Inside: Are you confused about how gross pay and net pay are calculated? This guide will clear everything up. Learn about the different deductions that are taken from your paycheck, as well as the tax rates that apply to your gross pay.
This is one of the most confusing questions for many people.
So, if you are wondering what the difference between gross pay and net pay, you are in the right place.
In order to become financially stable, you need to have a tiny amount of financial literacy.
If you’re like most people, you probably think of your “gross pay” as the amount of money you make before taxes are taken out. But in reality, gross pay is your total compensation from your employer before any deductions are made.
So what is “net pay,” then? Net pay is the amount of money that actually goes into your bank account or paycheck after all of those deductions are made.
Now you want to which one is more important between gross pay and net pay.
The answer is: it depends! If you’re trying to save money or make a budget, then net pay is probably more important to you. But if you’re trying to figure out how much taxes you’ll owe at the
We will dive into all of the details, you will not ever be confused again.
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What is gross pay?
Gross pay is the total amount of money earned by an employee before any taxes or deductions are taken out. It’s important to know your gross pay as it determines your overall income and can impact your taxes and benefits.
This is the total amount paid by your employer.
Knowing your gross pay is crucial for financial planning and paying taxes.
How can I calculate my gross pay?
To calculate gross pay, you need to know your hourly wage or salary, any overtime pay, bonuses, and additional reimbursements for work-related expenses.
For hourly workers, multiply the hourly wage by the number of regular hours worked within a pay period and include the overtime pay rate for any extra hours.
For salaried workers, multiply the gross monthly income by 12 to find the annual gross salary.
To calculate a paycheck, start with the annual salary amount and divide it by the number of pay periods in the year.
Find out 5000 a month is how much a year.
What deductions are taken out of gross pay?
Gross pay refers to the total amount of money an employee earns before any deductions are taken out.
As such, there are no deductions.
Learn what is annual income.
How are taxes calculated on gross pay?
Gross pay is the amount an employee earns before taxes and deductions are taken out by their employer.
Understanding taxes on gross pay is essential, as it affects an employee’s take-home pay and tax liability.
Taxes that are deducted from gross pay include FICA payroll taxes, federal and state income tax withholding, along with any state-mandated programs like this Colorado Paid Sick Leave.
To calculate taxes on gross pay, an employer uses a formula that subtracts all taxes and deductions from the gross pay amount. Learn how much you should withhold on your taxes.
Common issues that may arise during tax calculation include incorrect tax withholding and not considering voluntary pre-tax deductions. Understand why do I owe taxes this year.
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What is net pay?
Net pay refers to the amount of money an employee takes home after all deductions and taxes have been taken out of their gross pay.
This is the money left over that you can spend, save, and invest.
Thus, you will be able to budget by paycheck like a pro!
How to calculate net pay?
Calculating net pay is crucial for accurate and compliant payroll management.
Here is a step-by-step guide on how to calculate net pay:
Determine the gross pay based on hours worked or salary divided by the number of pay periods in the year.
Subtract mandatory deductions, including health insurance premiums, federal, state, and local income taxes, payroll taxes, and court-ordered wage attachments.
Subtract voluntary deductions, such as employee contributions to a 401(k) or other retirement plan as well as any flexible spending account.
The resulting amount is the employee’s net pay.
Learn about annual net income.
What deductions are taken out of net pay?
Net pay refers to the amount of money an individual receives after taxes and other necessary deductions have been subtracted from their gross pay.
It is a crucial factor in determining an individual’s income, as it represents the actual amount of money they take home.
There are various deductions that are commonly taken out of net pay, including mandatory and voluntary deductions.
Mandatory deductions are made in accordance with the law, while voluntary deductions are ones that employees have the freedom to opt out of.
The mandatory deductions include:
Federal, state, and local income taxes
Social security taxes
Medicare taxes
Local state or municipal taxes
Other common voluntary deductions from gross pay include:
Health insurance premiums (if signed up on a company plan)
Retirement contributions
Health savings account contributions
Flexible spending account contributions
Dependent Care FSA
Is gross before or after taxes?
Gross pay is BEFORE taxes.
Gross pay is the amount earned before taxes and other deductions are taken out. Taxes are then calculated based on the gross pay amount and deducted to arrive at the net pay. This means that gross pay is always before taxes.
Understanding the difference between gross pay and net pay is important to effectively manage finances.
Gross pay may seem like a large amount, but it is important to consider the impact of taxes and other deductions on the final amount received.
What is the difference between gross pay and net pay?
Gross pay and net pay are two important terms that employers and employees should understand.
Gross pay refers to an employee’s total earnings before any deductions are taken out, while net pay is the amount an employee takes home after deductions such as taxes, benefits, and garnishments have been subtracted.
Here are some key differences between gross pay and net pay:
Gross pay includes all earnings, such as wages, salary, reimbursements, commissions, and bonuses, while net pay is the actual amount of the paycheck after deductions.
Employers are responsible for deducting necessary expenses from an employee’s paycheck and making payments to the appropriate accounts before issuing the check or depositing the net pay into the employee’s bank account.
Gross income determines an individual’s federal income tax bracket and borrowing capacity, while net pay presents disposable income.
When budgeting for the year, starting with gross wages requires subtracting the total of taxes and other deductions to compute the actual amount left to spend from each paycheck.
Understanding the difference between gross pay and net pay is crucial for effective budgeting and financial planning.
Employers must ensure proper employee taxes are collected and paid to the government, while employees need to know their take-home pay to manage their expenses.
How do gross pay and net pay work?
Gross pay and net pay are two important terms in the payroll world that employees should understand to manage their finances effectively.
Gross pay is the total amount of pay while net pay is the amount of money you have to spend each month.
Understanding the difference between gross and net pay can help employees and employers avoid confusion and manage their finances better.
What is better gross pay or net pay?
One term is not “better” than the other as they each have different meanings.
When you increase your gross pay, your net pay will rise as well.
Here is how to use gross pay to your advantage:
Provides a clear understanding of the employee’s total compensation
Helps employees plan for future expenses
Can be used as a basis for negotiating salary increases
Figure out the amount of taxes you are required to pay.
Here is how to use net pay to your advantage:
Reflects the employee’s actual take-home pay
Helps employees budget for their expenses
Provides a clear understanding of the impact of deductions on their pay
Can be difficult to compare with other job offers that list gross pay
Overall, net pay is better for employees as it reflects their actual take-home pay and helps them budget for their expenses.
However, it’s important for employees to understand both gross pay and net pay to make informed decisions about their compensation.
Why do you receive more gross pay than net pay in your paycheck?
Employees receive more gross pay than net pay in their paychecks because gross pay is the total amount of money an employee earns before any deductions are taken out.
This includes an employee’s salary, wages, commissions, and bonuses.
On the other hand, net pay is the actual amount of money an employee takes home after taxes, benefits, and other mandatory deductions have been subtracted from their gross pay. These deductions can include federal and state taxes, Social Security contributions, health insurance premiums, and retirement plan contributions.
Therefore, employees receive more gross pay than net pay.
Learn is social security disability income taxable.
FAQs
Overtime wages are included in gross pay when an employee works more than their regular hours and earns additional compensation for the extra hours worked.
This is the case for nonexempt employees who are entitled to overtime pay under federal or state law.
Net income is the take-home pay or the money that you earn on payday, which is why it may be best to focus on that number when creating a budget.
This number helps you determine how much you have to spend, save, or invest.
By tracking your expenses and using budgeting techniques like budgeting with percentages or the 50/30/20 rule, you can manage your finances effectively and make the most out of your net income.
Remember, creating a budget is about being realistic and disciplined with your spending habits, so make sure to adjust your budget accordingly as your income or expenses change.
The tax rates for gross pay depend on the specific taxes being withheld, such as federal income tax, Social Security tax, and Medicare tax.
Federal income tax rates vary depending on the employee’s income level and filing status, with higher earners generally paying a higher percentage of their gross pay in taxes. Click here for the latest federal income tax brackets.
Social Security tax is a flat rate of 6.2% for the employee on the first $$160,200 of gross pay earned. Your employer must match the same contribution. (source)
Medicare tax is a flat rate of 1.45% on all gross pay with the employer matching the same percentage, with an additional 0.9% tax for high earners. (source)
Employees need to understand their tax liability based on their gross pay to accurately calculate their net pay and avoid any surprises come tax time.
Now, you Know the Difference between Gross and Net Pay
Understanding deductions and their impact on net pay is crucial for employees to accurately budget and plan their finances.
Since you know the difference between gross and net pay, you can make sure that you are getting the right amount of money in your paycheck.
Be sure to check your pay stubs carefully to make sure that all of the deductions are correct. If you have any questions, be sure to ask your human resources department.
Know someone else that needs this, too? Then, please share!!
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You can get an impressive return on cash you don’t need right away when you put it in a high-yield savings account. There’s no shortage of those around.
There aren’t quite as many high-yield checking accounts on the market, but that’s slowly changing. Innovative community banks like Quontic Bank and its High Interest Checking account are leading the way for people who want to earn interest on their walking-around money.
You have to work for that interest though. That’s one of several downsides to consider before applying for a Quontic High Interest Checking account. Perhaps you won’t deem them deal-breakers in the end, but it’s always better to be a fully informed consumer.
What Is Quontic Bank High Interest Checking?
Quontic Bank High Interest Checking is a high-yield checking account that earns up to 1.10% APY.
To earn the maximum interest rate on your balance, you must make at least 10 in-person debit card transactions of at least $10 each. Otherwise, you earn just 0.01% APY.
Quontic Bank is a small community bank based in New York, but it has a prominent online presence, and Quontic High Interest Checking is available to applicants nationwide. The minimum deposit to open an account is $100 and there’s no monthly or annual maintenance fee.
What Sets Quontic Bank High Interest Checking Apart?
Quontic High Interest Checking stands out for several reasons:
Above-average yield with qualifying monthly debit transactions. Complete at least $10 in-person debit card transactions worth at least $10 each in a statement cycle to earn 1.10% APY on your entire balance. That’s doable if this is your main checking account.
No maintenance fee. Quontic High Interest Checking charges no maintenance fees. You won’t pay anything to keep your account open.
Big fee-free ATM network. Quontic Bank has more than 90,000 fee-free ATMs in its network, which spans the entire United States.
Innovative approach to banking. Despite its small physical footprint, Quontic Bank is relentlessly innovative. It has one of the best mobile banking apps on the market and developed the first nonwatch payment wearable — theQuontic Pay Ring.
Key Features of Quontic Bank High Interest Checking
Quontic High Interest Checking’s core features include its interest program, its expansive ATM network, and its robust mobile features.
Account Yield & Requirements
Quontic High Interest Checking’s base yield is 0.01% APY on all balances. The yield rises to 1.10% APY, also on all balances, when you complete at least 10 in-person debit card transactions of $10 or more in a given statement cycle.
The yield applies to your entire balance. Back in the day, Quontic paid interest only on the first $150,000 in the account. That cap could theoretically return at some point in the future, though it’s high enough not to be a problem for most people.
Account Fees & Minimums
This account has no monthly or annual maintenance fee. The minimum opening deposit and ongoing balance is $100.
ATM Access
Quontic Bank has more than 90,000 fee-free ATMs in its network. You can find these machines at major convenience store chains, superstores, supermarkets, and other retailers coast to coast.
Mobile Features
Quontic Bank has an excellent mobile banking experience. Its mobile app can handle everything the regular online dashboard can, including mobile check deposit, bill payments, and person-to-person transfers.
Quontic also offers a groundbreaking and free (for now) contactless payment option called the Quontic Pay Ring. It’s a secure plastic ring that you can tap to pay from your Quontic High Interest Checking account wherever you see the contactless payment symbol.
Deposit Insurance
Your Quontic High Interest Checking balance has FDIC insurance on balances up to $250,000. If Quontic Bank were ever to fail, the federal government would step in to reimburse deposits up to this amount.
Pros & Cons
Quontic High Interest Checking does a lot of things well but has a few notable shortcomings too.
Above-average interest rate with qualifying activities
No monthly maintenance fee
Big fee-free ATM network
Must meet transaction requirements to earn significant interest
No debit card rewards
No early direct deposit
Pros
Quontic High Interest Checking complements its above-average yield (for a checking account) with other customer-friendly features.
Above-average interest rate with qualifying activities. Earn 1.10% APY on all balances for the entire statement cycle when you complete at least 10 debit transactions in-person and spend at least $10 on each. This is definitely attainable if you use your debit card for every in-person purchase.
No monthly maintenance fee. Quontic High Interest Checking charges no monthly (or annual) maintenance fee, so there’s no carrying cost to worry about.
Excellent mobile experience. You can easily do all your banking from your phone thanks to Quontic’s excellent mobile app. And in what Quontic claims is a first among American banks, you can use your Quontic Pay Ring to make in-person payments without taking out your debit card or phone.
Big fee-free ATM network. Quontic Bank has one of the biggest fee-free ATM networks of any bank in the United States, at more than 90,000 machines in all. They’re distributed across the country, and most are far from any physical Quontic branches.
Cons
Quontic High Interest Checking has some missing or unwieldy features that lessen its appeal.
Must meet transaction requirements to earn significant interest. Making 10 debit card transactions of $10 or more each month might not be a deal-breaker if this is your primary checking account. If it’s not, you might find yourself earning just 0.01% APY, which is barely worth the time it takes to open an account.
No rewards on debit transactions. Quontic High Interest Checking has no debit card rewards program. If you’d rather not apply for a rewards credit card but want to earn points or cash on everyday purchases, look to Go2Bank instead.
No early direct deposit. For such a mobile-friendly bank, it’s notable that Quontic has no early direct deposit feature. At a growing number of other banks, you can get your paycheck direct-deposited two days ahead of schedule as a matter of course.
Has a minimum balance. You need to scrounge up $100 to open a new Quontic High Interest Checking account. This isn’t a massive amount of money, but it could be a problem if you live paycheck to paycheck.
How Quontic Bank High Interest Checking Stacks Up
Quontic Bank High Interest Checking is part of a growing crop of interest-bearing checking accounts from lesser-known online and community banks. It has a lot in common with another interest checking account: Nationwide Advantage Checking. Compare them head-to-head, then make your choice.
Quontic High-Interest
Nationwide Advantage
Maintenance Fee
$0
$0
Minimum to Open
$100
$50
Minimum Ongoing
$50
$0
Maximum Yield
1.10% APY
0.90% APY
Qualifying Activities?
Yes
Yes
Quontic High Interest Checking and Nationwide Advantage Checking both have no maintenance fees and require qualifying activities to earn full interest. Quontic is a bit more relaxed on this front though, with just one requirement — 10 in-person debit card transactions per month, each totaling at least $10 — to Nationwide’s two. Quontic has a slightly higher maximum interest rate as well. So all in all, it’s the better choice.
Final Word
Quontic Bank High Interest Checking pays an above-average interest rate (for a checking account) in any statement cycle where you make enough qualifying debit card transactions. It has no recurring fees and an excellent mobile app. You can even make contactless payments with a wearable ring.
There’s a lot to like about this account, but it’s not perfect. Some high-yield checking accounts pay even more, often without asking users to jump through any hoops. And Quontic High Interest Checking has some notable points of friction, like its minimum balance requirement and lack of early direct deposit.
It’s up to you to decide whether the good outweighs the bad.
Editorial Note:
The editorial content on this page is not provided by any bank, credit card issuer, airline, or hotel chain, and has not been reviewed, approved, or otherwise endorsed by any of these entities. Opinions expressed here are the author’s alone, not those of the bank, credit card issuer, airline, or hotel chain, and have not been reviewed, approved, or otherwise endorsed by any of these entities.
The Verdict
Our rating
Quontic Bank High Interest Checking
Quontic Bank High Interest Checking is an above-average checking account thanks to an unusually high interest rate on all balances (with qualifying activities) and no hidden fees. It has an excellent mobile experience and a big fee-free ATM network too. But it’s not ideal if you don’t plan to use it as your primary checking account or enjoy earning rewards on debit card purchases.
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Brian Martucci writes about credit cards, banking, insurance, travel, and more. When he’s not investigating time- and money-saving strategies for Money Crashers readers, you can find him exploring his favorite trails or sampling a new cuisine. Reach him on Twitter @Brian_Martucci.
Our family has been going through a transformation from a paycheck-to-paycheck family to a family that has money in the bank. While I wouldn’t say we are extreme frugalists, we do try to save as much money as we can, yet still provide excellent entertainment and learning opportunities for our family. Like J.D. (and many others!), we have struggled with finding that balance where we allow some fun while working to increase our financial health.
When it comes to entertainment, I think we are close to finding that balance. We do allow some money in our budget for that type of spending, but not much. We supplement our spending by enjoying as many free activities/events in our area as we can. But where do we find them?
The internet turned out to be a great resource for us and I thought I would share what I’ve learned with you. Of course, internet sources vary greatly depending on where you live so this is a generic list that I hope can be helpful to everyone. By all means, if you have suggestions, feel free to share with everyone in the comments!
TV & Radio Stations — Most of our local stations have an online community calendar. While not everything listed has been free, I have found some great gems.
Newspapers — Our newspaper’s online version has a community calendar. They also sometimes post articles about free events (they tend to be right before the event so they are last minute finds).
Hospitals — I never knew our local hospital sponsored so many free activities to promote good health! The free activities around us are often geared towards kids but the whole family is invited.
Cities/Towns — Municipalities around us have event pages to promote what is happening. Free concerts around us are pretty popular.
Local Tourism Sites — Our local tourism sites have given us ideas regarding free places to visit and explore in our area. They also have a calendar that we check for free events.
Bookstores & Libraries — When it comes to finding free presentations by authors or literacy programs for children, bookstores and libraries are the place to look.
Sporting Goods Stores — I was surprised when I came across a local sporting goods store with a calendar of events. One near us sponsors things like free get-together bike rides.
National & State Parks — some state parks in our area have free nature programs and hikes for families during the summer.
Schools & Colleges — One school in our area has an online newsletter on their website that includes upcoming local activities for families. I’ve found quite a few free things to do from that. The local college advertises free seminars and concerts. Both of these are usually more active during the school year.
Historical Societies & Museums — In my experience, there is usually a fee for events sponsored by historical societies and museums. However, at least once a year the ones near us have a free open house and some link to free historical seminars at other locations.
Target Stores — They are sponsoring free and reduced fee activities this summer. The activities are in major metropolitan areas, but if you are near one there are some great offerings. For example, admission to the Portland Children’s Museum is free on the first Friday of the month.
Search Engines — I’ve found a few obscure free things to do just by searching for “free events [my town]” or “free activities [my town]” on Google.
The sites I find are bookmarked and checked weekly. The small amount of time I spend to check them is worth it since the free activities and events we attend feel like little splurges to us. They are fun and they are free!
The photo of the girl is by D Sharon Pruitt.The second photo is by the Goddard Space Flight Center of “The Sunday Experiment”, a free program they hosted earlier this year.
It’s never fun to consider declaring bankruptcy. But, believe it or not, bankruptcy can be a smart financial decision in certain situations. Bankruptcy’s designed to give people a fresh start when they need one. And if you file for bankruptcy, you’re taking a big step towards getting your finances under control. That’s always a responsible goal.
But it’s a serious decision with consequences. Your credit rating takes a big drop (as you may know already) and your spending habits may need to change. How do you know when the pros of bankruptcy outweigh the cons?
First, know the basics of what bankruptcy does. Bankruptcy usually does not eliminate all your debt. The courts treat different kinds of debts differently.
Here are the debts bankruptcy will NOT erase:
Student loans, whether public or private. You can get relief from student loan payments, but that’s a separate process
Income taxes you owe. There are payment options for back taxes. Just like student loans, though, income tax payments have a process all their own
Child support and alimony
Court fines or other legal penalties (such as traffic tickets)
Debts to government agencies
Debts for personal injury or death caused by drunk driving
Any debts you forget to list in bankruptcy papers
Here are the debts bankruptcy CAN erase or make easier to pay over time:
But debt itself doesn’t automatically make bankruptcy the best option. If any or all of the following circumstances apply to you, it might be time to file:
Creditors are suing you for unpaid debts
If creditors have already passed your debt to a collection agency, they may take the next step—a lawsuit. Debt collection lawsuits usually aren’t worth fighting in court. You’ll end up with court costs to worry about.
Bankruptcy will place an automatic “stay” on your account. This is a court order requiring creditors to cease all collection activity, including lawsuits.
Credit card debt is “unsecured” debt. This means creditors can’t repossess any items if you don’t pay it. Bankruptcy usually erases credit card and other unsecured debts.
If your utilities are about to be disconnected, bankruptcy can keep them from being cut off as well.
What’s Ahead:
You’re facing home foreclosure and/or car repossession
Bankruptcy can issue a stay on any repossession or foreclosure activity, just like it can for credit card collections. But this stay’s a little more complicated.
Money you owe on homes and cars may be a “secured” debt, or a debt where a creditor can repossess the property. This is the case if a creditor has a lien on your home or car. A lien is basically a claim on your property saying the creditor can take it back if you don’t make payments. You may have to read the fine print or consult a professional if you’re not sure whether creditors have a lien on your home. Bankruptcy can erase what you owe—but it can’t keep creditors with liens from repossessing property.
Don’t panic! In many cases you can keep your home even after you file. One type of personal bankruptcy, Chapter 13 bankruptcy, gives you time to catch up on mortgage payments. The property you get to keep also depends on your state’s bankruptcy “exemption” laws—each state has different rules about which properties are exempt from creditor claims.
Your wages are being garnished
Wage garnishment, or creditors taking a certain percentage of your paycheck, may be the result of a lawsuit or court order. Bankruptcy’s automatic stay will stop the garnishment.
You pay for everything on credit cards
If you’re paying off debt by digging yourself deeper into debt, bankruptcy can help you break the cycle. Chapter 7 bankruptcy, the most common type of individual bankruptcy, usually erases credit card debt.
You’re dipping into a retirement account to pay bills
Thought it may be tempting, think twice before you turn to retirement funds. Most states protect your pensions, life insurance, and retirement accounts like IRAs and 401(k)s in bankruptcy. You can file, get the rest of your bills under control, and keep the retirement funds. Check the specific legislation in your state to find out what’s protected.
Paying off your debts will take five years or more
To get a full financial picture, calculate how much you owe, to whom, and when you think you can repay—or how long you can manage modest regular payments without going underwater. Focus on the debts bankruptcy can possibly discharge, like credit card debt.
If you don’t see yourself making a dent within five years, much less paying everything back, bankruptcy may give you much-needed relief.
Your revolving debt exceeds your annual income
Revolving debt is any debt with an open-ended term or no end date. Credit cards, personal lines of credit, and home equity lines of credit are all sources of revolving debt. The debt “revolves” from month to month, though you pay a percentage each month.
You’ve tried everything else
Maybe you’ve already negotiated with creditors for a better payment plan. You’ve refinanced loans. You’ve done your best to budget and search for more income sources. And you’ve explored debt consolidation, management, and settlement.
Been there, done all of the above? Keep reading.
Since declaring bankruptcy takes time and affects your credit, it’s often considered a last resort. But the resort is there for a reason. Life happens. Overwhelming medical debt, for example, is a frequent cause of bankruptcy. If medical bills are stressing you out, though, you may have more options than you realize.
You’re eligible to file
We’ll discuss the two types of individual bankruptcy—Chapter 7 and Chapter 13—in detail below. But first, find out if you qualify.
For either type of bankruptcy you should be 90 days overdue on all the debts you need to discharge.
Chapter 7 bankruptcy requires filers’ monthly income to be below the median monthly income for their state (and a household of their size). To figure out your median income, add your gross income from the past six months and divide by six. Then deduct “reasonable and allowable expenses”. This includes what you spend each month on essentials like groceries, housing, and transportation. The number remaining is the income you have available to repay debts.
Here’s a 2016 estimate of the median annual household incomes per state—divide this number by 12 to see if you’re below the average.
If your income’s over the limit, you might still qualify for Chapter 13 bankruptcy.
So how are the two types different? And which one should you choose?
Chapter 7 bankruptcy
Otherwise known as “liquidation bankruptcy,” Chapter 7 is designed for individuals with no way to pay their bills otherwise. This type of bankruptcy pays off as much of your unsecured debt as possible, including credit card debt and medical bills. The court “liquidates” your assets by converting them into cash to pay off your creditors.
The process takes anywhere from three to six months. It’s usually much quicker than Chapter 13 bankruptcy. You can keep any assets your state marks as “exempt.” Your house or car, for instance, may or may not be exempt depending on the state you live in. If they’re not exempt, they can be collected. You’re more likely to lose assets if their equity—the value of the property minus the amount still owed—is high.
What if you have little to no income and few (if any) assets? Chapter 7 bankruptcy may be the best choice for you. Be aware, though, Chapter 7 doesn’t erase the obligations of any co-signers you may have on a loan.
Chapter 13 bankruptcy
Also known as “reorganization bankruptcy” or “wage earner’s bankruptcy,” Chapter 13 is designed for people who have a consistent income and who want to keep their property. Chapter 13 bankruptcy gives filers a “grace period” of between three to five years to make payments on their debts. Any debts that remain at the end of the grace period are discharged.
The Chapter 13 plan is similar to debt consolidation. Unlike Chapter 7, this plan lets you keep your assets. It can erase the same debts Chapter 7 can erase, along with any debts from a divorce (except for alimony and child support). The court will determine the value of your equity in assets, look at your income and expenses, and figure out a repayment amount and schedule.
If you have money coming in but you need to buy some time—and you want to ensure you keep your house—Chapter 13 bankruptcy may be the best choice for you. Chapter 13 also protects any co-signers, as long as you make payments on time.
What to know before you file
This is not a decision to be taken lightly (obviously), so consider the following before filing.
Your credit will be affected
A Chapter 7 bankruptcy stays on your credit report for 10 years. A Chapter 13 bankruptcy stays on your credit report for seven years. Scores can drop anywhere from 50 to 200 points (higher scores will drop more steeply). You may have trouble getting certain loans or will pay higher interest rates. But people have successfully obtained credit and even purchased homes after declaring bankruptcy. Good money management practices, from here on out, go a long way.
You’ll have a meeting or two in court
For Chapter 7 bankruptcy you only have to go once, to a hearing called a “Meeting of Creditors.” The trustee will ask you questions about the paperwork you filed, including your assets and debts. Creditors may or may not attend—they usually don’t. For Chapter 13 bankruptcy you go to court twice, for the Meeting of Creditors and an additional confirmation hearing.
You need a lawyer
Technically you can represent yourself, but experts don’t recommend doing this. Filing becomes complicated and takes time and research to get all the facts right. Especially with a Chapter 13 bankruptcy, the more complex kind, there are details of bankruptcy law only an attorney can navigate. Fees range between $2,000 and $4,000. The fee may seem steep, but you’ll save on the penalties you might pay otherwise. The American Bar has a directory of bankruptcy lawyers. Some lawyers offer free first consultations, and you may even be eligible for pro bono representation. The American Bankruptcy Institute keeps a list of pro bono bankruptcy attorneys in each state.
Bankruptcy becomes part of a public record
Potential lenders will know you’ve filed for bankruptcy in the past. Your employer, however, can’t fire you for declaring bankruptcy.
There’s a fee of around $300 to file
If your household income is less than 150% of the poverty line, the fee can be waived.
You’ll have mandatory financial counseling
The process of filing for bankruptcy includes mandatory lessons on financial literacy. You take one class before you file and one class before your bankruptcy is discharged.
Your spouse won’t be affected
Your spouse does not have to file for bankruptcy, and your filing won’t affect their credit. The exception is if you need relief from debts you acquired together. In that case you can jointly file for bankruptcy.
You’ll need to simultaneously stop bill payments
Once you file you’ll probably be required to stop all bill payments at once. This may feel strange, but any payment can show you favor one creditor over another, which creditors don’t like.
Filing bankruptcy, first steps
If you think you may be a candidate for bankruptcy, start gathering as much information as you can as early as possible. Although you can learn a lot online about the pros and cons of bankruptcy—and what to expect if you file—you’ll want a lawyer that specializes in bankruptcy to actually go through with filing.
Bankruptcy filing fees and your lawyer’s fees are apt to cost anywhere from $1,000 to several thousand dollars, which is another reason why the decision to file bankruptcy should be made extremely carefully.
If, however, creditors are already pursuing you in court, and bankruptcy will help keep the roof over your head and food on the table, those costs—and the other downfalls to bankruptcy—may just be worth it.
Summary
Filing for bankruptcy is a last resort and can be frustrating. But the end result should give you a little breathing room and a chance to rebuild your finances. Take advantage of this chance if you need to.
When you have a need or a problem, there’s usually a solution that can be bought. Buying a solution is often the easiest and fastest way to solve a problem — but it also can be the most expensive.
When my husband and I were in debt-repayment mode and had our discretionary spending locked down, I began to see that there are alternative solutions to problems that I once thought could only be solved by buying something. Sometimes quality counts, but more often than not, I would choose a solution that required spending more than necessary, when some forethought might have yielded a solution that was less expensive (or even free). Or maybe if I had stopped to think about it, I’d have realized it wasn’t a critical problem, and I could just choose to do nothing about it.
We set a strict budget while we were paying off our debt, so it was necessary to think about alternatives before every purchase to meet our payment goals. The great thing is that it became ingrained in me, and it’s something I continue to try to do. Here are some of the techniques I use.
Repair what you can Repair what you have instead of replacing it. You can do this with clothes, appliances, furniture, and cars. I know someone who used throw away a shirt when it was missing a button rather than paying to have it mended, or learning how to sew on a button himself.
But even if you’re not apt to go the do-it-yourself route, sometimes paying for a repair is worth it when it’s something that is expensive or difficult to replace. Last year I took my boots to a shoe doctor for the first time. I was ready to replace them, but I thought I’d try a repair shop first, and I was pleasantly surprised. The boots were re-heeled, the leather was conditioned, and they looked good-as-new. It would have been much more costly to replace them.
Delay spending Put off the purchase. People do this if they lose their jobs or if they live paycheck-to-paycheck and run out of money at the end of the month. I do it as a game when the credit card closing date is coming up, just to keep the number as low as possible.
Simply shelf the issue for the time being. Give it a week or two. (Or 30 days.) You might even think of a better solution during that period.
You also can do this with regular services. See how long you can stretch out time in between haircuts, for example, especially if your cut is low-maintenance to start. Stretching it out just four more weeks in between appointments reduced what I spend in a year by one-third. And you know, so far my hair is just fine.
Rent, trade, borrow, or take Can you borrow or trade for a solution? If you want a book or a DVD, try out a service like Book Mooch or Swaptree. Try renting tools if you won’t use them enough to warrant owning them. See if friends or family members will let you borrow a tool or appliance (just be sure to send a lovely thank-you note).
Also, don’t forget to check out sites like Freecycle for furniture, appliances, toys, and more. Items are given away for free; you just pay for the gas to pick up your stuff.
Plan ahead Many times we overspend because we’re pressed for time. Maybe you have to get a last-minute Christmas gift for a picky relative. The mall is typically where we end up in that kind of situation, and it’s not likely that you’ll find the perfect gift at a killer price when you’re in a hurry.
Planning ahead gives you the time to find the perfect gift at a great price, or maybe even free if you’re really creative.
Planning ahead isn’t limited to gifts. You can plan ahead for travel, social events, house guests, and more. You can plan your expenditures for any situation that you know about ahead of time.
Find creative solutions to achieve your goal There’s usually more than one way to solve a problem or reach a goal. Craving Chinese take-out? Try making stir-fry at home. Want to have a fun Saturday night with your friends? Throw a potluck or host a game night instead of meeting at a restaurant. Bored and feeling the urge to shop? Try reading a book, going for a walk, or doing something creative.
I’ve found the most inspiration from fellow bloggers:
Instead of completely redecorating a room, try a bit of wallpaper and a fresh coat of paint.
Rather than buying new furniture, consider how a few yards of fabric might breathe new life into the furniture you already own.
Hate the fit of a dress, but love the fabric? Consider a refashion.
Overwhelmed by the expense of baby gear? Find frugal ways to make it yourself.
A quick Google search usually provides new solutions I might not have thought of on my own.
Do nothing Just ignore the need and try to do without. A lot of times if you simply do nothing, you find it’s not as bad as you thought. The best personal example of this was our decision to do nothing about replacing our second car. We also do this when we’re swept off our feet by fancy kitchen gear, and then realize that our cast iron Dutch oven may not be as gorgeous as a porcelain enamel Le Creuset, but it gets the job done.
Make a habit out of questioning your purchases, and try a quick Internet search to see if there’s a less expensive solution out there.
What about you? What have you done lately to improvise, get by with what you have, or find a cheap solution, instead of buying something new? Share your tips!
[Editor’s note: Originally published on Selling Later.]
The industry makes you think new selling services are the problem, but we believe those conversations distract from the bigger issue, and that issue is Gatekeeping.
As a consumer, you think of real estate like this…
Sellers and buyers together, and then selling services, websites, exchanges, and offerings on the other side.
But in our opinion, the reality of buying and selling actually looks like this:
So who, or what, are all these people in the middle? Why aren’t sellers and buyers starting on the same side? Let’s dive in!
Selling Services
There are many ways to sell your home, which in our opinion, is excellent! You have options and should pick whichever service works best for you. The problem is that all of these services are competing against each other for home sellers. Once a service has your information, they don’t want it to get out as they don’t want someone else to steal you as a client.
This especially applies to real estate agents. There are 2 million real estate agents in the US (1.4 million are Realtors). So, not only are real estate agents competing against other selling services, but they are also competing against each other. Most agents only get paid when they close a deal, so they don’t want other agents contacting or having access to their potential client list. We don’t blame agents for being protective of their list because they lose a paycheck if they lose you as a client. This is especially true for newer agents whose paychecks can be infrequent and small for the first year or two.
The problem? These selling services only thrive when they insert themselves into the middle of the process (aka. middlemen). Letting their clients connect directly with each other decreases the chances of them becoming involved in the transaction.
Think of the 2 million agents and hundred’s of selling services that have future sellers and buyers in their databases. Those lists are not shared with others, especially consumers. So while they have access to know of future sellers and buyers, you as the consumer do not.
Special Consumer Notice: We have seen two different companies advertise that they give consumers access to their giant database. As a consumer, you should know that while you might be able to view their “buyer list,” you don’t get to see who they are. You also are not able to contact sellers and buyers directly. These “databases” aren’t new, and every single brokerage has buyers, especially in this market.
In our opinion, these ads are just made to lure buyers and sellers into that specific brokerage’s portal and collect their information. We believe their end goal is to get both sides of the deal, meaning they have one of their agents represent the seller and another one of their agents represent the buyer.
Aggregators
Aggregators are websites that pull some of the MLS information and make it accessible for consumers to view online. In our opinion, this was a big game-changer for consumers, as they are now able to search for homes themselves online. However, these aggregators are essentially lead generation platforms and make a lot of money by selling leads to agents and other services.
The problem? These platforms act as a portal to the MLS but have made a full business model off of collecting and selling your information back to the real estate industry or for their own internal services. Even if the homeowner posts the home, their information could still be sold to others, as could the inquiries.
Referral Platforms
Referral platforms aren’t new but recently have evolved to become the true middlemen of the middlemen (and a billion-dollar business model). We believe these platforms are one reason why commissions have gone down less than 1% since 1992!
These platforms position themselves as “helper” to find you the best agent, or even the best way to buy or sell your home. They typically promote themselves as a free service.
What they really do is lock in your attention and information before you start to find an agent or selling service on your own. They don’t tell you that most referral programs only refer you to agents/services that agree to pay for your information. Sure, some of them vet agents for specific qualifications, but it still comes down to only referring to agents who are willing to pay.
The problem? In our opinion, these platforms want to gatekeep your information for the sole purpose of selling it to someone else. Agents with years of experience and big lists of happy clients aren’t typically found on these platforms. The bigger issue with these referral programs is the lack of transparency in how they work and how they can impact your chance of negotiating your listing commission or asking for a buyer’s rebate (legal in 40 states).
When you get referred to an agent from these platforms, the agent has to agree to give the referral platform a big fee or 25%, 30%, sometimes 35% of their commission earned when you close on a home. That 30%+ is agreed upon when the agent takes you as a client. With that much already gone, usually without the consumer knowing, what is left for them to negotiate? Learn more about referral platforms.
Funnel Services & Kickbacks
This is something that we didn’t know about until we attended a real estate conference (as a consumer).
Once a company has you in their funnel, they don’t want you to shop elsewhere and can place specific companies in front of you for financial gain. Sure, this is business 101 to sell to you while you are already there. However, business 101 is a slippery slope when you are making the biggest purchase or sale of your life. Some home warranty companies, internet services, and even security systems offer kickbacks to brokerages or agents when they sell their specific product.
How do we know this? Because a home warrant company offered us $60 to sell their program to Selling Later members. We said “No way” but it opened our eyes to the kickback system in the industry
This is also why you will see some companies offering additional services like title, insurance, lending (or create a partner service to avoid RESPA violations).
The problem? While you may have thought about buying or selling for a long time, a lot of big decisions are made within the small time frame between when you placed an offer (or accepted an offer) to when you close. Big decisions like inspectors, home warranties, insurance, title companies, etc. are all made within that small time frame. As a consumer, your time to shop around and find the best value or best service is tiny. In our opinion, this is where those kickbacks cause an issue. You have to wonder if this company is referred to you is actually good or because there are kickbacks involved?
Big Data
The amount of data companies collect or purchase is pretty shocking. Beyond the problem of data privacy, the big thing to focus on here is that there are companies out there explicitly analyzing data to predict when you might sell or buy. This information can be packaged up and then sold to agents and lenders as a sales lead.
From tracking mortgage payments and equity and matching that information with the age of your home, these companies specifically watch for signs that you are going to make a move solely to sell you as a lead.
The problem? Beyond the issue of companies profiting from your personal information, this information is not publicly accessible to consumers. Instead, it is sent to the top of the gatekeeping pile (selling services). So, once again, the industry gets alerted to those making a move, but consumers do not.
We hope you are still reading because this is the most important part:
At Selling Later, we believe that consumer connections should come first, and selling services should come second. What does the industry look like if consumers regain control and make the system work best for them, not for other businesses?
Disclaimer: This is an opinion based on our studies of consumer practices in real estate. This isn’t about a specific company, real estate agents, or anyone in particular. Consumers have a right to know about a problem that starts before a consumer is ready to buy or sell and then works itself the whole way down the process.
I must confess to a new habit: I collect discarded ATM receipts. It all started when I walked by the bank in the building next to Motley Fool Intergalactic Headquarters, and found one such receipt blowing in the wind. I was shocked by how little the person had in her/his bank account, and how much she/he paid to get what cash was available.
To see what I mean, check out the stats on seven receipts I’ve recently picked up:
Withdrawal
ATM Fee
Account Balance
$60.00
$3.00
$72.79
$40.00
$0.00
$709.02
$100.00
$3.00
$8,973.53
$400.00
$0.00
$431.31
$20.00
$0.00
$301.73
$20.00
$0.00
$54.92
$20.00
$3.00
$48.04
What comes to your mind when you look at those numbers? Here’s what comes to my mind:
Some people have very small bank accounts. Only one of those accounts is substantial. Of course, this may not be the only bank accounts these people have. But if it is… well, these people are living on the financial edge. I suspect they have other accounts with much bigger balances: their credit card accounts.
Some people are willing to pay a lot to get their cash. Three of these people paid three bucks. In the case of the last person, that $3 ATM fee was 15% of the withdrawal and 4.5% of the entire bank balance.
Some people don’t give a hoot about polluting. I don’t dig through the garbage for these receipts; they all have been thrown on the ground. Some people take the time to rip them up and then throw them on the ground (even though there’s a trash slot under the ATM). I have considered the possibility that the receipts I collect aren’t indicative of banking customers in general but a self-selecting sample — specifically, people who have little regard for their community also have little regard for their own personal finances. Just a theory…
What’s Your Ther-Money-Stat?
Here’s another theory I have: We each have an internal level of financial stasis that involves having a certain amount of money in the bank, a certain level of debt, and a certain amount of each paycheck going to savings — an internal “ther-money-stat,” if you will. If we somehow find ourselves in a better situation than our regular level of financial comfortability, we turn up the spending. Perhaps it’s due to a raise, or a bonus, or an unexpectedly large tax refund. But as historian C. Northcote Parkinson wrote, “Expenses rise to meet income.”
On the flip side, there’s a level at which we freak out. Our financial condition drops below our internal ther-money-stat, and we swear off restaurants, movies, vacations, and anything but the necessities. (By the way, a difference in these internal levels is one of the biggest sources of conflict between couples.)
If I had just a few hundred dollars (or less) in the bank — as is the case for plenty of people, according to the ATM receipts I pick up — I would immediately cancel the cable and the cell phone, turn down the heat and layer up the sweaters, and likely get a second or third job. I would barely be able to sleep with that little in the bank.
Of course, I don’t know the stories behind these receipts, but my guess is that these folks have a much lower ther-money-stat than I do. The question is, can it be changed? Can someone who is willing to pay $3 to withdraw $20 from a $71.04 bank account turn into someone who would not rest until there’s three to six months’ worth of living expenses in an emergency fund?
I think it’s possible; you GRS readers have told us before what got you to become fiscally fit. But I bet it’s not easy.
Season’s Depletings
I suspect that many of us (myself included) tend to get a bit self-righteous when we see evidence of people making bad financial decisions. However, I can’t help — especially at this time of year — to also feel sorry for these low-balance bank customers. There are plenty of people who are experiencing tough times due to no fault of their own. I can even conjure images of parents withdrawing from their measly accounts to buy gifts for their kids. (I’m a sucker for a holiday sob story.)
So whatever the reason for these folks’ modest bank accounts, here’s to hoping that they — and you — have an enjoyable holiday season, and that 2010 brings bigger bank balances to us all.
Remember all those articles (including some on this blog) that claimed mortgage rates would have to rise to X percent in order for homes to become unaffordable?
Well, mortgage rates have been pretty flat for the past several years, and remain amazingly attractive historically, yet home prices have now risen out of reach for many prospective buyers.
What gives? How could this be? Well, they’re unaffordable because home prices have surged.
The Housing Recovery Has Left Many Behind
Half of largest housing markets nationwide are unaffordable
Despite the fact that mortgage rates remain low historically
And while median-priced homes remain affordable
These aren’t the properties that at for sale at the moment
While the housing recovery has been wonderful for those who were able to hang on through the crisis, and those lucky enough to pick up properties on the cheap post-crisis, it has left behind scores of would-be buyers in its wake.
Per a recent analysis from Zillow, mortgage payments are now unaffordable in half of the nation’s 35 largest housing markets, despite those rock-bottom interest rates. Certainly this can’t be good news.
They found that monthly payments for the median-valued U.S. property only require 16% of median income, which is quite affordable.
But here’s the problem – the median-priced home isn’t the one for sale. The homes that are for sale tend to be priced above the median for their particular market.
This isn’t just a feeling you get while perusing inventory online. In all but three of the largest 35 U.S. metros, the median price of homes for sale is higher than the median value of all homes.
In short, it’s mostly expensive homes that are listed these days, not the run-of-the-mill average-priced ones.
You’ve probably heard that starter homes are hard to come by. This is partially because the expected move-up buyers aren’t moving up, thanks to a lack of home equity and a low mortgage rate they don’t want to give up.
So when you actually look at homes listed for sale nationwide, 20% of median income is being swallowed up.
Unfortunately, that’s just the pretty picture of the nation as a whole. For many individual housing markets, it’s way worse.
Los Angeles Home Buyers Facing Biggest Challenge
Homes in Los Angeles are the most out of reach
They require a staggering 46.8% of median income
Which is likely beyond what lenders will approve DTI-wise
And even if approved it means heightened risk for the borrower
In Los Angeles, the typical property for sale requires 46.8% of median income, which a lender probably wouldn’t even accept DTI-wise.
Prior to the most recent housing bubble, buyers in LA only needed to spend 35.2% of income on mortgage payments for the typical home purchase.
To sum it up, LA buyers have access to some of the lowest mortgage rates in history, yet need nearly half their paycheck to cover the mortgage. Makes you question that rent vs. buy decision, eh?
It’s the same story in California’s five other largest metros, including San Francisco (40.2% of income), San Diego (39.6% of income), San Jose (39.3%), Sacramento (29.1% of income), and Riverside (27.9% of income).
To determine affordability, Zillow assumed the buyer had a 20% down payment and a 30-year fixed at Freddie Mac’s prevailing mortgage rate.
These numbers are all higher relative to the income spent on the mortgage from 1985 through 2000.
The problem is similar in many other metros nationwide aside from places like Cleveland, where homes are actually more affordable than they’ve been historically.
There, the median list price of ~$144,000 requires just 12.7% of median income for monthly mortgage payments, significantly less than the 20% needed during the pre-bubble years.
But Cleveland is one of the few places where it has gotten much cheaper, and remember, this is at a time when mortgage rates remain near uncharted territory.
Prospective buyers still have to contend with larger down payment requirements thanks to those higher list prices, when taken together, make the prospect of owning a home dim.
Underwriting Will Get More Forgiving
As a result of this lack of affordability
Mortgage lenders will begin easing underwriting guidelines
We’re seeing it already with 1% down mortgages
And higher DTI allowances, which could lead to trouble
The only silver lining is that many lenders are now offering 1% down payments, including Quicken, and some are even rolling out zero down options like Movement Mortgage.
At the same time, Fannie Mae will soon allow higher debt-to-income ratios when its Desktop Underwriter (DU) Version 10.1 is released in late July.
In just over a month, DU will consider loan applications with a maximum DTI of 50%, and no longer require compensating factors for DTIs between 45-50%.
Additionally, their prior DU release from last September opened the door to automated underwriting for borrowers without credit scores.
Clearly we are trending toward looser underwriting guidelines after years of what many felt were excessively harsh policies.
But it’s kind of worrisome given it comes at a time when home prices are eclipsing old all-time highs and mortgage rates remain dirt cheap.
If buyers are still struggling to qualify with 3% mortgage rates and 1% down payments, there might be a problem lurking.
We financial planners and financial writers love to trot out hypothetical illustrations along the lines of “If you save 20% of your income starting at age 40, you’ll be able to retire by your late 60s, assuming an 8% rate of return” — a scenario I wrote about in March. While such projections are necessary for planning for the future, the truth is that they will most definitely be wrong once the future rolls around. There are just too many unknowable variables, such as future investment returns, inflation rates, and tax rates.
However, the unknowable unknowns aren’t just limited to economic variables, as readers often remind me after I write such an article. Here’s a tale a GRS reader told in the comments section after my March post:
In 1996 I had $78,000 in retirement funds and was 32 years old (hubby was 38). Then our home was flooded because a contractor doing a city project made a mistake. While struggling with being unable to live in the house, I was diagnosed with cancer and needed surgery ([we had] no insurance). Within a year I had cashed out the $78,000 to begin rebuilding the house and pay for surgery (we recouped a very small portion of the loss from the contractor). We sold the house and walked away with $11,000 to our name. That was in 1998.
We’ve tried to get back on track, but every time I save, something happens to eat it up: chronic illness, cost of experimental medication, hurricane and tornado damage to home over three years (part not covered by insurance), and more. Life lesson for us: Continue to save because it’s the responsible thing to do. Plan for the future, but be prepared for something to get in the way of those plans.
A sad story with an important lesson: Along your road to retirement, you may encounter speed bumps, fender-benders, road blocks, and perhaps outright tragedies. While many will be unpreventable, the financial fallout can be mitigated.
In this post, we discuss the most common causes of financial derailment, and what you can do to keep your plan on course. While many of the solutions are specific to each particular risk, there’s one line of defense that will protect your financial empire regardless of the method of assault, and that is a big, fat emergency fund. You’ve heard it before, but we’ll say it again: Have three to six months’ worth of living expenses in cash, ready to be deployed when the possible becomes the present.
Illnesses and Accidents Health problems are expensive and can impair a person’s ability to earn a paycheck. They can also force older Americans into retirement earlier than planned. Studies indicate that as many as 45% of current retirees quit work due to health problems or disability. The haleness and heartiness of a household’s breadwinner(s) aren’t the only factor; the health problems of other relatives, such as children or elderly relatives, can consume savings and impede a career.
Your defense As the sad tale of the above GRS reader shows, being diagnosed with a serious disease while lacking health insurance can lead to financial disaster. Being properly insured is an absolute necessity. However, no insurance policy covers all procedures and all costs. Reduce the burden of out-of-pocket expenses by participating in your employer’s flexible-spending plan, if offered, which allows you to set aside money for qualified health-care expenses. The money you contribute is not subject to income or payroll taxes.
The decision to acquire disability insurance, which replaces your paycheck in case you’re unable to work, is not as clear-cut. You already have some coverage through Social Security, though the definition of disability is very stringent. You may also have coverage through your employer. If you decide to purchase disability insurance for yourself, you’ll find that it can be expensive and complicated. However, the more your job requires that you be in good physical shape (e.g., traveling, meeting with clients, holding a scalpel, violin, or other tool), the more you should consider disability insurance. Many employers, professional associations, and other groups offer group disability policies, which can be less expensive and easier to qualify for.
Finally, one of the best ways to keep health-care costs down is to be healthy. As much as 70% of health-care costs are due to lifestyle choices — eating too much, moving too little, and putting things in our mouths that smoke, impair, or bear no resemblance to anything in nature.
Job Loss Once the boss stops sending a paycheck, either due to a layoff or company collapse, contributions to the 401(k) also stop. Depending on the person’s employment prospects, it may also be just a matter of time before debt piles up or the nest egg is cracked to cover living expenses. It’s a recipe for a delayed retirement.
But it’s not only the unemployed who find it harder to save for retirement. These days, income insecurity also takes the form of stagnant or reduced wages, while the costs of many goods and services keep rising. In many cases, the first item in the budget that gets sacrificed is contributions to the 401(k) or IRA.
Your defense Strengthening and expanding human capital is one of the most under-appreciated concepts in financial planning. To shore up your ability to turn your talents into dollars, develop multiple skills, stay on top of the trends in your company and its industry, and become crucial to your employer or, if you’re self-employed, your customers.
Loss of a Spouse Whether through death or divorce, the loss of a spouse can be emotionally and financially devastating. Most married household finances are built on two incomes, or one income and one spouse who does a lot of work that otherwise would cost money (e.g., raising kids). Then there’s the division of labor; it’s common for one spouse to handle all the bills or one to handle all the investing, with the other spouse being fairly ignorant of what’s going on. A death or divorce can leave a spouse on her or his own, often getting by on less income and having to assume all the financial housework.
Your defense If the death of a spouse would lead to significant financial hardship, then that spouse should have life insurance. Also, don’t be in the dark about important aspects of financial planning; each spouse has to at least know enough to step in during an emergency. One subscriber to my newsletter (a man who handles most of the financial duties in his household) annually updates a document he calls “A Letter From Your Dead Husband,” which explains the family finances to his wife in the case of his untimely demise.
As for divorce, it’s not very romantic to plan for your marriage’s dissolution. But if your matrimony is full of acrimony, begin by protecting yourself while still being fair to your spouse. If you’re engaged, a prenuptial agreement can be a delicate topic but a good idea, especially if there are kids from previous relationships.
Natural Disaster The tsunamis in Japan and tornadoes throughout America demonstrate that Mother Nature is a risk to everyone’s financial plan.
Your defense Have enough homeowners or renters insurance, with an insurer that has a record of honoring legitimate claims. Inventory all your possessions, with proof of ownership for big-ticket items, so you can substantiate your claims if necessary. Keep copies in several places, including in a fireproof safe or safety deposit box, along with other valuable items so that they’ll have some extra protection from the elements (as well as thieves).
Kids It costs $260,700 to raise a kid until age 17, according to the Department of Agriculture (because there’s little difference between a cow and a kid). And that doesn’t factor in college costs. Yes, children are their own form of natural disaster, at least when it comes to money. (Don’t get me started on the hair loss.)
Your defense Scientists are working on a cure. In the meantime, enjoy all the non-financial benefits of reproducing or adopting. Such as an excuse to play Candyland and Chutes & Ladder, again… and again… and again.
If you haven’t started your children or teens off with a kids checking account optimized for their needs, you’ll want to help your college student open a checking account before they begin school.
Opening a checking account for your child can teach them about money management and financial responsibility, along with providing them an easy way to make debit card purchases. It’s never too late to get started.
One advantage to helping your young adult open their first student checking account is they have more options than they might have when they were 16 or younger. Students over 18 can open a bank account with few restrictions.
But choosing a student checking account may give them access to higher interest rates and added features and benefits, along with fee-free checking, no monthly maintenance fees, and no minimum deposit to open an account.
12 Best Student Checking Accounts
Not surprisingly, many of the best student checking accounts come from banks that also offer some of the best checking accounts for any age. However, the products below – in most cases – are tailored for young adults from the ages of 18 to 24, with the features this age group desires most, including an intuitive mobile app and low or non-existent minimum deposit requirements.
1. Best for Students under 18: Capital One MONEY Teen
Most of the student bank accounts on our list exclude children under the age of 17 or 18. Capital One MONEY Teen checking is available to children ages 8 and up. It comes with all the benefits and security of a big bank, providing peace-of-mind. This includes access to Capital One branches and Capital One Cafes for in-person service. This account also serves as a great tool to teach your young adult the basics of banking.
Capital One MONEY Teen checking is a joint account with no monthly fee, no overdraft fees, and access to 70,000 ATMs with no fees. Plus, earn 0.10% on all balances, including those in checking.
You can link Capital One MONEY Teen checking to any other bank account through any bank or neobank, making it easy to transfer money to your teen while they are away at college. Plus, you can keep tabs on their spending with their linked account in the Capital One mobile app.
When they graduate, your teen can hold onto their MONEY account or transfer the funds into a top-rated Capital One 360 Checking account of their own.
2. Best for Working Students: Chime
Chime is not a bank. It’s a financial technology company and mobile app backed by Stride Bank, NA, and The Bancorp Bank. Many features make it perfect for working students. First, you can receive your paycheck up to two days earlier than you might at other banks with ACH deposit.
Plus, you can set up automatic transfers to your linked Chime Savings account, helping you to establish good financial habits early on. Simply set up Chime to transfer a percentage of your paycheck into your Savings Account every time you receive a direct deposit.
When you use your debit card for purchases, the “Save When You Spend” program rounds up your purchase and transfers the difference directly into savings. That small change can really add up, whether you’re saving for your first apartment after college, a new car, or your next tuition bill.
For working students looking to build their credit, Chime gives account holders access to a Credit Builder Secured Visa, with no annual fee, no credit check, and no security deposit required. Instead, the credit account is secured by your Chime checking account with monthly direct deposits.
Like many of the best student bank accounts on this list, Chime has no overdraft fee, no monthly service fee, no ATM fee for in-network ATMs, and no minimum balance requirements.
3. Best Account Opening Bonus: Chase College Checking
Chase Bank has been handing out student account opening bonuses like they hand out lollipops at their branches lately. College students ages 17 to 24 can snag a $100 bonus when they open an account online or at a local branch (students age 17 will need to visit a branch). You’ll just need to make 10 qualifying transactions within the first 60 days of opening the student bank account.
What’s a qualifying transaction? Virtually anything, according to the Chase website, including debit card purchases, online bill payments, Chase QuickDeposits, Zelle transfers, and ACH credits. Bank as you normally would, and you should easily earn that $100.
In addition to the generous sign-up bonus, Chase College Checking has no monthly fees for college students for up to five years, access to 16,000 ATMs and 4,700 branches across the U.S., and zero liability protection for unauthorized debit card purchases.
Chase Overdraft Assist covers purchases that exceed your account balance. You’ll pay no overdraft fee if you’re overdrawn by $50 or less at the end of the next business day.
4. Best for Yield: Ally Interest Checking
Ally Bank is the first bank on our list not designed specifically for students, but the vast array of features in this interest bearing checking account makes it ideal for young adults.
Ally Bank offers an APY of 0.25% on checking account balances and 4.00% APY on balances in a linked Ally Bank savings account. Neither account has any monthly fees.
Ally offers several features to help those on a tight budget manage their money. You can organize your money into spending and saving buckets, which can help you see exactly where your money goes each month. Ally will also review your bank accounts and help you find opportunities to save, and shuttle that extra money into your high yield Ally savings account.
Customers who have deposited $100 or more into their Ally checking account, or $250 via direct deposit, gain access to Ally’s CoverDraft service after 30 days. This protection covers up to $100 or $250 in charges that would overwise overdraft your account. Some purchases, including Zelle transfers, or ATM withdrawals, may be declined if they would put your account into overdraft.
Ally has no monthly maintenance fee, no overdraft fees, no ATM fee for in-network ATM transactions and no minimum balance requirement.
5. Best for Referrals to Earn Extra Cash: GO2bank
GO2bank, the digital bank associated with the top financial technology company Green Dot, offers an easy, straightforward money account with overdraft protection up to $200 with eligible direct deposits. The linked savings account pays a high 4.5% APY, with no fees for qualifying customers and no minimum balance requirement.
You can get regular ACH deposits from your job or side gigs up to two days earlier than most traditional banks. If you receive government benefits, such as Social Security, you can receive those deposits up to four days early.
Your GO2bank account will have a monthly service fee that costs $5 per month, unless you have a qualifying direct deposit that month. You will also pay fees for transfers from a linked debit card from another bank or fintech, mobile check deposits, and cash deposits.
If you are the type of person with friends who come to you for advice, you can earn $50 for each friend you refer to GO2bank who signs up with direct deposit. Your friend will also earn $50. You can use this offer for up to 30 friends, yielding $1,500 annually. This makes a GO2bank account great for social media influencers or college students with a large friend group.
6. Best for Full-Service Banking: Bank of America Advantage SafeBalance Banking
Bank of America Advantage checking accounts offer options for people in various stages of their financial life. College students might be best to start out with Bank of America Advantage SafeBalance banking, a straightforward money account with no overdraft fee and no checks.
The account has no monthly fee for students under the age of 25 or customers under the age of 18. Preferred Rewards customers also receive free checking. There is a $25 minimum deposit to open an account.
New Bank of America customers can earn a $100 account opening bonus when they open an account and set up direct deposits of $1,000 or more within 90 days.
7. Best for Comprehensive Money Management: PNC Virtual Wallet Student
Money Magazine named the PNC Virtual Wallet on its best banks for students list three years running. PNC Bank divides this mobile account into three separate accounts for everyday spending, “reserve,” or short-term savings, and “growth” for long-term savings.
The account has no monthly service fee for students for up to six years, along with all the benefits of a regular PNC Virtual Wallet. Additionally, students receive a courtesy refund of your first overdraft fee on your Spend account, one free incoming domestic or international wire transfer per statement period, and free paper statements if you opt in to receive them.
Once six years have passed or you are no longer a student, your account converts into a regular PNC Virtual Wallet, which may have associated monthly fees. Check the PNC website at that time to determine the fees and how you can waive them.
Your PNC Virtual Student Wallet pays a 0.01% APY on money in your Reserve account, and .02% on account balances up to $2,499 in your Growth account, with .03% APY on balances over $2,500. These may not be the best rates available, but the reputation of PNC Bank, along with the money management features in a Virtual Wallet Student account, make this an account worth considering for students just learning to budget.
8. Best for Establishing Savings Habits.: Wells Fargo Clear Access Banking
As one of the Big Four banks in the U.S., Wells Fargo offers a reliable and safe place to store your money, plus access to thousands of branches nationwide.
The Wells Fargo Clear Access banking account is great for teens and college students, since it’s available for account holders ages 13 to 24. Anyone under the age of 18 will need to open their account in a branch and anyone younger than 17 must have an adult aged 18+ as a joint account holder. The account has no monthly maintenance fee for anyone 24 or younger. A $25 minimum opening deposit is required.
Wells Fargo Clear Access banking is a simple, straightforward money account with no checks and personalized service at Wells Fargo branches. There are no overdraft fees with the account, but also no overdraft protection. Transactions that exceed the account or minimum balance amount will be declined, which helps put teens and young adults in charge of their money.
You can link your Clear Access bank account to a Way2Save Savings account and earn a 0.15% APY. You can establish good money habits by setting up automatic savings. Wells Fargo will transfer $1 from your Clear Access account into your checking account each time you use online bill pay or use your debit card for a one-time purchase. You can also transfer as little as $25 per month or $1 per day into your account to see your savings grow even faster.
9. Best for Cash Back: Discover Cashback Debit
The Discover Cashback Debit account may not be marketed to teens and students, by name. But, it’s enticing to anyone looking for a standard checking account with no monthly service fees and 1% cashback on debit card purchases, up to $3,000 per month. It’s highly unlikely for most college students to max out that free money (unless they are putting housing, tuition, and car expenses on their card).
Discover Cashback! debit card offers many of the benefits you’d expect from these top-rated money accounts, including early direct deposit, 60,000+ no-fee ATMs, and overdraft protection from your linked Discover Savings with no fees. Discover charges no fees for insufficient funds, bank checks, regular checks, or expedited delivery of a replacement debit card.
These features make it one of the most convenient accounts you can hold. Plus, you don’t have to worry about “aging out” of the account and facing fees for a non-student bank account. Your Discover Cashback Debit account will be free no matter your age. Link it to a Discover Savings Account to earn 4.0% APY with no minimum deposit required.
10. Best for Unlimited Out-of-Network ATM Fee Reimbursement – Axos Bank Rewards Checking
Another bank account not marketed to students but meeting all their needs is the Axos Bank Rewards Checking account. This account has no monthly fees. It also reimburses ATM fees for out-of-network ATMs nationwide, which is great for students who travel domestically or who don’t have ATMs in their network on campus.
Pay no overdraft fee or non-sufficient funds fees with this account. Best of all, earn an APY of 0.40% on your checking balance if you receive monthly direct deposits of $1,500-plus. Young investors can ramp up their interest rate by 1% with an average daily balance of $2,500 in an Axos Invest Managed Portfolio Account, plus another 1% by holding $2,500 in a self-directed trading account. If you take out a loan through Axos, you can add another 0.60% to your APY.
College students likely won’t regret opening an Axos Bank account to take them through adulthood, especially with options for investing, low mortgage rates, car loans, and more.
Plus, earn a welcome bonus when you open an account and have direct deposits of at least $1,500 within a single calendar month during the first three months of account opening.
11. Best Credit Union: Alliant Credit Union Teen Checking
Alliant Credit Union offers a teen checking account for minors ages 13 to 17. The account is insured up to $250,000 per account holder by the National Credit Union Administration (NCUA). The adult account holder must be an Alliant Credit Union member. But it’s easy to join by depositing $5 into an Alliant Credit Union saving account. Alliant Savings earns an APY of 0.25%.
The teen checking account has no overdraft fees or non-sufficient funds fee. It also has no monthly fees or minimum balance requirements. Account holders gain access to 80,000+ fee free ATMs nationwide plus $20 per month in ATM fee reimbursement for out-of-network ATM use. This is an interest earning checking account which also pays 0.25% APY on all balances as long as you have at least one deposit, via ACH direct deposit, mobile check deposit, or transfer from another bank or credit union, each month.
12. Best for Young Shoppers: Varo Bank
Varo Bank is another account not necessarily marketed to college students but definitely optimized for their needs. The Varo Bank debit card delivers up to 6% cash back, with money deposited into your Varo account as soon as you accrue $5 in rewards.
Like many of the best student accounts on this list, Varo has no monthly fee, no minimum balance requirements, and no overdraft fee. If you need money before payday, you can use Varo Advance, an interest-fee program that allows you to borrow up to $250 and pay it back within 30 days. You will not pay fees to borrow less than $20. Borrowing up to $250 comes with fees that can be as high as $15, depending on the amount of cash advance you need.
Varo Bank uses the Allpoint network of ATMs, with fee free access to 55,000+ ATMs nationwide. Using other bank ATMs could result in charges up to $3 from Varo and fees charged by the other banks, as well.
It pays to open a linked Varo Bank savings to take advantage of a high 3% APY. Account holders with direct deposits equal to $1,000 per month and a positive balance in their Varo checking and savings can earn up to 4% APY.
One of the best things about a Varo account is it can grow with you. You won’t pay additional fees as an adult out of college, so you can keep the same bank account you started with for your entire life if you want.
Methodology: How We Select the Best Student Checking Accounts
To find the best student checking accounts, we evaluated the monthly maintenance fees, ATM fees, minimum deposit requirements, features, benefits, banking services provided, along with customer service and mobile app access at several of the biggest and most well-known banks and credit unions.
ATM Network
Most banks have ATM networks or partner ATM networks of 20,000 or more ATMs nationwide where you can use your debit card with no ATM fees. You might be surprised to learn that even online banks and financial technology companies that are not a bank provide access to thousands of ATMs nationwide through partner programs.
Nationwide availability (physical locations or mobile access)
College students often split time between their college campus and the home where they grew up. Finding a bank with physical locations in the areas they live or an online bank that provides a mobile banking app with fee free mobile banking from anywhere is important.
Fees and minimum requirements
Bank fees no longer have to be a way of life for today’s young adults. We chose financial institutions with no monthly maintenance fees or easy ways to waive maintenance fees.
Benefits such as high APY, cash-back rewards, or other additional perks
Student checking accounts today are more than just “bare bones” places to store your cash. Many student bank accounts offer perks, benefits, and high-yield savings or an interest bearing checking account to provide added value.
Overdraft fees
Cash management mistakes happen, especially when young adults first start learning to budget and manage their finances. Many banks have no overdraft fees and some offer overdraft protection to help out in a pinch.
How to Choose the Best Bank for College Students
We’ve offered 12 solid options to help you choose the best student checking account. Before you open a student bank account, it’s a good idea to think about what you need in your primary checking account and a linked savings.
The list below makes it easy to review your must-haves and nice-to-haves when you choose your first bank account as a college student.
Best student checking account interest rates
If you’re looking to earn interest on your standard checking account, many banks offer this feature. Review annual percentage yield (APY) figures for your top choices.
Remember, a higher savings interest rate might benefit you more, since money in your checking account tends to fluctuate based on paychecks, bills, and expenses. The best checking account may not pay interest, but can save you money in other ways.
Annual Percentage Yield (APY)
Likewise, you can put money in your pocket with an account with linked savings offering a high annual percentage yield (APY).
Mobile Check Deposit
If you get paid via paper checks, you’ll want to find an account with a mobile app that offers mobile check deposit. Find out how fast deposits clear, and if mobile banking services are fee free.
No Monthly Maintenance Fees
Many banks today make it easy to find a free checking account with no maintenance fees. If you have to pay a monthly maintenance fee, find out exactly what you’re getting for your money. Find out if the perks and benefits, such as a cash back debit card or reimbursement of ATM fees make the maintenance fees worthwhile.
Minimum Deposit and Minimum Balance Requirements
When you’re just getting started, cash may be tight. It’s important to find an account with no minimum deposit to open.
Banking Services Provided
Accounts should have customer service online, by phone or in branches, plus an easy-to-use mobile app and a debit card with no ATM fees.
FAQs About Student Checking Accounts
Read what people are asking about the best student checking accounts, including minimum deposit requirements and benefits of a student checking account.
What are the benefits of a student bank account?
A bank account tailored for students gives young adults a head start on their financial future and learning how to manage money. For students who work, they can receive direct deposits in their student account, pay bills online, and send money to friends and family using Zelle.
How to get a student checking account bonus?
Several student checking accounts, including Chase, provide sign-up bonuses. Make sure to read the fine print and complete the requirements, which may include setting up direct deposit or making a minimum opening deposit, to collect the bonus.
Can I open a student checking account without a deposit?
To open a student checking account without a minimum deposit amount, simply look for a bank account, like Varo, that has no minimum opening deposit.
Are there any downsides to opening a student checking account?
When you open a student checking account, you’ll want to make sure you won’t pay monthly maintenance fees. Some student checking accounts convert to a regular account once the student graduates, and there may be fees associated with the regular account.
Is there an age limit on a student checking account?
Most student checking accounts are open to students from the age of 18 to 24 without a joint account holder. Customers under the age of 18 may be able to open an account with a joint owner.
Can minors open student checking accounts?
Accounts like Capital One Money Teen are available to children ages 8 and up with a joint account holder. Some other accounts require students to be 18 or older.
What happens to your student checking account when you graduate?
Many of the student bank accounts on this list won’t change when you graduate college. Others offer the option to convert your account to one of the bank’s regular checking products. A Chase College Checking Account has no monthly fees for your first five years in college, but if you graduate or exceed that time frame, you might pay a $6 monthly maintenance fee unless you meet other requirements.