Owning a home can feel good. But is it a good financial decision?
There’s a lot that goes into answering that question, and one of the biggest factors is something that sounds both incredibly boring and incredibly confusing: mortgage amortization.
It’s not the sexiest financial topic in the world, but it has a big impact on your personal finances. In this post we’ll break it down so that you understand what it is and how it should factor into your decision about whether to buy a house.
What Is Mortgage Amortization?
Each time you make your monthly mortgage payment, that payment is split between paying interest and paying down principal (reducing your loan balance). Amortization is simply the process by which that split is calculated.
See, your payment isn’t split the same way throughout the life of your mortgage. It’s actually different with each payment, with your earliest payments going primarily toward interest.
For example, let’s say you buy a $250,000 house, put 20% down, and take out a 30-year, $200,000 mortgage with a 4% interest rate. That means your monthly payment would be $955.
To calculate how much of that first payment goes toward interest, you simply divide the interest rate by 12 to get a monthly interest rate and multiply that by your outstanding loan. Here’s how it looks in this example:
(4% / 12) * $200,000 = $667
That means $667 of your initial mortgage payment is used to pay off interest, while the remaining $288 reduces your mortgage balance to $199,712.
Next month the same calculation is run again, but this time with your slightly lower mortgage balance. That leads to a $666 interest payment and $289 going toward reducing your loan.
And that’s how it works. Your early payments are primarily used to pay interest, but over time it slowly shifts so that more and more of your monthly payment is used to reduce your mortgage balance.
You should receive an amortization schedule when you apply for a mortgage, and you can also run the numbers yourself here: Zillow Amortization Calculator. This will show you exactly how much of each payment goes toward interest, how much goes toward principal, and how much interest you’ll pay over the life of the loan.
What Does That Mean for You?
Okay, great, so you have the technical explanation for how mortgage amortization works. But how is that actually relevant to you? Why should you care?
There are two big implications to keep in mind as you consider whether or not to buy a house.
The first is this is one of the reasons it often requires you to stay in your house for several years before your home purchase pays off versus renting. People often talk about renting as if you’re “throwing money away,” but they forget that you’re doing something very similar in those early years of your mortgage as well.
Remember, those interest payments you’re making, which are the majority of your early mortgage payments, aren’t building equity in your home. That money is going straight to your lender and will never be yours again. It usually takes a while before your home equity really starts to grow.
The second is buying a house costs much more than most people realize. Take the example above. You might think of it as just a $250,000 purchase, but when you include all the interest you pay over the life of that 30-year mortgage, the total cost rises to $393,739.
And that doesn’t even include the cost of homeowners insurance, property taxes, repairs, upgrades, and everything else that comes with owning a home.
The bottom line is buying a house is expensive, and in many cases renting is actually a better financial move, especially if you aren’t committed to staying in the house for an extended period of time. You can run the numbers for yourself here: New York Times buy vs. rent calculator.
How to Combat Amortization
To be clear, mortgage amortization isn’t a bad thing. It’s just how mortgages work, and it’s important to understand so you can evaluate the true cost of buying a house.
But if you’d like more of your money to go toward principal sooner, and therefore decrease the amount of interest you pay, there are a few ways to do it.
The first is to put more money down when you buy the house. That down payment is immediate equity in your home that will not be charged interest.
The second is to make extra payments and make sure they go toward paying down principal. You will have to double-check your mortgage’s specific terms, though, to make sure there aren’t any prepayment penalties or other clauses that would make this a bad idea.
And the third is to take out a 15-year loan (or other shorter term). Using the same example above and changing only the length of the loan from 30 years to 15 years, the monthly payment increases to $1,479, but the total cost of the house over the life of the loan decreases to $316,287. That’s a savings of $77,452 and doesn’t factor in the likelihood of getting a better interest rate in return for the shorter loan period.
Keep in mind all of these strategies can be beneficial in some situations and not in others. In some cases it can make more sense to invest your money elsewhere, so you’ll have to run your own numbers and make the best decision based on your personal situation.
The majority of healthy Americans can use term life insurance policies to get sufficient coverage in place for anywhere from $15 to $100 a month. Most (85%) American consumers believe that most people need life insurance, but just over 60% carry a policy. Even among those who carry a life insurance policy, the amount covered is frequently not enough.
Term life insurance is a low-cost way for individuals with financial dependents to meet those people’s needs even after death. But it can be confusing to understand what it is and what it covers.
Anyone who has a financial dependent should consider buying life insurance if they don’t have the assets available to cover their dependent’s financial needs in the event of their death.
There are five major events that create financial dependence and may justify the purchase of life insurance. These events include:
Taking on unsecured debt with a co-signer
Taking on secured debt with a co-signer
Having a child
Moving to a single income
How Much Life Insurance Do I Need?
Term life insurance is the cheapest form of life insurance, but carrying too much life insurance is a waste of money. The exact amount you decide to carry will depend on your risk tolerance and the size of your financial obligations. In this article we offer rules of thumb that can help you calculate the financial loss associated with your death.
Most life insurance companies and brokers also offer life insurance calculators, but these calculators rely on averages. Since each person’s situation is different, it can be valuable to create an estimate on your own.
Unsecured debt with a co-signer
If you’ve taken on unsecured debt (like student loans) with a co-signer and you don’t have sufficient cash or investments to cover the debt, then consider purchasing life insurance in the amount that is co-signed. The beneficiary of this policy should be the person who co-signed the loan with you.
For example, if your parents have taken out $50,000 in loans via a Parent PLUS Loan or private loans, then you should take out a $50,000 policy with your parents as the beneficiaries. In most cases involving unsecured debt with a co-signer, a short term (such as 10-15 years) will be the most cost-effective option for covering this debt.
Secured debt with a co-signer
Secured debts (like a mortgage or a car loan) have some form of capital that could be sold to pay off most or all of the loans, but you still might want to consider taking out life insurance for these types of debts.
While your co-signer can sell the asset, pay off the debt, and become financially whole, that may not be the right choice for your situation (especially if the co-signer is your spouse).
For example, a couple that takes out $200,000 for a 30-year mortgage may decide to each take out a $200,000, 30-year term life insurance policy. This policy will allow either spouse to continue to live in the house in the event of the other’s death.
Marriage isn’t a financial transaction, but it brings about financial interdependence. In the event of your death, the last thing you want your spouse to be concerned about is their finances.
Couples without children who both work aren’t financially dependent on each other, but many people would still like to provide their spouse 1-3 years’ worth of income in life insurance to cover time off from work, final expenses, and expenses associated with transitioning houses or apartments.
A couple who each earn $40,000 per year, and who have $20,000 outside of their retirement accounts, can consider purchasing life insurance policies between $20,000-$100,000 in life insurance to provide for the other’s financial needs in the event of their death.
Having a child
Because children are financially dependent on their parents, parents should carry life insurance to cover the costs of raising their children in the event of a parent’s death.
The estimated cost of raising a child from birth to 18 is $245,000, so it is reasonable for each parent to carry a policy of $100,000-$250,000 per child. It is especially important to note that stay-at-home parents should not neglect life insurance since their death may represent a big financial loss to their family (manifested in increased child care costs).
The beneficiary of this life insurance policy should be the person who would care for your child in the event of your death. Sometimes this will be your spouse, but sometimes it will be your child’s other parent, or a trust set up in your child’s name.
If a couple has two children under age 5, and $50,000 in accounts outside of retirement, then each parent should have between $150,000 and $450,000 in life insurance. Parents of older children may choose to take out smaller policies or forego the policy altogether.
If your spouse is dependent upon your income to meet their financial needs, then it is important to purchase enough life insurance to care for their immediate and ongoing financial needs in the event of your death. If you are the exclusive income earner in your house or if you co-own a business with your spouse that requires each of you to play a role that the other cannot play, then your death would yield a tremendous financial loss for several years or more.
In order to estimate the size of policy needed in this situation, there are a few guidelines to consider. According to the well-respected Trinity Study, if you invest 25 times your family’s annual expenditures in a well-diversified portfolio, then your portfolio has a high likelihood of providing for their needs (accounting for inflation) for at least 30 years. A policy worth 25 times your annual income, less the assets you have invested outside of retirement accounts, is the maximum policy size you should consider.
Many people choose to take out even less than this because their spouse will eventually choose to return to work. A second rule of thumb is that the total amount of life insurance for which your spouse is the beneficiary should be worth 10-12 times your annual income. A policy of this size would reasonably provide money to pay for living and education expenses (if your spouse needs to re-train to enter the workforce) for many years without damaging your spouse’s prospects of retirement.
Based on these rules of thumb, if you earn $100,000 and your family’s expenses are $70,000 per year, and your spouse is a stay-at-home parent, then you should have enough life insurance to pay out between $1 million and $1.75 million (remember to subtract the values of any other policies or non-retirement assets above when calculating this amount).
How to Shop for Life Insurance
After deciding on the amount of insurance you need, and the terms you need, you can start shopping for the best policy for you. Although it’s possible to shop around for the best insurance, MagnifyMoney recommends that most people connect with a life insurance broker. For this report, every quote received from a broker was within a few cents of the quote received directly from the insurance company.
If you tell a broker exactly what you want, they can pull up quotes from a dozen or more reputable companies to get you the most cost-effective insurance given your health history. This is especially important if you have some health restrictions.
People with standard health (usually driven by high blood pressure or obesity, or many family health problems) may find some difficulty finding low rates, but brokers can help connect them with the right companies.
People with “substandard health” because of obesity, high blood pressure, or elevated cholesterol, those suffering from current health issues, or people recently in remission from major illnesses will not qualify for term life insurance.
Top Three Life Insurance Brokers
PolicyGenius – PolicyGenius is an online-only broker with an easy-to-use process and helpful policy information. Users give no contact information until they are ready to purchase a policy. PolicyGenius’s system saves data, so users don’t have to re-enter time and again. It is very easy to compare prices and policies before applying.
Quotacy – Quotacy is an online-only life insurance broker with connections to more term life insurance companies than most other life insurance companies. Quotacy offers quick and easy forms to fill out, and they do not require that you give contact information until you are ready to purchase a policy. Unfortunately, they do not fully vet out the policies, so you may need to ask an agent questions before completing a purchase.
AccuQuote – AccuQuote is an online-based brokerage company that specializes in life insurance products. Unlike the online-only brokerage systems, their quotes are completed through a brokerage agent via a phone call. People who prefer some human interaction will find that AccuQuote emphasizes customer service and offers the same price points as online-only competitors.
Top Life Insurance Companies
For those who prefer to shop for life insurance without the aid of a broker, these are the top five companies to consider before purchasing a policy. Each of these companies allow you to begin an application online though you may need to connect with an agent for more details (including a rate quote).
To be a top life insurance issuer, companies had to offer the lowest rates on 30-year term insurance for preferred plus or preferred health levels, and be A+ rated through the Better Business Bureau.
Allianz – Allianz offers the lowest rates for both Preferred and Preferred Plus customers, but they do require you to contact an agent or a broker for a quote.
Thrivent Financial – Thrivent Financial offers the lowest rates for Preferred Plus customers, but they require you to contact an agent before they will confirm your rate.
American National – American National offers among the lowest rates with Preferred and Preferred Plus customers, and they work closely with all major online brokers. You must contact an agent to get a quote directly from them.
Banner Life Insurance (a subsidiary of Legal & General America) – Banner Life Insurance offers an online quote portal and very low rates for Preferred Plus customers. They also seem to be a bit more lenient on the line than other customers for considering Preferred Plus (not considering family history).
Prudential – Prudential offers an online quote portal and the lowest rates for Preferred customers.
What to Expect Next
After you’ve decided to purchase an insurance policy, the policy will need to undergo an underwriting process. This will include a quick medical examination (height, weight, blood pressure, urine sample, and drawing blood) that usually takes place in your home. After that, the insurance companies will need to collect and review your medical records before issuing a policy for you.
Underwriting typically takes 3-8 weeks depending on how complete your medical records are. The company will then issue you a policy, and as long as you continue to pay, your policy will remain in effect (until the expiration of the term). Once your policy is in effect, you can rest easy knowing that your financial dependents will be taken care of in the event of your death.
In search of higher education, lucrative careers and better credentials, nearly 6 million Americans are enrolled in some kind of online course, according to data from the Online Learning Consortium. Distance learning programs tout online courses as an efficient and low-cost way to complete a degree. But are they worth the time and financial investment?
Here’s what to consider before you enroll in an online learning program:
What it really costs
For students looking to complete distance learning programs at in-state schools, the cost probably won’t vary much from traditional students attending classes in person. However if you’re comparing for-profit online schools to out of state public universities, for-profit schools tend to have lower tuition costs on average ($15,610 vs. $23,893 per year). Before you enroll in a for-profit university you should note that it is more difficult to obtain scholarships and grants when studying at a for-profit school.
Degree mills (for-profit schools that aren’t accredited such as American Central University or Golden State University) offer the lowest degree prices, but these institutions offer little in the way of education, and they drag down the appeal of all online degrees. Check to see if your school is accredited here.
A lower sticker price for an online degree might not translate to a lower out of pocket to you as a student. Before committing to an online institution, consider cost saving measures such as attending a Community College for two years and applying for scholarships at an in-state, public school. In many cases, this will end up being your lowest cost option.
However, if distance learning is right for you, you will qualify for subsidized loans if you attend any accredited school (this includes some for-profit online schools). If the school you plan to attend is accredited by one of the national or regional accrediting commissions (see this list to learn more), you will be eligible to receive the Pell Grant and Stafford or Perkins loans.
Online Degree Completion
Students in online only programs complete courses and degrees at a slightly lower rates than students in traditional programs. This may be due to a lower level of student support for online students, or the fact that more distance learners have both career and family demands in addition to their education.
Because online degrees have lower completion rates, you should ask yourself whether you have the time and resources that you need to complete your degree; if you don’t, it’s not worth the money. If your primary goal is to learn and continue your education, you may that Massive Open Online Course (MOOCs) through Khan Academy or Coursera fit your needs with negligible out of pocket costs.
What you won’t get from an online program
If you earn an online degree through a traditional university, employers will perceive your degree as on par with traditional degrees from that school. For example, a Master’s Degree in Statistics from Texas A&M is equally valuable if you earned the degree through their distance education program or while attending class on campus. However, not every employer views online for-profit universities favorably. Top tier online schools are working to change sentiments, but you should research the acceptance in your field before pursuing a degree from a for-profit institution.
Distance education programs offer fewer networking opportunities compared to traditional schools. Online students do not have as much access to professors or peers as traditional students which is a drawback during the learning process and the job search process, but recently, high quality online schools offer new technology to help their students network and job search.
You also shouldn’t expect as much hands-on help in your coursework as an online student. Distance learners need to be self-directed, and able to pick up complex concepts on their own. Students may need to teach themselves computer programs, and they will be expected to do labs or other physical projects on their own.
Advantages of online degrees
Online programs from top-tier online universities and not-for-profit universities offer high quality education that may increase your marketability. You can earn your degree with greater flexibility than in a traditional education model, and you may be able to earn your bachelor’s degree even while you hold down a full-time job and raise your family.
Depending on the school you choose and your financial aid package, an online degree may have a lower out of pocket cost compared to a traditional classroom setting. Online universities accept more transfer credits than traditional universities which can help you complete your degree faster and reduce your costs.
Especially for adults hoping to complete a degree, distance learning and online universities offer advantages that traditional schools cannot.
Is an online program for you?
The value of an online degree depends upon how you want to use it. If a degree will allow you to advance in your company or your industry, and you want to earn your degree while working then an online degree offers value above what a similarly priced brick-and-mortar school offers. Distance learners have increasing opportunities to study in a field that aligns with their personal and career goals. Popular degrees for distance learners include healthcare administration, business administration, information systems and psychology, but hands on fields like nursing and elementary education continue to make inroads for students pursuing their degree online.
On the other hand, if you’re not a self-directed learner, or your industry frowns on online education then the money will be wasted. Degrees from non-accredited universities aren’t going to be worth the money for most people.
If you choose to pursue an online degree, be sure to compare the out of pocket cost to you (including fees), consider whether you have the time and resources to complete the degree, and line up your funding ahead of time. It’s also important to weigh your expected increase in income against the cost of the degree. Online degrees aren’t a slam dunk in value, but you may find that it’s the right choice for you.
It’s often said that if customers speak, the market will listen. Well, when it comes to financial planning, millennials have spoken, and they’ve made it clear the planning and advisement services of generations past will not suffice.
And true to form, the market has responded. After years of shunning or altogether shutting out clients in their 20s and 30s, or at best, attempting to force-feed them the same services as their parents, the finance industry is in the midst of an about-face, as a host of new and innovative financial planning networks designed specifically for the younger generation are making waves in the marketplace.
It’s that last point that matters most. Millennials don’t want just any financial planning services. They want services designed specifically for them. So, what exactly does financial planning designed specifically for millennials look like? In keeping with the millennial spirit, there are no official guidelines, but when you build a shortlist of the best financial planning networks for millennials (we’ll do just that momentarily), you notice they generally revolve around a few core principles. For the most part, they’re all:
Millennials seem impervious to sales pitches and are highly cognizant of hidden costs. They want to know exactly how much they’re paying and what they’re getting in return. This means fee-based financial services are a must.
Inclusive and flexible. The best planning networks for millennials welcome clients regardless of how much they have to invest or where they’re investing it from. In other words, no required minimum deposits, and no geographic restrictions.
Education oriented. Millennials aren’t interested in being told what to do. They want financial advisers to be more like coaches — or better still, partners.
Digital and social. Suit-and-tie meetings behind the closed doors of a stuffy office are not for millennials. Millennials want to socialize, interact, and share ideas where they feel most comfortable — online and on their smartphones.
In some form or another, the best financial planning networks for millennials connect in ways traditional approaches never could.
Here are two standouts:
XY Planning Network
The XY Planning Network is a network of fee-only financial advisers who focus specifically on Gen X and Gen Y clients. There are no minimums required to get started as a client, and advisers in the XY Planning Network are not permitted to accept commissions, referral fees, or kickbacks. In other words, no high-pressure sales pitches or hidden agendas. Just practical financial advice doled out at a flat monthly rate. The organization is location independent offering virtual services that enable any client to connect with any adviser regardless of where they reside.
Garrett Planning Network
A national network featuring hundreds of financial planners, the Garrett Planning Network checks many key boxes for millennials. All members of the Garrett Planning Network charge for their services by the hour on a fee-only basis. They do not accept commissions, and clients pay only for the time spent working with their adviser. Just as important for millennials, advisers in the Garrett Planning Network require no income or investment account minimums for their hourly services.
For all you 20-somethings out there, know this: We 30-somethings, we get it. We get what it’s like to be a 20-something struggling to find your way and make ends meet financially. We get that your baby-boomer parents don’t always seem to understand the social and financial pressures 20-somethings face nowadays. We get that times have changed, and that financial advice from folks 30 years your senior – folks who themselves grew up in a dramatically different era – doesn’t always seem relevant. We get what it’s like to be you because we so recently were you. In many ways, we still are you.
That said, while the gap in years between your 20s and your 30s isn’t all that large, the life changes that often occur in that time period tend to be dramatic. And whether it’s marriage, children, or the fact that some of us are now closer to 50 than we are to 20, most 30-somethings, myself included, suddenly find themselves looking back at a long list of financial moves we’re either glad we made or wish we made when we were in our 20s.
So, without further ado, here are 10 pieces of financial advice I wish I had known in my 20s.
1. Live at home for as long as you can.
If the offer to live at home is on the table, then consider yourself lucky and take it. Even if only for a year or two, the savings are significant. I know living with your parents might not seem hip, but take it from a 30-something, there’s nothing hip about paying thousands of dollars in rent unnecessarily. If you do live at home, be mature about it. Help out around the house when and where you can, and don’t be surprised or offended if you’re asked to chip in financially.
2. Pursue a postgraduate degree only if you’re sure you’ll need it and use it.
The world is littered with 30-somethings who piled on additional student loan debt to pursue an expensive postgraduate degree they’ve never put to use. Not knowing what you want to do is fine. Paying for graduate school on account of it is not.
3. Don’t make money-driven career decisions … yet.
Now, I’m not saying money shouldn’t be a consideration when weighing job offers and career paths. But I am saying that for a 20-something, it shouldn’t be the only consideration. There will come a day when, out of necessity, financial considerations guide your career decisions. Your 20s shouldn’t be that time. Instead, use your 20s to explore, learn, and find a career you find fulfilling and, hopefully, enjoyable.
4. Keep credit card debt out of your life.
By the time your 30s roll around, you will regret every penny you spent paying interest on a credit card. Use your credit cards to build your credit history and earn rewards, but be sure to pay them off in full every month.
5. A 401(k) match is your best friend.
Regardless of what decade of life you’re in, free money is free money, and it’s never to be passed up. If you’re lucky enough to work for a company that offers a 401(k) match, then be sure to sign up and start contributing from day one.
6. A Roth IRA is your second best friend.
One of the best ways for 20-somethings to put themselves in a great financial position come their 30s is to start investing in a Roth IRA as soon as possible. If you’re not familiar with a Roth IRA, there are many great resources available to help you learn. But it really is pretty simple. You contribute after-tax money, and your investments grow tax free and cannot be taxed as ordinary income if withdrawn during retirement.
7. Automate everything.
One of the major advantages you have as a 20-something is your comfort and familiarity with modern online tools and technology, a growing segment of which is being built specifically to help you get a head start financially. Perhaps the best thing modern technology does is help you automate everything. Automation is the easy button for managing your finances as a 20-something. So, whether you’re talking about credit card payments, bill paying, 401(k) contributions, investments in your Roth IRA, or anything in between, automate it and know it’s done.
8. Skip the wedding of the century.
Yes, I know, easy for us to say. We 30-somethings all spent a fortune having grand weddings. But that’s exactly the point. We spent a fortune. And trust us, your wedding day will fly by, and you won’t remember every last detail about place settings and flower arrangements. What you will remember is how much you spent on it. There’s no limit to the good use to which 30-somethings could put all that money spent (or should I say, blown) in one day.
9. Spend on experiences, not things.
As we 30-somethings can attest, you’ll never look back and regret the things you didn’t buy (they go out of style fast anyway), but you will regret the experiences you never had. Which is why it’s no surprise so many millennials prefer to spend money on memorable experiences, like traveling the world, over things, like the hottest smartwatch.
10. Understand that time is on your side now, but it won’t be forever.
The biggest financial advantage you have as a 20-something is also the most fleeting – time. Hard as it may be to believe now, your 30s aren’t that far off. Whether it’s planning, saving, or investing, the sooner you start, the better off you’ll be.
If there’s one thing you take away from this long list of advice, make it that last point. There are few absolute truths in the world of finance, but in all aspects of money management, if you get started as a 20-something, you’ll be glad you did once you’re a 30-something. Trust us on that one.
Changing jobs can be exciting and overwhelming all at the same time.
There’s the thrill of beginning a new opportunity and advancing your career. But transitioning into a new role can also be a logistical nightmare, especially when it comes to your finances.
While we can’t help with everything, we can help you make the most of this transition from a financial perspective so that you avoid some common pitfalls and keep every last dollar you’re owed.
Here are the first 7 financial moves you should make when changing jobs.
1. Get the Skinny on Your New Paycheck
In addition to a change in your take-home pay, there may be a change the frequency and/or timing of your paycheck, either of which may require a change in habits.
As an example, maybe you’re currently paid twice per month on the 1st and 15th, but your new company will pay you every two weeks. That kind of change could mean a couple of things:
Even if you are getting a raise, your paycheck may not be as big as you think, because your salary will now be spread over 26 paychecks per year instead of 24.
You may need to adjust certain spending and savings habits to account for the fact that you’ll be getting paid on a different schedule. You should especially be careful about updating any auto-bill pay or auto-saving withdrawals through your bank account. If those were tied to your previous paycheck cycle, you could risk overdrafting your account.
Of course, you’ll also want to know how much you’ll actually be taking home with each paycheck after everything is taken out. Here are a few things to consider:
Your gross salary per paycheck. This is your annual salary divided by the number of paychecks you’ll receive over the year.
How much will be taken out for company benefits like health insurance and 401(k) contributions? More on this below.
How much will be taken out for taxes?
The website paycheckcity.com can help you estimate your new take home pay. Michael Solari, CFP®, the founder of Solari Financial Planning, recommends paying special attention to your withholdings on your W4, which may need to increase in order to avoid a large tax bill, or could decrease if you’re moving to a state without an income tax.
2. Split Your Raise 50/50
If your job change comes with a raise, congrats! Now it’s time to put that new money to work.
The key here is striking a balance between allowing yourself to live and being responsible. You don’t want to waste the money, but you don’t need to completely deprive yourself either.
Pam Capalad, CFP®, the founder of Brunch and Budget, advises her clients to put 50% of their raises towards spending and 50% towards savings and debt.
“If your net paycheck goes up by $400 each month, give yourself permission to spend $200 of that,” Capalad says. “Now you’ve given yourself some leeway to spend a little more each month, which is what would happen anyway, but you’re also committing a good chunk of your new earnings to savings.”
Whatever the case, you should start preparing for the change as soon as possible, preferably before you actually change jobs.
Estimate your new take-home pay and the expected difference in income.
Start living on that decreased income ahead of time if possible.
While earning your old income, put the difference into a savings account.
Following these steps allows you to adjust to the change ahead of time and build up some savings to help with any bumps in the road.
4. Know Your Health Insurance
Depending on the specifics of your coverage and your particular medical needs, your new health insurance plan could end up saving you money or forcing you to pay more out of pocket. Getting up to speed on how all of that works will help you prepare either way.
“Get familiar with the new deductibles,” says Capalad. “Make sure you know the new costs of any regular prescriptions you take, and talk to your doctor if you need to switch to brand name or generic, depending on what the new insurance will cover.”
If you are stuck with a high deductible plan, see if your employer offers access to a health savings account or flexible savings account, which allow you to cover medical expenses with pre-tax dollars. A health savings account can even be used as a retirement account. FSA accounts can also be used to help pay for childcare expenses.
5. Take Advantage of Employee Benefits
Companies offer all kinds of employee benefits, from life and disability insurance to free fitness equipment and child care reimbursement. These are valuable benefits that can save you money and add some security to your financial life.
Capalad recommends looking into worker benefits in your first week on the job, just to make sure you don’t forget and leave a valuable perk behind.
6. Rollover Old Retirement Accounts
Did you have a retirement account with your previous employer? If so, now is the time to decide whether to move the money.
There was a 20% surge in the number of homes flipped in the U.S. in the first quarter of 2016, according to RealtyTrac. Profits on flips soared to a gross average of $58,250, the highest level in more than a decade.
To qualify as a true flip, a buyer must sell a home within 12 months of purchasing it. If the property needs heavy repairs or upgrades before going back on the market, house flipping can easily become a full-time job. And what those RealtyTrac numbers don’t show is the net profit — how much flippers actually earn after pouring thousands of dollars and hours of labor into each home. Every day on a new project can present challenges that chip away at profit margins.
“First-time flippers should be prepared [to be] over-budget and behind schedule,” says Matt Forcum, a realtor and auctioneer with Century 21 Realty Concepts. “Sometimes, no matter how good an inspection is, problems like property line disputes, environmental hazards or other undisclosed or undiscovered issues can result in a problem that derails the whole process.”
We asked a battle-worn group of real estate investors to open up about the highs and lows of house flipping. Here are their stories:
I started in 2001 and have flipped more than 100 homes.
What was your best flipping experience?
I bought a country property in Platteville, Colo. from an online auction site. The house was about 10 years old with 2 acres and a 3-car garage. It had a very low starting list price, and I knew the website would eventually list a ‘buy it now’ price, where they post a price and any buyer can accept that price and end the auction right then. I checked the site every couple hours for days to see if that price had been listed, and once it was — for about $215,000 — I accepted as soon as I possibly could. After paying the buyers’ premium and other costs, the sale price was $228,000, but I knew the home was worth over $300,000 and needed minimal work. We spent $15,000 to replace granite in the kitchen, paint and landscape. Four months after we bought the house we sold it for $349,900. We made about $100,000 after the carrying costs, financing costs, buying and selling costs.
Have you ever been burned by a flip?
The worst flip happened this year. I bought an old house from the 1800s that needed a lot of work, and I had a project manager/contractor working for me who said it wouldn’t be too big of a job to add an addition. He ended up tearing off the back of the home, gutting the interior, adding stairs that were not up to code … and then quit. After spending $25,000 on his work, the house was worth less than I bought it for.
I had 10 flips going on at the same time and decided to dump this house instead of spending another $100,000 to fix it. Luckily, our market improved greatly and I was able to sell it for $15,000 more than I bought it for, but I took a $20,000 loss after carrying, financing and selling costs. Obviously this contractor never worked for me again.
What are some of the hidden costs of flipping that no one thinks about?
Buying costs, including closing fees, recording fees, title insurance in some cases, and inspections
Financing costs, like origination fees, appraisals and interest every month
Carrying costs, like yard maintenance, utilities, insurance, property taxes and HOA fees
Selling costs (if that’s your goal), like agent commissions, title insurance, closing fees, buyers’ closing costs, inspection repairs, low appraisals and appraisal repairs
Repairs, since they are almost always more than you think. I always recommend assuming the final repair bills will be 20% more than you think.
What’s the biggest misconception people have about flipping?
It will take longer than you think. Most people feel they can get in and make changes in a couple months, but it takes time to find a contractor, get the work done, go back and correct things that were not done right the first time, clean the home, and then, if you’re flipping it, get it listed, get a contract and close on the home.
What areas of the home have proved to be the biggest money sucks?
The foundation. This can be a huge cost if it needs to be repaired or redone, generally between $5,000 and $20,000. (Note: This cost and all the following ones are based on a home of approximately 1,000 to 2,000 square feet — costs would increase for larger homes.)
Electrical. Re-wiring a house can be expensive (between $2,500 and $10,000), but you also have to account for tearing up the walls to get to the wiring.
Plumbing. Galvanized plumbing — or pipes that have slowly deteriorated to contaminate the water — is common in old homes and needs to be replaced. This can cost thousands of dollars and the house may also need to be torn up to get to it.
Siding/paint. Many old houses have lead-based paint and possibly asbestos siding. If you disturb the lead-based paint or the asbestos, the work needs to be done by a certified company and it can run you between $5,000 and $15,000.
Plaster/drywall repair. Older houses were built with plaster, which deteriorates over time. There are very few contractors who work with plaster, and it’s best to use sheetrock to replace it. This can get very expensive as well, generally between $2,500 and $15,000.
Mindy Jensen Community Manager for BiggerPockets.com Licensed real estate agent in Colorado.
How long have you been flipping houses?
I purchased my first home in 1998 and it was ugly, so I upgraded the flooring, painted every inch of the walls and ceilings, and then lived there until I got married four years later. I sold it for 50% more than I paid for it, and was hooked on flipping. Together with my husband, I have flipped eight houses.
What was your best flipping experience?
My current home started out as a flip, but we decided to live here forever after falling in love with the neighborhood. We bought it for $176,000 as a 2-bedroom, 1-bath home with ugly everything. The market was just starting to heat up — it’s red-hot in almost the entire state of Colorado, but the Denver area just overtook San Francisco as the hottest real estate market in the nation — and this was a Fannie Mae HomePath foreclosure. Fannie Mae wants to put owner-occupants into homes as much as possible, so they accepted our offer over an investor’s offer because we were going to live here. We put about $75,000 into the property, adding a second story and remodeling the first floor to create a total of four bedrooms and three bathrooms, new landscaping, siding, windows, doors, wood floors, natural stone tile and upgraded electrical service.
Have you ever been burned by a flip?
In 2006 we failed to accurately gauge the market — we had made so much money from past flips that we didn’t pay much attention to the housing market during our rehab. We continued to make improvements to the home, anticipating that the $100,000 we put into it would grow exponentially. We ended up selling it for $200,000 less than we would have had the market not dropped in 2008-2012. We still made a profit, but it was much leaner than we had expected.
How have you saved money on your flips?
We do much of the work ourselves, which allows us to save a lot of money. We even live in the homes during the flips to avoid capital gains taxes. We’re finished with the home we live in now and could easily sell it today for $400,000.
In your experience, what are some of the biggest mistakes people make when buying fixer uppers?
Paying too much for the property in the first place. You have to analyze each deal. If the numbers work at $X, then $X is your highest offer. If you pay anything more than that, your numbers get thrown out of whack.
Not accurately budgeting expenses. If you’re remodeling a kitchen, it’s tempting to get a quote for cabinets, countertops, flooring and appliances — but what about lighting, plumbing and electricity? A ton of little things add up quickly.
Pricing the home too high. If you’re planning to flip, you may be tempted to price the home as high as you can to get the most money out of it. However, by pricing it at or even slightly below retail, you will get a faster sale — and can even generate a bidding war to end up with the higher sales price. Pricing too high can have the opposite effect. The home will sit on the market and become stale. You get discouraged and drop the price, but then buyers wonder what’s wrong with the home that it sat for so long. Many times you’ll get less than you would have had you just listed realistically in the first place.
In your experience, what is the No. 1 thing people should keep in mind if they’re looking at buying a fixer-upper for the first time?
Even if you aren’t doing any of the work yourself, you will still have to manage the people who are doing the work. Stay on top of them, because time is money. You need to treat it like a business.
What are the first places you inspect when you’re sizing up a new home?
The bathroom: Check for soft spots near the corners of the tub, which is a sure sign that someone didn’t tuck the shower curtain into the tub and water spilled out. The water damage can rot the subfloor. Yes, the repair could be small (subfloor rot can be just a small corner that requires very little repair, while damage to the entire floor would require removal of the tub and an entire replacement), but you still need to budget for it. The same goes for around the toilet.
The kitchen: Is the current layout the best option, or does it need to be reconfigured for better use? Reconfiguring can involve moving gas/electric/water lines, which is expensive.
In the bedrooms: Determine the state of the flooring — does it need to be replaced?
Cracks can be cosmetic or a very big deal. Horizontal cracks — running from wall-to-wall rather than floor-to-ceiling — are far more concerning than the vertical ones. That’s not to say that a vertical crack is nothing, but the horizontal cracks should give you pause since they can often be an indication of a more serious foundation issue,and they’ll require further inspection.
Aluminum wiring requires complete replacement. Get a quote from a licensed electrician. If the home doesn’t have 200-amp service — which means you can run your large appliances without having to worry about blowing a circuit — I’d recommend upgrading it, which will require a licensed electrician, as well.
Cast iron pipes rot from the inside out, so one day they may look fine on the outside, and the next your basement is filled with raw sewage. Get pipes scoped by a licensed plumber, which can range from about $150 to $250 and gives you an idea of the overall state of your pipes. To compare, replacing an entire broken sewer line could start at $7,000.
Mold. Perhaps the tiny bit of mold that you see is the extent of it, but perhaps it’s just the tip of the iceberg and the backside of the drywall is completely covered. Be wary when you see mold, as it can eat up quite a bit of your budget if you aren’t prepared for it.
Corey J. DeHeer Realtor, Property Manager and House Flipper
How long have you been flipping houses?
I’ve been involved in real estate for 10 years, and I’ve been flipping for four years.
What was your best flipping experience?
I bought a five-level, split house and started renovating in late 2015. I bought it for $79,5000 and sold it for $172,000, and only put about $35,000 into the renovations.
Have you ever been burned by a flip?
I haven’t had a flip that I lost money on, but I have had a couple that didn’t return what was budgeted. The lesson learned was it’s better to be aggressive on getting the home sold, as the holding costs — things like property taxes, interest on the mortgage, utilities, insurance and sometimes HOA fees — really will eat into your profits.
In your experience, what are some of the biggest mistakes people make when buying fixer uppers?
Sometimes there aren’t a lot of deals our there, and I’ve seen people buy a house that didn’t meet their criteria. Most of the time, it’s better to wait until the right deal comes along. There’s always another house out there.
What is the No. 1 thing first-time flippers should do to prepare?
Create a detailed budget for expenses, holding costs and time. Try to stick to your numbers and also, if you’re flipping, after the flip go through and evaluate how you did on the money and time aspects.
What are the areas you pay closest attention to on a flip?
Location. No matter what you do to the house, you can’t fix location.
I check the electrical, roof and HVAC systems to make sure they are all updated and in good condition.
A deal breaker can be structural issues. For example: Does the floor have a slope in it? If so, get a structural engineer’s opinion.
The other thing I look at is the layout and size of the kitchen, master bedroom and bathroom. It’s easy to renovate these areas, but hard and costly to try to make them larger. This is where most buyers make their decision on whether it’s worth the purchase.
College is a time for adventure, growth and learning, but it can also be a time for silly financial mistakes if your freshman isn’t careful. This will likely be the first time your kid is out in the world on her own, so it makes sense that she’ll want to try new things. But her actions might come with some serious and long-lasting financial consequences unless you can help point her in the right direction first.
Here are three mistakes college freshmen often make when it comes to their finances — and how you can help your child avoid them.
1. They choose a college without considering the price tag
While it’s true that going to a good college is important these days, that doesn’t necessarily mean that your kid needs to go to the most expensive college to score his dream job after school. If your kid has always dreamed of going to a specific, but expensive, school, sit down with him at least a year or two out of applying to talk about how he’ll pay for it. The U.S. government recently launched the College Scorecard, where you can easily search for a school and see how its students fare financially after graduation. It might change his mind if he sees most students graduate from his dream school with tons of student loan debt. If your kid is willing to be a little flexible, you might want to point him towards one of these 20 most rewarding colleges for student loan borrowers, which ranks the best schools for generating the highest income after accounting for loan expenses.
2. They apply for credit cards before they learn how to use them
Luckily it’s gotten much harder for banks and credit card companies to market credit cards to students on college campuses. But the temptation to apply for credit will still be there. The second your kid applies for a credit card, she starts building a credit history that will follow her for at least the next seven years. A smart way to give her experience with some supervision is to add her as an authorized user on your credit card account. You can keep track of her spending habits and she can start building credit while she’s still in school. But don’t just pay the bill off each month without question. Talk to her about her credit score, what a credit report is for and how interest works. If you think it’s a good idea for your kid to dip her toe into the credit card world independently, consider starting her out with one of these best credit card options for college students.
3. They never learn how to budget
The road to financial security starts with one simple building block: a budget. Unfortunately, budgeting isn’t something that comes naturally to everyone — especially for college freshman who may be trying to balance a job, classes, parties, and outings with friends. While your college kid probably won’t have a ton of disposable income to work with, it’s still a good idea to talk to him ahead of time about how to set up a budget, even when it’s just a limited amount of money he’ll be dealing with. If they can stick to a budget, they can also avoid costly mistakes like overdrawing their bank account, which can lead to all kinds of painful fees. During that conversation you can discuss the importance of an emergency savings account (because even college kids need an emergency savings account), how to divvy up income into necessary expenses and fun money, as well as how, once he graduates, he’ll likely need to put some extra money aside for retirement savings, as well.
Every parent I’ve ever talked to wants to be able to support their child’s college education. After all, you want to give your child all the opportunity in the world, and that’s exactly what college represents. But it’s a big expense and it’s growing. So how can you prepare to cover your child’s education while still paying your bills and saving for your own future?
Here are 10 financial moves to make before your child goes to college that will help your entire family build a better financial future.
1. Remember: Sometimes your needs come first
As much as you want to provide for your child, it’s important to take a step back and make sure you are on solid financial footing first.
The truth is that there are many routes to both obtaining and paying for a college education, from loans, to scholarships, to work-study, to less expensive schools.
But there is only one route to you having a secure financial future: your savings.
Putting yourself first not only ensures that you’ll be able to support yourself later on, but it ensures that your children won’t have to support you. So before you commit tens, or even hundreds, of thousands of dollars to your child’s college education, make sure your own financial needs are on the right track.
2. Get to the real goal
College is the default path, and for good reason. On average people with a college degree earn almost twice as much as those without one and are much less likely to be unemployed.
But before you assume that your child needs to go to the most prestigious (and expensive) college possible, take some time to think about what the real goal is here and if your child would flourish in the traditional four-year college setting. Perhaps a trade or technical school is the better fit.
Talk to your spouse or partner about the kinds of opportunities you’d like to provide. And talk to your child about the opportunities she wants for herself.
Figure out what you’re really working towards before making a huge financial commitment.
3. Evaluate your options
Once you know what you’re working towards, you can start to look at the options available to you.
When it comes to evaluating different colleges, you can look at cost. You can look at specialized programs. You can look at location, opportunity to travel, access to merit-based scholarships, and any other factors that are important to you.
It’s important to be realistic about what many employers value, which is certainly a college education. But it’s also worth keeping an open mind about what truly matters for your child’s specific goals and evaluating all of your options.
4. Estimate your ‘Expected Family Contribution’
As you investigate the college route, you can start to get a sense of your expected family contribution.
This is the amount you will be expected to contribute to your child’s college education, with the cost above that amount presumably being covered by financial aid (which includes student loans).
You can estimate your expected family contribution here.
5. Decide how much you’re willing to contribute
Your expected family contribution is one thing. Deciding how much you can and are willing to fund is another. And there are a few factors that should go into that decision.
The first is what you can afford to pay. This involves the work you did in Step 1 to evaluate your progress towards other financial goals, as well as a look at your budget to see whether there’s any room to shift things around.
The second is being clear about the things you are willing to fund. In addition to tuition, there are books, room and board, food, fraternity/sorority dues, and other discretionary living expenses. Have a conversation that includes your child about how much those things cost and whose responsibility each expense will be.
The third factor is what you expect your child to contribute, which we’ll get into next.
The goal here is to be realistic about what you can afford and to be clear about what’s expected from all parties.
6. Make sure your kid has skin in the game
Given that you’re talking about your child’s future, it’s not unreasonable to expect your child to help pay for it. In fact, doing so may give him more ownership over the decisions being made, which could lead to better results.
There are many different ways for your child to help financially, from working in the years leading up to school, to working part-time during school, to applying for scholarships and grants. You don’t have to put it all on them, but involving them in the process can be beneficial for everyone.
7. Create and implement a savings plan
With your funding targets in mind, you’re ready to start saving.
The younger your child is, and the more likely it is that he or she will attend a traditional college, the more helpful a dedicated college savings account will be. That’s because the tax-deferral those accounts offer will have longer to work their magic. But if you live in a state that offers an income tax deduction for contributions, they can be helpful even in the years right before college.
And don’t forget that a regular investment account can offer a lot of flexibility. The money can be used for college if necessary, or you can hold onto it and use it for other goals.
8. Get up to speed on student loans
Student loans will almost certainly be an option, and there’s a good chance that they’ll end up as part of your strategy. That’s not necessarily a bad thing either. The value of a good education can be incredibly high, and taking on some debt in order to make it happen can be a smart move.
They key is to make sure it’s done purposefully and with a strong understanding of the consequences. Far too many students are graduating with far more student loan debt than they should have ever taken on, largely because of a lack of knowledge about what they were getting into.
So take some time to learn about the pros and cons of the options available to you, and make a decision based on what you can afford and what your child truly needs in order to get the education she wants. This article will give you a good start: How to Handle Student Loans in 4 Easy Steps.
9. Apply for scholarships and grants
It takes some work, but you may find that your child can qualify for a significant amount of money in scholarships and grants. This can not only reduce your financial burden, but it can also be a great way for your child to help financially without having to come up with a large amount of savings.
Students can start applying for college scholarships can be as early as middle school. At the latest, start preparing for applications in the first year of high school.
No matter how much you save, college years can be tough on your budget. That’s especially true if you’ll have two or more children in college at the same time.
If you can, make your best guess at what your budget will look like during those years and start living on it a year ahead of time. That will not only help you get used to the budget, but it will allow you to build some extra savings to help smooth out any bumps in the road.
Whether you’re already a parent or are expecting soon, you’re likely about to encounter what will possibly be the biggest new line item on your family budget: childcare.
Childcare is by far the largest annual household expense for families with young children, averaging $18,000 per year, according to a 2015 Care.com report.
There are all forms of childcare, each carrying its own price. Per week, families spend anywhere from $140 (for in-home daycare) to $477 (for a nanny). In the middle of the spectrum, it costs about $360 per week to hire an au pair and $188 per week for a daycare center.
There are some steps you can take now to reduce the cost of childcare, without jeopardizing the safety or quality of care for you child.
1. Throw out your old budget
To properly prepare for the added expense of childcare, parents have to look closely at their current budget and make adjustments, says Aaron H. Kahn, a certified financial planner at Wealth Management Strategies, Inc. in Pittsburgh, Penn.
“If parents are not acutely aware of exactly how much they need each month for the necessities, it will be impossible to build a budget,” Kahn says.
He tells his expecting clients to track their spending over the last 12 months, using a program like Excel or Mint to divide their spending into categories. Then, compare their spending to their annual take-home pay. This exercise will give parents a chance to see how much wiggle room they have.
“It’s possible that they may already have enough extra cash flow each month to support childcare for the new baby,” he says.
Of course more often than not the opposite is true. When existing spending habits don’t leave enough room for childcare expenses, it’s time to make cutbacks.
“If possible, I’m always an advocate for a couple living on one salary while saving the other,” he says. “This is a great habit to develop not just for the childcare phase, but for life. Learning to live so far below your income can be a primer for tremendous financial health later in life.”
2. Look out for programs for single-parent households
The thought of covering childcare expenses on one income while also raising a baby can be daunting. To help handle the years before school, though, Kahn suggests seeking out childcare programs specifically catering to single parents. These programs often base fees on financial need. In some cases, if your income is a little too high to be eligible for these programs, Kahn recommends finding ways to reduce your taxable income. For example, you could increase your retirement plan contributions.
Besides saving up ahead of time to help defray some of the cost, there are other steps you can take to cut back on childcare expenses as well. Here are a few to consider.
3. Sign up for a Dependent Care Flex Spending Account
Your or your partner may have access to a Flex Spending Account (FSA) for dependent care through your healthcare provider. FSAs allow you to set aside pre-tax income for certain out-of-pocket healthcare costs, which can include childcare. Contributions made to an FSA are excluded from your gross income, so you don’t pay employment or federal income taxes on them. You can contribute up to $5,000 per year if you’re married and filing jointly or if you are a single parent. The limit is $2,500 per year if you’re married and filing separately. Keep in mind that FSA dollars can’t always be rolled over from year to year, so it’s a good idea to estimate the amount you need carefully. Or else you’ll have to forfeit any leftover money at the end of the year.
4. Make use of the child and dependent care tax credits
A special childcare tax credit provides parents with up to $3,000 in qualifying child care expenses for one child and up to $6,000 for two or more. Important: You can’t max out both your Dependent Care FSA and child care credit at the same time. For example, if you put $5,000 into your FSA for childcare expenses for the year, you’ll only be able to claim $1,000 for the Child and Dependent Care Credit. Find out more about the Child and Dependent Care tax credit stipulations here, and check out this calculator to help you determine the best way for you and your family to make the most out of tax savings on child care.
5. Ask your HR rep about employer-sponsored daycare options or discounts offered
You’ll never know if your company provides employer-sponsored options for childcare — like in-house daycare or discounts on other childcare options — unless you ask. “Especially if parents work for a large organization, or one with an affiliation to childcare products, they are likely entitled to programs designed to help with expenses,” says Kahn.
6. Approach your employer about a more flexible work schedule
If there’s a way to adjust your work schedule so you do not have to pay for a full week of childcare, you could save a bundle. Now, to be fair, having a productive work day at home is nearly impossible with a newborn demanding your attention. Think about inviting a relative or a part-time nanny to drop by at key moments during the day — feeding times, bath times, etc. — so you can focus on work and work alone.
7. Go with in-home daycare
In-home daycare is more affordable than most daycare facilities ($140/week vs. $188/week, according to Care.com). Picking an in-home daycare that feels right for you can be stressful (horror stories abound in the media). Start by asking around for recommendations from family and friends in your area who might have places they like. To save more, you should always ask if there’s a discount for enrolling an additional child, and find out if it’s possible to pay per day rather than monthly or yearly, which again might allow you to take advantage of family and friends nearby who can help out some days. There might also be some ways to cut back on superfluous daycare fees, like if you can pack a lunch for your kid instead of having to pay for the included meal.
8. Check out nanny share options
If you’d prefer the one-on-one care of a nanny but really don’t think you can afford the expense, try a nanny share. As the name implies, a nanny share occurs when you share a nanny with other families to help cut down on the costs. Keep in mind that if you’re going the nanny share route, in the eyes of the IRS, all the families that employ the nanny will be considered separate employers, and everyone will need to follow the proper nanny tax process of their state. Check out the HomePay section about nannies on Care.com for more information on nanny taxes. You can also check out the specific going rates for nannies in your area using this Care.com calculator to get a feel for what a share might cost you.
9. Look into publicly-funded daycare options
If none of the other options seem feasible, there are always plenty of reliable, publicly-funded daycare options to look into. For starters, you can check out this site for contact information in your state regarding child care assistance through the Child Care and Development Block Grants program, but be aware that there will likely be strict income and care guidelines if you go this route. Other programs options like Head Start are good places to check, or the National Women’s Law Center has a state-by-state fact sheets page with recent child care assistance policies depending on where you live.
Picking the best childcare options for your kid will be one of the more important decisions you make once your baby is born, but that doesn’t mean it has to cost an arm and a leg. With just a little bit of research and some digging, you’ll likely be able to come up with an option that you’re both comfortable with and won’t drain your bank account.