Let’s face it, budgets suck — like diets, they serve as a constant reminder of all the things you can’t do. But don’t be so quick to crush your calculator because, while you might have failed to make it on a budget, you do need to create a spending plan.
Spending plans empower you to tell your money where to go instead of wondering where it went, and being in control of your money is the best way to take control of your financial life.
From GPA to Sallie Mae
Your college education not only required a huge amount of your time ,but paying for it post grad could also cost you a large chunk of money. Here are a few things you need to know about student loans to keep your GPA from ruining your FICO score.
- Student loans historically carry low interest rates and some are capped at 8.5 percent; if your debts are with several lending institutions and you’re paying high interest rates, you may qualify for a loan restructure program under the Federal Direct Consolidation Loan program.
- If you’re still trying to find your financial feet post college, look into the option of “Graduated Repayment” — this means you’ll make lower monthly payments in the first two years of the loan and every two years the amount you pay will increase over time until the loan is fully repaid.
- If you’re between jobs or making less than you need to cover other necessary expenses, you may qualify for an income-contingent student loan repayment plan. Your current income is considered when determining your loan payment and your payments will adjust based on your salary.
The bottom line on student loans is you have to pay them back; knowing the repayment options available will give you more flexibility in doing so.
Credit card crunch
If you can remember the free gift you got for each of the cards you signed up for, chances are they’re costing you more than you bargained for. Since most people get access to their first credit cards while they are in college and many student credit cards have high annual percentage rates, the longer you wait to pay your cards off, the worse it gets.
It’s hard to get out from under the weight of debt once it starts to pile on; while you don’t have to literally go cold turkey on credit, you will have to curb your spending and boost your balances in your favor.
Systematically eliminate your debt by:
- Asking for an interest rate reduction. If you’ve paid you bills on time consistently and are paying above 15 percent interest, be bold and ask for a 13 or even 12.5 percent rate. The difference between three percentages points may not seem like a big deal but it could equate to a savings of hundreds of dollars.
- Pay off the debt with the highest interest rate before the highest balance. What determines how much you pay over the life of a loan is the interest, so be sure to wipe out the debt that you owe at higher interest.
- Maximize your minimum. Make the commitment to apply an additional $50-$100 more (above the minimum amount due) to your outstanding balances until the accounts are paid in full.
Ask for a balance reduction. You have the right to cap your credit limit. This will ensure that you are not tempted to pay down your balance and then bring it back up to the original amount. Sure, you’ll have less credit available to you, which really means that more of your future earnings will belong to you — the rightful owner.
Home sweet home
Many people believe that renting is a bad idea; the thought is that you’re essentially “throwing money away.” This is not true; don’t allow yourself to be pressured into purchasing a home before you’re ready just to “keep up with the Joneses.”
There are costs associated with home ownership that you never have to consider when renting, so just because you can afford to make the minimum monthly mortgage payment doesn’t mean you are ready to bear the financial burden of being a homeowner.
If you can’t see yourself settling in the same place for several years, don’t want to or know how to properly care for all the maintenance issues that houses require, or you simply aren’t able to put down at least 15 percent of the purchase price in a down payment, then you should strongly consider renting.
However, if home ownership is your intention or current reality, you need to consider the following:
Adjustable mortgages have taken their toll on the American homeowners who took advantage of what they believed were great deals only to realize that they were being taken advantage of. Since your monthly home mortgage payment is likely to be your largest expense, you want to get a fixed rate mortgage so you can manage your expenses effectively.
It makes sense to pay off your mortgage early, but not by signing up for programs that will do it for you. They charge a fee to do it, which you can keep for yourself — and all you need to do is take the equivalent of three months mortgage payments and apply that amount to the current payment you are making. Doing that will allow you to pay off a 30-year mortgage sooner, quicker, faster. And it’ll save you thousands in interest. PMI is a type of private mortgage insurance that you’re required to pay when you make a down payment of less than 20 percent of the purchase price. The insurance can be paid up front or rolled into the loan; if you are paying it as part of your loan payment, be sure to keep a close watch on when you’ve reached your 20 percent so you can eliminate that expense and apply that money to the actual balance owed.
Financial facts of family life
Talking to your honey about money may not seem romantic, but it sure beats fights and sleepless nights because someone forgot to balance the checkbook — again.
As a married couple the choices and considerations that you make about your life are far reaching, so you need to talk candidly about money with your spouse and follow these steps for creating “financial har-money” in your relationship:
Identify common financial goals. When you both have something that you agree to jointly, you can commit to making the necessary compromises that come after establishing your goals together. Working toward a common goal removes the feeling that one of you is winning and the other person is losing.
Add your combined monthly take-home pay, then determine how much of your living expenses needs to be allocated for: Necessities — rent/mortgage, food, utilities. Niceties — cable, dinner out, gym memberships.
Then divide your expenses by your take-home income to determine the percentage of the overall expenses each of you are responsible for paying. This will allow you both to have an active knowledge of what it costs to run your household and a respect for what contribution each of you makes.
When you have paid down your debt, gotten a handle on your expenses and socked away at least $2,500 cash in an emergency account, then you can start to invest in a 529 Plan (also known as a qualified tuition plan) for your children. 529s allow you to put money into a tax-advantaged savings plan that will help cover future college costs. But remember, “College is fundable — retirement is not.” What that means is you need to ensure that you have properly funded your retirement first before making this a priority.
You can’t afford not to save One of the biggest money myths you can buy into is that “you can’t afford to save”; the truth is that you can’t afford not to. Pension plans are like “the one who got away” and in their place is the less attractive but not horrible friend, 401(k) plans.
You have to understand that the purpose of a pension, 401(k) plan, rainy-day fund or even putting money under your mattress is never intended for use today. The idea is that it will be available for the inevitable "tomorrow" when you have come to the end of your work years and are ready to live off of what you saved.
It is estimated that only one out of four eligible employees contribute to this voluntary retirement plan and of those who do contribute, only one in 10 contributes the maximum allowed. Here’s what you need to do know about saving for the future:
Determine your investment style by asking yourself these questions:
- How much risk am I comfortable taking? Are you looking for high risk/high return or moderate risk/return? Knowing your risk tolerance level will help you choose the right investment options for you.
- How much time do you have to let your investments grow? Will you be needing access to the investment in five, 10, 20 or more years?
At the very minimum, invest in your future by putting seven to 10 percent of your pretax income into a 401(k) (or self-managed retirement plan) and get the benefit of building your nest egg, paying less taxes and actually having your employer pay you for doing it.
Buy low, sell high. Don’t let the volatility of the stock market scare you off from investing for the future. When you invest in a down market, you are actually getting the benefit of purchasing more stocks for less and having the satisfaction of watching their values climb over time.
While you may be painfully aware of the financial roadblocks that exist post college, there are things you can do to navigate the course and avoid the landmines that will keep you from reaching financial freedom.
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