When planning for the overall financial security for yourself and those you love, life insurance should typically play a part. This is because the proceeds from a life insurance policy can be used to ensure that dependents and survivors won’t be left with having to pay a debt or other expenses out of their own pockets. These funds can also be used for ensuring that the daily living expenditures of a spouse and children can continue – without those you care about having to go into a financial hardship, or even to change their lives drastically.
If you are in the process of shopping for life insurance – or you soon will be – then several key factors are important to keep in mind. These include securing the right type and amount of insurance coverage, as well as making sure that the company you plan to purchase the coverage through is safe and stable financially, and that it also has an excellent reputation for paying out its policy holders’ claims. One carrier that meets these standards is Primerica.
The History of Primerica Insurance Company
Primerica has been in the business of offering term life insurance that is affordable since 1977. Since its beginning, the company has had a key focus on serving middle America’s “Main Street” families in neighborhoods across the country. Primerica was started by Arthur (Art) Williams, a former high school football coach turned life insurance advisor.
Within just the first few years of operation, the company contracted with Massachusetts Indemnity and Life Insurance Company – and by 1982, the company had gone public and started trading its stock on the NASDAQ market.
The company takes more of an educational approach, and in addition to insurance coverage, it also focuses on educating its prospects and customers. For instance, the company’s complimentary Financial Needs Analysis asks some important questions to pinpoint exactly where an individual or family is on their goals, and then it suggests various financial solutions that fit both their needs and their budget.
There are currently three components to Primerica’s life companies. These include the following:
Primerica Life Insurance Company
Primerica Life Insurance Company of Canada
National Benefit Life Insurance Company
Primerica’s products are offered through independent representatives, many of whom work on a part-time basis. Over time, Primerica has earned numerous awards and accolades, including being named to the 2015 Forbes list of America’s 50 Most Trustworthy Financial Companies. The company has it main headquarters in Duluth, Georgia.
Primerica Life Insurance Review
Today, Primerica is a leading provider of term life insurance in the industry. The company pays out an average of $3.5 million in benefit claims every day – and more than 90 percent of these allegations are paid out within 14 days of the claim being submitted. Currently, Primerica serves more than 4.3 million customers and policy holders.
The company currently has more than $728 billion of life insurance in force. A significant portion of the policies that are sold via Primerica agents are done so using the “Buy Term Invest the Difference” philosophy. This alludes to having clients purchase affordable life insurance, and use the remainder of their funds (that may have been spent on more expensive permanent insurance protection) to invest in mutual funds and other appropriate investments for the client.
Using this concept, Primerica believes that people should look at purchasing life insurance in the same manner that they view buying auto, health, or home owner’s insurance – in other words, maximize the amount of the coverage and invest the difference. Doing so can provide individuals and families the ability to accumulate more money, and in turn, live a stress-free retirement in the future.
Certainly, one of the key advantages of the term life insurance products that are offered through Primerica is the lower rates (as compared to a comparable permanent life insurance policy). While an insured can get a nice amount of coverage for a reasonable rate, especially if they are young and in good health at the time of application, it is important to keep in mind that term life insurance is only issued for a set period, such as ten, fifteen, twenty, or thirty years. Then, once the initial policy has expired, it will be required that the insured renew the policy if they want to keep coverage in force. This, however, will typically be at a much higher premium rate, given the insured’s then-current older age.
However, for those who are seeking a way to cover “temporary” needs, such as the payoff of a mortgage and ensuring that a child or grandchild has enough money to attend college in the future – then a term life insurance policy could be a viable option.
Insurer Ratings and Better Business Bureau (BBB) Grade
Due to its robust and stable financial footing, and the timely way it pays out claims to its policy holders, Primerica has earned high ratings from the insurer rating agencies. This includes an A+ (Superior) by A.M. Best Company, of which less than 20 percent of life companies meet this standard.
Also, Primerica has been an accredited company via the Better Business Bureau (BBB) since January 1, 1980. The company has been provided with a grade of A+ by the BBB, on a scale of A+ to F.
Over the last three years, Primerica has closed out a total of 140 customer criticisms through the Better Business Bureau (12 of which were closed out within the past twelve months). Of the total 140 customer complaints, 77 of them focused on problems with the company’s products and services, 33 focused on billing and collection issues, and the other 30 had to do with advertising and sales issues.
Life Insurance Coverage Offered Through Primerica
Primerica offers straightforward and affordable term life insurance coverage. Many of the policies that are sold by this company offer renewal options, so that the insured may continue coverage once the initial period of the policy has been surpassed.
There are many different ways in which policy holders may structure their insurance coverage through Primerica, as the company offers individual riders and add-ons like terminal illness benefit, waiver of premium, and increasing benefit riders.
Primerica offers value through their unique approach to buying life insurance. Its primary life insurance offerings include the TermNow and Custom Advantage plans. Both options offer guaranteed insurability to the insured’s age 95, as well as a terminal illness benefit, industry leading renewal options, affordable renewal rates, and the flexible use of riders that can help with increasing the coverage and / or better “customizing” the policy to better fit the insured’s needs.
Other Products and Services Available Via Primerica Insurance Company
In addition to term life insurance coverage, Primerica also offers several other products and services that can provide solutions to its clients. These include:
Investments – Primerica offers mutual fund investments so that clients can put away money for the future. In many cases, clients may have the option of either investing a lump sum, or dollar cost averaging whereby they invest a certain amount of money on a regular basis over time.
Auto Insurance Coverage – Primerica offers auto insurance coverage through the Primerica Secure Referral Program. Here, clients can obtain competitive rates in ten minutes or less, and most individuals will qualify for this coverage.
Home Owners Insurance Coverage – As with the auto insurance coverage, the home owners insurance coverage that is offered via Primerica is done through the Primerica Secure Referral Program, which can make it easy for individuals to find out the quote they are eligible for, and to move forward if it is the plan they choose.
Long Term Care Insurance – Primerica also offers long-term care insurance coverage via some of the oldest and most experienced companies in the long term care insurance market place. Having this coverage can help clients to ensure that their other assets and savings are secure and in place for their originally intended purpose.
Pre-Paid Legal Services – While many people may need the services of a lawyer, not everyone can pay the high fees that attorneys are known for charging. With legal insurance protection, though, the playing field is leveled. By having a legal insurance plan, clients can access a plethora of different services, such as will creation, legal consultation, motor vehicle-related benefits, durable powers of attorney, IRS audit assistance, and probate benefits.
Identity Theft Defense – Today, identity theft is the fastest growing crime – which puts everyone in harm’s way when it comes to having their identity stolen. By having identity theft protection, though, if an incident occurs, the client may be covered from a financial perspective, as well as via a long list of other support services.
Debt Reduction / Payoff Solutions – The debt solutions that are offered through Primerica can help individuals and families to get on the road to debt freedom. The Primerica Debt Watchers product allows clients to use the information that is contained in their Equifax Credit Report to put together a simple to understand plan towards paying off their debt. This differs from many of the other debt relief products that are found in the market place today because it doesn’t just limit clients to seeing debts on their credit report, but rather to create an overall plan for becoming debt free.
Also, in addition to the other educational solutions and concepts that may be provided include the following:
High Cost of Waiting
Pay Yourself First
Theory of Decreasing Responsibility
Rule of 72
Power of Compound Interest
Debt Stacking
Being out of debt, and well protected with life insurance and other coverage, can make clients’ lives much easier.
How to Get the Best Life Insurance Rates with Primerica Insurance Company
If you are seeking the best rates on life insurance through Primerica – or from any other life insurance carrier – then it is recommended that you work in conjunction with an independent life insurance agency or broker. In doing so, you can compare different life insurance policies, companies, and premium prices – and from there, you can choose which one will be the greatest for you.
When you are prepared to proceed with finding out the best coverage option for you, we can offer support. We are an independent life insurance brokerage, and we work with many of the best life insurers in the market place today. We can get you all the necessary details needed to make a well-informed life insurance coverage buying decision. We can do so for you very swiftly, simply, and conveniently – all from your computer – and without you having to meet in person with a life insurance agent.
We understand that the process of purchasing a life insurance policy can seem a tad bit overwhelming. There are many different variables and components you need to consider while choosing the right coverage for your needs. But there is good news. This process can be so much easier when you are working with an ally on your side who can point you in the right direction. So, contact us today – we’re here to help.
Are you tired of being broke? It’s been a long time since I’ve been broke, but I can still remember exactly what it felt like. I can picture all the ugly details of the way I used to struggle; the empty bank account, the awkward moments, the feelings of despair…. And honestly, one particularly awkward conversation with my sister still plays clearly in my mind to this day:
“Hey sis, I’m coming into town this weekend,” she said innocently. “Maybe we could go grab dinner.”
“Ummm, let me think about that for a second.” I struggled to find a tactful way to tell her that I couldn’t afford it.
It’s been about ten years since then, but at the time I was 22 years old and flat broke. A series of bad decisions meant that I was trapped in a desperate situation that felt nearly impossible to get out of. And although I was going to school part time, I was living off a full-time job that only paid a whopping $9.15 an hour. Oh, and it gets worse.
Related >> Financial advice to my younger self
Bad Decisions Have Consequences
Have I ever mentioned that I once bought a $22,000 car while making just a little over minimum wage? The resulting $500 monthly car payment meant that almost half of my take home pay was being spent on transportation. And by the time I realized what I had done, it was much, much too late. Since I had always had wonderful credit, I refused to let a car repossession ruin everything in one fell swoop. I was (and still am) stubborn. So, instead of letting the car go, I struggled. This often meant that I didn’t have the money to put gas in my car or to go to the doctor. And I certainly didn’t have the money to go out to eat with my sister.
Related >> The best way to buy a new car
“Sorry, I don’t have the money to go out to dinner,” I said with shame and emotion I may never forget.
“You can’t afford to go to Applebees?!”
<insert awkward silence here>
I could tell by my sister’s tone that she thought it was ridiculous that I couldn’t afford to eat at the cheesy neighborhood bar & grill. And honestly, I thought it was ridiculous too. Living so close to my means meant that I was always just one step away from disaster. One day off work, one prolonged sickness, or one unfortunate incident had the potential to leave me completely desolate. I knew that I had to change something. Unfortunately, I struggled to figure out where to start.
The Truth About Being Broke
Shortly after realizing I couldn’t afford to eat at Applebee’s, I learned the truth about being broke. As much as I didn’t like it, I was going to have to make some drastic changes in order to improve my situation. So, I sucked it up and moved back in with my parents. As sad and pathetic as that must’ve looked to outsiders, I knew that this was my chance to get on solid financial footing. Since I no longer had to pay for living expenses, I used the opportunity to start paying additional car payments. I also began cleaning houses on the side while I went to school. I would often make $1000 or even $1500 payments on that stupid car, and I felt a sense of victory each and every time. It became a matter of principle. Every inch of my being wanted to pay off the darn thing, and I was itching to mail in that last and final payment. Fortunately, it was only a matter of time.
After a year or so at home, my car was completely paid off, and I pledged to drive it into the ground. Well, I ended up owning it for seven years before the events of getting married and having my first child necessitated a family-friendly (used) minivan. However, I still learned an important lesson from the whole ordeal. When I finally sold it, I was shocked to learn that it was only worth $2,500. I couldn’t believe it! I cringed at the thought of all I had given up for that car. After all, I had just spent several years of my life living like a pauper to own a car that lost 90 percent of its value in seven years. And, for what? The unfortunate truth is that I did it for no reason at all, except perhaps the opportunity to learn a lesson that I may never have learned otherwise.
What I Learned From Being Broke
Being broke gave me an entirely different perspective on cash flow, debt and my own financial well-being. I learned that there was a big difference between looking like you have money and actually having money. I also learned about living within my means and the real-life consequences of unplanned purchases. And most importantly, I became willing to do anything and everything to make sure that I was never broke again. Once I was out of debt, I pledged to never let that happen again. I promised to rise above my situation and start with a clean slate. And I did.
Of course, things haven’t gone perfectly since then. As I’ve written about many times before, my husband and I took the concept of lifestyle inflation to a whole new level in the early years of our marriage. Fortunately, we’ve reigned things in over the past few year years, and we’re now building wealth like never before. We’re debt-free aside from a small mortgage and we’re hell-bent on staying that way for eternity. And even though I’ve strayed several times since becoming an adult, some of the lessons from that part of my life have stuck with me.
Related >> Getting rich slowly on your own terms
Here’s what I learned from being broke:
Don’t rely on one income stream. I was never going to get ahead while relying on one full-time job for my entire livelihood. In fact, I never really started making progress against my debt until I started picking up cleaning jobs on the side. Sure, cleaning houses wasn’t much fun. But the truth is, the extra income that it brought in completely altered my financial situation over the course of a few years. Now that I’m older, I still strive to have several streams of income coming in. I started a profitable blog with my husband and have secured a multitude of part-time jobs that create a full-time living. I’ve also diversified my investments as much as possible including the acquisition of rental properties. I’ve learned that having one “job” means that you’re only one step away from not having a job at all.
Only you can solve your problems. As I look back, I realize that I would probably be much better off if I had filed bankruptcy and taken the car back to the dealership. I could’ve easily bought an old beater to drive around. It would’ve taken time, but I would have eventually restored my credit rating back to its former glory. Although that sounds tempting, I know that I wouldn’t be where I am now if I had chosen that path.
Live below your means. In retrospect, I now realize that spending half of my income on transportation is absolutely ridiculous. What was I thinking? Unfortunately,I wasn’t. Amazingly, I never once crunched the numbers to see what the real cost of buying that vehicle would be. Now that I’ve been broke, I realize how important it is to live below my means. And now that I make more money, I choose to live much further below my means that I really need to.
Life After Broke
The truth about being broke is that it can be exhausting and demoralizing. And although that part of my life caused a lot of heartache and embarrassment, I’m so glad that I was able to learn all of those lessons firsthand. Now that I’m on the other side, I use those experiences as motivation to continue my quest for financial independence and security. And now when someone calls to ask me to dinner, I have a choice. And when I say no, it’s not because I don’t have ten dollars in my bank account or because I’m saving to pay my electric bill. It’s because I’ve been broke and I want to make sure that I’m never broke again.
Have you ever been flat broke? If so, what did you learn from it?
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46k salary is a solid hourly wage when you think about it.
When you get your first job and you are making just above minimum wage making over $46000 a year seems like it would provide amazing opportunities for you. Right?
The median household income is $67,521 in 2020 which decreased by 2.9% from the previous year (source). Think of it as a bell curve with $68K at the top; the median means half of the population makes less than that and half makes more money.
The average income in the U.S. is $48,672 for a 40-hour workweek; that is an increase of 4% from the previous year (source). That means if you take everyone’s income and divided the money evenly between all of the people.
But, the question remains can you truly live off 46,000 per year in today’s society since it is below both the average and median household incomes? The question you want to ask all of your friends is $46000 per year a good salary.
In this post, we are going to dive into everything that you need to know about a $46000 salary including hourly pay and a sample budget on how to spend and save your money.
These key facts will help you with money management and learn how much per hour $46k is as well as what you make per month, weekly, and biweekly.
Just like with any paycheck, it seems like money quickly goes out of your account to cover all of your bills and expenses, and you are left with a very small amount remaining. You may be disappointed that you were not able to reach your financial goals and you are left wondering…
Can I make a living on this salary?
$46000 a year is How Much an Hour?
When jumping from an hourly job to a salary for the first time, it is helpful to know how much is 46k a year hourly. That way you can decide whether or not the job is worthwhile for you.
$46000 a year is $22.12 per hour
Breakdown Of How Much Is 46k A Year Hourly
Let’s break down how that 46000 salary to hourly number is calculated.
For our calculations to figure out how much is 46K salary hourly, we used the average five working days of 40 hours a week.
Typically, the average workweek is 40 hours and you can work 52 weeks a year. Take 40 hours times 52 weeks and that equals 2,080 working hours. Then, divide the yearly salary of $46000 by 2,080 working hours and the result is $22.12 per hour.
46000 salary / 2080 hours = $22.12 per hour
Just above $22 an hour.
Key Points….
That number is the gross hourly income before taxes, insurance, 401K, or anything else is taken out. Net income is how much you deposit into your bank account.
You must check with your employer on how they plan to pay you. For those on salary, typically companies pay on a monthly, semi-monthly, biweekly, or weekly basis.
Just an interesting note… if you were to increase your annual salary by $5K to $51000 a year, it would increase your hourly wage to almost $25 an hour – a difference of $2.40 per hour.
To break it down – 51000 salary / 2080 hours = $24.52 per hour
That difference will help you fund your savings account; just remember every dollar adds up.
How Much is $46K salary Per Month?
On average, the monthly amount would be $3,833.
Annual Salary of $46000 ÷ 12 months = $3833 per month
This is how much you make a month if you get paid 46000 a year.
$46k a year is how much a week?
This is a great number to know! How much do I make each week? When I roll out of bed and do my job of $46k salary a year, how much can I expect to make at the end of the week for my effort?
Once again, the assumption is 40 hours worked.
Annual Salary of$46000/52 weeks = $884 per week.
$46000 a year is how much biweekly?
For this calculation, take the average weekly pay of $884 and double it.
This depends on how many hours you work in a day. For this example, we are going to use an eight-hour workday.
8 hours x 52 weeks = 260 working days
Annual Salary of$46000 / 260 working days = $177 per day
If you work a 10 hour day on 208 days throughout the year, you make $221 per day.
$46000 Salary is…
$46000 – Full Time
Total Income
Yearly Salary (52 weeks)
$46,000
Monthly Wage
$3833
Weekly Pay (40 Hours)
$884
Bi-Weekly Pay (80 Hours)
$1769
Daily Wage (8 Hours)
$177
Daily Wage (10 Hours)
$221
Hourly Wage
$22.12
Net Estimated Monthly Income
$2,926
Net Estimated Hourly Income
$16.89
**These are assumptions based on simple scenarios.
46k a year is how much an hour after taxes
Income taxes is one of the biggest culprits of reducing your take-home pay as well as FICA and Social Security. This is a true fact across the board with an all-salary range up to $142,800.
When you make below the average household income, the amount of taxes taken out hurts your hourly wage.
Every single tax situation is different.
On the basic level, let’s assume a 12% federal tax rate and a 4% state rate. Plus a percentage is taken out for Social Security and Medicare (FICA) of 7.65%.
So, how much an hour is 46000 a year after taxes?
Gross Annual Salary: $46,000
Federal Taxes of 12%: $5,520
State Taxes of 4%: $1,840
Social Security and Medicare of 7.65%: $3,519
$46k Per Year After Taxes is $35,121
This would be your net annual salary after taxes.
To turn that back into an hourly wage, the assumption is working 2,080 hours.
$35121 ÷ 2,080 hours = $16.89 per hour
After estimated taxes and FICA, you are netting $35,121 per year, which is $10,879 per year less than what you expect.
***This is a very high-level example and can vary greatly depending on your personal situation and potential deductions. Therefore, here is a great tool to help you figure out how much your net paycheck would be.***
In addition, if you live in a heavily taxed state like California or New York, then you have to pay way more money than somebody that lives in a no tax state like Texas or Florida. This is the debate of HCOL vs LCOL.
Thus, your yearly gross $46000 income can range from $31441 to $36961 depending on your state income taxes.
That is why it is important to realize the impact income taxes can have on your take home pay. It is one of those things that you should acknowledge and obviously you need to pay taxes. But, it can also put a huge dent in your ability to live the lifestyle you want on a $46,000 income.
46k salary lifestyle
Every person reading this post has a different upbringing and a different belief system about money. Therefore, what would be a lavish lifestyle to one person, maybe a frugal lifestyle to another person. And there’s no wrong or right, it is what works best for you.
One of the biggest factors to consider is your cost of living.
In another post, we detailed the differences between living in an HCOL vs LCOL vs MCOL area. When you live in big cities, trying to maintain your lifestyle of $46,000 a year is going to be much more difficult because your basic expenses, housing, transportation, food, and clothing are going to be much more expensive than you would find in a lower cost area.
To stretch your dollar further in the high cost of living area, you would have to probably live cheap and prioritize where you want to spend money and where you do not. Whereas, if you live in a low-cost of living area, you can live a much more lavish lifestyle because the cost of living is less. Thus, you have more fun spending left in your account each month.
As we noted earlier in the post, $46,000 a year is below the average income that you would find in the United States. Thus, you have to be wise in how you spend your money.
What a $46,000 lifestyle will buy you:
If you are debt free and utilize smart money management skills, then you are able to enjoy the lifestyle you want.
Have some fun money in your budget.
Know being frugal green is helpful to stretch your budget.
You are able to rent in a decent neighborhood in LCOL and maybe a MCOL city.
You should be able to meet your expenses each and every month.
Participate in the 200 envelope challenge.
Ability to make sure that saving money is a priority, and very possibly save $3000 in 52 weeks.
When A $46,000 Salary Will Hold you Back:
However, if you are riddled with debt or unable to break the paycheck to paycheck cycle, then living off of 46k a year is going to be pretty darn difficult.
There are two factors that will keep holding you back:
You must pay off debt and cut all fun spending and extra expenses.
Break the paycheck-to-paycheck cycle.
It is possible to get ahead with money!
It just comes with proper money management skills and a desire to have less stress around money. That is a winning combination regardless of your income level.
$46k Salary to Hourly
We calculated how much $46,000 a year is how much an hour with 40 hours a week. But, more than likely, you work more or fewer hours per week.
So, here is a handy calculator to figure out your exact hourly salary wage.
$46K a year Budget – Example
As always, here at Money Bliss, we focus on covering our basic expenses plus saving and giving first, and then our goal is to eliminate debt. The rest of the money leftover is left for fun spending.
If you want to know how to manage a 46k salary the best, then this is a prime example for you to compare your spending.
You can compare your budget to the ideal household budget percentages.
recommended budget percentages based on $46000 a year salary:
Category
Ideal Percentages
Sample Monthly Budget
Giving
10%
$268
Savings
15-25%
$690
Housing
20-30%
$1052
Utilities
4-7%
$134
Groceries
5-12%
$288
Clothing
1-4%
$23
Transportation
4-10%
$153
Medical
5-12%
$192
Life Insurance
1%
$10
Education
1-4%
$10
Personal
2-7%
$31
Recreation / Entertainment
3-8%
$77
Debts
0% – Goal
$0
Government Tax (including Income Tatumx, Social Security & Medicare)
15-25%
$907
Total Gross Monthly Income
$3833
**In this budget, prioritization was given to basic expenses and no debt.
Is $46000 a year a Good Salary?
As we stated earlier if you are able to make $46,000 a year, that is a decent salary. You are making more money than the minimum wage and close to double in many cities.
While 46000 is a good salary starting out in your working years. It is a salary that you want to increase before your expenses go up or the people you provide for increase.
However, too many times people get stuck in the lifestyle trap of trying to keep up with the Joneses, and their lifestyle desires get out of hand compared to their salary. It is okay to be driving around a beater car while you work on increasing your salary.
This $46k salary would be considered a lower middle class salary. This salary is something that you can live on if you are wise with money.
Check: Are you in the middle class?
In fact, this income level in the United States has enough buying power to put you in the top 95 percentile globally for per-person income (source).
The question you need to ask yourself with your 46k salary is:
Am I maxed at the top of my career?
Is there more income potential?
What obstacles do I face if I want to try to increase my income?
In the future years and with possible inflation, in many modest cities 46k a year will not be a good salary because the cost of living is so high, whereas these are some of the cities where you can make a comfortable living at 46000 per year.
If you are looking for a career change, you want to find jobs paying at least $52000 a year.
Is 46k a good salary for a Single Person?
Simply put, yes.
You can stretch your salary much further because you are only worried about your own expenses. A single person will spend much less than if you need to provide for someone else.
Learn exactly what is a good salary for a single person today.
Your living expenses and ideal budget are much less. Thus, you can live extremely comfortably at $46000 per year.
And… most of us probably regret how much money wasted when we were single. Oh well, lesson learned.
Is 46k a good salary for a family?
Many of the same principles apply above on whether $46000 is a good salary. The main difference with a family, you have more people to provide for than when you are single or have just one other person in your household.
The costs of raising children are high and will steeply cut into your income. As you can tell this is a huge dent in your income, specifically $12,980 annually per child.
That means that amount of money is coming out of the income that you earned.
So, the question really remains can you provide a good life for your family making $46000 a year? This is the hardest part because each family has different choices, priorities, and values.
More or less, it comes down to two things:
The location where you live in.
Your lifestyle choices.
You can live comfortably as a family on this salary, but you will not be able to afford everything.
Many times when raising a family, it is helpful to have a dual-income household. That way you are able to provide the necessary expenses if both parties were making 46000 per year, then the combined income for the household would be $92,000. Thus making your combined salary a very good income.
Learn how much money a family of 4 needs in each state.
Can you Live on $46000 Per Year?
As we outlined earlier in the post, $46000 a year:
$22.12 Per Hour
$177-221 Per Day (depending on length of day worked)
$884 Per Week
$1769 Per Biweekly
$3833 Per Month
Next up is making $50000 a year.
Like anything else in life, you get to decide how to spend, save and give your money.
That is the difference for each person on whether or not you can live a middle-class lifestyle depends on many potential factors. If you live in California or New Jersey you are gonna have a tougher time than in Oklahoma or even Texas.
In addition, if you are early in your career, starting out around 38,000 a year, that is a great place to be getting your career. However, if you have been in your career for over 20 years and still making $46k, then you probably need to look at asking for pay increases, picking up a second job, or finding a different career path.
Regardless of the wage that you make, if you are not able to live the lifestyle that you want, then you have to find ways to make it work for you. Everybody has choices to make.
But one of the things that can help you the most is to create a biweekly budget to make sure you stay on track.
Learn exactly how much do I make per year…
One of the best ways to improve your personal finance situation is to increase your income. Here are a variety of side hustles that are very lucrative. With time and effort, you can start enjoying the lifestyle you want.
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Last Updated on February 25, 2022 by Mark Ferguson
Buying one rental property may not make you a ton of money right away. However, rentals can be an amazing investment when held for the long-term and when multiple properties are purchased. There is also the opportunity to buy larger commercial or multifamily properties, which can increase returns as well. With a good rental property, you should be making money every month (cash flow); you should make money as soon as you buy by getting a great deal; you will have fantastic tax advantages, you can use financing which greatly reduces the amount of cash needed; and the property value and rents will most likely go up in value over time.
Rental properties have been a great investment for me. I make more than $100,000 a year from the cash flow on my rental properties after all expenses including mortgages, property management, maintenance, and vacancies. I now have 20 rental properties which are a mix of residential and commercial. I bought my first rental property in December of 2010 for $97k. I started with residential properties but now buy almost all commercial, including a 68,000-square-foot strip mall in 2018.
You cannot buy just any property and turn it into a rental if you want to make a lot of money. You have to buy properties below market value with great cash flow to be a successful rental property owner. Not only do I make money every month from my rentals with minimal work, but my rentals have also increased my net worth thanks to buying below market value and appreciation (I don’t like to count on appreciation, but it is a nice bonus). This is not just a hypothetical article. I have owned rentals for many years, kept track of their returns, and written many articles about what I have learned.
The cool thing about real estate is while I have more than $6,000,000 worth of rental properties, it did not take millions of dollars to buy them.
Why did I choose rentals?
One of my passions is automobiles. I purchased a 1986 Porsche 928 a few years ago, and I absolutely love that car. I also have a 1999 Lamborghini Diablo, a 1981 Aston Martin V8, a 1998 Lotus Esprit Twin Turbo, and a few other cars. In my early 20s, I never thought I could afford any of these cars in my early. However, I started to make decent money as a real estate agent in my mid to late 20s. The problem was I was not saving much money. I just kept spending it. I knew if I ever wanted to get ahead in life and be able to afford these cars, I would have to invest the money I was making. I researched everything I could and decided rental properties were the best investment. I worked very hard to save money to buy my first rental.
As soon as I started buying rentals, I could see the fruits of my labor. I was making money every month from rent, I made money as soon as I bought the house because I bought it below market value, and it was forcing me to save money. I wanted to buy as many as I could, and I knew with steady money coming in every month from the rentals I could someday feel comfortable buying expensive cars.
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Why are rentals a good investment?
Not all properties are a good rental, but if you can find properties that are, they can be an amazing investment. A rental property should have a number of attributes
Cash flow
Good rentals will make money every month after paying all expenses. The expenses should include mortgage, taxes, insurance, maintenance, vacancies, and property management. The cash flow is the rent minus all of these expenses. Some people like to shoot for different numbers, but I always liked to see $400 to $500 in cash flow per property.
Buy below market
I get a great deal on every rental I buy. I don’t want to pay retail when I can pay to 20% to 30% less than retail. It is not easy to get great deals, but it is possible. On almost every house I have ever bought, I got a great deal. That instantly increases my net worth, makes me more cash flow, and looks better on my balance sheet for banks.
Leverage
You can put as little down as 20 percent when buying rentals. You can put even less down when buying a property as an owner occupant and then turning the property into a rental.
Tax advantages
Most expenses on rental properties are deductible or depreciable. You can also depreciate the structure of a rental property, which means you can save thousands of dollars each year on your taxes. You can also complete a 1031 exchange on rentals to avoid capital gains taxes.
Appreciation
Many people only talk about housing prices when comparing rentals to the stock market, but appreciation is a bonus. It is not what you are shooting for when buying a rental property because no one knows for sure if prices will go up or when.
It is not easy to find rental properties that are a good investment. It takes me months to find great deals that make over $500 a month like mine typically have, and they are not available in every market. My typical rental property used to cost between $80,000 and $130,000, and it rented for $1,200 to $1,500 a month. I put 20 percent down on the properties and finance the rest with my portfolio lender. I usually end up spending $25,000 to $35,000 in cash to buy each rental property. Cash flow is not the only benefit of rental properties. I slowly pay down the mortgage every month; I have great tax advantages; and they will most likely appreciate.
I am able to save that much cash from each rental property because I make a very good living as a real estate agent as well as from fixing and flipping houses. I like to have nice cars and a nice house, but I always make sure I am saving and investing money first. There are ways to buy rental properties with little money down, but I think you will get further ahead in life by saving as much as possible and investing wisely.
How much do you need to buy a rental?
I go over the exact cost of a rental property here, but let us assume that it costs $30,000 to purchase and repair one rental. You do not have to invest $90,000 a year to buy three rentals a year because you can begin refinancing rental properties after you own them for a year and take cash out to invest in more rentals. You can also save the cash flow from your rental properties to buy more rental properties. I usually buy my properties for about $100,000, with a four percent interest rate and 20 percent down, which leaves a payment of $381 for principal and interest. Those numbers combined with rents from $1,200 to $1,500 a month leave me with at least $500 a month in income from my rental properties.
How much should a rental property cash flow?
It is not easy to make $500 a month in cash flow from a single rental property. I detail how to calculate cash flow here, and I created a cash flow calculator to help people determine cash flow. Cash flow is not the rent minus the mortgage payment: you must consider many other factors. My rents range from $1,250 to $1,600 a month, and my mortgage payments range from $450 to $650 a month. I have to account for maintenance and vacancies on my rental properties, which leaves me with about $500 in profit each month. I buy my properties for $80,000 to $130,000 and usually make quite a few repairs before I rent them out.
What are the long-term returns for someone with little money?
Investing in rental properties can provide fantastic returns when you have a lot of money to invest. Even if you have little money, you can invest in rental properties. I am going to walk through how many years it will take someone to accumulate one million dollars from investing $7,500 a year into long-term rental properties.
The more money you make and save, the easier it is to make one million dollars from rentals. However, even people who do not make a lot of money can get there, although it may take a little longer. I am going to write out this plan assuming someone has a $75,000 salary and can save 10 percent of their income a year.
When you first start out, $7,500 does not go very far, and it takes a lot of money to buy an investment property. Luckily, there are many ways to buy a rental property with much less money if you are an owner occupant or use some of the techniques I discuss here. In the first year, the best bet is to buy a HUD home or REO that needs some work but will still qualify for an FHA or conventional loan. The key to my strategy is buying houses below market value. HUD or REO houses are a great way to do that. We will assume the investor can buy a house similar to the ones I purchase in my area, which cost around $100,000. There are closing costs that the buyer is charged when they get a loan, but you can ask the seller to pay most of your costs.
Buying as an owner occupant year one
The first step is to buy a house. But you cannot buy just any house; you want to buy a house as an owner occupant that you can later turn into a rental. You also want to get a great deal on a house to gain instant equity. To get a great deal on a house, you may have to buy one that needs some repairs. With a HUD home, you can roll $5,000 of the repairs needed into the loan with the FHA escrow and only put 3.5 percent down for the down payment. If the home needs a lot of work, you could use an FHA 203K loan to roll more repairs into the loan. We will assume this house needs $4,000 in work to qualify for a loan, and you bought a HUD home with the costs rolled into the loan. With an FHA loan, you have to pay mortgage insurance every month and an upfront mortgage insurance premium (which could be $200 or more a month).
With a conventional loan, mortgage insurance is much lower than FHA, and you might be able to remove it after two years. However, you may not be able to roll the repairs into the loan, but you could get the seller to fix some items before closing. If the repairs are cosmetic items, you should be able to get a loan without making the repairs before closing. I will assume the total cash needed to close on this hypothetical house is about $5,000. Hopefully, this house was bought below market value because it needed some repairs and was a foreclosure. Once the house is repaired, it should be worth around $125,000.
Since you bought this house as an owner-occupant, you have to live in the home for at least one year.
Year two
After one year, you have gained about $22,000 in net worth; $125,000 – $100,000 purchase price – $4,000 repairs rolled into the loan + $1,000 gained in equity pay down. In year one, no rent was collected because the home was owner-occupied to get a low down payment. In year two, the house is rented out and you can buy another owner-occupied home using the same strategy. When you try to buy a home right away, you won’t be able to count the rent from the first house as income right away. It is best to buy houses priced low enough that you can qualify for two houses at once to make this work. Otherwise, you may have to wait up to a year for the rent to count as income and can buy again.
You can only have one FHA mortgage at a time, so this time you have to get a conventional loan with 5 percent down. In the second year, you have saved up another $7,500 from your job and have $2,500 left over from the first year for a total of $11,500 saved. The second home also costs $100,000, and the seller pays 3 percent closing costs. The down payment needed is $5,000, and $5,000 in repairs are needed on this second house. The total cash needed to buy an owner-occupied home is $10,000 and the repaired value is $125,000.
The first house is rented out for $1,300 a month (which I will do all the time on a $100,000 purchase), and the payment is $550 with taxes and insurance. Add vacancy, maintenance, mortgage insurance and we’ll assume $300 a month in positive cash flow.
Year Three
In the second year, you made $25,000 from buying house number two (equity) and made $3,600 from cash flow. You also made $2,500 from equity pay down on both loans (I am assuming each loan will pay down $500 more each year). In year two, all the savings was used from year one, but you saved $7,500 and made $3,600 in cash flow for a total of $11,100 savings. Buy another house using an owner-occupied loan and use $10,000 of cash. Net worth increases to $53,100 after adding the equity pay down, cash flow and equity gained in the purchase of a new home.
The second house is rented out again using the same figures, although the mortgage insurance may be less because we are using a conventional loan instead of an FHA loan.
Year Four
Another house is bought below market value in year four. Cash flow increases to $7,200 a year plus $1,100 in previous savings and $7,500 saved this year. You now have $17,300 cash saved up before we subtract another $10,000 for the purchase of a new house as well as cash for the repairs. Net worth has increased $25,000 on the purchase plus $4,500 in equity pay down. The total net worth increase is now $90,800 for the last four years.
You own four houses and three of them are rented out. At this point, you may be able to remove the mortgage insurance on the conventional loans that have been held for two years, but I am not going to in my calculations to keep things simple and conservative.
Year Five
In year five, we repeat the entire process again and come up with the following numbers. Cash flow increases to $10,800 and previous savings $5,800 and $7,500 saved up equals $25,600 saved cash. The investor purchases another property and uses $10,000 in cash to leave $15,600 in his cash account. Net worth increases by $7,000 for equity pay down: $10,800 for cash flow and $25,000 for the purchase of a new property. The total increase in net worth is now $133,600.
You may have noticed this investor just mortgaged his fifth house. For many people, getting a loan on more than four houses is very difficult. However, the investor is buying houses as an owner occupant, which makes it much easier to get a loan.
Year Six
The same process is repeated all over again. Cash flow is $14,400, previous cash is $14,100, savings equals $7,500 for $37,500 cash minus $10,000 for a new purchase. The investor has $27,500 left in his bank account. He increases his equity pay down to $13,500, has an increase of $25,000 in net worth from a purchase, and an increase in net worth from cash flow of $14,400. He now has increased his net worth by $186,500.
Year seven
In year seven, the seventh house is purchased. Cash in the bank equals $26,000 from previous savings, $18,000 in cash flow, and $7,500 in new savings, which totals $53,000. You are now able to buy two properties this year! Buy another owner-occupied property using $10,000 and an investor-owned property.
To purchase an investment property, we need to put at least 20% down, and we still need to make repairs. We are buying below market value still, so we are going to assume we are adding $25,000 more a year in equity and $3,600 more a year in cash flow. Estimated costs for down payment and repairs is $32,000 to buy an investment property. You have $11,000 of cash left after buying two properties this year. Net worth increased by $60,500 after adding the usual amounts to total $247,000.
Year eight
Year eight is very exciting because we get to add two properties into the mix instead of just one. With the extra houses added, increased cash flow, and continued equity pay down, our net worth increased $98,200 in just one year! Total net worth is now $345,200, and you are making real progress! You have $42,200 saved up after buying another house in year eight as an owner-occupant, so you can buy another investment property, but won’t, because our margins will be too thin with only a couple thousand in savings.
Even though you are still making only $75,000 a year, you increased your net worth by almost $100,000 a year. There are not many people who can increase their net worth by more than they make in a year!
Year nine
In year nine, you are adding $26,500 in equity pay down, $28,800 in cash flow, $25,000 in built-in equity with purchases, for a total net worth increase of $80,300. Your total net worth increase over nine years is now $425,500. You also have $60,000 saved up after paying for one house as an owner occupant, which is enough to buy another investment property, leaving $26,500 cash left over!
Year ten
In year ten, you have enough cash to buy two more properties and have $28,000 in cash left over. Net worth increases by $114,500, bringing us up to a total increase of $540,000.
Year eleven
You can buy two more properties and increase your net worth by $129,200 for a total of $669,200. Cash flow is at $43,200 a year, and there is $36,700 of cash left over after buying two more properties. You could buy a third house this year but decide not to stretch your limits. You need to make sure you have plenty of reserves for the rentals.
Year twelve
This year, you buy three houses because there is $94,600 in cash available. After buying the three houses, there is $22,100 cash left in savings, equity was paid down, and $44,500 and $50,400 in cash flow was generated. Total net worth is now $814,100! You are getting closer to making one million dollars investing in real estate!
Year thirteen
You have increased your net worth by $190,200 this year because you bought three houses last year. The total net worth increase is now $1,004,300! Your actual net worth will be higher than this because I did not calculate savings from your income into the net worth, just the gain from buying rental properties. Cash flow is now $61,200 a year, and you have paid off $54,000 of equity in one year!
You own 16 rental properties which are producing over $60,000 a year! The incredible part is we did not increase the rents at all, even though they are likely to go up over thirteen years. We assumed there was no appreciation, even though there likely will be over that time. Due to the tax advantages of rentals, you are probably taking home as much in passive income from your rentals as you are from your job.
Things we did not consider
This was a very basic calculation for how to make one million dollars investing in rental properties. It would take a book to go through all the variables and possible roadblocks that might come into play. Here are a few items we did not consider, which would have an impact on the time it takes to reach one million dollars in increased net worth.
Inflation will increase the prices of homes and wages as well as rents. While the investor has to pay more for houses each year, he will also be making more and saving more. The biggest factor is the rent increases. His rent on the first houses he buys will increase as time goes on, but his payments will stay the same. His cash flow will increase greatly as time goes on, which we did not account for.
Taxes were not accounted for either because that gets very complicated. The cash flow the investor is making would be income, but the investor could offset that with depreciation from the rental properties. I assumed those two factors even themselves out.
Investment property purchases had 20 percent down, where the owner-occupant purchases had 5 percent down. There should be an increase in cash flow on the investment property purchases because of the lower down payment, but I left them the same to make the math easier.
Refinancing was not considered either, but the investor could easily have refinanced a couple of properties to get more cash out to buy more rental properties. This would have increased cash flow and net worth due to the increased number of properties purchased.
Obtaining more than 4 or more than ten mortgages can be difficult. I am assuming the investor is able to get as many loans as possible with a lender. I can have as many loans as I want with my portfolio lender, but many people cannot. This would be a roadblock once he reached ten financed properties.
Buying owner-occupied properties each year is possible but may not be realistic. Moving thirteen times in thirteen years may put a bit of stress on the family!
I also assume the investor manages his homes himself, which is doable in the beginning but it maybe tough when he gets ten homes or more.
How Did I Build a Rental Property Portfolio
I have 20 rentals now, but I did not buy them overnight. I started in 2010 and slowly bought them over the last 9 years. I bought 1 in 2010, 2 in 2011, 2 in 2012, and kept building from there. I worked very hard to make a great living as a real estate agent, but I also used real estate to buy more rentals.
I bought my first rental by refinancing my personal house and taking cash out of it. I also refinanced some of my rentals along the way so that I would have more capital to buy even more rentals. I was lucky that our market appreciated so much, but I also bought every rental property way below market value, which allowed me to take cash out when I refinanced.
I stopped buying residential rentals in 2015 because the market in Colorado became too expensive. However, I was able to invest in commercial rentals in my area and cash flow on them. There are a lot of different ways to invest in real estate!
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How much have my rentals made me?
I put together some stats to show how much rentals made me after four years of owning them. It has been a few years since then, and things have gotten even better! At the time, I had bought 11 rental properties. After doing some calculating, I discovered my rental properties have appreciated and been bought cheap enough to produce a gain of $600,000 since December of 2010! It is important to remember that net worth is all on paper, and I would not realize $600,000 in profit if I decided to sell all of my rental properties today. I would have to have selling costs, and I would have a large tax bill if I sold my rental properties.
How much equity have I built with rentals?
One thing I have done with every rental property I buy is buying them below market value. I try to buy my properties at least 20 percent below the current value, and if a home needs repairs, I want that rental property worth 20 percent more than the price I paid plus the cost of the repairs. For example; if I buy a rental for $100,000 and it needs $20,000 in work, I want it to be worth $144,000 or more when I am done repairing the home ($100,000 + $20,000 = $120,000 * .20 = $144,000). That means I usually gain at least $20,000 in net worth on every rental property I buy. The 11 rentals I have bought have gained at least $220,000 (I buy many properties at more than 20 percent below market) just by buying homes at the right price.
I also have been lucky that prices have increased significantly in Northern Colorado in the last few years. I would say lucky for the sake of calculating net worth, but the increase in prices has made it harder to buy cheap rental properties with great cash flow. If you want to know how much my houses have appreciated, I broke down each rental and how much money it has made below.
Rental 1
I bought my first rental property for $96,900 on 12/5/2010. At the time I bought it, I knew it was worth at least $125,000, which is not a huge spread between the buy price and fair market value, but the home needed less than $2,000 in repairs.
The house is now worth at least $165,000 and most likely more. I had it appraised earlier this year, and the appraisal was $165,000 and our market values have increased since that time. If the house is worth $165,000, then my net worth increased about $66,000 after you subtract the repairs. The home was rented out for 1,050 a month when I first bought it and now is rented out for $1,400 a month.
Rental 2
I bought rental property number 2 for $94,000 on 10/5/2011. This home needed much more work than number one, and I spent about $15,000 repairing the house. At the time I bought this house, I thought it was worth $140,000 after it was repaired, and this house is now worth around $175,000. That leaves me with a net worth increase of about $66,000 on this property as well.
This house has been rented to my brother-in-law since I have owned it. The rent has been steady at $1,100 the entire time but could be $1,400 to $1,500. My brother-in-law has a house under contract and will be moving soon.
Rental 3
I bought my third rental property for $92,000 on 11/21/2011. This house needed repairs, and I spent about $14,000 getting it ready to rent. At the time I bought this house, I thought it was worth $135,000 fixed up, and this house is now worth around $170,000, which creates a net worth increase of $64,000.
This home has been rented to the same tenants for $1,250 a month, but we just raised the rent this month to $1,300 a month. It would probably rent for $1,400 to $1,500 to a new tenant.
Rental 4
I bought rental property number 4 for $109,000 on 1/25/2012. This home also needed about $14,000 in repairs before it could be rented. At the time I bought this house, I thought it was worth $145,000. This house is one of my most valuable rental properties and is worth $185,000 in today’s market. That leaves a net worth gain of $62,000.
This home was rented for $1,300 up until this year when I rented it to new tenants for $1,500 a month.
Rental 5
I bought rental property number five for $88,249 on 12/14/2012, and it needed more repairs than the others. The market had definitely begun to improve at this point, and finding a home that was under $100,000 was very tough. This home was a good deal, even though it needed $18,000 in repairs. I thought it was worth around $130,000 when I bought it, and I now think it is worth $165,000. That leaves a net worth increase of $59,000.
This home has been rented to the same tenants for $1,200 a month.
Rental 6
I bought rental property number six for $115,000 on 3/7/2013. This house needed about $15,000 in repairs, and I thought the property was worth about $150,000 after it was fixed up when I bought it. It is now worth $170,000, and that leaves a net worth increase of $40,000.
This home was first rented for $1,300 a month until earlier this year it was rented for $1,400 a month.
Rental 7
I bought rental property number 7 for $113,000 on 4/18/2013. This house needed only $9,000 in repairs, and I thought it was worth $155,000 when I bought it. This neighborhood has done great, and the home is now worth $185,000, which leaves a net worth increase of $63,000.
This home has been rented for $1,400 a month since I bought it.
Rental 8
I bought rental property number 8 for 97,500 on 11/18/2013. The home needed $15,000 in repairs, and I thought it was worth $150,000 once fixed up. It is now worth $165,000, and that leaves a net worth increase of $52,000.
This home has been rented or $1,400 a month since I bought it.
Rental 9
I bought rental property number 9 for $133,000 on 2/14/2014. This home only needed $4,000 in work before it was rented, and I thought it was worth $155,000 after it was repaired. I think it is worth $165,000 now, and that leaves a net worth increase of $28,000.
This home is rented for $1,400 a month.
Rental 10
I bought rental property number 10 for $99,928 on 4/13/2014. The home only needed $3,500 in repairs before it was rented, and I thought the home was worth $125,000 when I bought it. I think it is worth about $130,000 now, leaving a net worth increase of $26,500.
This home is rented for $1,250.
Rental 11
I just bought rental property number 11 on 7/24/2014. This house will need about $15,000 in repairs, and I paid $109,318. I think this house is worth $155,000 repaired, leaving a net worth increase of $30,000.
I think this home rents for $1,400 a month.
What is the total gain?
If you add up all these numbers, my total net worth has increased by $556,500, but these numbers do not tell the entire story. I had more costs than I listed when I first bought these houses, but I did not go back through each closing file to get those exact costs. On many of these properties, I had the seller pay some closing costs, which covered much of my buying costs. I also had some carrying costs while I was getting the properties repaired and they were not rented out yet. However, I also did not include any of my cash flow or the money I made on these properties since 2010. I used all of my cash flow to pay off rental property number 1, which added up to over $70,000. That $70,000 in cash flowdefinitely covers all the closing and carrying costs I had on each property and went directly to increasing my net worth by paying off a loan. Speaking of paying down loans, I did not include the equity I have gained over the last 3.5 years by paying down my loans. I have paid down thousands of dollars of loan balances with regular payments on my rental properties.
Net worth is not money in my pocket but what I am worth on paper. Even though it is cool to see this number increase over time, this money is not all readily available. I would have to sell my rental properties to see this money, and I would not see all of it. There would be selling costs when I sell the properties and taxes owed once I sold them. Since I am using the depreciation on the rental properties to save me in taxes, I would have a higher than normal tax bill because I would have to recapture that depreciation.
What about in 2019?
I have 20 rentals that have increased my net worth about $3,000,000 in the last 9 years. I have gotten lucky that Colorado has appreciated like crazy, but they were still awesome deals even without that appreciation. They make me about $13,000 a month after all expenses. The cool part is I have spent less than $350,000 on the properties after refinancing some to take money back out. Talk about an amazing investment!
You can see all my rentals here.
My book on making money with rental properties
I provide a lot of information on my blog and YouTube channel, but I also have written six books. My book Build a Rental Property Empire has been a best-seller for years. It goes over everything I do to find, finance, repair, manage, and even sell my rentals. I also added a commercial chapter to go over that aspect as well. You can find the book on Amazon as a paperback, audiobook, and Kindle. Build a Rental Property Empire: The no-nonsense book on finding deals, financing the right way, and managing wisely.
Conclusion
It can take time to make a lot of money with rentals, but it is possible. Over the years I have bought a 1999 Lamborghini Diablo, a 1998 Lotus Esprit, a 1981 Aston Martin, and more thanks to the rental properties. The rentals have also allowed me to be aggressive with my house flipping business because I know I have that cash flow coming in every month. We flipped 26 houses last year!
By Peter Anderson8 Comments – The content of this website often contains affiliate links and I may be compensated if you buy through those links (at no cost to you!). Learn more about how we make money. Last edited September 26, 2011.
Lending Club has been around for a few years now, and while they and other P2P lending sites got off to a rocky start, I think they’ve started to hit their stride. Lending Club recently announced on their 4th anniversary that they have now originated over $300 million in total loans and paid out over 22 million in interest to investors. So they’re no longer the little engine that could, they’re now becoming the next big thing! Still, there are still those who don’t believe in P2P lending, mostly because they don’t completely understand it.
When I started lending with Lending Club I wasn’t sure what kind of returns I would see, and as such I was pretty cautious with who I lent money to. I was only investing with Grade A and B borrowers to begin with. Since then others have convinced me that investing with some lower grade borrowers is a sound idea, and I’ve seen my returns grow from somewhere in the high 8% range (not too bad) to the point where I’m now pushing 11%.
All I know is 11% net annualized returns are a lot higher than I’d be getting in a high yield savings account. The longer I’ve been using Lending Club, the more comfortable I am with the idea, and the more money I’ll consider putting in.
To start off at the beginning, check out my original review of lending club below:
Check out my original Lending Club review
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Lending Club Returns Above 10.76%
So how are my Lending Club investments currently doing? Here’s a snapshot of my account from earlier today showing that my returns are pushing 11% now.
Net Annualized Return of 10.76%: Up from 10.53% in June, and 10.13% before that. That puts me in the 55th percentile. My returns are higher than 55% and lower than 45% of all investors. So that means I’ve already reached my goal of doing better than 1/2 of other investors. Now to make it better than 75% of other investors!
Number of defaults remains at zero: Despite all odds I’m still showing zero defaults on my account, despite having given out over 100 loans so far. I’m actually surprised I haven’t had at least one or two. I do currently have one loan that is late, however. The funny thing is that once again the late loan is one of the Grade B loans, not one of the lower grade ones. Go figure.
Fourteen loans have been paid off early: Eight were A grade loans, and the other three were C grade loans, two were grade B and one grade E. Looks like grade A loans, while they’re more likely to be paid back, may also be more likely to pay of early – reducing returns.
My account balance still going up: I currently have $2,578.98 in my account, with another $800+ ready to invest. I’ll be the first to admit that the last couple of months I haven’t added many loans as I’ve been distracted by other things. I’ll probably be trying to invest that extra $800 soon though.
I’m still diversified by investing across a large number of loans: I’ve got 106 loans, with no more than $25 in each loan. That way if I do have defaults, while my return may go down, my risk will be minimized. Lending Club noted earlier this month, that 100% of their investors who have invested 800 notes or more had positive returns. Not too shabby, not everyone in the stock market can say that!
So it looks like my strategy I laid out a few months ago of adding more risky C, D and F grade loans is paying off so far.
Risky Loans Still Defying The Odds With Zero Defaults
I mentioned a while back that I was changing my Lending Club investing strategy and starting to invest in more higher risk lower grade loans. The rationale was that you can still find people that are relatively good risks, but who have bad credit. Most of these are going to be loans from people who have high incomes and steady employement, but for one reason or another have had a hiccup in their credit causing them to be lower grade.
I’ve invested in a bunch of these Grade C-E loans over the past year, and since doing so my returns have steadily climbed. I would have expected to see a few defaults in there, but so far I’ve been investing in the riskier loans for about a year now, and none of them have defaulted yet. Would you think some of them will still default despite my early success? Possibly. But I’m hoping my gamble on those with steady jobs and high incomes will mean I wont’ see many defaults.
Here’s where my NAR stands now, getting better every month. Now standing at 10.76%. I’m hoping I can break through that 11% threshold next month!
Lending Club Strategy
Here’s the basic strategy I’ve been using with Lending Club over the past couple of years.
Less than $10,000: I believe I’ll still be sticking with mostly loans below $10,000. Lower amounts mean higher likelihood of payback of the loan.
Zero delinquencies: Again, I may fudge slightly on this one, but I still want it to be very few or zero delinquencies.
Debt to income ratio below 20-25%: I like to invest in loans where the borrowers have a lower DTI ratio, and preferably have higher incomes. I’ll try to keep this as is.
Borrower answers to investor questions: Because of privacy and liability concerns you can no longer ask whatever question you want from borrowers, but only ask from a pre-set list of questions. It’s still good enough for me I think, although I’d prefer being able to ask specific questions.
So that’s what I’m doing with my Lending Club portfolio right now, and how I’m investing.
Not ready to invest, but looking to consolidate debt or pay off a high interest credit card? You might want to consider borrowing from Lending Club. Check out my post on borrowing from Lending Club.
Are you currently investing in Lending Club? How are your returns looking? Tell us in the comments!
You’re great, smart, and people just love you. A little praise has already taken you far in life, and now it’s time to apply it in pricing your home for sale.
What’s wrong with a little self-confidence when attracting a buyer, anyway? Nothing. But watch out.
Here are six things that overconfident home sellers do when pricing their home, and some helpful tips on how to avoid them.
#1: Trust themselves more than they trust the market
If you’ve been on social media sites ever in the past ten years, you might have seen messages to the effect of: “Your worth depends on how much you value yourself,” and “Speak about yourself the way you would about a prized possession.” This advice certainly has merit, but sadly, little value in the pricing of your home.
Houses have value only in the amount that a buyer is willing to pay for them. You can tell yourself your home is worth a million dollars, but statements of self-affirmation will do little to attract a buyer.
#2: They ignore the endowment effect
Studies show that when a person owns something, they mentally set its value at a price much higher than what they personally would be willing to pay for it. This is called the Endowment Effect. Say you have your eye on a carbon frame road bike which sells for $2000, but wait to purchase until you see a sale price of $1800. A year later, you want to sell this bike, which is worth—to you—$2000. But is it worth that? Of course not.
1) You weren’t willing to pay $2000 for it.
2) You got to own it new (or newer) than it is currently.
3) The experience you give the buyer—a garage sales-location versus a brick-and-mortar store—matter.
Homes are similar. Homeowners often value their own home at a price that is substantially higher than what they themselves—let alone the market—would be willing to pay for it. The reasons are the same as the three mentioned above. 1) Sellers want to feel like they are getting a good deal. (But so do buyers.) 2) Every home is older when it goes on sale than it was when it was purchased. 3) The experience of the sale matters, and current homeowners are not necessarily more talented than previous-owners at showing off the home.
#3: Misunderstand that Homes Don’t Go Up in Value, Property Does
Homes are like bikes. The older they are, the more wear-and tear they have. In fact, should you happen to own a rental home, you know that you can write-off the depreciation of the rental annually. This is because, as years goes by, the units which you rent out will eventually need to be remodeled extensively, just to keep them at the same value to renters. It’s even possible for a building to lose so much value that it is a complete loss, like a car that is worth less than the money needed to repair it. A building like this is generally torn down and replaced.
Property, on the other hand, tends to go up in value at a rate that reflects inflation, with the big wild-card being location. If the location in which you purchased becomes more desirable, you will gain equity. If the location becomes less desirable, you will lose equity.
#4: Price Your Home Based on What’s For Sale
Okay, so you’re ready to set your home value based on the market. Good for you. You look at homes on sale similar to yours and set your price to match.
Here’s the problem: The houses staying on the market longest—many of which you noticed specifically because of the lengthy time you’ve had to process that they were on sale—are overpriced.
House, like other retail items, do not always sell at asking price, as you may have noticed when you waited for a sale on the bike. You need to see what homes are selling for, not what over-confident homeowners are asking for. Appropriately-priced home sell quickly in a seller’s market like the one Utah is experiencing, often going under contract in days.
Getting data on purchase prices is trickier glancing at home sale prices, but certainly not impossible. Start with a desktop appraisal, like the one Homie provides free to all its clients. Once you’ve got purchase price info from comparable homes, check out our step-by-step details on setting your price.
#5: They over emphasize the value of their net on the home.
Imagine you fall in love with a house you can only purchase if the home you currently own sells for not a penny under $300,000. So you set that price as your asking price and won’t budge.
Whoa, not so fast. Consider the opposite scenario. A lovely couple wants to buy your property but can only afford to pay $270,000 it, not a penny over. Will you sell it at that? Not if a second family offers $290,000. Just as more than one buyer exists, more than one house is for sale. Buyers will bite on your house if it’s a reasonable deal compared to others. They will not pay an extra $10,000 to do you a favor.
#6: Expect 100% Return on Upgrades
Just as road bikes lose value the instant they’re used, so do flagstone patios, granite countertops and spring maple laminate floors. Even if your upgrades are perfectly marketable, they still depreciate in value over time. In valuing your home, you shouldn’t expect to retrieve more than 80% of your investment.
Bottom line
Setting your price is giving your best guess at what the market will pay, with helpful tools like Homie’s desktop appraisal to guide your thinking. If you set low, you are likely to get multiple offers that may drive up the price of your home as it goes to auction. If you set high, your home will languish on the market without offers until you adjust the price. React to the market and you have a high chance of selling your home in a reasonable amount of time.
If you really want to make more money on the sale of your home, visit Homie to check out our services and technology, which replace real estate agents and don’t come with commissions. Happy home-selling!
Inside: This free printable 100 Envelope Challenge is a great way to start saving money. At the end of the 100 days, you will have saved a total of $5000!
Today, I received an email from a reader, who said, “I struggle with controlling my spending and being able to save.”
That is something I hear over and over. Honestly, we spend because we truly don’t know what to do with our money.
Thus, enter the 100 envelope challenge.
A simple way to save over $5000 in a mere 100 days or about 3.5 months!
For most of us, we realized our spending habits needed work. Like every other month, I would spend money on unnecessary things like clothing and shoes (check!) or expensive meals out for one person (double check!). This way of life is no good if you have anywhere in your budget left over at the end of each month; it’s barely enough to make rent.
The solution? Challenge yourself with a 100 envelope challenge.
I know it sounds like a bit of a stretch, but hear me out: you’ll save $1 to $100 each day. The amount you save in the first month is random, but you can expect to save over $1,000 in just the first month! That’s enough to be excited about, right?!?!
Here are some tips on how to start this awesome money saving journey with my free printable below:
How much money do you save doing the 100 envelope challenge?
The 100 envelope challenge is a great way to save money.
By the end of the challenge, you can expect to save $5050.
That’s because you put away a good chunk of money each and every day. Depending on your budget and spending habits, you may be able to save even more!
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.
Right now, you are wanting a100 envelope challenge box to keep your cash stuffed envelopes.
Here are some great options to make sure you reach your goal.
Photo Credit:
www.etsy.com
This extremely popular handmade item on Etsy is for you!
You get to choose which theme you want your kit to be made from! This extra customization will keep you motivated. All envelopes are laminated and cut by hand.
Don’t want the full kid – just the cute envelopes!
This option is perfect for you! These envelopes are high quality as they are made of superior paper. They will last for use over and over with outstanding durability and sealing.
Plus it won’t expose the content inside.
Make saving money an interesting game! Do the 100 Envelopes Saving Challenge with your spouse or best friend. You can set a goal together, for example, to go someplace or buy something.
Commes with a complete kit and everything you need. Plus each envelope has a motivational quote to keep you going.
Photo Credit:
www.etsy.com
This homemade 100 envelope challenge kit has that personal touch you wanted.
This is a highly rated small and compact box to help you reach your goals!
100 Envelope Challenge Free Printable PDF
The 100 Day Envelope Challenge is a great way to save money over a short period of time. This fun and easy money saving challenge is popular thanks to Tiktok.
The challenge is simple: put a set amount of money into an envelope each day and don’t touch it.
This 100 envelope challenge pdf provides a visual way to track your progress during the 100 envelope challenge.
This will help you stay disciplined with your spending and save more money over time. You can print the PDF template for free, and it’s easy to use. It is simple to use and helps you stay motivated throughout the year.
100 Day Envelope Challenge PDF Template to Print
Here is how you can grab the free printable!
Simply click on the image, which will direct you to our free resource library. Enter your email and you will get a unique password. Check your email and come back and download your free template to print!
FREE PRINTABLE 100 ENVELOPE CHALLENGE PDF
Why You Will Love Saving Money with the 100 Envelope Challenge
The 100 Envelope Challenge is a fun, simple, and stress-free way to start saving more cash.
It is an easier way to save cash than ever before and a great way to learn about budgeting and saving techniques.
Download the 100 envelope challenge free printable today as a way to learn about how to save for short and long-term goals.
You will love saving money with the 100 Envelope Challenge because of the simplicity of this money saving challenge!
More Envelope Saving Challenges:
Additionally, there are many different variations of the challenge that you can do in order to save the money that you need.
50 Envelope Challenge – For those who are beginner savers or with low income, this money saving challenge is perfect to teach yourself how to save money.
100 Envelope Challenge – The most popular envelope challenge. Learn how to complete this 100 envelope challenge and save $5000.
200 Envelope Challenge – This is a spin on the traditional challenge that is easier for many of my readers to complete. Each day you will put between $1 to $50 in an envelope.
Know someone else that needs this, too? Then, please share!!
As a child growing up, I remember my father constantly eating Ramen Noodles in a Styrofoam cup.
It was pretty fascinating that all you had to do was add hot water, and presto, you had a ready to eat meal in a few minutes.
Perfect for an impatient kid!
As I got older I started to notice that the package of Ramen Noodles still existed in our kitchen.
My father had always struggled with money.
He had battled credit card debt and never really made good financial “cents” of his money.
I guess I always just thought that he really liked the cup of Ramen Noodles.
I later found it there was much more to the story.
All Too Familiar Feeling
I remember my first year as a financial advisor. I was meeting with a couple in their early 60s. At the time, I was 24 years old and already started a Roth IRA and was quickly learning the proper ways to invest in your 20s. I remember this couple in particular because while many people get excited about retiring and starting a new venture in their life, with these folks, retirement was nowhere in the near future.
Combined, they had maybe $50,000 saved in their retirement investment accounts combined. Their jobs offered no pensions, so all they had was social security.
I remember looking at this couple, and eerily, I saw similarities with my father. They had no hope of retiring. They had done a horrible job of saving.
The Ramen Noodles Jolt
This meeting instantly made me realize that I did not want to follow in their footsteps.
I knew that I did not want to be in my early 60s and be forced to be eating cup of Ramen Noodle soup.
I didn’t want to have to worry about not ever being able to retire. I know at the age of 24, I was thinking much more different than my peers. None of my friends talked about retirement. We talked about the next trips that we were going to go on, what concerts we wanted to go see, still reflecting back on the good old college days.
Investing in Your 20s Isn’t Cool, It’s a Must
I write this because if you are in your 20s, I know you’re thinking the exact same thing, even if it’s just how to invest with 100 dollars. What’s the point of investing? What’s the point of saving? What’s the point of even thinking about retirement?
Here’s one thing I know, you don’t want to be eating Ramen Noodles for dinner for the rest of your life. It might be good every once in a while, but I promise you, you get sick and tired of it.
So, why is it so important to start investing early in your 20s?
Most young people just don’t get it. They think they have plenty of time to start thinking about retirement. While, yes that’s true, what most don’t understand or appreciate is that the sooner you start, the easier it is.
You don’t want to discover you’ve waited until it is too late to retire.
For example, look at this chart. This chart was something that was shown to me whenever I was junior in college. The chart literally blew me away.
The chart has two young adults that should be investing in their 20s: Super Saver Parker who starts at the age of 25 and Super Slacker Sloane. Both graduate with good paying jobs and have well enough income to start contributing to a Roth IRA.
Super Saver Parker
10 Years of Contributions
Super Slacker Sloane
30 Years of Contribution
25
$2,000
25
–
26
$2,000
26
–
27
$2,000
27
–
28
$2,000
28
–
29
$2,000
29
–
30
$2,000
30
–
31
$2,000
31
–
32
$2,000
32
–
33
$2,000
33
–
34
$2,000
34
–
35
–
35
$2,000
36
–
36
$2,000
37
–
37
$2,000
38
–
38
$2,000
39
–
39
$2,000
40-65
–
40-65
$50,000
Total Contributions
$20,000
$60,000
Ending Account Value
$340,060
$266,427
*BIG* Difference
$73,633
Super Saver Parker starts putting $2,000 a year into his Roth IRA ($166.67 per month). He does this for a total of 10 years and stops for a grand total of $20,000 he put in. Why does he stop? Don’t ask. That’s just part of the illustration. 🙂
Super Slacker Sloane puts off saving because he wants to buy “stuff” (otherwise knows as “crap you don’t need”). He finally gets it and starts putting $2,000 a year starting at the age of 35. Wanting to catch Parker, he puts in $2,000 a year for 30 years contributing $60,000 in total – $40,000 more than Parker. *We’re assuming that they both average 8% return on their money.
After they showed this chart to me in my finance class, the question that was then asked was,
“Who will have more money at the age of 65?”
I remember my initial thought was “Duh, the guy who put in $40,000 of course!“.
Hmmm…..oh how wrong I was.
The reality is that the person who started 10 years earlier (preferably in their 20s) had actually made $73,633 more even though they put in $40,000 less.
Maybe a Chart Involving Beer Will Help?
Not convinced? Here’s something else to look at:
Sounds great, right? Being able to retire, not having to eat Ramen, being able to drink a gigantic tower of beer… all wonderful.
But if I had to guess there are some of you out there in your 20s — just starting careers, just starting families, just really starting to get into the swing of things — that are wondering:
How the heck do I start? I have no idea what I’m doing!
Well that’s hopefully one of the reasons you are reading my blog. I want every single one of my readers to be able to retire, and if I have to show each one how to do it then that’s what I’m going to do.
Resources for Getting Started on Your Retirement Saving
Here are some resources I’ve created to help you jump start your retirement savings.
Best Online Brokers for Beginners
With the large number of brokerage firms out there it can be really confusing deciding where to open an account. There are some brokers out there that are only for “professional” investors that trade a lot and need all kinds of crazy chart tracking.
If you’re just starting and investing in your 20s then that isn’t you.
I’ve boiled down your best online broker options for you to make the selection that much easier.
I like really simple, and beginner investors should too.
The Roth IRA is one of the best investment accounts to have to grow your nest egg for your retirement.
Naturally, you put the two together and you get a great result.The Roth IRA Movement
Last year I helped start the Roth IRA Movement to encourage young people to open and fund Roth IRAs. Over 140 bloggers jumped in to add their own articles and it was a huge success. The link above takes you to an easily accessible list of all of the posts. A lot of good reading here.
Start Saving for Retirement In Your 20s
No matter which broker you go with or what investment philosophy you end up selecting… please do not delay in starting your retirement savings. Investing in your 20s is the absolute way to go. Literally every day that goes by without saving for the future the harder you will need to work and save to meet the same goal.
Let your money work for you by giving it the maximum amount of time to be invested. Don’t end up eating Ramen Noodles and waiting for your next Social Security check. That’s no way to live your golden years.
What do you spend most of your money on? For most people, their two biggest expenses are their home and car(s). If you remember the post comparing expenses in 1913 to 2012, you might recall the three things that Mr. Average spent most of his “raise” on were:
Housing (36 percent of the raise)
Income taxes (28 percent), and
Transportation (24 percent)
A majority of the increase in transportation has, arguably, to do with that wonderful instrument of freedom — the automobile.
The choices we make
Our spectrum of choice in cars is, of course, wider than a mile. Egotistas spend big on the latest model of the coolest car. Hollywood celebrities once flaunted their beblinged Cadillac Escalades at the annual Oscar ceremony. That was before the 2002 recession. When that hit, it suddenly wasn’t cool any more to be seen piloting a behemoth slurping down rivers of Mother Earth’s precious resources. That’s when the curtain went up on the eco-friendly Toyota Prius, which Cameron Diaz and other stars rode to the 2003 big event in their sipply little Priuses. Overnight, saving the planet with the Prius became California Cool.
That was then.
The top 1 percent, as we saw a few weeks ago, figured out a way to ensure that a full 95 percent of the wealth increase from this economic recovery gets channeled into their pockets. With that, concern for saving the planet went the way of Uggs for boys, and now the wheels of choice for gliding down Rodeo Drive has become a Range Rover, starting at $85,000 (new, of course).
While an egotista’s main concern is how to bling up a new Range Rover, the other end of the spectrum is occupied by frugalistas sporting boring robust-o-cars destined for at least ten more faithful years of service. Those road warriors are inevitably at least 20 years old, scored on Craigslist for $500 from people with more money than savings concern.
Most of us find ourselves somewhere in the middle of the bulge of the ever-present bell curve, seeking to save while driving something a tad less extreme. That includes the mythical Mr. Average, the darling of all statisticians and bloggers.
So what does Mr. Average spend to keep his or her car on the road? The three biggest car expenses are depreciation, fuel, and car insurance. How does Mr. Average try to save on these items? Buy a cheaper car, is the usual answer.
Not for insurance. You would think you would save on auto insurance with an economical Toyota Corolla, which would be cheaper to insure than, say, a Chevy Tahoe, which is approximately twice the cost. You would be wrong. In an actual comparative pricing study I did for another blog post, I discovered that insuring the more expensive Tahoe is actually cheaper in total dollars than insuring the economical Corolla (new, as well as used).
Comparing gas mileage and depreciation is relatively easy. Getting a handle on car insurance costs for Mr. Average, however, is not.
You see, car insurance is greatly affected by “other” factors than by your choice of vehicle. According to Insurance.com, there are four basic factors insurance companies use to set your rates, and the actual vehicle is only third on that list.
The biggest factor setting your auto insurance rate is you — or, to be more specific, how insurance companies see you. You are bound to hate some and love some of these distinctions, but they’re driven by hard data, collected and analyzed by geeks at their computers.
Who you are
Age: If you’re under 25, your car insurance rates will be higher. Over 25, it depends. It drops until you become seriously interested in Depends, at which time your car insurance rates will start to climb again.
Along with age, insurance companies look at how many years you’ve been driving. Statistics prove that people who have driven longer file fewer claims. For that reason, it usually pays to keep your driver’s license current, even if you live somewhere like New York City or Chicago, where you many times don’t even need to own a car or drive. (Of course, you may need to have a driver’s license in America to write checks or buy stuff with plastic. Foreigners sometimes have a hard time figuring out how being able to pass a driving test qualifies you to write checks, but that’s a different story.)
Gender: Women pay less because:
They drive less
They get in fewer accidents
They get fewer speeding tickets
They get fewer DUI convictions
They buy safer cars
Please note: that’s not a personal judgment. Insurance companies agree that that’s what the numbers say.
Zip Code: Where you live affects your rates, because the frequency of “risk events” varies greatly from neighborhood to neighborhood. These risk events include vandalism, theft of cars and/or contents, and fraudulent claims. Again, these are not Mark Cuban types of assessments; they’re conclusions drawn from statistical data. For this reason, it’s not uncommon for two identical people living just a few miles apart to have a difference of as much as 50 percent in their auto insurance rates.
So, if you’re considering moving, it might be a good idea to find out what the difference will be in your car insurance. You can get quotes from esurance, Progressive, or other online insurance providers — or you can fill out a single form at Insurance.com and get free online quotes from a bunch of insurance companies any time you want to compare rates. (It’s pretty slick, but I digress.)
In general, it’s cheaper to insure cars in rural areas, because they have less crime, less traffic, and fewer accidents.
Credit History: You might not think paying your credit card bill late would increase your car insurance, but you would be mistaken. According to an insurance broker friend of mine, statistics show that people with bad credit file claims something like 40 percent more frequently than those with good credit. If you want to look into this, here’s an article about how and why your credit history affects your car insurance premiums.
Occupation: Again, statistics rule when it comes to insurance. Occupations like scientist, pilot, or actor/artist show lower claims and, therefore, have lower car insurance rates, generally speaking. Why? I want to say nobody really knows, but I’m sure somebody does. The most common explanation I’ve heard is that those occupations require attention to detail and being meticulous. In other words, those people are careful. That’s in contrast to occupations with high auto insurance rates, such as lawyers, business executives, judges and doctors. Apparently, the reason for that is the stress level that comes with jobs like those. (They say the rate for doctors isn’t much lower than for teens.) Real estate brokers also pay more because they have to drive more.
Marital Status: Did you know married people get into fewer accidents than their unmarried counterparts? Insurance companies do, and that’s why they offer married people lower rates. In addition, insuring two cars with the same company usually will get you an additional multi-policy discount, much like the next criterion.
Homeownership: Insurance companies generally charge less for homeowners because they’re regarded as more stable. By itself, that’s not a significant factor, but the discount you get from combining your home and car insurance is.
The rest
The other basic factors determining your auto insurance rates are:
Your driving record (accidents, tickets, etc.) and claims history
The coverage you’re looking for (pretty obvious)
Your vehicle
The impact of your vehicle selection is not obvious, so it’s not simply that a more expensive car will carry a higher insurance premium. In fact, as pointed out above, a Tahoe costs less to insure than a Corolla.
Chances are that if you’re concerned with getting rich slowly, you will have a good (or at least improving) credit record, and you’ll be on the positive side of many of the variables listed above. But now you know exactly how those factors can lead to savings on your auto insurance, the third largest expense of car ownership.
How have you gone about lowering your car insurance premiums?
Buying a home is one of life’s most rewarding milestones. However, as a prospective homebuyer, you may have noticed how much the real estate landscape has changed over the past few years.
Let’s take a look at how a temporary mortgage buydown concession could reduce your interest rate and make your initial monthly payments more affordable.
What Is a Temporary Buydown on a Mortgage?
A temporary buydown is a mortgage financing strategy that allows a homebuyer to lower their interest rate and payment for a predetermined amount of time through the payment of mortgage points at closing (whether by the lender, homebuyer or seller).
What’s a mortgage point? A mortgage point, also known as a mortgage discount point, equals 1% of your total loan amount. For example, a mortgage point on a $200,000 loan would be $2,000. When you purchase points in a mortgage buydown, you’re essentially prepaying interest upfront at closing in exchange for a lower rate, i.e., “buying it down.” Typically, a lender may offer a .25% rate reduction in exchange for one point.
How long could the rate and payment reduction last? Up to three years.
How much could the rate be reduced? A maximum of 3%. The rate is lower in the introductory period and increases over time — a maximum increase of 1% per year — to the original quoted rate.
What happens to those mortgage point payments? The money will typically go into an escrow account. Those funds temporarily subsidize your interest rate for the agreed-upon time period.
According to Scott Bridges, senior managing director of Pennymac’s consumer direct lending division, the benefit of a buydown is simple. “In short, the buydown allows a buyer to combat higher market rates,” he explains. “The first year of the loan, your rate and payment will be based on a rate that is 1% lower than the market rate. So if current rates are 6%, your first year of payments would be based on a 5% rate. That reduced rate for year one can save the average consumer several thousand dollars in payments (depending on loan amount).”
While interest rate discounts, loan terms, and conditions vary by lender, a buydown can be a good option for temporarily lowering your monthly mortgage payments at the start of your loan.
What Are the Benefits of Buying Down an Interest Rate?
There are several reasons you may want to buy down your mortgage rate. Here are a few potential budget-friendly benefits:
Lowers initial monthly mortgage payments. If you have a temporary buydown, those points you pay for upfront can make your initial mortgage payments more manageable, which can be especially helpful if you’re at the beginning of your career and expect your income to rise in the future. Those early savings will also add up to less interest paid over the life of your loan.
May boost your buying power. A reduced interest rate and the subsequent lower monthly mortgage payment may help you qualify for a higher mortgage, enabling you to purchase a more expensive home.
Can be arranged for both purchases and limited cash-out refinances. Whether you’re buying a new home or doing a limited cash-out refinance and replacing your current mortgage with a new, slightly larger mortgage, you may qualify for a temporary interest rate buydown.
Potential tax write-off. While a seller, builder, or lender may cover the buydown to facilitate a sale, the points may be deductible as home mortgage interest if you’re the buyer and pay for the buydown.1
Reduces rates for fixed-rate and adjustable-rate mortgages (ARM). You can purchase points to lower your interest rate on a fixed-rate mortgage and during an ARM’s introductory fixed-rate period. Depending on the buydown structure, rates may be reduced up to 3% for a maximum of three years.
More money in your pocket. A lower mortgage payment at the start of your loan could free up cash to pay bills or make home improvements.
Allows you to watch the market. A buydown gives you an opportunity to watch the market while saving on your monthly payments. “As rates move up and down during and after that first year, you can refinance into a lower rate with the knowledge you had a full year of reduced mortgage payments,” Bridges notes.
How Much Does It Cost to Buy Down the Interest Rate?
Generally speaking, the approximate cost for a temporary mortgage buydown equals how much you’ll ultimately save in interest. But several factors will be taken into account:
How much money you’re borrowing
How many points you’re buying; each point costs 1% of the mortgage amount
Type of buydown structure
Who funds a temporary mortgage buydown? In most cases, the buyer will pay the mortgage points, but in some instances, the buydown could be fully or partially funded by the seller, lender, or third party, such as a realtor or builder.
How long will the reduced interest rate be in effect? The lower rate and payment will be in effect for up to three years, depending on the rate buydown structure. Below are a few different types of mortgage buydowns.
Rate Buydown Structures
There are several types of rate buydown structures. If your lender offers you a buydown — most, but not all, lenders do — you will have the opportunity to negotiate pricing and determine which structure suits your financial needs. The following are the most common types of temporary mortgage buydown structures.
3-2-1 Buydown
A 3-2-1 buydown is a home financing arrangement that will reduce a homebuyer’s interest rate for the initial three years. The lowest interest rate is in the first year, increasing to the permanent quoted rate after the third year.
3-2-1 Buydown Basics
Reduces rate by three percentage points in the first year of the mortgage
Reduces rate by two percentage points in the second year
Reduces rate by one percentage point in the third year
Borrower pays full interest rate after the completion of the third year and is fixed for the remainder of the loan
3-2-1 Buydown Example
This chart shows how a 3-2-1 rate buydown could potentially work if you were to qualify for a 30-year, $200,000 mortgage at a rate of 7%:
Mortgage Year
Interest Rate
Monthly Payment (Principal and Interest)
Monthly Savings
Annual Savings
1
4%
$954.83
$375.77
$4,509.24
2
5%
$1,073.64
$256.96
$3,083.52
3
6%
$1,199.10
$131.50
$1,578
4 – 30
7%
$1,330.60
$0
$0
In this scenario, the total buydown cost would be approximately $9,171, the amount equal to the first three years of interest savings. The chart amounts don’t include insurance or taxes, and you will want to assume no points contribution from the seller, builder, lender, or a third party.
2-1 Buydown
A 2-1 buydown is a type of home financing arrangement that reduces the interest rate on a mortgage for the first two years, after which the rate rises to the permanent quoted rate.
2-1 Buydown Basics
Reduces rate by two percentage points in the first year of the mortgage
Reduces rate by one percentage point in the second year
Borrower pays full interest rate after the completion of the third year for the remainder of the loan
2-1 Buydown Example
This chart shows how a 2-1 rate buydown could potentially work if you were to qualify for a 30-year, $200,000 mortgage at a rate of 7%:
Mortgage Year
Interest Rate
Monthly Payment (Principal and Interest)
Monthly Savings
Annual Savings
1
5%
$1,073.64
$256.96
$3,083.52
2
6%
$1,199.10
$131.50
$1,578
3 – 30
7%
$1,330.60
$0
$0
In this scenario, the total cost of the buydown would be approximately $4,661.52, the amount equal to the first two years of interest savings. The chart amounts don’t include insurance or taxes, and assume no points contribution from the seller, builder, lender, or a third party.
1-0 Buydown
A 1-0 buydown is a type of home financing arrangement that reduces the mortgage interest rate by 1% in the first year, increasing to the permanent quoted rate after that initial year.
1-0 Buydown Basics
Reduces rate by one percentage point in the first year of the mortgage
Borrower pays full interest rate after the completion of the first year for the remainder of the loan
1-0 Buydown Example
This chart shows how a 1-0 rate buydown could potentially work if you were to qualify for a 30-year $200,000 mortgage at a rate of 7%:
Mortgage Year
Interest Rate
Monthly Payment (Principal and Interest)
Monthly Savings
Annual Savings
1
6%
$1,199.10
$131.50
$1,578.00
2 – 30
7%
$1,330.60
$0
$0
In this scenario, the total cost of the buydown would be approximately $1,578, the amount equal to the first year of interest savings. The chart amounts don’t include insurance or taxes and assume no points contribution from the seller, builder, lender, or a third party.
Who Can Buy Down a Mortgage?
In most cases, the buyer will buy down the mortgage, but there are times when the seller, builder, or lender will offer to purchase points and pay for the buyer’s mortgage buydown. Let’s take a look at each scenario.
Buyer-Funded Buydown
When a buyer negotiates a buydown with a lender, they pay a certain amount of points upfront at closing in exchange for a reduced interest rate. Depending on the buydown structure, the rate could be temporarily lowered for up to three years or the entire loan term. Most mortgage buydowns are buyer-lender arrangements.
Seller-Funded Buydown
A seller-funded buydown is when a highly motivated seller purchases points and buys down the homebuyer’s interest rate. This seller concession can help “seal a deal” by incentivizing and speeding up a home sale. Subsidizing a mortgage buydown can:
Give a seller a competitive advantage without having to lower the listing price
Help increase the borrower’s purchasing power
Make it easier for buyers to qualify for financing
Expedite the home sale process
A possible win-win for both the seller and the buyer. The seller could make a faster sale while holding on to more profits than they would if they lowered the asking price. The buyer saves money with a lower interest rate.
Builder-Funded Buydown
Homebuilders can offer mortgage buydowns to attract prospective homebuyers. As interest rates climb and the new-home market slows, builder buydowns are becoming an increasingly popular selling strategy. A recent survey found that 75% of nationally surveyed home builders confirmed they are buying down buyers’ mortgage rates to make payments more affordable.2 Builder buydowns can:
Lure buyers in a competitive and high mortgage market
Make new homes more affordable to a broader range of buyers
Be offered as part of a package, such as an upgrade or closing cost contribution
A builder buydown arrangement may require the buyer to go through the builder’s mortgage company for the mortgage.
Lender-Funded Buydown
Lenders may offer to subsidize a buydown by contributing all or some of the funds for the mortgage points. This concession option could help increase your negotiating and purchasing power as a borrower.
Is Buying Down an Interest Rate Right for You?
A temporary lower interest rate is certainly enticing, but mortgage buydowns aren’t for everyone. Buying mortgage points in exchange for a rate reduction may not be in your best interest if you are…
Having trouble meeting loan qualification criteria: You must qualify for the standard loan terms without the benefit of the buydown. This also includes:
Having a minimum 660 FICO score
Meeting the applicable Fannie Mae requirements
Submitting mandatory documentation
Purchasing an investment property or manufactured home: A mortgage buydown can be arranged for a principal, owner-occupied home, or a second home. It’s not available for investment properties or manufactured homes.
Planning on selling soon: There are substantial upfront costs involved with buying a new home, including the down payment and closing costs. Add mortgage points to the mix and it will take time to “break even,” meaning the time it will take for your savings to outweigh those costs to lower your interest rate. If you sell in the near future, you may not have been in the home long enough to recoup those point costs.
Doing a regular cash-out refinance: Mortgage buydowns are allowed on purchases and limited cash-out refinances only. Limited cash-out refinances follow Fannie Mae guidelines restricting the cash-back amount to $2,000 or 2% of the new loan principal balance, whichever is less.3
Short on cash: If you have limited cash, the high upfront costs may deplete your savings, leaving you short on funds you may need to cover other future expenses. Instead of buying points, you may want to allocate those funds to paying down high-interest debt or building an emergency fund.
Making a small down payment: If you’re purchasing a home and contributing less than 20% to the down payment, or if you’re refinancing and have less than 20% equity, you’ll likely have to pay for private mortgage insurance (PMI) on your conventional loan.4 The premium will be added to your regular monthly payment. Rather than pay for points, consider using that money to make a larger down payment.
When can a mortgage buydown make sense? This home loan strategy is worth exploring if…
You have enough liquid cash: If your savings is enough to cover the down payment, closing costs, and mortgage points — and you have a cash reserve left over — a temporary mortgage buydown can be a great option for reducing your interest rate for up to three years.
You expect your income to rise: Starting your career? Re-entering the workforce? If you anticipate that your income will rise within the next few years, a temporary mortgage buydown can help you ease into homeownership with a lower initial interest rate and payment.
The seller, builder, or lender is paying for the points: If you’re a homebuyer and the seller, builder, or lender offers to purchase the mortgage points for you, a temporary buydown can be an easy way to save money without any point-related, out-of-pocket expenses.
“Lots of people avoid buying a home when rates are higher,” says Bridges, “but this program allows you to at least achieve some reduced payments and real savings for a year.”
Higher rates can also significantly slow down home buying demand. That means, Bridges adds, “You will likely pay less for the house than you would in a low rate market when multiple buyers tend to bid over asking.” With a buydown, you set yourself up to win on multiple fronts. “You get a deal on the house you want, save money on the purchase price of the home in this higher rate market, save money on the monthly payment in year one, and refinance when rates drop.”
The Permanent Mortgage Rate Buydown Option
Want to lower your interest rate and monthly mortgage payment for your entire loan term? In addition to a temporary buydown, you may be eligible to negotiate a permanent buydown with your lender.
Protects against rate hikes. The lower rate will never increase during the loan term as long as you have a fixed-rate mortgage.
How much does it cost? The rate typically costs between six and eight points. Costs are added to the closing fees.
Ready to learn more about how Pennymac can help you find the right home loan? Begin your online application now, and if you still have questions, contact a Pennymac Loan Expert. We’ll help you evaluate your mortgage buydown options and decide the best course of action for your unique situation.