Health

How to Use Your Health Savings Account (HSA) as a Retirement Tool

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The editorial content on this page is not provided by any financial institution and has not been reviewed, approved or otherwise endorsed by any of these entities.

Medical expenses are no joke, and that is especially true for consumers saddled with high-deductible health plans (HDHPs). Since 2011, the rate of workers enrolled in HDHPs jumped from 11% to 29%, according to the Kaiser Family Foundation.

For people enrolled in one of these HDHPs, chances are they’re familiar with the HSA, which stands for health savings account. HSAs are useful, tax-advantaged savings vehicles that allow consumers to contribute pre-tax dollars to a fund they can use for out-of-pocket medical expenses.

What HSA users may not realize, however, is that they can also hack their HSA and transform it into a tool for future retirement savings.

Before we explain further, you need to understand how HSAs normally work and who can take advantage of them. From there, you can use a strategy that allows you to use your health savings account as a powerful retirement tool that will help you manage your biggest expense once you retire.

How to Invest Through a Health Savings Account (HSA)

Health savings accounts allow you to contribute a set amount each year. As an individual, you can contribute up to $3,400 for 2017. Families can contribute up to $6,750, and the catch-up contribution for those over 50 allows you to put in an additional $1,000.

The money you contribute is tax free, meaning it reduces your taxable income in the current year. Once your money is in an HSA, you can hold it in cash or invest your savings to increase its earning potential. If you choose to invest, you can explore a variety of options.

But before you get too excited about the possibilities here, remember: not everyone gets access to HSAs. As we noted before, you need to have a high-deductible health plan before you qualify to open one of these accounts, which may or may not make sense for your financial situation.

You don’t have to use the HSA provider associated with your employer’s health insurance company, says Mark Struthers, a Certified Financial Planner and certified public accountant with Sona Financial.

“HSAs are individual accounts that don’t have to go through your employer. You can shop around for the lowest fees and best investment options,” Struthers says. And unlike their close cousin the Flexible Savings Account, HSAs are portable, meaning you can take your HSA with you if you leave the employer you opened it with.

Within the HSA itself, explains Struthers, you also get to choose many types of investments. “In addition to low-risk, savings-type accounts, you can invest in the same type of fixed income and equity mutual funds that may be in your 401(k) or IRA,” he says.

Just like all other investments, protecting against the risk of losing your hard-earned money is an essential step to take. Tony Madsen, Certified Financial Planner and president of New Leaf Financial Guidance recommends taking a hybrid approach.

“I typically advise my clients to leave two years’ worth of the maximum out-of-pocket expenses in cash in their HSAs,” Madsen explains. “Then, we include the rest in investments that are in line with the client’s overall retirement allocation.”

When you’re ready to withdraw your HSA contributions or your earnings, you can do so without penalty — and again without paying tax — anytime, so long as you spend the money on qualified health care expenses.

Examples of qualified expenses include doctor’s fees and dental treatments, vision care, ambulance services, nursing home costs, and even services like acupuncture or treatment for weight loss. It also includes things like crutches, wheelchairs, and prescription drugs (but does not include over-the-counter medications).

Why HSAs Are Great for Retirement Savings

Here’s what makes your HSA such an attractive vehicle for retirement savings:

If you can contribute to your HSA, invest it wisely, and leave the money in the account just like you would leave the money in your 401(k) or IRA until retirement, you can build a sizable nest egg to use specifically on health care costs after you retire.

Not only will you have a fund for medical expenses, but it’s also money you can use tax free!

That’s a big deal, because health care will likely be your largest expense in retirement. Fidelity estimates couples retiring in 2016 can expect to pay up to $390,000 for medical expenses and long-term care during their golden years.

Health savings accounts are designed to help you pay for medical expenses, tax free. No other account offers so many tax advantages for savers.

You can contribute money to the account tax free. Then you can invest that money, and the earnings are also tax free. If you withdraw the money and use it on qualified health expenses, that money is free from tax too.

In addition to the tax advantages, the funds you contribute to an HSA roll over from year to year. That means you don’t have to spend what you saved until you choose to do so.

(This is different from a Flexible Spending Account, where funds are subjected to a use-it-or-lose-it policy. If you don’t spend the money you put into the account by the end of the year, you don’t get it back.)

And health savings accounts aren’t just liquid savings vehicles. You can invest money within them, often within the same kind of mutual or index funds that you might invest in within a Roth IRA or brokerage account.

When It Doesn’t Make Sense to Use an HSA for Retirement Savings

While HSAs can provide a great, tax-free way to save and pay for qualified medical expenses, your priority should be on selecting the best health care plan for your needs first and foremost. If an HDHP makes sense for you, then you can look at using a health savings account.

If you have an HSA already or currently qualify for one, the next step is to consider hacking it to make it work even harder for you. You can transform your account from a good way to manage medical costs into a tool that makes it easier to bear the brunt of your projected retirement expenses.

This strategy may not work if you currently feel overwhelmed with the cost of your health care and need to take advantage of the tax-free savings and spending power today, instead of waiting for retirement.

Because you’re already in a high-deductible health plan if you have an HSA, that also means you are liable for greater out-of-pocket expenses if you seek treatment.

At a minimum, HDHP deductibles start at $1,300 for an individual or $2,600 for a family. Many HDHPs come with deductibles that range upward of $4,000.

Unless you already have an emergency fund with at least enough money to cover the cost of your deductible should you need to pay it, taking on an HDHP can leave you in a bad financial situation if a serious medical concern arises.

Here’s what you need to think about and ask before you switch to an HDHP:

  • Do you expect to spend a lot of money on health care expenses in the next 5 to 10 years? If you’re young and have no health concerns, your expenses will likely be low and manageable.
  • Do you currently have room in your monthly cash flow for occasional unexpected or increased expenses? If your budget can handle a few doctor’s bills here and there, you may be able to handle health care costs with regular income while you’re young.
  • Do you have an emergency fund, and if so, is it fully funded? Would paying your full deductible wipe out that savings? If so, you may want to create a bigger rainy day fund before you take on an HDHP.
  • Will you save on premiums if you switch to an HDHP? Often the higher deductible can provide you with a lower monthly premium, which can help free up more money in your monthly cash flow to pay for health needs as they arise — but that’s not always the case, so compare plans before making decisions.
  • Can you contribute a significant amount to your HSA? Switching to an HDHP just to get an HSA doesn’t make sense if you’re not close to making the maximum contribution to the account each year.

You can also use a tool created by Hui-chin Chen, Certified Financial Planner with Pavlov Financial Planning. She designed a decision matrix where you can input your own financial information and numbers, and see if an HSA makes sense for you based on that information.

If you’re already on an HDHP and like your plan or if you decide you want to switch to one, open an HSA and start saving. At the very least, you can save money tax free, invest it tax free, and use it tax free on qualified medical expenses.

And that’s a great situation, even if you can’t contribute money and leave it in the account all the way until retirement. If you’re able to contribute and let your savings compound until you retire, great! Use your HSA as a retirement tool to help you cover your biggest expected expense in life after work.

“A ‘good’ HSA decision is to have one and use the funds you saved as you need them,” explains Brian Hanks, Certified Financial Planner. “‘Better’ is maximizing your family contribution each year and using the funds as needed. A ‘best’ situation is to maximize your family contribution, not use the HSA account for medical expenses, and treat it as a second 401(k) or retirement account instead.”

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Mortgage

First-Time Homebuyer’s Guide

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The editorial content on this page is not provided by any financial institution and has not been reviewed, approved or otherwise endorsed by any of these entities.

Homebuyer’s Guide

Buying a home is one of the biggest and most important financial decisions you can ever make. When done properly, a home can be an excellent investment. Rent is just an expense that makes your landlord rich. A mortgage can help you build wealth over time as you build equity. And a home is more than just a financial investment. It can be a place to build a family and make wonderful memories.

But a home can also be a financial nightmare. If you buy more than you can afford, you can end up in serious financial difficulty. Being foreclosed doesn’t just destroy your credit. It is an emotional and psychological nightmare. If you move too often, the costs associated with buying and selling a home can actually make renting a better option. And if you fail to budget for maintenance, you might start resenting the “money pit” that your house has become. Far too many people feel like their home “owns them” instead of the other way around.

If you are thinking about buying your first home, this guide is for you. In this guide, we will help you answer:

  • Should you use a mortgage to buy a home right now?
  • How big should your down payment be?
  • What is required to get approved for a mortgage?
  • What type of mortgage should you use?
  • How do you shop for the best mortgage?
  • What do all of those closing documents actually mean?

Section 1: Is a Mortgage Right for Me?

You already know that buying a home is one of the biggest financial moves you’ll ever make. You don’t need a lecture about how much responsibility this is, or how a monthly mortgage payment can be a burden on your budget.

What you do need is a way to understand whether or not a mortgage is right for you and your financial situation. While the idea of homeownership is often sold to us as the ultimate manifestation of the American Dream, buying a home is not necessary for everyone — and certainly isn’t the savviest financial decision in every single case.

What Are the Pros and Cons of Buying a Home?

It may help to understand some of the biggest advantages and disadvantages of homeownership to determine if a mortgage is right for you:

Advantages of Homeownership

  • The principal and interest in your monthly mortgage payment will remain steady over time and won’t rise with inflation (if you have a fixed-rate mortgage).
  • You can build equity as you pay down your mortgage and your home (hopefully) increases in value over time.
  • You have the option of turning your home into an income-producing rental property, which gives you the opportunity to earn a higher return on your investment in the house.
  • You may be able to take advantage of tax breaks and credits.
  • You have a place to call your own and settle down, which is a huge advantage for many people who want to feel deeply connected to a community or to provide a stable, unchanging place to start and raise a family. It also gives you the opportunity to live 100% how you choose to do so; you’re not limited by condo association rules or the wishes of your landlord.

Disadvantages of Homeownership

  • While your principal and interest in your mortgage payment will remain steady, property taxes and homeowner’s insurance may not. Over time, both your insurance and taxes will likely increase.
  • There’s no guarantee that your home will rise in value, or that you’ll be able to use it as an investment. Even when homes do appreciate in value, it’s very slowly over time. A house will generally cost more than renting if you plan to buy and sell in 5 years or less.
  • Homes take up a lot of cash — from the down payment to the regular costs associated with maintaining them. This can be problematic, because cash is completely liquid. A home is an illiquid asset. Homeownership can create a lot of financial pressure.
  • You have limited flexibility. Selling a home can be a process, and your timeline for offloading property is at the mercy of the economy and the market. You also have increased responsibility. Not only do you have to pay for maintenance and repairs, but you have to manage every situation yourself. There’s no landlord to call when something goes wrong.
  • It takes a while to enjoy the financial benefits of a home. If you don’t stay in your home long enough, renting would likely be a better decision than buying:
    • In the first years of your mortgage, more than 60% of your monthly payment goes towards interest. In the last year of your mortgage, less than 5% of your payment goes towards interest. Don’t expect your mortgage balance to reduce much in the first years.
    • There are a lot of fees when you buy and sell a home. When you buy, closing costs can be between 2 and 5 percent of the purchase price. And when you sell, real estate fees can easily be 6 percent of the property value. To buy and sell a home, expect to spend 10 percent of the home’s value in fees alone. On a typical 30 year mortgage, it will take 5 years to pay off 10% of the mortgage balance.
Your Checklist for Determining Whether to Buy Now or Wait

Knowing the pros and cons is an important first step. There are downsides to every situation, and part of making decisions is accepting the negatives.

If you feel comfortable with the not-so-great parts of homeownership and are still leaning toward buying your first home, use this checklist to help you determine whether now is the best time — or if it’s smarter to wait.

You might be ready to take out a loan and buy your first home if you:

  • Understand your future plans and goals, and how a home fits into those.
  • Can rely on your income and know what to expect with your earnings from month to month and year to year.
  • Are ready to settle down in one location for at least 5 years.
  • Know how a mortgage works, and understand what your responsibilities and obligations for repayment are.
  • Have enough cash to make a down payment.
  • Have enough cash to cover the closing costs – which can be expensive. You can use this closing cost calculator to estimate.
  • Have enough cash to meet the “cash reserve” requirement of your lender. Depending upon the type of mortgage you have, you could need between 2-6 months of mortgage payments in the bank.
  • Maintain enough monthly cash flow to cover monthly mortgage payments and unexpected costs like emergency repairs and irregular maintenance.
  • Have enough money to cover the expected annual maintenance costs. On average, people spend between 1 and 4 percent of their home’s value every year on repairs replacement.
  • Have actually done the math to determine what’s cheaper: renting or buying. This excellent calculator from The New York Times can help you determine what’s financially best for your situation.
  • Are able to cover your current costs and living expenses without struggle each month, and have other debts under control (or are debt-free).
  • Know what you’re actually looking for in a home for the next 5 years.
  • Have done your due diligence, asked questions and received answers, and done research on what all homeownership entails.
  • You are financially ready to deal with the broken air conditioner one month after moving in!

If you’re not checking many of these boxes, homeownership isn’t out of the question for you. But it’s a smart idea to expand your goal’s timeline. You may need to save more money for a down payment, find a more stable job with reliable income, or decide what you really want your life to look like — and where you want to live it — before committing to borrowing money that will take you decades to repay.

You Have Other Options

If you discover that taking out a mortgage is not right for you, this is not a bad thing. There’s absolutely nothing wrong with this! And you should be proud of yourself for recognizing and honoring this decision.

Too many people feel pressured to buy a home, or leap into homeownership without fully understanding whether or not that’s the best route for their situation. Remember, it’s much easier to start this process and take out a mortgage than it is to sell your home, repay your loan, and walk away without losing a lot of cash if you suddenly realize buying a house was a mistake.

Homeownership isn’t the only good option available to you. In many areas and for many people, renting makes more sense both for the lifestyle they want and for their financial situation. A house isn’t cheap and requires constant maintenance and management in addition to that monthly mortgage payment. Renting is much less work for you as a tenant, allows for more mobility, and may be cheaper than owning.

Homeownership later, instead of right now, may be another option. Again, you can extend the time horizon on your goal. Perhaps instead of buying now, you can save for an additional 5 years to put yourself in a position to comfortably buy property and afford the ongoing costs associated with it.

This is a much better option than pushing your budget past its limit and finding yourself in a position where you cannot pay for the necessary maintenance or make your monthly mortgage payment.

The Bottom Line: Is a Mortgage Right for You?

Again, everyone’s financial situation — and everyone’s goals and dreams — are different. This is a highly individual decision and many factors feed into what’s best for you. That includes your current cash flow, your income stability, your location, and your future plans.

To determine if a mortgage is right for you at this time, ask yourself these questions:

  • Are you prepared to stay in one place for at least 5 years? Buying may not make much sense if you’re unsure of your future plans. If you know you want to stay put for 5 years or so, and can commit to that, you may be ready for your first home.
  • Is your job and income stable? There’s no getting around the fact that any home is prone to eat up your cash and a large part of your monthly cash flow. If your source of income (for most of us, that’s our job) and the amount of income you make is stable, you may be in a good position to buy. If your income is unpredictable or you don’t feel secure in your current job, focus on stabilizing these factors before taking out a mortgage.
  • Do you actually want to buy a home? Get honest with yourself. Are you interested in buying your first home because that’s what you want — or are you feeling pressure from friends, family, or society as a whole? Make this decision for yourself. Not for anyone else, and not because it’s something you’re “supposed” to do.
  • Do you have enough cash to get through the first year? The first year is always the most difficult. It will almost certainly cost more than you budget. If you are going to be broke after you move in, you are not ready for a house.

If a mortgage is right for you, read on! Your work isn’t quite done. You still need to understand the ins and outs of down payments, how to get approved, what kind of mortgage you need, and understanding all the costs involved with buying your first home.

Section 2: Saving Up for Down Payments

If you’re still on board to buy your first home and you know taking out a mortgage is right for you, you need to understand how to save up for the right down payment — and why it’s so important that you do so.

The general rule of thumb is to put at least 20% of a home’s purchase price in cash down when you take out a mortgage. This means you’re financing 80% of the purchase. And remember: you will need cash for the closing costs in addition to the down payment.

And yes, 20% of a home’s purchase price is a lot of cash to put down and part with all at once. The median price of a home in the US was $221,800 in 2010 (the latest year data is available from the US Census). A 20% down payment would be almost $45,000 in cash!

Of course, this number varies wildly depending on one major factor: location. A home in Pittsburgh will be a lot cheaper than a home in San Francisco. But whether you’re looking at buying a $100,000 home and need to save $20,000 to put down or want to buy a $500,000 property and need to come up with $100,000 just for the down payment, we’re talking about a big chunk of change.

Why is this 20% number so important — and more importantly, how do you save up for it?

Why Is 20% So Important?

So why bother saving up that much money in the first place? After all, lenders will finance more than 80% of a home’s purchase price. Some loans will let you put down as little as 3.5%. Why pony up all that cash if you don’t have to?

There are a few major reasons why it’s worth making the effort to save up the full 20% for your down payment:

  • Saving up 20% for your down payment allows you to avoid PMI. PMI stands for private mortgage insurance, and you must pay this additional fee if you put down less than 20%. The idea behind it is that financing more than 80% of the home’s purchase price means you’re a riskier borrower for the lender. They impose PMI to protect themselves in case you default on your mortgage. PMI can add anywhere from $50 to $300 more onto your monthly mortgage payment, depending on the home price and your specific home loan.
  • Putting more cash down means more equity in your home right away. This can help protect you during market downturns or when home values sink. You’re less likely to find yourself underwater (owing more on your home than the house is actually worth).
    Remember: when you sell your home you will probably need to pay 6% of the home’s value in fees alone. The more equity you have, the more flexibility to get out of the situation if you are in trouble.
  • You save money on your home over the life of the loan. Financing less of the purchase means borrowing less money — and that means paying less interest on those borrowed funds. This can add up to serious savings, when you consider that home loans can cover hundreds of thousands of dollars.
  • Your monthly mortgage payment is smaller. It’s simple: if you borrow less, there’s less money to repay. The principal amount that you need to pay back each month will be smaller, making your entire payment less than if you borrowed a larger amount.
  • More cash up front can be used as a bargaining chip in the buying process. If you’re in a competitive market where multiple buyers put offers in on one home, putting down more cash may make you more appealing to the seller.
How to Save for a Home Down Payment

The short answer to “how do I save for a down payment?” is: set a goal, create a plan, spend less, and save more. There’s no magic solution. It really is that simple — but that doesn’t mean that it’s easy. You may need to cut costs out of your budget and make some sacrifices to free up more cash that you can allocate to your first-time home buying fund.

Here are some other steps you can take to save up for the down payment you need:

  • Reduce your expenses now. Move to a place with cheaper rent for a few years, embrace living frugally, cut back on discretionary spending, and get clear on your values and your priorities. Again, saving up enough for what you really want may be a long, hard slog. It’s important to remember why you’re working this hard: for the home you really want. Put in that perspective, living on less now so you can get into the home you want in the future is well worth the effort.
  • Reduce your price point. Make saving up for a down payment easier by looking for cheaper homes. You may need to consider buying less house or looking in lower-cost areas.
  • Boost your savings — and your income. Don’t just focus on how you can save more in your current budget. Look at how you can earn more, too. Earn and negotiate a raise, consider picking up more hours or part-time work, or explore creating an income stream based off freelance work or a side business.
  • Put your savings to work. If you have a long time horizon before you want to buy (say, at least 5 years out), consider moving your cash savings into a brokerage account and investing that money. All investment comes with risk, but with a large enough time horizon you’ll give yourself the opportunity to ride out market volatility. And your savings could earn far more than the piddling 0.01% interest rate that a liquid savings account.
  • Get the right savings account. If investing isn’t right for you because you want to buy sooner rather than later, make sure your cash is in a savings account that offers at least a little something. Credit unions may have high-yield savings accounts, or check out various online banks. Shop around and choose an account with the highest yield.
What Not to Do with Your Savings

There are also a few things you shouldn’t do to save for a down payment. The biggest: don’t drain your retirement accounts in order to buy your home. While you can do this — sometimes without penalty for dipping into your nest egg — it’s not a wise financial move.

It makes no sense to jeopardize your future financial security in exchange for buying a home right now. You have so many more options to explore first (like continuing to rent, buying in 5 years instead of 2, and so on). Avoid cashing out your 401(k) or Roth IRA for your down payment.

You’ll also want to avoid borrowing money just to take out a mortgage. Not only will you have to repay that original loan, but you’ll also need to start making monthly mortgage payments right away. Not to mention, most lenders won’t allow you to do this.

If you plan on using gifts for your down payment, you need to do your homework. In general, lenders will only accept gifts from family members. If you are putting down 20% or more, most family gifts are acceptable. If you put down less than 20%, your lender might put certain restrictions on allowable gifts. Just make sure you have a lot of documentation for any gift received, and be prepared to explain it.

What to Do If You Can’t Make a 20% Down Payment

A 20% down payment is the ideal number to shoot for, for a number of reasons. But let’s be honest: that’s a big sum of money that’s not always realistic to expect first-time homebuyers to save. You can buy a home and take out a mortgage if you have less than 20% of the home’s purchase price to put down in cash.

Kali’s Story:

When I bought my first home, I put only 10% down in cash — and even that wiped out my cash reserves. It took me about a year to build my savings back up, and I was extremely lucky that I got through that time period without any unexpected expenses or emergencies to handle. And because I put down less than 20%, I had to pay PMI. That added about $50 to my monthly payment that I wouldn’t need to pay had I financed less of the purchase.

In my situation, putting down less and getting into the home worked out in the end. Several factors contributed to that success: I bought the property when the market was still depressed, I bought a relatively inexpensive home, and I bought a home with resale opportunity at the forefront of my mind. I wasn’t looking for a dream home — I only wanted something I thought would be easy to quickly sell in a few years.

Had I waited to save 20%, the market would have shifted making inventory more expensive. The economy would have continued to recover, meaning interest rates on mortgages would have risen above the very low 3% I secured on my loan. And I wouldn’t have been able to cash in on my initial investment when I did; I may not have been able to sell my home within 3 years for a profit.

Is it possible to buy a home and get a mortgage if you put down less than 20%? Yes. Is it the wisest financial move? Probably not if it puts you in a precarious situation. Before choosing to use a smaller percentage, you need to understand the implications of putting down less in cash.

You have less equity in your home and it will take you longer to build that equity. You’ll pay more all around: more each month in your mortgage payment, more in interest over the life of your loan, and more thanks to PMI.

If you choose to buy a home and take out a mortgage with a smaller down payment, here are a few things to keep in mind:

  • Know that you’ll pay more. Be sure to understand the math for your specific situation: calculate how much you’ll pay if you put down 20%, and how much you’ll pay with a smaller down payment. The difference in costs may be acceptable to you, but you can’t make that decision until you’re fully aware of the actual numbers involved either way.
  • Don’t pour all your cash reserves into a down payment. Even a 10% down payment may be a stretch for you. But ensure that regardless of what amount you put down on the purchase, you still have some cash in the bank. Taking on a mortgage (and the home itself) means taking on more financial responsibility, and that requires you to maintain an emergency fund to cover the unexpected. Many lenders will even require that you have extra cash in the bank (cash reserves).
  • Look into various types of mortgages. The specific type of mortgage you’ll take out should be based on your financial situation, how much you want to put down, and how long you want to live in your home. FHA loans allow you to put down as little as 3%, but come with fees and additional costs that may not make sense for you. Consider working with a financial planner to figure out all your options, and to choose what’s best.

Section 3: How to Get Approved for a Mortgage

You’ve decided you want to buy a home. You know you’re ready to take on a mortgage. Now you need to determine what you can afford — and get yourself approved for the loan you want. Lenders assess you by factors like your debt-to-income ratio, income, assets, employment history, down payment, and credit history.

Here’s what that all means.

Understand What You Can Actually Afford

Before you can understand how these factors in your unique financial situation measure up from a lender’s perspective, you need to get clear on what you can actually afford, and how much money you’ll ask to borrow.

Lenders are legally required to only make loans that borrowers can reasonably afford to repay. But the definition of what you can reasonably afford may still be different than what you can realistically afford when you consider paying for unexpected expenses, managing other debts like student loans, and saving for retirement.

There are general rules that say your housing costs shouldn’t exceed about 36% of your income. That means, if you make $60,000 per year the total amount you spend on your home shouldn’t be more than $1,800.

But that’s a lot of money when you consider you still have a variety of other expenses to cover — and you don’t want to put so much stress on your budget that you’re unable to save cash, invest for the future, or cover one-time costs that pop up from time to time.

Loan calculators can be helpful tools to help you determine what you can realistically afford to purchase.

To fully understand the baseline costs you’ll pay, do your research. Know what the property tax rate is on homes in the county or town in which you want to buy. Call insurance companies and get quotes on policies. Look up the current average interest rate on mortgage loans.

Then take all that information and plug it into a loan calculator to get a more realistic idea of what the monthly payment would look like on homes in the price range you want to start in. If the payment is excessive, it’s time to lower your price point.

And if you feel comfortable with the estimated payment, that’s great! It doesn’t mean that’s the green light to spend more. Your mortgage payment should fall well within your means. Life is unpredictable and you may face higher expenses in the future. You could lose a job and find it hard to generate income — or you could start a family and see more of your monthly cash flow going to the needs of your children.

Whether positive or negative, you’re bound to experience changes in what’s available in your monthly budget over the years you own your home. Aim to leave wiggle room in your budget, and don’t think that you should max out what you can afford just to get “more” house.

What Lenders Look for in Borrowers

Once you understand what you can realistically afford in your monthly mortgage payment, you can consider what a lender is looking for before they’ll approve you for that home loan.

Lenders will want to ensure that you are willing and able to pay. Here is how lenders measure willingness and ability:

  • Your FICO credit score helps lenders see how willing you are to make payments on time. If you made payments on time in the past, it is highly likely that you will make your payments on time in the future.
  • Your ability to pay is measured by your down payment, debt burden (debt-to-income) and cash reserves. Lenders will want to verify all of this information.

Your credit score is a critical factor in getting approved for a mortgage. Lenders pull a hard inquiry to look at your FICO score, which determines how much of a risk you present to them. A lower credit score indicates more risk, and as a result, you won’t be able to secure as low of an interest rate as someone with a higher credit score (who is deemed less risky).

Lenders will want to look at all the assets you have, from cash to investments, and they’ll want to understand how much debt you currently carry. Looking at your income and assets allows the lender to get an idea of what you can afford and what reserves you have to pull from should something interrupt your cash flow.

They also want to understand how much debt you already have. Together, they’ll look at these numbers and determine what your debt-to-income ratio is. This ratio helps the lender determine how much money they’ll allow you to borrow.

Your DTI ratio should be under 36%. The lower your ratio, the better you look to the lender and the more likely you’ll get the mortgage and interest rate you want.

But before approving you for any mortgage, a lender will want to look at how reliable your income is. There’s no hard measure for this, but typically the institution will want to know about past and present employment.

If you’ve only be at your current job for a few months, that might make it harder to qualify for a mortgage. To the lender, the reliability of that source of income isn’t proven because you’ve only been earning it for a short period of time.

Your down payment impacts how lenders view you as a borrower, too. A smaller down payment signals more risk for them. A larger down payment makes it easier to secure the mortgage you’re looking for.

Better Your Chances and Get Proactive

Use this checklist as a guide to the action steps you can take before you talk to any lenders:

  • Prove that you’ve been employed and have consistent, steady income. You will need to provide proof of your income, typically via a payslip (for your most recent salary) and W2 (for historic payments). Ideally, you will have at least 2 or more years of steady income with your current employer. New to your current position? Consider pushing out the timeline for buying a home a bit. While it’s not fun to delay a goal, it can make the process considerably easier and may save you money if you’re able to show reliable income and therefore get a lower interest rate on the loan. And if you’re self-employed? Be sure to read Section 6 of this guide!
  • Pay down other debts. Improve your debt to income ratio by paying down any balances on credit cards, student loans, or other debts. This will improve your chances of getting approved, and better your overall financial health.
  • Save up for an appropriate down payment. Remember, 20% is ideal. However, you may be able to get a good mortgage with 10% down — and FHA loans only require a 3.5% down payment. While you can get by with less, a bigger down payment makes it more likely that you’ll get approved for exactly what you want.
Understanding the Importance of Your Credit Score

You may not be able to magically make thousands of more dollars per month overnight to make it easier to buy a home and get a mortgage. But you don’t have to take drastic actions across all areas of your personal finances. Just focusing on your credit score can make a world of difference.

First, pull your credit report from AnnualCreditReport.com. You can get a copy of this for free on an annual basis. Your report covers your accounts and credit history, and it’s important to check it to ensure accuracy.

If you find an error, report it to one of the three credit bureaus: TransUnion, Equifax, or Experian. We explain how to dispute credit report errors in this article.

Note that your credit report won’t include your actual credit score — and know that you don’t actually have just one score. Each of the credit bureaus issues you a score based on their own algorithms. And you have what’s known as a FICO score. That’s the one a lender will evaluate to determine your creditworthiness when you apply for any type of loan, including a mortgage.

For a mortgage, your official FICO score is very important. There are a few ways to get your official FICO for free. You might have a credit card that provides your score for free. If not, Discover offers free FICO scores to everyone (you do not have to be a Discover customer). We explain how to get your FICO score for free here.

Credit scores run from 300 to 850, with 850 being considered the absolute best. To get the best mortgage rates, you would want your score to be above 750. And you might find it very difficult (and more expensive) to get a mortgage when your score is below 640.

What to Do About Your Credit Score

A poor credit score won’t prevent you from getting a mortgage at all, though it may make it harder to qualify and cost you more. Your loan can also cost you more over time, since you won’t be able to get the lowest available interest rate. It’s well worth taking the time to work on your credit score before seeking approval for a mortgage.

Even if your credit score is considered good, work to boost it over 750 and have it considered excellent by lenders. Again, the higher your score the better your interest rate — and the more money you’ll save on interest. If you want to know how a better credit score could pay off, check out this tool that shows you the mortgage rate you could receive based on your score.

Here are some steps to take:

  • Make all credit card, account, and loan payments on time and in full.
  • Don’t carry balances on your credit cards.
  • Avoid opening or closing new lines of credit.
  • Keep your credit utilization ratio low. This means using as little of your available credit as possible. To have the best score, your utilization should be below 10%.

Keep in mind that improvements to your score won’t happen overnight. It may take a few months or over a year to get your score into that good range, depending on where you’re starting. Stick with it and keep your actions consistent.

What Hurts Your Chances of Getting Approved?

It’s important to note that some actions that you might otherwise think are innocuous can hurt your chances of getting approved for a mortgage. Here’s what you should avoid in the weeks and months before you approach a lender about a home loan:

  • Don’t take out new loans. If you want to secure a mortgage, remember that your DTI ratio plays a big role in what you qualify for. Avoid taking on new debts (including co-signing loans for others!).
  • Don’t open new credit accounts. This can impact your credit score and affect the interest rate you can receive on a mortgage.
  • Don’t generate any unnecessary banking activity. All of your accounts will be closely scrutinized in the approval process. Any activity without clear explanation can be questioned and the lender can require that you provide documentation to show why and how money moved in or out of your accounts.
Don’t Just Get Approved: Get Pre-Approved

One last important thing to note about mortgages and getting approved: you can — and should — get pre-approved. This simply means that you approach a lender before you start looking for homes and putting in offers on properties for sale.

The lender will take a cursory look at things like your credit score, income, debt, and employment history. The lender can then make a good faith guarantee that they can grant you a loan up to a certain amount when you actually find a home to buy and want to take out a mortgage to purchase the property.

This will get you a quote on an interest rate, but more importantly for your home search, will allow you to put in offers on homes you’re interested in. Many buyers will not even accept offers from buyers who have not been pre-approved. It’s a simple step that can make a big difference in your homebuying experience.

Section 4: Choosing a Mortgage Type

All mortgages are not created equal. There are a number of different types of loans that can help you purchase your first home depending on your situation, your down payment, and other qualifying factors.

Here’s a quick rundown of your options when it comes to choosing a mortgage:

  • Conventional
  • FHA
  • VA
  • Jumbo loan
  • Fixed rate or adjustable rate
  • 15 year or 30 year term

Let’s dive into the details on each of these distinctions:

How Conventional Loans Work

Fannie Mae and Freddie Mac are two quasi-government agencies that purchase mortgages from banks and mortgage lenders. These agencies set rules for what they will buy. If a mortgage meets the rules of Fannie and Freddie, it is considered “conventional.”

Conventional mortgages follow standard guidelines and don’t come with many bells and whistles — which means there are less hoops to jump through to qualify for these loans. They often close faster and offer an overall easier process for borrowers to work through.

You also have more options when it comes to the actual property you’re looking to buy. If you’re handy and want to take on a fixer-upper, for example, lenders will allow you to buy the property you want with a conventional loan. The same is true if you’re looking to buy anything other than a single family home, like a condo. Other loans have strict requirements on the condition of the property you want to buy, which can limit your options.

A 30 year conventional loan is most likely your best bet if you’re a conventional borrower: good credit score, low debt-to-income ratio, 20% down payment. If you can check all these boxes, you’ll likely get a competitive interest rate on a mortgage with few restrictions or requirements.

You may struggle to qualify if you don’t mean the traditional guidelines for lenders, however. And that’s where other mortgage products come into play.

What You Need to Know About FHA Loans

FHA loans are mortgages insured by the Federal Housing Administration (FHA). FHA loans can offer first time home buyers more options than conventional loans, as they don’t come with as many restrictions and offer more exceptions. Both of these factors can make buying a home much easier for you.

In general, FHA loans allow lower credit scores, higher debt burdens and lower down payments. But, in exchange, the loans cost more.

FHA loans only require a down payment of 3.5%. Why? Because of that insurance from the FHA. Lenders are more willing to originate loans for borrowers they’d otherwise consider risky, because if that borrower defaults the FHA promises to repay the loan.

So what’s the catch? The cost for an FHA loan can add up fast, thanks to various fees you need to pay as the borrower. The FHA doesn’t insure these loans out of the goodness of its heart. You’ll pay more for fewer restrictions and the ability to put down less over the lifetime of the loan.

The insurance fee is 1.75% at the time of the loan origination. You’ll also pay an ongoing monthly fee of 0.85% if the loan-to-value ratio is more than 95.01%. (And your 3.5% down payment would place you in this category.) This isn’t the same as PMI, which can eventually be removed once you build a certain amount of equity in your home. The insurance on FHA loans remains for the entire term.

That doesn’t mean an FHA loan is never a good option. If you have a poor credit score or simply cannot put more than 5% to 10% down, it’s worth exploring this type of mortgage to help you buy your first home.

Other Mortgage Options

In addition to conventional and FHA loans, borrowers may also be able to take out other types of loans. These include:

  • VA home loans. VA stands for Veteran’s Administration, and it’s a branch of the Federal government that helps servicemembers and veterans along with their eligible family members. The VA offers various housing programs to help vets “buy, build, repair, retain, or adapt a home.” The VA’s home loans are originated by private lenders, but the VA guarantees a portion of the loan. This allows the private lender to make the loan with more favorable terms than they might otherwise offer.
  • Jumbo loans. Fannie Mae sets what are known as “conforming loan limits” that lenders of mortgages cannot exceed. In plain English, this means that lenders cannot give you a conventional loans in excess of $417,000 on a single family home (at. This isn’t an issue for most, but if you live in a high-value real estate area and homes easily sell for over $500,000, have a strong credit score, and a low debt-to-income ratio, you may want to look into a jumbo loan. Jumbo loans allow you to borrow more than the conforming loan limit. But they are expensive loans to originate, many lenders will not make them, and you’ll have to jump through a number of hoops to qualify.
Fixed Rate vs. Adjustable Rate Mortgages

Loans come with various types of interest rates and terms. The actual interest rate can fluctuate based on a lender’s assessment of your creditworthiness, but you can also choose between a fixed rate or a variety of adjustable rates.

Fixed rate mortgages mean that you have a set interest rate that never changes over the life of your loan. If you take out a fixed rate mortgage with a 4% interest rate, you’ll always pay 4% in interest. (Note: we are very lucky in the USA. Most people around the world do not have access to 30 year fixed rate mortgages. Being able to borrow for 30 years at a low fixed interest rate is a great deal).

The benefit of this type of mortgage is that there are no surprises. You always know what you owe in interest, and your rate will never go up. This means that the rate isn’t subject to the economy or inflation. A fixed rate mortgage may not provide the absolute lowest interest rate available, and that’s where ARMs come in.

Adjustable rate mortgages are also known as ARMs. As the name suggests, the interest rate will adjust, or change, over the life of the loan depending on the specific terms of your mortgage. The rate remains fixed for 5, 7 or 10 years. Then the interest rate become adjustable, subject to change each year.

Many borrowers can secure a lower interest rate in the initial years of the loan if they choose an adjustable rate. However, that interest rate usually skyrockets as soon as the adjustable period kicks in. This can cost you far, far more over the life of the loan. And your payments will eventually be subject to external factors outside of your control.

ARMs aren’t always bad (although we usually recommend a 30-year fixed rate). If you are making a big down payment and only plan on being in your home fewer than 10 years, an ARM could be a good deal. You will end up paying less interest while you live in the home and then sell.

ARMs are a terrible idea if you can’t afford the payment when the interest rate is fixed. If your plan is to take out an ARM now (at a lower payment) and then refinance before the payment increases – you are setting yourself up for failure. Stay away.

In general, you should try for a 30 or 15 year fixed rate mortgage. Interest rates are at an all-time low and will only go up. You have the chance to lock in low interest rates now.

What’s Term Got to Do with It?

Most mortgages will come in either 15 or 30 year terms, meaning you either have 15 or 30 years to repay the loan. Most borrowers will choose a 30 year term because the longer repayment period equates to lower monthly payments.

A 15 year mortgage obviously allows you to repay your loan in half the time. That means you’ll save money in interest payments, build equity faster, and own your home free and clear in 15 years instead of 30.

If you’re interested in paying off your mortgage as quickly as possible, a 15 year loan may sound much more appealing than stretching that repayment over double the amount of time. But the best solution may be to choose a 30 year mortgage that allows for early payments without penalty.

You’re only required to make the monthly mortgage payment, but you can get on track to paying off your loan in half the time by doubling the amount you pay each month or making multiple payments toward your principal each month, instead of just one. This removes the pressure to make massive monthly payments: it’s now a choice, rather than a requirement, which provides you with more flexibility in your monthly cash flow.

Warning: People often refinance their mortgages. Refinancing can be a good option, particularly if you can get a lower interest rate. For example, if your credit score improves and the value of your property increases (reducing the LTV), you might be able to get a much lower interest rate than when you opened the mortgage. Just make sure you don’t fall into a common trap of extending your term when you refinance. If you take out a 30 year mortgage and then refinance after 5 years into another 30 year mortgage, you have just extended the term by 5 years.

Section 5: Getting a Mortgage When You’re Self Employed

All of the previous sections have walked through ideas, advice, information, and details that apply to almost everyone looking to buy their first home and take out a mortgage. But if you’re self-employed, you need to understand that this process is unlikely to be as easy for you as it will be for someone with an employers.

The current system skews toward favoring workers who make W2 income. Why? Most likely because it’s much easier to prove stable income from legitimate sources, thanks to a steady stream of consistent pay stubs. When you’re self-employed, you only have your own records of your income from month to month and what you earn is variable.

If you run a business with overhead, your business expenses could also hurt you. Deducting costs can help you on your taxes, but it can hurt on your mortgage application. Lenders don’t look at your gross self-employment income. They consider your net, and that means they subtract business expenses from your income when considering these factors for a loan.

Before you panic, it’s not impossible to qualify for a mortgage when you’re self-employed. The system does seem to favor employed individuals, but there’s no reason you can’t secure a loan when working for yourself. You need to understand that it may be more difficult, and know what the lender will want to see if you apply while self-employed.

How to Prove Your Income

Gather your tax returns. Because you don’t have pay stubs from an employer, a lender will want to see tax returns for the past two years. Lenders request this information directly from the IRS, so they’ll ask you to fill out IRS Form 4506-T. That gives the IRS to release your returns to a third party.

If you haven’t filed your tax return from the most recent year, you can work with a CPA and ask for an audited profit/loss statement. You may also want to supply your business license or a an official statement from your CPA that says you’ve been self-employed for at least two years.

Beyond this change, you’ll need to provide the same information as other, employed borrowers do when applying for a mortgage: your bank statements, statements from investment accounts to prove your assets, and so on.

Bring Backup Documentation

If you’re self-employed, you know that your finances are rarely ever simple and straightforward. You may experience busy and slow seasons, spikes in earnings thanks to an influx of new clients or dips in your earnings because you took time off, and more. Countless things impact what you take home at the end of each month.

Lenders, however, work very linerally, and must adhere to certain guidelines when underwriting loans. While they can’t bend the rules to make the reality of your self-employment income fit into the qualification standards, they may accept additional documentation if it helps prove that you can reasonably afford to repay the money you ask to borrow.

When I bought my second house, I was in an interesting employment situation. In 2013, I started earning self-employment income on the side of my work as a W2 employee. In 2014, I quit my job and became self-employed full-time. I made more running my own business than I ever did as an employee.

In 2015, I took on a new position and once again became a W2 employee. I continued working on my own business on the side, however, and once again brought in both W2 income and money earned from self-employment.

Throughout this time, I consistently earned higher and higher incomes. In fact, my self-employment income alone was triple what I had made at my old day job that I quit back in 2014.

In the spring of 2015, I planned to sell my first house and buy a new home. But at the time I applied for a mortgage, my most recent tax return was from 2013 — and reflected the low income I made at a job I had since left. I hadn’t yet filed my 2014 taxes, and had just started the new job where I earned W2 income.

It was a complicated situation, and despite the fact that my cash flow and bank accounts supported my claim that I could afford to repay the money I wanted to borrow — and the fact that I had no debt — the lender was extremely cautious because the paper trail they like to see simply wasn’t there.

I did end up getting approved for the mortgage, but it took a lot of work. What made the difference was submitting all the documentation I could get my hands on to prove my income and show that I wasn’t an extremely risky borrower.

I wrote a letter of explanation walking the lender through my employment situation, submitted all my financial statements around my self-employment records of income and expenses, provided over a years’ worth of bank and investment account statements, and obtained a signed letter from my new employer stating their intent to retain me (and therefore, pay me a salary) for the foreseeable future.

It was enough to get approved for the mortgage, although the loan was contingent upon the sale of my first house. If you’re self-employed or are dealing with a situation that may look a little funny on paper (like all my changes in employment status), plan to bring backup documentation.

Prove everything you can with a paper trail, and ask the lender if they’ll accept letters of explanation from you and other relevant parties (like a new employer).

Section 6: Understanding ALL the Fees

When you take out a mortgage, there will be a number of costs associated with the mortgage. In particular, you will be expected to pay for:

  • Origination charges
  • Title insurance
  • Inspection fees
  • Other misc. Fees

In addition, you will be required to fund the escrow account and prepay certain items.

You will be given all of this information at least 3 days before your closing in a document. You can learn all about the disclosure, and how to read it, at the CFPB website.

Section 7: How and Where to Shop Around

To determine the best interest rate available for your credit profile, use the Interest Rate tool of the CFPB. With this tool, you can see the best interest rate in your market.

In general:

  • If you are going to get a conventional loan, you should just go directly to the bank or credit union that offers the best rate in your area. Paying for a broker is almost always a waste of money for conforming, conventional loans.
  • If you have a lower credit score or want to make a lower down payment, you might want to search for an FHA lender and go directly to them. Otherwise, a broker could be helpful if you have a more complicated situation. Just make sure that if you use a broker, you do not let the broker talk you into buying a home you can’t afford. Remember: the more you borrow, the more the broker will get paid.

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Vacation Loans: Find the Lowest Rate Options

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The editorial content on this page is not provided by any financial institution and has not been reviewed, approved or otherwise endorsed by any of these entities.

Find the Lowest Rate Options

Travel is a huge priority for many people in their 20s and 30s. Seeing the world and collecting those experiences can make a big impact on you as you continue to develop into the person you want to be, and it’s just easier to get out there and go when you’re young.

You have fewer responsibilities to tend to back home, and long-term relationships, houses, or children might not be tying you down.

But if you’re early on in your career and still dealing with burdens like student loan debt from your college days, you also have less money to spend on travel when you’re young. Money can be a major limiting factor in your ability to take vacations and see more of the world right now.

If you’re set on taking vacations even when your budget is limited, you may be tempted to look into loans to fund your trips.

Can You Get a Loan for Travel?

While “vacation loans” aren’t really a thing, you do have options if you look into getting a loan to fund a vacation. Many lenders will provide personal loans instead.

You can get a secured or unsecured personal loan. A secured personal loan means you put up some asset as collateral against the loan, so if you don’t repay the money you borrowed you lose that collateral. (That collateral is often something like your car.)

You may be able to borrow more at a better interest rate if your loan is secured, but you risk losing whatever asset you used as collateral.

When you apply for a personal loan, you’ll need to provide a reason for borrowing the money. Some institutions accept things like travel and vacations as legitimate reasons for borrowing. And while taking out a loan for your vacation may sound crazy, it could be a better financial option than loading up travel expenses on your credit cards.

Funding Vacations with Personal Loans

If you do an online search for personal loans to fund your vacation with, you’ll likely come across a number of lenders that offer funds for this purpose. SoFi, Prosper, Earnest, LendingClub, Karrot, and Upstart are all legitimate companies to explore if you want to take out a personal loan for travel.

These are all online loan companies that offer personal loans, along with other financial products. (SoFi, for example, offers student loan refinancing.) The amount you can borrow will vary depending on a number of factors. Karrot allows borrowers to request $5,000 to $35,000. Upstart’s minimum loans vary by state, but all max out at $35,000 as well. SoFi offers personal loans in amounts from $5,000 and $100,000

Earnest is a little different. The company offers “merit-based” unsecured personal loans up to $50,000. These loans are designed for individuals who may have limited credit histories but demonstrate that they’re financially responsible.

There are a number of other companies that aren’t as reputable as those listed above, and are considered predatory. Predatory lenders tend to make loans with extortionate interest rates with complicated terms that are in favor of the lender, not the borrower.

You can quickly end up owing far, far more than what you initially borrowed if you’re not careful – especially when searching for a loan specifically to fund a vacation.

Again, there are no “vacation loans.” These loans are just personal loans, but marketed to be used for vacations. Predatory lenders target keywords like vacation loans and will often show up in search results if you look for a loan to fund your trip, so be aware of companies like Loans of America who create landing pages for their products like this. Choice Personal Loans is another example of a predatory lender that you should avoid.

But perhaps a loan shouldn’t even be your first thought.

The First Option to Consider

If you have excellent credit, then a 0% purchase APR credit card may provide you with a better option than a personal loan. The benefit of using these cards is that you’ll be able to pay off your vacation over time, with no extra payments to interest.

In addition to looking for personal loans, look into the following 0% purchase APR credit cards:

Keep in mind that most of these cards provide the 0% APR as a limited-time offer and there’s a time limit. If you fail to repay your balance in full by the end of that promotion period, you’ll owe interest on what you charged to the card. Not managing your payments can cost you a tremendous amount, so charge your vacation to any credit card with caution.

You could seek out a low interest rate credit card instead, but these typically come from credit unions and are reserved for the institution’s members. It’s well worth looking into this option if you’re a member of a credit union or are considering opening an account with one in your area.

If you are wary of charging your family vacation on a credit card or are concerned about paying it off before the end of the 0% APR, then look into personal loans.

If You Have to Borrow, Here’s What You Need to Know

If you choose to seek out a personal loan for a vacation, you need to have good to excellent credit to be approved – and to get a low interest rate on the money you borrow. Getting the lowest interest rate possible is the only way a personal loan might be a viable financial solution for your trip.

None of the lenders below charge a pre-payment penalty, but some do charge origination fees – so don’t forget to factor that in to the total cost.

Earnest (5.25% APR): One of the few lenders with no origination fee and no pre-payment penalty, Earnest is an excellent choice for those with top-notch credit and employment history. Fixed rate personal loans start at 5.25% APR and you can borrow up to $50,000. Earnest does a soft pull of your credit report to determine if you’re pre-approved and your rate, so it won’t hurt your credit score to check.

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SoFi (fixed APR 5.95% – 14.24% and variable APR range of 4.83% – 11.43%): Similar to Earnest, SoFi also charges no origination fee, no pre-payment penalty and allows you to check your rate without harming your credit score. You can borrow a minimum of $5,000 and up to $100,000 from SoFi.

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LightStream (5.99%, 7.79% APR): is another lender that doesn’t charge an origination fee, but their interest rates run higher with the lowest starting at 5.99%, if you borrow a minimum of $10,000 or 7.79% of you borrow the minimum of $5,000. Similar to SoFi, you can borrow a minimum of $5,000 and up to $100,000. Unfortunately, there is no soft pull option and it will be a hard pull on your credit report to check if you’re eligible and determine your rate.

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Karrot (6.44% APR): Karrot’s minimum APR is a bit lower than LightStream, but the company does charge an origination fee. This fee varies from 1.05% to 4.75% of the total loan. Karrot’s APR cap is also significantly higher than Earnest, SoFi and LightStream – which means you could end up borrowing at a rate closer to 30% APR.

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Upstart (4.93% APR): Similar to Karrot, Upstart also charges an origination fee and has a higher maximum APR cap of 29.99% APR. Upstart’s minimum APR is lower and starts at 4.93% and the origination fee is 1.00% APR to 6.00% APR on a loan up to $50,000. You can check your rate without it affecting your credit score.

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Be sure to shop around and get quotes from a number of companies, and then compare rates.

 

What to Do If You Have Poor Credit

The most difficult part of getting a personal loan from a reputable company for any purpose is getting approved as a borrower. Most companies require good to excellent credit scores before they’ll allow you to borrow funds.

But there are options if you have poor credit. Avant, One Main Financial, FreedomPlus, Springleaf, and Basix are all lenders that are more lenient with borrowers. But beware: these loans will come with origination fees and much higher interest rates than what is available via companies like SoFi, Earnest, and Upstart.

Avant, for example, charges 9.95% to 36.00% APR on its loans. FreedomPlus’ loans come with an APR from 8.47% to 29.90%. Basix’s APR is between 25.99% and 35.99%. Additionally, these products aren’t available in all states and rates may change depending on where you live.

You can find more information on these companies by searching for their FAQ, Support, or Help pages. Before applying, you should understand all fees involved, whether or not you’ll be charged if you pay off your loan early, and what interest rates and APRs you’ll be charged.

Look into Alternatives to Borrowing Money

At the end of the day, getting a personal loan is an option for funding your vacation — but it may not be the best money move to make. Instead of borrowing money, whether through a loan or by charging costs to a credit card, make a plan to explore financially sound alternatives.

The best way to fund your travels is to create a plan and start a travel savings fund for the trip or vacation you want to take. Consider using banks that offer great interest rates on cash savings accounts, like the ones in this post all offering APY of 1.05% or higher.

Then plan your trip and get an idea of the total cost. Let’s say you want to take a trip in the next year or so and you know your vacation will cost you $5,000. By giving yourself 18 months to save, you can set a goal to transfer $278 per month to your travel savings fund.

That will allow you to pay for your trip yourself, without taking out loans or using credit cards and subsequently paying more in fees and interest charges.

Feel like you can’t wait that long for your vacation? Your next option is to look at how you can reduce costs and take a trip that fits in your budget right now. Some solutions may include taking a trip with other people and splitting the cost of things like accommodations, or looking for low-cost alternatives to your dream trip. Perhaps you can stay in hostels or use Airbnb to find cheap rooms instead of splurging at pricey hotels every night.

And you can still use credit cards in a smart, responsible way. You can maximize your current spending and rack up reward points for travel. Then, you can use those rewards and points to cover your vacation expenses instead of paying for all costs with cash.

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Should You Shop with Fingerhut? (Probably Not)

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The editorial content on this page is not provided by any financial institution and has not been reviewed, approved or otherwise endorsed by any of these entities.

Should You Shop with Fingerhut

Plenty of consumers today either make a proactive choice to ditch credit cards or are unable to gain access to one due to a low credit score or non-existent credit history. In response, payment processors like PayPal offer a credit service where shoppers can finance purchases with online retailers – but more and more independent businesses are following the trend and offering their own lines of credit for online shopping portals.

Fingerhut is one such website. Fingerhut acts as a catalog that focuses on being able to finance your purchases. The site allows you to purchase and receive items now, and then make monthly payments on what you ordered to pay for them in full over time.

But is it really shopping on credit now and paying later?

How Fingerhut Works

Fingerhut LogoFingerhut is an online shopping portal that sells “everything from furniture and bedding to jewelry to the latest electronics.” All purchases are made on a line of credit extended by the company and customers must repay their balances with monthly payments.

You’ll receive an answer immediately when you apply for credit, and some customers are able to start shopping instantly. Purchases that aren’t paid off in full after buying accrue interest, with an APR of 25.15%. There are no annual fees.

Fingerhut offers two programs for customers to receive credit: the Fingerhut Advantage Revolving Credit Account and the Fingerhut FreshStart Credit Account.

The Revolving Credit Account “may or may not require a one-time down payment when you place your first order.” The company states that this isn’t a fee, but a charge that will be applied to your order.

In comparison, the Fingerhut FreshStart® Credit Account is backed by WebBank and acts as an installment credit program. You’re required to make a $30 down payment on what you want to order. If you make payments on time and in full, Fingerhut promises to change your account to the Revolving Credit Account (and up your credit limit).

You cannot transfer balances or take cash advances from either credit option, and your credit can only be used with Fingerhut.

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Who is Being Targeted?

Fingerhut doesn’t require membership, but you do have to apply for their lines of credit before you can shop with them.

The site targets people with no or poor credit who may be declined for lines of credit with other retailers. If you’ve been declined for a store card at your local department store, for example, Fingerhut’s offer may look particularly attractive: you get to finance your purchases even with poor credit.

The main reason people shop with Fingerhut is because the company offers popular, name-brand products and allows you to finance them instead of having to purchase what you’re looking for outright. The site is legitimate from that standpoint – you can charge items to your credit account, they’ll ship after you make a down payment, and then you can repay the balance monthly.

But consumers need to beware before signing up, applying for credit, and heading to the checkout page.

Buyers Need to Beware

Prices of items listed on Fingerhut are considerably higher than other retailers, and there’s little benefit to buying items on the line of credit they offer. Those with bad credit scores won’t see much improvement to that score by using the site, and there’s no reason to attempt to boost your credit score by purchasing material goods from an online retailer.

If consumers need to purchase on credit, they’re often better off charging something to a credit card (or saving up cash to buy what they want). Fingerhut’s prices for the items themselves are higher than in other stores, and their interest rates are often even higher than the rates on credit cards.

And customers aren’t building credit with any company beyond Fingerhut. The site claims that they “can help shoppers build buying power with us,” which is not the same as building credit history. Instead, try building credit history with a secured card.

Choose More Sensible Shopping Alternatives

Fingerhut’s online catalog features a huge variety of items that you can order now and pay for later. But by the time you’ve paid off your purchase, there will be much more cash out of your pocket than necessary. Through Fingerhut, you’ll pay more for your item itself than you would if you purchased at another store – and you’ll pay interest on top of that, too.

If you don’t have the cash in hand today, take a step back and look at your budget to understand why. Are you overspending? Do you really need the item you’re trying to buy, or is an impulse purchase? Is there something else you’d rather do with your hard-earned money than spend on material goods, like saving up for a goal or investing for your future?

If you decide you do want to buy items like the ones you can find on Fingerhut, it still makes sense to choose other alternatives for your shopping needs. In the long run, it’s much cheaper to buy what you’re looking for through other retailers. You can still shop online and get better deals on overall price.

Use coupon sites to look for codes and discounts, and check out online shopping portals like Amazon and eBay to hunt for the best deals. Set up price alerts to be notified when things go on sale and plan purchases carefully to make the most of the money you want to spend.

TAGS: ,

Life Events, Strategies to Save

5 Ways to Find and Recover Money You Didn’t Even Know Was Lost

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The editorial content on this page is not provided by any financial institution and has not been reviewed, approved or otherwise endorsed by any of these entities.

5 Ways to Find and Recover Money You Didn’t Even Know Was Lost

Did you know that in 2013, there was $58 billion worth of unclaimed cash and benefits in the United States? That figure may seem outrageous, especially if you track every dollar you earn or receive. You wouldn’t let any money of yours wander away unaccounted for, right?

Maybe, but it’s surprisingly easy to lose track of a few bucks here and there, forget about some sources of money with your name on it, or not be informed about how to claim your cash.

So what can you do about it? The good news is there are a number of ways to reclaim money with your name on it. It’s just a matter of knowing where to look.

1. Check with Uncle Sam First

The first place to look for lost money is with the IRS. You may have money with your name on it sitting at this agency for one of two reasons. Either your refund went unclaimed, or it was marked undeliverable.

Unclaimed refunds usually occur when you earn an income and have taxes withheld from your paychecks — but you didn’t make enough income throughout the year to file a return. You may be eligible for certain tax credits, or you can request a refund on the money that was initially withheld.

Refunds are sent to your last known address, so if your mailing address isn’t up-to-date with the IRS your check could miss you. This is what the IRS refers to as an undeliverable refund. You can update your information by visiting IRS.gov or calling the agency at 800-TAX-FORM.
Additionally, one way to preemptively “reclaim” your money when it comes to taxes is to change the withholding on your paychecks. By paying less in taxes throughout the year (in favor of owing come tax time each April), you’ll reduce the likelihood of any refunds you’re entitled to getting lost in the shuffle.

2. Search for Cash and Other Property by State

Search for any kind of unclaimed property at Unclaimed.org. This lists out assets left behind by state, and is a good place to start if you’re seeking lost or forgotten bank accounts, CDs, and certain types of uncashed checks.

Funds range from very small and potentially not worth the effort to reclaim, to serious amounts of cash that you don’t want to slip away. “I found $3.00 for my aunt. She was not impressed,” says John McCarthy, a CPA and founder of McCarthy Financial Planning. “I also found $300,000 for the company I worked for. Needless to say, the company was a little more excited than my aunt was!”

You can also search for other types of property like stocks, unredeemed money orders or gift certificates, insurance payments or refunds, utility security deposits, and more.

Joseph Hogue, CFA and blogger at Peer Finance 101, says that he used a state-specific site to search for unclaimed property in his family. Iowa’s state treasurer’s office runs the site Great Iowa Treasure Hunt, and Hogue used the resource to locate a variety of funds in his name and in his relatives’.

“Filling out the forms and getting the needed documentation turned out easier than I thought,” Hogue shares. “The website has downloadable forms to fill out and sign.” He says to file a claim, you’ll need to verify your address and provide a photo ID.

“I took the four forms and supporting docs to the Treasurer’s Office, but could have mailed them in,” says Hogue. “I got one check for the entire amount just three weeks later.”

You can try looking for state-specific resources by searching Google for “your state” + “unclaimed funds.” At the very least, you should find a government web page or two that lists out information about unclaimed property in your state. If you can’t find a search portal, use Unclaimed.org.

And if you’re looking for an old savings bond, there’s an entirely separate resource to help you track it down. Search for property on Treasury Hunt, which will let you know whether or not a savings bond has matured..

Finally, you may be able to find lost money via unclaimed insurance policies. Consumer Reports claimed that there’s at least $1 billion worth of unclaimed policy benefits out there, and that 1 in 600 people are eligible to claim money from those policies.

To get any money you may be entitled to, you should first use the above resources to look for unclaimed property. If that yields no results, you can contact the insurer who issued the life insurance policy. If the policy was held by a departed loved one, you should also seek out the documentation from their account.

3. Think Back to Past Employers

Another common source of unclaimed money? Old company benefits packages. It’s easy to forget about old retirement plans and accounts held with a previous employer after you leave for a new position with another company.

If you ever had a pension with a past employer, you can reach out to the Pension Benefit Guaranty Corporation. PBGC insures tens of thousands of different pension plans, and you can search for unclaimed pensions via their site.

While on the subject of old employers, think back and make sure you didn’t leave any other types of retirement accounts behind. If you opened a 401(k), make sure that you roll that account over to something you can continue to manage today.

And as a bonus tip, make sure you’re not losing money with your current employer! If you have the option to set up a 401(k) and contribute to receive a company match, do so. Company matches are like free money for you to claim, or like giving yourself an instant raise. Take advantage and don’t let that money go unclaimed or become forgotten!

4. An Ounce of Prevention…

While receiving money from an inheritance may be something that’s out of your control, you can encourage family members to ensure their assets are distributed according to their wishes by setting up an estate plan. It’s important you do this for yourself, too, for the assets in your name.

And no, an “estate” isn’t just for the super wealthy. Without an estate plan, regardless of how much money you have, everything must go through probate court. That’s a long – and public – process that can delay the distribution of funds or can lead to confusion about what money goes where.

This advice speaks more to preventing assets from going missing or unclaimed than to finding those monies once they’re gone. Setting up an estate plan can help avoid lost or forgotten funds in the first place by transferring money directly to heirs.

Doug Nordman, who pens the site The Military Guide, experienced this firsthand in attempting to search for accounts from both his father and grandfather. “Both of them suffered from dementia, eventually leaving their financial affairs in utter chaos,” he explains.

“Sites [to help locate unclaimed funds] are essential for ‘forensic accounting’ to figure out what’s been abandoned; anything from $40 refunds by the local electrical utility to $100,000 insurance policies which still have a cash value,” says Nordman. “It’s the only way to assure family, caregivers, conservators, and heirs that everything has been found.”

5. When to Hire Help

The above methods of finding unclaimed cash are fairly simple and anyone can utilize the resources listed. But is there ever a time when you should hire someone to help you track down lost or forgotten money that could be in your name?

Avoid working with “locator companies,” who charge a fee to do the kind of digging you can do on your own. And you should always guard against fraud or scammers. Be on your guard and only work with reputable companies that are known and trusted.

If you’re seeking a specific account or type of property, perhaps an inheritance from a loved one who passed away or an unclaimed insurance policy, it may be worth looking into an attorney who specializes in unclaimed property.

This should be a last resort, after you’ve explored other options and done some research and tracking on your own. Attorneys can cost hundreds of dollars per hour. Doing a search on unclaimed.org or making calls yourself may yield results with no more investment beyond your time and energy.

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Outreach, Reviews

Modest Needs: Legitimate Help for Those in Need

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The editorial content on this page is not provided by any financial institution and has not been reviewed, approved or otherwise endorsed by any of these entities.

Legitimate Help for Those in Need

Getting a grant to help pay your bills from perfect strangers sounds too good to be true. Could having someone else handle your unexpected medical bill or car repair costs really be as easy as submitting an application that explains why, even though you’re employed and making money, you don’t have the cash to pay for your bill yourself? Could a charitable donation made online to a stranger really be put to its intended use and skimmed off the top by a bloated company?

With Modest Needs, it seems receiving help or donating to those in need is just that simple. The organization makes grants to people who genuinely need a helping hand during hard financial times. It ensures money from donors goes toward empowering those in need.

What Is Modest Needs?

Modest Needs, also known as modestneeds.org, is a nonprofit organization founded in 2002. The charity aims to provide financial assistance to low-income individuals and families, with the goal of preventing these people from slipping into poverty.

Everything began as the personal project of Nashville, Tennessee resident Keith Taylor. Taylor made his charitable work very personal; he saved part of his own salary each month to give away to those in need. After launching the site to connect with people who needed help – and people who wanted to financially contribute to others – the project snowballed.

Today, Modest Needs assists “low-income workers who are struggling to shoulder the burden of a short-term emergency expense.” The main type of assistance they provide is called a Self-Sufficiency Grant. These funds are given as grants, not loans, meaning the money does not need to be repaid by recipients.

Self-Sufficiency Grants are intended to help people who work and earn an income, but live just above the poverty level and are therefore unable to take advantage of any social assistance programs. These people may be just one paycheck away from financial disaster, and that’s where a grant can help.

Grants are generally made to people who are facing a financial emergency that they cannot afford, or who cannot afford to pay a monthly bill because of a legitimate extenuating circumstance.

How Grants Are Made

Modest Needs requires an application if you hope to receive one of their grants. Applicants must provide proof of income (to ensure they actually need financial assistance) and need to explain the crisis they’re facing that prompted them to ask for help. The organization advises setting aside a half hour to 45 minutes to complete the full application.

Some of the group’s other requirements include having at least one employed adult in the household. In addition, the main source of income for household must come from earnings via employment, child support payments, Veteran’s Benefits, or retirement income. The size of the grant depends on the applicant’s income.

Finally, applications that receive funding are required to write a thank you note to Modest Needs. Donors may opt in to receiving a copy of that note from applicants, as well.

By law, Modest Needs cannot grant funds for expenses including taxes, past-due child support, or fines and fees associated with civil or criminal offenses. As a matter of policy, the group will not provide grants for things like credit card debt or “luxury” goods or services.

If you’re interested in applying for a grant with Modest Needs, then you can find out more information here.

One Catch

Once an application goes live on the site, donors are then given the ability to vote on which grants should be funded. Donors get a vote by making a contribution to Modest Needs. A donor gets a vote (referred to as a point) for each dollar contributed. If you decided to donate $50, then you could put all 50 points towards one cause or spread them around. The points are reflected with a progress bar the following statement: “$ [total voted] has already been given to Modest Needs by donors who’ve recommended this application for funding.” 

However, there is actually one catch. A request needs to be fully funded in order for the recipient to get the money. Modest Needs does not provide partial payment on grants.

For example, Sally needs $1,200 to get her roof repaired but donors only received $800 by the due date, she would not receive the $800.

Information for Donors

Modest Needs is a registered 501(c)(3) (tax exempt) organization (Federal ID #47-0863430). Contribution you make, if you’re a U.S. donor, is tax deductible.

Note that when you do make a donation, you’re not directly and immediately funding the application you entered a dollar amount for. Your donation goes to Modest Needs itself, along with a recommendation of which application you want to see funded. The organization has the final say-so in what applicants receive grants.

Modest Needs requires an application be “fully funded” before executing any grants. If the application you recommended for funding does not reach 100%, your donation is returned to your account and you have the option to recommend (vote for) another applicant with the money you contributed.

Find more information out here.

Legitimate Help for Those in Need

Donors should be able to rest assured that they’re giving to legitimate causes when they fund an applicant on the platform, and donations are tax-deductible. There are no minimum contributions.

When it comes to the applicants on the website, Modest Needs screens individuals to make sure requests are real and legitimate. They also have staff that perform the necessary due diligence and research into each application. Grants are never made in cash; instead, payments are remitted directly to a vendor or creditor on behalf of the applicant.

Modest Needs is a registered nonprofit with the IRS and with the state of New York. Watchdog site Charity Navigator gives the organization a 3 out of 4 star rating and garnered high praise in reviews on GuideStar. The nonprofit also meets the standards set by Give.org.

You can view financial reports from 2005 to 2012, and you can request hardcopies of this information through the website as well. Finding information from frequently asked questions to mailing and email addresses is easy, and it seems the group strives for transparency.

Giving More than a Handout

With the proliferation of personal pleas for assistance on crowdfunding sites like GoFundMe, Modest Needs stands out as a refreshing alternative. Anyone can go on crowdfunding platforms and ask for handouts, with the onus of responsible giving placed on the general public. People asking for funding are under no obligation to use the cash in a particular way; there are no requirements for funded projects after they’ve received money.

Modest Needs, on the other hand, was started and designed as a charity and giving responsibly is ingrained in its stated missions. The organization specifically focuses on helping those who are working and just above poverty level – meaning they’re often making enough to disqualify them from government assistance programs, but making too little to handle a financial emergency.

Some current applications for grants include a Wisconsin woman who lives independently and maintains a job as a housekeeping and laundry attendant, and needs to repair her car* so she can continue commuting to work. Another is from an elderly vet who needs new tires on his car to drive safely through the Colorado winter, while a teacher in Texas needs help to pay an unexpected medical bill.

The requests range in size from large to small – one woman works two jobs to pay all her expenses, but cannot afford to repair her broken washing machine – but all are similar in the fact that they come from working individuals who can cover their regular monthly expenses, but live paycheck to paycheck and struggle to come up with funds for unexpected or emergency costs. You can browse other requests here.

Modest Needs uses donations to fund these types of grants so lower-income, employed individuals can continue on with their lives and avoid having one random, unexpected expense push them into a cycle of poverty that they cannot break.

*Kali Hawlk decided to personally donate to this cause after writing this review.

TAGS:

College Students and Recent Grads, Eliminating Fees

Should Millennials Use a Robo Advisor?

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The editorial content on this page is not provided by any financial institution and has not been reviewed, approved or otherwise endorsed by any of these entities.

Millennials - large

If you’re like most 20- and 30-somethings, you don’t feel so sure about investing in the stock market. After all, it’s a volatile place that can take a nosedive based on factors outside of your control. Investing in stocks feels a little like gambling with your hard-earned money, and Wall Street is the house.

Of course, the reality is that investing to grow wealth is a savvy money move – but you need to know how to invest wisely. If you’ve worked through your fear of putting money in investment accounts, you may get tripped up by another common stumbling block for Gen Y: one in four millennials doesn’t trust anyone for financial advice.

But figuring out investments on your own is not easy (or smart). Traditionally, people have turned to financial advisors – but millennials may struggle to find an advisor they can connect with. Most require asset minimums that people in their 20s and 30s can’t afford and the average age of an advisor is about 55 (which creates a big disconnect between them and their young clients).

So where do you turn to if you don’t feel like you can trust the advice you’re getting? How can you find a way to get help in managing your money to grow your wealth?

Automated investment platforms, nicknamed robo advisors, hope to provide you with a solution.

What Are Robo Advisors?

CNN called robo advisors the next big thing in investing for younger generation, and for good reason. These platforms are technology-driven, run off algorithms that consider the variables you plug in and then manage your money for you. That’s all there is to it – no broker to worry about, no “advisor” who’s actually a commission-based salesperson and provides you with bad advice to enrich themselves.

Computers automatically adjust your asset allocation, attempt to help you save in taxes, and provide beautifully designed dashboards so when you log in to check on your money, you can get a big-picture view of your investments all in one place. You can get simple and affordable investment management without having to figure it out all by yourself.

There are a number of robo advisors out there, including:

  • Betterment
  • Wealthfront
  • Personal Capital
  • Jemstep

Each one offers something a little different, but at their cores they’re all striving to make investment simple, straightforward, and easy for beginner investors to use.

Is a Robo Advisor Right for You?

One of the biggest advantages to robo advisory platforms is the fact that most don’t require asset minimums out of the reach of the average millennial investor. Many traditional RIAs (or registered investment advisors) required you to already have $500,000 or more before they’d work with you as a client. And not many Gen Yers have half a million lying around just waiting to be invested with an advisor.

Robo advisors provide you with a way to get your money in the market, which is a huge hurdle for most people to overcome. Confusion over what to do or who to do it with prevents many people from getting started at all.

A robo advisor may be right for you if you know you need to get started investing — with whatever you have – but aren’t sure how to do it yourself and feel uncomfortable paying a traditional financial advisor. As your financial situation changes, you may want to find a way to acquire individualized guidance. But an automated approach from a robo advisor can help you get started on the right foot.

The Drawbacks of Automated Investment Platforms

Some argue that robo advisors are much too simple for serious investors with big money to invest. Most use Modern Portfolio Theory to determine where to place your money. For those willing to do some research, they can set up similar portfolios on their own and cut out the robo advisor’s fee.

For example, Betterment uses Vanguard ETFs in its investment plans. You could easily go straight to Vanguard and buy into those funds yourself instead of doing it through Betterment.

Essentially, the robo advisors offer a one-size-fits-all solution. And you’re an individual, so these plans may not be the absolute best option available. It makes it simple and easy and keeps you from having to figure it out all by yourself, yes. But it may not be as robust of a solution for you as it is for the person down the street who has a different financial situation.

And the biggest drawback to these platforms is also the most obvious: there’s no one to talk to about your money. While it may be easier for Millennials to trust they’re getting objective financial advice from an unbiased, completely logical computer, you do lose something in the technology translation.

When It’s Time to Call in the Pros

Not everyone should rely on robo advisors for their investment management needs. That human connection is incredibly valuable.

Here’s the deal: developing a good financial situation is like developing good health. We all know the fundamentals are simple. Eat healthy and exercise. Save money and invest wisely.

Simple, but not easy.

This is the value of an advisor who can work with your individually and have real, live, human conversations with you. They can talk about your goals, walk you through complicated situations, and stand between you and a silly mistake — like pulling your money out of the market when it’s crashing (when the rational move is to leave your money alone and stay the course so you can ride the wave back up).

You should consider getting in touch with a financial advisor if you want a comprehensive financial plan, and not just help in managing your investments. Remember, investing is only one part of your much larger relationship and situation with your money.

You should know how to look for the right financial advisor for you, and you should know where to look too. Start by searching NAPFA, the largest professional organization of fee-only financial planners, or check out XY Planning Network, the leading group of fee-only financial planners who specialize in helping Gen X and Gen Y.

Both groups adhere to a fiduciary standard and do not earn commissions off product sales. Also, you may want to focus on only considering financial planners who don’t have asset minimums.

TAGS:

Life Events

How to Choose a Financial Planner

Advertiser Disclosure

The editorial content on this page is not provided by any financial institution and has not been reviewed, approved or otherwise endorsed by any of these entities.

Geeting advice on future investments

Your financial situation grows more complex as you take on more responsibilities, create new goals, and hit big life milestones. No matter what you want your life to look like, it takes planning to turn your ideas and hopes into reality.

This is where a financial planner can come in and help make it happen. Financial planners and advisors provide outside, objective, and expert perspectives and advice. The best will keep you on track to meet your goals, whatever they may be, and can stand between you and making big mistakes with your money.

Your financial planner can serve as your guide through complicated decisions, helping you make rational ones instead of taking emotionally charged action. And her or she can serve as accountability partners to ensure you’re taking the steps you need to grow your wealth.

If you’re looking for a professional, you probably already know this – but the confusing part is how to choose a financial planner who’s going to best serve you and work with your interest in mind and not a commission fee.

The Challenges Consumers Face in Choosing an Advisor

The confusion starts with the fact that the terms “financial planner” and “financial advisor” aren’t regulated. Planner and advisor are interchangeable, and “advisor” sometimes appears as “adviser.” Anyone can call themselves a planner or advisor or “money coach” or a variety of other terms. This isn’t necessarily a bad thing, but it does make it more difficult to understand what a professional does when you first meet them.

For example, big banks and insurance companies employ many advisors that call themselves financial planners, but do very little comprehensive planning and instead focus on selling the bank or insurance company’s products. They function as salespeople but use the title of planner.

This looks very different than an advisor who provides comprehensive financial planning that includes a plan to repay your student loan debt, set up the right savings accounts for you, and map out what you need to do in order to reach your goal of quitting your job in the next three years to launch your own business instead. And yet both these people may go by the same title.

Understanding How Financial Planners Are Paid

There’s a lot of confusion around the job title for planners and advisors, which causes some issues. But an even bigger problem? Most people don’t understand the differences in how advisors receive compensation for their work.

There are three main ways an advisor is paid:

Commission-based: These advisors only receive payments through commissions on products they sell. These products could include life insurance, mutual funds, or annuities. This presents a huge conflict of interest. They’re incentivized to sell products whether or not those products make sense for you.

Fee-based: Fee-based advisors can earn commissions off product sales, but they also offer services for flat fees paid by their clients. While this eliminates some conflicts, fee-based service models still leave the door open for an advisor to make a recommendation that isn’t necessarily the best for their clients.

Fee-only: Fee-only financial advisors are not the same as fee-based. Fee-only advisors are paid a set fee by their clients for the services they provide. They do not earn commissions off product sales. For this reason, there are inherently no conflicts of interest between you and your advisor if they’re fee-only. Fee-only planners are only getting paid by you to provide the best advice.

Two Different Sets of Standards

To recap, “financial advisor” or “financial planner” can mean a lot of different things and the title applies to people who do very different work. It’s critical that you understand what type of advisor you’re considering and how they’re paid. Fee-only advisors are only paid for the services they offer, and that payment comes directly from the client. For that reason, fee-only advisors can operate with the least amount of conflict of interest.

In fact, they’re even held to a higher standard than other advisors: they need to uphold the fiduciary standard. The fiduciary standard requires professionals act in the best interest of their clients at all times. That includes putting their clients’ interests ahead of their own or their business.

Believe it or not, acting as a fiduciary is not the rule in the financial planning industry. There’s another standard that most fee-based and commission-based advisors fall under. It’s called the suitability standard, and it requires only that an advisor make a recommendation that is suitable for their clients. It doesn’t have to be the best option.

If you’re looking for a financial advisor, choose one who operates under the fiduciary standard. You can ask them to sign a fiduciary oath before working with you, and if they refuse, keep looking. There are too many qualified professionals out there who can work with you and put your interests ahead of everything else (including their own).

How to Choose a Financial Planner

There’s a lot to think about when you choose a financial planner. When starting your search, look for someone who is:

  • a fee-only financial advisor
  • willing to work as your fiduciary – and will sign (or has signed) a fiduciary oath

Additionally, you want to make sure the professional you find is qualified and experienced, and understands your needs and goals. Here’s what to ask when you talk to a financial planner:

What kind of designations do you have? Look for marks like CFP, CPA, and so on; or ask if they’re working toward these designations. The CFP, for example, requires considerable education, training, testing and three years of work experience to obtain. Plenty of good planners can add value to your financial life, but may still be in the process of earning their CFP.

What services do you offer? Planners can offer a variety of different services. You want to ask to determine if what they offer fits your needs. You may want comprehensive planning, investment management, or both. Some planners also offer “quick start” sessions, which is a one-time engagement that costs much less than ongoing service.

What kind of clients do you work with? You want to ensure your planner is familiar with the needs – and wants – of someone like you. If you’re interested in reaching financial independence so you can travel the world, working with an advisor who specializes in retirement planning and Social Security analysis doesn’t make much sense for you.

Where to Find Your Ideal Financial Advisor

Not sure where to start looking? Search these organizations for a financial planner to connect with. They’re all groups of fee-only financial advisors who uphold the fiduciary standard.

XY Planning Network: XYPN is the leading organization of fee-only financial advisors who specialize in serving Gen X and Gen Y clients. All of their members can work virtually, which means you can choose the best advisor for you regardless of physical location.

Garrett Planning Network: GPN is another organization of fee-only planners who serve clients from all walks of life. Their advisors offer planning services on an hourly basis.

National Association of Professional Financial Advisors: NAPFA is the largest organization of professional advisors who meet the highest set standards in the financial planning industry.

TAGS:

Life Events

The Cost of Moving Twice in a Year

Advertiser Disclosure

The editorial content on this page is not provided by any financial institution and has not been reviewed, approved or otherwise endorsed by any of these entities.

Mortgage

I’m 25, which puts me firmly in the Millennial generation. People my age tend to value flexibility in their living situation, and that’s certainly true of me, too.

But I also like taking advantage of financial opportunities when I can, which is why I chose to buy a home as soon as I could instead of continuing to rent. Buying a home ended up being a good investment for me, as I was able to sell for a profit – but there was a cost of three years of living in the suburbs and being very much stuck in terms of where I could work and choose to live.

I’m back to renting now and after my foray into home ownership (which was a good experience), I’m happy to be living with less responsibility and annual costs and more flexibility and freedom in what I can do and where I can go. However, there was a big financial burden I completely overlooked in my transition from homeowner in Atlanta to apartment-renter in Boston: the cost of that big move.

Nomadic Millennials Need to Prepare for the Cost of Moving

I was born and raised in Georgia. Although I’ve always had a case of wanderlust and itchy feet, I’ve always lived within about an hour of Atlanta my whole life. When the opportunity to experience life in a nice place arose, I took it – and landed in Boston.

Selling my house to make the move was actually no problem. The market was hot and it moved quickly, with the accepted offer coming about 7 days after the listing was live.

But then came the tricky part: figuring out the logistics of moving a whole lot of stuff – and two cats! – 1,100 miles up the East Coast. And then figuring out how to pay for it.

The good news is that I lean minimalist and have very few material possessions. I looked into the cost of renting the smallest U-Haul truck available, as well as the smallest POD shipping container. The bad news? Both those options, which were the cheapest available, would run me between $1,500 to $2,000. And that was just the cost of moving my things.

Millennials who want to take advantage of the flexibility that renting allows need to plan for the expense of frequent moves. Not everyone will choose to move up an entire coast, so a $2,000 shipping cost may not apply – but even renting a moving truck to go less than 50 miles can cost $100 or more.

Moving Costs More than Just Moving Stuff

I decided to ship my stuff via a POD because the cost difference between that and renting a truck and making the drive up the coast – with a car in tow – wasn’t too much cheaper. And there was an opportunity cost associated with that. It would take me far longer to make the drive in the moving truck rather than just my small car, which meant more time I couldn’t work and earn money.

But the cost of shipping my possessions is only the start of my laundry list of moving expenses. There’s still the drive I need to make, so that’s wear and tear on my car plus the cost of gas. I was able to pack the POD with the help of family members, but when I arrive in Boston I’ll need to hire movers to help me get everything up a very small, windy staircase. And because I’m moving to Boston proper, I also needed to purchase moving permits so the POD could park outside my building for the day.

This all adds up to an additional $500 or so in the total cost of my move. If everything goes well, I won’t have too much more to budget for – but just as you should have an emergency fund for life in general, it’s smart to plan for the unexpected in something like a big move, too. I fully expect to have miscellaneous expenses to cover, and I need to account for more intangible things, too.

I’m sure I won’t feel like going to the grocery store and stocking up on ingredients to prepare my own meals at home right away; I’ll be tired and more focused on getting everything unpacked and set up than on living as frugal as possible right away. I fully expect to prioritize convenience over what makes the most financial sense in that first week of settling in.

Account for All Possible Costs

While I prefer to live well on less, I’m still human. And humans tend to be exhausted after big life changes! Millennials who are ready to make their own big move should account for both the tangible costs that are easy to add up – and the costs that come from more intangible things, like how you feel after a long day of moving and the chaos that comes from living out of boxes for a week or so.

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Life Events

When to Stop Funneling Cash into Home Improvement

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Purchase agreement for house

I moved into my first house in June. The first time I tried to turn on the heat when it started getting chilly in November, I discovered the furnace needed to be replaced with a new one. Thankfully, the house sale included a homeowner’s warranty, which mostly covered the cost of the replacement.

But my out of pocket cost was still $900 — not chump change when you’re young, just out of college, and wondering how you’ll pay for all the fixing up the slightly-fixer-upper house you bought is going to need.

The Benefits of Snagging an Outdated Home

The house wasn’t a complete wreck, but it was built in 1987 and it needed upgrading and updating. In addition to the furnace that died immediately, the AC units were over 20 years old (and how they still functioned the entire time I lived there is beyond me) and the siding and shutters all could have used a new coat of paint outside.

The hardwood floors downstairs were mismatched, thanks for half of them being replaced when a pipe burst over the living room when the previous owners lived there. The kitchen countertops were original white laminate that had faded with time and use to something not-so-white, and all the cabinetry was original to the home too.

And the master bathroom had that wonderful feature that home builders in the 80s were for some reason way too fond of: carpet instead of tile.

There were other to-dos on the home improvement list, too: painting, refinishing the staircase, changing out the old brass hardware for something a bit more modern, updating light fixtures… most everything was cosmetic. As they say on HGTV, the house had good bones.

But still, it sounds like a lot of projects — and it was. The tradeoff was a low price on the home and a relatively small monthly mortgage payment. That helped free up cash flow to dedicate to tackling these projects, one at a time.

The idea was always to take advantage of the low purchase price, spruce the place up with these cosmetic fixes, then sell for a profit. It sounded good in theory, but there had to be a line that determined when it was time to stop funneling cash into home improvement projects.

Focusing on Biggest Bang for Smallest Buck

The first step was to determine what projects made the biggest impact in the house — and cost the least amount of money. Part of the criteria for “least amount of money” was “does it fit in my normal monthly budget?” meaning I didn’t have to save up before knocking out the project.

Painting and changing out the hardware came in first on that list. Redoing the stairs came the next month. Things like window treatments and a little landscaping followed after the stairs.

(And of course, it was all DIY. That made it exponentially cheaper, but it also took a lot longer!)

[22 Options for a Home Improvement Loan]

Choosing Big, Costly Projects Wisely

Eventually, the easier and cheaper projects were complete — and that line item in the budget started going toward maintenance and repairs instead. That’s part of home ownership no matter what condition a house is in. There’s always something to fix, maintain, or replace.

Deciding how much more money than necessary to put into the house required consideration of more factors than just, “how much would this boost the value of the house?” and “how much can I afford?” Both of these questions are, obviously, important — but the first one is particularly tricky.

Let’s address the how much can you afford one first. Ultimately, this is what you need to pay attention to and prioritize. It’s not wise to put thousands of dollars on a credit card for home improvements, because it’s highly unlikely you’ll turn around, sell your house for a profit, and use the cash to pay off your credit card balance before it’s due and starts accruing interest.

The other question is harder because it’s easy to justify spending money for the sake of making money down the road. But a $20,000 kitchen remodel or $10,000 bathroom redo doesn’t necessarily translate into a $20,000 or $10,000 boost in the value of your home when you go to sell.

That depends on comparable properties in the area, what the market is doing at the time, when you want to sell — and what buyers want. Your idea of a great home improvement might be someone else’s idea of a perfectly good kitchen ruined by bad taste.

Personally, the only big, major project that I thought was worth taking on was ripping up that awful bathroom carpet and replacing it with tile. While redoing the hardwood floors and updating the kitchen would have added value to the house, it likely wouldn’t sell for a high enough price to recoup my investment in the home improvement projects due to the comps in the area.

It’s easy to talk yourself into thinking spending money on your house is an investment. But like any investment, it’s not without risk. And in this case, unlike investing your extra cash into the stock market, you don’t earn a return over time. You only earn a return — if you get one at all — when you sell your home and pay off your mortgage.

While home improvement projects can help boost value in your house, it’s a fine line. Don’t just assume funneling more cash into repairs and updates will guarantee a better sale price. Look at all the variables involved, do your research, and figure out when you need to draw your own line on when to stop putting cash into your house.

 

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