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Which Debt Should You Pay Off First?

August 12, 2019

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Phyllis Shallman

Phyllis Shallman

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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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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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Royal Wedding or Vegas? Keeping Your Wedding Costs Under Control

Royal Wedding or Vegas? Keeping Your Wedding Costs Under Control

The average cost of a wedding in the U.S. is over $33,000.¹ That’s an expensive day by any standard.

By comparison, that amount might be enough for a down payment on a first home or for a well-equipped, late-model minivan to shuttle around your 1.6 to 2 kids – assuming your family has an average number of children as a result of your newly wedded bliss.²

Having cold feet about shelling out that much cash for one day’s festivities? Or even worse, going into debt to pay for it? Here are a few ideas on how you can make your wedding day a special day to remember while still saving some of that money for other things (like a minivan).

Invite Close Friends and Family
Many soon-to-be newlyweds dream of a massive wedding with hundreds of people in attendance to honor their big day. But at some point during any large wedding, the bride or the groom – or maybe both – look around the well-dressed guests and ask themselves, “Who are all of these people, anyway?”

You can cut the cost of your wedding dramatically by simply trimming the guest list to a more manageable size. Ask yourself, “Do I really need to invite that kid who used to live next door to our family when I was 6 years old?” Small weddings are a growing trend, with many couples choosing to limit the guest list to just close friends and immediate family. That doesn’t mean you have to have your wedding in the backyard while the neighbor’s dog barks during your vows – although you certainly can. It just means fewer people to provide refreshments for and perhaps a less palatial venue to rent.

Budget According to Priorities
Your wedding is special and you want everything to be perfect. You’ve dreamed of this day your entire life, right? However, by prioritizing your wish list, there’s a better chance to get exactly what you want for certain parts of your wedding, by choosing less expensive – but still acceptable – options for the things that may not matter to you so much. If it’s all about the reception party atmosphere for you, try putting more of your budget toward entertainment and decorations and less toward the food. Maybe you don’t really need a seven-course gourmet dinner with full service when a selection of simpler, buffet-style dishes provided by your favorite restaurant will do.

Incorporate More Wallet-Friendly Wedding Ideas
A combination of small changes in your plan can add up to big savings, allowing you to have a memorable wedding day and still have enough money left over to enjoy your newfound bliss.

  • Consider a different day of the week. If you’re planning on getting married on a Saturday in June or September, be prepared to pay more for a venue than you would any other day of the week or time of the year.³ Saturday is the most expensive day to get married, and June and September are both peak wedding season months. So if you can have your wedding on, say, a Friday in April or November, this has the potential to trim the cost of the venue.
  • Rent a vacation house – or even get married on a boat. The smaller space will prevent the guest list from growing out of control and the experience might be more memorable than at a larger, more typical venue. Of course, both options necessitate holding the reception at the same location, saving money once more.
  • Watch the booze costs. There’s no need to have a full bar with every conceivable drink concoction and bow-tied bartenders that can perform tricks with the shakers. Odds are good that your guests will be just as happy with a smaller-yet-thoughtfully-chosen selection of beer and wine to choose from.
  • Be thrifty. If you really want to trim costs, you can get creative about certain traditional “must-haves,” ranging from skipping the flowers (chances are that nobody will even miss them) to purchasing a gently-used gown. Yes, people actually do this. Online outlets like OnceWed.com provide beautiful gowns for a fraction of the price of a new gown that you’ll likely never use again.

There’s a happy medium between a royal wedding and drive-thru nuptials in Vegas. If you’re looking for a memorable day that won’t break the bank, try out some of the tips above to keep things classy, cool – and within your budget.

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Sources: ¹ Seaver, Maggie. “The National Average Cost of a Wedding Is $33,391.” the knot, 2018, https://bit.ly/2FycQmH. ² Russell, Andrew. “Here’s why Canadians are having fewer children.” Global News, 5.7.2017, https://bit.ly/2C1fPii. ³ Mackey, Jaimie. “What Are the Most Affordable Months to Book a Wedding Venue?.” Brides, 9.10.2017, https://bit.ly/2ry6wSt.

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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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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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4 Reasons Why Life Insurance From Work May Not Be Enough

April 17, 2019
4 Reasons Why Life Insurance From Work May Not Be Enough
April 17, 2019

In some industries, the competition for good employees is as big a battle as the competition for customers.

As part of a benefits package to attract and keep talented people, many employers offer life insurance coverage. If it’s free – as the life policy often is – there’s really no reason not to take the benefit. Free is (usually) good. But free can be costly if it prevents you from seeing the big picture.

Here are a few important reasons why a life insurance policy offered through your employer shouldn’t be the only safety net you have for your family.

1. The Coverage Amount Probably Isn’t Enough.
Life insurance can serve many purposes, but two of the main reasons people buy life insurance are to pay for final expenses and to provide income replacement.

Let’s say you make around $50,000 per year. Maybe it’s less, maybe it’s more, but we tend to spend according to our income (or higher) so higher incomes usually mean higher mortgages, higher car payments, etc. It’s all relative.

In many cases, group life insurance policies offered through employers are limited to 1 or 2 years of salary (usually rounded to the nearest $1,000), as a death benefit. (The term “death benefit” is just another name for the coverage amount.)

In this example, a group life policy through an employer may only pay a $50,000 death benefit, of which $10,000 to $15,000 could go toward burial expenses. That leaves $35,000 to $40,000 to meet the needs of your spouse and family – who will probably still have a mortgage, car payment, loans, and everyday living expenses. But they’ll have one less income to cover these. If your family is relying solely on the death benefit from an employer policy, there may not be enough left over to support your loved ones.

2. A Group Life Policy Has Limited Usefulness.
The policy offered through an employer is usually a term life insurance policy for a relatively low amount. One thing to keep in mind is that the group term policy doesn’t build cash value like other types of life policies can. This makes it an ineffective way to transfer wealth to heirs because of its limited value.

Again, and to be fair, if the group policy is free, the price is right. The good news is that you can buy additional policies to help ensure your family isn’t put into an impossible situation at an already difficult time.

3. You Don’t Own The Life insurance Policy.
Because your employer owns the policy, you have no say in the type of policy or the coverage amount. In some cases, you might be able to buy supplemental insurance through the group plan, but there might be limitations on choices.

Consider building a coverage strategy with policies you own that can be tailored to your specific needs. Keep the group policy as “supplemental” coverage.

4. If You Change Jobs, You Lose Your Coverage.
This is actually even worse than it sounds. The obvious problem is that if you leave your job, are fired, or are laid off, the employer-provided life insurance coverage will be gone. Your new employer may or may not offer a group life policy as a benefit.

The other issue is less obvious.

Life insurance gets more expensive as we get older and, as perfectly imperfect humans, we tend to develop health conditions as we age that can lead to more expensive policies or even make us uninsurable. If you’re lulled into a false sense of security by an employer group policy, you might not buy proper coverage when you’re younger, when coverage might be less expensive and easier to get.

As with most things, it’s best to look at the big picture with life insurance. A group life policy offered through an employer isn’t a bad thing – and at no cost to the employee, the price is certainly attractive. But it probably isn’t enough coverage for most families. Think of a group policy as extra coverage. Then we can work together to design a more comprehensive life insurance strategy for your family that will help meet their needs and yours.

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4 fundamental home buying guidelines

March 6, 2019
4 fundamental home buying guidelines
March 6, 2019

Over the course of a 30-year mortgage term, a humble home may save you thousands of dollars as opposed to a more opulent one.

Even if you abide in a smaller house than you might have envisioned as a kid, it could still provide wonderful memories while offering a haven for your family.

Home ownership can be a desirable goal, but it may become a burden, however, if the home makes you “house poor”. Imagine if every spare penny had to go toward your mortgage or upkeep of your home with nothing left over. That’s the definition of things owning you instead of you owning things. Thankfully, there’s a different way.

If you’re in the market for a new home, there are four areas to consider before you start your serious search.

Save first
You might discover there are lots of ways you could buy a house with almost no money down. However, resist the temptation of low-down-payment loans. In what could be a still-volatile housing market, you would not want to run the risk of finding yourself in a negative equity position, which means you would owe more than your house is worth. You also may pay more for Private Mortgage Insurance, which is required for home loans with less than 20% down. Before you make your move, try to save up for the 20% down payment as well as any additional amounts to help cover closing costs. You’ll also want to have an emergency fund stashed away before you buy.

Think smaller
If you don’t need a “big” house, consider buying a smaller home. Everything in smaller homes may be less expensive to replace or maintain because there’s simply less square footage involved. (The purchase price could be lower as well.)

Keep your budget under 25%
The loan officer for your mortgage might say “yes” to an amount that would cause your monthly payments to be more than 25% of your take-home pay, but that doesn’t mean those payments will fit your budget. Leaving yourself some extra margin may help you navigate life’s surprises and may give you the freedom to save more, provide more for your kids’ college, or even plan that trip you’ve always wanted to take. Bear in mind that mortgage payments may include other fees, which may increase your final monthly payment amount significantly. A 30-year mortgage may provide flexibility

When you’re focused on how much you’re borrowing, a 15-year mortgage that pays down the debt faster may be tempting. Consider a 30-year loan, though. The potential flexibility of not being obligated to a possible higher monthly payment with a 15-year loan may come in handy when those unexpected emergencies happen.

All in all, it’s worth considering your long-term outlook before you even begin your new home search.

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Top 10 ways to save more this year

February 25, 2019
Top 10 ways to save more this year
February 25, 2019

If you’re still writing “2018” on your checks, then it’s not too late to commit to a few New Year’s resolutions for 2019!

Here are some ideas for financial changes you can put in place today that can help get you closer to your saving and retirement goals.

1) Start a budget
There are few things that can paint your future financial picture as clearly as starting a household budget. In the process, you’ll track your spending – both in the past and in the future – and you’ll identify wasteful expenses as well as establish your priorities.

2) Start couponing
Once upon a time, clipping coupons could be quite a chore. Now, mobile apps make finding coupons for popular stores effortless, and there are online websites that provide promotional codes for all sorts of brands. If someone gave you money for buying something you were going to buy anyway, you’d take it, right?

3) Target home energy costs
Is your thermostat programmable? You can adjust your home temperature while you’re at work. Do you need to fix the insulation in the attic or that gap under the front door? Get to it as soon as you can! The longer you let those things go equates to money you might be saving on your energy costs.

4) Buy “pre-owned” items
When we think “pre-owned” we tend to think of cars. But the truth is that almost all consumer items depreciate. How much might you save by buying a refurbished phone instead of a new phone? Used laptops may cost a fraction of what you’d pay for a brand new computer. When it’s time to replace household items, consider buying used.

5) Use the 30 Day Rule to keep impulse spending in check
If you’ve got money burning a hole in your pocket, just wait. It won’t really burn you. By waiting 30 days before making a purchase, you’ll have time to decide if you really need the item or if it was just an impulse buy.

6) Use a shopping list
Want a way to stay focused when shopping and avoid wasteful spending? It might seem obvious, but get in the habit of using a shopping list. Before you head to the store, take a few minutes and write out a list (on paper or your phone), and include only the items you need. Stick to the list!

7) Quit smoking
Smoking seems to be less common these days, but for many households it’s still a costly expense that literally goes up in smoke. Think about how much you could put towards your retirement instead if you kicked the habit. (As a bonus, your health will probably improve.)

8) Stop using credit cards
Credit cards are the most expensive type of debt in many households. If you make a plan to pay off credit card debt and to save credit for (real) emergencies, you’ll probably wish you had given up your credit card habit sooner.

9) Cancel unused memberships and subscriptions
Memberships and subscriptions have a way of becoming forgotten – that is, until they automatically renew. Ouch. Keep the ones you want or need, cancel the others.

10) Cut the cord
Cable TV has become a norm but is your family really using it? Try to find less expensive ways to watch shows or movies online. Major broadcast networks can be picked up for free with an HD antenna.

Bonus ideas: Get a strategy in place to start building an emergency fund. Check your insurance policies to make sure you have the coverage you need. Research some ways in your community to have free (or nearly free) fun with your family.

It might take a little extra effort, but putting any of these ideas in place this year will help you and your family save more of your hard earned money and help get you closer to your retirement goals.

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How to live without credit cards

February 18, 2019
How to live without credit cards
February 18, 2019

Our parents, uncles, aunts, and maybe even our grandparents tried to warn us about credit cards.

In some cases, the warnings might have been heeded but in other cases, we may have learned the cost of credit the hard way.

Using credit isn’t necessarily a bad thing, but it may be a costly thing – and sometimes even a risky thing. The interest from credit card balances can be like a ball and chain that might never seem to go away. And your financial strategy for the future may seem like a distant horizon that’s always out of reach.

It is possible to live without credit cards if you choose to do so, but it can take discipline if you’ve developed the credit habit.

It’s budgeting time
Here’s some tough love. If you don’t have one already, you should hunker down and create a budget. In the beginning it doesn’t have to be complicated. First just try to determine how much you’re spending on food, utilities, transportation, and other essentials. Next, consider what you’re spending on the non-essentials – be honest with yourself!

In making a budget, you should become acutely aware of your spending habits and you’ll give yourself a chance to think about what your priorities really are. Is it really more important to spend $5-6 per day on coffee at the corner shop, or would you rather put that money towards some new clothes?

Try to set up a budget that has as strict allowances as you can handle for non-essential purchases until you can get your existing balances under control. Always keep in mind that an item you bought with credit “because it was on sale” might not end up being such a great deal if you have to pay interest on it for months (or even years).

Hide the plastic
Part of the reason we use credit cards is because they are right there in our wallets or automatically stored on our favorite shopping websites, making them easy to use. (That’s the point, right?) Fortunately, this is also easy to help fix. Put your credit cards away in a safe place at home and save them for a real emergency. Don’t save them on websites you use.

Don’t worry about actually canceling them or cutting them up. Unless there’s an annual fee for owning the card, canceling the card might not help you financially or help boost your credit score.[i]

Pay down your credit card debt
When you’re working on your budget, decide how much extra money you can afford to pay toward your credit card balances. If you just pay the minimum payment, even small balances may not get paid off for years. Try to prioritize extra payments to help the balances go down and eventually get paid off.

Save for things you want to purchase
Make some room in your budget for some of the purchases you used to make with a credit card. If an item you’re eyeing costs $100, ask yourself if you can save $50 per month and purchase it in two months rather than immediately. Also, consider using the 30-day rule. If you see something you want – or even something you think you’ll need – wait 30 days. If the 30 days go by and you still need or want it, make sure it makes sense within your budget.

Save one card for occasional use
Having a solid credit history is important, so once your credit balances are under control, you may want to use one card in a disciplined way within your budget. In this case, you would just use the card for routine expenses that you are able to pay off in full at the end of the month.

Living without credit cards completely, or at least for the most part, is possible. Sticking to a budget, paying down debt, and having a solid savings strategy for the future will help make your discipline worth it!

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[i] https://www.myfico.com/credit-education/improve-your-credit-score

WW115442-0219

Save the money or pay off the debt?

February 13, 2019
Save the money or pay off the debt?
February 13, 2019

If you come into some extra money – a year-end bonus at work, an inheritance from your aunt, or you finally sold your rare coin collection for a tidy sum – you might not be quite sure what to do with the extra cash.

On one hand you may have some debt you’d like to knock out, or you might feel like you should divert the money into your emergency savings or retirement fund.

They’re both solid choices, but which is better? That depends largely on your interest rates.

High Interest Rate
Take a look at your debt and see what your highest interest rate(s) are. If you’re leaning towards saving the bonus you’ve received, keep in mind that high borrowing costs may rapidly erode any savings benefits, and it might even negate those benefits entirely if you’re forced to dip into your savings in the future to pay off high interest. The higher the interest rate, the more important it is to pay off that debt earlier – otherwise you’re simply throwing money at the creditor.

Low Interest Rate
On the other hand, sometimes interest rates are low enough to warrant building up an emergency savings fund instead of paying down existing debt. An example is if you have a long-term, fixed-rate loan, such as a mortgage. The idea is that money borrowed for emergencies, rather than non-emergencies, will be expensive, because emergency borrowing may have no collateral and probably very high interest rates (like payday loans or credit cards). So it might be better to divert your new-found funds to a savings account, even if you aren’t reducing your interest burden, because the alternative during an emergency might mean paying 20%+ rather than 0% on your own money (or 3-5% if you consider the interest you pay on the current loan).

Raw Dollar Amounts
Relatively large loans might have low interest rates, but the actual total interest amount you’ll pay over time might be quite a sum. In that case, it might be better to gradually divert some of your bonus money to an emergency account while simultaneously starting to pay down debt to reduce your interest. A good rule of thumb is that if debt repayments comprise a big percentage of your income, pay down the debt, even if the interest rate is low.

The Best for You
While it’s always important to reduce debt as fast as possible to help achieve financial independence, it’s also important to have some money set aside for use in emergencies.

If you do receive an unexpected windfall, it will be worth it to take a little time to think about a strategy for how it can best be used for the maximum long term benefit for you and your family.

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WW115113-0219

New Year, New (Financial) You!

January 23, 2019
New Year, New (Financial) You!
January 23, 2019

The new year is best known for resolutions. The trouble is that many new year’s resolutions don’t survive past the first month or so.

Why is that? You might suspect it’s because we set unrealistic goals or lack the proper motivation.

If you’ve got some financial resolutions you want to stick to, the key is to set realistic goals and have the proper discipline to hang in there, especially when the going gets tough.

Consider the following tips. Everyone can improve their finances and – as a bonus – you won’t end up with a basement full of barely-used exercise equipment that’s standing in for clothes drying racks.

Put away your credit cards
Do you have a fireproof box at home? (You probably should to store your extra-important documents, like the title to your car or your will.) This might be the perfect place for your credit cards. Many families struggle with credit card debt and in many cases, they aren’t even sure where the money actually went.

Credit can be a crutch that only ends up helping us postpone healthy financial habits. The frequent result is years of accumulating interest payments and growing balances that may prevent you from maximizing your savings. (Debt also may lead to household friction.) Lock the credit cards in the strongbox and make a pact with the rest of your household to use a credit card just for when you have a real emergency – and this would only occur if you’ve depleted your normal emergency fund.

Get your own life insurance policy
It’s great to see families insured by at least an employer-sponsored policy, but how insured are they really? Employer plans usually don’t follow you to the next job, and the benefit for your family is typically limited to a fixed amount, such as $50,000, or in some cases up to one to two times your salary.[i] That’s probably not enough coverage for your family – and it might disappear at any time if you were to change jobs. Get a quote for your own life insurance policy that better meets your needs and that you can control.

Make a budget
Many of us think we know where our money goes, but making a budget will illuminate your spending in vivid, full-color detail. You might startle your family with loud exclamations as you realize how much you actually spend on gourmet coffee stops, eating out, clothes, golf accessories, etc. It can add up quickly. A budget may not only help you cut spending, but it may also help you build your emergency savings (yes, this should be a budget item) and start piling away more money for retirement (another necessary budget item).

Know your number
Nope, not the winning lottery number. In this case, your number is the one that can help you reach a financial goal. Saving for retirement without knowing how much you’ll need or how much you can put away each month is like running a race blindfolded. You need to see the course and the finish line ahead. That’s your number. Whether saving, paying down debt, or accomplishing any other financial goal, you need to identify the number that will define your short-term targets and help you reach your ultimate destination.

If you need help with your goals or aren’t sure how to find the number you need to know to prepare for your future, reach out. I have some ideas we can discuss.

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[i] https://www.policygenius.com/life-insurance/group-life-insurance/

WW113769-0119

You don’t have to be a rocket scientist

January 14, 2019
You don’t have to be a rocket scientist
January 14, 2019

The best way to make sure your insurance is working well for you is to conduct an insurance review.

It might sound complicated, but you can do it!

Around the beginning of the year, many of us might be prompted to consider our financial health. Maybe we’re setting new financial goals. We could be re-adjusting our budgets or strategizing about how we’re going to pay for our summer vacation. But whatever’s on your mind as far as finances go, don’t leave out insurance, an integral part of your financial health.

What is an insurance review?
An insurance review takes a deep dive into your insurance protection to make sure you’ve got the coverage you need at the best rate. You’re going to want to take a look at all your insurance policies and the premiums you’re paying. Examine your life, health, auto, and home insurance policies. Don’t forget to include any insurance provided by your employer.

If you come across something that you’re not sure about or don’t understand, just jot it down. At the end of your review you can contact your insurance representative with your questions.

Why do you need an insurance review?
Every insurance consumer needs an insurance review. When your life changes, your insurance should change with it.

Here’s an example. Let’s say you treated yourself to a new entertainment system. You used your year-end bonus and finally bought that huge 4K OLED TV and wireless sound system you’ve been dreaming of for years. You’ll want to find out if the new system going to be covered on your renter’s insurance policy. Also, you’ll need to add the new system to your personal property inventory.

If you forget to make these updates, you could come up short come claim time. An annual insurance review catches situations such as this and helps make sure you’re fully covered.

An insurance review may save you money
Another benefit of an insurance review is it may save you money. Life changes may affect our insurance coverage and rates. Sometimes though, we don’t change but our insurance company does. Insurance companies change rates and offerings regularly. It’s essential to conduct an annual review to make sure you’re getting the best possible rate from your insurance company.

Your insurance agent or carrier can review your policies and underwriting factors to make sure you’re still getting the best policy rate.

When you need an insurance review
Keep in mind that anytime your life changes in certain ways you may need an insurance review – moving, purchasing a new car, getting married, starting a family, buying a home, etc.

As a rule of thumb, an annual insurance review is part of good financial health. Take a close look at your policies to make sure you’re getting comprehensive coverage at the best price. Insurance coverage and costs change as your life changes, so make a regular insurance review part of your financial strategy.

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Budgeting 101: Where should I start?

January 2, 2019
Budgeting 101: Where should I start?
January 2, 2019

It’s the new year so there are bound to be some new resolutions you want to stick to.

If one of them is improving your budgeting skills – or maybe just creating a budget in the first place – read on for some guidelines that may help reduce some of your expenses (including what you might call the essentials).

Start with debt and interest rates
If you have any loans in your name, rest assured there will be interest associated with those loans, unless you’ve got a really nice aunt who loaned you some money interest-free. From the borrower’s perspective, interest is simply the expense of receiving money from a creditor which you’re required to pay back over time. No one wants to pay higher interest than necessary.

In contrast to other expenses, like rent, food, or entertainment, interest itself produces absolutely no value for the borrower. The borrowed money may produce value, but the interest itself does not. For that reason, you’re going to want to pay as little interest on your loans as possible.

One strategy is to transfer credit card balances to lower APR credit cards – just beware of transfer fees. Read the fine print to make sure the new card actually carries a lower interest rate, as sometimes the rate after the introductory period may go up. If you can refinance any of your loans, like student, auto, or home, consider it. For example, there’s no reason to pay 5% if you can pay 4%. (Again, make sure you understand the terms and any fees involved.)

Slim down the essentials
This is the time when all items in your budget are going to come under consideration. Everything is on the table. For transportation, any reduction in cost you can make is going to depend on your location. If you live in a high-density urban area and you normally drive yourself or use public transit to get to work or other destinations, ask yourself if you can walk or cycle instead. These options often provide health benefits as well.

The key? Look at the essential sections of your budget and mentally run through how you obtain those essentials, like driving to the nearest grocery store or who your landlord is. Then brainstorm alternatives for paying for these items or services – anything is fair game! (For example, would your landlord reduce your rent if you help out with yard maintenance?) Finally, do a little research and analysis to see if those alternatives are cheaper (and feasible).

Eliminate non-essentials
The next step is to look at each non-essential and determine its utility to you. If you barely think about the actual purchase, you might have simply developed the routine of purchasing that item or service (think: “monthly movie subscription service you never use anymore”). In that case, the hardest part might be combing through your credit card statement and nixing the services you never use. Another example of routine, autopilot spending might be the soda you buy with your lunch. Do you really need it? Maybe not. Switching to tea or coffee that you can brew at home may be cheaper. And water is (usually) free.

Repeat this process with every non-essential. Are you really using your 10GB/mo mobile internet plan? If not, look for a lower, more cost-effective GB plan. The key here is to try to distinguish between convenience and necessity.

Don’t discount the discount
There are discounts everywhere, from loyalty programs to manufacturers’ coupons to seasonal specials. If there is an essential that burns your budget, it may be worth checking to see if you’re eligible for a government program.[i]

Some credit cards offer rewards programs, but be very careful to pay off the full amount each month to avoid accruing interest, otherwise your rewards could be negated.

Keep the big picture in mind
Sometimes it can be hard to justify the time and effort that might be involved to save $2 per day. It’s just two dollars, right? But look at the accumulated savings. Saving $2 per day for a year translates to over $700, or about $60 per month. If you choose to brew that tea instead of buying the soda, maybe you can afford the 10GB plan instead of the 1GB plan.

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[i] https://www.usa.gov/benefits

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Is a personal loan a good idea?

November 14, 2018
Is a personal loan a good idea?
November 14, 2018

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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The effects of closing a credit card

November 5, 2018
The effects of closing a credit card
November 5, 2018

Americans owe over $900 billion in credit card debt[i], and credit card interest rates are on the rise – now over 15 percent.[ii]

So if you’re on a mission to reduce or eliminate your credit card debt (go you!), you may be thinking you should close out your credit cards. However, you need to know that doing that may have several effects, some of which may not be what you’d expect.

There are times when canceling a card may be the best answer:

  1. A card charges an annual fee
    If you’re being charged an annual fee for the privilege of having a certain credit card, it may be better to cancel the card, particularly if you don’t use it often or have other options available.

  2. You can’t control your spending
    If “retail therapy” is impacting your financial future by creating an ever-growing mountain of debt, it may be best to eliminate the temptation of buying on credit.

Then there are times when closing a credit card may not make much difference, or could even hurt your score:

  1. Lingering effects: The good and the bad
    Many of us have heard that credit card information stays on your report for 7 years. That’s true for negative information, including events as large as a foreclosure. Positive events, however, stay on your report for 10 years. In either case, canceling your credit card now will reduce the credit you have available, but the history – good or bad – will remain on your credit report for up to a decade.

  2. The benefits of old credit
    Did you know that one aspect factored in to your credit score is the age of your accounts? Canceling a much older account in favor of a newer account can actually leave a dent in your score, and we know that canceling the card won’t erase any negative history less than 7 years old. So it may be best to keep the older credit account open as long as there are no costs to the card. Another point to consider is that the effects of canceling an older account may be magnified when you’re younger and haven’t yet established a long enough credit history.

Credit utilization affects your credit score
Lenders and credit bureaus not only look at your repayment history, they also look at your credit utilization, which refers to how much of your available credit you’re using. Lower usage can help your credit score while high utilization can work against you.

For example, if you have $20,000 in credit available and $10,000 in credit card balances, your credit utilization is 50 percent. If you close a credit card that has a credit limit of $5,000, your available credit drops to $15,000 but your credit utilization jumps to 67 percent if the credit card balances remain unchanged. Going on a credit card canceling rampage may actually have negative effects because your credit utilization can skyrocket.

If unnecessary spending is out of control or if there is a cost to having a particular credit card, it may be best to cancel the card. In other cases, however, it’s often better to use credit cards occasionally, and make sure to pay them off as quickly as possible.

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[i] https://www.nerdwallet.com/blog/average-credit-card-debt-household/
[ii] https://fred.stlouisfed.org/series/TERMCBCCINTNS

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How to save for a big purchase

October 22, 2018
How to save for a big purchase
October 22, 2018

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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