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Best Unsecured Personal Loans for 2021
Personal loans can be used for any number of reasons from debt consolidation to a home renovation. Unlike secured loans like a mortgage or car loan, you can access funds without putting up your property…
The post Best Unsecured Personal Loans for 2021 appeared first on Crediful.
Auto Loan: New Car vs Old Pros and Cons
There are over 25 million auto loans every year in the United States, with the majority of drivers using finance to pay for new and used vehicles. Car loans are some of the most common secured loans in the country and for many Americans, a car is the second most expensive purchase they will make […]
Auto Loan: New Car vs Old Pros and Cons is a post from Pocket Your Dollars.
Which Debts Should You Prepay First? A 6-Step Plan
Maya asks:
“Is it better to pay off student loans or a mortgage first? I’m asking for my brother, who took out $80,000 in student loans about 20 years ago and has only paid off about $10,000. He recently bought a home in Southern California and took out a 30-year mortgage that might be as much as $400,000. I don’t know the interest rates he’s paying on these debts. I think he should pay off his student loans first because the total debt is smaller, older, and can’t be discharged in a bankruptcy. What do you think?”
Thanks for your question, Maya! This dilemma is common, especially now that most federal student loans are in automatic forbearance from March 13 to September 30, 2020, due to coronavirus-related economic relief. That means millions of student loan borrowers suddenly have the option to stop making payments without adverse financial consequences, such as hurting their credit or getting charged additional interest or fees.
If you have qualifying student loans and you're dealing with financial hardship due to the pandemic or another challenge, you may be grateful to have your payments suspended. But if your finances are in good shape and you don’t have any dangerous debts, such as high-rate credit cards or loans, you may be wondering what to do with the extra money. Should you send it to your student loans despite the forbearance, to your mortgage, or to some other account?
RELATED: 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.
What is Accidental Death Insurance, and do you Need it?
Accidental death insurance, also known as accidental death and dismemberment insurance, is a type of limited life insurance often acquired for a nominal fee or added to an existing policy. As the name suggests, it releases a benefit if the policyholder dies from an accident or suffers a dismemberment. Accidents kill an estimated 160,000 Americans […]
What is Accidental Death Insurance, and do you Need it? is a post from Pocket Your Dollars.
Is Now a Good Time to Buy a House?
When you’re thinking about taking the plunge into homeownership, timing the market may not be as important as taking stock of your personal finances and lifestyle.
The post Is Now a Good Time to Buy a House? appeared first on Discover Bank – Banking Topics Blog.
The Market Crash Is Coming! (…Eventually)
The stock market crash is coming…eventually. But trying to anticipate that crash isn’t too smart. Let’s see why.
Grow Your Money: Mutual Funds, Index Funds, & CDs
If you’re looking to save money for a short, intermediate or long-term goal, such as retirement, you need to find a safe place to park it, earn interest, and have fairly access to your money. But, how do you find such a safe place? The good news is that there are several places to put …
Continue reading “Grow Your Money: Mutual Funds, Index Funds, & CDs”
The post Grow Your Money: Mutual Funds, Index Funds, & CDs appeared first on GrowthRapidly.
What Are the Consequences of Not Having Life Insurance?
There’s a reason people keep telling you it’s important to purchase a life insurance policy. Here’s what happens if you don’t.
Guide to Managing Medical Benefits When You Leave or Start a Job
Leaving a job typically means saying goodbye to workplace benefits such as health insurance and medical spending accounts. No matter if you quit, get fired, or get furloughed, it's essential to know your options so you can make the most of those perks.
If you're starting a new job with benefits or becoming self-employed, you'll have critical decisions to make about what's best for you and your family. I recently received a couple of questions about how to handle benefits during work transitions, and I'll answer them throughout this post. We'll review the best options for managing medical benefits when you leave or start a new job.
What happens to health insurance when you leave a job?
When it's time to leave a job with benefits, it's essential to let your employer know so you can evaluate your options for managing or replacing them right away. The sooner you understand your choices, the more time you'll have to do your homework and consider what's best.
Any insurance perks you have typically end on the last day of the month you get terminated. So, be strategic about choosing your last day, when possible.
If you leave an employer on good terms or get a severance package, ask for an extra month or two of medical coverage if you need it.
For instance, if you work through November 30, your health insurance may end on that day. But if you work through December 1, your insurance may last until December 31. Also, remember that most things in business are negotiable. If you leave an employer on good terms or get a severance package, ask for an extra month or two of medical coverage if you need it.
Here are four work transitions you may need to manage:
1. You leave a job for a new employer with benefits
Congrats! Benefits at your new job may start on your first day, or you may be subject to a waiting period, such as 30 or 90 days. Don't roll the dice with a gap in critical coverages such as health and life insurance. Something unexpected—a car accident, illness, or death—could be financially devastating for you or your surviving family.
If you have a spouse or partner who also has workplace insurance benefits, you may be wondering which plan to choose or whether you can double up on benefits. Keep reading for tips to handle this situation wisely.
2. You leave a job for a new employer with no benefits
If your new job is with a small company, it may not offer expensive perks such as health insurance. But that doesn't mean you can't get affordable coverage on your own, which we'll cover in a moment.
3. You leave a job and become unemployed
No matter if your workplace doesn't offer benefits or you're unemployed, there are ways to get low- or no-cost health insurance.
4. You leave a job and become self-employed
When you work for yourself, you need to provide your own medical benefits package, and the same advice will apply, so keep reading.
What is COBRA continuation coverage?
A critical right you should be familiar with is COBRA continuation coverage. COBRA, which stands for the Consolidated Omnibus Budget Reconciliation Act, is a law that requires an insurer to continue your employer-sponsored medical insurance, including health, dental, and vision policies after you're no longer employed.
Anytime you leave a job with group health benefits, you can purchase COBRA coverage for a period. Your benefits administrator should give you information about your right to apply for COBRA coverage and the cost.
Anytime you leave a job with group health benefits, you can purchase COBRA coverage for a period.
You can purchase the same or fewer medical benefits than you had before you quit, got laid-off, or fired from your job. But the price won't be the same—COBRA coverage can be expensive because your previous employer does not subsidize it.
You must pay the full COBRA premiums, plus a 2% administrative charge, to the insurer. While it will cost more than you're used to, the upside is that your coverage will be seamless, and you'll be familiar with it.
COBRA protects everyone affected by the loss of group health insurance, including the former employee, his or her spouse, former spouses, and dependent children—when certain qualifying events occur, such as termination or reduction of work hours. It typically lasts for up to 18 months. However, if you're a surviving spouse or divorced from a covered employee, COBRA may continue for up to 36 months.
Don't make the mistake of thinking that you'll just wait and get health insurance when you get a new job or when you become eligible after a new employer's waiting period. If you get sick or need a trip to the emergency room, you could end up with a massive bill.
If you're not eligible for regular, federal COBRA, many states offer similar programs called Mini COBRA. To learn more, check with your state's department of insurance.
How do you get individual health insurance?
If you don't have the option to get COBRA medical benefits or can't afford it, your next best option is to shop for ACA-qualified health insurance. ACA stands for the Affordable Care Act, which set standards, known as essential health benefits, and provides subsidies that make qualified plans more affordable.
If you qualify for an ACA subsidy based on your income and family size, it can make a health plan much less expensive than COBRA continuation.
If you qualify for an ACA subsidy based on your income and family size, it can make a health plan much less expensive than COBRA continuation. But if you have high income and don't qualify for reduced premiums, COBRA may cost about the same or even give you better benefits.
So, shop and compare the cost of COBRA to a private policy when possible. Open enrollment for ACA-qualified health plans is limited to the last few weeks of the year. However, losing your group coverage at work is one of several life events that qualify you for a special enrollment period or SEP to get coverage. But you only have 60 days to sign up for an ACA plan after losing your insurance at work, so don't put it off.
If you miss the special enrollment deadline, you generally won't be able to get a marketplace plan unless you have another qualifying life event. These include getting married, having a child, or exhausting your maximum period of COBRA coverage.
You can get quotes for an ACA-qualified health plan from the following:
- Healthcare.gov (the federal healthcare marketplace)
- Your state's online healthcare marketplace (if you live in California, Colorado, Connecticut, District of Columbia, Idaho, Maryland, Massachusetts, Minnesota, Nevada, New York, Rhode Island, Vermont, or Washington)
- Insurance aggregator sites, such as Bankrate.com and eHealth.com
- Insurance brokers
Depending on your income, family size, and the state where you live, you may qualify for free or low-cost coverage from Medicaid or the Children's Health Insurance Program (CHIP). Also, note that if you're younger than 26, you can enroll in a parent's health plan even if you don't live at home or are married.
Can you have more than one health insurance plan?
Jamie left a voicemail and asks:
I'm starting a new job soon and am wondering if I should enroll in the dental and vision benefits because I already have them under my husband's insurance. How should I compare insurance policies if I need to choose between different plans?
It's not against the law to have more than one medical insurance policy, but it may be a waste of money. Having more than one medical plan doesn't mean that you get reimbursed twice for covered benefits.
Having more than one medical plan doesn't mean that you get reimbursed twice for covered benefits.
The plan you get through your employer becomes primary, and the one through a spouse or partner's employer is secondary. After the primary policy covers you, the secondary would pick up any remaining covered cost. But the combined coverage can't exceed 100% of the cost.
When you have dual health or dental plans, you must pay deductibles for both of them. In other words, you may still have out-of-pocket costs even when you have more than one plan.
Whether you could save money by enrolling in more than one medical insurance plan depends on several factors, such as the monthly premium, annual deductible, and how high your healthcare expenses could be in the future.
You'll need to make these same comparisons when you're choosing between different plans. Evaluate monthly premiums, annual deductibles, co-payments, co-insurance, and the doctor networks to estimate which one is best for your situation.
To get some help, speak to an insurance representative from each plan you're considering. Ask them about the types of healthcare services you and your family typically need or have needed in the past. You can't predict how healthy you'll be going forward. But to evaluate different plans, or know if having more than one plan is worthwhile, you must consider your previous expenses for health, dental, and vision care. So gathering that information should be part of your research.
What happens to an HSA when you leave a job?
Adam asks, "My employer makes contributions to my HSA every payday. Do I have to repay them if I leave my job to start my own business?"
Another insurance-related benefit that you may have at work is a tax-advantaged health savings account or HSA. You're eligible for an HSA when you're enrolled in a high-deductible health plan (HDHP). Having an HDHP may be a good option when you want lower premiums, are in relatively good health, and are likely to take advantage of an HSA.
An HSA is portable, so you can take it with you if you leave an employer.
The good news is that an HSA is portable, so you can take it with you if you leave an employer. Your account balance, including amounts contributed by your old employer, are yours to spend tax-free on eligible medical expenses with no spending deadline.
You can spend an HSA on qualified expenses for you or your family members, even if you don't have a high-deductible plan or you're uninsured. However, you can't make any new HSA contributions when you're not covered by HDHP.
If you become unemployed, you can use an HSA for COBRA premiums, or for other health insurance while you're receiving unemployment compensation. But if you spend HSA money on non-qualified medical expenses, the amounts will be taxed as income, plus you must pay an additional 20% penalty.
What happens to an FSA when you leave a job?
Another medical spending account you may need to manage when you leave a job is an FSA or flexible spending arrangement. These accounts can only be offered by employers and get funded by pre-tax payroll deductions that you can use for childcare and medical expenses.
Make sure you empty the account by spending the funds on qualified purchases before your last day of work or by the end of the month.
FSAs have a use-it-or-lose-it policy, which means the amounts you've contributed will be forfeited if you don't spend them before leaving a job. Make sure you empty the account by spending the funds on qualified purchases before your last day of work or by the end of the month.
Whether leaving a job is cause for tears or celebration, you can make smart decisions about your medical benefits and save money with some strategic planning. Be sure to ask your benefits administrator or your plan providers for help when you need it.