Where the Wealthiest Millennials Stash Their Money

There’s been much talk about millennials being fearful of the stock market. They did, after all, live through the financial crisis, and many are shouldering record levels of student loan debt, while grappling with rising fixed costs.

The truth is that historically, young people have always shied away from investing. A whopping 89% of 25- to 35 year-old heads of household surveyed by the Federal Reserve in 2016 said their families were not invested in stocks. That’s only two percentage points higher than the average response since the Fed began the survey in 1989.

MagnifyMoney analyzed data from the 2016 Survey of Consumer Finances, conducted by the the Federal Reserve, to determine exactly how older millennials — those aged 25 to 35 — are allocating their assets.

In 2016, wealthy millennial households, on average, owned assets totaling more than $1.5 million. That is nearly nine times the assets of the average family in the same age group — $176,400. Included were financial assets (cash, retirement accounts, stocks, bonds, checking and savings deposits), as well as nonfinancial ones (real estate, businesses and cars).

While the wealth of each group was spread across just about every type of asset, the biggest difference was in the proportions for each category.

To add an extra layer of insight, we compared the savings habits of the average millennial household to millennial households in the top 25% of net worth. We also took a look at how the average young adult manages his or her assets to see how they differ in their approach.

Millennials and the stock market

Despite significant differences in income, we found that both sets of older millennial households today (average earners and the top 25% of earners) are investing roughly the same share of their financial assets in the market – about 60%.

Among the top 25% of millennial households, those with brokerage accounts hold more than 37% of their liquid assets, or about $224,000, in stocks and bonds and an additional 26%, or $154,000, in retirement accounts. Meanwhile, just over 14% of their assets are in liquid savings or checking accounts.

By comparison, the average millennial household with a brokerage account invests a little over $10,000 in stocks and bonds, or 22% of their total assets, and they reserve about 21% of their assets in checking or savings accounts.

Millennial households invest most heavily in their retirement accounts, accounting for around 38% of their financial assets, although they have only saved $18,800 on average.

Wealthy millennials carry much less of their wealth in checking and savings, compared with their peers. Although wealthier families carry eight times more in savings and checking than the average family — $84,000 vs. $10,300 — that’s just roughly 14% of their total assets in cash, while for the ordinary young family that figure is around 20%

The Fed data show that those on the top of the earnings pyramid are able to save far more for the future, even though they’re at a relatively early stage of their careers.

Across the board, older millennial families hold the greatest share of their financial assets in their retirement accounts. Although that share of retirement savings is smaller for wealthier millennial families (26% of their financial assets, versus 38% for the average older millennial family), they have saved far more.

When looking at the median amount of retirement savings versus the average, a more disturbing picture emerges, showing just how little the average older millennial family is saving for eventual retirement.

The median amount of money in higher earners’ retirement account is $90,000 (median being the middle point of a number set, with half the available figures above it and half below). But the median amount is $0 for the typical millennial family, meaning that at least half of millennial-run households don’t have any retirement savings at all.

Millennials and their nonfinancial assets

Most of millennial households’ wealth comes from physical assets, such as houses, cars and businesses.

While nearly 60% of young families don’t own houses today, the lowest homeownership rate since 1989, homes make up the largest share of the family’s nonfinancial assets, Fed data show.

For the average-earning older millennial family, housing represents more than two-thirds of the value of its nonfinancial assets — 66.4%. On average, this group’s homes are valued at $84,000.

The homes of rich millennial households are worth 4.6 times more, averaging $470,000 — though they represents a lower share of total nonfinancial assets — 50%.

Cars are the second-largest hard asset for the average young family to own, accounting for about 14% of nonfinancial assets.

While rich millennials drive fancier cars than their peers — prices are 2.4 times that of average millennials’ cars — their $42,000 car accounts for just 4.5% of their nonfinancial asset. In contrast, they stash as much as 31% of their asset in businesses, 20 percentage points higher than the ordinary millennial.

It’s worth noting that young adults in general are not into businesses. A scant 6.3% of young families have businesses, the lowest percentage since 1989, according to the Fed data. (Among those that do have them, the businesses represent just over 11% of their total nonfinancial assets.)

The student debt gap

Possibly the starkest example of how wealthy older millennials and their ordinary peers manage their finances can be seen in the realm of student loan debt.

A significant chunk of the average worker’s household debt comes in the form of student loans, making up close to 20% of total debt and averaging $16,000. In contrast, the wealthiest cohort carries about $2,000 less in student loan debt, on average, and this constitutes just about 4.6% of total debt.

With less student debt to worry about, it’s no surprise wealthier millennial families carry a larger share of mortgage debt. About 76% of their debt comes from their primary home, to the tune of $233,500, on average. This is 4.5 times the housing debt of a typical young homeowner.

In some cases, the top wealthy have another 11% or so of their total debt committed to a second house, something not many of their less-wealthy peers would have to worry about — affording even a first home is more of a struggle.

When is the right time to start investing?

For many millennials the answer isn’t whether or not it’s wise to save for retirement or invest for wealth but when to start. Generally, paying off high interest debts and building up a sufficient emergency fund should come first. Once those boxes are ticked, how much young workers invest depends on their tolerance for risk and their future financial goals.

“It’s never too much as long as you’ve got money for the emergency fund, and as long as they are funding their other goals not through debt,” says Krista Cavalieri, owner and senior advisor at Evolve Capital in Columbus, Ohio.

The biggest mistake that Cavalieri has seen among her young clients is that very few have been able to establish an emergency fund that will cover at least three to six months’ worth of living expenses.

Kelly Metzler, senior financial advisor at the New York-based Altfest Personal Wealth Management, said older millennials may not be able to save outside of retirement accounts yet, which can be a concern if they want to buy a house or have other large purchases or unexpected expenses ahead.

Cavalieri said that’s because young adults’ money is stretched thin by the varies needs in their lives and the lifestyle they keep.

“Their hands are kind of tied at where they are right now,” she said. “Everyone could clearly save more, but millennials are dealing with large amounts of debt. A lot of them are also dealing with the fact that the lack of financial education put that in that personal debt situation.”

The post Where the Wealthiest Millennials Stash Their Money appeared first on MagnifyMoney.

Think Twice Before You Max Out Your 401(k)

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Financial planners can’t emphasize the importance of saving for retirement enough: The earlier you start saving and the more you contribute, the better. But should you max out your retirement account? And if so, how do you do it? 

Unfortunately, there’s no solution suitable for all; every individual has a different financial situation.  

But let’s start with the basics: The maximum amount of money you can contribute to your 401(k), the retirement plan offered by your company, is currently $18,000 a year if you are under age 50, and $24,000 if you are 50 or older. If you were starting from scratch, you would have to tuck away $1,500 a month to max it out by year’s end.  

This is a big chunk of money. And although there are multiple benefits to saving for retirement, you may want to think twice before hitting that maximum.  

Remember, this is money that, once contributed, can’t be withdrawn until age 59.5 without incurring penalties (with some exceptions).  

What’s more, putting away a significant portion of their savings to max out their retirement fund doesn’t make much sense for some workers.  

If you are fresh out of college and your first job pays $50,000 annually, you’d need to save 36 percent of your paychecks to max out your 401(k) for the year.   

“Everyone needs to save for retirement, and the more dollars you could put in, the earlier, the better, but you also need to live your life,” says Eric Dostal, a certified financial planner with Sontag Advisory, which is based in New York. “To the extent that you are not able to do the things that you want to accomplish now, having a really really robust 401(k) balance will be great in your 60s, but that would cost now.”  

A few things to consider BEFORE you max out your 401(k)

  1. Do you have an emergency fund for rainy-day cash? If not, divert any extra funds to establish a fund that will cover at least three to six months’ worth of living expenses.  
  2. Do you have high-interest debt, such as credit card debt? High-interest debts, like credit cards, might actually cost you more in the long run than any potential gains you might earn by investing that money in the market.  Still, if you can get a company match, you should try to contribute enough to capture the full match. It never makes sense to leave money on the table.  
  3. Do you have other near-term goals? Are you planning to buy a house or have a child anytime soon? Do you want to travel around the world? Do you plan to pursue an advanced degree? If so, come up with a savings strategy that makes room for your nonretirement goals as well. That way you can save money for those big-ticket expenses and will be less likely to turn to credit cards or other borrowing methods. 

Maximize your 401(k) contributions

If your emergency fund is flush, your bills are paid and you’re saving for big expenses, you are definitely ready to beef up your retirement contributions.   

First, you’ll want to figure out how much to save.   

At the very least, as we said above, you should contribute enough to qualify for any employer match available to you. This is money your employer promises to contribute toward your retirement fund. There are several different ways a company decides how much to contribute to your 401(k), but the takeaway is the same no matter what — if you miss out on the match, you are leaving free money on the proverbial table. 

If you are comfortable enough to start saving more, here is a good rule of thumb: Save 10 percent of each paycheck for retirement, though you don’t have to get up to 10 percent all at once.  

For instance, try adding 1 percent more to your retirement fund every six months. Some retirement plans even offer automatic step-up contributions, where your contributions are automatically increased by 1 or 2 percent each year. 

Larry Heller, a New York-based certified financial planner and president of Heller Wealth Management, suggests that you increase your contribution amount for the next three pay periods and repeat again until you hit your maximum.  

“You will be surprised that many people can adjust with a little extra taken out of their paycheck,” Heller said.   

Once you’re in the groove of saving for retirement, consider using unexpected windfalls to boost your savings. If you get an annual bonus, for example, you can beef up your 401(k) contribution sum if you haven’t yet met your contribution limit.  

A word of caution: If you’re nearing the maximum contribution for the year, rein in your savings. You can be penalized by the IRS for overcontributing. 

If your goal is to save $18,000 for 2017, check how much you’ve contributed for the year to date and then calculate a percentage of your salary and bonus contributions that will get you there through the year’s remaining pay periods.  

The post Think Twice Before You Max Out Your 401(k) appeared first on MagnifyMoney.

20 ZIP Codes With the Highest Real Estate Returns

Although it's a small number, ZIP codes play a large role in the real estate game — especially when it comes to profit.

Your ZIP code is a pretty important piece of an address, especially when it comes to the real estate market. HomeUnion, an online real estate investment management firm, identified zip codes in 20 metros that maximize real estate returns while minimizing risk over a five-year horizon. They examined school quality and neighborhood attractiveness for single-family rentals over five years.

“HomeUnion Research Services looked at more than a dozen attributes that characterize a neighborhood including crime, schools, white-collar jobs, unemployment, homeownership, permitting activity, etc.,” said Steve Hovland, director of research for HomeUnion. “Based on those attributes, we forecast appreciation, vacancy and rent changes over the next five years.”

The study calculated Annualized Total Return, which includes HomeUnion’s projections for how much the value of single-family rentals will appreciate and how much cash flow they’re expected to generate. According to Hovland, HomeUnion’s model can determine the price and rent for every single-family home within a specific zip code and allow them to predict the price and rent in five years.

The Long Haul 

Americans are increasingly investing in real estate to reap the rewards, which makes investing in the right ZIP code crucial. To mitigate risk and earn the highest real estate returns, investors should focus assets that can maintain value even during downturns, Hovland said.

Remember, when it comes to real estate, ZIP codes aren’t the only numbers that matter. Without a good credit score, financing a real estate investment can be difficult and costly. See where you stand and check your credit score for free at Credit.com. Here are the top ZIP codes with the highest real estate returns.

20. 46280

Submarket: North Indianapolis

Metro Area: Indianapolis

Annualized Total Return: 5.4%

19. 91602

Submarket: North Hollywood, California

Metro Area: Los Angeles

Annualized Total Return: 5.4%

18. 73003

Submarket: Edmond, Oklahoma

Metro Area: Oklahoma City

Annualized Total Return: 5.4%

17. 63043

Submarket: Maryland Heights, Missouri

Metro Area: St. Louis

Annualized Total Return: 5.5%

16. 85259

Submarket:  North Scottsdale, Arizona

Metro Area: Phoenix

Annualized Total Return: 5.5%

15. 77059

Submarket: Clear Lake City, Texas

Metro Area: Houston

Annualized Total Return: 5.6%

14. 75022

Submarket:  Flower Mound, Texas

Metro Area: Dallas

Annualized Total Return: 5.6%

13. 44023

Submarket:  Chagrin Falls, Ohio

Metro Area: Cleaveland

Annualized Total Return: 5.6%

12. 34677

Submarket: Oldsmar, Florida

Metro Area: Tampa

Annualized Total Return: 5.7%

11. 97224

Submarket: King City, Oregon

Metro Area: Portland, Oregon

Annualized Total Return: 5.8%

10. 30078

Submarket: Snellville, Georgia

Metro Area: Atlanta

Annualized Total Return: 5.8%

9. 45255

Submarket:  Forestville/Cherry Grove, Ohio

Metro Area: Cincinnati

Annualized Total Return: 5.9%

8. 60016

Submarket: Des Plaines, Illinois

Metro Area: Chicago

Annualized Total Return: 6%

7. 66223

Submarket: Overland Park, Kansas

Metro Area: Kansas City

Annualized Total Return: 6.2%

6. 37062

Submarket: Fairview, Tennessee

Metro Area: Nashville

Annualized Total Return: 6.5%

5. 33327

Submarket: Weston, Florida

Metro Area:  Fort Lauderdale, Florida

Annualized Total Return: 6.6%

4. 33158

Submarket: Palmetto Bay, Florida

Metro Area: Miami

Annualized Total Return: 6.8%

3. 48322

Submarket: West Bloomfield Township, Michigan

Metro Area: Detroit

Annualized Total Return: 6.9%

2. 19035

Submarket: Gladwyne, Pennsylvania

Metro Area: Philadelphia

Annualized Total Return: 6.9%

1. 33434

Submarket: Hamptons at Boca Raton, Florida

Metro Area: West Palm Beach

Annualized Total Return: 8.1%

Image: irina88w

The post 20 ZIP Codes With the Highest Real Estate Returns appeared first on Credit.com.

How to Buy a House With a Friend — The Right Way

It’s completely possible for you to purchase a house or other property with someone who isn’t your spouse, like a friend or family member.

“It’s a beautiful occasion, but it’s also a complex business transaction,” says Senior Managing Partner of New York City-based Law Firm of Kishner & Miller, Bryan Kishner. “There are tremendous positives to the overall thing, but people need to be careful with the unforeseen items, and a lot of people say they didn’t think about that.”

For friends who are unable to afford a home in their area on a single income, or cohabiting couples, buying a home together can help both parties boost their net worth or simply achieve a goal of becoming a homeowner.

That being said, purchasing a home with a friend can be more complicated than buying a house with your spouse. The key to a successful co-homeownership arrangement is to set yourselves up for success from the get-go.

Choose the Right Joint Homeownership Structure

When you buy a home, you’ll get a title, which proves the property is yours. The paper the title is printed on is called a deed, and it explains how you, the co-owners, have agreed to share the title. The way the title is structured becomes important when you need to figure out what happens when a co-owner needs to part with the property.

These are the two most common ways to approach joint homeownership:

1. Tenants in Common

A tenants in common, or tenancy in common, is the most common structure people use when they purchase a property for personal use. This outlines who owns what percentage of the property and allows each owner to control what happens if they pass away. For example, a co-owner can pass their share onto any beneficiaries in a will, and that will be honored.

The TIC allows co-owners to own unequal shares of the property, which can come in handy if one owner will occupy a significant majority or minority of the shared home. For example, if two friends decide to buy a multifamily home, but one friend pays more because one friend’s space has much more square footage than the other friend’s space, they can split their shares of the home accordingly.

Kishner says to make sure you “reference and evidence your intent to use the tenants in common structure on the deed,” as it’s the primary evidence of your ownership — meaning you would write who owns what percentage of the property on the deed and note the parties chose a TIC structure.

The Pros of a TIC structure

Ownership can be unevenly split

You can own as much or as little as you want of the property as long as the combined ownership adds up to 100%. So, if you’re putting up 60% of the down payment, you can work it out with the other co-owner(s) to own 60% of the property on the title.

You don’t have to live there

You can own part of the property without living there. This is relevant for someone who simply wants to be a partial owner, but doesn’t want to live at the property.

You get to decide what happens to your share after you pass away

The TIC allows you the flexibility to decide what happens to your interest in the property in the event you pass away. You can decide if it will go to the other co-owners or to an heir. Regardless, the decision is yours.

The Cons of a TIC structure

Co-owners can sell their interest without telling you

Co-owners in a TIC can sell their interest in the property at any time, without the permission of others in the agreement. However, if they are also on the mortgage loan, they are still on the hook to make payments, says Rafael Reyes, a loan officer based in New York City.

2. Joint Tenants with Rights of Survivorship

This arrangement is different from a tenants in common arrangement in that in the case of one co-owner’s death, the deceased party’s shares will be automatically absorbed by the living co-owners. For this reason, this type of structure is more common among family members or cohabiting partners looking to purchase property together.

If, for example, you are purchasing with a family member and would like them to automatically absorb your portion in case you pass away unexpectedly, this is the option you’d go with. Even if the deceased has it written in their will to pass their interest to a beneficiary, that likely won’t be honored.

A joint tenants agreement requires these four essential components:

  1. Co-owners must all acquire the property at the same time.
  2. Co-owners must all have the same title on assets.
  3. Each co-owner must own equal interests in the property. So if you buy with one friend, you’ll own 50%, but if you buy with two friends, you’d own one-third of the property. This may be an important consideration if co-owners will occupy different amounts of space in the property.
  4. Co-owners must each have the same right to possess the entirety of the assets.

The Pros of a joint tenants agreement

Everyone owns an equal share in the property

There’s not arguing over shares if you go with a joint tenants arrangement, since it requires all co-owners to have an equal interest. So each co-owner has the same right to use, take loans out against, or sell the property.

No decisions to make if someone dies

There’s nothing for co-owners or family members to fight over after you pass away. Your ownership shares are automatically inherited by the other co-owners when you pass away, regardless of what might be written in a will.

The Cons of a joint tenants agreement

Equal ownership

Equal ownership can be a con as much as it’s a pro. If you’re going to occupy more than 50% of the space, or put up more of the mortgage or down payment, you may want to own more than your equal share of the property. If that will bother you, a TIC agreement is best.

How to Create a Co-ownership Agreement

Before you even start the mortgage lending process, it’s recommended to work out an agreement on how you’ll split equity in the home, who will be responsible for maintenance costs, and what will happen in the event of major life events such as death, marriage, or having children.

“You are more or less going into business together” when you purchase a home with a friend or relative, says Kishner. And like any smart business owner, you’ll want to protect yourself in case things go south down the road.

A real estate attorney can help you set up an official co-ownership agreement.

Kishner recommends each person in the agreement get their own attorney, who can represent each party’s personal concerns and interests during negotiation. Rates vary by location, but he estimates a good real estate lawyer would charge around $1,000.

Ideally, Kishner says, this agreement is created and signed before closing the mortgage loan. That way, if simply going through all of the what-ifs scares someone off, they have the opportunity to pull out.

3 Questions Every Co-ownership Agreement Should Answer

The co-ownership agreement you draft and sign will need to address many issues. Here are three common scenarios the experts offered us:

1. What happens if someone wants out?

Your agreement should outline an exit plan in case one or more of you want out of the property. This could be because of a number of reasons but is the area where things can get extremely complicated. For example, what if one of the co-owners wants to be bought out by the other co-owners?

Let’s say you’ve got three people on a mortgage and on the title to a property. If the other two can come up with the money for the equity, you’ve solved that problem.

But if someone wants to sell their interest in the property, for example, Reyes says they can’t just take the cash and walk away, since they’ll still have some financial obligation to the home if they are on the mortgage. So you’d need to also refinance the mortgage to get them off of it, and that could affect the other co-owner’s financial picture. The only way to relieve someone of their financial obligation to the mortgage is to refinance with the lender. That’s because if they leave and decide to stop making mortgage payments, that will affect your credit score.

Be prepared. When you refinance, the remaining co-owners will need to qualify again for the mortgage. If you decided to add a co-owner because you couldn’t originally qualify for the property based on your income, you might not qualify to own after a refinance.

If you can’t refinance, you all may decide to arrange for the departing member to rent out their living space in the household … then you’d need to deal with the issues surrounding finding a roommate or having a tenant. However you all want to go about handling this kind of situation should already be outlined in the co-ownership agreement, so you’ll have one less thing to argue over in a split.

2. What happens if a co-owner loses their job?

You want to be prepared to fulfill your financial obligations if someone loses their income. That’s why it’s recommended to create a shared emergency fund, which you can draw from in the case that one of the owners runs into financial issues (or, of course, to handle any maintenance needs). You can establish the contributions and rules surrounding a shared emergency fund in your co-ownership agreement.

Reyes advises putting away about six months’ worth of the property expenses into a shared savings account.

“That six-month reserve, at least, is important because ultimately, God forbid, if there is some kind of financial turbulence like job loss, they can cover the mortgage or they could sell the home within six months in this market,” said Reyes.

3. How will you pay bills and taxes?

The co-ownership agreement also needs to address how you all will split up housing costs. Kauffman says you should set up a joint account and agree on what each party should contribute to the fund each pay period.

You should consider the repairs, maintenance, and upkeep on the house, as well as things that could increase over time such as property tax and homeowner’s insurance, too, Kauffman adds. In the event those costs exceed what you’ve set aside to pay for them in escrow accounts, the co-ownership agreement needs to outline how the extra bill will be paid.

Applying for a Mortgage as a Joint Homeowner

If you want to purchase a home with a friend or relative, you’ll first have to decide whether or not both of your names will be on the mortgage.

A lender will consider both of your credit scores during the underwriting process, which means a person with a lower credit score could drag down your collective credit score, leading to higher mortgage rates.

Kauffman strongly advises reaching out to figure out your financing before applying for a loan with friends.

“Each of them might understand what they can afford on their own, but they may not be aware of how their purchasing power changes,” Kauffman says. You may find you qualify for more or less house than you thought you could afford.

He adds there are some serious things to consider when you decide to enter into an investment with other people that you’re not necessarily tied to. Carefully consider your personal relationships with the people you’re going into homeownership with.

“You’ve got to really consider who you’re getting into it with and really consider all of these things that are bound to happen when you have [multiple] lives,” says Kauffman.

It can also be potentially awkward when friends or colleagues realize they must reveal aspects of their finances that they might prefer to keep private, such as their credit score, credit history, and total income.

“Oftentimes people learn a lot about their [co-owner] through a credit report, and it becomes embarrassing and uncomfortable sometimes,” says Rick Herrick, a loan officer at Bedford, N.H.-based Loan Originator.

The post How to Buy a House With a Friend — The Right Way appeared first on MagnifyMoney.

Ultimate Guide to Maximizing Your 401(k)

You’re probably familiar with the basics of a 401(k).

You know that it’s a retirement account and that it’s offered by your employer. You know that you can contribute a percentage of your salary and that you get tax breaks on those contributions. And you know that your employer may offer some type of matching contribution.

But beyond the basics, you may have some confusion about exactly how your 401(k) works and what you should be doing to maximize its benefits.

That’s what this guide is going to show you. We’ll tell you everything you need to know in order to maximize your 401(k) contributions.

The 4 Types of 401(k) Contributions You Need to Understand

When it comes to maximizing your 401(k), nothing you do will be more important than maximizing your contributions.

Because while most investment advice focuses on how to build the perfect portfolio, the truth is that your savings rate is much more important than the investments you choose. Especially when you’re just starting out, the simple act of saving more money is far and away the most effective way to accelerate your path toward financial independence.

There are four different ways to contribute to your 401(k), and understanding how each one works will allow you to combine them in the most efficient way possible, adding more money to your 401(k) and getting you that much closer to retirement.

1. Employee Contributions

Employee contributions are the only type of 401(k) contribution that you have full control over and are likely to be the biggest source of your 401(k) funds.

Employee contributions are the contributions that you personally make to your 401(k). They’re typically set up as a percentage of your salary and are deducted directly from your paycheck.

For example, let’s say that you are paid $3,000 every two weeks. If you decide to contribute 5% of your salary to your 401(k), then $150 will be taken out of each paycheck and deposited directly into your 401(k).

There are two different types of employee contributions you can make to your 401(k), each with a different set of tax benefits:

  1. Traditional contributions – Traditional contributions are tax-deductible in the year you make the contribution, grow tax-free while inside the 401(k), and are taxed as ordinary income when you withdraw the money in retirement. This is just like a traditional IRA. All 401(k)s allow you to make traditional contributions, and in most cases your contributions will default to traditional unless you choose otherwise.
  2. Roth contributions – Roth contributions are NOT tax-deductible in the year you make the contribution, but they grow tax-free while inside the 401(k) and the money is tax-free when you withdraw it in retirement. This is just like a Roth IRA. Not all 401(k)s allow you to make Roth contributions.

For more on whether you should make traditional or Roth contributions, you can refer to the following guide that’s specific to IRAs but largely applies to 401(k)s as well: Guide to Choosing the Right IRA: Traditional or Roth?

Maximum personal contributions

The IRS sets limits on how much money you can personally contribute to your 401(k) in a given year. For 2017, employee contributions are capped at $18,000, or $24,000 if you’re age 50 or older. In subsequent sections we’ll talk about how much you should be contributing in order to maximize these contributions.

2. Employer Matching Contributions

Many employers match your contributions up to a certain point, meaning that they contribute additional money to your 401(k) each time you make a contribution.

Employer matching contributions are only somewhat in your control. You can’t control whether your employer offers a match or the type of match they offer, but you can control how effectively you take advantage of the match they do offer.

Taking full advantage of your employer match is one of the most important parts of maximizing your 401(k). Skip ahead to this section to learn more on how to maximize your employer match.

3. Employer Non-Matching Contributions

Non-matching 401(k) contributions are contributions your employer makes to your 401(k) regardless of how much you contribute. Some companies offer this type of contribution in addition to, or in lieu of, regular matching contributions.

For example, your employer might contribute 5% of your salary to your 401(k) no matter what. Or they might make a variable contribution based on the company’s annual profits.

It’s important to note that these contributions are not within your control. Your employer either makes them or not, no matter what you do.

However, they can certainly affect how much you need to save for retirement, since more money from your employer may mean that you don’t personally have to save as much. Or they could be viewed as additional free savings that help you reach financial independence even sooner.

4. Non-Roth After-Tax Contributions

This last type of 401(k) contribution is rare. Many 401(k) plans don’t even allow this type of contribution, and even when they do, these contributions are rarely utilized.

The big catch is again that most 401(k) plans don’t allow these contributions. You can refer to your 401(k)’s summary plan description to see if it does.

And even if they are allowed, it typically only makes sense to take advantage of them if you’re already maxing out all of the other retirement accounts available to you.

But if you are maxing out those other accounts, you want to save more, and your 401(k) allows these contributions, they can be a powerful way to get even more out of your 401(k).

Here’s how they work:

Non-Roth after-tax 401(k) contributions are sort of a hybrid between Roth and traditional contributions. They are not tax-deductible, like Roth contributions, which means they are taxed first and then the remaining money is what is contributed to your account. The money grows tax-free while inside the 401(k), but the earnings are taxed as ordinary income when they are withdrawn. The contributions themselves are not taxed again.

A quick example to illustrate how the taxation works:

  • You make $10,000 of non-Roth after-tax contributions to your 401(k). You are not allowed to deduct these contributions for tax purposes.
  • Over the years, that $10,000 grows to $15,000 due to investment performance.
  • When you withdraw this money, the $10,000 that is due to contributions is not taxed. But the $5,000 that is due to investment returns — your earnings — is taxed as ordinary income.

This hybrid taxation means that on their own non-Roth after-tax 401(k) contributions are typically not as effective as either pure traditional or Roth contributions.

But they can be uniquely valuable in two big ways:

  1. You can make non-Roth after-tax contributions IN ADDITION to the $18,000 annual limit on regular employee contributions, giving you the opportunity to save even more money. They are only subject to the $54,000 annual limit that combines all employee and employer contributions made to a 401(k)..
  2. These contributions can be rolled over into a Roth IRA, when you leave your company or even while you’re still working there. And once the money is in a Roth IRA, the entire balance, including the earnings, grows completely tax-free. This contribution rollover process has been coined the Mega Backdoor Roth IRA, and it can be an effective way for high-income earners to stash a significant amount of tax-free money for retirement.

How to Maximize Your 401(k) Employer Match

With an understanding of the types of 401(k) contributions available to you, it’s time to start maximizing them. And the very first step is making sure you’re taking full advantage of your employer match.

Simply put, your 401(k) employer match is almost always the best investment return available to you. Because with every dollar you contribute up to the full match, you typically get an immediate 25%-100% return.

You won’t find that kind of deal almost anywhere else.

Here’s everything you need to know about understanding how your employer match works and how to take full advantage of it.

How a 401(k) Employer Match Works

While every 401(k) matching program is different, and you’ll learn how to find the details of your program below, a fairly typical employer match looks like this:

  • Your employer matches 100% of your contribution up to 3% of your salary.
  • Your employer also matches 50% of your contribution above 3% of your salary, up to 5% of your salary.
  • Your employer does not match contributions above 5% of your salary.

To see how this works with real numbers, let’s say that you make $3,000 per paycheck and that you contribute 10% of your salary to your 401(k). That means that $300 of your own money is deposited into your 401(k) as an employee contribution every time you receive a paycheck, and your employer matching contribution breaks down like this:

  1. The first 3% of your contribution, or $90 per paycheck, is matched at 100%, meaning that your employer contributes an additional $90 on top of your contribution.
  2. The next 2% of your contribution, or $60 per paycheck, is matched at 50%, meaning that your employer contributes an additional $30 on top of your contribution.
  3. The next 5% of your contribution is not matched.

All told, in this example, your employer contributes an extra 4% of your salary to your 401(k) as long as you contribute at least 5% of your salary. That’s an immediate 80% return on investment.

That’s why it’s so important to take full advantage of your 401(k). There’s really no other investment that provides such an easy, immediate, and high return.

How to Find Your 401(k) Employer Matching Program

On a personal level, taking full advantage of your 401(k) employer match is simply a matter of contributing at least the maximum percent of salary that your employer is willing to match. In the example above that would be 5%, but the actual amount varies from plan to plan.

So your job is to find out exactly how your 401(k) employer matching program works, and the good news is that it shouldn’t be too hard.

There are two main pieces of information you’re looking for:

  1. The maximum contribution percentage your employer will match – This is the amount of money you’d need to contribute in order to get the full match. For example, your employer might match your contribution up to 5% of your salary as in the example above, or it could be 3%, 12%, or any other percentage. Whatever this maximum percentage is, you’ll want to do what you can to contribute at least that amount so that you get the full match.
  2. The matching percentage – Your employer might match 100% of your contribution, or they may only match 50%, or 25%, or some combination of all of the above, and this has a big effect on the amount of money you actually receive. For example, two companies might both match up to 5% of your salary, but one might match 100% of that contribution, and one might only match 25% of it. Both are good deals, but one is four times as valuable.

With those two pieces of information in hand, you’ll know how much you need to contribute in order to get the full match and how much extra money you’ll be getting each time you make that contribution.

As for where to find this information, the best and most definitive source is your 401(k)’s summary plan description, which is a long document that details all the ins and outs of your plan. This is a great resource for all sorts of information about your 401(k), but you can specifically look for the word “match” to find the details on your employer matching program.

And if you have any trouble either finding the information or understanding it, you can reach out to your human resources representative for help. You should be able to find their contact information in the summary plan description.

Two Big Pitfalls to Avoid When Maximizing Your 401(k) Employer Match

Your 401(k) employer match is almost always a good deal, but there are two pitfalls to watch out for: vesting and front-loading contributions. Both of these could either diminish the value of your employer match or cause you to miss out on getting the full match.

Pitfall #1: Vesting

Clock time deadline

Employer contributions to your 401(k) plan, including matching contributions, may be subject to something called a vesting schedule.

A vesting schedule means that those employer contributions are not 100% yours right away. Instead, they become yours over time as you accumulate years of service with the company. If you leave before your employer contributions are fully vested, you will only get to take some of that money with you.

For example, a common vesting schedule gives you an additional 20% ownership over your 401(k) employer contributions for each year you stay with the company. If you leave before one year, you will not get to keep any of those employer contributions. If you leave after one year, you will get to keep 20% of the employer contributions and the earnings they’ve accumulated. After two years it will be 40%, and so on until you’ve earned the right to keep 100% of that money after five years with the company.

Three things to know about vesting:

  1. Employee contributions are never subject to a vesting schedule. Every dollar you contribute and every dollar that money earns is always 100% yours, no matter how long you stay with your company. Only employer contributions are subject to vesting schedules.
  2. Not all companies have a vesting schedule. In some cases you might be immediately 100% vested in all employer contributions.
  3. There is a single vesting clock for all employer contributions. In the example above, all employer contributions will be 100% vested once you’ve been with the company for five years, even those that were made just weeks earlier. You are not subject to a new vesting period with each individual employer contribution.

A vesting schedule can decrease the value of your employer match. A 100% match is great, but a 100% match that takes five years to get the full benefit of is not quite as great.

Still, in most cases it makes sense to take full advantage of your employer match, even if it’s subject to a vesting schedule. And the reasoning is simply that the worst-case scenario is that you leave your job before any of those employer contributions vest, in which case your 401(k) would have acted just like any other retirement account available to you, none of which offer any opportunity to get a matching contribution.

However, there are situations in which a vesting schedule might make it better to prioritize other retirement accounts before your 401(k). In some cases, your 401(k) employer contributions might be 0% vested until you’ve been with the company for three years, at which point they will become 100% vested. If you anticipate leaving your current employer within the next couple of years, and if your 401(k) is burdened with high costs, you may be better off prioritizing an IRA or other retirement account first.

You may also want to consider your vesting schedule before quitting or changing jobs. It certainly shouldn’t be the primary factor you consider, but if you’re close to having a significant portion of your 401(k) vest, it may be worth waiting just a little bit longer to make your move.

You can find all the details on your 401(k) vesting schedule in your summary plan description. And again you can reach out to your human resources representative if you have any questions.

Pitfall #2: Front-Loading Contributions

In most cases, it makes sense to put as much money into your savings and investments as soon as possible. The sooner it’s contributed, the more time it has to compound its returns and earn you even more money.

But the rules are different if you’re trying to max out your 401(k) employer match.

The reason is that most employers apply their maximum match on a per-paycheck basis. That is, if your employer only matches up to 5% of your salary, what they’re really saying is that they will only match up to 5% of each paycheck.

For a simple example, let’s say that you’re paid $18,000 twice per month. So over the course of an entire year, you make $432,000.

In theory, you could max out your annual allowed 401(k) contribution with your very first paycheck of the year. Simply contribute 100% of your salary for that one paycheck, and you’re done.

The problem is that you would only get the match on that one single paycheck. If your employer matches up to 5% of your salary, then they would match 5% of that $18,000 paycheck, or $900. The next 23 paychecks of the year wouldn’t get any match because you weren’t contributing anything. And since you were eligible to get a 5%, $900 matching contribution with each paycheck, that means you’d be missing out on $20,700.

Now, most people aren’t earning $18,000 per paycheck, so the stakes aren’t quite that high. But the principle remains the same.

In order to get the full benefit of your employer match, you need to set up your 401(k) contributions so that you’re contributing at least the full matching percentage every single paycheck. You may be able to front-load your contributions to a certain extent, but you want to make sure that you stay far enough below the annual $18,000 limit to get the full match with every paycheck.

Now, some companies will actually make an extra contribution at the end of the year to make up the difference if you contributed enough to get the full match but accidentally missed out on a few paychecks. You can find out if your company offers that benefit in your 401(k)’s summary plan description.

But in most cases you’ll need to spread your contributions out over the entire year in order to get the full benefit of your employer match.

When to Contribute More Than Is Needed for Your Employer Match

Maxing out your 401(k) employer match is a great start, but there’s almost always room to contribute more.

Using the example from above, the person with the $3,000 per-paycheck salary would max out his or her employer match with a 5% contribution. That’s $150 per paycheck. Assuming 26 paychecks per year, that individual would personally contribute $3,900 to his or her 401(k) over the course of a year with that 5% contribution.

And given that the maximum annual contribution for 2017 is $18,000 ($24,000 if you’re 50+), he or she would still be eligible to contribute an additional $14,100 per year. In fact, this individual would have to set his or her 401(k) contribution to just over 23% in order to make that full $18,000 annual contribution.

3 big questions to answer:

  1. Do you need to contribute more in order to reach your personal goals?
  2. Can you afford to contribute more right now?
  3. If the answer is yes to both #1 and #2, should you be making additional contributions to your 401(k) beyond the employer match, or should you be prioritizing other retirement accounts?

Questions #1 and #2 are beyond the scope of this guide, but you can get a sense of your required retirement savings here and here.

Question #3 is what we’ll address here. If you’ve already maxed out your employer match and you want to save more money for retirement, should you prioritize your 401(k) or other retirement accounts?

Let’s dive in.

What Other Retirement Accounts Are Available to You?

Your 401(k) is almost never the only retirement account available to you. Here are the other major options you might have.

IRA

An IRA is a retirement account that you set up on your own, outside of work. You can contribute up to $5,500 per year ($6,500 if you’re 50+), and just like with the 401(k) there are two different types:

  1. Traditional IRA – You get a tax deduction on your contributions, your money grows tax-free inside the account, and your withdrawals are taxed as ordinary income in retirement.
  2. Roth IRA – You do not get a tax deduction on your contributions, but your money grows tax-free and can be withdrawn tax-free in retirement.

You can read more about making the decision between using a Roth IRA or a traditional IRA here: Guide to Choosing the Right IRA: Traditional or Roth?

The big benefit of IRAs is that you have full control over the investment company you use, and therefore the investments you choose and the fees you pay. While some 401(k)s force you to choose between a small number of high-cost investments, IRAs give you a lot more freedom to choose better investments.

The only catch is that there are income limits that may prevent you from being allowed to contribute to an IRA or to deduct your contributions for tax purposes. If you earn more than those limits, an IRA may not be an option for you.

Health Savings Account

Health savings accounts, or HSAs, were designed to be used for medical expenses, but they can also function as a high-powered retirement account.

In fact, health savings accounts are the only investment accounts that offer a triple tax break:

  1. Your contributions are deductible.
  2. Your money grows tax-free inside the account.
  3. You can withdraw the money tax-free for qualified medical expenses.

On top of that, many HSAs allow you to invest the money, your balance rolls over year to year, and as long as you keep good records, you can actually reimburse yourself down the line for medical expenses that occurred years ago.

Put all that together with the fact that you will almost certainly have medical expenses in retirement, and HSAs are one of the most powerful retirement tools available to you.

The catch is that you have to be participating in a qualifying high-deductible health plan, which generally means a minimum annual deductible of $1,300 for individual coverage and $2,600 for family coverage.

If you’re eligible though, you can contribute up to $3,400 if you are the only individual covered by such a plan, or up to $6,750 if you have family coverage.

Backdoor Roth IRA

If you’re not eligible to contribute to an IRA directly, you might want to consider something called a Backdoor Roth IRA.

The Backdoor Roth IRA takes advantage of two rules that, when combined, can allow you to contribute to a Roth IRA even if you make too much for a regular contribution:

  1. You are always allowed to make non-deductible traditional IRA contributions, up to the annual $5,500 limit, no matter how much you make.
  2. You are also allowed to convert money from a traditional IRA to a Roth IRA at any time, no matter how much you make.

When you put those together, high-earners could make non-deductible contributions to a traditional IRA, and shortly after convert that money to a Roth IRA. From that point forward the money will grow completely tax-free.

There are some potential pitfalls, and you can review all the details here. But if you are otherwise ineligible to make IRA contributions, this is a good option to have in your back pocket.

Taxable Investment Account

While dedicated retirement accounts offer the biggest tax breaks, there are plenty of tax-efficient ways to invest within a regular taxable investment account as well.

These accounts can be especially helpful for nearer term goals, since your money isn’t locked away until retirement age, or for money you’d like to invest after maxing out your dedicated retirement accounts.

How to Decide Between Additional 401(K) Contributions and Other Retirement Accounts

With those options in hand, how do you decide whether to make additional 401(k) contributions, beyond the amount needed to max out the employer match, or to contribute that money to other accounts?

There are a few big factors to consider:

  • Eligibility – If you’re not eligible to contribute to an IRA or HSA, a 401(k) might be your best option by default.
  • Costs – Cost is the single best predictor of future investment returns, with lower cost investments leading to higher returns. You’ll want to prioritize accounts that allow you to minimize the fees you pay.
  • Investment options – You should prioritize accounts that allow you to implement your preferred asset allocation, again with good, low-cost funds.
  • Convenience – All else being equal, having fewer accounts spread across fewer companies will make your life easier.

With those factors in mind, here’s a reasonable guide for making the decision:

  1. Max out your employer match before contributing to other accounts.
  2. If your 401(k) offers low fees and investments that fit your desired portfolio, you can keep things simple by prioritizing additional contributions there first. This allows you to work with one account, at least for a little while, instead of several.
  3. If your 401(k) is high-cost, or if you’ve already maxed out your 401(k), a health savings account may be the next best place to look. If you can pay for your medical expenses with other money, allowing this account to stay invested and grow for the long term, that triple tax break is hard to beat.
  4. An IRA is likely your next best option. You can review this guide for a full breakdown of the traditional versus Roth debate.
  5. If you’re not eligible for a direct IRA contribution, you should consider a Backdoor Roth IRA.
  6. If you maxed out your other retirement accounts because your 401(k) is high-cost, now is probably the time to go back. While there are some circumstances in which incredibly high fees might make a taxable investment account a better deal, in most cases the tax breaks offered by a 401(k) will outweigh any difference in cost.
  7. Once those retirement accounts are maxed out, you can invest additional money in a regular taxable investment account.

The Bottom Line: Maximize Your 401(k)

A 401(k) is a powerful tool if you know how to use it. The tax breaks make it easier to save more and earn more than in a regular investment account, and the potential for an employer match is unlike any opportunity offered by any other retirement account.

The key is in understanding your 401(k)’s specific opportunities and how to take maximum advantage of them. If you can do that, you may find yourself a lot closer to financial independence than you thought.

The post Ultimate Guide to Maximizing Your 401(k) appeared first on MagnifyMoney.

The Best Investment for Your Lump Sum

Whether your lump sum arrived as a tax return, a bonus, an inheritance or a larger-than-expected gift, here are some suggestions for what to do with it.

Money doesn’t usually come out of nowhere, but when it does, it’s nice to have some idea of how to use it. Whether your lump sum arrived as a tax return, a bonus, an inheritance or a larger-than-expected gift from a family member, Shelly-Ann Eweka, a Denver-based financial adviser with TIAA, has suggestions on what to do with it, depending on the amount and how much money you’ve already saved.

Her suggestions apply to two different scenarios: One, if you haven’t maxed out your savings potential and are carrying around some debt and two, if you’re debt-free and have managed to shore up adequate savings. Experts suggest tucking away enough to cover three to six months of expenses in case of emergency, as well as approximately 10% to 15% of your income in retirement savings. So if you’re behind, now’s the time to get started.

If You’re Trying to Save & Have Debt

Here’s how Eweka suggested investing various dollar amounts if you’re behind on your savings and carry debt:

$100

If you have no savings at all, Eweka said to either open an account using the lump sum or split it between a savings account and your favorite charity. Even $50 in an account will start you down the road to saving — sometimes all you need is a push. Be sure the charity is a 501(c)(3) for potential tax benefits, she said.

$500

To grow that $500, Eweka suggested opening an IRA. “Talk to a financial adviser about the benefits and whether your qualify for a Roth and traditional IRA,” she said. “An IRA can offer a great way to help build additional savings for retirement.” If you don’t have a financial adviser, you can learn more about IRAs here.

$1,000

This amount can go a long way when it comes to debt, so Eweka said to focus on that. “Allocate any extra cash directly toward paying down debt, whether from credit cards or student loans,” she said. “Paying down debt as quickly as possible, while also saving for retirement, is critical to avoid high interest.” (Paying down debt can also improve your credit standing. You can see how by viewing two of your scores for free on Credit.com.)

$10,000

If you have no savings, plunking the full $10,000 into an account will make a great start. “To be safe, you should have enough money in your emergency fund to cover all your necessary expenses for [at least] three months,” Eweka said. “That amount will vary from person to person, but you should have enough saved up to cover your necessities in case of a financial catastrophe.”

If You Already Have Savings 

If you’ve maxed out your savings and retirement options, you have more flexibility. Eweka suggested putting the money toward things that will advance your career.

$100

Consider having your resume professionally written and critiqued. Getting ahead in your career is a way to jump-start your personal wealth, and creating the best resume possible can help you climb the corporate ladder.

$500

Use your $500 to have a professional photograph taken, especially if you have a professional website, use social media or need to submit your bio and photo for business purposes, .

$1,000

Most people could stand to make updates to their wardrobe. If you’ve received a $1,000 lump sum, go through your closet and donate anything that no longer fits, is outdated or you haven’t worn in more than a year. Throw out things that are beyond repair or stained. Then use your lump sum to restock with clothing and accessories for a more polished and professional look.

$10,000

Enroll in research classes or certificate programs to enhance your career options. These will help you keep up with your skill set and look fantastic on your resume.

Image: StockRocket

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What Should I Do With My Retirement Plan When I Change Jobs?

When you terminate employment, you need to make some critically important decisions regarding your retirement plan.

When you terminate employment, you need to make important decisions regarding your retirement plan. Generally, you have three choices that allow you to continue to defer income taxation: leave the investments with your current employer, move them to your new employer or transfer them to an Individual Retirement Account (IRA). Of course if you are permanently retiring, the new employer plan is not an option.

Another choice is to cash out your account and pay income taxes on the withdrawal. This is usually not a good alternative since taxes will reduce the amount available for retirement and withdrawals prior to age 59 ½ will generally incur an additional 10% penalty.

There are several factors to consider when making this important decision, including investment options, investment costs, simplicity and the ability to borrow from the plan. Here are four things to keep in mind.

1. Investment Options

Most employer retirement plans have a limited number of investment choices. This can be good and bad. Plans with an abundance of choices can overwhelm the participant with difficult decisions. However, too few choices can limit the participant’s ability to properly diversify assets or select options that reflect their goals and objectives.

It is important to evaluate the options available in the previous plan as well as the new plan. Moving the assets to an IRA allows the participant to invest in a nearly unlimited number of options.

2. Investment Costs

One of the advantages of large employer plans is that investment costs may be lower than those charged in a smaller IRA account. Large employers have more leverage to offer investment classes with lower management fees than an individual can access. However, some larger plans may actually have higher fees than those charged in IRA accounts due to plan administrative expenses.

One way to evaluate the investment costs is to visit the Financial Industry Regulatory Authority Fund Analyzer. This free tool can illustrate the total fees paid over several years and can be accessed online.

3. Simplicity

If you are like most Americans, you will probably change jobs several times over your lifetime. (Here’s what to leave off your resume when that happens.) Each new employment stop creates a new plan to monitor after you move on. Companies merge, change investment options and change plan administrators.

Each of these changes requires you to set up new investment choices and website logins. Keeping up with all of these changes among several retirement plans can be burdensome. Transferring the assets to a new employer or to a single IRA account can simplify your life since your retirement investments will be situated in one central location.

4. Plan Loans

Employer retirement plans may offer the ability for the participants to borrow from their account (loans are legally available to most employer plans, but not all plan sponsors elect to offer them, and some plan types cannot offer them). Retirement plan loans are limited to less than 50% of the account value or $50,000. While there may be an administrative fee charged for the loan, the interest paid by the participant goes directly into the account, rather than to the plan.

Tax regulations do not allow loans from IRA accounts, so retirement plan loans can be a reason to move assets to your new employer. It is important to recognize that plan loans normally must be repaid upon separation from the employer. Any unpaid balance is considered a taxable distribution, subject to taxation and the early withdrawal penalties previously discussed.

Financial decisions vary for each individual and there is not a one-size-fits-all answer that is right for everybody. You should weigh each of the four aspects of this question to determine the best option for you. (Get a look at your financial health by checking your free credit report snapshot on Credit.com.) Retirement plans and taxation are complex, so we recommend seeking the advice of a certified financial planner and a certified public accountant before making your elections. (Disclosure: I am a financial planner.)

Image: FatCamera

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8 Financial Choices You’ll Regret in 5 Years

Financial success will come easier if you can avoid these common mistakes.

If your goal is getting ahead financially, the formula for success is simple: Maximize tax-advantaged retirement accounts early, boost your savings with a Roth or traditional individual retirement account, choose investments you feel comfortable with and avoid debt like the plague. If you do those four things, you’re bound to enjoy less stress and more wealth over time.

But is it always that easy? Absolutely not. As you move through the various stages of life, you’ll encounter myriad pitfalls and temptations that can knock you off track – some of which can seem like a smart idea at the time.

Speeding toward financial independence is easier when you know which financial choices can slow you down. I spoke to a handful of top financial advisers to get their takes on the most common financial choices their clients live to regret. Here’s what they said.

1. ‘Investing’ in a New Car

“At first blush, buying the latest and greatest version of the ultimate driving machine may seem like a value worthy of your hard-earned money,” says California financial advisor Anthony M. Montenegro of Blackmont Advisors.

Unfortunately, new cars depreciate the moment they leave the lot, and continue dropping in value until they’re worth almost nothing. If you finance the average new car priced at more than $30,000 for five years, you’ll pay out the nose for a hunk of metal worth a small percentage of what you paid. (Remember, a good credit score can qualify you for lower interest rates on your auto loan. You can see two of your scores for free on Credit.com)

Pro tip: Buy a used car and let someone else take the upfront depreciation, then drive it until the wheels fall off. Once five years has passed, you won’t regret all the money you never spent.

2. Not Watching Your Everyday Purchases

While big purchases like a new car can eat away at your wealth, the little purchases we make every day can also do damage, says Maryland fee-only financial adviser Martin A. Smith. If you’re spending $10 per day on anything — your favorite coffee or lunch out with friends — your seemingly small purchases can add up in a big way. (If you must feed a coffee habit, the right credit card can help make it more worthwhile.)

Keep in mind that $10 per day is $300 per month, $3,600 in a year and $18,000 after five years. While you may not regret your daily indulgences, you may regret the savings you could have had.

3. Not Refinancing Your Mortgage While Rates Are Low

While refinancing your mortgage is anything but fun, now may be the perfect time to dive in. That’s because interest rates are still teetering near lows, says Colorado financial adviser Matthew Jackson of Solid Wealth Advisors LLC.

Even one percentage point can cost you – or save you – tens of thousands of dollars in interest over the years. Since rates will eventually go up, you “don’t want to miss the opportunity now,” says Jackson.

4. Buying Too Much House

Buying the ideal home may seem like a smart idea, but does your dream home jive with your financial goals?

Unfortunately, buying more house than you need can lead to regret and financial stress, says Vancouver, Washington financial planner Alex Whitehouse.

“Too much income going to housing payments makes it difficult to fully furnish rooms, keep up with rising taxes, and often leads to struggles with maintenance and utility costs,” notes Whitehouse.

Banks may be willing to lend you more than you can reasonably afford. If you want to avoid becoming house-poor, ignore the bank’s numbers and come up with your own.

5. Borrowing Against Your Retirement Account

While you can borrow against your 401K plan with reasonable terms, that doesn’t mean you should. If you do, you may regret it for decades.

“Millennials often ask if it’s okay to access their 401K or IRA early (before age 59 ½) to buy a home, travel or pay off debt,” says Minnesota financial adviser Jamie Pomeroy of FinancialGusto.com.

However, there are numerous reasons to avoid doing so.

Not only do you normally have to pay a penalty to access retirement funds early, but you’ll pay taxes too. Most important, however, is the fact you’re robbing your future self. You will regret the lost savings (and lost compound interest) when you check your retirement account in five years.

6. Not Using a Budget

While many people buy the notion that budgets are restrictive, the reality is different. If used properly, budgets are financial tools you can use to afford what you really want in life.

“I would suggest that you create a budget that you stick to,” says financial planner David G. Niggel of Key Wealth Partners in Lancaster, Pennsylvania. “At the end of the year, you have the chance to evaluate your spending habits and make some serious changes if necessary.”

If you don’t, your finances could suffer from death by a thousand cuts.

7. Not Saving as Much as You Can

While it’s easy to think of your disposable income as “fun money,” this is a decision you could live to regret in five years.

The more money you have saved later in life, the more flexibility you’ll have, notes fee-only San Diego financial adviser Taylor Schulte. And if you don’t get serious about saving now, you could easily regret it in the future.

According to Schulte, you should strive to “play it safe” when it comes to your savings.

“I’ve never heard anyone regret having too much money,” says Schulte. “But, I’d be willing to bet we have all heard far too many people complain about not saving enough or not starting earlier.”

8. Not Buying Life Insurance When You’re Young

If you are married, own a home, or have children, you need life insurance coverage. Unfortunately, this is one purchase that becomes more difficult – and more expensive – as you age.

If you don’t buy life insurance when you’re 25, you can expect to pay a lot more for coverage when you’re 30, 35, 40 and so on. And if you wait long enough, you may not even be able to buy it at all, says New York financial planner Joseph Carbone of Focus Planning Group.

As Carbone notes, if you develop a chronic health condition before you apply for life insurance coverage, you could easily become uninsurable. To avoid regretting inaction in five or 10 years, most people would benefit from applying for an inexpensive, term life insurance policy as soon as they can.

Image: Ridofranz

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17 Questions Every College Graduate Has (But Is Afraid to Ask)

If you're graduating from college, your work is only beginning. Here are some of life's questions for which you'll need answers.

May is a big month for college graduates. There’s all the last-minute details with finishing school – finals, papers, moving, selling stuff. There’s the family, the cap and gown, the parties, the sad farewells. Then after all that, there are the questions. What now? Where will I go? What will I do? We can’t answer all of them for you (you’ll have to decide to keep or dump that college sweetheart on your own). But here’s a good start at answering some of the questions you may have when it comes to money.

1. What Should I do With Graduation Money I Get From my Family?

Lucky you! Resist the urge to spend it all upgrading your hostels to hotels on that summer trip to Europe. Instead, use half of it to pay down debt or pay for your move to a new city, and the other half to invest for the future, preferably, retirement. Really. Read the parable of the Two Twins. In short, it shows that people who put away money for retirement in their twenties — and stop by age 30 — end up with more money than those who save nothing in their twenties but save from age 30-65. It seems impossible, but it’s true. Those who invest in their early twenties have an amazing advantage over everyone else.

2. When do I Have to Start Making Student Loan Payments?

Most student loans come with a six-month grace period, meaning the first payment is due seven months after graduation. For most of you, that means this November, unless you’re headed to graduate school.

3. Should I Go to Graduate School?

That depends. While it’s tempting to put off “real life” (and student loan payments) for a few more years, many people can benefit from working for a few years before returning to school. Studies can be more focused when students are sure they are studying a field they plan to pursue. A few years working as a paralegal in a law firm can disavow you of the notion you want to be a lawyer, which will save you a lot of money and strife through law school. Of course, in some fields, like medicine, graduate school is a prerequisite, so attending right away can make more sense. But it’s important to remember: The majority of folks who are drowning in excessive student loan debt incur that debt in graduate school, not during undergraduate studies, so poorly-planned grad school can become a real problem.

4. If I Must Start Repaying my Loans, Can I Lower my Payments?

Yes. There are many ways to do this, but all of them can have negative consequences. With federal loans, the simplest way is to select a “graduated repayment plan.” This allows borrowers to pay less now, and more later – payments usually go up every two years —  with the assumption that recent grads will earn more as time goes on. All borrowers are eligible, but it means borrowing more money for longer, which means more interest paid. Beyond that, the Department of Education has numerous plans available to borrowers. Consolidation loans can extend payment terms for up to 25 years – but of course the interest paid will soar. There are also various income-based repayment or loan forgiveness programs. These can be reviewed at the Department of Education websites. You can learn more about what happens if you do default on your student loans here.

5. What Should I Do to Prepare for a Job Interview?

Google yourself. Clean up your social media accounts. Erase, or at least make private, those keg stand pictures.  Then, prepare, prepare, prepare. Learn everything you can about the company you are about to interview with (and even the person if that information is available to you). Read the job description carefully and at least appear to be excited about the specific tasks that will be required of you. Know that while the ad may say “Join an exciting team and help build a life-changing product,” you could be spending nine hours a day composing social media posts. At least, at first. Embrace that. And, maybe get a new suit. You can find 50 more steps grads can take to find their first job here.

6. It’s my First Job, What Salary Should I Ask for?

The average starting salary for college grads this year is $49,785, according to advisory firm Korn Ferry. That’s not a bad starting reference point. And it’s up 3% from last year. Some professions get more, some less. Software developers earn 31% above average; customer service reps, 28% below. Check out more numbers from the Korn Ferry analysis.

7. How do I Make a Budget?

Budgets don’t have to be complicated. Type into a spreadsheet the costs you know (or guess) for rent, utilities, TV/video, Internet, car, phone, student loan repayments, food, entertainment and whatever else applies. Add it all up, then compare it to your take-home pay. If the first number is higher than the second, you’re going to have to make some cuts, so start figuring out what you can live without. At the end of the month, take out the credit card bill and see how realistic your projections were. Then add lines where you missed things – lines for travel, or savings, or emergencies (they happen, sometimes monthly). Then repeat, every month. You’ll get it. It might be painful, but keep at it.

8. Should I Put Money in a 401K or Pay Down Debt Instead?

Yes! You should do both —save and pay down debt at the same time. It’s a BIG mistake to pay extra to lower your student loan balance at the expense of contributing enough to your 401K to at least maximize your company match. That’s free money you should never leave on the table.

9. Should I Live With Roommates?

For most people, housing is the biggest monthly expense. Ideally, rent will cost no more than one-third of your income. Keep in mind, though, that it’s essentially impossible to afford an average-priced two-bedroom apartment one a single average income anywhere in the U.S. One bedrooms also can be are expensive, so while you may be tired of living with roommates, your best strategy is to live like you are in college for a few more years and save your money. Living with roommates can be the quickest route to owning a home in your thirties.

10. How Much Money Do I Need to Buy a House?

The median home price in the U.S. right now is $189,000. To make a traditional 20% down payment on that would be $37,800. A 5% down payment, accepted in many situations with higher fees, would be about $9,500. Of course, in many populous cities, prices are much, much higher. For example, the median home price in Washington, D.C., is $549,000 – a 20% down payment there is $109,000, and 5% down is $27,500. Some mortgage programs, like FHA loans, allow first-time home buyers to have even less money down, but those come with other fees, and of course, the monthly payment will be higher. Speaking of monthly payments, would-be buyers need to remember house payments also come with insurance and property taxes. Then, there’s maintenance and surprise repair costs. So, save while you can.

11. How Much Does a Wedding Cost?

From $100 to $100,000, or more. Seriously. You can Google the cost of an average wedding, and you’ll quickly find averages in the range of $25,000 to $30,000. But these numbers are based on online surveys, which are self-selecting. Averages are skewed by extremes, plus an “average” wedding in New York will cost more than one in St. Louis. You, you can spend as little or as much on your nuptials as you choose, but guess which one is financially smarter. You can go simple and put that cash toward a down payment instead.

12. How Much Money do I Need to Start a Family?

That’s not an easy question to answer, but here are a few data points. It costs $233,610 to raise a single child through age 17 (not including college), according to the U.S. Department of Agriculture. That’s just one child. Of course, you don’t need it all at once. A kid costs about $12,000-$14,000 annually. Costs will vary regionally, and on your taste in clothes and schools, and on your health insurance plan. Kids are expensive – the average cost of just having a baby in the U.S. is about $10,000, and that’s without any complications.

13. OK, Then. How do I Make More Money?

The easiest way is moonlighting in the gig economy. Drive an Uber one night per week (do it on a weekend night and you’ll save by not spending!) Rent out your place on AirBNB. Sell things on eBay or Etsy. Volunteer for overtime.  Most of all, hone a skill that’s desirable, like software coding. And don’t forget the most obvious: Ask for a raise at your current job …

14. How Do I Ask for a Raise?

Never forget that how much compensation you get from a company is a simple business negotiation. You don’t get to ask for more money because you need it. You have to ask for more money because you are worth it. Do your research. Go to places like Salary.com, Indeed, or Glassdoor and learn if you are paid commensurate with others in your profession. If you aren’t, that’s a good starting point. Chiefly, do a quiet job hunt and see what others in the market might pay you. The best way to get a raise is to get a counter-offer.

Also, note these two disturbing trends in many salary surveys: Workers often don’t get raises any more, they get bonuses, which help corporations keep down their long-term liabilities (it’s easier to kill a bonus than lower salaries when times get hard). And many workers today find the only way to get a real raise is to change jobs.

15. There Are no Jobs in my Major. What Should I Do?

Don’t give up your first love, but be realistic. Right now, the best-paid American workers and the most plentiful jobs are in software, engineering, and health care. Can you switch to one of those fields, and pursue your love of music or the arts on the side? Can you sell what you make on Etsy, but still have a day job? Could you write code during the day, and tutor children at night to fulfill your love of teaching? Creative thinking is your friend here.

16. What Do I Do if I Can’t Find a Job?

Start with part-time work. Research professions that offer piecework which might be similar to the field you wish to enter. FlexJobs maintains a list of jobs you can do from home. Consider joining the gig economy for a while.

17. I Don’t Know What I Want to Do. What Should I Do?

Read. Read a lot. Read books like What Color is Your Parachute. Talk to people. Talk a lot. Most important – DO SOMETHING. Anything. Work in fast food, or work at a Walmart. You can learn something at any job. Even if you hate it, that’s one thing you can cross off your list. And just maybe, you won’t hate it. But above all, don’t do nothing.  Wracking up credit card debt and student loan interest during your twentiess can haunt you for the rest of your adult life. Whatever you do, earn money and tread water. You’ll figure it out.

Image: pixelfit

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Earnest: Personal & Student Loans for Responsible Individuals with Limited Credit History

Earnest - Personal & Student Loans for Responsible Individuals with Limited Credit History

Updated August 21, 2017

Earnest is anything but a traditional lender for unsecured personal loans and student loans. They offer merit-based loans instead of credit-based loans, which is good news for anyone just starting to establish credit. Their goal is to lend to borrowers who show signs of being financially responsible. Earnest is working to redefine credit-worthiness by taking into account much more than just your score.

They have a thorough application process, but it’s for good reason – they consider different variables and data points (such as employment history, education, and overall financial situation) that traditional lenders don’t.

Earnest*, unlike traditional lenders, says their underwriting team looks to the future to predict what your finances will look like, based upon the previously mentioned variables. They don’t place as much emphasis on your past, which is why a minimal credit history is okay.

Additionally, as their underwriting process is so thorough, Earnest doesn’t take on as much risk as traditional lenders do. With their focus on the financial responsibility level of the borrower, they have less defaults and fraud, which allows them to offer some of the lowest APRs on unsecured personal loans.

Personal Loan (Scroll Down for Student Loan Refinance)

Earnest offers up to $50,000 for as long as three years, and their APR starts at a fixed-rate of 5.25% and goes up to 12.99%. They claim that’s lower than any other lender of their type out there, and if you receive a better quote elsewhere; they encourage you to contact them.

Typical loan structure

How does this look on paper? If you needed to borrow $20,000, your estimated monthly payment would be $599-$638 on a three- year loan, $873-$911 on a two- year loan, and $1,705-$1,744 on a one-year loan. According to their website, the best available APR is on a one-year loan.

Not available everywhere

Earnest is available in the following 36 states (they are increasing the number of states regularly, and we keep this updated): Arkansas, Arizona, California, Colorado, Connecticut, Florida, Georgia, Hawaii, Illinois, Indiana, Kansas, Maine, Maryland, Massachusetts, Michigan, Minnesota, Missouri, Nebraska, New Hampshire, New Jersey, New Mexico, New York, North Carolina, Ohio, Oklahoma, Oregon, Pennsylvania, Tennessee, Texas, Utah, Virginia, Washington, Washington D.C., West Virginia, Wisconsin and Wyoming.

Get on LinkedIn

Earnest no longer requires that you have a LinkedIn profile. However, if you do have a LinkedIn profile, the application process becomes a lot faster. When you fill out the application, your education and employment history will automatically be filled in from your LinkedIn profile.

What Earnest Looks for in a Borrower

Earnest AppEarnest wants to lend to those who know how to manage and control their finances. They want borrowers to know the importance of saving, living below their means, using credit wisely, making timely payments, and avoiding fees.

They look at salary, savings, debt to income ratio, and cash flow. They want borrowers with low credit utilization – not those maxing out their credit cards and experiencing difficulty in paying.

Borrowers must be over 18 years old and have a solid education background. Ideally, they attended college or graduate school, have a degree, and have a history of consistent employment, or at least a job offer that gives them the opportunity to grow.

Overall, Earnest wants to make sure borrowers are taking their future as seriously as they are. After all, they’re investing in it! The team at Earnest knows that money often holds people back when it comes to being able to achieve their dreams and goals, and they’re all about helping borrowers get there.

For that reason, Earnest seeks to learn more about those that apply for loans with them. They review every line of your application, and they want to develop a lifelong relationship with their borrowers. They genuinely want to help and see their borrowers succeed.

The Fine Print – Are There Any Fees?

Earnest actually doesn’t charge any fees. There are no late fees, no origination fees, and no hidden fees.

There’s also no penalty for prepaying loans with Earnest – they encourage borrowers to prepay to reduce the amount of interest they’ll pay over the life of the loan.

Earnest states that one of its values is transparency (and of course, here at MagnifyMoney, that’s one of ours as well!), and they are willing to work with borrowers who are struggling to make payments.

Hala Baig, a member of Earnest’s Client Happiness team, says, “We would work with the client to make accommodations that are appropriate to help them through their situation.”

She also notes that if borrowers are late on payments, they do report the status of loans on a monthly basis.

What You Can Do With the Money

The $30,000 loan limit is enough to pay off debt such as an undergraduate student loan, medical debt, or consumer debt, relocate for a job, improve your home or rental property, help you fund a down payment, or further invest in your education.

Earnest’s APR is much, much better than you’ll receive on many credit cards, and it could be a viable way to decrease the burden of debt you’re currently experiencing.

Earnest logo 1

The Personal Loan Application Process

Earnest does a hard inquiry upon completion of the application. They’re very open about this on their website, stating that hard inquiries remain on credit reports for two years, and may slightly lower your credit score for a short period of time.

Compared to Upstart, their application process is more involved, but that’s to the benefit of the borrower. They aim to underwrite files and make a decision within 7 business days – it’s not instantaneous.

However, once you accept a loan from Earnest and input your bank information, they’ll transfer the money the next day via ACH, so the money will be in your account within 3 days.

Student Loan Refinance

When refinancing with Earnest, you can refinance both private and federal student loans.

The minimum amount to refinance is $5,000 – there’s no specific cap on the maximum you can refinance.

We encourage you to shop around. Earnest is one of the best options, but there are others. You can see the best options to refinance your student loans here.

Earnest offers loans up to 20 years. Unlike other lenders, Earnest allows borrowers to create their own term based on the minimum monthly payment you’re comfortable making. Yes, you can actually choose your monthly payment, which means the loan can be customized to your needs. Loan terms start at 5 months, and you can change that term later if needed.

You can also switch between variable and fixed rates freely – there’s no charge. (Note that variable rates are not offered in IL, MI, MN, OR, and TN. Earnest isn’t in all 50 states yet, either.)

Fixed APRs range from 3.35% to 6.39%, and variable APRs range from 2.81% to 6.19% (this is with a .25% autopay discount).

If you refinance $25,000 on a 10 year term with an APR of 5.75%, your monthly payment will be $274.42.

The Pros and Cons of Earnest’s Student Loan Refinance Program

Similar to SoFi, Earnest offers unemployment protection should you lose your job. That means you can defer payments for three months at a time, up to a total of twelve months over the life of your loan. Interest still accrues, though.

The flexibility offered from being able to switch between fixed and variable rates is a great benefit to have should you experience a change in your financial situation.

As you can see from above, variable rates are much lower than fixed rates. Of course, the only problem is those rates change over time, and they can grow to become unmanageable if you take a while to pay off your loan.

Having the option to switch makes your student loan payments easier to manage. If you can afford to pay off your loans quickly, you’ll benefit from the low variable rate. If you have to take it slow and need stability because you lost a source of income, you can switch to a fixed rate. Note that switching can only take place once every 6 months.

Earnest also lets borrowers skip one payment every 12 months (after making on-time payments for 6 months). Just note this does raise your monthly payment to adjust for the skipped payment.

Beyond that, Earnest encourages borrowers to contact a representative if they’re experiencing financial hardship. Earnest is committed to working with borrowers to make their loans as manageable as possible, even if that means temporary forbearance or restructuring the loan.

Lastly, if you need to lower your monthly payment, you can apply to refinance again. This entails Earnest taking another look at your terms and seeing if it can give you a better quote.

Who Qualifies to Refinance Student Loans With Earnest?

Earnest doesn’t have a laundry list of eligibility requirements. Simply put, it’s looking to lend to financially responsible people that have a reasonable ability to pay their loans back.

Earnest describes its ideal candidate as someone who:

  • Is employed, or at least has a job offer
  • Is at least 18 years old
  • Has a positive bank balance consistently
  • Has enough in savings to cover a month or more of regular expenses
  • Lives in AR, AZ, CA, CO, CT, FL, GA, HI, IL, IN, KS, MA, MD, MI, MN, NC, NE, NH, NJ, NY, OH, OR, PA, TN, TX, UT, VA, WA, Washington D.C., and WI
  • Has a history of making timely payments on loans
  • Has an income that can support their debt and routine living expenses
  • Has graduated from a Title IV accredited school

If you think you need a little help to qualify, Earnest does accept co-signers – you just have to contact a representative via email first.

Application Process and Documents Needed to Refinance

Earnest has a straightforward application process. You can start by receiving the rates you’re eligible for in just 2 minutes. This won’t affect your credit, either. However, this initial soft pull is used to estimate your rates – if you choose to move forward with the terms offered to you, you’ll be subject to a hard credit inquiry, and your rates may change.

Filling out the entire application takes about 15 minutes. You’ll be asked to provide personal information, education history, employment history, and financial history. Earnest takes all of this into account when making the decision to lend to you.

The Fine Print for Student Loan Refinance

There aren’t any hidden fees – no origination, prepayment, or hidden fees exist. Earnest makes it clear its profits come from interest.

There are also no late fees, but if you get behind in payments, the status of your loan will be reported to the credit bureaus.

Earnest logo

Who Benefits the Most from Earnest

Those in their 20s and 30s who have a good grip on their finances and are just getting started with their careers will make great borrowers. If you’re dedicated to experiencing financial success once you earn enough money to actually achieve it, you should look into a loan with Earnest.

If you have a history of late payments, being disorganized with your money, or letting things slip through the cracks, then you’re going to have a more difficult time getting a loan.

Amazing credit score not required

You don’t necessarily need to have the most amazing credit score, but your track record with money thus far will speak volumes about how you’re going to handle the money loaned from Earnest. That’s what they will be the most concerned about.

What makes you looks responsible?

Baig gives a better picture, stating, “We are focused on offering better loan alternatives to financially responsible people. We believe the vast majority of people are financially responsible and that reviewing applications based strictly on credit history never shows the full picture. One example would be saving money in a 401k or IRA. That would not appear on your credit history, but is a great signal to us that someone is financially responsible.”

Conclusion

Overall, it’s very clear that Earnest wants to help their borrowers as much as possible. Throughout their website, they take time to explain everything involved with the loan process. Their priority is educating their borrowers.

While Earnest does have a nice starting APR at 3.35%, remember to take advantage of the other lenders out there and shop around. You are never obligated to take a loan once you receive a quote, and it’s important to do your due diligence and make sure you’re getting the best rates out there. If you do find better rates, be sure to notify Earnest. Otherwise, compare rates with as many lenders as possible.

Shopping around within the span of 45 days isn’t going to make a huge dent in your credit; the bureaus understand you’re doing what you need to do to secure the best loan possible. Just make sure you’re not applying to different lenders once a month, and your credit will be okay.

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