Six months after college graduation, I got an email reminder for a bill – student loans! At that time (June, 2012), repaying those consumed my financial life. However, as I watched house prices in my hometown fall and interest rates dip to as low as 2.8% for a 15-year fixed mortgage in July, 2012, that would all change. I knew I had something else to work for.
Should I save for a house?
With my income at the time, repaying the minimum on the loans each month wasn't a problem. Interest on three types of loans ranged from 4.5% to 6.8%, which, considering inflation and comparing it to credit card interest rates, wasn't all that bad. Even if I only made minimum payments throughout the course of the repayment period, I would lose just over $5,000 to interest. Although I wanted the loans out of my life, I could live with paying that over time if it meant saving tens of thousands of dollars on a home and mortgage while the market was down.
Drawing a plan
Student loan payments accounted for roughly 20% of my income at the time, while rent and utilities accounted for about 40%. After other expenses, I had around 10% leftover – not enough savings to purchase a house by 2015 like I planned. I needed to save nearly five times more! After all, I wanted to make a 20% down payment.
Supplementing my income
In order to save more, I had to make more. In addition to my nine-to-five, I decided to dive further into freelancing work to bring home some extra bacon. This involved writing articles, doing translation work, and teaching English. While jobs seemed to come and go at random when I started seriously pursuing it in the fall of 2012, I managed to drive up my monthly income by 30% within a year. I put two-thirds of that towards the house and one-third towards chopping off more student loan debt.
Compromising on my lifestyle
I knew I could increase savings by spending less. When my lease was up, I moved to a cheaper place outside the city center, saving me $125 per month on rent and utilities. I also found ways to save on groceries and cooked at home more. As impossible as it appeared, I cut my nightlife expenses in half by capitalizing on happy hour and staying at home with friends. Public buses and my bicycle became the only form of transit I recognized. Over time, I noticed that I was spending $210 less per month than I had been previously. Again, I set two-thirds aside for the house and one-third aside for loans.
Being satisfied with less house
At first, I envisioned a house with a nice lot in a private setting. I was dreaming. So I lowered my requirements significantly. This has made it much easier to financially prepare to make a house purchase. As I am beginning to look for a house now, I regular check out cheap foreclosures and houses that need some fixing. Sometimes I am shocked by how inexpensive certain places are.
Sticking to the plan
While the seduction of travel has tripped me up from time to time, I, for the most part, am right on track. Working more, reducing spending, and looking at cheaper properties has been the key. Getting pre-approved for a mortgage is something I hope to have handled shortly. If all goes through, my dream of becoming a homeowner by 2015 will be achieved.
I handle my finances with an "out of sight, out of mind" mantra – basically the opposite of how we're taught. If I overspend during the weekend, I wait as long as possible to check my balance the following week. If I receive an unexpected bill, it immediately goes into the "I'll do it later" pile. Fortunately, however, I always end up getting it done.
Credit, on the other hand, is the ultimate financial "out of sight out of mind." I can't log in somewhere to view it, and there's no deadline for me to check it by. I know it exists, but I could go months, years even, without reviewing my credit report. And for someone like me, that's a problem.
I pay my bills on time, so what's the big deal about checking my credit report?
There are major problems that can arise from ignoring our credit reports – problems that exist even if we practice perfect financial habits. ID theft, incorrect information, and unknown collections are a few prime examples – things we'd never know existed without our credit report. And, left undetected, these errors can be detrimental.
I don't want to apply for a mortgage and discover my credit score is 510 because Joe Schmo opened four credit cards in my name in 2011. I also don't want to find out that I've had a $40-medical bill in collections for the last three years, causing my credit to plummet. Or maybe there's information on my report that's just inaccurate. In any case, without reviewing my credit report I'd have no idea these errors existed; and the sooner incorrect activity is detected, the easier it is to dispute and remove from my credit history.
Checking my credit report is a great way to catch and fix potential errors, but is that all?
Credit reports are also a great resource to help build and improve our credit. Although the reports don't give our actual three digit credit score (this is an additional charge), they do indicate negative and positive activity that impacts said score – information we can use to make changes to our financial behavior.
My credit report might point out that my credit-to-debt ratio is too high. With this information, I'd know to focus on building down my balances to improve my score. Or my credit report may indicate that I've had too many recent credit inquires, informing me that I need be more careful when applying for loans or other activities that pull my credit. Without reviewing my report, I probably wouldn't know that.
I understand why it's important, but how much of a hassle is it to do?
There are three major credit reporting agencies in the United States – Experian, Equifax, and TransUnion – and we're allowed a free credit report from each one every year. All we have to do is visit annualcreditreport.com and request it. You can request all three reports at once or, like experts suggest, request one from each agency every four months.
Yes, it's another task to add to our never-ending to-do lists, but it's one that's definitely worth it. I know I won't get anything done unless I have a deadline, so I created credit report deadlines for myself; every four months I have an alarm set to remind me. Whatever works for you, do it. Like most things in the financial world, it's much easier to be proactive than reactive.
I remember filing my taxes for the first time. I sat in the den with my father, staring at the confusing form that he seemed to be navigating so easily, and wondered why I was bothering to try. I felt like I would never get a grasp on what should go in each numbered box. Year after year, I kept taking a stab at those manual tax forms (allowing Dad to check behind me) until I was able to teach my friends how to file their taxes. For a "words over numbers" kind of gal, this was huge!
Though I still do my own taxes, my methods have changed over the years. Tax software is thorough and user-friendly, which suits my current, more detailed needs perfectly. At each age and stage of our lives, it's important to consider our unique circumstances and choose the best method for filing our taxes.
Even in our digital age, some people still prefer to complete their taxes on paper. If filing the old-fashioned way, make sure you determine the most appropriate form for your situation. Form 1040EZ is the simplest to use and best for those filing as single or married filing jointly without any dependents, an income under $100,000 and who will not be itemizing. The next simplest is 1040A, where users claim certain credits and adjustments to income for IRA contributions or student loan interest and also have an income less than $100,000. For more complex situations, like claiming itemized deductions or reporting self-employment income and have taxable income of $100, 000 or more, choose form 1040. The IRS offers detailed instructions for each form and their convenient IRS Tax Help Line for Individuals (800-829-1040).
Tax preparation software works well for all of the situations listed above and contains every form you could possibly need. For those intimidated by the typical IRS forms, tax software offers a more user-friendly experience. Posing questions about your life, the program completes the necessary forms based on your answers. Questions probe for information about life events over the tax year, such as moving, job-seeking, children and related expenses, and home-buying. And the software guides you through entering information from the various documents you may have, such as W-2s, 1099s and mortgage interest statements. While you may worry that answering simple questions through a program may not get you the most accurate return, fear not. The major players in the industry carry 100% accuracy guarantees.
So how much does this method cost? For those with simple tax returns, there are free options available online. For those with more complex needs, prices start around $20 and rise with the addition of premium features. Many offer e-filing services as well.
Hiring a tax professional may be a more expensive but convenient route to take. You know that shoebox of receipts and forms that you have? Rather than sifting through each item yourself, you can have someone else put the pieces together! And hiring an expert gives you a sense of security that your filing has been done right; there's no wondering if you could have gotten a larger refund.
Though this may be the priciest way to go, the peace of mind may be worth it to you, especially if you have a more complex return. Though fees vary greatly depending upon location and the complexity of your preparation, according to the National Society of Accountants, the average cost is $246.
Whichever method you choose, remember that April 15th is the deadline for filing your federal taxes.
It’s a common question that people with credit cards and other forms of debt ask themselves: “How much is too much?” This is an important question to ask yourself before you let yourself get in over your head.
CNN reports that the average U.S. household with at least one credit card carried nearly $16,000 in credit card debt in 2012. This number is good and well, but depending on how much money that household is bringing in each month, that amount of debt could seem very small or almost insurmountable.
Before you sign for another loan or add to your credit card debt, determine your debt-to-income ratio. It's an important number used to gauge your financial situation and will give you some perspective on your debt load.
How to calculate your debt-to-income ratio
U.S. News provides a debt-to-income ratio calculator you can use to find a more definitive answer to whether or not you have or are incurring too much debt. To calculate this ratio, add all monthly debt payments, such as your mortgage or rent, minimum credit card payments, car loan payments, and other loan obligations and divide that number by the total of all your monthly income, such as your annual gross salary, overtime, bonuses, alimony, and any other income divided by 12. This number is your debt-to-income ratio.
Now that you have this number, what does this percentage actually mean? According to U.S. News, if your ratio is 36%or less, you are considered to have a healthy debt load for most people. In fact, other sources report that a score of 30%is deemed excellent by lenders.
A score of 37-42% is considered not bad, but it’s suggested that you start paring debt immediately before any problems arise. A ratio of 43-49% means that your finances are in trouble unless you immediately take action, and if you’ve reached a score of 50% or more, you need professional help to aggressively reduce your debt problem.
When does debt makes sense?
While some say that you should avoid debt at all costs, a little of what is known as “healthy” debt is actually relatively normal and certainly acceptable. Healthy debt is considered that which is necessary for a better quality of life, such as a mortgage or car. Unhealthy debt is more along the lines of debt with a high interest rate, such as from credit cards or collections agencies.
While it’s good to keep debt to a minimum whenever possible, it’s not necessarily a good idea to deplete your cash reserves just to keep that debt low. This depletion could mean that you don’t have the money you need when an emergency strikes, such as an unexpected hospital visit or repairs for your car or home. You want to pay back what makes sense for you each month without reducing your savings to an unsustainable level.
The bottom line is to take your debt-to-income ratio into consideration and only get into the amount of debt that you can readily afford on a monthly basis. Keeping your balances in check means that you will maintain a realistic amount of debt and prevent yourself from drowning in zeroes when it comes time to take out a loan or check out your credit rating.
Knowing how much debt is too much is crucial to a better quality of your financial life. Don’t wait until it’s too late. Calculate!
Graduating from law school and business school in the aftermath of the Great Recession and a particularly weak legal employment market meant that I had as much debt as a first-time home-owner and little to no steady income. As I looked for permanent work with little success, the first of my daunting, monthly debt payments loomed large in my mind. Not only was there no way for me to realistically make the mortgage-sized debt payments each month, but throwing in the towel was not an option. Federal student debt is one of the few debts that are not discharged in bankruptcy, except in some very rare circumstances.
I was not alone in this situation. There were and are thousands of students in the same boat. One solution introduced during the Obama Administration and aftermath of the 2008 Financial Crisis was Income Based Repayment (IBR). IBR pegs a graduate's monthly loan payments to his income (try the calculator here). So if you have a six-figure debt but are only making $30K/year, your monthly payments could be under $20. Once you establish yourself in your career, your payments increase and you end up paying it all off anyway. And if you haven't paid it all off after 20 or 25 years (depending on when you opted into the program), the balance is forgiven and you owe no more student debt.
The program sounds amazing, and for many recent graduates it is the only thing fending off financial ruin; there are two important downsides, however: increasing interest and U.S. tax policy.
Let’s start with increasing interest. My student loan debt carries an interest rate of 6.8%, much higher than most home mortgages and car loans. While being able to pay a fraction of my otherwise unmanageable monthly payment allows me to pay rent and buy groceries, it also means the size of my loan continues to grow at close to 6.7% interest per year, depending on how much I manage to pay off via my reduced payments. After years of paying a fraction of what monthly payments would be without the relief of the IBR, a graduate’s principal can grow to a staggering size. If that graduate’s income doesn’t eventually catch up to the size of the debt, there could be no end in sight to this growth.
The IBR’s solution to this problem creates the second problem: Depending on when you opted into the IBR, your remaining debt is entirely forgiven after 20 or 25 years. It doesn’t matter if you owe $5,000 or $500,000; the debt goes away. Sort of. Under U.S. tax law, debt forgiveness is considered a form of income. The rationale is that getting rid of an obligation to pay someone money is analogous to gaining money equal to that debt. So if you still owe $100,000 at the time your debt is forgiven, the IRS sees that as no different than you earning $100,000 on top of your other income. This means you have an immediate tax liability of roughly 30-40% of your income, depending on your tax bracket.
For many graduates, including myself, the IBR is an essential component of post-graduate financial life. I couldn’t afford to pay my true monthly payments without it. And yet it is important to understand the drawbacks of this program and not think it is a flawless cure to your student debt.
My husband and I worked diligently to pay down our debt, ensure our credit scores were favorable, and have a chunk of cash saved in the bank. At the time, we were renting and found that we were quickly outgrowing our small, two-bedroom house. We searched for a new house to rent and realized that the renters' market in our area greatly favored the renter rather than the tenant. Prices were outrageous.
After some budgeting and deliberation, we decided the best decision financially was to purchase a home. We made the three-mile drive to our credit union to inquire about a mortgage. They congratulated us on our superb financial planning at such a young age and proceeded to offer us a mortgage loan at the prime rate. The only stipulation we did not count on? They wanted a minimum of 20% down. We had saved only 10%.
The credit union gave us two options: save for a little longer or look into a FHA insured loan. With this type of loan, we only had to put down 3.5% on our home. The excitement returned, and we embarked on our hunt for the perfect house. Six months later, our home was secured, and we even had sellers pay our closing costs. We put 5% down, so we had extra money to contribute to furnishing our new place. Our dreams of homeownership had come true – but not without a cost we had not anticipated.
While the FHA loan was attractive with its low down-payment, we later found out that an extra fee for Private Mortgage Insurance (PMI) was tacked onto our monthly payment. The PMI fee was low so we did not really worry about it, but when we calculated it over the life of our mortgage, we realized we could have purchased a decent mid-sized sedan with that money. In hindsight, we realized that saving the extra 10% and going with the conventional loan might have been our better option.
Here's a general breakdown: Let's say your credit is good enough to get the prime FHA mortgage rate of 3.25% and you are looking to purchase a house at $150,000. Your down payment, excluding closing costs, is $7,500. Your borrowed amount is $142,500. Each lender makes the decision of what percentage rate to charge for PMI based on the buyer's credit score and loan amount. If your credit score is around 720, PMI will run about $85.50 per month on a fixed-rate, 30-year mortgage. Not so bad right? Well that $85.50 per month added to the life of the mortgage costs you $30,780. PMI can be cancelled once the loan to value ratio is below 78%, but even then you are still paying for PMI for at least 17 years – generally longer.
Still, the FHA loan has its benefits. The money saved by putting 20% down on home and avoiding PMI payments might not be a priority, and that is where FHA mortgages come into play. Borrowers with less than perfect credit can obtain a home with an FHA mortgage. Also, lenders who offer FHA mortgages will consider rolling the cost of any renovations into the life of the loan in case a borrower chooses a home that needs some work. Even the PMI insurance comes in handy, because having your loan insured by FHA makes some lenders lenient when approving a borrower.
The lesson here is to calculate what you're getting into. For some, an FHA loan can be a great opportunity. For us, it might have been wiser to save a little longer instead of jumping into a house. An FHA loan is there for a reason, but just because it's available, doesn't mean you should use it.
With a 45-minute commute, a fast-paced career, and a dislike for cleaning the kitchen daily, I've always been fascinated by the idea of freezer cooking.
Here's how it works: You prepare multiple meals at one time and freeze them. On days you'll be too busy to cook a real meal, you pull out the frozen concoction and toss it in the slow cooker. After an eight to 10 hour day when you would be tempted to order out, dinner's ready to be served.
On my first attempt, I made 12 freezer meals. It took about three hours to prepare the ingredients. However, it saved my sanity during a hectic time when I would work all day and then head to my first graduate-level class.
My favorite freezer recipes so far have been chicken and dumplings, smoky pulled pork, and chipotle beef tacos. But not every recipe will be a winner. You'll want to rely heavily on reviews and comments from other people. I once tried a rosemary honey chicken recipe that tasted like pine needles. The entire dish went in the trash, and I ordered a pizza instead.
Want to take a stab at this money- and time-saving trick? Here are six tips:
1. Buy ingredients during big sales. I bought all the items I needed for my freezer-cooking debut on a day when Meijer, the local grocery chain, ran a "5%-off-all-groceries" deal. I also try to use coupons and buy store-brand items to save even more dough.
2. Embrace family-sized packaging and bulk pricing. Typically, a young professional can't benefit from the savings of family-sized packaging and bulk pricing. But because you prepare so many recipes on the same day, you can save a few cents. During my last round of food prep, I bought two family-sized packages of chicken breasts, a very large container of chicken broth, and a big bag of onion.
3. Prep your own veggies. As much as I would prefer to buy pre-cut, pre-washed celery, it is cheaper to do it myself. But take shortcuts that you prefer – like using bagged baby carrots.
4. Freeze leftover ingredients. You won't use a freezer meal every night, but you can still save some of the prepped ingredients. For example, I love using chipotle peppers in adobo sauce. But a small can has more than I can use, and it feels wasteful to toss. I mince and freeze the peppers in tablespoon-sized portions. I also have tomato paste, chicken broth, and evaporated milk in my freezer. To save time, freeze ingredients in pre-measured amounts.
5. Be sure you have space. I have an extra freezer, which allows me to make 10 to 15 recipes at one time. Some people like to lay the freezer bags flat to freeze them, helping to save space. I prefer to place the bags side-by-side in an upright position because I know I won't want to clean the freezer if one of the bags leak. It's also easier because I can dump the frozen clump of ingredients right in the crock pot without having to defrost it.
6. Don't be afraid to improvise. I add extra vegetables in some of the recipes. Sometimes, I add extra broth or sauce because I end up leaving food in the slow cooker for eight to 10 hours. You also might want to add extra spices because some of the recipes you'll find online are a bit bland. Not sure what to add? Try adding spices right before serving.
When I ask most people if they have any regrets from college, they gaze off into the distance, smile, and shake their heads no. But for me, I look back and there is so much I would change. I made a lot of mistakes in college, and unfortunately most were money mistakes. Here are five of them that you can avoid.
Private loans – I didn't do any research. I didn't look into interest rates or calculate how much time it would take me to pay back these loans. I was out of scholarship and grant money and I needed a quick-fix solution to pay my tuition. Everybody had student loans right? How nasty could private loans really be? Turns out they can be pretty nasty. If you have to take out a loan, try to get a government subsidized one before taking the private loan route.
Credit cards – It's a great idea to have a backup credit card in case you get stuck in an emergency situation. But you need to be strict with your use of it. When I first got my credit card, I was good with it and then I lost control and let the material world get the best of me. I closed my accounts long ago but am still paying for the clothes and other unnecessary purchases I made 10 years ago.
Not commuting – I had the option to commute, but living near campus with my friends, frankly, was much more fun. It is possible to live at home and still have a great college experience – especially when you have friends on campus. Half our friends crashed with us multiple days of the week for free when they commuted. Rather than borrowing only what I needed for tuition and sucking it up at my parents for as long as possible, I took out loans for more than what I needed for my tuition so I could use it for books, rent, and living expenses. I'm still paying for that rent and food.
Not working – I did work in college – a few different reception jobs here and there –but I wasn't working all of the time. And I wasn't being wise with the money I was making. I used my class schedule as an excuse to work less and party more. What I should have done: work, work, work, and save, save, save. It would have saved me a lot of money.
Avoiding my debt – This is by far my biggest life mistake so far. I was young and naïve, and I had no idea how much money I was borrowing. I just took what I needed and thought I'd have it all figured out when college was over. But when college was over, I was lost and drowning in a sea of debt. Instead of taking charge, I avoided my debt until the loan companies started calling me and my parents. I was spending more than I was making, and that is something no one should ever do.
Five years later, I am embarrassed of my debt. I feel like I inherited it from someone I barely know, and now I am really paying for it today – not just literally. I easily could have avoided all of these mistakes if I would have taken the time to research and talk to someone like my parents or a counselor before just diving into the debt pool. Take it from someone who has walked in expensive shoes. Debt as a whole is difficult to avoid altogether, but if you can minimize what debt you take on, your future self would thank you.
Studies about the Millennial Generation bring up a number of generalizations. They expect praise. They're attached to their smart phones. They have college degrees, but they also have student loans, no meaningful job, and no major life purchases to speak of.
I'm 28 years old, and yes, I have an iPhone and parents who rewarded good grades with checks. But I'm also a college graduate with no student loans and a good job. I own a home and a car, I have a 401(k), and I'm getting married this year.
There's just one caveat to breaking the Millennial mold: I'm nearly $100,000 in debt.
36% of Millennials still live with their parents, according to an 2013 Zillow article.
"Millennials have seen their parents struggle firsthand," the article reported. "As a result, they're nervous they could find themselves in a similar position."
I see the attitude among my friends: Amy is a microbiologist. Jeff is an editor. Kristen has two degrees. They all live at home. They are weary of debt. They don't want to rent. They don't want to be tied to a house. They're scared of the commitment.
And there's something to be said for that because saving money is flexible. They go out to dinner and on weekend trips. They splurge without hesitation. If something breaks in the house, at least it's not their house to fix.
For twentysomething homeowners, every purchase is scrutinized, and saving is tough. Appliances die, utility costs spike, the todo list is long.
So is it worth it?
Every person's life presents different opportunities, regardless of the common economics or job markets. So my motto is simple: Plan ahead, and don't let good opportunities pass you by.
I have a $70,000 mortgage to pay off. But, by watching the market and working with a good realtor, I also bought my house at nearly half what it sold for a decade ago.
So now I have this house to pay for. Ouch. Could I use extra money in my paycheck? Absolutely. But by starting to save for retirement now and taking advantage of an employer match, I'll have a comfortable retirement.
Oh, and remember that mortgage? It will be paid off before I hit 60. My elderly years are going to be awesome.
You can live comfortably with debt if you know how to manage it.
- See a home for the investment - not the mortgage payment.
- Know exactly where your money goes, even if it's always to bills. For my fellow smartphoneloving Millennials, I recommend the money management app Mint.
- Save tax returns and bonus checks for rainy days.
- Hunt for deals and haggle for discounts.
- Practice the art of saying "no" to yourself and to others.
Repeat after me: Not all debt is bad debt. And besides, Mom's meatloaf isn't good enough to warrant waking up at age 30 in your childhood bedroom.
You're ready to launch into college, springboard into a career and vault into a happy, successful life. There's just one obstacle standing in your way: money. Yes, you've come to terms with the fact that you need a student loan. You may be a little anxious about it, or you may be downright petrified. But with a little planning and know-how, you don't have to fear the student loan. Here's what you can do to prep for your loan and take the anxiety out of the process.
Prepare your budget.
Your adult life will include many components (and costs). Take a sheet of paper and list them all out. What's the average starting salary for your career choice? What car will you be driving? Where do you plan to live? What about other expenses (groceries, shoe-shopping, utilities, etc.)? Average those in also. Now, consider your proposed starting salary minus your costs. Whatever is left over is the amount you can realistically afford to pay monthly for your student loan.
Figure out your interest rate (with a little help).
Terrifying and confusing, nothing quite intimidates like interest. Fortunately, there's a wealth of tools at your disposal, both online and in person, to demystify it. Here's where you can go for help in translating your interest rate into dollars and "sense":
- Financial aid websites: You'll find a host of sources online to help you unravel the mystery of your loan interest. Government-hosted websites, such as direct.ed.gov, offer reference material for a wide variety of student loans and the variance in interest rates you can expect for each.
- Loan interest calculators: Determining your payments for the duration of the loan is a must. At direct.ed.gov, you'll find online loan calculators to help you determine your payments for a wide variety of student loans and repayment plans. Simply plug in your loan amount, your interest rate and a few other relevant figures, and the calculator will determine what you can expect to pay throughout the life of your loan.
- Talk to a professional: There are plenty of flesh-and-blood resources to turn to for help with deciphering your student loan interest rate. Talk to your lender at length. He's there to answer questions and clarify your loan's fine print. Your school financial counselor is another excellent source of loan interest information.
Plan for the end.
You've plugged all the details into your loan calculator. You know how much you'll pay monthly and how many years it will take to pay off the loan. You need to plan for each year. Budget ahead for the expense of a new car and all the other growing pains of life. Student loans require a long-term plan, from beginning to end, in order to safeguard your financial future and avoid long-term debt.
A student loan doesn't have to lead to nasty surprises down the road or a lifetime of debt. Take the time to budget properly, explore your options and plan ahead, and your student loan will be a stress-free stepping stone toward a bright and successful future.