Strategies to Save

3 Reasons You Earn More But Still Feel Broke

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3 Reasons to Earn More

If you’re earning more but still feel like you’re living paycheck to paycheck, there’s a likely culprit: lifestyle inflation. Lifestyle inflation is the ultimate budget-killer — a widespread phenomenon that occurs when people spend more as their income increases. Before they know it, that raise or bonus they earned slowly but surely disappears … right into that cell phone upgrade, a bigger apartment, or those few extra takeout orders each week.

Any financial planner can offer sound, reasonable methods for avoiding this problem: Stick to a budget. Automate your savings. Bump up your 401(k) contribution. The solutions seem easy enough, but no matter how much more you earn, you still feel like you’re living paycheck to paycheck.

We’ve come up with three simple reasons why you might still feel broke — even though you’re earning more — along with strategies on how to overcome them.

You don’t know what you want from life.

One reason many people struggle to keep their spending in check as their income increases is that they aren’t intentional about how they spend their money, says Meg Bartelt, founder and president of Flow Financial Planning. Bartelt encounters this problem every day with her clients, who are mostly women working in the tech industry who earn healthy paychecks but live in expensive cities.

When people are clear about their reasons for earning money and the goals they hope to achieve with those earnings, it becomes easier to avoid the kinds of incremental spending increases that can quickly consume their budget.

“Ask yourself why you worked hard for a raise,” says Bartelt. “Was it so that you could eat out more or buy fancier clothing or have a better streaming subscription … or was it so that you could make a meaningful change in your life?”

Goals — whether it’s being able to retire at 45 instead of 65, sending your child to college, or buying a home — give workers a reason to keep an eye on their spending from paycheck to paycheck.

To help figure out your financial goals, Bartelt suggests asking yourself a specific set of questions:

What do you want out of life?
What do you want to do, have, or accomplish?
How much money is it going to take to get you there?
And how are you going to get that money?

Taking this approach may also make the concept of budgeting more palatable. Saying “no” to a few upgrades in your life will feel less like deprivation, and more like a positive step toward the future you imagine for yourself.

You compare yourself to others.

Nothing can threaten a healthy budget like a serious case of “FOMO” — fear of missing out.

It can be hard to keep long-term, big-picture goals in mind amid the constant stream of filtered photos of international trips and nights out posted on social media. “It’s a huge contributor [to lifestyle inflation], especially for younger generations,” says Stephen Alred Jr., founder of Atlanta, Ga.-based financial planning firm Ignite Financial. Constant, real-time coverage of internet acquaintances’ adventures can make people feel worse about the state of their own lives and distract them from what they really want or need. Then, when a raise or a bonus comes into play, they are more likely to spend it on something that fits into that picture of what they think they should be doing, rather than what works best for their future goals.

It’s important to remember that you won’t get the full picture of someone’s life by looking at their social media profile — for example, you won’t know that the friend who took the tour of Italy last summer is still paying off the resulting credit card bill a year later, and you won’t see that a person only ordered appetizers at that fancy restaurant she went to last week, says Alred. Focusing on your own needs and goals, separate from those of the people in your life and in your social network, is critical to being happy with the state of your finances and your life, now and in the future.

You haven’t addressed negative spending patterns.

Once your financial goals begin to take shape, the hard part isn’t quite over. If you have a pattern of spending money as soon as it’s in hand, it’s going to take a while to change that behavior. Alred calls this a “behavioral barrier” — something people do every day with money that prevents them from reaching their financial goals.

It’s calling Uber every time you’re at the office later than 5 o’clock. It’s using your credit card to pay for even the smallest purchases. It’s grabbing a $15 salad for lunch every day.

These behaviors can crush financial goals, whether a person earns $30,000 or $300,000. Getting the right habits in place now will not only help combat lifestyle inflation this year — it will help down the road as income (hopefully) continues to grow.

Come up with strategies to help break those negative spending habits. For example, we’ve written about a simple $20 rule that can help break your credit card addiction.

But don’t be too tough on yourself. You shouldn’t deprive yourself of simple pleasures or pinch pennies to the point that you’re putting your mental or physical health at risk. Budget for the things that you know will bring you happiness, like the weekly dinner with friends you can’t miss or your daily $5 latte.

“Be clear about what’s important to you,” says Mary Beth Storjohann, financial planner and founder of Workable Wealth. “You can do it all, you just can’t do it all at once.” Once debts and savings goals are taken care of, “20% should go toward something fun,” says Storjohann. Building in some flexibility will help you avoid stress and self-loathing down the road — and will allow the occasional indulgence without throwing savings goals off track.

The bottom line:

Rigid financial rules may work for some, but will be hard to implement without a solid reason for following them.

“It’s like a diet. If you restrict your calories significantly, maybe you can last for a week or a month,” says Bartelt. “But most likely, you’ll revert to your old habits in the long run.”

 

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Featured, Health, Strategies to Save

What To Do if Your Insurance Doesn’t Cover a Health Care Provider

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Smiling senior man having measured blood pressure

It’s a pretty common scenario: you’re looking to book a medical appointment, so you go to your insurance company’s website to find an in-network doctor. You book the appointment, see the doctor, and all seems well — until you get a whopping bill. Apparently, that doctor wasn’t in your network after all, and now you’re faced with out-of-network charges.

This happens more often than we think. Unfortunately, insurance company websites are notoriously fallible. Not only that, but they change so frequently that it can be difficult to nail down just who is and isn’t covered. At some point or another, just about everyone will have to deal with a situation where their insurance doesn’t cover a provider.

It’s easy to feel duped in this scenario. Navigating the ins and outs of insurance is hard enough, but there’s nothing more frustrating than being fed incorrect information.

So what should you do?

What to Do If You’ve Already Gotten the Bill

Call the doctor

Doctors don’t usually consider themselves responsible for significant out-of-pocket costs resulting from a lack of research on the part of the patient.

But if you asked the doctor or their representative about insurance coverage beforehand, you should contact them immediately if that information ends up being false. Many physicians will honor the price they initially told you or at least give a hefty discount. Don’t get discouraged if they don’t get back to you right away. Keep calling to see if you can get a lower price.

Negotiate and ask for a better rate

Most doctors have two different rates: one for insurance companies and one for self-pay individuals. If your doctor’s visit isn’t going to be covered by your insurance, call the doctor’s billing department to ask for the self-pay cost.

“Most physician offices will accept a lesser amount, especially if they know the service is not going toward a deductible,” said health insurance agent Natalie Cooper of Best Quote Insurance of Ohio.

Ask about a payment plan if you can’t afford to pay the bill in one go. Most medical offices would rather get the money a little bit at a time than not at all.

“Most physician and hospital groups will accept a small payment of $25 or $50 per month until it’s paid off,” Cooper said.

Use a health savings account

If you’re struggling to pay a medical bill out of pocket, see if you can open an HSA and use those funds to pay for it. If you owe $2,000, you can transfer $2,000 to an HSA and then pay the doctor directly from that account.

What’s the benefit? HSA contributions are deductible on your taxes. Unfortunately, only people with high-deductible plans are eligible to start an HSA. Individuals can only contribute up to $3,400 a year or $6,750 in an HSA. You can start an HSA anytime if you have an eligible healthcare plan.

The IRS says you can only use your HSA to pay for qualified medical expenses, a list of which you can find here. Funds in an HSA roll over from year to year, and you can contribute up to $3,400 annually or $6,750 for families.

You can also open a Flex Spending Account, which works similarly to an HSA. However, funds don’t roll over to the next year and users can only contribute $2,550 a year.

How to Prevent Out-of-Pocket Expenses

Ask beforehand

Many people use the insurance company’s website to find a doctor, but those lists are often out of date. Insurance information can even change daily. The only way to confirm a doctor’s status with an insurance company is to call them directly and ask if they’re a network provider — not just if they accept your insurance.

“When they are a network provider, they are contractually required to accept no more than the negotiated contracted rate as payment in full, which is usually less than the billed rate,” said human resources expert Laurie A. Brednich. “When they say they ‘accept xyz insurance,’ they are usually not a network provider, but will file the claims on your behalf, and you are responsible for the full billed charges.”

It can also be helpful to give them your insurance group and account numbers beforehand so there’s no question about your specific policy. The more specific you can be, the more accurately you’ll be able to navigate the insurance labyrinth.

Find out if all procedures and doctors are covered

Have you ever been to a doctor who’s recommended you see a specialist for a certain procedure — only to find out that the specialist isn’t covered by your insurance, even though they’re in the same building?

When a doctor recommends you to a colleague, they’re not confirming that the other physician is covered in-network. Before you make the appointment, talk to the billing department to see what their policies are. You can request an estimate in writing beforehand so you’ll have an idea of what the costs will be.

Some procedures might not be covered even if they’re being ordered by your in-network doctor. If your doctor sends your results to a lab, that lab might be out of network, even if your insurance covers the doctor who ordered them.

Confirm the lab’s status before you go in. If it’s too late, call your insurance and ask if they can bill the service as in-network. Cite the fact that you weren’t aware the lab would not be covered.

If they refuse, contact the doctor’s office and explain your situation. Ask them why they used an out-of-network provider and see if they’re willing to write off the bill. Be polite, but firm.

Ask the doctor to apply

When Julie Rains’ insurance changed to a preferred provider plan, she discovered her trusted doctor was now going to be out of network. Instead of searching for a replacement, she asked if her physician would apply to the insurance company to be covered by her new plan. He agreed.

It took almost two months for him to be accepted, Rains said. If you’re going this route, it’s best to start as soon as you find out your insurance company has changed policies. Rains said between the time she found out about the changes and when they went into effect, her doctor had already been approved.

You might have less luck with a doctor you’ve only been seeing for a short time, but most medical professionals take long-term patient relationships seriously — especially if your whole family goes to the same office. As always, it doesn’t hurt to ask.

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Featured, Strategies to Save

How to Use Truebill to Identify & Cancel Recurring Subscriptions

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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.

 

Have you ever forgotten to cancel a subscription that charges you automatically each month? Me, too.

Thanks to Apple Music album exclusives, I’ve racked up quite a few charges from a subscription that I initially planned to cancel right after the free trial.

Truebill is an app that wants to make you aware of all the seemingly low-cost subscriptions that can add up to a lot of money spent. Truebill uses an algorithm to help you identify and cancel recurring payments made from your credit cards and bank accounts so you can find savings.

We tried out the app to see whether or not using it to cut costs is worthwhile. In this post, we’ll cover:

  • How it works
  • Truebill extra features
  • The cost
  • Pros and cons

How Truebill Works

You need to download the Truebill app from iTunes or GooglePlay to get started. The app lets you sign up for a Truebill account by email or Facebook.

Truebill mobile interface

After you create an account, the next step is signing into your credit card and bank accounts through Truebill so that it can review your account data. I signed into one bank account and one credit card account for this trial.

Truebill mobile interface connect accounts

The results of the Truebill statement scan

Truebill scan of bills

The results of the account scan will appear in your app dashboard within a few minutes.

Recurring transactions found are broken down into three categories — subscriptions, recurring bills, and miscellaneous recurring payments.

Here’s what Truebill found from my accounts:

For subscriptions:

  • A recurring Express Scripts prescription charge
  • Payments for monthly services I use to run a business including:
    • ConvertKit
    • FreshBooks
    • Grammarly
    • GoDaddy

For recurring bills and utilities:

  • An annual credit card membership fee
  • A Comcast bill
  • An insurance bill

For recurring miscellaneous payments: 

  • A Bluehost monthly service charge
  • An iTunes (Hulu) monthly subscription

All of the above are current recurring payments that I’m making periodically.

Truebill also has a section that lists your inactive recurring payments.

Inactive payments are for past recurring items that are no longer posting to your account regularly.

In my inactive section, Truebill has recurring transactions and subscriptions from as far back as 2013, including old student loan payments, car note payments, and more.

If you discover that Truebill is missing a subscription, there’s an option to enter the service name, and Truebill will perform another search on your account.

Truebill no results screen show

You can reach out to a customer service representative for extra help if Truebill still can’t locate a subscription after doing this search.

Does Truebill Find All the Sneaky Costs?

The current auto-payments that show up for me are ones I already know about. I’m also someone who pays pretty close attention to every account transaction so I didn’t expect any surprises.

Despite being aware of these auto-payments, I still find it impressive how many past and present recurring transactions the algorithm picked up on. I can see how this tool can be a shortcut for catching pesky auto-payments in one fell swoop for someone who monitors their statements a little less frequently.

I did learn something new related to very old charges.

Truebill found a questionable Home Depot Project Loan transaction from 2013 and was unsure whether or not to mark it as an old inactive recurring payment.

Truebill Home Depot loan

I’ve never taken out a Home Depot Project Loan, so that’s a charge I plan on researching.

How to Cancel Recurring Payments

The second key feature of Truebill is that it helps you cancel these services.

You’re able to terminate many subscriptions within the app itself. When you click on a specific subscription, there’s an “Options” link, and then a red button to “cancel” the subscription appears.

Truebill cancel ConvertKit

However, the option to cancel isn’t available for all services on auto-payment. This is the case for my Express Scripts recurring payment below.

Truebill cancel subscription

If cancellation isn’t an option, you can head over to the Truebill cancellation page for additional instructions.

On this page, there’s a mega list of companies with directions on how to cancel services from each one. The list includes insurance companies, telephone companies, music streaming services, gyms, and more.

You need to fill out more information about yourself for Truebill to move forward with the cancellation of Express Scripts. The site gives a phone number you can call to cancel on your own. For some companies, Truebill even has video instructions on how to cancel a service.

Truebill form to cancel subscriptions

Truebill Extras to Lower Your Bills

Canceling isn’t the only action you can take to cut costs. The app also notifies you of opportunities to renegotiate contract terms for bills like cable, internet, and insurance to save money.

According to the app, my Comcast bill is high, and it recommends using the BillShark service to negotiate a lower bill. BillShark is a partner of Truebill and renegotiates contracts for consumers. If BillShark can lower your bill, it takes a 40% cut of the savings as a service fee. You do not have to pay a dime if BillShark isn’t able to reduce your bill.

I got a notification that my insurance bill seems high as well. The app refers me to a third party called SolidQuote to shop for competitive insurance rates.

We’ll talk a little bit more about these recommendations in the next section.

The Cost of Truebill

The Truebill app is entirely free to download and use. The one extra service that you may have to pay for is BillShark if you choose to use it to renegotiate your bill contracts. Technically, you’re not paying out of pocket for this service either. You will only pay if BillShark is able to find you savings.

How Does Truebill Make Money?

On the terms and conditions page, there’s mention of Truebill having sponsored links to third parties and advertisements. Truebill may receive compensation from recommending other companies to you.

For example, under the suggestion to shop for competitive insurance quotes with SolidQuote, there’s a link to an advertiser disclosure stating Truebill can get paid for the referral.

Truebill advertiser disclosure

You do not have to sign up for any of these third-party offers to use the service for free. You can simply avoid offers throughout the app and still benefit from using it.

Truebill Security

Truebill uses 256-bit encryption and bank-level security to protect your information. The account history used from your financial institutions to manage auto-payments is read-only, and your information is not stored by Truebill servers. Find out more about Truebill security here.

Pros and Cons

Pros:

  • Truebill is free for users.
  • The app is simple to use and reviews your accounts for subscription information quickly.
  • It shows you both active and inactive recurring payments.
  • You may be able to cancel bills with one click on the app. If you can’t cancel through the app, there are instructions on how you can terminate contracts with many companies on the website. Some cancellation instructions even include step-by-step video tutorials.

Cons:

  • There are advertisements to special offers on the app. These offers are not too distracting, but you should be aware that recommendations may be from paid affiliates.
  • The Truebill algorithm works by analyzing your account data. You need to sign in to your financial accounts for it to do its magic. If that’s a turnoff, you won’t get much use from this app.

The Final Verdict

The Truebill app is easy to use and definitely one to consider if you might be flushing money down the toilet with random subscriptions and services. The fact that it shows both current and past subscriptions is a highlight because it’s also helpful to review how much you’ve spent on these recurring payments in the past few years.

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Clever Ways to Reduce or Eliminate Your Housing Costs

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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.

We all know that aiming to live well below your means will help you save more money, get out of debt, and get ahead financially overall. To supercharge this process, you may want to consider attacking your largest expense: housing.

Just being able to save $200, $500, or more each month on housing could put a large dent in your debt repayment or help you seriously pad your savings. Reducing or eliminating your housing expenses might sound difficult, but there are so many different strategies, at least one could work for you.

What’s more is that these options don’t have to be permanent. You can always go back to a more traditional housing situation once you feel like the arrangement has run its course.

See if one of these ways of cutting your housing costs might work for you.

Be Energy Efficient

The eco-revolution is here, and as a result, there are so many ways to save on utilities. A bonus is that some energy-efficient modifications and products can help you earn federal tax credits.

The list of things you can do is long and can get expensive, but there’s some low-hanging fruit when it comes to reducing your energy consumption:

  • Stop air leaks with caulk, insulation, or weatherstripping
  • Swap out incandescent lights for LED lights
  • Turn down your water heater and get a jacket for it
  • Plug your devices into powerstrips that minimize idle current usage (or unplug devices altogether)
  • Use rainwater barrels for your outdoor water needs
  • Air-dry your clothing
  • Choose light colors on flooring and walls to minimize artificial light use during daylight hours
  • Program your thermostat
  • Get alerts for higher priced kilowatt rates during certain hours of the day

You get the point. The more you can minimize your energy use, obviously the more money you’ll save on these costs. Pick a few that work for you, then use the money saved to get ahead in your finances.

Put Your Bills on Autopay

Not only will this small gesture save your sanity, it could potentially save you fees and penalties connected with late payments. You can set up automatic payments to be deducted from your bank account or a credit card account. If you choose the latter, be sure to avoid carrying a balance from month to month and pay your credit card bill on time as well. Otherwise, the interest and late fees from missing your credit card payment could cancel out the benefits of your autopay set-up.

Appeal Your Property Taxes

If you’ve ever gotten those solicitations in the mail from companies that claim to reduce your property tax bill, don’t put it in the junk pile quite yet. According to the National Taxpayers Union, up to 60% of U.S. properties are over-assessed. This means that 60% of Americans could be paying inflated property tax bills.

Many property owners don’t even know that they can get their property tax bill reduced via an appeal process. Because of this, it’s very possible that you are paying too much for your property taxes.

The appeal process to get your taxes can seem daunting, but it’s usually a string of paperwork and deadlines. Of course, you’ll be dealing with government entities so that could add a layer of complexity to the whole ordeal, but it’s not insurmountable.

If you have the time and ambition, it’s a process you could easily undertake yourself. If not, it may be worth hiring help to file and follow up through the property-tax appeal process. If the appeal is successful and your property taxes are reduced, you’d fork over a portion of the savings to the firm or person you hire.

Shop Around for Insurance

If you’ve got home insurance, you are likely to have other policies for vehicles, and perhaps you also have coverage for health and life insurance benefits, too. If you’ve got insurance needs that require multiple policies, you can leverage your buying power to shop around for better rates.

Shopping around for insurance can seem straightforward, but be ready to use your brain to the utmost in this endeavor. Not only will you need to compare prices, but you’ll also want to compare things like coverage amounts, premiums, deductibles, and available riders at the quoted prices.

Fortunately, there are comparison sites and independent insurance agents that can make this task a little easier. Either way you do it, it’s a good idea to check around every once in a while to make sure your current insurance provider is being competitive and offering you the best rate.

Become a DIYer

One of the most costly expenses of owning a home can be maintenance, repairs, and upgrades. Save money by learning to do some things around the house yourself. There are many resources to help you with anything you don’t know much about, from books, to websites, to YouTube. Though it can take more time, you might come out ahead by cutting your own grass or installing your own kitchen backsplash.

If you’ve got complicated jobs that require special expertise and equipment, consider a partial DIY approach. For example, if you’re redoing your bathroom, you might ask the contractor about things you can do yourself to shave the bill down some. Demolition and cleanup of existing fixtures might be the type of work you can handle.

Don’t be afraid to experiment, but definitely be wise about the projects you decide to take on yourself. Finding the right balance between hiring and DIYing can save you time, money, and headaches as a homeowner.

Rethink Your Home Purchase Plan

Getting a conventional mortgage with vanilla terms that include a 10%-20% down payment and a 30-year loan period are all too familiar to the home-buying public. But if you really want to save on the single largest expense in your life, you might have to be a little more flexible than the standard terms accepted on most home loans.

Larger Down Payment

One approach to consider is putting down at least 20% on your home purchase. This will allow you to skip private mortgage insurance (PMI), which can amount to thousands of dollars over the life of your home loan. PMI can eventually go away over the life of the loan when certain criteria is met, but you can save more money by dumping it sooner than later.

Refinance Your Mortgage

Many people refinance their homes in hopes of getting a lower monthly payment or locking in a lower interest rate. Adjusting these numbers downward can definitely save money for some homeowners over the long run.

However, refinancing your home loan is not a silver-bullet solution that will work in every scenario. In some cases, it makes perfect sense to refinance, and in others, it wouldn’t be a good idea. The best thing to do is run the refinance numbers and make a decision. After doing the math, you might actually find that fees and extended loan terms could cause you to lose money rather than save it.

Make sure you fully understand the terms of your refinanced mortgage along with the potential impact on your entire financial outlook. Most definitely, confirm your assumptions about this move with math. If you need help running the numbers, check out this refinance calculator from myFICO.

Pay Cash for Your Home

While not an option for the average American, paying cash for your home is not unheard of. Paying cash for a home would eliminate tens, maybe hundreds of thousands of dollars in interest, mortgage fees, and PMI. If you think you’d like to go for the gusto and pay cash for a home, consider ways to make this feat possible:

Drastically Change Your Lifestyle

Though these options aren’t for everyone, they are still worth a mention. These suggestions are for those who might be willing to change their lifestyle in order to garner the most savings possible when it comes to housing.

Get a Roommate (or Two)

The home-sharing revolution has caught on, and everyone from young professionals to empty nesters are finding boarders on places like Craigslist and Airbnb. If it works out, it can truly be a good solution to help lower your housing costs. Plus, having a roommate can be temporary or longer term, based on your living preferences.

Again, this option is not for the faint of heart. Adding a roommate to your living equation could be utterly disastrous or surprisingly pleasant, so choose your housemates wisely.

Buy a Multifamily Unit, Rent One Unit Out

Depending on the location and property type in these situations, homeowners can often cover their entire mortgage amount with their renters’ payments. It can definitely have its benefits, but don’t buy that two-flat just yet.

Remember, with this arrangement, you’ll be swimming deep in the waters of landlordship. How it all pans out can be based on so many variables: the landlord, tenant, property, location, and a host of other factors can make this arrangement easy income or a nightmarish headache.

If things go wrong with your property, your tenant doesn’t share the burden of fixing things though they live there just the same. There can be costs associated with maintenance and repairs that go well beyond the monthly income your rented unit brings in. You’ll want to have a comfortable cash cushion for incidentals before starting your homeownership journey as a landlord.

Downsize

You don’t have to join the tiny home revolution to downsize (though it’s not a terrible idea). Downsizing can look different for different people. Downsizing for one person might be moving from the lake-view two-bedroom apartment to a studio in a less ritzy location. You’ll have to decide what downsizing looks like for you and if it will be worth the effort.

While you might not be game for all of these suggestions, you can probably adopt a few that could change your financial situation significantly. Whatever measures you choose to save or eliminate your housing costs, make sure you are ready to deal with the consequences. These consequences can be both beneficial and somewhat inconvenient for your quality of life and your financial health. In the end, you’ll have to determine if it’s worth it.

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Are Discount Gift Cards Worth the Hassle?

Advertiser Disclosure

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.

Gift card exchange sites are places where you can buy and sell gift cards. If you’re unfamiliar with the gift card exchange craze, here’s the rundown of how you can benefit:

  • Selling – You can sell unused gift cards on these sites for cash or other gift cards. According to estimates published by Market Watch, $750 million in gift cards were expected to go unused in 2014. Before your card is one of many that go to waste, you can sell it and get your hands on some money instead.
  • Buying – Gift card exchanges also sell gift cards for less than their value. Say you want to buy an iTunes gift card for your cousin Joe’s birthday. You may be able to find an iTunes gift card with $100 on it that’s selling for $95 or a 5% discount.

There are quite a few gift card exchange websites you can use to find deals.

In this post, we’re going to take a look at the popular gift card exchange sites to compare savings and how each one works. We’ll also dig into the major gift card search engine, Gift Card Granny, to review the process of using it to shop for and sell gift cards.

Lastly, we’ll give you our take on whether or not the deals you can get from buying and selling cards are worth your time.

Buying and Selling Gift Cards

The how-to process of buying and selling gift cards is pretty similar for each gift card exchange site so we’ve broken down what you need to know in the following two sections.

Buying gift cards

Most sites allow you to buy both e-cards and physical gift cards. E-cards are delivered to you by email after purchase. Physical gift cards can take from several days to over a week to get to you through snail mail.

A factor that can make shopping for gift cards tedious is finding a site that has the card inventory that you need. Gift card availability varies from seller to seller. Some sites have loads of cards you can buy, and others have very few on sale from restaurants and stores you may never visit.

One very important to thing to mention before we compare savings is that customers have complained about buying cards from popular gift card sellers that didn’t work or had no money on them when they arrived. This is why gift card exchanges have money-back guarantee policies.

If you buy gift cards, you must choose an exchange site that has a money-back guarantee that lasts at least several weeks. This way you have enough time to receive the card, test the card, and request a refund if it doesn’t work. We’ve included the guarantee period in our savings comparison below.

How gift card discounts compare from site to site

For our shopping example, we want to buy a Macy’s gift card and we want the card to have as close to $50 on it as possible because it’s for a gift.

We searched for deals on CardCash/ABC Gift Cards, Cardpool, GiftCardBin, Giftcard Zen, and Raise because each of these six exchanges has no fees, a money-back guarantee, a variety of cards for sale, and a user-friendly website.

Here’s what we found:

Gift-Card-Purchasing

*CardCash and ABC Gift Cards are the same company but can offer different savings rates on gift cards. For Macy’s the savings happens to be the same.

ABC Gift Cards and CardCash take the cake for the best percentage off discount in this example at 13.25% savings.

But GiftCardBin gives you a Macy’s gift card with exactly $50 on it. The person receiving the gift will probably be more appreciative of getting a full $50 on the card than $43.90 (unless it’s a gag gift).

Overall, in this example we can get between 5% to 13% off of our Macy’s gift card.

Savings will vary depending on the type of card you’re looking for. Even the inventory and discount can change for Macy’s cards from day to day, but this gives you an idea of what’s offered.

Selling gift cards

Now let’s move on to selling those gift cards you have piled up from Christmas and your birthday.

Some exchange sites will take both e-cards and physical cards. For sites that will take e-cards off your hands, you type in the e-code that’s on the e-card to go through with the transaction. The company will give you a free shipping label to send in physical cards.

How deals for gift card sellers compare from site to site

Let’s say you’re sitting on a $50 Macy’s gift card and you don’t intend to shop at that store.

We searched for trade deals from CardCash/ABC Gift Cards, Cardpool, GiftCardBin, and Raise.

Here’s what you can get for a Macy’s card:

Gift-Card-Selling

As you can see, the most value is given when you trade a gift card for another gift card.

At a quick glance, Raise appears to give you the most cash back for the trade, but you have to factor in the listing fee and whether someone will buy the card for that asking price.

You may notice Giftcard Zen doesn’t make our list for places to sell your Macy’s card when it made our list for places to buy a Macy’s card.

We went to Giftcard Zen to see what the site offers for a card trade and found the company is not currently accepting cards from Macy’s. Again, inventory and what a site will accept is ever changing.

This is where Gift Card Granny comes into the picture and tries to make your life easier.

Instead of having to search each and every gift card site for deals, Gift Card Granny is where you can compare buying and selling opportunities in one place.

Gift Card Granny — The Gift Card Exchange Aggregate

If you want to search a number of gift card exchange websites all at once, Gift Card Granny is a great source. The shopping experience on Gift Card Granny is like shopping for hotels and flights on Kayak.

You type in the gift card you’re looking to buy or sell, and the Gift Card Granny search engine pulls up deals from various gift card sites, including sites we mentioned above.

We went through a scenario with Gift Card Granny to weigh in on the recommended deals. Here’s what we found.

Finding places to buy cards using Gift Card Granny

Let’s go back to our initial scenario where we were buying our cousin Joe an iTunes gift card for his birthday.

Gift Card Granny came up with a bunch of options after we typed iTunes into the search bar.

gcg-options-iphone

We clicked on Card Kangaroo first since the check mark means it’s a Gift Card Granny Premier Partner. After getting redirected to the Card Kangaroo site, we discovered that there are no iTunes gift cards available even though the deal is listed on Gift Card Granny. It may be because Gift Card Granny has a lag in inventory updates.

This doesn’t come as a complete shock since Card Kangaroo was left off of our roundup from above for having a pretty slim gift card stock for buyers.

itunes-giftcards

So we decided to dig into two more options, GiftMe and Gift Card Spread. GiftMe has the highest savings percentage on the list, and Gift Card Spread is another Gift Card Granny Premier Partner.

GiftMe turns out to be an app that you need to download to your phone first before you can buy and sell your cards. We downloaded the app and found that there is indeed a $100 iTunes gift card available for $88.52.

GiftMe-App

To buy a card on GiftMe, you have to fill out your name and address. You also have to take a photo of the front and back of your credit card to be verified before purchase.

According to the app FAQ page, GiftMe will delete the photo after verification, and the app is PCI compliant. PCI is a security standard for transmitting credit card data, but to err on the side of caution, you probably shouldn’t be sending photos of your credit card to anyone.

That leaves the third and final top savings option that we looked into, Gift Card Spread. Gift Card Spread has iTunes gift card inventory for a little over 10% savings.

Gift-card-spread

You need to sign up for an account to buy a card from Gift Card Spread. In some cases, you may have to verify yourself as the credit card holder before purchasing by answering questions or going on a three-way call with the company and your credit card issuer.

Based on this experience shopping on Gift Card Granny, you’ll probably have to click around through several deals before you find a gift card seller that has the right stock and that doesn’t have a buying process that’s asking for too much of your personal information.

The exchanges we listed in our large roundup above appear on Gift Card Granny but not as one of the top savings options.

Finding places to sell cards using Gift Card Granny

Gift Card Granny will tell you the offers available for the type of card you want to sell.

The options will include places where you can sell your card instantly and others where you have to list your card for sale until someone buys it, such as Raise (we talked about Raise above) and eBay.

gcg-giftcard-sell

Be careful when selling cards on eBay because scams are rampant. You can even take a peek at the eBay community discussions here and here where someone shamelessly explains how they’ve scammed sellers out of gift cards.

A common way buyers seem to scam sellers is by asking for the serial number of a gift card to “confirm the amount” and then draining the card before paying. Scammers may also receive the card and then, to get a refund, complain to eBay that they never got it.

The bottom line is, proceed with caution when selling gift cards on eBay. It may be best to avoid the risk entirely.

Overall when it comes to buying and selling gift cards, Gift Card Granny does make it easier to compare options head-to-head even though you have to do some detective work to find good deals.

Gift Card Exchanges: A Much Better Deal for Buyers than Sellers

An honest opinion about the gift card buying process is that going through tedious sign-up forms and verifications for minimal savings (i.e., a $1.50 discount on a $15 iTunes gift card) may not be a good use of your time. Companies don’t want to get burned in the transaction, so they take extra precautions to confirm that your form of payment will work before releasing a gift card to you.

It’s an entirely different story if you can get something like 20% off of a $200 iTunes gift card. The $20 savings could be well worth the wait but only if the verification process is secure. Taking photos of your credit card or ID is still a little much even for $20.

As for the selling aspect, be aware again that this isn’t quick money (unless the site you exchange with has physical locations). The exchange website will need to confirm your gift card balance, which can take several business days, before they’re willing to send you cash or another card of your choosing.

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Strategies to Save

How to Negotiate Your Bills With BillFixers

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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.

If you have wireless, cable, or internet service, you’re probably familiar with irritating bill negotiations.

BillFixers wants to help you avoid waiting on the phone for hours or getting bounced around from department to department when trying to negotiate rates with your providers.

BillFixers is a service that reviews bills and then calls providers on your behalf to find you savings. The expert negotiators are familiar with deals and bundles that companies like Comcast offer, so they may be able to find discounts and specials you’re not aware of.

According to BillFixers, the service saves customers on average $300 per year on their monthly bills. We tested it to see how the process works. In this post, we’ll cover:

  • The types of bills that BillFixers can reduce
  • How BillFixers works
  • The cost
  • A trial of the BillFixers service
  • The billing process
  • The pros and cons

Types of Bills BillFixers Can Reduce

BillFixers can negotiate recurring bills for the following types of services:

  • Cable
  • Cellphone
  • Home security/alarm systems
  • Internet
  • Landline
  • Newspaper or magazine subscriptions
  • Satellite television

BillFixers doesn’t currently negotiate the following services:

  • Car payments
  • Credit cards
  • Debt services
  • Insurance bills and claims
  • Legal fees
  • Medical bills
  • Rent/mortgage payments

How BillFixers Works

To get started, you head to the website and sign up for an account. The sign-up page includes a space to upload files of the bills you want BillFixers to review and negotiate.

After adding your bills, BillFixers asks for the account pin, zip code, or password the provider may request when they call in to negotiate.

BillFixers also shares on this page what happens next after you submit a bill.

Here’s a quick overview of what you need to know:

  • Step #1: Analysis – BillFixers reviews your bill to see if there’s an opportunity for savings.
  • Step #2: Negotiation – BillFixers will reach out to the service providers to negotiate. If a change to your coverage is necessary for savings, they will get your permission first.
  • Step #3: Email results – BillFixers will email you the savings they find.

The Cost

BillFixers is risk-free. You pay nothing if the service can’t find you savings. If BillFixers is able to reduce your bill, you pay them 50% of the first year’s savings. You receive an invoice from BillFixers and have the option to pay a lump sum or to make monthly payments.

The BillFixers Trial

Moving on to the test run. We submitted an AT&T bill to BillFixers for negotiations.

This bill was an unusual one because it was for an AT&T account that was grandfathered into a plan with unlimited data. If you’re unfamiliar with this scenario, many years ago AT&T stopped offering unlimited data to new customers.

Users who already had the unlimited plans were able to keep them. Many AT&T customers have held onto these unlimited plans for nearly a decade to avoid newer plans that have data caps and expensive overage fees. My husband is one of these customers.

Although unlimited data is great, AT&T over the years began increasing the cost of this unlimited plan every so often making it less and less appealing and pushing customers toward other options.

This year, AT&T popped back up on the scene with new and more affordable unlimited data plans.

I figured this would be a perfect opportunity for BillFixers to dig into the new plans for us to make sure there are no hidden catches. And to see if it was finally time to say goodbye to the grandfathered unlimited plan.

The process

The experts at BillFixers seemed to be familiar with the AT&T bill situation, which was very helpful.

All communication about the bill negotiations happened through email. They initially had trouble accessing the cellphone account. We emailed back and forth to provide them the information necessary to negotiate.

It took a little over one month for BillFixers to come up with results. That time included some delays where we had to pass on information.

They did find us savings in one of AT&T’s new unlimited plans.

The old AT&T plan we had was a Nation 450 Plan with rollover minutes, unlimited messaging, and unlimited data for $99.99 excluding taxes and additional fees.

BillFixers sent us an email with the proposed plan.

The new plan offers unlimited talk, text, and data under the AT&T Unlimited Choice plan for $65 per month excluding taxes and fees. This is a savings of almost $400 per year.

Before making any changes, BillFixers asked for permission to move forward with the deal. Before agreeing to the change, we double- and triple-checked that this service still includes unlimited data.

Here’s the update:

The Billing Process

Again, there’s no upfront cost commitment with BillFixers. Our bill review would have been completely free if they couldn’t find us a comparable plan for a better price.

You can pay BillFixers 50% of your savings upfront or monthly. We plan on paying the invoice monthly. Then, after the first year, we get 100% of the savings from this new AT&T plan.

Pros and Cons

Pros:

  • You don’t have to pay any money up front.
  • BillFixers takes the frustration out of getting the runaround when negotiating bills.
  • BillFixers has experience working with many major service providers so they may find you discounts, credits, and deals that you aren’t aware of.

Cons:

  • You have to give up part of your savings for a year, which takes away from how much money you’re actually saving from reducing your bills.
  • All communication happens through email. There isn’t a BillFixers portal where you can stay up to date on negotiations or to review and approve your bill options. An account management feature on the site could make the process a little easier.

The Verdict

The best scenario is to lower your own bills to keep all of your savings. In our case, we’ll save about $200 instead of over $400 from AT&T this year because we’re sharing the savings with BillFixers.

That’s an extra $200 that could be in our savings account had we worked on the bill ourselves. Take a stab at negotiating contracts and bills first to keep your savings. If you run into trouble or prefer not to deal with the hassle, BillFixers is a good second resort.

TAGS:

Strategies to Save

Digit’s Surprise $2.99 Monthly Fee Stuns Users

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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.

By Kalyn Wilson

Digit, a once-free automated savings app, now charges users a $2.99 monthly fee.

Consumers are in an uproar this week over the Digit’s new monthly fee. The once-free automated savings app announced Tuesday in a Digit blog post that users will be charged $2.99 a month after a “trial period” of 100 days.

The company said in the announcement that it will increase the “Savings Bonus” — that’s the rate Digit pays to those who store their savings with the app — from 0.2% to 1%, to “reward” users.

The new monthly fee frustrated existing users (who also will have 100 more days of free use and then be charged) so much that Money.com reported the site went down on Tuesday due to increased traffic from complaints and so many customers trying to close close their account. The site was up Wednesday.

Digit CEO Ethan Bloch told Forbes the decision was based on the fact that they needed to monetize the company but didn’t want to sell customer data and advertising that would compromise its brand integrity.

“We went through this huge exercise and a lot of it was in philosophical debates,” Bloch told Forbes.

The app has been free since its launch in 2015. Many customers ranted on social media about the new subscription fee and Digit’s website outage. Some said they planned to abandon the app.

Here’s what you need to know about Digit’s new $2.99 fee and possible alternatives.

Is the app worth the fee?

Considering that no new or enhanced features have been added to the app aside from the increased Savings Bonus, there appears to be no clear benefit from the monthly fee. However, based on the amount of funds you may save due to using this app, some consumers may feel as though the fee is worth the return.

If I decide to leave, how can I cancel the account without getting charged?

For those who signed up for Digit after April 11 — when the changes went into effect — you have a 100-day trial period from your start date before being charged.

If you want to cancel your Digit account without being charged, go to Dashboard > Help > Close My Account within 100 days, as of April 11, 2017.

 

 

 

What are some free alternatives for automated savings?

Other companies offer free automated savings tools, programs, and services to help you reach your savings goals. Here are five options:

  1. Chime offers automatic savings per purchase, plus a weekly bonus reward. This service also offers a “spending” account, a Visa Debit Card and boasts no minimum, overdraft or ATM withdrawal fees.
  2. Qapital allows you to set goals based on “rules” in order to increase your savings potential. For example, the Spend Less Rule encourages you to set a lower budget than what you usually spend in a category, then saves the rest (e.g., if you spend $25 on fast food instead of $35, the app will save the extra $10). The company makes money by accruing interest from your savings and promises there are no fees.
  3. Simple boasts a Safe-to-Spend feature along with its goal-setting and automatic savings feature.
  4. Dobot is similar in its plan for you to establish goals and set aside small amounts toward those goals.
  5. For Bank of America users who prefer the traditional bank atmosphere, you can enroll in the Keep the Change Program. The bank rounds your purchases to the nearest dollar amount and saves the difference. You must have a Bank of America checking account, savings account, and debit card

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Retirement, Strategies to Save

Why You Should Open Up a Roth IRA for Your Kids

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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.

A Roth IRA is probably one of the most powerful retirement vehicles available on the market. Unlike a traditional IRA, the contributions made to a Roth IRA are pre-tax, which allows you to withdraw your money tax-free after age 59½ .

When it comes to a Roth IRA, it’s important to think of how you can use it in other ways too, namely, how your kids can use one to become financially successful one day. There are two ways unique ways you can use a Roth IRA to help your children.

The first way is to open one in their name that they can use to save for their eventual retirement. The second is to use a Roth IRA in your name as a college savings account.

Both of these options come with pros and cons, and it’s important to know them before deciding if either of them is right for you.

Opening an IRA in Your Child’s Name for Their Retirement

The challenge of opening an IRA in your child’s name is that in order to open an IRA in your child’s name, the child has to have a paycheck. You can see exactly what qualifies as earned income here. It might seem like this is impossible, but it’s not. Entrepreneurial parents all over the country who see the value in early retirement savings are taking advantage of this.

For example, if you run a business, you can employ your children to stamp your mail, be models for your brochures, and even manage your social media. As long as you issue them a 1099 or a W2 for their work, they are eligible to open a Roth IRA.

Another negative is that you can’t supplement your child’s income to reach the $5,500 cap on Roth IRA contributions. They can only put in what they earn up to $5,500. So if your child only earns $1,500 from working part-time at an ice cream shop one summer, they can only invest $1,500. However, if they earn $6,000 from that same ice cream shop, they can only invest $5,500.

When children have a Roth IRA in their names, the money is officially theirs. This is different from earmarking a savings account for them in your name. Instead, this is money that they earned going into an account that can benefit them in retirement. The biggest pro is that this is an awesome teaching tool for them. You can really show them how their money can compound and grow over the years.

Even if you start the Roth with a small amount and never touch it again, a one-time $5,500 investment (the current Roth IRA contribution limit) can grow to over $100,000 at a 6% return if your child lets it grow from age 12 to age 62. Fifty years of compounding interest will do that!

What an awesome gift that would be if your child never touched this until they were at their retirement age and got a bonus six-figure payout from work they did when they were a kid. That’s a good memory to leave with them.

Opening a Roth IRA in Your Name as a College Savings Account

Many people don’t realize that another great benefit of a Roth IRA is that you can use it as a college savings account. You could use a Roth IRA in your child’s name for their college savings, but let’s say your child doesn’t work, or if they do, you’d rather they kept the IRA for their own retirement one day.

If that’s the case, you could use your own Roth IRA for their college savings, and here’s why. According to Certified Financial Planner, Matt Becker, “If the money is used for higher education expenses for you, your spouse, your child, or your grandchild, there is no 10% penalty.” (Usually, if you withdraw earnings from a Roth before age 59 ½ there would be a penalty, but not if the money is used for college.)

The downside to all this is that if you use this money for your child’s college education, then you’re not saving it in your Roth for your own retirement someday, and that’s pretty important! The pro is that your money isn’t locked into a 529 plan where you have to use the money for qualified higher education expenses. Another interesting pro is that 529 assets are counted toward your Estimated Family Contributions on the FAFSA, but investment accounts, like Roth IRAs are not.

That said, it’s important to look very closely at the differences between 529 plans and Roth IRA plans if you want to use your Roth as a college savings vehicle. Additionally, if you are a high-income earner, you might not be able to contribute to your own Roth IRA unless you do what’s called a backdoor IRA. The current 2017 income limit for Roth IRA contributions is a $186,000 annual income for those who are married and filing jointly or $118,000 for those who are single.

As you can see, Roth IRAs are great accounts for a variety of different savings purposes, and you should try to think outside the box when it comes to using them to help your children create a bright financial future.

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Strategies to Save

How to Cut Sneaky Subscriptions and Recurring Expenses with Trim

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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.

 

It’s easy for small expenses to add up and burn straight through our cash. Especially since there are so many subscription and membership services available to sign up for that automatically bill accounts after a free trial.

Trim is a website that wants to help you identify and cancel these recurring costs to save money. You can connect your accounts to Trim, and it searches transactions for recurring payments to merchants that you can cut off.

According to Trim, the service has saved its users $8 million in sneaky expenses, so we’re putting it to the test. In this post, we’ll review the site to see what expenses Trim can identify.

We’ll discuss:

  • How Trim works
  • How much Trim costs
  • Pros and cons

How Trim Works

First, you need to go to asktrim.com to create an account. You can sign up for an account by email or through Facebook. For this review, I chose the email option.

 

Authenticating and setting up your account

After you input your email, first name, last name, and phone number, the website will send you a text message to confirm your phone number.

A confirmation of your phone number is necessary because the website corresponds with you via text message. You can also choose to receive messages from Trim through Facebook Messenger if you prefer. There currently isn’t a Trim app.

Trim needs to connect to your bank and/or credit card accounts to locate recurring subscriptions for cancellation.

Trim supports over 20,000 U.S. financial institutions. If you don’t see yours on the list, you can email Trim for support. Although I find tweeting a company usually gets a faster response.

The syncing of your financial accounts to Trim takes just a few seconds.

You’ll get a text message with the subscriptions Trim has found once the connection is complete. The identified recurring costs will also populate in your account dashboard on the website.

Here are a few of the subscriptions it found for me:

The dashboard breaks down your recurring charges into three different sections. There are subscriptions, utilities, and frequent charges.

Altogether, Trim found:

  • A car insurance payment
  • A Comcast bill
  • A banking account fee
  • Work-related expenses (Bluehost, Grammarly, and Freshbooks)

You’ll probably find like I did that not all charges found will be ones you can cancel or need to cancel. The purpose of Trim is to seek out any surprises.

How Trim cancels accounts

The cancellation aspect of Trim is what I consider the highlight because of how much of a pain it can be to terminate your subscriptions and memberships.

To cancel a service using Trim, you hit the red “Cancel this subscription” link on the website.

You can also message “Cancel (insert service)” to authorize cancellation from your phone.

Trim will contact the company by sending an email or calling. In some cases, like a gym membership, Trim may send out a certified letter.

I’ll be honest, I’ve moved from one city to another and completely forgot to cancel my gym membership before. This feature is one I can appreciate since gym memberships can be a huge hassle to cancel remotely.

Does Trim catch all recurring charges?

I went into this review with a pretty good grasp of the recurring charges that I pay. I was mostly curious to see how many of them the website algorithm would catch.

Trim found many of the biggies instantly.

But I was a little disappointed it didn’t catch items like my Hulu subscription through Apple iTunes.

The FAQ page states that Trim first identifies popular merchants like Netflix that use recurring payments. Then, it goes back through your bills monthly. The algorithm may pick up on other merchants after a few billing cycles.

I reached out to Trim via Twitter to see if there’s a reason Apple iTunes didn’t appear. I figured that would be one of the more popular merchants.

They got back to me the same day. It seems as though Apple charges can be hit or miss.

Extra Trim features

Trim has a few additional bells and whistles. You can review recent transactions of your financial accounts by merchant and category time.

Trim also offers other savings tools. For auto insurance, there’s a section on the site where you can type in your car’s make, model, and year to shop for cheaper insurance rates. You can also look for better Comcast deals through the account dashboard to potentially negotiate a better contract.

How Much It Costs

The Trim website is currently free to use. You’re probably wondering — what’s the catch?

Trim is really free. There are plans to roll out a paid financial advising component. But the basic Trim subscription review and cancellation service is supposed to remain free of cost.

Trim Security

According to Trim, the service uses Plaid security to connect to your financial institutions. This means Trim does not store the usernames and passwords used to access your financial accounts.

Instead, the credentials are sent through Plaid directly to your bank or credit card issuer to retrieve your transaction history. The transaction data Trim uses is read-only so that no changes can be made to your accounts. Trim also uses 256-bit SSL encryption for its own site and databases.

Pros and Cons

Now, for the pros and cons:

Pros:

  • The service is free.
  • Trim finds monthly recurring costs that you may have forgotten.
  • You can delete your Trim account at any time.
  • You can connect Trim to over 20,000 financial institutions.
  • You can correspond with Trim via messaging, which makes managing your account easy.
  • The Trim Twitter account responds quickly if you have questions.

Cons:

  • Trim may not pick up on all sneaky expenses right away.
  • Although there are security measures in place, connecting your financial accounts could be a deal-breaker if you’re extra cautious.
  • Ideally, you want to pay enough attention to your bank and credit card accounts to spot sneaky charges on your own. Trim is a nice shortcut to see if you’re missing anything, but for the long term, try to get into the habit of monitoring your statements.

The Final Verdict

Overall, Trim is an easy-to-use tool that can help you make sure there are no subscriptions from many moons ago still posting to your account.

However, Trim did not catch my iTunes Hulu membership initially, so I suggest you plan to keep your account open for at least a few months to give the algorithm time to identify money leaks.

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Investing, Life Events, Strategies to Save

Guide to Choosing the Right IRA: Traditional or Roth?

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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.

Guide to Choosing the Right IRA: Traditional or Roth?

The Roth IRA versus traditional IRA debate has raged on for years.

What many retirement savers may not know is that most of the debate about whether it’s better to contribute to a traditional IRA or a Roth IRA is flawed.

You’ve probably heard that young investors are better off contributing to a Roth IRA because they’ll likely be in a higher tax bracket when they’re older. You’ve probably also heard that if you’re in the same tax bracket now and in retirement, a traditional IRA and Roth IRA will produce the same result.

These arguments are part of the conventional wisdom upon which many people make their decisions, and yet each misses some important nuance and, in some cases, is downright incorrect.

The Biggest Difference Between Traditional and Roth IRAs

There are several differences between traditional and Roth IRAs, and we’ll get into many of them below.

The key difference is in the tax breaks they offer.

Contributions to a traditional IRA are not taxed up front. They are tax-deductible, meaning they decrease your taxable income for the year in which you make the contribution. The money grows tax-free inside the account. However, your withdrawals in retirement are treated as taxable income.

Contributions to a Roth IRA are taxed up front at your current income tax rate. The money grows tax-free while inside the account. And when you make withdrawals in retirement, those withdrawals are not taxed.

Whether it’s better to get the tax break when you make the contribution or when you withdraw it in retirement is the centerpiece of the traditional vs. Roth IRA debate, and it’s also where a lot of people use some faulty logic.

We’ll debunk the conventional wisdom in just a bit, but first we need to take a very quick detour to understand a couple of key tax concepts.

The Important Difference Between Marginal and Effective Tax Rates

Don’t worry. We’re not going too far into the tax weeds here. But there’s a key point that’s important to understand if you’re going to make a true comparison between traditional and Roth IRAs, and that’s the difference between your marginal tax rate and your effective tax rate.

When people talk about tax rates, they’re typically referring to your marginal tax rate. This is the tax rate you pay on your last dollar of income, and it’s the same as your current tax bracket. For example, if you’re in the 15% tax bracket, you have a 15% marginal tax rate, and you’ll owe 15 cents in taxes on the next dollar you earn.

Your effective tax rate, however, divides your total tax bill by your total income to calculate your average tax rate across every dollar you earned.

And these tax rates are different because of our progressive federal income tax, which taxes different dollars at different rates. For example, someone in the 15% tax bracket actually pays 0% on some of their income, 10% on some of their income, and 15% on the rest of their income. Which means that their total tax bill is actually less than 15% of their total income.

For a simple example, a 32-year-old couple making $65,000 per year with one child will likely fall in the 15% tax bracket. That’s their marginal tax rate.

But after factoring in our progressive tax code and various tax breaks like the standard deduction and personal exemptions, they will only actually pay a total of $4,114 in taxes, making their effective tax rate just 6.33% (calculated using TurboTax’s TaxCaster).

As you can see, the couple’s effective tax rate is much lower than their marginal tax rate. And that’s almost always the case, no matter what your situation.

Keep that in mind as we move forward.

Why the Conventional Traditional vs. Roth IRA Wisdom Is Wrong

Most of the discussion around traditional and Roth IRAs focuses on your marginal tax rate. The logic says that if your marginal tax rate is higher now than it will be in retirement, the traditional IRA is the way to go. If it will be higher in retirement, the Roth IRA is the way to go. If your marginal tax rate will be the same in retirement as it is now, you’ll get the same result whether you contribute to a traditional IRA or a Roth IRA.

By this conventional wisdom, the Roth IRA typically comes out ahead for younger investors who plan on increasing their income over time and therefore moving into a higher tax bracket or at least staying in the same tax bracket.

But that conventional wisdom is flawed.

When you’re torn between contributing to a traditional or Roth IRA, it’s almost always better to compare your marginal tax rate today to your effective rate in retirement, for two reasons:

  1. Your traditional IRA contributions will likely provide a tax break at or near your marginal tax rate. This is because federal tax brackets typically span tens of thousands of dollars, while your IRA contributions max out at $5,500 for an individual or $11,000 for a couple. So it’s unlikely that your traditional IRA contribution will move you into a lower tax bracket, and even if it does, it will likely be only a small part of your contribution.
  2. Your traditional IRA withdrawals, on the other hand, are very likely to span multiple tax brackets given that you will likely be withdrawing tens of thousands of dollars per year. Given that reality, your effective tax rate is a more accurate representation of the tax cost of those withdrawals in retirement.

And when you look at it this way, comparing your marginal tax rate today to your effective tax rate in the future, the traditional IRA starts to look a lot more attractive.

Let’s run the numbers with a case study.

A Case Study: Should Mark and Jane Contribute to a Traditional IRA or a Roth IRA?

Mark and Jane are 32, married, and have a 2-year-old child. They currently make $65,000 per year combined, putting them squarely in the 15% tax bracket.

They’re ready to save for retirement, and they’re trying to decide between a traditional IRA and a Roth IRA. They’ve figured out that they can afford to make either of the following annual contributions:

  • $11,000 to a traditional IRA, which is the annual maximum.
  • $9,350 to a Roth IRA, which is that same $11,000 contribution after the 15% tax cost is taken out. (Since Roth IRA contributions are nondeductible, factoring taxes into the contribution is the right way to properly compare equivalent after-tax contributions to each account.)

So the big question is this: Which account, the traditional IRA or Roth IRA, will give them more income in retirement?

Using conventional wisdom, they would probably contribute to the Roth IRA. After all, they’re young and in a relatively low tax bracket.

But Mark and Jane are curious people, so they decided to run the numbers themselves. Here are the assumptions they made in order to do that:

  • They will continue working until age 67 (full Social Security retirement age).
  • They will continue making $65,000 per year, adjusted for inflation.
  • They will receive $26,964 per year in Social Security income starting at age 67 (estimated here).
  • They will receive an inflation-adjusted investment return of 5% per year (7% return minus 2% inflation).
  • At retirement, they will withdraw 4% of their final IRA balance per year to supplement their Social Security income (based on the 4% safe withdrawal rate).
  • They will file taxes jointly every year, both now and in retirement.

You can see all the details laid out in a spreadsheet here, but here’s the bottom line:

  • The Roth IRA will provide Mark and Jane with $35,469 in annual tax-free income on top of their Social Security income.
  • The traditional IRA will provide $37,544 in annual after-tax income on top of their Social Security income. That’s after paying $4,184 in taxes on their $41,728 withdrawal, calculating using TurboTax’s TaxCaster.

In other words, the traditional IRA will provide an extra $2,075 in annual income for Mark and Jane in retirement.

That’s a nice vacation, a whole bunch of date nights, gifts for the grandkids, or simply extra money that might be needed to cover necessary expenses.

It’s worth noting that using the assumptions above, Mark and Jane are in the 15% tax bracket both now and in retirement. According to the conventional wisdom, a traditional IRA and Roth IRA should provide the same result.

But they don’t, and the reason has everything to do with the difference between marginal tax rates and effective tax rates.

Right now, their contributions to the traditional IRA get them a 15% tax break, meaning they can contribute 15% more to a traditional IRA than they can to a Roth IRA without affecting their budget in any way.

But in retirement, the effective tax rate on their traditional IRA withdrawals is only 10%. Due again to a combination of our progressive tax code and tax breaks like the standard deduction and personal exemptions, some of it isn’t taxed, some of it is taxed at 10%, and only a portion of it is taxed at 15%.

That 5% difference between now and later is why they end up with more money from a traditional IRA than a Roth IRA.

And it’s that same unconventional wisdom that can give you more retirement income as well if you plan smartly.

5 Good Reasons to Use a Roth IRA

The main takeaway from everything above is that the conventional traditional versus Roth IRA wisdom is wrong. Comparing marginal tax rates typically underestimates the value of a traditional IRA.

Of course, the Roth IRA is still a great account, and there are plenty of situations in which it makes sense to use it. I have a Roth IRA myself, and I’m very happy with it.

So here are five good reasons to use a Roth IRA.

1. You Might Contribute More to a Roth IRA

Our case study above assumes that you would make equivalent after-tax contributions to each account. That is, if you’re in the 15% tax bracket, you would contribute 15% less to a Roth IRA than to a traditional IRA because of the tax cost.

That’s technically the right way to make the comparison, but it’s not the way most people think.

There’s a good chance that you have a certain amount of money you want to contribute and that you would make that same contribution to either a traditional IRA or a Roth IRA. Maybe you want to max out your contribution and the only question is which account to use.

If that’s the case, a Roth IRA will come out ahead every time simply because that money will never be taxed again.

2. Backdoor Roth IRA

If you make too much to either contribute to a Roth IRA or deduct contributions to a traditional IRA, you still might be eligible to do what’s called a backdoor Roth IRA.

If so, it’s a great way to give yourself some extra tax-free income in retirement, and you can only do it with a Roth IRA.

3. You Might Have Other Income

Social Security income was already factored into the example above. But any additional income, such as pension income, would increase the cost of those traditional IRA withdrawals in retirement by increasing both the marginal and effective tax rate.

Depending on your other income sources, the tax-free nature of a Roth IRA may be helpful.

4. Tax Diversification

You can make the most reasonable assumptions in the world, but the reality is that there’s no way to know what your situation will look like 30-plus years down the road.

We encourage people to diversify their investments because it reduces the risk that any one bad company could bring down your entire portfolio. Similarly, diversifying your retirement accounts can reduce the risk that a change in circumstances would result in you drastically overpaying in taxes.

Having some money in a Roth IRA and some money in a traditional IRA or 401(k) could give you room to adapt to changing tax circumstances in retirement by giving you some taxable money and some tax-free money.

5. Financial Flexibility

Roth IRAs are extremely flexible accounts that can be used for a variety of financial goals throughout your lifetime.

One reason for this is that your contributions are available at any time and for any reason, without tax or penalty. Ideally you would be able to keep the money in your account to grow for retirement, but it could be used to buy a house, start a business, or simply in case of emergency.

Roth IRAs also have some special characteristics that can make them effective college savings accounts, and as of now Roth IRAs are not subject to required minimum distributions in retirement, though that could certainly change.

All in all, Roth IRAs are more flexible than traditional IRAs in terms of using the money for nonretirement purposes.

3 Good Reasons to Use a Traditional IRA

People love the Roth IRA because it gives you tax-free money in retirement, but, as we saw in the case study above, that doesn’t always result in more retirement income. Even factoring in taxes, and even in situations where you might not expect it, the traditional IRA often comes out ahead.

And the truth is that there are even MORE tax advantages to the traditional IRA than what we discussed earlier. Here are three of the biggest.

1. You Can Convert to a Roth IRA at Any Time

One of the downsides of contributing to a Roth IRA is that you lock in the tax cost at the point of contribution. There’s no getting that money back.

On the other hand, contributing to a traditional IRA gives you the tax break now while also preserving your ability to convert some or all of that money to a Roth IRA at your convenience, giving you more control over when and how you take the tax hit.

For example, let’s say that you contribute to a traditional IRA this year, and then a few years down the line either you or your spouse decides to stay home with the kids, or start a business, or change careers. Any of those decisions could lead to a significant reduction in income, which might be a perfect opportunity to convert some or all of your traditional IRA money to a Roth IRA.

The amount you convert will count as taxable income, but because you’re temporarily in a lower tax bracket you’ll receive a smaller tax bill.

You can get pretty fancy with this if you want. Brandon from the Mad Fientist, has explained how to build a Roth IRA Conversion Ladder to fund early retirement. Financial planner Michael Kitces has demonstrated how to use partial conversions and recharacterizations to optimize your tax cost.

Of course, there are downsides to this strategy as well. Primarily there’s the fact that taxes are complicated, and you could unknowingly cost yourself a lot of money if you’re not careful. And unlike direct contributions to a Roth IRA, you have to wait five years before you’re able to withdraw the money you’ve converted without penalty. It’s typically best to speak to a tax professional or financial planner before converting to a Roth IRA.

But the overall point is that contributing to a traditional IRA now gives you greater ability to control your tax spending both now and in the future. You may be able to save yourself a lot of money by converting to a Roth IRA sometime in the future rather than contributing to it directly today.

2. You Could Avoid or Reduce State Income Tax

Traditional IRA contributions are deductible for state income tax purposes as well as federal income tax purposes. That wasn’t factored into the case study above, but there are situations in which this can significantly increase the benefit of a traditional IRA.

First, if you live in a state with a progressive income tax code, you may get a boost from the difference in marginal and effective tax rates just like with federal income taxes. While your contributions today may be deductible at the margin, your future withdrawals may at least partially be taxed at lower rates.

Second, it’s possible that you could eventually move to a state with either lower state income tax rates or no income tax at all. If so, you could save money on the difference between your current and future tax rates, and possibly avoid state income taxes altogether. Of course, if you move to a state with higher income taxes, you may end up losing money on the difference.

3. It Helps You Gain Eligibility for Tax Breaks

Contributing to a traditional IRA lowers what’s called your adjusted gross income (AGI), which is why you end up paying less income tax.

But there are a number of other tax breaks that rely on your AGI to determine eligibility, and by contributing to a traditional IRA you lower your AGI you make it more likely to qualify for those tax breaks.

Here’s a sample of common tax breaks that rely on AGI:

  • Saver’s credit – Provides a tax credit for people who make contributions to a qualified retirement plan and make under a certain level of AGI. For 2017, the maximum credit is $2,000 for individuals and $4,000 for couples.
  • Child and dependent care credit – Provides a credit of up to $2,100 for expenses related to the care of children and other dependents, though the amount decreases as your AGI increases. Parents with young children in child care are the most common recipients of this credit.
  • Medical expense deduction – Medical expenses that exceed 10% of your AGI are deductible. The lower your AGI, the more likely you are to qualify for this deduction.
  • 0% dividend and capital gains tax rate – If you’re in the 15% income tax bracket or below, any dividends and long-term capital gains you earn during the year are not taxed. Lowering your AGI could move you into this lower tax bracket.

Making a Smarter Decision

There’s a lot more to the traditional vs. Roth IRA debate than the conventional wisdom would have you believe. And the truth is that the more you dive in, the more you realize just how powerful the traditional IRA is.

That’s not to say that you should never use a Roth IRA. It’s a fantastic account, and it certainly has its place. It’s just that the tax breaks a traditional IRA offers are often understated.

It’s also important to recognize that every situation is different and that it’s impossible to know ahead of time which account will come out ahead. There are too many variables and too many unknowns to say for sure.

But with the information above, you should be able to make a smarter choice that makes it a little bit easier to reach retirement sooner and with more money.

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