There’s been speculation pretty much ever since the last cut that the FHA would lower insurance premiums once more.
And the rumor mill has been really busy the past few weeks, signaling a possible cut in the next month or so.
The latest rumor comes via a bulletin from Inside Mortgage Finance, which revealed that industry chatter points to a 25 basis point cut in FHA premiums after the presidential election in early November.
That means the typical FHA borrower who puts down 3.5% and takes out a 30-year fixed mortgage will pay an annual MIP of 0.60%.
The decrease would return annual premiums to just above their pre-crisis levels of 0.55%, which would make perfect sense given the fact that we are now well beyond the most recent crisis and back to square one for the most part.
In case you haven’t been keeping score, the FHA’s annual MIP was 1.35% before the 50 basis point drop in early 2015.
Actually, it was as high as 1.55% if you had a loan amount above $625,500 and an LTV north of 95%.
But this rumored change will bring things back down to earth.
The argument for the change is that the FHA’s Mutual Mortgage Insurance Fund has been beefed up thanks to the higher premiums collected over the past few years and lower mortgage defaults during that span.
Is It Enough to Justify a Refinance?
While the change will be welcome news to most, it may not sway the decision to refinance.
The 25 basis point change on a $200,000 loan would amount to annual savings of roughly $500.
Currently, such a borrower would be paying about $142 per month in MIP costs. It would drop to $100 with the change.
The problem with FHA is the upfront MIP, which is set at 1.75% and probably not going to change.
If you refinance from an existing FHA loan into another FHA loan, you might be entitled to a partial refund of the upfront premium if the loan isn’t older than 36 months.
If you can snag a lower mortgage rate in the process, the argument is a lot more compelling. For some, just paying a lower MIP might be enough, assuming their loan isn’t very old and much of the upfront premium can be recouped.
Another problem with FHA loans these days is the fact that mortgage insurance is in force for the life of the loan, instead of just the first five years or once the LTV drops to 78%.
That’s why it often just makes sense to refinance out of the FHA and into a conventional loan if your LTV dips to 80% thanks to recent home price appreciation. You can avoid the mortgage insurance entirely and get a similarly low interest rate.
FHA Premium Cut Is Good News for New Home Buyers
Of course, the change will be great news for those looking to purchase homes with FHA financing.
As noted, savings of nearly $50 per month for relatively small loan amounts is nothing to sneeze at. And it just gets better as your loan amount rises.
Aside from the savings, it could help more borrowers qualify with lower monthly payments that could push the all-important DTI ratio to acceptable levels.
It will also make the case for an FHA loan vs. a conventional loan more interesting. You’ll still have to do the math to see which type of loan is best for your situation.
And remember, this is just a rumor. It’s not fact yet. But if it does happen, it’s supposedly going to take place after the election. Of course, the decision could be swayed by the outcome.
Your debt-to-income ratio, or DTI, is your total monthly debt payments divided by your total monthly gross income. DTI ratio is one of the criteria lenders use to determine whether you can realistically pay back a loan. As a general rule of thumb, you want to have a DTI ratio between 35% and 50%.
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If you’ve been shopping around for a mortgage, then you’ve probably run into the term “debt-to-income ratio”. This can be a confusing term for someone with limited knowledge when it comes to finance. But, when you apply for a major loan, your debt-to-income ratio can have a significant impact on whether or not a lender approves your application.
So knowing what a debt-to-income ratio is, and how to calculate debt-to-income ratio, is essential if you plan on taking out a mortgage or any other major personal loans in the near future. In this article, we’ll cover the following questions and topics:
What is a Debt-to-Income Ratio?
How to Calculate Your Debt-to-Income Ratio
What is an Ideal Debt-to-Income Ratio?
What is the 43% Rule?
Does Your DTI Ratio Impact Your Credit?
How to Improve Your DTI Ratio
What is a Debt-to-Income Ratio?
A debt-to-income ratio, or DTI ratio, is a metric that measures an individual’s gross monthly income against their total monthly debt payments. What your DTI ratio ultimately represents is the percentage of your monthly income that is used to pay off your outstanding debts.
This ratio is commonly used by lenders to evaluate potential borrowers, determine whether or not they’re able to take on additional debt, and assess the likelihood that they will be able to repay a loan. While a low DTI ratio indicates that you have been able to manage a healthy balance between debt and income, a high DTI ratio indicates the opposite—namely, that you owe a high amount of debt relative to your income, likely aren’t able to save much money each month, and are essentially living paycheck to paycheck.
Now that you have a foundational understanding of DTI’s meaning and application, let’s dive a bit deeper.
What Factors Make Up Your DTI Ratio?
The sum of your monthly debt payments includes credit card payments, your mortgage, child support, alimony, and any other loans you may have taken out. However, some recurring monthly payments aren’t included in your DTI ratio. According to moneyfit.org, you shouldn’t factor in non-debt payments such as:
Insurance premiums
Phone bill
Childcare expenses
Home utilities, such as your electric, heating, water, sewer, and trash bills
Gym membership
Music, cable, and streaming subscriptions
Internet bill
Landscaping costs
Storage unit rent
Income tax
Your gross monthly income is just your monthly pay before things like taxes and other deductions are taken out. Some common types of income that are factored into your DTI ratio, are as follows:
Gross income, whether hourly or salaried
Tips and bonuses
Any income earned from a side gig
Pension income
Rental property income
Self-employment income
Social Security benefits
Alimony received
Child support received
How to Calculate Your Debt-to-Income Ratio
Learning how to figure out your debt-to-income ratio is a valuable skill that can help you with more than just your mortgage applications. We’ve provided step-by-step instructions for how to calculate your DTI below.
You can calculate your debt-to-income ratio by dividing the sum of your monthly debt payments by your gross monthly income. Once you figure out your total monthly debts payments and add up your gross monthly income, you’ll be ready to divide those numbers and calculate your DTI ratio.
Dividing your monthly debt payments by your gross monthly income will give you a decimal number. In order to view your DTI as a percentage, you’ll have to multiply the decimal outcome by 100.
Example Calculation
To get a better understanding of how to calculate your DTI ratio, let’s take a look at a fictional example.
Here’s the situation: Mike has a gross monthly income of $5,000. He pays $1,000 on his mortgage, $400 for his car, $400 in child support, and $200 for other debts.
So, following the equation above to calculate Mike’s DTI ratio, we end up with:
$1,000 + $400 + $400 + $200 = $2,000
Therefore, Mike’s DTI ratio = $2,000 / $5,000 = 0.4 x 100 = 40%
What is an Ideal Debt-to-Income Ratio?
In general the lower your debt-to-income ratio is, the more likely it is that you’ll be approved for a loan you’re applying for. According to incharge.org, DTI ratios that fall between zero to 35% are considered healthy according to the standards of most major lenders, since they indicate that your debt is at a manageable level relative to your monthly income.
So what is a bad DTI ratio? Having a DTI ratio of 50% and above is considered an unhealthy level of debt in most cases, and can severely limit the kinds of loans you qualify for. Such a high ratio indicates that you likely don’t have much money to save or spend each month after making your current debt payments.
What is the 43% Rule?
The 43% rule is a rule of thumb used by banks and lenders to determine who is able to be approved for a Qualified Mortgage. Generally speaking, 43% is the highest DTI ratio you can have in order to be approved for a Qualified Mortgage by a lender.
If you’re unfamiliar with what a Qualified Mortgage is, it’s a category of loans that meet a particular set of standards and certain safety features that protect both the borrower and the lender. In order for a lender to offer you a Qualified Mortgage, they must adhere to certain requirements and make a good faith effort to evaluate your finances and determine whether you’ll be able to repay the loan or not.
The upside of a Qualified Mortgage is that it has a number of parameters in place that are supposed to help prevent you from taking out a loan you can’t afford. Some of the requirements for a Qualified Mortgage include:
The restriction of risky loan features, such as interest-only periods and balloon payments
A limit on your debt-to-income ratio, the maximum typically being 43%
Caps—dependent on the size of your loan—on the amount of upfront points and fees a lender is able to charge
Legal protections for lenders, since it’s assumed that they did their due diligence to ensure you had the ability to pay back your loan
Maximum loan term is required to be no longer than 30 years
All of this isn’t to say that you can’t take out a mortgage at all if your DTI ratio exceeds 43%. You may still qualify for other mortgages with a high DTI ratio, but you generally won’t be able to get approved for a Qualified Mortgage.
Does Your DTI Ratio Impact Your Credit?
While your DTI ratio has no direct impact on your credit score and won’t show up on your credit report, it can affect your ability to secure loans from banks and other lenders. A low DTI ratio increases the likelihood that you will be approved for the loans you apply for. That’s because lenders take a low DTI ratio as a sign that you are competent when it comes to money management and they can rely on you to pay back any debt you accrue according to the agreed-upon terms. Lenders also take a loan applicant’s DTI ratio into consideration because they want to ensure that borrowers aren’t taking out more debt than they can realistically pay back.
Although a lower DTI ratio typically makes it easier to get approved for a loan, keep in mind that it’s only one out of many factors that lenders take into consideration. When evaluating a mortgage loan application, lenders will also take a look at a potential borrower’s gross monthly income, the amount they can afford on a down payment, their credit history, and their credit score.
How to Improve Your DTI Ratio
There are two variables that go into calculating your DTI ratio—your total monthly debt payments and your gross monthly income. Therefore, to improve your DTI ratio you’ll need to either reduce your total monthly debt payments or increase your gross monthly income.
Reduce Your Monthly Debt Payments
Completely paying off debts is a great way to lower your monthly debts payments, but of course this is much easier said than done. Your first step should be to take a look at any loans you’ve already taken out and your current credit card debt and come up with a comprehensive repayment plan. For example, check out our money tips for recent college grads to get some advice on how to formulate a repayment plan for your student loans.
To avoid going further into debt, you should also make an effort to work on your personal finance skills. Try creating a monthly budget for yourself that can help you prioritize essentials, track your spending, and save money, made easy when you use the Mint app.
If you’ve already done some research on how to lower your monthly debt payments, you may be asking yourself, “Is debt consolidation a good idea?” Debt consolidation is when you combine all of your various debts together into one monthly payment with a fixed interest rate, and it may be a good idea depending on your circumstances.
If you don’t think you’ll be able to make a payment on one or several debts, then you can potentially avoid a late payment by consolidating that debt. However, you must have good credit to get approved for a debt consolidation loan and you should be certain that your financial situation will improve in the near future. If you don’t think you’ll be able to pay back your debts, even with debt consolidation, then you’d likely be better off trying to settle the debts directly with your creditors.
Increase Your Gross Monthly Income
Just like reducing your monthly debt payments, increasing your gross monthly income is a lot easier said than done. After all, it’s not every day that you’re given a raise or offered a job with a high-paying salary. Nevertheless, there are still ways to potentially increase your gross monthly income. Research passive income ideas or check out these examples of things you can do to make a little extra money:
Take up a side hustle, such as driving for a ride share company, taking on freelance writing projects, babysitting, etc.
Rent out an extra room in your home (if you have more than one property, consider turning one of them into a vacation rental)
Get a relevant certification or license that would either increase the salary of your current position or help you find a new, higher-paying job
If possible, try to pick up more shifts or get extra hours at work
If you’re in the market for a sizable loan, such as a mortgage loan, you’ll have an easier time securing financing with a lower debt-to-income ratio. If your DTI ratio is higher than 43%, then you might consider waiting to purchase a home until you can lower that number and qualify for a better loan. You should generally try to keep your DTI ratio as low as possible even when you aren’t shopping around for loans. This means minimizing your monthly debt payments and maximizing your gross monthly income—two things that can be hard to achieve, but not impossible. Having a well-thought-out personal finance strategy will make it easier to achieve these goals, keep your DTI ratio consistently low, improve your overall financial health, and provide both you and potential lenders with a sense of financial security.
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Let’s face it. Here in America, a car is not a luxury, it’s a basic necessity. With our wide-reaching cities and the harried schedule of our modern lives, the comfort, flexibility and privacy offered by the modern automobile is both an essential part of life, and a little slice of heavenly peace to brighten each day.
As a teenager, you fell in love with your first taste of four-wheeled freedom. As you moved through college and adulthood, you surely upgraded to models a little more befitting of your status. So now here you are in your late 20s, with a blossoming career and car to go with it. Whether it’s an Audi or BMW, Lexus or Infiniti, your ride tells the world who you are: your taste, your status, and your individuality.
Until that magic moment when all of this flies out the window: you have a baby on the way!
Suddenly, there’s more to be concerned about that simply style and performance. You’ll need to accommodate car seats, soccer balls, and strollers. You’ll need to load shopping bags from the mall into the back with a wriggling child or two in each arm. Family life means driving on snow and dirt, and hauling your trailers and toys. And above all, you’ll need the safest vehicle to protect your new precious cargo. This means 4-wheel-drive and superior crash protection.
In short, if the diagnosis is pregnancy, the prescription is SUV.
Luckily we’re on the job for you here at Mr. Money Mustache. I collected the best SUVs on the American market and compared them side-by-side to pick a winner.
2014 Toyota Sequoia Platinum
With seating for 8, the $60,795 Sequoia does it all. Featuring a fully boxed load frame, a responsive 381 horsepower 5.7L V-8 engine, and a 5750lb curb weight, this family hauler is nimble, capable, and luxurious. With fuel economy of 13MPG around town and as high as 18MPG on the highway, it can help your family’s dollar stretch just a bit further, and who doesn’t need that these days?
2014 Ford Expedition Limited EL
Sure, it’s big, and it’s fast, with specs rivaling the Sequoia at the budget friendly price of $51,695. But what really sets the Expedition apart is the perforated heated and cooled front leather seats! What could be a better respite from a pounding day of errands than a cushion of climate-controlled air that soothes you back to sanity? Fuel efficiency is just as good at 13/18 for the 4WD model. Also sold as the Lincoln Navigator, with an even more distinctive selection of luxury appointments.
2014 Chevrolet Suburban LTZ
It’s everything you’ve come to expect from a large SUV and so much more. High intensity headlamps and foglamps, Front Park Assist, 12-way seats, Side Blind Zone Alert with Lane Change Assist, all powered by an EcoTec 5.3L V-8 with the ability to tow 8,000 pounds. Eco-Tec means you’re actually helping the environment as you cruise your way through each 33.5 gallon (126 litre) tank of fuel! But if all that tech-talk makes your eyes glaze over, let’s just put it this way: A very sweet ride that will be the envy of your block, with 16 cupholders for only $62,595! Also sold as the Cadillac Escalade with a more prestigious front grille for only a few thousand more.
2014 BMW X5 50i
For those with smaller families and a higher demand for performance, the venerable X5 may fit the bill. Featuring a 4.4 liter twin turbo V-8 that pours 450 horsepower into this SUV’s lightweight 4950 pound figure, the X5 will scream from 0-60 in about five seconds, smoking all four of its 19″ performance tires in the process. But with heated leather seating for 7 and available personal video screens for each passenger, your lucky children might not even notice what you’re up to.
Starting at under $70,000 with the Mocha Interior Design Package and the Executive Package, the X5 gets my personal vote for the best vehicle to prepare for baby. If cash is a little tight, BMW’s financing and lease packages can have one of these safe and roomy vehicles in your driveway for as little as $789 per month.
Although having your first baby is a challenging experience that will require many costly purchases, I hope I’ve at least helped with the most critical decision of all: what to drive.*
*Oh, and happy April Fool’s Day. The best family vehicle is a pair of bikes for the parents, each pulling a bike trailer. Second choice is a good small car (you can get kid seats that fit 3-across even in compact cars). And if you REALLY need something to carry a lot of people, get yourself a 2007 Mazda5 with a 4-cylinder engine and a 5-speed manual transmission. It comfortably carries 6 adults (tested it myself), burns a reasonable amount of gas, and is not a gigantic Douchewagon that will get you punched in the face by passing Mustachians. Just don’t buy one and then use the damned thing for single-person commuting!
It’s not yet clear if we’re in for another “sold-out summer,” but it’s clear that we’re in for an expensive one — at least on the airline side.
If you’re searching for summer flights, chances are you’ve run into some serious sticker shock.
Fares for flights across the board are more expensive than they have been since the pandemic began, and in many cases, they are passing pre-pandemic summer levels.
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There are two main factors driving prices up, and both mean that if you’re planning to get away while the weather is warm, you might want to finalize your plans on the sooner side.
Fares are higher and demand is surging
For myriad reasons, airlines are simply charging more for flights this summer than they have in the past.
Data provided by the Airlines Reporting Corporation, a travel intelligence firm and ticket processor, shows that fares have largely risen across the board for flights this summer compared to both 2022 and 2019, the last full year before the pandemic.
The average price of fares for the top 10 summer travel destinations was 9% to 37% higher than in 2022, according to ARC’s data.
Prices increased even more compared to 2019, with average fares for each destination climbing between 23% and 54%.
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Rank
Destination (airport)
Average ticket price
Change vs. 2022
Change vs. 2019
1.
Cancun International Airport (CUN).
$599.
+10%.
+40%.
2.
Seattle-Tacoma International Airport (SEA).
$478.
+31%.
+38%.
3.
Orlando International Airport (MCO).
$425.
+12%.
+36%.
4.
Rome Fiumicino Leonardo da Vinci Airport (FCO).
$1,683.
+13%.
+44%.
5.
Los Angeles International Airport (LAX).
$525.
+37%.
+51%.
6.
Daniel K. Inouye International Airport (HNL).
$787.
+23%.
+23%.
7.
Heathrow Airport (LHR).
$1,662.
+15%.
+54%.
8.
Boston Logan International Airport (BOS).
$456.
+19%.
+39%.
9.
Punta Cana International Airport (PUJ).
$790.
+17%.
+24%.
10.
Harry Reid International Airport (LAS).
$471.
+9%.
+47%.
The data reflects tickets sold in the U.S. and processed through ARC’s systems between Jan. 1 and April 6, 2023, for travel during the summer season — between Memorial Day and Labor Day.
Demand is higher than it has been since the pandemic began. Even as airline capacity broadly remains slightly below 2019 levels, a supply-and-demand mismatch is driving prices sky-high. In fact, the U.S. Travel Association, an industry trade group, says domestic leisure demand has surpassed pre-pandemic levels.
ARC’s chief commercial officer Steve Solomon told TPG that the supply-and-demand asymmetry is the main driver of high prices.
“Increased demand is partly driving more expensive airfare as we’re seeing ticket transactions for the top summer destinations up year over year,” Solomon said. “Demand, coupled with other factors including increased labor costs, jet fuel up around 40% year over year, and not every airline operating at 2019 capacity levels, all contribute to higher prices paid by travelers.”
People are booking their vacation flights earlier
Alongside the increase in demand is a return to a pre-pandemic norm — leisure travelers are making their plans further in advance.
During the first two post-vaccine summers, travelers tended to finalize their plans only at the last minute. Uncertainty surrounding case outbreaks, personal illness or infection, travel restrictions and more made consumers wary about committing early. This was particularly true if reservations were nonrefundable or could only be canceled in exchange for a credit.
Plus, business travel was still significantly down. With business travelers more inclined to book close-in flights and typically less sensitive to prices than vacationers, airlines raised fares as departure dates moved closer. With the leisure booking curve shortening, those last-minute prices tended to look more palatable.
Now, airlines are seeing that leisure booking curve elongating again. Coupled with the high demand, that has made for some intense booking cycles.
For instance, Delta Air Lines said earlier this month that about 75% of seats on international flights this summer were already booked. Many of those bookings were made in February and early March: At a JP Morgan conference on March 14, Delta CEO Ed Bastian noted that the airline was experiencing record-breaking ticket sales.
“In the last 30 days, we’ve had the 10 highest sales days in our company’s history,” Bastian said.
“People remember last spring and summer, how hard it was to get those trips that they wanted to go on,” he added. “So we’ve seen a little bit of a pull forward in terms of the advanced bookings.”
United, too, has seen “a clear change in seasonality that is causing peak leisure demand months, March through October, to be even stronger,” CEO Scott Kirby said during an earnings call this month.
“Both international and domestic are booking further out. International more extreme than domestic,” United executive vice president Andrew Nocella added.
ARC’s data confirms that people are booking earlier, particularly for international trips. In March, the number of tickets sold for each of the top 10 European destinations increased dramatically over 2022:
That increased demand in Europe, plus earlier bookings, can also reflect greater consumer confidence over 2022. Gas prices are remaining lower, and there are fewer fears of Russia’s conflict in Ukraine spilling over to other parts of Europe.
For the top 10 U.S. domestic destinations, the changes compared to 2022 were more mixed, reflecting shifting travel preferences domestically and likely greater confidence in travel abroad:
Rank
Destination (airport)
Year-over-year change in tickets sold
1.
Seattle-Tacoma International Airport (SEA).
+52%.
2.
Orlando International Airport (MCO).
-18%.
3.
Los Angeles International Airport (LAX).
-1%.
4.
Daniel K. Inouye International Airport (HNL).
-6%.
5.
Boston Logan International Airport (BOS).
+11%.
6.
Harry Reid International Airport (LAS).
-11%.
7.
O’Hare International Airport (ORD).
+11%.
8.
San Francisco International Airport (SFO).
+2%.
9.
Denver International Airport (DEN).
-1%.
10.
John F. Kennedy International Airport (JFK).
+12%.
Early planners have already snatched up the cheapest fares, and those that are left are pricier.
Looking ahead and planning your summer vacation
Still, there may be good news ahead, according to Hayley Berg, lead economist at flight-booking service Hopper — but it depends on where you want to go.
Fares for domestic flights in July have decreased slightly in recent weeks, Berg said. She noted a pattern that seems “typical of normal summer pricing, which starts high in late winter and early spring, drops in April/May before rising in the last month or so ahead of departure dates.”
While overall average domestic fares for June and July are roughly 7% below 2022 levels, they remain 16% higher than they were at the same time in 2019. Berg said that she expects those prices to remain steady before spiking two to three weeks before departure.
However, if you’re looking to pay lower fares to fly abroad, you may be out of luck, Berg said.
“International airfare remains significantly higher than pre-pandemic given low supply of seats, high demand and overall higher costs, including high jet fuel prices,” Berg said. A report by Hopper forecast airfare to Europe over the next six months to be 24% higher than pre-pandemic, on average. Fares to Asia are expected to surge around 60%.
Even so, there are still sporadic deals, according to Katy Nastro, a travel expert at flight-deals subscription service Going.com.
“Airfare is volatile, and so prices you see today don’t necessarily reflect what you see tomorrow,” Nastro said. Even as prices climb on a particular flight or deal, “that doesn’t mean the flight won’t drop again — as we know airfare isn’t static — but the likelihood of it dropping majorly … is less.”
If you’re hoping to take a trip this summer and haven’t found anything for the right price yet, don’t lose hope: Stay tuned to TPG for the latest flight and hotel deals, as well as everything you need to know about traveling this summer.
Last Friday, I attended a workshop put on by Pamela Slim, who writes about entrepreneurship at Escape from Cubicle Nation. Before this meeting, I didn’t know much about Slim or her message, but her work came highly recommended from my friend, Chris Guillebeau. “Pam is the real deal,” he told me. “Her book is what a lot other books have tried to be.”
Based on this recommendation, I drove to hear Slim speak. I was impressed. Chris is right: She’s the real deal. I was so impressed, in fact, that I spent the weekend reading her book, which is also called Escape from Cubicle Nation.
Opening Up to Opportunities
Escape from Cubicle Nation starts at the beginning of the entrepreneurial journey: deciding what to do with your life. Slim spends several chapters discussing how to get in touch with what’s important to you. At times, this almost seems touchy-feely. Almost.
Even if you currently have no intentions to quit your job, Slim’s advice can help you protect yourself from future layoffs. She recommends:
Developing a wide social network
Investing in personal development
Pursuing a small business on the side
Slim advocates a philosophy of “life first, business second”. By becoming clear about what you want from life, what your ideal life contains, you can craft an entrepreneurial vision that helps you to pursue this goal.
Slim says that it’s important to choose work you’re passionate about. She cites the “sweet spot” described by Jim Collins, which is the place these three sets of skills overlap:
What people will pay you to do
That for which you have great passion
That which you are “genetically encoded” to do
In my case, that seems to be blogging. For you, it’s going to be something else. It may take time to find that “something else”, but when you do, you’ll be ready to create a business plan.
The Reality of Entrepreneurship
“Hating your job intensely is not a business plan,” Slim writes in the book’s introduction.
Although I think it is a tremendous idea to work for yourself and live a life of happiness and financial success, I don’t believe that is possible to become an overnight sensation with a few magic techniques or systems.
Slim doesn’t candy coat things. While she encourages readers to pursue their dreams, she admits that the path is often difficult. She also offers “a few horror stories for good measure”, real-life examples of how things can go wrong. She wants her readers to escape from corporate environments, but she wants them to have realistic expectations.
Escape from Cubicle Nation also covers topics like:
Drafting a business plan
Building and using a social network
Lifestyle design
Developing a personal brand
There are a lot of buzzwords in that list, but Slim handles each topic thoughtfully, with examples that readers can relate to. (Rachael Ray, for example, is a perfect example of personal branding.)
Make the Money Work
“Nothing will cause you more pain than ignoring the financial side of your business,” Slim writes. “Not horrible sales calls, crashed laptops, surly employees, or even bad press. When the financial side of your business is not working, life is miserable.”
To begin, however, your personal finances must be in order. Slim offers solid advice (the sort you’re used to seeing on Get Rich Slowly), and encourages readers to have realistic expectations about their financial situations. (This section even excerpts an underrated GRS post about facing and fighting financial trolls.)
There’s also a chapter on benefits for the self-employed, including health insurance.
Making the Leap
It’s one thing to draw up a business plan and to embrace the idea of entrepreneurship, but it’s another thing to actually make the leap. It can be scary to quit a safe job to pursue the unknown. In the final section of her book, Slim offers advice for smoothing the transition.
First, she tells readers to expect resistance from the people they know. “You are crazy if you think you can convince all your friends and family that starting a business is a good idea,” Slim writes. She provides techniques for handling common questions, and she stresses the importance of open communication with your spouse or partner.
Finally, Slim provides some pointers for getting organized — and deciding when it’s time to leave your job, to escape from cubicle nation.
Conclusion
I thought Slim’s workshop last Friday was great, and not just because of her content. I was impressed with the dynamic people in attendance. The flood of tips, ideas, and experiences was inspirational.
But Escape from Cubicle Nation — the book — is even better. Some people might be put off by how often she quotes from other sources. Not me. I love it. I like that she synthesizes advice from a variety of books and blogs to give the readers the best information possible. I wish more authors did this.
If you think Escape from Cubicle Nation might be useful for you but aren’t quite sure, you can give Pam Slim’s ideas a test drive at her blog. (Slim has also made the first chapter of the book available via PDF.) Based on the number of Get Rich Slowly readers at the workshop last Friday, it seems that many of you are looking to escape your corporate jobs to pursue your passions. That’s awesome.
Patios provide more than additional square footage to your home. They also enhance the design of any house and add to the curb appeal, meaning any improvement you make can turn out to be a good investment later on, when you decide to sell.
When you look around Phoenix, Arizona, you will see a lot of patio covers, gazebos, and porches.Sure, they look good but they serve a much more important purpose. With the sun bearing down on the city 85% of the time in an average year, there’s a dire need for additional protection from the searing heat.
When you think about it, Phoenix is the perfect spot to harness the power of the sun. After all, it is listed as one of the sunniest cities in America. Locals get 3,800 to 4,000 hours of sunlight per year, so why not try to capture that?
Particularly since homeowners can also get incentives when they go for alternative power sources other than the traditional fossil fuels.
Often, the glass panels get installed on the roof where the sunlight hits them directly. Sometimes, you can also see them on the ground with unique mounts that allow the panels to follow the sun’s movement throughout the day.
Solar panels in the patio: Best of both worlds
While most solar mounts you’ll see are set on the roof of the house, not every structure is ideal for supporting their weight, which makes the patio a great alternative.
Converting your patio into a mount for solar panels gives homeowners both additional shade and a great alternative source of power. Over the years, installers have introduced innovative ways to install the panels on smaller scales on Phoenix homes. You have solar trees, solar cars, and ground solar.
But patio manufacturers give an additional platform for suppliers to install solar power on homes. Unlike with ground solar, patios do not require supplementary land.
If you are planning to build a patio on your property, you can hit two birds with one stone by also adding solar panels on the roof.
One option is to use the panels for your main roof instead of a solid cover or a pergola. The main advantage of this option is that you maximize the solar footprint. The drawback, however, is that it does not supply maximum protection from the sun.
If you already have a patio attached to your home, you may need to contact a service provider such as City Seamless Patio Covers, to check the durability of the columns and beams and confirm that they can support the additional weight of solar panels. This is a crucial step in the process, and the good news is that it’s a relatively easy fix to reinforce the posts if they’re not sturdy enough.
If you own a small restaurant or cafe, patios give you that extra footprint to expand your indoor space. As a result, you can add more tables and chairs for your customers. Businesses spend about $2 for every square foot of space.If you have 1,000 square feet of business space, including your patio, you are looking at $2,000 per month. One innovative way to cut your overhead costs is to go solar.
Imagine how much you would save if you could reduce your utility bills down to zero? You can use solar energy to heat your water or to power your heat, ventilation, and air conditioning system. If you store enough energy, you can send it back to the grid for extra credits.
And your smart home can also be powered by the energy you store from the solar panels. The average homeowner in Arizona, for instance, pays about $120 per month on electricity bills. You can reduce that to zero with the help of your photovoltaic panels.
More tips for homeowners
Why is wicker used for outdoor furniture?What’s the difference between faux leather and real leather sofas?How To Set Up a Killer Smoking Room at Home The Kid-Friendly Home: Creating A Safe Haven For Your Little Explorers
Save more, spend smarter, and make your money go further
Are you a municipal government, a large business, or a homeowner with perfect credit and plenty of equity? If so, record-low interest rates are your friend. For savers, however, low interest rates are infuriating.
This week, NPR’s All Things Considered profiled a family of six with excellent credit that can’t refinance their home because it’s underwater; meanwhile, their savings account is paying 0.8%–less than the rate of inflation. Host Audie Cornish asked MintLife columnist Matthew Amster-Burton for his advice.
Unfortunately, said Amster-Burton, 0.8% APY is about as good as you’re going to get right now from an online savings account. But there are several other options to consider before putting the kids to work burying cash in the sandbox.
Series I US savings bonds (I-bonds for short) are great for any savings goal one year or more into the future. You can buy them directly from the government at TreasuryDirect.gov and they never pay less than the inflation rate.
Right now, for example, I-bonds pay 2.2%, which is better than most 5-year CDs, but much more flexible.
For Amster-Burton’s other recommendations and his attempt to find a silver lining on a very cloudy day for savers, listen to the NPR radio segment below (iOS and Android users can listen via the free NPR News app):
Save more, spend smarter, and make your money go further
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Thinking about retiring early? The idea can be tempting, but before making any decisions, you’ll want to carefully consider your financial situation.
It is possible to retire early at age 55, but most people are not eligible for Social Security retirement benefits until they’re 62, and typically people must wait until age 59 ½ to make penalty-free withdrawals from 401(k)s or other retirement accounts.
People with 401(k)s at work may be able to to withdraw money early from those accounts penalty-free — if they leave their jobs at age 55 and up (this is often called the “rule of 55”).
Can I collect Social Security and other retirement benefits at age 55?
If you retire at age 55, you probably won’t be eligible to receive Social Security retirement benefits for several years or be able to withdraw money from your retirement accounts without paying a 10% early withdrawal penalty. Additionally, for most people, Medicare won’t kick in for another 10 years.
Typical minimum age for benefits
Social Security
Individual retirement accounts, or IRAs
Although you can begin receiving Social Security benefits at age 62, that’s often not the best time to start. The Social Security Administration reduces your check by as much as 30% for life if you start taking benefits before you reach full retirement age. However, you’ll receive 100% of your benefit if you elect to wait until full retirement age, and you’ll get a bonus for every year (up to age 70) that you delay taking benefits
.
One other thing to note is that the more you pay in Social Security tax (typically through payroll taxes withheld from your paychecks), the higher your Social Security retirement benefits are. Accordingly, leaving the workforce early could affect the size of your eventual Social Security retirement benefit
.
Estimate your Social Security retirement benefits
Your actual benefit may be lower or higher than estimate made with this calculator, because it does not take into account your actual earnings history.
We assume you have earnings every year until you begin receiving Social Security benefits. If you had several years of noncovered employment or your earnings changed significantly from year to year, this calculator will overestimate or underestimate your benefit.
How can I bridge an income gap if I retire at 55?
Although retiring early at age 55 doesn’t make you eligible for Social Security or most government benefits for retirees, there are a few exceptions and strategies to know that could help you bridge an income gap.
Exceptions to 401(k) early withdrawal rules
In most cases, you’ll be subject to a 10% early withdrawal penalty if you take money from your 401(k) before you’re 59 ½. But according to the IRS, these circumstances may allow you to skip the penalty:
Exceptions to IRA early withdrawal rules
Generally, money taken out of an IRA before age 59 ½ is subject to a 10% early withdrawal penalty unless one of these exceptions applies:
You become totally and permanently disabled.
You have qualified higher education expenses.
You agree to take “a series of substantially equal periodic payments over your life expectancy.”
You are a first-time home buyer (for withdrawals up to $10,000).
You had tax-deductible medical expenses that exceeded 7.5% of your adjusted gross income.
You were a reservist called to active duty
.
Pension plans
Depending on where you’ve worked, you may be able to take withdrawals from a pension on or before you turn 55. Check with your employer to see if you’re eligible. Teachers in California, for example, might be able to retire at age 55 if they have at least five years of service credit
. Members of the U.S. military, meanwhile, typically can retire at any age after 20 years of service.
Nonretirement accounts
Although most types of retirement accounts limit how much you can contribute in a year, there are usually no limits to how much you can invest in high-yield savings accounts, stocks, bonds, mutual funds, exchange-traded funds or other investment vehicles. In particular, bonds, bond funds, dividend stocks and dividend funds might provide monthly income regardless of your age.
HELOCs
Do you own a home? If so, a home equity line of credit, or HELOC, may be an option. These loans let you borrow against the equity in your home without needing to sell or refinance your home. The fees for a HELOC vary, and you must repay the loan.
Bonus at the workplace or an unplanned income from family members are usually substantial. However, receipt of such substantial money can always create a dilemma of whether to invest the sum into SIP or pre-pay home loan. In the case of a lack of a home loan, the answer is pretty straightforward. But, if there’s the burden of a home loan, it can lead to a dilemma. And, the answer differs from person to person, however, the variable to determine the category could be the same. Thus, let us study what these variables are that decide the optimum outcome of this dilemma.
Age: First, age is a huge determining factor, since it decides the earning capacity of an individual. Say you are in your mid-30s and hold a secured job, you can opt for a lump-sum investment subject to other variables. However, if your age is in the late 40s or early 50s, you may want to close your home loan and reduce the liability before your income source extinguishes.
Liquidity or emergency fund: An absolute must in today’s date, but again a home loan can cause a serious hole in your financial planning. This indirectly deters the creation of any sort of emergency fund or liquidity. Thus, this surplus income can act as a stop-gap solution, and help you create a temporary fund in case of emergency. However, this option must be utilised keeping in mind other variables covered in this article.
Risk appetite: Investing in mutual funds always carries a risk to the stock market. Therefore, risk-averse investors might not want to test the double loss in mutual funds along with home loans hanging on their heads. In case of limited risk, it is appropriate to close the outstanding loans before going for investment in even moderately risky opportunities.
Tenure of investment: When there are multiple loans – car, personal, education, etc – apart from the long outstanding home loan, the surplus fund might be better utilised in closing one of these instead of pre-payment of the home loan. Since a home loan is the cheapest among all loans, investors can sustain it for a longer term. Even when there are no loans apart from home but the investor might need money for say renovation or a wedding, then also these surplus funds could be utilised.
Income Tax: Possibly the greatest benefit against pre-payment of home loan. It can help you with up to Rs 1.5 lakhs allowable deduction for principal repayment and an additional up to Rs 2 lakhs of benefit for interest repayment. Thus, the aggregate tax benefit per borrower goes up to Rs 3.5 lakhs. Now, if you are in a 30% tax bracket, with a gross income of Rs 15 lakh per annum, you will be saving almost a lakh in tax. However, since the limit of Rs 1.5 lakhs under 80C is available through other options such as PPF, school fees, life insurance premium, etc., the additional Rs 2 lakhs for interest benefit could be the actual benefit.
Psychology: With many risk-averse investors do not like the burden of huge liability on their heads. Lack of job security, single earning members, risky business nature or even lack of investment knowledge could lead individuals to pre-pay home loans instead of investing in mutual funds. Even an absence of sufficient life cover coupled with a sole source of income should opt for pre-payment of a home loan. While some investors even without any deteriorating conditions opt for pre-payment simply to retain sound sleep. Thus, psychology could play a major deciding factor in the dilemma.
Returns: This variable gives the most practical answer among all. To put it simply, one should only opt for a mutual fund over the pre-payment of a home loan if the post-tax income from a mutual fund is higher than the effective cost of a home loan. Effective cost is the total EMIs of a home loan reduced by tax saving subject to the tax slab of every individual. To see it through a macro perspective, an outstanding loan of Rs 70 lakhs at 9.5% interest brings to Rs 6.65 lakhs now after deducting the Rs 2 lakhs benefit of interest repayment it comes down to Rs 4.65 lakhs. So, a Rs 4.65 lakhs interest on a Rs 70 lakhs loan generates an effective interest of about 8.64% even for Rs 30 lakhs tax-bracket individual. In addition, these figures could change if the loan is jointly shared and both can enjoy the Rs 2 lakhs tax benefit. However, if the total loan outstanding goes below Rs 20 lakhs, then you may not be able to fully utilise the Rs 2 lakhs interest benefit, since the maximum interest paid in the whole year will be less than Rs 2 lakhs. In such a case, it is not advisable to pre-pay the loan and instead opt for a mutual fund.
To conclude, whether pre-pay a home loan or invest could vary from person to person given the above factors. Hence, it may be wise to evaluate each variable and then decide the factor.
(Viral Bhatt is the Founder of Money Mantra — a personal finance solutions firm)
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