Interest-only mortgages let you pay just the accruing interest on your loan for an introductory period — but they come with high payments once that period ends.
These loans mainly benefit those planning to move or anticipating a big income increase within a decade.
Since the Great Recession, interest-only mortgages have been hard to find due to their high risk.
An interest-only mortgage allows you to pay only the interest on your loan for a set period. This type of mortgage can help you more easily afford the payments in the short term — but not without some drawbacks. Here’s what to know.
What is an interest-only mortgage?
An interest-only mortgage is a home loan that allows borrowers to make interest-only payments for a set amount of time, typically between seven and 10 years, at the start of a 30-year term. After this introductory period ends, the borrower pays principal and interest for the remainder of the loan at a variable interest rate.
In the early 2000s, homebuyers gave in to the instant gratification of mortgages that allowed them to make interest-only payments at the start of the loan, so long as they took on supersized payments over the long term. This was one of the risky practices that contributed to the housing crisis in 2007, leading to the Great Recession. In the end, many people lost their homes.
Some lenders still offer interest-only mortgages today — often as an adjustable-rate loan — but with much stricter eligibility requirements. They are now considered non-qualified mortgages (non-QM loans) because they don’t meet the backing criteria for Fannie Mae, Freddie Mac or the other government entities that insure and repurchase mortgages. Simply put: an interest-only mortgage is a riskier product.
How do interest-only mortgages work?
With an interest-only loan, you’ll pay interest at a fixed or adjustable rate during the interest-only period. The interest rates are comparable with what you might find with a conventional loan, but because you’re not paying any principal, the initial payments are much lower. However, they may still include property taxes, homeowners insurance and possibly private mortgage insurance (PMI).
Even though you’re only required to pay the interest at first, you still have the option of paying down the principal during the loan’s introductory period.
At the end of the initial period, borrowers must repay the principal either in one balloon payment at a set date, which can be very large, or in monthly payments (that also include interest) for the remainder of the term. These payments of principal and interest are going to be larger than the interest-only ones. And, because your principal payments are being amortized over only 20 years instead of 30, those payments will be higher than those of someone with a traditional 30-year loan.
You can refinance after the interest-only period is over, although fees will likely apply.
Example of an interest-only mortgage
Say you obtain a 30-year interest-only loan for $330,000, with an initial rate of 5.1 percent and an interest-only term of seven years. During the interest-only period, you’d pay roughly $1,403 per month.
After this initial phase, with our interest-only loan example, the payment would rise to $2,033 per month — assuming your rate doesn’t change. Many interest-only loans convert to an adjustable rate, so if rates rise in the future, yours will, too (and vice versa).
With a 30-year fixed-rate mortgage for the same amount, you’d pay $1,882 per month. This includes principal and interest, and also accounts for the higher rate on this type of loan — in this case, 5.54 percent.
With both the traditional fixed-rate option and our interest-only loan example, you’d pay a total of about $677,000, with around $347,000 of those payments going toward interest. As you can see, however, you’d ultimately have a higher monthly payment with an interest-only loan. If your interest-only loan requires a balloon payment instead, you’d be on the hook for several hundred thousand dollars.
How to qualify for an interest-only mortgage
Interest-only loans have been harder to come by since the housing crisis of the mid-2000s. Fewer lenders offer them, and banks have set stricter requirements to qualify.
Banks generally only offer an interest-only mortgage to a well-qualified borrower. You’ll likely need:
A credit score of 700 or more
A debt-to-income (DTI) ratio of 43 percent of less
A down payment of 20 percent or more
Solid proof of future earning potential
Ample assets
Should you consider an interest-only mortgage?
The best candidates for an interest-only mortgage are borrowers who have full confidence they’ll be able to cover the higher monthly payments when they arise. This kind of home loan might be right for you if:
You’re in graduate school and want to keep repayments low for now — but anticipate having a high-paying job in future
You have a trust that will start releasing assets at a future date
You flip houses and need to keep expenses down during the remodel
You expect to move before the end of the introductory period
Interest-only loans can be a prudent personal finance strategy under certain circumstances, but they’re not a good idea for everyone. Here are some pros and cons:
Pros of interest-only mortgages
You get more house for your money. You can enjoy a larger home for less money while you save up for a larger mortgage. That’s assuming you have a sound plan in place for when those larger payments eventually kick in. Bankrate’s affordability calculator can help you estimate how much house you can afford.
Interest-only payments are smaller than conventional mortgage payments. The initial monthly payments on interest-only loans tend to be significantly lower than payments on conventional loans, and the interest rate may be fixed during the first part of the loan. Bankrate’s interest-only mortgage calculator can help you determine what your monthly payment would be.
You kick higher payments down the road. You can delay making large mortgage payments or avoid them entirely if you plan to move out of your home before the introductory period ends.
If interest rates are high now, you can avoid them. If rates are anticipated to be lower in the future, you can keep your monthly payments relatively affordable and then reap the benefits of lower rates by the time the interest-only period ends.
Cons of interest-only mortgages
You won’t build home equity. As long as you’re only paying interest, you’re not building equity in your home. And if your home’s value depreciates, you could end up upside-down on your mortgage or risk negative amortization.
You might get an unaffordable payment after the interest-only period. You could encounter serious sticker shock when the interest-only period ends, and your monthly payments suddenly double or triple, or if you have to make a sizable balloon payment at the end of the initial period.
You’ll be at the mercy of market interest rates. If rates have risen since the loan originated, when the intro period ends, you may have a payment much higher than you want.
If your income changes, the home may be unaffordable down the road. Your anticipated future income might not match your expectations, saddling you with more house than you can afford.
Alternatives to an interest-only mortgage
Before you take on this kind of loan, ask yourself: what is an interest-only mortgage going to do for you? Make sure you think long-term.
If you want to avoid this higher-risk form of home financing, you can explore other types of mortgages. Many adjustable-rate mortgages also have a long, low-interest introductory rate period — and, since the payments include some principal, you’ll be building equity during it.
If you’re drawn to interest-only loans because of the low monthly payment, explore government-backed loans like one from the Federal Housing Administration (FHA). These can give you more affordable payments without the future jump that comes with an interest-only mortgage.
Can I change to an interest-only mortgage?
It is possible to refinance a traditional mortgage to an interest-only loan, and borrowers might consider this option as a way to free up money to put toward short-term investments or an unexpected expense. So, how do interest-only loans work as a refi? You would meet the same scrutiny and requirements as you would if applying for a first-time interest-only loan.
The same eligibility criteria for refinancing also apply, and some lenders may raise the bar since it is a higher-risk loan.
In any refinance, you will need to receive a home appraisal and pay closing costs and fees. Refinancing can cost 3 percent to 6 percent of the home’s total amount. In addition, if you have less than 20 percent equity in your home, you will be required to pay PMI.
LOS ANGELES — More homeowners eager to sell their home are lowering their initial asking price in a bid to entice prospective buyers as the spring homebuying season gets going.
Some 14.6% of U.S. homes listed for sale last month had their price lowered, according to Realtor.com. That’s up from 13.2% a year earlier, the first annual increase since May. In January, the percentage of homes on the market with price reductions was 14.7%.
The share of home listings that have had their price lowered is running slightly higher than the monthly average on data going back to January 2017.
That trend bodes well for prospective homebuyers navigating a housing market that remains unaffordable for many Americans. A chronically low supply of homes for sale has kept pushing home prices higher overall even as U.S. home sales slumped the past two years.
“Sellers are cutting prices, but it just means we’re seeing smaller price gains than we would otherwise have seen,” said Danielle Hale, chief economist at Realtor.com.
The pickup in the share of home listings with price cuts is a sign the housing market is shifting back toward a more balanced dynamic between buyers and sellers. Rock-bottom mortgage rates in the first two years of the pandemic armed homebuyers with more purchasing power, which fueled bidding wars, driving the median sale price for previously occupied U.S. homes 42% higher from 2019 through 2022.
“Essentially, the price reductions suggest far more normalcy in the housing market than we’ve seen over the last couple of years,” Hale said.
The share of properties that had their listing price lowered peaked in October 2018 at 21.7%. It got nearly as high as that — 21.5% — in October 2022.
Last year, the percentage of home listings that had their asking price lowered jumped to 18.9% in October, as the average rate on a 30-year mortgage surged to a 23-year high of 7.79%, according to Freddie Mac.
Mortgage rates eased in December amid expectations that inflation has cooled enough for the Federal Reserve begin cutting its key short term rate as soon as this spring. Those expectations were dampened following stronger-than-expected reports on inflation and the economy this year, which led to a rise in mortgage rates through most of February.
That’s put pressure on sellers to scale back their asking price to “meet buyers where they are,” Hale said.
That pressure could ease if, as many economists expect, mortgage rates decline this year.
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I’ve been told that life is about living in the moment.
But are you living with intention?
Intention means to be aware of what you want, and your desires should align with your purpose.
If they don’t, it can lead to a feeling of not knowing who you are or where on earth life is heading. And without those two things happening in unison – clarity and direction – then any type of accomplishment becomes difficult if not impossible (see my personal story below, for example).
So how do you live with intention?
For many people, life is a struggle.
We are constantly told that we need to do certain things and be a certain way in order for us to feel fulfilled or happy.
While this may sound like good advice, it can lead some of us down the wrong path–especially when our lives are already suffering from a lack of motivation or direction.
In this post, we will discuss seven reasons why you should consider living your life with intention now rather than just letting life lead you. Also, this may change your perspective on life.
There are great benefits that come along with living your life with intention and what it means to live without limitations.
Most importantly, there will be questions you may want to ask yourself which could help get you started on the right path going forward.
Either way, to live life with intention, you must take action now!
What is Intentional Living?
This is an intentional practice of living more intentionally, with a greater focus on self-care and mindfulness.
Intentional living is a lifestyle that encourages you to identify your priorities and values.
This means that it matters more than ever before because people are gradually becoming clearer on what they want in life and how they can achieve those things.
It is not an easy task but one worth taking up if you’re ready for the challenge, as there will be greater clarity of focus when pursuing this goal.
Living Life with Intention Meaning
Intentional living means that we are aware of what’s going on in our lives and make conscious decisions about the things we want to do. It also implies being present, stopping for a moment, reflecting, and thinking about what’s happening.
When you live intentionally it gives your life meaning because you will see progress over time as opposed to just fixing things or achieving goals by ticking them off a list.
Intentional living is a lifestyle that allows for more time to experience love, laughter, happiness, and appreciating the intrinsic value of simpler things.
Saying I appreciate you is important.
In these exploratory questions below, we looked at what makes you happy, how you spend your time, and your future plans.
Why is it important to live intentionally?
It is important to live intentionally because you will have a life that is more meaningful, purposeful, and rewarding.
You are able to make decisions about what you want out of your life and know what is most important to you.
In this busy world, it is easy to get caught up in the rat race. Simplify your life and spend time doing what matters most requires living with intention.
We need to be mindful of how we choose our day-to-day activities so that they serve a greater purpose.
By living intentionally, one can live a happier and healthier life. Purpose in life is correlated with happiness.
7 Reasons For Living Life with Intention and Purpose
Intentional living is a lifestyle that focuses on reflecting and making conscious decisions about what’s in alignment with your values.
This approach to life helps you live more meaningful, satisfying lives by taking time out of each day to consider who you are, what matters most to you, and how might be able to change the course of your life for the better.
It only takes 7 minutes per day for intentional reflection.
In a short amount of time, the benefit is it allows you not only to think about what is in alignment with your values but also how you might be able to change the course of your life for the better.
And that’s the point of intentional living: to live your life with intention.
These 7 reasons are not only worth pursuing now but also in life’s present moments where there is no need to wait until tomorrow because it can be done today!
1. You’ll be more in the present moment.
You will be able to live a life more spontaneously and deeply, with intention.
By living each day more deliberately, you will find greater peace bliss, serenity in your day-to-day life, and increased meaning in a world where things and people repeatedly start to look the same.
Living a life with intention and purpose is going to be one of the best decisions you can make. Why? The power that comes from living a deliberate life will impact every area of your being.
2. You’ll be focused on goals and daily tasks, not distractions.
A person’s life is often focused on daily tasks, work, and going through the same routine day after day. This focus has its benefits, but it also entails forgetting about important goals that a person has set.
With the abundant distractions in our lives, we seek the next big project (or social media) to distract us from what we need to focus on.
In times like these, it becomes difficult to make the “life decisions” that will lead us closer to success.
3. You’ll be more likely to make smarter decisions and take on new challenges with confidence.
Happiness is a choice, and so are meaningful relationships. Time well spent will be a joyful day.
Managing your expectations will improve your life, making it harder for you to get too disappointed.
Start new projects with ease and make motivation part of your daily routine.
Handle criticism with ease knowing there will be some bumps and bruises along the way, but you know it is worth sticking your neck out.
Utilize today’s technology to your advantage – not a distraction device.
Sidestep old patterns or bad habits, so that you are open to the opportunities that lie ahead.
Perception of ease is attainable when you make healthy lifestyle choices and become reliant on an inner sense of what is worth.
4. It will help you better understand your priorities, which means less decision fatigue!
You’ll feel more relaxed knowing you are saving your time for the activities that matter: conversation, cooking dinner with friends, sitting on the couch working on your weekend project, and reading a book.
Maintaining your lifestyle and personal growth should be a top priority in your personal development plan since it is impossible to get back any time you waste.
This should not have to be a life of hustle.
In this life, you have time for time activities with meaning and purpose.
5. It will help keep you on track with your goals and priorities, which can be hard to do without a plan.
You have to find your 100% pure motivation and encouragement in this journey of life!
By setting goals and aligning your priorities, it will transform the way you live your life and have a fulfilling time.
Our focus on this post resonates with a well-timed message to help facilitate personal growth and success- with empowering and easy steps.
Learn how to make money goals and a vision board.
6. You’ll have the freedom to live life how YOU want to live it.
You’ll have the freedom to live life how YOU want to live it.
You will have the freedom to set and achieve objectives using the resources you have.
You will love how it keeps you balanced, since your world is always changing, and the results will show on your path to success.
One of the ways to achieve this is to understand the real meaning of time freedom. More importantly, you need to figure out how to live with time freedom dominating your day.
7. You will have clarity of your desired outcome and what you want to create for yourself, others, or both (meaning you’ll have a purpose).
Since the idea of pursuing happiness can be vague, you have to define the truths about living this free life and live more intentionally.
In these times, many are foregoing happiness in favor of sacrificing something to feel secure within their careers or daily overexerting themselves by trying to “keep up with the Jones.” You deserve clarity of how you want to spend the remaining years you have.
This answer will vary from person to person and situation to situation because you have the freedom to design the life you want.
With so many distractions and options, it can be hard to find your way. Whether you’re looking for love, fulfillment, or a career path, this mantra is the life guideline that will provide clarity and stay true.
Now, It is Your Turn…
Living Life with Intention turns the phrase “figuring it out” into a guide to the life you love.
It is about being aware of what matters most and prioritizing it in a way that helps you reach your goals. Intentional living is not just for those seeking blessings or divine guidance; anyone can benefit from this approach – whether they be spiritual seekers or simply trying to improve their quality of life.
This is how can I have an intentional life.
Is intention and purpose the same thing?
Intention is a conscious choice to act in a certain way. Purpose, on the other hand, is something that we do because it’s part of our core values and who we are as people. Intention helps you live life with purpose and intention.
The difference between Intention and Purpose:
– Intentions are short term goals or actions. These are things you do today to achieve your purpose.
– Purposes are your long term goals or actions. This is whys why you are doing the things that lead up to your intentions.
In addition, purpose also means that you are doing something for a larger reason than just the goal or action itself.
Intention and purpose are different because the intention is short-term, while purpose is long-term. They correlate to each other on how you live your life each day.
How to Live Life with Intention
Intention is defined as the direction or goal of one’s thoughts and actions. Even though people may be living their lives without intention, life still has a direction.
In order to live life with intention, one must think about their actions and their consequences of them. The consequence could be something small such as not picking up an item at the store that you needed to buy, or it could be something monumental such as not staying in a relationship that you feel is no longer healthy for you.
The point of living life with intention is to make the best choices for oneself, one’s family, and one’s future.
In order to do this, you must answer these soul-searching questions.
For most people, this is difficult because it requires you to consider how you want to live your life.
There are many ways that one can do this, and the answer will be different for everyone. However, it is important to do this with intention and intentionality.
1. Envision your perfect day
Make a picture of what your life would look like if you were living that perfect day and make it as detailed as possible.
Find a quiet place to sit and be still for at least 10 minutes.
Think about:
What would you spend your time doing?
Where would you be?
Who would be with you?
Now, how can you live days like that more often?
2. Decide your Personal Values
In order to make a change, you must first decide what is important to you. This process can be difficult and painful, but it’s necessary in order to keep yourself motivated towards your goal.
It is important to decide what your personal values are and use them as a guide for making decisions in life.
This is a process that starts with thinking about what your personal values are. This can be difficult to do in the abstract, but it is helpful to think of your values as being somewhere on a spectrum between your beliefs and what you do.
Do this exercise like you were an outside person looking in. What would that person say about you? What do you value in life?
Your life of personal values will be necessary in order to live with intention.
3. What is your Vision for Life?
Your vision for life is what makes all the difference in how you live your day-to-day life.
Core values are the guideposts that lead you along your path to fulfillment and happiness. By looking back on moments when you feel proud or happy, it’s easier to find out what is important to you and how those things can be expressed through your actions today.
A simple example could be:
My vision for life is to be happy and healthy. I want to live a long, fulfilling life with the love of my family and friends.
If you have never created a vision board, then this vision board planner will help you out!
4. Question the “Norms”
Think about everything you believe you belong on your list of “have tos.”
Those things you feel like you must do. Some examples of these are “you have to go,” “you need to eat,” and “I have to do my homework.”
Now, take a birds-eye observation… do these “norms” and “have tos” serve you well?
Are these “norms” the reasons why you are not living your life with intention?
Take inventory of what you actually have to do every day and eliminate all that does not serve your goals.
5. Relax Intentionally
Relaxing intentionally is a process in which one seeks to achieve a temporary escape from stress and the overwhelming pressures of everyday life.
This is something that is HARD to do when you first attempt to relax.
It is important to take some time for yourself.
Unwind from a busy day and get back into the life of intention by choosing low-energy activities that re-energize you.
During quiet time, spend time intentionally uncovering ways that help you relax.
Are you Ready to Live Life with Intention?
Ultimately, living life with intention is about curating a life based on things that really matter.
You can do this through intentional time management and making sure you are spending your time in the way that makes the most sense for yourself. This will help you to be more clear on what it means to live intentionally as opposed to just being dictated by society’s standards or guidelines.
This is something that you deserve to do.
Furthermore, intentional living is about being present and aware of what you value.
It is a shift from striving for the life that others think you should be leading to embracing the one that feels good. Intentional living allows us to find more room for love, laughter, happiness, and appreciate all those things we often take for granted in our daily lives.
It doesn’t mean giving up on your goals or aspirations but rather finding rhythm so they feel true instead of false like many other pursuits.
Living a life of intention will impact the world on what you believe in.
This is a step necessary for personal growth, which leads to accomplishing more things than you ever thought possible.
With true reflection, it will take time to figure out your values and decide what they are.
Intentional living is about more than just paying bills and going to work each day — it’s about giving your life a purpose. It means considering every decision from all perspectives that are relevant to the kind of life you want
You just have to start questioning every single action you take.
This is how can we live an intentional and purposeful life.
Know someone else that needs this, too? Then, please share!!
Did the post resonate with you?
More importantly, did I answer the questions you have about this topic? Let me know in the comments if I can help in some other way!
Your comments are not just welcomed; they’re an integral part of our community. Let’s continue the conversation and explore how these ideas align with your journey towards Money Bliss.
There is a difference between being rich and wealthy.
However, most people combine rich and wealthy into one bucket because they both seem so far off and unreachable.
It is important that you understand the distinction because what one person considers “rich” might actually be considered “wealthy.”
There is a huge difference between the two words, no matter how they are used.
Earning a lot of money does not automatically lead to happiness and success because when one achieves happiness when it can be reflected in the fulfillment of ambition.
Being rich usually means that you have an abundance of material things such as money and expensive items.
Being independently wealthy can be seen as someone who has a lot of money, but it also means that they have enough money that will last the test of time.
There is a difference between being rich and being wealthy, but they are both can be seen as positive things.
Let’s discuss the different types of wealth and how they are defined in order to help differentiate these two concepts.
The real key of Rich vs Wealthy is the discussion on which one you should be striving to be.
So, is it better to be rich or wealthy?
What is a Rich Person?
A rich person is someone who has a lot of money and assets. This may be a businessperson, an investor, or just someone who has been very successful in their field.
This rich person has probably created new money vs old money.
Rich people tend to barely save any money and spend excessively, meaning they run out of cash quickly. For example, a rich person might earn $10,000 in a month while spending $12,000 to wind up with a negative $2000 when the month is over.
The amount of debt for a rich person tends to be higher. They are willing to keep up the lifestyle rather than tell others about their debts.
To be rich you have to be able to take the risk of having money to invest and time to wait for the windfall.
What is a Wealthy Person?
A wealthy person is someone who has a lot of money for their lifestyle standards.
Since a wealthy person is consistently growing their money because they save and are wise with what they have. They tend to think of the future and put away some cash for it rather than spending everything.
Their goal is to take their large sum of money and grow that money even more through active or passive income.
A wealthy person does not have to be a number-crunching billionaire or someone who is living lavishly.
It is all about the decisions that you make and how those decisions can lead to wealth.
You can start to build wealth when you hit your first $100k in investments. When you have a salary of over $100k a year, this is much easier to do fast.
Wealthy people are those who have a lot more money than you do, but they work hard every day in order to keep it.
Rich vs Wealthy Money Habits
Rich people tend to spend more money than wealthy people.
The difference between rich people and wealthy people is that rich people have money habits that often lead to debt. Rich people are not usually frugal, and they tend to spend a lot of money.
Also, rich people have the ability to earn more if they choose something different in the future.
Rich people are usually defined as those with a net worth of over $10 million, but there is no set number for how much money someone has to be considered rich.
Wealthy people, on the other hand, have an annual income of $150,000 or more. Their wealth comes from hard work and saving money to slowly increase their net worth.
Broke People Habits:
Spend time watching TV and playing video games
Keep up with the Joneses’
Blame others for failures
The concept of change is too overwhelming
Too afraid of setting goals because they don’t want to be accountable
Deep in debt
Feel their situation will never change
Never save money
Willing to get a credit card just for a discount
Think bank fees and overdraft fees are a part of life
No emergency fund
Rich Habits:
Earns a lot of money
Spends a lot of money
Enjoys a flashy lifestyle
Okay being in debt
Focuses on the short term
Not big savers of their money
They frown upon being frugal
Prefer a challenge to make more money
Takes on bigger risks
Their inner circle is people exactly like them
Very impulse with decision making
Wealthy Habits:
Set long term goals
Creates an action plan to reach their goals
Take responsibility for their actions
Saves money consistently
Understands that passive income will grow their wealth
Constantly learning
Spend time reading
Enjoys the fact they have options
Lives below their means
Embraces frugal
Shy away from debt
Finds a mentor
How to Go from Rich to Wealthy
Many people feel the need to be rich because they have the idea that being rich is key to success.
However, many times, wealthy people are wealthier than their counterparts who are both richer and wealthier.
If you are rich, then it is important that you are not frugal because many times, being wealthy means having a lot of money and saving the rest. If you have a lot of money and are not frugal with it, then you could end up broke.
However, if your goal is to become wealthy meaning having a lot of money AND saving, then you are on the right path to financial freedom.
This is the difference between being rich and wealthy.
Rich vs Wealthy Mindset
First of all, the definitions of each of these are really close.
A rich mindset is a state of mind that knows that there are no limits to what you can achieve.
A wealthy mindset believes that success and wealth come from hard work and dedication.
Honestly, both money mindsets are needed to keep pushing yourself to reach financial freedom and enjoy time freedom.
You need a rich mindset to grow your money, but a wealthy mindset to keep that wealth.
The wealthy are more likely to have a growth mindset than the poor because they know that money is merely an instrument for achieving their goals.
Whereas, rich people often spend too much time worrying about what others think of them and why they aren’t as successful or wealthy as other people in society.
How to Become Wealthy
This is a question that has been asked many times, and finding the answer depends on how you define wealth.
In general, becoming wealthy means having enough money to support yourself without any outside help.
You have enough money to cover your expenses without the need for an additional influx of money. For many people, that means they need at least $1 million dollars, so they can live off the investments gains and dividends. If you are single, then $500k may be enough.
As such, becoming wealthy is one of the most difficult things to do.
If you are constantly struggling to make ends meet and never saving money, then becoming wealthy will be even harder for you to accomplish!
Here is what you need to do to move from well off vs rich vs wealthy.
Step #1 – Get out of debt
For people who are in debt, the solution is simple: get out of debt.
But for a lot of people, they need to make some changes before they can do that.
It’s important to get out of debt and that takes time. The more debt you have, the longer it will take.
However, I will tell you from personal experience. Until we paid off our debt, we didn’t make any progress financially. We were stuck on a hamster wheel. Since paying off our debt, we reach our financial goals so much easier.
Track your progress, set goals, and stay motivated while getting out of debt.
Step #2 – Stop comparing yourself
Although comparisons can be helpful and may indicate which side is doing better or worse, they are not always accurate. Sometimes comparing yourself to others will make you feel inferior and frustrated.
Keep in mind that you are not just the sum of your accomplishments.
Stop comparing yourself to other people and start focusing on the things that make you happy.
Conversely, spending time with people who inspire you will help cultivate a wealthy mindset. It can be anyone from your family members to celebrities, but it is important that these individuals are inspirational and not toxic for your mental health.
Step #3 – Become Your Own Boss
This doesn’t mean you can’t keep your 9-5 job. It means you are looking for ways to make money outside the traditional “job.”
An entrepreneur is a person who organizes and runs a business, typically with manageable risk and a small amount of capital, in order to turn it into a profitable venture.
Become creative with ways to bring in extra money. Some ideas include day trading, dropshipping, starting an Etsy shop, driving for Uber, or walking dogs.
Here are great ways to make money on the side:
It is possible to make more money on your business than you make more money in your current job or career.
Step #4 – Be Generous
Be generous to others.
Being wealthy means living a comfortable life and being able to help others.
Giving away money can be a way to build wealth, but it is not the only way. This helps you realize the impact you can have on the world.
Your small contribution can help shape and change the lives of so many.
Consequently, giving and helping others will motivate you to work harder and continue building your wealth.
Step #5 – Think Long Term & Set Goals
Life goals have exploded in recent years and many of us are now focused on growing our own wealth.
The truth of the matter is both wealth and richness are great.
Wealth enables a person to live life on his own terms and allows them to achieve the things they have dreamed of.
But, getting there does not just magically appear.
It takes a plan of action to reach those smart financial goals.
By consistently saving money, you will slowly build your net worth. Step by step you are building the foundation to become wealthy.
Baby steps to becoming wealthy.
Rich vs Wealthy Quotes
This rich vs wealthy quote from Stephen Swid is one of my favorite all-time quotes.
This quote quickly summarizes the difference between the wealthy vs rich definition.
“Being rich is having money; being wealthy is having time.”
As an American businessman and investor, Stephen Swid spent countless hours on various deal negotiations and build his own wealth. He understood the wealthy vs rich meaning.
This quote is something I focus on when making decisions of what next steps to take.
What does this quote mean to you?
What is considered being wealthy?
Being wealthy is a subjective term that can be interpreted in many ways. The definition of the term is different for everyone, so it’s hard to answer this question definitively.
Many people believe you need 7 figures or even 10 figures.
One could be considered to be wealthy or poor based on their country’s standards, their personal spending habits, and the types of investments they have.
The richest people are those who have made their wealth through investments and not necessarily the ones that have spent a lot of money.
The definition of wealthy is different for everyone, but it’s generally considered to be someone who has a lot of money and financial stability.
Being wealthy is measured by how much money you accumulate and save.
It is understanding your personal finances to budget, track savings, contribute to retirement, and grow liquid net worth.
A wealthy person is someone who has made wise decisions. Wealth does not have anything to do with how much money you have in your bank account.
Do you Fit the Definition of Wealthy vs Rich?
Now, we have covered the difference between the wealthy and the rich. If you’re wondering what is the difference between rich and wealthy, it’s not that complicated.
Rich people are those who have saved, invested, and built net worth through their income or assets. Wealthy people can follow these three simple steps to build your own wealth: save money in a savings account or investment account; invest in stocks, bonds, or other securities for growth; create an asset such as real estate by purchasing property with borrowed funds on low-interest rates
The key distinction between being rich or wealthy is the mindset.
Rich people might have more money in their bank accounts or assets, but they don’t think of themselves as rich because they are worried about their appearance and keeping up with their elite society. Wealthy individuals are those who see value in accumulating wealth primarily through investing and growing their financial portfolio with investments over time.
A rich person is someone who has more money than the average person but may not wealthy. They are always looking to make more money and spend more because they believe that there is not enough time or money in this world for them to enjoy.
Wealthy individuals are those who can afford to buy things and choose not to because it helps them increase their net worth and become more wealthy.
The only way to be wealthy is by being smart on your investments and having time for yourself in order to find happiness.
Being rich may or may not be something you should aspire to be. The more money you have, the more responsibilities you get.
There are many rich and wealthy people who are unhappy because they are so busy trying to keep up with society’s expectations.
Know someone else that needs this, too? Then, please share!!
Did the post resonate with you?
More importantly, did I answer the questions you have about this topic? Let me know in the comments if I can help in some other way!
Your comments are not just welcomed; they’re an integral part of our community. Let’s continue the conversation and explore how these ideas align with your journey towards Money Bliss.
Buyers who expect mortgage rates to drop must wait longer. (iStock)
Mortgage rates eased slightly this week, enough to reheat the homebuying momentum as the market heads into a traditionally busy season of the year, according to Freddie Mac.
The average 30-year fixed-rate mortgage was 6.88% for the week ending March 7, according to Freddie Mac’s latest Primary Mortgage Market Survey. That’s a drop from the previous week when it averaged 6.94%. A year ago, the 30-year fixed-rate mortgage averaged 6.73%.
The average rate for a 15-year mortgage was 6.22%, down from 6.26% last week and up from 5.95% last year.
The slight drop in borrowing costs led to a nearly 10% jump in mortgage applications, indicating that buyer interest is strong as the market heads into the spring homebuying season, according to the latest Mortgage Bankers Association Weekly Applications survey.
“Evidence that purchase demand remains sensitive to interest rate changes was on display this week, as applications rose for the first time in six weeks in response to lower rates,” Freddie Mac Chief Economist Sam Khater said. “Mortgage rates continue to be one of the biggest hurdles for potential homebuyers looking to enter the market. It’s important to remember that rates can vary widely between mortgage lenders, so shopping around is essential.”
If you are looking to take advantage of the current mortgage rates by refinancing your mortgage loan or are ready to shop for the best rate on a new mortgage, consider visiting an online marketplace like Credible to compare rates and get preapproved with multiple lenders at once.
SOCIAL SECURITY: COLA INCREASING BUT MEDICARE COSTS RISING TOO IN 2024
Market waits for rates to drop
While the Federal Reserve has said that the plan to reverse interest rate hikes is still in the works, the timeline for when those cuts will begin has been unclear. A reversal in interest rates is crucial in creating more affordability for buyers also dealing with record home price gains.
However, housing supply is improving, according to a recent Redfin report. New listings rose 13% from a year earlier nationwide during the four weeks ending March 3, the most significant increase in nearly three years. And home prices have also lost some momentum. Roughly 5.5% of home sellers dropped their asking price, the highest share of any February since at least 2015, while the share of affordable homes on the market has increased, according to Realtor.com.
“Mortgage rates remain stubbornly high, and since there is no indication that the Fed will set interest rates meaningfully lower in the short term, it is unlikely that mortgage rates will fall much this year,” Voxtur Analytics Senior Vice President David Sober said in a statement. “If a potential homebuyer is waiting for a lower rate, with house prices still rising overall, they probably won’t get the deal they want anytime soon.”
If you’re looking to become a homeowner, you could still find the best mortgage rates by shopping around. Visit Credible to compare your options without affecting your credit score.
AMERICANS LIVING PAYCHECK TO PAYCHECK OWN 60% OF CREDIT CARD DEBT: SURVEY
Buyers should shop for the best rate
Despite the continued increase in rates, homebuyers could save on borrowing costs by shopping for the best rate with the right lender.
When mortgage rates are high, borrowers can save more by shopping around. Mortgage rate variability more than doubled in 2022 when rates exceeded 7%, according to Freddie Mac research. Borrowers who shopped for five different rate quotes could have saved more than $6,000 over the life of the loan, assuming the loan remains active for at least five years.
“The increase in rate dispersion means that consumers with similar borrower profiles are being offered a wide range of mortgage rates,” Genaro Villa, a macro and housing economics professional for Freddie Mac, said in the research brief. “In the context of today’s rate environment, although mortgage rates are averaging around 6%, many consumers that fit the same borrower profile could have received a better deal on one day and locked in a 5.5% rate, and on another day locked in a rate closer to 6.5%.”
If you are ready to shop for a mortgage loan or are looking to refinance an existing one, you can use the Credible marketplace to compare rates and lenders and get a mortgage preapproval letter in minutes.
SECURE 2.0: OPTIONAL PROVISIONS KICK IN TO HELP RETIREMENT SAVERS WITH EMERGENCIES AND STUDENT LOAN DEBT
Have a finance-related question, but don’t know who to ask? Email The Credible Money Expert at [email protected] and your question might be answered by Credible in our Money Expert column.
Welcome to NerdWallet’s Smart Money podcast, where we answer your real-world money questions. In this episode:
Discover how to revamp your finances with a 30-day money cleanse that aligns your spending with joy and personal values.
How can you set a budget that aligns with your goals?
How can you optimize your spending to reduce waste?
NerdWallet’s Kim Palmer talks to Ashley Feinstein Gerstley, author of The 30-Day Money Cleanse, to help you understand how small changes can make a significant impact on your financial health. They begin with a discussion of the financial cleanse, with tips and tricks on aligning spending with personal values, creating lasting habits in 30 days by using a method that has saved others an average of $950 over 30 days — without feeling deprived.
They also discuss money management tactics that include keeping a money journal, practicing visualization and having money parties. They discuss the benefits of recording feelings associated with each purchase, indulging in simple low-cost activities that bring happiness and aligning spending with personal values for a more satisfying approach to personal finance.
Check out this episode on your favorite podcast platform, including:
NerdWallet stories related to this episode:
Episode transcript
This transcript was generated from podcast audio by an AI tool.
Sean Pyles:
Welcome to NerdWallet’s Smart Money Podcast. I’m Sean Pyles.
Kim Palmer:
And I’m Kim Palmer.
Sean Pyles:
On Smart Money, we’re all about answering your money questions big and small, ambitious and easy. This episode we’re taking on an especially ambitious question, how can you transform your finances in 30 days? And Kim is here in her role as the host of our regular book club series to guide you through this conversation. So Kim, who are you talking with?
Kim Palmer:
I’m speaking with Ashley Feinstein Gerstley, author of The 30-Day Money Cleanse, which is the focus of our conversation today. Feinstein Gerstley is also the founder of The Fiscal Femme, which offers online money courses, and she’s also a certified financial planner and a financial coach.
Sean Pyles:
Sounds great. Well, I will let you take things from here.
Kim Palmer:
Ashley, welcome to Smart Money.
Ashley Feinstein Gerstley:
Thank you. Thank you so much for having me.
Kim Palmer:
So Ashley, let’s start with what is a financial cleanse? Does it involve lemons and vinegar?
Ashley Feinstein Gerstley:
You’d think, right? You’d think that it would have some interesting food items as well, but it is about letting go of the things that don’t bring value to our lives and realigning and rethinking how we spend our money so it can be more conscious and intentional.
Kim Palmer:
What do you like about the financial cleanse concept? Because I think you’re right, we usually apply that to food. So what is it you like about applying that to money?
Ashley Feinstein Gerstley:
Originally when I created the program, it was actually created after a food cleanse in the same format because I think food and money are very similar. They are both emotionally charged. There’s so much more to them than just the numbers. And that’s what I was seeing over and over with clients is that sometimes we don’t have the education and we aren’t sure what we should be doing, but then even once we know what we should be doing, oftentimes we’re not doing it and that’s where our money mindset came in. And so The Money Cleanse definitely helps us shift that and put together that plan over the course of the 30 days.
Kim Palmer:
And what is it about 30 days? Why did you choose that versus a week or six months?
Ashley Feinstein Gerstley:
30 days gives us enough time where it’s that first week when we do something, we can feel really excited and have a lot of momentum. And then in maybe week two, week three is where it can get challenging and where we might end up giving up. And so I think a lot of the transformation in The Money Cleanse happens in those two and three weeks. And also there’s just a perfect amount of content to cover over the course of four weeks because we don’t want to take on too much. We all have a lot going on. We have jobs and social lives, but there’s a lot to cover. So if we are able to break that down into more bite-sized weekly chunks, I thought that was a really great format for The Money Cleanse. And even though it is called a cleanse, the idea is at the end you have a new lifestyle that lives on far long after the cleanse.
Kim Palmer:
We’re definitely going to get into all of those details in a minute, but first I wanted to ask you what you learned personally the first time you applied this to yourself. How did it go and what did you learn from it or change?
Ashley Feinstein Gerstley:
A lot of the concepts were concepts that I applied to my own life as I was learning and not in any given order, but what I found is that working with people across different goals and income levels, I was saying a lot of the same things over and over again and a lot of the lessons that I learned and provided me with a lot of transformation worked really well in this money cleanse format where we first focus on ourselves and then also on the environment around us. I think a lot of times we think of our own money lives, but so much of our lives are interacting with our family, our friends, our coworkers, and so how does that work with our finances as well?
Kim Palmer:
The numbers you share in the book I thought were pretty shocking. You say that according to your research, the average participant saved $950 over 30 days, and that is more than 20% of their pretax income on average. That’s amazing. Where are these savings coming from?
Ashley Feinstein Gerstley:
Honestly, a lot of it is just from intentionality. The coolest part about that stat to me, I was very thrilled always at the end of The Money Cleanse program. I ran it live for five years before turning it into a book, I would ask people at the end about their results and really understand what their income is and how that savings kept going. I think a large portion of that savings was happening month after month after The Money Cleanse, but I think the best part was that they mostly didn’t feel deprived and that it wasn’t like, “Oh, I’m staying home and eating canned beans every night in order to save that $950.” It was a lot of shifts and a lot of things that actually didn’t feel bad to them, which makes something that you’re able to keep going and keep consistent.
Kim Palmer:
Yeah, I think that goes back to what you were mentioning before in that you don’t want to just do this for 30 days, but it’s about setting up some new habits and some things that really stick with you.
Ashley Feinstein Gerstley:
Yes, exactly.
Kim Palmer:
So who would benefit most from doing a 30-day financial cleanse? Is there anyone who doesn’t need it, like Elon Musk?
Ashley Feinstein Gerstley:
Honestly, I’ve found that most of us will benefit from a money cleanse. I’d say the more you don’t want to do it, the more you probably will benefit. One of the exercises we do is keep a money journal, much like a food journal, where you just write down everything that you spend and earn. And I found that the people who dread doing that the most, have the most to gain from actually taking a look.
So I’d say I really think it’s something that most of us will benefit from regardless of our income, because what I found with working with clients across income ranges is you really can’t out earn it. We might think, “Oh, if I just make more money, I’ll finally start saving the way I’d like to.” And then you get the raise, get the promotion, this happened to me over and over again and next thing I know at the end of the month, I’m not saving a lot more than I was before. So I think we might imagine that doubling our salary or getting the raise will actually be the fix that we need, but then somehow our expenses tend to creep up, and that’s where The Money Cleanse can come in.
Kim Palmer:
I know like you said, it varies based on each person, but are there some common things you notice people cutting back on to find those savings? For example, for me, I know when I really focus on it and I short term stop myself from spending, it’s all about those recurring purchases on Amazon, for example, that are so easy to buy quickly. Are there some examples of expenses that people did find relatively easy to cut and really stick with it?
Ashley Feinstein Gerstley:
I would say some common offenders, definitely technology has made it so much easier to spend money and that just keeps getting easier and easier. So I would say Lyfts and Ubers were a shocker to a lot of people. Takeout. UberEats now is one that people complain about a lot. Any daily habits, if you’re grabbing lunch every day with your coworkers or a snack or smoothies. And also just the grocery store in general, which with prices where they are, it’s really hard to decrease spending there, but it is something you can strategize with and try.
Kim Palmer:
Yes, what you’re saying makes a lot of sense. Let’s get into the nitty-gritty a little bit for someone who really wants to try this and get started. When you talk about beginning your 30-day money cleanse, you suggest signing an agreement with yourself and you are acknowledging it’ll be hard, but you’re going to make it a priority. Can you explain why that can help?
Ashley Feinstein Gerstley:
I think often when we start something, and I mentioned this earlier, we can have a lot of energy around it, be excited around it, but I find just going through and thinking through what this commitment actually is, how much time I want to dedicate to it, it’s just a different level of commitment and promise to ourselves. And so along the way, any way that I can, have people feel more accountable or more dedicated to their money cleanse, I want to do it.
The other thing which you’ll notice throughout the book is that over and over again, I am allowing people to make mistakes, to forget to keep their money journal, to feel like they’re completely fallen off the wagon because that’s what happens to all of us. And I’ve noticed that we tend to want to do The Money Cleanse when it’s a week where we have no plans and we’re not going to be spending a lot of money, but it’s actually really great to do it when your life looks typical. Maybe it could be during the holidays when it’s extra challenging or you have a lot of plans with your friends, because that forces us to create a cleanse that works with our life as it actually is, not this time where you can just stay home and cook dinner every night.
Kim Palmer:
You also write about practicing visualization and how that can help people stay on track. How does that work? What does that look like exactly?
Ashley Feinstein Gerstley:
There’s some very cool research about how our mind works when we see things and believe that they are true and can visualize them. I also find a prompt that’s so helpful is to think about someone, let’s say if my goal is to save X number of dollars or to feel a lot more peace of mind with my money, I think there can be very objective goals, but then also more feelings based like, “This is how I want to feel and interact with my money” and thinking about, “Okay, if I were that person, what decisions would they be making?” It allows us to try it on and it also puts our brain to work making that reality happen and reconcile it.
Kim Palmer:
You have already mentioned money journals a few times. I want to understand that better. So what does your money journal look like? Does it help to have everything written out? Is it like any other journal?
Ashley Feinstein Gerstley:
I think the more challenging it sounds to you, the simpler I would recommend keeping it. So the simplest form is the item and the amount. And it can be if you are someone who loves writing things, I have the worst handwriting, but when I’m thinking or trying to brainstorm, I love writing by hand. So if you have a journal you’d like to keep it that way, definitely write it out by hand. But you can also keep it on notes in your phone and use an app. As long as you’re manually entering it in, that part is really important for registering the expense. You can get more fancy with it, more creative. If you want to take note of how you felt before an expense or how you felt after, that can also be really helpful. But I think at a minimum, just the item and the amount is great.
Kim Palmer:
Oh, okay. That’s so interesting. So you would write down every single thing that you spend. And then I like your add-ons as saying how it made you feel. I think I would go that route because I love keeping a detailed journal. So you can say how it made you feel and then does that help inform your future spending decisions?
Ashley Feinstein Gerstley:
I think it does because what happens is you reflect and realize on any expenses that do not feel good afterward, you might notice a common feeling beforehand. So something that happened with a bunch of people who’ve taken the money cleanse is they’ve noticed when they needed a break from work, they would leave the office and go on a walk. They needed that break. They were craving some kind of R&R after working really hard on something, but that might lead to a purchase that they didn’t feel great about. Maybe it was window shopping, then they ran in and bought something they didn’t even know they needed, but now they needed, or they used that time to grab lunch and they didn’t really even enjoy the $16 salad that they were getting. I think noticing how you’re feeling before, especially if how you’re feeling after is opposite or a feeling that you would like less of could be really beneficial and helpful information.
Kim Palmer:
One of my favorite tools that you talk about is focusing on frugal joys. And you include a list of things that sound so appealing, but they’re also free or very inexpensive, things like having a picnic, calling an old friend or taking a free online class. How can focusing on those frugal joys help?
Ashley Feinstein Gerstley:
I’m such a fan of frugal joys too, and while I list out a hundred of them, there really are limitless frugal joys. What actually brings us joy can be very different for each of us. So something that I love doing, someone else might say that sounds horrible. But that’s kind of the fun of it, is testing them out and see where we can add joy in our lives. They’re a great tool. If you want to trade out some joys that cost money for some free or inexpensive ones, that’s great for creating room in a budget. Or if you just want to add joy to your life, you can just start working in those frugal joys. Starting with just trying to find a couple a week I think is great, but if you can incorporate some frugal joys and focus on that joy and really relish in it, that’s a practice that is great for money and just life in general.
Kim Palmer:
You also talk about really thinking hard about your values and what’s important to you, the trade-offs that you are willing to make. For example, maybe you would give up buying that expensive coffee every day if it meant you could go on a big vacation at the end of the year instead. So how do you recommend thinking through your values and what trade-offs make sense for you?
Ashley Feinstein Gerstley:
This was something that really opened my eyes because I often thought of our spending as, “Oh, this is what people do.” I never thought of it as a real opportunity cost. Every time we spend a dollar, we are losing the opportunity to spend it in a different way or to save it. And so in a lot of cases, people are rearranging their spending. They’re not even changing a behavior in order to save. They can be changing a behavior in order to spend it in a different way that will actually bring them more joy.
It’s kind of a bummer at first to realize we can only use or spend our dollar one time, but then it’s also very liberating and creates a sense of intention with how we use our money. And I find that when we look at our spending, and this is something that I recommend doing in any budget, in The Money Cleanse, is looking at each expense in terms of how much you spend on it each year that can allow you to say, “Okay, if I brought my lunch to work, which can feel like a hassle, or sometimes people are going into the office less, maybe both times they go in bringing lunch instead of getting it out or doing it one time instead of doing takeout twice, how much does that save me per year? And is there anything else I’d rather do with the money?”
In The Money Cleanse, we think about the things that bring us the most joy that cost money, and we look at each of our expenses in terms of those things. So for me, especially when I started this money journey and was doing these exercises, I really thought I couldn’t afford to take a trip, but when I added up those daily habits, it was clear that I could if I made some changes, and that was really motivating to me. And it could also be money that you put towards a goal as well, not necessarily other spending. So I find it to be a really powerful exercise to decide what is worth it to us. And the cool part is that there’s no right or wrong answer. Something might be just worth it to you and you decide to keep it and it might not be, but now at least truly which item you want to be spending your money on.
Kim Palmer:
It’s so amazing how quickly those small expenses add up when you look at the whole year, like you said. I think that is such a powerful way to think about it.
Ashley Feinstein Gerstley:
It gives you the true number that you’re working with instead of, “Oh, this thing could never add up to that,” or “I can’t afford to do that.” And also thinking of it in terms of other things like it could be a monthly massage that just felt so out of reach but now feels, “Oh, if I just did this, I could get that.” Or the trip or savings or paying down a credit card, whatever it is.
Kim Palmer:
Let’s talk about how to stick with it after the 30 days. So say someone applied these tools and had a great 30 days and just wants to make sure to extend that. How can we keep it going?
Ashley Feinstein Gerstley:
My favorite financial habit is having money parties. Money parties are time we set aside every month or even every week depending on what you prefer to show our money some love. The main things that I’d recommend doing in your money party is definitely look at how your spending and earning looked for the last period. If it was a week, if it was a month, checking in on any goals, checking in on any guidelines from your money cleanse that you’re trying to continue to live by and what challenges came up. And if they did, instead of punishing ourselves, think “Interesting. What other strategies can I use to stick with them?” And I call them parties for a reason. I think we can make them fun and something that we look forward to.
I have a really fun money party playlist that I’m happy to share, but it’s basically songs that pump me up about money and I get in my PJ’s, I get a cup of tea and I reward myself after, then I’m done with my money party. So there are ways to make it a time that we look forward to and just to set up that calendar reminder so that it’s not something that we put off for months and months.
Kim Palmer:
Yes. I’m so glad you brought up the money parties. And let’s just explain to people what money parties are exactly, because it’s not necessarily… You’re not inviting a ton of people over, right? It can just be with yourself.
Ashley Feinstein Gerstley:
Yes. I would say most money parties are with yourself. If you have a long-term partner, if you’re part of a family, you can definitely bring them in on it. They don’t have to be there the whole time, but the more we’re on the same page with partners and families, the better. I’ve had people do them with friends as well, even digitally. I used to run digital money parties where we would do them all together online. But then you can go out with your friends after. You can go on a date night after. But generally it’s great to do them on your own as well.
Kim Palmer:
That sounds perfect. Well, thank you, Ashley. Any final thoughts to share to leave people with?
Ashley Feinstein Gerstley:
I think the overall thought I’d leave everyone with is that the whole idea of The Money Cleanse is that small shifts and small changes and little steps that feel manageable and accessible can make a huge difference and we can make big progress over time. So it doesn’t have to be hard. It can be fun and you can do it.
Kim Palmer:
Thank you. That is a great message to end on. Ashley Feinstein Gerstley, thank you so much for joining us today.
Ashley Feinstein Gerstley:
Thank you so much for having me and for this great conversation.
Kim Palmer:
That is all we have for this episode. To share your thoughts on talking about finances with your family, shoot us an email at [email protected].
Sean Pyles:
Visit nerdwallet.com/podcast for more info on this episode. And remember to subscribe, rate and review us wherever you’re getting this podcast.
Kim Palmer:
This episode was produced by Sean Pyles and myself. Tess Vigeland helped with the editing. Sara Brink mixed our audio. And a big thank you to the folks on the NerdWallet copy desk for all of their help.
Sean Pyles:
And here’s our brief disclaimer. We are not financial or investment advisors. This nerdy info is provided for general educational and entertainment purposes and may not apply to your specific circumstances.
Kim Palmer:
And with that said, until next time, turn to the Nerds.
Many or all of the products featured here are from our partners who compensate us. This may influence which products we write about and where and how the product appears on a page. However, this does not influence our evaluations.
An expense ratio is how much it costs to operate a fund compared to the total value of its assets. The lower expense ratios between 0.5% and 0.75% are ideal.
An expense ratio compares the cost of managing a fund to the total value of a fund’s assets. Mutual funds are like businesses—people actively manage your investment to maximize gains and minimize losses. These management fees and operation costs get passed on to you, the shareholder.
Understanding expense ratios and how they work is vital for anyone looking to add mutual funds to their investment portfolio. We’ll explore how expense ratios can affect your investment returns and share several helpful resources, like our investing guide.
Key Takeaways:
Expense ratios exist because of a fund’s management costs.
The closer an expense ratio is to 0, the more money you’ll save.
A high expense ratio can dramatically reduce your return on investment.
What Is a Good Expense Ratio?
Determining a fund’s expense ratio is relatively simple. Take a fund’s total operating expenses and divide that by the fund’s net asset value (NAV). For example, if a fund has $500,000 in expenses and $50 million in assets, it would have a 1% expense ratio.
Because expense ratios are percentages, even seemingly small numbers can have big impacts. Going back to the previous example, a $50 million fund with a 2% expense ratio would have a total of $1,000,000 in expenses.
Ideally, a good expense ratio would be as close to 0% as possible. We recommend looking for funds that have expense ratios between 0.5% and 0.75%, which would be beneficial to investing beginners and experts alike.
What Is a Bad Expense Ratio?
A bad expense ratio could be any percentage over 1%, according to conventional wisdom. Percentages affect larger numbers at an increasingly noticeable rate. For example, 1% of 100 is 1, but 1% of 10,000 is 100. This effect becomes more drastic as the percentage increases; e.g., 2.5% of 10,000 is 250.
As previously mentioned, we recommend looking for funds with expense ratios between 0.5 to 0.75% at most. Should you commit to an investment with a higher ratio, expect your total gross to be lower.
Why Are Expense Ratios Important?
Knowing the fees associated with anything you’re paying for is essential when investing. A higher expense ratio will reduce your returns, while lower ratios can help you invest in multiple funds easily. Even if you aren’t investing millions of dollars, expense ratios will add up for any investor over the long term.
Below are two examples of investments with different ratios:
$10,000 goes to a fund with a 1% expense ratio.
$10,000 goes to a fund with a 1.25% expense ratio.
If you initially invest $10,000 into a mutual fund and contribute $0 annually over a period of 10 years, your gross ending value would be $19,671.51 with $1,763.03 in fees if you have a 1% expense ratio. With a 1.25% expense ratio, a similar investment would result in a gross ending value of $19,671.51 with a total cost of $2,180.95 in fees.
Although the fees may seem small in the short term, there are always long-term effects to consider. Now, imagine the difference in your investments when you keep contributing! Personal finance courses can also help you understand these seemingly small factors much better.
How Does Expense Ratio Affect My Investment?
A high expense ratio can significantly impact your return on investment (ROI) and potentially offset any gains you might’ve experienced. In the examples above, we explored two investments that didn’t consider future contributions.
This normally isn’t the case—investors are encouraged to invest more money in a fund over time. While these added investments will increase your gross return, they’ll also increase the management costs of your investment.
How Do I Know a Fund’s Expense Ratio?
When looking up any fund, you’ll typically find details about its attributes. It’s easy to overlook a fund’s expense ratio if money-making aspects are top of mind. In these instances, managing expectations is key. Using a brokerage account is an easy way to gain realistic insight into a fund’s expense ratio.
Another way to find the expense ratio is to find the fund’s prospectus. A prospectus is an overview of a fund’s investments. It needs to be filed with the Securities and Exchange Commission (SEC) and sent to investors each year. Here, you’ll find a section detailing any fees associated with a fund—including its expense ratio.
Investors receive a fund’s prospectus annually, so carefully search through your email if you believe it’s missing. Brokerage firms normally provide the prospectus when you research their website as well. Finally, you can go directly to a funds website, if available, and you’ll also be able to find the prospectus there.
If all else fails, harness the internet. A quick and simple search for a stock ticker plus the words “expense ratio” will quickly uncover the information you need.
Can You Avoid Expense Ratios?
Any fund you invest in will have operating expenses, so expense ratios are part and parcel with mutual funds. However, you can find funds with relatively low fees. It’s also important to consider the type of fund and strategy you want.
Mutual funds, exchange-traded funds (ETFs), and index funds are three of the best investments at your disposal.
Mutual funds and ETFs are actively managed funds, meaning that brokers actively make trades on your behalf. An active fund typically comes with higher expense ratios as it’s more expensive to research and make trades constantly.
Index fund investing is more of a passive investment. Indexes are diversified and aim to track a particular section of the stock market or the whole thing, like the Dow Jones Industrial Average or S&P 500 index. These funds typically have a low portfolio turnover and are rebalanced far less than their actively managed counterparts.
Many firms such as Vanguard Group, Fidelity Investments, or T. Rowe Price will have index funds specific to their brokerage accounts with even lower rates as well.
Which Investment Strategy Should I Use?
A major part of your investment strategy is choosing how active or passive you want to be. According to a financial study from 2022, actively managed funds don’t typically outperform index funds over time (Sommer). With the higher fees and similar returns, passive investing makes sense for most of us. Index investing allows us to put our money in an index fund and forget about it.
However, actively managed mutual funds can outperform index funds in the short term. If you want to take on a more active investing role overall, you can manually review and rebalance your portfolio. But, keep in mind that short-term investing can be risky and result in a large loss of funds. Make sure you are ready to put in effort consistently and be aware of your total expenses.
You can always take on a hybrid investment portfolio. You can invest most of your money with index funds while investing in a few mutual funds for higher gains. Diversification is always an effective way to generate income from a portfolio.
Up Your Personal Finance Knowledge With Credit.com
Expense ratios help us understand the costs of investing in a fund. Before you buy shares, increase your understanding of the fees associated with a fund and general personal finance concepts.
Credit.com offers a wealth of personal finance resources to help you better understand investment concepts and strategies. When deciding which type of investment you want to make, it helps to know all you can about the types of funds within your reach and their true expenses.
In the short term, mortgage rates haven’t experienced any extreme movement since earlier in the month, but a slow trickle of weakness is starting to add up. As of last Friday, the average 30yr fixed rate was as high as it’s been since late November. There was a modest recovery yesterday, and it has now been erased by today’s market movement.
In other words, the average lender is now back in line with last Friday’s rates–the highest since November 30th, 2023. That’s the bad news. The good news is that those rates are still almost a full percent lower than the long-term highs seen in October.
Good, bad, or indifferent… where we’re going is more interesting than where we’ve been. That itinerary is constantly evolving based on incoming economic data and other events. The biggest influences are still several weeks away. We’re just watching fine-tuning adjustments in the meantime.
In the short term, it’s nice to see that today’s massively higher PPI reading didn’t do more than it did to crush the bond market’s spirit. This isn’t the craziest turn of events given that we already had a bit of spirit crushing after Tuesday’s CPI, but that several Fed speakers said they’re not reading too much into one month of data that breaks from the recent disinflationary trend. In the slightly bigger picture, however, there’s an opportunity cost. Sure, things may not be unimaginably worse than they were last week, but where would we be if inflation came in slightly below forecast? Very likely, that would have resulted in a much more constructive narrative heading into March where a decent result in NFP and CPI in 3 weeks would pave the way for the Fed to give the first signal that a rate cut would be on the table in subsequent meetings. As it stands, even if the data released in March is bond-friendly, it will have to be taken with a grain of salt until April. More waiting as opposed to less.
M/M Core PPI
0.5 vs 0.1 f’cast -0.1 prev
Y/Y Core PPI
2.0 vs 1.6 f’cast, 1.8 prev
09:08 AM
Moderate overnight weakness and additional selling after PPI data. MBS down half a point. 10yr up 7.5bps at 4.311
10:47 AM
Well off the lows now with MBS down only 11 ticks (.34) and 10yr up 6bps at 4.295
12:36 PM
Slipping again. MBS down 14 ticks (.44) and 10yr up 7bps at 4.307.
04:53 PM
Near best levels since before this AM’s data after a steady afternoon grind. MBS down only 10 ticks (.31) and 10yr up 4.3bps at 4.279
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Credit card debt is a widespread issue that affects countless Americans, becoming a heavy burden that can disrupt financial stability and well-being. Whether due to unforeseen expenses, medical emergencies, or the convenience of online shopping, the roots of accumulating debt vary widely across individuals.
However, when debt reaches overwhelming levels, seeking ways to reduce or eliminate it becomes a critical goal. This is where the concept of debt settlement enters the picture—a strategy that involves negotiating with creditors to resolve a debt for less than the total amount owed.
The path to settling credit card debt might appear challenging, but armed with the correct information and strategies, it’s entirely possible to regain control over your financial destiny. This article aims to provide a comprehensive guide through the different paths available for settling credit card debt, ranging from self-managed methods to seeking professional assistance.
By gaining an understanding of your options, the steps involved, and the implications of each decision, you can make choices that align with your financial situation and objectives.
Understanding Your Debt Settlement Options
When faced with credit card debt, choosing the best strategy to reduce what you owe can seem overwhelming. However, understanding your options can simplify this process, making it clearer and more manageable. Whether you’re considering a do-it-yourself approach, thinking about seeking legal advice, or pondering the assistance of a debt relief service, it’s crucial to weigh the benefits and challenges of each method.
DIY Settlement Strategies
Settling debt on your own can be empowering and financially beneficial, as it saves you the fees associated with professional debt settlement companies. This approach requires you to directly contact your credit card company to negotiate a settlement—a lump sum payment that’s less than the total amount owed.
To succeed, you’ll need to be well-prepared: research your credit card company’s policies on debt settlement, understand your financial situation thoroughly to know how much you can afford to offer, and be ready to present your case persuasively. While this method demands significant time and effort, it allows you to maintain complete control over the negotiation process.
Consulting with a Debt Settlement Attorney
For those who prefer professional guidance, consulting with a debt settlement attorney can provide valuable legal insights and negotiation leverage. An attorney can evaluate your financial situation from a legal standpoint, offer advice on the feasibility of a settlement, and represent you in negotiations with creditors.
This option is particularly beneficial if you’re facing lawsuits from creditors or if your debt situation is complex. While hiring an attorney involves legal fees, their expertise can lead to more favorable settlement terms and protect you from potential legal pitfalls.
Engaging a Professional Debt Settlement Company
Debt settlement companies act as an intermediary between you and your creditors. These services negotiate on your behalf to reduce the total amount of debt you owe. Opting for a debt relief company can be a good choice if you’re uncomfortable handling negotiations yourself or if you have a significant amount of debt.
It’s important to do thorough research before selecting a debt settlement company: look for reputable companies with transparent fee structures and positive customer reviews. Keep in mind, however, that while a debt relief service can simplify the process, it also means you’ll pay a fee for their assistance, which is typically a percentage of the debt reduced or settled.
Evaluating Whether Debt Settlement Is the Right Choice for You
Deciding to settle credit card debt is a significant financial decision that requires careful consideration of your personal circumstances. It involves analyzing your financial situation, understanding the advantages and drawbacks of settlement, and considering other potential strategies for managing debt.
Assessing Your Financial Situation
The first step in determining if debt settlement is the right path involves a thorough assessment of your financial situation. This means taking stock of all your debts, including credit card balances, loans, and any other financial obligations.
Additionally, evaluate your income, monthly expenses, and any savings or assets you may have. This comprehensive financial overview will provide clarity on how much you can realistically afford to pay towards settling your debts. If you find that your debts far exceed your capacity to pay, and you’re experiencing financial hardship, debt settlement might be a viable option to consider.
The Pros and Cons of Debt Settlement
Before deciding on debt settlement, it’s essential to understand both the benefits and potential drawbacks.
Pros
Reduced debt: The most significant advantage is the possibility of paying off your debt for less than the full amount owed, potentially saving you thousands of dollars.
Avoiding bankruptcy: For many, working with a debt settlement company is a preferable alternative to bankruptcy, which has a longer-lasting impact on your credit scores.
Cons
Credit score impact: Settling your debt can negatively affect your credit score in the short term, as it involves paying less than the agreed-upon amount.
Potential fees: If you use a debt settlement company, you will likely incur fees, which can be substantial.
Tax implications: Forgiven debt may be considered taxable income, which could increase your tax liability.
The Step-by-Step Process to Negotiate Credit Card Debt Settlement on Your Own
Tackling credit card debt through settlement is a proactive approach to managing financial challenges. This process involves several key steps, each designed to help you successfully negotiate with credit card companies and reach a settlement that reduces your debt. Here’s a structured guide to navigating this journey on your own.
1. Educate Yourself on Debt Settlement
Begin by conducting thorough research on how to settle your debt. Learn about the process, its impact on your credit scores, and the legal factors involved. Become familiar with the typical practices in this area, including the average percentage by which debts can be reduced. Gaining knowledge in these areas is crucial and equips you for effective negotiation with credit card companies.
2. Inventory Your Debts
Compile a detailed list of all your debts, including credit card company information, outstanding balances, interest rates, and monthly payment amounts. This comprehensive overview will clarify the total amount you owe and help you prioritize which debts to settle first based on their impact on your financial health.
3. Analyze Your Financial Capacity
Assess your financial situation by reviewing your income, expenses, and available assets. This analysis will help you determine how much you can realistically afford to offer in a settlement without compromising your basic living needs. Creating a budget, if you haven’t already done so, is a crucial step in this process.
4. Organize Your Negotiation Strategy
Before contacting your credit card issuer, develop a clear negotiation strategy. Decide on the initial settlement offer you’re comfortable with and the maximum amount you’re willing to pay. Also, plan how to address any counteroffers from the credit card company. Having a strategy in place will help you navigate the negotiation process more effectively.
5. Establish Communication with Credit Card Companies
Initiate contact with your credit card companies to express your interest in negotiating a settlement. It’s often best to start this communication in writing, followed by phone calls. Be polite, concise, and clear about your financial situation and your desire to settle the debt.
6. Negotiate with Persistence and Patience
Negotiation is a process that requires both persistence and patience. A credit card company may initially resist your settlement offers, so be prepared to negotiate firmly but respectfully. Keep detailed records of all communications and offers made during the negotiation process.
7. Secure and Review the Settlement Agreement
Once you reach an agreement, request a written settlement agreement from the credit card company. Review this document carefully to ensure it accurately reflects the terms you negotiated, including the settlement amount and any conditions regarding the reporting of the debt to credit bureaus.
8. Fulfill the Settlement Terms Diligently
After securing the settlement agreement, adhere to the terms diligently. Make the agreed-upon payment by the specified deadline to ensure the settlement is honored. Once the payment is made, confirm that the account is reported as settled on your credit report.
Negotiating a credit card debt settlement on your own can be challenging, but with thorough preparation and a strategic approach, it’s possible to reduce your debt and move towards financial recovery.
Alternatives to Debt Settlement
Turning to a debt settlement company is only one of several strategies for handling overwhelming debt. It’s crucial to explore all available options to make an informed decision that aligns with your financial situation and goals. Here’s a more comprehensive look at the alternatives:
Debt Consolidation
Debt consolidation involves taking out a new loan to pay off multiple debts, effectively combining them into a single debt with one monthly payment. This approach is particularly beneficial if you can secure a consolidation loan with a lower interest rate than your current debts.
The advantages include simplifying your monthly payments, potentially lowering your overall interest rate, and providing a clear timeline for debt repayment. However, it requires a good credit score to obtain favorable loan terms.
Credit Counseling
Credit counseling agencies offer a valuable service for those struggling with debt. They work with you to create a personalized debt management plan (DMP) and can often negotiate lower interest rates and waived fees with your creditors.
Enrolling in a DMP means making a single monthly payment to the credit counseling agency, which then distributes the funds to your creditors according to the plan. A credit counselor can help you manage your debts more effectively without taking on new loans, but usually involves a small monthly fee.
Bankruptcy
Filing for bankruptcy is a legal process that offers a way out for those in severe financial distress. There are two main types of bankruptcy for individuals: Chapter 7, which liquidates your assets to pay off as much debt as possible, and Chapter 13, which sets up a repayment plan to pay back debts over time.
Bankruptcy can severely impact your credit scores and your ability to obtain future credit, but it provides a clean slate for those who have no other way to manage their debts. It’s advisable to speak to a bankruptcy attorney to understand the implications fully.
Budget Adjustments
Sometimes, the solution to managing debt is as straightforward as adjusting your budget. Reviewing your income and expenses meticulously to identify areas where you can cut back can free up additional funds to pay down your debt.
This might include reducing discretionary spending, canceling subscriptions, or finding ways to increase your income. While it requires discipline and may involve some lifestyle changes, this approach avoids the potential negative impacts on your credit score associated with other debt relief strategies.
Preparing for Life After Settlement
Successfully negotiating a debt settlement marks a significant milestone in your financial journey. However, the path to full financial recovery extends beyond just settling your debts.
Preparing for life after settlement involves taking proactive steps to monitor your credit report, rebuild your credit score, and develop healthy financial habits. These actions are crucial for ensuring long-term financial health and avoiding future debt issues.
Monitor Your Credit Report
After settling your debts, it’s important to regularly check your credit report from the three major credit bureaus—Equifax, Experian, and TransUnion. Ensure that the settled debts are accurately reported and reflect a zero balance.
Monitoring your credit report helps you catch and correct any inaccuracies or errors that could negatively affect your credit scores. It also keeps you informed of your credit status, which is essential for rebuilding credit. You’re entitled to one free credit report from each bureau per year through AnnualCreditReport.com, making it easier to keep tabs on your financial standing.
Rebuilding Your Credit Scores
Settling your debts can impact your credit scores, so focusing on rebuilding it is crucial. Start by making any remaining debt payments on time, as payment history is a significant factor in your credit scores.
Consider using a secured credit card, which requires a deposit that serves as your credit limit. Using this card responsibly and paying the balance in full each month can help demonstrate your creditworthiness and improve your credit scores over time. Additionally, keeping your credit utilization ratio low—below 30% of your available credit—is key to showing lenders you can manage credit effectively.
Developing Healthy Financial Habits
The final step in securing your financial future is developing and maintaining healthy financial habits. Create a realistic budget that accounts for your income, expenses, savings, and investments. Stick to this budget to avoid overspending and to ensure you’re saving adequately for emergencies and future goals.
Prioritize building an emergency fund with enough savings to cover at least three to six months of living expenses. This fund can help you avoid falling back into debt in case of unexpected expenses. Finally, continue educating yourself on financial management and seek professional advice when necessary to make informed decisions about investing and saving for the future.
Frequently Asked Questions
What happens if I miss a payment on a settled debt?
If you miss a payment on a settled debt, it could potentially void the settlement agreement, leading the credit card company to possibly demand the full original amount owed or take legal action against you. It’s crucial to adhere to the terms of the settlement agreement and make payments on time. If you foresee difficulties making a payment, contact the credit card company immediately to discuss your options.
Can I settle debt that’s already in collections?
Yes, you can settle debts that have been transferred to a collection agency. In fact, collection agencies might be more willing to negotiate a settlement since they acquire debts at a fraction of the original amount owed.
Negotiating with a debt collector follows a similar process to negotiating with the original creditor, but ensure any agreement is documented and that you understand the impact on your credit report.
How does debt settlement affect my ability to get new credit?
Debt settlement can impact your credit scores and might be viewed negatively by future lenders, as it shows you did not pay the full amount owed. This can make obtaining new credit more challenging, at least in the short term. However, as you rebuild your credit over time and demonstrate financial responsibility, lenders may be more willing to extend credit to you.
Should I use my savings to settle debts?
Using savings to settle debts can be a viable strategy, especially if it significantly reduces your financial burden and avoids accruing additional interest. However, consider keeping enough in your savings for emergencies.
Evaluate your financial situation carefully to make an informed decision. Consider working with a financial advisor to ensure you’re not putting yourself at risk for future financial emergencies.
How long does a settled debt stay on my credit report?
A settled debt typically remains on your credit report for seven years from the date of the original delinquency that led to the settlement. While the impact of the settled debt on your credit scores decreases over time, it’s important to focus on rebuilding your credit by maintaining good financial habits.