Cost of Education

The following is a guest post. Enjoy!

In Bob Dylan’s memorable song Mr. Tambourine Man there are some interesting verses such as, ‘How many roads must a man walk down before you can call him a man…’. The path to growth and enlightenment, and certainly to financial independence is education. Wisdom is the sum total of our life experiences – both theoretical and practical, while success comes from a clearly formulated plan. Very little comes from haphazard behavior, unless of course it’s a windfall payday off a lucky lottery ticket.

For most of us, achievement is the result of working intelligently towards an objective. With this in mind, it’s important to formulate a blueprint for academic excellence. In the United States, tertiary education is a major expense item. By the time a young adult enters high school it is important to start planning for college. Unbeknownst to many students, the federal government offers many programs to assist students in paying for their schooling. These include grants, work-study initiatives, and loans. This federal aid is often what makes the difference between being able to pay for college education or not.

Understanding What Options Are Available for FAFSA

Depending on what type of education a student is looking for, costs can vary from a couple of thousand dollars a year to tens of thousands of dollars per year. Community colleges offer an alternative path to regular college, after completing 2 years before credits can be transferred over. This is an affordable option for many folks, and a workaround to the high costs associated with traditional colleges. There are several ways that students can enjoy federal aid, including the Free Application for Federal Student Aid. Otherwise known as FAFSA, this determines your personal eligibility for different types of student aid. The form can easily be completed online and can translate into free money for a college education. Students who apply for these forms of government aid may be enrolled in work/study programs or approved for different types of loans.

The bureaucratic red tape surrounding many federal aid programs is a disincentive to many folks. Fortunately, there are services out there that make it relatively easy to determine qualification for student aid, given specific criteria. The application process is 100% free, since there is an official federal government site available. Even universities and colleges across the United States use FAFSA applications to determine a student’s eligibility for non-federal student aid. Once the low-interest loans have been approved, students can use that as a tool to build their credit scores. The competition to enter US colleges is fierce. Students who show initiative by actively applying for student aid often fare better in admissions than others. Since the application process can typically be completed in under 30 minutes, it is an easy way to begin taking meaningful steps towards a college education.

Facts and figures:

  • Students can apply early for FAFSA loans – as early as 1 October
  • The deadline for students is 30 June
  • Corrections must be made by 15 September
  • Early applications do not guarantee early loans
  • Tax forms from the previous 2 years must be presented
  • Every year $150 billion is dispersed in federal student aid
  • You don’t need to apply to a college before you apply for Federal student aid loans

There are many benefits to receiving one of these loans, including no payment until graduation. It is also possible to temporarily postpone payments, or even lower payments accordingly. If a graduate works in public service, a significant chunk of the loan may be foregone. In an era of rising interest rates, such as the present, FAFSA loans are offered at a much lower rate than credit cards and personal loans.

How Our Spending Patterns Have Changed Over the Last 100 Years

The following post is by MPFJ staff writer, Melissa Batai.  Melissa is a freelance writer who covers topics ranging from personal finance to business to organics to food.  She blogs at Mom’s Plans where she shares her family’s journey to healthier living and paying down debt.

Do you go out to eat several nights a week?  Do you feel like you’re just getting by financially even though you have a decent income?  Do your kids have so many clothes that they can’t close their closet doors?  Do you have three cars in your driveway?

Think back in time 100 years ago to 1917.  Our finances and conveniences have changed drastically since then, yet many of us still feel dissatisfied and that we don’t have “enough.”  Why is this?  Why are we unfulfilled when we have so much more than our ancestors who lived 100 years ago?

Our spending habits have changed dramatically since then, but we’re still not satisfied.

 

Spending Habits in the Year 1900

The Atlantic put together an eye opening article about how drastically our lives have changed since the year 1900.  Back in 1900, “A quarter of households have running water.  Even fewer own the home they lived in.  Fewer still have flush toilets.  One-twelfth of households have gas or electric lights, one-twentieth have telephones, one-in-ninety own a car, and nobody owns a television.”

Just stop for a minute and imagine being without these things.  If a 1900 household didn’t have to pay utilities, make care payments, or purchase a television, cable, Netflix, etc., how did they spend their money?

According to The Atlantic, “Families [in 1900] spend a whopping 80% of [their money] on food, clothes, and homes.”  Eighty percent!   More precisely, this breaks down to approximately 43% for food, 14% for clothing, and 23% for housing.

Undoubtedly, life in 1900 was simpler in some ways, but a family needed to be diligent with their money just to take care of the necessities of life.  There was very little leftover for extras and “fun money.”

 

Spending Habits Now

Thanks to outsourcing our textile industries to foreign countries, our annual apparel cost is only 4% per year, and yes, that includes those big spenders who have many, many more clothes in their closet than they will ever be able to wear.  Thanks to big company farms, our food costs are now only 13% of our annual income (The Atlantic).

While it cost 57% of an annual income to pay for food and clothing in 1900, now those same categories only require 17% of our annual income.  That’s a lot of extra money left over.

In 1900, housing costs were 23% annually, while they are now 33%.  That accounts for some of the difference.  Health care is now 6% of our annual spending; it was 5% in 1900.  Another category that is now costing us more is transportation.

However, there can be no denying that our interpretation of “necessities” has changed.  We now consider many luxuries necessities, and that mindset is squeezing our budgets.

 

How Americans’ Attitudes Toward Spending Have Changed

My husband and I like nice stuff as much as the next person, but for the 16 years of our marriage, money has always been tight.  We’ve always been a one-income family.  First, I worked full-time while my husband attended graduate school full-time.  Then, when he graduated, I stayed home with the kids while he worked full-time.

Thanks to student loan payments and a fairly average income while living in a high cost of living area (Chicago), we’ve always had to live on a fairly tight budget.  That means we were a one car family until this last fall.  For 15 years of marriage, we made do with one car.  That car is now 12 years old and has nearly 180,000 miles on it.

We rented until we finally bought our first house 2.5 years ago.  In many ways we were more like a 1950s family than a family living in the 21st century.

In the book, The Overspent American, Jennifer Lawson, who participated in a focus group on spending said:

“In the fifties, growing up in upstate New York, my parents were considered middle-class pillars of the community. My father was an accountant. It’s a fairly poor rural area, and most people worked in a factory or waitressed or something. My dad was actually a professional person with a sign out in front. [My parents] had one car, and they drove it until it fell apart, and then they bought a new one, usually a station wagon. They had a fairly modest house. We took a vacation as a family for two weeks and rented a little cabin in Maine. And drove–nobody flew anywhere. I can’t remember anyone who had a second car. Everyone walked everywhere; children certainly didn’t have $100 sneakers. It amazes me now that my younger brother, who still lives there and who has a job that’s roughly equal to the job my dad had when I was growing up … he has three teenage daughters. And since they were about nine, they’ve each had their own color TV, and they have their own CD players, they all have their own telephone lines, because they complain about calls not being able to get through” (The New York Times).

Our lifestyles have changed dramatically since the 1950s, even more so since the 1900s.  What we now consider necessities—two cars per family (at least), exotic vacations, designer clothes, Internet access and cable tv, college education, just to name a few—were not priorities, or even available, in earlier times.

 

Another phenomenon of spending is that the U.S consumer is quickly bored by what he has.

We can see this phenomenon whenever new electronic devices are released.  Even though their current smartphones, iPads, etc. are working just fine, people are eager to get the newest release.  Never mind that it may cost hundreds of dollars that they really don’t need to spend.

The same mindset is present when people choose to lease a car rather than buy it so that they can continually have a “new” car to drive every few years.  Never mind that leasing costs them much more than buying a car, especially if they buy a used car.

People also frequently redecorate their homes, even though what they have is working just fine.  When they redecorate, they often buy all new towels, couches, etc., depending on what room that they’re “updating.”  Now, we tend to replace long before an item is worn out.

This is a luxury that people in the 1900s didn’t have.  My grandmother, who lived through the Great Depression, regularly washed out plastic baggies over and over again.  Rather than throwing them away, she would get 5 to 10 uses from each bag.  If something like a kitchen towel got a hole, she didn’t throw it away; she mended it.  We’ve lost that bit of frugality that earlier generations developed out of necessity.

Undoubtedly, many in the middle class are feeling a financial strain.  While some of that is due to modern day high costs (such as earning less money because our employers have to take so much out for taxes and insurance costs), much of it is also due to our increased expectations and standards.

The next time your budget feels unbelievable tight, look around your house and see how much you have compared to what your ancestors had 100 years ago.

How about you all? Is there a “necessity” you can do without to find more room in the budget?  Can you be content without the latest new electronic upgrade?

***Photo courtesy of http://www.idpinthat.com/edit/5340

Opportunity Funds

The following is a guest post by Akash Sky. Akash writes articles that teach people about investing using intuitive graphics and simple, plain English over at akashsky.com. Enjoy! 

I’m sure you have all heard of emergency funds, and I’m sure that many of you have them as well. But, have you heard of an opportunity fund? It’s similar to an emergency fund, except the purpose behind its use is different. In this article, we will discuss following:

  • what an opportunity fund’s purpose is
  • how large an opportunity fund should be
  • who stands to benefit most from an opportunity fund
  • where an opportunity fund should be stored
  • how an opportunity fund should be used

Alright, let’s start by discussing the purpose an opportunity fund.

 

What’s the purpose of an opportunity fund?

To better understand the purpose of an opportunity fund, let’s examine the purpose of an emergency fund. According to Investopedia, the purpose of an emergency fund is to improve financial security. In other words, the emergency fund is there to limit your downside potential (i.e. bad things like debt, homelessness, hunger, etc.). Now, take that purpose and reverse it.

The purpose of an opportunity fund is to maximize your upside potential. Basically, an opportunity fund’s purpose is to give you the financial fuel to make the most of an opportunity that comes across your way.

 

What type of person benefits most from an opportunity fund?

First off, I want to explicitly state that an opportunity fund is not for everyone. If you are simply looking to remove risk from your life and remain financially comfortable, an emergency fund is more than enough for you.

A person well-suited for an opportunity fund would have the following attributes:

  1. Is actively looking to increase their wealth / net-worth, even at the cost of accepting risk
  2. Can lock away / save additional money without negatively impacting their life

 

How much money should I set aside for an opportunity fund?

There are no hard rules for the amount of cash you need to have in your opportunity fund – you just need enough to make the most of an opportunity that is likely to come your way. In order to do that, you are going to have to do some introspection. You should try and answer the following question: what are some of the best opportunities that I have come across in the last 5 years?

Then. ask yourself: “How much capital / money would I have needed to take advantage of those opportunities?”. Of course, its hard to give an exact figure. For example, if you happen upon a killer real estate deal, your “opportunity fund” would need to be large enough for a down-payment, whereas if you come across a smaller opportunity like a correction in the stock market, you would only need a few thousand dollars.

In my case, I’ve got $5,000 in my opportunity fund. The opportunities that I’m expecting to capitalize on at the moment are corrections in the stock market, my personal blog, and small business ventures. In order to find out the dollar amount you need in an opportunity fund, you need to clearly define the opportunities that you want to take advantage of. Once you’ve done that, all you need to do is calculate the financial fuel you would need to make the most of those opportunities and then save that amount in the form of an opportunity fund.

 

Where should I place my opportunity fund?

Just like an emergency fund, an opportunity fund needs to be liquid. That means that you can’t store your opportunity fund in an investment that is difficult to convert to cash.

This means that savings accounts, CDs (if you are willing to take a slight penalty), and money market accounts are great places to store your opportunity fund. However, the best place (in my opinion) to store an opportunity fund is inside of a 1 year old I-Bond.

I-Bonds are a hybrid between CDs and savings accounts. After you lock away your money for 1 year, you are free to access it at any time. In addition, I-bonds carry less risk than savings accounts because they are immune to inflation and interest rates. To top it off, I-bonds often pay higher rates.

 

How should I use an opportunity fund?

Before we talk about how to use an opportunity fund, lets quickly talk about how to NOT use an opportunity fund. An opportunity fund is NOT extra spending money for when things go on sale. If you truly want to make the most of an opportunity fund, you need to spend it on opportunities that will provide long term benefit to you.

In order to properly use an opportunity fund, you need to be able to identify worthwhile opportunities when you come across them. In order to do so, you should ask yourself the following questions:

  • Is this opportunity likely to benefit me far into the future?
  • When is next time I can reasonably expect something like this opportunity to pop up again?

If you are not likely to come across the opportunity again and it is likely to benefit you far into the future, it may be a worthwhile endeavor to use your opportunity funds on. Ultimately, deciding if the opportunity is right for you is a personal choice. However, having an opportunity fund allows you to have a choice to begin with. It’s up to you whether or not to use your financial fuel to take up an opportunity to change your life for the better.

 

Finishing thoughts

In the end, whether or not an opportunity fund is a good fit for you depends on your financial goals. If you want to actively grow your net-worth instead of cruise along, I highly recommend starting an opportunity fund. In the investment world, cash is king, and you’ll always need to have some of it on hand to pounce on any wonderful opportunity that comes your way. After all, fortune favors the bold, and it is much easier to be bold with an opportunity fund.

How about you all? What do you think about opportunity funds, and are they right for you?

Share your experiences by commenting below! 

Smart Money Moves for the New Year

The following post is by MPFJ staff writer, Melissa Batai.  Melissa is a freelance writer who covers topics ranging from personal finance to business to organics to food.  She blogs at Mom’s Plans where she shares her family’s journey to healthier living and paying down debt.

The new year is often a time for renewal; people frequently vow to get healthier and be more responsible with money.  However, there’s no need to wait until the calendar turns to January 1st.  There is plenty you can do now to help your finances as you head into the new year.

 

Reduce the Interest You Pay

If you owe money, there are many ways you can cut the amount of interest that you’re paying so you can get out of debt more quickly.

Transfer credit card balances to a 0% APR card.  If you have a credit card balance and are paying high interest, take the time to stop that now.  If you have good credit, there are many 0% APR offers available.  Just do a simple Google search.  You’ll likely have to pay a transfer fee of 2 to 3% of the balance you’re transferring.  Crunch the numbers to make sure that the transfer fee is lower than the interest you would pay on the card you’re currently using.  Also, try to get an offer for 0% rate that lasts 15 to 18 months, giving you time to pay off the card.

Negotiate your interest rates.  If you don’t want to transfer your credit card balance, another option is to call your credit card company and ask them for a lower interest rate.  Really, it’s that easy.  This strategy works about 50% of the time, so it’s worth the time.  If the person you speak with tells you the company can’t change your interest rate, ask to speak to the supervisor who may be more likely to negotiate with you.

I did this about a year ago, and I was originally refused.  I asked to speak to a supervisor, and I was again refused.  I called back a few days later and again worked my way up to a supervisor.  This time, the supervisor not only reduced my rate by 3%, but he also gave me enough rewards points to cover the cost of my annual fee and additional to give me $50 cashback.  Persistence is key with this strategy.

If you try to call several times and don’t make any progress, tell them that you plan to move your balance to another card.  This is a last resort option and may provide the incentive the company needs to reduce your interest rate.

 

Be Mindful of Your Money

Money has a way of leaking out if we’re not careful.  There are several steps you can take to stop the leaks and keep more of your hard-earned dollars in your pocket!

Set up a budget.  If you have not done so already, take the time to set up a budget.  For years I did our budget with paper and pencil, but as our finances grew more complex as our family grew, I found this method increasingly frustrating.  A few months ago, I switched over to You Need a Budget! (YNAB), and I love it.  It’s made budgeting so much easier!

There are other budgeting tools available, too, like PearBudget, EveryDollar, Mint, CalendarBudget, Mvelopes, and many others.  Just find the tool that works best for you.

Delete ghost accounts.  Most of us have accounts that we’re still paying for regularly, but we no longer use.  Are you paying for a magazine subscription for a magazine you no longer read?  Do you still pay $40 to the gym, but you quit going months ago?  Take an afternoon to go through your checking and credit card accounts to see if you have any ghost accounts—things you’re paying for that you no longer use, need, or want.  You may be surprised to see that you have several!

Set up auto pay.  If you have trouble remembering to pay your bills on time or you don’t want to set reminders for yourself, consider setting up auto pay.  By utilizing auto pay, you can reduce the chance of having a late payment and suffering the accompanying late fee.

Check your tax withholding.  If you routinely get a tax refund, check your tax withholding.  You may want to claim more dependents so that you don’t get a big refund each tax season.  It’s far better if you put that money to work for you throughout the year rather than getting back a large lump sum in the spring.  Your accountant can help you determine the appropriate tax withholding.

 

Increase Your Savings & Retirement Contributions

Once you’ve lowered your interest rates and set up a budget, it’s time to look at your savings and retirement contributions.

Set aside money for Christmas.  Do you routinely put all of your Christmas shopping on credit card and then find yourself unable to pay it off quickly?  If so, you’re paying even more for the presents than you realize.

“You can figure out just how much your Christmas debt is costing you to carry by using calculators on the internet.  Plug in $1,000 at 17 percent (the prevailing credit card rate) in the calculator at www.bankrate.com, and you’ll find that your interest totals $94 over one year and $187 over two” (ABC News).

Rather than paying interest, take steps now so you’re prepared for next year.  If you spend $600 on presents, set aside either $11.50 a week or $50 a month.  When the 2017 shopping begins, you’ll have the cash to pay for your gifts.

Set up automatic savings withdrawal from your paycheck.  Most of us have trouble saving money.  One easy way to save more is to set up an automatic withdrawal from your paycheck to your savings account.  When I worked full-time, I did this.  At first, I missed the money from my paycheck.  But after a few paychecks, I forgot all about the money that was being deducted, and I learned to live on the paycheck I was getting instead of counting on the money that was being funneled into savings.

I truly forgot about this, so I was always in for a pleasant surprise when I checked my savings account balance.  It was growing steadily, with no help from me.

Simply go to the payroll department and fill out the form to have whatever amount of money you would like transferred to your savings account every paycheck.  You can likely also do this online.  A perfect time to make this adjustment is when you receive a raise.  You won’t yet be depending on the additional income, so you won’t miss it when it goes to savings.

Put money in your retirement savings.  If your employer offers a retirement savings match, make sure to allocate money for a retirement contribution, at least to the point that your employer matches.

If you’re in a better financial situation, consider adding to your Roth IRA or your regular IRA.  Remember that you have the first several months in 2017 to add to your account for 2016, which can help lessen your tax burden when you file your taxes.

Financial changes don’t happen overnight.  However, as we head into the new year, you can slowly make these changes so that you’re in a much better financial position in 2017.

How about you all? What financial changes do you plan to make for the new year?  What strategies would you recommend others implement?

Share your experiences by commenting below! 

***Photo courtesy of https://www.flickr.com/photos/scruch/2304897733/in/

A First-Timer’s Guide to Closing a Real Estate Deal

The following is a guest post. Enjoy! 

Hopefully, you did everything right from the beginning: You were pre-approved by your financial institution for an affordable home loan; you researched your area extensively to find the perfect property for you; you hired a real estate agent you could trust to gain access to property details and help you navigate the complex seas of paperwork. Now, it’s time to close.

Whether you are buying your first family home or a commercial property for your business, closing is convoluted and seemingly interminable. Even with the help of an experienced real estate agent, you should learn about the closing process before you attempt to survive your first real estate deal. This guide will walk you through the most important steps of closing your deal, so you come through excited to finally own your own property.

 

Obtain Title Insurance

Though it might seem unnecessary, performing a quick title search and obtaining title insurance will safeguard your investment from conflicts down the road. It’s possible that a previous owner of your soon-to-be home left the house in a will to a long-lost relative or failed to pay debts taken against the house. If anyone shows up trying to claim ownership over your home, your title insurance should reimburse you, so you won’t take a significant loss due to the state’s poor record-keeping.

 

Open Escrow

“I’m in escrow!” is an exciting statement to shout, but before you do, you should know what “escrow” means. Escrow is an account held by a neutral third party to prevent you or the home’s seller from being scammed. Until both parties in the transaction finish the necessary paperwork, all the money involved will be stuck in escrow.

 

Negotiate Closing Costs

Escrow isn’t free, but odds are you aren’t sure how much it should actually cost. Most escrow companies will try to take advantage of your ignorance and inflate their fees unnecessarily. By displaying your knowledge of the system (and using a few smart negotiating tactics), you can lower your closing costs and save some money. So-called junk fees to watch out for include:

  • Administrative fees
  • Application review fees
  • Appraisal review fees
  • Ancillary fees
  • Email fees
  • Processing fees
  • Settlement fees

Complete a Home Inspection

Do you know the difference between a wall crack caused by foundation settling and one caused by water damage? Can you tell just by looking how old the pipes are in the master bathroom? Can you recognize black mold? Most likely, the answer to all these questions ― and any questions about home repair or construction ― is “no.” That’s why you need to hire a home inspector to survey your desired property before you close the sale: You should know exactly what you’re in for before laying down cash.

You should also consider hiring a pest inspector to look for signs of damage due to wood-eating insects. If an infestation is discovered, most mortgage companies require the seller to resolve the issue before closing.

Renegotiate

Based on what your home and pest inspectors find, you might be able to lower the price you previously agreed to. Because you will likely need to complete some amount of repairs, you should ask that the seller to lower the cost by at least as much as the cost of the repairs ― or else request they complete the repairs themselves.

Set Your Rates

If you didn’t seek pre-approval ― which you should have, by the way ― it is time to lock down your interest rate. The best lenders will watch the market for a dip in rates, but you should avoid becoming too obsessed with obtaining the lowest possible number. Interest rates fluctuate several times every day, so your goal should be to obtain a reasonable rate that you can afford.

Funding Escrow

Finally, you can enter escrow. When you signed your purchase agreement, you likely deposited some earnest money into your escrow account to convince the seller that you do intend to buy the house. By now, both parties are certain about each other’s intentions, and it is time for you to move a more significant amount of money into your escrow account. You should deposit the full amount of your down payment (less the earnest money) and closing costs.

Sign the Papers

The last step of closing on your deal is signing the paperwork. In total, there should be about 100 pages worth of material, detailing the agreements of the sale, and you should read absolutely all of it. Because a home purchase will impact your finances for decades, you must know for certain that the contract says what it is supposed to. You don’t want any surprises in the way of rising interest rates or unknown fees down the road.