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.
- Pay yourself first – If you prioritize your current and future financial wellbeing the same way you prioritize getting out of debt, you’ll start viewing yourself as just as important to pay as your credit card bills and loans. Force yourself to live below your means by setting aside a set amount, like 5% to 10% of each paycheck, and put it away in savings immediately when you get it before you pay your other bills. Believe it or not, this will actually help you pay your bills in the future. Your savings should be for future goals and emergency funds. This way if you actually do have an emergency and you need to borrow from yourself to pay your bills, you’ll rest easy knowing you have money for just this occasion.
- Automate your savings – What you don’t see you won’t miss. The trick is to get the money out of your checking account and into a savings, money market, or investment account in as few steps as possible to reduce temptation. Set up an auto transfer for an amount you’re comfortable with and you can always add money on top of that if you’ve had a particularly good paycheck.
- Invest! – Make your money work for you by investing in things that will make you money without you having to think about them. High-yield savings accounts, investments, CDs (certificates of deposit), and bonds are all good choices that we’ll cover in depth in our next post. Most options out there are better than a traditional savings account which should really only be for your emergency fund.
- Shop with a list – This simple yet effective practice will save you money. Add an extra challenge by setting a spending amount and only taking that much cash with you and leaving your card at home — that way you’ll have no choice but to resist temptation.
- Set and track goals – If you can’t measure it you can’t manage it. Many studies point to the efficacy of writing down and tracking your goals for successful money management. Up the ante by sharing your goals with friends, family, or partners so they can help keep you motivated.
Common Ways To Cut Spending
- Phone – If you haven’t shopped around for a new phone plan for a while, now might be the time. Review your current plan and ask yourself if you’re really using or need all the services and limits provided.
- TV/Streaming services – If you’re trying to cut back on expenses, consider letting go of one of your streaming services. Every little bit helps, even $15 a month.
- Subscriptions/Memberships – Again, just make sure what you’re paying for is really serving you well. Is there something you signed up for years ago that you can do without?
- Food – Food is a necessity, but chances are you can probably cut down on how much you’re paying. Shopping with a list is a proven technique to help, and even resisting take out one or two times a week will help.
- Extra vehicles – If you have extra vehicles (or boats, atvs, etc.) you’re likely spending money for insurance, upkeep, and storage. Take a hard look at your future goals and consider ways to save.
- Activities – Focus on more low cost or free activities to help save money and suggest these to friends. If you’re commonly meeting up at pubs or restaurants, suggest a picnic in a park next time.
- Health insurance – We’ll talk more about medical bills below, and for many of us health insurance is a big ticket item that we can’t get away from. Still, there are small things you can do like making use of HSA and FSA funds that will help.
- Drive less – It’s a simple idea, but hard to do. Consider using public transportation, biking, or carpooling one or two days a week to cut down on fuel costs.
- Regularly service your vehicle – This seems counterintuitive since it costs you money, but by regularly keeping up your vehicle you’ll be less likely to encounter unforeseen emergencies and you’ll extend the life of your car.
- Insurance – Shop around, get quotes, and don’t forget to ask about discounts. Lots of insurance carriers offer discounts for safe driving, certain professions, past military service, or bundled policies.
- Eat in – If you work in an office building, the temptation to go out to eat is strong. Try to limit this as much as possible and bring your lunch whenever possible.
- Be careful of breaks – Breaks are another money sucker if you’ve got a convenient coffee shop or vending machine nearby – that one or two dollars a day adds up!
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:
- D – Define your goal: Be as specific as possible. Ex: don’t say “get a new car,” say, “get a used car with less than 75K miles on it with 4WD”
- E – Establish Criteria: Know your must-haves versus you want-to haves
- C – Choose two to three good options so you can compare them together
- I – Identify pros and cons for each of your choices
- D – Decide which one you want
- E – Evaluate your purchase: did you make a good decision? Do you feel like it was money well spent?
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.
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!
- Mint – Good for beginners, sends user alerts for upcoming bills or overspending, lets you input goals and will help you track them, adjusts based on your spending.
- Credit Karma – An app that gives your credit score and shows you how you stack up next to your peers. Usually we don’t recommend using anything other than Annualcreditreport.com, but this is legit. The way it’s free though should be noted: You have to input some basic information about your finances and spending and then it uses this data (just the raw data – not your private info) to sell to companies. It will also send you ads.
- Your Bank – Many banks have simple online spending apps or programs that can be useful. These are good if you’re curious about dipping your toe in, but don’t want to commit to a “real” app.
- My Weekly Budget – Only cost $0.99 and, like the name suggests, helps you set and track weekly budgets and goals.
- Personal Capital – Good for people with investments, lets you manage and track savings and checking accounts as well as brokerage and mortgage accounts too.
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).
- Secured – These are loans that have some kind of collateral connected to them like a car or a home. They have something securing the loan in place that the lender can then take should you default.
- Unsecured – These are loans that are only secured through a contract where you promise to pay back a certain amount or a revolving debt like a credit card that you are continuously adding to and paying down. The lender can go after you financially by suing you or damaging your credit, but there is nothing physical they can take from you to cover any unpaid debt.
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.
- Debt Settlement: This is a simple process where you negotiate with your current creditor for a reduction in your overall debt or for reduced payments. Credit card companies are not required to do this, but you may be surprised at how many will. After you explain your financial situation to them they may be able to offer you better terms because it’s in their best interest to keep you on as a customer. Ideally you can do this yourself, but there are some settlement companies out there who will charge you a fee for this service.
- Debt Management Plan – This is a highly structured option that you really have to be committed to. Through a debt management plan, you’ll work with a counselor at a non-profit consumer credit counseling service to help set budgets; negotiate fees, payments, and rates; and create an account that you make regular deposits in and then the counselor makes the payments for you. Though this would be done in a partnership with a non-profit, that does not mean the service is free. Make sure you know ahead of time the entire fee structure that you’d be agreeing to. The US Department of Justice has a list of federally approved credit counseling services here.
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:
- Add up all your monthly payments toward consumer debt (credit cards, car payments, students loans – this does not include any mortgage or rent payments).
- 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.
- 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)
- 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.
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
- When you file for bankruptcy, it can only absolve you of dischargeable debt. Things like taxes or child or spousal support are not included. Also, though you will be relieved of any mortgage obligations if they’re included in your filing, it’s likely the bank will foreclose and you will lose your home. However, in some cases filing for bankruptcy on your other debts could be the only way to save your home.
- Most people use bankruptcy to discharge debt like credit cards, medical bills, payday loans, deficiency judgments on repossessions and foreclosures, landlord-tenant judgments, and phone and utility bills (for companies you no longer do business with).
IS BANKRUPTCY RIGHT FOR YOU?
- Could you conceivably pay off creditors within two years? Take the total amount owed and divide it by 24 to get an idea of what your monthly payments would be if you had to pay it back over two years. If this seems in any way possible, you should consider forgoing bankruptcy. Typically it takes at least two years to build back your credit after filing, so this is a good time frame to think in.
- If you are served a lawsuit, you should contact a bankruptcy lawyer immediately so you don’t face wage garnishments. Most lawsuits have 45 days before creditors are able to garnish your wages up to 25% if you don’t respond. You need to take action at this point.
- If your wages are currently being garnished by creditors, calculate how much you are losing each paycheck to decide if you can afford it. Right when you file, creditors must halt any garnishments.
COSTS OF BANKRUPTCY
- Attorney and filing fees can range from $1,000 to $5,000
- Your insurance premiums will likely go up
- Your credit score will go down for at least two years
Everyone needs to borrow money at some points in their life, and it’s important to know what your options are:
- Bank and credit union loans – Typically you’ll get the lowest rates going through a traditional bank, particularly if you have good credit and are using a bank you have an existing relationship with. You should also get quotes from at least two other banks to compare rates. Sometimes if you bring in a better quote to your bank from a competing institution, they’ll match it to retain your business.
- Home Equity Loans or HELOCs (home equity line of credit) – These are also sometimes called second mortgages. Obviously you have to own a home in the first place to obtain these loans, but they’ll often give you the best rates because the lender knows there’s sufficient collateral (i.e. your house) to back it up should you fail to repay. As with most loans, it’s to your advantage to compare rates from two or three lenders. You do not have to go through the same lender that your first mortgage is through.
- Credit cards – This is usually only a good option for a short-term loan and if you know you are already fairly financially responsible and will pay it back. Shop around to find terms with no annual fee, low rates, and grace periods for late payments.
- Friends or family – The terms you’ll be able to get from friends or family will fluctuate based on your relationship and what they’re able to responsibly lend. Many times, you’ll be able to secure money at a lower rate than other options, but borrowing from people you know may come with other non-monetary costs. Be transparent about the rate, payment plan, and role of the lender (for example, do they think they’ll get a say in how you spend the money once they lend it to you?) Write out your terms, sign and date it, and if you can get it notarized.
- Retirement loans – Borrowing from an IRA or 401K can be a fast way to free up money, but is generally best for a short-term loan that you know you’ll be able to pay back. There are often fees and penalties from borrowing from these accounts because they are tax sheltered, but many can be avoided if the money is returned promptly. Make sure you understand the terms and timeline for repaying, as well as what happens if you are unable to repay.
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.
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:
- Deductible – Your deductible is how much you will have to pay out-of-pocket before your insurance kicks in. This typically resets at the end of each year, and will only apply to certain procedures. When looking through your coverage it will say, “subject to deductible.” These can be as low as $500 or as high as $5,000.
- Co-pay and Coinsurance – Your copay is the flat fee you pay when visiting a doctor, usually $20 to $40 per visit. Coinsurance is the percentage of certain procedures your insurance will pay after your deductible is met. For example a 70/30 coinsurance means they will pay 70% of the cost and you will pay the remaining 30%.
- Out-of-pocket Maximum – As the name suggests, this is the maximum amount of money you will have to spend on covered procedures. This typically resets each year too and is federally capped at $8,200 per individual and $16,400 per family. Note that this is only for covered procedures, so anything your insurance does not cover you’re on the hook for 100%.
- Research Medical Costs – Two good sites for this are Fairhealthconsumer.org and HealthcareBlueBook.com, but it is also helpful to call ahead to the actual clinic or office you’ll be going to and ask directly because prices vary so much. Also get in the habit of asking your referring doctor for options about where a procedure can be done. Often a doctor will quickly write a referral for you to have a test done at a specific clinic, but there may be other options nearby that could offer lower costs.
- How it Affects your Credit – Medical debt typically shows up after 180 days on your credit report, but some agencies don’t weigh this kind of debt as heavily against you as they would credit card debt. Like all debt, it’s important to keep up on minimum payments and if you can’t do so, call the lender immediately to work out a plan. In extreme cases, it may be in your best interest to look into bankruptcy instead of crippling yourself with debt and payments for years to come.
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:
- Alternative medicines like acupuncture, chiropractic, or massage
- Eyeglasses and contact lenses
- Over the counter drugs
- Weight loss
- Smoking cessation
- Dental Services
- Long term care facilities
- Physical therapy
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.
- Employer plans – If your employer offers health insurance, it’s likely you’ll get to choose between a few plans. You can always opt for one with the highest deductible or HSA option to save money and you’ll still have the protection of the out-of-pocket max.
- A parent’s health plan – Under the ACA, individuals up to 26 are able to stay on their parent’s health plan.
- Individual plans – These can be bought in the private sector or through the ACA, and offer three tiers – gold, silver, and bronze, as well as HSA options. The lower your income, the more subsidies you will receive to help pay for it. They also offer free local assistance navigating the website, choosing a plan, and understanding subsidies.
- Medicaid – People with disabilities and lower income individuals can qualify for federal Medicaid coverage. You can find out if you qualify here.
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.