What’s The Best Way to Pay Off Student Loans?

 

Big dreams, big debt

Many people who go to college do so with the help of student loans. I was one of those kids who couldn’t quite decide what I wanted to be when I grew up, and so I ended up spending many extra years in college, accruing massive student loan debt the whole time. At the time, I didn’t pay much attention to it, because it is not required to make payments on student loans while one is still in school. I sure did notice afterward, though, when the bills started coming in! I had multiple different loans from different companies, including both public and private loans. I had maxed out the amount of public or federal loans that I was able to get and had to get the rest in private loans, which came with even more hefty interest rates. The result was hundreds of dollars per month in bills 6 months after graduation.

Indecision will cost you

I have two bachelor’s degrees because the first one ended up being in a major that really didn’t have much in the way of job prospects without my having to go on to my Doctorate, which I could not do at the time. Unfortunately, I found this out after graduation. I started out paying the loans the best I could, which sometimes meant that I paid one but not another, or none at all. I got farther and farther behind, and because of interest my balances kept going up. My credit took a serious hit.

Taking a Break from Student Loan Payments Without Penalty

I finally went back to college for a degree that would lead to a well paying career, and in doing so was able to skip my loan payments for a while longer. This is called having your student loans deferred. I learned that if you contact the servicer of your loans, there are multiple different types of deferments. You can apply to have loans deferred for hardship for varying lengths of time. The main thing is to communicate with the lender/servicer before you are late or miss a payment. This will save your credit.

How To Refinance Student Debt

After I graduated the second time, I started paying my loans again. I also started doing a lot of research about how to lower my payments, because I felt like I was getting absolutely nowhere and drowning. I found out that I could consolidate my federal loans into one large loan with a fixed interest rate with only 1 payment. I immediately did so. It wasn’t hard, it just took some paperwork. I did some searching online for companies that offered student loan refinancing. At the time, there was really only one program with the federal government that did so. Nowadays there are multiple companies that offer student loan consolidation, so if you decide to go this route, shop around for the best interest rate and time frames. I then only had that payment and my payments for my private loans, because the government did not allow the combination of public and private loans. This still beatthe 6 payments I had before that because the consolidated payment was significantly less than the individual payments had been, and the interest rate was pretty low. One note about consolidation, and that is that if you consolidate loans it may make you ineligible for certain repayment programs offered by the government. One of those is the loan repayment for public service program, which is a way for people to get loans forgiven if they enter into certain professions. Always look into the details of loan repayment programs you may be interested in before consolidating, unless you cannot make the payments without doing so.

The Best Way To Pay Off Student Loans: The Stacked Loan Payment Payoff Method

Since I still had several loan payments, I wanted to pay them off in the most efficient way possible. I did so using a method called stacked pay off. This means that any time I had extra money I would send it to the loan with the highest interest rate first until that loan got paid off. Then, I would apply the amount of money I had been paying on that loan to the next loan in line each month. This drops the balance of the loans much faster than just paying the minimum payment on each one or just paying a little extra on each one. It is also quite satisfying to see loans being paid in full.

During college, I was fortunate enough to get married. My spouse, unfortunately, had almost as much loan debt as I did. We applied the same methods to paying them off, including consolidating them. We decided to maintain our frugal college lifestyle even after we were both working, and we applied all of my spouses income and any extra I made directly to our student loans in the stacked loan payoff method. The result was that we were able to pay off $136,000 in student loans in 7 years, with a combined income of about $80,000 per year.

Takeaways

Before even taking out any student loans, do your best to make a firm decision on what you want to accomplish in college. Taking extra classes or changing majors costs a lot of extra money.

Always communicate with your lenders before you miss any payments or get into financial trouble. Often they can help with deferments or other money saving options.

If at all possible, pay extra each month to decrease the amount of interest you pay on the loans.

Consider consolidation, if you have multiple loans with multiple payments and the payments cause a strain on you.

If you still have multiple loans or debts, using the stacked loan payment method can save time and money by paying the loans with the highest interest first and then applying the payments for each paid off loan to the next loan in line.

It will take time, but you can and you will one day be debt free. In the meantime, there are ways to make obligation feel less overwhelming and more manageable.

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Introduction to Credit

What is Credit?

Credit is a measure of how trustworthy you are with your money. It shows a record over time of how well you meet your financial obligations. This is reflected in a credit score. The better your credit score, the more likely a company will see you as an acceptable risk to take, and will lend you money. A company, say a loan company or a credit card company, extends you the privilege of using money you do not have. In exchange, they charge you extra each month in the form of interest. Then, you make payments that are designed to pay off the interest, then the original loan amount, over a set period of time.

Interest and the 0% Interest Trap

Credit isn’t free, unless there is a 0% interest rate. In fact, any time you use credit with interest above 0%, you will ultimately pay much more for whatever it is that you are buying. Even if the interest rate is 0%, beware of fine print. Often these are introductory offers that come with stipulations. Many times, the stipulations include having to pay in a specific amount of time, and if that doesn’t happen, then a lump interest sum is added to the amount you owe from that point on. So, say you had a 0% interest loan on a $1,000 mattress. The fine print shows that you have 6 months to pay for that 0% interest, but if your payments extend longer, the rate reverts to 22%. They would add $220 to your balance at 6 months, and from then on, whatever your balance was at the end of the month would also have 22% added to it. It would be extremely easy to get behind if you could not afford to pay the extra each month, or were unable to pay in the allotted 6 month initial period.

Credit cards work similarly, and are an easy way to get yourself in over your head. Many come with the introductory low interest rate. Wracking up a huge balance for that rate, though, is a dangerous game. You will have to pay it off in the specified period of time, or the debt snowballs as it did in the mattress example. After the introductory period, any remaining balance is usually subject to a pretty hefty interest rate, that compounds, or gets charged based on the amount you owe, plus any interest owed, each month. The minimum payment that the credit card company requires will never cover all of the interest and the amount you owe. They are in it to make money. In fact, paying the minimum could make your total debt grow. If at all possible, never carry a balance from one month to the next. If you pay a credit card off every month, you will not be charged interest, and your credit rating will improve over time.

What is Credit Utilization?

Credit utilization can be a term that refers to how much of your credit limit you are actually using, or utilizing. In other words, your current balance relative to the amount you could charge. A credit scoring company, such as FICO, looks negatively on someone who utilizes a high proportion of their credit line and keeps a balance. Credit utilization could also define how you are using your credit to increase your credit score. Utilizing credit in a way that it helps you and does not hurt you could be termed credit utilization. Using credit to pay other long term debts off, such as student loans and mortgage payments increases your credit score. It is improved by having accounts of different types, and paying each as agreed. Be careful that your total debt, both overall (excluding mortgage generally) and monthly does not exceed 1/3 of your income. This is called the debt to income ratio, and plays a large factor in your score. The lower your debt in relation to your income the better. There is a balancing act in how many accounts in good standing is too many or not enough. You want a mix of account types, but be sure your balances on rolling credit, such as credit cards, remains very low. Ideally, 0 each month. On regular loans, paying on time every month and a little extra each payment will add to your credit score.

A Warning from My Own Story

Credit allows you to buy things that you could otherwise not afford to pay for all at once. It should be seen as a tool and a privilege. Good credit can help you to get things such as nice cars and a nice home. Bad credit can affect nearly every aspect of your life. A person with bad credit can lose job opportunities, or be denied housing. In my life, I have been in a predicament where I did not have good credit, because I had let my student loan payments lapse. My partner at the time also had a rental eviction on her record. We could not find a single person to rent to us, and we ended up homeless briefly until a friend took us in. I never want that to happen to you, so please heed my advise. Protect your credit!

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Easy Ways to Build Credit

 

What is Credit?

Credit, and the credit score that goes with it, is a measure of how well you meet your financial obligations. You gain credit by having things like loans and credit cards (which really are a type of loan with a rolling or changing balance), and paying those off as agreed. The longer you have an account that remains in good standing, the better your credit will become over time. Factors that go into your score look at your overall financial health, including your total debt amount related to how much money you make and how much debt you have access to (your credit limit). The amount of time you have had credit and used it wisely, as well as the different types of accounts that you maintain also affect your score. There are some easy ways to build credit, but overall it takes time and careful money management.

Ways to Build Credit With No Credit History

When you are first starting out, it can feel like a catch 22. No one wants to give you credit, because you don’t yet have any. There are some ways around this. One of these is to get a loan, be it for a car or a small personal loan for something else, with someone else that already has established credit as your co-signer. This means that if you were to not make the payments, that person would then be responsible. Usually, it is a parent that will do this for you. Then, make sure to make the payments each and every time, on time. Your credit will slowly improve.

If that is not an option, there are things called secured credit cards which may be available to you. These work by having you actually send the credit card company a certain amount of money which they hold and they issue a credit card with a limit of that same amount, or sometimes slightly higher. Essentially, they have no risk, and you then have a credit card that you can use to make purchases and pay them off, thus building your credit.

Pitfalls of Credit Cards

Beware when opening and using credit cards, as it can be quite easy to lose track of how high their balances get. The interest rate will also probably be extremely high for those just starting out, so if you get behind in your payments or do not pay your balance off each month, your bill could end up getting bigger every month instead of smaller. Many people ruin their credit and get in dire financial straits using credit cards. It is always a good idea to keep close track of your credit card balance, and pay it off every month. If you find you cannot pay it off every month, at least pay more than the minimum payment so the interest doesn’t make your balance skyrocket, and then pay it off as soon as possible.

Warning!
The thing to remember about credit is that it takes a long time to build it, and a second to ruin it. If, for instance, you did like I did and paid my student loans as agreed for a number of years and then ran into some difficulties and didn’t pay for a little, your credit would go straight down the tubes. The longer the debt isn’t paid, the lower your score goes. If a debt is actually so far behind that it gets sent to a collection agency or goes into default, it will take years and money for your credit to recover.

I will say it again-you want to avoid late payments and missed payments on any of your financial obligations if at all possible. A good idea is if you are having any kind of difficulty paying, you should immediately call the company that has your debt and ask them about what options they have to help. Often, they will offer a temporary waiver or forbearance. They might even cancel some of the debt or drop the interest rate for you. This goes for many types of debt, from credit card companies, to loan companies, and even the Internal Revenue Service for taxes. Communication can go a long way in saving your credit!

Takeaways

It is important to build credit, and to use credit wisely. It can be a double edged sword to have a loan or a credit card, because both charge interest on your purchases. This means you end up paying more for whatever you buy. Credit cards may have a period before interest starts accruing, usually 30 days, but loans usually do not. If you want to minimize the amount of interest you pay, you must pay extra on each payment for loans, and pay off your credit card balance every month.

Remember-it takes a long time to build credit, but only moments to ruin it. Think carefully and use it wisely.

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Personal Budget Tips

Budget isn’t a Bad Word

Does the word budget make you cringe? Maybe it brings up feelings of constraint, or even memories of past failures. Have you tried to set up a personal budget but then found you couldn’t stick to it? We have all been there. Maybe your past attempts at making a budget were actually just too strict. A workable budget shouldn’t feel like a shackle. It should feel like an accomplishment and a daily, reachable goal. Learning how to create a budget and make a financial plan should make you feel empowered and will help you reach your financial goals.

Start Small

When I was first learning how to budget my money, I started small. I knew how much I made each month, so I took the money I had and divided it up into envelopes. The first one was Rent. Then Groceries. Phone. Gas. Insurance. Household Items. It wasn’t a perfect system. I often had to move money from one envelope to the next. Really, though, isn’t that what budgeting boils down to? It is making a plan that shows you what money you have and where it is going. It is dynamic. You can change the categories and the amounts that go into each one to make it as comfortable as it can be, and according to your goals. Even in this simple manner, it taught me a lot about where my money went.

My next step was to keep a piece of paper in my wallet that kept a running checking account balance. It started at the beginning of the month, and subtracted and added in order all my bills and income, so I would have an idea of what my account should look like if I was on track. It also made sure I didn’t miss a bill. I actually still use this method because I find it is such a reassurance to be able to glance at a piece of paper and see that I am where I want to be each month. My categories have expanded to include savings for emergency and vacation and entertainment, as well as a lot more bills since I own a house now instead of renting an apartment that had all utilities included. I don’t have to use the envelope method anymore because I have a steady income and the amounts that come out of my checking account are pretty consistent.

Using Credit Cards Responsibly

Once I was able to have a credit card, I began to use it to help me budget. I paid all my recurring monthly bills directly out of my checking account, using the methods I above. The rest of my spending when on a credit card that I paid off at the end of each month. I still use this method today. I like this method because it means that I don’t have to carry cash or worry about not having enough at the grocery store, and it also automatically categorizes my spending. I can just go to my credit card company website and it will show me how each transaction was categorized and show me overall spending categories. This feeds right into my next topic, budgeting software.

One word of caution before the software topic though, and that is that credit cards should only be used if you are able to pay them off every month, or for emergency purchases that you could not afford otherwise. They can help your credit if they are used wisely, but can be a black hole of debt if they are not paid off each month, as interest will accrue and your balance with skyrocket. Check out my pages on credit and debt to read more about this.

Budgeting Software

An invaluable tool for me once I could afford a computer and internet was budgeting software. There are a number of different ones out there, many of which are free. I personally love Quicken, Personal Capital and Mint. They take a little while to set up, maybe a couple hours depending on how many accounts you have, but they are an invaluable way to keep track of your money. The great thing is that you can see a snapshot of each account, the transactions that have come into and gone out of each one and their current balances. This includes your checking, savings, investment accounts if you have them, and credit cards. At any given moment you can look and see if you are spending more than you are making. It is also a great way to make sure no one has gotten a hold of your account information and is making unauthorized purchases, because you can see them all. I have caught many a fraudulent charge this way, and was able to call my credit card companies and get the charges written off and a new card sent to me.

One of my favorite features of Mint, other than it being a free app, is that there is a place in it where you can set up a goal. Say you want to save for a vacation, or pay off a debt. You can set up a goal in Mint, and each time you move money into an account set up for that purpose (a savings account usually), it will log it and keep a running total showing you how much progress you have made. There is also a lot of information on Mint.com about financially related topics. It has an area that shows you ways to save. You can see trends in your spending, like what categories you tend to spend the most in. There is a budget tab that allows for you to see if you are meeting your budget goals or adjust specific category amounts. You can even see your current credit score.

Quicken is a full service finance software. It isn’t free, but it is quite comprehensive. It has all the features of Mint, and more. It allows you to customize many of it’s features, including things like spending goals. It provides bill reminders and can forecast your account balances based on upcoming bills. It is also linked to TurboTax, so if you are using the two together, taxes become quite simple.  Quicken has different subscription options, including ones for small business and investing. I used Quicken to help me manage my money when I wanted to pay off my student loans, and I met my goal. I don’t think I could have done it without it.

Personal Capital is another free app that works similarly to Mint. It shows a snapshot of all your accounts, with the added ability to connect you directly with one of their financial advisors, if you so desire. I find that it synchronizes easier than Mint at times, as Mint seems to not always update each account when I sign in. It does not have a goal set-up feature, but is a nice, simple app for tracking your spending and cash flow.

Tips about Budgeting

One thing that I feel is important is a simple tip: Always budget based on less than what you actually make. Don’t try to budget every penny you make. This would set you up for failure. Some months you may not make as much money, or you may have an unexpected expense. If you had budgeted every bit of money you brought in, you would instantly be in a budget shortfall. That can lead to feelings of inadequacy or failure, even despair. Rather, by budgeting always for less than your actual expected income you give yourself a little buffer. Then, you are setting yourself up for success, because most likely you will find that you still have a little extra money at the end of the month, or at least didn’t fall short. Even if you end up spending every penny because you just don’t make much money in relation to your bills, budgeting this way sets the stage for savings later as your income increases.

On a similar note, it is a great idea to overestimate your spending as well. If a bill is not exactly the same every month, then try to put aside more than you think it will really cost for that category each month. If you find at the end of the month that you consistently have left over money you can adjust how much you put aside, or put it into savings. It is a lot better to expect a big bill and end up with a small one than the other way around. If your bills don’t equal your income, remember to account for Fun Money. It is important to feel like you have some money that is just for your own enjoyment. Once in a while it is ok to give yourself a little reward. Just be sure it doesn’t happen so often that it gets you off track.

Takeaways

Budgeting doesn’t have to be scary, or feel too restrictive. It should be a way for you to learn about yourself and your money habits. It is a tool to help you reach your financial goals. It is dynamic and changes as your needs change. A good budget is a way to invest in yourself, and it is an accomplishment in itself.

Set yourself up for success by setting your budget based on less money than you actually make, and higher bills than you actually pay. Save whatever is left after a little reward for yourself and you will meet your goals.

For helpful products and services, visit my Resources page.

Just Starting Out: All About Checking and Savings Accounts

Savings Accounts Are Not All the Same

One of the first steps I took on my financial journey, just after getting my first job, was to open a savings account. At the time, a person had to be 18 to have a checking account, and I was only 16. My savings account was really just a place to put my money that made me feel slightly more grown up than putting it in a piggy bank or under my mattress. It did come with an ATM card, though, so I felt very grown-up every time I opened my wallet and saw it there. I was allowed to take out money up to 6 times per month, which was plenty, considering I was only making $3.75 per hour and the ATMs made you take out $20 at a time.

Had I known anything at all about money, I would have shopped around for a high-interest rate savings account at least. The one I had earned something along the lines of 0.01% interest, which is pennies. These days, a high interest savings account, such as the one at Marcus.com earns about 1% interest. Not much, but still much better than a regular savings. It is always a good idea to shop around for the best rates, but when doing so make sure to watch out for any fees or introductory offers that expire after a short period.

Speaking of fees: Beware of Bouncing Money that Multiplies and Destroys

Once I was old enough to open a checking account, I immediately did so. I wanted to be able to write checks and have an actual debit card. The difference between a debit card and just an ATM card linked to my old savings account was huge. It meant that I could make a purchase with just a swipe and a signature (if it had the Visa or MasterCard logo on it), or just a pin code. The money immediately came out of my account. It was like magic!

The problem was, even though the money came out immediately every time I made a purchase, and I diligently kept track of every one like I was supposed to do and subtracted it from my balance, I didn’t account for little hidden fees. So, one day, I made an ATM withdrawal and took out the last $20 in my account. I had something like 20cents remaining. There was no minimum balance requirement (another thing to know before opening an account). I thought I was fine. Turns out, that ATM had a $0.50 fee for every transaction. When that fee was charged, my account became overdrawn, meaning I had accidentally taken out more than I had in the account. To make matters worse, there were a couple checks I had written that I didn’t think people would cash right away that went through before I had time to get to the bank to deposit more money. What followed was a snowballing disaster! The bank charged me $25 for each transaction that didn’t have the funds covered in the account, including the initial $0.50 cent ATM fee. I ended up being charged $75 in fees, plus the amount of the outstanding checks. I was in deep!

Luckily, I had the money within a few days, so I went to the bank to pay my debt, embarrassed and humiliated. I thought that would be the end of it, with a lesson learned to watch for fees. The bank, however, informed me that I had to pay the money, but they were also closing the account and had reported me to Check Systems. Check Systems was the entity that people saw on your credit report when you overdrew accounts, and it made a person into a very bad credit risk. The worst part was it lasted for 7 years. During that time, it was next to impossible to open another checking account, as most banks would see that on my credit and deny a new account. It was only several years later that an all online bank finally took a chance on me and let me open an account. I had to send them money through the mail. Scary! And I had to wait days for it to show up in the account. I knew I had to do it, though, in order to rebuild my checking account reliability and my credit.

Points to Remember

When it comes to savings accounts, shop around for one that will pay you the most interest on your money. That is free money, and it is always a good thing.

Always find out about any fees associated with an account or even with a transaction before you open accounts or perform a transaction. A little mistake with a checking account can hurt you for many years.

If there is a service called Overdraft Protection offered for your checking account, it is worth it to have it. This may have saved me a lot of money and years of strife. It is basically a little insurance plan saying they won’t immediately charge you and/or close your account if you take out more than you have, as long as you pay it back in a specified time frame.

For helpful products and services, visit my Resources page.

Good Debt, Bad Debt

Good Debt vs Bad Debt

You may be surprised to find that not all debt is the same. Whether debt is a good or bad thing can depend on the circumstances surrounding it. The type of debt also affects your credit score in different ways.

Basically, good debt is something that gives you access to an asset that should become more valuable over time. A mortgage is the prime example. Although it is usually a person’s largest chunk of debt, it falls into the good debt category because it gives that person control over a very large asset-their home. A home’s value usually rises over time, and could eventually make that person more money than their original mortgage loan. This is also one of the reasons that people like to invest in real estate. The difference between what a person pays for a house and what they rent it out for each month or what they eventually sell it for can be significant over time. Many people have made their fortunes in real estate by taking advantage of this. Of course, it isn’t a sure bet. Nothing really ever is when it comes to investing. Anyone who paid attention during the 2008-2009 mortgage crash knows this. If you buy a house that is over priced or values in the area drop significantly and it becomes worth less than you owe, you can become “upside down” in your mortgage. That debt would then become negative, at least until the market changed again. Luckily, it usually does if you wait long enough.

Examples of bad debt are debts that show a pattern of spending more than you make, or buying things that do not grow in value. Car payment debt is bad debt. A new car loses significant value immediately after being bought, and used cars continue to lose value over time in most cases. While it may be a necessary debt given the cost of cars these days, it is not considered a positive debt. Paying it off as quickly as possible should be a priority.

Credit card debt that is not paid off every month is also bad debt. If you don’t pay credit cards off every month, they accrue interest. That interest accrues more interest the next month and so on, until people can get quite overwhelmed with credit card debt. Many people fall victim to the ease of credit card use and do not pay attention to the balance as it rises each month. It is very easy to lose track of spending and find yourself in a situation where it is extremely difficult to pay off your balance. Always pay close attention to your credit card balance, and do your best to pay it off every month.

Mixed Good and Bad Type Debt

If credit cards are paid off every month, they can be considered positive debt, as this shows a pattern of strong financial management. This helps build your credit if you have a high limit and very low or no balance at the end of each month. This is called rolling credit. A couple accounts of rolling credit in good standing are major players in building a person’s credit score.

Student loans are an example of a mixed type of debt. While you are paying on them, if you do so every month and pay as agreed, they help to build your credit. However, their often substantial size counts against you, as it affects your debt to income ratio, which is important for your credit score.

If you default on your student loans, it will have a massive impact on your credit score. Take great pains to make sure this never happens. Always contact your loan holder if you anticipate having difficulty paying your payments on time. They may have options to help decrease or defer payments. Once your student loans are paid off, however, they help your credit because they show that you have met a significant financial obligation over a long period, assuming you did not have any late payments or defaults. Consolidating student loans can often help people lower their payments and simplify how they pay their loans, thus enabling them to benefit eventually from paying the loans off. If your payments are high each month due to several loans or you are having trouble keeping track of them all, consolidation may be a good option for you. It may even have a lower interest rate, which can save you a significant amount of money over time.

Debt To Income Ratio

Someone who owes a ton of money each month or overall, but does not make a lot of money has a high debt to income ratio. Banks and credit bureaus do not like this at all. It looks like you can barely make your payments on paper. Banks and other credit companies will be less likely to offer you loans, and more likely to give you steeper interest rates if they do offer you credit. You want to do whatever you can to not take out loans that you do not need, including credit card debt (which is a rolling loan). Paying on time and keeping loan balances low helps your credit.

Take Aways

Some types of debt are worse than others when it comes to their effect on your credit score. A mortgage, while a large debt, will not be looked at as negatively as a credit card balance. Student loans with high monthly payments hurt your debt to income ratio, but paying them off helps your credit score in the end. Car payments are always bad debt and should be paid off as quickly as one can manage.

Always pay your debts on time, every time. If you are having a hardship, contact the company, as they almost all have programs to help under these circumstances. Contacting them before you miss a payment can save your credit. Not doing so can hurt you for years to come.

What Does Being Wealthy Mean to You?

I have been thinking about what it means to be wealthy. Once upon a time, people in America may have considered themselves wealthy if they could afford a home, a car, an education for themselves and their children and their basic day to day needs. Has that changed today? It seems that we continually compare ourselves to others when we think of wealth, or even financial well being. We are bombarded with the lifestyles of people who have money in the millions and seemingly not a care in the world.

What does being wealthy mean to you? Does it mean you have enough money to meet your needs, with a little left over for fun? Does it mean you have to have so much money that you can buy whatever you want, whenever you want, without thinking about it? Does it mean not having to work now or in the future?

Is wealth only defined by the amount of money you have? Could it also include a broader definition, such as wealthy in the way of health, love, and happiness? Could you be financially poor, but emotionally wealthy at the same time?

Even though this is a finance website, I can’t help thinking about the relationship between money and happiness. When we ask ourselves what we truly want in life, the answer is usually to be happy. What we believe will enable us to be happy is much more complicated, as it is unique to each individual. We all want to meet our basic needs, such as having a home, our health, food, and love. However, meeting the basic needs doesn’t always make us happy. In fact, not having our basic needs cannot even prevent some people from being happy anyway. There are extremely poor people who would say they are happy, and very rich ones who would say they are not. To be wealthy, then, in life is not just about money. Money is just a part of it.

When we begin to examine our financial plan, the first thing we need to decide is what is our ultimate goal? Are we hoping to make enough each month to meet our bills and save for retirement, or do we want our money to grow so we can quit work and perhaps leave a legacy? Those are very different paths, and require different approaches. The first requires a steady job and retirement plan and perhaps a monthly budget. The second requires early investing, multiple income streams, perhaps owning ones own business and a lot of planning and calculated risk taking. It is important to know what you want, so you can make an appropriate plan to achieve it. It is very difficult to hit a target you cannot see.

I believe it is important to define personally what being wealthy means to you. Make money a part of it, but remember that it isn’t everything. It is true that money cannot buy happiness, but it does make some things in life a lot easier. Aim for a happy life, and make money a tool to help you get there.

For helpful products and services, visit my Resources page.

How to Pay Your Mortgage Off Early

 

Mortgages are Massive Debt

For most people, their mortgage is the largest debt they will ever have. It takes up the majority of their income each month, and a lot of that money is spent directly on interest. Mortgages are large loans, which accrue compound interest each day. They are set up so that for many years, most of the payment you make goes to that interest first, before it ever touches the principal. The principal is the original amount you paid for the house. Most also include payments for property taxes and home insurance, and sometimes mortgage insurance as well. This is why you can make payments that amount to thousands of dollars a month, but your principal balance may go down only slightly. Seems like treading water, doesn’t it?

Mortgages are Good Debt

The good news is that mortgage debt is considered “good debt,” meaning it builds credit, rather than hurting it. The value of your house most likely will go up over time, so the amount you owe will become proportionally less than the house is worth. This is where the idea of having equity comes in. Equity is that difference between value and debt. If you wanted to, you could refinance based on the new higher value of your house and use the extra money for things such as home improvement or paying off “bad” debts, such as credit cards and cars. Many people do this in order to save on interest if the new interest rate is lower, and only have one monthly payment. Mind you, they are only saving on short term interest, as the interest they will pay over a 30-year mortgage after refinancing could end up being substantially more than they would have paid if they paid off their credit cards on their own. As a house builds equity, there are other options, such as taking out a home equity loan, otherwise known as a 2nd mortgage, to pay for those things mentioned above. This gives you a second payment every month. If you don’t want a specific amount of money, a home equity line of credit that works similarly to a credit card with a rolling balance could also be used. So, mortgages have some advantages, due to the fact that they are secured by real property that builds value. This is why it is important to make sure when you buy a house that you are getting a good deal. If you pay too much, and the house actually becomes worth less (as has happened before with housing market crashes), you will not have access to these loans and lines of credit, and the mortgage will become negative debt (referred to as upside down). This is unusual, but can happen if you buy at the peak of the market, when prices are highest.

Conventional Advice

Given those advantages, most finance advisors and coaches will tell you not to prioritize paying off your mortgage over paying other debts. The idea is that if your house is valued higher than your mortgage, you could theoretically sell it at any time and not have that debt. This is true.

How to Payoff Your Mortgage Early: If you are like me and can’t stand compound interest (unless it is building it for myself)

This article is for those that have decided that they want to pay off their mortgage early anyway. I am one of those people. For me, the idea of owing so much money causes me a great deal of stress. I don’t like the idea that as long as I owe that money, I don’t really own the house. Plus, it represents a lot of my monthly income. I also despise the idea of compound interest when it is compounding my debt and not building my portfolio, like it does in the stock market. I feel that it just is not fair to charge people interest over and over on the same money, and then make them pay the interest before the loan balance. It really makes the cost of the house astronomical, even when you think you are getting a good deal. My own house cost around $200,000, but if I pay that over 30 years, I will pay another $200,000 in interest. In my mind, that is like paying 100% interest! Even though the bank calls it 3.75%, the way it is compounded and paid sure adds up. A straight 3.75% on $200,000 would only be $7500. Now, that would be fair! However, it isn’t the way the banking system does it. Fair or not, if I pay my mortgage over 30 years, I will effectively pay double for my house.

I don’t want to pay $400,000 for a house worth $200,000. Even now that the value of the house has risen, I don’t want to pay that much extra in interest. The value doesn’t matter that much to me because I am not planning on selling the house. It is just a number on paper. This is why I have made it a priority to pay my mortgage off early.

Specific Ways to Accomplish Your Goal

There are a few different ways to do that. The first and simplest way to shave years off your mortgage is to split your mortgage payment so that you pay half of it every 2 weeks instead of paying it all once per month. Because of the way interest compounds and the number of weeks in a year, you will actually end up making an extra payment per year and saving yourself a lot of interest. When I switched, my mortgage was reduced by a whopping 6 years! All it took was a call to my mortgage company to change how I made the payments. Now they come out every time I get paid, which is pretty convenient.

Another way to pay your mortgage off early is to send any extra money you have directly to the mortgage principal. You have to be sure that you specify that the extra money goes to principal, or the mortgage company could just send it toward your next payment or interest, or escrow and it wouldn’t help your balance decrease. By sending money directly to your principal, the amount of your loan that is earning interest is reduced, and so is the amount of interest you will pay. You will find as you do this that more and more of your regular payments will start going toward principal as well. It is a good idea to talk to your mortgage company first, to find out if there are any limits on how many extra payments you can send, or instructions on how to make sure the money goes to principal before sending any extra payments.

I tend to send my extra payments at the end of the month, when all my money budgeted for the month is accounted for. I can plainly see what I have left over and send it straightaway. In the past, I have also sent extra payments on payday, if I got more in my check than I had budgeted for in the first place. I also sent any bonuses or pay raise money. These days, because of the COVID pandemic, I am only sending the extra money I make each check, and not leftover money at the end of the month. I am putting that money into savings, until things seem a little more stable. Eventually, the pandemic will be over and I can send a large lump sum to the mortgage, which will still reduce my interest and the amount of years I have to pay. In the meantime, I have the money if I need it. It is also in a savings account that is earning a little interest, as a bonus.

There are other strategies out there to payoff your mortgage early using home equity lines of credit and other such things, but I am not an expert on those, and so I will not address that. What I do know is that if you send any extra money you have to your mortgage principal as often as you can, your balance will go down, you will pay less interest, and you will pay your mortgage off sooner. If you are like me, knowing that someday I won’t have a massive mortgage payment gives me a lot of peace of mind. I will always have to pay taxes and insurance, but it will still be a substantially lower payment each month than I pay now, and it won’t be just giving the bank free money in the way of outrageous amounts of interest.

As a side note, this strategy is almost the same as the one I used to pay off my astronomical student loan debt. See my blog post on Paying off Student Loans for more information.

Take Aways

Mortgage debt, though considered “good debt” is a very large one. It is possible to pay less interest and pay your mortgage off early by sending any extra money you have directly to principal each month. Even splitting your payments so you pay every 2 weeks instead of once a month will save you a lot of money in interest. Every little bit counts, so send what you can when you can if paying off your mortgage early is your goal.

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COVID and Your Finances

This pandemic has affected nearly everything. It has changed the way we interact, the way we work. Maybe it has changed the way you see the world. No longer such a safe place, it has taken on a scary demeanor. For me, it has made everything feel almost surreal. It is shaky, and fuzzy around the edges in some ways. In others, it is hard edged and razor sharp.

I am a nurse. I have seen some of its effects firsthand. It isn’t your run-of-the-mill flu. It presents in many different ways and causes unexpected complications. I have been lucky so far, in that my hospital did not get overrun. Our company put in effective measures to make sure we had what we needed to care for the sick. We have met the demand, and for that I am grateful. It is still worrisome to go home at night, though, hoping I am not carrying something deadly to my family.

In my everyday life, I feel like my little household lives in a bubble, where we can see and hear the outside world, but not touch it. I haven’t seen my friends or other family in months. I try not to go out much. Going to the grocery store can feel sinister and scary. The idea of a crowd is terrifying.

I wish I could say I haven’t been spending as much money, but that isn’t really the case. Most of my bills are unchanged, and I find that sometimes I want to buy things online just because I can. This is a dangerous financial habit. I justify it by saying I shouldn’t be going to stores, and I still need things, or deserve something for the stress relief. Retail therapy, as they say. Not a good coping skill, and one I hope you all are avoiding. I haven’t gone crazy, but I do need to keep an eye on my spending, because it is just so easy to do. Mostly, I have been indulging in way too much takeout, though, as I have not been feeling very motivated to get groceries and cook. This is terrible both for my wallet and my waistline.

Tragedy still strikes during pandemics as well, and my extended family has had a doozy of one. I have provided financial help, as I can, in light of there being nothing else that can be done to make it any better. If money could fix it, I would give every dime I had.

Needless to say, my financial goals have been put on hold. I have taken on more of a conservative, hunker down type of financial stance. I am loath to part with any savings beyond what I must, because I have this looming feeling of dread that I might need it. What if I lose my job, or my spouse loses hers? Or something happens to one of us? Or, or, or…

The new COVID financial reality calls for a different approach. Where normally I would say one should aggressively pay down debt, right now I would advise against that. I would also not be investing heavily, as the stock market has been as volatile as current events. Personally, I have decreased the amount I invest temporarily, in order to put more into savings. I know actual financial advisors always tell you to avoid changing your investing habits, but I feel it is the best way for me to feel prepared. It is frustrating to not see any progress on my goals, but it gives me a sense of security that I really need right now. I am not buying anything big. I question every purchase. I don’t think that will change until the world feels more stable. My goals will still be there when I am ready.

I know I am lucky, because I still have my income and my home. I wish everyone had the same, as well as their health, and their loved ones.

As much as I love finance, with the world the way it is, I just want to say to you all, Take Care and Hold On. We are all in this together.

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How to Save Money on Insurance

Yesterday was my birthday, and also the day that my 16 year old son got his driver’s license. That meant that I had to add him to my car insurance. When I called my agent, who I have used for years, except for one 6 month period where I found cheaper insurance elsewhere, she told me that because he has good grades (3.0 GPA), he would get a discount. Instead of being $135 more per month, it would only be $95 more per month. Whoa! That’s a lot of money. I immediately began shopping around. This post is about how to save money on insurance, which I ended up doing after a lot of time and energy.

Shop Around

When I say I shopped around, I mean it. I went to the website of every car insurance company I could think of and tediously put in all our information to request a quote. Then I went to all the ones that showed up on my Facebook feed and did the same thing. Most of the quotes came back in the same ballpark as my original company. Some services where they have you input your information and it is supposed to automatically compare multiple company quotes didn’t really work. Some ended up only giving me a list of websites to go to. Others ended up wanting me to call them. Who has time for that?

Compare Coverage Side by Side

What is important to do is to make sure you are comparing apples to apples, so to speak. By that I mean making sure you are asking for a quote that includes the exact same coverage as the one you are comparing it to. Otherwise, you could end up buying less than, or more than, you actually want or need. Insurance has to meet your state minimum, but it also needs to provide for the reason you are purchasing it-enough coverage in case of catastrophe. The last thing you want when you get into an accident is to find out that that cheap insurance you bought didn’t cover what you thought it did. You could end up on the hook for a ton of money in damages. Often, you will see advertisements saying things like, “pay $3 per day for car insurance” that sound initially very enticing. Read the fine print before you buy, though, because often they are lacking what you really want in your insurance. You have to decide what amounts and types of coverage you really need or want, and then compare the prices for those coverages side by side.

Buy Direct if Possible

Another thing to know is that many websites you run across for insurance are actually insurance agents or affiliates. What that means is that if you purchase through them, they will be earning a percentage of your premium. That can also mean that you pay more than you would if you bought directly from the company. Always compare, compare, compare before you buy. That was how I ended up saving myself tons of money. I ended up buying directly from an insurance company online. I combined my auto and home insurance, which is a common way to earn a discount. The interesting thing about this one was that my home insurance itself is about $150 more per year now, but because the auto insurance saved me about $1,000 per year, I still came out way ahead. If you are looking at combined offers like this, you have to be able to look at the bigger picture to see how your wallet will be affected overall. If I had given up just because the home insurance quote was a little higher, I would have ended up paying so much more than necessary between the two.

It took me two full days of shopping, but in the end I ended up getting the coverage I need for a fraction of the price. I feel like it was time well spent. There is nothing as satisfying to me as knowing that I did my research and got the best deal for my money.

Take Aways

Make sure you take the time to really compare different companies when looking for insurance. Try going to the company’s direct website first.

Choose your coverage wisely. You want enough insurance to cover a devastating event, but you don’t want coverage you don’t need. When comparing companies’ quotes, make sure their coverages match so you are comparing like to like.

Don’t stick with one company out of sheer, blind loyalty. It is a good idea to check around every 6 to 12 months to make sure you are not overpaying.

For helpful products and services, visit my Resources page.

Buying a Car: Things to Know

Buying from Private Sellers

I have a weakness. I admit it. I like to change the car I own way too often. I am not even sure if I can count how many I have bought over the years. In that time, I have learned a few hard lessons that I thought I would share, in hopes that maybe they can save you all some money, time, and energy.

When I was 16, I bought my first car with my own money by asking the seller to let me make payments. Surprisingly, he did. The whole car cost $600, and I was paying him $100 per month. On my way home with it on the first day, it died. I had to have it towed to a shop and repaired. I can’t even remember what the problem was, but I think it was something to do with a pump. Water? Oil? I don’t know. It has been a while. OK, a long time. Anyway, I called the owner up and told him what happened and pleaded for his help. Once again, he surprised me. He paid the bill and added only some of it to my bill with him. I don’t know how I got so lucky, because I can’t imagine that happening today. Once you drive away with a car, it’s problems are usually yours. Especially a cheap old car from a private seller. This man just acted out of the kindness of his heart to help a young, inexperienced girl with her first car. I will never forget it. The thing to realize here is, it doesn’t hurt to ask. Ask for a better price, or terms of payment. You have nothing to lose, and they just might surprise you.

The next cars I bought were also from private sellers. They all came with their share of problems and quirks. Most were huge gas guzzlers. None had under 100,000 miles. But, each one was a little better than the last. The best thing was, I had also learned a very important lesson. Car prices are negotiable. I got very good at asking them to lower their prices. I usually found some measure of success. Over the years, I have saved myself thousands of dollars this way.

Buying from Car Dealers

I learned a lot from my first car dealership experience. All were lessons that ended up costing me a lot of money. I learned about sticker prices, financing, 3rd party warranties, Carfax, and the importance of reliability.

Sticker prices and Financing

Even when buying from a dealer, there is always room for some price dropping. Don’t think you have to pay the price on the window. I made that mistake the first time I bought a newer car from a dealer. I thought the price was set in stone, and ended up paying a couple thousand dollars more than I should have. I didn’t even ask if they could give me a better price. Then, I financed the car with the bank that the dealer provided. I potentially could have saved even more money if I had shopped around for lower interest rates. If you want to be the most prepared, shop around for a car loan before you even go car shopping. You are much more likely to get a lower financing rate, lower payments, and even a lower down payment from a credit union before you buy than you would at the dealer. If you do find yourself at the dealer without pre-approved financing, make sure you tell them how much you are willing to pay each month and ask for their lowest price. Even a 0% interest financing could mean you will be paying a huge payment every month, because the time limit might be very limited. Look carefully at the documents before you sign them.


3rd Party Warranties

Sometimes dealers will sneak in extra costs, like warranties. A 3rd party warranty is something that a car dealership will often try to add on when they sell you a car. Sometimes they even include it in their sticker price, without telling you it is an optional coverage you are paying for. It is a warranty that you pay for, good for a certain time period, that covers very specific problems that may come up. The thing to know is that the dealerships make quite a profit off of these warranties. My mom said when she was a car dealer, that was where she made most of her money, because she always lowered the price of the car itself. Another thing about them is that they rarely cover the things that will actually go wrong. They are geared toward covering the things that may cost a lot if they do go out, but are not likely to have problems. I figured this out by reading the fine print, and working out what I was paying extra for that insurance. Luckily, even though I bought it when I bought my first dealer car, I was able to cancel it after a few months and saved myself a lot of money. The warranties themselves often cost several thousand dollars, so they are a very expensive “peace of mind.” A better idea, I have found, has been to a lot whatever extra amount that would have added to your monthly payment and put it into a savings account instead. That way, you will earn interest, and most likely have a good chunk of what you need if the unexpected happens, without giving that money to someone else and not being able to get it back if you don’t need if for repairs.

Carfax

Another thing I learned from that car is that the Carfax report may not be completely accurate. Even though I got one when I bought the car, I got another one many years later when I tried to trade it in. Much to my surprise, an accident had been reported on the second report that was not on the first. The dealer I got the car from had only recently acquired the car when I bought it. Sometime between when he bought it and sold it to me, someone reported that the car had been in an accident. That lag time made it so that neither I, nor the dealer knew it had been in a wreck. Low and Behold, the car I had paid thousands too much for by paying sticker price and getting an after market warranty was now worth even less because it had an accident on its record that I didn’t know about.

Reliability

The last lesson I learned with that car-buy a reliable brand, as new as you can afford, without actually being brand new. New cars lose thousands of dollars in value as soon as you drive them off the lot, where a gently used car with a high reliability rating holds its value both in the amount you could get when you sell it, and in the years of life you can use it. A new car doesn’t feel new for long, anyway, and if you are like me, you will just want a different one anyway.

Despite the fact that I ended up paying way more than I should have for that car, It wasn’t a total loss. I happen to have that car to this day, 16 years later. My son was an infant when we bought it because we wanted to have a reliable car to carry the baby around in, and in that respect it has been perfect. As a matter of fact, the car is now his to drive, since he just turned 16 and got his license. I have never (knock on wood) had to make a major repair on it, and it has cost me much less over the years than any other car I have owned. With regular maintenance, I have no doubt it will carry my son faithfully at least a few more years.

Take Aways

When buying a car, always negotiate for the best price, and come prepared with financing you can afford or set terms in your mind as to what you want.

Shop around, for both the car and the financing.

Do your research, so you know if the car is a good one. Buy the most reliable, gently used car you can and save the money you would have spent on 3rd party warranties to put into your savings account instead.

Don’t buy new unless you just can’t help yourself, and then keep the car as long as possible to avoid wasting money. Try not to be like me and buy cars too often. Buying a good one you can keep for many years will save you thousands of dollars.

Always, always read all the fine print before you sign any paperwork to look for hidden add-ons or fees.

What has been your experience with car buying? Do you find any of these hints helpful, or have some of your own to share? I would love to hear from you.

For helpful products and services, visit my Resources page.

 

 

In these COVID times

I have been thinking a lot about how people are managing financially in this new COVID world. I have a pretty stable job, and I still find myself worrying about my future. Will my job be cut because I haven’t been there long, and volumes are down? We already went through a period of furlough. Will I get sick and not be able to work, thus not be able to take care of my family? I am the main breadwinner, though not the only one, thankfully, but losing my income would definitely put everything at risk. Could I make ends meet? Would we be OK? How long could we sustain ourselves, and how long would it go on?

I know millions of people are wondering the same thing, or worse, already experiencing what I fear most. People are losing their business, jobs, possibly their homes. I wonder if the freeze on evictions and mortgages is really working, and how that will work when the freeze ends. Will people then owe all the back payments? Will they have to file for bankruptcy, or face eviction or foreclosure at that point?

This pandemic is calling out all the problems in our system, from our reliance on other countries to our obsessive buying of unnecessary consumer goods. Even our food supply chain has shown its weaknesses, as massive amounts of food were wasted due to supply chain issues. It is showing us how the world is so interconnected, for better or for worse. It is also reminding us that when it all comes down to it, we need very little in the way of things, and want the same when it comes to health, stability of basic needs, and love.

What can we do to make this time less stressful, financially or otherwise? Of course, reevaluating our spending, our needs vs wants will help. Reaching out to others, banding together, learning our resources from the government or other entities, such as charities. Give what you can. Take only what you need. Get back to the basics. Remember the little joys. Watch the sunset. Hold your loved one’s hand. Breathe deeply. Spend some time in nature. Don’t watch the news too often. Humans are resilient. We will get through this together.

I wish you health, and harmony. Stay strong, friends.

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