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When Is It OK to Use Another Job Offer to Get a Raise?

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We’ve all heard stories about leveraging a new job opportunity for a higher paycheck, or jumping at new job opportunities in the hope that they’ll offer a better salary.

When this strategy does work in your favor, you may see your salary rise at a much faster pace than your colleagues, who might choose to wait in asking for a raise during the next annual review cycle. Just consider these stats: Workers who change jobs see a 5.2% pay increase on average, according to a 2016 study conducted by Glassdoor Economic Research. That is more than double the average 2% pay increase the typical employee earns each year, according to the U.S. Department of Labor.

You don’t have to necessarily take the new job to get the higher paycheck. You could try to use it as leverage to get a raise where you currently work.

Amy Gallo, a contributing editor at the Harvard Business Review and author of the “HBR Guide to Dealing with Conflict,” tells MagnifyMoney she has seen firsthand how this can work for some employees.

In researching her book, Gallo spoke with an employee who had a hard time convincing HR to give her raise. But when she received an outside offer a year later, “HR was much more cooperative since there was a counteroffer in hand,” she said.

So, what is it about the counteroffer that controls the collective purse strings? In general, it reminds the company of how valuable you are, because sometimes they end up forgetting, especially if you’ve been there for a while. The counteroffer also gives the employee more leverage and information to compare with their current salary.

In her studies around negotiation for the Harvard Kennedy School, Hannah Riley Bowles, a senior lecturer, found that when people used an outside offer to raise their salary, it legitimizes their request for a higher salary. Still, despite its potential huge payoffs, the counteroffer, as you can imagine, can also backfire.

Paul McDonald, senior executive director for global staffing firm Robert Half, advises against using the counteroffer to boost your salary.

“It can burn bridges with the other firm and may cause your boss to question your loyalty and interest,” McDonald said.

In fact, in this 2015 survey, Robert Half, also a national recruiting firm, found that nearly eight in 10, or 78%, of CFOs said they wouldn’t be pushed to make a counteroffer to keep someone from leaving — and with good reason. There’s always a chance that the employee will leave shortly after anyway if they aren’t happy in their jobs to begin with. The Harvard Business Review reported that people who received a pay increase from a counteroffer started their job search again within six months.

So what’s the key here? When is it OK to use an outside offer to get a raise, and when is it not OK?

OK: If you’re genuinely interested in another job.

Generally speaking, it’s OK to use the counteroffer to get a pay increase or promotion if there is genuine interest in the other job. Because, if you’re genuine about your motives – for example, being paid fairly or getting additional responsibilities that you might crave – then you’re merely reminding the company that you’re a valuable asset it needs to support professionally, personally and financially in terms of growth.

Not OK: You’d like to stay with your current employer and are just using the new offer as leverage for more pay.

Be cautious if you’re using the counteroffer only to get a raise or promotion with no intentions of leaving. This carries much higher risk, Gallo warns.

“It may damage the social capital you have in that organization,” she said.

Jared Curhan, a faculty director for the Massachusetts Institute of Technology’s Negotiation for Executives program since 2011, agrees that this can be a “very dangerous strategy” but adds he wouldn’t rule it out altogether.

“I would say that if you really value your relationship, then alluding to your alternatives outside has to be done delicately because that could really damage your relationship,” Curhan explained.

The bottom line: Of all the tactics you could use to negotiate for more pay, using an employment offer from another job can potentially get you the greatest outcome — but also carries the most risk.

If you decide you’re willing to take the risk and go to your employer with another job offer, here are some tactics you should keep in mind:

Stick to the facts

First, always wait for the final offer letter before you begin negotiating with your current employer, says McDonald, who adds this a common mistake.

Next, research your worth and check out resources like Glassdoor, Salary.com, PayScale and the Robert Half Salary Guides to get an idea of your earning potential.

Talk to people in your industry about trends they’re seeing and consider other negotiable terms that affect your compensation package, like bonus and equity.

By getting a realistic idea of how your company measures up with its competitors, you are more prepared and can even potentially negotiate for education programs, like through General Assembly and Dev Bootcamp, which could boost your income in the long run.

Don’t go into the negotiation with a “me versus you” mentality

“The conventional view in negotiations is that it’s a battle between two sides like a seesaw and when one goes up, the other side goes down,” said Curhan. “So you can’t go up without the other side going down.”

However, when you ask business executives to list out their four most important negotiations ever, says Curhan, they tend not to be negotiations that are win-lose. Instead, they were typically negotiations where both parties walked away feeling like they did a little better. They had expanded the pie, so to speak, before splitting it between the two parties.

For example, if an employee is using another job offer to get a raise, instead of using a “you versus me” mentality which could sound more like a threat (“Match my offer or I’m leaving”), Curhan suggests thinking about it like metaphorically moving to the same side of the table. By looking at the issue from similar viewpoints, you can now jointly work on the problem together. The employee is no longer pointing the finger and saying their boss is the problem. Instead, they might say something like this:

“I want to thank you for introducing me to this company and for the offer that you made. I have also been doing some research and I would love to be able to work here, but I also have to pay attention to the offers I’m receiving elsewhere. And through that, I want to be able to feel like I’m being paid a rate that’s commensurate with the market. And you perhaps have done some research on the market, too. Maybe we can pool our research on the market together, and can jointly come up with a fair rate of pay.”

Consider the other party’s interest

Often when we enter negotiations, we think about our points and arguments, such as the 10 reasons we deserve a raise. While that’s important, says Gallo, if you only focus on that, you’re setting the conversation up to be a me vs. you battle, which is what Curhan advised against earlier. Instead, you need to also be thinking about what your boss is up against. That’s how the conversation will become more of a collaboration where you’re aligned in terms of the strategy of getting you what you need.

So think about what that person needs to say yes to you, suggests Gallo. Think about their concerns.

“For instance, when it comes to pay increase, managers are often worried about equity,” said Gallo. In other words, if you get a pay increase, what does that mean for how you are paid related to others on your team? “You have to think about that from your boss’s perspective,” she added, so think in terms of how can you help them say yes.

Knowing when to walk away

If you’re not paid fairly and it’s just about the money, by all means, bring that data to your boss, says Gallo. But before you go, know the point at which you’re willing to stay or go. So, say you want a $20,000 pay increase — are you willing to walk if your boss offered you $10,000 instead?

Back in January, Alison Fragale, negotiation expert and professor of organizational behavior at the University of North Carolina, told MagnifyMoney that before going into the negotiation, you should always be able to answer three questions:

  1. What are you trying to achieve?
  2. What’s your walkaway point?
  3. What’s the alternative?

At the end of the day, using an outside company’s job offer to get a salary increase is a risky tactic that if employed tastefully, could work in your favor. However, make sure your intentions are noble. For instance, if it’s just about the money and you’re genuinely interested in the other company, and could potentially see yourself working for them, then have that conversation with your current boss.

However, if you’re going to your boss with the intent to strong-arm them to meet your demands with no intentions of going through with your threats, then using the counteroffer could get professionally dangerous for you quickly.

And maybe most importantly, think about negotiations as an alignment or a collaboration instead of a “me versus you” mentality.

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Vivian Giang is a writer at MagnifyMoney. You can email Vivian here

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U.S. Regulators Slap Wells Fargo With $1 Billion Fine — Will Consumers See Any of It?  

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Update: Two federal agencies jointly announced a $1 billion settlement with Wells Fargo on Friday, ending speculation over how tough regulators would be on the bank in the wake of fraud allegations that surfaced last year.

The Consumer Financial Protection Bureau and the Office of the Comptroller of the Currency both found Wells Fargo violated the Consumer Financial Protection Act (CFPA) after an investigation into the bank’s mandatory auto insurance program and rate lock extensions charged to mortgage borrowers.

“We have said all along that we will enforce the law. That is what we did here,” CFPB Acting Director Mick Mulvaney said in a statement.

The CFPB’s announcement wasn’t at all unexpected. In a notice to investors earlier this month, Wells Fargo revealed it may face penalties of up to $1 billion from U.S. regulators to settle fraud allegations that came to light last year.  

The bank admitted to forcing auto insurance onto customers and unfairly charging rate lock extensions to mortgage loan customers last year, and has been under investigation by the Consumer Financial Protection Bureau and Department of the Treasury’s Office of the Comptroller of the Currency.  

Though the estimated financial penalty is steep, consumer advocates say they worry the punitive fee may not be enough to reverse a culture of systemic wrongdoing.  

Where will the $1 billion go?

The penalty charge is much larger than the fine Wells Fargo, the country’s third-largest lender, incurred for its fake accounts scandal, where it paid $185 million in fines in 2016 

Because of the way CFPB penalties are structured, the high cost may indicate that more customers were harmed at a greater degree from the auto insurance and mortgage loan violations, rather than just the CFPB getting tougher on banks, said Ed Mierzwinski, senior director of the federal consumer program at U.S. PIRG, a public interest advocacy group. 

“You have to have a lot of violations that are pretty extreme to get up that high,” Mierzwinski said.  

Will victims get any restitution?

In its statement Friday, the CFPB was vague about whether or not victims would be financially compensated. It said “Wells Fargo will remediate harmed consumers” but gave no further detail.

The estimated $1 billion may or may not include restitution paid to victims, Mierzwinski added. If the charge is purely for punishment and will not be used to pay back those harmed, the total will likely be split between the CFPB and OCC, though it’s unclear whether the split will be even, he said.  

The fee paid to the CFPB will be deposited into the bureau’s Civil Penalty Fund. The money collected in this fund will be used to compensate victims in circumstances when violators are unable to pay back victims. The fund can also be used to pay for consumer education and financial literacy programs, according to the CFPB.  

Mierzwinski said he hopes victims will be compensated, and that the civil penalties that follow will be high enough to punish “the corporate wrongdoer” and deter other banks from following Wells Fargo’s misbehavior.  

Don’t worry about Wells Fargo

While unprecedented of a move, the estimated $1 billion won’t be such a large hit for Wells Fargo, which was founded in 1852 and is headquartered in San Francisco, that they are unable to absorb the impact, said Edward Jones analyst Kyle Sanders. The $1 billion only accounts for approximately 5 percent of the bank’s profit in a given year, and the company will likely succeed in negotiating it down, he said.  

The real blow will come in the form of reputational damage as a result of ongoing reports of widespread misconduct within the company, Sanders said. If Wells Fargo agrees to pay the fine, he said the regulators will likely wrap up this particular investigation, allowing the company to move on while being held accountable through audits and examinations.  

Wells Fargo still faces other ongoing investigations, including one concerning potential violations with its wealth management fund. Sanders notes that regulators forced the company to make changes over the last year to heads of departments like risk management and compliance and the board of directors.  

Along with penalty fees, drastic changes are being forced onto the company by regulators, a move Sanders has never seen before. He said he believes the harsh punishment that Wells Fargo faces is unique and doesn’t expect regulators to continue with the same tone going forward.  

Lawsuits from victims are expected, but after three years or so, Sanders said he expects it all to die down and for the bank to restore its reputation.  

“People generally have fairly short memories, and most people have not left the bank,” he said. “Customer retention has been good.”  

“It’s really difficult for a consumer now to hold the bank accountable for wrongdoing,” said Christine Hines, legislative director at the National Association of Consumer Advocates, based in Washington D.C. 

The company announced in October 2017 that it planned to “reach out to all home lending customers who paid fees for mortgage rate lock extensions requested from Sept. 16, 2013, through Feb. 28, 2017, and to refund customers who believe they shouldn’t have paid those fees.”  

But in February 2018, U.S. Sen. Elizabeth Warren (D-Mass.) wrote after a letter to Wells Fargo CEO Tim Sloan after a report in The Wall Street Journal said some notices were sent to the wrong people or with incorrect information. “The bank is providing the customers it harmed with inaccurate information or making them jump through hoops just to get their money back,” she wrote. 

A Wells Fargo spokesperson told CNN in February that customers who reached out about the mortgage fee were being issued refunds, and auto insurance refunds could be issued by midyear. 

Those harmed by Wells Fargo will likely have to depend on the actions taken by regulators, such as the CFPB, or try to join a class-action lawsuit and hope the bank won’t fight it, Hines said.  

Because Wells Fargo included arbitration clauses in its financial services contracts, victims have little power, she said. She believes many of the bad practices within the company remained hidden until recently because of these contracts. The clause forces individuals into arbitration, solving all disputes outside of court, and bans class-action lawsuits.  

Individual arbitration is costly to the consumer and it allows the bank to make its own assessments, Hines said. When customers are stuck with such few options, it’s important for the CFPB and OCC to step in and make things right, she said.   

“The regulators should keep the bank on a tight leash,” Hines said.  “That’s why the regulators are there, to hold them accountable.”  

Despite being exposed of misconduct and cheating customers in some instances, many could find it hard to leave Wells Fargo. There has not been a notable change in the number of customers, Sanders said.   

The company, which has over $1.9 trillion in assets, said in a recent press release that primary consumer checking customers were up 0.9 percent year-over-year for first quarter 2018. However, it noted that total average deposits for first quarter 2018 were $1.3 trillion, down $14.4 billion from the previous quarter.  

Changing banks can be inconvenient, and having a mortgage loan through the company makes it more difficult. It’s up to the individual to weigh the pros and cons of leaving the bank and not everyone can sever ties so easily, Hines said.  

While Sanders expects the penalty fees and “sweeping changes” to resolve many of the issues, Hines remains skeptical. She said she doesn’t know if a $1 billion fine is sufficient or too much, but she doesn’t see Wells Fargo turning over a new leaf, at least in the near-term, because the problems were so systemic.  

“Based on its record of cheating people over the last several years, the bank cannot be trusted with servicing its customers,” Hines said. “There could be more wrongdoing that we discover down the road.”  

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Get Ready for a Credit Score Boost as Tax Liens Fall off Reports

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Good news — you may see a bump in your credit score soon.

As of April 16, the three major credit bureaus officially removed all outstanding tax liens from consumer credit reports. The change was the result of long-anticipated requirements implemented by the Consumer Financial Protections Bureau (CFPB) after a review of credit reporting standards last year. In the review, the watchdog agency found credit reporting agencies often report erroneous information on consumer credit reports that they obtained from public records databases.

How much of a credit boost can you expect? If you had prior tax liens on your credit reports that will now fall off, don’t get too excited. Your score actually may not change much. VantageScore and FICO have each done studies about the potential impact the removal of civil judgements and tax liens will have on consumer credit scores, and the results were fairly modest. VantageScore found consumers would see only a 10-point increase and FICO estimated an increase of less than 20 points. The reason for such a meager credit score improvement could be because “most people who have judgments and liens have other unrelated derogatory entries, which is why the score changes aren’t terribly significant,” credit expert John Ulzheimer told MagnifyMoney.

Will this stop lenders from finding past liens on your record? In short, no, it won’t.

Liens are public record, and lenders looking to evaluate your credit can obtain records of any liens from other sources, such as LexisNexis, Ulzheimer says. For example, mortgage lenders will hire a title search company to search for outstanding liens against both borrower and seller in a real estate transaction, which goes above and beyond what will show up on a typical credit report.

Why the change is happening now: The decision to eliminate all tax liens follows a lawsuit last year that was settled with TransUnion to improve the accuracy of credit reports, further expanding the requirements the CFPB imposed last year. The lawsuit found there was “systemic inaccuracy of their judgment and lien records for many years,” said Leonard Bennett, founding partner of Consumer Litigation Associates and lead counsel in the lawsuit against TransUnion.

Bennett went on to say that one of the major problems with the reporting of liens and judgments on credit reports was the inconsistent sourcing of data. People with similar names were matched incorrectly, and this led to errors on credit reports. This can be further evidenced by a study the Federal Trade Commission did in 2013 that revealed that an alarming one in five consumers reported mistakes on their credit report, possibly as a result of false liens.

Currently only TransUnion is legally obligated to remove liens and judgments from credit reports, but Experian and Equifax are following suit to potentially preempt any lawsuits against them.

Are tax liens going to be taken off credit reports forever? Take note that the current removal of liens and judgments from credit reports is unlikely to be permanent. Bennett says if TransUnion can accurately prove it’s reporting liens to the correct customers, then they may be shown on credit reports again, but not for at least a year and a half.

Other changes: There were requirements imposed on all three bureaus in July 2017, per the National Consumer Assistance plan. This plan required civil judgment data to have a consumer’s name, address, Social Security number or date of birth before being added to a consumer’s credit report — creating more accurate reports.

Learn more: How to dispute credit report errors on your own

Check you credit report regularly. The best way to get ahead of false reports or fraud is to monitor your credit report using a free tool like My LendingTree (note: LendingTree is the parent company of MagnifyMoney) and request a free copy of your credit report. If you notice anything odd on your credit report, dispute it with the credit bureaus.

If you notice errors on your credit report, you will need to dispute them with both the credit reporting company — Equifax, Experian, TransUnion — and the company that provided the information (aka the information provider or furnisher; such as a bank, credit card company or landlord).

Step 1: Dispute errors with the credit reporting company. See below for several options:

 

Online

Mail

Phone

Equifax

https://www.ai.equifax.com/
CreditInvestigation/home.action

Mail this dispute form to:
Equifax Information Services LLC
P.O. Box 740256
Atlanta, GA 30348

(866) 349-5191

Experian

https://www.experian.com/
disputes/main.html

Mail a dispute letter to:
Experian
P.O. Box 4500
Allen, TX 75013

(888) 397-3742

TransUnion

https://dispute.transunion.com

Mail this dispute form to:
TransUnion LLC
Consumer Dispute Center
P.O. Box 2000
Chester, PA 19022

(800) 916-8800

Step 2: Dispute the error with the company that provided the information. We recommend following the CFPB’s instructions and template for disputing the error.

The dispute process typically takes 30 days, and no longer than 45 days.

The 5 factors that make up your credit score

Your credit score is made up of five key factors that allow lenders to accurately assess your ability to manage credit:

  1. Payment history — 35% of your score. This is the largest component of your credit score and is a record of your on-time or missed payments.
  2. Amounts owed — 30% of your score: Utilization is the amount of your total credit limit you use versus how much credit you have access to. This is an important factor because it’s how lenders judge whether or not you can resist the temptation to use all your credit. If you tend to max out your credit line, you pose a greater risk than someone who uses a small amount of their credit. Try to keep this ratio under 30% as a rule of thumb.
  3. Length of credit history — 15% of your score: The average length of your credit history across all credit products. This will fluctuate if you open a new credit card or take out a loan since your length of credit history will decrease — though it’ll bounce back in time. This is one reason it’s wise to keep old credit cards open, even if you don’t use them regularly.
  4. New credit — 10% of your score: This is the frequency of credit inquiries and new accounts openings. Your score can take a slight dip from these actions, especially if they’re within a small time period.
  5. Credit mix — 10% of your score: This is the different types of credit you have, including loans, mortgages and credit cards.

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

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5 Things to Look at the Next Time You Log Into Your 401(k) Account

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You’re a hard-working millennial in your 20s or 30s and you have an employer-sponsored retirement plan going, so you are saving for retirement. Well done!

Imagine this common scenario: Just after orientation with your human resources department, you decided to log into that fancy retirement account. But, after you set your contribution, the rest of the stuff was … overwhelming. Terms like “employer match” and “target-date fund” didn’t fully make sense to you. So, you may have made a mental note to Google them and said you’d get back to it, eventually.

Well, eventually has finally arrived. It’s great to have some kind of retirement game plan going — especially when you’re just getting started in your career — but to make the most of the money you’re stashing away for your gray days, you’ll need to fully comprehend what’s going on with your investments.

What to look at when you log into your retirement account

Everyone reading this may see something different when they log into their retirement account, and that’s totally okay, as these tips generally apply to all retirement accounts accessible to customers via an online portal.

“Every provider has a different website and some of them are very easy to navigate and some of them you kind of have to dig around a lot,” said Crystal Rau, a certified financial planner with Beyond Balanced Financial in Midland, Texas.

You may immediately see a landing page with all of your information and an easy-to-adjust contribution scale. Or, it may be like navigating a labyrinth.

Your contribution rate

First thing’s first, see what you’re working with. Check your contribution rate so that you’re clear on what’s being put into the account in the first place.

Your contribution rate is the percentage of your salary that goes toward your retirement account. The more you contribute, the more you will (hopefully) have in retirement, but you’ll have less money per paycheck to play with today.

It’s important to know how much money you are currently contributing so you can set it to match your savings goals or make adjustments as necessary.

How much you should be contributing: 10% … or more.

General rule-of-thumb advice is to aim to put 10% of your income toward retirement. But you can be more aggressive than that. Rau says you should aim to put 15% to 20% of your income into the retirement account, especially when you are young.

“If you learn to live on less in the beginning, as your salary grows over the years, you’re going to be used to living with that percentage gone already because you’re used to saving it,” explained Rau.

Justin Harvey, founder of Quantifi Planning, a Philadelphia-based financial planning company says “Ten percent is a good savings rate … but if you can save 20%, 30%, I’d say do it because the more you can save and the quicker you can do it, the quicker you won’t be beholden to an employer.”

The best strategy for maximizing your retirement account, he suggests, is to pick a number as high as you can stand that would allow you to still pay your bills every month.

Your employer match

Always look to see if your employer will match the amount you place into your retirement account.

“I always say as a general rule of thumb try to max out at least what the employer will match,” said Reshell Smith, a certified financial planner for AMES Financial Solutions, a virtual financial planning company based in Orlando, Fla. “Anytime you have an employer match and you are not getting it, that’s like leaving free money on the table.”

If an employer match is not shown on the website, Smith recommends checking your monthly statement for the information, or simply asking the person in charge of benefits in your company’s human resources department.

To make sure you don’t leave any free money on the table, use the matching point as a gauge to set your contribution level. Make sure you are at least contributing the amount you’d need to take full advantage of the match.

For example, some companies may match something like 50% of your contribution up to 5% of what you contribute from your salary. So in that case, you would want to set your contribution at 5%, to get the entire employer match.

“Those are free dollars that are essentially equivalent to earning 100% in the stock market. As you know you, can’t really buy a stock and guarantee a 100% return,” said Harvey.

After that’s accomplished, work upward in your budget from the match point to see how much more you could be putting toward your golden days.

Investor or asset allocation quiz

Sometimes, your provider’s website will offer employee resources like a risk tolerance or asset allocation quiz, says Rau. You can take the provider’s quiz or others provided online like this one from Vanguard, or read this guide from Principal to get an idea of how your cash should be distributed among different types of investments available to you. This is also known as your asset allocation

Source: Sample asset allocation quiz from Principal

How risky should I be?

Your risk tolerance in investing refers to the degree of variability in investment returns you are able to withstand. Younger investors generally have a higher risk tolerance level because they have more time to absorb volatility in the market, so they may be more aggressive investors, whereas older investors may want to practice more conservative investing to protect their retirement funds.

But, that’s generally speaking. Depending on your personality, investment experience, time horizon and financial situation you may be more or less risky of an investor. Choose allocations based on what’s best for your needs.

Your investment or asset allocation

If you see a pie chart or some other chart with categories, take a look at it. It may give you an idea of your current asset allocation. The allocations you see will likely be a mix of equity (or stock) and fixed assets (bonds and cash). The pie chart won’t get into much detail beyond the general labels, but it will show a general breakdown of where your assets are sitting at the moment.

“Look at your pie chart or your breakdown and just make sure the allocation is appropriate for your risk [tolerance] level,” said Smith.

Why should you care about your asset allocation?

Your asset allocation is a window into how aggressive or how conservative you are being with your investments. If you’re heavily invested in stocks and you’re nearing retirement, you’re probably taking on too much risk and should shift more of your savings into conservative investments like bonds. If you’re young, however, you’ve got decades ahead of you to take risks and it’s typically advised that younger workers take an aggressive, stock-heavy approach to their allocation.

If you’ve never touched your retirement account, but you’re contributing, you may be surprised to find your funds may not be growing as you believed they were.

“More than likely, the contributions are going to default to a money market account, which is basically like a savings account,” said Rau. “There’s zero growth and so not taking action and choosing investments, you’re basically just putting your money in a glorified savings account.”

In some cases, retirement funds will automatically put you into a target-date fund, which is actually a nice way to start investing, especially if you’re not confident in choosing your own asset allocation yet.

A target-date fund is a mutual fund comprised of mixed investments you choose based on your age or the year you intend to retire. If you’re not familiar with investing or how to choose investments, a target-date fund may be a good option for you.

“The target-date funds are the easiest because the investments are chosen for you. They are rebalanced for you so that is the easiest way,” said Smith.

As you age, the fund’s assets will automatically be rebalanced to become more and more conservative.

Not sure what your ideal mix of stocks versus bonds is? Take your age and subtract it from 100 (or 110 if you’re more aggressive). The bigger number is how much you should allocate to stocks. The smaller is how much you should allocate to bonds.

If you take the asset allocation quiz, you may have a better understanding of the right mix of investments for you.

Fees on your investments

Investing isn’t free, because there are massive investment firms behind them pulling the strings. Some do more pulling than others, and they charge for that extra management. On the other hand, passively managed funds can be much less expensive.

The different investment options you’ll see in your 401(k) plan page each should come with information about fees. The key fee to look at is your expense ratio — the annual fee funds charge their shareholders to operate the mutual fund.

“Anyone that has a computer they should get into a website like Yahoo! Finance and type in that fund name and one of the first thing that pops up is an expense ratio,” says Rau. “Anything over 1% is more on the expensive side. Really expensive would be over 1.5%.”

Rau says the expense ratio isn’t the most important thing for new investors to pay attention to, but it’s something new investors should be aware of since it could cut into their overall return.

If you pay a 1% annual fee on your return and your fund averages 7% a year, for example, you would technically earn only a 6% return overall, instead of 7% because you’re having to account for those fees. She recommends choosing a fund with an expense ratio below 1%, closer to 0.7 or 0.8%.

You can get much lower fees that even that by choosing low-cost mutual funds, which aren’t actively managed by an investment firm and are much less fee-heavy.

Do an annual checkup

Don’t let this be the last time you check your retirement account until you either retire or leave your current employer. Check up on your funds at least once a year to see how it’s performing and consider rebalancing your allocations.

“If you’re in anything other than a target date fund whatever allocation that you set I would revisit it once or twice a year and rebalance back to that original allocation that you had,” said Rau.

For example, she added, “Over six months to a year if your stocks performed really well, your new allocation may be 90% stocks and maybe 10% bonds.”

Rau advises revisiting your account once or twice a year so that you’re not taking on more risk than you originally intended.

But, avoid rebalancing too much.

“There is an illusion that when you are trading stuff you’re going to increase your performance, which is false, says Harvey. “The stock market is going to do what it’s going to do. Look at it periodically, check your quarterly statements, if you’ve got a good strategy stick to the strategy.”

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What to Know Before You Buy a DNA Test

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

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Thanks to at-home genetic testing kits, the future is now.

But it can be difficult to know which of these spit-and-send tests to trust and which ones are trying to make a buck off our saliva. Read ahead for an overview of three popular testing services and important factors to consider if you decide to buy.

What are personal DNA tests?

More than 10 years ago, 23andMe was founded to provide consumers with direct access to their genetics. Patients could buy one of the California company’s kits without a physician’s approval at cut-rate prices. Since then, the DNA testing landscape has exploded, with at-home tests running around $100.

What to know before you buy

Direct-to-consumer DNA tests do not require a doctor’s note, but the American Medical Association recommends using them under the guidance of a doctor, genetic counselor or licensed health care professionals who help patients, including couples planning to have a baby, discover genetic traits. A word of caution: Genetic testing neither guarantees the likelihood — or absence — of disease.

To find a reputable at-home kit, genetic counselor Scott Weissman of Chicago Genetics Consultants says you should verify that the company does confirmation testing, meaning it will run your test twice to confirm the result. He also says reputable companies should have a genetic counselor on hand to answer customer questions. “If the company can’t put them through [to] a genetic counselor and they talk to a sales rep or customer service rep instead, I’d be worried,” Weissman said.

DNA tests can be purchased through a company’s website directly or through a third-party vendor like Amazon. Weissman, however, strongly recommends buying through the company itself.

Insurance generally won’t cover direct-to-consumer DNA tests, Weissman says, only paying for genetic testing if your doctor recommends it and you meet the criteria designated by your insurance provider. Because every insurance company has its own policy, contact yours directly to find out if DNA testing will be covered.

Read the fine print on privacy. Patients worried about privacy have reason for concern, but Weissman says most test providers do not sell or share your information for malicious reasons. Instead, they’re likely to use it for further research. Be sure to read the fine print when you sign anything from the test provider — that’s where they’ll disclose how they plan to use your information.

23andMe vs. AncestryDNA vs. Helix

DNA test

Cost

What information is included?

What can you do with the information?

How they use your data

Best for

23andMe

$99 for the ancestry option and

$199
for health and ancestry information

The ancestry portion shows your DNA’s geographic history.

The health option includes carrier information and diseases you’re more susceptible to, including Alzheimer’s and Parkinson’s

The ancestry information can be used to build your family tree.

The health results can be shared with your doctor for further screening

23andMe shares your results for research

People who want a mix of ancestry and health information

AncestryDNA

$79

Ancestry information, including your ethnic makeup and when your ancestors arrived in America

If you have any potential relatives in the system, you may be able to contact them for more information about the family tree.

AncestryDNA doesn’t store data with names attached. You can request destruction of your sample and records.

People who are primarily concerned about documenting their family origins


Helix

Start at $80 and vary based on what you purchase

Extra tests come from outside partners, which are reviewed by Helix.

Fitness and health information, such as what foods you’re sensitive to, if you have a rare form of diabetes or what kind of exercise your body responds to best

Tailor your diet and exercise to fit your genetic makeup

Helix only shares your data with the companies that service the extra tests that Helix provides. Helix doesn’t sell your data and you can revoke access any time

People who want to discover the intricacies of their body, including what foods are best for them and specific weight loss strategies

The unexpected consequences of DNA test results

A rare, but significant consequence of taking a DNA test is finding a new relative. That was the story of a biologist who gave his parents a 23andMe test as a gift, only to discover a family secret.

In this case, the scientist discovered a half-brother born from an extramarital affair, as the DNA Relative Finder option notifies users if their DNA is a match with someone else in the 23andMe database. The reveal was so damaging, the scientist’s parents divorced. If you don’t want to find any long lost relatives, skip that option.

Buyer beware. It’s also possible that test results could be used against you. Life insurance companies, for example, may deny coverage based on your health risks, including genetic information. The good news: The Genetic Information Nondiscrimination Act of 2008 (GINA) made it illegal for employers to discriminate or fire you because of your genetic makeup. GINA also prevents health insurers from denying coverage based on your genetic information.

How to interpret your results

If an at-home test reveals important information about your health, it’s time to contact your doctor. Most test companies will be happy to forward the results directly to your doctor or allow you to share them yourself.

Once you get your results, your primary care doctor may ask you to retake the genetic test, depending on the kind of DNA test you took. If you found out you’re at risk of high cholesterol, it may be as simple as watching what you eat or taking some medication.

The Angelina Jolie effect. However, if you find out you have a mutation for the BRCA1 or BRCA2 gene (which increases one’s risk of breast and ovarian cancers), it might be more complex. You’ll probably need to take more tests and meet with a clinical geneticist. In some instances, women may even have surgery to remove their ovaries and breasts (à la Angelina Jolie, who famously opted for a double mastectomy after discovering she carried a “faulty gene”). 23andMe recently became the first direct-to-consumer DNA test to start screening for BRCA gene mutations that increase the risk of breast cancer. However, the tests only screen for three mutations on the BRCA genes out of multiple possibilities. Some diseases, such as Alzheimer’s, have limited treatment options, so many question the value of knowing ahead of time.

The bottom line

Genetic testing is one piece of the health care pie. Many diseases, including cancer, can be traced to environmental conditions and personal choices.

“Genetics is amazing,” said Mayo Clinic researcher Matthew Ferber, “but for most healthy individuals, it only tells a part of the story. You still need to eat better, exercise, avoid smoking and alcohol, regardless of what your genetics tell you.”

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Here’s the Right Way to Close Your Expensive Rewards Credit Card

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Springtime is almost like the second coming of the new year — the weather is warmer, resolutions are renewed with new vigor and every other article is sharing advice with you about decluttering your life. Purging unneeded or expensive credit cards is common advice when spring cleaning your finances. Some credit cards, like rewards cards, involve a little more care and tact than closing any old regular credit card.

Rewards credit cards are, generally speaking, the most expensive credit cards to keep open, so they may be on your purge list if you’re not using them enough to make the associated costs worth it.

As a recent MagnifyMoney study found, the sign-up bonuses many reward cards offer come at a steep cost to consumers. The average annual fee on a card with a bonus offer is $120, up 62% from 2008. However, in the lenders’ defense, they’ve also bulked up rewards offerings on new credit cards in the time. A separate 2017 MagnifyMoney study found, since 2010, what banks spend to support credit card rewards has more than doubled, from $10.6 billion to $22.6 billion.

If you’re ready to ditch your rewards card, you’ll want to make sure it’s done with your best interest in mind — a minimal loss of rewards and a minimal change to your credit score. Here are a few tips on the right way to close a rewards card when the cost isn’t worth the benefit.

When it makes sense to cancel a rewards credit card

When the rewards stop being worth the fee. Generally speaking, you should do a cost-benefit analysis in any situation to determine if keeping a credit card open is worth the fees associated if it charges any.

Todd Ossenfort, chief operating officer of Rapid City, S.D.-based Pioneer Credit Counseling, says to cancel the rewards card if it’s not getting used and you don’t take advantage of the rewards they offer. Most rewards cards charge a fee, so check to see if you’re paying one before you ditch your bank.

If you like earning rewards, sans the annual fee, there are rewards cards that don’t charge an annual fee but offer lucrative cash back rewards like the Citi® Double Cash Card – 18 month BT offer, which offers 1% cash back when you buy and 1% cash back as you pay for those purchases or the Uber Visa Card which rewards spending in certain categories. The Uber cards award cardholders 4% back on dining, 3% on hotels and airfare, and 2% on online purchases and 1% on most other purchases.

If rewards are reduced or terms are changed by the issuer. Another thing that may alert you to close a rewards card is changing terms that may reduce the overall benefit of keeping the card open.

“Look for things like a sharp increase in the card’s interest rate, cutting back on benefits like auto insurance or trip protection or downgrades of ways you can earn points and miles,” says Benet J. Wilson, associate credit cards editor for CompareCards.com, another LendingTree-owned site.

Remember, companies generally reserve the right to alter the card’s terms at any point.

“Credit card holders always have boilerplate language that covers them if or when they decide to change benefits, but when it happens, it should always serve as a warning flag,” says Wilson.

Follow these tips to close a rewards card the right way

Closing a rewards credit card can be a bit more nuanced than closing any regular old credit card. Here are a few tips you can use to make sure the process is smooth sailing.

Reach out to the bank before they charge your annual fee

Plan to close the card a few months ahead of the date the annual fee will be charged to the account. Otherwise, you may find yourself paying for another year of rewards you may not benefit from.

“Be proactive and call the creditor,” says Ossenfort. “Don’t put the card in the drawer and forget about it until they charge the annual fee and then try to cancel. More than likely they will cancel the card and still have you pay the fee.”

Still carrying a fee? Pay it down or transfer the balance to a new card

You’ll need to zero out any balance on the account before you’ll be permitted to close the card. To do this, you’ll need to pay any balance in full or have it transferred to another card.

If you transfer, you’ll ideally want to move the balance to a card that won’t charge you a higher interest rate on the balance you transfer. Here are some balance transfer options to consider in case you need to use one.

Use your rewards before you lose them

Use up any existing rewards you’ve accumulated on the card before you close the account if you can — after all, you’ve earned them.

You may decide to cash out any cash back rewards to your bank account or choose to apply them to your statement credit. If you can apply rewards to purchase gift cards or other items in a marketplace, that may also be an option. If you have a partner who is enrolled in the same rewards program with the bank, you may have the option to transfer your points to your partner’s account before you close the card.

If the card is co-branded with an airline, hotel or another company, like Uber, and you’ve accumulated miles or points in an associated account, those will likely stay available to you to use after closing until the miles or points expire. However, if it’s a bank, like Chase or Capital One, you’ll generally lose the points if you close the account and have no other cards linked to the program.

One big thing to watch out for here is not incurring extra debt in the process, says Ossenfort.

“I wouldn’t recommend using 5,000 points towards any trip if it’s going to cost you another $1,000 just because [you don’t want to lose the points],” says Ossenfort.

Prepare for a drop in your credit score for 30-90 days

A common warning you’ll get if you talk about closing a credit card is that it can hurt your credit. Sometimes, that ding to your score could be worth the temporary pain if it means saving you money in the long run.

Closing a credit card could reduce your overall available credit limit, resulting in an increase in your utilization ratio — a factor that contributes to about 30% of your credit score. The ratio is your total used credit in relation to your total available credit. The higher your utilization ratio, the more it can negatively affect your FICO score.

Don’t close a card and think that it will help your credit score, because it doesn’t,” at least in the short term, says Wilson. “By closing an old or unused card, you are essentially wiping away some of your available credit and thereby increasing your credit [utilization ratio].”

She recommends you check the total balances on all your credit cards and run the numbers before you decide to close one down. Use a credit score simulator tool like this one from Credit Karma or this one from Chase (for Chase customers) to estimate the damage to your score if you close a certain card.

The age of the card is also a major factor to consider, as closing a credit card with a long history or could drop your score by a few points. The effect could be more severe if your other cards are significantly younger than the card you’re looking to close. You can see the possible impact, again, by using one of the credit score simulator tools we linked to above.

“If it’s the oldest credit line and it’s closed your credit score will take a hit,” says Ossenfort. However, he says most can expect the dip to be minor and temporary, about 30 to 90 days.

Consider downgrading the card rather than closing it to avoid credit score damage

You may be able to preserve your rewards — and your credit limit — and simply ask your credit issuer you can downgrade to a card that doesn’t charge as high of an annual fee. If you can’t afford the $450 annual fee on the Chase Sapphire Reserve®, for example, you may choose to downgrade to the Chase Sapphire Preferred® Card, that charges a lower $0 Intro for the First Year, then $95.

Monitor the card for at least two months to avoid fees after closing

After you cancel the rewards card, Oliver recommends you keep an eye on the account for about two months, in case any fees are charged to the account after closing.

“A fee may have come between the closing of the billing cycle and when you closed the account,” says Oliver. This may be in the form of an interest charge for purchases made during your last month the card was open. You may have paid the balance down, but the interest won’t be charged to the card until the next billing cycle.

Part of that due diligence is getting it in writing that you’ve closed the account, in case you aren’t aware of any fees charged and it shows up later in collections.

You can ask the representative to send you an email or letter to your address confirming the account has been closed. If issues arise later, its best to try to resolve them directly with the creditor, says Oliver. But if that doesn’t work, you’ll already have the account closing in writing so that you can file a stronger dispute.

Unlink bills and autopay accounts

You don’t run into any hiccups with your bills, so you want to make sure the newly-canceled card account is no longer linked to any current bills.

Follow up on any of the accounts or bills the card was linked to and unlink the canceled card. While you’re there, don’t forget to update your billing information to a new card or alternative payment option.

Be firm with sales representatives if they try to keep your business

The Federal Reserve reports that total outstanding revolving consumer debt stands at $1.03 trillion as of January 2018.

“That’s a lot of money on the table, and companies are understandably reluctant to lose it,” says Wilson.

If you’ve considered other credit options with the same card issuer ahead of time, prepare yourself by researching your options to know what’s available.

“They will try anything, including raising your credit limit, waiving annual fees and offering bonus points/miles to get you to stay,” says Wilson. She adds you may use the opportunity to negotiate better terms for your credit card — if they can’t make it worth your while, go ahead and walk away.

If the salesperson is particularly aggressive, advises Wilson, be firm and persistent. If they are particularly pushy, ask to speak with a supervisor. If they refuse, end the call, then call back and immediately ask to speak to a supervisor.

“It may take some persistence, but it can be done,” says Wilson.

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

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As China and U.S. Up the Ante, When Should Americans Worry About a Trade War?

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

The story was originally published on April 4, 2018.

Update: Trade dispute between the United States and China escalated for the second time this week as President Donald Trump threatened late Thursday to add tariffs on additional $100 billion in Chinese goods, a week after announcing tariffs on $50 billion in Chinese imports.

Trump said the new tariffs were a response to China’s “unfair retaliation” of announcing its intention to impose 25% tariffs on $50 billion worth of U.S. exports. China was answering the Office of the U.S. Trade Representative’s (USTR) Tuesday plan to impose 25% tariffs on 1,300 products imported from China.

“If the U.S. persists in unilateralism and trade protectionism despite opposition from China and the international community, China will fight to the end and hit back resolutely,” a spokesperson for the Chinese Ministry of Commerce said in a statement Friday in Beijing.

The U.S. imports $479 billion worth of goods from China, its largest trading partner. If the announced U.S. tariffs on $150 billion in Chinese products were to be implemented, nearly a third of Chinese imports would be affected.

The Trump administration was first to the punch. On Tuesday evening, it proposed a plan to slap 25% tariffs on 1,300 products imported from China. The products range from industrial supplies, machinery and raw materials to consumer goods, such as dishwashers and automobile parts, according to the Office of the U.S. Trade Representative (USTR).

In retaliation, China immediately announced its intention to impose 25% tariffs on $50 billion worth of U.S. exports. The list included soybeans, airplanes and automobiles, as trade experts had expected earlier.

China and the U.S. have been swapping tariff threats for the past few weeks. Neither country has imposed this week’s newly announced taxes yet, but it’s certainly a game of global trade “chicken” that has the whole world watching.

“This is very nerve-racking,” said Sherman Robinson, a nonresident senior fellow at the Peterson Institute for International Economics, a nonpartisan, nonprofit think tank in Washington D.C.. “The U.S. has basically gone rogue in the world trading system, and the Chinese are simply reacting to what the U.S. is doing.”

How did we get here?

President Donald Trump has been tough on trade since he was on the campaign trail as a presidential candidate and has had China in his crosshairs for a while, arguing the country hasn’t been playing fair on trade. Many critics agree that China has in some ways stymied growth in U.S. industries, and supporters of the new tariffs hope it will force China to play fairer on trade.

Trump made good on his campaign promise to rein in trade by announcing sanctions on steel and aluminum imported from China in early March. Later in the month, he threatened to impose 25% tariffs on $50 billion worth of Chinese industrial goods. At the time, the list of products impacted wasn’t released. Until now.

In turn, the Chinese Ministry of Commerce announced it would impose higher duties on $3 billion worth of 128 U.S. products exported to China, including fresh and dried fruits, pork, wine, seamless steel pipes and recycled aluminum, in response to the steel and aluminum sanctions. China imposed these tariffs on Monday.

Where Americans will feel the sting

Eventually, consumers will begin to feel the impact in indirect ways. For starters, the stock market plunged Wednesday morning in response to the newest tariff announcements (but later rebounded). And eventually, consumers may see higher prices on goods that are made using Chinese-sourced parts, experts say.

U.S. tariffs on Chinese imports will raise the prices of the resources used to produce final products for U.S. manufacturers and producers, which will eventually get passed along to American consumers in the form of higher prices, explained Mark Perry, an economics policy scholar at the American Enterprise Institute and professor of finance and business economics at the University of Michigan-Flint.

In addition, many jobs may be at risk in both countries, as sales and profits would decline as the cost of goods and services rise, Perry said.

This time around, China —  America’s third-largest export market, and the second largest market for U.S. exported agricultural products — is targeting U.S.-exported aircrafts and agricultural products such as soybeans, which could have a much larger-scale effect on the U.S. economy.

“It’s going to hit right up in the Midwest, where all our soybeans are produced,” Robinson said. “It’s going to hit Seattle, where our airplanes are produced and all over the industry in the Midwest and East.”

Consequently, farmers, automakers, Boeing and their suppliers could lose business, Robinson said, and workers could lose jobs.

Perry said for General Motors alone, the new steel and aluminum prices would increase their cost by about $1 billion annually in materials because everything they buy contains steel and aluminum. If automakers have to pay more for the raw materials, then cars and trucks might become more expensive, he said.

“If it hits fast, there will probably be macro shots, you’ll have repercussions with stock markets and you may have layoffs,” Robinson said. “If it’s slow, then there’s time for adjustment. You’ll see people lose jobs, but there will be time for the labor market to adjust.”

Experts had long predicted that China would target U.S. agriculture products and airplanes. But the Trump administration’s decision not to target everyday consumer products imported from China, such as textiles, garments and shoes, was a surprise.

The likely reason is that the Trump administration has been careful not to do anything that would directly hurt consumers, Robinson said. Another reason could be that hitting the apparel industry could hurt the first daughter and adviser to the president, Ivanka Trump, who owns a namesake clothing line, Robinson said.

“Her imports of her clothing line would not be affected by the U.S. tariffs [Trump announced Tuesday],” Robinson said.

‘The ball is really in the U.S. court. They’re the ones who started this.’

Robinson explained that a trade war usually starts out with just a few sectors and then escalates to include other sectors as well. He said whether there will be a full-blown trade war is mostly depended upon what the U.S. does, because the rest of the world has to decide how to react to the U.S. efforts.

If we moved toward a widespread trade war, the most extreme result could be that the U.S. decides to withdraw from the world’s trading system, cutting both exports and imports, Robinson said. And if the rest of the world holds firm to the rules-based trading system in the World Trade Organization, which Trump scorns, and all the other multilateral and bilateral agreements that they’re pursuing, then it would mostly hurt the U.S., he added.

And American consumers would ultimately pay the price.

“It would damage the structure of the U.S. employment if it’s done rapidly. It would undoubtedly cause some kind of a recession,” Robinson said. “If it’s done slowly over time, it means a major change in the structure of production, basically away from tradable goods to non-tradable goods. We become a nation of services workers, hamburger flippers.”

This would be the opposite of the stated goal of the USTR and Department of Commerce, which is to bring industries back to the U.S.

China’s Foreign Ministry spokesperson Geng Shuang said in a Wednesday press conference that China is open to further dialogue.

“We hope that the U.S. side could have a clear understanding of the current situation, remain level-headed, listen to its business community and general public, discard unilateralism and trade protectionism as soon as possible, and work with China to resolve trade disputes through dialogue and consultation,” said Geng.

“It may be that now having up the ante, everyone will step back and behave like adults,” Robinson said. “But the ball is really in the U.S. court. They’re the ones who started this.”

If history is any indicator, there is no winner in a tit-for-tat trade war, experts say.

“There’s a long history of previous attempts at trying to impose tariffs and protectionism,” Perry said. “We have mountains of evidence that this has never worked out in favor of the country imposing protectionism, but it’s like seems like an economic lesson that we never really learn.”

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Millennials Are Finally Heading Back to the Housing Market — Here’s Where They’re Moving

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

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Adults under the age of 35 are beginning to buy homes at an increasing clip, according to a recent study by LendingTree, the parent company of MagnifyMoney.

Millennial homebuyers made up nearly one-third of new mortgage requests during the period reviewed.  The average loan amount requested from this age group was $166,863.

In the study, LendingTree analyzed mortgage requests and offers for borrowers ages 35 years and under between Feb. 1, 2017 and Feb. 1, 2018, along with requests from the total population of mortgage seekers based on the location of the property to be mortgaged. In the end, the top cities were ranked by the percentage of mortgage requests coming from millennials.

Here’s where Millennials are putting down roots.

 

Heading out West Midwest

Six of the top 10 most popular cities for millennials buying homes are in the Midwestern U.S., while the others are in Pennsylvania and New York.

  1. Des Moines, Iowa
  2. Pittsburgh
  3. Buffalo, N.Y.
  4. Lansing, Mich.
  5. Fort Wayne, Ind.
  6. Grand Rapids, Mich.
  7. Scranton, Pa.
  8. Syracuse, N.Y.
  9. Youngstown, Ohio
  10.  Minneapolis

Meanwhile, Florida is struggling to attract younger homeowners. Cities in the Sunshine State made up half of the least popular cities for millennial homebuyers.

  1. Sarasota, Fla.
  2. Fort Myers, Fla.
  3. Honolulu
  4. Palm Bay, Fla.
  5. Las Vegas
  6. Lakeland, Fla.
  7. Tucson, Ariz.
  8. Reno, Nev.
  9. Tampa, Fla.
  10. Albuquerque, N.M.

The pros and cons of homeownership

Pro: You can build equity. Unlike renting, in a mortgage situation where the payment goes completely to the landlord, a percentage of the homeowner’s payment goes toward interest to the lender and another percentage goes toward the principal loan balance. As you pay down the principal, you gain more equity.

“Purchasing a home provides economic stability,” said Jessica Lautz, the managing director of survey research and communication for the National Association of Realtors. “You know the cost moving forward for the foreseeable future, and you are able to build equity.”

Pro: Tax benefits. There are also several tax benefits for homeowners, according to the North Carolina Housing Finance Agency. Homeowners can generally deduct interest paid on their mortgage loans as well as property taxes. Work with an accountant to figure out if the value of those deductions makes it practical to itemize your taxes vs. taking the standard deduction.

Pro: You don’t have a landlord to answer to. Another benefit to homeownership is the ability for a homeowner to customize their house, says Lautz. For example, most rentals do not allow renters to change fixtures in the apartments.

Con: Extra maintenance. In the same vein, the one caution the finance agency gives to millennials interested in home-buying is that they will become responsible for extra costs associated with maintenance or upkeep that typically are covered by landlords in rentals.

Con: Homeownership a long-term commitment. The big question millennials should ask themselves when deciding whether to rent a home or buy one is how long they see themselves in the area. The general rule is if an interested homebuyer plans to be in the area for five or more years, it’s a good idea to buy.

Con: The upfront costs of homeownership can be expensive. If you thought coming up with a security deposit was a pain, just wait till you estimate your mortgage closing costs. Closing costs can be between 2% to 4% of your mortgage, and that doesn’t even include your down payment.

Overcoming the obstacles

The largest barrier to entry for millennials looking at homeownership is typically making a down payment. Millennials may be able to afford a mortgage, but if they’re saddled with student debt, they may not be able to gather the money for a down payment.

But Lautz says it’s a common misconception that you have to pay 20% for a down payment. First-time homebuyers rarely pay that much for a down payment, she says, noting that the typical down payment for a first-time homebuyer is 5%, according to NAR data.

“There are a lot of myths out there about homebuying. Until you go through that process, you are not entirely sure, so make sure you talk to someone who is your local expert who might be able to tell you about programs that are available,” she said, adding that those options include low down payment programs and first-time home buyer programs.

State and city housing finance agencies, for example, have down payment assistance programs that can help subsidize those costs.

Before you enter the process, Lautz says first-time homebuyers should pull their credit score and make sure there are no surprises on their report. You also can seek advice and assistance on topics from homebuying to credit issues from housing counseling agencies.

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Acting Director of the CFPB Asks Congress to Limit the Consumer Agency’s Power

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In Mick Mulvaney’s first report to Congress, released on April 2, the Consumer Financial Protection Bureau’s acting director didn’t just highlight the consumer watchdog’s past work but also included recommendations for Congress to limit its power.

In the report’s introduction letter, Mulvaney requested that Congress:

  1. Fund the Bureau through Congressional appropriations;
  2. Require legislative approval of major Bureau rules;
  3. Ensure that the Director answers to the President in the exercise of executive authority; and
  4. Create an independent Inspector General for the Bureau.

“The Bureau is far too powerful, with precious little oversight of its activities,” said Mulvaney. The power wielded by the Director of the Bureau, he added, “could all too easily be used to harm consumers, destroy businesses, or arbitrarily remake American financial markets.”

What’s at stake?

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

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

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

While Mulvaney has been trying to dismantle the CFPB in various ways since Trump appointed him last November, consumer rights groups see his report to Congress as a significant action because he is formally recommending rules to undercut the agency and strip away its tools to carry out its mission.

If implemented, the recommendations would effectively stop the CFPB from protecting consumers in the future, consumer rights groups say.

“It’s another example of his effort to hamstring the bureau, to undermine its mission, to turn it into an agency that has the interest of financial predators at heart, rather than the consumers that it was statutorily created to protect,” said Rebecca Borné, senior policy counsel at Center for Responsible Lending, a nonprofit, nonpartisan organization based in Washington, D.C.

A closer look at Mulvaney’s recommendations

1. Funding

How it is now: Right now, the CFPB receives funding through the Federal Reserve. Under its former director Richard Cordray, the CFPB requested $602 million in funding for fiscal year 2017, below the funding cap of $646 billion.

The proposed change: Fund the bureau through Congressional appropriations.

In the past, CFPB’s funding requests have always been fulfilled by the Federal Reserve, and below the cap set by the Fed. But now Mulvaney wants the consumer bureau’s budget controlled by Congress.

Congress is known for being heavily dependent on campaign contributions from the financial sector, according to The Center for Responsive Politics, a nonpartisan, independent and nonprofit research group tracking money in U.S. politics. Borné explained that the statute that created the bureau, Dodd-Frank, intentionally made the agency’s funding independent so that it would not be subject to the political winds of Congress and vulnerable to the financial industry lobbying it.

So the question is: How much money would Congress budget for the CFPB? No one knows for sure, but consumer advocates have serious concerns about putting the agency’s funding in the hands of Congress. Mike Litt, consumer campaign director with the U.S. Public Interest Research Group, a nonpartisan consumer advocacy organization, thinks that “they would likely starve the agency to death so that it would not be able to do its job.”

In January, Mulvaney requested $0 in quarterly funding from the Federal Reserve, saying it would make do with dipping into its reserve funds. Litt said Mulvaney’s proposal for Congress to control the agency’s funding is much more problematic.

“It’s one thing to have a you know a director who is against the agency’s mission to request zero dollars for its operations for the next year,” Litt said. “It’s a whole [other] level to remove the agency’s independent funding forever.”

2. Rulemaking

How it is now: The CFPB creates and enforces federal consumer financial laws on its own. Before establishing a final regulation, the CFPB publishes proposals to address an issue and invites the public to comment.

The proposed change: Require legislative approval of major bureau rules. 

Litt said this would make the CFPB not just the only banking regulator, but also the only agency across the board where Congress would be in control of approving major rules.

“It runs counter to the way that administrative agencies in this country work and have worked for many years, which is Congress delegates authority and the agencies pass rules,” Borné said.

Mulvaney didn’t lay out specific reasons for making this recommendation, but it falls in line with his overarching argument that the bureau has too little oversight.

“This would just make it that much harder for a new rule even being issued in the first place and that is new territory that is dangerous,” Litt said. “It means major new consumer protections wouldn’t even see the light of day.”

3. Director’s role

How it is now: Dodd-Frank requires that the head of the CFPB be appointed by the president and confirmed by the Senate, but works independently from the president. The director serves a 5-year term and can only be removed from office due to “inefficiency, neglect of duty or malfeasance in office.”

The proposed change: Make the director answer to the president. The president can remove the director without cause.

Borné said the CFPB director role was created to be independent to make sure he or she acts based on what data show, rather than what the president says.

If implemented, Litt said Mulvaney’s proposal would mean that the president can fire the director for no reason, which takes the effectiveness away from the head of the CFPB.

“Even a director who believes in the agency’s mission might think twice because they know that the president could fire them without cause,” Litt said.

But supporters of this proposal think the CFPB has too much concentrated power in its single-director structure.

Peter J. Wallison, senior fellow in Financial Policy Studies at the American Enterprise Institute,  a nonpartisan public policy research institute, called the structure a “major — even historic — break with the past,” when Congress created multi-headed and bipartisan bodies to head other federal agencies.

“Because the director of the CFPB cannot be changed by the president, this powerful agency is insulated from the results of the electoral process that puts a president in office,” Wallison wrote on a February analysis.

4. Independent inspector general

How it is now: The Federal Reserve’s Office of Inspector General oversees the CFPB.

The proposed change: Create an independent inspector general for the bureau.

Borné said this is an unnecessary proposal because there is already an inspector general for the CFPB from the Fed, which was carefully designed by Dodd-Frank, Borné said.

“It’s hard to say for sure based off of a one-line recommendation in this report but likely the point of that recommendation is to replace the current Inspector General for the CFPB with one that is appointed by the president, which would then serve to undermine the independence of the agency,” Litt said.

But supporters say an independent inspector general would provide greater transparency and accountability at the bureau. Sen. Rob Portman, R-Ohio, introduced similar legislation last year to create a dedicated, Senate-confirmed Inspector General for the CFPB.

What’s next?

Congress would have to pass legislation implementing Mulvaney’s recommendations.

Mulvaney is due to testify before Congress next week. From there, it remains to be seen whether Congress will act on his suggestions.

Experts say that consumers have voiced support for a strong independent consumer bureau, which have helped fend off attacks on the CFPB in the past few years. A 2017 Center for Responsible Lending poll, conducted jointly by Republican- and Democrat-aligned firms, found that 73 percent of Americans of different political affiliations supported the CFPB.

As long as consumers continue to speak up, experts say they are hopeful that members of Congress will respect the will of their constituents to keep the independent structure.

“At the end of the day, reining in Wall Street, ensuring a fair competitive marketplace is not a left issue or right issue,” Litt said. “It’s a big guy, little guy issue.”

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Shen Lu
Shen Lu |

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

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