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What Trump’s Budget Really Means for Student Loan Borrowers

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There has been a lot of buzz around President Donald Trump’s $4.4 trillion budget proposal outlining steep spending cuts to domestic programs, including the federal student loan program since it was unveiled Monday.

If you are a student loan borrower, rest assured that this budget won’t cause changes — at least not directly. Experts interviewed by MagnifyMoney all said the proposal barely means anything to student loan borrowers or prospective borrowers because Congress may completely ignore it, as it did last year and many years in the past.

“The president’s budget in general is just a proposal and messaging document,” said Josh Gordon, policy director at The Concord Coalition, a national nonpartisan fiscal advocacy group. “And it doesn't have the force of law. It doesn’t get voted on in its entirety.”

However, the proposal does allude to the White House hoping to reform the federal student loan program.

Trump’s blueprint would streamline income-based loan repayment plans, eliminate the Public Service Loan Forgiveness Program and scrap subsidized loans. These policies would save roughly $203 billion over 10 years. While the savings amount is larger than what Trump recommended in last year’s proposal, the proposed policy changes stay largely unchanged from last year’s, which Congress did not act on.

“The chances of it being acted as written I would say if it’s not zero, it’s close,” Marc Goldwein, head of policy at Committee for a Responsible Federal Budget, an independent, non-profit, bipartisan public policy organization based in Washington, D.C., told MagnifyMoney. “But I could see pieces of it passing, particularly if there’s a broader higher education bill or some kind of deficit reduction bill in the next couple of years.”

What to know about Trump’s proposals

Trump proposed changing student loan policies that would apply to loans originated on or after July 1, 2019. Those who are borrowing now wouldn’t be affected.

Here are three pieces of major policy change recommendations:

1) Simplify income-driven repayment programs

The new budget plan would collapse income-driven repayment plans — monthly student loan payment calculated based on income and family size — into one, under which student loan borrowers would pay 12.5 percent of their monthly income toward student loans. Borrowers in general pay 10 percent under current plans.

Borrowers may have their remaining balance forgiven after 15 years if their loans covered undergraduate education. But those who borrow for graduate-level studies would have to make 30 years of payments before their balance can be forgiven. Under current law, loan forgiveness for private-sector employees kicks in after 20 or 25 years.

2) Eliminate subsidized loans

Subsidized loans are need-based undergraduate loans that the government pays interest while the student is enrolled at least half time or while the loan is in its grace period or deferment. After that, the borrower starts paying interest. Unsubsidized loans, on the other hand, accrue interest while the student is in school, in grace or in deferment, and the borrower is responsible for repaying all of it.

3) End the Public Service Loan Forgiveness program

As an incentive to encourage students to work in the public sector, government employees or those working for qualified nonprofit organizations may have their loan balance forgiven after 120 on-time payments (which takes a minimum of 10 years). Trump suggested ending this program.

Goldwein said the fact that Congress didn’t act on any of Trump’s last budget recommendations about student loans convinces him that not much is going to change this year either.

Where is Trump’s proposal headed?

Goldwein explained that when the president puts forward a budget proposal, it’s just a policy statement that provides a sense of the president’s priorities. And there’s not usually an effort in Congress to actually enact large parts of it: It either ignores the proposal entirely or picks up pieces of it.

Gordon said this year is even less likely for Congress to act on any presidential proposal because before Trump unveiled his proposal, Congress passed a budget deal that raised spending caps over the course of the next two years.

The fact that 2018 is an election year also makes it less likely that the Senate and the House will try to pass a budget that they can agree on.

“That would be a very difficult political vote, and it seems like they are going to try to avoid that,” Gordon said.

Goldwein said a future Congress may enact some of the president’s recommendations, but it’s unclear when and how.

So what can student loan borrowers do?

Goldwein cautions future borrowers that college costs will likely continue to rise and at the same time, the government will likely have less money to subsidize higher education.

This is in part because the country’s debt keeps rising while its population ages. Therefore, a bigger share of the federal budget is set to go to interest payments and entitlement programs for seniors, Goldwein explained. Meanwhile, revenue will decrease due to massive tax cuts. On top of that, the Federal Reserve will likely keep increasing its short-term interest rates, and so student loan interest rates will tick up.

Gordon suggests concerned borrowers or future borrowers get politically involved.

“If their interest is in it, they should ask their member of Congress of that they think or what they think about this proposal, how they would change it and what it would mean for their constituency,” Gordon said. “I think that dialogue with their representative is important.”

You may want to check out our guide on paying for college or our guide to student loan forgiveness, as it’s still an available option.

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The Cost of Filing a Sexual Harassment Lawsuit, Plus Ways to Save and Fight

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Even in the era of the #MeToo movement, the picture is still rather bleak for victims of workplace sexual harassment who may not have the financial means to seek recourse.

According to a 2016 U.S. Equal Employment Opportunity Commission Task Force report, one in every four women have experienced sexual harassment at work. That number could be even higher. That number could be even higher.

Fearing that their claims will be ignored and their careers will be put in jeopardy, as many as 70% of sexual harassment victims choose not to come forward, let alone file legal claims against their abusers, according to Maya Raghu, director of Workplace Equality and Senior Counsel at the National Women’s Law Center.

In a Gallup poll conducted in the wake of the Harvey Weinstein scandal, some 42% of women said they had been sexually harassed.

As movements like #MeToo and Time's Up gain more traction, many more women are coming forward through various channels, and resources are being pulled together to help them battle perpetrators and unlawful practices.

The Gallup survey suggests that the #MeToo social media campaign has encouraged more women to take legal actions against the abuser: About 38% of the women surveyed said they were more likely to sue the perpetrator they believed had sexually harassed them. This is a much higher percentage than the same question garnered 20 years ago (18%).

However, a provision buried in the new 2018 tax law could possibly deter victims from taking legal action than before. In the past, victims could deduct the attorney’s fees from a settlement subject to a confidentiality agreement, so that the amount taxed is equal to the portion of the payment the victim keeps.

Under the current tax law, which was passed late last year, employees who settle sexual harassment lawsuits and agree to a nondisclosure agreement may no longer be able to deduct their legal expenses on their taxes. Instead, they would be taxed on the full settlement.

Sen. Robert Menendez (D-N.J.) proposed this amendment last November before the existing tax bill was signed into law. The proposal came in wake of the #MeToo movement, following a flurry of sexual harassment scandals from Hollywood to Capitol Hill. Legal experts say the provision that was intended to curb corporations from seeking confidentiality — an instrument to keep victims quiet — might have unintentional consequences on the victims’ end: The way the rule is written, it would have the same effect on plaintiffs in such settlements..

Anthony C. Infanti, a professor at the University of Pittsburgh School of Law who focuses on tax law, told MagnifyMoney the provision was written so broadly that other expenses related to sexual harassment claims could be deemed eligible for tax deduction.

For instance, he explained, women going to therapy to discuss sexual harassment subject to a confidentiality agreement may not be allowed to deduct such medical expenses from their taxes.

“It’s so broadly written that it’s not targeted at perpetrators and their employers, who seem to be the intended targets,” he said.

Infanti stressed that many victims may have legitimate reasons for wanting a nondisclosure agreement, whether it is to maintain a low-profile life when the perpetrator is a famous figure, or protect their career. If the price of agreeing to a nondisclosure would be a huge tax bill, this could well prevent from them going through all the grief associated with coming forward in the first place.

“To a certain extent you have to give some agency to the victims, let them also make decisions for themselves rather than having Congress make the decision for them about what they should or shouldn’t be able to do, what’s good for them and what’s not,” Infanti said.

Whether victims will be able to deduct fees from taxes is unclear right now. It’s up to the courts and IRS to interpret the provision. But this gives more reason for sexual harassment victims to seek ways to address the issues without having to suffer from devastating economic hardships.

Once you decide to seek justice, here are the steps you should take, and resources to take advantage of:

“The thing is there are some legal options, but they aren’t perfect,” Raghu told MagnifyMoney. “And it takes a while sometimes to obtain justice, and unfortunately there are no guarantees even for someone who manages to persist, who’s able to find an attorney. It’s very very difficult.”

1. Follow your employer’s reporting guidelines

First, you should look to see if your employer has a sexual harassment policy before reporting the incidents. The employer should conduct an investigation, which doesn’t always happen or isn’t always as thorough as it can be, Raghu said.

But it’s important to go through the internal procedure before seeking external assistance. Raghu said that’s because if someone eventually chooses to file a lawsuit, his or her employer can assert as a defense that the victim didn’t take advantage of the internal reporting procedure.

Read our guide to report sexual harassment at work.

2. File a complaint with the EEOC

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Once an investigation is conducted, or the company doesn’t act, Raghu said the victim can go to his or her federal, state or local civil rights agency, and file a complaint citing discrimination. The EEOC is the federal agency that enforces laws against workplace discrimination. It has offices throughout the country.

Raghu said it is a prerequisite for the victim to file a complaint with the EEOC before filing a lawsuit, and the victim doesn’t necessarily need an attorney at this point.

What happens is that the EEOC will in many cases try to get the parties to come to some resolution without requiring a full-blown litigation. But if that doesn’t happen, the EEOC will investigate, asking the employer for a written answer to the charge. The victim will need to provide documents supporting the complaint, such as evidence of harassment and retaliation. The investigation is based on facts provided by both parties and additional information the EEOC gathers. The agency can either find the claim viable and can go forward with filing a lawsuit in court or they make a determination that the discrimination didn’t occur.

Sexual harassment is considered a form of sex discrimination that violates Title VII of the Civil Rights Act of 1964. If the EEOC determines that sexual harassment did occur after investigation, it will issue the victim a Right to Sue notice.

3. File a lawsuit

Once you have received the letter of Right to Sue, you can file a lawsuit under the federal anti-discrimination law. This has to happen within 90 days of receiving the green light from the EEOC. This is the time when victims need to work with an employment discrimination attorney.

4. Explore alternative options

Many victims may not have the financial means to take their employer or even an individual colleague to court and risk losing their case. Raghu acknowledges that few cases get to the point of trial or even a settlement. If you can’t find any legal defense funding and you still want to take action, you may want to come forward in public, Raghu suggested.

What we’ve seen in the last few months is that many victims have been talking openly about their experiences to the press and on social media, bringing the incidents to light without necessarily going through the legal process.

Catharine A. MacKinnon, who teaches law at the University of Michigan and Harvard University, wrote in a New York Times op-ed that the #MeToo movement is accomplishing what the law has not.

If you suspect the perpetrator has routinely harassed other people, maybe you can find allies in your company, or through former employees. Allegations of sexual harassment are being taken seriously as the social movements against predator behaviors run deep. You may feel more empowered coming forward as a group than battling on your own.

Just last week, 10 women signed a public letter accusing a Northwestern University journalism professor of sexual harassment and assault. The 10 former students of Northwestern’s Medill School of Journalism have received overwhelming public support from alumni and professors. The accused professor denied all the allegations, but will take a leave of absence while the case is being investigated by the university, according to the Chicago Tribune.

5. Prepare for the cost

To be sure, waging a legal battle against workplace sexual harassment can be a costly, time-consuming and mentally exhausting process. Victims may already have experienced substantial economic harms as a result of harassment in the first place. Many cannot afford legal representation, and very few cases get to the point of a trial or even a settlement unless they are representing themselves, Raghu said.

Raghu said some private attorneys may take on a sexual harassment lawsuit on a contingency basis, meaning that the lawyer would charge nothing — or sometimes they may ask the defendants to pay their costs — if you lose the case. On the other end, if the victim wins, the attorney would take anywhere from 20 to 50 percent of the money from a settlement or judgment.

Attorneys’ rates vary depending on the complexity of the case, the location of the attorney and the agreement between the plaintiff and the lawyer. But Raghu said those with a history of reaching larger settlements/judgments may charge a higher percentage for the case. In other cases, she said the lawyer may take a sexual harassment lawsuit on a partial contingency basis, requiring the client to pay for certain expenses, such as court filing fees, travel costs, etc., no matter whether they win or lose the fight.

If you are determined to pursue your rights through the legal system, there is legal and financial assistance available for victims. Here are some examples:

The National Women’s Law Center is the home of the TIME'S UP™ Legal Defense Fund, an initiative launched by women in the entertainment industry on Jan.1, 2018. Over $20 million has been raised to subsidize legal support for individuals who have experienced workplace sexual harassment and retaliation.

A screenshot of the TIME’S UP website.

When victims seek assistance, Raghu said the center connects them to a network of attorneys who will take their case for a reduced fee, or in some cases, pro bono. Depending on circumstances, their cases may be eligible to receive support by the TIME'S UP™ Legal Defense Fund. But there’s no guarantee of representation, Raghu adds.

NWLC’s Legal Network for Gender Equity, launched last October, now has 530 attorneys across the country. It has received almost 1,500 requests for assistance from workplace sexual harassment victims, Raghu said.

Equal Rights Advocates (ERA), a national civil rights organization based in California, defends laws that prohibit sex-based discrimination, and advances gender equality in the workplace partly through representing women in lawsuits. For more information or referrals, contact Equal Rights Advocates.

6. Weigh the pros and cons of signing a nondisclosure agreement

As the new tax law is currently written, people who decide to settle a sexual harassment lawsuit and sign a nondisclosure agreement may no longer be able to claim their legal fees as a deduction on their taxes. This was one way that plaintiffs could formerly offset the taxes they would likely have to pay on the settlement amount.

Infanti said the court and the IRS will be the final interpreters of the new provision under the tax law when such cases appear. At this stage, he said, there is not much that sexual harassment victims who may want to seek a confidentiality agreement can do besides put pressure on their state representatives to amend the law.

Potentially, employees may choose to change what type of claims they are pursuing in order to avoid a huge tax bill.

For example, “if you are a woman of color, you may be experiencing sexual harassment but also racial harassment, or racial discrimination or national origin discrimination that are all related,” Raghu said. “Or maybe there are sex discrimination claims that are not sexual harassment, for example.”

Raghu said all related information can be incorporated into the strategy when attorneys are litigating these cases or trying to negotiate a settlement agreement for the victims. If there are multiple claims other than sexual harassment, perhaps a settlement could be structured in a way that separates the allocation of the settlement from those other claims, so that the related attorney's fees aren’t taxed, according to Raghu.

In any case, this is even more of an incentive to find a qualified attorney knowledgeable in cases of sexual harassment or discrimination who can craft the right strategy for your situation.

7. Know the risks

Reporting sexual harassment comes with potential dangers, which have prevented so many from coming forward. Raghu advises victims to consider a few things before taking action:

  1. Understand what sexual harassment is. A December Reuters/Ipsos poll found that Americans hold very different views on sexual harassment. The EEOC defines sexual harassment as unwelcome sexual advances, requests for sexual favors, other verbal or physical harassment of a sexual nature, as well as offensive comments based on gender, which don’t have to involve sex. Sexual harassment occurs when it creates a hostile or offensive work environment, or when it leads to someone’s unemployment or demotion, according to the EEOC. Learn more about sexual harassment from this NWLC guide.
  2. Don’t be surprised if the employer dismisses your complaint or simply doesn’t believe your account. You may experience retaliation, which has deterred many women from coming forward. Retaliation comes in various forms that include firing, demoting and cutting salaries of an employee who filed a sexual harassment complaint. Retaliation is illegal but happens frequently. In 2013, roughly half of all complaints filed with the EEOC were retaliation allegations, with 42 percent of findings of discrimination based on retaliation, according to the agency.

Therefore, for practical reasons, you should:

  1. Document evidence of harassment, infractions, retaliation, correspondence with your supervisor and the human resources department.
  2. Start looking for other employment while trying to obtain justice. You can reach out to co-workers and former colleagues, and network with your industry contacts for job opportunities.
  3. Start putting money aside in case you have to leave the company as a result of retaliation following your harassment accusation. It is critical that you have a financial cushion to fall back on when you need to move on in your life. Generally, three to six months’ worth of necessary living expenses should be able to navigate you around job loss.

Check out this list of resources put together by the NWLC:

Federal Agencies
Department of Education Office for Civil Rights
Department of Health and Human Services Office for Civil Rights
Department of Labor
Equal Employment Opportunity Commission

General Resources
LawHelp.org
AVVO

Finding an Attorney
American Bar Association
National Bar Association
National Employment Lawyers Association
Directory of Local Bar Associations

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Here’s How the GOP Might Finally De-Fang the CFPB

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Update: The Consumer Financial Protection Bureau on Monday released a new five-year strategic plan, outlining a less aggressive approach to its mission of protecting consumer rights.

The consumer watchdog revised its mission and vision for 2018 through 2022. Under the new mission, the CFPB will be “equally protecting the legal rights of all,” including consumers and big financial institutions the bureau regulates.

"If there is one way to summarize the strategic changes occurring at the Bureau, it is this: we have committed to fulfill the Bureau’s statutory responsibilities, but go no further," said the federal agency’s acting director Mick Mulvaney, in a press release.

Refocusing CFPB’s mission is in line with a spade of drastic changes to the bureau under Mulvaney, who was tapped by President Donald Trump to take the helm at the federal agency in November.

The CFPB had already had quite a few eventful weeks prior to the memo. Or, according to critics and consumer advocacy groups, it had endured a flurry of "assault" launched by Mulvaney.

In the past few weeks, Mulvaney has: 

  • Requested $0 in quarterly funding from the Federal Reserve, instead, saying it would make do with dipping into its reserve fund.  
  • Issued a call for public comment on its enforcement, supervisory, rule-making, market monitoring and education activities. 
  • Wrote to the CFPB staff in a memo that the agency will have a more limited vision.  

Meanwhile, the CFPB, under Mulvaney, has: 

  • Dropped a lawsuit against four online payday lenders whom the CFPB alleged in its original complaint had preyed on working families by making loans with interest rates up to 950%.  
  • Announced it would “reconsider” federal restrictions on payday loans. 
  • Announced a yearlong delay to the effective date of a 2016 prepaid rule that would have protected prepaid cardholders.  
  • Dropped a four-year investigation into World Acceptance Corporation, a payday lender, from which Mulvaney has received $4,500 in campaign contributions in the past. 

The moves show that Mulvaney, as expected, is actively seeking to overhaul the consumer watchdog. MagnifyMoney interviewed several experts, who all say this trend of reversing rules, dropping investigations and limiting the mission of the consumer watchdog will continue. 

Yet it’s not all bad news. After a long-fought legal battle, the CFPB won a major court victory this week. In a case questioning the constitutionality the CPFB, the Court of Appeals for the District of Columbia Circuit reversed its own decision that ruled it unconstitutional in 2016.

Conservatives have long decried the independent nature of the agency and its sweeping level of oversight in the financial sector, which includes the freedom to write new rules and regulations in the interest of consumer protection.

What’s at stake? 

The CFPB is a U.S. government agency responsible for establishing consumer protection regulations and regulating key parts of the financial sector, such as the mortgage and debt collection industries. It was established in the wake of the 2008 financial crisis as a centerpiece of the Dodd-Frank Wall Street Reform and Consumer Protection Act. 

The agency has zealously targeted bad actors in the financial industry since its creation, reclaiming nearly $12 billion for more than 29 million consumers. Its latest high-profile actions included fining Wells Fargo in the unauthorized accounts scandal and creating new rules around payday lending. It has also rolled out new regulations in the mortgage, credit card, debt collection and prepaid card sectors.  

The Trump administration and Republicans have long sought to curtail the CFPB’s power as part of a broader effort to lighten federal regulation over financial institutions.    

Richard Cordray was the agency’s first director, holding office from 2012 until he announced he was cutting his tenure eight months short at the end of November 2017. He had been criticized by Washington conservatives but well-received by Democrats and consumer advocates.  

Mulvaney, head of the Office of Management and Budget, took over the bureau in a drama that unfolded into a lawsuit. The fight over who is the legal boss of the bureau is still ongoing 

A former South Carolina representative, Mulvaney had said in a 2014 interview with the Credit Union Times that the CFPB was “a joke...in a sick, sad kind of way.” In 2015, he co-sponsored a legislation to eliminate the agency.  

How the GOP could dismantle the CFPB 

Legislative action … not likely 

Last year, the GOP tried to pass the Financial CHOICE Act, which would have repealed the Dodd-Frank Act and, along with it, the CFPB. The bill passed the Republican-led House in June along party lines, but didn’t make it to the Senate. 

Republican supporters of the act claimed the Dodd-Frank Act was unnecessary. Meanwhile, legal experts said deregulation would pose systemic risk, negatively affecting financial reform. 

Jim R. Copland, legal director for the Manhattan Institute and a critic of the CFPB, told MagnifyMoney eliminating the agency completely would be difficult under the current Senate structure. 

“Without 60 votes you cannot get ordinary things through the Senate,” Copland explained. “And neither party seems willing to compromise with the either on most legislation.” 

Copland added that an unusual case would be for the Supreme Court to strike down some elements of the CFPB, forcing the Congress to restructure the agency. But he thinks it’s unlikely to happen given the court has been hesitant to do so with Obamacare. 

Melissa Stegman, senior policy counsel on the federal policy team of Center for Responsible Lending, a nonprofit, nonpartisan organization based in Washington, D.C., said she thinks legislative action to get rid of the CFPB is “extremely unlikely.”  

“My impression is that there isn’t even much of an appetite to do that legislatively, because Mulvaney is already doing it through the administrative process,” she said. “They don’t even really need to purse anything externally. It’s like a self-sabotage as opposed to having the sabotage coming from the Congress.” 

Death by a thousand paper cuts 

Indeed, there are plenty of administrative maneuvers to scale back the bureau, which is well underway. It’s clear Mulvaney is already utilizing this strategy, given the small ways he has already scaled back the agency’s operations.  

He has support from Republicans on Capitol Hill as well.  

In late October, Senate Republicans killed an arbitration rule that the consumer watchdog wrote, which would have made it easier for Americans to file class-action lawsuits against big financial institutions. The treasury department had released a report against the rule in an unusual move the day before.  

“The administration can’t get rid of an agency constructed by the Congress, although they certainly can change the focus and direction of an agency,” Copland said. “I think that’s happening. At least once they get their nominee in place.” 

Stegman pointed out Mulvaney’s appointment itself is a backdoor way to overhaul the bureau. 

Freshly appointed in November, Mulvaney announced a 30-day hiring freeze at the CFPB and an immediate halt on any new regulations, rules and guidances. 

In a Jan. 24 memo to the CFPB staff, an adapted version of which was published in The Wall Street Journal, Mulvaney said he had no intention of shutting down the bureau, but the agency will have a different mission under his leadership. 

“We will exercise, with humility and prudence, the almost unparalleled power Congress has bestowed on us to enforce the law faithfully in furtherance of our mandate,” wrote Mulvaney. “But we go no further. The days of aggressively ‘pushing the envelope’ are over.” 

Mulvaney’s deregulatory agenda has critics on guard. 

“He’s made public comments [that] he sees his constituency and the people that he cares about equally as corporations and consumers, which is completely counter to the CFPB’s mission to specifically protect consumers,” Stegman said. ”That’s really concerning.” 

Under Mulvaney, Stegman expects cases that may have been under investigation to be dropped, and changes be made to rules that already have been made final. 

For instance, the Home Mortgage Disclosure Act, a 2015 rule expected to assess trends in mortgage lending and originations, ensuring that companies follow the laws, was announced to be reopened last December. 

Stegman said concerns have also risen that CFPB’s Consumer Response Database, a public database that stores more than 1 million complaints about financial products and services since 2011, may go private. 

Besides the CFPB’s research agenda possibly dramatically shifting, Stegman worries that pending CFPB rules — such as on erroneous debt collections or exorbitant overdraft fees — will “never see the light of day or be harmful for consumers.” 

“It’s not a priority for Mulvaney,” Stegman said. “So he’s not gonna pursue this.” 

This story has been updated. It was originally published Jan. 31, 2018

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A Beginner’s Guide to Monetizing a Hobby

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Making extra money from a side hustle can be extremely gratifying, especially if it’s something you love doing.

And it seems like it’s never been easier to pick up side gigs or monetize your hobbies. There are 57.3 million freelancers in the U.S., according to a 2017 survey commissioned by the Freelancers Union and Upwork, up from 53 million a couple of years ago. In 2017, they collectively earned $1.4 trillion.

Make no mistake: Hobby-based businesses can become big undertakings. Juggernauts such as Facebook, Chanel and Microsoft all have roots in personal hobbies.

The Panel Study of Entrepreneurial Dynamics II, a multiyear survey of nascent entrepreneurs, found that nearly 26% of budding U.S. entrepreneurs started their businesses from a hobby.

But turning your hobby into a business can get complicated, to the extent that it could kill your passion for it. It is, in the end, a commitment that requires hard work. With proper planning, you may be able to strike the right balance of success and satisfaction from monetizing your hobby.

Learn the essentials

We asked career experts and hobbyists-turned-business owners to share their advice and the lessons they learned about starting hobby-based businesses, to help you start off your endeavor right.

Do research, assess your goals

Benjamin Warnick, a professor of entrepreneurship and strategic management at Washington State University, told MagnifyMoney that once you add money into the equation, a hobby isn’t just about personal enjoyment anymore; it morphs into a business that needs to create value for customers.

“People aren’t going to pay you just to do something you enjoy,” Warnick said. “If you can find a way to identify what people value — [Ask yourself] ‘How can I make life better for them in some way and how can I tie my hobby to that?’ — then you are on to something.”

Anna Juhl, a former nurse manager, quit her job at age 52 to pursue her passion for cheese and travel, but she did so carefully. Juhl now runs a business called Cheese Journeys, offering cheese enthusiasts tours in European and American destinations. She didn’t act on impulse; she had a plan.

Anna Juhl in England on a scouting trip in preparation for her first cheese tour. (Courtesy of Anna Juhl)

Juhl, who ran an artisan cheese shop and restaurant in Salt Lake City back in 2000 after working her full-time job as a nurse manager, did her homework before piloting a cheese-themed tour to Europe in 2013. She knew that food travels were on the rise. And she was confident that and her expertise in artisan cheese and love for food and travel would give her an edge in the market.

When her husband’s job led them to New York in 2007, it was a good opportunity for her to leave behind her previous career, and Juhl started brainstorming a cheese-travel business. During the first six months, she found herself spending hours reading up on food, travel and everything she needed to know about running the business. With help from industry experts in Europe, who coached her through the basic tour process, she launched a pilot England tour in 2013, 15 months after quitting her job.

Juhl said she was lucky that she was able to pilot the business with her own savings instead of taking out loans. She had to cover a considerable amount of money upfront, and she lost money in the first couple of tours. The fact that her husband has a good-paying finance job also helps, although Juhl admits that the switch to full-time entrepreneur was not without stress: She didn’t take a paycheck for a few years and any money she made was invested back into the business.

Then again, Juhl’s initial goal was not to make profit, she said; rather, her new business was a transition into retirement. She was prepared not to make a profit the first few years as she worked toward building a business that would allow her and her husband to travel while having a steady stream of income at retirement.

Looking back, Juhl said self-assessment really helped her focus in this midlife career shift.

“Know what you want from it, how much do you want to work and set your own goal so you build a business that meets your goals and not the expectation of somebody else’s.”

Indeed, entrepreneurship demands a big-time commitment. The word “passion” has its roots in Latin, meaning suffering, Warnick pointed out, so hobbyists need to ponder how much they are willing to sacrifice before launching their leisure-based business.

Start small, test it out

Nancy Collamer, career coach and author of Second-Act Careers, told MagnifyMoney that it’s wise for hobbyists to start testing out businesses as a side gig in their free time.

“Let’s say you are great at baking,” said Collamer. “What you may want to do is just on a very small scale, offer your brownies for sale during the holidays to some friends.”

A side hustle allows you to gauge the market interest and to test out pricing, she said. Once you have a taste of it, put a little more time into the work than you would on a hobby basis. If it doesn’t feel right, stop right there before you waste too much money or time on it.

“Keeping one foot in stable employment can really help ease the transition,” Warnick said. “So if you have alternative sources of income, especially in the early stage of the business, you can explore and then gradually scale up the business, instead of putting tons of money into it and then realizing it’s not going to work.”

Expect challenges

You may be excellent at what you love to do, but a business is a business. When you try to commercialize your expertise, there is a lot more work that goes into the process than you would probably have expected.

“That’s everything from marketing your services to keeping your books to producing your products, to finding the cheapest materials, to keeping your office clean every day,” Collamer said. “You are doing it all.”

The business side of the hobby entrepreneurship — bookkeeping, accounting, digital marketing — can be really daunting.

“Curating, researching and building the tour, that was easy,” Juhl admitted, “Executing the tour, super fun. Doing all the other related business things can be challenging.”

Gianna Leo Falcon, a New York-based freelance photographer, told MagnifyMoney the learning curve was very steep for her, a person who’s not quite business-oriented.

Gianna Leo Falcon, a New York-based freelance photographer. (Courtesy of Gianna Leo Falcon)

Prior to becoming a professional photographer in 2015, Falcon did occasional freelance portraits and headshots. She recalls constant frustrations with clients who booked shoots but ended up not showing up. To protect herself, Falcon later learned to ask for down payments.

“I’m really an artist. I just want to show up and shoot,” she told MagnifyMoney. “Invoices and how to get paid online are really confusing. I’m navigating and learning that stuff as I go along.”

Outsource labor if needed

Experts say being your own boss not only requires possessing a variety of skills and knowledge of the business but also knowing your own strengths and when to outsource some of the labors you have no interest in or talent for.

“You don’t have to be able to do everything,” Warnick said. “So if you got the expertise in the domain of your hobby, maybe you could bring on someone who’s a little bit more of the business side who can help you commercialize the hobby.”

As Juhl’s business has grown, she hired a bookkeeper, a website developer and a publicist so she can focus on the centerpiece of the business — booking and executing the trips.

“It’s a personal relationship that I have with people who travel with me,” she said. “So I have to make sure that I’m available to do what my role is, really what I’m best at.”

Find your clients

For any business to succeed, you need to find people to buy your services. But where do you start? Here are a few ideas.

Find complementary service providers

A good place to start is networking with complimentary service providers, Collamer said.

For example, if you want to be a wedding photographer, find other people who offer wedding services, Collamer suggested.

“They are going to be thrilled to meet you,” she said. “Because if it’s someone who has a wedding venue and they meet with couples, you might become one of their preferred service providers and that becomes a steady stream of clients for you.”

Get involved in trade groups and associations

There are established associations and trade publications within almost every hobby, be it specialty foods or heavy machinery. Get involved with those communities because they might have information and resources you need to grow your business. Better yet, they may be able to refer you to potential clients.

“Don’t think you need to reinvent the wheel,” Collamer said. “There are lots of people who are already probably [having] successful businesses that are related to what you want to do that you can learn from.”

Prioritize marketing

Juhl said she had a hard time finding customers when she started her cheese-travel business until the marketing and media support came in much later.

A year into the business, she realized that relying solely on word of mouth was not enough to attract customers; marketing should be a crucial piece of a business plan. Juhl eventually joined American Society of Travel Agents and other travel organizations so she could network and gain credibility. Through the association, she worked with agents who took on the responsibility of booking the international cheese tours. She sells the tours at an average $6,000 per person, and the travel agent charges a 5 to 10% commission. Soon after she started working with an agent, a group of semi-retired food and travel enthusiasts booked her trip.

In addition, she has hired people to help with website development, marketing and media relations.

Each year, she also budgets for a renting booth at large industry conferences where her potential guests attend. Those efforts come with thousands of dollars of additional travel expenses, booth rental fees, hotel, food and registration costs, which have become necessary overhead, and she has to include them into the monthly budget. But she said they are absolutely worth it.

In Falcon’s case, she is a full-time contractor for a wedding service that operates in several locations around the country and specializes in digital marketing. Falcon works as the company’s New York liaison and photographer. The firm brings her a steady stream of clients, which frees her up from the marketing piece of the puzzle. By booking clients for her, Falcon said the company takes a substantial cut from each project payment. Falcon said she could potentially earn more if she worked for herself, but she admits that booking is hard work, and she is grateful that someone else is doing it for her.

If you are looking to seriously grow your freelance gig and want your name out there, you may want to educate yourself about social media and digital marketing. That said, don’t get hung up if you are uninterested in this sort of things or simply don’t have time for them. It may be worthwhile to hire a marketing professional who specializes in your industry.

Find a place to sell your hobbies

Whatever service you offer, it’s critical to find an avenue where you can commercialize your hobby. Booming e-commerce makes it easier than ever to do so. Third-party platforms can relieve you of the hard work of finding buyers, but the trade-off is that they take a commission of what you earn.

For artists and crafters, if the idea of creating a website and learning digital strategies freezes you, marketplaces such as Etsy, Amazon and eBay may be a good fit.

The downside is that those places take a cut from your listings and transactions. For instance, Etsy charges a $0.2 listing fee for each item and a 3.5% transaction fee on sales.

Although the marketing task is off your hands when you sell your items through a marketplace, you also face competition from thousands of other sellers. Compared with the full control you would have over design, marketing and SEO with your own website, you have less freedom on those fronts with a third-party platform. You will be subject to those companies’ policies and rules.

If you have in-demand services to offer — anything from writing and web design to bookkeeping and accounting — third-party platforms like Upwork, Freelancer, TaskRabbit will be of help. Again, you have to somehow offset the time and effort saved from finding clients. The three services charge a 3 to 30% service/project fee.

And don’t forget the oldie but goodie Craigslist, where Falcon snagged her current contractor job.

Figure out your rates

It may be a bit strange to tie money into the things that you love to do, but knowing your market value is extremely important if you hope to profit off your passion.

The hobby community you are in is a great resource for you to find out the average fees. If you don’t feel comfortable asking about rates, there are tools available online to help you figure out the value of your time.

A screenshot of website http://sparetime.arkivert.no/en

BeeWits, a project management software company, has released a freelance rates calculator. Similarly, this website by FINN.no, a Norwegian online marketplace for classified ads, helps users figure out how much their spare time is worth.

Writers and journalists may want to check out The Freelancer’s rates database, where freelancers can add what they’ve earned for certain projects for a variety of publishers.

Watch out for these common missteps

Assuming other people will enjoy your hobby as much as you do

“It’s easy to think, ‘Oh, I love yoga. Why wouldn’t everybody love yoga?” Warnick said.

Guess what? Others may not care for it. This is why you need to do your market research and figure out if there is demand for your passion.

Trying to do everything

Collamer said often when people try to do everything themselves, they end up spending too much time daunting over overwhelming tasks that they are uninterested in. But really, they should outsource labor when they are able to.

“The key of building any business is to know when you reached a level where you need to call in help to ensure that you don’t burn out and that you can manage all the aspects of what you do well,” Juhl said.>

Not thinking like an entrepreneur

Your hobby might be something that you really enjoy today, but once you decide to commercialize it, be prepared to tackle the not-so-exciting work.

You need to educate yourself about everything from the zoning regulations in your particular town, business registration, marketing, taxes and everything else that comes with running a business, Collamer said. “It’s not all going to happen automatically.”

Going all in at the beginning

Before establishing yourself as an entrepreneur, it may not be wise to you quit your job and jump into your business all at once because it may not be a good fit for you.

Running a business is a big commitment, both in terms of your time and finances. Juhl and Falcon both had other streams of income or savings to support themselves while they built their hobby-based businesses. Juhl’s cheese tours weren’t profitable for the first couple of years. Falcon said it took her a good five years to solidify herself as a photographer while working other jobs.

Don’t forget about taxes

Running your hobby business may come with lots of uncertainties, but taxes are certain.

Mark Luscombe, principal analyst at Wolters Kluwer Tax & Accounting, told MagnifyMoney that people who made money off hobbies used to be able to deduct related expenses within certain limits, yet under the new tax law, expenses related to a hobby won’t be deductible at all. Luscombe said this makes it logical for taxpayers to treat a hobby as a business.

Luscombe urges freelancers or contractors to keep separate records of all the income and expenses related to the business. If part of your home is dedicated for business purposes, for instance, a home office or a kitchen exclusive for producing items for sale, you need to allocate the square footage used. That is, dividing the space used for the business by the total square footage of the house, and that would be the percentage of expenses, such as insurance and utilities, that you can allocate and deduct from your taxes.

Under the new law, pass-through business owners can deduct up to 20 percent of their qualified business income from a partnership, S corporation or sole proprietorship.

Individuals earning less than $157,500 ($315,000 for married couples) are eligible for the fullest deduction. So if you’re going to make money off your hobby, Luscombe said this new benefit is another reason to try treat it as a business.

If you are running a business on your own, you’re most likely seen as a sole proprietorship owner for tax purposes. You will have to report business-related income and losses on a Schedule C (Form 1040) each year, Luscombe said.

If you made more than $600 from any particular client, you should expect to receive a Form 1099-MISC. Likewise, if you paid anyone at least $600, you will have to issue the same form. For more information on how the new tax law affects small-business owners, check out our guide on the topic.

Advertiser Disclosure: The card offers that appear on this site are from companies from which MagnifyMoney receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). MagnifyMoney does not include all card companies or all card offers available in the marketplace.

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How to Make the Most of MoviePass, a Great (but Glitchy) Deal for Film Lovers

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

moviepass home page
Screenshot of the MoviePass website.

It seems that all of a sudden all my friends got MoviePass, a subscription service that allows users to purchase one movie ticket per day for a flat monthly fee of less than $10. That’s cheaper than a single admission at some theaters!

I’m not a frequent moviegoer, but I was immediately sold, thinking it was a good deal even if it could get me through the awards season.

Three weeks in, I have to say, MoviePass is indeed a great deal when it works, but the service got me on edge when it didn’t work quite well: The app is glitchy, and its customer service is lacking — when there is any.

A rocky start

The first red flag popped up nine days after I joined MoviePass and paid my first-month subscription fee. I received an email from my MoviePass Concierge notifying me that my card should have arrived, but it hadn’t, and the company had provided me no shipping information.

The message included a link so I could report that I had not received my card — but it didn’t work. Three days later, I sent an inquiry asking about the shipping status of my card via the MoviePass app’s chat feature. I received no response. I then sent a ticket to its support center online. Silence. Meanwhile, I could not find a customer service line on the MoviePass website.

The MoviePass app, by the way, is slow and clumsy, and the GPS location finder doesn’t always work. It lets you check in for movies outside its allowed distance — 100 yards — from a theater.

My card finally arrived four days after the email said I should’ve received the card, to my excitement.

I scanned through the three-sentence instruction that came with the card, checked for available movies on the app and decided to go to a member theater, an AMC Loews in Manhattan, for the 6:15 p.m. showing of “Three Billboards Outside Ebbing, Missouri.”

I didn’t notice the fine print below the check-in button saying I had to be within 100 yards of the theater to actually check in, but the app still allowed me to do so from my office, 0.4 miles away from the theater. No error message popped up.

When I arrived at the theater, my MoviePass, essentially a MasterCard debit card that’s supposed to be loaded with the money for a ticket upon checking in, didn’t go through at the kiosk. The message on the app was telling me I had already purchased a ticket that day.

moviepass app
Screenshot of the MoviePass app after I checked in too early for the movie.

That’s when the cashier told me I was supposed to swipe my card within 30 minutes after checking in on the app at the theater. The instructions I received with my card said nothing about the 30-minute time frame. Dumbfounded, I paid out of pocket for the ticket. The cashier assured me that if I contacted MoviePass, explaining the situation, they’d refund me for the ticket.

“We’ve had a lot of issues with MoviePass lately,” she shrugged. “You get what you paid for.”

Wait a minute. No, I didn’t get what I paid for — I had to pay out of pocket for a movie ticket, on top of my subscription.

moviepass
The instructions that came with my MoviePass card.

Before the movie started, I contacted the support center via the app, attaching my receipt and screenshot of the message on the app. I also sent in an inquiry via email, to no avail.

At this point, I was worried I was involved in a scam, but I decided to give it a second chance. Before trying the service for the second time, I carefully read the detailed instructions on the MoviePass website.

This time around, my card went through at the kiosk at a different theater after I used the app to check in on the spot. I was thrilled. At the same time, I was frustrated with my MoviePass experience when I had run into trouble, and it turns out, I wasn’t the only one.

Why is it so glitchy?

I ran into a fellow MoviePass holder at the second movie theater, who asked if it was the first time I was using it. I replied, “First time using it the right way.” He then went on to complain that he’d never heard back from its tech support team when he reported an issue.

I later tested the app for a third time. Knowing that I shouldn’t be able to, I once again successfully checked in from my office at the movie theater 0.4 miles away. And when I tried to cancel the purchase, the app wouldn’t let me, despite the fact that MoviePass allows you to change your mind after checking in. Even more strangely, a different movie appeared in my movie-watching history than the one I’d actually picked.

Curious if these issues were widespread, I went to the MoviePass Facebook page and its support center page, only to find they were flooded with complaints from customers who also experienced late arrivals of cards, billing and technical issues and unresponsive customer service.

In an open letter to users in August, the company explained it had seen an overwhelming increase of members that month, when it dropped the monthly fee to $9.95 from $39.99.

“An unprecedented volume of traffic” caused its system to crash, the letter reads. The issues, in turn, significantly increased incoming inquiries for assistance.

Indeed, interest in the service skyrocketed since the price adjustment. The number of MoviePass subscribers reportedly jumped from about 20,000 in early 2017 to 1.5 million as of January.

In particular, MoviePass says its membership went from 1 million to 1.5 million in a month, from December to January, a result of the company’s partnership with Costco, whose members can get a yearly deal with MoviePass for $89.99. Gabriel, a MoviePass customer support member, told me this when I called the customer line for Costco members. (I am not a Costco member, but someone posted the number on Facebook so I tried it.)

Although MoviePass has tripled the number of its support staff over the past month, they still couldn’t keep up with the demand, Gabriel said. He wouldn’t provide his last name when I asked to interview him about the issues.

“We are really happy to have so many customers,” Gabriel told me after he finished handling my refund request. “Unfortunately we just don’t have enough people at this time, but we are hiring as fast as possible. We are doing everything we can to try to prevent that from happening in the future.”

How to correctly use MoviePass

It seems that it may take a while for the company to fully staff its customer support team. We put together a step-by-step user guide with important notes, hoping that you will avoid some common mistakes and make the most out of the service without having to contact MoviePass.

Step 1: Order a MoviePass card

Download the MoviePass app from the App Store or Google Play Store. You will be asked to enter your address and credit card information upon registration. You can also sign up for the membership online. MoviePass charges your first monthly subscription fee upfront. MoviePass says your card should arrive within five to seven business days. But based on my experience and the experiences others shared online, it could take longer.

Step 2: Activate the card

My card came activated, but you may need to activate yours when it arrives in the mail. Follow the steps listed here.

Step 3: Use the card

  1. Find showtimes in your area by entering your ZIP code on the app.
  2. Pick a theater where you want to see a particular movie.
  3. Go to the theater with your MoviePass card. Choose the showtime for the movie on the app. Click “CHECK IN” to buy your ticket.
  4. The screen then shows, “SUCCESS! Go purchase your ticket.”
    If you accidentally picked the wrong movie or showing, click “Sold Out? Change Mind?” at the bottom. It didn’t work for me the first time I tried, but it allowed me to cancel a different purchase a few days later. Given my hit-and-miss experience, I’d advise you use the app with extra attention to details to make sure you get what you want.
  5. Swipe your card at the kiosk or a ticketing machine to purchase your ticket. Your MoviePass will be activated for 30 minutes for the purchase after you check in on the app, so don’t wait too long to buy your ticket.

A few things to note

  1. You can only see 2D movies with MoviePass.
  2. You can use MoviePass to see as many movies as you like in a month, but you can only see one per day. And you can only purchase a same-day ticket.
  3. You have to check in at the movie theater — you can’t book a ticket in advance at home. MoviePass may not work if you want to see a newly released box hit that may be sold out by the time you get to the movie theater. For big releases, you may have to arrive in the theater earlier to lock the ticket in for a later showing.
  4. Not every theater accepts MoviePass. The company claims MoviePass is accepted at more than 91% of theaters — more than 4,000 — nationwide. Check the theater map to make sure its service is available in your town before you sign up for it.

If you still have questions...

MoviePass recommends members use the real-time chat feature on the app or submit an email inquiry through its website. As I noted before, I had no success either way.

Head to the MoviePass Support Center online. On this page, the company lists answers to  common-user questions.

Gabriel said the company hasn’t set up a direct service line open to all customers yet; it’s work-in-progress, but Costco users can call 1-855-336-3632 for help, which I used, despite not having a Costco membership. The call center greeting message says it’s a MoviePass customer service line, not a line specifically for Costco members.

When I called it a week after my first call, another customer service worker named Jason said MoviePass had disabled the number when subscriptions skyrocketed, because the call center wasn’t able to take care of the flooding inquiries. Although the number is not listed on the MoviePass website nor on the app, Jason said the team is indeed taking MoviePass subscribers’ questions as the company beefs up the staff. MoviePass did not respond to an email request from MagnifyMoney seeking to verify the number as an official customer service line.

My refund was processed immediately when I called in, to my surprise. (Disclosure: I explained I was working on an article about MoviePass after customer service resolved my personal issue.) To add another level of complexity, I initially received a refund of $0.15, instead of the $15.19 I paid for the ticket, which prompted another call to the MoviePass customer support center.

MoviePass expects its membership to rise. It better speed up the hiring process!

Advertiser Disclosure: The card offers that appear on this site are from companies from which MagnifyMoney receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). MagnifyMoney does not include all card companies or all card offers available in the marketplace.

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Shen Lu is a writer at MagnifyMoney. You can email Shen Lu at shenlu@magnifymoney.com

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Ranked: The Best Finalists for Amazon’s Newest Headquarters

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Pittsburgh topped our rankings for the best city for Amazon's next headquarters, tying Raleigh, N.C. for first place.

Amazon finally narrowed the list of candidates to host its second headquarters down to 20 on Thursday.

The 20 finalists were picked from 238 cities from across the United States, Canada and Mexico to host what Amazon calls HQ2, a new facility that it expects to create 50,000 jobs. On top of that, the company estimates it will invest more than $5 billion in the city it ultimately chooses.

Amazon has been transparent about what it’s looking for in a potential headquarters — focusing on factors like the area’s proximity to airports, major highways and the city’s population center.

But which of the 20 cities is really going to offer those 50,000 employees the best quality of life?

MagnifyMoney researchers decided to do an analysis of the cities on Amazon’s HQ short list to determine which cities are the best to live in. We not only wanted to see which of these 20 cities offered a decent cost of living and relatively affordable housing, but also key quality of life factors like weather and the average commute time, and whether the housing stock has slack to support an influx of jobs.

The cities were rated on a scale of 100, based on these seven factors. Those rankings were summed and divided by seven for a highest possible score of 100 and a lowest possible score of zero.

  • Average commute time (in minutes)
  • Median monthly housing costs
  • Cost of living index (non-housing)
  • Temperate climate, as measured by the difference between the highest and lowest average temperatures across twelve months (a lower range ranked higher)
  • Marginal income tax rate for a single filer earning $100,000 in taxable income (state, federal and city)
  • Vacancy rate of rental homes
  • Vacancy rate of owner-occupied homes

“We trust that Amazon is doing a great job of evaluating (and negotiating) the core criteria and key preferences they deem essential to their business operations,” said study author Kali McFadden, an analyst at LendingTree, the parent company of MagnifyMoney. “We wanted to take a closer look at what each of these cities can offer their rank and file employees, both local and transferred.”

The best possible Amazon HQs: Pittsburgh and Raleigh

Let's start with the top three. MagnifyMoney gives Pittsburgh and Raleigh a tie for first place, both scoring 78 points.

Pittsburgh topped our rankings for the best city for Amazon's next headquarters, tying Raleigh, N.C. for first place.

Overall score: 78 

Pittsburgh combines a low cost of living with a decent commute time of just 26 minutes. Bring a jacket. The weather is on the chilly side.

  • Monthly median housing cost: $791
  • Avg. commute time: 26 minutes
  • Climate: Between the hottest and coldest day, there was a difference of 46 degrees

Overall score: 78

  • Monthly median housing cost: $1,051
  • Avg. commute time: 26 minutes
  • Climate: Between the hottest and coldest day, there was a difference of 38 degrees.

Dallas came in at no. 3.

Overall score: 69

  • Monthly median housing cost: $1,096
  • Avg. commute time: 28 minutes
  • Climate: Between the hottest and coldest day, there was a difference of 39 degrees.

The worst of the top 20 contenders

New York City is the lowest-ranking finalist on the MagnifyMoney list, scoring poorly at 22. The Big Apple fell to the bottom of the pack for three key reasons: it has the highest living costs, highest marginal tax rates and longest commute time.

Northern Virginia and Montgomery County share the second-to-last place with a score of 29.

Interestingly, the current Amazon headquarters Seattle, only earned a score of 41 points, but we didn’t include it in the official rankings. Seattle would have been ranked in the 14th place if we had.

Full rankings:

Methodology

The data was gathered on the Metropolitan Statistical or Combined Statistical area for a city, except in the cases of Northern Virginia; Montgomery County, Md.; and Washington, D.C., as these finalists are, at least partly, part of the same statistical area.

County data was used for commute times and median monthly housing costs (county data was not available for the other factors). Similarly, county data was used for Newark, N.J., where available, because it is part of the New York City (another finalist) statistical area.

The U.S. Census American Community Survey (2016) was used for commute times and median housing costs, while the Census Housing Vacancy and Ownership data was used for vacancy metrics. Statistics Canada was used for Toronto data. Federal and local tax authority rate tables were used to derive marginal income tax rates for $100,000 in income.  Weather data was derived from USClimateData.com and The Weather Network, while cost of living index data was sourced from Numbeo.com.

Advertiser Disclosure: The card offers that appear on this site are from companies from which MagnifyMoney receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). MagnifyMoney does not include all card companies or all card offers available in the marketplace.

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10 Money Rules to Break in 2018

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

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When it comes to personal finance, you’ve probably heard all types of “rules of thumb” to follow. Yet the painful truth is that there is no one-size-fits-all rulebook for financial success.

These rules are good places to start. However, blindly following them won’t lead to satisfying results. The future is unknown and every individual's goals and circumstances are unique.

What you can do is use the rules as general guidance. Assess your goals and needs regularly, and adjust your strategies for saving, investing, spending and debt payment accordingly.

We’ve summarized 10 common personal finance rules that you can refer to but can feel free to pick and choose based on your own situation:

1. “Save 10% for retirement.”

If you are comfortable enough to start saving, a common rule of thumb is to save 10% of each paycheck for retirement.

Catherine Hawley, a San Francisco-based financial planner, told MagnifyMoney that 10% may too low a bar for many workers, especially those whose incomes may fluctuate.

“[This rule] might be better thought of as a starting place one builds on,” Hawley said. “If you have a high income but anticipate switching careers or if that income is not stable, such as some sales jobs, your long-term savings rate may need to be closer to 50% to keep you on track for retirement.”

By saving more now, you’re allowing yourself a cushion of protection if you were to see a major reduction income.

Another reason the 10% rule isn’t so great is that some people simply can’t afford to go there just yet. In that case, it’s much better to start with 4% or 5% and work your way up than let this rule dissuade you from saving at all.

Instead: If you are earning a lot, don’t let the rule stop you from saving more. If you are early in your career, you don’t have to get up to 10% all at once. At the very least, contribute enough to your company-sponsored retirement plan to capture the full company match, if you are offered one. From there, consider increasing your contribution based on your other financial goals.

2. “Whatever you do, max out your 401(k).”

Financial planners can’t emphasize enough the importance of saving for retirement: The earlier you start saving and the more you contribute, the better. But maxing out your 401(k) isn’t necessarily a good idea for everyone.

The legal maximum amount you can save in your 401(k) is $18,500 in 2018 ($24,500 if you are 50 or over). If you were starting from scratch, you would have to tuck away more than $1,500 a month to max it out by the year’s end.

If you are a high-wage earner, it’s great if you can max it out without much effort. But if you make $50,000 a year, you would have to stash nearly 40% of your salary for retirement. Remember, this is money that, if contributed to a traditional 401(k), can’t be withdrawn until age 59 1/2 without incurring penalties (with some exceptions).

Planning for retirement from an early age is wonderful, but there may be other goals you want to achieve when you are young and need money in the near future. For example, you might want to prioritize paying off high-interest debts like credit cards or auto debt before throwing a good chunk of your paycheck into your retirement fund. And you should definitely save up at least a few months’ worth of income in your savings account so you have money set aside in case of emergencies.

It’s not wise to sacrifice your current life goals if maxing out your 401(k) is a tough task.

Instead: Although there are multiple benefits to saving for retirement, you may want to take a holistic view of your financial situation and review your near-term financial goals before deciding whether or not to max out your 401(k). Read our guidelines on things you should consider before hitting that maximum.

3. “Save at least three to six months’ worth of expenses.”

One common financial planner mantra is that you should have an emergency fund to cover three to six months of expenses.

Clearly, not many people can achieve that goal. The Federal Reserve reported that in 2016, 44% of Americans could not come up with $400 in cash to cover emergencies.

Depending on circumstances, some people probably can make do with a smaller cash reserve, but others may need a bigger one.

Hawley suggested for those who have consumer debt, they may be better off having a smaller emergency fund while prioritizing paying off one’s deficit.

A person who has an unstable income or several mouths to feed may find that three to six months’ worth of expenses may not be nearly enough. For example, if you’re a freelancer or a seasonal worker, you may want to double your savings goal so you can cover any dry spells.

“If you are very conservative or in a volatile industry where you periodically get laid off you may be more comfortable with more cash on hand,” Hawley added.

Instead: An emergency fund is an account you can use to cover necessary expenses in case you lose a job, your car breaks down or you get hit by an unexpected hospital bill. Your non-routine costs like a vacation or a kitchen renovation should not be part of the calculation. Don’t be afraid to go below or beyond the three-to-six-month rule considering your needs and debt situation. In general, the less steady your job is and the more dependents you have, the larger your emergency fund should be.

4. “Subtract your age from 100 to get your perfect investment allocation.”

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One of the most basic rules for asset allocation is to subtract your age from 100 to calculate the percentage of your portfolio that you should keep in stocks.

Under this rule, at age 25, for instance, you should keep 75% of your portfolio in stocks and the rest in bonds and other relatively safer securities. At age 75, you invest 25% of your assets in stocks. The idea is to gradually reduce investment risk as you age, because older people don’t have as much time to wait for a market bounce-back following a dip.

Much research has been done about asset allocation adjustment for retirement. Experts have different conclusions based on different models. David Blanchett, head of retirement research for Morningstar Investment Management, concluded in an 2015 article that declining shares in equity as people grow older is best for retirement planning in an environment of low bond yields and decent market performance.

This 100-minus-age rule is a good place to get people started in allocating their investments, but it has its flaws.

Americans are living longer and retiring later. The average life expectancy was 79 in 2015, five years longer than 1980, according to the World Bank. Retirement savings strategies should be adjusted as people need a bigger nest egg, can potentially grow the money more and recover from a market downturn.

At the same time, the yield on a 10-year Treasury Bill is roughly 2.5%, down from a peak of nearly 16% in the 1980s. But the stock market keeps soaring — the Dow Jones Industrial Average shot up 24% last year and hit 26,000 for the first time the third week of January. It may not make as much sense today to dump a large portion of money into fixed income when you could potentially reap greater gains.

Instead: Rebalance your investment portfolio each year, considering your target retirement age, plans on using the funds at retirement, your risk tolerance and market performance. If you’re feeling more comfortable with risk, use 110 (or even 120) as a starting point to calculate your stock exposure.

Maria Bruno, senior investment analyst at the Vanguard Investment Group, told MagnifyMoney that stocks should be a significant part of a young worker’s portfolio — 80-100% in equity is very reasonable. For people in retirement, it’s better to be more conservative but still not too afraid to take some risks. A ratio of 60:40 stocks to bonds is considered a balanced allocation for them, Bruno said.

“Equities still do play a role for somebody at retirement because they could be looking at a 30- to 35-year time horizon,” Bruno said. “Individuals may think that they are playing it safe by staying out of the market, but actually what they are doing is they are overexposing themselves to inflation risk, because the portofolio can’t grow in real terms.”

5. “Withdraw 4% of your savings in retirement.”

Here is another retirement savings regimen: You start withdrawing 4% from your portfolio in your first year of retirement, increasing your withdrawal each year enough to cover inflation.

If you have $1 million in your retirement account, for instance, you take out $40,000 for the first year. If the annual inflation rate is 2%, then you withdraw $40,800 the following year ($40,000 plus 2%). And you continue on the path for the next 30 years. This rule was created based on historical data by financial advisor William Bengen in 1994.

But this is not how life works; it hardly goes as planned. Your spending in retirement may vary year by year. This rigid rule doesn’t take into consideration of your investment performance, your retirement time horizon nor the current market and economic conditions. It assumes retirees have a portfolio split between stocks and bonds. Bengen later revised the rule himself to 4.5%, using a more diversified portfolio.

Instead: Be flexible. Revise your spending rate annually based on needs, portfolio performance and taxes. If you have a personal financial advisor, discuss with your planner to determine the withdrawal rates that best suit your personal situation.

For early retirees or someone who’s invested much more conservatively and may have a smaller nest egg, they would probably need to withdraw a little under 4% to make sure their lifestyle remains sustainable, Bruno said. On the other end, she said someone with a shorter horizon — in other words, someone who doesn’t think they’ll have much time to enjoy their savings —  or who’s late in retirement shouldn’t feel tied to that 4% rule; instead, they could stand to spend a little bit more.

6. “Spend no more than 30% of your income on housing.”

The 30% rule is a common budget benchmark for housing costs. The idea is to cap your rent or mortgage at under 30% of your monthly income.

This idea stems from housing regulations from the late ’60s. A U.S. Census Bureau study said the Brooke Amendment (1969) to the 1968 Housing and Urban Development Act established the rent threshold of 25% of family income in response to rising renting costs. The rent standard later rose to 30% in 1981, which has since remained unchanged, according to the study.

But the standard crafted almost four decades ago may not be realistic for many today. A Harvard University study shows that in 2015, nearly 21 million renters — that’s nearly half of the country’s renters — spent more than 30% of their income on housing across the country.

Instead: Think of affordability instead of the 30% rule. Depending on how much you earn, how much debt you bear and where you live, rent could be more or less than 30% of your paycheck. Hawley said she encourages people to work on earning more when rent eats away a huge chunk of income, which may be easier than relocating to reduce rent. If you live in a relatively affordable area compared with California or New York, housing doesn’t have to fill 30% of the budget, she said. In that case, you may have wiggle room to save more.

7. “Buy in bulk.”

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Price per unit may be cheaper at club warehouses like Costco than a local grocery store, and buying in bulk saves money for tens of thousands of American families. But bulk-buying won’t necessarily save money if you buy more than what you can consume. Indeed, many shoppers confessed they have always bought more than they needed just because they couldn’t avoid the temptation of “super deals” at those clubs.

In addition, wholesale markets are not a paradise for every family. If it’s a family of two, the quantities of groceries you stocked up from a major trip to a wholesale market are so large that it may take weeks or even months to consume. You are basically paying upfront a lot more for saving money later. Worse yet, jumbo-sized products may go rotten or expire before you remember that they are even there.

A 2014 University of Arizona study found that families trying to buy all their groceries in one major trip, stocking up on discounted items and purchasing in bulk often buy things that end up unused.

Instead: Buy what you need and how much you need now.

8. “Borrow as much student debt as your expected salary.”

Many college students find themselves saddled with an enormous student loan debt today.

When determining how much students should borrow for higher education, a rule of thumb is that you should cap your total student loan debt below your expected first-year annual salary.

But wait a minute, private schools charge far more than public universities. In some industries, wage growth has been in Stagnantville for decades. Graduates may see big wage increases as their careers advance if they are in finance or law. But if they are government workers, their pay raises may not come as often and substantial.

In a MagnifyMoney survey of the 2017 graduate class, 40% of the 1,000 surveyed recent graduates with student loans anticipated that they’d need more than 10 years to repay their student loans.

Aside from the projected initial annual salary, many other factors, including time expected to repay the loan, the school you attend, the industry you may end up entering, should go into the borrowing calculation.

Instead: Figure out how much you actually need to borrow by evaluating the potential costs, including tuitions, fees and living expenses. Adjust your lifestyle and cut down unnecessary expenses. Remember, you want to borrow as little as possible. Find a loan that works for your future lifestyle. Refinance student loans to a lower interest rate can help you save money.

[9 Options to Refinance Student Loans]

9. “Pay off your mortgage before saving for retirement.”

You may be advised to pay off your mortgage as early as possible because debt is a liability. It may feel great to be completely debt-free, but slowly paying off your mortgage early isn’t always the best move, especially if you are not living in your home for the long run.

“If you can pay off the house you plan to stay in for five years or more after the debt is retired, great,” said Kristin C. Sullivan, a Denver, Co.-based financial planner. “If not, keep that money for yourself and invest more in your 401(k) or other assets that have the possibility for growth.”

Homeowners who purchased their homes after Dec. 15, 2017 can deduct mortgage interest paid on up to $750,000 in mortgage debt from their taxes under the new tax law. For those living in expensive housing markets who will itemize their taxes, that’s all the more reason to invest that money elsewhere.

Instead: Before adding extra monthly mortgage payment, you should pay off other high-interest debt first, such as credit card balance. Prioritize your financial goals, for example, ask yourself whether paying off the mortgage or investing for retirement is more important for you, or if you want to save for your children’s education. If you can enjoy the tax benefits or plan to move in the next five years, that money can be well used in other ways.

10. “Credit cards are bad.”

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Many people shy away from credit cards, being fearful that they will spend money they don't have and later be trapped in debt over their heads. Those people are more likely to rely on debit cards or cash.

But credit cards are not that bad at all if they are used wisely. A cardholder will stay out of trouble if he/she can pay off the balance on time and in full to avoid a high-interest charge.

By steering clear of credit cards, consumers not only miss the opportunity to build credit, but lose rewards, which can come in forms of travel points or cash, that credit card companies give to incentivize cardholders to spend.

Instead: Stick to your budget and spend within your means. Focus on your card balance — not your credit limit. Set auto payment to pay off your credit debt in full, not just the minimum balance, every month. Check our latest review of best credit card offers and how to choose a card that suits your needs.

Advertiser Disclosure: The card offers that appear on this site are from companies from which MagnifyMoney receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). MagnifyMoney does not include all card companies or all card offers available in the marketplace.

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Investing

10 Ways to Invest Outside of Your 401(k) in 2018

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

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So you’ve got plans to max out your 401(k) and your emergency fund is cash-flush. What next?

You have plenty of options, many of which we’ve listed below. Wherever you put your money, remember that each type of investment comes with drawbacks. You should understand your risk tolerance and be comfortable with the potential pitfalls involved before getting started with a new investment. Asset diversification is a way to offset the potential risks — do not put all your eggs in one basket. If you are looking to diversify your assets, here are 10 ways to invest outside a 401(k). We’ve put them in order (roughly) of how complicated it is to get started with these investment strategies.

Upgrade your savings

Stashing your extra money in a certificate of deposit (CD), high-yield savings account, or money market account might be the least risky investment you can make in 2018.

The Federal Reserve has gradually raised its benchmark funds rate in 2017. The latest hike was in December, when the Fed raised the funds rate target range by 25 basis points. When the Fed rates increase, banks often raise savings rates as well. So it may be the time to upgrade your ho-hum deposit accounts.

Most accounts are insured by the Federal Deposit Insurance Corporation, a government agency, for up to $250,000. The risk with these accounts is you might not earn enough interest on your deposits to outpace inflation. If you choose a CD, you usually can’t access your money until the term ends without paying a hefty fee, so it’s probably not a good idea to lock all your savings into a five-year CD account.

You can read our reviews on CDs, online-bank savings accounts, and money market accounts with the highest yields and best perks.

Best for: Conservative investors who are not comfortable with investing in the market and those who need a place to save their emergency fund.

Get an automated micro-investing app

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Small savings add up quickly.

A wave of micro-investing apps have allowed users to invest spare money in small amounts in selected exchange traded funds (ETFs), which are securities that track a basket of stocks, bonds, commodities, or indexes — like the S&P 500 index, for instance. You can often select a ready-made portfolio depending your risk tolerance and invest as little as $5 each day.

Take Acorns as an example: It automatically invests a small amount of your money daily, weekly, or monthly. One of Acorns’ interesting features is rounding up your purchases to the nearest full dollar amount and makes the change available for you to invest.

Let’s say you used a credit card to buy a cup of coffee for $2.75. You can choose to invest the 25 cents on the app, or Acorns will invest the change for you if you elect automatic-roundup investments. It’s free to open an Acorns account. The app charges $1 per month if your balance is under $5,000, or 0.25 percent per year if your balance is $5,000 or more.

We’ve reviewed four micro-investing apps. Read more about their features here.

One thing to note: These apps target investors saving small amounts of cash, so you want to make sure the fees don’t eat into your returns. As a reference, the average ETF fee is 0.24%, and the average for target-date funds is 0.71%, according to Morningstar. So, it really doesn't make much sense for you to pay $12 a year if you only invest $200 a year through Acorns — the fee would be a sky-high 6%.

Best for: People with cash sitting idle in their checking account. And those who have the best intention to save but struggle to get over the emotional barrier. The automated apps help you save spare money and potentially grow it through investing.

Open a Roth IRA

Consider opening a Roth IRA if you have maxed out your 401(k) or you are simply not happy with the investment choices in your plan.

It’s a more flexible retirement investment vehicle, especially for early-career professionals, than a 401(k), according to financial planners. With a Roth, you save after-tax dollars. Money invested in a Roth grows tax-free, and you can withdraw your original contributions — but not the earnings — before retirement without tax consequences or penalty. Many parents also make it a piece of their college savings plan, thanks to its tax efficiency.

The total allowable amount contributed to a Roth is $5,500 for 2018 ($6,500 if you're age 50 or older). The IRS does have income limitations for who is eligible for a Roth IRA. Check if you qualify for a Roth here.

Best for: Young professionals who expect their incomes to rise as their careers advance, or their tax bracket to stay the same in retirement as it is now. Parents saving for their children’s education.

Health savings account (HSA)

Experts say an HSA is one of the most tax-favored, yet underused, investment vehicles.

People with a high-deductible health plan (HDHP) are eligible for a tax-advantaged Health Savings Account. Pros highly recommend that those who have an HSA use it not just as a medical fund for unexpected emergencies, but also as a long-term retirement savings account.

HSA has a triple-tax benefit: The money you put into an HSA is tax-deductible; the balance grows tax-free and rolls over each year; and withdrawals from your HSA for qualified medical expenses are not taxed. There are a variety of HSA investment options, from regular savings accounts to mutual funds.

The annual maximum HSA contribution in 2018 is $3,450 for an individual and $6,900 for a family. If you are at least 55 years old, you can contribute an additional $1,000 annually. Experts suggest you max it out if you can, given its triple-tax benefits. While you must have a high-deductible health plan to contribute to an HSA, you get to keep and use the funds even after you’ve changed insurance coverage.

You can search for HSAs on DepositAccounts.com, which, like MagnifyMoney, is a subsidiary of LendingTree. This may help you navigate the hundreds of plan providers out there.

Best for: People who have a high-deductible health plan.

529 plans

A 529 savings plan is a tax-advantaged savings account designed to encourage saving for qualified future education costs, such as tuition, fees, and room and board. Much like a 401(k) or IRA, a 529 savings plan allows you to invest in mutual funds or similar investments.

It used to only be eligible for college expenses, but under the new tax law, you can now use 529 savings for private K-12 schooling. Tax benefits are now extended to eligible education expenses for an elementary or secondary public, private, or religious school.

The new rules allow you to withdraw up to $10,000 a year per student (child) for education costs.

Edward Vargo, an Ohio-based financial planner, told MagnifyMoney that 529 plans are “excellent legacy planning tools” for one’s grandchildren or great-grandchildren.

One drawback of a 529 plan is that earnings withdrawn not used for qualified education expenses will be taxed, and an additional 10-percent penalty is applied. So parents should thoroughly evaluate the expenses that might be needed to fund education down the road.

Best for: Parents, grandparents, or couples planning on having children.

Education

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If you want to advance your career, move up the ladder, or increase your earning potential, consider furthering your education.

To be sure, going back to school is a big time and financial commitment. Be prepared for a time period of uncertainty and income drop if you quit a full-time job to pursue a degree, which may require a lifestyle adjustment. But knowledge is invaluable, and there’s potential for an economic return, as well. A 2014 Georgetown University economic analysis of college majors found that obtaining a graduate degree leads to a wage bump.

Biology and life science graduate degree holders make a median of $35,000 more with a graduate degree, for instance. The median salary of those with an advanced degree in humanities and arts is $18,000 higher than their counterparts with a bachelor's degree.

Investing in your education doesn’t necessarily require dropping everything to go back to school, either. Pursuing an unfinished degree on a part-time basis, attending professional workshops, taking ongoing education courses, or learning a new language could also be worth your time and money, depending on your career.

Best for: Professionals in fields where an advanced degree is highly preferred or those looking to advance their career or switch careers.

Open a brokerage account

If you’ve paid off your credit card debt, established an emergency fund, and exhausted all your tax-advantaged accounts, you can open a regular old brokerage account to squirrel away some more money.

A brokerage account is much like an IRA. It’s more flexible in terms of investment choices and money withdrawal than 401(k)s, but you don’t get any tax breaks. It allows you to buy and sell a wide variety of securities, from stocks and bonds to mutual funds, currency, and futures and options contracts, through a brokerage firm.

You can open a brokerage account with any of the major investment firms like Vanguard,Charles Schwab, or Fidelity. Just like with other financial accounts, you deposit money and work with a broker to buy or sell securities. The broker will recommend investments depending on your personal financial situation and goals. But you have the final say on investment decisions. The brokerage firm takes a commission for executing your trades, and there are fees linked to the transactions, ranging from account maintenance fees and markups/markdowns to wire fees and account closing fees.

Be prepared for a steep learning curve as a market newbie. You will have to study how each financial instrument works and the companies you invest in, such as learning to read their quarterly financial reports. Holding a brokerage account is also a big-time commitment. Although a broker will help you make investment decisions, you will have to stay on top of the daily market movements and news that may impact the market to make sure you are making a profit.

Best for: Aggressive investors with high-risk tolerance and extra savings.

Invest in real estate

The housing market poses a rosy picture in 2018. Nationally, home prices rose more than 6 percent in 2017, according to the S&P CoreLogic Case-Shiller Indices. Across the country, demand for houses is high while supply is tight.

It’s a good place to tap into if you are looking to diversify your portfolio.There are a couple options. If you want to get hands-on, you can buy a home and rent it out, flipp houses, or rent out your existing home. Or if you don’t want to be quite so involved, investing in Real Estate Investment Trusts (REITs) is another option.

If you are buying a property, experts advise you put the down payment funds in a fairly liquid account, so that it’s immediately available when you need to make a purchase.

Whichever way you choose to invest in real estate, you want to keep up with the latest economic trends, especially the real estate market. For example, you may want to read the real estate market outlook PwC published for 2018.

Unlike many other highly liquid investments, properties cannot be bought and sold for profit in a heartbeat. You want to set aside cash for other life expenses before jumping into real estate, because you are likely to hold the property for a long time.

Best for: Investors with a large sum of cash to cover a down payment and those who understand the real estate market.

Invest in a business

You may think it's a type of venture only the super rich or a venture capitalists can do. Well, not necessarily.

The Securities and Exchange Commission in 2015 approved crowdfunding rules that allow startups or small businesses to seek investors through brokers or online crowdfunding platforms. This basically means, ordinary Joes can now buy into startups now.

A parade of online equity crowdfunding platforms allow non-accredited investors to put money in small businesses and startups. MicroVentures, DreamFunded, SeedInvest, StartEngine, and Wefunder are among those.

But tread carefully. Entrepreneurship gives hope and excitement, but investing in small businesses and startups is risky.

Make sure you do homework before starting a venture. Familiarize yourself with the process and understand the risks. You also want to research the company thoroughly, and understand its management structure and the product or service it offers. Basically, read up on anything you can to find about the company you buy into.

Because of the risks involved, the SEC put a cap on how much you can invest in those businesses through crowdfunding depending on your net worth and annual income. Check the limitations here.

Best for: Adventurous investors who are comfortable with the potential risks, passionate about entrepreneurship, and willing to spend time studying the businesses they invest in.

Wait, but what about Bitcoin?

Investing in the extremely volatile Bitcoin is so risky that it has the chairman of the U.S. Securities and Exchange Commission on guard.

Bitcoin has had a wild ride. Its value skyrocketed from $1,000 to $19,000 in 2017, often moving thousands of dollars a day. And it’s been in the news constantly. But, as with any high-risk financial move, you shouldn’t invest unless you are willing to lose it all. There are no consumer protections on Bitcoin. If Bitcoins are lost or stolen, they are gone forever.

That being said, if you are curious about it and want to learn how it works, you can throw in $20 or $100 to buy through a digital currency exchange or broker. You can read more about the cryptocurrency craze in our ultimate Bitcoin guide.

Best for: Curious investors willing to experiment — and potentially lose.

Advertiser Disclosure: The card offers that appear on this site are from companies from which MagnifyMoney receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). MagnifyMoney does not include all card companies or all card offers available in the marketplace.

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Shen Lu is a writer at MagnifyMoney. You can email Shen Lu at shenlu@magnifymoney.com

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News

Spice Up Your Meals Without Hurting Your Wallet

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

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A fistful of parsley dries out in the refrigerator after you used it for a dish or two. And the 15 bottles of spices on your spice rack have long lost fragrance before you noticed.

Sound familiar?

It’s a common home-cook frustration. A new recipe calls for a tablespoon of fresh basil and a pinch of smoked paprika, but when you go to the grocery store, even the smallest quantities of those ingredients provide far more than you need. Why?

The answer is simple: It’s good business.

Big bunches make big money

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As far as fresh herbs go, sellers make more money off of large bunches, according to John Stanton, professor of food marketing at Saint Joseph's University in Philadelphia.

Demand for fresh herbs — like basil, cilantro, mint, rosemary, thyme, and parsley — has increased dramatically over the past few decades, thanks to gourmet restaurants, and the rise of celebrity chefs and cooking shows. Growing fresh herbs has become a high-profit niche market, experts say, but it’s costly to compete.

Because herbs are at their best when freshly picked, it is important for sellers to establish a quick supply chain. To be successful, they must develop an efficient system to move the herbs from growers to customers, Stanton said. Herbs are also more delicate than vegetables. To prevent damage to the leafy herbs and keep their attractiveness, growers, distributors, and sellers also have to handle them gently and package them properly for long shelf life.

“You cannot have the product sitting around some place too long,” Stanton said. “The withered parsley is almost as powerful as the unwithered, but it just doesn’t look good.”

The complex, labor-heavy logistics that get herbs from growers to grocers in good condition cost a lot of money. Selling herbs in large bunches — more than what a home cook may need — helps make up for these costs.

While no one wants to reveal profit margins for the products they sell, Stanton said growers profit more from fresh herbs than from competitive produce, such as tomatoes and carrots.

The struggle of minimizing waste

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Jeanine Davis, associate professor at the department of horticultural science at NC State University, said small packets of herbs are good alternatives to big bunches of cilantro, parsley, or mint.

While home cooks may avoid food waste by electing the fresh herbs that come in plastic containers, they aren’t necessarily saving money. For instance, a full bunch of cilantro costs $1.99 at Wegmans, a regional supermarket chain in the Northeast, but 0.25 ounces of the same product packaged in a plastic is priced at $1.25. The package is actually more expensive if you calculate the cost per unit. And it may still come with more than you need, as well.

If you’re more concerned about minimizing food waste, subscribing to meal kits might be the way to go. Herbs, spices and seasonings come in the exact amount you need for a dish from meal subscription services like Blue Apron or Sun Basket.

How to make fresh herbs last longer

Compared with buying smaller packages of herbs or subscribing to a meal kit, buying those big, fresh bunches of herbs is the most affordable choice. Buying more than you need doesn’t mean you’ll inevitably waste food either. Karen Kennedy, education coordinator at the Herb Society of America, shared these tips with MagnifyMoney for getting the most value out of your herb purchases:

Spices last longer but can still be problematic

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Most commonly, dried spices are sold in bottles at grocery stores. Each bottle contains a few ounces of herbs, generally about 1 to 2 ounces. Prices vary dramatically by spice.

Kai Stark, purchasing manager at Frontier Co-op, an Iowa-based natural product wholesaler that owns the organic spice brand Simply Organic, told MagnifyMoney that spices are costly because some are extremely difficult to harvest, such as saffron and vanilla, making them incredibly labor-intensive. Others are prone to crop failures, making them risky items for farmers to grow, Stark explained.

Still, many may think two ounces of nutmeg for $5 is costly, especially when the recipe calls for only a tiny bit. Stanton, however, argues that people believe that dried herbs and spices are expensive because they only think of the cost per bottle. He referred to a roasted chicken meal as an example:

“Let’s say a jar of tarragon costs about $3, and a nice chicken may cost $7,” he said. “So you put the chicken in a pan. You took a pinch of tarragon and then you put it in an oven. The cost of the meal is [actually] the full $7 dollars of the chicken and about 3 cents of tarragon.”

“It's better to think of it as cost per use and then it’s not that expensive,” he added.

How to keep your spice costs down

The trick to getting the most value out of a spice is using the whole bottle. Even though it might seem cheaper to buy dried herbs and spices in larger quantities, Kennedy suggests consumers stock them in small amounts to avoid waste.

In the case of nutmeg, you might want to buy a 0.53-ounce bottle that costs $2.

“If you can't use it all before the flavor diminishes, you haven't really saved anything,” Kennedy said.

Stark said the bulk aisle would be the place where consumers should look to save money on spices.

“You can purchase the exact amount of spice you want, whether it's a pinch or a pound,” he said.

To be sure, not every grocery store has bulk spice aisles, and there may not be a specialty spice shop in your town. If that’s not an option at your local grocer, and you feel like you’re wasting money on spices you don’t use up while they’re most potent, consider these tips:

What you can do to make spices last longer

To keep their shelf life as long as possible, Kennedy said it’s best to store the dried herbs and spices in airtight glass jars and and place the bottles in a dry, dark, and cool location. Use your nose as a judge: You may want to toss your spice jar when a strong aroma or flavor doesn’t come off right away when you open it.

“When the fragrance begins to fade, so has the flavor,” she said. Most spices are good for one year when stored properly.

Spices sitting on the shelf for a year may not smell as good as when they were freshly bought, but Stanton said that doesn’t mean they are not safe to eat.

The expiration dates on food are mostly irrelevant, said Stanton, adding that they were labeled by companies hoping that consumers would regularly toss old products and buy new ones. Indeed, expiration dates are not required by law. Industry groups such as the Grocery Manufacturers Association and the Food Marketing Institute are trying to get food manufacturers and retailers to stop labeling expiration/sell by dates to help consumers reduce food waste.

“If you have an old bottle of dried herbs, you might have to put a little more on,” Stanton said. “So instead of costing 3 cents to make the tarragon chicken, it actually costs 6 cents.”

Advertiser Disclosure: The card offers that appear on this site are from companies from which MagnifyMoney receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). MagnifyMoney does not include all card companies or all card offers available in the marketplace.

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Shen Lu is a writer at MagnifyMoney. You can email Shen Lu at shenlu@magnifymoney.com

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Retirement

I Am a Foreign National — What Should I Do With My 401(k)?

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

Thanasis Konstantinidis didn’t know what a 401(k) was when he got his first job in the United States almost four years ago. He just thought the term sounded a bit strange.

The 34-year-old software engineer from Greece eventually learned the basics of the classic American retirement investment account. But it didn’t exactly seem like the wisest move. He was granted a temporary work visa for three years. If at the end of three years he wasn’t granted permanent residency in his host country, there was a chance he would have to leave the country all together.

“My future was very uncertain at the time, and I wasn’t sure if I’d stay in the U.S.,” Konstantinidis told MagnifyMoney.

In 2016, there were 27 million foreign-born workers in the U.S., according to the Bureau of Labor Statistics. These workers made up nearly 17 percent of the American labor force that year, up from 13.3 percent in 2000.

Many non-native workers in the U.S. are young professionals hired by firms seeking workers with highly valued skills. In 2016, more than 870,000 foreign nationals were granted the most common temporary work visas. The U.S. has also seen a dramatic increase in the number of international students at colleges and universities in the past decade. After graduation, these students are often eligible for visas that allow them to pursue jobs in the U.S.

It is tricky enough for the average millennial to think about the future. The temporary immigration status of foreign nationals and the fact they may travel between countries in the future add additional layers of complication when it comes to retirement planning. How can they make long-term financial plans when they aren’t sure if they’ll be able to continue working in the U.S.?

In this article, we answered typical questions foreign nationals may have about 401(k)s as they pursue careers in the U.S.

Should foreign nationals contribute to a 401(k)?

The answer here may seem intuitive to those who, like Konstantinidis, think they will only stay in the U.S. for a few years. Tying up their funds in a 401(k) in a country they may be leaving soon might seem unwise. And by choosing not to participate in a 401(k) plan, they may have more cash available for their immediate needs.

In truth, there are pros and cons depending on a few factors, so you have to ask yourself a few questions first:

Do you view this 401(k) as part of a long-term investment plan or only as a short-term savings account?

When you are young and start saving early, you have a huge advantage on your side — time.

“Most of those folks who are here on a temporary visa tend to be young,” said Chris Chen, a Waltham, Mass.-based wealth strategist at Insight Financial Strategists. “They happen to be able to take the advantage of the power of compounding. That is truly a gift that you can't get when you are older.”

It’s also an opportunity to invest in the U.S. market, which is among the strongest economies in the world and has a relatively mature and stable market with lower fund fees than many other countries.

Are you a high earner, which would increase the tax benefit of opening a 401(k)?

Another immediate and major benefit that you would lose is the tax advantage. Especially for those high-income earners, you are saving money by not paying taxes now, and when you withdraw the money at retirement, you will pay fewer taxes because ideally, you will be in a lower income bracket.

Is there an incentive to contribute to your 401(k), like a company match?

If your employer offers a match, you would be walking away from additional income if you fail to contribute. Many U.S. employers offer to match up to a certain percentage of employee 401(k) contributions.

For example, an employer may offer to match up to 3 percent of the employee’s contribution.

Let’s say you make $60,000 a year and contribute 6 percent (or $3,600) into a 401(k) for the year. Your company would match up to three percent (or $1,800) of that contribution. This means you would only contribute $3,600 to your 401(k) but end up with $5,400 thanks to the match.

“They would be leaving money on the table by giving up on the match,” said Chris Chen.

How certain are you about returning to your home country in the near future?

It may not feel like your odds of needing a U.S.-based retirement fund are certain, especially if your circumstances are anything like those of Konstantinidis.

However, Chris Chen argues that an international worker’s future isn’t all that uncertain. In fact, if anything is certain at all, it’s the fact that they will likely retire at some point.

“Whether it is India or China or Europe, when you go back to your country, you are going to have to use the tools available there for retirement,” he said. “And in the meantime, you will still have an extra little [retirement fund] out there in the U.S.”

If you were to leave the U.S., you have several options on managing your U.S.-based savings, some of which will require some administrative hassle. We’ll cover these options later.

Furthermore, your plans may change. You might have planned to stay in the U.S. for just two years, but you may end up staying longer. In that case, it could be wise to start saving for retirement early.

Can your 401(k) help with non-retirement goals?

Hui-chin Chen, a financial planner with Arlington, Va.-based Pavlov Financial Planning, who works with foreign nationals in their 20s to 40s, told MagnifyMoney some have other plans for their 401(k) than just retirement.

Many of her clients stayed in the U.S. for jobs after completing their college or graduate studies here. Although some eventually left the country, they still wanted their children to have the same study abroad experience. So they considered their 401(k) an education fund.

“They think, ‘Okay, I can leave some money in the U.S. I don’t care about taking it with me,” Chen explained. “‘And if I leave the money in the U.S., I might as well get some tax benefits. I can wait until I am older and I can take that money out to pay for their college.’”

Just keep in mind that if you try to tap your 401(k) for funds before you turn 59 1/2, you will likely face early withdrawal penalties and could be hit with income taxes.

The disadvantages of contributing to a 401(k)

While financial planners encourage foreign nationals to invest in their 401(k) in general, they would advise against the idea in some cases.

For those who are certain that they are just staying in the U.S. for a very short time, are in a relatively low tax bracket, and don’t see 401(k) as a long-term savings plan, experts suggest they open a taxable account — like a brokerage or savings account — or send money back home if they have better investment choices over there.

But do take note that you are a considered a U.S. resident from the tax perspective as long as you live in this country. This means if you invest outside the U.S., your income from those investments are still subject to U.S. taxes.

The tax benefits could justify the administrative hassle for those who have worked in the U.S. for a long time and have a big 401(k) balance. That’s because they are able to save a potentially significant sum of money without paying taxes upfront. And when they withdraw those funds later, they will likely be at a lower tax bracket and, hence, enjoy big tax savings.

For international workers whose stay in the U.S. is shorter, however, that tax benefit doesn’t necessarily pack the same punch, especially if their account has a smaller balance.

“It’s OK if [your 401(k) is worth] $200,000. If it’s $18,000, the benefit is offset,” said Andrew Fisher, president of Worldview Wealth Advisors, a financial advisory firm that specializes in working with cross-border individuals with U.S. connections.

How much should I invest and where do I invest?

If you’ve decided to open a 401(k) with a U.S. company, the next challenge is figuring out how much to save and where to save it.

The answer to the first question — how much to save — is simple if your company offers a match.

Sirui Hua, 26, a producer with a New York-based digital media company, told MagnifyMoney that he saves 4 percent of his income in his 401(k). His employer offered to match up to 4 percent of his income and he didn’t want to give that up.

“If I don’t save the money now, I’d have nothing when I go back,” Hua said. “At least I would have a little something one day I go home.”

Hua, originally from China, was recently approved for his work visa by his employer, which allows him to continue working in the U.S. for up to six years. Knowing that he has a full six years of stable work ahead of him, he is planning to increase his 401(k) contribution. He’s still not sure if he’ll use it as a retirement account if he returns home to China, but he would rather take the opportunity while he has it.

At least contribute enough to capture the full match. From there, consider increasing your contribution based on your other financial goals.

Depending on your personal goals and future plans, contribute more if you are able to. Just remember the legal contribution limit for 401(k)s is $18,500 in 2018.

It may also make sense to save cash in a standard savings account so that you can access money in an emergency. Remember, early 401(k) withdrawals come with potential tax penalties.

What do I do with my 401(k) if I leave the country?

This is the question that has deterred many foreign workers from investing in their 401(k) accounts.

There are basically two solutions: You can either leave it in the U.S. or take the money out and deal with the tax and early withdrawal penalties — and the potential hassle of getting a U.S.-based bank to transfer funds to an international account.

Leaving your 401(k) in the U.S.

You can leave your 401(k) with your employer’s plan administrator or you can roll it over into an IRA.

In general, pros recommend that you do not cash out your 401(k) before age 59 1/2 (to avoid penalty) if you don’t have to. Keeping your 401(k) is the easiest solution.

“It’s less likely that [the plan providers] will say, ‘We have to close your account,’” Hui-chin Chen said. ”Because as long as you are still a plan participant, they cannot kick you out unless there is plan provision specifying it.”

That being said, you will want to check in every now and then to be sure your investments are properly allocated based on your needs. Hui-chin Chen notes that companies may offer good low-cost index funds with balanced asset allocations for employees. However, it’s important to be sure your investments are well-balanced and you’re not taking on more risk than is suitable for your age and goals.

You can keep your 401(k) with most plan providers even after you leave the company, she added. However, there are exceptions. Check with your HR department and read the details in your plan documents to find out specific plan rules.

Rolling it over into a traditional IRA

Another option for workers who leave the country is to roll the funds into a traditional IRA (Individual Retirement Account) that you can control yourself. Just like a 401(k), you may be able to defer paying taxes on money contributed to an IRA.

A major difference between an IRA and a 401(k) is that you are limited to a total annual contribution of $5,500 ($6,500 for those over age 50) with the IRA. But an IRA may potentially offer a wider variety of investment choices than a typical employer-sponsored 401(k).

The challenge with opening an IRA for foreign nationals is that not many plan providers work with people with foreign mailing addresses because they are seen as a potential risk, experts said. You should check with brokerage firms to see whether they will hold accounts for people with international addresses.

The advantages of keeping your 401(k) in the U.S.

Potential tax benefits

When you withdraw your 401(k) funds from a U.S.-based account, it’s likely that your home country will not treat it as taxable income.

Tax laws in different countries vary. There is a grey area whether other countries respect the tax benefits of the U.S.-based 401(k) or IRA.

Fisher of Worldview Wealth Advisors explains that in his experience, most countries have not expressly accepted or denied the tax-deferred status of funds held in a 401(k) or IRA, but most foreign tax preparers are treating it as such. In other words, you may continue to enjoy a tax-free growth investment vehicle even if you move overseas. But you want to check your country’s tax laws to make sure this is the case.

The magic of compounding

Before you take this road, remember you could face a 10% early withdrawal penalty plus a hefty income tax bill.

If you’re a younger worker, you’re also missing out on potentially decades’ worth of growth that you might enjoy if you leave your funds where they are.

Let’s say you save $18,000 in a 401(k) over your time working in the U.S. It might seem like peanuts to you. But consider this: If you never contribute another penny to the account, you could grow that savings to over $317,000 over the next 40 years (assuming an average annual return of 7.2%).

“It’s no longer peanuts,” said Chris Chen. “When you take [the money] out, think of that $18,000, what are you going to do with it? People often do that without much savings, so they will end up spending it.”

Cashing out your 401(k)

If you don’t want to leave the money in the U.S. to invest for the long run, there are more tax complications and administrative hassle to contend with.

You’re allowed to withdraw the money from your 401(k) when you leave the country, experts say. The amount you withdraw will count as taxable income unless you’re 59 1/2 or older. You’ll also face a 10 percent penalty.

You have to notify your plan provider when you leave that you are no longer a U.S. tax resident. The provider most likely will withhold taxes on the money withdrawn, and you will have to file a U.S. tax return for that income the following year, Hui-chin Chen said.

If you want to save money on taxes, Hui-chin Chen suggests you wait until the year after you leave or even later to take the funds out. When your U.S. income becomes just the amount of money you withdraw from your 401(k), you may be put in a lower tax rate than when you had full employment income in the U.S., Hui-chin Chen said.

But note that you need a bank account to receive the distribution, and not every provider may be willing to mail a check to an overseas address. It is likely that you probably have to keep a checking account open in the U.S., which is also easier said than done — banks don’t like clients with foreign addresses, either, Hui-chin Chen said.

“In the grand scheme of things, [for] most people, if they don’t stay in the U.S. for the long term, taking the money with them is probably not that difficult the year they leave or the year after they leave when they still have some leverage with the bank,” she said.

If you have a sizeable 401(k), taking a small distribution each year to pay zero-to-minimum amount of taxes is doable, experts say. But then you are facing far more complicated ongoing maintenance, which includes filing taxes every year, and keeping a U.S. bank account and address live. You may also be subject to some state taxes depending on your resident country, Fisher said.

Although Konstantinidis didn’t contribute to his previous 401(k) plan, his employer invested 3 percent of his income in a 401(k) for him for free. Konstantinidis, who lived through nearly a decade of financial crisis in Greece, is ultimately skeptical about the stock market.

Now, the self-acclaimed “paranoid” computer scientist is considering contributing 3 percent of his income to the 401(k) with his current employer as he awaits his green card — he is settling down.

“I’ve actually seen my 401(k) go up,” he said. “That’s really impressive. Now I am convinced.”

401(k) Frequently Asked Questions

401(k) is the name of an account U.S. workers can use to save for retirement through their employer. The name 401(k) comes from the section of the U.S. tax code that it was derived from in the 1980s.

The traditional 401(k) allows workers to set aside part of their pre-tax income to save for retirement. It’s up to the individual to decide how much to save. Even if you are not an American citizen, you are eligible to participate in a 401(k) plan, experts say.

There is also a Roth 401(k) option, which is becoming increasingly common. With a Roth 401(k) you would contribute funds and pay taxes on them right away, with the ability to withdraw funds in retirement tax-free.

When an employee signs up for a 401(k) plan, they’re typically given a choice of different investments, such as mutual funds, stocks, or bonds. The benefit of a 401(k) is that you not only avoid paying income taxes on your savings now but you’ll have a source of additional income later when you are ready to retire.

The legal maximum amount you can save in your 401(k) is $18,500 in 2018.

Employers may offer to match employees’ contributions up to a certain percentage.

For example, an employer may offer to match up to 3 percent of the employee’s contribution. Say you make $60,000 a year and contribute six percent (or $3,600) into a 401(k) for the year.Your company would match up to three percent (or $1,800) of that contribution. This means you would only contribute $3,600 to your 401(k) but end up with $5,400 thanks to the match.

Some employers may vest your match immediately. That means as soon as they contribute to your 401(k) the funds belong to you. However, others may have a vesting schedule, which is a set timeline that dictates how long it takes for you to own the money your employer contributes.

Generally speaking, you can start taking money out of your 401(k) account when you reach age 59 1/2. There are ways to tap into your 401(k) sooner, but you’ll face an additional 10 percent early withdrawal penalty and you could owe income taxes on the amount withdrawn.

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Shen Lu
Shen Lu |

Shen Lu is a writer at MagnifyMoney. You can email Shen Lu at shenlu@magnifymoney.com

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