like a much better option.

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What Does “Pay Yourself First” Mean?

April 29, 2019
What Does “Pay Yourself First” Mean?
April 29, 2019

Do you dread grabbing the mail every day?

Bills, bills, mortgage payment, another bill, maybe some coupons for things you never buy, and of course, more bills. There seems to be an endless stream of envelopes from companies all demanding payment for their products and services. It feels like you have a choice of what you want to do with your money ONLY after all the bills have been paid – if there’s anything left over, that is.

More times than not it might seem like there’s more ‘month’ than ‘dollar.’ Not to rub salt in the wound, but may I ask how much you’re saving each month? $100? $50? Nothing? You may have made a plan and come up with a rock-solid budget in the past, but let’s get real. One month’s expenditures can be very different than another’s. Birthdays, holidays, last-minute things the kids need for school, a spontaneous weekend getaway, replacing that 12-year-old dishwasher that doesn’t sound exactly right, etc., can make saving a fixed amount each month a challenge. Some months you may actually be able to save something, and some months you can’t. The result is that setting funds aside each month becomes an uncertainty.

Although this situation might appear at first benign (i.e., it’s just the way things are), the impact of this uncertainty can have far-reaching negative consequences.

Here’s why: If you don’t know how much you can save each month, then you don’t know how much you can save each year. If you don’t know how much you can save each year, then you don’t know how much you’ll have put away 2, 5, 10, or 20 years from now. Will you have enough saved for retirement?

If you have a goal in mind like buying a home in 10 years or retiring at 65, then you also need a realistic plan that will help you get there. Truth is, most of us don’t have a wealthy relative who might unexpectedly leave us an inheritance we never knew existed!

The good news is that the average American could potentially save over $500 per month! That’s great, and you might want to do that… but how* do you do that?

The secret is to “pay yourself first.” The first “bill” you pay each month is to yourself. Shifting your focus each month to a “pay yourself first” mentality is subtle, but it can potentially be life changing. Let’s say for example you make $3,000 per month after taxes. You would put aside $300 (10%) right off the bat, leaving you $2,700 for the rest of your bills. This tactic makes saving $300 per month a certainty. The answer to how much you would be saving each month would always be: “At least $300.” If you stash this in an interest-bearing account, imagine how high this can grow over time if you continue to contribute that $300.

That’s exciting! But at this point you might be thinking, “I can’t afford to save 10% of my income every month because the leftovers aren’t enough for me to live my lifestyle”. If that’s the case, rather than reducing the amount you save, it might be worthwhile to consider if it’s the lifestyle you can’t afford.

Ultimately, paying yourself first means you’re making your future financial goals a priority, and that’s a bill worth paying.

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Source: Martin, Emmie. “Here’s how much money the average middle-aged American could save each month.” CNBC*, 11.8.2017, https://www.cnbc.com/2017/11/08/how-much-money-the-average-middle-aged-american-could-save-each-month.html.

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Ways to pay off your mortgage faster

April 3, 2019
Ways to pay off your mortgage faster
April 3, 2019

It’s paradoxical how owning a home might make you feel more secure.

But it may also be a constant source of worry, particularly if you still have a hefty mortgage payment each month. For some, having a mortgage is simply a part of life. But for others, it can be an encumbrance, especially once you realize that your interest expense might cost as much as the home itself over the course of a 30-year loan.

Whether your goal is becoming mortgage-free or you just don’t want to pay interest to your lender for any longer than necessary, there are some effective ways you can pay off your mortgage faster.

Make bi-weekly payments instead of monthly payments
Many of us get paid weekly or bi-weekly (meaning every two weeks). A standard mortgage has twelve monthly payments. While we tend to think of a month as having four weeks, there are actually around 4.25 weeks in a month. This seemingly small discrepancy in time can work to your advantage, if you switch to making bi-weekly mortgage payments instead of monthly mortgage payments. At the end of the year, you’ll find that you’ve made thirteen mortgage payments instead of just twelve.

Over the course of a 30-year mortgage, switching to bi-weekly mortgage payments may shave some time off the length of your mortgage, depending on your mortgage balance and interest rate. You may potentially save thousands of dollars in interest expense as well.[i]

Make an extra payment each year
Some lenders may charge extra fees for customized payment plans or may not provide an easy way to make biweekly payments. In this case, you can simply make one extra payment each year by putting aside money in a dedicated account. If your mortgage payment is $2,000, you could fund your account with $40 per week, or $80 every two weeks, to save for an extra payment each year. If you use this method, your savings won’t be as dramatic as the savings you might see by making bi-weekly payments because the extra payments don’t reach your mortgage balance as frequently. If you have any spare cash, you might consider raising the amount that you save each week.

Round up your payments
Mortgage payments are almost never round numbers. Yours might look like $2,147.63, for example. Consider rounding up your payment to $2,175, $2,200, or even $2.500. Choose an amount that won’t break the bank but can put a dent in the balance over time. Depending on how much you round up your payment, this method may shave some time off your mortgage and potentially save you money in interest expense.

The key is consistency. Making one extra mortgage payment and then never making any extra payments again won’t make much difference, but sending a little extra with every payment may help make you mortgage-free a little faster.

Pro tip: Before you make any drastic moves to pay off your mortgage, first be sure that your emergency fund is well established, that your high-interest credit cards are paid off, and that you’re contributing enough toward your retirement accounts. The average rate of return on some types of accounts may be higher than the savings you might realize on mortgage interest. It’s possible that any extra money is more wisely put away elsewhere.

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[i] https://www.mortgagecalculator.org/calculators/standard-vs-bi-weekly-calculator.php#top

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Can you actually retire?

April 1, 2019
Can you actually retire?
April 1, 2019

Anyone who experienced the past two decades as an adult or was old enough to see what happened to financial markets might view discussions about retirement with understandable suspicion.

Many people who planned to retire a decade ago saw their nest eggs shrink. Some of those people are now working part time or full time to hedge their bet or to make ends meet. Fortunately, the markets have recovered, but that doesn’t help if your investments were moved to less-volatile investments and you missed the big gains the market has seen in recent years.

You might feel that preparing for retirement will be an episode in futility, but it just requires some careful analysis and discipline. If you’re relatively young, time is in your favor with your retirement accounts, and the monthly amount you’ll need to contribute may be less than you think. If you’re closer to retirement age, the question revolves around how much you have saved already and how you may need to change your monthly expenses to afford retirement.

Digging into the numbers
As an example, let’s assume that you’re 30 years old and want to retire at age 65. Let’s also assume that you expect to live to age 85. The median household income in the U.S. is just over $59,000, so we’ll use that number for our calculations.[i]

One commonly used rule of thumb is to plan for needing 80% of your pre-retirement income during retirement. Some experts use a 70% goal. But an 80% goal is more conservative and allows more flexibility so that if you live past 85, you’re less likely to outlive your savings. So if your income is currently $59,000, you’ll need $47,200 annually during retirement to match 80% of your pre-retirement income.

Reaching your $47,200 goal might not be as hard as it might seem. Starting at age 30 with nothing saved, you would need to put aside just over $4,858 per year. (This assumes a 6% annual return on savings compounded over 35 years from age 30 to age 65.) This calculation also assumes that you keep your savings in the same or a similar account during your retirement years, yielding about 6%.[ii]

Putting aside $4,858 per year may still feel like a lot if you look at it as one lump sum, but let’s examine that number more closely. That’s about $405 per month, or $94 per week, or only about $13.50 per day. You might spend nearly that much on a fast food meal with extra fries these days, and many people do. If your employer offers a matching contribution on a 401(k) or similar plan, the employer match can help power your savings as well, with free money that continues working for you until retirement – and after.

The real key to having enough money to retire is to start early. That means now. When you’re younger, time does the heavy lifting through the phenomenon of compound interest. If you earn more than the median income and wish to retire with a higher after-retirement income than the $47,200 used in the example, you’ll need to contribute more – but the concept is the same. Start saving early and save consistently. You’ll thank yourself for it!

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This is a hypothetical scenario for illustration purposes only and does not present an actual investment for any specific product or service. There is no assurance that these results can or will be achieved.

[i] https://seekingalpha.com/article/4152222-january-2018-median-household-income
[ii] https://www.msn.com/en-us/money/tools/retirementplanner

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How to Build Credit When You’re Young

March 18, 2019
How to Build Credit When You’re Young
March 18, 2019

Your credit score can affect a lot more than just your interest rates or credit limits.

Your credit history can have an impact on your eligibility for rental leases, raise (or lower) your auto insurance rates, or even affect your eligibility for certain jobs (although in many cases the authorized credit reports available to third parties don’t contain your credit score if you aren’t requesting credit). Because credit history affects so many aspects of financial life, it’s important to begin building a solid credit history as early as possible.

So, where do you start?

  1. Apply for a store credit card.
    Store credit cards are a common starting point for teens and young adults, as it often can be easier to get approved for a store card than for a major credit card. As a caveat though, store card interest rates are often higher than for a standard credit card. Credit limits are also typically low – but that might not be a bad thing when you’re just getting started building your credit. A lower limit helps ensure you’ll be able to keep up with payments. Because you’re trying to build a positive history and because interest rates are often higher with a store card, it’s important to pay on time – or ideally, to pay the entire balance when you receive the statement.

  2. Become an authorized user on a parent’s credit card.
    Another common way to begin building credit is to become an authorized user on a parent’s credit card. Ultimately, the credit card account isn’t yours, so your parents would be responsible for paying the balance. (Because of this, your credit score won’t benefit as much as if you are approved for a credit card in your own name.) Another thing to keep in mind is that some credit card providers don’t report authorized users’ activity to credit bureaus.* Additionally, even if you’re only an authorized user, any missed or late payments on the card can affect your credit history negatively.

Are secured cards useful to build credit?
A secured credit card is another way to begin building credit. To secure the card, you make an initial deposit. The amount of that deposit is your credit line. If you miss a payment, the bank uses your collateral – the deposit – to pay the balance. Don’t let that make you too comfortable though. Your goal is to build a positive credit history, so if you miss payments – even though you have a prepaid deposit to fall back on – you’re still going to get a ding on your credit history. Instead, it’s best to use a small amount of your available credit each month and to pay in full when you get the statement. This will help you look like a credit superstar due to your consistently timely payments and low credit utilization.

As you build your credit history, you’ll be able to apply for credit in larger amounts, and you may even start receiving pre-approved offers. But beware. Having credit available is useful for certain emergencies and for demonstrating responsible use of credit – but you don’t need to apply for every offer you receive.

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Source: “Does Being an Authorized User Help You Build Credit?” Discover, 2018, https://discvr.co/2lAzSgt.

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Debit or Credit? What's the difference?

Debit or Credit? What's the difference?

For many people, when purchasing items with a debit card or credit card, the only difference for them may boil down to simply entering a PIN code or scribbling a signature.

But what really is the difference? The answer may be a little complicated, largely due to misnomers and a blending of terms used by the public. Read on to see what the difference actually is.

A clarification of terms
The words credit, debit, and cash seem to be used so loosely by the general public that many people seem confused by what the difference is between them. But in accounting and finance, they have very specific meanings. For our purposes, cash is money that you can spend immediately. It can be cold hard currency of course – bills and coins which you might have in your hand or in your wallet – or cash can refer to the balance in your checking account. This is money that you own, and you can withdraw all of it right now, electronically or physically.

Credit is basically someone’s willingness to accept an IOU from you. Here we will use it as a noun. Buying on credit means the seller trusts the buyer to hand over cash – money which is spendable right now – in the future. Debit, on the other hand, is a verb, and it means to deduct an amount from a cash balance immediately (often a bank account balance). Of course, credit can also be a verb (meaning to add to a cash balance immediately). This mixing of verbs and nouns can make the distinction of the terms in everyday use difficult.

  • Cash is money you can spend right now, electronically or physically.
  • Credit is an agreement to pay cash later.
  • Debit is a verb that means to subtract cash from a balance right away.

When money is due
The major difference between credit and debit cards is the time when cash must be paid. Credit cards, standing in for a promise to pay cash later, allow one to purchase things even if said person has no cash immediately available. For example, if you need to buy some clothes for a new job, you might only have enough cash on hand to purchase one outfit. You may not receive any more cash until you get your first paycheck in two weeks. But you probably wouldn’t want to wear the same outfit every day for two weeks. What can you do?

This is when credit comes in handy: you buy all the outfits you need now, while making a promise to pay the credit card company back in the future. You receive your outfits immediately even though you don’t technically have enough cash yet. You need to complete some work before you receive the money, but the credit card company accepts your IOU in place of cash for the time being.

On the other hand, if you use a debit card to pay for the clothes, the cash will be deducted immediately from your bank account. Remember, the balance of your bank account is cash in financial terms because it is spendable right now. When you enter your PIN code, the bank checks that you have enough money to make the purchase immediately and, if you do, the bank authorizes the transaction. If you need new shoes for your job but don’t have enough money in your bank account, you won’t be able to use a debit card.

Interest rates for using credit cards
Why would anyone ever want to use debit if they could use credit? One reason is budgeting and discipline. However, a stronger reason can be interest: promising to pay later may come at a price, and that price is called interest. Credit card companies do not make these short term loans out of the goodness of their hearts. They do it for profit. If you borrow money for a little while – i.e., you take money and promise to pay it back later – you will have to compensate the bank, seller, or credit card company for that ability. Thus we potentially pay interest with credit cards but not with debit cards.

Why don’t we pay interest on debit cards? Well, because the money is already yours, of course.

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