Got Cash? What to Do with Extra Money

February 10, 2021 by Liam Lane Posted in Moving Guide Tagged 401(k), apartment, Auto, big, building, Buy, car, College, Credit, Credit Card, Credit Card Debt, credit cards, Debt, Debts, Emergency Fund, Extra Money, Family, Financial Goals, Financial Wize, FinancialWize, Grow, Home, house, housing, How To, Insurance, Interest Rates, invest, Investing, investment, investments, IRA, keep, Life, Loans, Make, money, More, more money, mortgages, Move, Moving, Personal, Personal Loans, protect, Rates, rent, Retirement, retirement savings, Roth IRA, save, Save Money, Saving, savings, Savings Account, School, Security, Spending, spouse, Student Loans, tax, Taxes

Have you found yourself with extra cash? Lucky you! Laura’s 3-step system will help you spend, invest, or save it wisely.

Laura Adams, MBA

October 21, 2020

investing your emergency money unless you have more than a six-month reserve.

The goal for an emergency fund is safety, not growth.

If you don’t have enough saved, aim to bridge the gap over a reasonable period. For instance, you could save one half of your target over two years or one third over three years. You can put your goal on autopilot by creating an automatic monthly transfer from your checking into your savings account.

Megan mentioned using high-yield savings, which can be a good option because it pays a bit more interest for large balances. However, the higher rate typically comes with limitations, such as applying only to a threshold balance, so be sure to understand the account terms.

Insurance protects your finances

Another critical aspect of preparing for the unexpected is having enough of the right kinds of insurance. Here are some policies you may need:

RELATED: How to Create Foolproof Safety Nets

How to invest for your future

Once you get as prepared as possible for the unexpected by building an emergency fund and getting the right kinds of insurance, the next goal I mentioned is investing for retirement. That’s the “I” in PIP, right behind prepare for the unexpected.

Investments can go down in value—you should never invest money you can’t live without.

While many people use the terms saving and investing interchangeably, they’re not the same. Let’s clarify the difference between investing and saving so you can think strategically about them:

Saving is for the money you expect to spend within the next few years and don’t want to risk losing it. In other words, you save money that you want to keep 100% safe because you know you’ll need it or because you could need it. While it won’t earn much interest, you’ll be able to tap it in an instant.

Investing is for the money you expect to spend in the future, such as in five or more years. Purchasing an investment means you’re exposing money to some amount of risk to make it grow. Investments can go down in value; therefore, you should never invest money you can’t live without.

In general, I recommend that you invest through a qualified retirement account, such as a workplace plan or an IRA, which come with tax benefits to boost your growth. My recommendation is to contribute no less than 10% to 15% of your pre-tax income for retirement.

Magen mentioned Roth IRAs, and it may be a good option for her to rebuild her retirement savings. For 2020, you can contribute up to $6,000, or $7,000 if you’re over age 50, to a traditional or a Roth IRA. You typically must have income to qualify for an IRA. However, if you’re married and file taxes jointly, a non-working spouse can max out an IRA based on household income.

For workplace retirement plans, such as a 401(k), you can contribute up to $19,500, or $26,000 if you’re over 50 for 2020. Some employers match a certain percent of contributions, which turbocharges your account. That’s why it’s wise to invest enough to max out any free retirement matching at work. If your employer kicks in matching funds, you can exceed the annual contribution limits that I mentioned.

RELATED: A 5-Point Checklist for How to Invest Money Wisely

How to pay off high-interest debt

Once you’re working on the first two parts of my PIP plan by preparing for the unexpected and investing for the future, you’re in a perfect position also to pay off high-interest debt, the final “P.”

Always tackle your high-interest debts before any other debts because they cost you the most. They usually include credit cards, car loans, personal loans, and payday loans with double-digit interest rates. Remember that when you pay off a credit card that charges 18%, that’s just like earning 18% on an investment after taxes—pretty impressive!

Remember that when you pay off a credit card that charges 18%, that’s just like earning 18% on an investment after taxes—pretty impressive!

Typical low-interest loans include student loans, mortgages, and home equity lines of credit. These types of debt also come with tax breaks for some of the interest you pay, making them cost even less. So, don’t even think about paying them down before implementing your PIP plan.

Getting back to Bianca’s situation, she didn’t mention having emergency savings or regularly investing for retirement. I recommend using her upcoming cash windfall to set these up before paying off a low-rate student loan.

Let’s say Bianca sets aside enough for her emergency fund, purchases any missing insurance, and still has cash left over. She could use some or all of it to pay down her auto loan. Since the auto loan probably has a higher interest rate than her student loan and doesn’t come with any tax advantages, it’s wise to pay it down first.

Once you’ve put your PIP plan into motion, you can work on other goals, such as saving for a house, vacation, college, or any other dream you have.

Questions to ask when you have extra money

Here are five questions to ask yourself when you have a cash windfall or accumulate savings and aren’t sure what to do with it.

1. Do I have emergency savings?

Having some emergency money is critical for a healthy financial life because no one can predict the future. You might have a considerable unexpected expense or lose income.

Without emergency money to fall back on, you’re living on the edge, financially speaking. So never turn down the opportunity to build a cash reserve before spending money on anything else.

2. Do I contribute to a retirement account at work?

Getting a windfall could be the ticket to getting started with a retirement plan or increasing contributions. It’s wise to invest at least 10% to 15% of your gross income for retirement.

Investing in a workplace retirement plan is an excellent way to set aside small amounts of money regularly. You’ll build wealth for the future, cut your taxes, and maybe even get some employer matching.

3. Do I have an IRA?

Don’t have a job with a retirement plan? Not a problem. If you (or a spouse when you file taxes jointly) have some amount of earned income, you can contribute to a traditional or a Roth IRA. Even if you contribute to a retirement plan at work, you can still max out an IRA in the same year—which is a great way to use a cash windfall.

4. Do I have high-interest debt?

If you have expensive debt, such as credit cards or payday loans, paying them down is the next best way to spend extra money. Take the opportunity to use a windfall to get rid of high-interest debt and stay out of debt in the future.

5. Do I have other financial goals?

After you’ve built up your emergency fund, have money flowing into tax-advantaged retirement accounts, and are whittling down high-interest debt, start thinking about other financial goals. Do you want to buy a house? Go to graduate school? Send your kids to college?

How to manage a cash windfall

Review your financial situation at least once a year to make sure you’re still on track.

When it comes to managing extra money, always consider the big picture of your financial life and choose strategies that follow my PIP plan in order: prepare for the unexpected, invest for the future, and pay off high-interest debt.

Review your situation at least once a year to make sure you’re still on track. As your life changes, you may need more or less emergency money or insurance coverage.

When your income increases, take the opportunity to bump up your retirement contribution—even increasing it one percent per year can make a huge difference.

And here’s another important quick and dirty tip: when you make more money, don’t let your cost of living increase as well. If you earn more but maintain or even decrease your expenses, you’ll be able to reach your financial goals faster.

About the Author

Laura Adams, MBA

Source: quickanddirtytips.com

Roth IRA Rules and Contribution Limits for 2021

February 10, 2021 by Liam Lane Posted in Moving Guide, Retirement Tagged 401(k), Compound Interest, earnings, Featured, Fees, Finance, Financial Advisor, Financial Wize, FinancialWize, Grow, Home, invest, Investing, investment, investments, IRA, keep, Life, Make, money, More, Move, Moving, mutual funds, Personal, personal finance, Popular, Purchase, Retirement, Roth IRA, save, Save Money, savings, tax, Taxes

$6,000 for the 2021 tax season.

Interested in learning more about the specifics of the Roth IRA? Here’s everything you need to know.

How Much Can You Contribute to a Roth IRA?

For the 2021 tax season, standard Roth IRA contribution limits remain the same from last year, with a $6,000 limit for individuals. Plan participants ages 50 and older have a contribution limit of $7,000, which is commonly referred to as the “catch-up contribution.”

You can also contribute to your IRA up until tax day of the following year.

Contribution Year	49 and Under	50 and Over (Catch Up)
2021	$6,000	$7,000
2020	$6,000	$7,000
2019	$6,000	$7,000
2018	$5,500	$6,500
2017	$5,500	$6,500
2016	$5,500	$6,500
2015	$5,500	$6,500
2014	$5,500	$6,500
2013	$5,500	$6,500
2012	$5,000	$6,000
2011	$5,000	$6,000
2010	$5,000	$6,000
2009	$5,000	$6,000

What You Need to Know About Roth IRAs

Here’s the thing about opening a Roth IRA: not everyone can use this type of account. We’ve included a few important Roth IRA rules you need to know about below.

Fund Distributions

Roth IRA accounts come with a few unique benefits outside of future tax savings. For example, you don’t have to take Required Minimum Distributions (RMDs) out of a Roth IRA at any age, and you can leave your money in your account for as long as you live.

You can also continue making contributions to a Roth IRA after you reach age 70 ½ provided you earn a taxable income that’s below Roth IRA income limits.

Income Limits

Not everyone can contribute into a Roth IRA account due to income caps. There are income guidelines that must be followed — it’s even possible to have an income so high you can’t use a Roth IRA at all.

If your taxable earnings fall within certain income brackets, your Roth IRA contributions might be “phased out”. This means you can’t contribute the full amount toward your Roth account.

Here’s how Roth IRA income limits and phase-outs work, depending on your tax filing status.

Married couples filing jointly:

Couples with a modified adjusted gross income (MAGI) below $196,000 can contribute up to the full amount.
Couples with a MAGI between $196,000 and $205,999 can contribute a reduced amount.
Couples with a MAGI of $206,000 or more can’t contribute to a Roth IRA.

Married couples filing separately:

Couples with a MAGI below $10,000 can contribute a reduced amount.
Couples with a MAGI of $10,000 or more can’t contribute to a Roth IRA.

Single tax filers:

Single tax filers with a MAGI below $124,000 can contribute up to the full amount.
Single tax filers with a MAGI between $124,000 and $138,999 can contribute a reduced amount.
Single tax filers with a MAGI of $139,000 or more can’t contribute to a Roth IRA.

Retirement Account Conversions Allowed

If you have another type of retirement account, like a traditional IRA or even a workplace 401(k), it might be tempting to convert this account into a Roth IRA. This is known as a Roth IRA conversion which requires you to pay income taxes on your distributions now so you can avoid income taxes later on.

Although that might sound aggressive and unnecessary, there are many scenarios where a Roth IRA conversion can make sense. For example, let’s say you’re not earning a lot of money in a specific year and you want to convert to a Roth IRA while paying an extremely low tax rate. You could fork over the taxes now and avoid paying income taxes on distributions later in life when you’re taxed at a higher rate.

As mentioned earlier, Roth IRA accounts don’t require you to take a minimum distribution while you’re alive. Moving your money into a Roth IRA can make sense if you don’t want to be forced into required minimum distributions (RMDs) like you would with a traditional IRA or a 401(k) at age 72.

With a Roth IRA conversion, you’d create an opportunity where your money could grow and compound, untouched, for a much longer stretch of time.

IRA Recharacterization

A recharacterization takes place when you move money from a traditional IRA to a Roth IRA, or from a Roth IRA to a traditional IRA. More specifically, recharacterization changes how specific contributions are designated depending on the type of IRA.

For example, maybe you believed your income would be too high to contribute to a Roth IRA in a specific year but found your income was actually low enough to contribute the full amount. If you already contributed to a traditional IRA, a recharacterization could help you move your funds into a Roth IRA, after all.

Of course, the opposite is also true. You might’ve thought your income qualified you to contribute to a Roth IRA but at the end of the year, you found out you were wrong after already making Roth contributions. In that case, a recharacterization to a traditional IRA could make sense.

These moves can be complicated, and there might be significant tax consequences along the way. It’s best to consult with a financial advisor or tax specialist before changing the designation of your IRA contributions and face potential tax consequences.

Early Withdrawal Penalties

You can withdraw your Roth IRA contributions at any time without penalty. Also, you can withdraw contributions and earnings 59 ½ and older, if you’ve had the Roth IRA account for at least five years. This is considered a qualified disbursement that won’t incur early withdrawal penalties.

But there are downsides if you need to withdraw your earnings ahead of retirement age. If you choose to withdraw your Roth IRA earnings before age 59 ½, you’ll face a 10% penalty. Some exceptions apply, though.

For example, you can withdraw earnings from your Roth IRA account without paying a penalty if you’ve had the account for at least five years, and you qualify for one of these exemptions:

You used the money for a first-time home purchase,
You’re totally and permanently disabled, or
Your heirs received the money after your death.

Where to Get Help Opening an Account

If you feel like a Roth IRA is the best retirement vehicle for goals, you can open a Roth IRA account with almost any brokerage account. But they don’t all offer the same selection of investments to choose from. Some brokerage firms also offer more help creating your portfolio, and some charge higher (or lower) fees.

That’s why we suggest thinking over the type of investor you are before you open a Roth IRA. Do you want help creating your portfolio? Or do you want to select individual stocks, bonds, mutual funds, and ETFs and create your own?

Always check for investing fees as you compare firms, and the types of investments each account offers. We did some basic research for you to come up with a list of the best brokerage firms to open a Roth IRA.

$0 per trade
$0 mutual fund
$0 set up
0.25% – 0.40% account balance annually

Get Started

Summary

Opening a Roth IRA is a great idea if you want to avoid taxes later in life, but you’ll want to start sooner rather than later if you hope to maximize this account’s potential. Remember that all of the money you contribute to a Roth IRA can grow tax-free over time. Getting started now lets you leverage the power of compound interest to the hilt.Before opening a Roth IRA account, compare all of the top online brokerage firms to see which ones offer the investment options you prefer at fees you can live with. Also consider which firms offer the type of help and support you need, including the option to have your portfolio chosen for you based on your income, your investment timeline, and your appetite for risk.

Good Financial Cents, and author of the personal finance book Soldier of Finance. Jeff is an Iraqi combat veteran and served 9 years in the Army National Guard. His work is regularly featured in Forbes, Business Insider, Inc.com and Entrepreneur.

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Source: goodfinancialcents.com

14 Smart Money Moves To Make In 2021

February 10, 2021 by Liam Lane Posted in House Architecture Tagged 401(k), away, budget, car, Car Insurance, car insurance rates, Checking Account, crash, Credit, Credit Card, credit cards, credit report, Credit Score, Debt, Emergency Fund, experian, Family, federal student loans, Finance, Financial Wize, FinancialWize, government, Grow, Home, How To, Insurance, Interest Rates, invest, Investing, investment, investments, keep, Life, Life Insurance, Loans, Main, Make, Managing Your Money, money, money moves, More, Mortgage, mutual funds, Pay Off Debt, paycheck, Personal, personal finance, private student loans, Quick Money, Refinance, refinancing, Retirement, retirement savings, Rewards, Salary, save, Save Money, Saving, savings, Spending, Student Loans, tax, Taxes, Travel

Are you looking to make some smart money moves to improve your future?

The new year is a great time to start thinking about what you can do to improve your financial situation. You can use this time to look forward and start making smart money moves that will help you in the future.

For example, maybe you want to become better prepared for emergencies in 2021 – probably on a lot of people’s minds after the year we had in 2020. There are several easy money moves you can take if being prepared is your goal.

You could put together an emergency binder that organizes your finances, contacts, personal information, etc. It’s everything someone would need if they had to take over your finances.

There are also smart money moves like finding affordable life insurance and creating an emergency fund that can help you be better prepared in 2021.

If lowering your bills is one of your goals for 2021, you may want to refinance your student loans, or make one of the easiest money moves and find a less expensive alternative to cable.

There are so many smart money moves you can make in 2021. Some are small and some are bigger, like taking advantage of your company’s 401(k) match, but all of them will help you improve your financial future.

The tasks on this list will help you to gather important documents, obtain free money (hello, company match!), find life insurance, save thousands of dollars a year, and more.

Of course, not everything on this list will apply to each of you, but this list is a good starting point. If anything, these smart money moves will get you motivated to start taking control over your finances in 2021.

Related content:

Here are 14 smart money moves to make in 2021.

1. Take your company’s 401(k) match

Does your employer offer a company match?

If so, I hope you are taking it!

A company or employer match is when your employer contributes to your 401(k). And, a 401(k) is a type of retirement account that you get through an employer.

Because this is basically free money that will help you grow your retirement savings, this is one of the best money moves right now. I highly recommend taking advantage of your company’s match if you can!

It allows you to invest a portion of your paycheck before taxes are taken out, and the amount in your 401(k) can grow tax free until you withdraw. Once you reach retirement and take money out of your 401(k), the amount you withdraw from this account is taxed.

Your 401(k) is an account that holds investments, similar to how your bank account holds your money. You may choose to place investments such as stocks, mutual funds, and more in your 401(k).

Each company offers its own kind of match. For example, an employer may match 100% of your contribution, up to 5% of your salary.

If you have this option with your job, I highly, highly recommend this as one of the smart money moves you make this year. Look into this further AS SOON AS YOU CAN!

2. Create an emergency binder

An emergency binder is a way to store financial information, like bank account numbers and passwords. You can store insurance information, personal details about you and each member of your family, information about bills, and more.

Having an emergency binder is so very important.

I know there are many, many families who would be very lost if something were to happen to the person who usually manages their financial situation.

Accounts could get lost, passwords would be unknown, bills may be forgotten about, life insurance may be hard to find, and more.

It’s best to keep a family emergency binder of everything just in case something were to happen, even if it’s something no one ever wants to think about. Having one just makes life so much easier, and it’s one of the smart money moves you should make this year.

I recommend having an emergency binder if:

You have a family
You have children
You are single – this is because someone will have to handle your affairs if something were to happen to you, and they’ll most likely have no clue as to where to start. The binder can guide them.

An emergency binder can help pretty much everyone and anyone.

This can be useful in non-emergencies as well. Creating a binder like this organizes all your family’s information in one place. It makes finding any piece of information quick and easy, and you’ll probably refer to it often.

My top tip is to check out the In Case of Emergency Binder to help you with creating your own emergency binder.

This is a 100+ page fillable PDF workbook.

3. Sign up for a complimentary $10,000 accidental death insurance policy

My friends at Harmonic have partnered with Making Sense of Cents, and they would like to give you a $10,000 accidental death insurance policy to encourage you to build your own personal safety net.

This company is simply looking to introduce more people to Harmonic, which is why they are giving away a complimentary policy. I share lots of free things on Making Sense of Cents – this is simply another item that I’ve negotiated for my readers. You have to be a U.S. citizen, though, to sign up.

You can click here to sign up to claim your policy today! It takes less than 5 minutes.

This policy is slightly different in that it covers you in case you die in an accident – such as a car crash. Accidents are the number one cause of death for people ages 1-44, according to the folks in our government that track that sort of data.

Since this $10,000 accidental death insurance policy is at no cost to you, I recommend that everyone sign up for it. Whether you are single, have a family, have a dog, etc., it’s a no-brainer because this won’t cost you anything.

4. Find life insurance

Since we are talking about insurance, looking at life insurance is another one of the smart money moves you should take this year.

Surprisingly, life insurance is much more affordable than you’d probably think.

I did a quick search through PolicyGenius, and I was able to find a $1,000,000 policy for 20 years, for less than $27 per month.

Life insurance is money for your family if you were to pass away. And, if you are the sole or primary earner in your family, then there are probably a lot of people who rely on you financially. Life insurance is money that can be used to pay for funeral expenses, day-to-day bills, pay off debt, etc.

If you are looking for life insurance, I highly recommend looking into PolicyGenius.

PolicyGenius makes getting life insurance easy. A quote takes just 5 minutes and you can see comparable policies so that you can determine what is best for you.

You can click here to find a life insurance policy.

5. Shop around for more affordable car insurance

Shopping around for car insurance is something that most people do not do, and it can cost you tens of thousands of dollars over your lifetime.

By simply comparing insurance rates, you can save over $1,000 yearly.

You’d be surprised by how many people NEVER compare insurance rates, and how much money it can cost you.

In fact, a family member of mine has been paying around $2,200 a year for quite some time, and when I found out, I was absolutely shocked!

I easily helped them find car insurance with better coverage for just $600 a year. Yes, they were able to save around $1,600 in literally less than 30 minutes.

You can shop car insurance rates through Get Jerry here.

This company will allow you to get quotes from up to 45 insurance companies, and switching is super easy – you simply click a button and save money.

This is one of the quick money moves that can help you save money each month for years to come!

6. Have a money meeting

A new year is a great time to have your next (or first!) money meeting.

In your money meeting you may want to discuss things like:

Completing an annual financial checkup
Looking over your debt amounts
Checking your expenses
Discussing your financial goals
Thinking about what changes need to be made
What the family’s budget is
How much is needed for retirement, and where you are on that track
Any financial problems, and so on

There is no exact outline of what you should talk about in your money meetings because every financial situation is different.

Money meetings help you get comfortable talking about your finances, and they make it easier to set goals and work towards them with your partner. I know talking about money can feel uncomfortable at first, but starting to have regular money meetings is one of the smart money moves every couple should take in the new year.

7. Start an emergency fund

An emergency fund is money that you have saved for when something unexpected happens, and I think 2020 showed many people why creating an emergency fund is one of the best money moves right now.

Your emergency fund can be used for something such as paying your bills if you lose your job (or if your hours or pay are cut), paying for a car repair, a medical bill, or something like a surprise leaking roof.

You can learn more at Why You Need An Emergency Fund and How To Start One Today.

8. Learn how to invest

Investing is important so you can:

Retire one day
Prepare for unexpected events in the future
Allow your money to grow over time

If you want to learn how to live your best life in the future, investing is a great way to do so. And, you can even start investing with little money.

Investing is a smart money move because it means you are making your money work for you. If you weren’t investing, your money would just be sitting there and not earning a thing.

This is important to note because $100 today will not be worth $100 in the future if you just let it sit under a mattress or in a checking account. However, if you invest, you can actually turn your $100 into something more. Investing for the long term means your money is working for you, potentially earning you an income.

For example: If you put $1,000 into a retirement account that has an annual 8% return, 40 years later that would turn into $21,724. If you started with that same $1,000 and put an extra $1,000 in it for the next 40 years at an annual 8% return, that would then turn into $301,505. If you started with $10,000 and put an extra $10,000 in it for the next 40 years at that same percentage rate, that would then turn into $3,015,055.

9. Increase your credit score

Do you know what your credit score is? Do you know how it can impact your life?

While I don’t think that you need to go crazy and obsess over your credit score, improving your credit score is not something that will hurt you.

Your credit score can impact the interest rate you receive on a loan or a mortgage, finding a rental home, attaining certain jobs, your insurance rates, even your cell phone bill, and more.

A credit score is a three digit number that shows others your creditworthiness, and is often used as an indicator to show how risky you are. A good credit score is usually over 720.

You can check your credit score with Credit Sesame for free.

If this is one of the smart money moves you want to make in 2021, here are some of the actions you can take to increase your credit score:

Pay your bills on time
Regularly check your credit report
Keep your balances and utilization rate low

Learn more at Everything You Need To Know About How To Build Credit.

10. Get your free credit report

One easy money move that I recommend this year is to start getting your free credit report.

You can receive one annual free credit report from the three main credit bureaus (Equifax, TransUnion, and Experian).

Yes, this means that you get one from EACH, so three each year. I recommend spacing them out so you can get one every four months.

You can read more about this here.

11. Find an alternative to your expensive TV bill

Over five years ago, we decided to get rid of cable.

And, we haven’t missed it one bit.

I know of many people who spend $100 each month on cable TV, many spend over $150 a month, and I even had someone tell me that they spend over $300 each month on cable.

If you’re trying to find ways to cut your budget, and you have an expensive TV bill, I definitely recommend finding an alternative. This is one of my favorite smart money moves in 2021 because there are more options than ever. There’s no reason to spend that much on cable ever again.

Learn more about your options at 16 Alternatives To Cable TV That Will Save You Money.

12. Track your money

Tracking your money is important when it comes to managing your money.

Luckily, there is a free, easy tool that allows you to do this.

Personal Capital is a free personal finance software that allows users to better manage their finances.

You can connect accounts, such as your mortgage, bank, credit cards, investment portfolio, retirement, and more, and it is all free.

You can track your cash flow, your spending, how much you’re saving, how your investments are doing, and more.

With their free financial platform, you can easily see all of your accounts in one place so that you can manage everything efficiently.

If tracking your money is one of the smart money moves you want to make in 2021, Personal Capital can help you reach your goal.

13. Refinance your student loans

Do you have student loans?

If so, then you may want to think about refinancing them. This is one of the smart money moves that can help you lower your monthly bills and possibly save money over time.

Student loan refinancing is when you apply for a new loan that is then used to pay off your other student loans.

This is usually a great option if you borrowed private student loans and your credit score is better now than when you originally took out your student loans.

By refinancing your student loans, you may qualify for better repayment terms, a lower interest rate, and more. This is great because it may help you pay off your student loans quicker.

The positives of refinancing student loans include:

One monthly payment to simplify your finances
Lower monthly payments
Lower interest rates, and more

Companies, such as Credible, help you to refinance your student loans. With refinancing, the average person can save thousands of dollars on their loan, and that’s incredible! You can save a lot of money with student loan refinancing, such as with Credible, especially if you have high interest federal or private loans.

Credible’s platform is similar to the way Expedia works for finding flights – with Credible, you simply search the available rates to find the best student loan rate for you. There is no service fee, no origination fee, and no prepayment penalty if you end up paying off your student loans faster.

To use Credible, it takes less than 10 minutes and just follow these steps:

Fill out a quick simple form (2 mins) – It only takes one form to see the many different lender options.
Choose an option you like (2 mins) – On Credible, you can easily compare the different lenders all in one place.
Provide your loan details (3 mins) – After providing more information about yourself, it takes one business day to receive your finalized offer.

Before refinancing a federal student loan, though, you will want to think about different federal benefits that you may be giving up. You may give up income-based repayment plans, loan forgiveness for those who have certain public service jobs (including jobs at public schools, the military, Peace Corps, and more). By refinancing your federal student loans, you may be giving up any future options for these loan forgiveness programs.

However, keep in mind that by refinancing your student loans, you may receive lower monthly payments, lower interest rates, and more. This may help you pay off your debt much faster. For me, I didn’t qualify for any loan forgiveness, so refinancing would have definitely helped me if I knew about it back then.

14. Get a travel rewards credit card

Do you earn rewards with your credit card?

Using a travel rewards credit card means that you can gain points that you can use to get free or cheap travel. You can earn airline tickets, gift cards, hotel stays, cash, etc., all for simply using your credit card.

If you are going to pay for something anyway, then you might as well get something for free out of it, right?

If you travel a lot and/or already use credit cards, then signing up for the ones with the best rewards can help you earn free travel.

However, this is only a smart move money if you are able to use credit cards responsibly. Taking on debt to earn travel rewards isn’t a smart move!

Two cards I recommend include:

What should I do with my money in 2021?

It’s entirely up to you! Start by thinking about what your goals are for this year and your future.

Do you want to pay off debt? Start investing more? Reduce your monthly bills?

Those are all smart money moves to make, and the ideas on this list can help you work towards any of them.

Remember, what you decide to do with your money in 2021 is personal. You may want to make steps towards quitting a job you don’t love, plan a vacation, donate more to your favorite charity, and so on.

It’s never a bad idea to focus on paying down your debt and finding ways to save money, but from there, think about what you want for your future.

What is the smartest thing to do with your money?

I believe that paying off your high interest rate debt is one of the most important smart money moves. Debt makes it hard to save or invest for your future, and the average person holds a lot of debt.

Having debt can keep you in a debt cycle that is hard to break free from, but you can learn how to become debt free and finally start focusing on your future.

What’s on your financial to do list for 2021? What smart money moves are you making?

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Source: makingsenseofcents.com

10 COVID-19 Stimulus Benefits for the Self-Employed

February 10, 2021 by Liam Lane Posted in Renting Tagged 401(k), Business Income, cons, Coronavirus, covid-19, Credit, Credit Card, credit cards, crisis, Debt, earnings, Education, Emergency Fund, estate, existing, Family, Federal Reserve, federal student loans, Finance, Financial Wize, FinancialWize, freelancers, Get Out of Debt, health plan, hsa, Interest Rates, IRA, keep, Life, Loans, Make, Manage Money, money, More, Mortgage, News, paycheck, Personal, personal finance, principal, pros, Pros and Cons, rent, Retirement, retirement funds, savings, Savings Account, second, Security, Small Business, spouse, Student Loans, tax, Taxes, Unemployment

If you’re self-employed with financial hardships due to the pandemic, there are various stimulus benefits that can provide relief. Use these ten options to improve your personal and business finances.

Laura Adams, MBA

September 30, 2020

Coronavirus Aid, Relief, and Economic Security (CARES) Act became law on March 27 as the largest stimulus legislation in American history since the New Deal in the 1930s. Here are ten ways it provides relief for individual solopreneurs and small business owners.

1. Getting lower interest rates

On March 3, the central U.S. bank, also known as the Federal Reserve or Fed, made a surprising emergency interest rate cut of half a percentage point. That’s the largest single rate cut since the financial crisis of 2008. While this move wasn’t part of a coronavirus stimulus package, it was an aggressive cut meant to prepare the economy for problems the pandemic was expected to cause.

An economic recovery could take a few years, which likely means the Fed rate will stay near zero through 2023.

In mid-September, the Fed reiterated its promise to keep interest rates near zero until the economy improves and the unemployment rate declines. They indicated that a recovery could take a few years, which likely means the Fed rate stays near zero through 2023.

While savers never celebrate low interest rates, they’re beneficial to borrowers. In general, the financing charge on variable-rate credit cards and lines of credit goes down in lockstep with interest rates. Carrying a balance on your personal and business credit cards may be slightly less expensive, depending on your card issuer and type. For instance, if your card’s annual percentage rate or APR is 20%, your adjusted rate could go down to 19.5%.

If you have a fixed-rate credit card, the APR doesn’t change no matter what happens in the economy or with federal interest rates. Also, note that if you pay off your balance in full each month, a credit card’s APR is irrelevant because you don’t pay interest on purchases.

2. Having more time to file taxes

Earlier this year, the due date for filing and paying 2019 federal taxes was postponed from April 15, 2020, to July 15, 2020. You didn’t have to be sick or negatively impacted by COVID-19 to qualify for this federal tax delay. It applied to any person or business entity with taxes due on April 15, 2020.

If you missed the tax filing deadline, be sure to request an extension.

Most businesses make estimated tax payments each quarter. Those payment dates have shifted, too. The 2020 schedule gives you more time as follows:

The first quarter was due on July 15, 2020, which changed from April 15, 2020
The second quarter was due on July 15, 2020, which changed from April 15, 2020
The third quarter was due on September 15, 2020
The fourth quarter is due on January 15, 2021

Individuals and businesses can request an automatic extension to delay filing federal taxes. But it doesn’t give you more time to pay what you owe for 2019, only more time to submit your tax form—until October 15, 2020.

If you missed the tax filing deadline, be sure to request an extension. Individuals must file IRS Form 4868, and most incorporated businesses use IRS Form 7004.

However, depending on where you live, you may have to pay state income taxes, which have not been postponed. If you need a state tax filing extension, check with your state’s tax agency to determine what’s possible.

Taxes due on any date other than April 15, 2020—such as sales tax, payroll tax, or estate tax—don’t qualify for relief.

3. Getting more time to contribute to retirement accounts

You typically have until April 15 or the date of a tax extension to make traditional IRA or Roth IRA contributions for the prior year. But since the CARES Act postponed the federal tax filing deadline, you also have until July 15 or October 15, 2020 (if you requested an extension) to make IRA contributions for 2019.

However, this deadline doesn’t apply to retirement accounts you may have with an employer, such as a 401(k). Nor does it apply to self-employed accounts, such as a solo 401(k) or SEP-IRA, which correspond to the calendar year.

4. Getting more time to contribute to an HSA

Like with an IRA, you typically have until April 15 or the date of a tax extension to make HSA contributions for the prior year. Under the CARES Act, you now have until July 15 or October 15, 2020, to make HSA contributions for 2019.

To qualify for an HSA, you must be covered by a qualifying high-deductible health plan. In early March, the IRS issued a notice that a high-deductible health plan may cover COVID-19 testing and treatment and telehealth services before meeting your deductible. And just as before the coronavirus, you can pay for medical testing and treatment using funds in your HSA.

5. Delaying tax on retirement withdrawals

While you typically must pay income tax on retirement account withdrawals that weren’t previously taxed, the good news is that for a period, you can delay or avoid tax altogether. The CARES Act gives you two options for withdrawals made in 2020:

Repay a hardship distribution within three years to your retirement account. You can replace the funds slowly or all at once, with no change to your annual contribution limit. If you take money out but return it within three years, it’s like you never took a distribution.
Pay taxes on a hardship distribution from your retirement account evenly over three years. If you can’t pay back your distribution, you can ease your tax burden by paying one-third of your liability for three years.

Since withdrawing contributions from a Roth retirement account doesn’t trigger income taxes, it’s a good idea to tap a Roth before a traditional retirement account when you have the option.

6. Skipping early withdrawal penalties

Most retirement accounts impose a 10% early withdrawal penalty if you take make withdrawals before age 59.5. Under the CARES Act, if you have a coronavirus-related hardship, the penalty is waived.

Under the CARES Act, if you have a coronavirus-related hardship, the penalty is waived.

For instance, if you, your spouse, or a child gets diagnosed with COVID-19 or have financial challenges due to being laid off, quarantined, or closing a business, you qualify for this penalty exemption. You can withdraw up to $100,000 of your retirement account balance during 2020 without penalty. However, income taxes would still be due in most cases.

The no-penalty rule applies to workplace retirement plans, such as 401(k)s and 403(b)s. It also applies to IRAs, such as traditional IRAs, Roth IRAs, and SEP-IRAs.

Since you make after-tax contributions to Roth accounts, you can withdraw them at any time (which was also the case before the CARES Act). However, the earnings portion of a Roth is subject to income tax if you withdraw it before age 59.5.

7. Getting larger retirement plan loans

Some workplace retirement plans, such as 401(k)s and 403(b)s, permit loans. Typically, you can borrow 50% of your vested account balance up to $50,000 and repay it with interest over five years.

You can delay the repayment period for a retirement plan loan for up to one year.

For retirement plans that allow loans, the CARES Act doubles the limit to 100% of your vested balance in the plan up to $100,000. It applies to loans you take from your account until late September 2020, for coronavirus-related financial needs.

You can delay the repayment period for a retirement plan loan for up to one year. For example, if you have $20,000 vested in your 401(k), you could take a $20,000 loan on September 30, 2020, and delay the repayment term until September 30, 2021. You’d have payments stretched over five years, ending on September 30, 2026. Any amount not repaid by the deadline would be subject to tax and a 10 percent early withdrawal penalty.

Note that individual retirement accounts—such as traditional IRAs, Roth IRAs, and SEP-IRAs—don’t allow participants to take loans, only hardship distributions.

8. Suspending student loan payments.

Starting on March 13, 2020, most federal student loans went into automatic forbearance until September 30, 2020, due to the CARES Act. On August 8, the suspension of student loan payments was extended through December 31, 2020.

On August 8, the suspension of student loan payments was extended through December 31, 2020.

The suspension covers the following types of loans:

Direct Loans that are unsubsidized or subsidized
Direct PLUS Loans
Direct Consolidation Loans
Federal Family Education Loans (FFEL)
Federal Perkins Loans

Note that FFEL loans owned by a private lender or Perkins loans held by your education institution don’t qualify for automatic forbearance. However, you may have the option to consolidate them into a Direct Loan, which would be eligible for forbearance. Just make sure that once the suspension ends, your new consolidated interest rate wouldn’t rise significantly.

During forbearance, qualifying loans don’t accrue additional interest. Even if you have federal student loans in default because you haven’t made payments, zero percent interest applies during the suspension period.

Additionally, missed payments during the suspension don’t get reported to the credit bureaus and can’t hurt your credit. Qualifying payments you skip also count toward any federal loan repayment or forgiveness plan you’re enrolled in.

However, if you want to continue making student loan payments during the suspension period, you can. With zero percent interest, the amount you pay gets applied to your principal student loan balance, enabling you to get out of debt faster.

With zero percent interest, the amount you pay gets applied to your principal student loan balance, enabling you to get out of debt faster.

If you’re not sure what type of student loan you have or the pros and cons of consolidation, contact your loan servicer. Even if your student loans are with private lenders or schools, they may offer relief if you request it.

9. Having Paycheck Protection Program (PPP) loans forgiven

The PPP is part of the CARES Act, and it supports small businesses, organizations, and solopreneurs facing economic hardship created by the pandemic. The program began providing relief in early April 2020, and the application window ended in early August 2020.

Participating PPP lenders coordinated with the Small Business Administration (SBA) to offer loans to businesses in operation by February 15, 2020, with fewer than 500 employees. Loan amounts could be up to 2.5 times the average monthly payroll up to $10 million; however, annual salaries were capped at $100,000.

For a solopreneur, the maximum PPP loan was $20,833 if your 2019 net profit was at least $100,000. The calculation is: $100,000 / 12 months x 2.5 = $20,833.

When you spend at least 60% on payroll and 40% on rent, mortgage interest, and utilities, you can have those amounts forgiven from repayment. Payroll includes payments to yourself, but you can’t cover benefit costs, such as retirement contributions, or payments to independent contractors.

In other words, a solopreneur could have received a PPP loan for up to $20,833, paid the entire amount to themselves, and not repaid it by having the load forgiven. Using a PPP loan for qualifying expenses turns it into a grant.

The best part about PPP loan forgiveness is that it won’t qualify as federal taxable income. Some states that charge income tax have indicated that they won’t tax forgiven amounts.

However, if you have employees, the PPP forgiveness calculations and requirements are more complex. For example, you must maintain reasonable salaries and wages. If you decrease them by more than 25% for any employee (including yourself) who made less than $100,000 in 2019, your forgiveness amount will be reduced.

PPP loan forgiveness also depends on keeping any full-time employees on your payroll. But if you had employees who left your company voluntarily, requested a cut in hours, or got fired for cause during the pandemic, your loan forgiveness amount won’t be reduced for those situations.

The best part about PPP loan forgiveness is that it won’t qualify as federal taxable income. Some states that charge income tax have indicated that they won’t tax forgiven amounts.

However, not all states have issued their rules on taxing PPP forgiveness. So be sure to get guidance if you live in a state with income tax.

You must complete a PPP Loan Forgiveness Application and get approved by your lender to qualify for forgiveness. The paperwork should come from your lender, or you can download it from the SBA website at SBA.gov. Most PPP borrowers have from six months after loan disbursement or until the end of 2020 to spend the funds.

The forgiveness application explains what documents you must include, and they vary depending on whether you have employees. Once you submit your paperwork, your lender has 60 days to decide how much of your PPP loan can be forgiven.

If some or all of a PPP loan isn’t forgiven, you typically must repay it within five years at a 1 percent fixed interest rate. You don’t have to start making payments for ten months after loan disbursement, but interest will accrue during a deferral period.

10. Getting SBA loans

In addition to PPP loans, the Small Business Administration (SBA) offers several loans for businesses and solopreneurs facing economic hardship caused by a disaster, including the COVID-19 pandemic.

Economic Injury Disaster Loan (EIDL) can be up to $2 million and repaid over 30 years at an interest rate of 3.75 percent. You can use these funds for payroll and other operating expenses.
SBA Express Bridge Loans gives borrowers up to $25,000 for help overcoming a temporary loss of revenue. However, you must have an existing relationship with an SBA Express lender.
SBA Debt Relief is a program that helps you make payments on existing SBA loans for up to six months.

Depending on your state, you may qualify for unemployment assistance, which allows self-employed people, who typically are ineligible for unemployment benefits to get them for a period.

This isn’t a complete list of all the economic relief available for small businesses and solopreneurs. There are federal tax initiatives, funds from local and state governments, and help from private organizations that you may find by doing a search online.

How to manage money in uncertain times

When it comes to surviving uncertainty, such as how COVID-19 will affect the economy, those who have emergency savings will feel much less financial stress than those who don’t. That’s why it’s essential to maintain a cash reserve of at least three to six months’ worth of living expenses in an FDIC-insured bank savings account.

If you don’t need to dip into your emergency fund, continue shoring it up when possible. If you don’t have a cash reserve, accumulate savings by cutting non-essential expenses, and even temporarily pausing contributions to retirement accounts. That’s a better option than succumbing to panic and tapping your retirement funds early.

If you don’t need to dip into your emergency fund, continue shoring it up when possible.

If you find yourself in a cash crunch, contact your creditors before dipping into any retirement accounts you have. Many lenders will be willing to work with you to suspend payments or modify existing loan terms temporarily.

RELATED: How to Reduce Money Anxiety—Compassionate Advice from a Finance Pro

My new book, Money-Smart Solopreneur: A Personal Finance System for Freelancers, Entrepreneurs, and Side-Hustlers, covers many strategies to earn more, manage variable income, and create an automatic money system so you can strengthen your financial future. It’s a great resource if you’re thinking about earning side income or have already started a business.

Many economic factors that affect your personal and business finances aren’t under your control. Instead of worrying, look around, and figure out how you can create more income or cut unnecessary expenses. Working on tasks that you can control gives you more clarity and helps manage stress in uncertain times.

About the Author

Laura Adams, MBA

Source: quickanddirtytips.com

How the Biden Presidency Could Affect Your Money

February 10, 2021 by Liam Lane Posted in Loans Tagged 401(k), away, big, car, estate, Financial Wize, FinancialWize, Home, Insurance, Life, Life Insurance, Loans, money, More, mutual funds, News, Podcast, principal, real, Real Estate, savings, Security, Student Loans, tax

Whenever there’s a new president, things happen. Laws get passed. Priorities change. And lots of those new laws and many of those new priorities end up affecting your wallet.

President Joe Biden has certainly hit the ground running. While he’s yet to get new legislation passed, it won’t be long before he’ll start trying. So now’s the time to see what’s potentially ahead. Already proposed are big changes in tax law, student loans, 401(k) rules, health care costs, Social Security and lots more.

Ready to learn about changes that might affect your finances? Then you’re in the right place, because that’s what this week’s “Money!” podcast is about: exploring what the Biden administration has in mind for your money, and how best to position yourself.

As usual, my co-host will be financial journalist Miranda Marquit, and we’re joined by our producer and sound effects guy, Aaron Freeman.

Sit back, relax and listen to this week’s “Money!” podcast:

Not familiar with podcasts?

A podcast is basically a radio show you can listen to anytime, either by downloading it to your smartphone or other device, or by listening online.

They’re totally free. They can be any length (ours are typically about a half-hour), feature any number of people and cover any topic you can possibly think of. You can listen at home, in the car, while jogging or, if you’re like me, when riding your bike.

You can listen to our latest podcasts here or download them to your phone from any number of places, including Apple, Spotify, RadioPublic, Stitcher and RSS.

If you haven’t listened to a podcast yet, give it a try, then subscribe to ours. You’ll be glad you did!

Show notes

Want more information? Here’s what other financial experts have said:

About me

I founded Money Talks News in 1991. I’m a CPA, and I have also earned licenses in stocks, commodities, options principal, mutual funds, life insurance, securities supervisor and real estate.

Disclosure: The information you read here is always objective. However, we sometimes receive compensation when you click links within our stories.

Source: moneytalksnews.com

10 Financial Steps to Take Before Having Kids

February 10, 2021 by Liam Lane Posted in Life Hacks Tagged 401(k), Auto, away, budget, Budgeting, Buy, Buying, College, Compound Interest, Credit, Credit Card, Credit Card Debt, Debt, Debts, Education, Emergency Fund, Family, Featured, Fees, Finance, Financial Goals, Financial Plan, Financial Wize, FinancialWize, government, Grow, Health Insurance, Home, How To, hsa, Insurance, Interest Rates, invest, investments, IRA, Life, Life Insurance, Loans, Make, Manage Money, money, Mortgage, News, Personal, personal finance, planning, Popular, Raising a Family, Refinance, refinancing, Retirement, retirement planning, retirement savings, Roth IRA, Salary, save, Saving, savings, Savings Account, School, Spending, Student Loans, tax, tax credit, Taxes, Travel

average of $233,610, and that’s for each child. This figure doesn’t even include the cost of college, which is growing faster than inflation.

CollegeBoard data found that for the 2019-2020 school year, the average in-state, four-year school costs $21,950 per year including tuition, fees, and room and board.

Kids can add meaning to your life, and most parents would say they’re well worth the cost. But having your financial ducks in a row — before having kids — can help you spend more time with your new family instead of worrying about paying the bills.

10 Financial Moves to Make Before Having Kids

If you want to have kids and reach your long-term financial goals, you’ll need to make some strategic moves early on. There are plenty of ways to set yourself up for success, but here are the most important ones.

1. Start Using a Monthly Budget

When you’re young and child-free, it’s easy to spend more than you planned on fun activities and nonessentials. But having kids has a way of ruining your carefree spending habits, and that’s especially true if you’ve spent most of your adult life buying whatever catches your eye.

That’s why it’s smart to start using a monthly budget before having kids. It helps you prioritize each dollar you earn every month so you’re tracking your family’s short- and long-term goals.

You can create a simple budget with a pen and paper. Each month, list your income and recurring monthly expenses in separate columns, and then log your purchases throughout the month. This gives you a high-level perspective about money going in and out of your budget. You can also use a digital budgeting tool, like Mint, Qube Money, or You Need a Budget (YNAB) to get a handle on your finances.

Regardless of which budgeting tool you choose, create categories for savings (e.g. an emergency fund, vacation fund, etc.) and investments. Treat these expense categories just like regular bills as a way to commit to your family’s money goals. Your budget should provide a rough guide that helps you cover household expenses and save for the future while leaving some money for fun.

2. Build an Emergency Fund

Most experts suggest keeping three- to six-months of expenses in an emergency fund. Having an emergency fund is even more crucial when you have kids. You never know when you’ll face a broken arm, requiring you to cover your entire health care deductible in one fell swoop.

It’s also possible your child could be born with a critical medical condition that requires you to take time away from work. And don’t forget about the other emergencies you can face, from a roof that needs replacing to a job loss or income reduction.

Your best bet is opening a high-yield savings account and saving up at least three months of expenses before becoming a parent. You’ll never regret having this money set aside, but you’ll easily regret not having savings in an emergency.

3. Boost Your Retirement Savings Percentage

Your retirement might be decades away, but making retirement savings a priority is a lot easier when you don’t have kids. And with the magic of compound interest that lets your money grow exponentially over time, you’ll want to get started ASAP.

By boosting your retirement savings percentage before having kids, you’ll also learn how to live on a lower amount of take-home pay. Try boosting your retirement savings percentage a little each year until you have kids.

Go from 6% to 7%, then from 8% to 9%, for example. Ideally, you’ll get to the point where you’re saving 15% of your income or more before becoming a parent. If you’re already enrolled in an employer-sponsored retirement plan, this change can be done with a simple form. Ask your employer or your HR department for more information.

If you’re self-employed, you can still open a retirement account like a SEP IRA or Solo 401(k) and begin saving on your own. You can also consider a traditional IRA or a Roth IRA, both of which let you contribute up to $6,000 per year, or $7,000 if you’re ages 50 or older.

4. Start a Parental Leave Fund

Since the U.S. doesn’t mandate paid leave for new parents, check with your employer to find out how much paid time off you might receive. The average amount of paid leave in the U.S. is 4.1 weeks, according to a study by WorldatWork, which means you might face partial pay or no pay for some weeks of your parental leave period. It all depends on your employer’s policy and how flexible it is.

Your best bet is figuring out how much time you can take off with pay, and then creating a plan to save up the income you’ll need to cover the rest of your leave. Let’s say you have four weeks of paid time off, but plan on taking 10 weeks of parental leave, for example. Open a new savings account and save weekly or monthly until you have six weeks of pay saved up.

If you have six months to wait for the baby to arrive and you need $6,000 saved for parental leave, you could strive to set aside $1,000 per month for those ten weeks off. If you’re able to plan earlier, up to 12 months before the baby arrives, then you can cut your monthly savings amount and set aside just $500 per month.

5. Open a Health Savings Account (HSA)

A health savings account (HSA) is a tax-advantaged way to save up for health care expenses, including the cost of a hospital stay. This type of account is available to Americans who have a designated high-deductible health insurance plan (HDHP), meaning a deductible of at least $1,400 for individuals and at least $2,800 for families. HDHPs must also have maximum out-of-pocket limits below $6,900 for individuals and $13,800 for families.

In 2020, individuals can contribute up to $3,550 to an HSA while families can save up to $7,100. This money is tax-advantaged in that it grows tax-free until you’re ready to use it. Moreover, you’ll never pay taxes or a penalty on your HSA funds if you use your distributions for qualified health care expenses. At the age of 65, you can even deduct money from your HSA and use it however you want without a penalty.

6. Start Saving for College

The price of college will only get worse over time. To get a handle on it early and plan for your future child’s college tuition, start saving for their education in a separate account. Once your child is born, you can open a 529 college savings account and list your child as its beneficiary.

Some states offer tax benefits for those who contribute to a 529 account. For example, Indiana offers a 20% tax credit on up to $5,000 in 529 contributions each year, which gets you up to $1,000 back from the state at tax time. Many plans also let you invest in underlying investments to help your money grow faster than a traditional savings account.

7. Pay Off Unsecured Debt

If you have credit card debt, pay it off before having kids. You’re not helping yourself by spending years lugging high-interest debt around. Paying off debt can free-up cash and save you thousands of dollars in interest every year.

If you’re struggling to pay off your unsecured debt, there are several strategies to consider. Here are a few approaches:

Debt Snowball

This debt repayment approach requires you to make a large payment on your smallest account balance and only the minimum amount that’s due on other debt. As the months tick by, you’ll focus on paying off your smallest debt first, only to “snowball” the payments from fully paid accounts toward the next smallest debt. Eventually, the debt snowball should leave you with only your largest debts, then one debt, and then none.

Debt Avalanche

The debt avalanche is the opposite of the debt snowball, asking you to pay off the debt with the highest interest rate first, while paying the minimum payment on other debt. Once that account is fully paid, you’ll “avalanche” those payments to the next highest-rate debt. Eventually, you’ll only be left with your lowest-interest account until you’ve paid off all of your debt.

Balance Transfer Credit Card

Another popular strategy involves transferring high-interest balances to a balance transfer credit card that offers 0% APR for a limited time. You might have to pay a balance transfer fee (often 3% to 5%), but the interest savings can make this strategy worth it.

If you try this strategy, make sure you have a plan to pay off your debt before your introductory offer ends. If you have 15 months at 0% APR, for example, calculate how much you need to pay each month for 15 months to repay your entire balance during that time. Any debt remaining after your introductory APR period ends will start accruing interest at the regular, variable interest rate.

8. Consider Refinancing Other Debt

Ditching credit card debt is a no-brainer, but debt like student loans or your home mortgage can also weigh on your future family’s budget.

If you have student loan debt, look into refinancing your student loans with a private lender. A student loan refinance can help you lower the interest rate on your loans, find a manageable monthly payment, and simplify your repayment into one loan.

Private student loan rates are often considerably lower than rates you can get with federal loans — sometimes by half. The caveat with refinancing federal loans is that you’ll lose out on government protections, like deferment and forbearance, and loan forgiveness programs. Before refinancing your student loans, make sure you won’t need these benefits in the future.

Also look into the prospect of refinancing your mortgage to secure a shorter repayment timeline, a lower monthly payment, or both. Today’s low interest rates have made mortgage refinancing a good deal for anyone who took out a mortgage several years ago. Compare today’s mortgage refinancing rates to see how much you can save.

9. Buy Life Insurance

You should also buy life insurance before having kids. Don’t worry about picking up an expensive whole life policy. All you need is a term life insurance policy that covers at least 10 years of your salary, and hopefully more.

Term life insurance is extremely affordable and easy to buy. Many providers don’t even require a medical exam if you’re young and healthy.

Once you start comparing life insurance quotes, you’ll be shocked at how affordable term coverage can be. With Bestow, for example, a thirty-year-old woman in good health can buy a 20-year term policy for $500,000 for as little as $20.41 per month.

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10. Create a Will

A last will and testament lets you write down what should happen to your major assets upon your death. You can also state personal requests in writing, like whether you want to be kept on life support, and how you want your final arrangements handled.

A will can also formally define who you’d like to take over custody of your kids, if both parents die. If you don’t formally make this decision ahead of time, these deeply personal decisions might be left to the courts.

Fortunately, it’s not overly expensive to create a last will and testament. You can meet with a lawyer who can draw one up, or you can create your own using a platform like LegalZoom.

The Bottom Line

Having kids can be the most rewarding part of your life, but parenthood is far from cheap. You’ll need money for expenses you might’ve never considered before — and the cost of raising a family only goes up over time.

That’s why getting your money straightened out is essential before kids enter the picture. With a financial plan and savings built up, you can experience the joys of parenthood without financial stress.

goodfinancialcents.com

5 Sacrifices to Help You Max Out Your Retirement Account Next Year

February 10, 2021 by Liam Lane Posted in Life Hacks, Retirement Tagged 401(k), big, budget, Buy, car, cars, Credit, Credit Card, Credit Card Debt, Debt, Extra Money, Family, Finance, Financial Wize, FinancialWize, frugal, Frugality, Home, How To, invest, IRA, keep, Life, Lifestyle, Loans, Make, money, Mortgage, Pay Off Debt, Personal, Personal Loans, planning, Retirement, retirement savings, Rewards, Roth IRA, save, Saving, savings, second, Side Hustle, Spending, Travel

Are you at the point where you’re ready to invest more in retirement each month but aren’t quite sure how? Maybe you want to increase your savings rate but the numbers don’t add up. I’ve always said that saving something is better than nothing. If you can’t max out savings like your retirement account, it’s not a big deal and you can always work your way up to this goal year after year. We’ve put together 5 sacrifices to max out your retirement account.

Right now, the maximum contribution limits for a 401(k) is $19,000 and $6,000 a traditional or Roth IRA. This year, I was finally able to max out my retirement account contributions for the first time. I know how it seems like you’d have to fork over a lot of money each year to do the same thing, and that’s because you will. However, you can save enough to max out your retirement for the year and still live a comfortable life.

You may have to make some sacrifices, but they may not produce super drastic changes to your budget or your lifestyle. Here are 5 reasonable sacrifices to help max out your retirement account next year and every year afterward.

Your Car

One thing that you can sacrifice to help you max out your retirement account is your car. While you can probably save a ton of money by not having a car especially if you live in a big city, you don’t have to give up owning a car completely. My husband and I both drive older paid-off cars and we love it. With the average car payment hovering around $400 to $500 per month, that’s a lot of money to fork over each month just to drive.

In fact, $500 per month is all you need to max out an IRA right now since the annual contribution limit for anyone under 50 is $6,000. Since cars depreciate in value so much, it often doesn’t make financial sense to buy a brand new car. Used cars can be paid off quicker and you may even be able to buy a decent used car in cash. From there, you can use that money that you would save by not having a car loan and put it toward retirement savings.

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Live in a Smaller Home

My husband and I are sacrificing our dream home right now and I’m totally fine with that. We bought our first home a few years ago when we were 26 and 29 years old. It’s a nice starter home and it’s small. We don’t even have a basement but our family size is small right now so it’s fine. By having a smaller home and making it work, we save a ton of money on our mortgage, maintenance, repairs, and cleaning.

Now, would I love to have more space, walk-in closets or an extra enclosed room to serve as my office? Sure, but it’s not killing me that we live in a 1,300 sq ft home and instead I’m choosing to focus on what I love and enjoy about our home. I love how we have an extra bathroom and a nice fireplace in the family. We always have a decent-sized yard with a wrap-around deck and garden boxes that were already set up when we moved. Even though we are technically ‘sacrificing’ our dream home right now, I know that we will buy it later down the line and I’m content with where we’re at now.

RELATED: 6+ Easy Ways to Save Thousands on Home Repair

Frugal Travel

Some people give up traveling to pay off debt and save more. You don’t have to do this even if you’re willing to make sacrifices to max out your retirement next year. Instead of giving up travel altogether, find ways to make it more affordable so you can go on trips, and still invest generously. This is why I love frugality. Being frugal allows you to get creative and use the resources available to spend wisely on your values and save where you can.

Instead of paying for flights full price, you can wait for sales or sign up for a rewards credit card. Instead of spending tons of money on a hotel, see if you can stay with a friend or relative when you travel or book an Airbnb. Usually, when I travel, I’m not super picky about where I stay so long as it’s clean. I also plan to cook some meals if possible if our accommodations allow it.

I’ll usually book an Airbnb or a suite with full kitchen access so I can prepare breakfast and snacks. You don’t have to dine out for all 3 meals when you travel and breakfast is one of the easiest meals to prepare whether you have full access to a kitchen or not.

RELATED: How to Plan for Budget Travel This Year

Delay Your Gratification

We live in a society where people want everything fast and right now. This often leads to getting items and services before you can pay for them in full. If you want to avoid debt and living above your means, practice delayed gratification regularly and budget for larger purchases instead of financing them.

My husband and I used to have a ton of credit card debt, student loans, personal loans, and car loans. This debt really ate into our disposable income. Even after paying it off, I’ve still been tempted to finance things like furniture and other purchases. I choose not to and to delay my gratification. By simply waiting and planning, I save a lot of money and do a better job of committing to live below my means.

When you slow down on financing purchases and making impulse buys regularly, you’ll find that your budget is not so tight. You may even wind up with thousands extra each year that you can invest.

Your Time

Time is not a renewable asset. Once you use your time, it’s gone. You can never go back or relive a day where you wasted time. Keep this in mind when considering sacrifices to max out your retirement account. However, it should also be motivation to make good use of your time especially when it comes to working and earning extra money. If you’re looking to start maxing out your retirement account, odds are you’re still earning an active income where you’re trading time for money. If you want to earn more or increase your savings rate, you may have to get a second job or a side hustle.

Even if you want to establish a passive stream of income, you’ll need to dedicate time or energy to get that idea off the ground. Of course, sacrificing your time to work is not a waste. You can even make the most of your effort by choosing work that is enjoyable and fulfilling. Or start a side business where you can do things you love and still make good money.

Try to stick to your budget and save your money wisely to make it all worth it in the end. Pay yourself first consistently and remain dedicated to your goal in order to max out your retirement next year and each year afterward.

Source: everythingfinanceblog.com

Which Debts Should You Prepay First? A 6-Step Plan

February 10, 2021 by Liam Lane Posted in Skilled Nursing Care Tagged 4%, 401(k), agent, Auto, Auto Loans, big, building, Buying, Buying a Home, california, car, Career, Coronavirus, Credit, credit cards, crisis, Debt, Emergency Fund, Extra Money, Family, federal student loans, Fees, Financial Goals, Financial Wize, FinancialWize, Health Insurance, Home, housing, How To, Insurance, Interest Rates, invest, Investing, investment, IRA, keep, Life, Life Insurance, Lifestyle, Loans, market, money, Mortgage, mortgages, Personal, Personal Loans, protect, Refinance, rent, Retirement, retirement savings, save, Saving, Saving for Retirement, savings, Security, spouse, Student Loans, tax

Hooray, you have some extra money each month to pay down debt! This 6-step process will help you decide how to use that money wisely to reach your financial goals.

Laura Adams, MBA

May 13, 2020

10 Things Student Loan Borrowers Should Know About Coronavirus Relief

6 Steps to Decide Whether to Pay Off Student Loans or a Mortgage First

Let’s take a look at how to prioritize your finances and use your resources wisely during the pandemic. This six-step plan will help you make smart decisions and reach your financial goals as quickly as possible.

1. Check your emergency savings

While many people begin by asking which debt to pay off first, that’s not necessarily the right question. Instead, zoom out and consider your financial life’s big picture. An excellent place to start is to review your emergency savings.

If you’ve suffered the loss of a job or business income during the pandemic, you’re probably very familiar with how much or how little savings you have. But if you haven’t thought about your cash reserve lately, it’s time to reevaluate it.

Having emergency money is so important because it keeps you from going into debt in the first place. It keeps you safe during a rough financial patch or if you have a significant unexpected expense, such as a car repair or a medical bill.

How much emergency savings you need is different for everyone. If you’re the sole breadwinner for a large family, you may need a bigger financial cushion than a single person with no dependents and plenty of job opportunities.

If you’re the sole breadwinner for a large family, you may need a bigger financial cushion than a single person with no dependents and plenty of job opportunities.

A good rule of thumb is to accumulate at least 10% of your annual gross income as a cash reserve. For instance, if you earn $50,000, make a goal to maintain at least $5,000 in your emergency fund.

You might use another standard formula based on average monthly living expenses: Add up your essential costs, such as food, housing, insurance, and transportation, and multiply the total by a reasonable period, such as three to six months. For example, if your living expenses are $3,000 a month and you want a three-month reserve, you need a cash cushion of $9,000.

If you have zero savings, start with a small goal, such as saving 1 to 2% of your income each year. Or you could start with a tiny target like $500 or $1,000 and increase it each year until you have a healthy amount of emergency money. In other words, it might take years to build up enough savings, and that’s okay—just get started!

Your financial well-being depends on having cash to meet your living expenses comfortably, not on paying a lender ahead of schedule.

Unless Maya’s brother has enough cash in the bank to sustain him and any dependent family members through a financial crisis that lasts for several months, I wouldn’t recommend paying off student loans or a mortgage early. Your financial well-being depends on having cash to meet your living expenses comfortably, not on paying a lender ahead of schedule.

If you have enough emergency savings to feel secure for your situation, keep reading. Working through the next four steps will help you decide whether to pay down your student loans or mortgage first.

2. Reach your retirement goals

In addition to saving for potential emergencies, it’s critical to save regularly for your retirement before paying down a student loan or mortgage early. So, if Maya’s brother isn’t contributing regularly to meet a retirement goal, that’s the next priority I’d recommend for him.

Consider this: If you invest $500 a month for 35 years and have an average 8% return, you’ll end up with an impressive retirement nest egg of more than $1.2 million! But if you wait until 10 years before retirement to start saving, you’d have to invest over $5,000 a month to have $1 million in the bank. When it comes to your retirement savings, procrastinating can make the difference between scraping by or have a comfortable lifestyle down the road.

When it comes to your retirement savings, procrastinating can make the difference between scraping by or have a comfortable lifestyle down the road.

A good rule of thumb is to invest at least 10% to 15% of your gross income for retirement. For instance, if you earn $50,000, make a goal to contribute at least $5,000 per year to a tax-advantaged retirement account, such as an IRA or a retirement plan at work, such as a 401(k) or 403(b).

For 2020, you can contribute up to $19,500, or $26,000 if you’re over age 50, to a workplace retirement account. Anyone with earned income (even the self-employed) can contribute up to $6,000 (or $7,000 if you’re over 50) to an IRA.

The earlier you make retirement savings a habit, the better. Not only does starting sooner give you more time to contribute money, but it leverages the power of compounding, which allows the growth in your account to earn additional interest. That’s when you’ll see your retirement account value mushroom!

3. Have the right insurance

In addition to building an emergency fund and saving for retirement, an essential part of taking control of your finances is having adequate insurance. Many people get into debt in the first place because they don’t have enough of the right kinds of coverage—or they don’t have any insurance at all.

Without enough insurance, a catastrophic event could wipe out everything you’ve worked so hard to earn.

As your career progresses and your net worth increases, you’ll have more income and assets to protect from unexpected events. Without enough insurance, a catastrophic event could wipe out everything you’ve worked so hard to earn.

Make sure you have enough health insurance to protect yourself and those you love from an illness or accident jeopardizing your financial security. Also, review your auto and home or renters insurance coverage. And by the way, if you rent and don’t have renters insurance, you need it. It’s a bargain for the protection you get; it only costs $185 per year on average.

And if you have family who would be hurt financially if you died, you need life insurance to protect them. If you’re in relatively good health, a term life insurance policy for $500,000 might only cost a couple of hundred dollars per year. You can get free quotes for many different types of insurance using sites like Bankrate.com or Policygenius.com.

If Maya’s brother is missing critical types of insurance for his lifestyle and family situation, getting it should come before paying off a student loan or mortgage early. It’s always a good idea to review your insurance needs with a reputable agent or a financial advisor who can make sure you aren’t exposed to too much financial risk.

4. Set other financial goals

But what about other goals you might have, such as saving for a child’s education, starting a business, or buying a home? These are wonderful if you can afford them once you’ve accounted for your emergency savings, retirement, and insurance needs.

Make a list of your financial dreams, what they cost, and how much you can afford to spend on them each month. If they’re more important to you than paying off student loans or a mortgage early, then you should fund them. But if you’re more determined to become completely debt-free, go for it!

5. Consider your opportunity costs

Once you’ve hit the financial targets we’ve covered so far, and you have money left over, it’s time to consider the opportunity costs of using it to pay off your student loans or mortgage. Your opportunity cost is the potential gain you’d miss if you used your money for another purpose, such as investing it.

A couple of benefits of both student loans and mortgages is that they come with low interest rates and tax deductions, making them relatively inexpensive. That’s why other high-interest debts, such as credit cards, personal loans, and auto loans, should always be paid off first. Those debts cost more in interest and don’t come with any money-saving tax deductions.

Especially in today’s low interest rate environment, it’s possible to get a significantly higher return even with a reasonably conservative investment portfolio.

But many people overlook the ability to invest extra money and get a higher return. For instance, if you pay off the mortgage, you’d receive a 4% guaranteed return. But if you can get 6% on an investment portfolio, you may come out ahead.

Especially in today’s low-interest-rate environment, it’s possible to get a significantly higher return even with a reasonably conservative investment portfolio. The downside of investing extra money, instead of using it to pay down a student loan or mortgage, is that investment returns are not guaranteed.

If you decide an early payoff is right for you, keep reading. We’ll review several factors to help you know which type of loan to focus on first.

6. Compare your student loans and mortgage

Once you have only student loans and a mortgage and you’ve decided to prepay one of them, consider these factors.

The interest rates of your loans. As I mentioned, you may be eligible to claim a mortgage interest tax deduction and a student loan interest deduction. How much savings these deductions give you depends on your income and whether you use Schedule A to itemize deductions on your tax return. If you claim either type of deduction, it could reduce your after-tax interest rate by about 1%. The debt with the highest after-tax interest rate is typically the best one to pay off first.

The amounts you owe. If you owe significantly less on your student loans than your mortgage, eliminating the smaller debt first might feel great. Then you’d only have one debt left to pay off instead of two.

You have an interest-only adjustable-rate mortgage (ARM). With this type of mortgage, you’re only required to pay interest for a period (such as several months or up to several years). Then your monthly payments increase significantly based on market conditions. Even if your ARM interest rate is lower than your student loans, it could go up in the future. You may want to pay it down enough to refinance to a fixed-rate mortgage.

You have a loan cosigner. If you have a family member who cosigned your student loans or a spouse who cosigned your mortgage, they may influence which loan you tackle first. For instance, if eliminating a student loan cosigned by your parents would help improve their credit or overall financial situation, you might prioritize that debt.

You qualify for student loan forgiveness. If you have a federal loan that can be forgiven after a certain period (such as 10 or 20 years), prepaying it means you’ll have less forgiven. Paying more toward your mortgage would save you more.

Being completely debt-free is a terrific goal, but keeping inexpensive debt and investing your excess cash for higher returns can make you wealthier in the end.

As you can see, the decision to eliminate debt and in what order, isn’t clear-cut. Mortgages and student loans are some of the best types of debt to have—they allow you to build wealth by accumulating equity in a home, getting higher-paying jobs, and freeing up income you can save and invest.

In other words, if Maya’s brother uses his excess cash to prepay a low-rate mortgage or a student loan, it may do more harm than good. So, before you rush to prepay these types of debts, make sure there isn’t a better use for your money.

Being completely debt-free is a terrific goal, but keeping inexpensive debt and investing your excess cash for higher returns can make you wealthier in the end. Only you can decide whether paying off a mortgage or student loan is the right financial move for you.

About the Author

Laura Adams, MBA

Source: quickanddirtytips.com

How I Invest – The Best Interest – My personal investing breakdown

February 10, 2021 by Liam Lane Posted in Home Improvement Tagged 401(k), Buy, car, Debt, earnings, estate, Extra Money, Financial Wize, FinancialWize, front, government, Grow, house, how i invest, index fund, index funds, invest, Investing, investment, investments, IRA, Life, Make Money, market, money, Mortgage, mutual funds, Original, Personal, principal, Purchase, real, Real Estate, Retirement, Roth IRA, Salary, save, Saving, savings, Savings Account, savings accounts, Security, stock market, tax, Taxes, trusts, Vs.

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One of the most common questions I receive from readers like you—especially since Grow (Acorns + CNBC) published my story last week—asks me how I invest.

All this theoretical investing information is fine, Jesse. But can you please just tell me what you do with your money.

That’s what I’ll do today. Here’s a complete breakdown of how I invest, how the numbers line up, and why I make the choices I make.

Disclaimer

Of course, please take my advice with a grain of salt. Why?

My strategy is based upon my financial situation. It is not intended to be prescriptive of your financial situation.

I’ve hesitated writing this before because it feels one step removed from “How I Vote” and “How I Pray.” It’s personal. I don’t want to lead you down a path that’s wrong for you. And I don’t want to “show off” my own choices.

I’m an engineer and a writer, not a Wall Street professional. And even if I was a Wall Street pro, I hope my prior articles on stock picking and luck vs. skill in the stock market have convinced you that they aren’t as skilled as you might think.

All I can promise you today is transparency. I’ll be clear with you. I’ll answer any follow-up questions you have. And then you can decide for yourself what to do with that information.

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Are we clear? Let’s get to the good stuff.

How I Invest, and In What Accounts…?

In this section, I’ll detail how much I save for investing. Then the next two sections will describe why I use the investing accounts I use (e.g. 401(k), Roth IRA) and which investment choices I make (e.g. stocks, bonds).

Stock Market Forecasters See Modest Gains at Best This Fall | Barron's

How much I save, and in what accounts:

401(k)—The U.S. government has placed a limit of $19,500 on employee-deferred contributions in 2020 (for my age group). I aim to hit the full $19,500 limit.
401(k) matching—My employer will match 100% of my 401(k) contributions until they’ve contributed 6% of my total salary. For the sake of round numbers, that equates to about $6,000.
Roth IRA—The U.S. government has placed a limit of $6,000 on Roth IRA contributions (for my earnings range) in 2020. I am aiming to hit the full $6,000 limit.
Health Savings Account—The U.S. government gives tremendous tax benefits for saving in Health Savings Accounts. And if you don’t use that money for medical reasons, you can use it like an investment account later in life. I aim to hit the full $3,500 limit in 2020.
Taxable brokerage account—After I achieved my emergency fund goal (about 6 months’ of living expenses saved in a high-yield savings account), I started putting some extra money towards my taxable brokerage account. My goal is to set aside about $500 per month in that brokerage account.

That’s $41,000 of investing per year. But a lot of that money is actually “free.” I’ll explain that below.

Why Those Accounts?

The 401(k) Account

First, let’s talk about why and how I invest using a 401(k) account. There are three huge reasons.

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First, I pay less tax—and so can you. Based on federal tax brackets and state tax brackets, my marginal tax rate is about 30%. For each additional dollar I earn, about 30 cents go directly to various government bodies. But by contributing to my 401(k), I get to save those dollars before taxes are removed. So I save about 30% of $19,500 = $5,850 off my tax bill.

Editor’s Note: The original version of this article incorrectly stated that 401(k) contributions are taken out prior to OASDI (a.k.a. social security) taxes. That claim was incorrect. 401(k) contributions occur only after OASDI taxes are assessed.

Many thanks to regular reader Nick for catching that error.

Second, the 401(k) contributions are removed before I ever see them. I’m never tempted to spend that money because I never see it in my bank account. This simple psychological trick makes saving easy to adhere to.

Third, I get 401(k) matching. This is free money from my employer. As I mentioned above, this equates to about $6,000 of free money for me.

Roth Individual Retirement Account (IRA)

Why do I also use a Roth IRA?

Unlike a 401(k), a Roth IRA is funded using post-tax dollars. I’ve already paid my 30% plus OASDI taxes, and then I put money into my Roth. But the Roth money grows tax-free.

Let’s fast-forward 30 years to when I want to access those Roth IRA savings and profits. I won’t pay any income tax (~30%) on any dividends. I won’t pay capital gains tax (~15%) if I sell the investments at a profit.

I’m hoping my 30-year investment might grow by 8x (that’s based on historical market returns). That would grow this year’s $6000 contribution up to $48000—or about $42000 in profit. And what’s ~15% of $42000? About $6,300 in future tax savings.

Health Savings Account (H.S.A.)

The H.S.A. account has tax-breaks on the front (36.7%, for me) and on the back (15%, for me). I’m netting about $1300 up-front via an H.S.A, and $4,200 in the future (similar logic to the Roth IRA).

Taxable Brokerage Account

And finally, there’s the brokerage account, or taxable account. This is a “normal” investing account (mine is with Fidelity). There are no tax incentives, no matching funds from my employer. I pay normal taxes up front, and I’ll pay taxes on all the profits way out in the future. But I’d rather have money grow and be taxed than not grow at all.

Summary of How I Invest—Money Invested = Money Saved

In summary, I use 401(k) plus employer matching, Roth IRA, and H.S.A. accounts to save:

About $7,100 in tax dollars today
About $6,000 of free money today
And about $10,500 in future tax dollars, using reasonable investment growth assumptions

Don’t forget, I still get to access the investing principal of $41,000 and whatever returns those investments produce! That’s on top of the roughly $25,000 of savings mentioned above.

I choose to invest a lot today because I know it saves me money both today and tomorrow. That’s a high-level thought-process behind how I invest.

How I Invest: Which Investment Choices Do I Make?

We’ve now discussed 401(k) accounts, Roth IRAs, H.S.A. accounts, and taxable brokerage accounts. These accounts differ in their tax rules and withdrawal rules.

But within any of these accounts, one usually has different choices of investment assets. Typical assets include:

Stocks, like shares of Apple or General Electric.
Bonds, which are where someone else borrows your money and you earn interest on their debt. Common bonds give you access to Federal debt, state or municipality debt, or corporate debt.
Real estate, typically via real estate investment trusts (REITs)
Commodities, like gold, beef, oil or orange juice

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Here are the asset choices that I have access to in my various accounts:

401(k)—my employer works with Fidelity to provide me with about 20 different mutual funds and index funds to invest in.
Roth IRA—this account is something that I set up. I can invest in just about anything I want to. Individual stocks, index funds, pork belly futures etc.
H.S.A.—this is through my employer, too. As such, I have limited options. But thankfully I have low-cost index fund options.
Taxable brokerage account—I set this account up. As such, I can invest in just about any asset I want to.

My Choice—Diversity²

How I invest and my personal choices involve two layers of diversification. A diverse investing portfolio aims to decrease risk while maintaining long-term investing profits.

The first level of diversification is that I utilize index funds. Regular readers will be intimately familiar with my feelings for index funds (here 28 unique articles where I’ve mentioned them).

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By nature, an index fund reduces the investor’s exposure to “too many eggs in one basket.” For example, my S&P 500 index fund invests in all S&P 500 companies, whether they have been performing well or not. One stellar or terrible company won’t have a drastic impact on my portfolio.

But, investing only in an S&P 500 index fund still carries risk. Namely, it’s the risk that that S&P 500 is full of “large” companies’ stocks—and history has proven that “large” companies tend to rise and fall together. They’re correlated to one another. That’s not diverse!

Lazy Portfolio

To battle this anti-diversity, how I invest is to choose a few different index funds. Specifically, my investments are split between:

Large U.S. stock index fund—about 40% of my portfolio
Mid and small U.S. stock index fund—about 20% of my portfolio
Bond index fund—about 20%
International stocks fund—about 20%

This is my “lazy portfolio.” I spread my money around four different asset class index funds, and let the economy take care of the rest.

Each year will likely see some asset classes doing great. Others doing poorly. Overall, the goal is to create a steady net increase.

Updating My Favorite Performance Chart For 2019 — An asset class “quilt” chart from 2010-2019, showing how various asset classes perform each year.

Twice a year, I “re-balance” my portfolio. I adjust my assets’ percentages back to 40/20/20/20. This negates the potential for one “egg” in my basket growing too large. Re-balancing also acts as a natural mechanism to “sell high” and “buy low,” since I sell some of my “hottest” asset classes in order to purchase some of the “coldest” asset classes.

Any Other Investments?

In June 2019, I wrote a quick piece with some thoughts on cryptocurrency. As I stated then, I hold about $1000 worth of cryptocurrency, as a holdover from some—ahem—experimentation in 2016. I don’t include this in my long-term investing plans.

I am paying off a mortgage on my house. But I don’t consider my house to be an investment. I didn’t buy it to make money and won’t sell it in order to retire.

On the side, I own about $2000 worth of collectible cards. I am not planning my retirement around this. I do not include it in my portfolio. In my opinion, it’s like owning a classic car, old coins, or stamps. It’s fun. I like it. And if I can sell them in the future for profit, that’s just gravy on top.

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Summary of How I Invest

Let’s summarize some of the numbers from above.

Each year, I aim to save and invest about $41,000. But of that $41K, about $15K is completely free—that’s due to tax benefits and employer matching. And using reasonable investment growth, I think these investments can save me $15,000 per year in future tax dollars.

Plus, I eventually get access to the $41K itself and any investment profits that accrue.

I take that money and invest in index funds, via the following allocations:

40% into a large-cap U.S. stock index fund
20% into a medium- and small-cap U.S. stock index fund
20% into an international stock index fund
And 20% into a bond index fund

The goal is to achieve long-term growth while spreading my eggs across a few different baskets.

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And that’s it! That’s how I invest. If you have any questions, please leave a comment below or drop me an email.

If you enjoyed this article and want to read more, I’d suggest checking out my Archive or Subscribing to get future articles emailed to your inbox.

This article—just like every other—is supported by readers like you.

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Tagged 401(k), how i invest, hsa, index fund, roth ira

Source: bestinterest.blog

529 Plans: A Complete Guide to Funding Future Education

February 10, 2021 by Liam Lane Posted in Home Improvement Tagged 401(k), Back To School, Blog, Buy, College, college savings plan, Credit, estate, Family, Financial Wize, FinancialWize, go back to school, government, Grow, Home, housing, invest, Investing, investment, investments, keep, Life, money, NBA, new york, real, Retirement, Rewards, save, Saving, savings, School, second, tax, Taxes, Vs.

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Do you have kids? Are there children in your life? Were you once a child? If you plan on helping pay for a child’s future education, then you’ll benefit from this complete guide to 529 plans. We’ll cover every detail of 529 plans, from the what/when/why basics to the more complex tax implications and investing ideas.

This article was 100% inspired by my Patrons. Between Jack, Nathan, Remi, other kiddos in my life (and a few buns in the oven), there are a lot of young Best Interest readers out there. And one day, they’ll probably have some education expenses. That’s why their parents asked me to write about 529 plans this week.

What is a 529 Plan?

The 529 college savings plan is a tax-advantaged investment account meant specifically for education expenses. As of the passage of the Tax Cuts and Jobs Act (in 2017), 529 plans can be used for college costs, K-12 public school costs, or private and/or religious school tuition. If you will ever need to pay for your children’s education, then 529 plans are for you.

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529 plans are named in a similar fashion as the famous 401(k). That is, the name comes from the specific U.S. tax code where the plan was written into law. It’s in Section 529 of Internal Revenue Code 26. Wow—that’s boring!

But it turns out that 529 plans are strange amalgam of federal rules and state rules. Let’s start breaking that down.

Tax Advantages

Taxes are important! 529 college savings plans provide tax advantages in a manner similar to Roth accounts (i.e. different than traditional 401(k) accounts). In a 529 plan, you pay all your normal taxes today. Your contributions to the 529 plan, therefore, are made with after-tax dollars.

Any investment you make within your 529 plan is then allowed to grow tax-free. Future withdrawals—used for qualified education expenses—are also tax-free. Pay now, save later.

But wait! Those are just the federal income tax benefits. Many individual states offer state tax benefits to people participating in 529 plans. As of this writing, 34 states and Washington D.C. offer these benefits. Of the 16 states not participating, nine of those don’t have any state income tax. The seven remaining states—California, Delaware, Hawaii, Kentucky, Maine, New Jersey, and North Carolina—all have state income taxes, yet do not offer income tax benefits to their 529 plan participants. Boo!

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This makes 529 plans an oddity. There’s a Federal-level tax advantage that applies to everyone. And then there might be a state-level tax advantage depending on which state you use to setup your plan.

Two Types of 529 Plans

The most common 529 plan is the college savings program. The less common 529 is the prepaid tuition program.

The savings program can be thought of as a parallel to common retirement investing accounts. A person can put money into their 529 plan today. They can invest that money in a few different ways (details further in the article). At a later date, they can then use the full value of their account at any eligible institution—in state or out of state. The value of their 529 plan will be dependent on their investing choices and how those investments perform.

The prepaid program is a little different. This plan is only offered by certain states (currently only 10 are accepting new applicants) and even by some individual colleges/universities. The prepaid program permits citizens to buy tuition credits at today’s tuition rates. Those credits can then be used in the future at in-state universities. However, using these credits outside of the state they were bought in can result in not getting full value.

You don’t choose investments in the prepaid program. You just buy credit’s today that can be redeemed in the future.

The savings program is universal, flexible, and grows based on your investments.

The prepaid program is not offered everywhere, works best at in-state universities, and grows based on how quickly tuition is changing (i.e. the difference between today’s tuition rate and the future tuition rate when you use the credit.)

Example: a prepaid credit would have cost ~$13,000 for one year of tuition in 2000. That credit would have been worth ~$24,000 of value if used in 2018. (Source)

What are “Qualified Education Expenses?”

You can only spend your 529 plan dollars on “qualified education expenses.” Turns out, just about anything associated with education costs can be paid for using 529 plan funds. Qualified education expenses include:

Tuition
Fees
Books
Supplies
Room and board (as long as the beneficiary attends school at least half-time). Off-campus housing is even covered, as long as it’s less than on-campus housing.

Student loans and student loan interest were added to this list in 2019, but there’s a lifetime limit of $10,000 per person.

How Do You “Invest” Your 529 Plan Funds?

529 savings plans do more than save. Their real power is as a college investment plan. So, how can you “invest” this tax-advantaged money?

There’s a two-part answer to how your 529 plan funds are invested. The first part is that only savings plans can be invested, not prepaid plans. The second part is that it depends on what state you’re in.

For example, let’s look at my state: New York. It offers both age-based options and individual portfolios.

The age-based option places your 529 plan on one of three tracks: aggressive, moderate, or conservative. As your child ages, the portfolio will automatically re-balance based on the track you’ve chosen.

The aggressive option will hold more stocks for longer into your child’s life—higher risk, higher rewards. The conservative option will skew towards bonds and short-term reserves. In all cases, the goal is to provide some level of growth in early years, and some level of stability in later years.

The individual portfolios are similar to the age-based option, but do not automatically re-balance. There are aggressive and conservative and middle-ground choices. Thankfully, you can move funds from one portfolio to another up to twice per year. This allowed rebalancing is how you can achieve the correct risk posture.

Advantages & Disadvantages of Using a 529 Plan

The advantages of using the 529 as a college investing plan are clear. First, there’s the tax-advantaged nature of it, likely saving you tens of thousands of dollars. Another benefit is the aforementioned ease of investing using a low-maintenance, age-based investing accounts. Most states offer them.

Other advantages include the high maximum contribution limit (ranging by state, from a low of $235K to a high of $529K), the reasonable financial aid treatment, and, of course, the flexibility.

If your child doesn’t end up using their 529 plan, you can transfer it to another relative. If you don’t like your state’s 529 offering, you can open an account in a different state. You can even use your 529 plan to pay for primary education at a private school or a religious school.

But the 529 plan isn’t perfect. There are disadvantages too.

For example, the prepaid 529 plan involves a considerable up-front cost—in the realm of $100,000 over four years. That’s a lot of money. Also, your proactive saving today ends up affecting your child’s financial aid package in the future. It feels a bit like a punishment for being responsible. That ain’t right!

Of course, a 529 plan is not a normal investing account. If you don’t use the money for educational purposes, you will face a penalty. And if you want to hand-pick your 529 investments? Well, you can’t do that. Similar to many 401(k) programs, your state’s 529 program probably only offers a few different fund choices.

529 Plan FAQ

Here are some of the most common questions about 529 education savings plans. And I even provide answers!

How do I open a 529 plan?

Virtually all states now have online portals that allow you to open 529 plans from the comfort of your home. A few online forms and email messages is all it takes.

Can I contribute to someone else’s 529?

You sure can! If you have a niece or nephew or grandchild or simply a friend, you can make a third-party contribution to their 529 plan. You don’t have to be their parent, their relative, or the person who opened the account.

Investing in someone else’s knowledge is a terrific gift.

Does a 529 plan affect financial aid?

Short answer: yes, but it’s better than how many other assets affect financial aid.

Longer answer: yes, having a 529 plan will likely reduce the amount of financial aid a student receives. The first $10,000 in a 529 plan is not part of the Expected Family Contribution (EFC) equation. It’s not “counted against you.” After that $10,000, remaining 529 plan funds are counted in the EFC equation, but cap at 5.46% of the parental assets (many other assets are capped higher, e.g. at 20%).

Similarly, 529 plan distributions are not included in the “base year income” calculations in the FAFSA application. This is another benefit in terms of financial aid.

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Finally, 529 plan funds owned by non-parents (e.g. grandparents) are not part of the FAFSA EFC equation. This is great! The downside occurs when the non-parent actually withdraws the funds on behalf of the student. At that time, 50% of those funds count as “student income,” thus lowering the student’s eligibility for aid.

Are there contribution limits?

Kinda sorta. It’s a little complicated.

There is no official annual contribution limit into a 529 plan. But, you should know that 529 contributions are considered “completed gifts” in federal tax law, and that those gifts are capped at $15,000 per year in 2020 and 2021.

After $15,000 of contributions in one year, the remainder must be reported to the IRS against the taxpayer’s (not the student’s) lifetime estate and gift tax exemption.

Additionally, each state has the option of limiting the total 529 plan balances for a particular beneficiary. My state (NY) caps this limit at $520,000. That’s easily high enough to pay for 4 years of college at current prices.

Another state-based limit involves how much income tax savings a contributor can claim per year. In New York, for example, only the first $5,000 (or $10,000 if a married couple) are eligible for income tax savings.

Can I use my state’s 529 plan in another state? Do I need to create 529 plans in multiple states?

Yes, you can use your state’s 529 plan in another state. And mostly likely no, you do not need to create 529 plans in multiple states.

First, I recommend scrolling up to the savings program vs. prepaid program description. Savings programs are universal and transferrable. My 529 savings plan could pay for tuition in any other state, and even some other countries.

But prepaid tuition accounts typically have limitations in how they transfer. Prepaid accounts typically apply in full to in-state, state-sponsored schools. They might not apply in full to out-of-state and/or private schools.

What if my kid is Lebron James and doesn’t go to college? Can I get my money back?

It’s a great question. And the answer is yes, there are multiple ways to recoup your money if the beneficiary doesn’t end up using it for education savings.

First, you can avoid all penalties by changing the beneficiary of the funds. You can switch to another qualifying family member. Instead of paying for Lebron’s college, you can switch those funds to his siblings, to a future grandchild, or even to yourself (if you wanted to go back to school).

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What if you just want you money back? The contributions that you initially made come back to you tax-free and penalty-free. After all, you already paid taxes on those. Any earnings you’ve made on those contributions are subject to normal income tax, and then a 10% federal penalty tax.

The 10% penalty is waived in certain situations, such as the beneficiary receiving a tax-free scholarship or attending a U.S. military academy.

And remember those state income tax breaks we discussed earlier? Those tax breaks might get recaptured (oh no!) if you end up taking non-qualified distributions from your 529 plan.

Long story short: try to the keep the funds in a 529 plan, especially is someone in your family might benefit from them someday. Otherwise, you’ll pay some taxes and penalties.

Graduation

It’s time to don my robe and give a speech. Keep on learning, you readers, for:

An investment in knowledge pays the best interest

-Ben Franklin

Oh snap! Yes, that is how the blog got its name. Giving others the gift of education is a wonderful thing, and 529 plans are one way the U.S. government allows you to do so.

If you enjoyed this article and want to read more, I’d suggest checking out my Archive or Subscribing to get future articles emailed to your inbox.

This article—just like every other—is supported by readers like you.

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