Common 401k Questions

Once you have contributed to your 401k, you are still left with the somewhat daunting decision of how to invest within your plan. For better or for worse, 401k providers typically “help” by limiting your choices to a small number of mutual funds (after all, the only true freedom is freedom from choice, right?).

A good strategy that will serve anyone well is the 3-fund portfolio. In the 3-fund portfolio you aim to hold broadly diversified index funds in the three major asset classes: US stocks, International stocks, and Bonds. By investing in this manner you are instantly diversified across thousands of different securities, will never significantly underperform the market, and are mathematically certain to outperform most investors doing differently.

Identifying what asset class a fund belongs to can be challenging, especially if your 401k provider doesn’t break them out for you. Identifying which funds are index funds can be even more difficult, but in general index funds will have expense ratios that are much lower than the other available funds. The expense ratio is the annual fee you pay for the privilege of investing in the fund. A low expense ratio is the single best indicator of superior long-term performance. An expense ratio of 1.5% may not seem like a lot, but when compared with an index fund charging an expense ratio of 0.3%, that 1.2% difference compounded over 30 years will add up to tens of thousands of dollars in lost returns. Vanguard offers various tools to compare the costs of investing in high or low expense ratio funds.

Unfortunately not all 401k plans are created equal, and some fund selections are truly horrendous containing funds with expense ratios in excess of 1.5%. If this is the case for your 401k plan, consider campaigning for improvements. While you’re doing that, make the best of a bad situation and choose the lowest-cost funds in your plan. You could also consider funding an IRA before contributing to your 401k (since this is a post about 401ks I will not go into the details here – see the FAQ or Google “IRA”), however, if you are saving for retirement you should contribute to your tax-advantaged accounts to their limits before putting money in a taxable account with no tax advantages.

 

Some other frequently asked 401k questions

1. My employer does not match my contributions. Should I still contribute to my 401k?

If your employer does not match contributions and you are looking to save money in a tax-advantaged account, most people will be better served with an IRA. However, the IRA contribution limit is $5,500 per year for those under 50 and has income limitations. If your income is such that you do not get the full tax advantages of an IRA, it is absolutely worth contributing to your 401k in order to save for retirement.

2. My 401k is crappy. Should I still contribute to it?

If your 401k has a poor selection of high cost funds, consider contributing to an IRA first. You can open an IRA with whoever you want, thus allowing you to choose which funds you have access to. If you have already maximized your IRA contribution for the year and still have money left over you want to put towards retirement, you should contribute to your poor 401k. The effect of high expenses really only starts to bite after long periods of time, and 401ks are quite portable in that you can roll them to your IRA if you leave your current employer, or sometimes you can roll it into a new 401k with a new employer. Bad 401k plans can turn into great IRAs in a heartbeat.

3. I want to retire early. Should I contribute to my 401k and lock up my money until age 59.5?

You should take advantage of the tax structure of the 401k for at least some of your savings, assuming you are planning to live past 59.5 years of age. Early retirement requires a lot of planning – you should project your needs before and after you’re eligible to take distributions from your 401k and plan accordingly.

From /u/arichi: If you plan to retire before 59.5, but close to it – say, at 55 or so – you can use 72(t) distributions to access pre-tax money without penalty. If you do so even earlier, you can access it with a five-year delay via a Roth IRA conversion ladder, although you’ll still need the first five years’ expenses available via taxable accounts, Roth IRA contributions, and perhaps part-time work.

4. Pay off debt or contribute to my 401k?

If your employer matches any of your 401k contributions you should contribute enough to get the full match. This is free money that you should not leave on the table. After that, any high interest debt carrying interest rates beyond what you could reasonably get investing elsewhere should take priority. Remember that paying down debt offers something that only scammers can claim otherwise – guaranteed, risk free return!

5. I’m a young person and want to invest aggressively – why invest in bonds at all?

Bonds provide a source of funds to purchase potentially higher-yielding investments when they can be had at discount prices during market downturns, reduce your portfolio’s volatility, and usually offer a steady return themselves. On the technical side, there are numerous studies that show that 100% (or more) stock investors are not compensated in proportion to the extra risk they take on by doing so. While stocks have outperformed bonds over the long run to date, “past performance is not indicative of future returns.” Finally, the psychological/emotional effects of a severe bear market really cannot be appreciated until they’re felt first hand. It is one thing to say you’re OK watching half of your investment portfolio evaporate in a few weeks. It’s quite another to watch it happen for real and have the wherewithal to stay the course. Bonds offer some consolation in such a scenario.

6. What is a vesting period?

(By suggestion from /u/dgmachine) Any contributions that come out of your paycheck are always 100% yours. However, if your employer provides any matching contributions to your 401k, occasionally they become yours according to a vesting schedule. A vesting schedule is essentially a time delay between when the money your employer contributes becomes “yours,” and is used as an incentive to keep employees with a particular company. Vesting schedules can take many forms – some schedule vesting in 20% increments (20% the first year, 40% the second year, etc.), some have a set amount of time (100% vesting after 3 years), others do not have a vesting period at all and the money is yours immediately. Your company’s HR section should be able to explain the terms of your company’s vesting schedule, if you have one.

7. I’ve left my previous employer. What should I do with my old 401k/403b/retirement plan?

See the FAQ entry on Rollovers.

8. Do rollovers into my new 401k count against my annual contribution limit?

No. Rollovers do not count against annual contribution limits for your 401k. For more information on rollovers, see the FAQ page on Rollovers.

9. Do employer contributions into my 401k count against my annual contribution limit?

No – employer contributions do not count against the individual contribution limits ($18,000 in 2015 and 2016). They do, however, count against the total 401k contribution limit – currently $53,000 in 2015 and 2016.

10. My company offers an after-tax 401(k). Should I contribute?

Possibly, if you have already reached the annual max for traditional or Roth contributions. See detailed discussion here.

11. Can I contribute $18k to my 401k and $5.5k to my IRA?

Yes. The 401k and IRA contribution limits are separate and do not affect each other.

12. Can I withdraw my contributions from my Roth 401k without taxes or penalties (like my Roth IRA)?

No. Unlike a Roth IRA, you cannot choose to only withdraw contributions from a Roth 401k. Distributions will contain a proportional amount of contributions and earnings, and the earnings will be taxed and penalized.

How does a 401k work?

In plain English, a 401k is an account you put money into that receives favorable tax treatment. Each year you can elect to contribute money to your 401k plan through payroll deductions. Elective deductions are usually specified as a percentage of your income, although some plans allow you to specify a dollar amount as well. The annual contribution limit is $18,000 in 2015 and 2016 (plus an additional $6,000 in 2015/2016 if the employee is age 50 or older). Do not go over this limit (some plans will not let you, and others will simply stop accepting contributions once you reach the limit).

 

401k plans come in two flavors:

  • Traditional 401k plan contributions reduce your taxable income. This is known as tax deferral – you are not taxed on the money you contribute now, but will pay income tax on your contributions and your earnings at your marginal tax rate when you take distributions from your 401k in the future.
  • If you contribute to a Roth 401k, contributions have already been taxed at your current marginal income tax rate. In exchange, all earnings may be distributed tax free if the distribution meets certain age and eligibility requirements. Note that not all 401k plans have a Roth option.

Which one do you choose? It depends on a lot of factors, but the big ones are:

  • Income – High earners are usually better off contributing to a traditional 401k, as this allows them to avoid paying their current high marginal tax rate. Conversely, those with lower incomes usually favor the Roth option, as they can pay a low marginal tax rate now in exchange for never being taxed on that money again.
  • Your guess about your future income tax rates – Those that believe they will be in a lower income tax bracket when they retire usually favor the traditional 401k. Those that believe they will be in a higher income tax bracket when they retire usually favor the Roth option. Those that believe income tax rates will rise across the board in the future usually favor the Roth option.

Money you contribute to your 401k must then be invested in the funds your 401k provider offers you.

 

What should I do with my old 401(k)?

You usually have 3 options to choose from:

  1. Leave it where it is, managed by your old 401(k) company. (This assumes there is no periodic fee to maintain your account as a non-employee and that you have enough money in the account to meet any minimum requirements.)
  2. Roll it over into an IRA. (Note: this may not be a great idea for pre-tax 401(k) plans if you have a high income that is above the Roth IRA contribution limits and are planning to do a backdoor Roth IRA in the future.)
  3. Roll it over into your new company’s 401(k) plan. (This assumes they allow it.)

Make your decision based on which of the three options provides the best selection of investment options. “Best” is based primarily based on which has the investment options with the lowest expense ratios. Most of the time this will be option #2: an IRA with a low cost provider where you have access to index funds with expense ratios below 0.2%. However, if either your old or new 401k has a particularly good choice of low expense ratio index funds (below 0.1%) to choose from you may want to choose option #1 or #3. This is usually only the case with extremely large corporations.

Note that some 401(k) plans feature “force-out” provisions that will remove separated participants with a low-balance from the 401(k) plan. If your old employer’s 401(k) plan features a force-out provision, they may exercise it if your account balance is less than $5,000. If your account balance is below $1,000, your former employer may send you the entire balance in the form of a check; otherwise, your employer must exercise the force-out by rolling the money into an IRA on your behalf. If you have an old 401(k) and are planning on keeping your money in the plan (as per option #1), ensure that your balance is high enough that you cannot be forced out, or that your plan does not force out old participants. If you are planning a rollover (as per option #2 or #3), and your old employer’s 401(k) plan features a force-out provision, you may want to roll your balance out as soon as possible, to avoid your 401(k) balance going through the force-out process.

 

I have a bad 401k plan, can I roll it to an IRA now?

401k plans usually only allow rollovers upon separation from the employer that sponsors the plan. Some plans, however, have an “in-service rollover” provision that does allow participants to roll funds from a 401k to another qualifying retirement plan without separating from the sponsor. This is a plan-by-plan feature, so you need to check with your 401k administrator or human resources office to find out if your plan has it.

Do rollovers into my new 401k count against my annual contribution limit?

No. Rollovers do not count against annual contribution limits for your 401k or IRA.

What’s the best way to perform/initiate a rollover?

Starting in 2015 the IRS is instituting a “one rollover per year” policy regardless of how many IRAs you own. In context, this refers to a rollover when you, the account holder, receives a check and then redeposits the money into the proper account. It does not apply to trustee-to-trustee rollovers in which you never have to deal with a check and everything is handled by the gaining and losing financial institutions. Thus, do a trustee-to-trustee rollover whenever possible to avoid any potential complications with the IRS, losing the check, or accidentally taking a distribution when you don’t mean to.

What’s the best company to roll my 401k/403b/etc. to?

Vanguard, Fidelity, and Charles Schwab are generally the IRA providers with the lowest expense ratio funds to invest in.

Useful Personal Finance Loopholes

A lot of personal finance advice is straightforward applications of math: Keep expenses less than income. Pay off highest interest rate debts first. Compound growth is your friend. Then there are obvious legal requirements and benefits: Use tax-preferred retirement / HSA accounts. Keep insurance in force. Know how self-employment taxes work.

This post is about less-obvious but still interesting existing US laws to your advantage. There’s an endless number of these, but some come into play frequently enough that it makes sense to raise awareness about them.  Here are some that you may not already know about:

Tax planning loopholes

  • If you earn less than 30K single / 60k jointly, you can use the Saver’s Credit to get a tax credit for a portion of your IRA or 401k contributions, even for Roth contributions. Full-time students are not eligible. If you contribute to a retirement account (401k or IRA) at low(ish) income levels (see the link in the OP), then a portion of your contribution, up to a limit, is applied directly against your other tax liability. For example, couple making 36K jointly (even if one income) contributes $2K to one or more 401ks (to get a match, say), and now can apply an additional $1000 against their other tax liability as well, either reducing their taxes or increasing their refund in most cases. The exact benefit depends in income and phases out quickly.
  • You pay no taxes at all on long-term capital gains if your taxable income (including those gains) is less than the top of the 15% tax bracket. That could be $95,000 gross income for a married couple filing jointly. This is better than a Roth in that you can do this at any age.
  • Sales of a personal residence often have no capital gains tax as well. Various rules apply.
  • If you rent a room in your house, part of all of your housing expenses (including insurance and utilities) can be Schedule E expense deductions against your rental income (but you need to declare the rental income).
  • Take advantage of “adjustments” like student loan interest, tuition, moving costs, etc., that don’t require itemization if you are eligible.

 

Retirement planning loopholes

  • Employer contributions to your 401k don’t count against the 18k limit.
  • If you change you mind about making an IRA contribution, e.g. your income becomes too high for it to be allowable, you can simply remove the money before the tax filing deadline without penalty.
  • For redditors with more “life experience”, you can increase your contributions to a 401k and IRA at age 50, and your HSA contributions at age 55.
  • Self-employed people have lots of options for retirement accounts. This can apply even if you have employment retirement savings.
  • Think you make too much to contribute to Roth IRA? Think again! The ever-popular Backdoor Roth IRA may work for you. [But no, I am not adding the Mega-Backdoor Roth. There are some places even I won’t go.]
  • Retirement accounts are often protected for those filing chapter 7 or chapter 13 bankruptcy. If your medical bills or finances are getting the better of you, don’t touch your retirement accounts to pay them off.

 

Health insurance loopholes

  • If you change jobs and don’t have insurance coverage for a time, you have 60 days to elect continuing (COBRA) coverage. This works retroactively; you can decide to take COBRA at day 59 and be covered for the previous 59 days. Yes, we get that COBRA is expensive. But it’s free if you wait to elect it and don’t need it, but you’re still covered because you can elect it retroactively. Any other health insurance you’d have to pay for but probably still not use.
  • You won’t pay a penalty for lack of health insurance if you have a single brief coverage gap, which is defined as “less than three months.” I.e. May 1 to July 28 is OK. May 1 to July 31 is not.
  • A very important part out of COBRA “loophole” which is yes you have 60 days to apply, and it is retroactive, but you also have 30 days from the date you apply to start making payments. On the 88th day or whatever you can just call and say you know what I changed my mind and as long as you didn’t file any claims against it can cancel it free of charge. So in this scenario you have 88 days under an umbrella of emergency coverage without paying a dime.
  • HSAs -You are able to either contribute directly out of your pay check (like a 401(k)) or deposit whenever you want from a personal account (like an IRA). If you contribute out of your paycheck, you do not need to pay FICA taxes on that amount (SS or Medicare). This gives you an extra 7.65% of what you contributed. If you contribute directly from a personal account you do not get this break, as you have already paid the FICA taxes on that money and there is no provision to get it back come tax time.

How to do Financial Background Check on Yourself

Thanks mainly to the FACTA (Fair and Accurate Credit Transactions Act), companies that compile personal information on you to give to others must (for the most part) give you at least one free report detailing what they have on you every 12 months.

The Consumer Finance Protection Bureau maintains a list of these databases but many of them either have the same information as the major ones or don’t have as much as the big ones do.

These companies essentially control your ability to open bank accounts, rent an apartment, get a mortgage, find a job, get a credit card, etc. You deserve to know what they have on you so you can tell them to correct something if it’s wrong.

In order to keep things simple, these are the information providers you should be looking at if you suspect you may have credit, banking, employment, driving or housing issues.

 

How to check Credit Reports?

It’s what you hear about most on this sub and rightfully so since credit report impact most peoples’ daily life.

  • AnnualCreditReport.com offers your credit report from Equifax, Experian and Transunion every 12 months. You can order all 3 reports at once or spread them out 4 months a piece, etc. You’ll see loans, credit card accounts, collections, court judgments (most counties), addresses, etc.

How to Check General Background Information

Employers will usually pull one of these background files on you if they want to hire you. If you plan on going into certain fields (law enforcement, regulatory administration, anything with a security clearance) they’ll likely pull more than one type of background check on you as part of their investigation.

  • First Advantage Corporation and Verification offers information mainly concerning court cases, both criminal and civil and will report some things which might also appear on your credit reports.
  • Hire Right gives potential employers and landlords a better look into your driving records as well as things that might appear on a court docket or your credit report.
  • LexisNexis may be your most important file since they vacuum up information on nearly everything. If you’re only going to get one non-credit report disclosure, make it this one.
  • CredCo is another fairly all-encompassing database which doesn’t require that you mail in a paper copy of your request.

 

How to Check Banking Record Reports

ChexSystems is the gatekeeper at 80+% of banks, a few major banks don’t use them (Regions) but most do.

  • ChexSystems is what would likely stop you from being able to get a bank account if you’ve written bad checks or left account balances negative in the past. See what they have on you to start figuring out how you can fix it.

 

How to Check Rental History

Most landlords run some type of tenant background check to see if you have previous evictions or you owe your former landlords money. These databases hold that information:

  • SafeRent is mainly used by landlords and can be slightly more extensive than other background checks.
  • Tenant Data may have something that SafeRent might have missed and vice versa.

 

How to Check Credit Scores

Other than getting your credit score from a banker for free after a loan application, you can use these site guides to get a close approximation of your credit score.

  • Credit Sesame offers your credit score and credit report along with what aspects of your credit you need to improve.
  • Credit Karma gives you free credit reports and scores along with recommendations for credit cards and loans.
  • Discover Score Card offers your Experian score and updates it on a monthly basis.

How to Combine Finances Bank Accounts After Marriage

What should you do with your finances after getting married? It’s totally up to you as to how you want to do it. The most important thing to do is to think about it and agree.

Handling Finances After Marriage

There are many small and big things that you should consider doing. Absolutely first thing is determine a monthly budget. Frankly that should have been done BEFORE the wedding. This is imperative. Do it now. Budgeting is much easier if all bills come out of one account. I recommend having at least a joint checking account for bills and a joint savings account. It is up to the two of you if you also want individual checking accounts to keep your spending money in.

How to combine marital finances?

Key to success with this method: Recognize that each person will spend money on him/herself that the other person may not benefit from. Discuss it if it becomes a problem (like one person spends an unfair/disproportionate amount on him/herself) and take steps to fix it. Communication is key, especially with this arrangement since both people will have equal access to all the funds.

 

 

Create Joint Bank Accounts After Getting Married

Joint bank account, regularly review eachothers purchases and the financial plan with eachother to stay aligned. Pay essentials first (mortgages, bills, food budget, AND TREAT SAVINGS AS ESSENTIAL). Then whatever money is left, either dedicate to a family fun budget or split between yourselves.

In my case, my wife does a lot of the shopping but doesn’t do well with paying bills or keeping track of budgets. So I basically maintain the accounts and let her know where we are in the budget. She often asks if she can buy this or that, not because she needs my permission but because I am the one who keeps track of it all.

 

Talk about finances after marriage

This does mean that I have to be careful about how much I spend on things for myself vs. her. It’s so easy for me to justify buying myself a new pair of headphones but saying no to her request for a new frying pan (boy that sounds sexist but it’s the most recent real-life example). Sometimes I have to realize that for every dollar I spend on myself, I should probably plan on spending the same amount on her.

Pros of having joint bank account after marriage:

  • We each know exactly what the other person is spending on everything and we can see how much our own spending stacks up against the other person’s spending (this could potentially be a con, depending on the people in the relationship).
  • There are fewer bank accounts to juggle/worry about.

Cons of having joint bank account after marriage:

  • If you want to buy a surprise gift for your SO or spend money on yourself, chances are they will see the purchase and amount if they monitor the account online.

There is also an argument to keep accounts separate after getting married….

 

Keeping Bank Accounts Separate After Getting Married

We keep our accounts completely separated and so far it has worked really well. I can’t say that we’ve had a single argument about money.

We divided the bills such that each of us manages certain utilities. When it comes to rent, we break it down such that we each contribute a percentage relative to the amount we bring home. So if I bring home 60% of our income, I contribute 60% toward rent. When it comes to credit cards, we each pay our own credit cards off every month.

I feel like this keeps things fair, but also gives each of us the ability to spend money without feeling trapped or at the mercy of the other person’s approval when it comes to spending. It also helps that we’re both pretty frugal in our spending. We also tend to thoroughly discuss major purchases (such as a car, laptop, etc.) weeks to months in advance of the actual purchase.

 

Strategies for Married Finances

What I think it comes down to is maturity and communication. If you communicate well with your partner and you’re mature enough to make responsible financial decisions then it doesn’t necessarily matter how you organize the money into different accounts. Separate accounts or not, if one of you can’t make good spending decisions or has a problem with impulse purchases then you’re probably going to have a bad time.

Key to success with this method: Discuss who will pay for what before problems arise and stick to it unless it cannot work for someone. Then, discuss again.

Pros of keeping bank account separate after marriage:

  • You don’t have to justify/feel guilty about your spending because it’s your money.
  • You know exactly how the money is being spent and you can adjust that spending because you have complete control.

Cons of keeping bank account separate after marriage:

  • One person’s contributions to joint causes may be greater than the other person’s contributions and may cause resentment.
  • If the people make dissimilar amounts of money, the lower-paid person may feel like even though they are married, they are not benefiting from the other person’s higher salary and that they are not truly sharing in everything.

 

Having Joint and Individual Bank Accounts While Married

The reason I have such a hard time seeing how people split it down the middle (though more power to you if you can make it work) is that so many factors go into what you have to depend on to make that work. Common issues:

  • Each partner has to make roughly the same amount of money as the other, or else the likelihood of resentment increases (either because the lesser earning spouse feels left out of the other’s spending, or the higher earning spouse feels like they are pulling most of the weight)
  • Nobody should have to compromise their career to accommodate the others, which is nearly impossible unless you’re both in the same field or both miraculously find excellent positions you both love in the same place
  • Did you know that household chores are frequent cause of resentment between spouses? With both working full time jobs, shouldn’t you split those as well? Yet many couples have a hard time finding a copasetic way to do this. And then when children come, more often than not the burden of childcare disproportionately falls upon one spouse. Is it fair that they have to do the cleaning and childcare and still work so that they can split everything?

 

Using a Joint Bank Account when Married

Key to success with this method: Decide how much (either in terms of a dollar amount or a percentage) of each person’s paycheck will go to each type of account and stick to it. If this amount does not work for one person, discuss it. If one person feels like someone is not using the joint account fairly, discuss it.

Pros:

  • We each felt like we were contributing fairly equally (percentage-wise, at least) to the joint goals of the family.
  • We each had free reign of our own accounts so we didn’t have to justify or feel guilty about any spending that came out of those accounts.

Cons:

  • If the two people make dissimilar amounts of money, one person may feel s/he should have more say in how the joint funds are used, and the other may feel helpless because s/he likely can’t control how much money they make.
  • If you don’t agree on how much (either in dollar amounts or percentages) of each paycheck will go into what account, one person may add more to his/her own piggy bank and less to the joint accounts, leading to frustration and anger on the part of the other person.

 

Financial Items to Consider After Marriage

  • Pick one healthcare provider for health insurance purposes. Cancel the other.
  • Determine monthly budget
  • Identify short term, mid-range, and long term financial goals (House, graduate education, kids, etc.)
  • Decide which credit cards we are keeping
  • Determine if life insurance is necessary at this point

Other Things to Change After Getting Married

There are also small things like change insurance policies to both names (car insurance) you will need a copy of marriage license, change name on her passports and ss card, think about a getting a will written up. We both owned home as well when we got married (2 years ago) and put each others name on the house.

One thing that is not mentioned are parents. Have you had the discussion of who would take care of either of your parents, financially and otherwise, in case something happens? This is not discussed enough and is a huge shocker sometimes to marriages.

Also, insurance needs to be altered (you can probably get cheaper rates with combined car insurance), setup beneficiaries for your IRA/401(K), and living revocable trusts need to be setup.

Having Financial Conversations with Your Partner After Getting Married

I would say that the most important way for a couple to decide what they should do is to have frequent, completely honest discussions with each other.

  • Discuss short- and long-term goals, and really focus on each person’s strengths and weaknesses when it comes to spending.
  • Pay special attention to how fiscally responsible each person is and view this realistically, not idealistically, when making your decisions about the money.
  • When you have discussions, you have to be able to keep it objective and not become emotional.
  • When discussing the money going in and out of a joint account, it is incredibly important to communicate about it frequently to ensure the other person is OK with those actions and to be sure that you each know how much money is in the account so it doesn’t get overdrawn.
  • It is also important to consider each person’s personality. Someone who is laid-back may be OK with any option, but a more forceful person might want to have more control over the money situation. For example, my cousin (who is somewhat stubborn when she wants something) used to have a bit of a spending problem and also racked up a lot of student loan debt by going to a private college. She recently got married and her husband, who (on paper) is stricter about finances, has given her an “allowance” so she can still spend money but they can also reach their financial goals. This might work for some people but because of their different personalities I think they fight about how he controls the money she gets but sometimes doesn’t apply the same restraint when he wants to buy something.

 

Financial Planning for Married Couples

Each couple will come up with what works for them, but I think being open to new ideas and being willing to really decide what financial goals the couple has will ultimately determine how (and if) they divvy up their money.

Saving Money on Health Insurance Premiums

Selecting a health insurance plan can be a stressful experience. Health insurance plans and billing practices can be complicated, and selecting the right plan can significantly affect the physical, mental and financial health of you and your family. Buying too much insurance can be very costly over the long term if you buy a more expensive plan than you need.

How to Save Money on Health Insurance

Likewise, under-insuring, especially by the young and healthy that feel like they don’t need insurance, can be even more costly if an accident occurs or bad diagnosis given. Having a basic understanding of the available options will help ensure that you pick a plan that is right for you and your family.

Keep in mind that much of what is on this page are general guidelines. Individual plans vary and you should carefully read all information about the plans that are available to you.

 

Six Tips for Saving Money on Healthcare

  1. Pick the right insurance policy
  2. Shop around for medication
  3. Know what your health insurance policy covers
  4. Ask whether tests, prescriptions or procedures are really necessary
  5. Ask for prices upfront, and ask about discounts for cash payments
  6. Pick the right facility

 

Different Types of Health Insurance

  • HMO(Health Maintenance Organization): HMO insurance plans generally have cheaper premiums than the other types of plans. The drawback is that they are also usually the most restrictive when it comes to selecting health care providers.
  • EPO(Exclusive Provider Organization): EPO insurance plans, like HMO, usually will only cover non-emergency medical costs from providers that are in-network. Referrals are not usually required in order to see specialists.
  • POS(Point of Service): POS insurance plans will usually cover medical costs both in- and out-of-network, though you will typically pay less at in-network providers. Referrals from a primary care provider may be required to see specialists.
  • PPO(Preferred Provider Organization): PPO insurance plans, like POS, cover medical costs both in- and out-of-network, with cheaper costs when staying in-network. A referral is usually not required to see specialists.

 

High Deductible (with HSA) vs Low Deductible Plans

As suggested by their name, High Deductible Health Plans generally will have higher deductibles and out-of-pocket maximums than Low Deductible Plans. Lower premium costs often make high deductible plans a preferred option for people who do not expect to have many medical expenses. With the addition of HSA contributions, high deductible health plans can be right for anyone.

Low Deductible Health Plans have higher premium costs. In return you will usually get a lower deductible and out-of-pocket maximum. The higher up-front costs may be worth it for people who expect higher medical costs or who don’t expect to have enough savings to pay for a higher deductible.

 

How to Compare Health Insurance Plans

When comparing plans, the following factors should be considered:

  • Calculate the total amount you’ll pay in premiums throughout the year for both plans. Keep that difference in mind while looking at the other factors.
  • Compare deductibles. If possible, ensure you’ll have enough savings to pay at least your deductible for whichever plan you choose.
  • Compare out-of-pocket maximums. Not as important as the deductible for most people, but it’s good to know the absolute maximum you’ll have to pay.
  • Compare networks. Ensure that your preferred providers are covered by the plan that you choose.
  • Compare co-insurance for each plan.
  • Compare which services are covered by co-pays and/or not subject to the deductible.
  • Potential tax benefits or employer contributions related to an FSA or HSA.
  • Estimate the amount and type of medical expenses you will have throughout the year, keeping in mind that even healthy people can easily end up in the emergency room.

 

Making the Most Out of Your HSA

If you qualify for an HSA, you can take advantage of one of the best savings vehicles available. The following tax advantages apply to any contributions made to your Health Savings Account:

  • Tax free contributions. This even includes FICA taxes for pre-tax contributions made through your employer. Most states also offer a state tax deduction.
  • Tax free earnings.
  • Tax free distributions if used for qualified medical expenses.

 

Using HSA Funds and Tax Consequences

It’s also very important to note that once you turn 65, any funds in your HSA are no longer subject to the 20% penalty when used for non-health related costs. This means that you can treat your HSA very similar to a Traditional IRA. With that in mind, it may be advantageous to max out your HSA contributions before contributing to an IRA or 401(k) beyond employer match.

 

Common Health Insurance Terms

  • Premium: The cost of insurance coverage, usually billed per pay period.
  • Deductible: The amount that you pay out-of-pocket for medical services each year before insurance starts paying.
  • Co-insurance: The percentage of medical costs that you must pay once the deductible has been met.
  • Co-pay: A fixed amount that you pay, generally for services which are not subject to the deductible.
  • Out-of-pocket maximum: The maximum that you will pay out-of-pocket in any given year. Once this has been met, the insurance company will pay 100% of medical costs for the remainder of the year.
  • FSA(Flexible Spending Account): A tax free savings account that may be used to pay for qualified medical expenses. Any funds that are not used by the end of the year are forfeited.
  • HSA(Health Savings Account): Similar to an FSA, contributions are tax free and may be used to pay for qualified medical expenses. Unlike an FSA, unused contributions remain yours forever. Contributions may only be made if you are covered by a qualifying high deductible health insurance plan.
  • Pre-authorization: Certain tests or services must receive prior authorization from your insurance company.
  • Referral: Some plans require referrals from a primary care provider in order to see a specialist.

Understand Your Car Insurance Policy

Your auto policy is broken down into different coverage types. The types are fairly standard company to company and across different states. There is some variation in exclusions and definitions between insurance companies. In addition, different states have different minimum requirements as well as some different coverage options and requirements.

 

What is Collision Car Insurance Coverage?

  • Collision: This is what most people think of when they picture car insurance. It covers damage to your car resulting from an accident (with another car or stationary object). Collision is usually required when you have a car loan. When you don’t have a loan, collision is usually an optional coverage. If you are driving a beater it may not be worth the money to insure, especially if you have an emergency fund to cover a new car in case of an accident. Deciding whether to drop collision is a personal decision. It is recommend talking to an agent. They can break down your quote and tell you what it costs to keep collision on your vehicle. This will help you decide if it’s worth it.

 

What is Comprehensive Car Insurance Coverage?

  • Comprehensive (Comp): Comp is similar to collision but this covers damage to your car caused by an ‘act of god’ (wind, hail, falling trees, deer, cracked windshield, etc.) Everything else said for collision applies here. However, note that you can have separate deductibles for comp and collision. Many people like having a lower comp deductible to cover the less severe cosmetic damage (hail, glass).

 

What is Property Damage Liability Car Insurance?

  • Property Damage Liability or Physical Damage (PDL or PD): If you’re deemed at fault in an accident, this covers the damage to the other car(s) and / or building / property you damage. This is a required coverage with the required limits varying state to state. I’d highly recommend getting at least $25,000 limits (if not more) even if your state requirements are lower. If the damage you cause exceeds your limits you will be legally obligated to pay the difference out of pocket.

What is Bodily Injury Liability  Car Insurance?

  • Bodily Injury Liability (BI): This is similar to Property Damage Liability but it covers the person you injure, not the car. BI pays for medical bills, pain and suffering, wage loss, and funeral service. It is primarily used for people in the car you hit but also covers pedestrians you hit and any passengers in your car. However, note that this coverage does not cover you (the at fault driver). The limits with this coverage get a little more complex. There are two limits. Per person and per occurrence. A common example would be 50/100. This means it will cover up to $100,000 for any given accident but each person is limited to $50,000. Like Property Damage Liability, you could be held liable for additional damages if your limits are insufficient. A minimum of 100/300 is recommended.

What is Medical Expense / Medical Payments Car Insurance?

  • Medical Expense / Medical Payments (Med Pay): This covers your (and your passengers’) medical bills. It is a no fault coverage so it applies regardless of who caused the accident. This is a great coverage, especially if you have no / limited health insurance. Even if you have health insurance this is nice because there are no deductibles / copays. In some PIP states (see below) med pay is not available.

 

What is Personal Injury Protection (PIP) Car Insurance?

  • Personal Injury Protection (PIP): This varies greatly from state to state and is not offered in some states yet required in other states. Like med pay, it’s a no fault coverage. It will cover your medical bills regardless of who is at fault. However, unlike med pay, there is sometimes a threshold; you must reach a certain amount of medical bills before this coverage kicks in. Another difference is that PIP also covers additional expenses such as wage loss.

 

What is Uninsured / Underinsured Motorist (UM/UIM) Car Insurance?

  • Uninsured / Underinsured Motorist (UM/UIM): This is an additional coverage and varies from state to state. It basically covers accidents where you’re not at fault but the other person doesn’t have any / enough insurance. You may be thinking that earlier this page mentioned under BI/PD that if you’re at fault you can be held personally liable if your insurance limits aren’t sufficient. So why would you need this coverage? If the other party is at fault either their insurance would cover it or they would pay out of pocket. But what if it’s a hit and run? Or an unemployed bum? The chances of you ever seeing a penny is slim. This coverage protects you when the liable party is unable to pay. The PD portion covers damage to your car and the BI portion reimburses you for medical bills, pain and suffering, and lost wages. So now you’re probably thinking well I have health insurance plus I already have med pay so why would I need this? Simple. This offers further protection. If you’re in the hospital, unable to work, after the accident this will cover your lost wages. If you require in home care, this will cover it.

 

What are other types of car insurance?

  • Other: Depending on the carrier, there may be other optional coverages such as emergency road side assistance. These are highly variable so they will not be covered here.

 

Ways to save money on car insurance

Here are a few tips on how to save on buying car insurance

 

Shop around for better car insurance.

  • Shop around. Talk to an agent. Get a quote online. There are dozens of factors that go into pricing and each company has a slightly different formula. Find the company whose formula works in your favor.

 

Pay Car Insurance Bill Upfront

  • Pay your bill upfront rather than monthly. Many companies give you a discount for paying right away rather than once a month. Additionally, if you’re able to use a rewards credit card to do this you could get additional cash back (just make sure to pay your statement in full to avoid paying interest).

 

Adjust Car Insurance Deductibles

  • Adjust your deductibles. Sometimes this makes sense, sometimes it doesn’t. It really comes down to how the company prices and how comfortable you are with risk. For example, if some cases, increasing the deductible from $500 to $1,000 would have only saved the driver $8 every 6 months or $1.33/month. In order for this to work out in that person’s favor, they would have to go 375 months without an accident. In this situation it wouldn’t be worth the extra risk and kept the lower deductible. However, if you feel you’re a safe driver and are unlikely to get in an accident, and also have an emergency fund big enough to cover a large deductible, go ahead and increase your deductible and save a few dollars.

 

Bundle Car Insurance with Other Insurance

  • Bundle. Try to get your homeowners / renters through the same company. Most places offer a large discount when you bundle. If you have children / dependents it could also be worth looking into term life as well.

Take a Defensive Driving Course to Lower Car Insurance Rates

  • See if you can get a discount for taking a defensive driving course. Just make sure the discount would offset the cost to complete the course.

Get Usage Based Car Insurance

  • Get usage based insurance (UBI), especially if you do not drive a lot. Many companies offer a discount for installing a device in your car that monitors your driving habits for a few months. On top of the discount offered for installing the device, most companies will then lower your premium further if you have safe driving results.

 

Ways not to save on car insurnace

We all try to save money, but there are some saving tips that could hurt you in the long run.

  • Do not lower your limits to save a few bucks. You can probably safely lower the collision / comprehensive if you have a large emergency fund but it is not advisable to lower any of the other coverages.
  • Make sure to check reviews before choosing a company. Going with a reputable, better rated company is worth a few extra bucks. When your car is totaled and you’re in the hospital, the last thing you want to deal with is an unresponsive insurance company.
  • Don’t lie about anything on your application (such as pre-existing damage, etc.). This is illegal can come back to hurt you.

What is Bitcoin and Where to Get Bitcoins?

Bitcoin is the currency of the Internet. A distributed, worldwide, decentralized digital money. Unlike traditional currencies such as dollars, bitcoins are issued and managed without the need for any central authority whatsoever.

There is no government, company, or bank in charge of Bitcoin. As such, it is more resistant to wild inflation and corrupt banks. With Bitcoin, you can be your own bank.

 

Where can I buy bitcoins?

You can buy or sell any amount of bitcoin (from as little as $1 worth) and there are several easy methods to purchase bitcoin with cash, credit card or bank account. You can buy bitcoin from local traders or online using a bitcoin exchange. There are bitcoin exchanges all around the world, and as bitcoin grows the exchange market is fluidly growing as well, with exchanges located in many countries. You can start by checking the list on where to buy bitcoins in the FAQ.

 

How much do bitcoins cost?

Note: Bitcoins are valued at whatever market price people are willing to pay for them in balancing act of supply vs demand. Unlike traditional markets, bitcoin markets operate 24 hours per day, 365 days per year. Here are a couple useful sites [bitkoin.io, preev.com] that shows how much various denominations of bi

tcoin are worth in different currencies. Alternatively you can just Google “1 bitcoin in (your local currency)”.

 

Where can I buy bitcoin online?

InternationalUSACanadaEuropeChinaSouth America
CoinsetterYYYYYY
LocalBitcoins.comYYYYYY
Coinbase.Y....
Circle.Y....
Bittylicious......
Canada info......
BitstampYY....
BTCChina....Y.
Bitfinex......
BTC-e......
Bitcoin.de...Y..
......

 

Bitcoin Units

One Bitcoin is quite large (hundreds of £/$/€) so people often deal in smaller units. The most common subunits are listed below:

UnitSymbolValueInfo
millibitcoinmBTC1,000 per bitcoinSI unit for milli i.e. millilitre (mL) or millimetre (mm)
microbitcoinμBTC1,000,000 per bitcoinSI unit for micro i.e microlitre (μL) or micrometre (μm)
bitbit1,000,000 per bitcoinColloquial “slang” term for microbitcoin
satoshisat100,000,000 per bitcoinSmallest unit in bitcoin, named after the inventor

For example, assuming an arbitrary exchange rate of $500 for one Bitcoin, a $10 meal would equal:

  • 0.02 BTC
  • 20 mBTC
  • 20,000 bits

If you want to use ‘bits’ exclusively, just remember that there are 100 satoshis in 1 bit, and 1 million bits in one bitcoin. For more information check out the Bitcoin units wiki.

 

Where can I spend bitcoins?

Here are a few places that you can spend your bitcoin, but there are more appearing all the time, so check online for the most up to date information, or tell us or add other significant ones that you find!

StoreProduct
MicrosoftXbox games, phone apps and software
Spendabit and The Bitcoin ShopSearch engines of online retailers accepting bitcoin with millions of results
Overstock andRakutenEverything under the sun
GyftGift cards for hundreds of retailers including Amazon, Target, Walmart, Starbucks, Whole Foods, CVS, Lowes, Home Depot, iTunes, Best Buy, Sears, Kohls, eBay, GameStop, etc.
NewEgg,TigerDirect andDellFor all your electronic needs
Expedia, Cheapair,Lot, Destinia,BTCTrip, Abitskyand 9flatsFor when you need to get away
BoltVM,Namecheap,Mullvad and PIAHandy web services
Foodler andTakeawayTakeout delivered to your door!
HumbleBundle,GreenmanGaming, and Coinplay.ioFor when you need to get your game on
Reddit GoldPremium membership which can be gifted to others
EcoyarnsOrganic and eco-friendly yarn and fibre

 

Can I mine bitcoin?

Mining bitcoins can be a fun learning experience, but be aware that you will most likely operate at a loss. Newcomers are often advised to stay away from mining unless they are only interested in it as a hobby similar to folding at home. If you want to learn more about mining you can read more here.

If you want to contribute to the bitcoin network by hosting the blockchain and propagating transactions you can run a full node using this setup guide. You can view the global node distribution here.

 

Securing your bitcoins

With bitcoin you can “be your own bank” and personally secure your bitcoins OR you can use established companies such as Coinbase and Circle which have secured wallets where they hold the bitcoins for you and provide insurance.

If you prefer to “be your own bank” and have direct control over your coins without having to use a trusted third party, there are many options. If you would prefer easy and secure storage without having to learn computer security best practices then a hardware wallet such as the Trezor or other hardware wallets are recommended.

BitCoin Wallet security

Now we are getting to the meat of things.

There are a number of wallets available to store your hard earned bitcoins. If you have a decent amount of coins to store, you should look into software wallets – BitcoinQT, MultiBit, Armory or Electrum. They are among the best place to store your money safely (provided your computer is secure as well). Chose one you think best suits you, install it and encrypt your wallet file with your strong password. You should take your wallet file and back it up (location of the file is different for different clients, so you have to do some research as to where to find that file). Back it up on a CD, safe USB drive or the like. Keep them safe. If you lose that file, you will lose your money.

A quick word on deterministic wallets. Electrum and Armory allow you to create wallets from a seed. If you use the same seed later, you can recreate your wallet on other machines. With deterministic wallets, you only need to keep that seed secure to have access to your money.

In comparison, in BitcoinQT’s traditional wallet, every address you use is random, meaning that after you send 50-100 outgoing transactions your backups can be obsolete. Always keep an up-to-date backup of such wallet file if possible.

Okay, sometimes you need to have your Bitcoins with you when you leave your computer. In this case, you should look into either online or mobile wallets. A staple for both of those is Blockchain.info, but there are others to chose from.

A good rule of thumb with these is to not store more money in them than you can afford to lose. They are best used as a convenient way of accessing some money, not storing your savings. Online wallets are especially vulnerable to their servers getting hacked and people’s money getting stolen.

 

What to keep in mind while using online wallets:

  • Use a secure password (the more money you have in them the stronger the password should be)
  • Always keep a backup of your wallet in case you need to recover your money
  • Whenever possible, enable two factor authentication
  • Don’t use your online wallets from unsafe computers

Cold storage for Bitcoins

Sometimes you want to store your bitcoins for a long time in a safe place. This is called “cold storage”. There are a few ways one can do this.

First of all, paper wallets. They are nice for giving people small bitcoin gifts, but also for long-term storage if properly used. What you want to do is generate and print them offline. You can save the linked page for example and run that offline. If you are really paranoid, you can put it on read-only media and access that from a different computer. For really long term storage, use archival-grade paper.

Another approach to take is using a separate computer for storing your money that is offline 99+% of the time. You could set one up easily by buying an old laptop, reformatting it, installing Linux and a Bitcoin client. Generate an address on that machine and send money to it from your main wallet. Depending on how paranoid you are you can connect that computer to the Internet afterwards to synchronize data with the Bitcoin Network and then turn it off and put it away somewhere safe until it’s needed.

How to Create a Budget and Stick to a Budget

Budgets. Not only do they make finance nerds happy, but it’s essential to your financial health. They allow you to keep a modicum of self-control on your spending. They will show you, clear as day, where you can start saving money. In fact, I would go as far to say that trying to make ends meet without a budget is like trying to drive a car without a brake pedal. And here’s the wildest thing about them: they only take mintues to set up; shorter than the time it takes to read this post. If you haven’t started yet, you’d be crazy not to.

 

Create a budget: List Monthly Income

1. Start with listing your Monthly Income. Budget out with four weeks of take-home pay. If you’re starting a new job and planning ahead, use an after tax paycheck calculator to get some rough numbers.

  • If you’re bi-monthly, you might want to grab your February pay stubs (or a calculator) and see what 10 workdays of pay looks like, then multiply by two. This will help you budget out the worst-case scenario.
  • If your monthly income fluctuates, list your worst-case or lower-than-average scenario. Budget out for that instead, and anything that’s left over should be allowed to float in your checking as a buffer.

First thing you want to do is budget out for four weeks of take-home (after-tax) pay. This means if you’re paid weekly, your monthly income is based on four paychecks. If you’re bi-monthly, you might want to grab your February pay stubs or a calculator and see what 10 workdays of pay looks like, then multiply by two.

You probably noticed that you’re missing a couple of checks, or at least part of your checks. In fact, you just calculated a year to be only 48 weeks long. This is a good thing. You are assuming the worst-case scenario, which will happen at least once a year: February. Only base your monthly income off of your minimum, guaranteed income.

So what does this mean? If you’re bi-monthly, you get paid a little more than you expect a month. If you’re weekly, you get four “bonus” checks spread throughout the year. Bi-weekly, you get two or three “bonus” checks per year.

Using this method—whether you’re bi-monthly, weekly, or bi-weekly—you’re earning on thirteen months, while spending on twelve. All of your “bonus” money should go toward Step 4.

 

Create a Budget: List Mandatory Spending

2. Take a look at your Mandatory Spending. This is all the spending that is related to safety and survival. This kind of spending includes:

  • Mortgage, rent, and insurance.
  • Electric, natural gas, water/sewer.
  • Groceries
  • Transportation

Not included in this list are discretionary items (which belong in Section 4):

  • Cable TV
  • Dining out, bars, and clubs
  • Shopping

A few Rules of Thumb: You should consider making a major change to your lifestyle if one of the following scenarios is happening:

  • Your monthly mortgage/rent is more than 30% of your take home pay. You might want to consider getting a roommate, or moving to some place cheaper.
  • Your monthly expenses on your car is more than 15% of your take home pay. You might want to consider carpooling to work, traveling less, or taking the bus or a bike. You may also want to consider moving closer or selling your car, if either’s an option.
  • Your groceries cost more than $300 per person. If you’re trying to cut costs, you might want to look at more frugal options for buying groceries, such as buying in bulk, going for store-brand foods, or frequenting less expensive grocery stores.

Create a Budget Review Debts, Goals, and Retirement

3. Take a look at your Debts, Goals, and Retirement. How much you put here is subjective, but the faster you take care of this, the quicker you can become financially independent.

  • You want to pay debt down fast (especially debts with high interest rates), so you pay as little interest as possible. There are tools to help you, and Mint has a paydown calculator if you chose their service. (Some investors would advise you to pay low interest debt, like debts that are only a few percentage points above inflation, more slowly. You can instead invest in retirement and get higher returns. More on this later.)
  • You want to save up for an emergency to cover 3-6 months of expenses in case something goes horribly wrong. You will need this money available to you in a separate, liquid savings account, not an investment fund. I will elaborate why in next week’s post.
  • You want to invest as early as you can into retirement, so you can take advantage of compound interest and live a wealthy lifestyle.

Your ultimate goal in this section is taking steps toward total, financial independence. This can take years or even decades, but don’t fret about the timeline. The point is that this should be your biggest financial focus, and the more you put toward this step, the more your money compounds. Your money can work harder than you do.

“Those who understand [compound interest] earn it. Those who don’t, pay it”

—Albert Einstein

 

Create a Budget: Discretionary Spending

4. Discretionary spending is anything that’s left over from your goals. Shopping, hobbies, cable, coffee, fast food, dining, and so on. Just remember: always live within your means, and try to save up for capital expenses before buying.

Dining out is more expensive than a lot of people think. It’s easy to blow $250+ in a month just eating by yourself, or going to the bar with friends. If you’re looking to cut back on this, consider making food at home, or inviting friends over for beer and homemade wings over a football game instead of going out.

 

Budget Tools and Budget Websites

Commercial Software

  • Mint is free and automates much of the process by linking up with most large financial institutions to help track your spending and other aspects of your finances.
  • Personal Capital is free and automates much of the process by linking up with most large financial institutions to help track your spending and other aspects of your finances.
  • YNAB is commonly recommended here. Here are some notes on pricing:
    • Currently a subscription service at $5/month (or $50/yr)
    • The “classic” software (version 4) has a 34 day free trial.
    • The “classic” version (version 4) costs $60.
    • Students with a .edu e-mail address may be able to obtain Classic YNAB (version 4) for free.

 

Protect Yourself Against Identity Theft

So you just found out that your identity has been compromised. Perhaps you have had your purse or wallet stolen and your ID and social security card was in there, or you found out someone opened a credit card in your name. Whatever the case may be, you need to take control of the situation promptly.

What to do immediately if your identity is stolen

Do these steps right now, in order, and do not wait if you even suspect that someone has stolen your identity.

 

Immediately report any stolen credit cards

Imediately report any stolen credit cards or missing checks to their respective banks or issuers. Make sure you account for each card and check, and contact every lender. Prompt reporting will limit your liability in the event of fraudulent usage.

 

Place security freezes if identity is stolen

Place security freezes with each of the following Credit Reporting Agencies:

You must file a separate report with each agency. Once you freeze your credit reports, no bank or lender will be able to pull your credit reports. This will prevent identity thieves from opening lines of credit, credit cards, or other loans in your name. This will also prevent you from taking out your own loans or credit lines, unless you either temporarily thaw your credit, or permanently unfreeze them. You will be mailed a confirmation letter with a PIN code, and you must use that PIN code to initiate any temporary or permanent unfreezing. Keep these PIN codes filed in a safe and secure place!

Depending on your state, placing a freeze may be free for everyone, or it may only be free for identity theft victims. If it’s free in your state, or if you don’t mind paying for immediate peace of mind, then place the freezes online and skip to the next step. If you can’t afford to pay, but your state makes it free for identity theft victims, first place a free fraud alert online (and unlike a freeze you only have to do it with one agency, they will report the alert to the others), then file an identity theft affidavit and police report (more info below) and then come back and file your free security freezes. You will need to mail in the requests with copies of your documentation.

 

ChexSystem Security Freeze

Place a security freeze with ChexSystems:

Eighty percent of banks and credit unions use ChexSystems to screen new customers. This step will make it harder for thieves to open a bank account, at most banks, in your name. This works the same as the above credit reporting agencies, and it is free for everyone. This is not foolproof, as some smaller banks may not use ChexSystems, but this will limit a common scam (a thief will open a new account, make a large cash ATM withdrawal to send the account negative, and then leave your credit damaged when the account gets charged off).

 

Identity theft affidavit and file a police report

4. Create an identity theft affidavit and file a police report.

  • You can file your identity theft affidavit online with the FTC. When you are finished, save your complaint reference number, and click “Click here to get your completed FTC Identity Theft Affidavit”. Make sure to save a copy and print it.
  • Then, file your police report. Bring along your filled out affidavit, a form of government issued ID, proof of address, and a copy of the FTC memo to law enforcement.
  • If you haven’t signed the affidavit yet, bring it to a notary public to have notarized. Many banks offer notary services for free. DO NOT sign the affidavit until instructed to do so by the notary public! They must witness your signature! Now you will have a notarized identity theft affidavit along with the police report. Together these two documents make up your “Identity Theft Report”, and will be the basis for any future disputes.

Identity Theft Government Resources:
FTC.gov Identity Theft Affidavit (.pdf)
If you don’t want to file online with the FTC, you can print this blank affidavit and fill it out.
FTC.gov Identity Theft Guide (.pdf)
There are sample documents at the end of the identity theft guide, including a blank identity theft affidavit, and also sample dispute letters.

Secure Your Online Presence

Make sure your online presence is secure.

  • Install anti-virus on your computer, check for malware, and remove any malware that is discovered. Use a well-regarded program such as Avira, Bitdefender, Avast, ESET, or Microsoft Security Essentials.
  • If your computer was infected, immediately change your passwords for any financial accounts, social media, and email (especially any accounts related to the ID theft). (There is more on this below.)

 

What to do within the first few days after Identity Theft

These steps are not as urgent, but are still important to do in a timely fashion.

Credit Report After Identity Theft

Pull a copy of your credit report to look for newly opened accounts. Remember to pull all three bureaus. You will need to dispute fraudulent accounts with both the credit reporting agency, and with the fraud department of the bank or lender where the accounts were opened. You should also look for recent credit inquiries that you didn’t initiate (signs of attempted fraud), and check to make sure that the only addresses being reported on your credit report are your actual address (thieves will open accounts using addresses they control, or try and change the address for your existing accounts to one they control). Dispute any fraudulent inquiries or addresses. You can get copies of your reports for free via www.annualcreditreport.com, or through a credit monitoring service (read below).

1a. (Optional) You should consider signing up for a credit monitoring service, preferably one that will let you have daily credit report pulls, and keep it signed up for at least 90 days (preferably a year).

  • If you were impacted by a large data breach such as the Anthem Health breach, the Office Of Personnel Management breach, or one of the many other breaches that have been in the news, you can typically get free credit monitoring for 2 to 3 years. Find the official web site regarding the breach and sign up (it should be linked from the company’s main web site or you can find it via Google).
  • If you can’t afford a paid service, consider signing up for Credit Karma (uses TransUnion and Equifax).
  • Since you have already frozen your credit reports, if nothing comes up in the first couple of months, itprobably never will. That being said, you may want to sign up for a paid credit monitoring service, ideally a service with “3 bureau” monitoring. American Express customers may want to consider CreditSecure Unlimited and USAA members may want to consider USAA CreditCheck Monitoring. Otherwise, compare the paid “3 bureau” credit monitoring options from Equifax, Experian, TransUnion, and MyFICO (you shouldn’t need to pay more than $15 per month).

 

Monitor Credit Accounts Online

Keep an eye on your accounts. Check your recent transactions frequently. Set up text (SMS) alerts with your bank and credit cards for things like “address changes”, “failed log-in attempts”, and/or “suspicious activity” so that you can be notified immediately. Immediately dispute fraudulent activity as soon as you learn of it. Dispute debt collection notices within 30 days (to protect your rights under FDCPA), and send all disputes via certified mail, return receipt requested. You can read more about dealing with collection agencies here: /r/personalfinance/wiki/collections

 

Notify the IRS About Recent Identity Theft

Notify the IRS if your tax information was stolen, or believe that someone has already filed (or may try to file) a fraudulent tax return in your name. File a Form 14039, Identity Theft Affidavit with the IRS. Read it, fill it out, sign and mail it. Then continue to file and pay your taxes like usual. You can contact the IRS Identity Protection Specialized Unit at 1-800-908-4490 if you need further assistance. More information is available here: http://www.irs.gov/pub/irs-pdf/p5027.pdf

 

Things you should do to protect your information in the future

1. Change your important passwords, and use two-factor authentication (2FA) for any accounts that support it. Especially consider two-factor authentication for your Email and Banking services. Gmail, Bank of America, Yahoo!, Facebook, Twitter, and many other services support two factor authentication. You can find a whole list at twofactorauth.org. Make sure to print out backup codes (if applicable), and keep the backup codes in a safe location such as a fireproof safe. Two factor authentication will keep anyone who gets your password from being able to log in, but if you don’t have your backup codes and you lose your phone or device,you’ll be locked out too! You can also use a password manager such as 1Password or LastPass to securely store passwords that are too long to remember.

2. Protect your physical information carefully. Keep important identification and sensitive documents on your person at all times when they are not in a secure place (a locked car is not a secure place, anyone can bust open a window and grab your stuff). If you don’t have a safe deposit box you should invest in a safe (preferably a fire resistant, RSC-rated safe, but any cheap locking fire safe is better than nothing) to store your documents in at home, and if possible bolt it down or keep it hidden. Only take documents out for as little time as is absolutely necessary. And don’t carry your social security card in your purse or wallet.

3. Shred documents containing personal information before disposing of them. Utilize a cross-cut or micro-cut shredder. Although it may not be likely that someone will dig through your trash, items in an unlocked garbage container are generally considered public property, so legally anyone could.

 

Things you should consider doing, to protect yourself

1. Opt-out of pre-screened credit offers from coming to you in the mail: OptOutPrescreen. This will reduce your junk mail, and reduce your risk in the event of mail theft. This is free to do, and you can opt out for five years or permanently.

2. Put all of your phone numbers on the Do Not Call Registry if they aren’t already. You can verify online if you aren’t sure. This will reduce unwanted telemarketing calls.

3. If you want to reduce the amount of personal information about you available online, use a service likeSafeShepherd to opt-out of common public data brokers. You can cancel after a few months, because once they’ve done the heavy lifting of opting you out of databases, you probably don’t need them anymore. Or if you are paranoid, you can keep your subscription. You can also opt-out individually (list) but it is more time consuming.

4. Turn on encryption on your computer (on Windows, use BitLocker, on Macs, use FileVault).

 

Important things to remember about Identity Theft

1. Stay calm. Don’t get discouraged. Take things step by step, and deal with problems as they arise.

2. Send all mail USPS Certified Mail, Return Reciept Requested, and make a note to yourself of what you sent along with the certified mailing number. It is important to have a paper trail for documents, and certified mail is the gold standard for sending legal correspondence. Send copies of original documents if possible, but if you need to send original documents you should keep copies of them for yourself. Write brief notes like the Certified Mail #’s on your copies, or on a cover sheet, so you don’t lose that information. When you get back the green signature receipt cards, attach them to your copies of what you sent as proof of receipt.

3. Keep good records of the steps you took, when you took them, who you sent things to. Take notes, record phone conversations if possible (but check the laws in your state first). If you ever have legal troubles resulting from identity theft, good documentation will make your life a lot easier.

Personal Finance Resources, Books, and Videos

What are some good books on personal finance?

There are lots of books that teach everything from the basics of budgeting to how to invest like a pro. I’ve listed a few of my favorites geared for every stage in life. To help narrow down the choices and find the best advice, we reached out to personal finance experts and authors to find out which foundational books everyone should read

  • Your Money or Your Life by Vicki Robin, especially if you want to change your emotional relationship with money.
  • The Millionaire Next Door by Thomas Stanley, especially if you have high expenses.
  • The Money Book for the Young, Fabulous & Broke by Suze Orman.
  • I Will Teach You to be Rich by Ramit Sethi.
  • The Bogleheads’ Guide to Investing and/or The Bogleheads’ Guide to Retirement Planning, both by Larimore et al, which covers the investing philosophy espoused by most of /r/personalfinance.
  • A Random Walk Down Wall Street by Burton Malkiel, especially if you aren’t convinced that index-investing is right for you.
  • The Four Pillars of Investing by William Bernstein
  • Total Money Makeover by Dave Ramsey, especially if you are in more debt than you want to be.
  • The Richest Man in Babylon by George Clason, for timeless advice.
  • Additional Authors to Consider: John Bogle, Larry Swedroe, David Swensen and Rick Ferri

 

What are some good videos about personal finance?

 

Are there any free e-books about personal finance?

 

What are some good blogs about personal finance?

(Please don’t ask to be added to this list, sorry.)

 

What are some good books on investing?

  • A Mathematician Plays The Stock Market by John Allen Paulos, for a good overview of various investment terms in the context of the author’s unfortunate dabbling in WorldCom stock.
  • Why Smart People Make Big Money Mistakes by Gary Belsky & Thomas Gilovich, for an accessible overview of how psychological biases affect your investments & finances.

 

What are some good books for more specific topics?

  • Stock options and stock grants:
  • Windfalls and inheritances:
    • Sudden Money: Managing a Financial Windfall by Susan Bradley and Mary Martin
    • The Windfall Club: What to do When Life Deals You a Good Hand by Janne Ashton
    • Sudden Wealth: Blessing or Burden? by David Rust
    • Windfall: Managing Unexpected Money So It Doesn’t Manage You by Maria Brill

What are some other resources for investing advice?

Learn about Personal Finance Videos from Khan Academy

In a very easy to understand format, the Khan Academy provides several dozen finance tutorials, ranging from three to 15 minutes in length. All of these personal finance videos are available on YouTube for the public to view for free. In an easy-to-understand format, these personal finance YouTube videos explain the basics behind several personal finance topics, such as inflation, taxes, and compound interest. It might make sense to increase the speed in which these videos are played in order to be able to watch all the videos quicker. Most of these personal finance videos are U.S. centric, however some of them discuss topics that are appropriate for people in all countries.

 

The personal finance video series consists of:

  • Part 1: Institutional Roles in Issuing and Processing Credit Cards – Learn about the institutions involved in processing your credit credit and how they relate to each other. After watching this video, you should understand how credit cards work when buy stuff at the store.
  • Part 2: Roth IRAs – An Introduction to Roth IRAs and tips on how to save for retirement. There is another video that discusses how to use different IRA accounts to maximize retirement savings.
  • Part 3: 401ks – Learn About 401ks and how to save for retirement through a workplace retirement plan. You will also learn about the differences between a 401k and IRA in this video.
  • Part 4: Basics of the U.S. Income Tax Rate – What is it and how does it affect the taxes you pay? Learn exactly what you are paying to Uncle Sam and how to file your taxes.
  • Part 5: Inflation Overview – A tutorial on how the cost of goods and services change over time. Inflation is a very important concept to understand.
  • Part 6: Mortgage Interest Rates – Learn how interest rates are tied to specific types of mortgages. Also learn about that the important aspects of getting a mortgage are in order so you pay less when you purchase a home.
  • Part 7: Time Value of Money – Why the value of money isn’t just about what you have today. This ties into interest rates.
  • Part 8: Term and Whole Life Insurance – A tutorial on the most common types of life insurance. Learn about which type of insurance is best for your family.
  • Part 9: Open-Ended Mutual Funds – An overview on investing in mutual funds. Mutual funds are one of the easiest ways to build a diversified investment portfolio.
  • Part 10: Estate Tax – How items are taxed after a person passes away. In most cases, most families in the United States will not owe estate tax.
  • Part 11: Unemployment Rate Primer – An explanation of how the rate is calculated and more. The unemployment rate can affect financial markets and the economy.
  • Part 12: Traditional IRAs – What they are and how they differ from other IRAs. Traditional IRAs are another special type of account that can be used to save for retirement.
  • Part 13: What It Means to Buy a Company’s Stock – What does it mean to buy stock in a company? Learn about investing in the stock market with this personal finance video.
  • Part 14: Relationship Between Bond Prices and Interest Rates – Why bond prices move inversely to changes in interest rates. This video explains essential concepts related to investing in bonds.
  • Part 15: Introduction to Bonds -Find out what it means to buy a bond. Learn about bonds investing.
  • Part 16: Introduction to Compound Interest – What compound interest is and how it impacts your savings. Compound interest is vital to anyone’s savings account.
  • Part 17: The Rule of 72 for Compound Interest – Learn how long it will take for your money to double. This is also related to compound interest.
  • Part 18: Annual Percentage Rate (APR) and Effective APR – An overview on the rates affecting your debts and loans. Learn really what you are paying your credit card or loan company.
  • Part 19: What is Bankruptcy? – What it is, how it originated, types of bankruptcy and more. Bankruptcy is not always a bad thing if handled properly.
  • Part 20: Introduction to Mortgage Loans – Find out more about the loans you take out to buy a home.

More Personal Finance Videos

Khan academy has some amazing stuff no matter what you’re trying to find! These personal finance videos will be sure to increase your knowledge of many of these topics.  The videos — and other resources throughout this site — are all meant to help you manage your money, not be managed by it. Most of the information you need is already at your fingertips. Post other personal finance videos you find online in the comments! Getting a grip on your finances is easier than you think.

 

Links to Other Personal Finance Videos

In addition to the YouTube links above, the Khan Academy has over 300 more finance videos on our website here (not to mention a ton of content in other subjects!):

https://www.khanacademy.org/economics-finance-domain/core-finance

5 Ways You Definitely Won’t Save Money on Clothes

5 Ways you definitely won't save money on clothes

Finding some solid ground in the sea of good (and ‘great’) advice can be a tricky thing. Most people will advise you to do this or that, but if you listen to them all, you’ll get nowhere. Such is the case with saving money on clothes as well – everyone seems to know the best possible way to save money when out shopping for new clothes, but to be honest, not all the things you hear make sense. These are some of the most useless advice given to people on how to save money on clothes.

 

How to Save Money on Clothes
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Seven Ways to Save Money This Summer (While Still Having Fun)

Seven Ways to Save Money this Summer

Summer’s finally here and with it comes lots of great activities like beach going, camping, swimming, cookouts, and don’t forget about that heat! With so much to do this summer, it’s easy to relax and forget about how much you’re spending to have fun, but there are many simple ways to save money this summer as you enjoy this wonderful season. Saving money in the summer might even let you have more fun in the summer! Follow money saving tips for summer fun.

Seven Ways to Save Money This Summer
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14 Money Saving Tips for College Students

14 saving tips for college students

You’re in college for a reason. To learn, right? To set yourself up for a rewarding life of getting paid to do the things that fire up your brain. Well, your course-load won’t reflect this, but you’re also in college to learn how to manage your money. And there’s never a better time than when you don’t have any J.

Here are my top money saving tips for college students that will help you get through school with cash to spare and no debt other than your student loan.

14 Money Saving Tips for College Students

  1. Don’t wait.

    Don’t wait until you have more money to start to save. It’s a myth that can trap you for life – you do not need to make more money to start to save.

    Track your spending for a month to see how it lines up with your budget. Almost every person who does this is surprised how much more they spend than they thought – usually on things like eating out and beer. Make it cool to be nerdy about spending. Take advantage of free online tracking software like trackeverycoin or mint. Or keep every receipt and tally up the results manually. Whatever. Just try it, and get the real picture of what you’re spending by tracking every time you pull out your wallet.

    Assuming you have no student loan debt, think about opening up a Roth IRA and contributing something to it on a regular basis. You qualify because you have earned income. A ROTH contribution allows your money to grow tax free, is easy to set up, and offer a wide variety of investments. The original amount contributed can be withdrawn at any time without penalty because it is paid in post tax. So, for instance, if you needed to make a down payment on a home in a few years you could use the money you had contributed to your Roth.

  2. Get inspired.

    Check out this cool savings calculator. Plug in one of your basic expenditures, like your morning coffee, and see how much you could save by cutting back just a bit. For example, that $2 daily cup of coffee is $14 every week. Cutting back on that one thing alone would add up to $3718 in savings over just 5 years.

    Apply for scholarships as often as possible. You don’t always have to be a star student to qualify and even a small bursary can be a big help.

    What’s it worth to live off campus? Residence or dorm living is MUCH cheaper. Yes, it’s pretty tempting to share that cool off-campus apartment with your best buddies, but think about the electricity bills, laundry costs, transportation costs to and from college… and then compare with the costs of residence.

  3. Get What You’ve Already Paid For.

    Bone up and make sure you know all of the free stuff that comes with your tuition. College tuition often includes free access to libraries (some provide free movie rentals), gyms, intramural sports, student clubs, guest speaker series, and entertainment on-campus. Take advantage of them and save your $$.

  4. Cellphone!

    Be sure you’re on the most economical cell phone plan for your needs. Maybe get on a family plan with your parents – that way everybody saves. Tip: texting is expensive. Companies charge both sender and receiver of text messages, so consider using web-based messaging services like Facebook (sorry) or Myspace. Or send email!

    Gotta make a budget. Whether you start one on the back of a napkin, or set up your own detailed spreadsheet, planning where you will spend your money each month is hands down the best way to take control. There are all kinds of tips out there on how to set up a personal budget, including one of my faves here. Don’t just take it from me. Try it yourself and see how much easier it is to save if you have a good idea what the big picture looks like on the personal finance front.

  5. Beans over beef.

    I’m talking grocery shopping here. Meat is much more expensive than beans. Buy groceries instead of eating out. And buy on sale. Buy in bulk.

    Plan your meals, and spend an afternoon a week preparing quick easy meals that you grab from your own freezer or fridge at a fraction of the cost. It’s definitely cheaper to go make your own food with what you get from the groceries but it gets hard when you got hw and projects. I usually get $400 meal plan and ramen and $2 Trader Joe’s frozen dinners during my studying term so I can just eat and gtfo to study. You can live off of $200 a month in most areas unless cost of living is really high. What I’d do is get a crockpot ($60) and make meals in bulk. You’ll get more meals for less money by slow cooking. And it doesn’t take much of your time. Set it up in the morning. Eat it for dinner. Then leftovers. With intelligent freezing, you could also unthaw previous meals for variety once you get things going.

  6. Absolutely avoid credit.

    Okay, except for your student loan. Pay with cash or debit. If you have a credit card, put it away and don’t use it except for emergencies. If you don’t have a credit card, don’t get one. There are all kinds of companies who love to get college students hooked on their credit tools, charging outrageous interest and laughing all the way to the bank while you struggle under the load of compound interest on the charges you rung up. Don’t get caught up in that trap!

    Credit cards do relatively little to effect your credit score in a positive way. Assuming you’re paying your bill off completely and on time. I had one for years and it didn’t really do anything. When I bought my first car on a 5 year loan plan, my credit shot up and after around 12-18 months of paying into it I had an immaculate credit rating.

  7. Pay interest.

    What? You heard me. This may be counterintuitive, but don’t just let your student loan sit there accumulating interest. Make the monthly interest payments and reap the benefits that will accrue. Here’s a great article on how this works and how much it can save you in the long run.

  8. Study on the cheap. Buy used textbooks! Every textbook for every class doesn’t have to be brand spanking new. Look for the used bookstores on or off campus. Check out ads in the student paper. Search for online versions of the books you need. The little bit of time and effort you put into looking for and buying used textbooks will save you BIG in the long run. And, as mentioned in another blog on this site, sell your own textbooks too once you’re done with them.Buy international editions, often can get a much cheaper current version, but sometimes have to get the previous edition to get a great deal. International edition is the same but on cheaper paper and not hardback. Exactly same content though. Textbook publishers have begun to change the homework problems in international editions more and more. That being said, you can easily get a considerably less expensive international edition and borrow a friend’s copy (or library copy on reserve) to make sure you’ve got the right pages at the back of the book! It’s well worth the extra leg work in many cases. International editions used to be identical to the main versions, but a few years ago the supreme court made a landmark decision that essentially said textbook publishers had no basis for prohibiting the sale of international editions in the United States. In reaction to losing that cases, textbook publishers started charging more for international editions, and also began changing homework problems in certain books in an effort to get college students to pay more for the main versions of books, but everything else is still the same.
  9. Ditch the driving.

    Carpool sounds so lame so we won’t use that term here. But gas, parking, parking tickets and tow charges all add up. Fast. So, hitch a ride with friends, or better yet, take transit.

    With a little thought, a little planning, and little adjustments in your behavior, you’ll develop great habits today that will make a big difference tomorrow. I promise.

Quick Guide to Keeping More of Your Money in Check (Get It?)

Guide to Keeping your money in the right balance

There are a lot of very helpful (and common-sense) financial gurus out there who can promise all kinds of wonderful things if you follow their wisdom. The first thing they’ll tell you is probably the hardest though – and that’s the cold, solid fact that there aren’t any shortcuts to keeping more of your money and becoming debt free.
 

Quick Guide to Keeping More of Your Money in Check (Get It?)

The financial gurus aren’t all that different from us…

The best of these financial advice experts on television and other media are the ones with a story to tell. In a lot of cases, financially careful people were brought up in a household where money was tight – and by observing a thrifty parent they were able to learn from an early age how important it is to manage our money.

Sometimes it may seem as if these folks are financially ‘better’ than ordinary people. But off course, life can be a pretty changeable thing – and there are doubtless many financially astute people who have had their ups and downs for various reasons such as redundancy or a downturn in the economy affecting business. So if you’ve ever felt the pinch, don’t worry – you’re not alone in this. And as with all things, the lean times can be a very useful learning experience for when things are less, well, lean…

Learning from the lean times…

For instance, I grew up during a comfortable era, and in a comfortable part of town. But my parents weren’t rich. So when I packed my stuff together and headed off to college, I knew that I wouldn’t be the kind of student who’d be dining out and paying cash every night, then driving home in a gas-guzzling but low slung and aerodynamic sports car. No, a big treat for me would be a trip to the baked potato shop once a week. Or maybe some fish and chips if I was feeling recklessly spendy.

All of which might sound frugal, bleak – maybe even Spartan. But here’s the thing – it really wasn’t all that bad. No, I will take a step further than that and say, loudly, that it was actually pretty good!

Why?

Oh, so many reasons! But, I will try and list the main ones to give you an idea of how my lean times worked for me:

The learning curve of value

If I’d always had a bit of spare cash, I’d never have learnt to cook. Think about that for a second. It would mean someone else cooking or preparing your dinner every night. For a decent profit margin too. Think of a restaurant meal’s price then compare it with the cost of the raw materials. Even in great value for money restaurants, some profit still has to be made. Same with microwave-ready meals. The value is in the convenience – and that’s why you pay a premium. Now, if I’d always had spare cash, I now realise that I’d always have wasted a proportion of it.

The upside of times when money’s too tight to mention  

We’ve all made mispurchases, I imagine. That bought-in-a-sale suit that never seems to get worn, or that restaurant meal that didn’t get eaten. Or we’ve maybe  overspent a little and had to endure effects of it until the cash flow is back to its ‘flow’ state. In tight times these things are somehow felt about twice as keenly. With some extra money kicking around a mispurchase or an overspend means putting up with the effects there and then. In other words, with no contingency cash (or very little) to put things right.

The upside of all this is that it provides a good learning context, and one from which you emerge much more careful with the contents of your wallet. I’m not even talking about being penny-pinching or parsimonious here. You just develop a little sixth sense for the things that are good value and those that aren’t – as well as instantly knowing when to shell out and when to refrain from spending a single penny.

A little bit of give and take can work wonders

A long time ago, I realised that the wider economy as well as our own personal situation is a bit like the weather. Sometimes it rains! And even the riches of rich guys probably feels poor – or at least disappointed at times – like when the price of stocks takes a dive, instantly dissolving a chunk of personal net worth.

So in the ‘ups and downs’ aspect of finances, few (if any) of us are totally immune. However there  are a series of steps we can take to ensure that things run smoothly, and here are a few that I always find to be massively important:

Cheapest doesn’t mean best. Shop around for quality as well as price. Get the best deal – it isn’t always the crazily low priced one.

Financial products – do they do what it says on the tin?’. Savings accounts may have good advertising – but many pay a rate of interest lower than inflation. In real terms, year-on-year, that isn’t saving so much as erosion! Also for any mortgages or other loans, make sure that you are clear – and I mean crystal clear – about the considerations of fees, rates, security, repayments and the like

The road is long – with wind in it…

So the song goes. But if you apply some ‘best practices’ in your behaviour, and get into a happy thrifty habit over the long term, you have a much better chance of being insulated against any financial shocks, and instead, hopefully, will be in good money health.


This post was guest-written by Chris from Spend It Like Beckham.

Good Debt Versus Bad Debt or How Should Young People Should Use Credit?

Good Debt vs Bad Debt - How should young people use credit?

It’s possible to live completely debt-free, but it’s not necessarily good advice for the average young person. Very few people have or can earn enough money to pay cash for life’s most important purchases: a home, a car or an education. The most important consideration when buying anything on credit or taking out a loan is whether the debt incurred is good debt or bad debt.

 Good Debt Versus Bad Debt or How Should Young People Should Use Credit?

Good debt is seen as an investment, you are buying an asset that will grow in value or maybe generate long-term income. This means that the debt will be paid off and you will profit by owning an income producing asset.

Getting a Mortgage Can be Good Debt

Obtaining a mortgage to buy a home is usually considered good debt; firstly you need somewhere to live so instead of paying rent you are paying down the debt owed against the home.  The ideal situation would be that your also home increases in market value over time, so not only are you reducing the amount owed each month by making the payments the property is also increasing in value.  Mortgages also generally have lower interest rates than other debt as the lender holds the asset as security.

 

Student Loans Are Good Debt

Taking out student loans to pay for a college education is also deemed an example of good debt as student loans typically also have a low interest rate compared to other types of debt and a college education in theory increases your value as an employee and raises your potential future income. In my mind there are many caveats to this and a lot of thought has to go into the future earning potential in the field you are studying vs the cost of education vs is it truly a field you want to spend your working life and how transferable is the education.  I could talk about this subject in a lot more depth and how a lack of planning before taking out a student loan is a common problem, but this is a topic for another article.

 

An Auto Loan May Be Good Debt

An auto loan is another example perceived as good debt and it can be categorised so if the vehicle is essential to doing business and earning and income but vehicles are a depreciating asset so it is not in the buyer’s best interest to pay interest on a loan against an asset that is declining in value if it can be avoided.

Loans are not inherently bad, but almost everyone will tell you they are. If you can afford this loan and it will lower you gas expense and also be less than you would be saving and finally having a low interest rate I really see no reason not to take the loan out. You can also make additional payments to the loan and pay it off faster minimizing your interest since you said you will be paying less than you were anticipating saving as well as spending ~$100 less a month in gas. Assuming a 5 year loan and estimating paying $200 extra per month you could significantly reduce the amount of interest you pay since you could turn that 5 year loan into just under a 3 year loan (34 Months) and only paying about $433 in actual interest on the loan which is essentially nothing.

 

What is Bad Debt?

Bad debt is debt incurred to purchase things that have no value or quickly lose their value.  Bad debt is also debt that usually carries a high interest rate, such as credit card debt. The simple rule to avoid bad debt is if you can’t afford it, don’t buy it.

Bad debt includes debt you’ve taken on for things you don’t need and can’t afford and one of the worst forms of debt but often the easiest to come by is credit-card debt, since it usually carries high interest rates and relatively low monthly payments meaning the temptation is to stay current by making the minimum payments and never paying down the debt.

 

Payday Loans are Bad Debt

Payday loans/Cash advance loans are the worst kind of debt. Basically the borrower decides the amount he wants to borrow, a fee is then added to that amount and the borrower has until his next payday to pay back the loan amount, plus the original fee and any interest incurred over that period of time. Interest rates for payday loans are very deceptive and can be very misleading as the time period of the loans are so short it is only truly clear what is being charged if the interest and fees are actually annualised the same as other lending product so they can easily be compared, pay day loan annualised rates can be as high as 300 percent.  If you fail to pay back the amount by your next payday, the loan basically rolls over and you incur additional fees and more interest on top of the fees and interest you have already been charged.   It’s a slippery slop and hard to get out of once you are in the cycle.

 

The most effective ways to stay out of debt.

Practically speaking it’s almost impossible for most of us to live debt-free, we can’t pay cash for our home, our cars or our children’s college educations. But easy access to credit means too many young people let debt become unmanageable.

Ideally, your total monthly long-term debt payments, including your mortgage, car loans and credit cards, should not exceed 36% of your gross monthly income. This is one metric mortgage lenders and bankers call TDS (total debt service ratio) and is always consider when assessing the risk of a potential borrower.

Of course, avoiding debt at any cost is not smart either if it means depleting your cash reserves completely. The challenge is learning how to judge which debt makes sense and which does not and then wisely managing the money you do borrow. A student card is a good place to start if you’re in school. I suggest Capital One Journey (which you can later upgrade to Quicksilver) or Discover IT. Both have low requirements.

Otherwise, without credit history, you won’t be approved for much. You may need a secured card, which means you put a deposit down which is your credit limit, and after a few months of responsible use you can be upgraded to an unsecured card and get your money back.

 

When to take on good debt?

Taking on sensible debt can include financing items you absolutely need but can’t afford to pay for up front without wiping out cash reserves or liquidating all your investments. In cases where debt makes sense, only take loans for which you can easily afford the monthly payments. Consider the following when taking on sensible debt:

  • What is the interest rate/terms on other loans?
  • Do you have a full emergency fund?
  • What other debts do you have?
  • Have you taken advantage of employer 401k match, if any?

So based on the above it may seem logical to use every dollar you have available to keep you debt down as low as possible, even on good debt as it will reduce the interest payments and mean you can pay off more principle, but it’s not always the best move. You need to take into consideration your need for cash reserves for emergency expenses and also what your investments are earning.  If you deplete your cash reserves you become reliant on short term, easily available credit to meet unforeseen emergency expenses and the short term easily available credit is usually the highest interest rates.

Staying out of Debt and Creating a Budget

The key is to first create and accurate and realistic budget. Creating a budget you can follow will reduce stress, increase savings and mean you are not reliant on high interest credit for unexpected bills.

Make budgeting easy and part of the family daily routine. Keeping track of expenses, think about how to save money and plan what to do with your savings is all part of gaining control over your financial situation and are life lessons your children will learn by how the family deals with money and aren’t skills that are taught in school but ones that will stay with them for the rest of their lives and skills they learn by being involved in the family budget and decisions on how to spend money.

The best way to understand how to budget is to understand what you are spending your money on. There are no short cuts to becoming financial accountable for your lifestyle choices so save all your receipts and add them all up at the end of the week. This now matches your budget with your lifestyle. It doesn’t matter what your lifestyle is as long as you create a budget that fits with your income and allows you achieve your financial goals.

The goal of any good budget is to figure out ways to maintain your current lifestyle by spending less money. This allows you to enjoy the things that give you pleasure in life but ensures you aren’t using credit to fund them.

Some expenses are easier to reduce than others. Things like car loans, rent or mortgage payments and credit card payments all have set payment plans making them hard to change. The goal is to focus your attention on your discretionary expenses, the ones that you make a choice on every day and understand how those choices effect you long term financial goals.

 

Monitoring and maintain your credit score.

This is an important part of your overall financial plan. Understanding how to read your credit report and maintain a good credit score will allow you to access good credit at the lowest rates possible meaning less overall cost to acquire appreciating assets but also means even ‘bad credit’ is available at favorable rates in the case of emergencies ensuring it is paid of sooner and before it becomes unmanageable.  Far too many people experience difficulties and sometimes embarrassment because of having bad credit and this could be avoided through proper monitoring of your credit report. See more information about learning what goes into your FICO credit score.

 

Establishing a Good Credit History

Establishing a good credit history is important, even if you aren’t planning any large future loans/purchases. Car insurance companies use your credit score to determine your rate, and employers use your credit score to determine your trustworthiness as an employee. As mentioned, fraud protection gained by making purchases via credit card has significant value, as some the sometimes available extended warranty that some cards offer.

If you prefer not to use credit cards at all, it’s still a good idea to open a credit card account (with one that doesn’t charge an annual fee) and use it once per year for a minimal purchase, just to keep it active.

As an aside, it’s very possible that you will decide to make a purchase in the future that will benefit from your decision to get a credit card now. Personally, I feel it’s important to leave as many future options open, rather than delude yourself into thinking that what you feel/think/believe today will be what you feel/think/believe at some point in the distant future.

 

Choosing Good Credit Cards

Check out American Express Blue Cash (1/2/3% cash back, no fee) or the Capital One Quicksilver Cash Back (1.5% everywhere, no fee).

Some specialty cards are also worth it, I’d say – I’ve got a Target card that gets me 5% savings on everything there, with no fee. Since I do plenty of shopping at Target, that’s worthwhile for me.

For other paid cards, you can often look up the break-even point. (For example, AmEx has an upgraded Blue Cash card that’s 2/4/6% cash back, but costs $75 per year. I think you break even if you spend $6k or more per year on groceries.)

Just set up an auto-pay in full for whatever card you choose, and you’re essentially always saving a percentage point or two off of everything you buy with it. If you have good credit, no plans for mortgage/car payment etc., you can use your credit worthiness to get a lot of free stuff. Free hotel stays, free flights, gifs cards & money back. I’ve personally flew to Vegas twice for free, have gotten multiple Marriott hotel stays for free, and still have plenty more travel points left to spend on JetBlue, Southwest, and Marriott.

Chase Sapphire Preferred, and Chase Southwest Premier are two popular cards that always get brought up in the credit card forums. You have to do some digging though and find the best offers. A good sapphire preferred offer would be 40k or more points ($400 cash value) and only get the southwest card if it offers 50k southwest miles (good for two round trip flights at normal fares).

Gotta be careful though. The cards have minimum spend requirements (must spend $1000 in first three months to get bonus, etc.) so you need to make sure you can meet the requirement. If you fail to meet the spend requirement you won’t get the bonus.

6 Essential Skills That You Must Possess For Frugal Living

6 Essential Skills that you must possess as a frugal person

Frugal living is not only about mad coupon clipping and refraining from buying almost all non-essentials. It’s a lifestyle. And as being a lifestyle it requires a specific mindset, and of course certain skills that will help you spend less money and be more self-dependent. I put together this list of skills that help me and I hope would help you as well. I excluded the obvious tips like having self-control and figuring out the basics of money-management, and tried to be as specific as possible. This six different skills will help you save money and improve yourself.
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