In an era of student loans and continued recession, debt can seem like a fact of modern life.
While many struggle to manage it, I made a different choice. Lack of debt has been my ticket to make career, family, and lifestyle decisions without taking loans, including launching my own business.
Establishing a debt-free lifestyle may be easier than you think. I embraced these three ideas at age 17 and have been happy with my decisions every since.
You may not need to go to college, and other people will pay for it if you do.
Before you join the ranks of those staggering under student loans, take a minute to determine whether your desired field requires a college degree to start out. A certificate, apprenticeship or trade school, for instance, may be more highly valued in your field.
If you are certain that college is required, find ways to lighten your financial load. Talk to a recruiter – the military paid for my education. Apply for scholarships. Identify companies that offer tuition breaks as part of their benefits package, and earmark them as your most desirable employment options, even for entry-level positions. There is nothing to be lost by pursuing college once you can afford it, and that may not be immediately. Do you really want to figure out the answer to the "what do I want to do" question while paying a bank more than six figures to sit in classes you may not even enjoy?
If you can’t afford to write a check, you can’t afford it.
This idea has been the key to my ability to remain debt-free. I have proudly driven a used car, negotiated to take money off the sticker price once I was able to buy new vehicles, clipped coupons, and skipped restaurants. Sure, my early-20’s weekends were a bit sparse at times, but I was glad that I lived frugally when the time came to buy a house, start a family, and take a chance on a career move. With a bit in the bank and no debt to chip away at what I earned, I had full freedom to pursue exactly what I wanted.
You can live within your means and still have a good credit history.
While credit card companies work hard to convince us that we can’t build credit history without soaring card limits, the truth is that credit history is built over time. The first credit card I acquired had a limit of $300. I used it for every purchase, paid it off every week, and have continued that habit to this day. While I rarely carry a balance higher than $500 and have never taken a loan, my credit rating is sky-high.
It can be healthy to assume debt in two circumstances. The first exception is buying a house because it can be difficult to get flood, fire, or other insurance if you don't have a small loan and good credit history. The second is some types of business startups. As a service provider, I was eager to avoid startup debt for a simple reason – you become your own boss! You lose that freedom and control if forced to adapt goals, plans, and methods of operating to make that startup loan payment every month. If you offer a service, stay within your means at launch by adapting or scaling down your offering at first or pursuing it part time. If you push a product, a small loan may be necessary to buy machinery or for an initial inventory purchase, but again, you can always grow.
Dismayed because you already have debt? Don’t be! Develop a plan, commit to paying it off as quickly as possible, and adapt a “no more debt” approach once you do. Personally and professionally, the world is a more relaxed place when you don’t owe a thing to anyone.
I have over $40,000 in college debt. But that's going to change in 2014. I'm going to pay $6,000 of it down. No excuses. No pretending. But by the end of 2014, My debt will be smaller. Here's how I plan on making it work.
Playing with my paycheck
I love my paycheck – not for the money, but because it helps give me options. I have an account called "Loan Payments," where 5% of my check goes. Because I don't see it, I never miss it, and it pushes me to save consistently. By the end of the month, I can make two smaller loan payments on top of the one I already budget for, which accelerates how fast I pay down my debt. It's a game I play with myself, and I always win.
Turn my insights into dollars
I don't know everything, but the things I do know are worth something. 2014 will be the year I cash in on my passions. This requires taking a leap. My leap was writing a book that started as an idea over the summer. I set up a landing page and had a cover designed for $10. I wrote the book and hired an editor and designer (who were looking to build their portfolios). The results have been great. I've made more than I would have if I didn't write. More importantly, I learned that I have something worthwhile that people will buy. I plan to keep writing and making digital products in 2014. But that's just my hustle. You have one, too. Try it. You don't need money – you just need persistence and consistency. Those extra dollars you earn can go a long way.
Invest in myself
Everyone talks about being frugal, but I don't think that will help me. What will help is investing in myself and experiences that make me better. All the penny-pinching in the world might save me some money, but it won't make me any more money. On the other hand, spending $50 online course might be worth thousands later on. Some things are worth splurging on.
I am going to beat my debt back by $6,000 this year, because I am going to chose what matters more than what feels comfortable. I am going to play by my own rules and have fun in the process. You should, too.
Startups are hard. Building a product is hard. Finding that elusive "product-market fit" is hard. You know what is very really freaking hard? Raising money, when all you and a co-founder have are a shared laptop and some grand aspirations.
VCs and angels are a clever, shrewd bunch. Considering they often invest in maybe five startups out of a 1000 that pitch them, it is very likely you may be led on by one, subconsciously debating your office décor only to hear crickets when it should have been the fax machine producing a term sheet. And while the chase game of fundraising is in effect – you are taking meetings and running the deck ¬– who's left building the product, the one thing that will actually make your company succeed?
The best advice I can give? Forego looking for a seed round, and bootstrap the company instead. Let's look at some alternative ways to keep the company afloat while you build the next big thing.
The first to the rescue are usually Friends, Family and Fools, or the Three F's, as they like to be called. Tapping into your immediate support system is an obvious first step. But what if your uncle isn't an oil magnate from Dubai? Well, here is where you first carefully asses how much you actually need. What is the bare minimum that can sustain you and your fledgling firm while you create the product? Be realistic, as you are more likely to get money from the close people in your life not on business potential, but on their faith in you, your personal potential. Don't let them down!
Loans and credit is the de facto method for getting the company off the ground with some capital infusion. Banks, however, tightened up their lending policies since the crash. Therefore, if you are pre-revenue and pre-prototype it may not be an option to really bet on. That said, banks aren't also the only financial institutions to give out business loans – venture debt funds and government programs can also participate at this stage. And if all that fails, there is always the option of taking out a credit line or piling on some credit cards. While this has worked for some, it also tarnished the credit of countless others. Be realistic about your timeline, and reduce risk wherever possible.
Grants and awards
If you and your co-founder are cooking up something special in the garage, you may qualify for a range of government research and innovation grants and/or awards. Given that these options take a bit of time to really come together – consider the preliminary investigation, selection, application, follow-up – it is advised you get going with it sooner than later. Assess your options and figure out which criteria must be met for you to be selected. Some awards are given out in early stages based mostly on concept and market, but they are heavily reliant on the entrepreneur leading the pack and the experience he/she brings. Needless to say, these grants are highly competitive. Sifting through the multitude of options is an arduous task, but it may reward you with a no strings attached cash infusion, either at very favorable terms or no terms at all – take it and run with it.
A recent emergent trend is that of crowdfunding. By now most of you have heard of the $10 million campaign on Kickstarter and the countless other products that were catapulted from obscurity to happy customers the world over. The reality, however, is a bit less rosy than that. In the early days, there was virtually no competition for so-called "mindshare" of customers. If you had a product that was half interesting on a popular crowdfunding platform, you would meet your goal. Nowadays, however, companies big and small are all trying to sell their stuff through pre-orders. Thus, you are not competing against a couple guys with a clanky prototype but well-oiled operations that simply don't want to deal with retailers – and you can bet this is not their first rodeo. This likely exists as an option once you already have something in place and functioning. Remember to make one heck of a video.
Let me know which option worked for you in the comments below.
According to wedding website TheKnot.com, the average American wedding can come with a price tag of around $28,000.
While that's an acceptable amount of money to spend on, say, a brand new car or a down payment on a home, some couples may decide that building a life together is more important than throwing an extravagant party.
Engaged on Christmas 2013, I am part of one such couple. However, I also didn't buy into my fiancé's plan: “Let's just go to Vegas.”
Everyone has heard the tips about buying a second-hand dress or getting married on a Friday to cut costs. But when you're talking thousands of dollars, every savings counts. So after you've set a date and a (realistic) budget, consider these unique ways to save on wedding costs.
Decide what's really important
Picture your dream wedding. Write down the top five things that would make the day perfect, such as a unique menu, a gasp-worthy dress, or a specific venue. These are the items that you should settle first then work the other details around those big expenses. Using a line-item budget planner can help. Real Simple has a great downloadable worksheet.
The Internet is your best friend
I had my sights set on a particular type of shoes. But rather than snatch up the first pair I saw that fit my vision, I scoured Amazon, Heels.com, eBay, and Tradesy. Being hasty and saving money are not compatible activities. Check out a ton of wedding websites for invitations, accessories, decorations, and party favors. Many of them have email signups that can score you great coupons.
Haggle with vendors
For individual items, the cost is often set. But for services, a little hard work and some people skills can pay off. We want to serve craft sodas at our wedding. An email to the company owner promising promotion of his product enabled us to get wholesale prices. A close friend who is a photographer agreed to give us his services as a wedding present. Our venue is free because we went with a place looking to break into the market. How will they promote their space to other brides and grooms? With our wedding photos, of course.
This is your wedding. You don't have to send out save-the-dates, buy a floor-length gown, or serve a four-tiered cake with an intricate fondant design.
If you're worried about breaking rules or offending guests, check out the Q&A or submit your question to the forum on The Knot.
Cut corners when you can
Remember that budget you set? It's likely you will reach a point where you could go over it. Here's where that list of your Very Important Details comes in handy. Everything not on that list should be negotiable. Scrutinize all your non-essential expenses and you may find that your dream wedding can happen without them.
Stick to your budget, and remember: It's better to save that money for the rest of your lives together.
Inevitably, your new puppy is going to chew up something she shouldn't – a MacBook power chord in my case. Pets are invaluable companions, but they also come with a huge financial commitment – not to mention a lot of unexpected and expensive trips to the Apple store. Here are some overlooked pet care costs and advice for how to avoid them.
Coming of age
The American Society for the Prevention of Cruelty to Animals predicts that small dog owners spend around $1,300 their first year of ownership, and large dog owners spend more than $1,800. The same report says first-year cat owners spend about $1,000 and first-year fish owners spend $235.
Growing animals tend to incur extra expenses like training leashes, toys, vaccinations, and spaying or neutering. New owners often experiment with different brands and varieties of dog food, toys, and treats, too. Also remember accidents happen, and it's always when you least expect it that your best friend eats his bed – or yours.
Jacquelyn Berezoski, the manager at Poudre Valley Feed and Supply in Fort Collins, Colorado, says that that grooming items such as dog shampoo and tick-prevention medication are more sought out by customers during the summer months. Other extra costs to consider in the summer, Berezoski says, are vaccinations against heartworm.
Think seasonally, and think in advance about summertime pet care costs. Extra vaccinations and grooming supplies add to the bill but prevent even higher expenses.
State and national parks and sometimes even dog parks require entrance fees for each pet. Campground fees often include additional dog fees, too. Do your research so you can be prepared for the often cash-only requirements at parks and campgrounds.
Last year, a rent.com infographic reported 71% of renters expect to pay $200 or less for a pet deposit. The remaining 29% said they expect to pay more than that. Some landlords also collect pet rent in addition to pet deposits.
Given the inconsistency of pet deposits, it's in a renter's best interest to negotiate their costs, Renters should provide pet recommendation letters and request pet interviews to possibly decrease these deposit costs.
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.