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Top 5 Financial Moves to Make This Year

Written by Aliyyah Camp - One Comment

With a new year comes the chance to have a fresh start. According to a Fidelity study, more than one-third of Americans set a financial resolution for 2017. Whether or not you set a financial resolution, though, improving your finances is likely still important to you. To help with this, we came up with a list of the top five financial moves to make this year.

5 financial moves

1. Create a Realistic Budget

A budget is simply a plan for your money. It can be as minimal or as comprehensive as you like. What’s important is that you know how much money you bring in versus how much money you spend and save.

A realistic budget is one that you can sensibly stick to over time. To create such a budget, you’ll need to track your expenses for a few months. You can do this by looking at your bank account and credit card statements and seeing how much you’ve spent in previous months. You can also use a tool like Personal Capital or Mint to track your expenses for you.

Learn More: How to Budget If You Hate Budgeting

After you’ve tracked your monthly spending, you’ll need to decide how much you can reasonably save each month. If the amount you want to save each month is doable based on your current spending habits, great! Otherwise, you may have to reduce your spending in order to meet your savings goals.

2. Build an Emergency Fund

An emergency fund is an amount of cash set aside for use in the event of a financial crisis such as job loss or a large expense. If you don’t have an emergency fund already, this is the year to build one. Aside from the obvious financial benefit, an emergency fund also provides a peace of mind that’s priceless.

Resource: How to Decide If an Expense Is Emergency Fund-Worthy

To build your emergency fund, you can set it up like any other savings goal you have. You can decide on an amount to be transferred from your bank account into the savings account on a regular basis – for example, every two weeks or once per month – until you reach your goal. Personal finance experts recommend having three to six months of expenses saved in an emergency fund.

Your emergency fund should be liquid, meaning that it can converted into cash quickly. For this reason, it’s a good idea to keep your emergency in a savings account. To get the most interest on your money, consider an online-only bank such as **add affiliate link!!** Capital One 360 or Ally. Online banks offer high-yield savings accounts with competitive interest rates compared to traditional banks.

3. Save for Retirement

If you’re like many who have access to employer-sponsored retirement plans, make sure you’re contributing at least up to the employer’s match if applicable. The good thing about employer-sponsored 401(k)/403(b) plans is that the money comes out of your paycheck pre-tax. This reduces your taxable income for the year. It also makes it a bit easier to save because you won’t have to worry about any manual transfers.

If you’re self-employed, you can still save for retirement. You can save money in a Roth IRA or a traditional IRA. There are no income limits for contributing to a traditional IRA. But to contribute to a Roth IRA, there are income limits. Both retirement accounts offer tax benefits, but in different ways. Traditional IRA contributions are tax deductible, but the withdrawals are taxed in retirement. Roth IRA contributions aren’t tax deductible, but the withdrawals are tax-free in retirement.

Resource: Current IRA Contribution Limits

4. Review Your Insurance Policies

Review all of your insurance policies to make sure you and your family are substantially covered this year. One major insurance policy that you want to be sure to review is your health insurance. A large medical expense could put you in debt if you’re not adequately covered.

The biggest decision you’ll probably have to make is whether to enroll in a high-deductible health insurance plan or a regular health insurance plan. If you have a high-deductible health insurance plan, you’ll be eligible to contribute to a health savings account, which has multiple tax benefits. On the other hand, a regular health insurance plan will give you more predictable medical costs without you having to foot a large bill upfront before your insurance kicks in.

Other insurance policies to review include your life insurance, car insurance, homeowner’s insurance (if you own a home), and renter’s insurance (if you rent your home).

5. Determine Your Lifetime Goals

The last financial move to make this year is to determine your lifetime goals. What do you want achieve? Do you want to retire early? Do you build your own business? Whatever your lifetime goals are, you’ll need to take a look at how your finances fit into that picture. If you want to retire early, you’ll need to make sure you are contributing enough to retirement accounts now to fully fund your lifestyle in the future. If you want to build your own business, you’ll need to set income goals and profit projections to make sure you’re on track.

When you’re clear on what your lifetime goals are, it makes it easier to make decisions now. It makes it easier to say “no” to things that don’t fit into your plans and “yes” to opportunities that will further your progress.

Final Thoughts

As you can see, these financial moves are pretty involved. Each one requires some effort on your part. The good news is that these recommended actions can have a positive impact on your finances and your life overall.

I like to look at personal finance as one pillar of personal development. When you manage your money effectively, you are taking control of your future. Just take things one day at a time, and before you know it you’ll be making substantial progress by the end of the year.

Dave Ramsey’s Baby Steps

Written by Nickel - 11 Comments

While I’ve been somewhat critical of Dave Ramsey and his “Debt Snowball” in the past, he’s definitely helped an awful lot of people get their finances in order. Thus, I thought that it might be worth spending a bit of time talking about Dave’s “Baby Steps” for getting out of debt and improving your finances. Here they are:baby steps

[more]

Published on January 18th, 2017
Modified on January 19th, 2017 - 11 Comments
Filed under: Debt Reduction
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How to Save Money on Life Insurance

Written by Nickel - 17 Comments

Life insurance is an incredibly important financial product. Unfortunately, it’s also relatively costly. With that in mind, I thought I’d put together some tips for saving money when you’re in the market for a life insurance policy.

save life

Get healthy

Any insurer worth their salt will require a physical as part of the underwriting process. The good news is that it’s easy — they’ll send someone out to your home or office. Smoking, obesity, high blood pressure, etc. will all result in significantly higher premiums. So, leading a generally healthy lifestyle will save you a lot of money on your life insurance premiums.

Buy it only if you need it

Life insurance makes the most sense for people with significant financial responsibilities. If others depend on you for financial support, then you most likely need it. However, if you’re young, unmarried, and childless, you may be better off skipping it and banking the savings.

Buy term and invest the difference

The simplest and cheapest form of life insurance is a term policy. Sure, insurance policies with a cash value — such as whole life or universal life — can make sense in certain circumstances. But you can save a good bit of money by foregoing the investment component, buying a term policy, and investing your savings on your own.

Don’t buy more than you need

The more coverage you buy, the more it will cost. You don’t want to go cheap and leave your loved ones high and dry. However, it also doesn’t make sense to buy more than you really need. Just don’t forget to factor in the effects of inflation.

Pay attention to your payment terms

Most insurers allow you to pay monthly, quarterly, semi-annually, or annually. While paying monthly might sound better than coughing up a year’s worth of premiums in advance, keep in mind that many companies charge for the privilege.

Shop around

The premiums on identical policies from different issuers can vary widely. Thus, it pays to shop around. Either enlist the help of a reputable insurance agent  or do what we did — poke around using a life insurance company finder tool like ours. Just don’t buy from a company on the brink of bankruptcy in the interest of saving a few bucks.

So there you have it… Six simple tips for saving money on life insurance. If you have any further suggestions, please be sure share them in the comments.

And if you’re generally reviewing your insurance policies, see our articles on how to save money on car insurance, how to save money on homeowners insurance and how to save money on health insurance.

Published on January 17th, 2017 - 17 Comments
Filed under: Frugality,Insurance
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Passive Income Streams: What They Are and Where to Find Them

Written by Aliyyah Camp - One Comment

Passive income is money received on a regular basis that requires little effort to maintain. Sounds great, doesn’t it?

passive income

Generating passive income is a great financial goal because it’s a smart way to build wealth. One thing to realize is that creating passive income requires an upfront investment — whether it’s money or time. You’ll need to be committed in order to be successful at creating a passive income stream. Here are three passive ideas and how they work:

Idea #1: Investing

Investing is a tried and true way to make passive income. Of all the passive income ideas, investing is probably one of the most passive. The most significant investment you’ll make is your money upfront. There isn’t much upkeep after that.

Whether you’re starting out with $1,000 or $100,000, you can make money in the stock market. The important thing to know is that investing doesn’t come without its risks. The value of your stock portfolio will continue to fluctuate as long as you own it. If you’re in it for the long haul, however, you can ride out those fluctuations and see profits over time.

There are many methods for investing your money in the stock market. One way is to invest in dividend-paying stocks. A dividend is a payout some companies provide to shareholders on a regular basis. Dividend yields vary from company to company, so keep that in mind.

It’s important to not merely go after stocks with the highest dividend yield. Instead, focus on companies that have a proven track record of increasing dividend payouts over the years. You can either receive your dividend payouts as cash or choose to reinvest them in the same stock. The latter is known as DRIP, a dividend reinvestment plan.

One way to invest your money that doesn’t involve the stock market is peer-to-peer lending. Peer-to-peer lending involves funding personal loans to borrowers through an intermediary like Prosper or LendingClub. As a lender, you make money through interest payments on the personal loans.

Although peer-to-peer lending doesn’t have the risk of stock market fluctuation, your money isn’t completely secure. Borrowers have the ability to default on loans. To mitigate this risk, you can diversify your portfolio with multiple personal loans. You can also review personal loan requests and decide which ones you’d like to fund. For example, you can review criteria such as credit worthiness and the reason for the loan.

Idea #2: Rental Properties

Making passive income from rental properties is effective, but it often takes more time than people expect. The way you make passive income is by receiving rent payments each month that exceed the mortgage payments. If you bought the property outright, you’ll begin making passive income right away. However, you will need calculate how many years it’ll be until you recoup your initial investment.

There are many things besides the cash investment that go into making rental properties profitable, though. You’ll need to spend the time learning about real estate to make sure you don’t lose your investment.

When looking for rental properties to invest in, one of the first things you’ll want to consider is location. In the real estate industry, properties in good school districts tend to have great potential. The same goes for properties near expanding retail or local transportation.

The next thing you’ll want to consider is your return on investment. If you want to charge a higher rent, consider doing renovations to the property. For example, tenants are usually willing to pay a higher rent for updated kitchens and bathrooms. Make sure you leave some buffer room for occasional expenses such as plumbing problems and other tenant requests.

The least passive part of rental property income is managing tenants. You’ll want to minimize the amount of time that your property is vacant because this means no rental income for you. Finding and screening tenants can be a time-consuming process. Moreover, managing tenant requests takes up time as well. To save time, you can hire a property manager to take care of these tasks for you. This expense will eat into your returns but may be worth it to avoid the headache of tenant management.

Idea #3: Information Products

Unlike investing and rental properties, information products generally do not require much upfront monetary investment. Instead, it requires a greater upfront time investment.

You’ll need to spend time researching the market for your information products (whatever type or topic they may be), creating the actual information products, and then marketing them. Despite the time investment required, creating information products is a very attractive way to generate passive income because you don’t have much to lose. If you don’t sell any, you won’t be losing money.

There are many different types of information products. There are eBooks (which you could sell on Amazon or your own website), physical books, online courses, training material, and audio content, among others. The type of information product you create will greatly depend on the topic. For example, if you want to teach people about software programming, an online course would be ideal so that you can show live examples and include practice prompts. The barrier to entry for creating information products is low. If you’re an expert in a subject matter that people are interested in, you’ll have a market. You can even outsource the creation of your information product if you just have a good idea.

A good way to prepare yourself for creating a profitable information product is to start by freelancing or consulting. Not only will working in industry increase your credibility, it’ll also give you insight into your market. For example, if you have a personal fitness training business, you can take note of the common problems your clients experience. Then, you can use that insight to package a set of videos and training material to sell to people who’d like to get in shape.

Final Thoughts

As you can see by the three examples above, passive income requires some upfront investment. Whether it’s money or time, you’ll need to invest something before you can begin generating passive income. Seeking after passive income is well worth it though. Once you establish the right foundation, you can create a continuous stream of income that requires little maintenance.

Published on January 16th, 2017 - One Comment
Filed under: Self Employment,Working
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Current High-Yield Online Savings Account Rates

Written by Nickel - 156 Comments

I frequently receive e-mails asking my opinion as to which online bank has the best high-yield savings account. I’ve used several online banks over the years for my emergency fund and look to a few factors in selecting a savings account:

  • The interest rate (of course)
  • Minimum deposit requirements
  • Monthly maintenance fees
  • The website and how easy it is to use

high-interest

Considering these factors, we’ll look at a number of high yield savings accounts. Here’s an automated rate table that will show you several of the top options.

I’ll also update the list below with accounts that FiveCentNickel readers have identified as their favorite online savings accounts.

Looking for the best online high-yield savings account? Here are some of the most popular online savings options. All savings rates were updated as of January 10, 2017.

Barclays Savings Account: 1.00% APY

Barclays has been around for over 300 years and operates in 50 different countries. Barclays is a large bank and offers competitive rates on savings accounts. There is no minimum balance or any monthly fees, and don’t worry, its FDIC insured. Click to Apply.

Ally Bank Online Savings Account: 1.00% APY

Formerly known as GMAC Bank, Ally is one of my favorites. They offer one of the highest savings rates out there, and they also have very competitive CD rates. Accounts with Ally have no monthly fees as well as no minimum balance requirement. We’re actively holding a portion of our savings with them. Click to Apply.

Synchrony Bank: 1.05% APY

Synchrony offers one of the highest rates available today on a savings account. There is no minimum balance required and Synchrony does not charge monthly fees. Money can easily be withdrawn from the account online, and it is FDIC-insured. Click to Apply.

GS Bank Savings Account: 1.05% APY

Formerly GE Capital Bank, Goldman Sachs acquired the online bank and renamed it GS Bank. Its online savings account features a highly competitive yield, no transaction fees and no minimum monthly balance or opening deposit. All GS Bank accounts are insured by the FDIC.

CIT Savings Account: 0.95% APY on balances over $25,000

CIT was founded by Henry Ittleson in 1908 with a mission to provide financing for businesses. CIT continued to grow, offering financing, lending and insurance for corporations in many different sectors. CIT Bank, an FDIC-insured institution, offers CDs, savings accounts and custodial accounts to consumers and small businesses.

FNBO Direct Online Savings Account: 0.95% APY

FNBO is currently offering a 0.95% APY on their Online Savings Account. There are no minimums and no monthly fees. They offer a return that has averaged ten times higher than traditional savings accounts according to a 2012 study by bankrate.com. Maximum principal deposit balance: $1,000,000.

Capital One 360 Savings Account: 0.75% APY

Building off the legacy of online-banking pioneer ING DIRECT, Capital One 360 is a new favorite. Capital One 360 offers both an online savings account and a high-yield checking account. There are no fees, and its site has an ultra-slick interface with lots of useful features.

EverBank High Yield MMA1.11% 1st Year APY

EverBank offers a high yield money market account. For first-time account holders, new account bonus rate for Yield Pledge Money Market Account – first year APY is currently 1.11% for account balances up to $150K, and an ongoing APY currently at 0.61%. There are no fees associated with your account as long as you maintain a $5,000 minimum balance. They also have a high-interest checking option. While you may not have heard of them, they’re FDIC insured. Definitely worth checking out.

Lending Clubaverage net annualized return of 5% to 7%

If you’re looking for a significantly higher yield than a regular bank can offer, you might want to check out online investing company Lending Club. They are a good option if you don’t mind taking on some additional risk. It’s not FDIC-insured, but an average net annualized return for Lending Club notes are between 5.25% for grade A notes and 8.57% for C grade notes. It’s free to open an account, and you can get started with as little as $25. I’ve been using them for the past few months, and have had a great experience thus far. Click to Apply.

I should also note that USAA was a popular option among those that have access to it. I did not, however, include it in the main list, as it’s only available to members of the armed services (active duty, reserves, or retired) and their families.

Published on January 13th, 2017 - 156 Comments
Filed under: Banking,Online,Saving & Investing
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Contribute to Your Roth IRA, Even if it Stretches Your Budget

Written by Nickel - 9 Comments

Contribute to Your Roth IRA

Your 2016 taxes are due in just over three months. That also means that you have just over three months left to make any 2016 IRA contributions that you might have been putting off.

But what if you’ve neglected to contribute to an IRA because you’re not sure you can afford it? Maybe the only cash you have on hand is earmarked for emergencies, and you’re not willing to risk the 10% early withdrawal penalty that comes with a traditional IRA.

max-ira

Well, I’d like to encourage you to think twice about that stance and still consider making a Roth IRA contribution. As I’ve noted before, Roth IRA contributions can be withdrawn at any time and for any reason without penalty. And if you don’t believe little old me about this, you can check it out for yourself in IRS Publication 590.

Now, I’m not necessarily crazy about this flexibility, to the extent that it encourages (or at least allows) people to raid their retirement to buy shiny things. However, one huge benefit is that it gives you the flexibility to make a contribution, even if you’re not sure you can afford it.

This flexibility is very valuable because you’re only allowed to contribute a limited amount to IRAs each year. In other words, if you fall behind on contributions now, you won’t be able to make up for it later when you can (hopefully) better afford it.

If you make the contribution now and fate smiles upon you, you’ll be able to re-build your emergency savings “on the outside” while having more money stashed away inside your Roth IRA. And if things go awry, you’re free to yank that money out (up to the amount that you’ve contributed) and use it to take care of whatever emergency you’re dealing with.

Some issues to be aware of:

  1. This rule applies to Roth IRAs only, so don’t try this trick with a traditional IRA.
  2. The usual contribution limits still apply, so don’t try to sock more money away than is allowed.
  3. Roth IRA conversions are subject to a five year waiting period before they can be withdrawn without facing a penalty.
  4. Make sure a Roth is right for you. If you expect to pay the same or higher taxes in the future, then a Roth might make sense for your situation. But if you expect your tax burden to fall in the future, a traditional IRA might be better. Either way, remember: only Roth IRAs qualify for the penalty-free withdrawal of contributions.
  5. Given that this is money that you may need to withdraw at any time, be sure not to put it at risk once inside the Roth. Instead, plug it into a money market fund or something similar until you’ve rebuilt your emergency savings.

Published on January 10th, 2017 - 9 Comments
Filed under: Retirement,Saving & Investing,Taxes
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What’s a Side Hustle (and How Can It Help You Achieve Financial Freedom)?

Written by Aliyyah Camp - Leave a Comment

Whether you want to pay off outstanding debt, save up for a house, or just have extra spending money, having a side hustle is a great way to reach your financial goals faster. The nice thing about side hustles is that they do more than just bring in extra income. Side hustles can be a source of fulfillment as well.

side-hustle

Before we discuss how to find the best side hustle for you and look at some ideas, let’s define what a side hustle is:

What’s a Side Hustle?

A side hustle is something you do in addition to your main employment, as a way to make extra money. Since a side hustle isn’t your primary source of income, it gives you flexibility to use it as an opportunity to explore something that truly interests you. If you aren’t in love with your full-time job, a side hustle could be exactly what you need to do something more fulfilling while making some money at the same time.

One thing a side hustle is not is a part-time job. If you seek hourly employment at a place like a retail store or fast food chain, that generally isn’t considered a side hustle. That’s just part-time employment. A side hustle is more of a venture that you embark on for both money and enjoyment.

How to Find the Best Side Hustle for You

The first step to find the best side hustle for you is to identify your interests. As previously mentioned, a side hustle is not only a means for extra income but also a way to explore a passion you may not be able to explore at your day job. When you decide to pursue a side hustle, now’s the time to decide what truly interests you. Do you have a passion for cooking? Are you fascinated by technology? These are just a couple of interests that could turn into a side hustle.

The next step is to identify your money-making skills. Not all of your interests may easily translate into a lucrative side hustle. To determine which skills are easiest to monetize, simply do a web search and see what other people are offering. For example, if your skill is writing, you can look up other writers’ websites and search for their rates. If your skill is coding, you can search on freelance job boards and see how much those types of projects are paying.

The last step is to evaluate the time commitment needed. Some side hustles require more time commitment than others. You want to find one that doesn’t require more time than you’re willing (and able) to dedicate.

A Few Ideas

Now that you know how to find the best side hustle for you, you may already have some ideas in mind to get started. In case you don’t, though, here are 10 that you can try:

  • Resell items on eBay – Make money by buying highly discounted items at places like yard sales or thrift shops. Then, resell them on marketplaces like eBay.
  • Sell crafts on Etsy – If you’re a crafty person, consider making keepsakes like scarves or figurines and then selling them on a marketplace like Etsy.
  • Freelance writing – If you’re a good writer and have subject matter expertise, freelance writing is an excellent way to bring in extra income. Sites like Upwork can be a great place to find potential jobs.
  • Drive for Uber or Lyft – If you have a decent car and a lot of spare time, you can spend a few hours each day driving for one of these ride-sharing services.
  • Rent a room on Airbnb – Renting out a room (or the whole place!) on Airbnb is a great way to take advantage of any extra space you have in your house.
  • Publish eBooks – If you know enough about a particular topic to position yourself as an expert, publishing eBooks can bring in passive income for years.
  • Create information products – You can go a step further and create other information products, such as online courses and training materials.
  • Tutoring – If you’re knowledgeable about a subject that is taught in school, such as history or math, you can seek out students to tutor on a regular basis.
  • Network marketing – Become a representative for a reputable company and sell their products to people for a commission.
  • Become a consultant – Leverage your skills from your day job to create a consulting business, where you advise people for a one-time fee.

Final Thoughts

When deciding which side hustle you’d like to explore, remember to consider both your skills and interests. In addition to being an additional source of income, a side hustle should be something that brings you enjoyment.

Another thing to consider is how much time you’re willing to commit. This may rule out certain side hustles that require a lot of time in order to make good money. Once you get the hang of things and begin bringing in a consistent stream of income, you can brainstorm ways to increase your income even more. One day, your side hustle income may even exceed that of your full-time job!

Published on January 9th, 2017 - Leave a Comment
Filed under: Automotive,Self Employment,Spare Change,Working
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Dave Ramsey is Bad at Math

Written by Nickel - 693 Comments

See also: Dave Ramsey is Good at Psychology

If you’re familiar with Dave Ramsey, then you’ve no doubt heard of his ‘snowball’ approach to paying down your debt. In short, Ramsey suggests that you make minimum payments on all but the debt with the lowest balance. Any additional money you have goes to that lowest balance debt. Once the low-balance debt is paid off, you add the dollars that had been going there to what you’ve been paying against the next lowest debt. And so on.

The idea is to pick up steam in paying down your debts by knocking them out one by one and piling up the payments that would have gone to each of the paid off debts in order to knock out the next one. Sounds enticing, but is it a good idea? [more]

Published on January 6th, 2017 - 693 Comments
Filed under: Credit Cards,Debt Reduction
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How to Get Out of Debt

Written by Nickel - 36 Comments

On the way home from work the other night, I heard a radio commercial touting a debt reduction system that (supposedly) works like no other. As I drove along, I couldn’t help but chuckle. After all, they made it sound like there’s some sort of silver bullet out there that will magically make your debt disappear — for a fee, of course.

Guess what? There isn’t. That’s the bad news. The good news is that, with a bit of hard work and focus, you can do it on your own. What follows are some tips for making it happen.

get-out-of-debt

Recognize the problem

It may sound trite, but the first step in tackling your debt is to admit that you have a problem. Unless you’re willing to own up to your situation and commit to changing it, you’re going to be in debt for a long, long time. If you’re married, now’s the time to sit down and have a heartfelt talk about money.

Stop taking on new debt

This is a hard one, especially if you’ve become reliant on credit cards for making ends meet. If you want to climb out of the hole, you have to stop digging. If you don’t have the money to pay for something, don’t buy it. Period. If you have to cut up your credit cards in order to make this happen, DO IT.

Here, it’s important to understand why you are going into more debt. For some, it’s the unexpected emergency (see building up a cushion below). For others, it’s just steady overspending. One solution is to create and follow the dreaded budget.

It’s really not that bad, and there are several different ways to budget. Pick one that works for you. It may take some trial and error, but stay the course and you’ll get into a good rhythm in no time.

Build up a cushion

If you’re planning on living without credit, then you’ll need a cushion to handle unexpected expenses — i.e., an emergency fund. Debt reduction experts, such as Dave Ramsey, recommend saving $1,000 for starters. Of course, this number might vary depending on your circumstances. If you’re single and on your own, you can probably get away with less than someone with a family.

Just remember, as important as your emergency fund is, you shouldn’t overdo it. Build it up, stash it in a local bank or online savings account, and move on. After all, your debts will just keep on growing until you start wiping them out.

Inventory your debts

In the interest of developing an effective debt repayment strategy, you need to know exactly what you’re up against. Develop a detailed list of who you owe, how much you owe them, and the associated payment terms (e.g., minimum payments, interest rates, etc.). Don’t leave anything off.

Ask for help

Call the creditors on your list and ask if there’s any way they can reduce your interest rate. As unlikely as it seems, this strategy actually works. No, they won’t all agree to it, but some will. And the worst they can do is say no.

Reduce your existing debt

There’s been a lot of debate over the best debt reduction strategies. Some say to attack your smallest debts first, whereas others say to focus on those with the highest interest rates. Guess what? How you do it doesn’t really matter. The important thing is to pick a method and get started.

In order to stay current on all of your debts, and thus avoid unnecessary fees, send at least the minimum due to each creditor every month. After that, take whatever money you have left over and attack your #1 target. As your debts begin to melt away, you’ll be able to direct more and more money toward your next target. Lather, rinse, repeat.

Accelerate your payments

If you’ve made it this far, you’re doing great. Now it’s time to ramp things up. Start by ditching any recurring, discretionary expenses, and cut back wherever else you can. Whatever extra savings you have should be directed toward your debts.

Some additional ideas:

Every little bit helps.

That’s all folks…

So, there you have it. A thumbnail sketch of my magical system for getting out of debt. And it’s all yours for the low, low price of… Free.

Published on January 5th, 2017
Modified on January 6th, 2017 - 36 Comments
Filed under: Credit Cards,Debt Reduction
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Paying Off Your Mortgage Early: Some Things to Consider

Written by Richard Barrington - 19 Comments

Paying Off Your Mortgage Early: Some Things to ConsiderLet’s talk about a somewhat controversial subject, at least in financial planning circles: paying off your mortgage early.

A great deal of conventional wisdom says you should never pay a mortgage off early. Well, I’ve gone against that conventional wisdom. Twice. I don’t know if that means I lack conventionality or I lack wisdom, but it seems to have worked out well.

First, I’ll explain why I thought it was a good idea, and then I’ll address some of the common arguments against paying your mortgage off early. Finally, I’ll give you some advice about what to consider if you face this decision.

It seemed like a good idea at the time… and still does

When I reached the point in life where I started to accumulate some meaningful savings, I was confused about what to do with it. It happened to be at a time when both the stock market and the bond market had made huge runs. I didn’t fancy the idea of putting the money into an overpriced market, so I was at a loss with where to put it all. My wife and I discussed it and, without hesitation, she asked,”Why not put it into the mortgage?”

Why not? Well, I was aware of a few reasons why not (but more on that in the next section). Personally, though, when I thought about the choice between putting money into some overheated financial markets or putting it into the roof over our heads, it seemed logical to do the latter.

What we got out of it immediately was a feeling of satisfaction and peace of mind. We’ve always looked at debt as something that you don’t simply try to manage, but something you strive to get out of as soon as possible. That may sound terribly old-fashioned, I know. But years later, having witnessed a housing crisis in which too many people lost their homes because they had failed to build equity, I can tell you I’m even happier for having played it safe.

Why not? Here’s why not…

The following are three reasons financial planners often give for not paying off a mortgage early, followed by my arguments against those reasons.

  1. You’ll lose the tax deduction. Yes, mortgage interest is tax deductible, but do the math. If you have a four percent mortgage and you’re in a 25 percent tax bracket, you’re effectively paying 4 percent to save 1 percent. Also, the deduction on interest you pay will be somewhat offset by taxes on what you earn by having the money invested instead, which leads to the next point…
  2. You’ll miss out on investment opportunities. This was a popular argument in the 1990s when investments seemed to go straight up. It holds less water now, though. While mortgage rates are low, at around 3.5 percent, CD and savings account rates are even lower. Bonds are below 2 percent across most of the yield curve. As for the stock market, well, let’s just say it’s had a rough decade. You can take your chances, but remember that by investing borrowed money, you are essentially leveraging your portfolio, which increases your risk level.
  3. Don’t tie up liquidity. This is a fair argument. A house is an asset, but not a very liquid one. You shouldn’t put so much capital into it that you have no money left over for unexpected expenses, emergencies, etc. On the other hand, when people have liquidity, they tend to find a way to spend it. Putting money into your house helps to make sure that money saved stays saved.

Questions to ask before acting

Of course, virtually no financial advice applies universally. Facts and circumstances matter greatly. Here are three things to consider before you pay off a mortgage early:

  1. Are there prepayment penalties? Actually, it’s best to ask this question before you sign up for a mortgage. If you can minimize prepayment penalties, it will give you more options down the road.
  2. Is your income solid? This is essential for making sure you don’t run into a liquidity problem by putting too much into your mortgage too soon.
  3. Have interest rates fallen or risen? If interest rates have risen (and assuming you have a fixed-rate mortgage), you might do better by investing at higher rates while continuing to pay a low rate on your mortgage. If rates have fallen, you face a choice of paying down the mortgage early or refinancing, which leads me to my final suggestion.

Not sure? Consider a hybrid strategy

If interest rates have fallen since you got your mortgage, consider a hybrid strategy of refinancing to a shorter-term mortgage. This will allow you to get an even lower interest rate (15-year rates are lower than 30-year rates) and pay down your mortgage faster without immediately tying up your liquidity.

In the end, as you ponder this decision, just remember that having these options is an opportunity, not a problem.

Published on January 3rd, 2017 - 19 Comments
Filed under: Debt Reduction,Mortgages
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