You’re still here! Congratulations! We’re so excited to move onward with our journey toward financial security and knowledge! Today we’ll be focusing on spending and borrowing — two unavoidable yet necessary features of life. We’ll review ways to control, plan, and prioritize your spending; how to understand and deal with debt; the best options for borrowing; and we’ll get real with the unfortunate reality of mounting medical bills and what to do about them.

Shop Smarter and Cut Spending

RESIST INSTANT GRATIFICATION

Instant gratification is baked into our bones, and much of the time we don’t even realize what’s happening when we make that impulsive purchase – all we know is that it makes us feel good! And it does . . . but only temporarily. If you find yourself subject to the whims of impulsive purchases and how it affects your bottom line, read below for some practical tips on how to keep it in check.

Common Ways To Cut Spending

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Big Purchases

We know we’ll all eventually have to make big purchases – car, washer/dryer, water heater, roof, etc. Whatever it is, take time to really research and know you’re getting the best deal so it’s not an emergency buy. Use this handy acronym to approach each purchase:

HOW TO USE LAYAWAY TO YOUR ADVANTAGE

Many stores offer layaway as a way to make bigger purchases over a set time period. Typically you will make an initial payment toward the item, then set up a payment plan for installments payments at the end of which you’ll get the product. This is a good option for a purchase you know you will need in a few weeks to a few months, like a large gift or appliance. Make sure to compare prices and know any additional fees that will be added on to your regular payments. Also ask if there is any penalty for missing a payment or changing your mind about the purchase all together.

Spending Apps

Get a mobile spending app! There are tons out there and finding one that fits your lifestyle and goals could make all the difference. For some of us, it can turn saving and spending into a game with the prize being more money!

Strategies for Paying Off Debt 

DEBT CONSOLIDATION – SHOULD YOU DO IT?

First let’s review the difference between secured and unsecured loans (we went over this in our first post). 

If you are considering debt consolidation, only do so if the monthly payment, interest, and payback terms are all lower than your original, and be mindful of using collateral like a car or home. Debt consolidation is essentially taking out another loan to help pay for your existing ones, and if this is the habit that got you into debt trouble in the first place, you may want to consider other options.

OTHER OPTIONS

The Debt Zone

Unsure if you need help with your debt? One way to analyze where you’re at is by calculating your consumer debt ratio. Experts say this number shouldn’t be any higher than 15 to 20% of your income. Here’s how to determine yours:

  1. Add up all your monthly payments toward consumer debt (credit cards, car payments, students loans – this does not include any mortgage or rent payments).  
  2. Know your monthly net income. For this calculation you’ll want to use your take-home pay (after taxes) to get a real idea of money-in and money-out.
  3. Calculate your “debt zone” – If your monthly net income is $3,000, then your debt zone is $450 – $600 ($3,000 x .15 = $450, and $3,000 x .20 = $600)
  4. Now look at your total monthly debt. Is it in the zone? If you’re below 15% consider increasing your payments to pay off debt faster. If it’s in between, keep an eye on it and see how much closer you can get it to 15%. If you’re over 20%, it’s time to take action.

Bankruptcy

Considering bankruptcy is a huge step, and one that should only be taken in the most extreme circumstances when you’ve exhausted all your other options (like exploring loan consolidation and credit counseling). That said, it exists for a reason, and there is life after bankruptcy though it’s a long road. Here’s what you need to know:

WHAT BANKRUPTCY COVERS

IS BANKRUPTCY RIGHT FOR YOU?

COSTS OF BANKRUPTCY

Smart Borrowing

Everyone needs to borrow money at some points in their life, and it’s important to know what your options are:

LOWER-EXPENSE OPTIONS

MEDIUM-EXPENSE OPTIONS

PEER TO PEER LENDING (P2P LENDING)

P2P Lending is basically a way to match investors with individual borrowers. They operate online to reduce overhead costs and can sometimes offer lower rates than a traditional lender can, though it will often depend on your credit score and employment history. Rates can jump as high as 35% or be as low as 6% based on your need and how much risk the lenders are taking. There are a number of online P2P lending platforms, but two of the more well known and reputable are Prosper and LendingClub

If you’re interested in P2P options, you can get quotes for free by submitting to a soft inquiry on your credit. If you do ultimately choose to go this route, most loans will charge some sort of origination fee, so make sure you read all the fine print. These platforms can be helpful for those who may not have well established credit, but are able to prove they’re able to repay.

Beware of Loan Scams

If at all possible, avoid using payday loan services. These are notoriously predatory business models that will load you with high interest rates loans and terms as short as two weeks, and often borrowers find themselves in a spiral of indebtedness, needing to take out more loans to cover the previous ones. The typical payday loan borrower spends 37% of their income in fees and interest paid to the lender. 

It may seem like a quick fix to get you through to the next week, but it is not a long term solution and will usually put you worse off than you originally were. The best thing you can do is educate yourself about basic finances and know what other options are available to you. Don’t wait till your debt is out of control to ask for help.

Medical Bills 

A sad reality in our country is that every day individuals who have worked hard, saved their money, paid their bills, and have in every way been fiscally responsible, are saddled with unexpected medical debt. A recent study done by Harvard Medical and Law Schools showed that 62% of bankruptcies in the US are due to medical bills. You need to be prepared should this happen to you. 

WHAT YOU CAN DO AHEAD OF TIME

If you know you’ll need a non-emergency medical procedure done in the near future, do your research beforehand. Look closely at your insurance plan and make sure you know the following:

FSAS AND HSAS (FLEXIBLE SPENDING ACCOUNTS AND HEALTH SAVINGS ACCOUNTS)

HSAs and FSAs are good options that you may want to take advantage of. They both offer ways to put away pre-tax dollars to be used on medical expenses not covered by your insurance plan. They both have slightly different rules, so check with your individual plan or HR department to learn more. In general the money you put into an HSA rolls over to the next year, and an FSA must be used by the end of the year or you’ll lose it. Because you are using pre-tax dollars, and if you know you will be spending this money anyway, it can be a wise way to cut down on expenses. Some common things these are used for are:

INSURANCE OPTIONS

Now that the penalty for not having health insurance was done away with under the ACA (Affordable Care Act, colloquially known as “Obamacare”), there is no longer any fee for not having coverage. That said, there are options available for most people for lower cost plans. And, even if you have to choose a plan with only emergency coverage, you will be shielding you and your family from future debt or potential bankruptcy.

Children’s Health Insurance Program (CHIP) – This plan offers children insurance even if the family earns more than the minimum to qualify for Medicaid. More information can be found here.

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