Saturday, February 4, 2017

Student Loans: Applying for Federal vs. Private Loans

Knowledge is power.  That's a motto I live by, and it's what got me into student loan debt in the first place.  I absolutely love to learn.  Unfortunately, there are a few things I could have stood to learn earlier in life.  One of those things has to do with student loans.  Not all student loans are created equally.  Since the season for financial aid applications are upon us, let's look at the options.

The first thing to know is that there are two different kinds of student loan debt.  There are private student loans, and federal student loans.   When enrolling in a college or university, you generally submit a FAFSA form, which is the application for federal financial aid.  After submitting, and waiting for a while, a notice comes in the mail with information about how much money has been "awarded."  If the letter uses the word "grant" then you know you just won the jack-pot because you don't have to pay back a "grant."  If you see the word "loan" anywhere in the "award" letter, you will have to pay them back.  The loans will say "subsidized" or "subsidized."   The primary difference between them is whether or not the government is going to pick up the tab for the interest accruing while you are in school.  If you have a "subsidized" loan, this means that you have demonstrated "financial need," and the government will pay the interest during certain points in time.  If it is "unsubsidized," there is no "financial need" requirement, and you are responsible for the interest during all times.  Additionally, each year, the federal government puts a cap on the amount they will let students borrow (between $5500-$12,500 for undergraduates in 2016).  If you need more than that, you have to make up the difference.  This is where private loans come in...

If you (or your child) wants to go to a school that is more expensive than the federal government loan cap can fund, you need to make some tough choices.  You need to either choose a less expensive school, pay for the difference yourself, or apply for a private student loan.  Frequently people choose the latter.  This is where I will say BE CAREFUL!  I would really rather not see you take out a private loan.  Why?  Well, there are a few reasons.  First, private student loans rarely (if ever) offer a fixed rate (federal student loans have a ceiling on rates also, so you won't pay more than about 6.8%).  Usually the interest rate on a private loan is variable.  That means your payment and interest rate can be hiked up at ANY point in time, and you are stuck!  It's a pretty scary prospect.  The second reasons is that they offer very limited (if any) deferment options.  Ideally, when you enter repayment, you won't need to defer.  That being said, life can be unpredictable.  If something terrible happens (unemployment, medical, etc), you don't want to end up in default (that's when you stop paying your loans, and it's terrible for your credit).  You want options!

Taking out a private student loan is a little like playing Russian Roulette.  Admittedly, I took private loans out.  My variable interest rate has been hovering at about 3%, which is great.  The timing has accidentally worked out for me because once the recession hit, loans became somewhat cheap.  That being said, I am making 100% sure to get my last private loan paid off this year.  I don't want to run the risk of being on the wrong side of a rate hike!  I've been accidentally VERY lucky with my private loan, but the truth is that I should have investigated another way of funding the difference that I needed.

Please, please, empower yourself with knowledge when it comes to taking out student loans.  Investigate everything.  There are online calculators that will help you to estimate future payments, etc.  Try to close any financial gaps without resorting to private loans, or the school of your dreams could contribute to a future nightmare!

What questions or experiences do you have with selecting student loans?  Leave questions and comments below!

Saturday, January 28, 2017

Beauty Savings

I am always looking for ways to save money on my regular and semi-regular expenses.  Also, like many females today, I enjoy fashion, beauty, and treating myself.  What I don't enjoy is the sticker shock that comes with some of these luxuries.  Now, admittedly, I keep my hair style relatively simple:  long, straight, no bangs, rarely any color.  If I go in for a haircut in New York City (where I live), I am looking at $65-$110 at the salon that I like.  I don't pay anywhere near that!  I have learned that the salon I like best also has a beauty school.  If I go to the beauty school, my haircut costs $28!  This is literally more than 50% cheaper!

Now, this solution may not be for everyone, but if you keep a relatively simple hairstyle, this is a perfect solution.  Also, let's be honest, if you are really, REALLY committed to reducing your debt and becoming financially free, you NEED to find some ways to reduce expenses.  This one saves a ton of money AND still feels like a treat!

I am thinking of some special hairstylists in my life that may not love that I am giving this advice, but let's be honest, this change only needs to be temporary.  This is what you do WHILE you are becoming a financially free individual.  I have been doing a lot to slash my expenses in order to meet this goal.  Literally everything in my life is up for review:  haircuts, vacations, new clothing, everything!  Before I indulge in anything "unnecessary," I ask myself : "Do I want this enough to wait a little longer to be financially free?"  I don't kick myself if the answer is "Yes!"  That's okay sometimes, but more often than not, the answer is "No, I can wait."

Once I am a financially free individual, I will probably remain frugal because I always have been, but I will probably indulge in a few more beauty treatments, massages, facials, designer haircuts.  I'm not going to lie...  But for now, I will go to the beauty school and indulge in these services for less than half the price, and become financially free a little sooner!

What ways have you found in order to indulge at a discount: beauty or otherwise?

Sunday, January 22, 2017

A Roth vs. Traditional IRA

Sometimes, we fail to do something that's good for us because we don't totally understand our choices.  We get frustrated and fail to do anything at all.  Retirement savings can be one of those areas.  If you are saving for retirement in any vehicle at all, I applaud you for taking a fabulous first step.  If you haven't started, or want to be sure you are using the best account for you, read on.

Both Traditional IRA's and Roth IRA's are pretty fabulous tools if you know how to use them well.  I personally think that a Roth IRA is one of the best retirement tools out there if you qualify for one because it when you retire, and take the money out, you will have already paid the taxes!  That being said, a  Traditional IRA also has a few benefits that might want to utilize...  Take a look at the following chart  that highlights the pros and cons of both!

Traditional IRA
Roth IRA
Pro:
  • Can save you money on the current year's taxes.
  • Earnings can grown tax-deferred
  • You can save up to $5500 if you are under 50 in this investment vehicle in 2016 (the per year contribution amount is changed periodically by the IRS).
  • If you are over 50, you can contribute an extra $1000 (annually).
  • You can use this no matter how much money you earn (as long as you have earned income, there is no ceiling)! 
  • Qualify for the retirement savings credit as well (form 8880).
  • Contribute for the previous tax year all the way until Tax Day (April 18th this year). 









Con:
  • You cannot contribute money after you turn 70 1/2.
  • You are required to start taking money out by the time you are 70 1/2.
  • You will pay taxes when you start taking the  money out.
  • You must have earned income to use this type of account. 



 Pro:
  • Earnings grow tax-free.
  • You can save up to $5500 if you are under 50 in this investment vehicle in 2016 (again, note that the IRS periodically adjusts this dollar amount).
  • If you are over 50, you can contribute an extra $1000 (annually).
  • You are not ever required to take the money out (as a distribution).  This means that you could leave this money to your heirs if you don't need it.
  • Qualified distributions are tax free.  You will already have paid taxes on the contributions, so you won't owe that money later in life.
  • In an emergency, you could take out the money you contributed without paying any penalty.
  • No age limits for contributions.  If you still have earned income, you can still contribute even after the age of 70 1/2.
  • Qualify for the retirement savings credit as well (form 8880).
  • Contribute for the previous tax year all the way until Tax Day (April 18th this year). 


Con:
  • Income limitations apply in order to be eligible to take advantage of this account.   In 2016, for single filers it's a MAGI (modified adjusted gross income) of $117,000 and married $184,000.  There are other "phaseout" dollar figures.  If your income is close to these amounts, talk to your tax pro to see if you can use this account.
  • You are paying taxes on this money now.
  • This will not lower your taxable income on this year's taxes (however you can still take the retirement savings tax credit-form 8880).
  • You must have earned income to use this account.


A few notes to consider:

  • If you are a married couple, and one of you does not have earned income but the other does, you can do what is considered a "spousal" contribution.  So, you can still fully fund an IRA.  if you fall into this category, ask your tax pro to help you with this.
  • If you make less than $5500 in earned income (from a job) you can only contribute up to the amount you earned working.
  • If you "make too much" for a Roth IRA, you might still be able to contribute to a Roth via a "conversion".  This is a slightly newer strategy, and somewhat tricky. If this is something you want to try to do, talk to a tax pro so that you can get help and advice that is specific to your situation.

Sunday, January 15, 2017

Student Loans: Public Service Loan Forgiveness

I don't frequently discuss my place of employment during the course of this blog, but I had an interesting experience to share.  I teach in a local high school.  I went into the office and asked the appropriate person to complete a section of a form for me.  Of course this person did exactly as requested, then just before I exited the room, asked me what the form was for.  I told this person that I wanted to document my employment for the purposes of student loan forgiveness.  I was shot back a look that made me feel certain that this person had no clue what I was talking about.  Of course that made me really uncomfortable.  I am absolutely incapable of  leaving someone in the dark about a financial opportunity they ought to look into.  So, I explained the Public Service Loan Forgiveness Program.  This person didn't realize that if you work for certain entities, you can have you student loans forgiven!  Not knowing something this important could cost some serious dough!

So, let me explain to you, as I did to this person.  The federal government has a program for employees of governmental or non-profit agencies called the Public Service Loan Forgiveness Program.  First, it's important to see if you even qualify.  In order to qualify, you must work full-time for a government agency or non-profit.  If you can successfully check off both of those boxes, this may be for you.

Next, you need to make sure you are on an approved payment plan.  If you are not already on an income based payment plan, you need to get on one asap!  Technically any of the repayment plans that use your income to determine the payment are approved payment plans.  The standard 10-year repayment plan is technically approved as well, but you don't really want to pick that one.  You see, once you are on an approved payment plan you have to make 120 qualified payments, the rest of the balance will be forgiven!

Now does it make sense why you don't want to be on that Standard 10-Year Plan?  If you paid all of your payments under that plan, you wouldn't have any balance left to forgive!  That certainly doesn't make sense with your cents, does it?

After you've made 120 qualified payments, you need file a form to apply for the loan forgiveness.  This is super important because if YOU don't file the application, NOTHING will happen!

This all sounded really easy didn't it?  Well, it really is pretty easy.  There are a few special "extra" items that you might want to investigate further.  For example, they only count on payment per month toward your 120, so there is no way to make it less than 10 years of paying.  Additionally, you won't have to pay federal income tax on the forgiven amount.  I was pretty surprised to learn that one myself.  Moreover, you can periodically file a form that helps you to track your progress toward forgiveness.

Regardless, I don't want to overwhelm you with more information that what's truly useful to you as you get started, but what I will say is this:  if you are looking at this, and think that you qualify for this program, you need to take action immediately.

Get on the phone and call your loan servicing company.  Ask them about this program, and get on a qualifying plan.  They should know ALL about it, and should be able to provide some guidance.  Furthermore, you are your own best advocate and researcher.  I wrote an article about the various options for student loan repayment plans that you can read in order to arm yourself with information before you call your loan company.  It is called Student Loans:  Repayment Plans Explained.  If you want more information beyond that, I recommend going to Federal Student Aid.  This is a government website, and it is full of really useful information.




Sunday, January 8, 2017

Tax Corner: Retirement Savings Credit

Winter is a crazy time for our financial lives...  As soon as the slew of winter holidays fly by us, we turn the corner into a new year, and find ourselves in the midst of tax season.  I am going to say right off the bat, you can totally manage your own taxes if they are simple enough, but over time, most of us get financially complicated enough to warrant a tax professional.  Now, that being said, there is still a certain amount of personal knowledge and preparation you should have in order to get the most of your return.  I'm sure some of you are looking at the screen right now, rolling your eyes at me, but hear me out.  When you go to the doctor's office, don't you have a list of medications you are taking, maybe a list of new and old ailments to go over?  That's pretty normal, right?  You totally trust your doctor, but you recognize that the care you receive is only as good as the information you provide them with..  The same is true of your appointment with your tax professional.  Just like when you go to the doctor with a list of ailments to discuss, and your prescription list in tow, when you go in to see your tax professional, you should have a basic idea (or list) of things you are pretty sure you should get credit for on your return, and all of your tax-related financial papers.

Okay, now that you are with me, I want you to see if this scenario applies to you.  Do you like saving money for doing what you already do?  That's a no-brainer, right? and you probably have some sort of retirement account, and have contributed to it this year. Maybe it's an IRA (Roth, Traditional, or SEP are all fine)... If you don't have any of those, think back for a second.  Did you sign up for one of those employer sponsored retirement accounts?  It's really easy to let those slip your mind because they more or less go on autopilot.  Well, now is the time to remember it!  It doesn't matter if it's a 401k, 403b, 457b, Thrift Savings Plan, you name it.  Frankly, the IRS doesn't seem to care much which type of retirement savings plan you contributed to, if you fall within their income guidelines, you qualify for a credit.  The IRS isn't going to come knocking at your door to let you know that you have more money sitting at the table (it would be great if they did), so you had better know that you've got this one coming.

Tax Professionals sometimes call this "the savers credit," while the IRS refers to it as form 8880.  Regardless of what you call it, this is a good deal.  In the tax game, there are two kinds of credits referred to as refundable and nonrefundable and refundable. Nonrefundable credits are the kind that reduce the amount of tax you owe.  Refundable credits can increase the amount of your return (aka your check in the mail).  Quite frankly, you want to have as many of both kinds as you possibly can.  If you can get your tax bill reduced to zero through the nonrefundable type, then you can set yourself up for a break-even or refund situation...  Anyhow, this credit for retirement savings is the kind that reduces your tax bill.

The IRS says that you must be within their income guidelines in order to qualify.  In the 2016 tax year, you must:

  • Make $30,750 or less for single filers
  • Make $46,125 or less for those filing head of household
  • Make $61,500 or less for married people filing jointly
They also say you can't take the credit if you are a full-time student or can be claimed as a dependent on someone else's return.

Regardless, I am betting a ton of you have at the very least set a 401k on autopilot, and fall within this income range.  If that is the case, you need to make sure your tax professional catches this credit on your behalf or you're just leaving money at the table!



Monday, January 2, 2017

Freedom Fund: Breaking the Bonds of Servitude

I am the kind of person that loves to feel secure.  I love security.  I am also the kind of person that doesn't like to feel obligated.  I like to feel free.  I think that these two things are at the core of my desires as a person.  Sounds pretty simple, right?

When things make me feel like my freedom and security are threatened, I become out of alignment with the person that I am internally.  This leads to unhappiness.

As I see it, there are two things that are currently threatening my freedom and security:  debt and insufficient income producing assets.

About twelve years ago, I made a decision.  I decided to give up everything that typically made me feel secure in order to pursue a particular dream.  I subletted my apartment, and took leave from my job and flew to the west coast to a place where I had plenty of friends but no job and no apartment.  I won't get into all of the details of what happened, but I will say that it was the happiest that I had ever been in my life.  I spent two years flinting from coast to coast, taking temporary jobs here and there, staying with various friends, and living my life.  I woke up every morning and chose to do exactly what I wanted to do.  My life had purpose: pursuing my dreams, building relationships with people, and being a spiritually and emotionally happy person.  My only financial obligation were my cell phone bill, feeding myself, my credit card, and student loans.

I lived this life for roughly two years before I "settled down" and took a full time job.  While that time of my life was in many ways the happiest in my life so far, it was not sustainable.  I didn't have a huge amount of credit card debt, only a couple thousand, but I sure wasn't paying it down.  I also had my student loans on deferment.  So, they weren't negatively impacting my credit or anything, but I wasn't dealing with them in a sustainable manner.  As we all know, deferment is temporary.  Lucky for me, I succeeded at obtaining full-time employment just before the financial crash of 2008.  I beat the crash by about two months, to my good fortune.  I didn't have a high paying position, but it was very reliable with solid benefits, and it was for a company whose mission I believed in.

I have different employment now, with higher pay, and even better benefits, doing something I enjoy.  "So, what's the problem?" you're thinking.

The problem is that I that I am missing the freedom that is essential to my most peaceful existence.  It makes me think of a history lesson from my childhood.  We were learning about how some people became Indentured Servants in exchange for financial backing and passage to the New World (America).  I seem to recall 7 years of labor was a typical exchange.  (Eventually, this became less and less common, as the European settlers found people they could enslave without ever setting free...I can't let myself go down that rabbit hole or I will lose my original point).  Anyhow, I remember that the idea of Indentured Servitude struck me as being ancient, outdated, even barbaric. I mean, who in their right mind would work as slave labor for someone for SEVEN years just because they incurred some sort of debt?  Uh...wait....  Sound familiar?

Indentured Servants didn't have the ability to choose what they were going to do with their days.  They would go to work for the man day in and day out.  The debt ruled their lives, until paid off.  Now, I imagine that at the end of the seven(ish) year stint, some decided they were happy where they were and wanted to stay on, while others moved on with their lives and did something else.  Don't you want that choice?

I want to wake up every morning and choose exactly what I am going to do with my day.  That might involve staying exactly where I am...  That might involve moving on...  I don't know, but that's not the point.  The choice is the point.  Right now, my debt is pretty minimal.  Once it is gone, so are my obligations.

"Wait!"  you're thinking "you are always going to need a paycheck."

Wrong.  I am always going to need money.  That is where Freedom Fund comes in.  I opened a savings account and literally named it "Freedom Fund."  I have several side gig, and the paychecks from those go directly in.  Once it hits a certain dollar amount, I am buying my second rental property.

The passive income from the two rental properties will be enough to buy me the choice to work or not work as I see fit.  There is no possession that I want to buy for myself more than I want to buy that choice.  With my eye on that prize, it is very easy to stay on track with my financial plan, which is simple: My regular paycheck is for bills, my partner's pays off  our debt, and my side gigs fuel the Freedom Fund.

This was a relatively long path to a relatively simple point, I know...but I want to leave you with this thought.  Please decide what you really want.  How much is having a choice worth to you?  Can you give up some trinkets to get it?  Start your own Freedom Fund and buy yourself a choice.

Sunday, January 1, 2017

2017 Financial Goals

I am one of those people that actually does make New Year's resolutions.  I always make a resolution that relates to my health in some way.  I usually pick something small, but sustainable.  In 2008, I was in a car accident that left me with some soft tissues injuries.  Nothing catastrophic, but I was definitely undergoing medical care for the better part of a year, and wouldn't be signing up for any races for a while.  The accident was during the holiday season.  As the new year started to roll around, I found myself thinking "What can I do this year that will actually be doable, given my recent injuries?"  I thought carefully about it, and finally came to a resolution.  I was going to stretch every morning that I had to go to work during 2009.  I am happy to say that the habit formed nicely, lasting far beyond 2009...but what made it successful?  I was very careful in how the goal was constructed.  For example, I was specific.  I said "every morning."  So, I had set myself a time frame.  Since I had to be to work at a certain time in the morning, the time frame was pretty specific.  It is also measurable.  You know, "How will I know when I've succeeded?"  Well, if I did it every day that I had to go to work that week, I succeeded for the week.  That's pretty simple.  The goal was attainable, meaning I could actually manage to DO it.  There is no point in setting  a goal that I can't actually meet.  By stating that I would do this every morning "that I have to go to work," I build in some hookie time.  I gave myself room for human error.  If I woke up Saturday morning, and didn't want to stretch, it was fine because I didn't have to go to work that day.  Now, truth be known, once I got into the habit, I found myself doing it 7 days a week, but that's not the point.  The point is that I was being realistic.  It also has a time frame attached to it.  If we don't give ourselves timelines, we frequently drag our feet and fail to deliver.

Little did I realize at the time, I had created what is known as a "SMART" goal.  Each letter in the word "SMART" stands for something that you need to consider when you create the goal.  If you look it up, you will find a few variations, but it basically goes like this:

S  is for Specific (no vague goals)
M is for Measurable (How will you know that you succeeded?)
A is for Attainable (Don't pick something that is totally out of reach)
R is for Realistic (Kind of like attainable, but it's more like "Will you really do this?")
T is for Timely (When will you do this?  For how long?  You know, attach a time frame.)

So, looking at my financial life, I know that I have several goals for 2017.  In general, I plan to have all of my private student loans paid off.  Then my partner and I will be doing some serious saving.  Right now, I am going to make a SMART goal for one of them.

I think I am going to be able to pay off the private student loan by June, but to be safe, I will say August.  I am going to make a payment toward  this goal in equal installments every payday (twice a month for my partner and I).  Unless something unforeseen happens, this will  easily have this goal met before the end of the summer.  Once that goal is almost complete, I will reevaluate and set a new goal.

What goal do you plan to set?