Tuesday, March 28, 2017

5 Student Debt Stats Parents Need To Know

Today I have a guest post by a fellow fin blogger.  Enjoy!

As parents we want what is best for our children, especially when it comes to their college education.  But what many of us struggle with is balancing the need for a great education with a manageable level of student loan debt.  The cost of an undergraduate degree is skyrocketing, and with it, the average student loan debt.  Most students attend college directly out of high school, and lack the basic knowledge to truly understand what it means to sign a long-term loan.  That's why it's so important that parents learn as much as they can about student loan debt, so they can guide their children as they make these critical decisions.
Image result for student loan default

National Student Debt Is At An All-Time High

Across the U.S., we have more student loan debt than ever before and the number continues to rise.  The current outstanding national student loan debt is at 1.4 trillion dollars and growing.  Student loan debt is the second highest type of consumer debt behind only mortgages.  This number represents all types of student loan debt, including loans for career and technical colleges, undergrad and grad schools.

The exploding level of student debt is attributed to a number of factors:

1) The ever increasing cost of tuition and fees
2) The number of students going to college
3) Cuts in funding to public education

Average Debt Per Undergraduate Borrower Is Rising

In 2016, the average undergrad walked off the stage with a diploma and over $16K in loan debt.  The average debt per borrower was $28,400.  This is a 6% increase from 2015.  60% of all college grads will have some student loan debt.  Having substantial student loan debt can make it incredibly challenging for your child to start their adult life on firm financial ground.  An entry level job currently pays about $35K per year.  The average monthly student loan payment is $351, making it difficult to save any money for adults making an entry level salary.  This monthly burden also makes it hard for young adults to afford a mortgage,  a car, or a nice wedding.

The Default Rate

A borrower is said to default on his loans when he has not made a payment between 270 and 360 days.  The default rate for federal student loans is currently 11.3% and 3% for private student loans.  Overall, however, about 40% of student borrowers aren't even making payments which means they either have not started repayment or they already defaulted.  The difference between these two numbers is likely due to the greater protections in place for borrowers with federal student loans, such as income-based repayment plans and forbearance, and deferral programs for borrowers facing hardships.

Default is a serious concern for anyone with student loans, particularly because this type of debt cannot be discharged in bankruptcy.  Talk to your kids about these stats, and make sure they understand what these numbers mean before signing onto major loans.  

Graduate Student Debt

While undergraduate degrees can be costly, graduate and professional degrees tend to be even more expensive.  In 2016, the average debt per graduate student was $57,600!  Many graduate degrees are necessary for students to work in a particular field, but these fields aren't necessarily financially lucrative.  Talk to your son or daughter about options for paying for graduate school other than taking out student loans, such as grants, scholarships, or an employer paying for school.  Getting started in their career without significant student loan debt is the main goal.

Federal Versus Private Student Loans

There are two primary options for financing your child's college education: federal and private.  The majority of student loans (90%) that are taken out in the U.S. are held by the federal government.  These loans offer many benefits over private loans, such as fixed interest rates, generous borrower protections, and potential subsidized interest rates if you qualify.  Federal student loans don't require a cosigner, a credit check, or to even be creditworthy.  In contrast, private student loans require your child to be creditworthy or have a cosigner to be approved.  In most cases (90%), your child will require a cosigner to be approved.  If the primary borrower doesn't pay the loan, the cosigner will assume responsibility for the loan.

Whenever possible, steer your son or daughter toward federal student loans.  While private loans may sometimes offer lower interest rates than federal student loans, as a general rule, federal student loans are considered more student friendly.

Taking some time to learn about student loan debt can help you guide your child as he or she makes one of the biggest decisions of their life.  While student loan debt may be unavoidable, understanding these basic statistics can help your child make a better choice when it comes to the type and amount of debt that he or she has.

Drew Cloud is the Founder and main contributor to the Student Loan Report.  After struggling to repay his own student loans, Drew decided to make a site to help keep borrowers up to date on current student loan news.  Drew is also a freelance writer who typically writes about student loans, personal finance, and education.    

Saturday, March 25, 2017

4 Stupid Things We Do With Our Coins

The typical American gets some change back once, maybe twice a week if they use cash to make purchases.  I use my debit card as often as I can but still, I have spare change to deal with at least once a week.  And just how do most Americans deal with their spare change?  That's what I'll be discussing in this post which by the way, was inspired by my visit to the grocery store today.  You see, on the spur of the moment I decided to grab the coin jar I had sitting atop a closet shelf gathering dust, and go dump my coins into a Coinstar machine.

After feeding a machine exactly like this one above, I got a voucher for $17.44.  I agreed to the 10.9% charge for this service because frankly I didn't want to spend my valuable time putting coins of each denomination into coin sleeves.  Doing some quick math, I must have had around $19.57 in my jar.  That seems just right because any more money sitting idle is money losing purchasing power to inflation.  After cashing in my voucher, I went to the pump and got three-quarters of my gas tank (I drive a 2007 Honda Civic Ex) filled up.  Now that's how you're supposed to use cash you got lying around.

When it comes to coins, we make some serious mistakes.  I'm personally just becoming conscious of some of these.  Here are four that need to be rectified immediately.

Image result for coin jar
This is dumb!!

1) Keeping coins in your car.  The change in our consoles or cup holders has got to be some of the grimiest possessions we have.  We tell ourselves that one day we'll need spare change when we're driving around so we hoard it in our cars.  Meanwhile, we're spilling juice, protein shake, and soda all over it.  Dirt and dust gathers on it making it gross to even pick up.  Why do we do this?  To hand it to the poor guy asking for money on the corner of the street.  Geesh.  We're better off taking our spare change inside the house, and dropping it in our coin jar...but not to be kept there forever.

Image result for filthy coins in the car cup holders

2)  Letting our spare change drop in between couch cushions.  Again, we are so lazy sometimes that we'll plop on the couch and forget we have loose things in our pockets.  We take that sweet nap and our coins go to rest in the kingdom of the underneath.  Then one day we get to cleaning like a fool and lift them cushions, finding all sorts of junk and coins.  Unfortunately, over time, those coins, just like the dollar bill, have lost purchasing power.

3)  Waiting until our coin jars are full to do something about it.  This is what I've just learned after today: there is a specific volume (or height on the jar) of coins that amounts to about $20.  I've marked it.  So now, I save only until my coins reach this level.  Then on a visit to the grocery store, I empty my jar out and put that cash to work immediately.  Why are you leaving so much change in your jar?  Does it give you a sense of accomplishment to have saved so much spare change over time?  Don't be foolish.  Inflation will eat up the value of your money as you wait to put a lid on it.

4)  Let our kids keep them in their piggy banks all year long.  Just like our own coin jar, as soon as our kids have enough money saved to make a visit to the bank worthwhile, that spare change should be deposited.  You'll need coin sleeves this time, but if your kids are old enough, you can teach them once and they can take care of it in the future.  Transferring that money into a custodial money-market account may not be enough to keep up with inflation (depends on the interest rate you can get), but it's a whole lot better than keeping it in a savings account.

The moral of this story is that you need to take spare change seriously.  Ignoring or forgetting about it does impact your finances.  If you pride yourself on being a great saver, and have many spare change jars around the house filled to the brim, you're hurting your ability to buy things in the future, and being stupid with your money.  Alright, I'm outta here!  If you liked this post and want to receive more like them in your inbox, don't forget to subscribe to this blog by submitting your email below.  Thanks!
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Sunday, March 19, 2017

Do These 3 Things When The Fed Raises Interest Rates

This past Wednesday, the Federal Reserve raised its target for federal funds by a quarter percentage point, from 0.75% to 1%.  This means banks will be charged a tad bit more for borrowing money from Federal Reserve banks.  Most people don't understand what any of this means.  The Federal Reserve is actually a network of 12 banks and 24 branches across the country.  Part of their job is to loan inventory (cash) to other banks at the going "Fed Funds" rate.

The Federal Reserve has kept the funds rate very low the past several years, to spur the economy via cheap money for banks that they can turn around and lend to companies and people at higher (but still low) rates.  With inflation creeping up, however, the Fed has begun hiking the Fed funds rate to keep the money supply from being too high which would cause even more inflation.  The days of cheap money for borrowers are ending.  Good or bad?

Image result for the fed funds rate

In this post we'll explore what you should be doing with your money right now to adjust to the new Fed policy.  (By the way, the Fed has signaled two more rate hikes in 2017).  Not doing these things will seriously cost you some bills in the near future.

1. Be aggressive paying off your credit card debt.  In my last post, I mentioned that 157 million have outstanding credit card debt.  Credit card interest rates are variable.  (They're actually tied to the "prime rate," an index a few percentage points above the federal funds rate).  So your equity line of credit and credit card debt will be facing higher charges.  The change is immediate too.  Your interest rates are on the move up now!  Do not play around with your balances, meaning paying just the minimum or a few bucks above the minimum.  Be aggressive with that debt and pay it down as much as possible.  Divert money you may be saving for other things to paying down your credit debt.

Image result for pay credit cards

2.  Borrow cheap money before it gets more expensive to borrow.  If you're a business owner or are looking to start a business, now is the time to go get a loan.  You're going to want to borrow before the next two hikes, or you'll pay more for it.  The same goes for people that want to buy a house.  Although interest rates on home loans are not tied to the federal funds rate, they'll be creeping up nonetheless because banks are being charged more for borrowing, meaning they'll pass on these extra costs to the consumer.  If you have been waiting to refinance, now is the time to get on it for similar reasons.

3.  Transfer money from your regular savings account into a Money Market Account.  MMA's are not FDIC insured as is your regular savings account, but they are relatively safe.  The Fed raising rates is a move that benefits savers.  Remember, the Fed kept rates at 0% for many years to get people to invest.  This punished many savers who couldn't get squat for putting their money in long term CD's.  Now the reverse is happening.  Little by little, you'll see interest rates being offered for CDs start to increase.  This means that if CDs are your thing, start laddering as you don't want to tie your money up when rates are rising.  Again, keeping money in a savings account when rates are rising is plain stupid.  The most risk averse people should move some of their savings into a MMA to capture more upside.

One last tip, mind the rate of inflation.  If the Fed is raising rates, it means inflation could be a real threat to your purchasing power.  Inflation has been so out of the news for so long that people have been lulled to sleep.  If you're not making money on your money (by investing) at a rate above inflation, you're essentially losing money as you'll not be able to buy as much.  The economy is improving.  This isn't just an expression for you to repeat over the water cooler at work.  Take action!  Until next time.  If you liked this post, please consider subscribing to get more like them in your inbox.      
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Sunday, March 12, 2017

6 Ways To Resist The Use of Your Credit Card

Credit cards.  They're everything to some people.  According to the Nilson Report, credit card receivables topped $1 trillion in 2016.  Out of this total, 65% of it or $650 billion, was subject to a finance charge.  Yikes!  How many people in America would have to have debt outstanding on one or more credit cards to tally $650 billion?  Around 157 million.  Meaning, if you're reading this, you probably have a credit card balance.

Can You Use a Debit Card as a Credit Card?

When saving (and not making more) money is the only way most Americans have any chance at building wealth, why would they so readily shoot themselves in the foot, so to speak, using credit cards irresponsibly?  What doesn't pop into most people's minds when going for that credit card in the wallet is what ultimately kills any chance at living a life financially secure.  To call you naive would be correct, but insulting.  To call you out on your ignorance would be harsh, but perhaps what you need to hear.  You see, the use of a credit card is an emotional thing, and I just pushed your buttons so you'd start to really think about your obsession with plastic.

With that, let me say that I'm here to give you some tips on how to reduce your use of credit.  You shouldn't stop using your credit card altogether.  There are times when using a credit card makes more sense.

1) Stop shopping so much!  Does shopping make you excited?  Do you feel depressed when you're not at the store, mall, or online at an e-commerce site, and a rush when you are?  See a psychologist!

2) Screw convenience!  Many people pay with credit card because it's more "convenient" to do this versus carry and count cash at the register.  Not seeing the money leave your hand, however, is exactly why you're in your debt predicament.  When you use plastic, you're seeing past the cost of the item(s) and only acknowledging the benefits.  Use cash more often and you'll spend less often, guaranteed.

3) Don't fall for the gimmicks.  Spending for points and prizes makes you a sucker.  There are people who use their credit cards as part of rewards program, turning shopping into a game.  I recently read an article on CheatSheet.com with headline: How I made over $2,000 from only using credit cards.  Articles like this are very misleading, and only feed into people's competitive nature.  The perks are intentionally juicy people!  Don't fall for it.

4) Use your ATM-Debit card.  This is what I do.  My Wells Fargo ATM debit card handles about 99.9% of all my monthly purchases.  This card is linked to my checking account so it's essentially like using cash.  I don't believe in kicking the can down the road.  I can track exactly how much I spend, and pay the full amount with no worries of ever having a potential finance charge.  Plus it's just as convenient as a credit card.

5) Don't conform.  You don't have to be like everyone else, you know.  If everyone else is using their credit cards to make themselves feel wealthier than they actually are, you don't have to follow suit.  If you associate with people wealthier than you, trying to keep up with them will be the end of you.  Don't be part of the herd!

6) Accept life's negatives.  Pushing aside life's negatives to live in a make believe world will only make the negatives pile up.  It's best to confront your financial situation, and take it head on, sacrificing if necessary.  The credit card is not your magic wand that you can flick whenever you want a fairytale experience.  If you do use it splurge on yourself, your fairytale will have a bad ending.

Don't justify the overuse of your credit card to build credit or win rewards.  Having a track record of making credit card payments on time and paying over the minimum monthly payment is nothing to brag about.  In fact, paying any credit card interest is foolish.  Avoid doing this like you'd avoid a sick co-worker.  Thanks for reading!  If you liked this post and want to receive more like them in your inbox, please subscribe.
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Wednesday, March 8, 2017

Get Your Kids Saving for College or Retirement Now!

Do you like going to work each day, exchanging your time on earth for money?  Hmm...I think the majority of you would say, heck no!  Well, our kids (I have two) will also hate having to join the rat race and be financially insecure, especially when it comes to retirement.  I don't think we have enough adult conversations with our children about money.  Many of you would rather keep children oblivious to the hardships of making ends meet in America.

I say that's wrong.  We don't give our kids enough credit.  They are capable of taking on more responsibility for their own future than most of us imagine.  There are two major expenses that will overwhelm them just like they overwhelmed us, college and retirement.  Many adults see paying for their kid's college as their responsibility.  But let's face it, unless you're a high roller, you'll be making some serious sacrifice, most notably toward your own retirement savings, by paying for your kid's college education.

Financial lesson number one all kids should learn: saving.  They will be given money as early as three years old.  Either you or a relative will gift them a little cash.  Having them build a habit of saving any money they come into, will be the best thing you can do for them.  Once they're four or five, depending on maturity, you can start talking to them about college.  That's what any great parent would do.  But don't just stress the importance of going to college.  Also talk to them about the costs.  Then invite them to save some of their allowance or birthday money for this expense.  Write on their piggy bank, "College Fund: Do Not Spend Ever," even if they have yet to learn to read.  You can tell them what it says.

When they're in elementary, and have learned some basic math, you can have them do a simple math project.  How much money would you have at the end of 12th grade if you saved $1 a day?  If they're in 2nd grade and start saving that year, they'll have 11 years to put their money into a savings account (one that you'll set up for them...preferably a Money Market Account in your name, or a Roth IRA where you'll be the custodian).  Have them calculate how much money they'd have after a year.  That's 365 times 1 or $365.  After two years, $365 plus $365 or $730.  Don't talk to them about interest until they'rein 4th or 5th grade.  Make a simple chart for them.  See below:

Year      Grade        Money Saved
1               2                 $365
2               3                 $730
3               4                 $1,095

Seeing the money add up would motivate most kids to take on the challenge.  The next part of the project is for them to brainstorm where they'll get this $1 from.  Ideas?  Well, there's allowance, doing chores for money, and even selling things (like cool stickers) to other kids.  Get these in bulk from Amazon and sell individually.  By the way, school is where many candy and toy transactions take place unbeknownst to the administration.  Yes, many entrepreneurs began their journeys as young hustlers on a school campus.

By middle school, many teens know if they love to learn, study, and read.  These are prerequisites for being successful in high school and college.  If your child has kept up his/her savings program for college, encourage them to ramp it up.  Instead of a $1, have them save double, or $2.  The key is dangling the balance in front of their face.  You should be showing them how much money they have in the account periodically.  This will keep them money primed.

The beauty of getting kids focused on saving money for college or retirement (more on the latter in a bit), is that kids will understand the nature of the game so to speak.  Freedom costs money.  If you don't put in the work early (saving), you'll be put to work for many years.  If it turns out that your child decides to forego on college, then in effect, their college savings account has become a retirement account.  If they've not touched any of the money thus far, which would be a great feat since young people have a hard time with delayed gratification, they can lock it up even more by transferring the money into a Roth IRA of their own.

Kids should now why saving is important and the words that should spring forth from their mouths whenever asked is, "college and retirement."  Make these two words so well known in your household so that there is never any doubt why you go to work (to save for retirement as much as to pay for your expenses) every week.  Let your kids be kids but don't set them up for enslavement to debt either.  They should know!

Until next time.  Thanks for reading.  If you liked this post and want more like them, please subscribe.    
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Wednesday, March 1, 2017

Don't Be An Idiot Refinancing Your Home

Refinancing your home seems like a no-brainer when interest rates are lower than your current adjustable or fixed rate loan.  Or is it?  Most people, when asked to comment on the benefits of refinancing their mortgage, will tell you that it allowed them to take cash out (from their equity) and pay down other debt or do a major home improvement.  They justify getting a new mortgage on their home by explaining that they were able to lower their monthly payment on account of refinancing into a lower interest rate.

Image result for Refinancing a home

There are times when refinancing your home makes financial sense.  If your home has appraised enough, e.g., you owe $250K and the appraised value of your home is $375K with interest rates lower than your current fixed rate, getting a new mortgage at $375K and getting over $100K in cash out for the purpose of buying rental properties, I say go for it!  I would not use that money to remodel my home because no project will ever get you a dollar for dollar value.  You'll be using $100K to maybe add $85K in value to your home.  Rental properties allow you to get assets that'll pay you monthly income (if you buy right) and your return on that $100K will be worth much more over time.

Another great reason to refinance is your mortgage converting to an adjustable or variable rate in the immediate future.  Rates are rising so you can pretty much guarantee an increasing monthly payment.  In this case, by all means, refinance!  Paying off high interest credit cards or other debt with the cash you take out from your home is also a smart move, but you shouldn't have gone there in the first place.  What a waste.  

Now let's look at how idiotic it can be to refinance your home.  As you may already know, most of your payment when just starting out on your mortgage goes to interest.  Very little of your payment actually goes to paying the principal.  You can look at an amortization schedule of your loan and see for yourself.  So when you refinance like to like, meaning if you had a 30-year fixed rate loan and you refinance into another one, even with a lower interest rate, you've essentially reset the clock.  Continuously refinancing puts you right back in the interest-paying portion of your new loan.  Let's also not forget that refinancing costs money up front!

Image result for Refinancing a home

If you plan on living in your current home for most of your life, why would you want to return to the interest-paying portion of a new loan?  But mortgage interest is deductible, you may be thinking.  Did you read my last post on how there's very little tax savings in mortgage interest on your home?  You should read it so you can realize how badly the bank is going to screw you collecting all that interest when you make the minimum monthly payment on a 30-year fixed rate loan.

So what should you do when considering refinancing?  Refinance to a 15-year loan instead of a 30-year one.  Your monthly payment will be higher with a 15-year loan, but at least you'll pay a whole lot less interest over time.  Yet another obvious solution is to make larger mortgage payments if you've already refinanced back into a new 30-year fixed rate loan.  Making 13 payments a year works wonders to reduce your interest costs.

Okay, so don't think refinancing to a lower rate on your mortgage is penalty free.  You'll owe more on your home AND be back at the mostly interest-paying portion (first 15 years) of your amortization schedule.  Not good.  Refinance into a 15-year loan to avoid being an idiot.  Thanks for reading!  If you found this post to be informative and want to get more like them, please consider subscribing below.  Also hit some likes on some of my social media buttons on this page.   
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