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Apache is functioning normally

April 10, 2024 by Brett Tams

A tax deduction reduces your taxable income, potentially lowering the amount of income you can be taxed on. A tax credit directly reduces the amount of tax owed. Tax deductions are based on expenses or contributions, such as mortgage interest or charitable donations. Tax credits are applied after calculating how much you owe in taxes and can provide a dollar-for-dollar reduction.

When you file your federal and state tax returns, you probably look for ways to reduce the amount of money you owe. To maximize your savings, you need to know the difference between a tax credit vs. a deduction. Both affect the amount of tax due, but they do so in different ways. Here’s how to distinguish between the two.

Note: This is for informational purposes only and is not tax advice. Please consult your tax professional to discuss your individual situation.

Defining Tax Credit vs. Tax Deduction

A tax credit is a tax incentive that allows you to subtract the amount of the credit from the amount of tax you owe. For example, if you owe $2,000 in taxes and take a credit worth $1,000, the credit reduces your tax bill to $1,000. The tax credit is a dollar-for-dollar adjustment.

In contrast, a tax deduction is an amount of money deducted from your income. When you take a deduction, it reduces your taxable income by the same amount of money. For example, the standard deduction allows you to deduct $14,600—$29,200 for married couples—from your adjusted gross income.

Here’s the main difference between the two. Tax credits reduce your tax bill directly, as they offset your tax liability. Tax deductions don’t reduce your taxes directly, but they lower your tax bill by reducing the amount of taxable income you have.

Refundable vs. Nonrefundable Tax Credits

Once you understand the difference between a tax credit vs. a deduction, you also need to know the difference between refundable and nonrefundable tax credits. The type of credit you apply makes a big difference in determining the size of your refund.

If you owe less than the amount of a refundable credit, you get the difference back from the IRS or your state revenue agency. Assume you owe $500 and are eligible for a refundable credit worth $1,500. Not only would the credit wipe out your $500 tax bill, but it would also help you qualify for a $1,000 tax refund.

With nonrefundable credits, you don’t get back the difference between the amount of the credit and the amount of tax you owe. In the scenario above, the credit would reduce your tax bill to $0, but you wouldn’t get the extra $1,000 as a refund.

Common Tax Credits and Deductions

Before you prepare your tax return, take time to learn about some of the most common tax credits and deductions for taxpayers in your situation. Many credits and deductions are based on your income, family size, and filing status. You may also qualify for credits and deductions based on college enrollment, self-employment, or charitable donations.

Tax Credits

Earned Income Tax Credit

The EITC is a federal tax credit for filers with low to moderate incomes. To qualify, you must have earned income, which is income you get from working. Dividends, bank interest, and other forms of passive income don’t count as earned income.

You must also earn less than $63,398 annually. The amount of the EITC ranges from $600 to $7,430, depending on how many children you have.

American Opportunity Tax Credit

The American Opportunity Tax Credit is a federal tax credit worth up to $2,500 per year. You may qualify if you have expenses related to your first four years of higher education, such as tuition, textbooks, or course fees.

Additionally, the AOTC is partially refundable. If you owe $0, you can get back 40% of the remaining amount of the credit as a refund. For example, if you owe $0 and are eligible for the $2,500 maximum, you can get a $1,000 refund when you file your return.

To qualify for the AOTC, you must have a modified adjusted gross income of no more than $80,000 per year—$160,000 if you’re married and file a joint tax return.

Lifetime Learning Credit

The Lifetime Learning Credit is also an educational credit, but it’s a little more flexible than the AOTC. To claim this credit, you must meet the following requirements:

You paid qualified expenses for higher education.
You paid the expenses for an eligible student enrolled at any college, trade school, university, or other educational institution that meets the requirements to participate in a federal student aid program. This is known as an “eligible institution.”
The eligible student is you, your spouse, or a dependent claimed on your tax return.
Your modified adjusted gross income doesn’t exceed $90,000—or $180,000 if you’re married and file a joint tax return. Note that the amount of the credit is gradually reduced if you have a MAGI between $80,000 and $90,000. If you’re married and file a joint tax return, the phaseout starts at $160,000.

This credit is worth up to $2,000 per year, and there’s no limit to the number of times you can claim it.

Child and Dependent Care Credit

The child and dependent care credit reimburses you for some of the expenses you paid for the care of a qualifying individual. If you have a child, they must be under the age of 13 at the time you pay for care. A qualifying individual may also be an adult who’s mentally or physically unable to care for themselves.

The IRS only allows you to claim this credit if you paid for care because you were working or actively looking for work. You can’t claim the credit if you needed child or dependent care for another reason, such as attending school or taking time off to care for an elderly parent.

If you qualify for the credit, the amount you can claim depends on your income. Under the IRS rules, an eligible taxpayer may claim 20% to 35% of their child and dependent care expenses. However, you’re only allowed to claim up to $3,000 in expenses for one dependent or $6,000 in expenses for two or more dependents.

Assume the following:

You have one eligible dependent.
You spent $3,600 on childcare expenses during the tax year.
Based on your income, you can claim 35% of your eligible expenses.

In this scenario, you can’t claim the full $3,600 in expenses, so you’d multiply $3,000 by 35% to determine the amount of your credit.

Tax Deductions

Medical Expense Deduction

The medical expense deduction allows you to deduct unreimbursed medical expenses on your federal tax return. However, you can’t use this deduction unless you itemize, which involves deducting specific expenses rather than taking the standard deduction. Itemizing doesn’t always save you the most money, so consult with a tax professional before you take this deduction.

If you decide that itemizing is right for your situation, you can only deduct medical expenses that exceed 7.5% of your adjusted gross income. Here’s an example:

Assume you have an AGI of $60,000 and $7,000 in unreimbursed medical expenses. If you multiply $60,000 by 0.075, you get $4,500. You can only deduct expenses exceeding the 7.5% threshold, so your deduction would be $2,500, not the full $7,000.

An unreimbursed medical expense is any expense that hasn’t been reimbursed by your health insurance company or another entity. Note that you can’t claim expenses that were paid from a flexible spending account or a health savings account, as both types of accounts already have tax advantages.

Mortgage Interest Deduction

If you have a home loan, you may be able to deduct the interest on your federal tax return. To qualify for this deduction, you must file Form 1040 or Form 1040-SR, itemize your deductions on Schedule A and have an ownership interest in the mortgaged property.

The amount of money you can deduct depends on the amount of your mortgage and when you took it out. Calculating the deduction can be a bit tricky, so don’t be afraid to consult a qualified tax professional.

Student Loan Interest Deduction

If you have student loans, the IRS allows you to deduct $2,500 or the amount of interest you paid during the year, whichever is less. For example, if you paid $2,346 in interest during the year, you can deduct $2,346 from your AGI. You can’t deduct the full $2,500.

Additionally, you can’t claim the student loan interest deduction if you earn more than $75,000 as a single filer or $155,000 if married filing jointly.

Making Sense of Tax Credits vs. Deductions

Credit and deduction amounts aren’t set in stone. The IRS may decide to change the eligibility criteria for some of these credits and deductions. It’s wise to consult a tax professional if you need help determining the best way to file your tax return.

Note that the credits and deductions above apply to your federal tax return only. Your state may offer additional savings opportunities, or it may have different eligibility criteria. Ask your tax professional if you qualify for any state-level credits or deductions.

Visit Credit.com for more information that may help you during tax season.

Source: credit.com

Apache is functioning normally

February 29, 2024 by Brett Tams

Key takeaways

Home improvement loans are offered by banks, online lenders and credit unions.
Unlike home equity loans, home improvement loans are generally not tax deductible.
If used for projects that substantially improve your home, you may be able to deduct the interest on a home equity loan from your taxes.

Home improvement loans generally aren’t eligible for federal tax deductions, even when used for eligible renovations or property improvements. Unlike home equity loans, which can be tax deductible, home improvement loans are unsecured debt, rendering them ineligible for tax credits.

Home improvement loans vs. home equity loans

Although home improvement and home equity loans may sound similar on paper and can be used for the same purpose, it’s important to understand the differences between the two categories.

If you turn to a home improvement loan to finance your next project rather than an equity loan, you could leave thousands of dollars in tax deductions on the table.

Home improvement loans

A home improvement loan is offered by online lenders, banks or credit unions and functions as a personal loan. Borrowers must meet the lender’s requirements to get approved and receive the funds in a lump sum. While lenders typically require good credit, some provide bad credit home improvement loans.

Most lenders offer repayment timelines between two and five years and can come with fixed or variable interest rates based on your creditworthiness. In short, home improvement loans are unsecured personal loans specifically marketed toward borrowers looking to finance renovations.

Unsecured loans or debts (like personal loans for home improvements) aren’t secured by a house or property. Therefore, they’re not eligible for the tax credits, even if the funds are used for eligible projects or improvements.

Home equity loans

Home improvement loans and home equity loans are in two different categories for a number of reasons. For one, home equity loans are secured — backed by the home — and allow you to tap into the equity you’ve built up in your home over time.

Also called a ‘second mortgage,’ these loans and lines of credit tend to have stricter usage restrictions and are higher risk. If you fail to make the payments, you run the risk of losing your home. Home equity loans and lines of credit (HELOCs) are a few of the most popular secured debts and qualify for tax deductions.

Home loans that are tax deductible

As a rule of thumb, if your home or property doesn’t back the loan, it doesn’t qualify for the tax interest deduction. However, if you’re looking to finance a specific renovation, consider a home equity loan or line of credit.

Home equity loans

A home equity loan allows you to borrow against the equity — the portion of the home you’ve already paid off — built up in your home. They typically have fixed interest rates and repayment terms of up to 30 years, but most lenders allow the borrower to choose a repayment plan.

How much you can borrow will depend on the lender and how much equity you’ve built up over time. However, many lenders cap the amount you can borrow between 80 to 85 percent of your home’s equity.

If used for projects to substantially improve your home, you may be able to deduct the interest from your loan on your taxes, even if only a portion of the balance went toward the home.

Home Equity Lines of Credit (HELOCs)

HELOCs also allow you to borrow against the equity you’ve built up over time, but rather than dispersing the amount in a lump sum, a HELOC allows you to withdraw funds over time.

Borrowers can take out how much they need when they need it. The interest is eligible for a tax credit when used for eligible projects. Because of this, HELOCs can be a great way to finance an ongoing home improvement project.

Deduction-eligible home equity loan uses

Not all home improvement projects qualify for a tax deduction, even if you use a home equity loan for financing. It’s not likely that you’ll see any interest deducted for smaller projects, like updating your kitchen cabinets or installing a patio.

The IRS has specific parameters around what qualifies as eligible. Check the specific home improvement details and deadlines before banking on a significant return this tax season.

Home office deductions

If your residence is your primary workspace, you may be able to deduct certain home office improvements or purchases. This applies to homeowners and renters residing in any home or utilizing a free-standing structure for their business. Employees will not qualify, even if they meet the other requirements.

The term “home office” is more of an umbrella term as personal property also may qualify. Among others, Boats, RVs, mobile homes and unattached garages, studios or barns fall under this category if used strictly for business.

In order to qualify, the IRS states that:

You must use a specific part of your home strictly for business purposes.
Your home (or structure) is your principal place of business, or if administrative tasks can only be performed on your property.

If you work on a hybrid schedule and only work from home a few times a week, it likely won’t qualify. “If the use of the home office is merely appropriate and helpful, you cannot deduct expenses for the business use of your home,” an IRS resource page reads.

Medical-related home renovations

The installation of specialized household equipment for medical care to support you, your spouse or your dependent may qualify for a tax break, but only if the additions fall within certain parameters.

For example, the value of the property must not be increased by the renovation for the entire cost to be considered a taxable medical expense. Such improvements may include:

Widening hallways and doorways.
Adding ramps or lifts to accommodate for a wheelchair.
Modifying stairwells.
Lowering (or modifying) kitchen appliances, cabinets or household electrical outlets.

Any amount paid (or borrowed) for medical upkeep and operation also qualifies as long as the funds are used strictly for medical purposes and the installation of a specialized plumbing system for a person with a disability.

If you’re unsure whether your renovations qualify, consider the primary function of the addition and the potential value-add it gives your home. “Only reasonable costs to accommodate a home to your disabled condition are considered medical care,” the IRS tax resource reads. “Additional costs for personal motives, such as for architectural or aesthetic reasons, aren’t medical expenses.”

Energy efficient installations

If you’ve installed energy efficient equipment — think solar panels, energy efficient windows, skylights and doors, biomass equipment or small wind turbines — then you may qualify for a tax break on your next return.

Also called the residential clean energy property credit, qualifying eco-friendly renovations made after Dec. 31, 2021, and before Jan. 1, 2033, are eligible for a tax credit totaling up to 30 percent of the equipment costs. Any expenditure made in 2033 can result in a 26 percent maximum tax credit and a 22 percent maximum credit for property placed in 2034. There will be no credit available for renovations made Dec. 31, 2034.

What constitutes a qualifying cost when calculating the deduction percentage will vary based on the type of eco-friendly equipment you’ve had installed. There’s also a $1,200 aggregate yearly tax credit maximum for home components, energy audits and energy property, while qualifying heaters, stoves and boilers have a separate $2,000 limit.

Which is better: home equity or home improvement loans?

While there isn’t a ‘right’ answer as to which product is better, there are projects that are better suited for certain projects. For example, home improvement loans are best for smaller projects that don’t qualify for tax deductions, especially if you don’t have significant home equity built up.

For larger and longer renovations, HELOCs may be the better option for qualifying borrowers. Home equity loans are well suited for long-term homeowners with less strenuous projects that qualify for tax credits.

Source: bankrate.com

Apache is functioning normally

August 22, 2023 by Brett Tams

Figuring out how to pay your bills when your usual income stream is interrupted by job loss can be a difficult task. You probably know to cut back on dining out and movie nights, but what can you do about bills for your rent, student loans, and other vital expenses?

Plenty of people confront this situation, and there are ways to navigate this challenge. If you are wondering how to pay bills when you lose your job, it’s a matter of knowing how to recognize the most pressing bills, organize your assets, and seek additional income and assistance if needed.

Here, learn more, including:

• Which bills to prioritize if you lose your job.

• How to develop a survival budget.

• Where to access funds until you find your next job.

What Bills Should I Prioritize?

If you’ve lost your job, you may feel as if you can’t pay all your bills. In this situation, it’s crucial to prioritize certain ones to make sure you can meet your basic necessities. This means looking at your list of bills and determining ones that should be at the top of your list (or close to it).

In addition to the bills that keep your daily life running, you also want to consider the damage unpaid charges can do to your credit rating. The goal is to balance these factors with the funds you do have available.

Bills you should probably prioritize include:

Rent

Having a roof over your head is important for you and those who live with you, so contact your landlord as soon as possible to discuss alternative payment arrangements. Perhaps you can negotiate lower payments for a window of time. Otherwise, if you don’t communicate and don’t pay, you could find yourself facing eviction.
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Mortgage Payments

If you have a home loan, falling behind on payments can have serious consequences, one of which is foreclosure. Non-payment can lead to default and the bank has the right to recoup their property (aka the home) and sell it to attempt to make back the money it lost.

If you’re wondering what to do about loans when you’ve lost your job, contact your lenders as soon as possible. Many offer forbearance or alternative repayment programs.

Student Loans

Falling behind on student loans could mean you’ll go into default. In some cases, the lender may have the right to garnish your wages. If you’re handling student loans during a job loss, consider applying for an income-driven repayment plan for federal student loans or contacting your private lender to see what options are available.

Car Loans

You’ll most likely need your car to run errands or look for work. Staying on top of payments for your loan or lease can help ensure you won’t risk having your vehicle repossessed.

Insurance

Non-payment could result in denial of coverage, which might not be helpful if you need to see medical treatment or are in a traffic accident, for instance.

Utilities

Not paying these types of bills can result in your electricity, water, phone, and internet being shut off. These are obviously vital for daily life and, in terms of connectivity, job hunting.

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How to Create a Survival Budget

If you’ve lost your job, it’s important to create a survival budget to help prepare for the lean times ahead. This type of budget only takes into account the bare necessities with whatever savings or income sources like unemployment benefits you currently have.

The main goals of a survival budget: to ensure you and your family are taken care of, and then turn your attention to any creditors as necessary. What this means is that even without a job, you pay the bills that will ensure you can survive first — such as food and housing.

Taking Stock of Your Expenses

To start, look at all of your current expenses and eliminate anything that isn’t really and truly a necessity.

• You can’t get rid of your food expenses, but you can temporarily cut back on dining out. Cook your meals instead, and ditch your takeout coffee habit for now.

• If you have a cell phone, you can consider downgrading your service for a cheaper plan to save some money.

Look at the funds you have available for the next couple of months as you job hunt. Deduct the priority expenses, and then evaluate what is left and how you can budget those funds. Be strict with yourself: Now is the time to unsubscribe from all those streaming services and save your money for what’s vital.

If you’re not sure if you have enough cash to pay for the necessities and debt payments, it’s best to seek options like forbearance and deferment — negotiate with your lenders to see what you can do.
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Where Can I Turn for Money?

Here are some income sources you can turn to when you’re unemployed. It’s hard to pay bills with no job, but these resources may get you through a tough time:

Credit Cards

Using credit cards or even taking out a personal loan when unemployed can be a quick source of funds if you need to make purchases such as groceries and gas. While the interest rates tend to be high, you’ll have a grace period before your balance is due, giving you a buffer to get another income source.

Otherwise, you can make the minimum payment for the time being and make a plan to pay it back once you’re employed again.

Also, see if you can negotiate with your card’s issuing company; you might be able to delay credit card payments. You may also want to explore balance transfer credit card offers, which give you a window of low or no interest.

Retirement Accounts

Tapping into a retirement account like a 401(k) or an IRA is typically seen as the last resort because the downsides typically outweigh the benefits. However, if you’re running out of resources and you have a decent chunk in there, you may not have another choice.

You can choose to tap into your retirement accounts in the following ways:

• Take out a 401(k) loan: Depending on the terms of your 401(k) plan, you may be able to borrow up to a certain amount — usually up to $50,000 or half of your vested amount — and pay it back within a predetermined amount of time (in most cases, five years). Keep in mind you could face additional penalties if you don’t pay back the loan, such as the loan amount being subject to taxes. In addition, loan and management fees may apply.

• Withdraw from your retirement accounts: If you have an IRA or taxable brokerage account, you can make withdrawals. Keep in mind with IRA accounts, you may be subject to a penalty and taxes on the amount you withdraw.

Government Assistance

You’ll want to find out how unemployment works if you lose your job; it can help get some cash flowing your way. Those funds can help you pay for your necessities as you seek other work.

If you’ve been unemployed for a while or face mounting pressures on things like an unexpected medical expense, you may be able to seek other forms of government assistance. These sources can be helpful if you feel as if you’ve lost your job and can’t pay your bills. To see what you may qualify for, you can search on Benefits.gov , your local state or municipal office, and even local charity organizations and churches.

How Setting Up a Bank Account Can Help You When You Are Not Working

When you’re unemployed, setting up a bank account (if you don’t already have one or one you love) may seem like the last thing on your mind, but doing so can help. For one, it can help you to keep track of your finances and apply for products such as credit cards and loans if you need these sources of income.

Plus, many banks offer tools to help you budget your money, a useful feature considering you need to watch your money more carefully. These pros of opening an account can make this moment of unemployment a good one to explore your options.

How to Budget and Save with a Bank Account

Here are some ways in which you can make a budget and save using a bank account when you are unemployed and navigating the job market:

• Divide money into multiple checking or savings accounts for each type of expenses so you can ensure you have enough money for necessities as well as bills.

• Set up automatic transfers so you can ensure you’re setting aside money from any income to save or pay bills on time.

• Set up direct deposit for unemployment benefits or government assistance.

• Set up card controls or features from your bank to restrict spending.

• Turn on balance alerts to notify you when your account falls below a certain balance, so you can decide to pause or delay certain purchases.

• Earn interest with a high-interest savings account.

Alternative Sources of Possible Income

For some people, the above options for money won’t be a good fit; for others, additional funds will be needed. If you have learned how to apply for unemployment and taken other steps to get money but are still seeking other sources of income, consider these options to get cash flowing:

• Borrow from friends and family.

• Look for work on freelance marketplace sites like Upwork and Fiverr.

• Sell things you own or make online via eBay, Etsy, or other sites.

• Participate in paid market research.

• Look locally for jobs like dog-walking.

• Explore passive income ideas, including renting out your car or your tools.

Protecting Your Finances from Future Job Loss

There are also steps you can take to bring in income and prepare for any future financial setbacks you may endure. Consider these options:

Starting a Side Hustle

A side hustle is a gig you start that doesn’t have to be full-time but fits into pockets of time you have available. One of the key benefits of a side hustle is bringing in income.

Side hustles can include anything from driving a rideshare to delivering food. You might sell your nature photography online or help local businesses with their social media part-time.

Building an Emergency Fund

Starting an emergency fund can help protect your finances if you were to lose your job. This involves saving money so it’s there if you are laid off or encounter an unexpected expense, such as a major car repair or dental bill.

In terms of how much money should be in an emergency fund, aim for three to six months’ worth of basic living expenses. Of course, it’s fine to build that up over time versus coming up with the whole amount. Even putting aside $20 a month is a start. And by keeping the funds in a high-interest savings account, you’ll help it grow.

It’s important to know when to use an emergency fund. Losing one’s job is an emergency; it’s exactly what the money is there to pay for. However, the opportunity to travel at a deeply discounted rate or buy designer shoes for 50% off are not good reasons to tap this account.

Starting a Budget

Developing a budget and following it can help you get through challenging financial moments and thrive in good times. A budget helps you balance the money you have coming in, your spending, and your saving. It helps you get a better handle on your financial situation and make adjustments in real time.

• One popular budget is the 50/30/20 budget rule. This says that, of your take-home pay, 50% should go to basic living expenses, 30% to spending on your wants (such as eating out), and 20% should go to savings and debt payments beyond the minimum.

• If you have lost your job, you can minimize the 30% by trimming back your spending on wants as much as possible and then attributing more to the basic living expenses and debt payments.

• The 20% saving figure can be a way to plump up that emergency fund that can help sustain you during a job loss.

The Takeaway

Paying bills when you lose your job can feel stressful, but it’s not impossible. Some key steps may include prioritizing your bills and focusing on budgeting for the bare necessities. It’s also wise to negotiate lower or delayed payments where possible and look for other interim streams of income while you look for your next job.

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FAQ

What happens to debt when you lose your job?

Your debt does not go away when you lose your job. You want to keep paying at least the minimum due. However, you may be able to negotiate a way to lower your interest rates or defer payment while you are out of work. Contact your creditors and see what can be worked out.

What bills should I pay first?

When you are unemployed and need to pay bills, prioritize basic living expenses, such as housing, food, and healthcare. It’s also important to stay current on loans, such as student or car loans.

How do you budget if you are unemployed?

If you are unemployed, focus your budget on paying for your basic living expenses (food, shelter, healthcare, etc.) and paying the minimum on your debt. Trim down your discretionary spending; negotiate with creditors to keep debt manageable; and look into borrowing or earning additional funds.

Photo credit: iStock/Delmaine Donson

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Apache is functioning normally

July 7, 2023 by Brett Tams

The investing information provided on this page is for educational purposes only. NerdWallet, Inc. does not offer advisory or brokerage services, nor does it recommend or advise investors to buy or sell particular stocks, securities or other investments.

Welcome to NerdWallet’s Smart Money podcast, where we answer your real-world money questions. In this episode:

Learn how checking your bills can prevent you from overspending, how to manage a raise and how to build wealth early.

This Week in Your Money: Sean Pyles and Liz Weston discuss how you can prevent overspending by double-checking all your bills and share how doing so saved Sean more than $100 on just a single bill. They also discuss some surprising ways bills can demonstrate that you’re getting shortchanged.

Today’s First Money Question: Smart Money co-host Sara Rathner helps Sean and Liz answer a listener’s question about how to prioritize spending and saving after a significant salary increase. The hosts dive into the 50/30/20 budget, how to combat the temptation of “lifestyle creep” that comes with entering a new income bracket, and methods for setting financial goals and establishing a path to meet them. They also look at how to prioritize debt repayment and retirement savings when you’re in your 40s or 50s and your budget may be more stretched.

Today’s Second Money Question: Personal finance Nerd Kim Palmer joins Sean and Liz to answer a question from a 16-year-old listener about how to get an early start on setting up a bright financial future. Kim discusses options for starting to save early, the time value of money and when it may be worth considering switching banks.

Check out this episode on your favorite podcast platform, including:

NerdWallet stories related to this episode:

Episode transcript

Liz Weston: Hey, Sean. When you were 16, what were you doing to build wealth?

Sean Pyles: I can confidently say that I was doing nothing at all to build wealth.

Liz Weston: Well, today we’ll give a 16-year-old listener some ideas for how they can start to build wealth early. You’ll also learn why you should double-check all your bills and how to prioritize your spending and saving when your income increases from a pay bump.

Sean Pyles: Welcome to NerdWallet’s Smart Money podcast. I’m Sean Pyles.

Liz Weston: And I’m Liz Weston.

Sean Pyles: This month, we’re bringing back some of our most popular money tips from the last couple years, so if they sound familiar, no, it’s not just you.

Liz Weston: Today, you’ll actually hear two terrific money questions from listeners. The first one is how to manage a change in your income, and the second is about how to build wealth while you’re young. But first, here’s a story we did about why you should always double-check your bills. And, yes, that means all of them.

Sean Pyles: And listener, if you changed any of your money habits around checking your bills after you heard the story the first time we ran it, then please let us know. We’d love to hear your story. Leave us a voicemail or text us on the Nerd hotline at 901-730-6373. That’s 901-730-NERD or email a voice memo to [email protected]

Liz Weston: OK, on with the show. For medical bills, restaurant tabs and even your insurance, it’s worth giving everything you’re expected to pay a little more scrutiny. Sean, this was inspired by a recent bill you received. You want to tell us about that?

Sean Pyles: I recently received a bill for $100 more than it should have been, and that inspired me to dig into what was going on and realize that I’m actually being charged for more things than I really should be. So let’s start with this bill. Basically, I have the same medical appointment every four months. It’s pretty standard. And every time I have it, it’s covered by my insurance even though I have a high-deductible health care plan.

For the latest appointment that I had, I received this bill that was for over $100, and I looked into it a little bit. I called the billing department, I called my insurance company. I had a lot of back and forth. It turns out that they coded the wrong appointment. The code that they used was one number off from what they typically use, and after talking with them for a long time, took over two hours to get this whole thing sorted out between all of the phone calls, they ended up reissuing the bill to my insurance company and it was covered. And if I hadn’t done that, if I had just accepted the bill and thought, “Oh, bummer, got to pay this bill,” I would’ve been out over 100 bucks that I really didn’t have to pay at all.

Liz Weston: Medical bills are notorious for being incorrect, for charging you things they shouldn’t have charged you.

Sean Pyles: It’s worth being pretty punctual about this as well. The moment I got the bill, I knew it was not right and so I called and I dug into it and it was resolved within a day, which is great, but it also can be a lot more of a lengthy process for those who aren’t as well-versed in how to do this. Anytime you get a bill for any sort of medical expense, it’s worth asking a couple questions, just making sure that the billing code is correct and that you are being charged what you’re supposed to be.

Liz Weston: And I’m a huge fan of automatic payments. I have almost everything on autopay, but the downside of that is you can let things slide. Cable bills, internet and satellite radio are really notorious for jacking up the price after they’ve given you some kind of teaser intro rates. That can wind up being hundreds of dollars that you don’t need to spend.

Sean Pyles: And somewhat similar to my experience with the medical bill, I also recently had a prescription that, because I’m on this high-deductible plan, was not covered by my insurance. So I talked with my medical office and they said, “Oh, just charge it through GoodRx. Here’s the price that I’m seeing.” I’ve talked about GoodRx before, but I’d never actually used it. So I finally signed up, and I was able to save half off what the pharmacy was originally asking me to pay.

Liz Weston: That’s something about those high-deductible plans. They really inspire you to look around for some savings.

Sean Pyles: But that’s where the health savings account comes in pretty handy. So I could have just expensed it, but again, I’m trying to have as much money in there as possible so I can invest it.

Liz Weston: One of the things you can do to make sure that you’re not overpaying is keep an eye on your transactions, whether you autopay or not, making sure that you review your transactions. I try to do it every month or so. And our app, the NerdWallet app, is a really good way to keep track of a bunch of different accounts at once and look at those transactions. Is that something you do or is that something you have to remind yourself to do?

Sean Pyles: So I am a big weirdo who pays off my credit card almost daily because I used to have credit card debt years ago and it’s something that has stuck with me, this almost hawkish approach to making sure I’m keeping my spending in check. So I look at it more than maybe I should or most people would even want to, but it helps me know that what I’m paying is what I should be paying.

I actually had another similar experience to this, touching on the whole aspect of making sure you’re getting billed correctly at restaurants and bars, where I was recently going through my credit card statement and I saw a charge for a bar that I went to. I only had one drink, but I was charged over $70. And I realized that my friend was trying to close out their tab. Everything they had been charging wound up on my credit card. So we had to sort it out. It was fine in the end, but it’s a reminder to double-check everything you’re being charged because that really stood out and if I hadn’t double-checked and looked at this closely, I would’ve been paying that.

Liz Weston: And that’s not something you want to do.

Sean Pyles: No. As much as I love my friends, I don’t want to shell out $70 for their tater tots and beer. Another thing that I’ve been thinking about, I recently discovered that Target and Best Buy in particular have excellent price matching policies. So if you’re looking for something and you see that it’s a little bit more at Target, but it’s easier to shop at Target because it’s in your neighborhood and you don’t want to rely on shipping or something like that, you can say, “Hey, here’s what I’m seeing at this other retailer. Can you price match me?” And they pretty much will.

Another area folks should look into if they don’t want to be overcharged is their car insurance. While a lot of people will just be tempted to sit with their same car insurance company year after year, one analysis found that folks could save an average of $560 by shopping around for car insurance.

Liz Weston: OK, that’s some serious cash. And I know we’ve talked about this before, but again, it’s something that’s really easy to leave on autopay or leave on automatic and not realize that you can save a ton of money with just a little bit of effort.

Sean Pyles: Absolutely, and the Nerds on the insurance team found that the ideal cadence for shopping for car insurance is once a year.

Liz Weston: OK. I think I can manage to do that.

Sean Pyles: Yeah, just set aside an hour, maybe even less, on a Sunday afternoon and just knock it out. Liz, I know you recently had an experience not getting the credit you deserved for credit card purchases and points. What happened there?

Liz Weston: Yeah, well, the big one has to do with a voucher for a trip we had to cancel in 2020, and it’s a fairly substantial voucher. It’s for $2,500.

Sean Pyles: Oh, wow.

Liz Weston: Yeah, I can’t find it on the airline site and customer service is so backed up. I actually got an email when I inquired about it. It’s like, “Why isn’t this voucher on my account?” They say they’ll get back to me in 10 weeks. Excuse me?

Sean Pyles: OK.

Liz Weston: That’s kind of a outlier, but I’ve noticed when you sign up for, say, money-back offers on your credit card, you can get $50 off if you spend $250. Half the time I have to go to the customer service line and say, “Hey, I didn’t get credit for this particular purchase.” So again, the credits are inducing you, those offers are inducing you to spend money. If you do it, make sure you follow up and make sure you got that money.

Sean Pyles: Yeah, make sure they’re following through on their word.

Liz Weston: Because they don’t always do so, and again, we all get busy and it’s easy to let it slide, but this can add up to real cash.

Sean Pyles: All right, well, I think that about covers it. Let’s get on to this episode’s money question.

Liz Weston: This episode’s money question comes from a listener’s voicemail. Here it is.

Speaker 3: Hi, guys. Thank you for doing the podcast. I really appreciate it. I have a question about prioritizing. So I’m in my late 20s and I am about to have an over $200,000 pretax income after basically never having a salary before. I’m starting at a big law firm. And I have about $100,000 in debt from grad school, some of which has, I think, a 6.8% interest rate. And I just have no idea whether to start by putting any of that excess income into a 401(k), into a Roth IRA or going against my student loans. What’s the smart order to go in here? Thank you. Bye.

Sean Pyles: To help us answer our listener’s question, we are joined on this episode by our occasional Smart Money co-host Sara Rathner. Hey, Sara, welcome back on.

Sara Rathner: Thank you. It’s fun to be on the other side of the proverbial microphone today.

Sean Pyles: Yeah. Well, we are going to grill you, so I hope you’re ready for it.

Sara Rathner: Oh, boy.

Sean Pyles: Our listener is about to experience a sudden and dramatic change in their personal finances, and I think that they should probably take some steps to set themselves up for success and make sure they’re managing their money properly going into this new phase of their life and their career. And where do you think they should start?

Sara Rathner: Well, one, acknowledge that this is a very nice problem to have. Congratulations to our listener for getting this job offer coming out of law school. That’s a big deal, so you should be proud of yourself. Whenever you experience even a somewhat major life change, like an income increase or decrease or new job or relocation for work or anything like that, it’s a great time to ask all of these questions. All the questions that this listener is asking are great. And you never really want to go into these situations just thinking that “I can just keep managing my money the way I did before,” because things are different. So it is good to take stock of what you’re doing currently, if it’s working for you, what more could you be doing with your new situation? And earning $200,000 a year, even if you have substantial grad school debt, it’s the kind of thing that can give you a really nice head start in life if you play your cards right. That’s what we are here for. We’re here to help you with it.

Sean Pyles: Right. Well, one thing I was thinking is that it would be helpful for them to take stock of their income and expenses, basically getting a grip on their new budget. One tool that we like to recommend is the 50/30/20 budget, where half of your income goes to cover needs. That’s rent. Thirty percent goes towards wants. That’s kind of fun things like travel. And 20% goes towards debt payments and savings. And with a pretty hefty income that our listener has, I think they should be able to use this pretty well.

Sara Rathner: Something that’s a big adjustment when you’re new to working is figuring out how much you cost. Because your life might have been very different when you were a student. Maybe you were being supported financially by family or you were working part time while in school, living with roommates.

Sean Pyles: Living off of ramen noodles.

Sara Rathner: Living the student life, and now you are out into the world potentially taking the rein of your finances on your own for the first time possibly. And so figuring out how much do blueberries cost. You know what I mean? It’s the little things you need to know. And that’s going to take some time, but it’s OK to take a couple of months and just sort of observe your spending and formulate a budget based on where your money is going and then also where you wish it would go if it’s not going where you want it to go.

Liz Weston: Well, and if somebody is jumping from being a broke law school student to having $200,000, it’s going to be really hard not to go nuts. Buy a new car, get a great apartment, buy clothes, do everything.

Sara Rathner: Yeah. Listen, I know you want the Tesla. OK? We can talk for a second. You don’t need the Tesla yet. This is not Tesla time.

Sean Pyles: And also there are plenty of other great cars besides Teslas. Let’s say that, too.

Sara Rathner: Yeah, if you aspire to Tesla, do it. They’re beautiful. But it is just important to recognize where you are, especially when you’re going into big law. The lifestyle creep temptation has got to be significantly higher than it is in other industries because it’s one of those industries where depending on what firm you work for, what city you live in, how you look matters.

It matters to clients, it matters to the partners, and how you look is, it’s how you dress, it’s what you drive, it’s how you arrive. You know what I mean? Do you golf on weekends? That’s a very expensive hobby. Do you ski? I don’t know. These are people who do things like this. And you are entering this world. And if this was not part of the world that you grew up in, it could be a real adjustment, too.

Sean Pyles: Well, yeah, that also brings me to the point that I think our listener should think about their financial goals and they can set them for one, three, five years down the road and then actually establish a path toward meeting them.

Sara Rathner: Yeah, that’s really big. The listener in their question asked about retirement savings and they asked about student loan debt. But there’s a lot of other things you have to plan for in life. You’re not just paying off your student loans and retiring. I would hope that you do other things and those other things are going to cost you money, like potentially buying a house or traveling, or maybe you want to help family out financially. Maybe you want to have children eventually. If you are working in a big law firm, child care is definitely going to be something to budget for because you work long hours. There’s a lot of life that happens in between grad school and retirement, so it’s important to list out what those things are for you and then begin putting some numbers behind them and begin making some monthly savings goals for those things.

Liz Weston: We should also make the obvious observation that you don’t net $200,000. And when you’re up in that stratosphere, you might be a little shocked at how much comes out in taxes. So figuring out what your after-tax income is going to be will really help with the 50/30/20 budget, but it will also help you right-size some of your expectations, so about how much you have to spend for an apartment, how much you have to spend for a car.

Sean Pyles: One tool that might be helpful is having a savings bucket strategy that I’m super fond of. And, Liz, actually, you turned me onto this.

Liz Weston: Oh, cool.

Sean Pyles: For me, I have half a dozen different savings accounts with different goals attached to them, and I have a certain percentage of my income go into them each paycheck, so that way I am saving toward different goals. One of them is just fun money, and that is my general bucket of cash that I have for things like travel and gifts for friends and restaurant night outs, things like that. So you can have fun with this, but I think it’s important to give every dollar a purpose.

Sara Rathner: Yeah, that’s super helpful. And when you name your goals, I think there’s studies that back up the fact that if you have a named goal, you save more, more quickly than if it’s just, “This is my savings account. It’s for saving.”

Sean Pyles: It can help gamify it because you’re seeing how much more you’re getting each paycheck.

Sara Rathner: Right. Yeah. And that way you can say like, “Hey, in five years I’m celebrating a milestone birthday and I want to take a big vacation and I’m going to budget five grand to do that.” OK, so you have to save $1,000 a year towards your vacation. Divide that by 12, set that money aside, make an automated transfer into your vacation account, and when you’re ready to book, you have the money. You don’t have to take on debt to take that trip.

Liz Weston: And you’re doing more than one thing at a time. People can get really focused on, “I’m going to pay off all my debt and then I’ll save for retirement.” No, you do it at the same time because you want to take advantage of the time value of money and multitasking is the way to go.

Sean Pyles: But there is also a balance between multitasking and prioritizing where you put your money, which is the question that our listener had. So Sara, what are your thoughts on how to prioritize different financial goals and ways to direct money?

Sara Rathner: All right. There are the big goals like retirement, buying a house, getting married, things like that. Retirement is big. Everybody has a different vision of what they want their retirement to look like, but there will be a point in your life where you can no longer work. So even if you want to work until you’re 80, your body might have other ideas and you’ll have to quit earlier because of medical issues. That’s unfortunately really common.

You do need to plan for an eventual time period where you’re not working anymore where you might have higher medical expenses, things like that. And so you’re young, you’re just out of grad school, you’re just getting started, and Liz mentioned the time value of money. Getting started early means that you can save less every month and end up with more money when you’re in your 60s or 70s than if you wait until you’re in your 40s or 50s to try to catch up.

That’s how compound interest works. The more time you give it, the better off you’re going to be, and the less aggressively you’ll have to save. And when you’re in your 40s or 50s, you might not have the money in your budget to save that aggressively for retirement because by then you might have kids in college and your vacation home and your fleet of Teslas or whatever, and you’re just not going to have as much money every month to put into your retirement account. And so start early when your life is a little simpler and just save, save, save.

Sean Pyles: But prioritization can also be a matter of personal preference, too. Maybe our listener really doesn’t like having that six-figure student loan debt hanging over them, so that might be something they want to prioritize just because psychologically that would benefit them.

Sara Rathner: Honestly, that’s what I did with my student loans. I thankfully did not have $100,000 in debt, but I did have debt. And every year before tax time, you get a letter in the mail that tells you how much interest you paid over the year. And I remember I was making my minimum monthly payments every month, and then I get this letter and it tells me how much I paid in interest, and that letter made me mad. I was like, “I just spent this money to literally just have debt.” And I was upset. I took a hard look at my budget and I was like, “How much more can I put toward this every month?” And I put an extra $40 a month toward the principal for a while, and when I got down to the last thousand dollars, I paid it all off.

Sean Pyles: Nice.

Liz Weston: Sweet.

Sara Rathner: If having that number hanging over your head annoys you or makes you angry, that’s a good thing. That’s power. You can put that anger to work. Even if you can put an extra $25 to $50 a month into the principal, it’s something. It will chip away that debt that much faster. If you get an annual bonus, for example, from your law firm — a lot of law firms do that — it could be that you set aside a certain percentage of your annual bonus and put it toward the principal of your loan just to chip away at that faster, so that’s another way that you can prioritize that debt.

Liz Weston: The interest rate they’re paying makes me think that they probably got federal student loans. It was probably graduate PLUS loans, and if that’s the case, they’re probably going to get pitched to refinance those loans into private loans just to lower the interest rate. And I’d be really hesitant about doing that just because federal loans have a ton of protections, as we know from the pandemic pausing the payments for so long. If you lose your job, if you have any kind of economic setback, you’ve got some flexibility there, whereas private student loans don’t have that as much.

Sean Pyles: Mm-hmm.

Liz Weston: If they do happen to be private student loans, then refinancing can be a great idea because it just lowers your interest rate and you’re not losing anything. But you do lose something very substantial if you’re trying to refinance federal student loans. And this is relatively high rate debt, and I doubt that they’re getting any kind of tax break on it. Usually we say, “Don’t worry about your student loans, let them ride, you’ve got more important things to do with your money.” But in this case, I endorse paying some of that down.

Sean Pyles: That brings me to another question from our listener, which is, what is the quote “smart order” to do things in?

Sara Rathner: That’s a million dollar question, isn’t it?

Sean Pyles: Yeah. I think the answer is that there maybe isn’t one specific, perfect smart order to do things in.

Liz Weston: Yeah, I think it’s very individual. With most people, you’ve got to prioritize retirement because most of us are going to get there, most of us are going to need the money, and it takes a long time. That’s an expensive goal. But if this debt is bothering you and you want to pay it off faster, that would be the next thing for me.

Sara Rathner: Obviously, if something’s a top priority and this listener mentioned retirement and debt, sounds like that’s on their mind. That could be a good place to start. Getting yourself set up so that you have your automated payments into your student loan so you know that money’s going out every month on time. Do you want to add to those payments and overpay your loan to some extent? Go ahead and do that. You also automate your retirement savings if it’s through your employer. That comes out of your paycheck automatically. When you start your job, there’ll be some paperwork to fill out, but get that going. Don’t delay. Get that money into your retirement account, select your investments and just let that money accumulate over time.

So once you automate all those things and you learn to live without that money in your bank account every month, that’s when you can really start thinking about, “OK, well this is what I have left. What do I want to do with it?” And that’s where that 50/30/20 budget comes in. And what you want to prioritize can change from year to year. You might prioritize living super cheaply so you can save up for travel, but then the next year you finish your trip and you’re like, “I hate my apartment. I don’t want to live with roommates anymore. Now I want to prioritize finding an apartment that’s just mine that maybe is a little bit nicer.” That’s going to cost you more money. Leave room in your plan for those changes because you’re at a point in your life where a lot’s going to change from year to year.

Sean Pyles: You kind of touched on getting things set up to begin with, and I think that’s something that is very smart to do first, if possible, because there’s a certain amount of administrative overhead involved in setting up your savings accounts. As you mentioned, getting your retirement savings and contributions and investments all organized. And that might take a good Sunday afternoon set aside to dive into, but then once that’s done, you pretty much have it going in the background and your money is going where you want it to.

Sara Rathner: Yeah, you revisit it every couple years, but for the most part, those things can run on autopilot for a while.

Sean Pyles: Right. All right, Sara, do you have any final thoughts for our listener?

Sara Rathner: Well, it’s just like we said, this is a huge change for you. You’re going from being a student to making a substantial annual salary, which is amazing, and this gives you options. Don’t sleep on how well you can set your life up with this income. This is a really great time to sit down and make a plan for yourself and really think about where you want your money to go, how hard you want it to work for you. You do work for clients as a lawyer, right? So think of it as if you are your money’s client, and it’s got to work for you or else you’re going to fire it. Well, you can’t fire it, but you know what I mean? We’re trying to make a metaphor here. Just go with it. But really the people I know who have made it to their mid-30s and later who are financially comfortable for where they are in life are people who didn’t ignore this stuff when they were in their 20s.

They’re the people that used that time to set a good foundation for themselves. The people who just kind of, well, winged it, they’re like, “I make money, I spend money, whatever, it’s all in my checking account. I don’t know,” they’re the ones who are hitting their mid-30s and they’re like, “Why can’t I afford a house? I don’t have a retirement account. Should I have a retirement account?” Yeah, yeah, you should. Because, yeah, we’re millennials. We’re not going to have any social safety net, right?

We do need to save for these things. That’s the advice I would give to you. As somebody who’s been out of school long enough and who has friends in the same boat to see all the different choose-your-own-adventure paths people have taken, I would say, “Use this time wisely.” You can still have fun. You can still do all the things you want to do, but you could do it because you know you’re also doing the things you have to do.

Liz Weston: That is an excellent point, Sara.

Sean Pyles: Well, thank you so much for talking with us.

Sara Rathner: Thanks for having me back, guys.

Sean Pyles: Before we get into the next money question, I wanted to mention that this is probably not the first time you’ve heard us suggest the 50/30/20 budget and it probably won’t be the last. The tool is a handy framework to get a grip on your spending so you can be more intentional about directing your income. If you haven’t already looked into it, then I hope you do now or maybe the next time we bring it up, and we definitely will. OK. Now let’s get on to the next money question.

This episode’s money question comes from Luca. Here it is. Hi, Wallet Nerds. I have used NerdWallet for quite some time and recently discovered your podcast, and I am a very big fan. I have a few questions I would like to ask of the show. I’m 16 and, as you can tell by me emailing you, a personal finance nerd. I want to know if there’s anything I can do now to help my financial future. I have a job, IRA, checking/savings account, and I am an authorized user on my parents’ credit card. Is there anything else I can do? Because I’m a personal finance nerd, I also like looking into various accounts. I am not very satisfied with my current bank and want to switch. Are there any cons to having multiple accounts? What about closing old accounts? I feel confident in my ability to manage them and keep track of my money. Thank you very much. Sincerely, Luca.

Liz Weston: I love Luca. Luca is our kind of nerd. Getting an early start with investing is always good, but getting started as a teenager, that is huge. Those extra years could more than double the amount that Luca can put aside for retirement. This is awesome. Anyway, to help us answer Luca’s question on this episode of the podcast, we’re joined by one of our own personal finance Nerds, Kim Palmer.

Sean Pyles: Welcome back to the podcast, Kim.

Kim Palmer: Thank you so much for having me.

Sean Pyles: Our listener, who is the youngest that we’ve ever heard from, is looking for some advice about how to jump-start their financial future. What do you think?

Kim Palmer: First, I think we have to acknowledge that they’re off to such a strong start because so many people aren’t even thinking about money yet. I think it’s really great that they’re already so far ahead. There’s one area actually that they didn’t mention and that is spending. I think it might make sense to take a deeper dive into how they’re currently spending money.

One thing I’ve noticed is that once you get in the habit of saving and of spending less than you’re earning, it’s easier to maintain. What a perfect time to start that habit when you’re a teenager. One tool we love at NerdWallet is the 50/30/20 budget, and that basically allots your take-home income into three different categories. You have 50% going toward needs, you have 30% going towards wants, and 20% going towards any debt payments and savings. Now, as a teenager, everything might not apply to you there. For example, you don’t probably have rent right now or a mortgage, but I still think it’s a useful tool just to start thinking about where your money is going.

Sean Pyles: I also think our listener should appreciate the really unique opportunity they have by starting building wealth so young. There’s the saying that youth is wasted on the young and for so many, so is their time horizon for saving for retirement and investing. But I think that Luca might be an exception to this, and as you nodded to, Kim, because they’re starting so young, they don’t have as many financial obligations. They probably don’t have student loans or a car payment or a rent, so they can maybe fudge the 50/30/20 to make it so that they can save a lot more right now.

Kim Palmer: I think that is a great idea. When it comes to investing, you do have to be 18 to actually go ahead and open up a brokerage account, but it can definitely be something that you do along with your parents and, as Liz mentioned, when you do start investing early, you have a head start. You have so much more time to grow your money.

One thing I like to do with my kids is go through a company like Stockpile and buy fractional shares of really big companies that you’re already familiar with. For example, with my kids, they can take $25 and buy Netflix or Disney and see how the stock fluctuates, and I think it can just be a way to get your head around what investing feels like, see if you like it.

Liz Weston: Yeah, because one of the problems with getting started with investing is that sometimes the buy-in is really high. Shares of companies that kids know and recognize might be $100 or more, and that’s not easy to get started with. Or if they’re looking at mutual funds, they can have an even higher minimum investment, so these fractional shares are a good way to get an early start.

Sean Pyles: But they will have to be 18 to open one of these accounts? How can they get around that? Is it that they’ll open one with their parents, and are there also any other limitations that Luca shouldn’t look out for because they are still under 18?

Kim Palmer: There is definitely a limitation in that you have to be 18 to open some of these accounts, but the easiest way around it is if you do have the help of your parent, then they can do it for you or you can do it jointly. Liz, do you think I’m missing anything else he should be thinking about?

Liz Weston: You’ve got to consider financial aid. If you think that you’re going to need financial aid to go to college, then you don’t want to have this money in the child’s name. Or you can do a workaround, which is to open a Roth IRA. Now, there are contribution limits to those, but Roth IRA and other retirement money is not counted in financial aid formulas, so that’s a way to get around that concern that your holdings could interfere with how much financial aid you get.

Sean Pyles: One thing I keep thinking about is how lucky Luca is to have parents that have encouraged their kid to start building a solid financial foundation really early on. Adding them as an authorized user on the credit card, for example, will give Luca an early start on building good credit. Kim and Liz, I’m wondering if you can share any other tips that you have as parents for how parents out there can help their kids get started like Luca’s parents did.

Liz Weston: Well, I think it’s like most things with parenting is that you start talking about it early and often so it’s not a subject that’s being brought up at the last possible minute. When you take your child shopping, you can talk about the cost of things and how you decide what to buy and what not to buy.

With our daughter, as soon as she was recognizing that money bought things, which was very early, like 3 years old, I want to say, that’s when we started her with an allowance. And that’s very early, but we had some good experiences with it. That’s something to consider.

Sean Pyles: And she seemed ready, right?

Liz Weston: Oh, yeah. Well, we’ve talked about this before. She was ready to save. She was ready to spend. She didn’t understand the sharing part. Why should she have to share her money? Then as she got older and she got jobs and started her own little business, we would match her earnings with Roth IRA contributions.

Sean Pyles: Oh, that’s cool.

Kim Palmer: That is very cool. My parents did the exact same thing, and I really think it helped me. I think it helped me learn how to save. One thing I’ve noticed with my kids is that from a very early age, like toddlerhood, they start asking for things, and they have no qualms about spending your money. The good thing about that is that it gives me a chance and parents a chance to say no and to explain the whole idea of scarcity. We can’t have everything we want. That’s really the basis of learning how to budget right there.

As they get older, it morphs into a more complex conversation. For example, with my 12-year-old, we can have a more nuanced discussion about saving and putting money aside so you can afford something bigger. And I think as the kids get older, you can start having those more nuanced conversations, but it really starts, I think, around age 2.

Liz Weston: Luca’s also wondering about switching banks. Kim, what do you think they should know when they’re shopping around?

Kim Palmer: It’s a really good question to look into switching banks. A lot of people are afraid to switch banks, and they just go with the flow of their current bank even though they’re not happy. I really encourage this line of thought to look at if another bank could serve your needs better. What you want to do when you start thinking about opening a new bank is first see what would be a good fit.

That starts with some online research. Where can we make sure we’re paying as few fees as possible? Where can we earn the highest APY? Where can we get the most for our money? Once you do that comparison and you choose a good fit with your new bank, you just go ahead and you transfer any money that you have into the new account, you close your old one. And it’s really not as complicated as I think a lot of people worry that it is.

Sean Pyles: Or as a lot of banks might want you to think it is to switch banks like that. I did this in the past year. I had had a goal for a while to go from the big national bank I’ve been using since high school to a local credit union in the Pacific Northwest, and it took me a while to actually muster up the energy to do it, and it took me five minutes. It was shockingly easy.

Liz Weston: Yeah, I think it’s more complicated when you have more bills to pay, especially if you’re autopaying through your bank account, so you may need to keep your old account open for a while for those to clear, but if you’re somebody like Luca who’s just starting out, you can choose whatever bank you’d like. And an online bank might be a good fit because they tend not to have minimums and a lot of fees. You can start with a small amount and build from there.

Sean Pyles: But, again, they’ll probably have to have their parents help to open any sort of account like this.

Liz Weston: Luca is obviously in pretty good shape today and is already saving for their future.

Kim, what else should Luca consider going forward?

Kim Palmer: Well, I think it really all goes back to getting in the habit of saving money. I think some of the habits that they’re establishing now really will last possibly their whole life. Of course, as a teenager, you might not have the same priorities that you will have in your 20s or 30s or beyond, so I think when you’re focused on saving and you have that savings cushion, it helps you have that flexibility. So wherever you turn, whatever priorities emerge over the next decade or two decades, if you have that savings habit, I think that gives you such a strong backbone to rely on.

Liz Weston: Yes. Absolutely. And I love the fact that you talked about the importance of saving while you’re young because a lot of people just keep putting it off thinking, “Well, in the future I’ll have more money. It’ll be easier in the future.” It is never easier in the future. Start now, do it now, and you’ll have a lot more flexibility down the road.

Sean Pyles: Well, Kim, thank you so much for talking with us.

Kim Palmer: Of course. Thanks for having me.

Liz Weston: So Luca gave us a chance to talk about the power of compounding, which is another of our favorite topics, and how an early start can make a huge difference in how much you can save over time. But we don’t want people to despair if they’re coming late to investing and wealth building. We want them to have some kind of hope.

Sean Pyles: Right. Because even small changes can make a big difference over time. Just getting a handle on your budget can be a great first step. And that’s all we have for this episode. Do you have a money question of your own? Turn to the Nerds and call or text us your questions at 901-730-6373. That’s 901-730-NERD. You can also email us at [email protected]

Liz Weston: Remember to follow our show on your favorite podcast app to automatically get new episodes. If you’re listening on Apple Podcasts or Spotify, then tap that five star button to rate the show. We really appreciate it.

Sean Pyles: This episode was produced by Liz Weston and Cody Gough with help from me. Kaely Monahan mixed this episode with additional audio editing by Cody. And a big thank you to the folks on the NerdWallet copy desk for all their help.

Liz Weston: And here’s our brief disclaimer. We are not financial or investment advisors. This nerdy info is provided for general educational and entertainment purposes and may not apply to your specific circumstances.

Sean Pyles: And with that said, until next time, turn to the Nerds.

Source: nerdwallet.com

Apache is functioning normally

June 15, 2023 by Brett Tams

Nursing home care can be extremely expensive. According to Genworth’s 2021 Cost of Care Survey, the median monthly cost of a private room is a nursing home is $9,034. That’s over $100,000 a year! And most people will need nursing home care or something similar in their old age: A study from the Urban Institute and the U.S. Department of Health and Human Services found that 70% of Americans who reach the age of 65 need some long-term care during their remaining years.

But there are ways to get some of these costs covered, as well as strategies that can help cover any out-of-pocket expenses. We’ll examine four ways to pay for nursing home care, some of which you can implement early in your life to ensure a financially secure retirement. Consider working with a financial advisor if you want more personalized retirement and savings advice.

What Government Programs Will Cover

There are three government programs intended to insure and help cover medical costs for Americans ages 65 and older. Let’s take a look at how each of these may be able to help you pay for nursing home care.

Medicare: Medicare typically doesn’t pay for nursing home stays because it doesn’t cover custodial care. Custodial care is defined as “non-skilled personal care, like help with activities of daily living like bathing, dressing, eating, getting in or out of a bed or chair, moving around, and using the bathroom.” Medicare will only cover nursing home care when you need more advanced medical care — like regular injections that can only be administered by a medical professional. Medicare has additional restrictions and limits, and shouldn’t be counted on as a way to pay for long-term care in a nursing home.
Medicaid: Medicaid will cover 100% of your nursing home care so long as you meet the program’s financial eligibility requirements, according to the American Council on Aging. Individuals typically must have a low enough income and few financial resources to qualify for Medicaid. States limit the amount of income you can earn while qualifying for Medicaid and also typically put a $2,000 cap on the amount of cash and other assets you can have (beyond your home’s value). Additionally, the services must be deemed medically necessary by a physician.
PACE: Some states offer a Program of All-Inclusive Care for the Elderly (PACE), which is a joint Medicare-Medicaid program that can help those who need nursing home care. If you’re eligible and there’s a PACE program in your area, you can apply for care.

What Specialized Insurance Will Cover

Long-term care insurance is a fantastic option that can help you pay for nursing home care if you don’t qualify for government programs. This product is intended to cover the exact kind of care that isn’t often covered by Medicare — custodial care — as well as any specialized care or rehabilitation therapy you need.

Long-term care insurance isn’t cheap, but it can be a lot cheaper than paying out of pocket. The American Association for Long-Term Care Insurance found in its 2023 analysis that a 55-year-old man purchasing long-term care insurance with $165,000 in immediate benefits can expect to pay $900 a year. A woman in the same situation can expect to pay between $1,500 and $3,600.

How Tax Deductions Can Help

According to the IRS, you can deduct some or all of your nursing home expenses on your tax return. A tax deduction is a provision that allows some of your income to go untaxed. For instance, if you make $40,000 in income and qualify for a $5,000 tax deduction, you’ll only pay taxes on $35,000 of your income. While these tax provisions won’t necessarily help you pay for nursing home care up front, they can save you money after the fact.

The IRS specifies that if you’re in nursing home care primarily for medical reasons rather than custodial care, you can deduct the total cost. If you’re in nursing home care primarily for non-medical reasons, you can deduct the cost of any medical care, but not the cost of services such as lodging and meals. To figure out your tax deduction amount, most taxpayers will simply need to total up all of their qualifying medical costs, then subtract 7.5% of their adjusted gross income.

How to Cover Out-of-Pocket Costs

Even if you have long-term care insurance or another plan for covering your nursing home care, you will still want to have some money on hand to finance any uncovered expenses or surprise costs. Plan ahead for these out-of-pocket expenses by setting up a tax-advantaged retirement account.

A good option is to open a Roth IRA to use for these costs. Since you fund a Roth IRA with after-tax money, you won’t be taxed when you withdraw the money as long as you have reached age 59 ½ and the account has been open for five years. And unlike a traditional IRA, you won’t be subject to required minimum distributions (RMDs) at a certain age, so that money can remain invested until you need it.

An annuity is another smart way to cover out-of-pocket expenses or anything insurance won’t cover. An annuity is an insurance product where you pay a certain amount in exchange for receiving payments at a later date. You can specify when you want the payments to start, what schedule you want them to follow and how much you want them to be. You can also purchase an annuity with a long-term care rider to help cover some specified conditions requiring medical care.

Bottom Line

Nursing home care is expensive, but there are ways to plan for it and programs that can help you cover the costs. See how much government programs can help you, look into insurance options and make sure to take advantage of medical expense tax deductions. Lastly, set aside some savings for the costs that won’t be covered by government programs or insurance.

Retirement Planning Tips

Consider talking to a financial advisor about your options for preparing for long-term care costs. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three qualified financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
A related concern is how much life insurance you may need. SmartAsset’s life insurance calculator will give you an estimate of how much life insurance you should have.

Photo credit: ©iStock.com/Drazen Zigic, ©iStock.com/SolStock, ©iStock.com/Wavebreakmedia

Source: smartasset.com

Apache is functioning normally

May 29, 2023 by Brett Tams

Do you feel like you are stuck in a never-ending debt cycle?

Perhaps you keep getting out of debt, only to fall back into it shortly after. That is what a debt cycle is, and many people fall into this cycle and can’t seem to get out.

Falling into debt over and over again can lead to insane amounts of stress, unhappiness, sadness, and feelings of hopelessness. No one wants to experience these feelings.

But, I want to tell you that it IS possible to get out of the debt cycle.

Today, I will help you finally escape the debt cycle so that you can live the life you want.

Face your problem

Before we continue, you need to realize why you keep falling into a debt cycle. You should think about the answers to the questions below:

Do you feel like you deserve everything you buy?
Are you trying to keep up with the Joneses?
Do you have an emotional spending problem?
Are you afraid to face how much debt you have?
Do you feel like debt makes things seem more affordable?
Are you unprepared for emergencies?
Do you truly understand how debt and interest rates work?
Are you living paycheck to paycheck?
Do you live beyond your means?
Do you have credit card spending problems?

To get out of a debt cycle, you need to realize why you keep falling into debt. By understanding why you are falling into debt, you can begin to prevent yourself from falling back into a debt cycle.

However, until you dig deep and realize this, the debt cycle will never end.

Side note: I highly recommend that you check out Personal Capital if you are interested in gaining control of your financial situation. Personal Capital is very similar to Mint.com but 100 times better. Personal Capital allows you to aggregate your financial accounts so that you can easily see your financial situation. You can connect accounts such as your mortgage, bank accounts, credit card accounts, investment accounts, retirement accounts, and more. And, it is FREE.

Add up your total debt

This is related to facing your problem, as adding up your total amount of debt will help you realize how to gain control of your debt. This will help you to truly understand how much debt you are dealing with.

Plus, most people have no idea how much debt they have. By adding it up, you will have a more realistic view of your debt problem.

Create a budget

Most people have student loans, credit card debt, a mortgage, car loans, and sometimes many other forms of debt. However, not many people have a budget.

According to a survey done by Gallup, 68% of households in the U.S. do not have a budget.

Budgeting can help you take control of your financial situation so that you can stop the revolving debt cycle.

Read more at The Complete Budgeting Guide: How To Create A Budget That Works.

Pay off debt

In order to get out of the debt cycle, you’ll have to pay off your debt!

No surprise there.

Paying off your debt can lessen your stress levels, allow you to have more money to put towards something else (such as retirement), stop paying interest fees, and more.

Read more at How To Eliminate Your Debt.

Create a vision board

Having your financial goal displayed in front of you can make it that much more real, plus it’s nice to have a constant reminder of what you’re working towards.

Various ways to make your financial goal visual include:

Create a graphic that demonstrates your financial goal. I did some research and found a blog post on A Cultivated Nest about many creative ways to do this.
Keep a picture of your goal on hand. You could even go all out and create a vision board on Pinterest, or you can create a poster board of all of the things that debt freedom will allow you to do.
Write down what debt free life will be like for you.

Start an emergency fund

An emergency fund is something that everyone should have. However, according to a report by Bankrate.com, 26% of Americans have no emergency fund whatsoever. This same report found that only 40% of families have enough in savings to cover three months of expenses, with an even lower percentage having the recommended six months worth of savings.

This is scary to me, as having an emergency fund can greatly help you get through hard and unexpected situations that may arise.

An emergency fund can help if you:

Lose your job
Have your hours cut back
When your car breaks down
If you have a medical expense, and so on.

Plus, an emergency fund can help you get out of the revolving debt cycle. This is because if an emergency does arise, you won’t be forced to rely on debt in order to solve your situation. Instead, you’ll have your emergency fund to bail you out!

Read more at Everything You Need To Know About Emergency Funds.

Spend less than you earn

Too many people live paycheck to paycheck. This can lead to credit card debt, high interest rates, and more.

You should always be spending less than you earn. If you aren’t, then you need to find ways to cut your budget and/or increase the amount of money you earn.

Save more money

Finding ways to save more money may allow you to pay off your debt a little faster, improve your financial habits, help you reach your dream sooner, and more.

Read more at 30+ Ways To Save Money Each Month.

Make extra money

I believe that earning extra income can completely change your life in a positive way. You can stop living paycheck to paycheck, pay off your debt, and more, all by earning extra money.

In fact, because of extra income and my blog, I was able to pay off $38,000 in student loans within 7 months, leave my day job in order to pursue my passion, travel full-time, and more!

Making extra money can do something similar for you as well. It can help you break out of the debt cycle as you’ll be able to put more money towards your debt, and you will be able to spend less than you earn.

Related articles:

Try using just cash

If your problem with debt is that you don’t know how to correctly use credit cards, or credit cards or too tempting for you, then you may want to get rid of your credit cards and try using cash.

A cash budget is when you pay for the majority of your purchases in cash. Of course, there are certain expenses, like a mortgage payment, that you may not be able to do that for or that you may not want to do that for. For the most part, any and almost all spending is done with cash when a person is taking part in a cash budget.

A cash budget can help because:

It forces you to think about where your money is going
It can prevent impulse shopping and clutter
Spending actual cash “hurts” more than spending money with a credit card

Don’t keep up with the Joneses

Whether you are a young child and want that new toy everyone is playing with, or if you are a parent and are feeling the need to upgrade your house, car, etc., everyone has experienced wanting to keep up with someone else.

The problem with this is that keeping up with the Joneses can make you broke and fall into a revolving debt cycle.

When trying to keep up with the Joneses, you might spend money you do not have. You might put expenses on credit cards to, in a pretend world, “afford” things. You might even buy things you don’t really care about. The problems can go on and on.

This can then lead to a lot of debt and potentially set your financial goals back years, if not decades.

You should stop caring about what other people are buying, and, instead, only do what makes you happy.

Are you stuck in the revolving debt cycle? What are you doing so that you can get out?

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Source: makingsenseofcents.com

Apache is functioning normally

May 24, 2023 by Brett Tams

I spend almost as much on groceries as I do on my mortgage.

Now, before you spit your coffee all over your keyboard, you should know that my mortgage is pretty low, lower than what some of my friends pay in rent. And for me, “groceries” includes all of the extras one buys at grocery stores, like paper towels and soap and the latest issue of the weekly tabloid.

(Kidding! I have zero interest in the tabloids. Especially now that none of them cover the bat boy or alien baby adoptions.)

Anyway, non-food expenses aside, I still spend a lot of money on groceries. Part of it is need. We do need to eat. Part of it is want, since food and cooking is a hobby of mine. I make cuts in other places in order to afford things like fresh-pressed olive oil. And part of it I view as a health expense — things like antibiotic-free meat and organic strawberries.

The thing is, I know I’m lucky to be in a position to afford it. Yes, I prioritize food and health in my spending, so that helps. But not everyone can do that. You can’t prioritize organic avocados over, say, paying the rent or paying for childcare.

For instance, check out this post by TomInTexas on the PaleoHacks message board:

“The wife and I are having to cut costs as I’m quitting my job to go back to school. I’ll still have some income, but less than half of what I make right now. As such, cuts have to be made, and it looks like the ‘unnecessarily high’ cost of my paleo diet is in the crosshairs. (I’ve recently gone paleo, she didn’t.)

“After more than two months … I feel great. But today I had my first non-paleo meal in a while: Lentils and some chicken. 15 minutes later I was bent over the commode revisiting my lunch. Now I feel horrible. And I’m hungry again, 1.5 hours after I ate.

“Moral is at a bit of a low. Any ideas on how I can keep the cost … on the low end? I live in a small apartment, so buying half a cow, etc. is not an option. Based on my stomach’s response to lunch, neither is rice and beans.”

Traditional advice isn’t practical

Now, this post isn’t about the paleo diet per se. I don’t personally follow any diet plan. I chose TomInTexas’s quote because it gets to the heart of the financial aspects of trying to eat a “clean diet,” whatever that means to you. These aspects are often disregarded by people who espouse these special diets.

Usually when you’re talking to a health nut about the expense of eating healthy, they say things like “cut other expenses to afford it” or “consider it a medical expense.” Or they offer the advice TominTexas mentions: “Buy half a cow.”

But TomInTexas is on a very restricted budget. He can care about his health until the grassfed cows come home, but that won’t magically put food dollars in his bank account. And he can’t buy in bulk because he lives in an apartment.

Plus, his significant other isn’t on board. She doesn’t share his views on diet, and that’s a difficult situation when his food expenses have increased and his income has decreased. She has a right to be concerned about their finances.

So what can Tom do to keep eating in a way that makes him feel better while keeping to a tight budget?

Decide what matters most

The solution is to prioritize. You may not be able to afford a “perfect” diet, whatever that means to you, but you can make choices where it matters most.

Here’s a round-up of some of the best advice I’ve read about what to prioritize and how to stretch your budget.

Cut the fancy supplements, powders, and special drinks. If you have to watch your budget, think about cutting the $50 protein powder and have some eggs for breakfast instead. Ditto the special drinks. “Don’t drink your calories,” writes Anthony Vennare at Hybrid Athlete. “Avoid soda, juice, and energy drinks. Stick to water, tea, and coffee.” (Cheaper and healthier!)

Don’t throw your food budget in the trash. If your produce often goes bad before you get a chance to eat it, buy some frozen vegetables. “Sure, I love fresh veggies,” writes Steve Kamb of NerdFitness, “but since frozen veggies are picked and then frozen at peak ripeness (and thus most nutritionally dense), they are often a better value while being edible for months longer.”

Get the most nutritional bang for your buck. “Target nutrient dense foods, but understand that we’re looking for the most economical choices,” writes Kamb. “If food A costs $10 and has 50 of nutrient X, we’ll pick food B instead, which only provides 45 of X but costs just $2.” High on his list? Dark leafy greens, broccoli, eggs, meat, canned tuna, legumes, bananas, and plums.

Cook like your grandma. “After…ditching my go-to Pam cooking spray, I began to research other cooking oils,” Rachael Adams, The Freckled Foodie, tells Abel James, the Fat Burning Man. “My favorite early discovery … is to save all the excess grease from cooked bacon, ground pork, and any other meat, and use it to cook your veggies or side-dishes.”

Another way to use up everything you buy? Eat the perfectly healthy parts of produce that most people throw out. For instance, you can sauté beet greens and you can steam broccoli stalks.

It’s okay to buy less expensive meat. If you want the highest quality of meat but can’t afford it, don’t sweat it. “If I can’t eat grassfed meat, I look for the cleanest meat I can find (no hormones, no antibiotics, etc.),” writes Mark Sisson, author of The Primal Blueprint. Another way to save is by buying the cheaper cuts of meat. For instance, dark meat is cheaper than white meat. Skirt steak is cheaper than ribeye. There’s nothing wrong with those cuts, they’re just less desirable to the majority of consumers.

Shop sales. Okay, this one is a bit obvious, but it had to be included because sales are hard to come by for non-processed food. Places to look: grocery stores clearing out nearly-but-not-yet expired food, coupons for frozen produce, weekly sales on select cuts of meat, and end-of-day deals at the farmers markets, when vendors are packing up to go home.

As for specific advice for TomInTexas, I would tell him to sit down with his wife and come up with a food budget that works for both of them. Then, he could offer to do the grocery shopping using the tips above to stick to his diet as much as possible, while keeping in mind his wife’s food preferences too. If he can find coupons for some of the foods she likes to eat, that would also help him stick to their budget.

What advice would you give TomInTexas? And whatever your diet of choice, what are some ways you eat healthy on a budget?

Source: getrichslowly.org

Apache is functioning normally

May 14, 2023 by Brett Tams

Flexible spending accounts, or FSAs, are special savings accounts offered through some employer benefit plans. They allow the account holder to pay for certain out-of-pocket medical and dependent care costs with tax-free money.

However, FSAs come with some rules and regulations. For instance, FSA rules cap the amount of money that can be placed in the account each year ($3,050 for 2023), and also dictate which types of expenses qualify for an FSA distribution.

Still, FSAs can be a powerful tool for covering unavoidable medical costs that could otherwise wreak havoc on finances.

Flexible Spending Account Explained

FSAs are savings programs offered through employers — which means that self-employed people aren’t eligible. Those who are self-employed may be covered through an employed spouse’s plan, or they may choose to open an HSA, if they qualify.

FSAs are also sometimes called flexible spending arrangements, and they can cover you, your spouse, and your dependents. There are also a few sub-types of FSAs, such as dependent care FSAs (DCFSAs) and limited purpose FSAs (LPFSAs).

Recommended: Benefits of Health Savings Accounts

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Flexible Spending Account Rules: An Overview

FSA contributions work similarly to employer-sponsored retirement plans like 401(k)s: a certain amount of wages is withheld each pay period and contributed to the account.

The account holder elects how much to withhold at the beginning of the plan year — and, importantly, they may not be able to change it unless there’s a change in employment or family status. That means it’s important to think the decision through carefully.

But unlike a 401(k), the funds placed into an FSA aren’t just tax-deferred — they’re actually tax-free. That means they aren’t included in the account holder’s total taxable income, nor are taxes due when distributions are made.

Recommended: Tax Credits vs. Tax Deductions: What’s the Difference?

How Much Can I Contribute to My FSA?

In 2023, account holders may contribute up to a maximum of $3,050 per year to their FSAs. Employers may also place limits on the amount an employee can elect to be contributed, up to this federal cap.

Unused Funds: FSA Rollover and Reimbursement Rules

Another rule regarding FSAs is the fact that, generally speaking, unused FSA funds are forfeited.

In other words, FSAs are “use it or lose it” accounts; the money that isn’t used for qualified expenses by the end of the plan year can’t be rolled over into the next.

Thus, account holders may want to be cautious to avoid over-contributing to the plan and carefully estimate how much they think they’ll need to spend on out-of-pocket health expenses. Setting up a budget may help with this.

However, there are some exceptions that may be accessible, depending on the employer’s policy choice. They may allow for a “grace period” or a carry-over option — one or the other, but not both, and they’re not legally required to offer either.

• The grace period option allows account holders to use their FSA funds for an additional two and a half months after the plan year to pay for qualified medical expenses.

• The carry-over option allows account holders to roll over up to $610 of unused funds into the account for use the next plan year, though the employer may specify a lower dollar figure. Carryover doesn’t affect the maximum allowable contribution for the next year’s plan.

Recommended: How to Negotiate Medical Bills

What Can a Flexible Spending Account Be Used For?

Given the contribution limits and forfeiture rules of flexible spending accounts, FSA account holders usually want to be careful about calculating how much money they might be able to use — otherwise, significant amounts of their paycheck might end up right back in their employers’ hands.

And although many medical expenses qualify, not all of them do, or especially rules apply. For instance, non-prescription medications are covered only with a doctor’s prescription. The exception is insulin, which is covered without a prescription.

FSA funds are also ineligible to be used for health insurance premiums (though you can use them for deductibles and copays) or long-term care coverage and expenses, which may affect those with chronic illnesses or disabilities.

There are, however, a wide range of procedures and healthcare services that FSA funds can be used to cover, including dental expenses.

In basic terms, any treatment that would qualify for a medical expense tax deduction can be covered by FSA funds; the full list of which can be found in IRS Publication 502 .

From acupuncture and alcoholism to birth control pills and psychological counseling, many services do count as qualified medical expenses.

Along with being the right kind of medical expense, services paid through FSA funds must be applied to the right people in order to be covered. Eligible beneficiaries include:

• The account holder

• Their spouse

• Dependents claimed on their tax return

• Children age 26 and under

Keep in mind, too, that FSAs generally work in conjunction with other types of health benefits and coverage, and funds can’t be used to reimburse services that are covered under other health plans.

It might be a valuable exercise to write out all of the expected medical expenses you’ll face as a family at the beginning of the plan year in order to decide how much to contribute, including additional coverages, in order to avoid over-contribution. While nobody can predict the future, some routine expenses can be foreseen — and a little bit of planning might save a lot of forfeited funds in the end.

Recommended: 15 Creative Ways to Save Money

Taking Distributions from an FSA

The process for taking distributions from an FSA may vary based on the plan. In some cases, distributions are made from an FSA to reimburse the account holder for medical expenses they’ve incurred. Some FSAs also have a debit, credit, or stored value card that can be used to pay directly for qualifying expenses.

In order to take a distribution, the account holder may have to provide a written statement from the doctor or medical service provider that specifies the medical expense incurred, as well as a statement documenting that the expense hasn’t been covered by any other health plan. In other situations, a receipt may be sufficient documentation in order to be reimbursed.

FSA reimbursements are only available for verifiable medical expenses that have already been incurred, rather than expenses the account holder plans to incur in the future. (In other words, you can’t write to the FSA and tell them you’re going to the doctor next month.)

Finally — and importantly — FSA participants must be able to use the entire benefit (that is, the total amount of money they pledged to contribute to the plan) even if those monies haven’t yet been contributed. There is some opportunity for roll-over, depending on the plan rules. Some FSAs allow account holders to carry over up to $610.

For example, if you decide to contribute $2,000, but get hurt midway through the year when only $1,000 has been deducted from your pay, you’ll still be able to use up to $2,000 worth of tax-free FSA coverage for qualified expenses. Pretty cool, huh?

Is a Flexible Spending Account Worth It?

A flexible spending account can be a helpful tool, but it’s not the only option for footing medical bills.

For one thing, $3,050 might not even scratch the surface of some common medical procedures, such as childbirth.

Furthermore, although the tax-free nature of FSAs is attractive, the prospect of forfeiting parts of a paycheck is definitely not — and there are other ways to save cash for medical expenses and other emergencies which offer not just flexibility, but growth.

For example, you could open an online bank account with a high-yield and earn more than 4% APY (annual percentage yield) in interest. That could be an option to explore.

Another idea is to create an emergency fund to help pay medical expenses. However, if you think you’ll use all the funds in an FSA, going that route instead may be worth more to you.

The Takeaway

The tax benefits of the FSA can make them an appealing and useful tool, especially for those who know they’ll spend a decent amount out of pocket on healthcare.

But if you’re not sure you’ll use the funds saved in an FSA, a SoFi Checking and Savings account could be an alternative solution. You’ll earn a competitive APY and you’ll pay no account fees. You could even use a SoFi Checking and Savings account as a complementary tool, along with your FSA, to work toward other saving goals.

Got medical expenses? Let SoFi Checking and Savings help you save for your healthcare needs.

SoFi® Checking and Savings is offered through SoFi Bank, N.A. ©2023 SoFi Bank, N.A. All rights reserved. Member FDIC. Equal Housing Lender.

The SoFi Bank Debit Mastercard® is issued by SoFi Bank, N.A., pursuant to license by Mastercard International Incorporated and can be used everywhere Mastercard is accepted. Mastercard is a registered trademark, and the circles design is a trademark of Mastercard International Incorporated.

SoFi members with direct deposit can earn up to 4.20% annual percentage yield (APY) interest on Savings account balances (including Vaults) and up to 1.20% APY on Checking account balances. There is no minimum direct deposit amount required to qualify for these rates. Members without direct deposit will earn 1.20% APY on all account balances in Checking and Savings (including Vaults). Interest rates are variable and subject to change at any time. These rates are current as of 4/25/2023. There is no minimum balance requirement. Additional information can be found at http://www.sofi.com/legal/banking-rate-sheet.
Tax Information: This article provides general background information only and is not intended to serve as legal or tax advice or as a substitute for legal counsel. You should consult your own attorney and/or tax advisor if you have a question requiring legal or tax advice.
Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.
Third-Party Brand Mentions: No brands, products, or companies mentioned are affiliated with SoFi, nor do they endorse or sponsor this article. Third-party trademarks referenced herein are property of their respective owners.
External Websites: The information and analysis provided through hyperlinks to third-party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.
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Source: sofi.com

Apache is functioning normally

May 4, 2023 by Brett Tams

How to File for Student Loan Bankruptcy – MintLife Blog

credit score significantly. Depending if you file for chapter 7 or chapter 13, bankruptcy will stay on your credit report for seven to 10 years. You should also be aware that when you file for bankruptcy, all of your financial information becomes available to the public. The court may also decide on how and when you can spend your money, as well as who you must repay first.

Something else that you can try instead of filing for bankruptcy is checking if you are eligible for an income-driven repayment plan. This allows you to repay your student loan debt at an affordable monthly rate based on your income. Another option is to see if you are eligible for a forbearance. A forbearance puts a temporary hold on your loan payments if you are approved. To get approved you must show that you have some kind of outstanding medical expense or financial obligation. You can also get approved for military or AmeriCorps service. One thing to consider with a forbearance is that your loans still build interest when you don’t pay them.

Next, you can check to see if you meet the requirements for Public Student Loan Forgiveness (PSLF). To qualify you must have made at least 120 qualifying monthly loan payments under a qualified plan while working full-time for a qualified employer.

Some last things to consider before you decide to file are the costs and time it takes to get your loans discharged. Getting student loans discharged is very uncommon, so you will want to be certain you will qualify before you try. If you plan on filing, you should be ready for filing fees and attorney fees — attorney fees average over $1,400 and filing fees are typically around $300. This can be a lot, especially for someone who is looking to file for bankruptcy. That is why it is important to fully understand where you stand with your finances. Many people do not realize what it costs to file for bankruptcy. For some people this is a burden that damages their finances even more. This is why you must be certain that you can do things like pay your rent and buy groceries after filing. If this is too much, then you might want to consider other options.

How to Demonstrate Undue Hardship

Proving that your student loans will cause you undue hardship is not an easy task. You will have to demonstrate that paying back your student loans will cause a significant negative effect on you and those who depend on you.

There is no set way to determine or ask someone to demonstrate undue hardship. Courts have the discretion of what methods they use to determine your hardships. A common method used by many courts to prove undue hardship is the Brunner test. To prove undue hardship, you must meet all three factors of the test:

Poverty – You can’t afford to pay your loans with your present earnings and spendings, and maintain a minimal standard of living afterwards.
Persistence – Your present financial struggles will carry on for a considerable amount of time while you repay your loans.
Good Faith – You have made efforts in good faith to repay your loans and arranged for an affordable payment plan

Some courts use a different method of testing for undue hardship known as the Totality of Circumstances Test. For this test the court will review all of your applicable financial assets, future earnings, and expenses. Based on what they find they might rule for undue hardship. This test is different from others because it looks at all aspects that could have an effect on the person, rather than just one or two factors.

Filing for Student Loan Bankruptcy

Discharging your loans comes at the end of bankruptcy, and you might run into some tough questions along the way. There are a few things you can do to help you understand and complete the process.

1. Talk to a Financial Advisor or Lawyer

As mentioned, getting your loans discharged can be very challenging, especially for someone who is unfamiliar with the process. This is why you will want to seek assistance from a bankruptcy lawyer who is practiced and has been in these situations before. Their professional knowledge will be very useful when it comes to filling out the correct forms and procedures.

2. File for the Correct Type of Bankruptcy

When you try to discharge your student loans, you will first have to file for bankruptcy for either chapter 7 or chapter 13. Chapter 7 might discharge your loans if they deem you unable to pay because of undue hardship. Chapter 13 bankruptcy will not get rid of your loans, rather restructure the payments so they are affordable.

Chapter 7

You must show the court that you cannot afford the cost of your loans.
If you are eligible, all loans can be cleared and you will no longer be personally liable.
You must meet with and be questioned by your appointed trustee and creditors.
This process can take 4 to 6 months, but can completely discharge your loans.

Chapter 13

You can prove that you can repay some of your debts, but finishing your current payments will cause undue hardship.
Rather than being discharged, loans are restructured. You will hold onto assets and debts will be discharged after the case.
You must create a payment plan for the court and all creditors to view.
Payment plans can take 3 to 5 years.

3. Start the Adversary Process

An adversary proceeding is a lawsuit filed in bankruptcy and basically means that you are making a complaint in court. This is required for bankruptcy because your complaint is your inability to pay your student loans. When you file this proceeding you will need to have proof that you cannot make your loan payments due to undue hardships. This means verifying your income and proving that dependents rely on you, making it impossible to pay your loans.

So can you file for bankruptcy on student loans? The answer is yes, but you should look into other options first and establish an affordable payment plan. Now that you know what it takes to discharge your student loans this way, and you understand the difficulty and costs that come with proving undue hardship, you can take your next steps. Use a debt-to-income ratio tool to help you plan your payments by determining your ability to afford and pay a loan.

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Defining Tax Credit vs. Tax Deduction

Refundable vs. Nonrefundable Tax Credits

Common Tax Credits and Deductions

Tax Credits

Earned Income Tax Credit

American Opportunity Tax Credit

Lifetime Learning Credit

Child and Dependent Care Credit

Tax Deductions

Medical Expense Deduction

Mortgage Interest Deduction

Student Loan Interest Deduction

Making Sense of Tax Credits vs. Deductions

Key takeaways

Home improvement loans vs. home equity loans

Home improvement loans

Home equity loans

Home loans that are tax deductible

Home equity loans

Home Equity Lines of Credit (HELOCs)

Deduction-eligible home equity loan uses

Home office deductions

Medical-related home renovations

Energy efficient installations

Which is better: home equity or home improvement loans?

What Bills Should I Prioritize?

Rent

Mortgage Payments

Student Loans

Car Loans

Insurance

Utilities

Ready for a Better Banking Experience?

Open a SoFi Checking and Savings Account and start earning 4.50% APY on your cash!

How to Create a Survival Budget

Taking Stock of Your Expenses

Where Can I Turn for Money?

Credit Cards

Retirement Accounts

Government Assistance

How Setting Up a Bank Account Can Help You When You Are Not Working

How to Budget and Save with a Bank Account

Alternative Sources of Possible Income

Protecting Your Finances from Future Job Loss

Starting a Side Hustle

Building an Emergency Fund

Starting a Budget

The Takeaway

FAQ

What happens to debt when you lose your job?

What bills should I pay first?

How do you budget if you are unemployed?

Episode transcript

What Government Programs Will Cover

What Specialized Insurance Will Cover

How Tax Deductions Can Help

How to Cover Out-of-Pocket Costs

Bottom Line

Retirement Planning Tips

Face your problem

Add up your total debt

Create a budget

Pay off debt

Create a vision board

Start an emergency fund

Spend less than you earn

Save more money

Make extra money

Try using just cash

Don’t keep up with the Joneses

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Flexible Spending Account Rules: An Overview

How Much Can I Contribute to My FSA?

Unused Funds: FSA Rollover and Reimbursement Rules

What Can a Flexible Spending Account Be Used For?

Taking Distributions from an FSA

Is a Flexible Spending Account Worth It?