“Hey, kid, get out there and play a clean game and have fun … oh, and remember to send the IRS your quarterly estimated tax check and don’t forget about the social post you owe Vinny’s Pizzeria today,” shouts the hypothetical parent of a student earning NIL money in 2024.
Lots of talented people have become young entrepreneurs in the couple of years since it became permissible for college and, in many states, high school students to cash in on their own personal brand. It’s a concept referred to as name, image and likeness (NIL) — think of a recognizable college athlete getting paid to endorse a brand’s product or a player selling signed merchandise.
While the vast majority of kids aren’t working with an Arch Manning-like windfall, people earning modest amounts may be more vulnerable to money missteps, experts say.
Young stars hoping to profit off their brand need to be savvy about their money. If you’re an athlete, here are five tips to keep in mind.
1. Review contracts carefully
It’s easy to understand why a teenage athlete might be overly eager to sign any business deal that comes their way, but tread carefully, says Helen Drew, a professor of practice in sports law at the University of Buffalo.
“Student athletes are somewhat at the mercy of the people who would be engaging with them,” she says. “It’s hard to know whether or not the deal is worth taking.”
Drew recalls a deal she saw in which a student was being asked to give power of attorney as part of the deal. “He [the student] had no idea what that meant,” she said.
A power of attorney is a legal document that lets another person or business act on your behalf in certain situations, and probably isn’t top of mind for a 19- or 20-year-old.
“[Student athletes] have to understand a contract before they sign it,” says Luke Fedlam, partner and chair of sports law at Porter Wright Morris & Arthur LLP in Columbus, Ohio.
Drew says to pull your parents in, use caution and vet the business before signing anything. “If it looks too good to be true, it probably is.”
And if you spot a term like “power of attorney,” you may want to consult an attorney.
2. Budget earnings to last
When a reputable deal does go through, you can get paid. That’s when you have to start thinking about the future.
Assuming you’re not Bronny James, expect deals to be sporadic with varied pay. Even for those able to earn six or seven figures, classic financial concepts still apply.
Fedlam advises young earners to buckle down with a budget and plan for how to spend and save the money.
It’s a concept that needs to be drilled into adults, too. But once you do it — open a spreadsheet and set some spending guardrails — you’ll be glad you did. Put some money in savings to establish your emergency fund. Strive for $500, then build it up from there.
If your personal brand is bringing a sustainable income, it would be wise to put retirement savings on your radar now.
3. Plan to pay taxes
While you’re finding room for savings, keep the IRS in mind, too.
The good thing about a regular day job, boring as it sounds, is employers typically withhold taxes from your check — so you don’t have to do the math later. That may not be the case with a one-off NIL deal.
“Typically in these agreements, the responsibility for paying taxes is passed to the student athlete,” Drew says.
Depending on your earnings, you may need to pay self-employment tax and make quarterly estimated tax payments to avoid a big bill come April.
Athletes with higher earnings and multiple sources of income may want the help of an accountant.
4. Budget your time, too
There are many ways athletes can make money from their name, image and likeness, but social media influencer marketing tops the list of NIL activities, says Bill Carter, an NIL educator and consultant and founder of Student-Athlete Insights. (For example, Company X gives a student athlete money to post about a product on the athlete’s social media account.)
Posting for pay may sound like music to a teenager’s ears, but it may also be more work than you think.
Carter administers a monthly NIL survey of a panel of 5,000 college student athletes and 1,000 high school prospects.
According to data from the poll, a social media post as part of an influencer campaign takes about three hours, on average.
Athletes used to free-posting personal stuff on social media may be taken aback by the planning, coordination and communication required to post for a business, Carter says.
If you’re an athlete already working with limited free time, be prepared to grind it out off the field, too.
5. Seek education
Experts say financial education is essential for young athletes navigating NIL, but acknowledge it’s a work in progress.
School programs aren’t necessarily built for what comes with NIL, Drew says. She also laments the lack of basic financial education in grade school.
“The types of things these kids need are things every adult needs,” she says. “Maybe you don’t need to balance a checkbook anymore. But you should probably have some understanding of what the ramifications of signing any kind of contract are.”
Carter says his survey results regularly show student athletes involved with NIL are eager to learn more about areas like investing and the basics of how to build credit.
The good news is you can gain financial clarity by reading about budgeting, saving, credit and investing from reputable sources online. If NIL becomes a reality for you, there are more specialized resources like AdvanceNIL.com, which Fedlam co-founded to provide education for athletes and families.
And when your playing (and paid posting) days are over, what you learned could set you up for financial success in what’s next.
Many people send and receive funds via their checking account, the hub of their financial life. But not everyone has an account. In fact, an estimated 4.5% of U.S. households (approximately 5.9 million) were “unbanked” in the most recent year studied, according to the FDIC. This means that, in their household, no one held a checking or savings account at a financial institution such as a bank or credit union.
Not having a bank account can make it more challenging to send and receive money, but it’s not impossible. Here, you’ll learn how you can move funds around without a bank. Read on to learn:
• Key considerations before choosing a money transfer method
• What options are available for sending and receiving funds without a bank account.
What to Consider Before Choosing a Transfer Method
As with all financial services, you don’t want to rush and just go with the first method available. Each option you review will probably have its pluses and minuses. If you are trying to send or receive money without a bank account, do your research. Consider these important factors as you move toward making your decision.
Reliability
Reputation matters, always — and especially with something as important as money. You want to use services that have been around long enough to have a track record. You can start by asking your inner circle of friends and family to hear what they use. You can read online reviews as well at trusted sites. Key things to consider are whether money transfers were completed successfully, on time, and without excessive charges.
Transfer Cost
Without a bank account, you may not have the ease of, say, having your paycheck direct-deposited via Automated Clearing House (or ACH) or using a debit card. In fact, you may have to spend time and money to send or receive some cash. So read the fine print on the options you are considering to make sure you’re clear on the fee structure.
When it comes to how to transfer money from one account to another, what will you be charged for and what’s free? Will there be certain criteria to meet in order for a transaction to be done without fees? You don’t want any surprises.
Security
Security is critical. When it comes to cash changing hands, you want to feel confident about safety. You don’t want to risk your hard-earned dough getting stuck in the ether somewhere or vanishing entirely. Look into what layers of protection are in place, such as two-step authentication, data encryption, and an adequate privacy policy. Fraud and identity theft are rampant these days, so safeguarding financial information is a must.
💡 Quick Tip: Help your money earn more money! Opening a bank account online often gets you higher-than-average rates.
Options for Sending and Receiving Money Without a Bank Account
With all those factors in mind, here are specific options you may have to send or receive funds without a bank account involved.
Mobile Wallets
Here’s one idea for how to send money to someone without a bank account: mobile wallets, or digital wallets. These are smartphone apps where you can store your debit and credit cards. Apple Pay, Google Pay, and Samsung Pay are a couple of examples you may have heard of. These services offer a way to pay a friend without cash exchanging hands. Or you might receive funds. Some points to note:
• There are often no fees involved, and you may enjoy cash back and other rewards for completing a transaction with your linked card.
• Both the sender and receiver must have the same digital wallet for the transaction to be free. If you have PayPal or Venmo, your recipient needs to have them too in order to do a peer-to-peer or P2P transaction.
• Fees may apply when using extras like expedited transfers or paying by credit card, and mobile wallets in the US are often restricted to transfers within our country.
• Mobile wallets can get all sorts of information as you use them — your name, mailing and email addresses, mobile number, records of your calls and texts, your contacts and calendar, the unique ID number of your mobile device, account information, what you buy and where and for how much. Not everyone is comfortable with sharing all of that personal data.
Money Orders
Money orders may seem like they’ve gone the way of the dinosaur, but they still serve a purpose, including offering a way to send money without a bank account (or to someone who is unbanked). Some details:
• You get one from the post office or stores like CVS and Western Union, among others.
• They may not be the fastest way to send money without a bank account.
• The recipient will need to show identification to cash it.
• Prices vary depending on the service you use and how much money is sent, but they can be reasonably priced. For instance, at the post office, you may pay $2.10 for a money order up to $500 and $3.00 for one that’s more than $500, up to $1,000. By the way, money orders are typically capped at $1,000. You could buy multiple ones if you need to transfer more than that amount.
Credit Cards
If you don’t have a bank account to fund the transfer, know that some money transfer services allow you to pay by credit card. Then, your recipient will be able to pick up cash pretty much instantly. It’s easy and convenient, but it’s likely to be more expensive than other methods.
For example, Cash App allows you to use a credit card to send funds, but will charge you 3% of the transaction value, and then the credit card you’ve linked may also charge you interest or fees. This might not be your first choice if you have less pricey options available.
Prepaid Debit Cards
A prepaid debit card is another way to move money when a person doesn’t have a bank account. It shares some features of a credit card, debit card, and gift card.
• It is a debit card that’s been pre-loaded with money, and you can generally use it at any retailer (online or in person) that accepts credit cards.
• Prepaid debit cards may be associated with credit card networks; think MasterCard or Visa, for example. This means they can be used anywhere that accepts that kind of plastic.
• These cards may be riddled with fees. For instance, you might get hit with a fee for card activation, making a purchase, adding money to the card, and/or withdrawing money at an ATM. You’ll want to read the fine print because these fees may make prepaid cards a less attractive option.
Recommended: Alternatives to Traditional Banks
Cash or a Check
Cash is king and can be a super-simple way to send or receive funds, even if you don’t have a bank account, provided you can safely hand over the bills. If the two parties involved are in different locations, this becomes a lot riskier. Mailing cash is probably never a wise move.
Checks are also a time-honored way to transfer money; the person who receives it can then cash the check, perhaps paying a fee since they don’t have a bank account. But if you use mail to send the payment, a lost check situation can occur or a check might be stolen. So, there could be some risk involved.
Money Transfer Services
Money transfer services can be a godsend. No bank account is required for either the sender or recipient. It’s easy. In addition to in person retail outlets, you can now access money transfer services like Western Union and MoneyGram online.
• It’s a quick transaction; money can arrive as early as the same day.
• You have some flexibility, such as sending money transfers to a debit card or a mobile wallet.
• Pay attention to fees, though, as they vary and depend on the amount you’re sending and more. For example, if you use Western Union to send money to someone in Mexico, the fee could be anywhere from $4.99 to $26.49 or more, depending on the specifics.
The Takeaway
Having a bank account can be a cornerstone of good money management, but there are a number of Americans who don’t have one. If, for whatever reason you are without one or you want to transfer money with someone who doesn’t have an account, there are still ways to send and receive money. These include digital wallets, money orders, money transfer services, and other options. Some will have fees and security risks, among other downsides. Take your time to explore the safest, most convenient, and affordable choice for your situation.
If you are an account holder in this situation, you might also see what options your financial institution offers to simplify transfers.
Interested in opening an online bank account? When you sign up for a SoFi Checking and Savings account with direct deposit, you’ll get a competitive annual percentage yield (APY), pay zero account fees, and enjoy an array of rewards, such as access to the Allpoint Network of 55,000+ fee-free ATMs globally. Qualifying accounts can even access their paycheck up to two days early.
Better banking is here with up to 4.60% APY on SoFi Checking and Savings.
FAQ
Can I transfer money to someone without a bank account?
Yes, there are a number of options to transfer money if someone doesn’t have a bank account. These include using a money transfer service, prepaid debit card, mobile wallet, or money order.
What is the best way to transfer money to someone without a bank account?
What’s best depends on the two people involved. What are any time constraints, what is cost-effective, and what method is most convenient? Once these and other factors are considered, you can determine the best method, which might be a money transfer service, a mobile wallet app, a money order, or a prepaid debit card.
How much does it cost to send money without a bank account?
Costs vary depending on the method you use, the amount of money you’re sending, and whether it is being transferred domestically or internationally. While a domestic money order from the U.S. Postal Service will cost up to $3.00 for an amount between $500 and $1,000, you might wind up paying considerably more for other transactions.
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 activity can earn 4.60% annual percentage yield (APY) on savings balances (including Vaults) and 0.50% APY on checking balances. Direct Deposit means a deposit to an account holder’s SoFi Checking or Savings account, including payroll, pension, or government payments (e.g., Social Security), made by the account holder’s employer, payroll or benefits provider or government agency (“Direct Deposit”) via the Automated Clearing House (“ACH”) Network during a 30-day Evaluation Period (as defined below). Deposits that are not from an employer or government agency, including but not limited to check deposits, peer-to-peer transfers (e.g., transfers from PayPal, Venmo, etc.), merchant transactions (e.g., transactions from PayPal, Stripe, Square, etc.), and bank ACH funds transfers and wire transfers from external accounts, do not constitute Direct Deposit activity. There is no minimum Direct Deposit amount required to qualify for the stated interest rate.
SoFi members with Qualifying Deposits can earn 4.60% APY on savings balances (including Vaults) and 0.50% APY on checking balances. Qualifying Deposits means one or more deposits that, in the aggregate, are equal to or greater than $5,000 to an account holder’s SoFi Checking and Savings account (“Qualifying Deposits”) during a 30-day Evaluation Period (as defined below). Qualifying Deposits only include those deposits from the following eligible sources: (i) ACH transfers, (ii) inbound wire transfers, (iii) peer-to-peer transfers (i.e., external transfers from PayPal, Venmo, etc. and internal peer-to-peer transfers from a SoFi account belonging to another account holder), (iv) check deposits, (v) instant funding to your SoFi Bank Debit Card, (vi) push payments to your SoFi Bank Debit Card, and (vii) cash deposits. Qualifying Deposits do not include: (i) transfers between an account holder’s Checking account, Savings account, and/or Vaults; (ii) interest payments; (iii) bonuses issued by SoFi Bank or its affiliates; or (iv) credits, reversals, and refunds from SoFi Bank, N.A. (“SoFi Bank”) or from a merchant.
SoFi Bank shall, in its sole discretion, assess each account holder’s Direct Deposit activity and Qualifying Deposits throughout each 30-Day Evaluation Period to determine the applicability of rates and may request additional documentation for verification of eligibility. The 30-Day Evaluation Period refers to the “Start Date” and “End Date” set forth on the APY Details page of your account, which comprises a period of 30 calendar days (the “30-Day Evaluation Period”). You can access the APY Details page at any time by logging into your SoFi account on the SoFi mobile app or SoFi website and selecting either (i) Banking > Savings > Current APY or (ii) Banking > Checking > Current APY. Upon receiving a Direct Deposit or $5,000 in Qualifying Deposits to your account, you will begin earning 4.60% APY on savings balances (including Vaults) and 0.50% on checking balances on or before the following calendar day. You will continue to earn these APYs for (i) the remainder of the current 30-Day Evaluation Period and through the end of the subsequent 30-Day Evaluation Period and (ii) any following 30-day Evaluation Periods during which SoFi Bank determines you to have Direct Deposit activity or $5,000 in Qualifying Deposits without interruption.
SoFi Bank reserves the right to grant a grace period to account holders following a change in Direct Deposit activity or Qualifying Deposits activity before adjusting rates. If SoFi Bank grants you a grace period, the dates for such grace period will be reflected on the APY Details page of your account. If SoFi Bank determines that you did not have Direct Deposit activity or $5,000 in Qualifying Deposits during the current 30-day Evaluation Period and, if applicable, the grace period, then you will begin earning the rates earned by account holders without either Direct Deposit or Qualifying Deposits until you have Direct Deposit activity or $5,000 in Qualifying Deposits in a subsequent 30-Day Evaluation Period. For the avoidance of doubt, an account holder with both Direct Deposit activity and Qualifying Deposits will earn the rates earned by account holders with Direct Deposit.
Members without either Direct Deposit activity or Qualifying Deposits, as determined by SoFi Bank, during a 30-Day Evaluation Period and, if applicable, the grace period, will earn 1.20% APY on savings balances (including Vaults) and 0.50% APY on checking balances.
Interest rates are variable and subject to change at any time. These rates are current as of 10/24/2023. There is no minimum balance requirement. Additional information can be found at https://www.sofi.com/legal/banking-rate-sheet.
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Anyone can have trouble with money, and it can be stressful when credit card bills start to add up. But you can find ways to handle your debt. Credit card companies will sometimes work with people who owe money to find ways to get it paid off. Also, it’s not common, but your credit card debt might be forgiven.
The first step to getting rid of debt or having it canceled is to learn more about it. First, let’s talk about the chance of getting rid of credit card debt.
Credit Card Debt Forgiveness – Is It Real?
Credit card forgiveness programs do exist. In credit card forgiveness, some or all of a borrower’s credit card debt is cleared, the amount is no longer due and no longer needs to be paid back to the credit card company. A personal or student loan debt is another type of debt that could be forgiven.
How Does The Credit Card Debt Forgiveness Program Work?
The program does exactly what it says it will do. The creditor agrees to forgive a portion of your credit card debt if you make a lump sum payment on time This usually happens when the debt settlement company negotiates with credit card issuers to get your credit card debt forgiven, citing your financial hardship.
Let’s say you had $60,000 in credit card debt. If you qualify for the credit card debt forgiveness program (often known as the debt settlement program), you will pay back $30,000 within a specific time. For sure, the credit bureaus will notice that you have not made the full payment, and they will penalize you with a lower credit score. However, on the plus side, potential creditors will be happy to see that you’re working to reduce your debt.
Remember that if your account is already past due, it will affect your credit score. Once the debt settlement is complete, the account will be marked as paid as settled. If you have a good relationship with your creditor, you may request them to update your credit report as “paid as agreed” or “paid in full.” A “paid in full” account status doesn’t hurt your credit score.
Who qualifies for the credit card debt forgiveness program?
You can qualify for the credit card forgiveness program if:
Your creditor must be on the list of banks, law firms, debt collectors, or creditors who decided to participate in the program.
You have to have not made a payment on your account in over 120 days.
You are in financial hardship and that is why you can’t make the full payment.
You need to pay the agreed-upon amount within the specified time. You can’t take extra days to pay off debt.
If you miss even one payment, the creditor will end the program. The outstanding balance will return to the original amount minus the amount you’ve paid.
Remember that any amount refunded over $600 is taxed as income.
What are your other alternatives to it?
Apply for Debt Consolidation Loans
This debt relief option lets you make one monthly payment instead of several. Most of the time, debt consolidation means getting a new loan with a lower interest rate than the one you’re paying now. This lowers the amount you owe each month.
There is yet another way to consolidate debt. You can enroll in a debt consolidation program wherein creditors agree to lower your interest rate and arrange an affordable repayment plan. You make monthly payments for 3-5 years (depending on the debt amount).
File Bankruptcy
If settling your credit card debt doesn’t help, you might need to talk to a bankruptcy lawyer. Yes, bankruptcy will hurt your credit score and short-term ability to borrow money, but if you have no other choice, it can help you quickly get out of credit card debt. If you file for bankruptcy, you can clear all your debts. This would let you start over with your finances.
Set Up A Repayment Plan
Get in touch with your credit card issuer and try to work out a deal that works for both of you. This could include options for forbearance, which lets you briefly put off making your payments to get some relief without hurting your credit.
Go for Credit Counseling
A credit counseling agency can help you make a plan to pay off your debts or handle them better. These plans are made for you and might not cost you anything. Not only does credit counseling help you with your bills, it does more. In addition to creating a money management plan based on your wants and income, a credit counselor can teach you how to make a budget.
Enroll in a Debt Management Plan
In a debt management plan, credit counselors offer you a budget plan to manage your income and expenses. Furthermore, they negotiate with your creditors for a repayment plan at a lower interest rate.
Note: You may or may not have to pay a fee for credit counseling services. But in the case of a debt management plan, you get a structured repayment plan, and you have to pay a monthly fee for that.
Conclusion
Credit card forgiveness programs only partially eradicate your debt. You have to pay some portion of the debt. So, you still need to save some amount. But you can only qualify for it when you are in financial hardship. So make sure you arrange all the relevant documents to prove it.
Author Bio:
Attorney Loretta Kilday has over 36 years of litigation and transactional experience, specializing in business, collection, and family law. She frequently writes on various financial and legal matters. She is a graduate of DePaul University with a Juris Doctor degree and a spokesperson for Debt Consolidation Care (DebtCC) online debt relief forum. Please connect with her on LinkedIn for further information.
Inside: Escape the cycle of being broke with insightful tactics. Learn to invest, save smartly, spot financial traps, and build secure money habits today.
You are desperate right now. You want to know why I am broke.
I get it. This is a situation I have been in before and just recently when I lost my main source of income.
The feelings of you can’t afford anything may send you down a steep spiral of depression.
So, how do we escape?
Here are the tips I used before and plan to use again.
Top Reasons for Why I am Broke
#1 – The Mindset Traps That Keep You Broke
A mindset that cultivates a sense of scarcity rather than abundance can be a massive roadblock to financial prosperity. When you’re shackled by thoughts like “I am always broke,” you unwittingly set the stage for a self-fulfilling prophecy.
The mental narrative that convinces you wealth is unattainable can keep you trapped in a loop of missed opportunities and poor financial decisions.
You may inadvertently sabotage your potential to earn more, save, or invest wisely by clinging to a defeatist paradigm.
Fixing a broken mindset is about shifting from a state of helplessness to one of deliberate, empowering action.
It starts with self-awareness and is further built through intentional positive affirmations and financial education.
Overcome By: Remember, the mind is powerful—it can be your greatest ally or your most formidable adversary. Change your money mindset.
#2 – Living Beyond Your Means: A Fast Track to Empty Pockets
Living beyond your means is akin to constantly filling a sieve with water, hoping it will someday retain more than it loses—a surefire way to financial drought. It’s a lifestyle where your outflow far exceeds your inflow, and every paycheck evaporates into the ether of consumerism.
With the advent of credit cards and buy-now-pay-later schemes, the temptation to spend money we don’t have has never been greater.
The façade of affluence conceals the grim reality of financial instability.
Acknowledging this trap is step one. Living within one’s means doesn’t imply sacrificing joy or reverting to asceticism; it’s about striking a harmonious balance between the lifestyle you desire and the one you can sensibly afford.
Overcome By: Making choices aligned with your financial reality, finding contentment in simplicity, and prioritizing financial health over transient pleasures.
#3 – Chronic Debt: Borrowing from Tomorrow for Today
Chronic debt is a pervasive issue, ensnaring individuals in a vicious cycle of borrowing today and worrying about repayment tomorrow. This pattern often stems from an urgency to fulfill immediate desires or needs without adequate financial resources.
Alarmingly, the trend of increasing consumer debt signals a culture obsessed with instant gratification as consumer debt is $16.84 trillion in Q2 2023, according to Experian. 1
Being in debt should not be normal.
The onus of breaking free from chronic debt lies in reevaluating your relationship with money. It means slowing down the urge to splurge, meticulously planning for future financial obligations, and carving a path towards debt repayment.
Overcome By: Find the discipline to not only stop accumulating debt but also to aggressively tackle existing debts through methods like debt snowball or debt avalanche strategies.
#4 – You Haven’t Learned to Plan and Budget for a Brighter Tomorrow
The lack of a strategic financial plan and a detailed budget is tantamount to navigating unknown terrain without a map. Without these critical tools, your finances are left to chance rather than choice, leaving you vulnerable to the whims of circumstance.
Budgeting is perhaps the most fundamental step toward taking ownership of your financial future. It gives you a clear snapshot of where your money is going, which is essential for making informed spending decisions.
However, many avoid the budgeting process, perceiving it as restrictive or complex. The truth is that budgeting liberates you from the anxiety that comes with uncertainty. It empowers you to align your spending with your financial goals and to find a balance between today’s necessities and tomorrow’s aspirations.
Overcome By: Choose a budgeting method whether it be the zero-based budget, the 50/30/20 rule, or the envelope system, the key is to find a method that resonates with your lifestyle and stick to it.
#5 – No Emergency Fund to Weather Financial Storms
An emergency fund is an essential bulwark against the financial tempests life invariably hurls your way. Without it, a single unforeseen event—a job loss, a medical emergency, or an urgent car repair—can capsize an already precarious financial ship. The lack of an emergency cushion extends an open invitation to debt and financial strain.
The data tells a stark tale:
A statement from the Consumer Financial Protection Bureau highlights that nearly a quarter of consumers (24%) don’t have an emergency savings account. 2
Additionally, 39% have less than a month’s worth of income saved for emergencies, setting the stage for potential financial disaster. 2
This precarious situation has become more pronounced with the increasing cost of living and high inflation rates witnessed in 2021-2023.
Overcome By: Structured, automatic savings transfers to facilitate the gradual growth of your emergency fund without it feeling like a financial blow. The goal is to build a reservoir robust enough to cover several months of living expenses, providing a comfortable buffer that can help you bounce back from setbacks without the need to borrow money at high-interest rates or liquidate precious assets at inopportune times.
#6 – Lack of Understanding of The Power of Investing
Understanding the power of investing is key to grasping the potential of a seed. A seed, given the right conditions, can grow into a flourishing tree. Similarly, investing allows your finances to grow beyond the confines of stagnant savings.
Yet, many people fail to harness this power due to a lack of understanding or fear of the unknown. This was me for many years until I decided to learn to trade stocks.
A common misconception surrounding investing is that it’s solely the playground for the rich or financially savvy. This myth steers many away from multiplying their wealth via investments, leaving them to rely solely on their primary source of income. Moreover, a lack of understanding often leads to panic during market volatility, resulting in ill-timed decisions to buy high and sell low—contrary to sound investment strategies.
Overcome By: Invest money consistently into a low-cost mutual fund or ETF that tracks the overall S&P. Then, continue your investing education on how to invest in stocks.
#7 – Wasteful Spending Habits
Wasteful spending habits are the quiet thieves of financial security. They nibble away at your earnings, leaving you wondering where your money has gone at the end of each month. This pattern often goes unnoticed, as it’s usually composed of small, seemingly insignificant purchases that accumulate over time.
The danger of wasteful spending is its subtlety.
It’s the daily coffee on the way to work, the meal out because cooking feels like too much of an effort, or the impulse buys during the sale season.
Individually, these do not seem like considerable expenses, but together, they can consume a substantial portion of your budget.
To curtail this financial leak begins with recognizing and acknowledging these habits. Tracking every penny spent can be an eye-opening experience, illustrating just how quickly the ‘little things’ can add up. With this awareness, one can then consciously decide where to cut back.
Overcome By: Adopting a minimalist approach, where value and purpose become the benchmarks for every expense, can help combat wasteful spending. Questions like, “Do I really need this?” or “Will this purchase add value to my life?” can serve as useful filters. Take up a no spend challenge to see your mindless consumption.
#8 – Fail to Recognize the Patterns That Lead to a Near-Empty Wallet
Failing to recognize the patterns that deplete your wallet is akin to ignoring the signs of a leaking roof until it caves in—it’s a disaster in the making. Often, it isn’t one significant financial blunder, but rather a series of small, recurring missteps that lead to the near-empty wallet syndrome.
For instance, routinely underestimating monthly expenses can lead to a perpetual state of surprise when the bills pile up.
Similarly, neglecting to keep tabs on bank account balances may result in overdraft fees that, over time, take a sizable bite out of your funds.
Disregarding the accumulative effects of late payment charges or routinely paying only the minimum on credit card balances can exacerbate financial distress.
Overcome By: To reverse this trend, one must become a detective in their own financial mystery. Start by scrutinizing bank statements and tracking expenses. Look for patterns, like repeated late-night online shopping sprees or habitual dining out, which contribute to the thinning of your wallet. Use budgeting apps or spreadsheets to flag these patterns visually, making it easier to identify and amend them.
#9 – How Fear and Denial Contribute to Ongoing Money Issues
Fear comes in several forms: fear of failure, fear of taking risks, and even fear of facing the truth about one’s financial situation. It can immobilize individuals, preventing them from making necessary financial changes or taking action that could otherwise mitigate or reverse money woes.
For instance, the fear of losing money might dissuade one from investing in potentially lucrative opportunities, leaving them stuck in the low-yield safety of a savings account.
Further, there’s the psychological phenomenon of denial—a defense mechanism that numbs the pain of reality. When faced with mounting debt or budgetary failure, denial kicks in, allowing individuals to live as if the problem doesn’t exist. Unfortunately, ignoring overdue notices or dodging calls from creditors doesn’t make debts disappear.
Denial only deepens the financial hole, often leading to larger, more complex problems.
Overcome By: To confront these challenges, it’s crucial to adopt a stance of brutal honesty with oneself. This means acknowledging fears and confronting financial shortcomings head-on. Professional help, such as financial counselors or advisors, can provide support and guidance to navigate these tricky emotional waters.
#10 – No Clear Financial Goals and Plans
The absence of clear financial goals and plans is like embarking on a voyage without a destination. It not only leads to aimless wandering but also ensures that you miss out on the focus and motivation that well-defined objectives provide.
When you lack clarity on what you’re saving for or what you wish to achieve, there is little impetus to resist the temptations of immediate gratification or to weather the short-term sacrifices that long-term gains often require.
Setting clear and measurable financial goals lays the groundwork for creating effective plans to reach them.
Overcome By: To break this cycle, begin by reflecting on what you value most and where you would like to be financially in the future. Whether it’s achieving debt freedom, owning a home, funding education, or planning for retirement, having specific goals in mind will define the purpose of your financial activities. Craft a plan that outlines the steps needed to accomplish them.
#11 – Laziness is your Game
When you approach your finances with a laissez-faire attitude, it’s akin to ignoring the health of a garden; without regular attention and effort, it’s bound to wither. Financial laziness can manifest in various ways, from failing to review bank statements and ignoring budgeting to neglecting opportunities to cut costs or boost income.
Each act of omission is a step closer to the financial doldrums.
Procrastination or avoidance might seem less painful at the moment, but they ultimately compound the problem. Contrary to what some might think, simple acts of financial diligence, such as cash management or regularly doing household chores, do not require Herculean effort.
Moreover, they set a foundation for sound financial habits that thwart needless spending.
Overcome By: Schedule time for financial management much like an important meeting.
#12 – Keeping up with Others is Breaking Your Bank
The urge to keep up with others—often termed the ‘Keeping up with the Joneses’ or ‘Keeping up with the Kardashians’ phenomenon—is a profound pressure that exerts an invisible, yet powerful, force on financial habits. This social comparison can lead to an insidious form of competition, one that disregards personal financial realities in favor of an illusory social standing.
It’s an impulse driven by comparison, where the benchmark of success is set not by personal satisfaction, but by the possessions and lifestyles of others.
The decision to upgrade to a luxury car, splurge on designer clothes, or redo a perfectly functional kitchen stems not from need, but from a desire to project an image that matches or surpasses those in your social sphere.
Financial guru Dave Ramsey encapsulates this philosophy with his common saying, “Live like no one else will now, so in the future, you can live like no one else can.” This means making money moves that are right for you, not those dictated by social pressures, which can sometimes involve humbler living now for a wealthier future.
Overcome By: Breaking free from the shackles of this social competition requires introspection and a bold reaffirmation of personal values. Adjusting focus towards personal financial goals and aspirations, rather than mirroring others’ spending decisions, is key.
#13 – Need Help Differentiating Needs from Wants
The blurring line between needs and wants is a common financial pitfall that can lead individuals deeper into the morass of money woes.
Needs are essentials, the non-negotiable items necessary for survival—food, shelter, healthcare, and basic utilities.
Wants, on the other hand, include anything that is not vital for basic survival but enhances comfort and enjoyment of life.
The difficulty in distinguishing between the two often stems from habituation. What starts as a luxury, like eating out at restaurants, getting a high-end smartphone, or subscribing to multiple streaming services, can quickly become perceived as essential. This is particularly difficult in a consumer-driven society, where advertising and social media constantly inflate our perception of what we ‘need’ to lead a fulfilling life.
The result? A budget that’s stretched thin on non-essentials, leaving little room for savings or investment.
Overcome By: Regularly reassess expenses and ask the hard questions about whether a purchase is genuinely essential or merely a desire dressed up as a need.
#14 – You Don’t Make Enough Money to Cover Your Expenses
When your income doesn’t cover expenses, the strain can be relentless. This financial imbalance is often the stark root of the “I am broke” refrain. In such cases, every dollar becomes precious, and the financial breathing room feels nonexistent.
The reason is straightforward: if what comes in is less than what goes out, deficits and debt are the inevitable outcomes.
Addressing this challenge requires a two-pronged approach—increasing income and/or reducing expenses. For many, reducing expenses is the immediate reflex, and while it’s an essential strategy, there’s only so much you can save, but no limit to how much you can earn.
Overcome By: Focus on making more money. This could mean asking for a raise, seeking better-paying job opportunities, pursuing a side hustle, making money online, or acquiring new skills that offer higher income potential.
Long-Term Solutions to Build a Secure Financial Future
Building a secure financial future is an aspirational goal for many, but achieving it requires a strategic approach characterized by foresight, discipline, and an understanding of personal finance.
Becoming financially independent doesn’t happen by magic chance; it’s the result of deliberate actions taken with consistency over time.
Here are the foundational blocks for constructing a sturdy financial edifice:
Invest in Financial Literacy: Knowledge is power, and this is especially true in the realm of finance. Educate yourself about budgeting, investing, insurance, taxes, and retirement planning. Reliable resources include books, online courses, podcasts, and workshops.
Set Clear Financial Goals: Define what financial success looks like for you, whether it’s being debt-free, owning a home, or achieving financial independence. Detailed goals provide direction and motivation for your financial plan.
Create a Robust Budget: A flexible budget isn’t a one-time exercise but a living document that should evolve with your financial situation. It should reflect your income, fixed and variable expenses, and financial goals.
Establish an Emergency Fund: This is the bedrock of financial security. Aim to save three to six months’ worth of living expenses to protect yourself from unforeseen circumstances without falling into debt.
Pay Off Debt: High-interest debt is a major impediment to financial growth. Utilize strategies like the debt snowball or avalanche methods to tackle debts efficiently. Once you’re debt-free, avoid accumulating new debt.
Diversify Income Streams: Relying on a single source of income is a risk. Look for opportunities to create additional streams of income, such as side businesses, freelance work, or passive income from investments.
Invest Wisely: Make your money work for you through smart investments. Consider diversified portfolios, retirement accounts, and tax-efficient investment strategies to grow your wealth over time.
Plan for Retirement: The future is closer than you think. Contribute regularly to retirement accounts like 401(k)s or IRAs. Take advantage of employer match programs if available, as they’re essentially free money.
Protect Yourself with Insurance: Ensure you have adequate insurance coverage for health, life, property, and potential liabilities. This helps to guard against catastrophic financial losses.
Breaking the Cycle of Being Broke
Just like becoming broke is often a gradual process—a few uncalculated loans, hasty investments, and numerous credit card swipes. Suddenly, financial stability seems like a far-off dream.
The same goes for breaking the cycle of being broke. It is about moving from living paycheck to paycheck with no savings, drowning in debt, and making questionable spending decisions to become financially stable.
Even though our society may see being broke as normal, it is possible to embrace financial prudence to defy such norms. It’s time to delve into the reasons behind the perpetuation of brokeness and unveil practical steps toward lasting financial freedom.
What do I do if I’m broke?
Finding yourself in a financial predicament where the end of your money arrives before your next paycheck is a stress-inducing scenario.
When faced with the stark reality of being broke, here’s a step-by-step guide to help you navigate through and set the stage for a more stable financial future:
Assess Your Situation: Take stock of all your available assets and resources. This includes checking account balances, any savings, and items you could potentially sell for quick cash. Understanding what you have can help you gauge your immediate next steps.
Prioritize Your Expenses: Sort your expenses by urgency and necessity. Essentials like rent, utilities, and groceries come first. Non-essentials or discretionary spending should be paused or significantly reduced until your financial situation improves.
Reduce Costs Immediately: Eliminate any non-essential expenses. Cancel or suspend subscriptions, memberships, or services that are not vital. Consider cheaper alternatives for necessary expenses, and utilize community resources, such as food pantries, if needed.
Negotiate with Creditors: If you’re struggling to pay your bills, proactively reach out to creditors to discuss payment options. Many are willing to work with you on a revised payment plan to avoid defaults.
Seek Additional Income Sources: Consider taking on a side job, selling unused items, freelancing, or offering your skills for short-term gigs. Even small amounts of additional income can make a significant difference when you’re broke.
Consider Assistance Programs: Look into local, state, and federal assistance programs. You may be eligible for temporary aid to help with food, housing, or utility bills.
Borrow with Caution: If borrowing is unavoidable, be cautious and choose the most cost-effective options such as loans from family or friends, a personal loan with a low-interest rate, or a hardship withdrawal from your retirement account (as a last resort).
Remember, being broke can happen to anyone, so there’s no shame in it.
The key is to take swift, decisive action to mitigate the immediate crisis while also planning longer-term strategies to prevent recurrence. By addressing the issue head-on and adjusting your financial habits, you can initiate the journey from being broke to becoming financially buoyant.
FAQ: Navigating Away from Being Broke
Finding yourself consistently broke at the end of each month is an indicator that there’s a disconnect between your income and your spending habits.
It’s often the result of several factors or behaviors that, when combined, result in a cycle of financial scarcity. Here are common reasons why this might be happening:
No Budget or Poor Budgeting
Overspending
Impulse Purchases
Lack of Emergency Savings
Failure to Track Expenses
Living paycheck to paycheck
High Debt Payments
Remember, understanding why you’re broke at the end of the month is the first step towards financial stability.
Saving money when funds seem stretched to their limit is a challenge that requires creative strategy and discipline. Even with a tight budget, there are ways to eke out savings without significantly impacting your day-to-day life.
If saving a significant amount seems daunting, start by saving your change. Physically save coins or use apps that round up your purchases to the nearest dollar and save the difference. Check out my mini savings challenges.
Saving money when it seems there’s barely enough to cover the bills begins with a commitment to take whatever steps are necessary, however small they may initially seem. Every dollar saved is a step towards financial resilience and a buffer against future financial challenges.
Investing can be a powerful tool for building wealth over the long term, and it’s often considered a key component of achieving financial stability. However, for those who are currently struggling to make ends meet, the decision to invest should be approached with caution.
Investing typically involves committing money with the expectation of achieving a future financial return. It has the potential to outpace inflation and increase your wealth due to the power of compound interest. Nevertheless, it often carries the risk of losing the invested capital, a risk that those in financial distress may not be in the position to take.
Feeling Broke without Money – Time to Make A Change
Feeling broke is a stressful and demoralizing experience, but it’s also a clarion call for change. It signals that your financial health needs attention and that your money management strategies may require a significant overhaul.
However, the situation is not without hope; with determination and the right approach, it’s possible to transform your financial landscape.
The journey away from the precipice of being broke begins with honesty, introspection, and a willingness to adapt. It’s about confronting uncomfortable truths, devising a clear plan, and taking decisive action. From crafting and adhering to a precise budget, cutting unnecessary expenses, to seeking additional income streams—all these steps are essential in the path to financial stability.
Remember, feeling broke isn’t a permanent state. Mindset is everything.
It’s a challenge to be met, an opportunity for growth, and a chance to steer the course of your financial ship towards calmer and more abundant waters. Your future self will thank you for the changes you implement today, so take that first step now.
>>>It’s time to make a change—because you deserve the peace of mind that comes with financial security.
Source
Experian. “Experian Study: U.S. Consumer Debt Reaches $16.84 Trillion in Q2 2023.” https://www.experian.com/blogs/ask-experian/research/consumer-debt-study/. Accessed January 25, 2024.
Consumer Financial Protection Bureau. “Emergency Savings and Financial Security.” https://files.consumerfinance.gov/f/documents/cfpb_mem_emergency-savings-financial-security_report_2022-3.pdf. Accessed January 25, 2024.
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Inside: Are you looking to maximize your rewards and credit card hacks? This guide will teach you the most effective methods for using your hacking, signing up for bonus rewards, and making efficient card purchases.
Credit card use extends beyond just making purchases. Savvy credit card users understand that with the right set of hacks and optimal usage, there’s a world of rewards that are ripe for the picking.
Money saved can be money earned, and this simple philosophy forms the cornerstone of these 25 credit card hacks you’ll be learning about today.
Why do credit card hacks matter? Well, I just received a $700 check for credit card rewards. That is enough to pay for a weekend trip away.
What are Credit Card Hacks?
Credit card hacks are creative strategies employed by credit card users to maximize the benefits and rewards offered by their credit cards while also potentially saving more money.
This trend has become more popular in recent years due to the rise in premium travel and cashback cards that offer lucrative ongoing rewards programs. Users who learn about these hacks can save you money on travel or just put cold hard cash back in your wallet.
With strategic approaches, these hacks provide an avenue to optimize rewards and navigate the financial landscape more effectively.
Proven Credit Card Hacks to Maximize Rewards
Tip #1 – Utilize sign-up bonuses
One of the most attractive features of credit cards is the sign-up bonuses they offer, which are essentially rewards that cardholders can earn after meeting a certain spending threshold within a specified timeframe. The bonuses can range from hundreds to even thousands of points, miles, or cash – favorably impacting your rewards balance.
To illustrate, if you take the Chase Sapphire Preferred® credit card, both partners in a household can get up to 50,000 extra points each as part of the sign-up bonus.
Bonus tip: Stagger your applications, so once one person gets the bonus after meeting the spending requirement, the other person can then apply and achieve the next round of bonuses.
Tip #2 – Increase credit limit
The principle behind this is simply buffering your “credit utilization ratio”, which is how much of your total available credit you are utilizing.
To illustrate how a credit limit increase will work, let’s consider an example: with a credit limit of $10,000 and a credit usage of $3,000, your utilization ratio stands at 30%. But once your credit limit increases to $15,000 with the same credit usage, your utilization ratio drops to 20% – which is a noticeable improvement.
Remember, when requesting a credit limit increase, some card issuers might execute a hard inquiry on your credit report, which could temporarily decrease your score. Hence, you should try to find out beforehand whether your issuer is likely to perform a hard or soft credit pull. Soft inquiries won’t affect your credit score, making them the preferable approach.
Tip #3 – Master balance transfers
A balance transfer, executed proficiently, can be an effective way to handle significant credit card debt. By focusing on reducing the cost of debt through lower interest rates, balance transfer can accelerate your debt repayment process while saving you considerable money over time.
This is what one of my clients did and the date when the 0% interest ended was very motivating to pay off their debt.
This process entails the shuffling of debt from one card (usually one with a high interest rate) to another card—preferably with a 0% promotional APR offer. With this interest-free period, you can focus on repaying the principal balance, hence clearing your debt faster.
As a finance expert, make sure balance transfers are only beneficial if you’re mindful of the terms, like how long your 0% rate will last and what fees are involved in the transfer to the new card.
Tip #4 – Purchase prepaid cards with credit
Need a way to spend a certain dollar amount by a certain deadline? Then, look at purchasing prepaid cards with a credit card as a strategy to earn extra rewards points. This method entails buying prepaid cards or gift cards using your credit card, and later using these prepaid cards to cover those expenses you typically will use.
In other cases, customers have reported that their credit card companies have clawed back rewards points that were initially given for gift card purchases. Double check their terms and conditions, many issuers, including American Express, explicitly exclude such transactions from earning rewards. 1
Tip #5 – Harnessing the 15/3 Methodology
The 15/3 Methodology is a credit card hack that intends to optimize your credit utilization ratio—one of the significant factors that impact your credit score.
Here’s how it works: You pay off a majority of your card’s balance 15 days before your statement date, and then pay off the remaining balance three days before the statement date. By doing this, you create the illusion of a lower balance, which can positively impact your credit score.
There is still a debate about whether or not this strategy improves your credit card score. Paying your bill on time will definitely improve your score.
Tip #6 – Strategies to earn additional rewards through third-party programs
An often overlooked but highly effective credit card hack is utilizing third-party apps and websites that offer additional rewards when you shop at participating retailers and restaurants. These rewards are additional to the cash back, miles, or points awarded by your credit card.
One such app is Dosh, a cashback app. By linking your credit card to your Dosh account, you can earn up to 10% cash back from participating retailers on top of the rewards earned from your credit card. Similarly, apps like Drop and Bumped give users points for every dollar spent, and these points can be redeemed for gift cards.
Furthermore, many airlines and hotels participate in dining rewards programs where you’ll earn extra rewards at select restaurants. Airlines like United, Southwest, Delta, and hospitality giant companies like Marriott and Hilton actively participate in such programs.
Tip #7 – Earn a credit card sign-up bonus then canceling the card right away
Also known as credit card flipping or churning, the tactic of earning a credit card sign-up bonus and then canceling the card right away has been employed by some savvy credit card users to maximize rewards.
However, this practice isn’t as easy or beneficial as it appears. While it sounds like an accessible system to generate easy money, it comes with several potential pitfalls that could make it a risky move.
Firstly, numerous card issuers have, over the years, implemented stricter rules to deter this practice. Chase, for instance, has the 5/24 rule indicating you can have only five new credit cards within the last 24 months. 2
Repeatedly opening and closing the same card can result in a declined application or rescinded bonus and hurt your credit score-perceived as credit misbehavior by the issuer.
It can also be viewed as unethical and potentially lead to you being barred from opening accounts with that issuer in the future.
Churning can negatively affect your ability to get approved for future credit cards and loans because lenders may think you’re a risky borrower.”
Tip #8 – Develop a multi-card system
This method aims to cover all your spending by using different cards that offer elevated rewards for certain purchase categories.
For instance, we have one card that pays an unlimited flat rate of 2% on all purchases. Then, another rewards card offering increased category rewards, with travel and gas. Then a there card that rotates through various categories each quarter.
Diversifying your spending amongst several credit cards can help you to earn the maximum possible rewards. However, endowing yourself with several credit cards is not for everyone as it requires careful financial management. In some cases, the potential of overspending can outweigh the benefits.
Tip #9 – Transfer points between multiple cards
Transferring points between cards (provided they are from the same issuer) is another useful strategy whereby you can redeem them at their maximum possible value.
The goal is to make your spending work for you and maximize the rewards you can earn from daily expenses. However, people should employ this strategy responsibly and ensure they’re not overspending just to earn rewards.
In such a strategy, points on traditional cashback cards can be transferred to airline and hotel partners when you also have a transferable points card like the Sapphire Reserve or Sapphire Preferred. So, not only are you earning cashback on your purchases, but you’re also accumulating lucrative points that can be redeemed for travel.
Tip #10 – Don’t use cash
In the world of credit card rewards, cash is no longer king. Whenever feasible, you should consider using your credit cards instead of cash or debit to pay for everyday purchases. This allows you to earn rewards on purchases you’re making anyway.
The best way to implement this is for you to bills with their credit cards instead of cash or debit and set this up on autopay. This serves a dual purpose of potentially earning rewards on these payments whilst also conveying a positive message to the banks about your money management skills, leading to possible credit score improvements.
However, this method works best when your spending doesn’t increase as a result. Only use your credit card for expenses that you’d normally pay in cash and for which you already have the money set aside to pay.
Tip #11: Time your purchasing
Being strategic about when you make your credit card purchases can help you wring out some extra benefits.
One way to optimize your earning potential and maintain a healthy credit score is to plan your large purchases around your credit card’s billing cycle. Making your most significant purchases immediately after your statement date ensures that you have the longest possible repayment period, effectively offering you a short-term, interest-free loan.
Furthermore, if your issuer has a rewards cut-off at the end of a calendar year, you can make larger purchases ahead of time to push yourself into a higher rewards bracket.
Tip #12 – Make Micropayments
Rather than making one full payment, consider making multiple payments over the billing cycle, commonly referred to as ‘micropayments.’ This helps keep your running balance low and, in turn, your credit utilization ratio – the percentage of your available credit limit you’re using – also low, positively impacting your credit score.
Plus it helps to keep your checking account at a more accurate level.
Tip #13: Have your spouse apply for the same credit card
Known informally as the “two-player mode” amongst credit card hacking enthusiasts, having your spouse or partner apply for the same credit card can be an effective strategy to earn double the sign-up bonus. This approach is based on the idea that instead of just adding your spouse or partner as an authorized user to your card, they should apply separately.
For instance, if a card like the Chase Sapphire Preferred® offers a 50,000 points bonus on sign-up, both partners can potentially earn up to 100,000 points collectively, essentially doubling the bonus.
But remember, this hack should be used strategically – you should stagger your card applications and ensure each of you fulfills the spending criteria to qualify for the bonus.
Tip #14 – Importance of prompt payment
Quite possibly the hack with the most significant impact on both your credit score and your pocket, prompt payment of your credit card bill cannot be overstated.
Making on-time payments can drastically improve your credit score since your payment history is the most heavily-weighted factor that credit scoring models consider.
Plus paying your balance in full each month can help you avoid interest charges and penalties, effectively saving you money in the long run.
Tip #15 – Know What Rewards you Want
Rewards such as travel miles, discounts at partnered retailers, cashback, or access to premium experiences like airport lounges or concert tickets are available, depending on your card.
By understanding and leveraging these varied rewards, you can get the most excellent value out of your credit card expenses.
Cautionary Advice on Credit Card Hacks
While credit card hacks can undoubtedly offer substantial benefits when done right, pitfalls can ensue if one isn’t careful.
Pitfall #1 – Overspending
For starters, these hacks can inadvertently lead to overspending or unnecessary purchases. Be wary of making purchases you don’t need or can’t afford in an attempt to earn more rewards or meet the spend necessary for a sign-up bonus.
Consequently, the pursuit of credit card rewards could also lead to accumulated debt if you’re not diligent about paying off your balance in full each month. The interest that you need to pay on balances carried over can easily eat up the value of any rewards earned.
Pitfall #2 – Impact on your Credit Score
Applying for multiple cards can lead to hard inquiries on your credit report, which can temporarily lower your credit score. Similarly, canceling cards after acquiring the sign-up bonus could harm your credit utilization ratio and your length of credit history, both key factors in your credit score calculation.
Additionally, irresponsible habits like ‘credit card churning’ and ‘paying for everything with credit’ may risk your relationship with card issuers. Some companies might close accounts or even ban individuals from opening new ones if they’re perceived as abusing the system.
While some of the top-tier reward and travel credit cards often come with hefty annual fees, not all of them are worth paying. This is especially true when a card’s annual fees outstrip the value of the rewards earned.
Before you sign up for a credit card with an annual fee, it’s advised to read the fine print and estimate what you can earn from it. You should evaluate whether the perks, bonuses, rewards, and credits offered offset the annual fee cost.
Personally, I don’t use any cards that have an annual fee.
Pitfall #4 – Paying interest
Credit card interest can significantly impact your overall financial health if you’re not careful. The money invested toward paying it off could be better used elsewhere – for saving, investing, or spending on your needs and desires. Hence, one of the best “credit card hacks” out there is to simply stop paying interest.
You want to focus on debt free living.
Pitfall #5 – Avoiding counterproductive habits like “balance surfing”
Balance surfing is a strategy where you continually move credit card debt from one card with an ending 0% APR promotion to another card with a new 0% APR offer. While this approach can potentially delay interest payments, it can become a dangerous cycle if you find yourself simply transferring debt instead of reducing it.
Meanwhile, the total debt remains the same. Without a consistent debt repayment strategy, this method can lead to an endless cycle of balance surfing.
What are some of the best credit card rewards and hacks for 2024?
As we venture into the new year, some credit card reward strategies remain timeless while others evolve in response to new credit card offers and updated reward programs. In 2024, here are some of the best credit card hacks worth considering:
Take Advantage of Updated Card Offers: Credit card issuers frequently update their card offers and rewards programs. Ensure you stay updated on these changes to maximize your card benefits.
Focus on Cards with Flexible Reward Categories: Some cards, like the Bank of America® Customized Cash Rewards credit card, allow you to choose your highest cash-back category (like online shopping, dining, or grocery stores). These flexible category cards can be more advantageous as you can adapt them to your spending habits.
Leverage Rotating Categories: Cards like the Chase Freedom Flex℠ and Discover it® Cash Back offer 5% cash back on up to $1,500 in purchases in various categories that rotate each quarter, once you activate. Plan your spending in advance to leverage these rotating categories optimally.
Remain Alert on Loyalty Program Partnerships: Many credit cards and airlines have partnerships with other brands. This can mean increased rewards when shopping with those brands, so always watch for new partnerships or promotions.
Revisiting Annual Fees: If your credit card perks no longer justify its annual fee due to changes in lifestyle or spending habits, consider downgrading to a no-fee card from the same issuer. This way, you can save on annual fees without closing your account which could potentially harm your credit score.
Diversify Your Rewards: While it may be tempting to concentrate all your spending on a single card, diversifying your rewards can make you earn more. Consider employing a multi-card system to maximize rewards across different spending categories.
Your credit card should be a tool to enhance your financial flexibility, not a burden that leads to financial stress.
Frequently Asked Questions (FAQs)
Deciding whether to focus on paying off a single card or distributing payments over several cards can seem complicated, but there are a couple of methodologies to strategize your payoff.
The Debt Avalanche method suggests focusing on the card with the highest interest rate first. Once you’ve paid this card off in its entirety, you then move on to the card with the next highest interest rate. This can potentially save you more money in the long term as it targets high-interest debt first.
Alternatively, the Debt Snowball method, proposed by financial guru Dave Ramsey, recommends paying off the card with the smallest balance first, then moving on to the card with the second-smallest balance. While you may not save as much money in interest compared to the debt avalanche method, the psychological motivation of paying off a credit card balance entirely may be more important for maintaining consistent repayment.
Either method requires you to make minimum payments promptly on all cards to avoid late fees and possible credit score damage.
Getting credit card points without spending any additional money may seem like wishful thinking, but there are certain strategies that you can employ to achieve this. Strategically managing your credit cards can turn your everyday spending into reward points, miles, or cash back.
Referral Bonuses: Many credit card companies offer referral bonuses to their existing cardholders who refer friends or family members. If the person you referred gets approved for the card, you can earn bonus points.
Cardholder Perks: Credit card companies often run promotions offering bonus points for certain activities. These can range from enrolling in paperless billing, adding authorized users to your account, or completing an online financial education course. Check with your card issuer to view any current promotions.
Shopping Portals: Many credit card issuers, and even airline and hotel rewards programs, have their own online shopping portals where you can earn additional bonus points for every dollar spent. If you were already planning on making an online purchase, consider making it through these portals to earn extra rewards.
Sign-up Bonuses: Some cards offer sizeable sign-up bonuses for new cardholders who meet a required minimum spend within the first few months. Although this technically requires spending money, it doesn’t require spending more money if you use your card for purchases you were already planning to make.
While implementing certain credit card strategies can potentially earn you higher rewards or save money, they can also unintentionally harm your credit score if not executed responsibly.
Several factors can contribute to this potential downfall:
Opening and Closing Accounts: A high frequency of card applications can lead to multiple hard inquiries on your credit report, which might lower your score in the short term. Closing credit cards, especially older ones, can affect both your credit utilization ratio and the age of your credit history, two significant factors in your credit score calculation.
Carrying a Balance: Maintaining a high credit utilization ratio—i.e., carrying a large balance relative to your credit limit—can negatively impact your credit score.
Late Payments: If these deadlines are not strictly adhered to, they could result in late payments, which can seriously harm your credit score.
Excessive Spending: Some tactics lead to unnecessary spending to earn more reward points or meet an initial spend required for a sign-up bonus. Not only can this increase your credit utilization ratio and potentially lower your credit score, it can lead to debt if these balances are not paid off in time.
While both rewards cards and travel rewards cards offer perks to their users in return for spending, the primary difference lies in the kind of rewards they offer and their target user base.
A Rewards Card generally offers cash back, points, or miles for every dollar spent, redeemable in a variety of ways. This is the type of card I prefer. For example, you may redeem your accumulated rewards as cash back into your account, use them to purchase products or services, or exchange them for gift cards. The flexibility of rewards makes these cards are suitable for people with varied spending habits and prefer a variety of redemption options.
A Travel Rewards Card, on the other hand, is designed specifically for frequent travelers. These cards earn you points or miles on specific travel-related expenses, like booking flights or hotel stays. The redeemed rewards are typically used towards further travel-related expenses like airfare, hotel stays, or car rentals. Travel Rewards Cards often offer additional travel-centric perks like free checked bags, priority boarding, airport lounge access, and more.
Consider your spending habits, lifestyle, travel frequency, and preference in terms of reward redemption.
Protecting yourself from credit card fraud is an important aspect of managing your credit card usage effectively.
Monitor Your Accounts Regularly: Keep a thorough watch on your credit card statements for any unauthorized or suspicious charges. Report them to your credit card issuer as soon as possible.
Use Secure Networks: When making online purchases, only shop on secure websites (look for “https” in the web address), and avoid using public Wi-Fi networks for transactions.
Keep Your Personal Information Safe: It’s important to dispose of old credit card statements properly, and avoid giving out credit card information over the phone unless you initiated the call and you trust the recipient.
Protect Your PIN and Password: Don’t share these with anyone, and avoid using easily guessable combinations like birth dates or the last four digits of your social security number.
Enable Account Alerts: Most banks now offer optional security alerts that can be sent via text message or email whenever a charge above a certain amount gets made to your account.
Protect Your Computer and Phone: Make sure your devices are equipped with up-to-date antivirus software and that your phone is locked with a secure password or fingerprint identification.
In case you become a victim of credit card fraud, know the steps to protect yourself – report it to your bank or credit card company immediately, file a report with the Federal Trade Commission, and report it to the three major credit bureaus, requesting them to put a fraud alert or a credit freeze on your account.
Also remember, credit cards don’t have routing numbers.
Making the Most of Credit Card Hacking
When used wisely, credit card hacks and reward strategies can play a significant role in stretching your budget and rewarding your spending. These secrets of savvy credit card use — from aligning your card to your spending habits, making the most of sign-up bonuses and reward categories, to understanding the ins and outs of your credit card’s rewards structure — can help maximize your potential rewards and save money.
Personally, we use all of our credit card rewards to pay for our travel expenses.
However, it’s paramount to remember that these tips and tactics should not encourage unnecessary spending or carrying a balance. Only spend within your means, ensure you pay off your balances each month to avoid interest charges and remember to safeguard your credit score by handling credit card applications and closures cautiously.
Ultimately, credit card hacks and rewards should fit within your overall financial plan and goals, adding value to your everyday spending habits and rewarding you for well-managed financial practices.
Remember your goal is to reach your FI number.
Source
Reddit. “American Express Clawing Back Points Earned From Gift Card Purchases.” https://www.reddit.com/r/AmexPlatinum/comments/14hywaq/american_express_clawing_back_points_earned_from/. Accessed January 19, 2024.
CNN. “What is the Chase 5/24 rule?” https://www.cnn.com/cnn-underscored/money/chase-5-24-rule#:~:text=The%205%2F24%20rule%20is,your%20approval%20odds%20with%20Chase. Accessed January 19, 2024.
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More importantly, did I answer the questions you have about this topic? Let me know in the comments if I can help in some other way!
Your comments are not just welcomed; they’re an integral part of our community. Let’s continue the conversation and explore how these ideas align with your journey towards Money Bliss.
When most people talk about money management, they discuss tactics. Occasionally, you’ll encounter someone who elevates the discussion to strategy, rather than simply scattershot tactics.
But what’s missing from both conversations — both tactics and strategy — is a wider-lens look at how to become a better thinker; how to become a crisp, clear decision-maker.
How to think from first principles. How to better your brain. How to cultivate the wisdom to know the next move.
This series is an attempt to bring first principles thinking into the conversation around money. Welcome to the inaugural post.
Welcome back to First Principles, my series with an alternate definition of FIRE — Financial Psychology, Investing, Real Estate and Entrepreneurship.
Today we’ll dive right in with the question on everyone’s mind: is a recession looming?
Financial Psychology
Are we in a recession?
Short answer: Possibly. I may even go as far as to say “probably.”
A recession is defined as two consecutive quarters of negative economic growth, as measured by GDP. (Notice that recessions reflect the state of the economy, not the stock market. We’ll come back to that in a moment.)
By definition, a recession is only visible in hindsight, after two negative-growth quarters have passed. This means it’s possible we’re already in a recession. It’s also possible that one may be looming.
Why now?
What’s behind this (potential) recession? In a word: inflation.
As I’m sure you know, the Federal Reserve has been raising interest rates. (There have already been 5 rate hikes so far in 2022!)
The Fed is tasked with a “dual mandate” to control both inflation and the risk of recession; this “dual mandate” exists because controlling inflation necessarily carries a recessionary risk.
But why?
To control inflation, the Fed must make money more expensive to access. When borrowing becomes more expensive, people and companies do less of it, which slows spending and growth. This could lead to a couple of consecutive negative-growth quarters, which is, by definition, a recession.
What does this mean for you?
Recessions vary along three dimensions:
(1) severity
(2) duration
(3) frequency
It’s tempting to think that a recession will impact us in the same ways as the Great Recession of 2008.
This is due to a few cognitive biases, including:
Recency bias — our tendency to overestimate that an event that occurred recently will re-occur again, or to assign greater importance to things that have happened most recently.
Salience bias — our tendency to focus on events and facts that are remarkable (the headline-grabbers), rather than events and facts that are mundane.
Availability bias — our tendency to think that examples that most easily come to mind are more important or significant than they actually are.
The Great Recession of 2008 was (1) recent; (2) remarkable; and (3) easy to recall.
Its remarkability and ease-of-recall stems from the fact that the Great Recession was both high-severity AND long-duration. It felt personal; millions lost their jobs and homes, which meant that this recession impacted us in the most visceral, tangible ways possible.
For all those reasons, it’s easy to assume that every recession will look, feel and behave similarly to the Great Recession.
But will it?
Let’s turn our attention to 2022, and look at the many factors that are different this time around, including:
(1) Unemployment is at a record low. Despite the occasional warning headline (e.g. Tesla will be reducing its salaried headcount by 10 percent), the unemployment rate remains 3.6 percent as of May 2022, according to the U.S. Bureau of Labor Statistics.
(2) Housing prices continue to rise, despite higher interest rates, due to imbalances in supply-demand fundamentals. The cost of materials (such as lumber) remains high, which increases construction costs and therefore home values.
(3) Consumer spending remains strong, particularly in discretionary areas such as travel and dining. Despite higher fuel prices, airlines are seeing strong demand for flights.
What does this mean?
We may or may not already be in a recession, or enter one in the near future.
But if we do, there’s a chance this might be experienced as an “on-paper” recession, in which the daily lives of the average middle-class worker isn’t strongly affected.
If unemployment remains low, consumer spending stays strong, and inflation gets roped into check, there’s a chance that this recession will be forgotten. It might be long-duration, but low-severity.
Of course, this is one of a range of possibilities, and as you know, I’m not in the business of prognostication.
But it’s worth making the point that we shouldn’t let our cognitive biases lead us astray. Don’t assume that the next recession will resemble the conditions of 2008.
SPOTLIGHT ON…
Have you been interested in real estate investing for years, sitting on the sidelines watching the market go up and wishing you’d gotten in sooner?
I have a secret for you: it’s not too late to find good deals.
Even though parts of the US market are crazy, there are still good deals to be found; you just have to know where to look.
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Investing
Recessions reflect the economy, not the stock market.
Let’s return to the definition of a recession: two consecutive quarters of negative economic growth, as measured by GDP. This definition doesn’t directly relate to stock prices.
But investors react in varied ways.
There are two popular styles of investing: growth and value.
Growth investors tend to sell (or not buy) during recessions. When companies expect lower profits, growth investors are usually unwilling to pay a high price for a share of that company, so stocks can fall.
But this is counterbalanced by value investors who pick up shares of the ‘winners,’ the companies and stocks that they believe have been maligned by the market and that will emerge strong during the recovery.
Hence, the volatility.
So let’s zoom out and look at what’s happening now:
Everything (except real estate) is falling.
Stocks are volatile. Crypto is depressed. Bonds are unattractive.
And that’s not surprising, given the liquidity patterns of the past two years.
At the start of the pandemic, $10 trillion in liquidity got pumped into the monetary system. Investors used that liquidity to buy all types of assets — stocks, bonds, crypto, housing — triggering a massive spike in the value of all asset classes across the board. (It’s no surprise that “meme stocks” like GameStop and AMC Theaters became a thing at the exact moment when millions received “stimmy” checks.)
Two years ago, people were already asking the question, “what should I invest in when everything is expensive?”
Last year, that question only became louder and more pronounced.
It’s reasonable that today, as liquidity is getting removed from the system and capital becomes harder to access, the values of these assets will gyrate for awhile, then stabilize at a “new normal,” with valuations that reflect market fundamentals such as earnings and expectations.
What does that mean for you?
Expect that the rest of 2022, perhaps 2023, could be volatile. Stocks, crypto and bonds may swing for awhile as investors try to figure out the “new normal.”
But these types of events are how the market cleans itself.
The poorly-run companies run out of money and fold. Better companies take their place. And the broad market, over the long-term, reflects the growth of the winners.
Many fantastic companies started during the Great Recession; many new companies will be created during the next one.
Real Estate
We created a massive, multi-day email series to deep-dive into recession and inflation in 2022 — and specifically, to talk about how it could impact the housing market.
It’s waaayyyy too detailed to summarize into this post, so I’d suggest signing up to get this multi-day email series.
If you’re even thinking about buying real estate, either as an investor or as an owner-occupant, you’ll find a ton of value in this free email series.
Get the free email series
Entrepreneurship
One of the most interesting stats to watch in coming months relates to the unemployment rate.
Right now, many entrepreneurs are struggling to hire talent. The labor market is tight. Small businesses are having a tough time competing with the salary and benefits packages offered by major corporations.
Many real estate investors (which is a specific subset of entrepreneurship) have spent years lamenting how hard it is to hire contractors — because many contractors are booked, busy, and in high demand.
Given the record-low unemployment, that’s not surprising.
If the labor market loosens, it might become easier to hire. And that will be a blessing for small business owners and real estate investors who are trying to find top talent, especially 1099 contractor talent.
Again, this is why many great companies tend to be launched during recessions:
One of the best times to create a business is when skilled talent is looking for work.
Hope you enjoyed this issue of First Principles.
I’ll see you in the next issue. Until then!
Click here if you want future posts like this straight to your inbox with more thoughts, ideas and insights on a new take on FIRE.
When your child heads off to college, you are probably awash in all kinds of emotions. Pride, relief (yes, they got into school!), sadness, anxiety, and excitement can all swirl around you. Your baby is growing up and forging their own independent life. Will they make new friends? Like their classes and excel in them? Find their way around campus easily enough? Will they overspend, sleep through class, and stay out all Friday night?
Part of having a college student as a child means you must get used to some separation and lack of information. But that doesn’t mean you can’t continue to play a vital role in their life. Here, some wise advice about conversations to have, topics to cover, and when to help them have an amazing time at school.
Advice for Parents of College Students
Although each parent-child relationship is unique and each parent may face different challenges with their college student, there are moments that can be universal when your “baby” heads off to university life.
You’ll need to know how much to let go and encourage your child to become independent versus how much you should continue to provide support, whether that’s emotional support or financial.
Where that line should be drawn for each child and parent depends upon things like the seriousness of the problems being faced and how temporary or permanent they may be. In general, though, tips include:
• Listen, but try not to dive right into problem solving. This may not be the moment to lead with, “Here’s what you need to do…”
• Be mindful about how often you communicate and give your college student space while also staying available. Texting constantly and expecting quick replies will be unrealistic for many parents.
• You may be used to getting those report cards regularly and monitoring your child’s checkups at the doctor’s office. Recognize that now, times are changing, and you may not always be kept in the loop. FERPA (or the Federal Education Records Privacy Act) gives college students new privacy rights that can be defined pretty broadly. You may want to talk to your child about signing a FERPA waiver that will give you more access to information.
Accepting that college isn’t just about education but also about your child establishing themselves as an independent adult is an important transition for both of you. 💡 Quick Tip: Pay down your student loans faster with SoFi reward points you earn along the way.
Parenting College Students During Summer Break
Just when you figure out how to parent your child when he or she is away from school, summer break arrives with a different set of challenges. The young adult that you watched leave for college is probably not the same person who is returning. Maybe they don’t want to chat as much as before, or don’t seem as open to talk about daily life, friendships, and relationships.
The parent-child dynamic may be less about directing your kid’s actions and more about creating a collaborative partnership.
This can include things like withholding judgment about your child’s actions and making requests rather than demands — even when you’re sure you’re right. Your child is growing up and stretching their wings, both at school and when they return. They are becoming a full-fledged adult, after all.
Analyze which rules are the most important, and focus on those, letting other ones go. One example is you might ask that he or she call you if dinner will be missed, but not try to impose a curfew.
Recognize that during summer break you’ll probably need to readjust to being together, while also focusing on enjoying your time together.
Conversations about Paying for College
As part of your evolving parent-child relationship, you’ll likely find yourself in conversations about the best ways to pay for college. As the parent, you’ll likely initiate these talks. As part of your discussions, you may want to:
• Be clear about how much money you’re willing or able to contribute towards your child’s college expenses and how much your child will need to contribute.
• Discuss how much college will cost once you add tuition, housing, books, and other expenses together.
• Talk about student loans, including the differences between federal student loans and private student loans.
• Discuss how your child working during college may help pay for expenses.
• Talk about money management and how your child may feel some stress over student loan debt.
Here are some valuable topics to mention.
• There are scholarships and grants that usually don’t need to be repaid. What’s left is the amount that typically needs to be paid for by a combination of parental contributions, student contributions, and student loans.
• The two main types of student loans are federal and private. To qualify for federal student loans, you’ll need to fill out the FAFSA® (or Free Application for Federal Student Aid). This form needs to be filled out every year to determine eligibility for federal student aid dollars, including federal student loans.
• Federal loans can be subsidized or unsubsidized. Students may be eligible for a subsidized loan if they have a certain degree of financial need. Subsidized loans do not accrue interest during the six-month grace period after graduation/dropping below half-time enrollment and during any loan deferments.
• If the student drops below half-time enrollment, the grace period will begin even if he or she has not graduated yet, although there are some circumstances in which the student loan grace period can change.
Unsubsidized federal student loans do not require a demonstration of financial need, but do accrue interest during the entire loan period.
Private student loans are not funded by the government. Your child can apply with individual lenders, and each loan will come with its own terms and conditions, including repayment terms. Private loans can help fill the gap between what your child can pay with scholarships, grants, or federal loans. 💡 Quick Tip: Would-be borrowers will want to understand the different types of student loans that are available: private student loans, federal Direct Subsidized and Unsubsidized loans, Direct PLUS loans, and more.
Saving for Your Child’s College
If you’re still saving for your child’s education, your options may include:
• What are known as 529 college savings plans, also called qualified tuition plans, allow you to save for college while potentially offering tax benefits. Money saved in an education savings plan (sponsored by some states) can be used for tuition, fees, room and board, and other qualified higher education expenses at a college or university.
• Prepaid tuition plans (available at some universities) offer the option to prepay tuition and fees at current rates.
• Traditional or Roth IRAs, although more commonly used to save and invest for retirement, can be used to save for college expenses. .
• Coverdell Education Savings Accounts allow you to set up an account to pay for qualified education expenses, but contributions are not tax deductible and are only available for people whose income falls under certain limits.
• Uniform Gifts to Minors Act (UGMA) or Uniform Transfers to Minors Act (UTMA) accounts are intended as a savings vehicle for beneficiaries under the age of 18. Depending upon your state, the funds will transfer to your child at either age 18 or 21 and do not have to be used for education expenses.
Tax Credits and College
When it’s tax time, if you claim your college-age child as a dependent, you might qualify tax credits related to education.
• The American Opportunity Tax Credit could be helpful during the first four years of their undergraduate education. Qualifications include MAGI, or modified adjusted gross income, among other factors.
This is a credit for tuition and other qualified education expenses worth up to $2,500 per eligible student and could reduce the filer’s tax bill, not their taxable income.
• The Lifetime Learning Credit is also a tax credit, but may be harder to qualify for. Each year, you can claim either the AOTC or the LLC, but not both.
Parent Student Loans
You may be able to take out loans for your child’s education expenses, including a federal Parent PLUS Loans, available to parents of dependent undergraduate students for the amount of attendance costs minus other financial aid.
Private lenders may also be an option. Fees, rates, and repayment options vary by lender and they don’t typically offer forbearance or deferment options like federal loans do. As another option, you may be able to co-sign a private student loan with your child.
SoFi Parent Loans
Paying your child’s tuition with SoFi’s flexible, competitive-rate parent loan may be an option for consideration as well.
If you’ve exhausted all federal student aid options, no-fee private student loans from SoFi can help you pay for school. The online application process is easy, and you can see rates and terms in just minutes. Repayment plans are flexible, so you can find an option that works for your financial plan and budget.
Cover up to 100% of school-certified costs including tuition, books, supplies, room and board, and transportation with a private student loan from SoFi.
SoFi Loan Products SoFi loans are originated by SoFi Bank, N.A., NMLS #696891 (Member FDIC). For additional product-specific legal and licensing information, see SoFi.com/legal. Equal Housing Lender.
SoFi Private Student Loans Please borrow responsibly. SoFi Private Student Loans are not a substitute for federal loans, grants, and work-study programs. You should exhaust all your federal student aid options before you consider any private loans, including ours. Read our FAQs.
SoFi Private Student Loans are subject to program terms and restrictions, and applicants must meet SoFi’s eligibility and underwriting requirements. See SoFi.com/eligibility-criteria for more information. To view payment examples, click here. SoFi reserves the right to modify eligibility criteria at any time. This information is subject to change.
Checking Your Rates: To check the rates and terms you may qualify for, SoFi conducts a soft credit pull that will not affect your credit score. However, if you choose a product and continue your application, we will request your full credit report from one or more consumer reporting agencies, which is considered a hard credit pull and may affect your credit.
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.
Non affiliation: SoFi isn’t affiliated with any of the companies highlighted in this article.
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.
Earned wage access is an employer-provided benefit that allows employees to access a portion of their paycheck ahead of payday. This can be immensely helpful for employees living paycheck to paycheck who incur unexpected, emergency expenses.
On-demand access to money that employees have earned can keep them from relying on more dangerous and costly alternatives, like payday loans, cash-advance apps, and even intentionally overdrafting their bank accounts. But earned wage access programs may also carry some fees, and they can inspire bad habits with budgeting and money management.
How Does Earned Wage Access Work?
Earned wage access (EWA) works similarly to a cash advance app, except that it’s an employer-provided benefit. Employees who work at a company offering this benefit can download the app of the third-party EWA provider that their company works with and then apply to access a portion of their paycheck.
Employers typically limit how much of a paycheck employees can access early. EWA providers charge a fee for this access. In some cases, the employee will have to pay the fee every time they use the service; in others, employers foot the bill as part of the benefit.
Recommended: What Are Credit Card Cash Advances?
Earned Wage Access Example
Here’s an example of how earned wage access (also sometimes called early wage access) might work in the real world:
An hourly employee earns $20 an hour, after taxes and retirement contributions. Though she receives her paycheck every two weeks, the employee realizes she needs money now to cover an emergency vet bill. She has already worked six days, meaning there are four working days before the end of the pay period — and more time before payroll processes.
She uses the EWA app that her company has partnered with to apply for early access to her paycheck. There is a $5 fee, but her company covers the cost as part of the earned wage access benefit. The EWA benefit is limited to 50% of her total pay for the period, so the employee then receives $800 ahead of her paycheck.
On payday, the employee usually receives a check for $1,600. Because she’s accessed $800 early, however, her paycheck will only be $800. 💡 Quick Tip: Some lenders can release funds as quickly as the same day your loan is approved. SoFi personal loans offer same-day funding for qualified borrowers.
How to Qualify for Earned Wage Access
Qualifying for earned wage access is easy. You just have to work at a company that offers it as a benefit. EWA is growing increasingly popular. Companies like Uber, McDonalds, and Walmart have all adopted early wage access as an employee benefit.
Unlike personal loans or credit cards, there’s no credit check to access the money early. Instead, you’ll just need to download the app of the program that your company has partnered with and connect it to your bank account or debit card to have the money transfer go through.
Earned Wage Access Pros and Cons
Earned wage access offers tremendous benefits, especially to employees who are struggling financially. However, EWA also has its fair share of drawbacks to consider.
Pros
• Fast access to money: The best way to handle unexpected expenses is to draw money from your emergency savings fund. In theory, the money will have been sitting there — in a high-yield savings account actively earning interest — so you don’t have to rely on credit cards, personal loans, cash advance apps, or payday loans. However, people who live paycheck to paycheck understandably can’t build an emergency savings fund. Earned wage access offers another path forward. You’ll be withdrawing money you’ve earned, just a little early. That means you aren’t taking on debt to cover life’s unexpected expenses.
• Easy to qualify: Taking out a personal loan for emergency expenses is often a smart idea if you don’t have the money in savings. But if your credit score is in poor shape, you might have trouble getting approved for a personal loan. Getting money through earned wage access may be easier. As long as your company offers this as a benefit, you don’t have to worry about credit checks and high-interest debt.
• No fees (or at least low fees): Many employers cover the admin fee of earned wage access for their employees as part of the benefit. Other employers might have arrangements with EWA platforms that don’t charge fees when employees access their funds early. Even if the employee is responsible for a transaction fee for an EWA, the cost is usually low.
Cons
• Smaller paycheck: When you need money in a pinch, earned wage access can be a great solution that doesn’t involve taking on debt. However, when payday arrives, your paycheck could be much smaller. Often, EWA platforms allow you to access up to 50% of your paycheck, meaning your payday will be cut in half. While you’ve covered the cost of the emergency expense, you’re now faced with paying your monthly bills on only half of your normal check. That could mean tightening your belt at the grocery store or making late payments on bills.
• A bad habit: Like cash advance apps or even payday loans, EWAs can be a slippery slope. You may access a portion of your paycheck early during one pay period, get a smaller paycheck as a result, and then need to turn around and access the next paycheck early to make up for your reduced paycheck. According to a 2021 study by the Financial Health Network, more than 70% of employees who utilized earned wage access used it in consecutive pay periods. It’s a difficult pattern to get out of — and could be even more detrimental if you change jobs and your new employer doesn’t offer EWA. In that case, you might be tempted to take out a predatory loan instead.
• Potential fees: In some cases, employees do have to pay for earned wage access. These fees are usually nominal, especially when compared to alternatives — overdraft fees from spending more than they have in their bank account or exorbitantly high interest rates for payday loans — but EWA fees should still be a consideration for people on a budget. Maybe there’s another alternative, like borrowing money from a family member or a payment plan for whatever emergency expense the employee has incurred.
Recommended: How to Avoid Overdraft Fees
Earned Wage Access vs Cash Advance Apps
Cash advance apps, also referred to as early payday apps, share some similarities with earned wage access. Both are typically managed through mobile apps and help you access cash flow ahead of your next paycheck.
Earned wage access, however, is offered solely through an employer. The employer may cover fees for the employees, and the amount a person can access is related to their actual paycheck.
With a cash advance app, consumers are responsible for any associated fees. Some apps may advertise no fees (and no interest), but they may charge a fee for instant transfers. Otherwise, you’ll have to wait a few days to get the money, which often defeats the purpose. Other cash advance apps might have a monthly charge.
The amount you can borrow through a cash advance app varies and may be tied to the cash flow of your linked bank account. Repeat borrowers may get approved for higher funds. Repayment is due on the borrower’s next payday.
Though hidden fees can make cash advance apps expensive, they’re generally a safer option than payday loans. 💡 Quick Tip: Just as there are no free lunches, there are no guaranteed loans. So beware lenders who advertise them. If they are legitimate, they need to know your creditworthiness before offering you a loan.
The Takeaway
Earned wage access can be helpful in an emergency situation, if your employer offers this benefit. However, EWA may come with fees, can make it more challenging to budget on payday, and may even lead to a recurring habit. As an alternative in an emergency solution, you can take out a personal loan. It won’t affect your upcoming paycheck, you can use loan moneyfor a variety of purposes, and it can give you the funds you need, at a low cost, to get through a financial hardship.
Think twice before turning to high-interest credit cards. Consider a SoFi personal loan instead. SoFi offers competitive fixed rates and same-day funding. Checking your rate takes just a minute.
SoFi’s Personal Loan was named NerdWallet’s 2023 winner for Best Online Personal Loan overall.
FAQ
Is earned wage access a loan?
Earned wage access is not a loan. It allows employees at participating companies to access money they’ve already earned, just ahead of schedule.
What are the benefits of earned wage access for employees
Earned wage access offers employees several benefits, including fast access to money they’ve technically earned, no or low fees, and easy qualification requirements. (You’ve just got to work for a company that offers this benefit.)
What are the downsides of earned wage access?
Earned wage access can have some downsides. Employees may have to pay fees to get early access to their paycheck, the amount you can access is often capped at 50%, and it can lead to a bad habit wherein you regularly need money before your paycheck.
Photo credit: iStock/Ivan Pantic
SoFi Loan Products SoFi loans are originated by SoFi Bank, N.A., NMLS #696891 (Member FDIC). For additional product-specific legal and licensing information, see SoFi.com/legal. Equal Housing Lender.
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.
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.
Inside: Learn how many months it usually takes for your budget to start working effectively. Plus explore successful budgeting strategies.
Learning to budget can often be a challenging process, but its benefits are irreplaceable. Initially, it might feel overwhelming, as it involves accounting for every small expenditure, adhering to a fixed financial plan, and exercising self-control.
The frustration often emerges from unexpected expenses or changes in income, like getting a raise or having to make a new car loan payment.
However, this ongoing process ultimately fosters financial discipline, enables goal-setting, offers a clear financial picture, and encourages proactive handling of money matters, making the frustration worthwhile.
According to experts, it could take up to three months to adapt to a new budget.
This post may contain affiliate links, which helps us to continue providing relevant content and we receive a small commission at no cost to you. As an Amazon Associate, I earn from qualifying purchases. Please read the full disclosure here.
The Essential Role of Budgeting
Financial budgeting plays a critical role in managing resources efficiently, informing financial goals, prioritizing initiatives, optimizing financing opportunities, and offering flexibility in various situations.
These reasons make it a highly regarded tool in business and personal finance.
Defining Financial Budgeting
Financial budgeting is a systematic approach to managing your finances by mapping out your income and expenditures over a designated period.
This process provides a framework to guide your financial decisions, which aids in achieving your monetary objectives.
It’s essentially an overview of your financial position, goals, and cash flows.
How many months does it usually take for your budget to start working as a budget should?
As per our expert opinion, it typically takes around three months for a budget to start functioning effectively.
When starting a new budget, it’s normal not to see results immediately.
This time frame allows for adjusting to new spending habits, dealing with unexpected costs, and instilling a sense of discipline and control over your finances. Remember, budgeting requires patience and commitment.
Practicing Efficient Budgeting Techniques
Now, the key to being successful is having a few budgeting tricks up your sleeve.
I can guarantee you that budgeting is actually freeing. This is how you do it!
The Process of Getting One Month Ahead
Getting one month ahead in your financial budgeting means living off last month’s income.
In this practice, you pay November’s bills with October’s income, for example, essentially preventing you from spending money you haven’t earned yet.
To set up this process, create a monthly budget, determine your income and expenditures, establish your spending goals, and ensure your income exceeds your spending. More than likely, you will have to save money to get one month ahead of bills completely. YNAB can help you with this.
YNAB
Enjoy guilt-free spending and effortless saving with a friendly, flexible method for managing your finances.
Pros:
Comprehensive approach to budgeting, helping you plan monthly budgets based on your income.
Offers expert advice, making it suitable for those who require an in-depth, forward-thinking budgeting strategy.
Superior synchronization skills make it the winner in this area.
YNAB has extra features like goal setting for budgeting, shared budgeting tools for partners.
Option to manually add and upload transactions from accounts each month.
YNAB prioritizes user privacy.
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Familiarizing with Zero-Based Budgeting
Zero-based budgeting is a method where every penny of your income is allocated to different categories, from necessary and discretionary spending to savings and debt payments.
You start each month with a fresh budget, balancing out your expenses and income to zero. This approach demands meticulous attention to detail and is best suited for individuals with a fixed income and predictable expenses.
Executing the Envelope Method
The envelope method involves assigning an envelope (physical or digital) to each spending category, such as grocery or utilities, and putting cash into each envelope for planned expenditure. Once the cash in an envelope finishes, it means you’ve exhausted your budget for that category.
This method, as per expert suggestion, instills discipline and curbs overspending, making it an ideal choice for cash-driven individuals. Connecting this method with digital tracking systems is possible with the cashless envelope system to cater to those using debit or credit cards.
12 Effective Strategies to Make Budgets Work
These strategies not only allow the allocation of resources efficiently, but also help set realistic financial goals, prioritize projects based on their potential cash flow, and explore optimal chances to reach financial independence.
Moreover, having a budgeting plan in place also ensures flexibility to adjust to unanticipated financial challenges, contributing to long-term wealth creation.
1. Determine Goals and Objectives
Start your budgeting process by clearly defining your financial goals and objectives. Are you aiming to buy a new home, fund your education, or build an emergency fund?
Whatever aspiration you have, short- or long-term, incorporating them into your budget amplifies your drive and focus on achieving them.
This goal-driven strategy aligns your budgeting with your needs and wishes, creating a financial roadmap toward your envisioned milestones. Consider these smart financial goals to get you started.
2. Better Planning, Fewer Surprises
Planning your budget effectively requires a thorough consideration of all personal budget categories.
Also, incorporate both short and long-term financial goals into your budget by prioritizing them, such as purchasing a home, taking a vacation, or furthering your education. Regularly reviewing and adjusting your budget accordingly, based on changes in income or unexpected expenses, can also ensure you stay on track.
Utilizing a variety of budgeting tools, like spreadsheets, apps, or budgeting software, can simplify this process and help keep you accountable.
Quicken
Personal finance and money management software allows you to manage spending, create monthly budgets, track investments, retirement and more.
I have used this platform for over 20 years now.
Pros:
Birds-eye view of your complete financial picture.
Conveniently download your spending activities, and automatically categorize them (Quicken connects to over 14,000 financial institutions).
Track investments with it’s features like portfolio analytics, retirement goals, and market comparison.
Cons:
Little complex to use at first, the learning curve is moderate.
Yearly subscription-based model to use the platform.
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3. Reduced Financial Stress through Budgeting
A successfully implemented budget significantly reduces financial stress by providing an accurate picture of your financial health.
With a well-defined budget, worries about overspending, living from paycheck to paycheck, or falling into debt diminish. Monitoring and updating your budget will allow you to feel more confident and secure about your financial standing, paving the way to monetary stability.
4. Deciding When to Review Your Budget More Frequently
An effective budget is not a set-and-forget one; it requires regular check-ins and updates. A bill calendar is very helpful.
A recommended starting point is a monthly review. However, when first starting out, you will need to review your budget monthly until you find it working for you.
Other situations may need more frequent check-ins according to changes in income, financial goals, or unexpected expenses.
5. Spot Potential Room for Improvement
Budgeting provides a realistic view of your spending patterns, allowing you to identify areas of improvement.
Upon reviewing your budget, you might notice unnecessary expenditures or categories where expenses consistently exceed budgeted amounts. Such insights help you re-evaluate your spending habits and update your budget accordingly.
This phase coupled with a no spend challenge involves being brutally honest with yourself, taking into account your needs, wants, and financial realities.
6. Analyze Your Expenses and Income
Critical examination of your income and expenses is crucial for successful budgeting. Begin by calculating your total income, then list and categorize your monthly expenses into fixed and variable.
Pinpointing the difference between the totals can highlight whether you’re living within your means.
If your income surpasses your spending, consider investing the surplus.
Conversely, if your expenses outnumber your earnings, think about ways to increase income or decrease spending.
7. Set Limits for Your Budget Items
Setting reasonable spending limits for your budget categories ensures financial discipline. Check each category of spending—groceries, entertainment, or personal care, for instance—and contemplate areas you can cut back.
Ask around to see how much others are spending in certain categories in your neighborhood.
Remember, your budget should be flexible and realistic to your lifestyle, ensuring you don’t feel deprived. Embed small “wants” into your budget to keep the whole process enjoyable and sustainable.
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8. Create a System for Tracking Your Expenses
Creating an efficient system for tracking expenses is vital to maintaining control over your finances. This could be a simple spreadsheet, a manual ledger, or budgeting apps on your smartphone.
Tally every cent spent, dividing your expenses into their respective categories—rent, food, clothing, utilities, etc.
This way, you get a detailed insight into your financial habits and can identify potential areas for savings. The method isn’t as important as its thoroughness in ensuring no expense gets overlooked.
9. Track Your Spending with a Spreadsheet
Spreadsheets are an optimal resource for tracking spending. You can utilize an online template, like Tally, or make one yourself from scratch.
As you spend, record each transaction under the fitting category. This real-time monitoring can help spot overspending, analyze spending habits, and adjust budgets as needed.
So, if you’re a whiz with Excel or Google Sheets, tracking expenses this way might be your best bet.
Tiller Money
Your financial life in a spreadsheet, automatically updated each day.
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Pros:
Tiller automatically updates Google Sheets and Microsoft Excel with your latest spending, balances, and transactions each day.
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10. Budget for Emergencies
Budgeting for the unexpected is an essential aspect of sound financial planning. Financial emergencies don’t knock before they occur; therefore, creating a buffer in your budget helps you face them without plunging into debt.
As an expert, we suggest an emergency fund of one month of income or at least $1000. Then, start a rainy day fund with three to six months of expenses.
Having these funds built into your budget ensures you’re financially covered for challenging situations such as job loss, medical emergencies, or sudden home repairs.
11. Talk to Your Family About Your Budget
Talking to your family about your budget ensures everyone understands and works towards your financial goals. This discussion becomes especially crucial if you’re budgeting for a household.
I always provide my family with an overview of the budget, explaining how it works and how we can achieve our goals. Being open about your financial plan can foster greater accountability, and cooperation to achieve shared financial objectives more seamlessly.
12. Look for Ways to Make Money
Increasing your income can be an effective strategy to make your budget work better, rather than solely focusing on cutting expenses.
By finding ways to earn more money, for example by taking a part-time job, freelancing, selling unused items, or investing, you add flexibility to your budget and reduce the pressure on spending.
Moreover, the additional income could be directed towards savings, debt repayment, or funding your personal goals as identified in your budget plan.
Financial Budgeting FAQs
Starting a budget begins by assessing your total income, followed by identifying and categorizing your expenses.
Once done, subtract your expenses from your income to understand your financial standing.
Next, set your financial goals—short term and long term.
Then, allocate your earnings across different categories, maintaining a balance between savings, expenditures, and other aspirations.
Review and adjust this plan periodically to ensure it aligns with your financial landscape.
Budgeting should ideally start as soon as a person starts earning money. It’s never too early to begin planning where your money should go, and late starters can still benefit significantly.
Budgeting is a lifelong practice that guides you to live within your means, handle emergencies smoothly, and achieve your financial goals efficiently. It’s an indispensable tool for ensuring monetary success and stability.
Successful Budgeting as an Essential Life Skill
Successful budgeting is undeniably an essential life skill. It not only helps you live within your means but also provides a clear direction towards your financial goals.
Mastering this skill early on can lead to effective financial decision-making, lesser financial stress, and a more secure way of life.
There will be fluctuations in your budgeting, so you can start to forecast your budget. It also reinforces the value of discipline and planning, offering improved self-management and positive monetary habits.
Ultimately, progressing from just surviving to thriving financially is the goal, and disciplined budgeting is a tool to get you there.
This is just one step towards becoming financially independent.
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