Have you fallen into a rut of living the same day over and over again, rehashing the same information and thinking the same thoughts? Maybe you’re bored and looking for adventure or intellectual stimulation. It turns out that there are actually a few things you can do to consistently push your mental capacities and become a lifelong learner!
Good writing is magical. It can transport us to distant lands and introduce us to incredible worlds and characters. But reading can also transform our minds, especially when we encounter new and challenging ideas. We’re able to overcome the limitations of our own imaginations and experiences and see the world through someone else’s eyes.
Surveys have shown that almost all successful people, regardless of their backgrounds, read extensively.(1) And it’s no wonder; the ability to assume appreciate perspective is incredibly powerful. But what should you be reading?
Expand your horizons
Not all reading is created equal. Romance novels about vampires and werewolves might count as brain “junk food”. It also might be best to avoid a 19th-century philosophical treatise right out of the gate!
Instead, explore entry-level books about topics you don’t know a lot about. Dip your toe into new subjects and see if they spark your interest! You can always move to more advanced work on the subject from there. On the other hand, you can find new opinions and perspectives on topics that you’ve already mastered. How is your field changing or evolving?
Conversation is another great way to encounter new ideas. Chances are that you’re surrounded by vast amounts of knowledge sitting untapped inside your friends and family. You just need to know how to extract it! The keys are to listen seriously and ask real questions based on what you’ve heard. Most of us are more consumed with what we’re going to say next than with what the other person is saying. Honing in on what you’re hearing and trying to develop questions as you listen helps you understand what they’re saying and fuels your curiosity. It’s a virtuous cycle where everyone benefits!
But the key to both of these lifelong learning strategies is to focus intensely. That means when you’re reading or taking a class, turn off your phone and absorb what’s right before you. Engage in conversation intentionally, asking real questions based on what the other person is saying. You might be surprised how tricky both of those things can be at first! But stick with it. Those learning muscles will grow stronger and stronger until you’re brimming with information!
One final tip: always ask why. Don’t just ponder something to yourself. Ask someone who might possibly have an answer! And don’t be vague. Be as precise and specific as possible when you ask your question. The best thing about learning is that you can potentially keep learning forever! Learn to love the process of learning, and you might be amazed by how far your brain power can go.
Some people seem to be born with an eye for the new and the unexpected and the exciting. There’s nothing wrong with conventional thinking; you probably don’t want a doctor or nurse known for an avant-garde attitude! But there are times when we’re confronted by problems without obvious solutions. We have to think outside the box to overcome and make progress. Fortunately, there are some steps you can take to approach life more creatively. You might not become a Van Gogh, but these tips might come in handy the next time you encounter a roadblock.
Talk to the experts to expand your horizons
Experts can be a touch boring, especially when they keep lording their knowledge over you at dinner parties. But they can also be a huge source of inspiration, if you know how to talk to them! Instead of zoning out or looking for a way to interject your own opinion, start listening for opportunities to ask questions. Look for things you don’t understand about what they’re saying or an idea that strikes you as interesting and ask them about it. And when they’re done explaining it, try repeating it back in your own words. You might be surprised by the connections that your brain starts to make. Plus, the person you’re talking to will feel valued and appreciated!
Boredom births creativity.(1) It’s counterintuitive, but it makes sense when you think about it. Your brain likes to be busy. Watching paint dry or reading the phonebook is so dull that (if you actually did those activities) you’d spontaneously start exploring new ideas just to pass the time. Your brain is never less inhibited or less constrained than when you’re performing a mundane task. Clear out some time in your schedule for a boring activity. Maybe (safely!) try voice recording your ideas in the car on your commute to and from work. You might find a long shower is the perfect time to brainstorm and think through problems. Get creative and do something monotonous!
Pick up a creative hobby
If your schedule is already full and you’re constantly on the move, picking up a hobby might seem kind of pointless. But a hobby can teach you important lessons about creativity that you can’t learn anywhere else. You might learn that performing a beautiful song is composed of dozens of little micro-movements and components that all take time to learn and master. You might learn that painting a stunning landscape starts with a single brushstroke. And you might learn that out-foxing your opponent in chess comes down to your burgeoning ability to imagine a dozen possible outcomes and responding well when things don’t go your way. Clear out some time, talk to an expert, and start creating something just for fun!
Start with the craziest idea first
Convention is the biggest enemy of creativity. We’ve all had ideas that we’re afraid to share or voice because we think people will think we’re stupid. But being creative is all about seeing potential where no one else can. And that by default means some folks are going to shoot you looks. Overcome all of that by expressing your wildest ideas first. Come out of the gate with a barn burner. Listen to serious feedback and criticisms, but don’t be afraid to voice your ideas. You might just stumble on something brilliant!
These tips may not transform you into a generation-defining sculptor or wordsmith*. But they might just spark the creative edge you need to see problems in a new light and find opportunities where others see danger. So make some time, start some conversations, pick up some hobbies, and start dreaming!
*Please let me know if this article does happen to make you into a generation defining artist of any kind!
They’re not usually meant to consume hours of your time each week or distract you from your main source of income. Fortunately, right now we’re in a side gig golden age. There are dozens of opportunities just a tap or click away. Here are a few simple side hustle ideas that might make you a few extra bucks without sacrificing all of your free time!
Working as a freelance writer can be a simple, efficient way of turning your prose prowess into cold, hard cash. Powerful and persuasive writing is of top importance in the information age, and there are plenty of people and companies that are willing to pay writers for quality content. Look for opportunities to write about your favorite hobbies and interests. It’s an easy way to combine your personal passions with making a little extra each month.
Private tutoring or lessons
Do you have a hidden talent? Maybe you’re a secret chef, a low profile ping pong wizard, or a late night guitar hero. You might be surprised by how much people will pay for your insights and guidance—certain video game coaches can make between $10 to $140 per hour, depending on their skill level!(1) The beauty of this gig is that it doesn’t take tons of leg work to get started. You already have the skills and your client base can be from your local community. Just plot out a curriculum, set a price for your services, and get the word out!
Rideshares have become icons of the side-hustle economy. But ferrying strangers to and from bars on the weekends isn’t the only way to make some extra cash with your car. There are plenty of startups and companies that need drivers. That might mean delivering food for a local restaurant chain or dropping off packages for a more established company. Do some sleuthing on what’s available near you and what demand looks like in your area.
The beauty of these gigs is that they’re built on skills and tools that you already have. Put in the leg work to get things started and you might just find yourself with a dependable extra income stream!
Most major banks have apps or websites that allow you to transfer funds and manage your account without ever going into a branch. But what about the new generation of online-only banks that seem to be popping up? Can you be a reliable bank without brick and mortar locations? Let’s explore the world of online banks and some pros and cons.
How do online banks work? Online banks and physical banks have a lot in common. They’re both places that store and protect your money. They both loan out your money for a profit. So what’s the big difference?
For one thing, banks with brick and mortar locations have high overhead. They may pay rent on properties, maintain buildings, hire managers to operate locations, and pay tellers to serve customers. Online banks typically have drastically lower upkeep costs. Sure, you need to pay developers to keep the system running smoothly and securely, but it’s generally much lower compared to the costs of maintaining physical locations.
Pros So what do those differences mean for you, the consumer? Banks with physical locations will pass on their location upkeep expenses to you, the customer. That means they’re more likely to charge you for opening an account, give you as little interest as possible, and crank up rates on loans for houses and cars.
Online banks aren’t weighed down by those physical locations. They have fewer expenses and don’t have to charge you as much to make ends meet (1). That means you might get significantly higher interest rates on your savings accounts. They also tend to lean less on fees than traditional banks (2).
Cons But there are some drawbacks to using an online bank. You might find withdrawing cash without paying ATM fees more difficult than before (3). Depositing cash might also take some more leg work and research (4). Customer service can’t be handled in person so problems must be solved via phone or online chat. Plus, safety deposit boxes are harder to come by with an online bank. In short, many of the old school conveniences just aren’t provided by the new generation of online banks.
It’s important to weigh the pros and cons before pulling the trigger and opening an account with an online bank. Trying to make more with your savings account? You may want to investigate banking online. But if you’re on a strict cash diet to avoid excessive spending, a traditional bank might have some classic services that will come in handy. Talk with a licensed financial professional before you make the decision.
At the least, a low score can saddle you with high interest rates, or at the worst, prevent you from getting important loans.(1) It can even be a roadblock to renting a house or getting a job!(2)
But what exactly is a credit score? And how is it different from a credit report? It turns out the two have a close relationship. Let’s explore what they are and how they relate to each other.
Your credit report is simply a record of your credit history. Let’s break that down.
Many of us carry some form of debt. It might be a mortgage, student loans, or credit card debt (or all three!). Some people are really disciplined about paying down debt. Others fall on hard times or use debt to fuel frivolous spending and then aren’t able to return the borrowed money. As a result, lenders typically want to know how reliable, or credit worthy, someone is before giving out a loan.
But predicting if someone will be able to pay off a loan is tricky business. Lenders can’t look into the future, so they have to look at a potential borrower’s past regarding debt. They’re interested in late payments, defaulted loans, bankruptcies, and more, to determine if they can trust someone to pay them back. All of this information is compiled into a document that we know as a credit report.
All of the information from someone’s credit report gets plugged into an algorithm. It’s goal? Rate how likely they are to pay back their creditors. The number that the algorithm spits out after crunching the numbers on the credit report is the credit score. Lenders can check your score to get an idea of whether (or not) you’ll be able to pay them back.
Think of a credit report like a test and the credit score as your grade. The test contains the actual details of how you’ve performed. It’s the record of right and wrong answers that you’ve written down. The grade is just a shorthand way to evaluate your performance.
So are credit reports and credit scores the same thing? No. Are they closely related? Yes! A bulletproof credit report will lead to a higher credit score, while a report plagued by late payments will torpedo your final grade. And that number can make all the difference in your financial well-being!
1) Latoya Irby, “The Side Effects of Bad Credit,” The Balance, April 5, 2020.
2) Latoya Irby, “The Side Effects of Bad Credit,” The Balance, April 5, 2020.
Americans now owe a record $1.04 trillion in credit card debt.¹ If you’re not careful, credit card debt could hurt your credit score, wipe out your savings, and completely alter your personal financial landscape.
So: debt, debit, both, or neither? Before you apply for that next piece of plastic, here’s what you need to watch out for.
Low interest rates
Credit card companies spend a lot of money on marketing to try to get you hooked on an offer. Often you hear or read that a company will tout an offer with a low or zero percent APR (Annual Percentage Rate). This is called a “teaser rate.”
Sounds amazing, right? But here’s the problem: This is a feature that may only last for 6–12 months. Ask yourself if the real interest rate will be worth it. Credit card companies make a profit via credit card interest. If they were to offer zero percent interest indefinitely, then they wouldn’t make any money.
Make sure you read the fine print to determine whether the card’s interest rate will be affordable after the teaser rate period expires.
Fixed vs. variable interest rates
Credit cards will operate on either a fixed interest rate or a variable interest rate.² A fixed interest rate will generally stay the same from month to month. A variable interest rate, by contrast, is tied to an index (fancy word for interest rate) that moves with the economy. Normally the interest rate is set to be a few percentage points higher than the index.
The big difference here is that while a fixed rate may change, the credit card company is required to inform its customers when this happens. While a variable APR may start out with a lower interest rate, it’s not uncommon for these rates to fluctuate. What’s more, the credit card company isn’t required to tell you about a variable rate change at all!³
Low interest rates are usually reserved for individuals who have great credit with a long credit history. So, if you’ve never owned a credit card (or you are recovering from a negative credit history) this could be a red flag.
Of course, you could avoid these pitfalls altogether if you pay off your credit card balance before the statement date. Whatever the interest rate, be sure you’re applying for a credit card that’s affordable for you to pay off if you miss the payoff due date.
High credit limits
While large lines of credit are usually reserved for those with a good credit history, a new cardholder might still receive an offer for up to a $10,000 credit limit.
If this happens to you, beware. While it may seem like the offer conveys a great deal of trust in your ability to pay your bill, be honest with yourself. You may not be able to recover from the staggering size of your credit card debt if you can’t pay off your balance each month.
If you already have a card with a limit that feels too high, it may be in your interest to request that the company lower your card’s limit.
So you’re late paying your credit card bill. Late payments not only have the potential to hurt your credit score, but some credit cards may also assess a penalty APR if you haven’t paid your bill on time.
Penalty APRs are incredibly high, usually topping out at 29.99%.⁴ The solution here is simple: pay your bill on time or you might find self paying ridiculous interest rates!
Balance transfer fees
It’s not uncommon for a cardholder to transfer one card’s balance to another card, otherwise known as a balance transfer. This can be an effective way to pay off your debt while sidestepping interest, but only if you do so before the card’s effective rate kicks in. And, even if a card offers zero interest on balance transfers, you still may have to pay a fee for doing so.
Whatever type of credit card you choose, the only person responsible for its pros and cons is you. But if you’re thrifty and pay attention to the bottom line, you can help make that credit card work for your credit score and not against it.
¹ Samuel Stebbins “Where credit card debt is the worst in the US: States with the highest average balances,” USA Today (March 7 2019, updated April 26, 2019)
² Latoya Irby, “Credit Card Interest Rates: Fixed vs. Variable Rates,” The Balance (May 20, 2019)
³ Latoya Irby, “Credit Card Interest Rates: Fixed vs. Variable Rates,” The Balance (May 20, 2019)
⁴ Latoya Irby, “Credit Card Default And Penalty Rates Explained,” (August 12, 2019)
Paying off your mortgage, car, and student loans can sometimes seem so impossible that you might not even look at the total you owe. You just keep making payments because that’s all you might think you can do. However, there is a way out! Here are 4 tips to help:
Make a Budget
Many people have a complex budget that tracks every penny that comes in and goes out. They may even make charts or graphs that show the ratio of coffee made at home to coffee purchased at a coffee shop. But it doesn’t have to be that complicated, especially if you’re new at this “budget thing”. Start by splitting all of your spending into two categories: necessary and optional. Rent, the electric bill, and food are all examples of necessary spending, while something like a vacation or buying a third pair of black boots (even if they’re on sale) might be optional. Figure out ways that you can cut back on your optional spending, and devote the leftover money to paying down your debt. It might mean staying in on the weekends or not buying that flashy new electronic gadget you’ve been eyeing. But reducing how much you owe will be better long-term.
Negotiate a Settlement
Creditors often negotiate with customers. After all, it stands to reason that they’d rather get a partial payment than nothing at all! But be warned; settling an account can potentially damage your credit score. Negotiating with creditors is often a last resort, not an initial strategy.
Interest-bearing debt obligations may be negotiable. Contact a consolidation specialist for refinancing installment agreements. This debt management solution helps reduce the risk of multiple accounts becoming overdue. When fully paid, a clean credit record with an extra loan in excellent standing may be the reward if all payments are made on time.
Get a side gig
You might be in a position to work evenings or weekends to make extra cash to put towards your debt. There are a myriad of options—rideshare driving, food delivery, pet sitting, you name it! Or you might have a hobby that you could turn into a part-time business.
If you feel overwhelmed by debt, then let’s talk. We can discuss strategies that will help move you from feeling helpless to having financial control.
Having your emergency fund at the ready would be ideal to cover your conundrum, but what if your emergency fund has been depleted, or you can’t or don’t want to use a credit card or line of credit to get through a crisis?
There are other options out there – a cash advance or a payday loan.
But beware – these options pose some serious caveats. Both carry high interest rates and both are aimed at those who are in desperate need of money on short notice. So before you commit to one of these options, let’s pause and take a close look at why you might be tempted to use them, and how they compare to other credit products, like credit cards or traditional loans.
The Cash Advance
If you already have a credit card, you may have noticed the cash advance rate associated with that card. Many credit cards offer a cash advance option – you would go to an ATM and retrieve cash, and the amount would be added to your credit card’s balance. However, there is usually no grace period for cash advances.[i] Interest would begin to accrue immediately.
Furthermore, the interest rate on a cash advance may often be higher than the interest rate on credit purchases made with the same card. For example, if you buy a $25 dinner on credit, you may pay 15% interest on that purchase (if you don’t pay it off before the grace period has expired). On the other hand, if you take a cash advance of $25 with the same card, you may pay 25% interest, and that interest will start right away, not after a 21-day grace period. Check your own credit card terms so you’re aware of the actual interest you would be charged in each situation.
The Payday Loan
Many people who don’t have a credit history (or who have a poor credit rating) may find it difficult to obtain funds on credit, so they may turn to payday lenders. They usually only have to meet a few certain minimum requirements, like being of legal age, showing proof of employment, etc.[ii] Unfortunately, the annualized interest rates on payday loans are notoriously high, commonly reaching hundreds of percentage points.[iii]
A single loan at 10% over two weeks may seem minimal. For example, you might take a $300 loan and have to pay back $330 at your next paycheck. Cheap, right? Definitely not! If you annualize that rate, which is helpful to compare rates on different products, you get 250% interest. The same $300 charged to a 20% APR credit card would cost you $2.30 in interest over that same two week period (and that assumes you have no grace period).
Why People Use Payday Loans
Using a cash advance in place of purchasing on credit can be hard to justify in a world where almost every merchant accepts credit cards. However, if a particular merchant only accepts cash, you may be forced to take out a cash advance. Of course, if you can pay off the advance within a day or two and there is a fee for using a credit card (but not cash), you might actually save a little bit by paying in cash with funds from a cash advance.
Taking a payday loan, while extremely expensive, has an obvious reason: the applicant cannot obtain loans in any other way and has an immediate need for funds. The unfortunate reality is that being “credit invisible” can be extremely expensive, and those who are invisible or at risk of becoming invisible should start cautiously building their credit profiles, either with traditional credit cards or a secured card[iv], if your circumstances call for it. (As always, be aware of fees and interest rates charged with the card you choose.) Even more important is to start building an emergency fund. Then, if an emergency does arise, payday loans can be avoided.
Now you can plan those vacations for just the two of you, delve into new hobbies you’ve always wanted to explore… and decide whether or not you should keep your life insurance as empty nesters.
The answer is YES!
Why? Even though you and your spouse are empty nesters now, life insurance still has real benefits for both of you. One of the biggest benefits is your life insurance policy’s death benefit. Should either you or your spouse pass away, the death benefit can pay for final expenses and replace the loss of income, both of which can keep you or your spouse on track for retirement in the case of an unexpected tragedy.
What’s another reason to keep your life insurance policy? The cash value of your policy. Now that the kids have moved out and are financially stable on their own, the cash value of your life insurance policy can be used for retirement or an emergency fund. If your retirement savings took a hit while you helped your children finance their college educations, your life insurance policy might have you covered.Utilizing the cash value has multiple factors you should be aware of before making any decision.*
Contact me today, and together we’ll check up on your policy to make sure you have coverage where you want it - and review all the benefits that you can use as empty nesters.
*Loans and withdrawals will reduce the policy value and death benefit dollar for dollar. 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 premium 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 59 1/2, may be subject to a 10% tax penalty.
Your credit report may affect anything from how much you pay for a cell phone plan, to whether you would qualify for the mortgage you might want.
Getting and maintaining a good credit score can be advantageous. But how do you achieve a good credit report? What if you’re starting from scratch? The dilemma is like the chicken and the egg question. How can you build a positive credit report if no one will extend you credit?
Read on for some useful tips to help you get started.
Use a cosigner to take out a loan
One way to help build good credit is by taking out a loan with a cosigner. A cosigner would be responsible for the repayment of the loan if the borrower defaults. Many banks may be willing to give loans to people with no credit if someone with good credit acts as a cosigner on the loan to help ensure the money will be paid back.
Build credit as an authorized user
If you don’t want or need to take out a loan with a cosigner, you may want to consider building credit as an authorized user of someone else’s credit card – like a parent, close friend, or relative you trust. The credit card holder would add you as an authorized user of the card. Over time if the credit account remains in good standing, you would begin building credit.
Apply for a store credit card to build your credit
Another way to start building your credit record is to secure a store credit card. Store credit cards may be easier to qualify for than major credit cards because they usually have lower credit limits and higher interest rates. A store credit card may help you build good credit if you make the payments on time every month. Also be sure to pay the card balance off each month to avoid paying interest.
Keep student loans in good standing
If there is an upside to student loan debt, it’s that having a student loan can help build credit and may be easy to qualify for. Just keep in mind, as with any loan, to make payments on time.
Good credit takes time
Building a good credit report takes time, but we all must start somewhere. Your credit score can affect many aspects of your financial health, so it’s worth it to build and maintain a good credit report. Start small and don’t bite off more than you can chew. Most importantly, as you begin building credit, protect it by avoiding credit card debt and making your payments on time.
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.
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.
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.
Here’s the breakdown:
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 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!
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.
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.
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.
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.
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.
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!
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!
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.
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.
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!
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!
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…
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:
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.
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!
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.