As I was perusing my Mint account the other day, I noticed that for the first time ever I had incurred a fee from my amazing bank, Charles Schwab. What? Didn’t they read my post about how much I adore their fee-free services?
It turns out that I had deposited a check that bounced. Now, this is the first time this has happened to me and it seems like a pretty unfair situation…I had no idea how much money the check writer had in her account, so how was I supposed to know the check was no good? And then I was charged a fee? I picked up the phone, called my favorite bank (24-7 customer service that employs Americans to work their call centers) and had the fee waived within three minutes. I didn’t even have to ask, they just fixed it for me! Charles Schwab maintains its gold-medal banking status! Hooray!
The lesson for you all is that when companies charge you fees- maybe you accidentally missed a payment, or there is a minimum balance that you didn’t meet- don’t just blindly pay the fees. Pick up the phone and ask that the fees be waived! This is more likely to be successful if you don’t make a habit of whatever it is you were charged for. I have had high success with the phone call technique.
The reason why this works is because banks/credit cards spend an awful lot of money on advertising and recruiting new customers…a few hundred for every new customer. It is in their best interest to keep you happy.
Picking up the phone to call can also help you if you are having trouble making your payments. Calling your credit card company or your student loan manager and explaining that you can’t make the payment and you would like to see if they can help you out for a month or two is significantly better than not making your payments and having it impact your credit. Actually every time I call my student loan manager they ask right off if I can afford my payment and tell me that they can put my payments on hold for a few months if I need them to- I think it is part of the call center script!
Life happens and sometimes that means you incur a fee, but any bank interested in keeping you as their customer should be able to accommodate the occasional hiccup from an otherwise excellent customer. Don’t be shy, don’t be embarrassed- just pick up the phone and ask!
My new job means I will have dental insurance and also a flexible healthcare savings plan!
Now, dental insurance is awesome and I am thrilled to have it. But my cavities are plentiful and expensive, and my insurance doesn’t cover the whole cost of mining my mouth.
I have never had a flexible healthcare spending account before, but I spent a little time researching them, now that I have one. Basically, it is money that you put aside before you pay taxes (another way to lower your tax bill, woohoo!!) that can be used for healthcare expenses like prescriptions, glasses or contacts (Lasik, even!) or…to fill in those cavities.
Flexible healthcare savings plans allow you to get more medical bang for your buck. Suppose I had to pay $1000 out of pocket for my cavities. Normally, I would have to pay that amount after I had already paid taxes on it, so it would cost me about $1300 (paid to the dentist and to Uncle Sam). With this savings account, I only have to pay $1000 to the dentist and none to Uncle Sam. Cavities stink, but at least I can save some cash-ola.
What is the catch?
You have to estimate the amount you think you will need up front. You don’t get to readjust, and you set the amount once a year.
If you don’t spend the full amount in the savings plan, you don’t ever get the money back (this is called a catch, friends).
My strategy is to plug in the amount I already know I am going to have to spend (hellooooo fillings) and then to estimate the remainder based on my past expenses. I am being somewhat conservative because this is a gamble. I would rather not forfeit money… and I know that I have some health expenses (like new glasses) that I can take or leave, depending on how much money is left in my account at the end of the year. Worst case scenario I pay taxes on my healthcare expenses, which I would have done, anyway!
As you might guess, I filed my taxes this weekend. I also have had some big life changes. I am no longer funemployed! My job was supposed to start today but we are having a good old fashioned snow day instead! Kind of a bummer, but now I get to tell you about some of the things that I just learned about taxes.
Along with my new job comes some new benefits. I had to decide on my benefits this weekend, too, so I now have many more thoughts about that.
The first thing I learned was a little bit about how to work the tax system (thanks, Mom!). You know how I told you all that 401k’s are tax deferred? Meaning, you pay taxes on them when you are ready to retire, but you don’t pay taxes on the money now? Here are a few new things that I just learned.
You pay taxes on the amount in your retirement not based on the amount of money you made the last year you worked (ideally, this will be a gazillion dollars) but on the amount of money you take out of your retirement each year when you are retired (ideally, this will not be a gazillion dollars). Therefore, you will pay taxes during retirement based on the tax bracket of someone with your “retirement income.” Which may or may not be lower than your income is now, but you have control over how much you take out, and therefore you can control which tax bracket you are in when you retire.
You can LOOK UP tax brackets and do the calculations yourself. This may sound like the most obvious thing in the world to some of you, but taxes have always been a big mystery to me and I didn’t realize it can be simple to estimate your taxes. I’m really smart, I swear! I just don’t like taxes.
Because you don’t pay income tax on tax-deferred savings, you are able to put more money into your investments at the start (and you can look up how much more, depending on your tax bracket). This means more money (like, 25-30% more…not insignificant) will be subjected to compound interest from the get-go. So your end result will be much higher than if you had paid taxes on the same amount at the beginning (like for a Roth IRA). Don’t forget that you have to pay taxes when you withdraw your funds, though. There is no escaping Uncle Sam, but you can decide how and when you want to pay those taxes.
When you put money into tax deferred accounts, you can actually calculate the amount of money you will be saving in taxes, so it is a little easier to choose how much to save. For example:
Say I make $80,000 per year. I am able to invest up to 5% into my 401k ($4000). Not only am I getting compound interest (like a boss), but I also am spending less on taxes! Here is the math (based on the 2014 tax schedule):
Amount owed in taxes
Difference from no investment
Without investing in 401k
$0 invested, $0 tax savings
Investing 2.5% in 401k
$2k invested, $500 tax savings
Investing 5% in 401k
$4k invested, $1k tax savings
It is a bit of a balancing act: if you put more into your 401k, you have less cash to spend today, but you also save on taxes (which you can spend before you retire). If you can afford to contribute the maximum into your 401k, you get compound interest, but you also pay less in taxes.
Hopefully this was obvious to all of you, but I had not thought of tax deferred investments as a tool to decrease your tax load (probably because I have never had benefits before….), but there you are- an added benefit to saving for retirement!
Woohooo you graduated! Things are great! You have that coveted degree (or two) and you never have to take an exam again! Yeah!
Just one thing though…you still have to pay for that degree. For new graduates (regardless of your field) this can be daunting. When I first calculated my loan repayment amounts I had to pour myself a stiff drink for the shock…yikes. The number was pretty high- almost as much as my rent! That is with scholarships, working multiple jobs, eating lots of beans and living a very slenderized lifestyle! It’s not easy being edumacated, that’s for sure.
Luckily, things aren’t as bad as they seemed. First of all, there are a number of repayment plans that are a little more forgiving than the evenly-spaced-repayment-over-ten-years plan. These alternative plans have encouraging titles, such as “Pay as You Earn,” and “Income Based Repayment,” and they will make paying back your loans a lot more tolerable (at least at first, while you are still working internships while waiting tables on the side). By signing up for one (the paperwork takes a few months, so be prepared) I expect to reduce my required payments by about 75% each month. Some service jobs (government work, teaching etc. etc.) allow forgiveness of the remainder of your loans after 10 years of steady payments (but don’t bet on this! It is still better to pay loans off more aggressively than to assume you will have them forgiven 10 years from now).
Now, that doesn’t mean I shouldn’t be paying more than the minimum, if I can afford it. Paying any more than the minimum (even if it’s just $50 more each month) will save you quite a bit in interest in the long run. The more aggressively you pay back your loans, the less you will pay in interest and the sooner you can move on with your life.
Speaking of interest- if you can afford to pay more than the minimum, all of your extra payments should go towards the loans with the highest interest rates.
Here are a few tricks that will lessen the total cost of your loans and that will not burden you one bit:
Loan servicers often offer a slight (.25%) discount on interest if you sign up to have your loans taken directly from your bank account. It is automated (yay! No worries and no late payments!) and a .25% reduction in interest on a 10 year, $50,000 loan comes out to be nearly $1000. I’d like a spare $1000, would you?
Consider making your loan payments biweekly instead of monthly (this is especially good if you get paid every two weeks). This way you sneak in an extra month’s worth of payments without even noticing the difference in your paycheck. Suppose you pay $500 each month. $500 x 12 monthly payments= $6000…versus $250 x 26 biweekly payments = $6500. On a 10 year $50,000 loan at 7% you will pay your loans off in 9 years and save $2100 in interest. You never even noticed the difference.
Boom. I just saved you $3100 (and a year’s worth of making payments!) You can thank me in your Oscar acceptance speech.
Have a relative with some spare cash? If you are responsible, have a steady income and have a good relationship with this family member, consider offering them the following: they pay your loans off up front and you pay them off to the family member at a slightly lower interest rate. If you were paying 8% on your loans before, offer your relative 5% interest. Set up a formal agreement with a payment plan (loan calculators are just a google away!) If you have proven yourself to be responsible, this could be a win-win: you get a lower interest rate on your loan, your family member gets a guaranteed 5% return on their investment. This won’t work for everyone, but it is an option to think about.
Just remember- even the president had crippling student loans. It happens to everyone (well, not those lucky trust fund babies…) but hopefully these tricks will make repayment a little easier on you.
I’m sure you have heard quite a bit about credit. Good credit, bad credit. But what exactly is credit?
Quick answer: “Credit” generally refers to your credit score, which is a number that grades you on how risky it may be to give you a loan.
Having good credit means that you are expected to be a responsible money borrower- you will probably pay your loans back in full and on time. Good credit is often rewarded with the ability to borrow more money and lower interest rates on loans (you REALLY want this, because of compound interest!)
Bad credit means you are considered a higher risk loan customer. It might be harder for you to get a loan, and your interest rates will probably be higher than someone with good credit.
So what is a credit score? A credit score is a number between 300 and 850. Seems crappy that all of your brains and beauty and talent should be simplified into one measly number, but that’s how life works sometimes. Try to get the best number you can!
Below 600 is generally considered not so hot. You might have trouble getting a loan and your interest rates will not be great.
600-674 is below average.
675-710 is good.
710 and above is excellent. You should have no trouble getting a loan and you should be able to get highly competitive interest rates.
How do you find your credit report?
Under law, you can get a free summary of your credit report once a year. There is only one website that is authorized to give you the official credit report that you are legally entitled to. This is https://www.annualcreditreport.com/. They get their data from one of three sources and you can pick one to give you your free report: Equifax, Experian or TransUnion. Any other website has not been Federally approved and are considered scam websites (and you are putting your social security number in there, so be careful!).
Equifax, Experian and Transunion get their data from different sources, so theoretically your credit reports could be different from each company. You can only order from one of these companies each year for free, but you can always pay for reports from the other two companies.
It’s important to get your credit report periodically because it helps you make sure the information is accurate. It also protects you against identity theft.
What is in a credit report?
Information such as: your address, social security number, date of birth (to make sure it is you!).
How much credit you have access to (loans, credit cards, mortgages etc.) and the dates of opening these accounts.
How many loans you have requested (signing up for lots of credit cards can impact you negatively!)
Any outstanding debt or collections you have against you.
Drat! No! You usually have to pay more (between $10 and $15) to get your credit score. If you are thinking about taking out a big loan in the future, it is probably worth your money to pay for the credit score so you can factor interest rates into your budget. I get mine every few years just to check in, because there are ways you can improve your credit score if you need to.
If you had some errors in the past, those problems may stay on your report for up to 7 years. Sorry. If you are currently in a dispute over a bill or if you just missed one payment, make sure you call to ask that the late payment isn’t reported. Usually there is a grace period and you won’t get reported if it has only happened once, so don’t freak out. Also sometimes (for whatever reason this happens with medical bills frequently) the first time I get the bill in the mail it is already overdue. Just pay it as soon as you get it and save the envelope with the postage date stamp- they will send you second and third notices before they actually report you for nonpayment.
A benefit to being young: if you make a lot of credit errors when you are 21 (we all made a lot of mistakes when we were 21, don’t worry. Tequila was high on my list…), by the time you are ready to buy a house, you will probably have moved past the seven year mark and your errors will be off of your credit report. It is not as easy for a 35 year old to recover from credit mistakes because a 35 year old generally needs access to more credit than someone in their early 20s.
The amount owed does not necessarily mean that if you are in debt, you have bad credit. It really refers to a how much you owe compared with how much people would loan you. If you have a credit card with a $15,000 limit and you owe $2,000, you still have $13,000 of credit available. That is good. If you have a credit card with a limit of $5,000 and you owe $2,000, you only have $3,000 left of credit. That isn’t so great.
One way to improve your credit score (immediately! One phone call!) is to ask for a credit increase. This is only appropriate for you to do if you don’t have a ton of credit cards and/or loans out, because asking for too much new credit at once can harm your credit report. (GAH! Can we never win!?!) But occasionally- maybe once a year, or if you get a raise- call up your credit card and ask for a credit increase.
Length of Credit History
This one is pretty obvious- the longer you have been using credit and paying bills on time, the safer a candidate you are. If you are a freshly minted adult, now is a good time to slowly start using credit to build up a good credit history. Additionally, if you have a credit card that you never use but you have had for a long time- don’t close that account. Keep it open (maybe put your Netflix subscription on there and automatically pay it off each month, so you don’t have to think about it).
Also- closing an account does not delete it from your credit history. Sorry, kids.
If you have suddenly signed up for four credit cards all in the same day (did you get suckered into those 20% off offers at the mall?!?!! NOOOOOOOOOOO!!!!!) then your credit score will suffer (especially if you don’t have a long credit history). Any sudden request for multiple forms of credit may drop your score.
This is why I NEVER recommend that people sign up for those store credit cards at the mall. Saving 20% on a pair of sweet shoes may save you $20 today, but a lower credit score can impact your mortgage rates when you buy a house, which will cost you THOUSANDS OF DOLLARS. You should have two or three credit cards, but you should not have a different credit card for every store you have ever shopped in. It is better to have a few credit cards with high credit limits and rewards you like.
Types of Credit
Your score also considers the different types of credit you have. Credit cards, installment loans, retail accounts, mortgages, car loans are all different types of loans. It’s normal for young people to only have a credit card and not a mortgage, so don’t go buying a car to try to diversify your loan types. It is more important that you are responsible for the types of credit that you do have, so that when you get older and buy a house you will already have a solid credit score to negotiate with.
There you go: credit demystified. Not as scary as it seems, huh?
I don’t know anything about cars except that you shouldn’t put diesel into a car that doesn’t take diesel and also something about sugar in a gas tank will wreck the car?
Understanding cars is a monster subject. I don’t even own a car, so this is the first installment of a few guest posts by Darius about our most loved appliance.
You are ready to buy a car, you say?! You have followed Kate’s budgeting advice and you want to hit the road. Great!! What do you think the first step is?! Color? Brand? NO! The first step should be listing the criteria you want your new car to meet. Only one of those criteria should be price. Here is a sample list:- How many people do you want to carry? Seems simple but it is a valid question. Why buy a four door pickup that can seat six when it’s just you?! (a tip for the boys…size really doesn’t matter). Do you and your friends take turns being sober drivers? You might want more seats for more safety. For the ‘about to have kids’ readers, the smaller the person, the more junk they need. ‘Lower lift height’ is a parent’s new best friend. Plan accordingly.
– How much cargo do you need to carry/tow? Cargo capacity is not just the weight a vehicle can haul. An SUV with a racy and slick curved rear roofline looks nice but you can’t fit nearly as much into the back as you can with an SUV that has a more squared off look. It’s just geometry (<—this is the moment your math teacher told you about). *Note from Kate: my mom has a Honda Fit and one time we fit a shelf, two dressers, a nightstand, a mirror and two people in there without even breaking a sweat! That car is a miracle clown car!*
– What kind of mileage do you want? Automakers want you to focus on the highway mileage of their cars. Unless you are commuting 50 miles over a traffic-free highway per day, you want to disregard this number. The EPA has implemented it’s ‘combined’ fuel economy rating and it is the BIG number on the car sticker. This is calculated using a mix of driving 55% in the city and 45% on the highway and should give you a better idea of what mileage the average user can expect (and should help you estimate gas costs)
– Do you live in an area that requires four or all wheel drive? Four wheel drive (in most cases) weighs more and lowers fuel economy. It also costs more (except on Subarus) and requires that much more maintenance. Does it make the car safer to drive?! On snow, ice, hurricane level rains, mud, and loose dirt: yes. Otherwise…no. If you don’t live in an area where you need the extra safety, save yourself some cash and stick with two wheel drive.
– How much do you want to spend? There are a few options to get your hands on a car. You can:
Pay cash. This means no interest and therefore will save you money in the long run. Cash price=sticker price.
Finance. Remember this simple rule…on average for every $1000 you finance (fees and interest rates included) with a bank, it will cost you $16.67 per month in payments for a five year car note (60 months) (depending on your loan rates). $17,000 financed = ~$283 per month. The total amount would be lower if you paid cash up front.
Lease. Leasing means that you can pay less to get a nicer car (overall), and you don’t have worry about maintenance because the car is under warrantee. However, this is not a good financial option because you end up with no physical asset at the end of your lease- you have been making monthly payments and when your lease is up, you have no car. For most twentysomething readers, this is a bad financial decision.
If you have bad credit, do NOT sign up for a high interest loan. Horror story from the front page of the LA Times here. (Summary: Ms. Lee paid $3000 down and signed a loan with 20% interest for a $7500 car. Over the next year and a half, she paid $6,966 more on the loan ($9966 total for a $7500 car). According to the terms of her loan, she still owed $11,610. When she fell behind in the payments her car was repossessed and she was left with nothing (even though she had already paid more than what the car was worth. This is not an unusual story. If you have $3000, buy a less nice car with cash and then save up for a nicer car.)
Don’t forget to budget in your insurance costs.
– Do you live in an urban or rural area? Buying a 4X4 Heavy Duty pickup when you live in a city will mean that you will be very frustrated driving to (and parking!) any event in the city. Parking spaces are tight and parking garages have an average clearance of 6′ 6″. Consider where you live…trust me…you will do your future self a lot of favors.
Less time than an episode of New Girl. You can even do it while you watch an episode of New Girl.
It will save you massive amounts of time, stress, stamps, late fees- and it may help improve your credit score.
Pay your set expenses through your bank, pay your variable expenses (electric bill, water bill…) through your utility company website.
While you’re at it, automate a transfer into your savings account so you can start saving up for your emergency fund and for that vacation to Europe (you can save for both at the same time, it’s totally cool).
Do I seem like I have my act together? Do I seem like the most organized and fiscally savvy gal you have ever encountered? Oh do go on.
Here is reality: I am 28 years old. Until three months ago I kept all of my important papers in a bin. This bin:
I don’t have a desk, so I just threw everything important into this bin. Checks, thank you notecards, my passport, medical documents, my lease, broken pencils, my social security card, an old alarm clock, a gazillion paperclips, important mail, pay stubs, used up highlighters, tax information, wrapping paper. It was all in there.
To give myself a little credit: I never lost an important document, so at least I was consistent about tossing crap in there.
However. As I’m sure you understand, the situation is not sustainable. Firstly (if you recall), I move a lot. Lugging this bin of unsorted paperwork around with me is not a good use of my energy.
Secondly, the bin goes under my bed. It is annoying to go searching under the bed every time a piece of mail comes in.
Third, I had multiple panic-filled moments when I had to spend time rummaging through there praying I had actually followed my system. Lots of stress and anxiety and self-scolding for not being a more organized person.
I needed at least an intermediate step…so I did this:
What you are looking at is a beautiful plate with an octopus on it (see the tentacles peeping out of the bottom left?) that my aunt gave me. It became my mail receptacle. And by mail receptacle I mean place to put towers of mail until they get too tall and they fall over and I have to shove them in the bin under the bed.
You can see why this system is not great. I can’t even see my pretty plate.
Finally, at the age of 28 and 2 months old, I finally decided to keep my paperwork like a grownup.
I invested in an ugly file folder crate and some hideous army green hanging folders. Now when my mail stack gets too high, I file the important paperwork. I don’t even keep those little empty mailback envelopes they give you! I get rid of them right away! The files and box weren’t cheap, they don’t look nice, and it is definitely not my favorite part of being an adult.
However…. after being an adult for over a decade now, having this file box does make me FEEL more like an adult. And I no longer freak out about where my social security card is (what is that thing for, anyway?)
So you see- I am not a naturally organized person. I don’t have a label maker. (I don’t want a label maker because then I would feel guilty for not putting things away in the places I had chosen for them) The reason I have organized my finances the way I have (with automatic bill pay and instant budget making) is because if I didn’t have it automated, my bills and important paperwork would end up in the under-the-bed-lack-of-filing-system and I would have no clue about my money at all.
You will also notice that I didn’t come up with this new organization system overnight. I had a few failed experiments including:
A pink binder that did not have enough space in it and I also couldn’t find the hole punch
Multiple shoe boxes that I moved around with me
A lovely green storage container that got crushed during a move 😦
The point is- sometimes you are going to try to set up a system, and it won’t work. You might need to set up a system one piece at a time (the mail plate was a genius step for me to avoid making my roommates crazy with my old bills stacked on the hall table…) But if you keep trying different systems (and in my case, if I had just bought some stupid file folders) then one day you will find a system that works for you.
My friend Marisa said some lovely things about my blog the other day. This is what she emailed me:
Kate- I LOVE your blog. I forwarded it to my sister and my mom and told them to join. You are saving my financial life right now (and Willow too since she sent me her budget spreadsheet), and you’re doing it in a way that makes it funny, easy, and I dont get anxiety about it!
Thank you, Marisa! I really hope that this blog is helping my readers get over any financial-planning anxiety they have. The goal is to make you feel awesome about how you manage your money, instead of guilty and/or anxious and/or head-in-the-sand about finances.
I couldn’t help but notice what Marisa included in the parenthesis, though. Willow’s budget spreadsheet? Willow is our mutual friend (also the best roommate I have ever had) and Willow is an extremely practical person who will put infinite extra effort into things she cares about, but does not like spending time on things she doesn’t give a crap about.
You know what Willow doesn’t give a crap about? Money. But she lives in reality and not in the poorhouse, so she has to do some financial planning just like the rest of us. But she and Marisa don’t want to spend hours on Mint. While I (obviously) love Mint because of its automatic tracking, graphing capabilities and goal-setting, some of my readers might find Mint overwhelming (it is kind of a bear to sign up for Mint) and some of my readers just might not be interested. That’s ok, but it doesn’t excuse you from sticking to a budget.
Here is Willow’s (and Marisa’s, now) budgeting method:
Willow made a spreadsheet on googledocs that she can access from anywhere because it lives online. She is the only one with access to it so the world can’t see her financial information (although even if they could it’s still pretty safe because she isn’t including bank account numbers in there).
For the first three months, Willow compared her estimated spending with her credit card/ checking account spending to make sure the numbers line up and adjusted them when they weren’t working.
She uses her credit card for all of her purchases so that all of her spending is in one place and she can easily compile categories. (And she gets rewards. She just cashed in her rewards for $100. Nice.)
This is not that much work for her because she is not a big shopper (so for example, she only goes to the grocery once a week, so that is four trips a month, just four numbers to add).
She pays off her credit card in full each month.
If she spent too much in one category one month, (her words: “like if I spend too much on socks one month”) she cools it the next month on that category.
It’s a general estimate. She doesn’t give a crap about tracking each penny.
She has an automatic transfer into savings so she doesn’t have to worry about saving money. Ditto into retirement.
She has a “free money” category. This is for miscellaneous purchases, and anything left over in the “free money” category gets transferred into savings at the end of the month.
She has emergency savings, savings for trips and big purchases. She knows when she will be spending a lot of money that is not normal for her budget, and she can plan accordingly to make sure she has enough to cover it.
Want to see how her budget works? I have recreated a template with example amounts for you all to use. Please use it, but I have made it so you have to copy and paste it make your own version in googledocs or Excel so that everyone can use it without overwriting their own personal information.