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Debt Avalanche vs. Debt Snowball: Which Payoff Method Is Right for You?

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debt avalanche vs. debt snowball

You have several debts piling up, and you’re starting to worry you’re losing control over them. You have a car loan, student loan debt and two mounting credit card balances that are only getting higher with each passing month.

You’ve heard of two primary methods for paying off debt: the debt avalanche method and the debt snowball method. Both are effective ways to eliminate debt. But which one is right for you? Here’s everything you need to know about the two methods of debt elimination.

Debt avalanche vs. debt snowball: What’s the difference?

Both forms of debt elimination involve paying off debts one at a time. The primary difference between the two forms of debt elimination is which debts are paid off first.

With the debt avalanche method (also referred to as debt stacking), you pay off the debt with the highest interest rate first. With the debt snowball method, which was popularized by Dave Ramsey, author of “The Total Money Makeover” and radio personality, you prioritize the debt with the lowest balance.

Below, we’ve explored the nuances of each method so that you can figure out which one is ideal for you.

How does the debt snowball method work?

The debt snowball method involves taking a look at all your debt balances and paying them off from smallest to largest. You still pay the monthly minimum balance on all your debts, but put an extra, predetermined amount of money each month toward the smallest debt.

“Once you pay off the lowest balance loan, you would take that extra money and move it toward the second lowest balance,” said Forrest Baumhover, a certified financial planner at Westchase Financial Planning in Tampa, Fla. “At some point, you snowball. All of these principal payments that you were paying toward — all of these tiny loans or credit card balances — are now focused on the last remaining one.”

Who is it good for?

People who benefit from regular motivation. Consumers who opt for the debt snowball method tend to see success due to the “little wins” that go with paying off small debts quickly.

“If the difference in interest rates is not that much in terms of the overall savings, I might tell somebody to go with the snowball method just because they get to see progress sooner,” said Luis Rosa, a certified financial planner with Build a Better Financial Future in Henderson, Nev. “They might have smaller balances that they can get rid of in a month or two, and then they continue to be motivated because they can see some progress at the very beginning of the plan.”

The debt snowball method can also be beneficial for people who have a significant amount of debt in various forms. “The way I see it is if you’re starting with a pretty big number, then a lot of little victories will help you along the way,” Baumhover said.

Does it save you money?

Not necessarily. The debt avalanche method typically makes more sense as you save money on interest. But Rosa and Baumhover said people are often better able to stick to the snowball method because of the satisfaction of “little wins.”

Research from Kellogg School of Management at Northwestern University showed that even though the avalanche method typically leads to more savings, consumers who opt for the snowball method are more likely to eliminate all their debt.

Breaking down how it works

Rosa offers this example:

Debt TypeMinimum PaymentCurrent PaymentBalanceInterest Rate

Car loan

$359

$359

$20,000

7.99% APR

Personal loan

$75

$75

$800

5% APR

Credit card No. 1

$100

$100

$5,000

17.99% APR

Credit card No. 2

$50

$50

$3,000

15% APR

If a consumer only made the monthly minimum payments on the above debts, it would take them 112 months to pay them off, Rosa said. Adding an extra $200 each month would cut that to 44 months.

Assuming the consumer puts an additional $200 per month (on top of minimum payments) toward paying off their debts from smallest to largest, they will have paid off the personal loan by December 2018 if the above scenario begins in October 2018. With the debt avalanche method, the personal loan will not be paid off until August 2019.

How does the debt avalanche method work?

If you opt for the debt avalanche method, you will continue making the monthly minimum payments on all your debts, but you will put your extra monthly allotment toward the debt with the highest interest rate, not the debt with the lowest balance.

“The key differentiator between the avalanche and the snowball [is that] the avalanche is going to be based on the highest interest rates first,” Rosa said. This means that you’ll likely focus on higher-interest debts, such as credit cards, before lower-interest debts, such as student loans.

Who is it good for?

People who are intrinsically motivated and who aren’t as concerned with the “little wins” that go with the snowball method.

“The avalanche method is typically known to be the most efficient mathematically,” Rosa said. “But sometimes the thing that’s best mathematically isn’t the best for you, because your card with the higher interest rate might be your higher balance card, and you might not see any progress for quite a bit.”

Does it save you money?

Typically, this debt repayment method saves you money, Rosa said. Because you are paying off the debt with the highest rate first, you will see more savings in interest paid.

Breaking down how it works

The benefits of the avalanche method can be seen using the same example as above:

Debt TypeMinimum PaymentCurrent PaymentBalanceInterest Rate

Car loan

$359

$359

$20,000

7.99% APR

Personal loan

$75

$75

$800

5% APR

Credit card No. 1

$100

$100

$5,000

17.99% APR

Credit card No. 2

$50

$50

$3,000

15% APR

If a consumer puts an extra $200 toward their debt each month and pays it off in 44 months (like the above example), they will not have the quick “win” that accompanies the debt snowball method, but will instead save slightly more on interest. The debt snowball method, in this case, has an overall interest savings of $6,496.82, while the debt avalanche method has an overall interest savings of $6,669.64.

Which debt repayment method is best for you?

Both methods can be beneficial strategies for paying off debt. What it typically boils down to is a person’s mindset and long-term goals.

What does Baumhover typically recommend?

“It depends on the type of client that I’m working with,” he said. “For people that need to tick off little milestones along the way to know that they’re actually making progress, there’s a powerful emotional aspect to [the snowball method]. But when you run the numbers, you do pay a little bit more in interest.”

For people who have intrinsic motivation and don’t need “little wins” to stay on track, the avalanche method might be a better option. “If someone really has a focus on just minimizing the amount of interest, then the debt avalanche would probably be what they would want to do,” Baumhover said.

To figure out which method is ideal for your specific financial situation, you can use this calculator.

5 ways to prioritize and pay off your debt

Now that you know the difference between these two debt payoff methods, it’s time to get started. Here are the first steps you should take once you’ve decided to tackle your debt.

1. Review your debts

Rosa said the first thing people should do is list out every single debt they have by name, APR, balance and minimum payment. Then, he suggests using a free online calculator, which allows you to enter all your debt information and compare different debt elimination methods.

This step is crucial for success. “The debt avalanche vs. the debt snowball, neither of those is going to work for someone who’s not willing to take a look at their whole picture,” Baumhover said.

2. Take a look at your spending habits

Once you’ve identified all your debts, take a look at your spending habits so that you can figure out how much money can go toward your debt elimination plan each month. “[People] should really try to set a realistic expectation of what they’re willing to live on in terms of their budget,” Baumhover said.

The most important thing is to be realistic. Don’t say, “I’ll put an extra $1,000 toward debt each month” without actually taking a hard look at your finances to see if this is possible. You’ll be setting yourself up for failure, Baumhover said.

“It’s kind of like trying to lose 50 pounds,” he said. “It’s not realistic to do it in a month, but if you say, ‘Maybe I need to do it over a year and a half, and I can afford to lose 3 pounds a month,’ then that’s a little bit more sustainable.”

3. Decide which debts you’ll prioritize

This is the point at which you should figure out which debt elimination plan is ideal for you. Are you the type of person who would benefit from small wins each month? Does the idea of eliminating three of your eight debts quickly appeal to you and sound motivating? If so, the debt snowball method is likely the right option for you.

If you have a history of diligence and determination and don’t think the “little wins” would do much for your motivation, then the debt avalanche method might be a better option for you as it’ll lead to more savings.

4. Get advice from an expert

If you’re struggling to prioritize and pay off your debts, consider contacting a financial expert such as a certified financial planner or a nonprofit credit counselor. They can help you take a big-picture look at your finances and offer advice on which strategy is better for you.

5. Stop racking up debt

Rosa said he often sees consumers begin a debt elimination plan and continue racking up credit card debt. This can ruin a debt elimination plan.

“Some people continue to use the cards,” Rosa said. “For example, they might be going after rewards points. The system only works if you no longer use the cards.”

But Rosa added that you shouldn’t necessarily close all your credit cards since this can have an impact on your credit score.

“If you have a credit card from 10 years ago, a major card like MasterCard, Visa or AmEx, you might not want to necessarily close it, even if you paid it off,” he said. “Just continue to use it occasionally, like for gas, [and] pay it off at the end of the month so that you keep that history.”

Another way to pay off your debt: Debt Consolidation

The avalanche and snowball methods aren’t the only ways to manage your debt.

You could take out a personal loan to combine your existing debts. In doing so, you’ll get to make just one monthly payment on a loan with a lower interest rate and different repayment term. This is called debt consolidation, and it’s another repayment strategy that could save you money on interest.

A debt consolidation loan could help you get out of debt faster by reducing the total interest you pay over time. You also get to choose a new repayment term on your debt. So if you want to aggressively pay down your debt and save more money on interest, you could simply choose a shorter repayment period. Compare up to five offers in minutes when clicking “see offers” below. Note: Clicking “see offers” below does not affect your credit.

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LendingTree is our parent company. LendingTree is unique in that you may be able to compare up to five personal loan offers within minutes. Everything is done online and you may be pre-qualified by lenders without impacting your credit score. LendingTree is not a lender.

Regardless of the repayment strategy you choose, you’re taking a step in the right direction by deciding to take control of your finances and eliminate your debt.

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

Jamie Friedlander
Jamie Friedlander |

Jamie Friedlander is a writer at MagnifyMoney. You can email Jamie here

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Can You Be Arrested for Debt?

Editorial Note: The editorial content on this page is not provided or commissioned by any financial institution. Any opinions, analyses, reviews or recommendations expressed in this article are those of the author’s alone, and may not have been reviewed, approved or otherwise endorsed by any of these entities prior to publication.

Disclosure : By clicking “See Offers” you’ll be directed to our parent company, LendingTree. You may or may not be matched with the specific lender you clicked on, but up to five different lenders based on your creditworthiness.

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You’re in significant debt. The collection calls have started coming in, and letters seem to appear in your mailbox every day. Your debt is mounting, and the constant phone calls and letters are starting to make you nervous.

Can I be arrested for my debt? If this question has entered your mind more than once, take a deep breath and relax. Aside from a handful of extenuating circumstances (which we’ll cover below), you cannot be arrested for your debt.

Read on for everything you need to know about whether you can be arrested for debt and what you should do if a lender threatens to arrest you.

Can you be arrested for debt?

In short, the answer is no. You cannot be arrested for the debt you hold, whether it’s credit card debt, a personal loan, a medical bill, student loans, utility bills, a car loan or any other form of debt that is referred to as civil debt. You can be sued for your debt, but you cannot be arrested. It is illegal for lenders and debt collectors to threaten to arrest you for not paying back your debt.

“Debt collectors can’t threaten to arrest someone,” said Barry Coleman, vice president of counseling and education programs for the National Foundation for Credit Counseling. “They can’t make threats to intimidate people.”

There are a handful of situations, Coleman said, in which threatening to arrest someone can be a legal option. This would apply in rare cases in which the arrest would be related to something tangential to the debt — such as fraudulent activity, identity theft or defying a court order — but not the debt itself.

“We always say: If someone gets an order to appear in court, even if they know they legally owe that debt and they can’t pay it right then and there, show up in court,” Coleman said. “Because if you don’t, then you will face other consequences.”

Also, consumers can be arrested if they cheat on their taxes or don’t pay child support debt, according to Coleman. “Those types of debt are a little bit different,” he said.

What should I do if a lender threatens to arrest me?

A lender threatening to arrest a debtor violates the Federal Trade Commission’s Fair Debt Collection Practices Act (FDCPA), according to John Ulzheimer, founder of The Ulzheimer Group and a credit reporting expert who worked for FICO and Equifax.

“You’re not allowed to use abusive tactics to collect debt,” Ulzheimer said. “And certainly indicating or suggesting to somebody that they can go to jail if they don’t pay [their debts] is illegal.”

If a lender threatens to arrest you, there are a few things you can do. You can do nothing and hope the threats stop, Ulzheimer said. (It is wise to document the threats of arrest, however, in case you need to take future legal action against the lender or debt collector.)

You can also leverage your rights under the FDCPA and file a lawsuit against the debt collector for abusive debt collection practices.

Coleman adds that you can report the lender to the Consumer Financial Protection Bureau (CFPB), and someone with the bureau will follow up with you about the complaint.

“Both the [CFPB] and the Federal Trade Commission have authority to pursue action if a debt collector is threatening something that they can’t legally do,” Coleman said.

What can happen if I don’t pay back what I owe?

Consequences for not paying back debt vary by state, but there are some federal regulations on unpaid debt.

Although you cannot be arrested for your debt, there are a handful of other things that can happen. “There are a lot of bad things that can happen when you don’t pay your debt,” Ulzheimer said. “Nothing good comes from not paying your obligations, right?”

If you don’t pay back your debt, it will go into default. Once in default, creditors will typically try to collect the debt themselves, Ulzheimer said. Your credit report and score will be negatively affected, and you will likely receive phone calls and letters.

If you still don’t pay back your debt, the lender will likely sell your debt to a third-party collection agency or debt collector. “They will eventually get sick and tired of attempting to collect the debt and they will either sell the debt or consign the debt to a debt collector,” Ulzheimer said. “If the debt is large enough or if the debt collector chooses to, they can file a lawsuit against you.”

If a debt collector files a lawsuit against you, you should show up to court no matter what. If you don’t show up, the collector can get a default judgment against you.

Coleman said one potential repercussion of not paying back one’s debt is court-ordered wage garnishment. That means the debt collector can legally seize a portion of your paycheck before the money hits your bank account.

“Wage garnishment, I think, is probably the biggest repercussion of not paying a debt,” he said. “It is probably the biggest concern for folks that are behind on the debt and aren’t trying to work with that particular creditor or debt collector.”

How to fix your debts

If you’re struggling to pay back your debts, there are a handful of important steps you can take to get on solid financial footing.

1. Don’t ignore your lenders or debt collectors.

Even if you can’t afford to pay back your debts, one of the worst things you can do is avoid your lender or debt collector. Answer the lender or debt collector’s phone calls, and, of course, any court summons you receive.

“Consumers will want to be proactive and work with their creditors and any debt collectors when they owe debt to work out some sort of an arrangement to avoid it escalating and becoming an even bigger situation,” Coleman said.

2. Negotiate with your lenders.

Some consumers might not be aware of this, but you can negotiate your debts with your lenders. Contact your lender and explain your financial situation. Tell it that although you cannot repay the entire debt, you can pay X amount each month. If you have extenuating circumstances, such as the loss of a job, illness or a death in the family, tell the lender.

“If you don’t have the means to pay, just be honest and state that,” Coleman said. “If you can pay a little bit, offer to do that. If the lender says, ‘OK, I’ll accept this payment arrangement,’ just ask that it be in writing so that you have something to back that up.”

3. Seek help from a nonprofit credit counseling agency.

If you’re struggling to repay a significant amount of debt across multiple channels, consider contacting a nonprofit credit counseling agency. Counselors at these agencies can help you come up with a plan for repaying your debt and can negotiate with lenders on your behalf if necessary.

4. Consider using the debt snowball or debt avalanche method for repaying debt.

These are two common strategies consumers use to repay their debt. The debt snowball method involves paying back debts from smallest to largest, while the debt avalanche method involves paying back higher-interest debts first.

5. Consolidate your debt.

If you have multiple debts and are struggling to stay organized, consider taking out a debt consolidation loan (nonprofit credit counselors can help in this area). This involves consolidating all your debts and making one monthly payment that gets distributed among your various creditors. If you have a fair credit score, you may even be able to snag lower interest rates, which could save you money in the long term.

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5.99%
To
35.99%

Credit Req.

Minimum 500 FICO

Minimum Credit Score

Terms

24 to 60

months

Origination Fee

Varies

SEE OFFERS Secured

on LendingTree’s secure website

LendingTree is our parent company

LendingTree is our parent company. LendingTree is unique in that you may be able to compare up to five personal loan offers within minutes. Everything is done online and you may be pre-qualified by lenders without impacting your credit score. LendingTree is not a lender.

Although you cannot be arrested for debt, there are myriad consequences that can result from not paying back what you owe. Ignoring your debts or any court-ordered summons will only make your situation worse. Be as proactive as possible to avoid the repercussions of not repaying your debt.

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

Jamie Friedlander
Jamie Friedlander |

Jamie Friedlander is a writer at MagnifyMoney. You can email Jamie here

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Personal Loans

Is Getting a Personal Loan a Bad Idea?

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You’re in a pinch and in desperate need of money. You’ve already asked family members for help, but nobody can assist you. You’ve heard of a personal loan before, but is taking one out a good idea?

In short, it depends on your particular financial situation. If you’ve racked up high-interest credit card debt, for example, and you can take out a personal loan with a lower interest rate to consolidate and pay off that debt, a personal loan might be right for you. But if you have other assets you can borrow against that will have lower interest rates — such as a 401(k) loan or a home equity line of credit (HELOC) — you might want to consider pursuing those lines of credit instead of a personal loan.

Here’s everything you need to know about when a personal loan might be worthwhile, and when you might want to look elsewhere.

When a personal loan might be the answer

Personal loans can be taken out for a variety of reasons, such as to pay for car repairs or medical expenses, as well as to consolidate debt. Consider these ways you could use a personal loan.

You’re consolidating high-interest credit card debt

Taking out a personal loan is particularly common for people who have significant high-interest credit card debt and are interested in consolidating that debt and paying it off. Personal loans can allow someone with high-interest credit card debt to take out a loan with a lower interest rate than their credit cards. Also, many consumers like having to make only one monthly payment.

If you explore personal loans in our marketplace, you’ll find that they traditionally come with terms between 12 and 84 months.

Charles Adi, a financial advisor with Blueprint 360 in Houston, said the most common reason he advises his clients to take out personal loans is for the consolidation of high-interest credit card debt — particularly when the interest rates on clients’ credit cards are more than 15 percent.

“Because on the personal loan side, you’re probably looking at a 7 to 9 percent interest rate, so that savings is very helpful,” Adi said. (This rate, it should be noted, is likely for borrowers with excellent credit.)

In August 2018, the average interest rate on personal loans for people with excellent credit (760 and above) was 8.10 percent, according to data from our parent company, LendingTree. For those with good credit (680 to 719), it was 17.92 percent.

Josh Nelson, a certified financial planner and the CEO and founder of Keystone Financial Services in Fort Collins, Colo., said one benefit of using personal loans for the consolidation of high-interest credit card debt is that they push clients to begin using better financial habits.

“The nice thing about a consolidation loan is that it does force discipline,” Nelson said. “It forces people to have to make that higher monthly payment.”

In addition, Adi said many of his clients like the one monthly payment that accompanies a debt consolidation loan. “A lot of my clients get frustrated when they have to keep track of five or six different cards,” he said. “Consolidating it into one payment and [seeing] that balance going down steadily — it’s just a feel-good story.”

He adds that he doesn’t recommend clients take out personal loans for debt consolidation if they don’t have good financial habits already in place. He said he has seen a handful of times where clients take out a personal loan to pay off high-interest credit card debt, and then spend the personal loan on their lifestyle.

“That’s pretty much the only time where I don’t move forward with it because it makes no sense helping someone save a few thousand on interest if it’s going to lead to them making poor financial decisions,” Adi said.

You’re making home repairs and can’t access a home equity loan

Taking out a personal loan for home repairs only makes sense if you’re disciplined enough to pay off the loan quickly. It can also make sense if you’re going to refinance your home to pay off the personal loan.

Although many homeowners will make repairs or renovations using a HELOC, some will also take out a personal loan if they are unable to take out a home equity loan because they don’t have enough equity to qualify for a HELOC. “I’ve recommended [personal loans] for individuals who wanted to do some home repairs, but they couldn’t access money from their house via the traditional equity channels,” Adi said.

But Luis Rosa, a certified financial planner with Build a Better Financial Future in Henderson, Nev., said most consumers looking to make home repairs will consider a HELOC before a personal loan.

“Typically, the home equity loan is going to be a lower interest rate than a personal loan because you have the home as collateral,” Rosa said. But consumers who take out a HELOC only get charged for interest as they use the credit line.

“If you needed a $30,000 home improvement project, you might draw $5,000 at a time, as opposed to the personal loan, where you get the whole $30,000 upfront and start paying interest on the full amount,” Rosa said.

You need a real estate bridge loan

Jeff Motske, a certified financial planner and president of Trilogy Financial in Southern California, said he has seen people use personal loans in real estate. For example, he had a client whose house was still in escrow, but the client wanted to buy a home in 30 days.

“Those are opportunities to get personal bridge loans to manage that gap and not have to deal with running a whole new mortgage you want to pay off because you’re moving into retirement or you don’t want debt on the house,” Motske said.

Ilene Davis, a certified financial planner based in Melbourne, Fla., said she rarely advises clients to pursue personal loans because of their high interest rates. In fact, one of the only situations in which she would recommend clients use them is for a bridge loan in which the client will only need the money for a short period and has the resources to pay it back quickly.

You’re making a large personal purchase (and have good financial habits)

Although it’s not ideal, Rosa said he has seen people take out a personal loan to finance a large purchase, such as an engagement ring or wedding. “You probably don’t want to buy a big-ticket item like that on credit, but I’ve seen people do that just because it was cheaper than credit cards,” he said. This only makes sense if you have excellent credit and can repay the loan back quickly.

Also, Rosa said he has seen people take out personal loans to pay for medical procedures. “If you’ve considered the alternative of financing through the doctor’s office or if that was not an option, then perhaps it makes sense because it would be cheaper than putting it on a credit card,” he said.

When a personal loan might not be the answer

A personal loan can be a great way to manage your debt or afford purchases. But weigh your options carefully. Taking on debt is a long-term decision — and you may have other options to consider.

You may qualify for a HELOC

Dennis Nolte, a certified financial planner with Seacoast Investment Services in Oviedo, Fla., said he typically recommends clients borrow against their own assets, such as their home, before pursuing a personal loan.

“Because [personal loans] are so expensive, and you have to jump through hoops to qualify, we try to find where they have assets and borrow against those assets first,” he said, adding that a HELOC is not as common as it used to be because the new tax law doesn’t allow deductions if the funds aren’t being used for real estate. “But most people who are going for a personal loan probably aren’t itemizing anyways,” he said.

Motske said he recommends a HELOC over both a 401(k) loan and a personal loan nearly every time.

“In particular, if it’s just a short-term or a manageable piece, because a home equity line usually has some tax benefits next to it, whereas personal loans and credit card loans not only don’t have those benefits, but also they come at much higher interest rates,” he said.

You have a 401(k) loan

Nolte said that despite the common lore that you should never borrow against your 401(k), it might be the last resort for young people whose only savings are in their retirement accounts. Nolte said the benefits of taking out a 401(k) loan over a personal loan are that you don’t have to qualify, you’re paying yourself back in interest and it’s your money.

“Basically, it’s your assets,” Nolte said. “If you’re just shifting assets on a balance sheet and you’re disciplined about it, that’s not a bad way to go. Rather than going to other sources that are going to charge you a lot more interest, a lot of times it makes sense to use your existing assets if you can.”

Sallie Mullins Thompson, a certified public accountant and financial planner based in New York City, said that although taking out a 401(k) loan is fine, people have to be extremely careful that they follow the guidelines set in place for paying it back.

You have to pay the loan back monthly, you have to pay it back within five years, you can’t get another loan on that 401(k) and if you leave the company before the loan is paid back, there are ramifications: The entire loan has to be paid back immediately, and, if it isn’t, you’re liable for the income tax on it as well as the 10 percent penalty if you’re under 59 ½, Thompson said.

“Plus, there’s the fact that you’re taking money from your retirement investment that’s no longer earning money,” she said. “And then you’re paying it back with interest.”

Adi has also recommended that his clients take out 401(k) loans in the past. “Depending on what the rates are, you could probably hit a 5 percent rate on a loan from a 401(k), and that interest is going back to yourself,” he said.

Be cautious of the idea that you’re “paying yourself back,” Mostke said.

“You’re really not,” Motske said. “You’re hurting your ability to grow that nest egg that you’re going to need for retirement.”

You’re consolidating student loan debt

Thompson said, typically speaking, it’s not wise to use a personal loan to consolidate and pay back student loan debt.

“The personal loan rates are usually under credit card debt rates, but they would not be under student loan debt rates, particularly with the various repayment programs you find these days,” she said.

Rosa said he doesn’t advise his clients to use personal loans for student loan debt either. “There are companies that do debt consolidation loans specifically for student loans, and you can do them through the government as well,” he said. “You can actually just consolidate it through studentaid.ed.gov, so you wouldn’t need to go to an outside lender for that.”

Shopping for personal loans

By shopping online for personal loans, you can compare more rates than you’d be able to compare by going to banks in person. Further, an online lender or member-owned credit union may be able to offer more competitive rates.

Where to find a personal loan

You might be able to secure a better personal loan interest rate through a credit union. Adi said he often advises his clients to look for personal loans at credit unions or even local banks because they tend to have better rates than larger institutions. If you already have a loan at the institution, that’s even better.

“Let’s say you have your car at a local regional bank, go back to the same institution looking for the personal loan as opposed to going somewhere else, because you want to have that history with the bank so that the next time you come back, you’re a preferred customer,” Adi said.

And if you have two financial products open with an institution, such as a car loan and a mortgage, you’ll be in even better shape. “Try to accumulate goodwill with the particular institution if possible,” Adi said.

Nolte said he advises his clients to look for personal loans at credit unions, too. “For interest rates on loans, they are generally cheaper, and they work with you a little bit more than some of the bigger banks,” he said.

And while credit unions used to have strict membership requirements to join, they may be more lenient nowadays, Nolte added.

How a personal loan affects your credit

If you’re shopping for a personal loan online, you’ll likely be submitting to soft credit checks, which don’t affect your credit. But if you find lenders that require a hard credit check each time you request a quote, that could hurt your score.

Regular on-time payment on a personal loan can boost your credit score, as it shows that you responsibly manage and pay back your debt.

One thing to be cautious of is taking out a personal loan for credit card debt consolidation, and then closing old credit cards. Rosa said consumers will often take out a personal loan and then close all their credit cards because they feel like they need a fresh start.

“But that might hurt them creditwise, because they might pay off a card that they’ve had for a very long time, which has helped them build that credit history,” he said. In addition, some people will open a new credit card at the maximum limit while they are still paying back their personal loan, which can lower one’s credit score, according to Rosa.

Personal loan pitfalls to avoid

When shopping for a personal loan, there are a few common pitfalls you should avoid.

  1. There’s a sales pitch at the end. Often at the end of closing for a personal loan, there will be a life insurance or unemployment insurance sales pitch. These policies might be beneficial for some people, but you should do your due diligence to figure out if either is right for you.
  2. There might be talk of precomputed interest. In short, precomputed interest is bad. Ask if it’s part of your loan, and do not pursue the loan if it is.
  3. There is an origination fee. You likely cannot avoid this, so just make sure you understand the fee and take a look at the APR of the loan, not just the interest rate, as the APR takes the origination fee into account.
  4. There might be a prepayment penalty. Most loans will not have a prepayment penalty, but you should check to make sure yours doesn’t before signing on the dotted line.

The bottom line

When considering whether to take out a personal loan, your financial habits, credit score and need for the money should all be taken into consideration.

In general, personal loans can be a good idea for consumers with excellent credit. But if you don’t have excellent credit, a personal loan might come with an interest rate so high that it’s more than some credit card rates. Make sure you know the interest rate before you take on a personal loan.

Nearly every financial adviser and planner interviewed warned against personal loans if the consumer didn’t have good financial habits already in place.

“Sometimes people do personal loans because that’s their last resort,” Motske said. “That can be a real dangerous path to run on.”

Nelson said he feels similarly. “I think it really depends on the psychology of the person — if they’re really trying to pay debt off, or if they’re looking for a quick fix,” he said. “And quick fixes don’t typically work.”

Thompson advises her clients take a good hard look at why they’re considering a personal loan in the first place.

“They really need to look at the reasons they got into that problem to begin with,” she said. “The personal loan is not the solution. You can get the personal loan, pay off your credit card debt and then you have an issue with paying off the personal loan.”

If her clients do take out personal loans, Thompson said she spends ample time educating them about personal finance. “I spend a lot of time talking to my clients about what they’re going to do differently this time so that they can pay off that personal loan and not get themselves right back into credit card debt again,” Thompson said.

But if you have the right discipline in place, a personal loan can be a good financial decision. Adi said one of the most satisfying personal loans he ever did was with a client who was in his mid-70s and had several store credit cards — including Dillard’s, Macy’s and Costco — racked with debt.

“We consolidated it into a personal loan, and he paid it off in three years,” Adi said. “The client told me, ‘I never thought I would be debt-free.’ I think it’s important for everybody to know that no matter your age, it’s possible to get a personal loan to pay off all of these debts.”

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Good Debt vs. Bad Debt — What’s the Difference?

Editorial Note: The editorial content on this page is not provided or commissioned by any financial institution. Any opinions, analyses, reviews or recommendations expressed in this article are those of the author’s alone, and may not have been reviewed, approved or otherwise endorsed by any of these entities prior to publication.

When you think of debt, you might picture someone faced with thousands of dollars in credit card or student loan bills. Or perhaps you’ll think about a substantial loan someone secured to launch their small business.

Although these are all forms of debt, they are not all created equally in the eyes of lenders or credit bureaus. No form of debt is inherently “good,” but there are forms of debt that are not necessarily as bad and can contribute to someone’s financial future in meaningful ways.

Learning to spot the difference between good debt and bad debt, knowing which type of debt to pay off first, and determining what forms of debt you should never take on can allow you to have financial stability and peace of mind.

What is good debt?

Good debt is debt that in some way contributes to your financial future in a significant way.

“When people are financing either assets or other things that have some sort of true and intrinsic value — and maybe even an ascending value — then you can make a pretty good argument that it’s good debt,” said John Ulzheimer, founder of The Ulzheimer Group and a credit-reporting expert formerly of FICO and Equifax.

Gerri Detweiler, a consumer credit expert and author of Debt Collection Answers: How to Use Debt Collection Laws to Protect Your Rights, said good debt boils down to whether someone comes out of debt with something to show for it.

“I think overall, generally good debt is debt where you come out ahead,” Detweiler said. “Whether that’s investing in a home that’s later paid for and provides you with a place to live, or an education that results in higher earning power over your career, or even small business debt that allows you to start or grow a small business that brings an income — those are all examples of debt that can be good debt.”

But Detweiler adds that all forms of good debt must be looked at on a case-by-case basis.

“[They’re not] automatically ‘good’ debt, because it’s possible, of course, to get into a house that ends up being a money waster,” she said. “You could end up spending a lot of money for an education and not be able to translate that into a career or a steady income. Or you could invest in a small business that fails. There’s no guarantee that those types of debt that are often good will be good for you. You have to be sure you’re making a smart decision.”

Experts agree that generally speaking, the following are all forms of good debt.

Mortgages

A mortgage taken out to finance a home is considered a good debt because as a buyer, you are investing in a piece of property that will hopefully provide you a return on investment one day. And depending on your income level, a mortgage could provide a deduction on your taxes.

“You can make a pretty strong argument that debt incurred to buy a home is good debt, presuming that you’re buying a home that is going to appreciate over time, and when you sell it someday, you’re going actually make money out of it,” Ulzheimer said.

Mortgages also tend to have lower interest rates than other types of loans. The average interest rate in the U.S. for a 30-year fixed rate mortgage is currently 4.55 percent, according to the Federal Reserve Bank of St. Louis. On the other hand, the average interest rate for new credit cards in the U.S. is nearly 14 percent, according to the Federal Reserve Bank of St. Louis.

Student loans

Perhaps the most valuable debt someone will incur in their lifetime, according to Ulzheimer, is student loan debt to pursue a college education.

“I think studies are pretty clear that people who have a college degree over their lifetime are going to earn more than people who do not,” Ulzheimer said. “In my mind, that may be the best of all debts in terms of return on investment.”

Interest rates on federal student loans vary, but currently sit between 4.45 and 7 percent, according to the U.S. Department of Education.

The earning potential for college graduates is starkly higher than that of non-graduates. Men with a bachelor’s degree earn an average of $900,000 more in their lifetime than men with only a high school education, while women with a bachelor’s degree earn an average of $630,000 more in their lifetime than their high-school educated counterparts, according to data from the Social Security Administration. The numbers only increase with graduate degrees: Men earn an average of $1.5 million more and women $1.1 million more in their lifetimes than those with only a high school education.

Small business loans

Taking out a small business loan can be beneficial — investing in a small business, assuming it succeeds, means investing in something that could provide you significant future earnings.

Loans guaranteed by the Small Business Administration (SBA), for example, typically have lower down payments, lower interest rates and flexible overhead requirements, according to the organization.

“You’re making an investment in yourself, in your future, in your business,” said Kathryn Bossler, a credit counselor with GreenPath, a nationwide consumer credit counseling agency.

That being said, there are some very high-cost short-term business loans available that could cause a strain on your bottom line; approach these with caution.

Home equity loans

Home equity loans fall into the “good” category because they allow someone to borrow against him or herself (instead of from an outside lender) to make a large purchase or investment, or to pay off debt with a higher interest rate.

In addition, home equity loans typically come with lower interest rates — they range from about 4.25 to 6 percent, according to LendingTree — and can help someone consolidate and pay back other higher interest rate debts.

However, home equity loans used for the wrong purpose, such as financing a vacation or an unnecessary large purchase, could become a form of “bad” debt — ultimately, it all depends on what the home equity loan proceeds are used for.

What is bad debt?

When Detweiler was in her 20s, she went to Sears and got approved for a credit card. She purchased a couch, an answering machine and a lamp. “Before that debt was paid off, the couch had a rip in it, the answering machine had been zapped by lightning and the lamp was broken,” she said. “I still had a bill, and nothing to show for it. That’s definitely bad debt.”

Detweiler said “bad” debt is debt in which the borrower has nothing to show for it, save for the fact that they’ve spent a significant amount of money.

Forms of bad debt typically come with very high interest rates, making it difficult for borrowers with significant debt to pay it back in a timely manner.

Experts agree that generally speaking, the following are all forms of bad debt.

Credit card debt

Credit card debt is perhaps the most pervasive form of “bad” debt in the U.S., with 121 million Americans currently carrying credit card debt. The average credit card debt per person is $4,453, while the average credit card debt per household is $8,683.

Credit card debt falls into the “bad” category mainly because of the high interest rate that often accompanies credit cards. In fact, the average interest rate for a new credit card in the U.S. is around 14 percent, according to the Federal Reserve Bank of St. Louis.

“Typically, it’s a red flag if you need to carry a balance on your credit card,” Bossler said. “Credit cards are really designed for convenience. There are lots of consumer perks in terms of points and rewards … But carrying a balance is probably going to come with a high interest rate, and is promising money that you don’t have right now.”

Luckily, consolidating credit card debt can help borrowers pay it back more quickly than they might be able to pay back other forms of “bad” debt.

Payday loans

Payday loans should be avoided at all costs.

“I think the worst of the worst, most people would agree, would be payday loan type debt, because the interest rates are so high and the repayment requirements are so immediate,” Bossler said. “And usually someone who is taking out that type of loan is in serious financial distress.”

Because payday loans are typically smaller and paid back in a couple of weeks, borrowers might not feel their impact. But that doesn’t mean it’s not there.

“They’re called ‘lenders of last resort’ for a reason,” Ulzheimer said. “Their interest rates are, when you annualize them, in some cases several hundred percent APR. You don’t feel that because they have short-term amortization schedules.”

“Gray area” debt

Some debts may not be inherently good or bad. It all depends on how you use them.

401(k) loans

Borrowing against your 401(k) might not seem like a terrible decision in the short-term — after all, you’re taking out a loan from yourself — but it can come with a number of consequences. Ulzheimer said he often sees people take money out of their retirement accounts to pay off debt, but then fail to pay back their 401(k) loan.

“You’re almost compounding the problem by doing something silly like that,” he said. By not paying it back, people face countless consequences, including delaying their retirement plan, potentially paying more in taxes (401(k) funds are pre-tax), and potentially paying a penalty for not paying back the loan in time.

In addition, if someone leaves a job before paying back their 401(k) loan, he or she must repay the loan over a set period of time or it could be treated like a distribution and taxed accordingly.

Auto loans

Auto loans fall into the murky territory between good and bad. A car can be a necessary purchase for many people. And someone with the right financial know-how can take on an auto loan that is neither bad nor good, but rather necessary.

However, Detweiler said people often get swept up into higher car payments than they can afford, which can lead to a situation in which someone is paying for a car that is either not running or not worth investing in anymore. “You really have to be on guard when going into debt for something like a car, because it’s very easy to get talked into or psyched into spending more than you can afford.”

Bossler said that when she first began working as a credit counselor 12 years ago, three to five-year loans were common. Now, because cars are more expensive and because consumers want the lowest interest rate possible, she’s seeing terms as long as 72 and 84 months.

“That’s when I would say we’re getting into dangerous territory,” she said. “The car is probably not going to be worth what you owe a couple years down.”

Learn more: Revolving debt vs installment debt

Installment debt is a standardized loan that is paid back in installments that are typically monthly. Mortgages and auto loans are common forms of installment debt. The amount the borrower pays typically remains the same month-to-month.

Revolving debt, on the other hand, doesn’t have a set amount to be paid by the borrower each month, though there is a limit to how much a borrower can use. Credit cards and home equity lines of credit are common forms of revolving debt, because credit is borrowed, then paid back, then borrowed again in a revolving manner, with the amount changing each month.

Both forms of debt affect your credit report and credit score, though revolving debt is typically seen as riskier by the credit bureaus, as credit scores often hinge on the amount of available credit a consumer uses. Installment debt is often associated with an asset (i.e. a home or car), making it a safer form of debt in the eyes of credit bureaus.

It’s generally viewed as positive to carry a mix of both installment and revolving debt, with fewer of the latter in your credit mix. Credit mix makes up 10% of your credit score.

How to eliminate debt

Regardless of what type of debt you have, paying it off in a timely manner is crucial for achieving financial freedom. Keep these best practices in mind when you begin paying off your debt.

1. Know your interest rates.

Detweiler said she has spoken to countless consumers who have no idea what their interest rates are. They will throw money at a debt trying to get out of it before actually looking at what the numbers say.

By taking a look at the interest rates for all of your loans, you can determine whether refinancing or consolidating is a good option. Or, you can identify which loan has the highest interest rate, and then prioritize paying back that loan first.

2. Consider refinancing your debt.

Getting a lower interest rate on your debt can be integral for paying it off. “While you’re paying off debt,” said Detweiler, “look at whether you can refinance some of that debt to make the interest rate less expensive.”

For personal loans, such as mortgages and student loans, this could mean refinancing to get a lower rate. For credit card debt, it could mean taking on a lower-interest consolidation loan or transferring a balance to a card with a better interest rate.

3. Establish your priorities.

Ulzheimer said you should first ask yourself what your priority is. Is your priority to get out of debt as quickly as possible? Is it to pay down your most expensive debt first? Is it to eliminate nuisance balances on retail store credit cards? Is it to improve your credit score?

Once you identify your priorities, you can begin effectively paying off your debt.

One strategy Ulzheimer recommends for paying off credit card debt is paying down the cards you use the most while also paying off your nuisance balances.

“Credit scores hate balances on credit cards, and credit scores hate to see highly leveraged cards, to the extent you can take care of those first,” Ulzheimer said. “A. You’re getting out of debt which is good, and B. Your credit scores are going to start to improve because your utilization ratios are going to go down, and the number of accounts you have balances with is also going to go down.”

4. Be conscious of the credit you use while paying off debt.

Bossler said she would advise someone looking to get out of debt pursue the strategy that is not only going to give them the best interest rate, but is also going to stop them from using the credit again and digging themselves into the same hole.

“What we see sometimes is that people will refinance their home or take out equity to pay off credit cards or get into those 0 percent interest credit cards, and then go back around and use the old cards again,” she said. “Something we talk a lot about with consumers is yes, we have this strategy to address your debt, but what are the other steps you’re going to take to avoid it again?”

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How to File for Unemployment When You’re Laid Off

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If you were part of a company-wide set of layoffs, your first instinct might be to head to the local bar to wallow with your co-workers, or log onto LinkedIn or Indeed to start scouring the web for job openings.

But before you focus on lining up your next gig, you might want to secure unemployment benefits first. As soon as you find out you’ve been let go, grab your laptop and a cup of coffee, and settle in to apply for unemployment benefits. The process shouldn’t take more than 30 minutes, and it’ll be time well-spent in the end.

We’ve consulted experts to answer any question you might have regarding applying for unemployment benefits.

How soon should I apply for unemployment benefits after being let go?

Immediately, because the process can take a while. Someone will have to approve your claim, and then contact your company to confirm you worked there.

But don’t worry if you were overwhelmed and forgot to apply the day you were laid off. Your benefits will be paid out from your last day of employment, not the day you filed, according to Daniel Kalish, managing partner of HKM Employment Attorneys LLP based in Seattle. Kalish primarily represents employees during employment litigation. If you got laid off on Jan. 1 for example, but didn’t apply until Jan. 15, you would still collect benefits from Jan. 1 onward, Kalish says.

Even if you have a job lined up with a start date in two weeks, you can and should still apply for unemployment. “Might as well get the extra $500 a week if you can just for those two weeks you’re out,” Kalish said. “You’re definitely legally entitled to it.”

What information will I need?

Each state has a different form, but typically you will need to provide the name and location of your employer, your personal information, dates of employment, hours worked and pay rate.

Be aware that the language in the letter you receive from unemployment after applying is standard for everyone, and includes a line that says “You may have been discharged due to misconduct connected with the work.”

“People call us all of the time and say, ‘I didn’t commit any misconduct,’” said Matthew Schorr, an attorney at Schorr & Associates, an employment law firm in Cherry Hill, N.J. “Everyone gets the same exact thing whether they did or didn’t. Don’t think you did something wrong. That’s just the boilerplate response unemployment sends out.”

How do I know if I qualify?

In order to qualify, you typically must have been laid off after being employed for six months or so, depending on the state. “The idea there is that they don’t want to give unemployment to someone who works for a day, gets fired and then gets unemployment for six months,” Kalish said.

But those six months don’t have to be at the same job. As long as you worked full time continuously for six months — even if you held two jobs at different employers — you can qualify for unemployment.

In addition, you will need to have been an employee (full time or part time) at the company, not a freelance worker. You can collect unemployment benefits if you were a part-time employee, you will just need to have worked a certain number of hours (which is calculated on a state-by-state basis) in the previous year, Kalish says.

Are unemployment benefits administered by the state or the federal government?

In a sense, both. Unemployment benefits are paid by the state, and you apply through your state. But the federal government often determines how much unemployment you can collect, Kalish says.

How much money will I get and how long will I get it for?

The number is calculated based on how much you earned at your job. The maximum amount someone can typically collect is roughly $500 per week, but this depends on the state according to Kalish.

In most states, you can collect unemployment benefits for up to 26 weeks, though a handful of states offer more or less. For example, Montana provides up to 28 weeks, while Florida only provides up to 12 weeks, according to the Center on Budget and Policy Priorities, a research institute.

Can I apply if I’ve been fired or if I quit my job?

If you’ve been fired, you will have to prove you were fired without having engaged in any gross misconduct, which Kalish says is defined as an intentional act against your employer’s interest. If your company can prove this, you will not be able to collect unemployment.

If you quit your job, you typically cannot collect unemployment. But if you quit your job with something called good cause, you might be entitled to it.

Good cause is defined as quitting because of illness or disability, a spouse’s military transfer, reduced pay or hours, workplace safety, illegal activity at the workplace and a handful of other reasons, according to The Unemployment Law Project, a Washington-based firm that provides free and low-cost legal representation to residents.

What if I have multiple sources of income?

Having more than one channel of income is common today. Perhaps you have a handful of freelance gigs in addition to your main job. Maybe you have an Etsy business on the side. Or perhaps you drive for Uber or work for Favor at night.

Regardless of your other sources of income, you are still legally entitled to collect unemployment if you were a full-time employee at a company, so long as your part-time work is less than 32 hours a week. If your part-time gigs total 32 hours or more, you will be considered full time and won’t be able to collect unemployment, according to Adam L. Schorr, an attorney at Schorr & Associates.

So how much will you collect if you have less than 32 hours of part-time work? After inputting your earnings and hours worked when applying for unemployment, you will get a weekly benefit rate and a partial weekly benefit rate.

“If you work part-time, regardless of whether you work one hour or 31 hours, you will get your partial benefit rate,” Adam said. The partial weekly benefit rate is higher than the weekly benefit rate, but part-time earnings are factored in.

“If your weekly benefit rate is $500, your partial benefit rate is $600 and you make $300 in a week, you would get $300 from unemployment,” Adam said. “If you didn’t work at all, you’d get $500 total. It’s generally good to work part time if you can, because you will get more money total.”

Will my company try to fight it?

It’s unlikely. “Typically if you’re legitimately laid off, a company won’t contest it because there’s no need,” Kalish said. “They’re probably going to lose, and that will cost them money.”

However, some large companies will try to fight back against unemployment claims. “One thing everyone always asks me is, ‘Why would any employer give a damn? Why do employers care? They don’t pay unemployment. It’s the state,’” Kalish said.

The reason some companies care is because their unemployment insurance tax rate, which every company pays, can go up. Kalish says, for example, a company might pay a tax rate that is 0.05 percent of their payroll. If too many people collect unemployment in a year, that rate could be raised to 1 percent.

If you were laid off from a small company, there’s nothing to worry about. “It’s often big companies who care,” Kalish says. “If Coca-Cola or Microsoft gets hit with a greater percent, they will be significantly worse off than a small business that really has no incentive to oppose it.”

If an unemployment claim is disputed by the company, Kalish says there will typically be a hearing regarding whether the employee engaged in misconduct, or whether the employee qualifies for unemployment.

Just remember: layoffs are common, and filing for unemployment benefits is nothing to be ashamed of. In fact, 19.9 million people were laid off or discharged in the U.S. in 2016, according to statistics from The U.S. Department of Labor.

If you’re ready to apply for unemployment benefits, you can get started here.

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15 Ways to Save More, Owe Less and Boost Your Net Worth in 2018

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Maybe this is the year you finally want to save enough money to go to Paris with your significant other. Perhaps you just had children, and thoughts are looming about saving for their future college education. Or maybe you’ve simply decided that you’d like to have enough money to live lavishly once retirement comes.

Whatever the case may be, there are tangible steps you can take to boost your income and improve your overall net worth this year.

The first step is simply calculating your net worth. Understanding your net worth is arguably one of the most important ways to get a clear picture of where you stand financially after hypothetically ridding yourself of liabilities with your assets.

And it’s simple to calculate: “Subtract what you owe from what you own,” said Tiffany Aliche, a financial educator and founder of the Live Richer Challenge. This January, Aliche, also known as the “Budgetnista,” sponsored a multi-week challenge with hundreds of thousands of participants to educate them on the power of boosting their net worth.

Once you know your net worth and determine whether that figure puts you in the red, the next step is a bit more challenging: finding ways to increase it over time.

Get started with these tips to boost your net worth with any or all of the strategies below.

Earn More 

Ask for that raise. This is the initial move to take toward increasing your annual earnings. “Start by establishing where you are,” said Stefanie O’Connell, author of “The Broke and Beautiful Life.”

“Do your research to figure out what the current pay range is for your position by talking to recruiters, speaking to friends and colleagues in similar positions, or by using a website with salary information like Glassdoor or PayScale,” she said.

Consider the cost of living in your city when you negotiate, too. An accountant in Charlotte, N.C. might be paid much differently than an accountant in San Francisco, where costs are much higher, for example.

“Establish where you want to go,” O’Connell said. “What are the going rates in your field, and where do you fall in that pay range? Given your competency and the value you add to your workplace, where do you think you should fall within that pay range?”

If no raise is possible, ask for something else in its place. In you’re denied a raise, don’t be afraid to ask for something else, suggests O’Connell. For example, you could ask for equity in your company if it’s available to employees. Once that equity is vested (meaning, it’s totally available to you to use), you can leverage it in a number of ways and potentially grow it over time if invested properly. That will no doubt boost your net worth.

Other soft perks to consider include a more flexible schedule, more paid time off, access to educational programs, an expense account, a club membership, a bigger office or a new job title.

These may not have a concrete impact on your financial bottom line, but they could definitely add value to your quality of life and make you a more productive worker.

Turn your hobby into a real business. During Aliche’s Live Richer Challenge online workshop, she encouraged people to look into starting a side business to bring in additional income.

“I had people create a mind map of what they’re good at, what they’re passionate about, and [had them] ask their family and friends: Looking at this, what do you think I could start or open?” Aliche said. “Something that’s going to increase your income so you can increase how much money you have saved.”

Thanks to the gig economy, options for side hustles are endless. If none of the obvious outlets appeal to you (Uber, Favor, Amazon Flex) don’t worry. From designing T-shirts and selling them on Etsy to being a remote personal assistant, there are myriad side gig options out there. 

“I suggest people do side hustles that are related to what they went to school for or what they’re currently doing,” Aliche said. “When I was a schoolteacher, I side hustled by tutoring and babysitting. You get paid more because you’re already doing it, and there’s no learning curve.”

Look for unexpected income sources. If your skills have lead to additional side income, look for ways to lock in lucrative business contracts.

Aliche says it snowed in her city recently, and she discovered the city had a contract for $210,000 for snow cleanup. You didn’t need a snow plow or even experience to secure the contract. All you needed was a license to drive the vehicle.

In addition, her city’s zoo had a $25,000 face-painting budget, and her friend secured the contract because she was the only one who applied. “You have the ability to lock down good money for doing something you’re already doing,” Aliche said. You need an LLC to secure a contract, but they’re typically only around $125, according to Aliche.

Put your tax refund to work. “Most taxpayers who use the standard deduction will get a tax cut this year,” said Jane Bryant Quinn, author of “How to Make Your Money Last: The Indispensable Retirement Guide.”

“Instead of changing your withholding schedule, consider leaving it alone and collecting the tax cut as a refund in 2019, and save the refund.” 

Figure out your hourly rate. You can figure out exactly what your time is worth using this Norwegian website  by FINN.no AS, an online classified advertising marketplace. This tool is good not only for figuring out what you should charge for freelance or contract work, but also for determining which things you should do, and which you should outsource.

For example, it might be worth your time to hire someone to clean your apartment once a week, or you might find it’s easier to do your taxes yourself rather than hiring an accountant.

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Invest wisely in your 401(k). If you’ve already invested a significant amount in your 401(k) and you’re younger, Quinn suggests taking more risks. “If you’re under 40, don’t be afraid of investing 100 percent of your 401(k) or other savings into stock-owning mutual funds,” she said. The stock market will fall from time to time, but it tends to rebound in time, and you may be better off riding the rough patches if you’re investing for long-term growth.

Start an Individual Retirement Account (IRA). If you don’t have a company 401(k), or you’ve maxed out your contribution for the year, don’t worry. “Start an IRA at a low-fee purveyor of mutual funds such as the Vanguard Group or Schwab,” Quinn said. “Buy an index fund that follows the U.S. market as a whole or the total U.S. and global markets as a whole.”

Look into automatic advising companies like Acorns. If you’re interested in investing but aren’t sure where to start, Aliche suggests dipping your toes into robo-advising, or services like Acorns, Betterment and Wealthfront. “A lot of people don’t know where to begin investing, and that’s truly the only way to grow wealth,” Aliche said. “You have to invest.”

Delay receiving Social Security. “For older people, delaying Social Security collection for even six months can have a big impact on lifetime net worth,” said Teresa Ghilarducci, professor of economics at the New School for Social Research in New York City and author of “How to Retire with Enough Money.” For example, if you delay until age 67, you’ll receive 108% of the monthly benefit and if you delay until age 70, you’ll get 132% of the monthly benefit.

Reduce expenses

Keep a record of your expenses. This might seem basic, but if you’re not doing it yet, you should be. “Keep a record of expenses and review every month,” said Ghilarducci. “This one low-energy, low-cost habit can help people identify where they are being overcharged and where they spend money without much pleasure.”

Attack your debt head-on. One half of the equation when it comes to increasing net worth is paying off debt. Aliche suggests an automated plan, like Dave Ramsey’s well-known debt-snowball method, in which you pay off debts from smallest to largest. 

Ghilarducci also emphasizes the importance of paying off debt, especially high-interest debt like credit cards. “If people can pay off all their debts, they earn a guaranteed rate of interest far above what they can earn risk-free in the stock market or anywhere else,” she says.

That being said, you should also try to keep saving as you pay down your debts. If you don’t have an emergency fund set up for the unexpected expenses, you might find yourself only digging deeper into debt.

Also, consider how much that debt is costing you versus how much you could gain by saving. It might make sense to throw every last penny at that 22% APR credit card. But it might make less sense to forfeit your 401(k) savings in favor of paying off a low-interest mortgage or auto loan more quickly. 

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Maintain good health. “An overlooked way of saving money is not getting sick,” Ghilarducci said. “Everyone over 20 should pretend they have diabetes and eat a diabetic diet. It’s good insurance against the rising cost of health care, insurance premiums and copays.”

In a less dramatic fashion, you could simply strive to stay on top of your health and preventative treatments that could stave off illness down the road. Maintain your annual checkups and don’t let minor health issues spiral out of control.

Find ways to trim expenses. Whether you grab takeout way too many nights a week or have a penchant for Whole Foods, groceries and eating out are a perfect area to cut back. Try shopping at a cheaper grocery store, or making a goal to cook four nights a week. You might even try becoming a vegetarian, temporarily. “Vegetarianism has lots of pluses – it’s cheaper and healthier,” Ghilarducci said. “A good diet is a good way to raise your lifetime net worth.”

Sell unused items in a Facebook Buy/Sell/Trade group. Groups for selling anything and everything abound on Facebook. If you’re addicted to shopping at Anthropologie or love rare Nikes, there’s a group for you. Some extremely popular groups—such as Lululemon Buy, Sell and Trade — have over 50,000 members.

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How to Report Sexual Harassment at Work in a #MeToo World

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Veronica Cannon was just a year out of college when she was took a job at a Jewish community center in South Florida in the early 2000s. At the time, she worked as a social worker and program director for the organization’s senior citizen program.

One morning, about six months after she started, a male colleague made explicit sexual comments toward Cannon in an office corridor. She knew immediately his remarks were out of line. But despite the fact that she took notes of the encounter, recorded her side of the story on tape, and went to higher-ups at her office to complain, the man was never terminated.

“In the two to four weeks that followed, it was very uncomfortable [to work there],” said Cannon, 31, whose name and other identifying details have been changed in this story. “I definitely considered resigning. The only reason why I stayed was because I felt obligated to the clients I was serving. And then after some time had passed, I just tried to put it behind me as much as possible.”

The encounter happened nearly a decade ago, many years before the rise of the #MeToo movement, which was fueled by a wave of public allegations of sexual assault and harassment against Hollywood A-listers — from Harvey Weinstein to Louis C.K. — media moguls like former “Today” Show host Matt Lauer and former CBS anchor Charlie Rose, top editors at NPR and Vice and politicians like Sen. Al Franken and Roy Moore.

Momentum appears, for once, to be on the side of victims. In the wake of these allegations, many of the accused have lost lucrative contracts and jobs in their industries. And at the start of the new year, hundreds of well-known actresses and high-powered women in the entertainment industry launched the Time’s Up initiative, which features a multi-million-dollar legal defense fund to aid victims of workplace sexual harassment.

For targets of sexual harassment in the workplace, especially women, it has been historically difficult to speak up for fear of retaliation. According to a 2017 poll conducted by ABC News and The Washington Post, 30 percent of women in the U.S. have experienced “unwanted and inappropriate sexual advances” from a male colleague. And nearly 95 percent of women who claim they experienced unwanted sexual advances at work say the men did not get punished.

“It’s not easy and it takes a lot of courage, but things are changing little by little, and it’s because of more people finding the courage to stand up,” said Candice Blain, Esq., a managing attorney at Blain LLC in Atlanta. Blain, who is also a survivor of sexual assault, has focused on helping victims defend themselves in cases of sexual harassment, cyberbullying and human trafficking.

One thing is for certain. Whereas complaints like the one filed by Cannon might once have been brushed aside by higher management, the tide may be changing in workplaces across the country. Fueled by the heightened awareness of sexual harassment in the workplace, women may find their management more receptive to their complaints and more willing to take action against offending colleagues.

“Having more public role models to give a voice and safe space to reporting these issues is only going to further empower people to not feel as if they have to be shackled by the shame of experiencing discrimination in the workplace,” Cannon said. “By sharing our stories, we can be our best advocates.”

The best thing you can do if you experience inappropriate behavior from a colleague or superior is to be prepared. From bringing any relevant documentation with you to learning about your office’s specific sexual harassment policies, there are steps you can take that will help ensure you did everything in your power to appropriately report what happened.

Tips to report sexual harassment or assault in the workplace:

Report the incident to your company first.

Although some companies may choose not to take action, it’s still an important first step to look up your company’s harassment policy and follow the proper protocol for reporting.

Karla M. Altmayer, an attorney and co-founder of Healing to Action, a Chicago-based organization that aims to end gender violence in the workplace, says it’s a good place to start.

“If a person has followed that policy guideline, then they have done everything in their power to ensure that the company has knowledge of the incident,” Altmayer said. The company’s knowledge of the incident is crucial in the event that legal action is taken later on.

Know when to escalate the situation.

Altmayer says that if an employee has followed the appropriate protocol and the company has not taken proper action, then an employee should file his or her complaint with the U.S. Equal Employment Opportunity Office (EEOC) or their local human rights agency. If you find yourself questioning whether or not your company took appropriate action, Altmayer says to trust your gut.

“Ultimately, if a person feels like the action that the employer took was not reasonable, then usually that’s the beginning of a sign that maybe there are grounds for filing a complaint,” she said.

In Cannon’s case, she knew she needed to escalate her situation after her direct supervisor failed to take it seriously, even if the end result was not the one she hoped for. “If it was something that had happened to me, I was sure it had happened to someone else, and could potentially happen to someone else in the future,” Cannon said.

Bring documentation of the harassment in any form.

Cannon’s decision to record and write about the incident immediately after it happened was crucial. Altmayer says documentation is integral to the success of any claims of harassment, and can take many forms.

One of the common ways news reporters have partly validated stories from women who have come forward with sexual harassment allegations is to ask close relatives or friends whether or not the women told them about the harassment at the time.

“Talking to people is important,” Altmayer said. “Because it does establish a record.” She says another piece of advice she gives her clients is to keep a journal. “Because if you’re keeping a journal in contemporary time with the incidents that are happening, then that is actually admissible as a [court] record.”

If it’s been a long time since the incident occurred and there isn’t documentation, Altmayer says that doesn’t mean the victim won’t have a strong case. “There are ways of establishing the harm that occurred and the credibility of the harm,” she said. One way is by talking about the experience with a therapist, who can then write about it or testify on the victim’s behalf.

“If you don’t have documentation, your testimony is still important … ” Blain said. “If it happened, it’s the truth, it is still worth speaking up and you can work your way around the documentation later on.”

Find an ally.

Cannon called her mom immediately after she wrote down what happened. She said she decided to call her not only because she trusted her mom, but because she worked as a legal administrator and had experience dealing with similar situations.

Blain says having an ally is a great idea, but to be cautious of picking someone at your workplace.

“The problem is that if the victim confides in somebody at the workplace before she actually reports it up the chain, that can create problems for her later on because there is a duty on the part of victim to report it as immediately as possible,” Blain said.

She explains that companies can use the fact that a victim spoke about the incident with his or her colleagues but didn’t report it as a way to say they didn’t know what was happening.

“If you’re going to talk about it in the workplace, the first person you should talk about it with is somebody who can put a stop to it,” Blain said.

Know that not all workplaces are treated equal.

Some companies — especially very small ones — don’t have sexual harassment protocols in place. Cannon’s workplace didn’t have such a protocol, which made it less clear for her on how to proceed with her complaint. Even though her superiors decided not to take action against her colleague, Cannon took it upon herself to meet with the director of human resources to help put policies in the book for reporting incidents of sexual harassment, since none had existed previously.

Altmayer says that for people who work somewhere without protocol, the target of sexual harassment should first consult a manager or someone at the company who has hiring or firing power. She reiterates that one of the most important things is for a company to have knowledge of the incident occurring. If a workplace doesn’t take action, Altmayer says victims want to be able to have the power to say his or her employer had knowledge of the incident and could have done something, but didn’t.

“If you tell your supervisor who doesn’t really have hiring or firing power, that is not enough to bind the employer to actually take action,” she said.

Be prepared for retaliation — and document it.

For employees who don’t have the financial means to gamble with their livelihoods, speaking up against a colleague and facing potential retaliation in the workplace could easily dissuade them from reporting harassment.

If you do speak up, however, and your company retaliates against you in some way — such as reducing your work hours, turning you down for a raise, or moving you to a department that doesn’t match your skill set — you may have an even more firm case against them.

Blain says victims who are nervous of reporting sexual harassment for fear of workplace reprisal should know that retaliation is actually a separate claim.

“The reason that’s important and why victims should take comfort in that is because even if the original claim of harassment is not successful — even if you ultimately can’t prove it or win it — if you reported it and you were a victim of retaliation, that in and of itself is a separate violation,” she explained.

So, if a woman does not win a workplace sexual harassment lawsuit, she can still win one related to retaliation from the incident.

Document the incident and contact the EEOC or legal aid groups, such as Time’s Up.

How companies can better manage harassment claims

Altmayer shares this advice for companies looking to create or tweak their sexual harassment code.

Consider keeping the target’s identity anonymous.

“There’s no law that says that the information has to be kept anonymous,” Altmayer said. “But there are definitely best practices.” Her advice to companies who might be creating or tweaking their current policies is to have a rule in which they keep the identity of the complainant confidential.

Having the victim’s identity revealed could have major consequences. “They might be retaliated against,” she said, “or further harassed.”

Don’t put the offender and the victim in the same room at the same time.

Cannon’s direct supervisor brought her and the offender into the same room to discuss what happened. She says her direct supervisor wanted to give the offender the opportunity to share his side of the story.

Cannon, who no longer works at the community center where the incident occured, says that because she had conviction in what had happened she was OK with this. “But I could imagine that would be a really uncomfortable situation for someone else,” she adds.

Altmayer believes bringing people into the same room is a bad idea. “That’s never good practice,” she said. “Because you’re talking about someone who is really fearful of coming forward in the first place, who has put a lot on the line, and is taking a big risk in the workplace culture.”

Tweak the protocol’s language.

Research conducted by the Harvard Business Review found that often times, the language in companies’ sexual harassment policies is ineffective.

They gave 24 employees of a large government organization a copy of their company’s sexual harassment policy and found that nearly all of the participants found the language to be more concerned with perceptions of behaviors instead of behaviors themselves. “The policy was perceived as threatening, because any behavior could be sexual harassment if an irrational (typically female) employee perceived it as such,” the study’s authors wrote.

Consider taking a close look at your company’s policy to ensure it resonates well with all employees.

Be as proactive as possible.

“It’s important also for employers to think about what steps they can take to prevent the violence from happening in the first place,” Altmayer said.

Being proactive includes ensuring both men and women are at the table to discuss company culture, “because in many of these cases, it’s difficult to protect yourself, especially if you’re in a workforce that is predominantly male,” she said.

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Tiny Home Retirement: How Downsizing Helped Me Retire Early

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tiny home living
When Rhonda Jourdonnais, 64, decided to retire early, she knew she needed to downsize her monthly housing costs. So she bought a tiny home on Whidbey Island in Washington State.

When Rhonda Jourdonnais turned 62, she began feeling she was ready for retirement. She had worked as a veterinary technician and assistant for 25 years, and wanted to try living off Social Security. But on a fixed income, there was no way she could afford her monthly mortgage and homeowners association fees at the townhouse she owned in Grass Valley, California.

She thought of different ways she could make her vision a reality, and then a drastic idea sprung to mind: She’d live in a tiny home.

Jourdonnais, 64, had followed the tiny-home movement since it began gaining popularity in the early 2000s. “Tiny House, Big Living” premiered on HGTV several years ago, and the TV show rekindled her interest in the movement. She was living in California at the time — where she’d been for five years — but says she wasn’t happy. She envisioned moving back here she used to live, on Whidbey Island in Washington State.

“In California, the housing is too expensive,” Jourdonnais tells MagnifyMoney. “I wouldn’t have been able to retire and still keep up my townhouse without working.”

The monthly HOA fee for her townhouse was close to $400, which would not have been sustainable.

She decided to take the leap in  2015. She sold her townhouse at a profit and put that money into her IRA. In October 2015, she flew to Colorado Springs, Colo., to order her tiny home. She found a company there that had been in business since 1999, and she considered them the most reputable. In December of that year, she retired from her job and in February 2016, she moved into her 8-by-24-foot home on a friend’s six-acre property on Whidbey Island. She pays her friend $200 per month to stay on her property.

“The tiny home made retirement possible,” she says.

Toward early retirement

Jourdonnais says that since moving into her tiny home, she lives on roughly half of the money she did before retirement. Before, she would have had to work until she was 70 to save enough for retirement, and she didn’t feel physically or emotionally prepared for that.

Jourdonnais and many others are turning to tiny-home living as a way to make early retirement possible.

According to Senior Planet, 40 percent of tiny-home owners are over age 50. And there are other advantages that seem tailor-made for older Americans. According to figures cited in a CBS Moneywatch report from 2016, 89 percent of tiny house owners have less credit card debt than the average American, and 65 percent have none at all. Additionally, tiny home owners have about 55 percent more savings in the bank.

Long thought to be a lifestyle primarily for those interested in achieving more peace of mind through fewer objects, it has also become a way for many people to retire earlier with fewer utility costs, lower property taxes and little or no mortgage. (The average home in the U.S. costs $272,000, compared with $23,000 for a tiny home, according to The Tiny Life.)

Though pop culture has made the concept of tiny-home living popular, it’s still quite rare. Only 1 percent of homes purchased in the U.S. are below 1,000 square feet, and the average tiny home clocks in at somewhere between 100 and 400 square feet, according to data compiled by the blog Restoring Simple.

Weathering the challenges

Tiny-home living is rife with challenges, including complicated permit and zoning codes. But Jourdonnais says the biggest ongoing hurdle for her is simply adjusting to the space, especially on cold, rainy days.

“If I get up to go into my kitchen it’s like two steps,” she says. “If I go into my bathroom, it’s two steps. If somebody was claustrophobic, they probably wouldn’t like the lifestyle.”

Her advice to people interested in retiring early by moving into a tiny home is to try it out before buying a property. The U.S. has numerous tiny-home rental communities, which Jourdonnais recommends. “The thing I miss the most is the space,” she says. “It is a really big adjustment. It’s definitely worth it for people to try it out in some of the rental communities.”

But overall, Jourdonnais has loved her new lifestyle. She regularly takes a small pop-up travel trailer to campsites with her dog. (Some people actually travel with their tiny houses, but she does not — she says she doesn’t have a truck big enough to pull it.) And she has already traveled much more in retirement than she ever anticipated.

Jourdonnais has planned her finances so that she can sustain tiny-home living for many years to come, assuming her Social Security remains the same. “I imagine it could be the way I live the rest of my life,” she says, “as long as I stay healthy.”

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What Happens to Debt When You Get Married?

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According to the New York Federal Reserve, total student loan debt in the U.S. has reached $1.3 trillion, while more than 44 million Americans have student loan debt. Between these figures and soaring credit-card debt, paying off all we owe can take some people years, if not decades. 

The problem can seem particularly acute for young couples, more and more of whom are getting married with tens or even hundreds of thousands of dollars to pay off. In many instances, one partner has significantly more debt than the other. 

When Jeff and Cassandra Campbell of Austin, Texas.,  got married in 2006, Jeff was $61,000 in debt — his was a combination of credit card debt, a second-home mortgage and a car loan. Cassandra was debt-free, but the couple immediately agreed that with marriage, his debt was now the burden and responsibility of both of them.   

“I believe that successful couples combine everything when they say, ‘I do,’” says, Jeff, 53. “It’s no longer my income or your debt, it’s ours.”

Deciding how to tackle a single spouse’s or partner’s debt is no simple thing. It might be nice to chip in to help pay down your beloved’s debt, but in the eyes of the law, marriage doesn’t necessarily mean you have to. 

What happens to debt when we marry? 
 

Adam S. Minsky, a Massachusetts-based lawyer and expert in student loan law, says that although it varies by state, most of the time debt brought into a marriage only affects the spouse who brought it in.   

“Generally speaking, certainly where I practice here in Massachusetts, there is no way to make a spouse liable for a debt,” he says.

An exception might be if the couple did a form of refinancing once they got married and now jointly own the debt together. But if one spouse brought a debt into the marriage and both spouses paid off the debt together, the other spouse would not be liable for the debt, and that debt wouldn’t affect his or her credit score.

“As long as [the debt] only stays in one of their names, it’s only going to be reported for one of them,” Minsky says. 

There are, of course, slightly different rules when it comes to couples who are divorcing. For example, if a spouse helped pay off the other’s debt in marriage, that circumstance is often taken into account in divorce proceedings, Minsky notes. 

Learning the legal nuances of spousal debt, having necessary premarital conversations and understanding  optimal strategies for paying off debt can allow a couple to avoid the uncomfortable and frustrating conversations that might accompany one spouse having significantly more debt that the other.

Here are some tips on how to tackle debt as a couple:  

Have those tough (but essential) conversations before getting hitched.

Minsky says his greatest piece of advice for couples in which one partner has significant debt and the other doesn’t boils down to this: Talk about it openly before marriage. 

“Communication is the most important thing,” he says. “Because you don’t want to get married and then find out there’s a bunch of debt you didn’t know about, or you didn’t fully understand the nature of the debt, or you didn’t have a plan. I’d say develop that communication and be comfortable talking about it.” 

Eric Bowlin, 32, a real estate investor based in Worcester, Mass., says he and his wife, Jun — whom he met during graduate school—always approached their finances as a team. Eric says Jun accepted his roughly $85,000 debt ($60,000 of which was related to student loans) before they got married in 2009. But a tough conversation ensued when Eric wanted to make a large real estate investment before they had paid off the debt.  

“I deployed to Afghanistan” around 2010, he says, “and when I got home, we had saved about $100,000. We could have easily paid off all my student loans, car and half the multifamily house we owned, but I told her I wanted to use every dollar to invest in more real estate and I wanted to drop out of our Ph.D. program.” 

He says despite Jun’s hesitation, she agreed. “To this day I’m amazed she ever agreed to let me do that,” Eric says. He spent all of his savings, maxed out all his credit cards and borrowed about $40,000 from friends.  

“She was crying at night and I couldn’t sleep because of the stress,” he says. But his decision paid off. He has since built up a successful real estate portfolio, and the couple paid off their debt in 2016.

Employ strategies for paying the debt off together.

Once you and your partner have agreed to tackle the debt together, come up with a solid plan.  

“I’ve seen trouble happen when married couples never really talked about [debt], and then it’s a thing,” Minsky says. “Or they didn’t really come up with a plan and now there’s complicated feelings of resentment or guilt or shame.” 

The plan a couple employs will vary based on an array of variables: the amount and type of debt, income level, housing situation, location and more. The Campbells, for example, didn’t decide to pay off their debt until the birth of their first daughter. 

Shortly thereafter, they discovered the “snowball method,” popularized by personal finance personality Dave Ramsey, and decided to pay off their debts from smallest to largest.

They put retirement savings and vacations on hold, paid cash for everything except bills and generally limited their eating out and social activities. They became debt-free about five years ago.

Jeff now blogs about personal finance and relationships, and his advice for newly married couples is to agree on a budget before each month. 

“Some spouses will naturally be more of the spender, saver or math nerd,” he says. “So while it’s not crucial that both be involved in doing everything, the discussion should happen prior to the start of each month about where ‘our’ money is going to go, and what out of the ordinary expenses may be happening.” 

Don’t forget about your taxes.

Minsky advises giving thought to how you will file your taxes, especially in the case of student loan debt.

For example, if one spouse mostly has federal student loans and is going to do an income-driven repayment plan, there could be incentives for filing taxes as an individual as opposed to making a couple’s joint filing. That way, the income of the spouse without student loan debt won’t be factored in.   

We have previously explored the nuances of deciding whether or not to file jointly or single when spouses have student loan debt. 

Have a story to share? Send us a note at info@magnifymoney.com.

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Life Events

How to Make a Career Change in Your 40s

Editorial Note: The editorial content on this page is not provided or commissioned by any financial institution. Any opinions, analyses, reviews or recommendations expressed in this article are those of the author’s alone, and may not have been reviewed, approved or otherwise endorsed by any of these entities prior to publication.

 

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Chandrama Anderson was the senior director at a technology start-up in the heart of Silicon Valley when she decided it was time for a career change. At the time, she was in her early 40s and grieving the recent deaths of her daughter and grandparents.

She decided she wanted to do what she called “work of the heart.” For her, that meant pursuing a career as a family therapist.

Having earned her undergraduate degree in journalism and creative writing, she would have to go back to school for a master’s in order to transition to psychology. She quit her lucrative job at the tech firm and enrolled at John F. Kennedy University in Pleasant Hill, Calif., where she earned a master of arts in counseling psychology/holistic studies over the course of three years.

Going back to school after working for 25 years was daunting, but she didn’t let the intimidation factor stop her.

“A person said to me, ‘You’ll be 48 when you’re a therapist,” she recalls. “I replied, ‘I’ll be 48, or I’ll be 48 and be a therapist.’”

Fifteen years since she quit her job, Anderson, now 57, is the president of Connect2 Marriage Counseling, a couples counseling practice in Palo Alto. She oversees a team of therapists who see people primarily for marriage counseling, premarital counseling, grief and relational issues.

Running her own team of therapists wouldn’t have been possible if Anderson hadn’t taken a risk and made a career change later in life, when she truly felt it was time.

As Anderson’s example shows, switching careers in one’s 40s is definitely doable. But it does require the right amount of planning and forethought.

Kerry Hannon, a retirement, personal finance and career change expert — and the author of numerous books, including “What’s Next? Follow Your Passion and Find Your Dream Job” — says there’s been an uptick in the number of people switching careers in their 40s and even their 50s.

Indeed, a 2014 study from USA Today and Life Reimagined, an organization dedicated to helping people reimagine their lives, found that 29 percent of people ages 40-59 were planning to make a career change in the next five years. Numerous factors are at play in such findings, but Hannon believes that among the biggest, it’s easier to start a business and ramp up one’s education online today.

Many people who change careers at this stage in life, Hannon says, do so because of defining and often tragic life experiences, such as a death in the family or a serious illness. That played a factor in Anderson’s metamorphosis.

“They pause and they say: ‘Is this what it’s all about? Is this what I really want to be remembered for? Is this how I want to spend the rest of my life?’” Hannon says.

There are certain roadblocks to changing careers in middle age: Financial readiness is one, and workplace age bias another. One 2013 AARP study found that three out of five older workers said they had experienced or witnessed age discrimination at work.

Hannon believes making a career switch at this age can be done if one takes the right steps.

Move for the right reasons

Before anything else, take a long, hard look at why you’re intent on making this change.

“First, do your soul-searching about why you want to make this jump, this transition to something new,” Hannon says. Put another way: Really drill into your motivation and figure out if this is your passion, or if you’re simply in a rut at your current job.

To say Mounir Errami put some serious thought into becoming a doctor in his 40s would be an understatement. After working several different jobs over the course of his career, Errami — now a doctor at University of Texas Southwestern Medical Center in Dallas — knew he wanted to return to medical school at the age of 38. He had initially started medical school at 18 in Lyon, France, but dropped out. He then pursued a Ph.D. in biochemistry and bioinformatics, as well as an MBA, and started two business.

His first business went under and once he was in his late 30s, he sold his second one, a software company. He then took a few years off to spend with his family.

After a reset, he knew he wanted to return to medical school, lest he always have regrets.

If he hadn’t made that choice, he says, “it would’ve been sort of an unfulfilled quest that I had started and never finished.” He adds, “I’m very happy I’ve done it.”

Once you’ve identified your intended path, take a look at the marketplace, Hannon says. “What’s the market for it? What’s out there? Who’s currently doing it? Reach out to those people. If possible; network with people who are currently doing the kind of work that you would like to do.”

Just because you think you know your new life is calling, that doesn’t mean it’ll fulfill your every dream. After all, it’s still a job. Figure out if you’re OK with the inevitable downsides of a new career before diving in.

“If possible, it’s really, really important to do the job first,” Hannon says. “Volunteer or moonlight. Something might feel dreamy and like, ‘Oh my gosh, I always wanted to do this,’ but when you’re actually doing it every day, it might not have that glamour to it that you thought.”

Facing a pay cut

For some workers, the whole point of pursuing a new career in their 40s is to leave one low-paying field for a job with better financial prospects. But in reality, the opposite may be true.

“You absolutely have to get financially fit,” Hannon says. “It’s really critical.” She says it’s likely you’ll earn less when you begin your new job — either because you’re a newcomer or you’ve started your own new venture, in which most of the money goes into the business. Coupled with the fact that most career changes occur on a three- to five-year timeline, factoring in a return to school and additional training, you’ll want to save up.

If you’re taking a substantial pay cut, focus on paying down lingering debts or downsizing your lifestyle to fit your new, reduced income.

“At a certain life stage, you might also be able to downsize your home,” she says. Indeed, some people in this demographic might have children who have already left home.

Anderson and Errami were both fortunate to be in a solid financial condition before entering school. Anderson says she inherited some money from her mother and grandmother, while Errami used funds saved from his previous business.

Not having to worry about finances when switching careers means you can focus on the path ahead, in all its nuance.

“If you’re financially fit, then you have options,” Hannon says. “Then you give yourself the opportunity to try different paths, to try new things and move in a different direction without that burden of a must-have salary.”

Don’t quit your day job just yet

Changing careers after decades in a certain field isn’t something to be taken lightly. As previously discussed, it’s vital to make sure you aren’t just restless in your current position. Hannon says you should really identify your “why” before making any drastic decisions.

“What’s the motivation?” she asks. “Is it that you’re just bored with your job right now? Because there are lots of ways to fix that.”

Perhaps you need to work in the same field, but move to a different company. Or perhaps you need a new position within your existing field.

And if you ask yourself these questions and are still fairly certain you want to switch careers, do not quit right away. Saving up around six months’ worth of salary is a great way to ensure you’re financially ready for a change. If you don’t have this much money in the bank, stay at your current job for a bit longer and try moonlighting or working a side gig in your desired field.

Going for it

Once you’ve decided you’re ready to switch careers, Hannon suggests taking these four steps:

  1. Go slow. Take your time and do one thing every day toward making the change. Start out by asking someone in your intended profession for coffee.
  2. Again, don’t be so quick to quit your day job. There are exceptions to the rule, but most people shouldn’t quit their job. Instead, volunteer or get a side job.
  3. Take baby steps. This doesn’t mean you can’t get started right away. Just don’t spend a huge portion of money or dedicate an immense amount of time to your new career path until you’re absolutely certain it’s the right fit.
  4. Don’t be afraid. Hannon says she has spoken with hundreds of people who have made later-in-life career transitions. She says they invariably say, “I wish I had done it sooner.”

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Jamie Friedlander
Jamie Friedlander |

Jamie Friedlander is a writer at MagnifyMoney. You can email Jamie here

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