Featured, Investing

The Basics of a Backdoor Roth IRA

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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.

One of the nice things about making more money is that you have the opportunity to save more money.

But one of the downsides of making more money is that you eventually run into some restrictions on where you can save it.

Specifically, the IRS limits the amount you can contribute to a Roth IRA and the amount you can deduct for contributions to a Traditional IRA based on your income. Once your income reaches a certain point, those accounts are limited in their use.

However, there’s a loophole that can allow you to keep contributing to a Roth IRA no matter how much money you make.

It’s called the backdoor Roth IRA. Here’s how it works.

The Basics of a Backdoor Roth IRA

For 2017, Roth IRA contributions are not allowed once your modified adjusted gross income exceeds $196,000 for married couples, or $133,000 for single filers (source). And if you’re participating in an employer retirement plan like a 401(k), you would also be prohibited from deducting Traditional IRA contributions at that income level.

But there are two additional provisions that, when used together, can allow you to work around these limits:

  1. You’re allowed to make nondeductible contributions to an IRA no matter how much money you make.
  2. You’re allowed to convert money from a Traditional IRA to a Roth IRA no matter how much money you make.

So let’s say that between you and your spouse, you make more than the $196,000 limit for contributing to a Roth IRA. And let’s say that you also participate in a 401(k), meaning you can’t deduct Traditional IRA contributions.

Here are the workaround steps you could take to get money into a Roth IRA:

  1. Open a new Traditional IRA.
  2. Contribute to your new Traditional IRA. You won’t get a tax deduction for the contribution, but as you’ll soon see, that won’t matter.
  3. Wait until you receive your first statement from your new Traditional IRA, which should be in about one month. There is some disagreement around how long you should wait, but one month seems to be a fairly safe bet.
  4. Convert the money in your new Traditional IRA to a Roth IRA. Whichever company you have your IRA with can help you do this (it’s pretty straightforward).
  5. As part of the conversion you will be taxed on any growth that’s happened since contributing to the Traditional IRA, but since it’s only been a month or so, that should be minimal. You won’t be taxed on the amount you contributed, since that was already after-tax money.

And that’s how a backdoor Roth IRA works. And now that your money is inside a Roth IRA, you’ll eventually be able to withdraw it tax-free.

Of Course, There’s Always a Catch…

If you don’t have any existing Traditional IRAs, SEP IRAs, or SIMPLE IRAs, then it really is that simple. But if you do, there’s a big caveat you need to be aware of.

When you convert from a Traditional IRA to a Roth IRA, the IRS considers all of your IRAs to be part of one big pot, and it considers the money you convert to come proportionally from each part of that pot.

Here’s an example to show you what that means:

  • James has $20,000 in a Traditional IRA. All contributions to that IRA were deductible, so this money has never been taxed.
  • This year James makes too much to deduct contributions to a Traditional IRA, but he likes the idea of a backdoor Roth IRA. So he opens a new Traditional IRA, completely separate from his old one, and makes a $5,000 nondeductible contribution.
  • He converts the $5,000 in that new, nondeductible Traditional IRA to a Roth IRA.
  • From the perspective of the IRS, that $5,000 conversion was actually made from a single $25,000 IRA, even though James has two separate accounts.
  • Since 80% of James’ combined IRA money has never been taxed, 80% of his Roth IRA conversion will be taxed.
  • This means that $4,000 of James’ conversion will be taxed. Assuming James is in the 28% tax bracket, he will owe $1,120 on the conversion. And it may be more when you include state income taxes.

In other words, having an existing Traditional IRA that you’ve made deductible contributions to throws a big wrench in your plans to do the backdoor Roth IRA by subjecting a potentially significant portion of your conversion to taxes.

The Way Around the Catch

All hope is not lost. There’s a way to do the backdoor Roth IRA tax-free even if you have money in an existing Traditional IRA, SEP IRA, or SIMPLE IRA.

All you have to do is roll all of that existing IRA money into a 401(k) or other employer retirement plan BEFORE executing the backdoor Roth IRA. Then, when you convert your nondeductible contributions to a Roth IRA, there won’t be any other IRA money to look at and you’ll avoid the big tax hit.

Now, this may or may not be possible depending on your situation. First, you have to currently be participating in an employer retirement plan. And second, your plan has to accept rollovers from all of your existing IRAs, which they may or may not do. You can ask your employer for specific details.

It may also not be desirable for other reasons. Many 401(k)s are littered with high fees, and one of the advantages of having your money in an IRA is that you have much more control over both your investment options and how much you pay.

But if it’s allowed and if your 401(k) has reasonable investment options at a reasonable price, it can be a worthwhile move that frees you up to do the backdoor Roth IRA.

Tread Carefully

The backdoor Roth IRA is a legitimate tactic that’s used by a lot of people every single year.

But there are a number of moving parts and a number of potential hang-ups, so it makes sense to tread carefully and potentially even seek out the help of a professional before making any final moves. A financial planner could help you decide whether it’s the right move, and an accountant could help you navigate the tax issues.

Still, when it’s done right, a backdoor Roth IRA gives you access to a significant amount of tax-free money you wouldn’t have otherwise had.

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College Students and Recent Grads, Featured

Student Loan Borrowers: Here’s How to Renew Your Income-Driven Repayment Plan

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If you are on an income-driven repayment plan, it’s important to know that you must renew your plan each year in order to remain enrolled. And waiting on your student loan servicer to remind you of that fact isn’t the smartest idea

The Consumer Financial Protection Bureau recently filed a lawsuit against Navient, the country’s largest loan servicer. Among many other claims, the CFPB alleged Navient failed to adequately inform borrowers of their need to renew their income-driven repayment plans.

The outcome of the CFPB’s lawsuit is still unknown. Navient has already taken steps to improve communication with borrowers around repayment plan renewal time. Even so, the news serves as a prime example of why you should learn the details of the income-driven repayment renewal process on your own.

How to Renew Your Income-Driven Repayment Plan

The DOE began offering income-driven repayment, or IDR, in 2009 to help ease the burden of student loans on borrowers struggling to repay federal student loans. If you can meet certain income or family criteria, you could pay as little at $0. Another important benefit is for the first three years after enrollment, many borrowers qualify to have the federal government pay part of the interest charges if they can’t make payments.

IMPORTANT: If you are on an income-driven repayment plan, you have to renew your plan each year.

This will require you to submit updated information about your annual income and family size to your servicer. The time to renew your plan is typically a month or two before the 12-month mark.

If you do not renew your income-driven plan, you’ll get kicked out of your IDR plan and your payment may increase since it will no longer be based on your income.

There are two ways you can renew your IBR plan:

  1. Visit the Federal Student Aid website at studentloans.gov: This is the fastest and generally the most convenient way to renew your plan.

Steps:

  1. When you get to the website, follow the “Apply for an Income-Driven Repayment Plan” link. You will follow the same link if you need to renew your IBR. The form will prompt you to select a reason for your request once you begin.

Select “Apply for an Income-Driven Repayment Plan” to get started:

Choose “submit recertification”:

  1. The application will ask you for information such as your marital status, household size, employment, and income. Once you are on the “Income Information” section, you’ll have the option to retrieve and use your most recent income information from your taxes if you filed them with the IRS.

Choose the “annual recertification” option:

The application asks for your personal information:

  1. Follow up with your loan servicer. If you have loans with multiple servicers, you only need to submit the request once. They should all be notified when you renew online via the Federal Student Aid site. Below is an example of a completed submission with one servicer; your other servicers will be listed if you have multiple servicers.

Completed submission:

  1. Use the Income-Driven Repayment Plan Request form

Steps:

  1. Download the official income-driven repayment plan renewal form here on the Federal Student Aid website or on your servicer’s website.
  2. Once you print and complete the form, you can submit it to your servicer’s website if they allow. Navient allows you to upload the completed form. You also have the option to mail or fax the paperwork to your loan servicer.
  3. Your servicer should notify you once your request has been processed.
  4. You should be able to monitor the status of your renewal on your student loan servicer account.
  5. If you mail or fax the paperwork to your servicer, you’ll need to mail one to each servicer individually as they will not be automatically notified of your request.

How to Enroll in an Income-Driven Repayment Plan

The first time you apply for an IDR plan, you can either do so through the government’s website at studentloans.gov or contact your student loan servicer to help you enroll. You’ll need to log in to the platform and follow directions to fill out the application. It should take about 10 minutes, although you may be asked to mail in supplemental documentation to your servicer for review.

You can use the studentloans.gov website repayment estimator to estimate how much your payments, interest, and total amount paid would be under each plan option.

Repayment estimator results from studentloans.gov

Your servicer will notify you once your request has been processed.

Choosing an Alternative Income-Driven Repayment Plan

When you renew your IDR plan, you can check to see if you’d qualify for alternative payment options. You might find an alternative could work better for your budget.

In addition to the two standard repayment and graduated repayment plans, borrowers have five income-driven repayment plans to choose from. It’s important to note that under most IDR plans, you’ll pay more over time than you would under the standard plans.

Here’s a quick rundown of each:

1. Income-Based Repayment Plan

The traditional income-based repayment plan generally caps your payment at either 10% or 15% of your discretionary income. Your payments will never be more than what they would be on the standard 10-year plan. Payments are recalculated each year and are based on your updated income and family size.

After 25 years of payments, your loan balance is forgiven, although you’ll have to pay taxes on the forgiven amount when you file your taxes for the year.

2. Pay As You Earn (PAYE) Plan

Pay As You Earn increases your monthly payment as your annual earnings increase, but generally sets your monthly payments at about 10% of your discretionary income. Only those who took out their first federal loan on or after October 1, 2010, or who received a direct loan disbursement on or after October 1, 2011, can qualify for the PAYE plan. Applicants must also have a partial financial hardship (disproportionately high debt compared to current income). Your payment is recalculated annually based on your updated income and family size. The loan’s outstanding balance is forgiven after 20 years.

3. Revised Pay As You Earn (REPAYE) Plan

The Revised Pay As You Earn Plan expanded the PAYE plan to about 5 million more borrowers. You may qualify for REPAYE regardless of when you took out your first federal student loan. It doesn’t require you to have a partial financial hardship. REPAYE generally sets payments at about 10% of your discretionary income and doesn’t cap income. Spousal income is considered in calculating payments no matter how you file your taxes. Under this plan, undergraduate loans are forgiven after 20 years, while graduate loans are forgiven after 25 years.

4. Income-Contingent Repayment (ICR) Plan

This plan caps your monthly payment at either 20% of your discretionary income or the amount you would pay on a two-year fixed payment plan, adjusted for your income. The payments are recalculated each year and based on updated income, family size, and the amount you owe. After 25 years of payments, your balance will be forgiven.

5. Income-Sensitive Repayment Plan

The income-sensitive repayment plan serves as an alternative to the ICR plan for those who received loans via the Federal Family Education Loan Program (FFELP). It makes it easier for low-income borrowers to make their monthly payments. Under the ISR plan, you can make monthly payments based on your annual income for up to 10 years. The payments are set at 4% to 25% of gross monthly income, and the payment must be larger than the interest that accrues.

Currently, Federal Direct loans and Direct PLUS loans qualify for both IBR plans, but private loans and Parent PLUS loans do not qualify. Read more about your repayment options here.

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Featured, Pay Down My Debt

5 Risks of Working with a Debt Settlement or Debt Relief Firm

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5 Risks of Working with a Debt Settlement or Debt Relief Firm

If you’re deep in debt, you may have looked into getting some outside help to find relief. Frequently, your search for aid will bring you to debt settlement firms.

Debt settlement firms negotiate directly with your creditor to reduce your debt. If they succeed in settling your debt for a lesser amount, you will then be required to make one lump-sum payment, effectively wiping out your obligation.

Using these firms may sound like a lifesaver to someone struggling to pay off many debts at once. But debt settlement firms can actually cause more harm than good to your finances if you aren’t careful.

“Based on all the evidence we’ve seen, it is extremely rare that anyone benefits from using a debt settlement firm,” says Andrew Pizor, a staff attorney with the National Consumer Law Center.

Before you agree to work with a debt settlement firm, it’s important to know the risks:

5 Risks of Working with a Debt Settlement Firm

1. You will have to stop paying your debts. When you begin working with a debt settlement firm, many firms will encourage you to stop paying your debts and start paying into a third-party bank account. The idea is that you will eventually build up enough money in that account to be ready to make a lump-sum payment when the firm succeeds in convincing your lender or collections agency to settle.

This, of course, means that your accounts are going to become increasingly delinquent. It can take up to 36 months to fully fund a debt settlement firm account, according to the Federal Trade Commission.

While you are not paying your debt, your creditor can send your account to collections or even file a lawsuit against you before the settlement firm gets a chance to negotiate. You could also be responsible for any interest, late fees, and legal fees that have accrued over that time as well.

2. They may not succeed in settling your debt. Once you have saved up enough money to make a lump-sum offer to the creditor, the debt settlement firm will attempt to enter negotiations. What they may not tell you is that some creditors will not work with these firms as a rule. That means it’s possible that after you’ve saved enough money for the payment — meanwhile, allowing your accounts to become severely delinquent and your credit score to tank — you could be left without a resolution at all. To avoid this, call your lender or collections agency directly to ask if they work with debt settlement agencies before you sign up for their services.

3. They’ll take a portion of your debt savings. If the firm is able to successfully negotiate, they will often take a cut of your savings in return. For example, if you owe $10,000 and they are able to negotiate a lump-sum payment of $8,000 with $2,000 of your original debt forgiven, the firm would take a percentage cut of that $2,000.

4. Your credit will tank. It is important to note that debt settlement shows up on your credit report when it is reported to the credit bureaus. It will serve as a red flag to future lenders that in the past, you have not paid your debts in full. This could result in higher interest rates, smaller lines of credit, or even failure to get approved for credit at all.

5. You could face a hefty tax bill. If the amount forgiven is $600 or more, you will most likely have to report it as taxable income. Let’s look back at our earlier example. When that person settled their $10,000 debt for $8,000, the lender effectively forgave $2,000. To the IRS, that forgiven debt could be treated as additional income and you could owe taxes on it.

What to Look for in a Debt Settlement Firm

There are six things you should consider red flags when it comes to debt relief services, according to the FTC:

  • The company charges any fees before it settles your debts
  • The company advertises that they are part of a “new government program” to bail out personal credit card debt. There are no such programs.
  • The company guarantees it can make your unsecured (credit card) debt go away
  • The company tells you to stop communicating with your creditors, but doesn’t explain the serious consequences
  • The company tells you it can stop all debt collection calls and lawsuits
  • The company guarantees that your unsecured debts can be paid off for pennies on the dollar

Almost all states have some form of regulation for debt relief services. Some states ban them altogether.

A debt settlement firm may be licensed to operate in your state, but that does not mean they are necessarily the best for your needs. Because state licensing agencies are not federally regulated, quality standards can vary widely from state to state.

What should you look for, then?

A best-case scenario, according to Pizor, is finding a company that only takes a percentage of your debt reduction in exchange for their services. “This setup helps better align their interests with your own,” Pizor says. If you do well, they do well.

How to Avoid Debt Settlement Scams

Most debt settlement firms focus on unsecured consumer debt, like credit card debt. The most common scams in these situations involve telemarketing. You’ll receive a call from a company posing as a debt settlement firm that promises to reduce the amount of debt you owe as long as you pay an upfront free. They may even tell you that you don’t have to pay a fee until later as long as you’re saving money in a third-party account.

The latter sounds legitimate, but in both these situations, the supposed debt settlement firm can easily run with your money. There was a flurry of these telemarketing scams following the 2008 financial crisis, prompting the FTC to add further federal regulations under their Telemarketing Sales Rules.

If you can’t sit down with someone in person, it’s difficult to judge their legitimacy. In these situations, it’s best to just hang up.

Another tactic scammers perpetrate is using a lawyer as a front. This lawyer may be licensed to practice in your state, but will outsource your debt woes to companies across the country, or even the world, that have no legal background.

In order to avoid this scam, make sure you can sit down with the lawyer face to face in their office. Pizor recommends asking probing questions to get a feel for their legitimacy, including, “Who will be working on my case?”

If the lawyer or a paralegal in their office will be doing the work, that is much more acceptable than someone they cannot immediately supervise in person, or someone without a background in law.

Scams also frequently happen in the student loan sector. You’ll often see settlement firms advertising that there is a “new government program” that could help you settle your student loan debt. This is tricky because there are legitimate government programs that can help those with federal student loans defer payments or even forgive their remaining debt, but you should never have to pay anyone a fee in order to access these programs.

In late 2014, the Consumer Financial Protection Bureau prosecuted two companies that were preying on those with student loans.

Try Negotiating Your Own Debt Settlement

As long as you’re aware of the effect it may have on your credit, you can negotiate a settlement on your own. Many creditors have a floor for how much they’ll reduce your debt in favor of a lump-sum payment. This floor applies to debt settlement firms and consumers alike. By entering negotiations without a third party, you can save yourself the fees and potential victimization that you would risk by working with a debt settlement firm.

There are two important things to remember before you settle your debt:

  1. You will likely need to provide a lump sump payment right away. It’s unlikely a debt collector or lender will accept installments. Also, having the ability to make a lump sum payment could give you additional bargaining power.
  2. As we mentioned before: If the debt is settled for a lesser amount, you may be taxed on the portion of the original debt that was forgiven.

Consider Paying Your Debt in Full

Debt settlement leaves a scar on your credit report that will take years to fade. If possible, attempt to negotiate a lower interest rate and/or longer terms that may decrease your monthly payment. Just be aware that a longer term may lower your monthly payments but increase the amount of interest you pay over the course of your loan, even if your interest rate goes down or stays the same. However, you’ll more likely be able to afford your payments and possibly save your credit report.

That being said, some debts may have passed their statute of limitations in the state in which they originated. Once that statute of limitations has been passed, it is no longer possible for the lender or collections agency to sue you for those unpaid debts. Furthermore, they may have already fallen off your credit report. However, if you make any further payments, the clock will restart and the debt will be revitalized. Consult a consumer law attorney or a credit counselor before deciding whether to make a payment on an old debt.

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Featured

3 Lies Your Student Loan Company Might Tell You

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3 Lies Your Student Loan Company Might Tell You

Student loan servicer Navient found itself in hot water with a consumer watchdog on Wednesday, when the Consumer Financial Protection Bureau announced a long-anticipated lawsuit against the company. Navient, formerly known as Sallie Mae, is the nation’s largest servicer of both federal and private student loan debt. For years, the CFPB alleges, Navient loan servicers steered borrowers who were struggling to repay their loan debt in the wrong direction, “providing bad information, processing payments incorrectly, and failing to act when borrowers complained.

One of Navient’s biggest transgressions, the CFPB alleges, is that Navient representatives encouraged borrowers to put their loans in forbearance even when it wasn’t the best option. By doing so, Navient potentially added $4 billion to its own coffers in the form of additional interest charges.

The lawsuit is a major wake-up call for the student loan servicing industry as a whole. It should also trouble the millions of student loan borrowers who may rely on their student loan servicer for advice when they are deciding how to repay their debts. With vast numbers of customers to support and an increasingly complicated menu of federal repayment plan options to sort through, student loan servicers may not be the best sources of guidance.

Here are three lies student loan servicers may tell you:

1. “Can’t pay? You’re better off putting your loans in forbearance.”

When you can’t scrounge up the money to cover your student loan bill, forbearance can sound like a dream option. Forbearance allows borrowers to pause student loan payments for up to 12 months at a time. Your loan servicer may encourage you to put your loans into forbearance because it is a much easier process on their end. But here’s what they may not tell you: Interest will continue to accrue on your loans. So while you enjoy the break from those student loan bills, your loan balance will balloon more and more every day. Over time, you could bring your loans out of forbearance only to find out you now have even higher monthly payments because your balance has increased.

If you know you will be unable to make your federal student loan payments for an extended period of time, a better option may be to enroll in an income-driven repayment plan. IDR plans can reduce your payments to an affordable amount based on your annual income (sometimes as low as $0/month). Interest will still accrue if you enroll in an IDR plan; however, the government may cover your unpaid interest charges if your monthly payment is not enough to cover them. That benefit lasts for up to three consecutive years from the date you enroll in the IDR plan. And it does not apply to borrowers whose loans are forbearance.

Another perk of IDR plans is that your remaining debt is generally forgiven after your plan period is over – from 20 to 25 years, depending on which plan you are enrolled in (see chart below).

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Source: https://studentaid.ed.gov/sa/

It is especially important for people who work in nonprofit or government jobs to understand their income-driven repayment plan options. After making 120 consecutive federal student loan payments (10 years) while working in the public or nonprofit sector, you may be eligible for public student loan forgiveness. But if you are in forbearance, you are not making any payments at all, which means you do not get credit toward your 120 payments goal. If you are in an income-driven repayment plan, however, those payments will count toward your public student loan forgiveness required payments.

2. “Once you enroll in an income-driven repayment plan, you’re set for life.”

Contrary to what your student loan company may tell you, it is absolutely vital to re-apply for income-driven repayment plans each year. That is because the plans are based on your annual household income. If your income changes during the year, you need to update your income on your income-driven plan in order to calculate the proper monthly payment.
If you do not renew your IDR plan, you could wind up with higher student loan payments you cannot afford and you may risk falling into delinquency again. What’s more, you have to be enrolled in an income-driven repayment plan in order to qualify for federal student loan forgiveness. If you let your enrollment lapse, you could derail your eligibility for future loan forgiveness.

Unfortunately, millions of student loan borrowers fail to renew their income-driven repayment plans each year. The CFPB is working to crack down on student loan companies that do not properly inform borrowers about the deadline to renew, but it’s also up to borrowers to stay on top of their enrollment status. In order to renew your plan, contact your student loan company directly and ask them to re-enroll you. Alternatively, you can download the application and fill it out yourself here: Income-Driven Repayment Plan Request.

Before you enroll in an income-driven repayment plan, know the cons as well as the pros. You may reduce your monthly payment but pay more in interest over the long term. Also, if your loans are ultimately forgiven, you may owe federal tax on that forgiven amount. Use this student loan repayment calculator to find out if IDR is the right plan for you.

3. “We’re happy to allocate your payment to whichever loan you want.”

Student loan borrowers often have multiple loans to manage. Let’s say you’ve got five student loans. One month, you realize you have an extra $200 to put toward those loans. Theoretically, you should be able to ask your loan company to take that extra $200 and apply it to the loan with the highest interest rate. It is generally considered wise to allocate extra payments toward whichever loan has the highest interest rate. This way, you are working to reduce the loan that is accruing the most interest each month and avoiding spending more on interest than you have to.

In the case of Navient, the CFPB alleged that the company’s representatives repeatedly misallocated borrowers’ payments. In order to fix the issue, the borrowers themselves had to keep a close eye on their monthly payments and alert the company.

It’s important to review your loan statements carefully each month to be sure your payments are allocated the way you desire. Some student loan servicing websites make it fairly simple to allocate your payments manually, without having to rely on the help of one of their loan specialists. Even so, play it safe and double-check your loan statements to be sure your payments are being applied according to your wishes.

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Featured, Health

3 Ways to Keep Medical Debt from Ruining Your Credit

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3 Ways to Keep Medical Debt from Ruining Your Credit

Turns out, your physical well-being isn’t the only thing at stake when you go to the hospital. So too is your financial well-being. That’s because no debt is more common than medical debt.

The numbers are staggering in their scope. According to the Consumer Financial Protection Bureau, more than half of all collection notices on consumer credit reports stem from outstanding medical debt, and roughly 43 million consumers – nearly 20% of all those in the nationwide credit reporting system – have at least one medical collection on their credit report.

Now, you might be inclined to think that because you’re young or have both a job and health insurance, medical debt poses you no risk. Think again. According to a recent report from the Kaiser Family Foundation, roughly one-third of non-elderly adults report difficulty paying medical bills. Moreover, roughly 70% of people with medical debt are insured, mostly through employer-sponsored plans.

Not concerned yet? Consider that a medical collection notice on your credit report, even for a small bill, can lower your credit score 100 points or more. You can’t pay your way out of the mess after the fact, either. Medical debt notifications stay on your credit report for seven years after you’ve paid off the bill.

The good news (yes, there is good news here) is you can often prevent medical debt from ruining your credit simply by being attentive and proactive.

Pay close attention to your bills

Certainly, a considerable portion of unpaid medical debt exists on account of bills so large and overwhelming that patients don’t have the financial wherewithal to cover them. But many unpaid medical debts catch patients completely by surprise, according to Deanna Hathaway, a consumer and small business bankruptcy lawyer in Richmond, Va.

“In my experience, it’s often a surprise to people,” says Hathaway. “Most people don’t routinely check their credit reports, assume everything is fine, and then a mark on their credit shows up when they go to buy a car or home.”

The confusion often traces back to one of two common occurrences, according to Ron Sykstus, a consumer bankruptcy attorney in Birmingham, Ala.

“People usually get caught off guard either because they thought their insurance was supposed to pick something up and it didn’t, or because they paid the bill, but it got miscoded and applied to the wrong account,” says Sykstus. “It’s a hassle, but track your payments and make sure they get where they are supposed to get. I can’t stress that enough.”

Stay in your network

One of the major ways insured patients wind up with unmanageable medical bills is through services rendered – often unbeknown to the patient – by out-of-network providers, according to Kevin Haney, president of A.S.K. Benefit Solutions.

“You check into an in-network hospital and think you’re covered, but while you’re there, you’re treated by an out-of-network specialist such as an anesthesiologist, and then your coverage isn’t nearly as good,” Haney says. “The medical industry does a poor job of explaining this, and it’s where many people get hurt.”

According to Haney, if you were unknowingly treated by an out-of-network provider, it’s not unreasonable to contact the provider and ask them to bill you at their in-network rate.

“You can push back on lack of disclosure and negotiate,” Haney says. “They’re accepting much lower amounts for the same service with their in-network patients. They may do the same for you.”

Work it out with your provider BEFORE your bills are sent to collections

Even if you’re insured and are diligent about staying in-network, medical bills can still become untenable. Whether on account of a high deductible or an even higher out-of-pocket maximum, patients both insured and uninsured encounter medical bills they simply can’t afford to pay.

If you find yourself in this situation, it’s critical to understand that health care providers themselves usually do not report unpaid bills to the credit bureaus – collection agencies do. After a certain period of time, most health care providers turn unpaid debt over to a collection agency, and it’s the agency that in turn reports the debt to the credit bureaus should it remain unpaid.

“If you can keep it out of the hands of the collectors, you can usually keep it off your credit report,” says Hathaway.

The key then is to be proactive about working out an arrangement with your health care provider before the debt is ever sent to a collection agency. And make no mistake – most providers are more than happy to work with you, according to Howard Dvorkin, CPA and chairman of Debt.com.

“Trust me, no one involved with medical debt wants it to go nuclear,” says Dvorkin. “The health care providers you owe know very well how crushing medical debt is. They want to work with you, but they also need to get paid.”

If you receive a bill you can’t afford to pay in its entirety, you should immediately call your provider and negotiate, says Haney.

“Most providers, if the bill is large, will recognize there’s a good chance you don’t have the money to pay it off all at once, and most of the time, they’ll work with you,” he says. “But you have to be proactive about it. Don’t just hope it will go away. Call them immediately, explain your situation, and ask for a payment plan.”

If the bill you’re struggling with is from a hospital, you may also have the option to apply for financial aid, according to Thomas Nitzsche, a financial educator with Clearpoint Credit Counseling Solutions, a personal finance counseling firm.

“Most hospitals are required to offer financial aid,” says Nitzsche. “They’ll look at your financials to determine your need, and even if you’re denied, just the act of applying usually extends the window within which you have to pay that bill.”

If all else fails, negotiate with the collection agency

In the event that your debt is passed along to a collection agency, all is not immediately lost, says Sykstus.

“You can usually negotiate with the collection agency the same as you would with the provider,” he says. “Tell them you’ll work out a payment plan and that in return you’re asking them to not report it.”

Most collection agencies, according to Haney, actually have little interest in reporting debt to the credit bureaus.

“Think about it,” Haney says. “The best leverage they have to get you to pay is to threaten to report the bill to the credit agencies. That means as soon as they report it, they’ve lost their leverage. So, they’re going to want to talk to you long before they ever report it to the bureau. Don’t duck their calls. Talk to them and offer to work something out. They’ll usually take what they can get.”

At the end of the day, according to Haney, most people can keep medical debt from ruining their credit by following one simple rule.

“Just be proactive,” he says.

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The One Financial Resolution You Need in 2017: Automation

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The One Financial Resolution You Need in 2017: Automation

“Out of sight, out of mind” isn’t typically the kind of advice you get from a financial professional. However, taking some financial decisions off of your mind and out of your hands can be one of the smartest money decisions you’ll ever make. We’re talking about the power of automation. Automating most or all of your recurring financial decisions can be a huge help when it comes to saving, investing, and digging yourself out of debt.

Even better, many popular financial resolutions for the new year — paying off debt, building an emergency fund, investing, saving for a large purchase, and building your credit score — are easy to automate.

What Is Automation?

Dr. Barry Schwartz, a behavioral economist and author of The Paradox of Choice: Why More Is Less, says we may be naturally programmed to live in the here and now and think about the future when we get there. By learning to use tools and life hacks to automatically make choices for our financial well-being, we’re removing one of the biggest barriers toward financial health: ourselves.

“People have a hard time thinking accurately about risk, and they have a very hard time giving adequate weight to the future,” says Dr. Schwartz. “Automated investment would address both of these problems. But, of course, the software would have to be doing the right thing for the client rather than the company.”

When you automate, you eliminate the opportunity for that negative feeling to affect your decisions because you won’t be actively making that payment.

7 Ways Automation Can Help You Keep Your 2017 Resolutions

If your goal this year is to learn budgeting, save up for a large purchase, or simply try to better manage your finances, automation can be a huge help.

  1. Automate Your Budget

Creating a budget is the easy part. Following it becomes the real challenge.Try these two automation hacks to stick with your budget in 2017.

Create a bank account for your allowance

  1. Open up a secondary checking account with your bank, but don’t get a debit card for this one. The account will act as your “reserve” account. You’ll keep your fixed and flexible spending money there and schedule bills to be paid from this account.
  2. Figure out how much money you can freely spend each week (after your bills are paid).
  3. Set up an automatic weekly transfer from your reserve account to your “spending” account (main checking account) for that amount.

It will be like getting a weekly allowance to spend on whatever you want, just like in middle school.

Use apps that do the math for you

Sometimes all we need is a little nudge to follow through with our goals. Budgeting apps like Level Money, Budgt, or Daily Budget can be the reminder you need to keep to your budget each day. The apps take into account your income, fixed expenses, and savings goal to come up with a daily spending number.

Level Money will connect to your bank accounts and generate the number automatically, while Budgt and Daily Budget require you to enter your spending manually, then generate what you have left to spend for the day. The apps will notify you daily with how much cash you can spend each day and still stick to your budget.

  1. Automate Routine Expenses

This one is for anyone who has ever walked into a grocery store to buy a gallon of milk but walked out with bags full of things they didn’t really need.

You can save time and money on groceries by avoiding the grocery store. That doesn’t mean you have to stop buying groceries and splurge on dining out. Automate your grocery shopping with services such as AmazonFresh or Fresh Direct. The services cost about $150 to $200 annually. With these services, you are able to compare prices and add and subtract items from your cart to stay on budget, then schedule your delivery time.

You could also try a meal delivery service like HelloFresh or Plated to deliver fresh ingredients coupled with recipes for meals weekly. Using these services, dinner for two costs about $10 to $15 a person. If you’re a couple that dines out often, scheduling weekly meal delivery and cooking could help you cut back significantly on spending.

If you live in an urban area like New York or Los Angeles, you may have several other options for grocery delivery available to you.

  1. Automate Your Savings

Automation makes it easy to set aside funds for an emergency fund or a large purchase such as a down payment for a home.

….at work

If you get paid via direct deposit, check with the human resources department at your place of employment to see if you can split your paycheck into different accounts. If you can, send the amount you want to save from each check into your savings account. If your pay is inconsistent, you may be able to set this amount as a percentage of your pay.

If your human resources department doesn’t offer that option or you simply want to handle it on your own, you can set up an automatic transfer to your savings account and schedule it for the dates you get paid.

…on your smartphone

You can also try automated savings software such as Digit, Qapital, or Simple.

Digit, backed by Google’s venture arm, analyzes your spending habits then uses an algorithm to determine how much it can transfer to your Digit savings account and how often to make transfers. When you need the money, you can have it transferred in one business day by sending a text.

Qapital lets you set savings goals and rules to match them, then automatically transfers money toward your goal when the rule applies. For example, you can set a savings goal to purchase $200 tickets to a music festival, then set a rule to round up all purchases you make with your debit card to the next dollar and save the difference. Qapital will transfer the difference to the account designated for your festival tickets.

Some new digital banks have added budgeting tools. Simple, for example, calculates a “safe-to-spend” number so you know how much you can spend freely.

  1. Automate Your Investments

You don’t have to be a financial whiz to invest your money. If you plan to start investing this year, you can do so passively with automation.

An important and easy way to do this is to automate savings to your retirement account(s). If you contribute to a 401(k) or an IRA through your employer, you can set a contribution as a percentage of each paycheck. Some plan providers allow you to automate annual contribution increases. This way, you’re automatically saving more each year without having to do any extra legwork. Even an annual increase of 1% or 2% can drastically improve your savings outlook.

If you use robo-adviser services like Betterment or Stash, set up auto deposits for your accounts and let them grow. Acorns is a great tool for beginners to automate investing. Acorns rounds up each of your transactions to the nearest dollar, then invests the difference.

You can find more details about these apps, such as what fees they might charge to manage your investments, here.

  1. Automate Your Student Loan Payments

If you resolved to stay on top of your student loan payments this year, setting up automatic payments could be tremendously helpful. Automating your payment can help ensure you pay on time each month. With most servicers, you’ll get the added benefit of .25% off interest on your loans.

If you want to pay back your loans faster, you can automate an additional payment to all of your accounts when you set up direct debit. If you can’t set up an automatic additional payment to a specific loan, you can set alerts with a calendar or a budgeting app to remind you to make an additional payment to your loans on payday.

  1. Automate All Your Bills

You can automate most recurring bills like your rent, credit card payment, auto loan payment, utilities, and subscription services to avoid missed payments. This tactic can also help time your payments to ensure you have enough money in your accounts to cover them. There are several options to help schedule bills you know need to be paid each month.

Choose whichever of the following methods work best for you:

  • Set up automatic bill pay through your bank’s online banking platform.
  • Use a budgeting app like Mint, Level Money, or YNAB to link to your accounts and schedule automatic payments.
  • Set up an automatic debit with each individual service provider through their online platform or over the phone.

If you pay an individual each month for something like rent or shared utilities, you can pay them via automatic bill pay to their bank account, or set up automatic payments using a tool like PayPal.

  1. Automate Your Credit Makeover

If your goal is to improve your credit, paying bills on time and lowering your utilization rate are the two most powerful things you can do.

Debitize lets you use your credit card like a debit card. The app automatically transfers money from your checking account to pay off charges to your credit card with money. You’ll be using your credit card, then paying it off in full each month. Even better, it’s more difficult to overspend, since you’ll be using up the funds in your checking account.

If you’re building or rebuilding your score with a secured card or a new credit card, you can try this “set it and forget it” method:

  1. Figure out what 20% of your credit limit is. Example: 20% of $200 is $40.
  2. Find something that you pay for each month that costs less than that. This might be a payment for a streaming service such as Hulu, Netflix, or Spotify.
  3. Set up your account to take the payment from your credit card each month.
  4. Set up your checking account to pay your credit card balance each month.
  5. Watch your score grow with a credit monitoring service like Mint or Credit Karma.

When your score reaches the high 600s or mid-700s, you’ll have an easier time qualifying to borrow large amounts for an auto loan or a mortgage.

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Guide to Handling Your Financial Life After Divorce

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Guide to Handling Your Financial Life After Divorce

Divorce is often a time of financial upheaval. Dan Burges, a financial adviser and Certified Divorce Financial Analyst (CDFA) with Ameriprise in Southlake, Texas, says, “Everything is different. Even if you are in the same house and same job, it is different. Your bills aren’t cut in half, but your income might be. You may even be spending more for child support and alimony.” So while it may be tempting to go on a spending spree to celebrate your newfound freedom – or go into hibernation mode and ignore your money altogether – it’s more important than ever to get educated about handling your financial life after divorce.

Don’t make rash decisions

Many people who are still reeling emotionally from a divorce are prone to making rash decisions they later regret, such as buying or selling real estate, cashing in retirement assets, or changing jobs or even cities. Take time to process and get yourself together — financially and emotionally — before you make any large purchases or other big financial moves.

Avoid the temptation to indulge in “retail therapy” after a divorce, whether to dull the pain, prove to yourself that you can still maintain your same standard of living, or just replace the material objects in your life with ones that don’t remind you of married life. If you must spend money, at least try to avoid using credit cards. Otherwise, bad decisions will just make your problems worse.

Set up your finances for success

The first step to managing your finances after divorce is to create a budget. “It’s especially important to think beyond your monthly expenses, such as mortgage and electricity,” says Avani Ramnani, a Certified Financial Planner (CFP) and CDFA with Francis Financial in New York, N.Y. “Think about one-time expenses such as vacations, weekend trips, and emergencies. People tend to forget about them.” Ramnani says you should also remember expenses relating to your home. “If you own your own home, something is always breaking down or needing repair. You need to account for these,” she adds.

Burges agrees that budgeting is essential in your new circumstances, and he recommends looking at your cash flow daily. “You’ve got the app on your phone,” he says, “Don’t be scared to look at it.”

Budgeting can also help you avoid getting deep into credit card debt, a common problem when people are adjusting to a new standard of living after divorce. Burges says he sees too many people with debt piling up before they realize it.

In addition to budgeting, there are several steps you should take to get your finances in order after a divorce.

Get all assets in your own name

If you kept the family home after the divorce, you need to refinance the mortgage to have your ex-spouse’s name removed from the loan. Just as you did when you initially took out the mortgage, you will have to apply for a loan and go through the underwriting process. But this time, the lender will look only at your income and credit so you will have to be able to qualify on your own. If the refinance is approved, you can have your ex-spouse’s name taken off of the deed to the property by filing a quitclaim deed. An experienced attorney can help with this. If you cannot qualify to refinance the mortgage in your name alone, your best course of action may be to sell the home and move on.

Bank accounts that were owned jointly may need to be closed and the assets transferred to new accounts in your name only. Typically, your bank will not be able to just remove your ex-spouse’s name from the account, even if the divorce decree assigns the account to you.

Cancel joint expenses

Any credit cards issued in both names will have to be closed and accounts reopened in your name. Think about other costs that were shared jointly such as utilities, auto loans, and leases.

Even if the divorce decree specifies that your ex-spouse is responsible for a debt, if any joint debts still have your name on them, missed payments will continue to affect your credit score.

Before you close any joint credit card accounts, consider opening a few accounts in your name. Once you start closing credit cards, your credit score will take a hit. Opening a few cards in your own name before you close the old accounts will ensure you continue to have access to credit.

While you’re at it, change the passwords on all your account pages, especially if they were known to your ex-spouse or partner.

Rebuild your credit

If your credit accounts were jointly held with your ex-spouse, they might be closed as part of the divorce process, and you may need to start rebuilding your own credit.

Part of your credit score is based on the length of your credit history, so closing all of your existing accounts and opening new accounts will negatively impact your credit score.

You may have also racked up debt to pay attorney fees or other expenses related to separating and setting up a new household. Your budget can help you plan for paying credit card bills and other debt payments.

Get into the habit of checking your credit report at least annually by pulling a copy of your credit report from all three credit bureaus for free through AnnualCreditReport.com. Watch out for other services that promise a free copy of your credit report but require you to sign up for other services.

Once you get your credit report, review all information to make sure that there are no errors and that none of your ex’s accounts or information are on your credit report. If you do find any issues, contact the credit bureau to have the error corrected.

Prioritize paying off debt

If you come away from the divorce with a lot of debt, make it a priority to pay it off as soon as possible. If you are living on a tight budget, that may mean being more frugal or getting a second job to bring in extra money.

Save money

Make sure your budget includes setting aside money for the future. Ramnani recommends taking stock of all of the assets you have left after a divorce – retirement, non-retirement, and real estate – to figure out if they are enough to last for the long term. “If a woman is dependent on spousal maintenance, at some point that will stop,” she says.

That’s because spousal support payments are rarely permanent, unless the spouse receiving payments is elderly or has health problems. The courts typically award alimony on a temporary basis in order to allow a former spouse time to complete an education program or get back into the job market. “You may think you can just live off of savings after the maintenance payments stop, but is it really enough to sustain you long term? Those questions can be difficult to face,” Ramnani says.

If a woman receives spousal support from her ex, Ramnani recommends setting aside spousal support payments for long-term savings.

A financial adviser can help you model your financial situation based on income, savings, Social Security, and other assets to see whether you have enough to continue your way of life or whether you need to make other plans to support yourself.

Consider hiring new financial professionals

Married couples often share financial and tax advisers. Should you continue working with the same professionals after a divorce or hire your own to avoid conflicts of interest? Burges says that decision is very personal. “Consider how much you trust that person. If the financial adviser and your ex were college roommates, then you should find someone else,” he says. “You need to feel confident that whatever you say to your adviser isn’t being repeated to your ex-spouse.”

Ramnani agrees that people should make their own decisions about whether to stay with the same adviser or find a new one. “At the end of the divorce process,” she says, “take stock and think about what makes the most sense.”

In some cases, your ex-spouse may have handled all of the finances, and this is your first time managing them on your own. Make sure you have someone with experience to help you navigate your new reality. Ramnani and her firm specialize in working with women going through emotionally traumatic life events. She says many of the women that come to her felt like their adviser had lost track of them since their ex-husbands were more involved.

Burges also recommends working with a certified public accountant the first time you file your taxes after a divorce, even if you are used to doing your taxes yourself. “Your taxes may be super simple,” he says, “but a CPA will ask you questions about things you may not have thought of before.”

Change beneficiaries on all of your assets

Changing beneficiaries is another important step to managing your finances after divorce. Most likely, your ex-spouse was named as a beneficiary on life insurance policies, auto insurance, retirement plans, annuities, and bank and brokerage accounts.

Burges points out, “if you switch advisers, you’ll have to set up new beneficiaries, so that is one way to clean up.”

If you and your ex have minor children, talk to your attorney before you name a minor child as a beneficiary. You may need to set up a trust. Otherwise, your ex-spouse may get control over any assets left to your kids.

You should also talk to your attorney about updating health care directives, living wills, and powers of attorney, so your ex-spouse isn’t in control if you are incapacitated.

Handling joint expenses

Divorced couples with children often need to continue sharing certain costs, such as summer camps, college expenses, and field trips, long after the divorce is finalized. What is the best way to handle these ongoing conversations?

In these cases, it pays to plan ahead. Ramnani says most attorneys today consider those items when drawing up the divorce agreement, and a good financial adviser can help you make sure all of your bases are covered if you let them take a look at the agreement while it is still in proposal form.

Burges recommends getting the divorce decree to explain, in detail, what child support covers. “Some people see child support as strictly covering a roof over their head, food, and clothing,” he says. Consider who will be responsible for paying for medical care, school fees and supplies, child care, extracurricular activities, music or dance lessons, your child’s first car, and even entertainment and travel expenses. “Try to get your lawyer to define what the child support is for. It may be something you argue about during the divorce process, but it will be worth it in the end. Set yourself up for success,” Burges says.

Ramnani also recommends keeping very detailed records of any joint expenses in case of disagreements. In the end, though, she says, “that’s the reality of life. If you share children, you still have to deal with each other. Hopefully, it’s at least a cordial relationship so you can speak openly.”

Dealing with college financial aid

Applying for college and navigating financial aid can be a stressful time for divorced couples. No matter your financial situation, you have to complete a Free Application for Federal Student Aid (FAFSA) in order for you or your child to access assistance from federal, state, and college financial aid programs.

Your FAFSA is used to determine your family’s ability to contribute funds for college. In order to arrive at that calculation, the application requests household income.

A divorce decree may allow one parent to claim the child as a dependent, even if the child lives with the other parent 90% of the time. For FAFSA purposes, who the child lives with matters because that parent’s income will be used to calculate their financial aid need. If maximizing college aid is a priority, it might make sense for the child to reside with the parent with the lowest income. In that case, the lower-earning parent should claim the child as a dependent on their tax return in the year before the child applies to college.

Gray divorce presents unique challenges

“Gray divorce” is the term for the divorce trend of Americans age 50 and older, and a 2013 study by researchers at Bowling Green State University found that the divorce rate among couples age 50 or older doubled between 1990 and 2012. While divorce can be a blow to the finances of couples at any age, it can be especially damaging for older couples who are close to retirement.

Burges says many retirement plans are made based on the couple not getting divorced. “Pensions, 401(k)s, annuities. You’ve been putting a plan together, then your assets get cut in half but your expenses in retirement don’t. That can be a massive setback on your retirement plan. He says the knee-jerk reaction is that you won’t be able to retire when you thought you would. “And that’s often true unless you’re able to really step up your retirement savings. If you’re 10 years or less out, that’s hard to do.”

The bottom line

Handling your financial life after divorce starts with a realistic evaluation of your current situation. That can be difficult to face if you are still reeling emotionally from the split or find yourself with more expenses and less income than you are used to working with. If you find it too difficult to do on your own, consult with a CDFA who will take the time to figure out where you are, where you want to go, and how to get there.

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Hidden Fees That Could Ravage Your Investments

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Hidden Fees That Could Ravage Your Investments

Most of the time higher quality things cost more money. As the saying goes, “you get what you pay for.”

But the opposite is true when it comes to investing. Research has shown again and again that lower cost investments perform better. Quite simply, the less you pay, the more likely you are to get better returns.

And the great thing is that cost is one of the few investment variables you can really take charge of. You can’t control or predict how the markets will perform, but you can definitely control how much you pay to be in the market.

The bottom line is that finding lower cost investments is one of the easiest and most effective ways to increase your investment returns. Here’s how to do it.

Two Big Investment Costs to Watch Out For

For most people, the majority of their investment costs will come from the following two places. If you can minimize these two things, you’ll be in good shape.

1. Expense Ratio

Every mutual fund or exchange-traded fund (ETF) has something called an expense ratio, which is simply the annual cost of investing in the fund. That money is used to pay for the cost of managing and administrating the fund for you.

The expense ratio is charged as a percent of the money you have invested in the fund. So if a particular mutual fund has an expense ratio of 1%, that means that 1% of the money you have invested in that fund will be taken out as a fee each year.

And while 1% may not sound like much, it can add up to a huge difference over a long period of time. Assuming you contribute $5,500 per year and earn an 8% annual return, a 1% difference in fees will likely lead to more than a $100,000 difference in retirement savings over a 30-year period.

In other words, you’ll want to pay close attention to your expense ratios and minimize them as much as possible. Most good mutual funds these days have expense ratios of 0.2% or lower, though some specialized funds might go as high as 0.5%.

2. Sales Loads

Sales load is a fancy term for commission. It’s a percent of your investment that goes to the person who sold it to you.

For example, if you contribute $1,000 to a mutual fund that has a 5% sales load, only $950 will actually go into the fund. The other $50 will go to the person who sells you that mutual fund. And that will be true for every additional contribution you make to that fund in the future.

There are two big things to understand about sales loads:

  1. Not all mutual funds or ETFs have them. In fact, it’s pretty easy to avoid them.
  2. Research has shown that mutual funds with sales loads underperform those that don’t have them.

For those reasons, it will usually make sense to avoid mutual funds that have a sales load. There are simply better options out there.

Four Other Investment Costs to Watch Out For

While expense ratios and sales loads are the two biggest costs to watch out for, there are plenty more to keep an eye on. Here are four of the most common.

  1. Trading Fees

Depending on the company you use to do your investing, you may be charged a fee each time you buy or sell an investment. For example, E*TRADE currently charges $9.99 per ETF trade (with some exceptions) and between $0 and $19.99 for mutual fund trades.

And while that may not sound like much, it can add up pretty quickly. If you make monthly contributions to three ETFs, you’ll end up paying about $360 per year just for the privilege of contributing.

Of course, there are ways around this. For example, major investment companies like Vanguard, Schwab, and Fidelity allow you to trade their own funds for free. And many ETFs are commission-free on certain platforms. So there are plenty of ways to eliminate or at least minimize this cost.

  1. Taxes

If you’re investing in a retirement account like a 401(k) or IRA, you don’t need to worry about taxes until you start taking withdrawals.

But every trade within a taxable account is subject to potential taxes, and the more you trade, the more you may have to pay. And even if you never sell anything, the mutual funds you own will make trades, and those tax consequences will be passed on to you.

We all have to pay our fair share in taxes, but there’s no need to take on more than that. In general, the less often you trade, and the more tax-efficient your investments, the less you’ll have to pay in taxes.

  1. Management Fees

Whether you work with an investment adviser who manages your money for you or you invest through a company like Betterment, there’s a cost to having someone else in charge of your investments.

And while that cost can be worth it, make sure you know what you’re getting and that you’re not paying more than you should.

  1. Account Maintenance Fees

Some companies will charge you a monthly or annual fee simply for the service of providing you with an account.

These can often be avoided by meeting certain conditions. For example, Vanguard charges a $20 annual fee for IRAs, but it’s waived if you either sign up for e-delivery of statements or you have a certain total account balance with them.

In some cases, like with health savings accounts, a small maintenance fee might be unavoidable. But in most cases there’s no need to incur this kind of cost.

The Bottom Line: Lower Costs = Better Returns

Watching out for fees may sound kind of boring, but it’s one of the easiest and most effective ways to improve your investment returns.

Remember, not only does a smaller fee mean that more of your money is invested, but the research shows that lower cost investments actually perform better.

It’s a double win that you should definitely be taking advantage of.

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These Women Paid Off $262,000 Worth of Debt Using Accountability Groups

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Just a few short years ago, Janet Lombardi of Long Island, N.Y., was mired in debt. Her husband of 25 years was recently sent to prison, and she was left to face their $485,000 mortgage and $60,000 of credit card debt alone.

“Once I realized the astounding levels of debt he had accumulated, I resolved to get solvent, and I did,” Lombardi told MagnifyMoney.

Help came from an unexpected source: an accountability group. Lombardi joined a support group for people struggling with debt called Debtors Anonymous (DA), an offshoot of the well-known support group Alcoholics Anonymous (AA).

Using a process similar to the 12-step program made famous by AA, the DA process includes making amends to those wronged and becoming aware of compulsive habits and characteristics that can lead to overspending. People can attend meetings at no cost with the options of face-to-face, online, or phone meetings in several languages.

After joining DA, Lombardi made some big strides in her finances: She sold the home she couldn’t afford, negotiated her credit card debt down from $60,000 to $20,000, and paid it all off over the next two years. She says she now lives solely on cash and enjoys the kind of financial stability she’d never experienced before.

Lombardi

“Having a place to openly discuss feelings around money is enormous,” Lombardi says. “And having partners to help you go over your finances and help you with day-to-day management is super helpful.”

If getting out of debt has been difficult for you, joining an accountability group might be a simple way to get the support you need. Whether you are trying to lose weight, overcome addiction, or fix your finances, those who work in a group setting are more likely to reach their goals, research has shown.

Things like stating a goal and having accountability along with action steps make all the difference in reaching that goal.

In this post, we spoke to Lombardi as well as three other women who have paid off a collective $262,000 worth of debt with the help of debt accountability groups.

3 Reasons Accountability Groups Work

The Group Effect

Studies reveal that those who explicitly state a goal or an attempt to solve a problem are 10 times more likely to reach their goal than those who don’t. In a group setting, there’s no negotiating: You’ve got to be up front about your problems along with your resolve to fix them.

Positive Peer Pressure

Dr. Robert Cialdini, a social psychologist who studies the power of social influence, is noted for observing the effects of positive peer pressure: It helps us make difficult decisions and attempt to one-up our peers (in a good way). In other words, you are more likely to strive toward a goal if you see people similar to you achieving (or going toward) the same goal.

Powerful Problem Solving and Inclusion

Group therapy is common in the world of psychotherapy and can be an effective tool for dealing with the behavioral root of money problems. A group approach to problem solving involves talking, reflection, and listening to people with different backgrounds and viewpoints. Groups can also remove the stigma and loneliness of dealing with a problem like money mismanagement.

Jessica Garbarino, 39, of Wellington, Fla., completed a popular course on money management called Financial Peace University (FPU) in 2010. The class isn’t free, with a fee of $109 to $149 to enroll. FPU was created by debt-free guru, Dave Ramsey. FPU’s course is typically taught at churches, community centers, or schools, but people can also complete the course online. For Garbarino, the group approach of tackling debt helped her pay down $8,000 while in the class and gave her the tools to get rid of another $26,000 worth of debt that same year.

Jessica Garbarino

“It made you feel like you were not alone in your financial journey,” Garbarino says. “We were all able to talk openly and honestly about our current financial situation and encourage each other.”

How to Find a Debt Accountability Group

Debt accountability groups and forums exist all over the internet. Many, like Financial Peace University and Debtors Anonymous, mainly operate as in-person meetings. Some of your favorite financial gurus might have groups you can participate in as well. Look for personal finance authors, bloggers, or experts who discuss money regularly. They may have a debt accountability group or be able to direct you to one they can vouch for. These groups can be offered in a variety of formats: in person, online (Facebook groups, Google Hangouts, webinars, website forums, etc.), or even on group conference calls.

Leslie Walsh, 48, of Sparks, Nev., is a government worker who says she paid off over $28,000 with the help of her accountability group. She found support in an unconventional arena: Facebook. Walsh joined a group started by personal finance blogger Jackie Beck of The Debt Myth. Walsh says she received support and encouragement through the Facebook group, via email, and through a debt repayment app the group’s founder created.

Leslie Walsh
Leslie Walsh

When searching for an accountability group, make sure that it’s is a good fit and that you are comfortable with the way it operates. For example, some groups have rules around confidentiality and want participants to check in regularly. Some groups are more relaxed in terms of updates and accountability. Choose a group approach that works for you and will help you reach your goal of paying off debt.

How to Get the Most Out of an Accountability Group

Rachel Gause, 38, of Richlands, N.C., completed Financial Peace University twice and now teaches the class herself. She believes firmly in the power of a group to fix your finances. After paying off $180,000 in debt as a single mom, she believes coming clean and taking responsibility helps you get the most out of a group setting.

Rachel Gause
Rachel Grause

“[Group members] must acknowledge that they have an issue with managing their personal finances,” says Gause. “People with all types of incomes have issues regardless of race, age, and education level.”

There are many ways to participate and get value out of an accountability group, but the more you put in, the more you’ll get out of it.

Here are some tips that should help:

  • Remain committed to check-in times, assignments, and times to share.
  • Be as transparent as you possibly can but avoid sharing personal details like account numbers, passwords, etc. with group members.
  • Have a plan to share with your group, but be realistic (and open) about your progress.
  • Though group advice will be helpful, remember that debt problems can be financial and legal in nature, so engage professional help when necessary.

The evidence is compelling: An accountability group could help you make strides toward eliminating your debt once and for all. But although accountability groups can be good for people who need an extra nudge toward their financial goals, remember to seek professional help when necessary. Done the right way, group accountability could be just the thing you need to make a dent in your debt.

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7 Signs That Identity Protection Service Isn’t Worth It

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7 Signs That Identity Protection Service Isn’t Worth It

According to a report released by the Federal Trade Commission (FTC), identity theft complaints increased by 47% from 2013 to 2015. Needless to say, identity theft is on the rise, and many people are concerned they could become a victim. Like any crime, totally preventing identity theft is practically impossible. However, that hasn’t stopped many so-called identity theft protection and prevention companies from selling services that promise to do just that.

As a consumer, it’s important to be cautious when purchasing identity theft services simply out of fear. Sometimes, fear-based marketing tactics can cause consumers to pay or overpay for services they may not need, or worse yet, may not be even be effective.

Before we dive into the details of assessing the value of the ID theft protection service you are considering, let’s do a quick recap on the types of identity theft and common services offered to help with this issue.

A Quick Recap: Types of Identity Theft and Protection Services

Types of Identity Theft

There are two primary types of identity theft. The first is account takeover, which is more common and normally not too difficult to address. In account takeover, someone steals a credit card or gains illegal access to your bank account or credit card to make unauthorized transactions.

The second, less common and often more complicated to resolve, is identity takeover. That’s when someone assumes your identity and acts fraudulently on your behalf. Identity takeover can manifest in medical, criminal, or financial scenarios.

Common Identity Theft Protection Services

The most common offerings from identity theft protection companies are along the lines of prevention, monitoring, and resolution.

To be clear, you can reduce your risk of being an identity theft victim with good “identity hygiene” habits, but you can’t totally prevent identity fraud. An effective identity theft protection service is not prevention so much as it is early detection (monitoring) before the damage gets out of hand. Once a problem is detected, having a plan that includes resolution services (doing the legwork of fixing the fraud damage) is likely the most value you’ll get for your money.

7 Signs to Watch Out For

1. Misleading Claims and Offerings

Many consumers are reeled in with hefty promises of $1 million or $5 million in “coverage” and may not know what that coverage entails. When you see these numbers, it usually means that a company will commit up to $1 million in resources to help you through the resolution process. That might mean things like covering notarized forms or other professional services needed in the resolution process. Some companies will cover lost wages from missing work due to dealing with an ID theft incident.

In many cases, your bank or credit card company will have policies in place so that you are not liable for fraudulent transactions anyway, so the millions in “coverage” wouldn’t be applied toward recovering that property. (Some services will reimburse fraudulent transactions but with stipulations around reporting time frames, proof of criminal activity, and making sure you aren’t covered already under another benefit.) Resolution services can be extremely helpful, but they usually only run a few hundred dollars, not even close to millions!

2. Excessive Offerings

Looking at the laundry list of items that a common identity theft protection company offers can make these services look like consummate, comprehensive coverage. IDShield, a LegalShield product, promises to monitor so many things that you wonder what could fall through the cracks: 10 phone numbers, 10 email addresses, your driver’s license number, and a host of other personal data points.

With all these monitoring claims, it makes you feel good about spending that $20 or $30 per month for a service, but the fact of the matter is that it’s highly unlikely that you’ll get the medical ID number monitoring promised. A quick visit to the Better Business Bureau complaint section shows this to be true for many companies. Common complaints for identity theft protection services reveal monitoring and alerts don’t always happen as promised. In these complaints, people report moving, opening new accounts, and other activities they are sure should trigger alerts, but receive no notifications.

3. Services You Can Do Yourself or Already Have Coverage For

Eva Velasquez, president and CEO of the Identity Theft Resource Center (ITRC) says there are many things you can do yourself if you have the time. ITRC provides resources for helping people execute the DIY version of identity fraud resolution. Velasquez feels you shouldn’t be shut out of help in the midst of an identity fraud crisis because you don’t have the money to handle it.

Velasquez also encourages people to check other places they might already have identity theft protection benefits in place at low or no charge. Insurance riders, employee benefit packages, credit cards, credit unions, banks, or motor clubs are are few places where protections could already be in place for you.

4. Aggressive or Questionable Marketing Tactics

When a data breach occurs, the company whose customers’ information was compromised typically offers identity theft protection services to these customers at no charge. The provider of these services is call the data breach vendor. In the famous Target data breach of 2013, Target provided a basic service to customers through Experian’s product, ProtectMyID. There were many complaints citing Experian’s aggressive attempts to upsell vulnerable customers to monthly subscriptions because the free services offered by Target and the data breach vendor were limited in benefits.

5. Limited Offerings

In the example above, Target opted to provide data breach victims a pared-down package of the complete ProtectMyID package. This package monitored only one credit-reporting agency (CRA), while complaints surfaced of victims who would eventually face identity fraud due to the data breach and poor vigilance of their personally identifiable information post-breach.

Zander Insurance offers services that focus heavily on the resolution side. They offer monitoring of your personal information in varied capacities, but only have reminders to check your free credit report each year. Their take is that CRA monitoring provides a false sense of security and that the real value is in the resolutions services they offer.

6. Not Following Best Security Practices

Enrolling in an ID theft protection service means you’ll likely have to give your service provider a lot of your precious personal information. The idea is that they will be able to effectively monitor all the data points you provide for fraudulent activity.

If this is the case, you’ll want to make sure that your information is collected, stored, and accessed in a secure manner. A major player in the identity theft protection space, LifeLock, was fined by the FTC in 2010 and 2014 for poor information security practices, among other things.

7. Complaints, Lawsuits, and Fines

Eva Velasquez of the ITRC, who also worked for the Better Business Bureau for five years, says third-party verification agencies like the BBB can be a consumer’s best friend when vetting identity theft protection services. Search sites like Consumer Affairs and the BBB for common complaints about an ID theft protection service you are considering. The complaints section is a great resource to learn about common problems and misunderstandings with a particular ID theft protection company.

Tips on Evaluating Identity Theft Protection Services

As a reminder, these services will help you mainly with detection and resolution, not prevention. There is no perfect identity theft protection solution, only a solution that is perfect for you. To start, you’ll have to play an active role in protecting your personal information and reducing your risk for ID theft.

In the end, it’s true that there are many services you could perform on your own to resolve ID fraud, but you may not have the time. So one person’s value-add would be different for another. Read the fine print and understand exactly what you are paying for. Check third-party consumer advocacy sites with honest reviews about identity theft protection service shortfalls and gaps in coverage.

Understand your specific needs, time constraints, and risk exposure to find the solution that provides the most value, not the one that feeds off your worst fears.

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