Set a date.A comprehensive mission statement isn’t something you can just whip up while you’re eating dinner after a long day at work. “Conversations about money—no matter who they’re with—can be uncomfortable,” Mueller-Lust says. “So choose a time when you have each other’s undivided attention. You want to be completely present to really listen and hear your partner’s perspective.” That said, feel free to lighten the mood and make it fun, Gilmour says. Pick up some wine and cheese—or whatever sharable treat you enjoy that’ll put you in the right frame of mind to kick off a productive conversation.
Discuss your common life values.Even though the goal of this exercise is to nail down a money mission statement, your first assignment is to brainstorm a list of life values. “[That’s because] your beliefs should drive your money behaviors, not the other way around,” Gilmour says. “If there’s misalignment, you could experience some internal friction.” Start by jotting down the first words you think of, says Washington, D.C.-based money therapist Dominique Broadway. This could be family, friends, travel, education, community, charity, home—or all of the above. “Do this on your own first, then compare notes,” Mueller-Lust says. “You need to understand each other’s wants and needs very clearly before deciding on combined priorities. This way, you’ll prevent misunderstandings and disagreements down the road when you’re confronted with a new money issue—which will inevitably happen.” Gilmour says it’s normal to start with a list of 20 or even 30 values, but suggests whittling it down to the top five you want to build a life around together. RELATED: Your Money Values Roadmap: 6 Ways to Budget for What Matters to You Most
Pinpoint your joint financial goals.Now it’s time to nail down your main money priorities—for both the short- and long-term. To get this conversation rolling, Broadway suggests answering these big-picture prompts: Will we live in the city or suburbs? Will we rent or buy? What world destinations must we visit in our lifetimes? What are our dream careers? When do we want to retire, and what might a happy retirement look like? Out of these discussions, you should be able to identify several large financial goals that can help you accomplish those dreams, such as paying off debt, saving up for tuition for a master’s degree or starting a baby fund. Just remember that these aims should relate back to the life values you just defined. So if you notice a key priority isn’t being addressed, make sure to work it into your financial goals before moving on to the next step.
Start shaping your statement.Ready to put pen to paper? The best part about this to-do is that you’re totally free to structure your statement however you like. Love the ease of bullet points? Go for it. Prefer paragraphs? That’s O.K., too. What’s more important is finding the right balance between making the content general enough to apply for years to come, but specific enough that you can still suss out actionable to-dos. For some goals, that might mean keeping the language vague. “A statement that says you want to minimize debt could always be true,” Mueller-Lust notes. “A desire to own a home can remain valid, as well, even if you change what type [of property], or where you want to live.” Other priorities, however, may lend themselves to specific numbers, in which case you should spell them out. For instance, if giving is one of your main priorities, you can easily stipulate that you’ll both carve out 5% or 10% of your paychecks to donate to charity each month. RELATED: How to Budget for Giving All Year Long
Divide—and conquer—key to-dos.This step is like figuring out who’s responsible for taking out the garbage—only with higher stakes. To avoid inaction—or unnecessary conflict down the line—pinpoint which spouse will take responsibility for certain items covered in your mission statement. “A good example of an individual task might be signing up for benefits through one person’s employer, like getting disability insurance or enrolling in an FSA account,” Gilmour says. While these to-dos may not be directly outlined in your statement, they may contribute to greater goals, such as saving money wherever you can or being financially secure. Of course, not every task will be something one person can do alone, but when appropriate, scribble your name next to the ones you’re tackling, so nothing falls through the cracks.
Sleep on it—then edit as necessary.Once you’ve hammered out a first draft you’re happy with, hit the pause button. While you may be anxious to wrap up the project, research from Lancaster University has shown that your mom’s wise advice of “sleeping on it” can actually encourage problem-solving. After a few days, revisit the statement together with a fresh perspective—and don’t worry if you feel the need to be a little heavy-handed with the red pen. “In the moment, you may think something sounds good,” Gilmour says. “But then upon further reflection, you might want to make adjustments to ensure it’s a statement you both agree on.”
Put your mission statement on display.With the finished product in hand, it’s time to designate a prominent spot for it in your home. “Keep your statement front and center,” says Mueller-Lust, who recommends digitizing and saving it as your desktop background, tacking it up in your kitchen or even framing and hanging it in your bedroom. “The key is just not to lose sight of your goals.” So when you’re contemplating life’s major decisions as a couple, you’ll know exactly where to look if you need a quick reminder of what you’ve decided is most important to you.
Ask for help putting your plan into action.Now it’s time to get cracking on your objectives! To help you work through the list quickly and efficiently, Gilmour suggests asking for a trusted professional, such as a Certified Financial Planner™ or certified public accountant, for guidance. “A good planner should take your values into consideration, and can help you navigate various investment products and tools, so you can achieve the goals you’ve outlined,” he says. A CPA, on the other hand, can help you better understand key tax laws and use them to your advantage. For instance, a CPA can give you the low-down on short-term action items, like whether to file your 1040 jointly or separately come April; advise on how to track and deduct your charitable contributions; and explain why stashing away more money in your 401(k) is a good move for your future and lowers your tax liability. Bonus points if the professional you’re working with helps you identify a financial goal you hadn’t even thought to include in your mission statement! RELATED: 9 Types of Financial Advisers: Which One Is Right for You?
Hold each other accountable.When it comes to staying on track with your goals, it’s important to touch base with your partner often to ensure you’re both holding up your end of the bargain. After all, there’s never a time when you’re not making money decisions—even if it’s just the simple act of spending $20 at the grocery store. “Every day, there’s some kind of financial choice being made, so you need to have open lines of communication,” Gilmour says. This is especially important for those tasks you agreed to divvy up and individually tackle in step 5. “A lot of people tend to procrastinate on money to-dos,” Gilmour notes. “So while you don’t want to nag each other, it’s important to not let anything fall by the wayside. Gently remind each other [by saying things like], ‘Hey, don’t forget to increase your 401(k) contributions at work!’”
Revisit and update as necessary.Mueller-Lust suggests scheduling regular sit-down meetings to review your money mission statement, so you can compare it to what’s happening in your life at that moment. It’s during these check-ins—which Gilmour suggests doing annually—that you may realize your circumstances have changed and it’s time to revise the document. “[After some time], something you wrote as a newly married couple might look very different than something you might write once you have children.” Other notable times to compare your current values and goals to your mission statement: when you accept a new job or leave the workforce; a death of a loved one, such as a parent, occurs; or you finally buy that home you’ve been saving up for since you tied the knot. “Your goals should always be fluid,” Mueller-Lust says. “Life changes, and so will priorities. Getting used to that idea—and making adjustments when it happens—is critical to making a marriage grow.”
Max out your retirement accounts.Reduce your taxable income for the year by putting as much as you can into your 401k and IRAs. You can contribute up to $17,500 to your 401k and as much as $5,500 toward your traditional and Roth IRAs ($6,500 if you’re age 50 or older). RELATED: Roth IRAs: Everything You Need to Know
Donate to charity.Charitable gifts are tax deductible (if you itemize your deductions), so now is a great time to consider donating to your favorite causes. Just keep in mind that the I.R.S.’ date of delivery rule means the recipient must receive your donation (or it must be postmarked) by December 31. RELATED: 11 Great End-of-Year Tax Gifts You Should Give Yourself
Make an early mortgage payment.If you make your January mortgage payment by December 31, you can deduct the mortgage interest on your upcoming tax bill. You can also pay your property taxes early to get another deduction.
Use up your flex spending.A new rule allows employers to let their employees roll over up to $500 in their flex spending accounts from one year to the next. But if you’ll be ending the year with more than that left over—or if your employer hasn’t updated its policy—you should use up the remaining funds so you don’t lose them. Consider stocking up on extra contact lenses or squeezing in a dental checkup. (Here’s a list of all allowable purchases from the I.R.S.) RELATED: Health Insurance Checklist: 12 Coverage Terms Everyone Should Know
Pay college costs ahead of time.You or your child’s tuition and fees for the spring semester may not be due until January, but if you pay the bill before year’s end you may be able to claim the American Opportunity Tax Credit on your 2014 tax return. RELATED: 5 Smart Tax Breaks You May Not Know About
When you're determining who should be covered under your plan ...If you’re single and have no dependents—that is, a child or another individual whom you can claim as a deduction on your taxes—then you’re likely only seeking coverage for yourself. But the decision gets a bit more complicated if you and your spouse or domestic partner both have access to health insurance through work. If your employer provides better coverage options or vice versa, then it might make sense for you, your partner and your kids (if you have them) to all go under the same plan. “We see a lot of newly married spouses who both have benefits, but they never review [their plans] to see whether it might be cheaper to go on one spouse’s plan,” says Robert Walsh, a CFP® and founder of Lighthouse Financial Advisors in Red Bank, N.J. “Maybe one employer [provides a plan] that offers 80% coverage, whereas another might pick up only, say, 40% [of health care costs].” So if you’re married or have a partner, weigh the pros, cons and costs of maintaining separate health insurance plans versus using one family plan as you walk through all of your coverage options.
When you're trying to predict next year’s health care needs ...You don’t have a crystal ball, so you won’t know whether you’ll break a bone or get a bad case of the flu next year. You can, however, make some educated guesses about the type of coverage you think you’ll need, based in part on your past medical history and any changes you see coming on the horizon. One thing to keep in mind is that, per the Affordable Care Act, everyone who buys health insurance gets a level of standardized preventive care. This refers to tests, checkups or other procedures that are done in an effort to stay healthy or catch a disease in its earliest stages, as opposed to treating an illness or condition you already have. Annual physicals and mammograms are examples of preventive care. So, for example, if you’ll be undergoing your first mammogram this year, then you’ll likely want to choose a plan that offers strong coverage for women’s preventive health services. If you or your spouse is pregnant—or plan to become pregnant—then adequate coverage for prenatal care, some of which is also considered preventive, should factor into your decision too. Another key consideration? Current and future medication needs. "Prescription drugs are a major cost for many," says Lisa Zamosky, author of "Healthcare, Insurance, and You: The Savvy Consumer's Guide." “Understanding if and how your drugs are covered is a critical analysis to do [in order] to protect yourself financially." So consider making a list of your current prescriptions, so you can check them against a given plan’s drug list. "Make sure you know not only if a drug is covered, but also how much a generic versus a brand name will cost," adds Walsh.
When you're weighing how much flexibility you'll need in choosing doctors and specialists ...There are many different types of health insurance plans, and choosing one will depend, in part, on whether you’re willing to stay in or out of the network of providers that the insurance plan offers. Below are three of the most common types of plans: A health maintenance organization, also known as an HMO, tends to be among the more affordable choices because it usually has a low premium (the amount you pay an insurance company each month for coverage) and a low or no deductible, which is what you have to pay first before your plan starts to foot the bill. The catch is that you must stick to doctors within your network, and your primary care physician serves as a gatekeeper who needs to provide a referral before you can see a specialist. A preferred provider organization, or PPO for short, allows you to see any doctor you’d like, but you may have to shell out extra if you elect to go outside of the insurance company’s network. For instance, if you see an out-of-network physician, the insurance provider may charge you coinsurance, which is a percentage of costs you’d have to pay before the insurance company would start covering any costs. Consumer-directed health plans (CDHPs), also known as high-deductible health plans (HDHPs), tend to have lower premiums but higher deductibles than other types of plans. They are often paired with some type of tax-advantaged health account to which either you, your employer or both can make contributions. This money can be used to help pay out-of-pocket medical costs until your deductible is met, after which you’ll likely pay a coinsurance that's based on whether you saw an in- or out-of-network doctor. If you have doctors you like, check to see whether they accept the type of insurance you’re leaning toward before you make a decision. This can be a good idea whether or not you’re switching plans since practitioners may change which insurance companies they choose to work with. You may also want to briefly ponder a worst-case scenario. "Ask yourself, 'If I got a rare cancer and wanted to see an expert, what would happen?’ " says Carolyn McClanahan, a doctor-turned-CFP® based in Jacksonville, Fla. "If a place like the Mayo Clinic is part of your HMO, you'll probably be happy, but if you'd be limited to a local community clinic, you might regret it."
When you're reading a policy's fine print ...Even if you intend to keep the same health insurance plan as last year, it’s still important to read the terms of your policy. "Often people assume that all the elements of their plan—including their deductible, provider networks, etc.—will remain the same from one year to the next if they just stick with the same policy, but that's not necessarily the case," Zamosky says. And if you are electing a new health insurance plan, one thing to watch for are exclusion periods for pre-existing conditions. If you were diagnosed or treated for an illness within a six-month period prior to enrollment, your provider may not cover treatment for that illness for a specified period of time. Another piece of important fine print to note: prior authorization requirements, which are the approvals you may need to obtain before your insurance will cover a particular service or medication. For example, your provider may require prior authorization from your doctor for you to undergo special surgical procedures, or if you need to use a brand-name medication instead of a generic one.
When you're crunching the numbers ...Zamosky says one of the biggest mistakes she sees people make when choosing a plan is basing the decision solely on the cost of the premium. "It’s natural to focus on how much money you have to shell out each month to maintain a policy, but so many other details also impact your wallet,” she says. “What initially seemed like the cheapest plan can actually end up costing you more by the end of the year than a policy that would have required you to spend a little more each month." For example, CDHPs may offer the lowest premiums, but because of their high deductibles, they may not necessarily save you more in the long run. “[CDHPs] place a higher level of decision-making and financial risk onto health care consumers,” Zamosky says. They may make sense if you typically don’t have a lot of health care costs, adds Walsh, but if you have a chronic illness or dependents, you may quickly run out of any money you’ve set aside in the health account you have with your plan. Some other key factors to consider when calculating your potential total health insurance coverage costs: Copayments, which are the flat fees you may have to pay each time you see a doctor or fill a prescription. Out-of-pocket limit, or the most you’ll have to pay during the duration of your policy before your plan will cover 100% of the costs for essential services. Lifetime maximum payout, also known as the lifetime limit, which is the total amount the insurance company will pay out for non-essential health services on your behalf over your entire lifetime, not just from year to year.
Determine what you can truly afford.Well, there are no surprises here: Your first step in the home-buying process is to determine your budget, just as you'd likely do for any other major financial decision. But where should you start? “As a general rule of thumb, you should be looking at home prices that are two to three times your annual income,” says Tom Gilmour, a CFP® at LearnVest Planning Services. “This helps ensure that you’re not taking on a larger mortgage commitment than you can afford." Speaking of mortgages, Gilmour recommends that payments generally not exceed 28% of your monthly gross income—but if you have other high costs, such as private school tuition, it can be wise to pare down this percentage even more. If you're not sure what's realistic, consider seeking help from a financial professional, who can help walk you through an appropriate breakdown, based on your individual situation. Once you've defined your budget, it's time to look at your cash reserves. Gilmour suggests saving up a minimum of 20% for your down payment in order to avoid having to buy private mortgage insurance, plus another 3% for closing costs. (More on that later.) You’ll also want to make sure you have enough savings left over to help pay for any home improvements, decorations or miscellaneous moving and maintenance costs that may pop up—in full. Translation: You should not be using your emergency fund to cover these costs. “Being a homeowner often comes with surprises, like a burst pipe in the middle of the night that needs to be fixed right away,” Gilmour says. “So you need to be financially ready for these surprises, which means you shouldn't deplete your emergency fund for expenses like furniture or remodeling.”
Figure out which mortgage is the right fit for you—and get pre-approved.Now that you've nailed down your numbers, it's time to start shopping for a mortgage lender with a reputation for good customer service and timely closings. You'll likely have a lot of questions—like how long the process will take and what the qualifying guidelines are—so choose a lender that answers them all satisfactorily. Next, decide which mortgage makes the most sense for you. There are plenty of different options to consider. Although Gilmour advises choosing one of the most common two: a fixed-rate mortgage, in which your interest rate remains steady for the duration of the loan, or an adjustable rate mortgage (ARM), in which your rate fluctuates to reflect market changes. “[ARMs] can be a good option—but usually only if you plan to live in your home no longer than the original fixed period,” Gilmour says. “Otherwise, if the interest rate rises, you could find yourself with a mortgage payment that's higher than you planned and, depending on your budget, may not be sustainable.” As for the length of your loan, Gilmour favors a 30-year term over 15—even if you think you can pay off your home faster. “Building equity in a home can be a good way to grow your wealth, but it's important that you do so in a way that doesn't stretch your finances too thin,” he cautions. “Things can get really ugly when the housing market declines, so it may be a good idea to take out a 30-year mortgage but accelerate your monthly payments as if you had a 15-year mortgage. If you ever need to lower your payment in the future, you'll still have that option.” Next up on your to-do list: Apply for a pre-approval, the process in which a lender reviews your financial information—like your credit report, W2s and bank statements—and commits to giving you a mortgage for a specified interest rate. It's a good idea to consider doing this now because it can prove to a seller that you're a qualified buyer, and once an offer is made, the bank will just have to appraise the home—not the property and your finances. But a word to the wise: A bank may approve you for a larger loan than you've determined you can afford. So don’t be seduced by their findings—and stick with the number you landed on in step one.
Consider a financial trial run.If the idea of not being able to afford your mortgage keeps you up at night, this step is all about assuaging those fears by simulating the experience of being a homeowner—before you buy. Start by totaling up all of the monthly costs associated with a home purchase, including your projected mortgage payment, tax and insurance estimates, HOA fees and home maintenance costs. And don't worry if you don't have concrete numbers—the point is to see if you can afford a ballpark amount. If the sum of the expenses equals more than what you're paying for housing now, then subtract your rent from the total. The difference is what you should consider transferring to your savings account for a few months to simulate what you'd be paying out to cover your monthly new-home costs. If you can comfortably pull this off, then rest assured that you can probably handle the typical expenses of being a homeowner. But if you can’t—or you’re making unpleasant trade-offs—consider readjusting your home price until all of these costs are feasible on your current income.
Decide which house features are must-haves vs. nice-to-haves.It’s the rare lucky person who finds the perfect home within their budget, so before you go house hunting, brainstorm a list of what you absolutely must find in a home—and which features are simply nice extras. Examples of must-haves might include the number of bedrooms and bathrooms, proximity to work and other places you frequent, and access to your preferred school districts. You might also have a strong preference on the amount of outdoor space a house offers, and whether it's move-in ready. Things that shouldn’t be on your must-have list? The way a house is decorated, well-manicured landscaping, a pool—or anything else you can easily fix or install yourself. Refer to this list if you need help down the line making an objective decision between two or more houses—as well as to remind you of what's really important, versus what could be luring you to pay more than necessary.
Start house hunting, and determine whether you’ll work with a real estate agent.Now for the fun part: house hunting! Browsing online resources like Trulia for available homes in your neighborhood is a good place to start, and can help confirm whether your budget and house must-haves are reasonable in light of what’s for sale. This is also a prime time to decide whether you'll hire a real estate agent, if you haven’t already. While you're under no obligation to do so, there are several potential benefits to working with one. First of all, an agent can provide access to more home options than you'll likely find yourself, as well as set up viewing appointments. Since home-buying can be an emotional process, an agent can also act as a mediator between you and the seller. To find someone, interview several buyers’ agents—this means they exclusively represent you, and not the seller, as well—until you identify someone who understands your needs and makes you feel comfortable. As a final step, check your state’s real estate licensing board’s website to ensure they’re registered, and don’t have any complaints or suspensions logged against them. But whether or not you decide to hire an agent, you should hit the ground running now on viewing as many houses as possible.
Research homeowner's insurance.Your lender will likely require the name of the agency providing you with home insurance, which is why you should shop around for a quote while you're still house hunting. Basic insurance typically covers fire, theft, storm damage and liability should someone get injured on your property and sue you. But you can also add on riders for things like expensive jewelry, furniture and home office equipment, as well as choose to get additional flood insurance if your home is in a flood-prone region. To find a provider, you can shop around online, from agency to agency, or use an independent agent, who can provide several quotes to review at once. It varies based on your area and, of course, the value of your home, but you can estimate your costs here.
Put in an offer.So you’ve fallen in love with a property that meets all of your needs and some of your wants—and it’s within your price range. Let's make an offer! But here’s where it can get tricky: You don’t want to lowball your offer, and risk losing the home to another buyer or insult the seller—but you also don’t want to pay more than is necessary. So how do you land on the ideal number? While there are no hard-and-fast rules, a few factors can help inform your decision. First, look at other home sales in the area. Is the house you want priced reasonably in comparison? Did other homes sell for less or more than the asking price? If they sold for an amount that's comparable to your seller's list price, that's a good indication you should be offering a number close to asking. Next, consider how long the home has been on the market, and how incentivized the homeowner is to sell. For example, if the seller is living in a transition home while waiting to sell, you may have a better chance of getting the seller to accept a discounted offer. But if he's casually putting the home on the market to see how much he can net, the seller may be more apt to wait for the perfect price. Lastly, what’s the market like in the neighborhood? Is it like New York City, where condos get snatched up with all-cash offers, or are you in a Las Vegas-esque location, where empty homes are a common site? In the former situation, it may be a good idea to start with a strong offer to beat out an army of other suitors, whereas you may have more leeway in a market like Vegas.
Review the contract carefully, and submit your mortgage application paperwork.The seller accepted your offer—congrats! But before you sign on the dotted line, you should make sure to review the contract thoroughly and understand every single clause. Pay special attention to contingencies in the contract, which spell out situations when you can back out of the sale to help protect yourself in case something goes wrong. For instance, such scenarios can include if you discover that the home has serious physical defects or if your bank rescinds financing. Speaking of defects, now is also the time when you'll get the home inspected, which typically costs between $200 and $500. If there are issues, such as a non-functioning fireplace or an old boiler, you may be able to ask for a price reduction to help cover the cost of repairs. And if you find any deal breakers, such as an unstable foundation or serious mold, you have the option of backing out now. Once your inspector confirms that there are no big defects that could affect the home's value, you'll submit a mortgage application. Review all closing costs—the ones you've hopefully saved up 3% to pay for, which might include an attorney's fee, title insurance and partial property taxes—before you sign the contract.
Sign the papers!Before the big day, you're entitled to a walk-through to confirm that nothing has changed since the inspection. After that, make sure you have all the money required for the closing wired into the correct account. Ask the settlement agent for copies of all the paperwork you'll sign before closing, so you can carefully review them at your leisure. You’ll be putting your John Hancock on several items, including the HUD-1 settlement statement, which details all of the costs related to the home sale; the Final Truth-in-Lending Act statement, which outlines the cost of the loan and the interest rate; and your final mortgage paperwork. On closing day, bring your photo I.D., as well as any paperwork you received throughout the home-buying process, including insurance and home inspection certificates. Once you've signed the paperwork, you’ll be handed the keys … and you'll officially become a homeowner!
Track your spending.Keeping precise tabs on how much money is coming in and going out of your checking account each month should be a top money priority. And we don’t just mean estimating how much you “probably” spent on dinner or “about” how much you paid for your last vacation—we’re talking exact numbers. Bottom line: Without knowing how much you’ve spent, it’s nearly impossible to know how much you have left to put toward important financial goals, like building up your emergency fund. And a good way to monitor your cash flow is to create a budget, so you know at the start of each month exactly how much money you have to allocate toward food, housing, student loans, lifestyle expenses and future financial goals. Another reason it’s so important to build this habit as soon as possible: Part of the beauty of a budget is that it can evolve with your lifestyle. So as your circumstances change and you have different financial needs—say, getting married and buying your first home—tweaking your budget can become second nature instead of a major project.
Live below your means.Put simply: Living below your means requires spending less money than you earn. Easy enough, right? The reality is that many people understand the concept, but have trouble with the execution. Once those rent checks, car payments and student loan bills start piling up, it can be hard to keep your outflow of cash less than your inflow—which is how too many of us end up living paycheck to paycheck, or worse, saddled with hefty credit card debt. Fortunately, a budget can do wonders for helping you live within your means. Once you have a solid framework for your monthly spending in place, it can be easier to see where you need to rein in any frivolous outflow—like maybe forgoing that daily $4 coffee. You’ll also want to take a look at whether you can pare back on any fixed costs, such as renegotiating your cell phone plan or perhaps reducing your electric bill. The earlier you make a habit of living within your means, the better off you can be—because the stakes only get higher as you age and take on more responsibility. And no matter how many raises you get or how well your investments are doing, you’ll always have a finite amount of money—and you’ll never want to owe more than you can comfortably pay.
Pay yourself first.Saving some money each and every month is as important a money to-do as routinely tracking your spending. Of course, we also know that this is easier said than done—unless you get into the habit of paying yourself first, which is the practice of saving a set amount of money from each paycheck before you do anything else. After all, money saved now is money to spend later. And, trust us, you’re going to be glad it’s there later—like when it’s time to retire. One way to help make the pay-yourself-first process easier is to simply automate your deposits by funneling money straight into a savings account every time your paycheck hits your bank account. We’ll talk more about what exactly you should be saving this money for later, but in the meantime, it’s important to recognize two tenets of saving: The more time you have to save, the less you have to save at any one time. Second, saving generally gets easier—and more ingrained—the more you do it. So once you make it a habit, you probably won’t even notice the smart choice you’re making for your future.
Contribute to a retirement fund.Everyone needs money to live on in retirement. That’s why specific, tax-advantaged accounts have been created, so people can help maximize their savings for retirement in vehicles like IRAs and 401(k)s. When we talk about paying yourself first, this is one of the primary ways you can do it—by contributing to your retirement accounts. Of all your savings priorities, retirement contributions can be particularly easy to make automatic, if you have access to a company-sponsored retirement plan, like a 401(k) or 403(b). You can usually have your savings taken directly from your paycheck before you receive it, so you’ll probably never even notice the money is “missing.” But even if you don’t have access to a plan through your employer, you can consider opening a Traditional IRA or a Roth IRA—and set up direct deposits to automate these retirement contributions, as well. There’s another reason why this can be a good money habit to adopt early in life: A retirement account isn’t simply a savings vehicle. It’s an investment account, which means you may be able to reap the benefits of compound investment returns—and be able to watch your money grow faster than it would in a traditional savings account.
Save for other future goals.You aren’t quite done paying yourself. Now that you’ve taken care of retirement, it’s time to talk about the rest of your savings. While we believe that everyone needs an emergency fund, the rest of your savings goals are probably as individual as you are. Do you want to own a home one day? Have a baby? Travel through Europe? Start your own business? All of these goals can require serious cash—and now is the time to start getting it together. Once you’ve identified your goals—and picked two or three to prioritize first—you can consider diverting money into separate savings accounts. This not only helps you keep track of your savings progress, but it also helps curb any temptation to dip into one account to bolster another. And as we’ve discussed already, the sooner you start saving, the sooner you can achieve your future goals.
Get smart about credit cards.Given all the horror stories you hear about ballooning credit card debt, it may seem like steering clear of plastic is the safest move. But, in fact, it may be a better idea to get in the habit of using credit cards—very wisely. Aside from being enormously convenient when it comes time to place an order on Amazon, credit cards are crucial to building your credit history and credit score, which lenders use to evaluate your trustworthiness based on past behavior. If you have good credit, they’re more likely to loan you the money for life’s biggest purchases, like a mortgage, as well as give you a better interest rate. Getting in the habit of smart credit card use as soon as possible—meaning you only charge what you can afford to pay in full each month—can be helpful because the length of your credit history is a major factor in your score. But it’s also helpful for another reason: If you do make a misstep, you’ll want to have plenty of time to fix it—well before more major financial obligations, like retirement, need your attention.
Look out for your family.We all want what’s best for our loved ones—and if the worst should happen, it’s comforting to know they’ll be protected. One way to help ensure they’ll be financially secure should you pass away unexpectedly is to purchase life insurance. It’s important to do your homework here: Different families have different coverage needs, and life insurance policies aren’t one-size-fits-all. For instance, you can take out a term policy, which covers you for a limited period of time, or a permanent policy, which never expires and has the potential to accumulate cash value. Newlyweds and new parents, in particular, might want to give this to-do extra thought because they may be in a position in which someone else is dependent on their income. But even if you don’t have your own family, you may have other important people in your life for whom you want to provide—and the best time to take advantage of locking in a lower rate is when you’re young and healthy. Bottom line? As with any of these financial habits, it’s better to start thinking of ways to help protect yourself today … so you aren’t sorry tomorrow.
Recognize what you want isn’t always what you need.Now that your savings priorities are in place, you’re using credit cards responsibly and you’re learning to rely on your budget, it’s time to focus on the rest of your money—the green you spend on groceries, movie tickets and daily indulgences. When it comes to forking over your hard-earned dollars, it’s important to get in the habit of distinguishing between your wants and needs. On a global level, your basic needs are food, shelter and transportation. But day to day, these will be different for everyone. Case in point: A new pair of rain boots might be something you want if you already have a perfectly good pair at home, but it becomes a need if your old pair has sprung a leak that soaks your socks on the walk to work. Clearly, a need takes priority over a want—so if you’re looking to reduce your spending in order to, say, put more money toward retirement, your wants are the first place you should look to cut back. Of course, we’re not saying you can’t spend any money on your wants. But the sooner you can get in the habit of identifying which expenses are and aren’t necessary, the easier it can be to modify your spending as you change your goals. Because that’s what all of these habits are about, after all: getting you closer every day to the things you want most.
Review your budget.News flash: It’s expensive to be a parent! According to an August 2014 report from the U.S. Department of Agriculture, raising a child for 18 years will set you back nearly a quarter of a million dollars—so reviewing your budget before you’re even pregnant can be a smart financial move. You can start by analyzing both your fixed and flexible monthly expenses, so you can figure out where you may be able to free up some cash to put toward an account that you designate specifically for baby savings. And be sure to pay attention to where you may need to spend more now in order to accommodate your baby later—like moving to a bigger home—and then create a plan that’s designed to help you afford it.
Consider purchasing life insurance.We won’t sugarcoat it: If you’re thinking about starting a family, life insurance can be an important consideration. When people depend on you for financial support, it’s wise to consider having a plan in place to help ensure they’ll be covered in the event that you unexpectedly pass away. A life insurance policy that’s in force—this means it’s active and in good standing—can make up for your lost income and help provide for your family’s living and educational expenses down the line.
Determine how much parental leave time your employer offers.After you become pregnant, one of your first money to-dos may be to familiarize yourself with your employer’s maternity and paternity leave policies, which are typically detailed in an employee handbook that’s available through your Human Resources department. Many large, well-established companies provide about six weeks of paid maternity leave. However, if you work at a smaller company with more modest benefits, you may have to get a bit creative in order to afford the time away from work. To DIY your parental leave, you can cobble together other types of paid time off offered through your employer—sick days, personal days and vacation time—and also look into short-term disability insurance benefits. Additionally, you can supplement that time off with paid disability benefits that are available through some states, or with 12 weeks of unpaid leave, thanks to the U.S. Department of Labor’s Family and Medical Leave Act of 1993.
Decide whether you’ll work once your baby is born.Now’s the time to start thinking about when—or even if—you’ll return to the office once your maternity or paternity leave is up. Do you want to consider a part-time arrangement? Or would you rather stay home full time instead? If you’re leaning toward reducing your work schedule, refer to your newly refreshed budget and calculate whether you can still cover your baby-related expenses without your full-time salary. And don’t forget to factor in one of your biggest baby costs: child care. If the basic math works, try committing to a trial run while you’re pregnant—tapping only a portion of your salary to pay your expenses—to simulate the experience of living off a lower salary.
Review your health insurance.If you and your spouse are covered by separate health insurance plans, examine each policy and decide which one would suit your baby best, based on premiums, access to doctors you trust and how much coverage you’ll get for regular pediatrician visits, medications, vaccines and hospitalizations. It may not be critical to adjust your health insurance plan before your child is born—typically, babies are automatically covered under your policy for the first 30 days of life—but it’s generally a good idea to prepare now so that when the sleepless nights take over, you won’t have to worry about this to-do in the first month of new parenthood.
Put a plan in place for child care.If you plan to return to work after your parental leave time has expired, it may be a good idea to start making arrangements for child care before your baby is born. Some new parents are fortunate enough to have family nearby who can take care of their baby during the week, but if this isn’t possible for you, start researching and comparing your options. Based on your location, day care at a center, where spots are often limited, costs an average of $11,666 annually, according to a report by the National Association of Child Care Resource & Referral Agencies. Nannies, on the other hand, can run you about $2,167 to $3,033—per month! So do your homework to decide the best fit for your growing family and what your budget can comfortably sustain while you still have enough time to adequately weigh your options.
Save for college.When your baby finally arrives, it’s officially time to start thinking about saving for … college. We know, we know. You’re still discussing how to afford those astronomical day care bills, but college tuition alone was just under $9,000 for the 2013-14 school year, according to the College Board—and that figure isn’t likely to decrease by the time your newborn turns 18. Once your baby has a Social Security number, get a jump on this major financial consideration by looking into tax-advantaged savings vehicles that you can start contributing to now. And when your kid is old enough to earn an allowance, think about transferring a portion of that piggy bank balance to the college fund, teaching the importance of saving for education early on.
Be smart about new baby buys.With so many adorable items for sale that you can’t possibly live without, it’s easy to get carried away when you have a new baby. But splurging all of the time—say, on that over-the-top jogging stroller you’ve been eyeing—can be a big-time budget-buster. So when it comes to your post-baby budget, focus on covering the key basics at first. And a word to the (financially) wise: Take advantage of hand-me-downs from family and friends when it comes to clothes, books and toys. As for safety-related items—cribs, car seats and high chairs—it’s worth the money to buy new to help ensure your baby is always secure.
Establish a plan for your estate.During the first few months of your new baby’s life, writing a will can be an especially important to-do because it can include a designation of who will raise your child should something happen to you—and it can state the manner in which your child will inherit your assets. If you don’t have a will, your possessions—and your child’s guardianship—are left to the courts, potentially making a tragic situation even worse. If you have considerable assets, this can also be the time to consider creating a trust, which will allow your estate to skip the drawn-out probate process and help ensure that your children receive your assets whenever and however you want them to be doled out.
Rebalance your budget.By your baby’s one-year mark, you should be well-versed in the practice of revisiting your spending plan often—a good money habit that should serve you well as your little one gets older. Bottom line: Just as your own expenses and priorities evolve as you age, so do your child’s. For example, your grocery bills will likely increase once your kid is older, but you’ll also no longer have to pay for diapers. And once your child starts school, your day-care costs can change significantly. So continuing to rebalance your budget as your day-to-day expenses shift will not only help protect your own financial security, but also set the right example for your kids as they grow into adults.
Get educated about your policy options.When you start the process, one of the first things you’ll need to decide is what type of policy works best for your situation. There are two main types of life insurance: term and permanent. Term life insurance gives you coverage over a set period of time, which can range from five to 30 years. The premium remains fixed, and you can generally drop your coverage at any time without incurring penalties. The trade-off is that the premiums may increase after the set term, potentially making the policy more expensive to renew. If you choose to get another term policy after the initial one has expired, you will have to undergo a new underwriting process, which also generally means an increase to your premium. Permanent insurance provides coverage over the course of your lifetime. It may include a “cash value” feature that you could potentially withdraw or borrow from. The most common type of permanent life insurance is whole life, in which your premiums stay fixed over the course of your lifetime.
Get educated about how a premium works.Your coverage is contingent upon making a regular payment, known as a premium, to the life insurance company. The cost is based on the risk assessment results of the underwriting process, which take into account such factors as your age and medical history, among others. Once your premium is determined, it can be paid monthly, quarterly, twice a year or once a year, depending on your specific policy. One thing to note is that there are usually fees associated with not paying your premium annually.
Get educated about how to choose beneficiaries.Your beneficiaries are the individuals who will receive your death benefit, or payout, should the unexpected happen. It’s up to you to decide who will get the money in your policy—and that’s no small decision. If you have dependents, such as a non-working spouse or young children, they’re the people you’ll likely want to designate as primary beneficiaries. You can also designate aging parents, or anyone else who currently relies on you for support. And if you’re taking out a policy to protect a business that you own, your business partner can be named as a beneficiary. Note that you can name more than one primary beneficiary, splitting the amount between them as you see fit. It may also be a good idea to consider naming contingent beneficiaries who will receive the payout should your primary beneficiaries pass away before you do. And you don’t necessarily have to designate a person as a beneficiary—you can also name your estate or a trust.
Get educated about how life insurance benefits work.In the event of your death, your beneficiary will need to make a claim. The insurance company will then write a check for the amount of the policy, known as a benefit, either as a lump sum or in regular payments, depending on your policy. (Generally, the more dependents and financial obligations you have, the greater the death benefit you may need.) The designated beneficiary can then use the money to cover several different types of associated expenses, which fall into two buckets: immediate costs and long-term costs. Immediate costs can include funeral expenses, estate settlement and lawyer fees, medical bills, taxes and personal debt. Long-term costs encompass ongoing expenses that impact quality of life for surviving beneficiaries, such as debt payments, child care costs or college tuition. Your beneficiary can essentially choose to use the death benefit for almost any type of expense.
Get educated about how to shop for a policy.There are two main ways to get a life insurance policy: through a local agent affiliated with an accredited insurance brokerage or through your employer. If you have the option of getting life insurance coverage through work, normally you can have the monthly premium automatically taken out of your paycheck. One thing to keep in mind is that if you switch jobs, you’ll likely have a gap in coverage until you secure a new policy, either through your new employer or independently. In the meantime, you can look into supplemental life insurance to help ensure your coverage during this transition period. Bottom line: It’s worth checking in with your benefits administrator to see if your company offers coverage, as well as to determine if you can buy additional coverage beyond just the basic to suit your needs.
Broach the topic.For some couples, this can actually be one of the hardest steps. “Maybe you’ve made some bad decisions or aren’t great with money and you’re fearful of being judged by your partner,” says Blaylock. “But marriage really is for better or worse, and it can be helpful to know how much better or worse your future partner’s financial situation is.” Try starting with some easy questions like, “What was your earliest memory regarding money?” suggests Blaylock. Or share some of your own financial mistakes. “One important thing to keep in mind is to make sure you hold your judgment,” he says. “Your future mate will most likely clam up the second they feel they are being interrogated.” When you’re comfortable with the topic of money, you’ll want to discuss some basics: What are your spending habits? How much debt do each of you have? Do either of you feel strongly about a prenup?
Decide how you'll handle money in your household.Once you have an idea of each other’s financial past, it’s time to talk about your financial future — together. Will you combine your bank accounts? Who will handle which aspects of the finances? Which joint accounts do you need to open? Research has found that more and more couples are opting to keep individual accounts in addition to joint ones. But every couple is different, and you need to decide which approach works best for both of you.
Discuss financial goals.You’ve probably talked about how many kids you want to have and your dream home, but have you discussed these hopes in terms of finances? How much do you want/need to save for a down payment on a home? (LearnVest generally suggests putting down 20% and setting aside 3% for closing costs.) To start a family? To save for your future children's college expenses? For your own retirement? Will both of you continue to work if you have kids? If all this planning sounds overwhelming, remember to prioritize your goals. At LearnVest, we advise that you focus on basic financial security (retirement, emergency savings and debt repayment) first. Then you can move on to other personal goals, like financing your kids’ college education and paying down your mortgage.
Determine how much is going out/coming in.One of the most common financial mistakes, especially among young people, is not knowing how much you earn or spend each month. Now that there are two of you, it's a good opportunity to figure out your new financial reality. Track where your money is going on Learnvest.com, where you can link up to your accounts, calculate your net worth and see how much you’re spending from month to month.
Figure out how much money needs to be in your emergency savings.LearnVest Planners typically recommend that every couple have at least six months' worth of net income (for the highest earner in the household) in their emergency savings fund. A lot of unexpected events may crop up in your lifetime together — job losses, health problems, car repairs— but if you prepare for them now with an emergency fund, they won’t derail you as much as they could.
Create a budget.Having an idea of how much money you’re going to spend each month and what you’re going to spend it on will help keep you both on the same page — and help mitigate disagreements about finances. Not sure where to start? You can create a budget for free on LearnVest.com.
Establish a five-year plan and a ten-year plan.“Planning for the future is so important, not because we want to drive expensive cars and live in huge houses, but because without goals, saving and planning can become boring,” says Blaylock. “When that happens, we may then stop saving and start spending because we think that will cure our boredom.” After you have a budget and you’ve discussed your financial goals, come up with a loose timeline of when you want to meet those goals. Where do you want to be financially in five years? Ten years? 40 years? “The plan should be flexible and can change over time,” says Blaylock. The point is to have goals set in a loose timeline, so you have a good idea of where you’re headed together—and how much you may need to contribute to get there.
Make sure you have the right insurance.“This is often the most overlooked area in all of financial planning because it deals with pretty unpleasant events,” says Blaylock. But the reality is, houses can burn down, cars can crash and all of us will face death, at some point. It’s important to be financially prepared and protected. So what insurance do you need? Health, life, disability and property (homeowner's or renter's insurance, auto insurance, and scheduled personal property) all may be important to an adequate financial plan. You may also want to consider umbrella insurance if your income or assets make you a target for a potential lawsuit, or if you own rental property. “If you’re having trouble deciding the appropriate amounts of coverage, it may be time to check in with a professional who can help,” says Blaylock.
Think about estate planning.First things first: Everyone should consider having a living will and health care POA (power of attorney). A health care POA designates the person that will oversee your medical decisions and follow your medical wishes outlined in your living will in the event that you are unable to make them for yourself, says Blaylock. After you get married, be sure to update your beneficiary forms and add a TOD (transfer on death) or POD (payable on death) designation on any individual accounts, like checking, savings and brokerage assets. These forms, in a sense, act as substitutes for a will and allow money to transfer to a beneficiary directly—without the overhead or complexities of probate. For any joint accounts, you can also consider titling the account as Joint Tenants with Rights of Survivorship, which serves the same purpose. Once you own a home and/or have children, you should consider setting up a last will and testament to plan for the transfer of your home and designate a legal guardian for your children. And finally, you may want to consult a trust and estate attorney to discuss your specific estate planning needs if you are combining significant assets. “This is a specialized field of legal practice," says Blaylock, "so working with an estate attorney can sometimes be necessary depending on the complexity of the couple’s financial situation." Specifically, if you have significant assets and live in a Community Property State and/or you are blending families, you should especially consider consulting an estate attorney about setting up a prenup and/or a trust.
Automate your financial life.Set up automatic withdrawals or direct deposit to pay yourself first for things like retirement and your emergency savings funds. Designate time once a month to discuss budgeting to help make sure your spending levels are within set limits. Then review your investments quarterly and your financial goals annually. “This gives you a chance to course-correct throughout the year if you begin to get off track,” says Blaylock.
List your financial goal(s).(Don’t stress about making this step perfect—we’ll refine it later.) What are your top three today? Buying a home? Opening an investment account? Paying off your student loans? All three? O.K., now write your goals down. Why? Because research shows that people who write down their goals are more likely to achieve them.
Figure out what your real motivation is.As this expert in positive psychology explains, the motivation to achieve your goal should be intrinsic, not extrinsic. Extrinsic motivations are reasons that are given to you whether you like them or not, whereas intrinsic motivations are ones you have for yourself. For example, “I’m going to build up my emergency fund because that’s what everyone says I should do” is extrinsic. “I’m going to build up my emergency fund so that I can quit my job to become a freelancer” is intrinsic. “I need to pay off my credit card debt because my girlfriend is yelling at me” is extrinsic. “I’m going to pay off my credit card debt so I can pop the question knowing I’m financially secure” is intrinsic. Get the idea? Good, write it down.
"Stack" your goals.Many people save for more than one money goal at once. And that’s fine! At LearnVest we recommend you work on three main goals first, though. First, you should be on track with your retirement savings. Second, you should have an emergency fund that is growing, with an eye to having at least six months of income in there. Third, you should have all your credit card debt paid off. Now, if you’re wondering how this advice for doing all this “boring” stuff jives with step number two, here’s a trick you can use: Stack your goals. By that, we mean making the “boring” goals the first step toward getting to the fun goals. For example: “Once I’ve paid off my credit card debt, I can start saving for a new car that actually runs.” Or, “When I have six months in emergency savings, then I’ll start saving for my own beautiful condo with hardwood floors.”
Make your goal specific, measurable and challenging.Huh, how do I do that, you wonder? Research has shown again and again that the best goals are clear, measurable and require you to rise to the challenge. In other words, “Get better with money” will do nothing for you, just like "lose weight" doesn't seem to move the needle for most people. But “Pay off my $9,000 in student loans by 2017” is great. You’ll know exactly when you'll achieve your goal because it involves hard numbers and a specific time frame. Also, research shows you’re less likely to give up on a goal when you can see the finish line. And, like exercise, your goal should involve a challenge, or else it can be demotivating when you reach your target too easily and too fast. One last thing: To truly be achievable, the goal needs to be possible. And, surprisingly, you should give yourself a little wiggle room. For example, a 2013 study showed that when consumers set a goal to lose “two to four” pounds instead of a hard “three pounds,” they were more likely to re-enroll in the weight loss program, despite both groups losing the same amount of weight. If you want to make financial health a long-term habit, you might consider setting goals that won’t mean utter failure if you’re off by a week or two, or by a hundred dollars. Oh, be sure to write this part of your goal down too! RELATED: I Want to Pay Off My Student Loans
Break it down.O.K., you've got a specific goal in mind. Now, how are you going to get there? A good plan will be broken down into steps and take into account contingencies. If it’s getting on track for retirement, those steps might include calling up the human resources department to open your 401(k), using a retirement calculator to decide how much you should be saving each month, having pre-tax dollars sent there every paycheck, deciding how to invest that money, etc. Also, visualize the process of trying to reach your goal, which research shows works better than just envisioning the goal. What will the day-to-day look like? For example, if you are trying to pay off your credit card debt, imagine yourself shaking your head no when the waitress asks if you would like a second round, locking your credit card in your safe box, and logging into the website for your credit card to pay off a couple hundred dollars of debt in a few weeks. Also consider different trigger experiences, and what your alternate behavior will be. For example, “If I’m invited out for after-work drinks, I will only order one glass of wine.” “If I get a sale email from Banana Republic, I will unsubscribe and delete the email.” You guessed it, write these steps down.
Evaluate your budget.Next, we're going to bake your financial goals into your real money life. You’ll want to evaluate your budget from two angles. The first is by multiplying your take-home pay by .2. Why? Because 20% is one good rule of thumb for how much money you should be devoting to your financial goals. Way more than that, and you're going on the equivalent of a financial crash diet: You could be setting yourself up for failure. Way less than that, and you may be selling yourself short and not achieving as much as fast as you could. Write down that ideal amount of money you'll devote to your goal. Also, take a quick look to see where in your current budget you might free up money. If you look at your cash flow and see that, gee, you have $500 each month that you don’t know what to do with, well, good for you. But most people might have to make some decisions, like canceling cable, saying no to a couple invitations for dinner, or grocery shopping more mindfully. (Or all three.)
Run the numbers.You now have an idea of the steps you can take and about how much money you have available to devote to your goals. If you have multiple financial goals, remember to divvy up the money you have to spend between them. Here's a good article on how to prioritize different financial goals. In the LearnVest Money Center, you can set a timeline for a goal and see how long it will take you to achieve it. For example, if you put away $200 a month, will you reach your savings goal by next year? You might find that you have to either reassess your goal in this step, or reassess how you’re spending your money—or both. But once you come to a specific plan that you like, write it down.
Automate it.Don’t rely on your unfailing willpower! Automate your progress. Consider setting up a transfer from your checking to your savings account for the amount you want to save, and have the transfer happen right after your paycheck arrives so that you barely see the money. Saving into your employer's retirement plan is another way to make savings automatic, even before the funds hit your checking account. Of course, for both steps, you should transfer only what you can afford. RELATED: How Much of My Paycheck Should I Save Each Month?
Buddy up.Research shows that doing all the above steps—coming up with a goal, writing it down and coming up with action commitments—is great. But sending those commitments to a friend (or working with a professional) can increase your odds of achieving that goal. So pick a supportive friend, tell him your financial goal, and check in once a week to share how you are doing.
Monitor your progress.Next you'll want to decide how often you’ll evaluate your progress. We recommend a quick check-in at the beginning of each day, or you might check into the Money Center to check on that particular goal once a month. And don't be hard on yourself: Celebrate the fact that you have stopped running up your credit card debt and have committed to paying it down instead of getting down on yourself for not paying it off faster. And, if you mess up, go easy on yourself! Acknowledge the hiccup, make an “if, then” plan (like we talked about in step 5), and keep going. If, after a few weeks, you realize your goal is unrealistic, it’s O.K. to re-evaluate your timeline and numbers. We’re not saying give up, but if you find that you were overly optimistic, keep calm, revise downward and carry on.
Celebrate!Once you've reached your goal, you can consider rewarding yourself for a job well done with a well-earned splurge. Treat yourself to something you like, invite friends out to celebrate with you, or reward yourself with a weekend away so you can really savor your accomplishment.
Repeat steps 1 through 11.We know you have a new goal to go after: With one success under your belt, it's easy to get in the habit of always working toward your next financial hurdle.
Keep calm.If you're having a hard time keeping a stiff upper lip, that’s understandable. But don’t go sprinting out of the front door of your office or blow up any bridges. Make sure you fully understand everything that HR or your manager is telling you. Don’t sign anything without reviewing the documents fully or consulting a lawyer if need be. Advocate for more severance if that’s an option. Gather useful contacts off of your computer and write a goodbye email to colleagues and clients, if time permits. If you have time and can do so calmly, say goodbye in person to anyone you’re on good terms with in the office. You’ll be grateful you did all these things later, when you need a recommendation or have more severance to live on while you job-hunt.
Understand why you lost your job.Everything can be a learning experience, and nothing more so than losing your job. If your whole department just got laid off, maybe the only lesson is to recognize the warning signs. But if you were let go for low performance, as difficult as it may feel to ask, get all of the painful details from your manager and HR so you can avoid a repeat at your next job. They may have valuable advice, such as, “You might do better in a corporate environment.” It’s also worth asking what you did well—not just for the confidence boost, but so you can target your job search more effectively. RELATED: How to Deal With Your Finances When Unemployed
Apply for unemployment.Applying for unemployment benefits can be a long process, so you should get started right away. To qualify, you must have worked at your job for a certain amount of time, not been fired for gross misconduct (like doing something dangerous or illegal) and be actively searching for your next job, as opposed to going to school. Find out if you qualify and how to apply.
Check on your health benefits.Losing your job can mean losing your health insurance, which can turn into a financial disaster if you let it. If you can get coverage under your spouse’s policy, make those arrangements ASAP. You could also consider COBRA, which lets you pay out of pocket for the same health benefits you received at your job, though it’s not necessarily the cheapest option. If you are confident that you understand your needs, you could use a website like ehealthinsurance to compare options. Otherwise, talk to a broker who can help you find the most affordable and appropriate policy for you. Still flummoxed? Here's a handy checklist to help you figure out what you need.
Review your budget.Examine your budget to see how your income has changed, and especially to see where you can cut back. For example, you might have to pay for health insurance coverage, but will be able to spend less on gas. And keep in mind you have a more flexible schedule, which can be an advantage. For example, some gyms will give you a discount if you only come during off-hours, during the weekday. Maybe you can save by cooking more in your free time instead of ordering takeout. The goal is to stretch your emergency fund as long as possible. (Learn how one family cut their spending by $1,000 a month after a layoff.) If the numbers just aren’t adding up, don’t rule out getting a part-time job, as it doesn’t necessarily nullify your unemployment benefits. But you'll likely want to think twice about withdrawing money out of your 401(k). You'll likely get socked with a big tax penalty and fees, which could take a big bite out of the money you have saved, not to mention leave you with a lot less for retirement.
Talk to your creditors.Your creditors might be able to work with you if you’re honest about your situation. They could renegotiate the terms of the loan or credit card, or freeze your interest rates, depending on what kind of credit it is. So give them a call and ask to speak about some options to make your payments more palatable. (Here’s how to negotiate down your credit card APR.)
Polish your LinkedIn profile and résumé.Now that you’ve shored up your finances, you can focus on your future. Update your LinkedIn profile (or create one if you don’t already have one) and your résumé with your latest skills and projects. Even if you were only at your last job for a couple months, you can add a bullet point or two about what you did. Or, in some cases, you may not want to list the job at all, if your tenure was short. Here are six big résumé flaws—and how to hide them.
Spend some time thinking about what you want to do next.Before you start job hunting, you should have a clear idea of your skills, priorities, goals, passions and values, and take some time to write them down. Also think about what you liked best about your last few jobs, and what you didn’t. If you’re completely confused about where to go from here, use this trick from author and career expert Roman Krznaric: Email ten friends from different walks of life, tell them what your skills and passions are, and ask them to suggest two or three jobs that you might excel at. You may get some surprising ideas to pursue. RELATED: How to (and How Not to) Brand Yourself When Unemployed
Start networking.You might be embarrassed by your situation, but it’s time to tamp down your pride and let everyone know you’re job searching, including your professional contacts, former classmates and professors, friends, LinkedIn—even your hairdresser. Studies have shown that weaker social ties—as opposed to your close friends—will turn up more job leads. Tell them what you’ve done so far in your career, what your skills are and what you would like to do next. Specific is good—if you are too vague (“I want to do a job where I can write”), they won’t know where to start. If you are very specific (“I want to write grant proposals for a nonprofit based in or around the Boston area, one that works with children, if possible”), you’ll get more useful leads. And don’t be afraid of ruling out good jobs by being too specific, you’ll probably get answers like, “I know someone who works at a nonprofit that helps animals, would you be interested in that?” Also get out there into the world among different circles of people. Attend networking events, volunteer at a new nonprofit—anywhere you might meet someone whose sister’s husband works at that company that needs someone just like you.
Come up with projects and activities to work on.You can only spend so much time every day job job-hunting. (FYI: If you’re filling eight hours sending out résumés, you’re casting way too wide of a net.) So find something worthwhile to keep yourself busy, feel useful and improve your value to a potential employer. It could be volunteering in a way that uses your job skills, like helping publicize a charity event if you work in PR, or visiting the local nursing home to give the ladies a new 'do if you’re a hairdresser. You could also work on building a personal website to showcase your portfolio, making some serious progress on your novel, or taking some free online classes on an interesting subject. One project should be getting in an hour of exercise every day, like you’ve been promising yourself you would do when you had more time. Exercise is healthy for the body and the mind, which is especially important right now. (It’s even shown to lead to a higher salary.)
Make a schedule.Losing your job can be hard psychologically, but you know what’s even more depressing? Realizing it’s 5 p.m. on a Tuesday, you’re still in sweatpants, and you’ve spent three hours perusing cat Tumblrs. So create a schedule for yourself and stick to it. Set an alarm so you can greet the day and answer any important emails that pop into your inbox. Hit the gym, get dressed in a nice outfit, leave the house, schedule time to work on the aforementioned projects, and meet up with friends and contacts for coffee. You’ll feel more capable, engaged and motivated, which will come through to potential employers. Remember, unemployment is a temporary state, not your fate, and you will be working again. RELATED: Unemployed? 9 Dos and Don'ts of Getting Laid Off
- How long is the lease term?
- When is the rent due? Do you have a grace period of a few days, or will your landlord come knocking at 9 a.m. on the first of each month?
- Is there a penalty for not paying rent on time?
- Which, if any, utilities are included in the rent?
- Can you sublet the apartment if you go out of town?
- What's the penalty if you want to break the lease early?
- How much money do you have to pay upfront?
- What are the rules for getting your security deposit back?
- Are pets allowed?
- Are small changes to the apartment (painting, hanging pictures) allowed?
- The apartment was vacant for a few months before you found it
- It's winter, when fewer people are moving and overall demand is lower
- You're willing to throw down several months of rent (think six months) at once
- You're open to signing a lease that is longer than the typical 12 months
- You can convince your landlords that you're a reliable renter who's likely to stay, saving them the trouble of finding someone new in a few months
- It was considered “frivolous.” This term can vary by bureau, but in general, credit bureaus might label your dispute as frivolous if you dispute too many items in one letter, if you don’t have proof to support your claim, if you use hardship as the basis for your dispute or if you use the same reasons over and over again when trying to get credit report errors removed. If the credit bureau refuses to investigate for this reason, but you don’t consider it to be frivolous, you can try to dispute again.
- It wasn’t deemed to be erroneous. You can’t remove correct information from your credit report, even if you'd like to do so. You can, however, take steps to rebuild your credit, and subsequently boost your credit score.
- The credit bureau says that it’s not an error, but you have proof otherwise. If this is the case, you can either try to dispute it again or go directly to the furnisher of the line of credit to perform what is called a "direct dispute." For instance, if the error is a misreported credit limit, you'd submit a new dispute letter to the credit card issuer, using the same disputing process outlined above. Be sure to include your full name and the account number associated with the company in your letter.
Know how much money you're working with.Before you can figure out a budget for your new, independent lifestyle, you need to know how much money you'll have to use each month. If you have a job lined up, congrats! Look at your most recent pay stub to figure out your take-home pay, which is the amount you bring home after taxes. If you haven't yet received your first paycheck, make an estimate by figuring out your tax bracket or using a paycheck calculator. When in doubt, round down, so you're not overestimating. If you don't have a job lined up yet (like if you're trying out a new city to search for jobs), you can rejigger your budget and potentially move to a nicer place once you've found your dream gig. In the meantime, job searches take a while—around 7 months, on average, if you're unemployed. Instead of creating a budget based on how much you think or hope you'll make, calculate based on now. If you've saved a cushion to give yourself a six-month runway, for example, then divide your savings by six so you know how much you have each month as your personal "allowance." If you're receiving financial help from your family, know how much you can reliably count on each month. The last thing you want is to make a financial commitment like signing a lease ... and only realize later that you bit off more than you can chew.
Figure out how much you can afford in rent.Now that you've figured out how much income you have coming in (or how much personal "allowance" you can afford per month), it's time to set up a budget in the LearnVest Money Center. To figure out your maximum rent, we'll work backwards from the 50/20/30 rule, which says you spend no more than 50% of your take-home pay (or, in this case, your monthly "allowance") on essential expenses. Essential expenses include rent, groceries, utilities and transportation. After that, you should dedicate 20% of your take-home pay to your financial priorities like your savings, retirement contributions and debt payments. You can spend the remaining 30% on lifestyle expenses, which is fun stuff like dinners out, shopping or a gym membership. Add up your estimated monthly costs for each of these: Transportation: This includes your car payment and gas, or the monthly cost of public transportation. (If you need help with your estimations, try our gas cost calculator.) Utilities: You might estimate based on prior living arrangements. If you don't have any experience paying utilities, a good rule of thumb is to estimate $75-$200 a month for an entire apartment, according to My First Apartment. Once you find a place you like, you can ask the current tenants about their monthly costs. Groceries: Your grocery costs will vary depending on your tastes and whether you like to cook, but the USDA says that a middle-of-the-road figure is $50 per week on groceries for a single person. Now add up those expenses. Next, you'll calculate 50% of your take-home pay or monthly allowance. Subtract your total expenses from that 50% number. The amount you have leftover is the maximum you can spend on rent.
Get to know different neighborhoods.Moving to an unfamiliar neighborhood? Check out the area at several times of day, so you know you'll feel comfortable walking in the mornings, after work and late at night. Feel free to spark a conversation with some locals or chat with shop owners to get a sense of whether this is an area you'd like to live. If you don't know which neighborhoods are the safest (or least safe), you can check out a crime map at spotcrime.com. Besides just making sure you feel safe, you'll want to ensure that you'll enjoy living in this neighborhood, too. Are there cafes or places to go in the evening? How will the location affect your commute? Use Google Maps to estimate how long your commute would be if you lived here. And walking the streets on a Saturday night can tell you very quickly whether you'll find the nightlife to your liking.
Find a roommate—or two!One of the easiest ways to save money on rent is to split the bill. Reach out on social media to see if any acquaintances or friends-of-friends are currently looking for a place, or a roommate. You can also use a site like Craigslist. Joining up with a preexisting group of roommates can help you cut your costs, since most apartments listed under roommate-shares are already furnished. Make sure you vet any strangers very carefully and feel absolutely comfortable with them before agreeing to live together. You might even ask for personal references if you have any doubts. Discuss your living styles to see if you'd be a good fit. Talk out who will pay which expenses, and whether you'll change the rent according to room size. Once you have ironed out any issues, consider writing up a semi-formal roommate agreement, so you know where each of you stands. RELATED: 5 Questions to Ask a Potential Roommate
Know what it takes to get a lease.Are you prepared to sign a lease? If you are moving to a new city without a job, you might not be prepared to sign a year-long commitment. Some landlords will run a credit check before taking you on, so if you're unemployed or don't have strong credit from the get-go, you might need a co-signer. Additionally, in some cities, like New York, renters are the ones who pay a fee to the real estate broker, not the landlord. Find out how it works in your city, and ask early on how much the broker's fee will be. If you're not ready to sign a full-on lease, subletting is one option, though sublets are often more expensive because they're short-term.
Read your lease or sublease.If you choose to sublet, get something in writing and review your sublease carefully. If you go for a regular lease, make sure that you and your roommates read it thoroughly. Be sure to ask the landlord or broker about any points that seem unclear. Some important questions include:
Negotiate your rent.The most important thing to do before you attempt to negotiate is research. Ask around to figure out what other people in your building, block and neighborhood are paying. Peruse Craigslist and other apartment listings for comparisons. There's no guarantee that trying to negotiate your rent with your landlord will yield a lower payment, particularly if you're moving to an area where demand is high, but it's worth a shot. A few factors can put the odds in your favor:
Document the state of the apartment.When you move in, snap photos of your apartment in its move-in state. Make note of loose floorboards, dents in the walls and other flaws. When you move out, you don't want to get charged for damage you didn't cause.
Get renter's insurance.Renter's insurance can protect you against unforeseen disasters, like a fire, wind storm, electrical surge or certain kinds of water damage. While your landlord's insurance will cover fixing your actual building, it won't cover any items of yours that get ruined, or your living costs if you have to stay elsewhere during repairs. Renter's insurance will also cover you if you experience a break-in or vandalism. It even includes liability coverage in case someone gets hurt while in your home, or if you accidentally destroy someone else's property, like if you smash a neighbor's window while playing ball in the street with your nephew. You can often add renter's insurance on top of your auto insurance policy, or buy it directly from a broker. You can read more on renter's insurance here.
Review your credit report.You're entitled to receive one free credit report every 12 months from each of the three major credit bureaus: Equifax, Experian and TransUnion. If you’ve never examined your reports before, you can pull all three at AnnualCreditReport.com, which is the only government-approved site that provides reports for free. (We suggest that you only pull one every four months, so you can regularly check up on your credit throughout the year for free.) In some cases, you may not find the error on all three credit reports, so inspect each report carefully to find out if this is the case. You only need to dispute the error with the bureau(s) reporting the incorrect information. In addition, if you have a credit line from a small company, such as a credit union, it’s important to keep in mind that it may not report to all three bureaus. Before you assume that a bureau is incorrectly reporting your credit line, check with your creditor to see which bureau it reports to.
Gather documentation supporting your dispute.In order to successfully dispute an error with the credit bureaus, you’ll need proper documentation that supports your claim. For instance, if your credit card limit is being incorrectly reported, get proof that your limit is different than the one referenced on your report. Circle or highlight the error on your credit report(s), and make copies of your supporting documentation to send with your dispute letter.
Write your dispute letter.Write a letter to the bureaus reporting the mistake on your credit report. Not a wordsmith? The FTC has a great sample dispute letter that you can use as a model.
Make copies of everything.You don’t want to have to repeat the first three steps if the dispute gets lost in the mail, so make copies of the dispute letter you’ve written, the documents you’re using as proof and the page(s) of your credit report with the errors clearly marked. File these documents in a safe place, so you can easily find them later.
Send your letter and enclosures via certified mail.Although the bureaus accept online disputes, experts recommend disputing errors via postal mail, so you have a paper trail if the problem persists or you need to show a record of your efforts in court. Send your letter, the marked-up credit report and your supporting documentation via certified mail, and request a return receipt, so you'll have a record that the credit bureau received the package.
Follow up in 30 days.After the post office notifies you that the credit bureau has received your dispute, set up a calendar reminder to follow up with the bureau if you haven't heard back after 30 days. Credit bureaus are required by law to investigate your claim, and they will typically do so within that timeframe. The credit bureau should also forward all of the relevant data that you provide about the inaccuracy to the company or organization that provided the information, such as your credit card issuer or a mortgage lender. The information provider will then investigate, and report back to the credit bureau. If your dispute is successful, the company is required to notify all three credit bureaus, so that they can correct the information in your file. The credit bureau will then have to report the results back to you, and include a free copy of your credit report if there was a change made due to the investigation.
Take appropriate steps if the dispute is unsuccessful.If your dispute doesn’t work, it may be due to one of the following reasons:
Monitor your account for future errors.Once your reports are finally free of errors, make sure that all of your work doesn’t go to waste! Continually monitor your reports to ensure that they remain error-free by obtaining one free report every four months. It's important to stay vigilant about disputing any incorrect information on your credit report because it can have an impact on your credit score and financial health. Good luck!
Gather your paperwork.Here's a short list of what you need before you can begin your taxes:
- Your Social Security number, as well as those of your spouse and dependents
- Your bank account and routing numbers
- A list of taxes you've paid so far this year, including property taxes, state and local taxes and any estimated taxes that you've made
- Income tax forms, such as W-2s, 1099s, Schedule K-1s and any other records showing income
- IRA contribution or distribution information
- Payments you've made toward education, such as tuition or student loan interest paid
- Child-care costs detailed in canceled checks or invoices, as well as the child-care provider's name, address and tax ID or Social Security number
- Home mortgage interest paid and home improvement expenses
- Expenses related to a job search or moving
- A list of charitable donations
- Records of medical expenses
Decide if you need an accountant.On the one hand, you could save money by not paying an accountant. But if you miss a crucial credit or deduction, you could end up paying thousands more than necessary. Some people can actually knock their taxes out in an afternoon with good tax-filing software, plus the help of a great resource like, say, our free Ace Your Taxes Bootcamp and helpful tax articles. Here are some situations in which you might consider getting an accountant:
- You're itemizing your deductions
- If you're part of a business partnership, own your own business, are self-employed or freelance
- You've undergone some big life changes in the past year (or plan to this year)—like having a child or selling a home
- You bought or sold a lot of investments in the past year
- You worked or lived abroad
Pick tax-filing software.If you aren't using an accountant, we still recommend signing up for tax-filing software. Yes, it costs money, but much less than an accountant. And it really makes tax filing easier and more intuitive. Here are some popular tax-filing software options:
Decide your filing status.Your filing status is crucial to know because it determines which (and how many) tax breaks you can take. It's determined by your marital status, whether you have dependents and some other factors. These are the five types:
- Single individual (unmarried with no dependents)
- Married person filing jointly (married, filing taxes together)
- Married person filing separately (married, but filing separate tax returns)
- Head of household (unmarried, have cared for a dependent more than half the year and paid more than half the cost of maintaining a home)
- Qualifying widow(er) with dependent child (used in the two years after your spouse dies, as long as you did not remarry and you have a dependent child)
Decide if you're itemizing your taxes.Your final tax bill is largely determined by your deduction(s). A deduction subtracts from your income, so that you aren't taxed on your entire income, and hence get a smaller tax bill. Here's a simplified example: If you have an income of $60,000 and you have a deduction of $5,000, then you pay taxes on just $55,000 of income. If you were in the 15% tax bracket, that deduction of $5,000 could save you about $750. As a taxpayer, you have a choice between taking a standard deduction or listing all of your individual deductions and taking the sum total as your deduction. The latter option is called itemizing. It's more work and requires more math and documentation, but it could end up saving you a lot of money. The standard deduction for the 2012 tax year is $5,950 for individuals, $11,900 for married filing jointly or qualifying widowers with a dependent child, and $8,700 for those taking the head-of-household status. If your itemized deductions add up to more than your standard deduction, you should itemize. As a rule of thumb, if you are paying interest on a mortgage, you have medical expenses that are more than 7.5% of your income, you pay a lot in state and local taxes or you have a lot of self-employed or small business expenses, it would probably be a good idea to itemize. And, yup, we have a quiz that tells you whether you should itemize.
Get all of your exemptions.Exemptions work in a similar way to deductions by reducing the amount of taxable income. For each exemption that you take for 2012, you can deduct $3,800 from your gross income to arrive at your taxable income. If you fall in the 10% tax bracket, that could translate to $380 less in taxes. You are allowed to take exemptions for:
- Yourself (“personal” exemption)
- Your spouse
- Each dependent
Get all of your credits.Unlike deductions and exemptions, which lower the amount of income you are taxed on, credits directly reduce the amount of taxes you owe. So if you receive a $1,000 credit, that means you will pay $1,000 less in taxes. You could claim a credit if you:
- Have a low income
- Made energy-efficient improvements to your home
- Bought an electric, plug-in car
- Are paying for college for yourself, a child or a spouse
- You paid for care for your child
If you'll miss the deadline, ask for an extension.The deadline for filing in 2013 for the 2012 tax year is April 15th. You can get extra time to file without filing for an extension if you are:
- Living outside the United States. Read more.
- Serving in a combat zone or a qualified hazardous duty area. Read more.
- Your Social Security number
- Your driver's license (if any)
- Your 2012 W-2 forms and other records of money earned
- If you are a dependent student, your parents' 2012 Federal Income Tax Return
- If you are not a dependent student, your (and, if married, your spouse's) 2012 Federal Income Tax Return
- IRS 1040, 1040A or 1040 EZ; a foreign tax return; or a tax return for Puerto Rico, Guam, American Samoa, the U.S. Virgin Islands, the Marshall Islands, the Federal States of Micronesia or Palau
- Your 2012 untaxed income records
- Your current bank statements
- Your current business and investment mortgage information; business and farm records; stock, bond and other investment records
- Your alien registration or permanent resident card (if you are not a U.S. citizen)
- Are they federal or private? Try to cover the remaining balance of your college education with federal loans, which come with low interest rates, and officers can work with you if you have a low income after graduation. (More on why federal loans are better than private loans.) Only after that—and only if you have additional tuition not yet paid for—should you turn to private loans. (Loans that originate with Sallie Mae are considered private, although Sallie Mae can also service federal loans.)
- What is the interest rate? The lower the interest rate, the better.
- Are the federal loans subsidized? This means that the government will pay the interest on them until you graduate, saving you money.
- Is the interest rate variable or fixed? A variable rate might be lower now, but it could pop up to a higher percentage by the time you graduate.
- the name of each credit card
- your APR for every credit card
- how long you've been making on-time payments
Find out your deadline(s).The FAFSA application season to apply for the academic year, starting in the fall, begins on January 1st. Deadlines for state aid vary from state to state--the first deadline is February 15th for Connecticut, while others are in March, April or May. Some states have no deadline at all. You should check the deadline for the state in which you are hoping to attend school or where you currently live. If you missed the state deadline, you should still fill out the FAFSA because federal aid is still available--you can apply for it at any time during the academic year.
If you're 24 and under, get your parents on board with the process.If you're applying for undergraduate aid and you're 24 or younger, you have to work with your parents to fill out the form, even if you won't receive financial help from them. Graduate students don't need parents’ info, even if they are under the age of 24.
Do your taxes early.The Department of Education uses your family's tax information to determine your eligibility for aid, and providing your most up-to-date tax information makes the process much easier and faster. As a bonus, three weeks after you electronically file your taxes, you can transfer the information electronically right from the IRS onto the FAFSA form at the Department of Education's website. (This only applies to parents who file jointly or single parents. Unfortunately, you cannot transfer married, filing separately tax information over electronically yet.) RELATED: You can find everything you need to know about doing your taxes in the Knowledge Center and our Ace Your Taxes Bootcamp.
If, however, a deadline is coming up, and you or your parents haven't gotten around to filing those taxes, you can still apply. While it will take more time, you can use last year's tax information with appropriate changes for this year. For example, if your mom got a raise or dropped out of the workforce, when she completes her taxes, you can go back and update that information on the FAFSA.
Gather your documents.You'll need this information on hand when you apply:
Fill out the form online.You can do that on the FAFSA website.
Contact your school(s) if you have a special financial situation.The financial aid officers at colleges can use some professional judgment to interpret financials when handing out aid. If they see something that doesn't make sense--like rent that is too high for your family's income--they could award you less money. So contact the financial aid office at your college(s) of choice to let them know if your family's income changed significantly from last year, you have high medical expenses, you are receiving subsidized housing aid or if there is anything else that could affect your eligibility for aid.
Review and understand your options.On or around April 1st, you will receive an acceptance letter from colleges and universities, which will include the financial aid package that's available to you. (It may include the CFPB's suggested award letter or their own form.) Some options you might have are grants, scholarships and federal loans. If you're confused about anything, ask the financial aid office questions. For example: How many years will a specific scholarship be available—just freshman year or all four years? Will you have to reapply each year?
Get more free money.If you aren't eligible for a free ride to your college(s) of choice, find more money in the form of scholarships and grants. There are several websites that make searching easy, including FastWeb, Scholarships.com, FindTuition.com, ScholarshipExperts.com and Sallie Mae’s The College Answer.
Compare loan options.If you've maxed out your scholarship and grant options, and your parents aren't contributing enough to cover the rest, carefully compare the financial implications of the loans you're offered:
Collect offers that other companies mail to you.Credit card companies aren't as free and loose as they were before the 2008 recession when it comes to sending out card offers, but you could still get some good solicitations in the mail for cards with lower rates and 0% introductory offers. If you do, save them because they could help make your case later.
Know your rates.Look for your APR on all of your credit card statements. It's not easy to find, but trust us, it's there. Write down:
Know your credit.Your credit score helps to determine what kind of APR is possible for you. You can get a ballpark estimate for free without dinging your credit through CreditKarma.com. But if it's been more than three months since you've pulled a credit report, we suggest you do so now--if you have erroneous or bad marks on your credit report, calling to ask for a lower interest rate could call attention to the mistakes, and your credit card company could actually raise your interest rate. Here's how to get your credit report. Once you have access to it, promptly dispute any errors and have them taken care of before proceeding with any discussions about lowering your APR.
Check out the competition.Head over to bankrate.com, creditcard.com, credit.com and lowcards.com to look at what kind of APR you could get from competing credit card companies. That credit score that you pulled above comes in handy here because you'll see offers that are only available to individuals with excellent credit. You can also find the average current credit card APR listed on the right-hand side of Bankrate.com. This will give you an idea of whether it's even reasonable to expect a lower interest rate. (Given that the average "low interest" credit card rate as of this writing is 11%, someone with an APR of 9% already has a great rate. Sorry, Charlie, that's what you get.) After collecting this info, along with any paper offers that you receive in the mail, come up with a target rate that you would like to get.
Make the call.Flip your card over, and dial the number on the back. Ask for the "credit account specialist," which should help put you in touch with someone who has more power to help you. Be polite yet firm, and ask open-ended questions instead of any that can be easily answered with a "no." Case in point: "Do you think that you can lower my interest rate?" Consider using this script: "Hi, my name is _____. I've been a good customer of (current credit card company) for (number of years), and I make my payments on time, but my APR is too high. I have offers of (x) from (competing credit card company A), and (y) from (competing credit card company B). I've had a good experience with you, but I'm considering switching. I would like to have my APR lowered." [Note: Ramit Sethi has also gotten good reviews for the script included in his book, which is also available via this $1.99 iPhone app.] If they offer you just a point lower, but don't get you to your target rate, say, "Can you do any better?" If it's the best that they can do, move on to the next step.
Ask to speak with a supervisor.If step 5 doesn't work, don't take it personally. Credit card companies make more money in interest if your APR is higher, so you need to work hard to convince the right person that you should have a lower interest rate. Politely ask to speak to "someone who could help me with this" or "your supervisor." If the representative says a supervisor isn't available or they can't transfer you, say, "I would like to have your name and your identification number, so I know who I'm speaking with." This communicates that you are not the kind of customer who gives up easily, and makes them feel accountable for giving you a satisfactory answer. (Also, if you have this information, you can call back later and report your dissatisfaction with how that particular representative handled your account.) Then ask again to speak with the supervisor, stating that you'd prefer to speak to that person now instead of calling back. Once you have the supervisor on the line, repeat the script in Step 5. If this still doesn't get you more than a point lower, move on to step 7.
Ask to speak to someone in the retention department.The job of the retention department is to keep you as a customer. Remember: You probably have a lot of juicy offers in your hand right now, so you could bolt at any time if they can't help you. With this knowledge, they'll be incentivized to make you happy. So repeat the script in step 5. But the difference here is that you're not merely "considering" switching--you probably will switch, unless they give you a reason to stay. RELATED: 5 Surprising Things You Should Negotiate
Call back in a week.If none of the above works, all is not lost. If you call back after a few days, you may get another representative who is better able to help you.
Transfer to another card.If that still doesn't work, and you can get a better interest rate elsewhere, take it! If you can get a balance transfer to a card with a 0% introductory rate, that's ideal--but only if you can pay off your debt before the introductory rate expires because the interest rate could jump to a higher level than what you have now. If you're worried about paying it off within a set amount of time, you could also go for a credit card that will guarantee you a low rate "for the life of the balance transfer." Additionally, watch out for balance transfer fees. While some companies waive such fees, others charge anything from a flat fee (such as $75 per card transferred) to a percentage, like 3% of the amount you're moving. If you're going to pay off your credit card within a few months, the savings you'd reap from the lower APR might be lower than what you'd pay to make the transfer. Once you've determined that a transfer will save you money, and you know all of the terms of the transfer, go ahead and switch to a card with a lower interest rate that's clearly established in the contract. And make sure to read all of the fine print before signing. RELATED: 0% Credit Card Offers Gone Wrong: 5 Devastating Mistakes to Avoid
Consider a forbearance plan and/or a debt management plan (A.K.A. credit counseling).This option is only for those who are genuinely having trouble making minimum payments, and who have a large amount of credit card debt and/or other consumer debt relative to their income. The debt management company will work with the credit card companies to help negotiate lower interest rates, so you can pay off your debt--and possibly streamline it into one monthly payment. But there are big downsides: Your credit card company could report that you're in this plan to the bureaus, lowering your credit score. And you might have to close your account while you pay it off. So don't lie and say that you're in financial distress when you aren't. If you are in serious financial trouble because of a job loss, divorce or high medical bills, it may be worth it to talk to someone at the National Foundation for Credit Counseling (NFCC.org). They have highly trained counselors who can guide you through your options.
Determine how much home you can afford.As a general rule, try not to shop for a house that's more than 2.5 times your annual salary. So if you make $100,000 per year, that $275,000 house may not be the right fit for you. Next look at how much you have saved for a down payment, which is the portion of the cost of the home you aren't borrowing. Do you have 20% or more socked away for a house of your target price? (While most lenders only require that a borrower put down 3%, they prefer that an applicant borrow no more than 80% of the cost of the house--and that's a good idea for your finances, too.) If you can't pay that much, you may still qualify for a mortgage, but you might be considered a high-risk borrower, which means that you will probably pay a higher interest rate. Keep in mind that if the housing market dips, and your mortgage goes under water, the fact that you have so little equity in the house would give you little to no cushion to absorb any loss that you might incur if you had to move. Finally, when considering how much house you can afford, don't forget to factor in homeowner's association fees, property taxes and homeowner's insurance--all of which could turn a $2,000 mortgage into a $3,500 monthly expense. Overall, you'll want your mortgage payment, including taxes and insurance, to be no more than 28% of your income. Additionally, you can have a realtor give you the expected utilities for a home that you're interested in (these are sometimes made available by the current owner and posted by their realtor in the MLS system) or check county records online to see what property tax rates are in the area.
Check your credit score and credit report.When you apply for a mortgage, your lender will need to see evidence that you're a reliable borrower. If you're planning to apply for a mortgage in the near future, you probably won't have time to improve your credit score or credit report, but you'll want to make sure that there aren't any errors. A score over 720 is considered strong; under 660 is looked upon as weak, which may mean that you'll have to pay a higher interest rate. (If you do have time to improve your credit score, use our checklist to help you.) You can review your score once a year from each of the three credit reporting agencies using Credit Karma. To get your credit report, use our checklist.
Assemble your financial documents and your down payment.Be prepared to "undress" financially. The bank will look at your previous financial records, so you'll want to get them in order. Lenders almost always require applicants to:
- Verify income, which you can usually do by presenting recent pay stubs--or tax returns, if you're self-employed.
- Show how much cash money you have available to spend. Post-recession, lenders are extremely cautious about liquidity, so it's not unusual for a lender to require that you have several months' worth of mortgage payments in the bank. Your bank statements can serve as proof of your liquid assets.
- Disclose other assets you own (real estate, investment accounts, cars, etc.) and all of your debts, including personal loans, credit cards and student loans.
Consider whether you need a broker.A mortgage broker's job is to act as an intermediary for you and a lender--a broker will help you figure out what types of mortgages you qualify for, and who offers them. A broker's chief advantage is insider knowledge of the industry, plus his relationship to lenders. If a broker brings a lender enough business, that lender might be inclined to help him (and you!) to the best of its abilities. However, since brokers are usually paid by lenders, the lender might increase your interest rate to accommodate that extra cost. A 2009 study found that buyers who work with a broker pay an average of $300 to $425 more in fees than borrowers who did not work with brokers. If you have the time and the patience to approach lenders yourself, working without a broker is usually the more affordable option. On the other hand, when you're looking at a $200,000 or $300,000 purchase, it might be worth it to hire a broker who can hunt down the best loan. For instance, brokers may know of specific loan programs that could help you, such as those targeted specifically to teachers, veterans or physicians.
Look for a lender with a reputation for good customer service and timely mortgage closings.Closing your mortgage on time is imperative. If you've promised the seller that you'll move in by a certain date, and your mortgage hasn't closed, you may owe penalties--and you could end up without a place to live if you've already moved out of your current residence. For this reason, when you look for a lender, you'll want to inquire around. If you're already working with a realtor, ask for a recommendation. Also speak to friends and family who've bought homes recently for suggestions. The next step is to make calls directly to lenders and to your local bank. For both lenders and banks, make your calls in one fell swoop--rates change daily, so calling different lenders on different days may not give you an accurate idea of comparative rates. When you contact a lender, don't offer up your Social Security number--instead, give your credit score and income, and ask for a quote. This quote won't be exact, since the lender will revise it once they have more information. To make the comparison easier, ask for the rates on one specific type of mortgage, such as the common 30-year fixed. And keep in mind that major banks aren't the only institutions that can grant mortgages: Credit and labor unions sometimes also offer mortgages, and if you qualify, there are special arrangements for military veterans. Your local bank may also serve as a good resource for a mortgage loan: If you have excellent credit, the bank may lend you the money and hold the loan "in house," meaning that they will act as both broker and lender. The bank may also make the loan to you initially, and then sell your loan to a larger bank or mortgage lender. This is common, but remember that the terms of your original loan will still be in place--after all, a loan is a contract, and whoever buys the contract is still bound to honor it. And make sure to exhaust your options before choosing a lender. While it's favorable to find a lender that can offer a low interest rate, it's crucial to find a trustworthy lender with a good reputation: If you stumble across a lender with unbelievably good interest rates, they probably are just that--unbelievable.
Choose the mortgage that's right for you.Mortgages aren't one-size-fits-all. The payment plans vary by interest rate and by duration--the most popular plans offer a fixed rate (the interest rate will always be the same) for 15, 20 or 30 years. The other option is an adjustable rate, which means that the interest rate will change each year. Loans can be fixed, adjustable or a combination of the two. (Read more about types of mortgages in our 101 story.) An adjustable rate mortgage, in which the interest rate changes at preset intervals to reflect the current market, may be ideal if:
- You are primarily looking for low interest rates in the short term
- You don't intend to stay in the home long enough for rates to rise (say, if you're planning to renovate and flip a house)
- Interest rates are rising
- You're counting on a steady, predictable payment
- You plan to stay in the home for a long time
- You expect to sell the home before the rate becomes adjustable
- You plan to refinance or have your loan re-evaluated for a potentially better rate before the rate becomes adjustable
Get preapproved.In preapproval, a reputable mortgage lender will agree to give you a mortgage loan for a specified amount, but you won't make a commitment to buy a specific property. Whether or not the preapproval will also "lock in" your rate--give you the same interest rate in your actual mortgage as in your preapproval letter--depends on the lender and whether rates are rising. If rates are rising, you may want to lock in your rate. If rates are going down or have been low and don't show much sign of movement, it may not matter. Many borrowers decide not to lock in their rate since they don't know how long it will take to find a home, and then have their offer accepted. If you want to lock in your rate for a longer than normal period (i.e. 60 days instead of 30 days), it may cost you more in points or in a slightly higher interest rate. You'll fill out a full mortgage application, which will ask you about your comprehensive financial history. You'll also usually pay an application fee, so don't take this step unless you're truly ready to start shopping for a home. In some cases, you won't even need to meet with your lender to submit the application--they'll let you send it via email. Preapproval used to be less common, but it's now expected that you'll get preapproved before you even start house-hunting. Not only does it improve your chances of getting the seller to take your offer seriously, but it will make the final mortgage process move more quickly once you've agreed to a price. There are two caveats: First, just because you are pre-approved for a certain amount of debt doesn't mean that you should necessarily borrow that much. It's a good rule of thumb to knock 20% off whatever the approved amount is, and use that as the ceiling for your potential loan. Second, pre-approval letters typically only last for 90 days, so it's not something that you want to do too early in the process. You can get the letter re-validated if your hunt takes longer than you anticipated, but remember that you're working against the clock. If you get your actual mortgage after the initial 90 days, your lender may require you to re-verify the information that you provided to confirm that your financial situation hasn't changed.
Ask for an estimate of closing costs.Once you have signed a contract for the purchase of your home, ask the lender for a "good faith estimate" (you can review this here). Your lender will estimate how much money you'll need for closing costs, which are the extra charges and fees you'll be asked to pay when you finally become the owner of the house. Closing costs can include pointsPrepaid interest in the form of an upfront fee imposed by a lender (they work out to about 1% of the loan amount), taxes, title insuranceAn insurance policy that protects your ownership rights to the property should someone else try to claim ownership and try to buy, sell or otherwise profit from it., financing costsFees paid to the lender for the use of their money. and more (a commonly missed charge, for example, is "fuel adjustment" or the price for the heating fuel that's already in the house when you buy). When the final form is presented to you, your lender or broker is required to show you which numbers cannot change and which are subject to a 10% variation. You'll be required to pay all of the charges whether or not they vary, so start saving up as soon as possible. In some instances, a motivated seller will offer to pay your closing costs just to get the deal done. Although this may seem like a good thing, it may mean that they are less willing to budge on the sale price and you're really just amortizing the cost into your 30-year note.
Consider what you'll do if you get rejected.So let's say that you've done your research, figured out how much you can afford, decided whether you need a broker, found a trustworthy lender, chosen the mortgage structure that's best for you and submitted your paperwork ... but the lender says, "not so fast!" Even if you've done everything right, it doesn't necessarily mean that you'll get the mortgage you want. It's not very common to get rejected outright--if you do, it's most likely because of a problem with your credit report, and you'll be entitled to review it. More commonly, you'll be approved for a smaller mortgage than the one you applied for, which means that you'll need to either rethink the house you had intended to buy and bid on something smaller or delay buying a house until you have more money--and need only a smaller mortgage to make up the difference.
- You can cash out some of the benefits before the policy holder dies, like if you are terminally ill and want to buy a home for your children, your retirement income isn't quite enough, you want to pay tuition for your child's college or you just want to make a large investment. (We're not saying you should, just that it's possible.)
- You can take out a loan against the value of the benefit, which is simpler and easier than a loan from the bank. If you repay the loan, your cash benefit stays the same. If not, the benefit will be reduced. For example, if you want to take out a $30,000 loan to buy property, you could do so from your life insurance, then pay back the value of the loan over time. But if you don't pay it back, the value of the benefit would be reduced by $30,000.
- You can stop paying premiums for a period of time and keep the benefit, as long as you have enough "cash value" to cover the premiums for a while. You don't have to make up the missed premiums; you'll just end up reducing the cash value and therefore the total death benefit.
- Because this type of policy is an investment, the value of it could increase over time, just like a retirement account could. And the increasing value is tax-deferred, meaning you aren't paying taxes on the gains you are making. This means that if you aren't very good at regularly saving for big investment goals such as college or retirement, you could use this as a sort of forced savings plan for those types of goals since you have to make a monthly payment. Each premium you pay partially covers the cost of the insurance and partially builds up the "cash value" of the policy.
- Whole Life: The simplest and most common type of permanent insurance, your premiums stay the same your whole life, and the value of the benefit upon death is guaranteed; you also build up cash value above and beyond the actual cost of insurance, which then earns dividends or interest.
- Variable Life: You invest your premiums in sub-accounts comprised of stocks or bonds, hoping to get a higher return or payout.
- Universal Life: You can vary the amount of your premium payments, like dropping them if you are OK with the value of the benefit growing more slowly, or increasing them if you can afford to invest more. Alhough, if you drop your payments too low, the value of the cash benefit could be reduced.
- Variable-Universal Life: A mix of the above two types, premium payments are variable, and you invest them in stock and bond accounts.
- If you consolidate to a longer payback period, you will pay more interest over the life of the loan
- When federal loans are consolidated, the average of your loan interest rate is taken, rounded up to the nearest 1/8th of a percent. That means your interest rate will be higher overall than it was before.
- If one or more of your loans has benefits like interest subsidiesFor many federal loans, the government will pay the interest while you're in school, during the six-month grace period after you graduate or while you've deferred your loans. or cancellation programsSome loan payment programs allow you to discharge your remaining debt once you've made on-time payments for 10 or 25 years., you could lose those through consolidation.
- Your credit has improved by 50 or more points since you took out the loan, which means you could get a lower interest rate.
- You have several different loans, and you're having trouble keeping track of your payments.
- You want to spread out repayment over a longer period of time, lowering your monthly payment (but accruing more interest over the life of the loan).
Decide if you actually need it.If you have anyone depending on you for income, like a spouse, child or other family member, or you have high debt and not a lot of assets, life insurance is a good idea. But if you are young and single and no one is depending on you, you probably don't need coverage yet. Read more here. You can also take out a life insurance policy on someone else. For example: a parent who has high debts that you think you might have to cover when they pass away. You'll need the person's consent and they will have to agree to submit to the typical medical exam required to get approved for a policy.
Learn about the types of coverage.There are two main types of life insurance. You can choose one type, or get both to take care of different needs: Term Insurance Term insurance is a policy with fixed premiums for a certain amount of time, or a term. Once the term is up, you have to choose whether to give up the coverage or maintain your coverage at a different (usually much higher) premium and with different conditions. For example, when your children are born, you could choose a 20-year policy that would insure you almost through the end of their college years. Or you could choose a one-year policy that would cover you while you're taking a sabbatical and not covered by a work policy. With term insurance, the only time you get a payout is upon death. This type of life insurance offers the greatest coverage for the lowest premium, which makes it ideal for families and people on a tighter budget. Permanent Insurance Permanent insurance offers you life-long coverage. Some differences from term insurance include:
Choose term insurance or permanent.Which one you go with depends on your situation. But because permanent insurance is generally much more expensive and requires you to pay the same amount in premiums for your entire life, it's usually the less practical option. That's because once you reach age, say, 55, you might not need life insurance anymore. Your kids may be grown and financially independent, you may have a sizable retirement account that would pass to your spouse and you might have even paid off your mortgage. As you can see, it may make more sense in this situation to have a term policy with a term that ends when you pass into this stage of life.
Calculate how much coverage you need.Life insurance works by giving you or your family cash when the covered person passes away. There's no one-size-fits-all life insurance policy. You'll have to decide what amount of money would be appropriate for you and your family. For example, if you would want your family to have the same standard of living if the main breadwinner passed away, you'll need more coverage; likewise if you have a lot of debt. If you would only want to cover immediate costs, such as funeral expenses and lawyers' fees, you would need minimal coverage. LearnVest recommends, as a simple rule of thumb, replacing anywhere from 7 to 10 times your annual income. If you work personally with an independent agent (step 6, below), they will also help you determine how much coverage you may need.
Determine how long your policy should be.If you've chosen term life insurance (which is our recommendation for most people), then you need to choose how long you wish to be covered. If you are about to have a child, you may want the policy to extend until you believe they will be financially independent, possibly for 20 years or more. If you're taking it out to benefit your spouse, you might want to take out a longer policy to cover you until retirement.
Decide how much you can afford to pay.Your monthly premium will depend on many factors, including, but not limited to, what state you live in, how much you want the value of the life insurance policy to be, your health and age, your family's medical history, and your tobacco use. But generally, if you're young and healthy, you can expect to pay a few hundred a year for a 20-year, $1,000,000 term life policy, or less than $75 a month. If you want the pricier permanent or universal insurance, your premiums may be much higher, stretching to several hundred a month or more. If you get insurance later in life, your premiums will be higher. Take a look at your budget and decide how much you can afford to pay a month in premiums. This should be a premium that you can afford to pay both now and over the next 20 years. It's best to get coverage that doesn't stretch you too thin, in case you go through financial hard times.
Choose how you will get coverage.You can get coverage one of three places: Through work: Getting coverage through work is often easier and more affordable than finding it independently. You can get access to lower group rates and have the monthly premium taken right out of your paycheck. However, if you leave your job you will likely have a gap in coverage while a policy at your new job kicks in, or you secure a new policy. Inquire with your company to see if they offer coverage, and if so, whether you can buy additional coverage beyond just the basic to suit your needs. Through a local agent: Ask for referrals from friends, family members or colleagues, try this agent locator or get a list of agents through your state's insurance agency. Meet with at least a couple different agents to compare their credentials and experience. Any agent you choose should have at least one of the following certifications: Chartered Life Underwriter (CLU), Chartered Financial Consultant (ChFC), Certified Financial Planner (CFP), Financial Services Specialist (FSS) or Life Underwriter Training Council Fellow (LUTCF). You'll also want an agent with experience dealing with someone in your financial situation and needs. Another great idea is to look for an independent agent with an insurance brokerage firm who can recommend policies from a wide range of companies to find the best value for your particular situation. Compare quotes you get from an agent to other sources, like another agent or online. Make sure the rates are competitive. Don't let your agent present you with only one insurance company as a choice--he or she should have several different companies and quotes to choose form, and be able to clearly explain the differences. Online: You can get quotes on life insurance through online brokers like Accuquote, InsWeb, Insure.com or LLIS.com. You may get less hand-holding through the process than if you were working through a local agent, but you will still have the opportunity to speak with a broker before committing to a plan.
Research the insurance company.Zeroed in on one or two quotes that are appealing? Make sure the insurance company is financially sound. Look up their rating through S&P, Moody's, Fitch or A.M. Best. Next, look at the level of service they provide. Examine the fine print to see what restrictions apply, how long it would take to file a claim and receive money, and whether there are any negative customer service reviews online. If all things are equal at this point between your choices, then you can choose the most affordable option.
Fill out the application accurately.If you're a smoker, overweight or have a family history of disease, among other things, you might be tempted to lie to get a lower premium. However, if the company finds out you lied on your application, they could refuse to pay out the claim. That means you could have paid thousands for coverage, only to have it be useless to your family. Don't risk it!
If you get rejected ...First, ask the insurance company why you were rejected. It could be for a mistake, or for a small health indicator--like high blood pressure--that could be explained to the company by your doctor. If that doesn't work, you can apply to another company. But again, be honest. You'll have to disclose on this application that you were rejected by another insurance company, or else you risk being denied a claim.
Pay your premiums on time.Once you've gotten coverage, don't let it lapse by paying late or not at all--even if your budget is tight. A lapse in coverage means you've just thrown away money you've been paying--you or your family will no longer be covered and that could leave you or them in a financial crisis.
Get organized.Your first step is to know exactly how many loans you have and their total. (Maybe you want to pour yourself a glass of wine first ... just a thought.) Head to nslds.ed.gov and look up all your loans. Put them all into a spreadsheet, with what kind of loan they are (Stafford, Perkins, PLUS for example), their interest rate, who you owe them to, the minimum payment and their amount. Learn about all the different types of student loans here. Put the private loans at the top (to be paid off first) and then sort the federal loans below from highest interest rate to lowest interest rate. Add up the total. If you need a day to let this sink in, that's fine. Come back tomorrow, because we'll give you strategies for reducing this number before you ever make a payment. In the meantime, make sure to connect all your student loans in the Money Center. This will show you how they affect your net worth, and also how quickly they're going down or up as you pay them off or accumulate interest.
Update your contact information.Student loan communications are still largely conducted by mail, and under law you are responsible for keeping your address updated so you can receive all communications. If you put your parents' address as yours when taking out the loan, and now have a permanent address, make sure to list your updated address with all loan holders.
Consider consolidation.If you have several loans, you could consolidate them into one loan. It sounds great--makes everything simpler, right? But there are several drawbacks:
Make a budget.Now that you've faced the big number, it's time to figure out how much you can afford to pay each month toward your loans. Set up your budget in the Money Center. Keep in mind, at least 20% of your take-home pay should be going to Financial Priorities, which includes debt payment and saving for retirement. If your student loan payments are high (either because your minimums are high or because you're decided to increase your payments), though, you might find yourself with a higher percentage going to Priorities. See how much room you can make for your payments by cutting back on Lifestyle Choices, like eating and drinking out, shopping, gym memberships, cabs and more. You might also reevaluate whether you can afford your current rent when you factor in your student loans. Just don't cut back on retirement savings, especially if your job matches your contribution. Learn more about creating a budget here.
Calculate your payment timeline.Now that you know what you can currently afford to pay (which has to be at least the minimum, but ideally more), use that number to calculate how long it will take to pay off your loans. Put the minimum payment toward all the loans except for the one you ranked highest, which will be your highest-interest rate private loan if you have more than one. Once you pay that loan off, you can focus on the student loan with the next highest rate. (Remember it's always important to prioritize paying private loans before federal.) Use this calculator for each loan, and input the pay-off time in your spreadsheet. As we go through the next steps, this repayment timeline will probably change, so continue on!
Choose the best repayment option.You have six options for paying off your federal loans (seven if you count paying them off in a lump sum, though we're assuming this isn't an option for you). If you have private loans, the best payment plan is paying them off as fast as possible, especially if they have variable interest rates which could pop up. Plus, private lenders don't adhere to a set of standard repayment plans. But for federal loans, you can choose the best plan for you. We go into detail about repayment plans here, but overall, you need to know that the lower your monthly payments now, the more interest you'll pay over the life of the loan.
Find ways to increase your payments.If you can increase your income, you can pay off your student loans faster and save yourself money in interest. If you've just graduated, make sure you negotiate your starting salary. If it's been almost or over a year since your last raise, gather up your accomplishments and prepare to ask for a raise. Read more about negotiating a raise here. But if a raise isn't possible, there are plenty of ways to increase your income, even if you have a full-time job. Try freelancing in a field related to your career or passion first (it's a résumé builder, after all). You can also try babysitting through Sittercity (you'll get paid more as a college grad than as a high school student), find odd jobs on Craigslist or TaskRabbit, participate in focus groups through Findfocusgroups.com, search for local mock jury or brand ambassador jobs, work for 1-800 call lines through West at Home and find retail and marketing gigs from the National Association of Retail Marketers. See more ways to make money on the side here.
Consider working in public service or education and/or moving to another city.If you get a job in the public sector and make 120 loan payments (10 years of payments), the rest of your student loan could be discharged. If you work full-time as a teacher serving low-income students, you could have up to $17,500 of your loan paid off. Find out more here about these two options. Other options include joining the military, Americorps, the Peace Corps, Teach for America, social work, the National Health Service Corps, Equal Justice Works, or if you are an occupational or physical therapist, choosing an employer that offers loan forgiveness. If you're not tied to a place, you could get a boost from moving to a new area too, and not just because of a lower cost of living. As part of programs to boost population and bring in bright young workers, some areas offer incentives in the form of loan payments. For example, the city of Niagara Falls offers to pay up to $15,000 of your student loans if you move there. Kansas could entice you to Rural Opportunity Zones by waiving state income tax and paying off $3,000 per year of your debt, up to $15,000. Search for opportunities near you or in your state to start.
Ask your employer to pay off your debt.If you work in a field that requires a specialized degree (health care especially), you could search for an employer offering to pay off student loans as part of the package, or ask your employer to put money toward your loan in exchange for paying you a lower salary. Employers are willing to do this because over the long run it costs them less in salary payments. But you must show you are committed to staying in your job for some time in order to prove it's worth their while--it's sort of like a signing bonus. If you are a new grad and interviewing at a small company that can't give you a high salary, bring this up during salary negotiations. If you are already an employee, talk to HR about the possibility in your next review, confirming that you're committed to the company.
Consider deferment or forbearance.If you just cannot swing payments right now, and if you are at school part time, in the military, having trouble finding a job or going through economic hardship, you could qualify for deferment or forbearance, which allows you to stop making payments. For subsidized loans and federal Perkins loans, the government might pay your interest expense during this time. But for other loans, if you neglect to pay the interest while in deferment, it will accumulate and be added to your loan. By the time it's out of deferment, you will owe a lot more, which might leave you in an even worse situation. For these reasons, consider this option carefully before jumping in, and only if you truly cannot make your payments after finding sources of extra income and aggressively cutting your costs. If you're struggling to make payments, this post will help you.
Sign up for autopay.Now that you know how much you want to pay, having your payments automatically deducted is just good sense. You'll never forget to make a payment, plus if you time it for right after you get a paycheck, you'll never even miss the money. The bonus is that all government and some private lenders charge a slightly lower interest rate--about .25 percentage points less--if you enroll.
Take the student loan tax deduction.Don't leave this money on the table! If you are paying for a student loan and have an income under a certain threshold, you can deduct up to $2,500 in student loan interest from your taxes as of 2012. Learn more.
Check your credit score.You can get your credit score for free at a few sites such as Credit Karma and Credit Sesame. In order to sign up for these services, you’ll have to provide some personal information, including your name, address and Social Security Numbers. At Credit Karma you’ll get a free credit score from TransUnion, one of the three major credit bureaus, as well as daily credit monitoring. They will email you when something important changes in your credit report. Also, get a sense of how you can improve your credit score by checking the site’s credit report card, which grades you on the different factors that influence your credit score, such as open credit card utilization or derogatory marks. (Read our 101 to find out about all the factors.) Credit Sesame provides your Experian credit score once a month and also has helpful tools like your current credit usage.
Clean up your credit report.Up to 25% of credit reports contain serious errors that can affect your credit score. Before you apply for credit, make sure your credit reports are error-free by checking all three at AnnualCreditReport.com. (If you’re not applying for credit soon, you should check all three over the course of a year, as we suggest in this checklist.) If you find an error, follow the steps outlined here to clean them up.
Automate your installment loan payments.Installment loans are credit accounts that you make regular payments on, like a mortgage or car loan. If you miss a payment, it could affect your credit score. And bills that remain unpaid can eventually be sent to collections, which will negatively affect your credit score and make it difficult to get approved for credit in the future. Make it easy on yourself by automating these consistent payments through your bank’s bill pay system.
Automate or set up calendar alerts for your credit card payments.If you're confident you can pay your credit card bill in full every month, then go into your credit card account and set it to pay the total amount due every month. However, if you're worried that the automatic payment might overdraw your account, instead of automating your payment, you can set up a calendar alert to remind you to pay your bill ten days before it’s due. That’ll give you enough time to schedule your payment early.
Ask for a credit limit increase.This is a little advanced, but it can help boost your score. We talked about your credit utilization rate and how it affects your credit score in Credit Scores 101. One way to make sure your balances are always less than 30% of your limits is by having high credit limits. Most credit card companies will automatically review your limit and increase it every six months or so. If this hasn’t happened recently, you can call up your credit card company and ask for an increase. Just keep in mind that this could initiate a hard inquiry on your credit.
Think before closing old credit card accounts.Sometimes, closing an old credit card account can do more harm than good when it comes to your credit score. If the account has a high credit limit, closing it can greatly increase your credit utilization percentage. Plus, if it’s one of your oldest credit cards, it’ll reduce the length of your credit history, another important factor in your credit score. However, closing a card that charges you a high annual fee and doesn’t give you good rewards can be a good idea.
Check your score again each month.Creditors—like your credit card company or mortgage lender—report activity to the credit bureaus once each billing period. That means that new balances, paid-off accounts or delinquent accounts can take a full 30 days to impact your credit score. Checking your credit score more often that once a month isn’t necessary, but it’s a good idea to do a quick check-up monthly.
- A 529 Savings Plan is a type of state-administered investment account that gives you tax benefits for saving for child’s college education. It's available regardless of your income level and contribution limits are high, up to $360,000 total, depending on the state.
- A prepaid plan is a form of a 529 that is becoming less common. It probably makes the most sense if you believe your child will attend an in-state public college, because it pegs the payout to the current price of in-state tuition.
- A Coverdell account differs from a 529 investment plan in that you can use it for primary and secondary education as well as college, the contribution limits are low--$2,000 a year--and there are income limits. For these reasons, it's more limited than a 529 and best for those who want to use it to pay for a private K-12 education in addition to college.
- High maximums and low minimums for contributions, meaning you don't need to contribute a huge amount at a time if you don't have the means, but you can also contribute a lot if you want to.
- The ability to use the account for all qualified higher-education expenses including graduate school, whether billed directly by the institution or not.
- The ability to make non-penalty rollovers to other states' 529 plans.
- The ability to make partial withdrawals without having to close the account.
- Easy deposit and withdrawal procedures.
- If the bank will charge maintenance fees for the account, and whether they kick in if you drop below a certain balance
- How convenient in-network ATMs are to your home, work and play (or if all ATM fees are refunded)
- Customer service ratings (MyBankTracker.com is a great place to start)
- The interest rate on your checking and/or savings account
- Interest rates on products you might want to use, like CDs, mortgages, car loans and personal loans
- Paycheck deposits, including freelance income direct deposits
- Social Security, disability, unemployment or other government income
- Monthly payments for music and movie services, charity donations, gym or other monthly memberships or newspaper subscriptions
- Transfers between your accounts, like deposits to your savings account from your checking account
- Wire transfers. This is most the most convenient, but also the most expensive. Wire transfers from big banks can cost anywhere from $24 to $30. However, the money will deposit to your new account within a day. Use this option if you are transferring a large amount of money and will need access to it immediately.
- Electronic Transfers. This is similar to a wire transfer, but it costs less--either free or just a nominal fee of a few dollars. However, it will take one to three days to see the money show up in your account. Use this option if you are transferring a large amount of money and can do without the money for a few days.
- Certified checks. This is slightly less expensive than a wire transfer--no more than $10 per check. But you have to physically carry or mail the check to the new bank, and then it can take a week for it to clear. That means you won't have access to your money for that entire time. Because of this, we prefer some of the other methods here.
- Cash. This involves withdrawing cash and depositing it in your new account. While this is free as long as you use an in-network ATM or teller, and money posts quickly, it's also work-intensive. You can only draw a few hundred bucks at a time, and must physically carry it to a new bank. Also, it's dangerous. Fingers crossed you don't lose your wallet or get robbed! Use this option only if you are transferring less than a couple hundred dollars.
Know your plan options.First, you need to know what the best plan is for your situation. We've got an overview here, and you can read the full details on these plans in our 101:
Check if your home state offers a plan.The majority of plans come with state-tax benefits, and you can search by state here. For investors who live in states without a state tax or tax benefits, check out Morningstar.com or Savingforcollege.com to search for out-of-state plans that would be available to you based on the state where you reside. Once you've narrowed down the plans that look best to you, move on to the next step.
Find out the plans’ past investment returns.Call the company directly or visit Morningstar.com to see the average returns. (Many plans offer target-date funds that automatically rebalance into safer investments as your child nears college age. This is an ideal investment tool for someone who prefers a guided investment program.) While past performance can be a good indicator of future returns, keep in mind that it does not guarantee them.
Look for these characteristics in a plan:
Investigate the fees.Do the fees associated with your state account options negate any tax benefits you’re being offered? As a general rule of thumb, if a plan charges more than 1% in fees, you can probably find a better one.
Make sure the plan offers a range of investments and assets.Your investments should be diversified, covering different sectors of the market such as large-cap, mid-cap, small-cap, emerging markets, etc. Find out more about diversification and your personal risk tolerance.
Look for good customer service.A good plan will offer thorough and complete program materials with ample use of legal counsel, call centers or program offices staffed by people knowledgeable and enthusiastic about 529 plans, as well as a well-designed website providing access to program materials.
Open the account and start funding it.Once you choose the best account for your needs, you might have to fill out an online or paper application and send it in before the account is opened. During that process you can choose how you wish to contribute: either through payroll deductions or through automatic transfers from your bank account.
Periodically check in.Some funds will automatically rebalance the asset allocation as you get closer to using the money for college. That means as your child gets older, the investments will become more conservative to protect the money you've invested. Even so, you should still review the account at least once a year to see how it's doing, check if you're saving enough and rebalance it if you've elected for a plan that gives you more control over investment options.
Choose a new bank.Before you start this process, the most important thing is to choose a better bank. You have many more options than just that nationwide bank on the corner. You could switch to a credit union or online bank, both of which often have much more favorable terms than brick and mortar banks. Start your search at SavingsAccounts.com and Bankrate.com. Once you narrow down your choices to five options or less, write down and compare these factors for each bank:
Transfer your automatic deposits and payments.Ask your new bank for a "switch kit" which gives you all the information you need to move to the new bank, including instructions on changing automatic deposits and withdrawals. Next, check all your account activity in your old bank accounts, either in the My Money Center, online on your old bank's website or on statements going back several months. You're looking for any payments or deposits that are automatic or recurring. Make a list of everything that needs changing. Some things to look for include:
Transfer some money to your new account.You might be ready to zero out your account already, but hold off! This is where things get a little tricky. You need enough money in your new account to deal with any automatic transfers, deductions and payments you've switched. You also need enough money in your old account to handle any checks that haven't been cashed or payments you somehow missed. We suggest you look through your checkbook ledger or for invoices sent to you in the past few months, and make sure there are no outstanding payments you've made from your old account. If there are, a) make sure there's enough money left in your old account to cover them, plus a small cushion for contingencies and b) contact anyone who's been holding on to a check and ask them to go ahead to cash it. If drawing down your account also triggers maintenance fees that you didn't have before, that's another thing to consider. Once you're ready to transfer your money, you have a few options:
Get to know your new bank.Pop into the My Money Center or your new bank's online activity ledger every day and make sure everything is running smoothly--deposits are showing up, payments are getting made, etc. Also notice if the lag time between the date of a deposit or transfer and the date when the funds are available to you is different at your new bank. If so, you may want to adjust some transaction dates. For example, if the timing is too tight between a regular deposit and a regular payment, set up the transfer earlier, or ask for a later monthly due date on that bill. Time to monitor activity: One month Time to make adjustments: One day for each
Leave the old account open and check back.If you close your former account and a transaction posts in it (your niece cashes her birthday check, you forget about an automatic deposit) then the account can automatically be reopened and go in the red (called a "zombie account"), incurring overdraft fees without your knowing it until the bank happens to send a statement a month later. So leave a cash cushion in that old bank account, and check the My Money Center on a weekly basis (set a calendar alert for Monday morning, for example) and see if anything has changed. If an automatic deposit comes in or an auto-payment goes out, then set up that transaction with your new bank account. Wait until a whole month goes by without any account activity in your old account, you're sure all outstanding debts are paid, and all your recurring payments are posting in your new account, then you can move on to the next step ... Time this will take: One to two months
Close the account!Now you can say with confidence that nothing will pop up and reopen the account. Head into your old bank and speak with a representative about closing the account. If you can't do this in person, you can also close the account over the phone or by mail. Withdraw the rest of the money from the account, get a check for the balance, have it wired to your new account or initiate an electronic transfer. Note that drawing your account down to $0 is not the same as closing it, so notify the old bank that you are closing the account, make sure to get a copy of the paperwork confirming you closed the account and save it for your records.
Understand why health insurance is important.When you’re healthy, paying for health insurance might seem like a waste of money. But having health insurance safeguards your finances and your health. It gives you access to health care services and provides discounted rates for these services, so you’ll use them and prevent yourself from having serious health issues. Without coverage, your routine office visits, prescription medicines and especially your unexpected hospital stays could really drain your wallet.
Find out what plans are available to you.Depending on your situation, you may have several options to consider. Lay them all out before you begin comparing the pros and cons. If you think If you have a job … Your employer will probably offer some form of group health insuranceGroup health plans are benefit plans for employees run by an employer, organization or union., though you may or may not have a lot of choice in which kind of plan you can get. If you’re between jobs … Good news! You can temporarily extend the health insurance coverage you received from your previous employer. The bad news: This option, called COBRA (Consolidated Omnibus Budget Reconciliation Act), a series of federal health benefit provisions, is expensive. Another option is to buy an individual and family plan, or even short-term insurance, to cover the gap before you start another job. (If you're interested in buying either of these, you're in the right place! Keep following the steps.) If you’re a student … You have several options. Your parents can continue to cover you on their plan, you can purchase your university’s health plan, or you can buy your own individual planIndividual plans can cover an individual, couple or family and are purchased directly by the person seeking coverage.. If you’re a recent grad … You can stay on your parents’ plan until you’re 26. Or, if you get a job, you can enroll in any group health insurance sponsored by your employer. If you have a partner or spouse … You can get your own health insurance or obtain coverage through your partner’s plan. If you’re starting a family soon … You can be covered under your partner or spouse’s plan, buy an individual or family plan or apply for a group health plan from your employer, union or other organization. (Again, if you want to buy your own, keep the following the steps to learn how!) If you’re low-income … Every state offers public programsPublic insurance plans, such as Medicare or Medicaid, are government-sponsored programs meant to cover people with low-income or disabilities. There are also programs that cover veterans, members of the military, federal and state government employees, and Native Americans. to help individuals or families who are struggling financially or cannot get approved for coverage, though the waiting lists can be very long. If you don’t fall into any of the above categories … You can buy your own health insurance plan online (which we'll show you how to do) or through an organization or a union.
Determine whether you are eligible for any of these plans now.For some health insurance options, there may be a certain window of time when you can sign up, or a waiting period until you’re fully covered. You can apply to buy an individual plan anytime, though some have restrictions on certain benefits. Individual plans often have a waiting period (usually between 12 and 18 months) before they will cover prenatal care and delivery. When you start a new job, you have a certain number of days to sign on to your employer’s health insurance plan—it’s normally between 60 or 90 days. However, sometimes there is a waiting period before you are fully covered. Some employer-sponsored health coverage also has a specific time period during which you can sign up for a health insurance plan or make changes to your existing plan; this is often called open enrollment, and it typically happens in the fall. Read more about open enrollment here. Finally, if you’re between jobs, you can apply for short-term insurance or opt for coverage sponsored by COBRA, which lets you extend health insurance coverage from your previous job. You can choose to sign up for COBRA any time in the 60 days after you leave your job.
Know this health insurance lingo.All health insurance companies require that you chip in for the cost of covered health care services; this is called “cost-sharing,” and it varies with different types of health plans. The following terms will help you figure out how much you’ll pay for a given health insurance policy.
- Premium: The amount you pay to the insurance company to maintain coverage, usually on a monthly basis.
- Co-payment (aka Co-pay): The specific amount you pay upfront for a specific type of service. For example, your health insurance plan may require you to pay a $10 co-payment for every office visit or prescription refill, and then will cover the rest.
- Deductible: The amount some plans require you to pay out of pocket before your insurance kicks in and covers other costs. It can be an annual deductible (i.e., you must spend $2,000 of your own money before your insurance covers anything) or service-specific, like a $500 deductible for every hospitalization.
- Co-insurance (such as an 80/20 plan): The portion you pay for each medical service before your plan pays for the rest. For example, a plan may require you to pay 20% co-insurance for covered health services, then the insurer pays the remaining 80%. That’s known as an 80/20 plan.
- Out-of-Pocket Maximum: The most that you will have to pay for health services in a year, often a combined cost for co-payments, co-insurance and deductibles. After you’ve paid that amount, your plan pays 100% of covered services for the remainder of the year.
- Health Savings Account: Some high-deductible health plans let you open a health savings account (HSA), into which you can contribute funds to pay for medical expenses. Any funds you put in this account cannot be taxed when you deposit them, and any money left in the account at the end of the year will “roll over” to the next year if you haven’t spent it. This is a great option for people who would like to save money while they’re working to cover their health care costs during retirement.
- Flexible Spending Account: Like an HSA, you can deposit funds into a flexible spending account (FSA) for medical expenses, and these funds will not be subject to payroll taxes. Unlike an HSA, though, flexible spending accounts do not allow money to “roll over” to the next year, so if you don’t use it, you’ll lose it.
- Health Reimbursement Account: Like HSAs and FSAs, a health reimbursement account (HRA) sets aside money specifically for health costs not covered by the company’s health insurance. However, the employer, not the employee, funds the account.
Learn the types of health insurance plans.With the key terms you learned in the previous step, you’ll now be able to discern between the different kinds of health insurance policies. There are two main kinds of plans: 1. Those that let you visit any doctor, hospital or health care provider you want. These so-called fee-for-service or indemnity plans give you a tradeoff for your freedom of choice: They will only pay for a portion of the total charges. Most such plans have a deductible you must pay every year before the company will begin covering expenses, and many also require you to pay co-insurance.
- Characterized by annual deductibles and co-insurance, as well as out-of-pocket maximums; costs vary greatly depending on coverage
- Characterized by lower out-of-pocket costs, higher co-payments and higher cost of treatment outside the PPO network
- Characterized by lower co-payments and fewer fees; any treatment outside the network, however, is rarely covered
- Characterized by low co-payments, low out-of-pocket costs and no deductibles for network care; high co-payments and deductibles for non-network care
Assess your needs.To begin shopping for health insurance plans, figure out your particular needs by asking yourself the following questions. Your answers will help determine the kind of policy you should buy. How often do you visit the doctor? Are you on prescription medicines? If you’re young and healthy (read: unlikely to get ill) and if you’re trying to cut costs, you may decide to buy a fee-for-service/indemnity plan with “catastrophic coverage.” That means you’ll pay much less every month, but if you do need medical treatment, you’ll have to pay more out of pocket. For example, your premium might be $50 a month instead of $500, but you’ll have to pay $10,000 out of pocket, instead of $1,000, before the insurance company covers any costs. As you can see, it could turn out to be a risky bet. If you visit the doctor frequently for a chronic condition or regularly take prescription medicine, the opposite applies: you’ll probably want to pay a higher monthly premium to keep your co-payment and deductible low. In this case, you’ll probably want a form of managed care instead of a fee-for-service plan. You’ll have less choice of providers, but you’ll be able to keep costs down. Are you pregnant, or do you have children? If you are pregnant or planning to become pregnant soon, you’ll want to carefully examine plans’ maternity benefits. Individual plans often have a waiting period (usually 12-18 months) before they begin covering prenatal care and delivery. Group plans, which you can get through an employer or, in some states, your union or university, do not have the same restrictions, so if your employer, union or school offers a group plan, consider applying for one. Frequent doctors’ visits, as well as labor and delivery, can be very pricey; a plan that covers you 100% after a deductible, or an 80/20 plan, may be the best options. Both fee-for-service and managed health insurance plans offer maternity coverage, but they offer differing degrees of freedom. Fee-for-service insurance will let you pick your own medical doctor and hospital, but may limit the coverage for each health procedure. Managed plans will offer coverage for providers within the network, but will charge if you go outside the network. Don’t forget to find out how much it costs to add your baby to your plan. If you already have kids, don’t automatically decide on a family plan without comparing your other options. Family plan coverage varies wildly. It may be best to choose a plan that’s best for you and your child, and have your partner or spouse buy a different plan or accept a plan offered by an employer or organization. You probably will want a form of managed care, since fee-for-service plans traditionally do not cover preventative medicine, making check-ups, office visits and shots expensive for families. Do you have savings, or do you live paycheck to paycheck? If you haven’t built up savings, you’ll want a health plan with a low deductible or no deductible at all, such as a Point of Service plan. That way, if you have an accident, you won’t have to pay a large sum out of your own pocket. You might even consider applying for your state’s public health care plan. On the other hand, if you have savings and can afford a higher deductible, you might opt for a plan with lower monthly premiums.
Search for your options.Compare all of your health insurance options to find the policy that best suits your lifestyle. Even if your employer offers health insurance, don’t assume it will cover your specific health care needs. If you realize it doesn’t, it’s worth checking to see if you could be getting more bang for your buck with a different plan. Go to eHealthInsurance.com and enter your age and ZIP code to get free quotes on different policies that may suit you, including individual and family plans, high-deductible health care plans and HSA-eligible plans.
Weigh the pros and cons of each plan by these criteria.
- Type of plan: Consider your needs and how much freedom in choosing providers you’d like, and decide whether an indemnity/fee-for-service plan or a type of managed care works better for you.
- Costs: Consider each plan’s premium, deductible, co-payments and co-insurance, and determine which plans are in your budget. Remember, a high-deductible plan is good if you want a low monthly premium and have savings, and vice versa.
- Health benefits: Buy the plan that offers the benefits that you need. Avoid expensive benefits, like prenatal care or prescription drugs, if they aren’t necessary.
- Physician: If you have a favorite doctor, figure out which plans she accepts and consider buying one. This could be important if you’re planning to start a family and you have an OB/GYN you really trust.
- Brand: Are there brand-name carriers that you prefer or want to avoid because of a bad past experience? Is there a prescription medicine you need that is covered by one plan but not another, or does one plan offer a lower co-payment for it than another? Pick the plan that best covers the brand of prescription medicine you prefer to take.
Apply for coverage.Once you decide on a plan, you can apply for coverage a number of different ways, depending on who’s helping you get health insurance: through your employer’s HR department, a professional organization, a union, a government program or a website like eHealthInsurance.com. To apply, you’ll provide information about yourself—your age, location, your health history—as well as your family members. It can take anywhere from a few days to a few weeks before the insurance company notifies you of its decision.
- You or your spouse got or will get a new job
- You received a tax refund in April that was larger than $1,000 or had to pay additional taxes
- You got or will get married or divorced
- You have had a child since the last time you updated your W-4 or will have a child in the upcoming year
- You purchased or will purchase a home
- You got hit with the Alternative Minimum Tax (or if you think you will get hit with it because you got a raise; this tool from the IRS can help you figure that out)
- You got or will get a windfall, like prize winnings or a lot of income from investments
- Did you have zero tax liability last year—as in, you didn’t have anything withheld and you didn’t pay anything in April—and also expect to pay nothing this year as well? Your ideal number of allowances is 0. You indicate this on line 7 of your W-4.
- Does someone claim you as a dependent? Find out here if this applies to you.
- If you’re married, does your spouse make less than $1,500?
- Do you have a dependent? Find out if you have dependents (this isn’t just for your children).
- Are you filing as head of household? You need to be supporting a dependent to claim this. Find out your filing status.
- Will you pay $1,900 or more in qualified child care or dependent expenses? Find out the answer here.
- Will you claim the Child Tax Credit? Learn more.
- You plan to itemize your deductions next April. Find out here if you should itemize your deductions.
- You are married and you and your spouse both work and earn more than $1,500.
- You yourself have two jobs.
Open a savings account.Where should you store your savings? The answer is not in a mattress nor in a piggy bank nor in your checking account! Keeping your money in a savings account is important for two reasons: it’s generally harder to withdraw money from it than from a checking account, so you’re less likely to dip into it, and it will usually have a higher interest rate than your checking account, which will allow your money to grow faster. If you don’t already have a savings account, use our checklist for opening a savings account. Then come back to step two.
Build a budget.In order to start saving, you need to know how much money you can afford to stash aside. So the first step is to build your budget. If you don’t have one yet, consider doing it now! A budget is the foundation for a solid savings plan, and we’ll even walk you through the basics of building one here. Once you can cross that off your checklist, come back to step three.
Determine how much to allocate to your emergency fund.An emergency fund is what you’ll rely on if you lose your job or have another financial emergency. Generally speaking, it should be equivalent to at least six months of your net, or take home, pay. If you don’t yet have one, look at your budget to see how much money you can start putting toward an emergency fund every month. As you should have just read in the budgeting checklist, 20% of your budget should be allocated to Financial PrioritiesThese are expenses that help you accomplish important financial tasks, such as paying off loans, building savings, saving for retirement and more., so your emergency fund contribution should come out of that. If you aren’t saving as much as you would like, take a hard look at your monthly spending habits and figure out what you can decrease or cut out. Try our free Cut Your Costs Bootcamp to get a comprehensive plan to help decrease your expenses.
Set up automatic deposits to your savings account.Out of sight, out of mind. In order to build up your savings, you should consider automating the process. If you don’t, you may either forget to move money over, or you may spend everything in your checking account and not have money left over to send to savings. (It’s called living paycheck to paycheck, and not only will it not be helpful for building your savings, it could leave you in dire straits should you lose your job or have a health emergency.) If you receive a regular paycheck, consider depositing money to your savings account in one of the following two ways:
If you are self-employed, we suggest depositing your earnings straight into your savings account, and then sending your living expenses, minus what you would like to keep in savings, to your checking account right afterward.
Contribute to other savings goals.Aside from your emergency fund, you probably have more fun goals you want to save up for: perhaps a trip to the Galapagos, a kitchen renovation or a milestone anniversary party for your parents. Pick out a few goals and then play with our Get to Your Goal calculator to figure out how much you may need to put away each month to reach each of them in an ideal time frame. You can also open up sub-accounts (with fun names like “See Darwin’s Finches”) separate from your emergency account. It’s important not to co-mingle your accounts for goals and your emergency fund so you don’t start dipping into the latter.
Keep yourself motivated.Remind yourself of what you're saving up for by putting a picture of it on your desk or in your wallet—it will keep you motivated! A financial vision board is another very fun strategy we recommend to help get you excited about reaching all of your financial goals.
Increase your savings along with your income.There's wisdom in the phrase: "Bank your raise." Whenever you get a salary increase, first calculate what your new emergency fund is, i.e, six months of your new, higher monthly paycheck. Think about sending contributions to your emergency fund until you get to that goal, then increase contributions to your other savings goals as well.
Determine if you need to change your W-4 at all.You only need to fill out a W-4 if:
Get a W-4.Get in touch with the human resources department or equivalent at your job and request a W-4 to fill out. You can also download it here. If it’s your first day, HR will hand one to you without you even needing to ask. So nice of them!
Understand allowances.An allowance is what your employer uses to determine how much you will probably pay in taxes and hence how much to withhold. They are related to the exemptionsExemptions reduce the amount of income you will be taxed on. For instance, for the 2011 tax year, you could have deducted $3,700 from your gross income to arrive at your taxable income. you take on your taxes, but not the same, so don’t expect the number of allowances to equal the number of exemptions. The more allowances you have, the less money will be withheld from your paycheck.
Get familiar with your situation.You want to find out your ideal number of allowances, but before you can use the withholding calculator in step 5, you need to know the answers to the following questions:
Use the IRS withholding calculator.The IRS withholding calculator will walk you through determining the number of allowances you should take.
Fill out your W-4.If your finances are fairly simple, you can just use the first sheet, which is remarkably straightforward for a tax form. But there are some instances when you should use the worksheet on the second page to decide the number of allowances you will take:
Decide if you want additional withholding.When you decide how much to withhold from your taxes throughout the year, you want to choose an amount that will result in you neither receiving a refund nor owing a large additional amount in taxes come April. If you got hit with a tax bill when you filed this past year and you are being recommended the same withholding as last year, you can add in additional withholding so you don’t have a big tax bill again next year. Add in the additional withholding on line 6 of the form. Just divide the amount of your tax bill by the number of pay periods left in the year and write that down. For example, if you owed $3,000 in taxes last year and get paid twice a month, you’ll put $125 on line 6 ($3,000 divided by 24 pay periods). You should also ask to have additional withholding if you will fall into the AMT this year (see step 1), or you’ve gotten or will get a windfall in 2012 that will be taxed.
Sign the form and turn it in to your employer.Just like it says!
Redo your budget to reflect the change in your paycheck.Now that your withholding is different, you want to make sure you are prepared for the change in income, so pop into the My Money Center and rework the numbers in your budget so you continue to live below your means and save what you need for the future.
Come up with a rough budget.Before you plan anything, you need to know how much you can spend. Remember that almost everything can be more expensive on a vacation, so you can’t assume a weeklong trip will cost as much as a week’s worth of living expenses. This is especially true if you’re going to an expensive city, like San Francisco or Paris. In addition to paying for travel to your destination, you’ll be paying for lodging, eating out, cocktails and all the activities you’ll want to enjoy, plus souvenir shopping. Perhaps you’ve already been saving for your big adventure. If so, congratulations! See how much you have in that savings account (not your emergency fund, please). If you don’t have savings yet, you’ll need to start putting money into a savings sub-account right away. If you’re not sure how much to set aside, don’t worry. We’ll help you figure it out in a few steps.
Decide whether you need a travel agent.Did you know a travel agent can actually save you money? That’s because you won’t have to pay her for her services; wholesalers and hotels will. She’s just getting you the best price! You should consider getting a travel agent if you’re:
- traveling internationally
- traveling with a group
- not sure where you want to go yet
Choose a target date.When choosing a date, you’ll want to balance several factors:
- when it’s convenient for you to take off work (i.e., not March if you’re an accountant)
- your traveling companions’ schedules
- how many vacation days you have, and how many you need to reserve for other travel or the holidays
Choose a location.Now comes the fun part: choosing your vacation spot! Consider all these factors:
- How you will get there and the cost: Research how much plane, train or bus tickets will cost around your target date, or the cost of gas to drive there. See if low-cost carriers like Air Tran and Southwest service that destination; if so, all fares—even from high-cost airlines—will typically be lower. Find out if airlines like Jet Blue are offering any deals to certain destinations. Also sign up for email alerts from sites like Travelzoo, Airfarewatchdog and Yapta to see if there’s a deal for a place you’d like to visit.
- The cost of lodging and food there: Browse travel guides, websites like TripAdvisor, Lonely Planet and Budget Travel and ask other travelers on travel forums for an estimated daily budget. If you’re going to a foreign country, find out whether the exchange rate will automatically make everything more expensive—or less.
- What kind of activities you will do and their cost: Are the main attractions expensive, like shopping and going out (Vegas), or cheap, like hiking (Boulder)?
- Destinations that will be in their off-season (and therefore less expensive) during your target dates: Will it be miserable in the off-season (the Caribbean during hurricane season), or could you still have a good time (Rome in March)?
- New clothing or gear you may have to buy: For example, will you need hiking or snow gear? How much might that cost?
- Whether the country charges a fee for entry: For example, some South American countries charge U.S. citizens $100 or more just to get in.
Revisit your budget.
Save on airfare.If you’re flying, this is likely to be one of the biggest—if not the biggest—expense. So spend some time on this!
- Search multiple discount sites: Use discount flight search engines like Kayak, CheapoAir, ITASoftware, cfares.com ($50 annual fee) and Vayama (for international flights only).
- Shop on Tuesday mornings: Fare sales are often launched Monday nights, so other airlines have matched their prices by Tuesday morning.
- Consider flying out and returning in the middle of the week: Flights on days like Wednesday tend to be cheaper than flights on, say, Sunday.
- Search how full your flight is: You can tell if your flight is full or empty by starting to buy tickets online and “choosing your seat.” That will show you how many seats are taken already.
- Use online tools: Kayak’s “Hacker” tool can help you find two one-way flights to make a round trip that saves money. Kayak also offers a fare chart so you can see ticket price trends, and Bing offers a price predictor tool to help you guess if fares are going up or down.
- If in doubt, book earlier: If Kayak and Bing can’t provide much guidance, it’s better to book in advance when more seats are available. Only bide your time if your flight isn’t too full and you know the price is a lot higher than it should be.
- Follow airlines: Some airlines promote one-hour sales on Facebook or Twitter only, so follow an airline for the best deals.
- Use tips tailored to the time of year you are flying: Each flying season has its own tricks for getting the best tickets. Read our guide here.
- Consider other options: New bus services like Bolt Bus offer affordable and comfortable connections between large cities. Also look into the train, which will usually take you from city center to city center and is largely free of the fees that come with air travel. Train prices are typically lower than airfare but higher than bus tickets.
Save on car rental.After saving on airfare, don’t get fleeced on your rental car. Here’s how to save if you have to get a car:
- Watch out for hidden fees and taxes: When you see a great price, look further to make sure it’s not too good to be true. Possible hidden fees include: Collision Damage Waiver fees, airport surcharges, fuel charges, mileage fees, taxes, additional driver fees, underage-driver fees, out-of-state charges and equipment-rental fees for car seats or ski racks.
- Avoid renting from the airport: If possible, take a free shuttle to your hotel and rent from there.
- Decline rental insurance: The clerk might press this on you. But you are likely already covered by your own car insurance and/or credit card company—so check with them first.
- Play around with rental time: If you’re renting for six days, see how much it costs to rent for a week: A weekly rental rate could be lower than six individual days. Also, try different days if possible: Many companies offer specials at certain times of the week or year.
Book your lodging.You can try to find good hotels through deal sites, such as Kayak or TravelZoo or with your frequent flyer card or credit card rewards, but you might consider less obvious options. Airbnb lets you rent homes and apartments, often for lower prices than hotel rates. Or swap homes for free with another traveler through a website such as VRBO, HomeAway or Home Exchange. The bonus with these types of lodgings is that you can cook some of your meals and store leftovers to save on food.
Decide whether you need travel insurance.Travel insurance is there to cover you in case of last-minute cancellations, emergency medical care, lost or delayed baggage and other mishaps. Check with your credit card company first to see if they cover what you need. But you may need more coverage if you’re traveling internationally, especially to risky areas, or with children. Learn more here.
Know credit and debit card policies.Speaking of credit and debit cards, do you know what their policies are? If not, you could rack up hundreds of dollars in fees in just a few days. If you’re traveling domestically, find out if your destination has in-network ATMs. If you’re traveling internationally, find out if your debit and ATM cards charge fees for using non-network ATMs. Also find out if your credit card charges fees for foreign transactions. If you have time before your trip and you anticipate traveling often, you might apply for a card that doesn’t charge any of these fees. Finally, even if you’re just traveling to another state, tell your credit card company in advance, so they don’t think your card has been stolen and block your card.
Know your cell phone plan.Here’s another way in which fees could quickly pile up: cell phone charges! Make sure you’re familiar with your plan. Data, texting and calls are all more expensive in other countries, and even in the U.S. you can end up in the expensive roaming mode. One fix: turn off your data roaming and just use your phone sparingly. Or use some smartphone apps like Skype, Viber and Whatsapp that allow you to use an internet connection to make calls or text.
Budget for your activities.You know overall how much you can spend, but without a clear daily plan you could go over. Look at how much money you have left after booking your travel and accommodations. Divide that by the number of days you’ll be traveling: this is how much you can spend per day on food, local transportation, activities and souvenirs. Do a quick calculation now to make sure that you have a comfortable cushion after your projected food, local transportation and activity costs. Lastly, come up with a system for keeping track of what you’ve spent. If you have access to a computer and the My Money Center to automatically track your expenses, great! If you don’t, bring a notebook with you, or give yourself a daily cash allowance to spend.
Pack Smartly.Packing well is important for two reasons: First, you don’t want to forget anything and have to buy it when you arrive. Second, you want to avoid checked luggage fees if possible, and you definitely don’t want to incur overweight luggage fees. Start a packing list a few weeks in advance so you don’t forget anything the day of. Research all your activities and the weather at your destination so you’re prepared. Pack items that are versatile and can be easily remixed into new outfits. Wear your bulkiest items while traveling. Leave extra room in your luggage so you can bring home your souvenirs. Finally, to avoid being pick-pocketed, consider packing a money belt that goes under your clothes if you’re visiting a crowded, touristy destination. Or pack a purse with zippers and latches that you can easily carry toward the front of your body. Don’t wear backpacks or fanny packs. Finally, unless you’re traveling to Fashion Week, don’t pack flashy or expensive clothing and jewelry. For more smart packing tips, read this.
Have fun!Here are some more tips for enjoying your adventure:
- Eat a big breakfast at the hotel to save on eating out.
- If you have some nice restaurants on your list, find out if the lunch menu is more affordable.
- If you’ll be using local public transportation a lot, buy passes by the day or week instead of individual rides.
- One cheap and fun way to soak in a destination is to find the nearest park, where you can hike, have a picnic and people watch.
- Guidebooks are great, but another way to have a memorable time is to befriend as many locals as you can—on the subway, in a café, in the boutiques—and ask them what they recommend you do while you visit.
- Stafford Loans are the most common type of federal loan applied for, and they are capped at a certain amount per year, based on whether you are dependent on or independent of your parents and what year you are in school. (See the annual limits here.) There are two types of Stafford Loans: subsidized and unsubsidized loans. Subsidized loans are awarded based on financial need. The interest on these loans will not accrue while you are in school at least part-time or during future “deferment” periods, when you will be out of school but your loan payments will be suspended. Unsubsidized loans are not based on financial need, and the interest begins to accrue from the moment the government disburses the loan. For undergraduates, a subsidized Stafford Loan has a lower interest rate than an unsubsidized one.
- Perkins Loans are for students with extreme financial need. Interest rates for Perkins Loans are a standard 5%, and the loan is limited to $5,500 per year in aid.
- PLUS Loans are issued to parents of students. Parents can borrow a PLUS loan to supplement costs not covered by other forms of financial aid.
- A consolidation loan combines one or several loans into a single loan package. According to the nonprofit American Student Assistance (ASA), interest rates on consolidation loans are calculated by doing a weighted average of the rates of each individual loan being combined and rounding up to the nearest one-eighth percent. The interest rate is capped at 8.25%.
- Institutional loans are offered by the school you're attending. Unlike a scholarship, this money must be repaid to the school once you graduate.
- Private loans are sometimes called "alternative loans" because they differ from government-funded Stafford, Perkins and PLUS loans. Unlike government loans, whose interest rates don’t vary and which have standard repayment schedules, the interest rates of private student loans can change over the life of the loan, and repayment schedules are not standardized. For this reason, private loans tend to be a greater financial burden for students who take them on. We recommend that they be used only when other sources of financial aid have been exhausted.
- Your Social Security Number
- Your W-2 and tax return paperwork from the previous year
- Your parent’s W-2 and tax return paperwork from the previous year (if you are still legally their dependent)
- Tuition: Determine how many units or credits you plan on taking for the entire academic year and how much that will cost in tuition. If you know you will want to take courses over the summer or between quarters, account for these added expenses as well.
- Additional fees and charges: Schools can charge additional student fees separate from academic tuition fees. Examples include student union fees, health fees, etc. The charges and amounts vary from school to school, so ask your admissions and records office what you should expect to pay in terms of these fees.
- Housing (optional): If you live in the dorms or rent an apartment of your own, housing can be a major expense.
- Books and Supplies: Required textbooks and school supplies add up fast. General education textbooks can range from $50 to $200 each. Estimate how much you'll need for books and supplies by budgeting about $150 per class for mandatory textbooks and supplies.
- Transportation: If you commute to school, you’ll have to pay for gas and possibly car insurance or for public transportation. Decide how you'll get around while in school and come up with a transportation budget.
- Miscellaneous: Estimate how much you'll need for personal care products, clothing and food. This area can typically be cut down to the bare essentials, which will make college living more affordable.
- Loan type
- Interest rate
- Term length
- First payment due (this will be determined based on your expected date of graduation)
- Accuracy of basic information (name, address, Social Security number, student I.D. number, etc.)
- A cash diet: You give yourself just as much as you can spend every week. This has the benefit of making every purchase more meaningful, as it is psychologically harder to part with cash than to swipe your card.
- A“cashless” diet: Leave your credit cards at home and instead use your debit card for all purchases, making sure not to go over your weekly limit. This has the benefit of allowing you to track everything you spend, without racking up more debt. Make sure you don’t have “overdraft protection” on your debit card, which could let you overdraw your account and rack up fees.
- Credit card debt
- Car loans
- Personal and payday loans
- Student loans
- Small business loans
- Taxes owed to the IRS
- $5,000 on your Visa with a 15% interest rate and $50 minimum
- $2,000 on your Mastercard with a 20% rate and $15 minimum
- $8,000 on a car loan with a 10% rate and $250 minimum
- Balance transfer fees: These fees are a percentage of the debt being transferred, which are typically around 3%.
- Introductory interest rates: These are usually 0% to entice you to transfer your debt.
- Regular interest rates: These are the interest rate you’ll get after the introductory period is over.
- Accrued interest: If you don’t think you can pay off your credit card before the introductory period ends, don’t sign up for a card that charges accrued interest. When the intro period ends, you’ll have to pay the regular interest rate on your entire transfer—not just what you have left to pay.
- What is the balance transfer fee? That seems really high, can you bring it down? Is it capped? If not, can it be capped at a dollar amount, like $75?
- Do you have anything better to offer me?
- Will a better offer be coming up soon?
- When does this introductory interest rate end?
- What is the rate after the introductory period ends?
- Will you charge accrued interest if I don’t pay the entire balance before the introductory period is over?
Learn about student loan types.It's important to know about the main types of student loans so you choose the ones that are right for you. You don't need to memorize them all--just take note of the ones that you think will be the most useful to you.
Fill Out Your FAFSA.The Free Application for Federal Student Aid (FAFSA) is used to assess whether you are eligible for federal student loans and other forms of financial aid, and if so, what amount. The online form will walk you through the whole process, but a few things you’ll need to fill out a FAFSA are:
Figure out the total cost of the schools you're applying to.There are many costs associated with attending college. Sometimes the figure displayed on the institution's "cost of attendance" web page does not accurately depict how much that school will cost. Factor these items into your total cost of attendance:
Figure out how much your family will be expected to contribute and how much you'll need in loans.After submitting your FAFSA in step 2, you will receive a Student Aid Report (SAR) via e-mail three to five days later, or via standard mail seven to ten days later. The SAR details the information you entered in the application, and also identifies your estimated Expected Family Contribution (EFC). The EFC, an estimate of how much your family might contribute toward your college education, is used by your school when determining your financial aid package. While it may not exactly be what your family will end up contributing, it provides a rough estimate since the school's financial aid package will be based on it. Subtract the EFC from the cost of attendance amounts you calculated in step 3. The difference is the amount that, after your family contribution, you’ll cover with student loans or other financial aid like third-party grants or scholarships. If the EFC is larger than what your family thinks it can afford, don’t worry just yet. You’ll have an opportunity to negotiate with the university financial aid offices later on if the financial aid package at your top school isn't sufficient.
Compare the financial aid packages of the schools that accepted you.Shortly after, you will receive acceptance letters from schools, as well as notification of your financial aid packages. Timelines for receiving financial aid packages may vary from school to school, so if you’re still missing a package, contact the school. Some colleges send acceptance letters with financial aid letters together as early as March, while others send acceptances in early April and financial aid award letters in May. Technically, you can accept a school before you've been offered financial aid, but we don’t recommend it! Starting with your top choice school, see how your financial aid package measures up to the total cost of the school. Will your family be able to swing the rest? Financial aid packages that have more grants and scholarships are nice, since those don’t need to be paid back. But ultimately, your decision comes down to this: Are you willing to take on that much debt in order to attend this school? If the financial aid package at your top choice school is close but not yet quite to what you’d be comfortable with, call the financial aid office to request more aid options or funds. Tell the financial aid officer this school is your top choice and why. Then, explain your financial circumstances and state how much you still need. Ask what additional school scholarships you're eligible for and whether the school can offer you more in federal loans. And, if those options fail, ask them for a list of school-recommended private lenders. Make sure you've done all you can to maximize your federal loans by contacting your school's financial aid office before you turn to a private lender.
Accept the student loan.Once you’ve selected which school you want to attend, you’ll need to officially accept the federal student loan package. While your federal loan money officially comes from the U.S. Department of Education’s Direct Loan program, you’ll receive your loans (and the Federal Parent PLUS loan) through your college's financial aid office. Your loan may also come with a "servicer," which is a third-party company that the government has made responsible for processing your loan payments and acting as a customer service liaison between you and the government. To accept, log in to the school’s online financial aid system and choose which loans you’d like to accept and at what amount (up to the maximum offered to you.) You’ll also need to sign a promissory note, which acknowledges how much you’ve decided to borrow, how long your repayment term is and other terms and conditions associated with the loan. Additionally, all first-time federal student loan borrowers are required to go through "Loan Entrance Counseling." Your school will email you a link to this approximately ten-minute online Department of Education quiz to teach first-time borrowers about basic student loan knowledge and repayment expectations. If you’ve decided to accept a private loan, which, again, we only recommend as a last resort, speak directly to the lender to learn more about paperwork and documentation you need to sign. (Read our Student Loans 101 to understand why private loans are riskier than federal loans.)
Note the details of your student loan package.Review the details and terms of your student loan package. Items to be aware of are:
Make a budget.Write a list of your non-negotiable, fixed expenses, such as tuition and fees. Then write down other expenses that you may be able to skimp on if need be, such as housing and books. Subtract the total of your fixed expenses from the amount of the loan. Determine how much you have left over. That is the amount you can spend on flexible items, such as housing, food, etc. Use our Budgeting Tool to set up a budget for these expenses. For instance, if you know that after paying tuition and fees, you’ll have $1,000 a month for other expenses, you can set aside $500 a month for housing, $100 per month for transportation, $200 a month for food, etc.
Re-apply next year.In subsequent years (i.e. sophomore year, junior year, etc.) you'll have to re-apply for financial aid by starting with step 2—filling out a FAFSA. Every year, re-calculate the costs afresh. Maybe you'll have decided by your sophomore year that dorms aren't the thing for you, so you're moving back home, which would lower your housing costs.
Stop increasing your debt.Simply making payments toward your debts isn't enough to pay them down—you also have to also begin living within your means. In order to stop increasing your debt—especially credit card debt and personal loans—you have to do two things. First, you need to figure out how much you need to live on per month. Run through our budgeting checklist to find out how much money you need to set aside for shelter, food and other living expenses. Now that you know how much you have to live on, your second step is to stick to set up a system that keeps you from spending more than this amount. Subscribe to one of the following:
Tally up all your debts.If you haven’t yet, connect your accounts to the My Money Center to see how much debt you have. Most can be automatically tracked by connecting your accounts. Any that can’t, like taxes owed, can be added manually. Include these debts:
Determine how much you can pay toward your debt every month.Before you can begin to tackle your debt, you need to know how much is coming in and going out of your wallet. If you haven’t buckled down and created your budget yet, you must complete the budget checklist before you continue. Once you've budgeted for your monthly essentials, you'll know how much is left over to pay down your debts.
If you are feeling overwhelmed, consider credit counseling.If you realize after completing your budget that the amount you can allocate to debt payments is not enough to meet your minimum monthly payments, it might be time to seek credit counseling. Call up the National Foundation for Credit Counseling and read our guide on finding a reputable credit counseling agency in order to avoid scams that will put you deeper in debt.
Research the interest rate for each debt and prioritize them.If you can’t find the interest rate in your monthly statements, the document you received upon opening the card or in your online account, call up the lender to verify what it is. Rank your debts from highest interest rate to lowest interest rate, but always prioritize credit card debt over debt from loans, even if the credit card has lower interest rate. The interest on credit cards snowballs, whereas the debt on other loans is set at a fixed amount.
Call each of your lenders to negotiate down the interest rate.We don’t want you paying unnecessary interest, which can really add up. So first see if you can bring that down by calling up each lender. Lenders want you to repay them, so if you’re more likely to pay them back at a lower interest rate, that’s an incentive for them to help you. If they turn you down the first time, keep calling back. The first person you talk to might not be able to help you, so ask to speak to a supervisor. If your finances have taken a dive recently and that’s why you are struggling with this debt, you might even qualify for a hardship program, which would lower your interest rate or your minimum monthly payments or both. If you’ve been getting offers from other companies, mention those offers in your conversation.
Calculate your payback time and total interest.Use this calculator to calculate your payback time and total interest paid. Let’s say you have:
Search for balance transfer offers.If you think you can pay your debt off in just a few months, or your current interest rates are less than 10%, this step probably isn’t worth your time and you can move on to step 10. That’s because cards often charge balance transfer fees, which could be more than the interest you will save. Otherwise, use Bankrate.com to search for credit cards that offer the opportunity to transfer to a card with a lower or 0% interest rate. Comparison shop, looking at these factors:
Transfer your balance(s).Once you’ve found some promising balance transfer offers, call up the companies and ask:
Set up your payment plan.Focus on paying off one credit card at a time. Pay the minimums on all your debts except the top debt, and then for the top debt, pay as much as you can. After you pay off the top debt, pay as much as you can toward the second-highest debt while paying the minimums on the others. Continue in this fashion until you’ve paid off all your debt, but keep in mind the end dates of the introductory periods on any cards to which you’ve transferred balances.
Free up more money in your budget.To pay off your debt faster and save on interest, look at areas where you can cut back and come up with more money to put toward your debt. One way to do so is with the Cut Your Costs Bootcamp, which will help you cut expenses in every area of your life.
Look into earning more.Don’t just go super-frugal. Also try to earn more, a tested and proven method of paying off debt. Use the Build Your Career Bootcamp to up your salary and/or use creative methods to bring in extra income, like selling your unwanted possessions on eBay, picking up jobs on Taskrabbit, and turning your hobby into a source of income.
Don’t neglect your retirement and emergency funds.While paying off your debt is important, we would like to reiterate that you should not ignore your retirement or emergency fund in the pursuit of a $0 balance. If your employer offers a 401(k) matching plan, take full advantage, or open an IRA. Also send some money every pay period to your emergency fund, until you have the equivalent of at least six months of your paycheck in the bank. We don’t want you to put emergency expenses on a credit card! If you feel like you need to get a good handle on your overall financial life, sign up for our Take Control Bootcamp, which will walk you through handling your entire financial picture.
Finally, smile!You’re on the road to becoming debt-free! As long as you stick to your budget and keep making your payments, you can get there by following the clear plan you created.
Examine your wasteful and expensive grocery habits.We each have so-called "spending triggers," and these apply to buying food, too. Look through your fridge and pantry and take a minute to think about the groceries you bought in the last month, when they went to waste and when you paid more than you should have. Do you buy fresh veggies only to have them spoil before you use them? If so, consider buying frozen vegetables instead of fresh (storing them properly will make a big difference, too). Or are you always running out of staples like milk and eggs, causing you to run to the local corner store, which is twice as expensive? Make sure you put those staples on your weekly grocery list. Whatever your bad habits are, take a few minutes to brainstorm new habits that can prevent you from wasting food or money. RELATED: Grocery Shopping on a Budget: 10 Ways to Keep Rising Food Costs in Check
Plan your menu.Before heading to the store, decide what you’re going to make for dinner each night for a week, and what you (and your family, if you have one) are going to eat for lunch (that means recipes, not prepared or processed meals). Choose recipes that use the same main ingredients, like chicken or rice, so you can do prep work once for the whole week to save time. Planning your meals in advance will also cut down on the trips you make for just one or two ingredients, saving you time and transportation costs. For a game plan with a full month of recipes, check out our Food for a Month series.
Try meatless Mondays (or meatless lunch).Meat and fish can be one of the most expensive items on your list, and what you might not know is that you can get plenty of protein from a plethora of cheaper meat alternatives like beans, quinoa and more. As you plan your menu, look for healthy vegetarian recipes to replace some meat-centered meals. Meanwhile, when you do buy meat (assuming you aren’t a vegetarian), buy it when it’s discounted and throw it in the freezer for later.
Make a better list.Now that you have your weekly menu, make a list of the ingredients you need for meals, plus staples and healthy snack options. Even if you're usually good at remembering everything, putting it in writing will ensure you don’t buy needless things just because they're on sale. Organize your list by category (produce, dairy, meats, pantry staples, etc.), so you’ll be in and out quickly, instead of doing laps around the store, which has been proven to make us buy more. For some of our favorite apps that help you make the smartest grocery list ever, read this.
Consider coupons.Many frugal grocery shoppers swear by coupons, but in order to use them, you’ll need to be organized and prepared to make it work. Look at your shopping list and see if any of your needed items are on sale in the circulars of your chosen grocery store, on websites that collect coupons or in the mailers of your favorite brands. Remember to stick to your list—don’t buy something just because you have a coupon for it. (That would increase your grocery bill, defeating the purpose of this checklist!) Then, organize all your coupons by type of food for faster grocery shopping.
Consider cash.If you have the tendency to overbuy at the grocery store, pay in cash instead. After you determine how much you can spend per month on food (a good starting point is $300 per person), divide that by the number of times you plan to shop each month. Bring that amount in cash with you each time. Another plus to paying in cash: studies have shown that not only do we spend less than when using credit, we're also less likely to buy junk food. Note: You may want to keep $20 in a different compartment of your wallet as a cushion, so you're not stuck at the register if your mental math doesn't quite add up.
Get rewarded with your card.Sign up for loyalty cards at grocery stores you shop at frequently. Again, if an item’s not on your list, don’t buy it just because it’s discounted. You can get even more rewards on top of store discounts by shopping with a credit card that offers cash back or points. (However, if you’re trying to curb overspending at the grocery, then we still recommend cash for you.) If you spend $500 per month and have a cash-back card that gives you 3% on groceries, you'll get $180 back in a year—and you don't have to do anything to get it!
Find the best store.Examine your shopping list. If you’re mostly getting in-season, locally grown produce, your nearest farmers’ market might be the cheapest option. If you’re mostly buying staples like eggs, milk and pasta, consider going to a store that sells in bulk, like Costco or BJ’s, for more savings. If you’re unsure which grocery store in your neighborhood is cheapest, look at their websites, if they have them, or remember to compare prices for a few of the staple items on your list next time you're there.
Have a snack before leaving.It's conventional wisdom that's truly wise: Shopping on an empty stomach will make you more prone to impulse buys and purchases of junk and snack food. Rather than hitting the store while ravenous, have a nutritious snack before you go, so you can stick to your list without being distracted by your growling stomach!
Use a cart, not a handheld basket.Though baskets hold fewer items than carts, shoppers actually buy more junk food when using a handheld basket. Researchers attribute this fact to the arm flexing necessary to hold the basket, the pain of which causes shoppers to seek out instant gratification in the form of easy, sugary snacks.
Shop the perimeter.Grocery stores are designed so that the fresh foods, including produce, dairy, meat, fish and bakery items, are stocked along the walls. The inner aisles, by contrast, are stocked with processed foods. Sticking to the perimeter will help you avoid the unhealthier and more expensive processed foods.
Don’t buy what's at eye level.A lot of thought is put into grocery store design. The most expensive versions of an item are put directly at eye level so it’s the first thing the customer sees—and puts in her cart. If you spot the item you need on a shelf, like tomato sauce, look on the lower and top shelves as well. Odds are you’ll find a less expensive version.
Buy generic.Generic or store-brand items generally taste just as good as brand-name items—because they're made with the same ingredients. They just cost far less. For example, you can save between 25 and 50% buying generic breakfast cereal versus a name brand. Similarly, staples like flour, sugar, salt and spices are virtually identical to name brands because they're subject to the same government regulations. If you do notice a taste difference, you can always return to the more expensive version on your next trip. Find out which generic brands are the best.
Read the fine print on multiple deals.In order to get shoppers to spend more, supermarkets advertise deals like “5 Cans for $5!” or “Buy 10 for $10.” John T. Gourville, a professor of marketing at Harvard Business School, says it’s about the power of suggestion, and that many people end up buying the amount the store recommends, when in reality you can usually get the same price per item without lugging home ten cans of baked beans.
Ignore store displays.Be very skeptical of items on end-of-aisle displays. Once again, supermarkets are trying to trick you by suggesting that these items with their neon price stickers are a steal. Often, they’re no cheaper than other versions of the same item located elsewhere in the store.
When you get home, store your food properly to ensure it will last longer.All your careful planning will be for naught if you don’t store your food properly. Check out our guide to food storage to distinguish your fruit basket from your whole-wheat flour storage, and follow it when you get home. But don’t store all of the produce yet—we’ll address that in the next step.
Cook your produce right after shopping.If you’re the kind of person who always discovers your veggies rotting in your crisper, we have a trick you’ll love. After you’ve stored your meats, dry goods, dairy and eggs, start in on produce preparation. Wash and tear your leafy greens into a salad-ready bunch. Chop up and roast, steam or sauté your other vegetables, then store them all in meal-sized portions—in the fridge for the week or in the freezer for later. Voila: You’ve just made your own fresher and less-expensive convenience food. Now, your veggies will end up in your meals instead of wilted in the garbage.
- No more than 50% goes toward Essential Expenses, which includes just four expenses: housing, transportation, utilities and groceries.
- At least 20% goes toward Financial Priorities, which are goals that are essential to a strong fiscal foundation. These include retirement contributions, savings contributions and debt payments. You should make these contributions and payments after you pay your Essential Expenses, but before you do any other spending.
- Lastly, no more than 30% goes toward your Lifestyle Choices, which are personal, voluntary and fun choices about spending discretionary income. They often include cable, internet and phone plans, charitable giving, childcare, entertainment, gym fees, hobbies, pets, personal care, restaurants and bars, shopping and other miscellaneous expenses.
- Daily transportation
- Organize and find information when you need it
- Prioritize your tasks so that you are always using your time most effectively
- Manage your time so that you have the flexibility to deal with crises but can progress steadily on longer-term work
- Get a bird’s eye view of entire projects, so you can plan each from start to finish
- Help you identify potential crises in advance
- Track your progress and results, so you can easily communicate them to coworkers, clients and superiors
- Learn from each week
- Salary: This is your income. Find the number representing your gross income during this pay period. Pull out a calculator, multiply that amount by the number of pay periods in a year, and you should have the official salary you were promised. If not, it’s time to call HR.
- Pre-tax items: Also known as deductions, these items get taken out of your paycheck before you pay taxes. The more deductions you have the less you pay in taxes. It can include things like contributions to your 401(k) or 403(b) plan, a flexible spending plan, health premiums and transit check. (The more of these you have, the better! See step number 8.)
- Taxes: Taxes are taken from your paycheck after deductions (or pre-tax items, above). Each line of your taxes is for a different type of tax, such as Social Security, Medicare, federal, state and local.
- Net Pay: This is the final value of what will be deposited in your account after pre-tax items, taxes and any other expenses (such as health insurance) have been deducted. Your net pay, not your gross income, is what you will use to build your budget! (Sorry.)
- How much you need to live on (this should equal about 80% of your paycheck)
- How much you can contribute monthly to your emergency fund, financial goals, etc. (this should equal 20%). If you would like to be walked through setting up a budget and are wondering where the 80% and the 20% guidelines are coming from, we have a checklist right here that will help you do that.
- Split it: Have your emergency fund contribution and other savings contributions (the 20% you determined above) directly deposited into savings, and the rest (the 80%) into your checking account for living expenses. The benefit of this method is that the money going into savings will be out of sight, making you less likely to spend it.
- The other option is to send it all to your main savings account, the way it is currently set up. If you go for this option, in the next step, we will then create a transfer (of the 80%) to your checking account that essentially functions as an allowance for your bills and other spending money. While this method is good for putting savings first, if you think you might be tempted to give yourself a bigger allowance for your living expenses from time to time, then go for option 1.
Learn the 50/20/30 rule.The first thing you need to know when you set up a budget is that your goal is to live on your net paycheck, the money that hits your bank account after all your deductions. That means your budget excludes any pre-tax retirement contributions such as those to an employer-sponsored 401(k) or 403(b). You'll divide that amount into three buckets according to what we call the 50/20/30 rule:
Determine how much you make per month.In order to figure out how much you have to spend, you need two pieces of information: i. How much one paycheck is ii. How many paychecks you receive a year Let’s say your paycheck—after tax withholdings—is $1,000. If you receive one paycheck a month, that’s easy: you receive $1,000 a month. If you receive two paychecks a month, that’s easy, too: you receive $2,000 a month. If you receive a paycheck every other week, rejoice! Budget as if you receive two paychecks ($2,000) a month, but then you get a bonus check every six months, which you can put toward one of yourFinancial Priorities—savings, debt or retirement! Lastly, if you receive a paycheck every week, then let’s just pretend you get four checks ($4,000—lucky you!) every month. For the four months of the year that you get a fifth paycheck, put that toward one of yourFinancial Priorities: debt, savings or retirement. When you set up your Smart Budget in the Money Center, it will ask you for your income, both salary and any other income you have.
Determine your Essential Expenses.As outlined above, you will decide how much you pay every month for:
Allocate money between debt, your emergency fund and your other financial goals.Your next step is to set up Priority Goals, which should be at least 20% of your budget. If your Essential Expenses take up less than 50% of your budget, then you can allocate a little more than 20% here, if, for instance, you have a large amount of debt to pay off, or are gunning toward a savings goal, for example.
To track your progress toward your goals in the Money Center, you'll need to connect your savings and debt accounts. For example, if you would like to pay off your credit card debt, all your credit cards need to be connected. If you want to max out your IRA, your brokerage's IRA account needs to be connected. This will allow you to track your progress toward your goal and remind you if you're falling behind on what you promised to send each month. If you're not using the Money Center, divide your monthly after-tax income by 5 to find the minimum you should be sending toward your financial goals. Each month you'll just need to manually input how much you've put toward your goals in your spreadsheet or document.
Allocate your leftover money to your financial folders for your Lifestyle Choices.Again, Lifestyle Choices include shopping, entertainment, going out and other expendable expenses such as your gym membership and travel, and shouldn't add up to more than 30% of your budget. If you're using the Budget Setup, input how much you want to spend on Lifestyle Choices, and it will show you how close you are to 30%. If you find yourself wondering how much you need per category, you can look at the transactions in your Financial Inbox and use how much you normally spend per category in a month as a guide. If you're using a spreadsheet or written budget, multiply your monthly after-tax income by 0.3, and add up all your lifestyle categories to make sure you're not spending more than you should.
Try out your budget.Chance are, after seeing how your own spending stacks up against the 50/20/30 rule, you had to make some changes. Try your new budget on for size for a month or two, to make sure it is realistic. Maybe you're always going over on groceries, but you're under on shopping. Tweak your budget to make it suitable for your lifestyle, while still helping you reach your goals. Be warned: You might have to make some lifestyle changes to get to your ideal budget, like bringing lunch to work or unsubscribing from those tempting marketing emails. But that's a good thing--budgets are made to keep your spending on track!
If you know you have a problem sticking to your budget, try a cash budget.If you find that you’re consistently spending above your means and falling into debt or dipping into savings, you may want to temporarily try a cash budget in which all your lifestyle spending is done in cash. You can do a cash budget two ways. One is to give yourself a weekly allowance. For instance, if you have $600 in spending money, you would divide it by four to see how much you can spend per week—$150. At the beginning of your week, you put $150 in your wallet, and live on that until the next week. Another way to do it is to follow the folders in the Smart Budget. If you give yourself monthly allowances of $200 for restaurants and bars, $150 for clothing, $50 for health, $50 for personal care, $50 for home, $50 for gifts and $50 for charity, you can put those amounts into envelopes marked with those labels. Then, when you go clothes shopping, you only uses the cash in your clothing envelope, and when you go to the drugstore, you only use the $100 in your health envelope, and so on. You stop spending in any one category for the month when the money in that envelope runs out. (However, if you have leftover clothing money at the end of the month and you need that cash for health expenses, you can transfer from category to category.) The following month, you replenish the envelopes. If you do revert to a cash budget while you get your spending under control, we still recommend that you use the Financial Inbox or LearnVest iPhone app to log your expenses. You can enter all your cash transactions there, and in fact, doing so provides an opportunity for reflection on whether that purchase was a good use of your money or not! If you’re really finding it hard to spend your money in worthwhile ways, check out our Purchase Appraiser, which will help you figure out when it’s worth it to spend and when you should save. We only recommend a cash budget for people who are in the habit of spending beyond their means. For everyone else, debit and credit cards are better than cash for two reasons: they usually offer rewards, and, at least when it comes to credit cards, using them builds your credit history, which will someday help you buy a car or a home. Thus, a cash budget is a temporary, not permanent, solution.
If you don’t have enough room in your budget for expenses you need or want, consider cutting costs or trying to earn more.There are only two ways to free up more room in your budget: decrease your expenses or boost your income. 1. To cut your costs First look at all your regular expenses, from your rent to your utilities to your cell phone bill. Call your providers to see if you can negotiate for less expensive packages. Or cut the service if you’re not using it, whether it’s a gym membership, a cable TV subscription or a texting plan far beyond what you need. Then analyze the recent lifestyle purchases you made. If you see that in the last month you ate out 10 times, perhaps you can cut that to eight times. If you regularly buy clothing, assess how much wear you really get out of every new piece and whether the items you buy are really different from others already in your closet. For more tips on cutting your costs, check out our Cut Your Costs Bootcamp. 2. To earn more Check out our tips on negotiating your salary here, and take our free Build Your Career Bootcamp to learn how to shine in your career, nab promotions and raises right and left … and plump up your bank account. Also, consider generating side income, perhaps from a hobby you love—whether that’s baking cakes, making jewelry, taking photographs or opening your own eBay store. Check out more ideas to make money on the side and how real people make extra money.
Monitor your Financial Inbox to make sure you are not going over budget.Finally, the only way to make a budget truly work for you is to actually follow it. While you can set up a budget that, in theory, will keep you spending below your means, only by diligently adhering to it will you keep your costs down, pay off your debt, grow your savings and build real wealth. To that end, the Financial Inbox and iPhone app are excellent tools for ensuring that you stick to your budget. Because each folder has a limit, you can easily see when you are spending beyond your means. Get in the habit of logging in every day to see how you stack up against your monthly spending goals. (If you haven’t yet connected your accounts yet, do so here.) Lastly, remember that you can do it. A budget is the foundation of all your finances. If you stick to your budget, you can achieve any money goal you set for yourself.
Bring two forms of ID or your passport.When you arrive on your first day, your employer will give you a form called an I-9, which verifies you are eligible to work in the United States. In order to complete it, you’ll need either a valid U.S. passport, or a state-issued driver’s license plus a Social Security card. If you don’t have one of these, you can find a full list of appropriate IDs here.
Fill out your W-4.You’ll also be asked to fill out your W-4 on your first day. This determines how much in taxes will be withheld from each paycheck. If this is your first time ever filling out a W-4, don’t worry—your taxes are most likely very simple, and you can follow the instructions right on the sheet. However, if you’re at all unsure how many allowances to take, we provide a full explanation of how the W-4 works here.
Set up your paycheck for direct deposit.On your first day, you’ll probably also receive a form that gives you the option of getting your paycheck deposited directly into your bank account, which will make your life much simpler. Some companies don’t even have a form—they just request you hand them a voided check. We think it’s best to put your first paycheck in your savings account (we’ll tell you how to get money into checking later), so you’ll need to know the routing number and account number for the bank that holds your savings. You can log in to your account or call your bank to find out. Some banks even provide a direct deposit form that you can print and hand in. Later on in the checklist, you’ll decide whether you’d like to have your whole paycheck go to savings permanently.
Digitally link your savings account to your checking account.You won’t be transferring any money today—you won’t have your first paycheck for a couple of weeks at least. But linking your two accounts together now will ensure that when your first paycheck arrives, you’re ready to send yourself some spending money. To do so, log in to the account where your paycheck is being deposited, and find the option for “transfers.” In order to link your accounts, you’ll need your checking account's routing number and account number, both of which are found on a check for that account. Follow the instructions from the bank to complete the process, which might take a few days.
Review your employee handbook.Now is the time to make sure you thoroughly understand your company policy on holidays, vacation, hours, overtime, the dress code and more. You’ll want to be familiar with how many days you can take at the beach, whether sandals are appropriate in the office and if you get free dinners for working late!
Set up your health care benefits and flex spending account.This is an extremely important financial decision, as you won’t get another chance to change your preferences until open enrollment in the fall. Read this guide for setting up your health care benefits and flex spending account.
Sign up for your employer-sponsored retirement plan.What if you had the choice of buying a summer dress for $75, or keeping that money, having someone else double it, and then watching it grow by 7% every year? We hope you’d take the latter choice. If your company offers a 401(k), 403(b) or SIMPLE IRAA SIMPLE IRA is an employer-sponsored retirement plan for small businesses, including self-employed individuals. It often offers a matching component. with matching benefits, then–hey, pay attention!—you’re about to get free money. Make sure you’re contributing at least the match percentage or you’re turning down that free money. For a complete guide to choosing your retirement accounts, read this.
Maximize your benefits.Now it’s time to take a look at all the benefits your company offers. If it has a program that allows you to buy public transit passes with pre-tax dollars, signing up can save you hundreds of dollars of savings over a year. Or maybe your company offers discounts on museum visits or gym memberships, or the gym discount might come through your health insurance. Some companies match your tax-deductible charity donations each year up to a certain dollar amount. Read this complete guide to tax-free benefits, see what your company already offers and maybe even suggest a couple new benefits to human resources if you work in a small company.
Set up your workspace.Now comes the fun part! It’s time to customize your workspace for maximum motivation and efficiency. To get inspired, read the four tips to improve your office space, or even try a little bit of practical feng shui for your desk. Your boss will notice that you’re set up and ready to work!
Get organized.Next set up a personal organization and time management system that helps you to stay on top of your duties and makes sure you get the most of every hour. You might have to tweak it after a few days or a week as you get comfortable with your duties. It should enable you to:
Understand your first paycheck.When your first paycheck arrives, look it over and understand it. You want to make sure it’s correct and that you know exactly where your money is going. While not every paycheck is laid out in exactly the same way, you should see each of the following on it:
Reassess your budget in the budgeting tool.Now that you know exactly how much will drop into your bank account every pay period, you can reassess your budget. Look at how much you get each month and then determine:
Decide how you will handle your paycheck.Now that you know how much you’ll be contributing to your savings account every month, you’re ready to decide how to handle your direct deposit. There are two ways we suggest directing your paycheck:
Revise your direct deposit arrangement at work or set up an auto-transfer to your checking.If you decide to split your paycheck so 20% is going into savings and the rest into checking, then go back to your human resources department and change your direct deposit arrangement. The easiest way to add your checking account to your direct deposit is to bring in a voided check, which will have both the routing and account numbers on it. If you are going to have your entire paycheck deposited into your emergency fund, pop into the bank accounts that you linked in step 4 and set up an auto-transfer for the 80% to your checking account. If you only get paid monthly, then set up two monthly auto-transfers so you get your money spread out in doses, or even a transfer every week! You’ll avoid the end-of-the-month panic when you spend everything too early.
Set up transfers to your other savings goals.Remember that 20% of your income should go toward “financial priorities,” which are retirement, an emergency fund, debt payment and other savings goals. (However, this is only based on your take-home pay, so it excludes whatever you may be contributing toward, say, retirement through an employer-sponsored 401(k) or 403(b) before you receive your paycheck. That’s just bonus!) For example, let’s say your take-home pay is $2,000 a month in two paychecks of $1,000 each. You’ve determined you need $1,600 a month to live on, so for each paycheck, send $800 to your checking. Then, allocate $50 to your “New Car” savings account and leave $150 behind in your main savings account for your emergency fund.
Consider disability insurance.Check and see if your employer offers short-term and long-term disability insurance as a benefit, and how good the policy is. Short-term disability is used in situations like maternity leave and if you’re recovering from surgery. Long-term disability would provide you with a portion of your income (usually around 60%) if you were ever seriously injured and out of work for months or years or became disabled. If you cannot get this coverage through your employer or it’s insufficient, it’s time to start looking. Ideally you want a long-term policy with “own-occupation” coverage. Otherwise you might get injured but be told that you won’t receive disability insurance because, even though you can’t work at your old job, you could still work in the fast food industry. Some employers will allow you to pay a little more in order to improve your coverage, so if you find that your employer’s disability coverage is lacking, ask HR. Learn more about this and other types of insurance here.
Understand why retirement is important.You kind of, sort of think you know that you should start saving up for retirement ... someday. Well, the day you start is today. Contributing money toward your retirement will be one of your priorities from now until the day you leave the workforce. To find out why, check out our article, Saving for Retirement 101. Plus, learn what not to do when it comes to retirement in Top Retirement Mistakes to Avoid. Then we'll get you started.
Learn this lingo.As you dive into retirement brochures and websites, you may come across a fair amount of retirement account lingo. Read over these terms so it’s not all gibberish to you.
- Qualified retirement plan: A retirement plan that the Internal Revenue Service has deemed eligible to receive tax benefits.
- Tax-deferred accounts: Retirement accounts such as a 401(k) in which the account holder pays taxes later, when funds are withdrawn from the account.
- After-tax accounts: A retirement account, such as a Roth IRA, in which the contribution is made with money that has already been taxed.
- Pretax contribution: A retirement contribution made with money before taxes are taken out, usually to a tax-deferred account.
- Post-tax contribution: A retirement contribution made with money after taxes are taken out, usually to a Roth IRA, which will not charge the account holder tax when the money is withdrawn.
- Matching contribution: An amount of money an employer pledges to contribute to an employee’s retirement account as long as the employee makes a certain level contribution.
- Rollover: The transfer of money from one retirement account to another without having to pay taxes on the move.
Find out what retirement savings programs are available to you through your employer.If you’re self-employed, skip down to step number eight. But if you have a full-time job, then definitely look into the retirement programs your employer offers, because such plans usually have tax benefits (though retirement accounts you set up on your own can also have tax benefits). The most common types of employer-sponsored retirement programs are:
- 401(k)s: A 401(k) is offered primarily by private companies and allows employees to have contributions to their retirement accounts taken out of their paychecks. The account holder does not pay taxes on the contributions herself, but pays taxes on the money distributed from the account.
- 403(b)s: A type of retirement account that is similar to a 401(k) but is available to public education institutions, non-profits and ministers.
- 457s: A 401(k)-like retirement account for governmental employers.
- Roth 401(k)s: This type of retirement account is like a regular 401(k) except for the way it is taxed. Unlike a regular 401(k), the contributions are taxed before the money is deposited into the account. However, that means that when the funds are distributed in retirement, the recipient does not have to pay any taxes! Though not as common as a traditional 401(k), the Roth 401(k) is becoming a more popular additional offering.
- 401(a)s: Also known as a “money purchase plan,” a 401(a) does not allow the employee to choose the amount he or she contributes to the plan. The company contributes to the plan on its own or mandates that all employees deduct a set percentage from their paychecks as a contribution.
Find out whether your employer offers a matching program and, if so, how it works.Sometimes, companies will add money into your retirement account to create incentive for you to save for retirement. Let’s say your company contributes 50% of what you contribute up to 6% of your salary. So, if you make $100,000 and you contribute 6% of your salary, then your company will chip in another 3%, and you’ll be socking away 9% of your salary each year, while actually only taking 6% out of your salary. Basically, you’ll be getting 3% for free! Let’s try another example: your company has an even more generous plan that matches you dollar for dollar up to 6%. That means that if you contribute 6% of your salary, you’ll actually get to save 12% of your salary every year even though only 6% is being taken out of your paycheck. Not all companies match, and this is by no means the only reason to be saving, but if your company does, it is a great incentive to get started.
Determine how much you need to live on.You should contribute to retirement as least as much as you need to in order to take full advantage of your company’s match, and if you can contribute more, as much as what works for your budget. But it’s a bit tricky figuring out how much you can contribute toward retirement since it isn’t easy to predict how it will affect your paycheck. (Since the money comes out pre-tax, you can’t assume that contributing $200 to retirement every paycheck will just knock $200 off your current paycheck.) An easy backwards way to figure out how much you can contribute while still leaving you enough to live on is to follow this quick rule of thumb: tally up your essential monthly expenses—housing, daily transportation, utilities, groceries. Multiply that number times two: this is how much your take-home pay needs to be in order for you to have a properly balanced budget.
Determine how much your retirement contribution will be.Play around with this calculator to see how much your paycheck will be based on various retirement contribution scenarios. In “results,” you want the net income number to equal your target balanced-budget number (twice your monthly essential expenses). If you don’t know how much of your paycheck to allocate toward various expenses, learn how to do your budget right here!
Sign up for your work retirement program and meet the minimum requirements necessary to receive a full match, if offered.Now that you know how much you’ll need to live on per month and how your retirement contribution will affect your paycheck, sign up for your work retirement program, making the contribution you need to get the full match from your company and that still works for your monthly budget. For instance, if you'll get full matching from your company with a 5% contribution, but you have calculated that you can contribute 10% of your paycheck and still have a balanced budget, then by all means, contribute 10%. However, if you need to contribute 5% to get the full company match but find that you can only contribute 3% without jeopardizing your budget, we suggest you try to redo your budget, earn some side income or cut some expenses in order to be able to contribute 5%.
Choose a diversified investment portfolio.Each retirement program offers different types of investments. You should base your choices on your own individual risk tolerance, which is a way of measuring how big a loss you are willing to risk for potential gains. Many retirement programs offer risk tolerance quizzes that will then recommend investments to you. If you want to test your own risk tolerance here, take our quiz.
With every raise, increase your retirement contribution until you’ve reached the maximum contribution.The government mandates limits on contributions to certain types of retirement accounts. (The reason the government doesn’t let us contribute as much as we want is that the wealthy could then exploit 401(k)s by contributing exorbitant amounts of money to them in order to avoid taxes.) The limits vary every year. For 2012, the limit on contributions to employer-based accounts such as 401(k)s and 403(b)s is $17,000; for Roths and traditional IRAs, the limit depends on your income, tax filing status and age. (Read more at the IRS website.) If you’re not currently contributing the maximum, increase your retirement contribution with every raise. So, if you receive a 3% raise, increase your retirement contribution by 3%, continuing to live on the same budget. Also, if you want to speed up the increase in your contributions, then aim to boost your contribution by 1% every six months. Each time, also re-do your budget, finding a new expense to cut, or coming up with a new way to make side income so you don’t have to cut costs.
Choose an Individual Retirement Account (IRA).IRAs are useful no matter your employment status (but you can only contribute to one if you have earned income--or are married to someone who does). If you’re self-employed or your employer doesn’t offer a retirement account, you’ll need to open your own. If you have an employer-based retirement account and you’ve reached the maximum contribution and want to save more for retirement, then you’ll need to open an IRA as well. These are the main types of IRAs:
- Traditional IRAs: This type of retirement account is similar to a 401(k) in how the account is taxed. In a traditional IRA, the money you contribute now will get you a tax deduction (up to a limit), plus, your money won’t be taxed as it grows. However, when you withdraw the money during retirement, the money will be taxed.
- Roth IRAs: A Roth IRA is different from a traditional IRA in that you pay taxes upfront at today’s tax rates. In return, you never have to pay taxes on your investment earnings. However, in order to contribute to a Roth IRA, your income has to be under a certain threshold, depending on your tax filing status. In 2012, if you file your taxes as single or head of household, your modified adjusted gross income has to be below $125,000 in order for you to contribute, and if you are married filing jointly, your combined income cannot be more than $183,000.
- Self-Employed Pension (SEP) IRAs: A SEP is an IRA commonly used by people who own their own business or are self-employed. The owner of this business may contribute to the SEP and take a tax deduction for contribution. Employees do not pay taxes on their SEP contributions, but they pay taxes when the money is paid out. People who have SEPs must also have traditional IRAs, into which the employer will deposit SEP contributions.
- Spousal IRAs: If you're not working but have a spouse who is, a Spousal IRA is a great fit for you. It can either be a traditional or Roth IRA, and your spouse can contribute to it as long as you file a joint tax return.
Set up your chosen account.Use the guidelines in the I Want to Open an Investment Account checklist. Before setting it up, make sure you have created your budget so you have a clear idea of how much you can afford to put toward your IRA every month. If you have a retirement plan at work, you may not be able to get a tax deduction for contributions to a traditional IRA. However, you can still save more beyond what you are putting in your employer-based account and have the money grow tax-deferred, which means you won’t pay taxes on it until you use the money.
Calculate how much you need to save for retirement.The biggest hurdle to saving for retirement is just starting. So, congrats on getting yourself set up. But now you must be wondering how much you need to put away. Now is the time to calculate that. Check out this calculator to see:
- How much retirement will cost you.
- How much you’re on track to have by the time you retire, based on your current contributions.
- Whether you’re putting away enough, and if not, how much you need to contribute.
Schedule regular transfers from your bank account to your IRA or Roth IRA account.Now that you know how much you need to be saving up every month, let’s see how we can get you there. If at the moment you can’t contribute the amount you’ll need in order to hit your retirement goals, start with whatever you can manage now with your budget. Set up your contributions so you fund your IRA throughout the year gradually with each paycheck, rather than trying to put away one big lump sum. These regular transfers you set up to fund your IRA are called Automatic Clearing House (ACH) debits.
Once you’ve maxed out your all of your qualified retirement accounts, consider opening a separate brokerage investment account.If you’re now contributing the maximum to your employer-based account and to your IRA, you can always contribute more to an investment account. (But it's best to do this only if you have saved up an emergency fund and have no credit card debt.) Follow this checklist to learn how to open an investment account. Again, set up regular contributions to the account to fund it gradually.
If you’re far away from your goals, don’t panic! Redo your budget to free up some money so you can contribute a bit more.Every little bit counts, so aim for smaller increases more frequently (like 1% every quarter) rather than a big increase “when you can afford it”—which is likely to be put off indefinitely until you realize you’ve been meaning to increase for five years and haven’t. If you’re looking for ways to free up some money, take our Cut Your Costs Bootcamp, or complete our budgeting checklist.
Review your accounts at least once a year.Don’t just open these accounts and forget about them! Check in on your accounts once a year to see if your investments still make sense for your age (i.e., the years you have until retirement) or in case your risk tolerance has changed. If it has, it may be time to adjust the mix of investments in your portfolio. Also be sure to re-run your retirement income projections (Step 10) every few years to make sure you’re still on track.
- Incorrect personal information, such as an address you don’t recognize
- Erroneous account details, such as an incorrect credit limit
- Mistaken accounts, such as one that actually belongs to a family member, not you
- Fraudulent accounts, which include accounts you don’t recognize as yours
- Any other unfamiliar items, such as a late payment on an account you know you’ve never paid late
- If your heart stopped beating, would you want CPR or defibrillation, which gives an electric shock to the heart?
- If you were unable to breathe on your own, would you want assistance from a breathing machine?
- If you were unable to eat or drink, would you want feeding tubes to supply your body with nutrition and fluids, and/or dialysis to remove waste from your blood and manage fluid levels?
- Would you want to donate your organs and tissue for transplantation or scientific study?
- Make sure you follow the laws of your state because the process for creating a living will and health care proxy varies from state to state. Some states require you to have two witnesses or a notary A notary is a state-appointed official licensed to perform legal acts, particularly witnessing signatures. when you sign your living will. Others only need one witness or even none at all. Learn the regulations for living wills and proxies for your state here.
- Search online for your state’s living will and proxy forms (search “[your state] + living will form”).
- Fill out the forms and have them signed by the agent you’ve chosen, as well as any witnesses your state requires. Because of the ease of creating your own living will, most people should be fine with the do-it-yourself option. If would want to hire an attorney for any special concerns you have, it will likely cost between $150 and $500.
Go to AnnualCreditReport.com.
Choose from which bureau you’d like your free credit report.
Fill out the verification form.
Print out and read your entire credit report and highlight any questionable or erroneous data.
If you find errors, dispute them with the credit bureau.
Make special note of errors that appear to be identity theft or fraud.
Follow up on any disputes.
Check your report again, with another bureau, in four months.
Understand what a living will and health care proxy are and why they are important.A living will, also known as an advance medical directive, is a document that outlines the medical decisions you want made in case you are unable to communicate them yourself. A health care proxy, a document that often accompanies a living will, names the person you want to make health care decisions for you (known as an agent) in case you are incapacitated. Essentially, the living will states what you want and the health care proxy states who you want to carry that out. While something like planning for retirement seems like a long-term project, writing a living will shouldn't because it could affect you and your family tomorrow. It’s not pleasant to think about, but a living will ensures that you’ll receive the treatment you want if you have an accident or suddenly fall ill. It could spare your family members the stress of deciding on treatment for you, or the costly court process of appointing a guardian if they are unable to agree. (Read more about the importance of living wills here.)
Figure out your preferences for medical treatment.Consider these questions to help you decide:
Appoint a health care proxy agent and inform him/her of your decision.For your health care agent, choose someone you think will act honestly and maturely, with your interests at heart (not someone you feel obligated to ask). This can be a family member, friend or outside adviser who is able to make unbiased decisions. Once you decide, inform her of your decision and decide on a time to meet and discuss your living will before writing the official legal forms.
Decide whether you want to hire a licensed attorney or write your own will.If you want to write your own, you can order both a living will and health care proxy (sometimes referred to as a health care power of attorney) from LegalZoom.com ($40- $50) or download the forms from your state’s website (costs range from free to around $40). If you decide to do it yourself:
Fill out the forms, and have them signed by your chosen health care proxy.If you’ve written your own living will, you should take it to a notary. Notarizing your documents means the notary will identify you, acknowledge that she saw your living will signed, and make a note of it in her records. It’s not required in all states, but it’s always a good idea to make your documents official. If you decide to hire an attorney, she will let you know if you need witnesses when you and your health care agent sign your documents and will get both notarized, if necessary.
Give a copy of your living will to your health care agent, attorney and family doctor, and keep one for yourself.After you’ve given your living will to these three important people, file away your copy in a binder with the rest of your estate planning and insurance documents, and let your health care agent and family members know where you put it.
Review your living will every few years.If you move to a different state, check to see if the requirements for living wills and health care proxies for your old state will still stand. If they are different, you’ll have to fill out new forms. You can see your state’s living will laws here. Also be sure to revisit your decisions as your perspective on life, your health or your family situation changes.
Determine if you’re ready to set up an investment account.Investing is what you do after you’ve gotten all your other financial ducks in a row. If you answer yes to the following three questions, then you’re ready! If not, come back after you’ve taken care of these three tasks. a. Have you paid off all of your credit cards? If not, that debt will cost you more money than you would make by investing. b. Do you have at least six months of your net pay in an emergency fund? You always need pure cash on hand to help you out in case you lose your job, you receive a large unexpected medical bill, your car breaks down or another emergency comes up. The money you invest should be separate from this emergency fund. (Read more about saving here.) c. Do you have a retirement account and are you maxing it out? If your company matches your 401(k) contributions, make sure to get the full match before you divert any money to your own investment account, or else you’re missing out on free money!
Save up enough to seed the account.Many brokerages require you to invest a minimum amount, ranging from $500 to $2,500, in order to open an account. Even if you choose a brokerage with no minimum, you’ll need enough to spread your risk in several different investments, which is called diversifying. You should diversify your investments across companies, industries, countries and types of financial instruments, which protects you if one company or industry tanks. $500 is a good starting point, as it’s enough to buy a couple shares in ten different mutual funds or ETFs Investment vehicles that bundle together stocks for easy diversification.. You shouldn’t need nor have any plans to use this seed money for at least the next five years. Let’s say that after you invest $5,000, the stock market dips, shrinking your investment to $4,000. If you needed to pull your money out for an emergency, you wouldn’t have time to let it grow back, and you’d have to swallow the $1,000 loss. If you are considering using that money to go back to school or make a down payment on a home soon, stick it in a savings account instead.
Consider a discount brokerage.There are two types of brokerages: discount and full-service. At a full-service brokerage, you’ll place trades with a person and pay someone to manage your investments for you. This is an expensive option, typically costing $150 per trade, and is best for people with sizeable assets to manage and very little time and interest in managing them. So don’t be turned off by the term “discount.” While these brokerages let you trade in a matter of seconds for a fee as low as $4 per trade, they also offer useful tools and research. Some discount brokerages include Scottrade, Fidelity, Charles Schwab, E*Trade and TD Ameritrade. They offer a range of services and charge different trading fees, and some even offer an initial bonus for opening an account. Just remember, you’re going to be with this brokerage for a while (you’re investing for the long term) so do your research carefully to find a brokerage you are comfortable with. When you compare brokerages, consider:
- Whether it charges a maintenance fee if your account value falls below a certain amount
- How much it charges for each trade
- The minimum to open an account
- What kind of tools and research it offers
- How easily you can get a representative on the phone
- The bonus for opening an account
- How easy the website is to navigate and use
Determine your risk profile.In general, the sooner you’ll need the money you’re investing, the more conservative you should be. For example, if the money you’re investing is meant to help you buy a home in ten years, you will take on less risky investments than the ones you’d make for your retirement 30 years down the road. Lower-risk investments will grow more slowly but are less likely to drop drastically in value. But if you’re 26 and have no plans for your money for the foreseeable future, you could more comfortably buy reasonably risky investments, because over the long term they have the potential to grow faster—and if they don’t at first, you have the time to recoup your losses. This also has to do with how thick your investing skin is. Even if you are investing for the long term, if you know yourself well enough to foresee a mini panic every time the stock market drops, you’re best off going with low-risk, low-return investments. Determine your own risk comfort with our quiz. Your brokerage might even have a little quiz for you to fill out to determine your risk profile, which will spit out investment recommendations for you.
Choose your mutual funds and ETFs.If you are dead set on buying the stock of your favorite company, we can’t stop you. But in general, LearnVest recommends buying mutual funds and ETFs. These are collections of stocks or bonds or other investments, so they make it a snap for you to diversify, automatically spreading your risk. They are also clearly labeled so you can easily build a complete portfolio. You can grab yourself an international fund, a fund that specializes in large companies, a fund that specializes in small companies, one that does tech stocks and even a fund that only invests in environmentally conscious companies! Almost anything you want is available. Many brokerages will recommend how you should split up your investments according to your risk profile and investment goals. You could also start with a basic book on investing, like this one, to determine your risk profile. To search for your investments, use Morningstar, a website that rates the quality of funds according to a five-star system. (Brokerage firms often link to it.) Finally, choose no-load funds, which means that those funds don’t charge a commission for trading them (other than the brokerage’s trading fee), which saves you money.
OPTIONAL: Set up automatic transfers.This step isn’t required, but it’s a great way to increase your investments. If you have room to spare in your budget after saving for your short term financial goals and contributing to retirement, set up an automatic transfer every month or after every paycheck to build up the value of your portfolio over time. This helps your “dollar cost average,” which means you buy shares in the funds you want to own at all different prices, and you often pay a lower price per share on average. Remember, profit is based on the difference between what price you paid and what price you sell at, so the lower the price you pay the better. But only do so if you have a solid grasp on your budget. Read more here to learn how to set up your budget.
Review your statements quarterly.After choosing your funds, you can pretty much set it and forget it for a few months. You don’t want to make yourself nervous by tracking the stock market because you’re investing for the long term, remember? Many people like to review their portfolio quarterly or semi-annually in order to return to their ideal asset allocation (a.k.a. balance everything out so you don’t find yourself with an overwhelming chunk in Chinese investments or consumer goods funds) or just make sure everything is running smoothly. Set yourself a calendar reminder to log in and see how everything is going at least twice a year.
- Traditional savings accounts: A savings account that promises to hold your funds secure and provides modest interest on your money. It usually does not allow you to write checks or pay for transactions with that money, and often limits the number of withdrawals you can make on the account within a month.
- Certificates of deposits: A certificate of deposit is an investment that may provide higher returns than a regular savings account but requires you to lock your money up for a set amount of time, usually between three months and five years (you'll pay a penalty if you take the money out earlier). As of early 2012, interest rates in CDs are only negligibly higher than in savings accounts and money market accounts, so we don’t recommend locking up your money just to snag a slightly higher interest rate that could be easily wiped out by the early withdrawal fee.
- Money market accounts: A money market account pays a higher rate of interest, often in exchange for larger deposits (usually at least $500, though many online banks have no minimum) and a limited number of transactions per month. Some of these accounts also come with the ability to write a check from them, unlike traditional savings accounts.
- Free checking with no strings attached
- No minimum balance so you can keep as much as possible in your savings account
- No penalties and no fees for transferring between checking and savings
- No or low ATM fees
- A minimum opening balance you can afford
- The highest interest rate you can get
- A high APY
- The ability to subdivide your savings into separate accounts for your emergency fund and shorter-term goals
- No fees for making transfers to checking
- A minimum opening balance you can afford
- Proof of age: You'll need to prove your age when opening a bank account. A driver's license or state-issued ID card that shows your birthdate are common options.
- Proof of residence: If you’re opening the account in person, bring in a copy of a utility bill that has your mailing address printed on it. This is used to verify your address and ensure you are who you say you are. If you’re opening an account online, you’ll just need to type in your address.
- Proof of legal status: To show that you're a U.S. citizen, have either your Social Security card or U.S. passport available to prove your status.
- Your initial deposit: Most banks require that you provide them with the minimum deposit required upon opening an account.
- Available time: Unlike a casual trip to the bank to withdraw money, opening a new account takes some time. Banks need to carry out standard paperwork and conduct approvals, so plan to spend 30-60 minutes with the service representative.