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Is your debt stressing you out? If so, we promise you’re not alone. Especially if you are financing a home. According to the Center for Microeconomic Data, mortgage balances—the largest component of household debt—rose by $60 billion during the second quarter of 2018.
If you’re committed to getting out of debt, we’ve got you covered on how to set up a debt repayment plan to make sure you stay on track and reach debt freedom as soon as you can.
Here are five simple steps on how to jump-start your debt repayment journey:
#1 Assess The Amount of Debt You Owe
Of course, that’s what Mint is here to help you do — easily and automatically track where every last penny goes. Tracking your expenses will help you see where you can cut down, thus helping you reduce outstanding debt, as well as your debt/income ratio (outstanding debt divided by annual net income). Having a clear view of the numbers will empower you to make a plan that actually works based on where you are now.
#2 Sleuthing For Savings
Don’t think you have any extra money to create a debt destroyer? Once you start tracking your expenses, you might be surprised. For example, can you can cut your cable bill (average of $75 a month) and switching to a streaming service (about $10.99 a month)? Or is there a subscription you’re paying for that you don’t actually use? The smallest things here and there can really add up, so make sure you understand what you don’t actually need to be paying for in order to find some extra cash to put toward your debt goals.
#3 Pick A Debt To Tackle First
Some people choose the smallest debt first because getting a few wins on the board helps motivate them to keep working toward bigger goals. Others choose to go after debt with the highest interest rate first because it’s costing the most money right now. Once you choose which debt to work on first, pay the minimums on all other outstanding debts, and put every leftover dime toward the debt you’re targeting.
#4 Start Snowballing
After you pay off the first debt, move on immediately to the next one on your list, instead of taking a break and using that extra money elsewhere. As your number of debts decrease, the amount of money you have to attack the ones that remain increases. This means you can snowball your payments until all of your debt is pummeled
#5 Enjoy Life After Debt
Once you’ve started paying down debt, now you’re ready to establish a commitment to saving. First, determine what you are you saving for! The first goal you should set is an emergency fund. This will help protect you in case of sudden unemployment, a medical emergency or other unexpected expenses. If you want to be consistent with your savings contributions, try automated savings. Start small and then increase the deposit amount when you feel confident that you can set aside more.
The earlier you get started with a strategic debt repayment plan, the better. Remember, take things step by step and first get organized to figure out what you owe. We know debt can feel overwhelming at times, but it’s important to remember it doesn’t have to last forever if you’re committed to creating a better financial future!
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It’s claimed Albert Einstein once said “the power of compound interest is the most powerful force in the universe.” While it’s still unknown if he actually said this or not, the message remains powerful and widely adopted and here’s why: Compound interest is basically interest on the principal amount + interest that has already accrued.
In other words, interest on interest. Here are the key factors to keep in mind:
Principal = amount borrowed or invested
Interest rates =
Interest paid on principal
Interest paid on accrued interest
Compounding schedule = interest can accrue daily, monthly, yearly or any other schedule laid out in the agreement.
Depending on whether you’re earning compound interest by saving money, investing, or paying it off on credit cards, loans, etc., compound interest can either help you out or hold you back.
Working in Your Favor
Let’s say you deposit $1,000 into a savings account that pays 1% interest compounding annually. At the end of the first year, you would get $10 in interest, bringing the account balance to $1,010. Assuming you don’t make any deposits, at the end of the next year, you would earn 1% on the $1,010 in your account, earning $10.10 in interest at the 1% rate. At the end of the second year, your balance would be $1,020.10.
Though in this example the increase seems small, over time (and depending on the interest rate) you can see how the dollars can add up without much effort on your side. So take a look at the interest rate on the accounts you have now, and keep this in mind if you ever consider signing up with a new bank.
Considering the Downside
Now, say you have a $5,000 credit card balance on a card that has an annual percentage rate (APR) of 15%, which compounds daily with a 30-day billing cycle. First you should calculate your daily interest rate from your purchase APR by dividing the 15% purchase APR by the number of days in a year. Then you multiply the daily rate by your average daily balance. Next: multiply that number by the number of days in your billing cycle to get your monthly interest charge.
In this case, your monthly interest amount is $63.70. Meaning, if you were to make payments of $63.70 every month to pay off the compound interest (and without spending any more on that card) your balance would never go up or down. However, by only paying the interest rate, you’re not making progress towards reducing the overall amount you owe on the card balance.
In the end, you have to factor in the amount you need to pay for interest as well as an additional amount you want to pay to decrease your debt in order to work toward clearing the balance.
Now What?
Are you earning or paying compound interest? If you’re earning it, congrats – keep it up! If you’re paying it on credit cards, student loans, mortgages, etc. you can use an online calculator, like the Securities and Exchange Commission’s, to see how much you’ll end up paying – and can adjust your budget accordingly.
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Personal finance and investing gurus are fond of an old Chinese proverb: “The best time to plant a tree was 20 years ago. The second best time is now.” Chances are you’ve heard it before.
It’s a profound quote, and trees are a great metaphor for growing your investment portfolio. If you water the tree daily – and have patience – you can expect to reap the rewards in due time. Whether you start investing in college or after you turn 40, the important thing is planting the seed.
The problem is, this proverb actually undersells the importance of starting as soon as possible from an investing perspective.
While a tree grows to maturity at a sustained rate and only reaches a certain height, investments actually grow larger the earlier you start. If investments are trees, then the seed you planted today may grow as tall as a mighty redwood, while the one you plant in 20 years becomes a pine. In other words, the growth potential of your portfolio is directly tied to the amount of time you give it to grow.
This is thanks to something called compound interest, where the interest your account accrues is compounded on itself. Here’s everything you need to know about compound interest – how it can help you, how it can hurt you and how to maximize its benefits.
Keep reading for a comprehensive look at compounding interest, or skip to the section you’d like to learn more about using the navigation links below.
What is Compound Interest?
There are two ways to accrue interest: simple and compound. Simple interest is when you earn interest only on the principal. So, if you have $1,000 invested at 5% interest, you’ll earn $50 every year.
Compound interest is earned on the principal and the interest in your account. Let’s look at a hypothetical example. Pretend you have $5,000 in a retirement account, earning 7% interest each year. The first year that your account is open, you earn $350 in interest, which brings your total to $5,350. The following year, interest is calculated based on that $5,350 total, not the original $5,000. You earn $374 in interest and now have a total of $5,724.
Even if you never deposit anything but the original $5,000, you’ll have $38,061.28 in 30 years. That’s a $33,061.28 profit.
Compound interest rewards people who invest over long periods of time, not necessarily those who can afford to invest the most. It’s specifically helpful for young people who start investing early.
A 25-year-old who invests $200 a month with 7% interest will have $226,705.89 in 30 years. If they wait 10 years to start investing, they’ll have to more than double their savings rate to reach the same total.
Use our compound interest calculator to see how much of a difference it can make.
Pros and Cons of Compound Interest
Compound interest is your best friend when you’re investing or saving for a long-term goal, but it’s your worst enemy if you have debt that’s not being paid off.
Here’s an example: A borrower with $30,000 in student loans defers their loans for a year while they look for a job. During that year, interest continues to accrue on those loans. Once they’re ready to resume making payments, they discover their $30,000 balance has grown to $45,000 because of compound interest.
To slow down the negative effects of compound interest, you should pay off your debt as quickly as possible. You can also refinance your loans to a lower interest rate. When you borrow money, compounding interest works against you and benefits the lenders. The interest rate a lender charges is the trade-off for taking on the risk of lending money and giving out loans. However, it makes it very important for you, the borrower, to pay off your loans on time and keep tabs on your interest rate.
If you have credit card debt, you may want to consider transferring your balance to a card with 0% APR to avoid interest while you pay off the balance. Otherwise, you’ll accrue interest that makes it more expensive for you to carry debt month to month.
Calculating Compound Interest
To calculate compound interest, you’ll need to use the formula below:
Compound Interest = Amount of Principle and Interest in Future (or Future Value) less Present Value
= [P (1 + i)n] – P
= P [(1 + i)n – 1]
P = principal, i = nominal annual interest rate in percentage, and n = number of compounding terms.
Compound Interest Investments
Some banks only calculate interest on a monthly basis, while others do it every day. More frequent compounding is better when you’re trying to maximize interest, so find out how frequently your bank calculates interest. You might have to call or poke around the fine print to determine their compounding schedule.
Next, find the highest interest rates possible while also minimizing risk. If you have a savings account with $10,000, choose a high-yield savings account. Aim for 2% interest or higher. A $5,000 savings account with 2% interest will be worth $7,459.04 in 20 years, but only worth $5,204.05 in a savings account with .2% interest. Using an investment calculator can give you a better idea of how interest will impact your return.
Compounding interest investment accounts can help both grow your money and secure your future. But it’s important to start early. And before you start investing in stocks, it’s important not to get ahead of yourself. Do your research and familiarize yourself with different investment options. Make sure you’re only investing money after you’ve topped off your emergency fund. It’s also important to ensure that you’re current on all your loan payments. Otherwise, any investment gains might be negated by snowballing debts.
If you’re saving for retirement, invest in low-fee index funds. Fees of 1% or more will drag down your profit and cut into your compound interest. Index funds will follow the market’s course and provide a solid rate of return. Avoid investing in individual stocks, as their volatility can be problematic.
Compound interest works best if you start saving as soon as possible, even if it’s just $25 a month. A 22-year-old who saves $25 a month at 7% interest for five years will have $1,795.80. When she gets a raise after those five years and can afford to put away $100 a month, she’ll have $294,213.07 when she retires at age 67. If she hadn’t started investing until after her raise, she’d only have $264,689.70.
Even though she only contributed $1,500 during those first five years, her portfolio is worth nearly $30,000 more. For most people, that’s enough to retire a full year earlier, and all it cost her was a monthly contribution of $25. Even someone earning an entry-level salary can afford that.
The same principle applies to debt. Even if you defer your student loans, keep making payments on them as much as you can afford to. Taking time off will only delay your debt payoff and increase how much you pay in interest.
Always compare rates before taking out a loan and get at least three quotes. Each percentage point matters when you’re borrowing money, especially for long-term debt like a mortgage. You can also limit compound interest by borrowing money for as little time as possible.
A 30-year $200,000 mortgage at 4.85% interest will cost $379,940 in total. A borrower who takes out the same loan for 15 years will only pay $269,910. That’s a difference of $110,000, which is more than half the total mortgage principal.
Takeaways: The Power of Compounding Interest and Growing Your Wealth
Compound interest can help you grow your wealth and secure a more stable financial future. Even if you can’t afford a large principal or large ongoing additions to your investment, you can still extract value from small investments with compounding interest. The key is to start as early as possible and do adequate research to ensure that you’re making investment decisions that make sense with your overall financial goals and situation. With these tips, you’ll be on your way to stabilizing your financial foundation and making your money work for you.
For more information on compounding interest, you can check out dolv.gov for more resources.
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Car accidents are not only scary but also a monumental hassle. That’s largely thanks to what comes after the accident itself.
After an accident, you’ll likely have to spend ample time on the phone with your insurer. Then there’s dealing with the auto shop and rental car agency. There’s also the possibility of having to shop for a new car. When you consider all these factors, the whole cost of even a minor fender-bender can be hefty — both in terms of time and money.
Three-quarters of all drivers have been in an accident. Three-quarters of drivers also believe they’re well covered by their car insurance policies. Unfortunately, this might not be so. A recent Esurance study found that it’s not uncommon to shell out more than $1,000 after an accident — and spend 20-plus hours dealing with post-accident demands.
Truth be told, we often make the whole thing more expensive than it needs to be. From understanding coverages to researching repairs, here are several ways you can ease the financial (and emotional) burden of an accident.
Understand Your Policy
Most online quote systems will customize coverage for you. It’s based on both your ZIP code and the answers you provide throughout the quote. That way, at the very least, you meet minimum state requirements — plus, you can see relevant coverage options.
However, many people don’t even read their policy after they purchase it. That’s not surprising—insurance policies are long, complicated and not particularly riveting. But knowing the fundamentals of your coverage can go a long way in helping you to be aware of protections you don’t have or reimbursements you’re entitled to.
As a starting point, ask yourself the following as you go through your policy:
Is my vehicle protected in the event of a collision?
While no state requires collision coverage, it can be invaluable. It’s designed to cover repair costs for your car, whether you hit another car or another car hits you. Yet the Esurance study reported that over a quarter of drivers opt out of it — likely in an attempt to shave down their premium.
But consider this: If your vehicle’s a newer model, a damaged bumper alone can easily cost $1,000. That’s because many newer models are equipped with a suite of built-in sensors and cameras. Without collision coverage for your car, even a minor accident can burn a hole in your wallet.
It’s worth noting, too, that collision coverage goes hand-in-hand with comprehensive coverage – in fact, some insurers require that you buy them together. That’s because when you bundle them, they help foot the bill for a wide array of mishaps: crashes, fallen trees, hail storms, hitting a snow bank, vandalism, auto theft, collisions with animals and more. Whether you need to replace a damaged part or your entire vehicle, these coverages can be lifesavers.
Do I have backup transportation?
For many of us, a car isn’t just a luxury, it’s a necessity. Our job, school, errands, doctor visits and the like depend on it. Having an easily accessible backup plan can save you a lot of money and stress.
If your car is in the shop after an accident, having transportation in the interim helps daily life continue as normally as possible. Rental car costs can add up quickly, so knowing whether your car insurance will help cover those costs is critical—especially if the shop is, say, waiting on a replacement part, which could take a couple weeks.
How much will my coverages actually cover?
Having coverage is one thing. Having enough coverage to be reimbursed for the total cost of an accident is another. Let’s say you’re found at-fault in an accident. The other driver is injured and looking at about $100,000 in medical bills. Your bodily injury liability limit is $25,000. That means you could be responsible for the remaining $75,000.
While lower limits might save you money at checkout, it could leave you in the lurch after an accident. Pay attention to your coverage limits and make sure you’re comfortable with them.
What do I have to pay out of pocket?
A deductible is what you pay before you’re insurance coverage pays. When you buy car insurance, you get to choose from a range of deductibles. The more you’re willing to pay out of pocket, the lower your premium is likely to be.
But your deductible should be one you’re comfortable paying. If, for instance, you choose a higher deductible of $1,000, make sure you have $1,000 in your bank account on standby. Otherwise you could be facing a not-so-little snag in the claims process.
Research Local Auto Repair Costs
About two-thirds of U.S. drivers don’t trust auto repair shops in general, according to a 2016 AAA survey. Fear of being overcharged is understandable, so researching auto repair costs in your area can be to your advantage. According to the Esurance study, drivers who had to shell out less than $1,000 in repairs after an accident were more than 60 percent more likely to have done their research on repair costs.
Auto insurance companies typically have a direct repair program. This consists of a network of repair shops pre-approved by your insurance company. After all, your insurer has a stake in this too, and a quality repair job at a reasonable price reflects well on them.
However, direct repair programs aren’t mandatory. Ultimately, it’s up to you to choose the repair shop you want to work with.
Plan for the Unexpected
Lawsuits over emotional distress. Being hit by an underinsured driver. Missing work due to injuries. These are scenarios no one likes to dwell on, but having a contingency plan in case they do happen can bring you much peace of mind.
It’s not just money in the bank that’s at stake. Your assets ought to be top of mind as well — property, equity, savings. For this reason, the general rule of thumb is to purchase the coverage that’s right for you and fits within your budget. An auto policy shouldn’t cost an arm and a leg, but it should protect that arm and leg as well.
Eric Brandt has more than 25 years’ experience in the insurance industry. Eric currently serves as Chief Customer Advocate for Esurance, where he leads the customer experience, including claims fulfillment. Prior to joining Esurance, Eric led customer-centered transformations in the areas of claims, risk management and relationship management for carriers offering personal lines, commercial lines and employee benefits protection. To learn more about Esurance’scarinsurance options, visit their website.
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For most of us, getting organized is a pipe dream. The random creams, pastes, and oils in your bathroom cabinet will probably never be color coordinated or arranged alphabetically. Your sock drawer will probably be a nest of tangled and mismatched cloth until the day you die. Your DVD collection… well, at least now you can use Netflix instead.
But whether you’re naturally tidy or a chaotic mess, there’s one area of your life that truly needs to be organized: your finances. You can get away with a messy garage or a cluttered basement, but working toward financial goals without a discernible structure is like trying to build a home without pouring a foundation.
If your finances are as disorderly as the rest of your life, here’s an argument for making a change – and how to actually do it.
Why You Should Organize Your Accounts
There are few things duller than making sure you know where your life insurance monthly statement is or how to access your 401k. But like exercise and a healthy diet, organizing your financial information is important even if it’s the last thing you want to do.
It’s crucial to have a firm sense of where you actually stand financially. Do you have a positive net worth or do you have more debt than you realized? Are you adequately insured? Did you update your beneficiaries when you had kids or got divorced?
Being aware of your financial health lets you plan for the future more accurately. You can’t adequately prepare for retirement if you don’t know the value of your assets or where they’re located because you won’t be able to set accurate and realistic goals. Knowing the total balance of your 401k and IRA can inform whether you’re on track or woefully behind.
There’s also a motivational component to this. By starting from a firm foundation and keeping close track of where your finances are headed, you’ll be able to measure your progress towards the goals you care about.
Think of it like a weightlifter. You might be able to get stronger by consistently lifting random weights, but you won’t be able to fully appreciate your success. By having an accurate sense of how much you lift every session, you’ll have an exact measurement of how much stronger you’re getting week to week.
If you can’t muster up the willpower to do it for your own sake, consider your family. People pass away every year without disclosing relevant financial information to their loved ones, leaving them in the dark about everything from retirement savings to insurance information. By organizing your accounts and passwords in a secure location, you can make the grieving process easier for your spouse, children or any remaining family who might inherit your estate.
Find and Maintain a System
There are multiple ways you can organize your financial accounts. You can use a pen-and-paper system, an Excel spreadsheet or an app like Mint. Apps sync to your financial accounts and keep them updated every time you log in. Some even send notifications if you’re running a low balance or if you were charged a late fee.
The benefit of using a spreadsheet is that you can customize it to fit your specific needs. It won’t be able to pull information automatically, so this works better for someone who doesn’t mind tinkering for a few hours every month.
A digital cloud like Google Drive or Dropbox is the best place to store your records since you can access it anywhere and they can’t be physically stolen or damaged. If you do keep records on the cloud, use a secure password and enable two-factor authentication, which means you’ll have to provide a unique code if the account is accessed.
There’s no right or wrong way to track and manage your financial accounts. The key is to pick a system that’s easy for you to use on a regular basis.
Keep a running list of every financial account you have, including:
Bank accounts
Checking and savings
Health Savings Accounts or Flex Spending Accounts
Credit cards
Retirement
401ks, IRAs and brokerage accounts
Debt
Mortgage, student loans, auto loans, home equity loans or lines of credit, personal loans, medical debt and more
Insurance
Auto, health, disability and life insurance
Taxes
W2s, 1099s, and other tax-related forms
You should know the following information for each account:
Account number
Username
PIN
Total balance
Beneficiary
For debt-related accounts, write down the interest rate, monthly payment, the total balance remaining, loan provider, loan term and any other relevant details. If you can’t remember where to find all your accounts, check your credit report. It will list all credit-related accounts, even those that are closed.
Still feel like something’s missing? Check sites for unclaimed money that the federal or state government is holding in your name. These funds can come from a closed bank account, undeposited tax refund or a life insurance payout. Be sure to check both federal and state websites since it’s not clear where your money might be. I like to check these websites once a year just to make sure there’s nothing I’m forgetting.
If you’re married or have kids, repeat these steps for your spouse and children.
Don’t Forget Your Inbox
Now that everything is online, our inboxes have become a digital dumping ground for financial documents. Whether you use Gmail or Outlook, you can organize financially relevant emails by adding labels or assigning them to specific folders.
I’m self-employed, so I keep all records of business-related purchases so I can deduct them at tax time. I categorize all potential tax-deductible receipts in a “Taxes” label. When I’m updating my income and expenses spreadsheet, I refer back to the email label to see what I can deduct.
If you prefer to use paper records, keep them in clearly marked folders divided by account or year. Use a fireproof safe that you can easily grab in case of emergency, but keep it hidden where a burglar won’t be able to find it quickly.
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