12 Tips To Help New Parents Avoid Money Mistakes

12 Tips To Help New Parents Avoid Money Mistakes

“Don’t raise kids to have more than you had. Raise them to be more than you were.”

Anonymous

 

Having a newborn baby is a time to rejoice. However, the reality of raising a child can be daunting. The costs are often underestimated. Even those with the best money habits may get carried away for a new family member. We justify our spending more easily as we seek safety, comfort and fulfillment. Costs will mount if we don’t put some brakes in place in advance.

New parents must put a financial plan in place to fit their new responsibilities. To avoid financial blunders, parents should increase their efforts to save and invest, spend within our means, take a fresh look at workplace benefits and utilize tax credits.

Here are 12 tips to help you dodge potential financial mistakes:

 

1. Be Financially Ready With An Emergency Fund

Every household should have an emergency fund with 6 months of savings set aside for unforeseen events. It is no different when we are expanding our family. Arguably, we need this money cushion even more so.

Raising a child in the first year costs $13,186 on average.. These costs are before hospital costs which may be covered by health insurance. A LendEdu survey found that parents budgeted $9,371 for that first year, saving roughly that amount. However, this falls short of the actual amount. Diapers costs, among other items, are miscalculated.

Why Do We Underestimate?

It is so easy to be blindsided when we lack experience, especially when we are raising our newborns. Ask any new homeowner and they will share major home costs that were a surprise. That’s what an emergency fund is for.

I recall being surprised by the many purchases we had to make in a rush for our baby. We learned that the delivery date for our son was moved up about 2 weeks unexpectedly. Comparison shopping was just not an option. We were older parents but felt like helpless newbies. Excited at our upcoming birth, we acted like children in a candy store.

My Bad

One of my worst purchases (ever!) was handmade Egyptian cotton linens for the crib for $1,000. I was suckered into it by a salesperson at the now-defunct Bellini’s. How ridiculous a thing to buy for a newborn baby!

We were fortunate to have ample savings having worked for several years. But I always wonder, what if we were younger or didn’t have a cushion to spend.

2. Don’t Overspend For Your Newborn’s Needs

We want the best for our children always. However, we need spending limits or go broke before they go to college. Be judicious about spending early and learn to budget. We need good financial habits when planning for our new child. Not everything has to be the best, the newest or the most expensive. Emphasize safety above all else. Plan out what is important to get initially, borrow from family or friends for some items and consider thrift shops.

Find Acceptable Price Ranges For Needed Items

Initially, you do need diapers, a place to sleep (crib or bassinet) and a car seat. There are some great sites to find average costs and price  ranges for bassinets, cribs and mattresses, diapers (cloth is cheaper versus disposable) and a diaper bags, changing tables, baby monitors (audio or video), car seats, glide rocking chairs and ottomans, baby swings, and bath tubs.

You probably don’t need Louis Vuitton monogram mini Lin Diaper Bag, the world’s most expensive diaper bag at $2,200 or the other most expensive newborn items on this list.

What You May Need

Luxury is not a necessity. Some of your costs are one-time like baby proofing your home. Other costs will vary significantly by where you live. For example, if you are both working and want to hire a nanny the average fees can range from $400-$1000+ per week. Additionally, you may need a babysitter and their rates go from $10-$25 per hour.

The US National average for day care is $611 per month, however, in major cities like Boston or New York, it will be well over $1,000 per month. Well baby doctor visits without health insurance average $95 per visit according WebMD. Visits may be significantly higher in New York and other urban areas.

You can bulk up on baby food and diapers, however, your baby may reject some brands or tastes.

3. Avoid Lifestyle Inflation

As your child gets older and makes friends, you may feel pressed to shop for more stylish clothing and sporting a luxury stroller. Remember, young kids will size out of these things fairly quickly. Avoid throwing lavish birthday parties even though you want celebrate each year. Their friends will have fun no matter where you have the party. Of course, we do it to impress the other parents but we don’t need to.

Speaking of lavish waste, we once received a beautiful box delivered to our doorman. It was from a friend of our son’s with an invitation to a 5th birthday party that read like a wedding invitation. My jaw nearly dropped and I worried about what kind of party my son would want. The funny thing is I recall that Tyler did not have a good time at this birthday party.

It may start with birthday parties but we soon may think about bigger homes and nicer cars. Keep your spending in check. 

4. Saving Early For College

Set up a 529 savings account as soon as you have a social security number for your child. Start saving early for college to benefit from tax advantages and compounding growth. You are not limited to the plan offered in your home state. There are many investment choices to suit anyone. Don’t get so overwhelmed at the choices that you end up not activating the account.

To read more about 529 Savings Plans and alternative savings devices  for college, see our recent post here. Start with any feasible amount and continue to add to this account. Tell your child’s aunts, uncles and grandparents that you would prefer a cash present over another toy or outfit. Make them aware of your savings account.

There are several ways to save early besides the 529 Plan although that is preferable. Below, we discuss life insurance for babies and infants that have a savings component that may appeal to you.

5. Keep Up Your Retirement Savings

While saving for your child’s tuition is important, do not sacrifice  your own retirement savings. Many parents do that but it is not a good idea. As much you may hate your child borrowing for college tuition, taking a loan our for retirement is a worse outcome. It is better to reduce your spending on unnecessary items to save more than face withdrawal of your retirement funds or borrowing against it.

6. How To Talk To Your Children About Money

Our children take their cues from us in a number of different ways. Start to teach your kids early about money at an age-appropriate time. They may be better able soak in how to treat and respect money values.

We should be good role models in helping them learn how to save money. Teach them to know the difference between wants versus needs. Don’t give in to impulsive purchases when they get upset. Instead delay gratification on purchases. Set a good example on investing now for future growth.

Both parents should be on the same page in this regard. My husband and I often argue from on opposite sides.  He can’t seem to say no to the kids so I play the heavy parent. However, my kids just ask me less for things and go around me and get what they want from Dad. I think I just admitted that my kids manipulate us. (They do!).

 7. Your Employee Benefits Need A Fresh Look

Once you have a child, it is a good time to take a fresh look at your employee benefits package. What may not have jumped out at you when you first started working there, may be more important now for your growing family.

According to Harvard Business Review, when making a decision between a higher paying job or lower paying job but better benefits, health insurance (88%), more flexible hours (88%) and work-from-home options (80%) scored the highest in their survey.

Childcare Are Among Our Largest Expenses

The cost of child care is high for those who are working and need support. According to Care.com’s 2015 Cost of Care Survey, 28% of families pay more $20,000 annually for this. Childcare is the largest expense for many families and may even surpass college tuition and housing costs for some families.

Among the employee benefits that can lift some of working parents’ burden are dependent care assistance, child care financial support by way of tuition assistance and scholarships, long term care resources and referral. Back up child care is also key when the nanny is ill. Onsite child care centers are often offered by companies that have large campuses.

8. Flexible Spending Account (FSA)

If you have a health plan through your job, you can use a flexible spending account to pay for co-payments, deductibles, some prescription and non-prescription drugs and other out-of-pocket health care costs. The FSA is a savings account with tax advantages.

This account allows employees to contribute a portion of their pre-tax earnings to pay for qualified expenses.  Employees have limits of $2,650 per year per employer. If your spouse has an FSA at their employer, you can put in an additional $2,650 per year. It is a “use it or lose” plan. Your FSA does not earn interest.

Another type of FSA is a dependent-care flexible spending account which is used for childcare expenses for children age 12 or under. The maximum dependent care FSA contribution is $5,000 per household.

Making use of these accounts may provide you with beneficial cost savings.

9. Health Savings Account (HSA)

The HSA is similar to an FSA as it provides tax advantages. HSAs are associated with high deductible health insurance plans which are often used by the self-employed. Like the FSA, you can contribute your pretax earnings, making your contributions tax-free. Here, the contribution limit in 2018 was $3,450 for an individual or $6,900 for family coverage.

Unlike the the “use it or lose it” feature of FSA, you may rollover the unused contribution to the next year for the HSA. Your account earns interest and if you leave the job you may take the account with you.

10. Life Insurance Is Essential For Growing Families

To protect your growing family, you need to have life insurance coverage. You may have a starter plan from your employer but generally the amount is insufficient, especially with young children. In the event of the passing of the main earner of the family, your life insurance should cover your fixed living costs as college tuition and other child care needs depending on their ages.

There other types of insurance families need to consider including disability insurance. We cover several insurance types here.

Should You Have Coverage For Your Newborn Or Infant?

Generally, you don’t need to buy life insurance for your baby. Hopefully, they are healthy and they don’t have earnings streams to protect.

Among life insurance providers, Gerber Life Grow-Up Plan has some attractive features:

1. Parents, grandparents or permanent guardians may purchase this plan. It is whole life insurance of $5,000-$50,000 of coverage. They may apply for their newborns or infants when they are 14 days to 14 years.

2. As a whole life insurance policy, there a cash value portion that accumulates as premiums are paid. According to Gerber’s plan, coverage doubles during the child’s 18th year at no extra cost. Additional coverage may be bought as needed.

3. It guarantees insurability and locks in an affordable premium for a child at a young age. For families with high risk of medical issues, this may be an important benefit.

4. With a whole life insurance policy, it provides death benefits plus you are building cash value in a tax-deferred manner. This savings component can be used for college tuition. The policy may be surrendered for its cash value.

True, the death benefits is a bit macabre and hopefully not needed for children.

The Criticisms:

I don’t believe life insurance for babies is needed. I have read some criticism of Gerber’s plan. Despite having a longstanding good brand name for baby foods, review the details carefully.  Look into the fee structure for additional insurance coverage, its tough cancellation policy, and how slow the cash surrender value actually builds.

Although this plan has some appeal, I prefer 529 Savings plan for college tuition and it is debatable if life insurance is needed for babies.

11. Several Tax Benefits For Your Children

Our children may be helpful when it comes time to pay taxes.There are a number of different tax credits  that you can use if you have a child. Check with your tax professional for possible changes associated with the 2017 Tax Law.

Child Tax Credit

You may be able to reduce your tax bill up to $2,000 for each of your qualifying dependent children under age 17. The credit is intended to offset the cost of raising children. Parents may get the maximum amount with qualifying incomes (married couples who make under $400,000 or single persons under $200,000).

There is a $500 non-refundable credit for qualifying dependents (eg. an incapacitated parent) other than children.

As a tax credit, it reduces your taxes dollar-for-dollar. If you do not benefit from the full amount of the Child Tax Credit (because the credit is greater than the amount of income taxes you owe for the year), you may be eligible up to $1,400 for a refundable amount.

Child And Dependent Care Tax Credit

Paying for childcare and dependent care can be quite expensive. The Child and Dependent Care credit can be worth from 20% to 35% of up to $3,000 of child care (or $6,000 of expenses for two or more dependents) related to some or all of the dependent expenses you paid. The higher 35% is for incomes below $15,000.

This tax credit may help you defray childcare costs for dependent children 12 years or under. For dependents, other than children, the IRS requires that they must have lived in your home more than half the year.

Adoption Tax Credit

There is a federal adoption tax credit up to $14,080 per child for finalized adoptions in 2019. This is not refundable so you can only use it if you have federal tax liability.

This credit may be used for qualifying expenses you paid to adopt a child. These expenses include adoption fees, attorney fees, court costs, traveling expenses (including lodging and meals while away from home), and other expenses directly related to the adoption. You would need to have supporting documents that you received If you claim this credit.

American Opportunity Credit

Tax credits are for qualified education expenses for an eligible student for the first four years of higher education. The maximum amount you can claim is $2,500 per eligible student per year. The amount of credit is 100% of the first $2,000 of qualified education expenses you paid for that student. However, if the credit pays down your taxes to zero, you can have 40% of the remaining credit (up to $1,000) refunded to you.

There are income limits to claim full credit with modified adjusted gross income pegged at $160,000 or less for married couple filing jointly (or $80,000 for a single filer). The American Opportunity Credit is preferable, however, if you don’t qualify, you can try for the Lifetime Learning Credit.

Student Loan Interest Tax Deduction

You may be able to claim the Student Loan Interest Deduction for interest paid on a qualified student loan, even if you choose to claim a student tax credit. If you decide to claim the deduction, you could reduce your taxable income by up to $2,500 of the student loan interest you have paid for your dependent child. You don’t need to itemize your deductions to claim this deduction.

To qualify for this deduction, see respective modified adjusted gross income limits.

12. Estate Planning

The best time to think about your plan is when you don’t have a compelling reason to do so. When you are raising children, it is a great time to be  thinking of your family’s best interests.

Set Up Your Designated Beneficiaries

By creating your estate plan, you will have control over your asset distribution during your lifetime to your loved ones. A significant portion of your assets can be easily transferred to your intended heirs. This will help you to avoid often painful and lengthy probate court procedures.

When setting up your beneficiaries, think carefully whether to identify for your children as there may be complications for you to be aware of and we discuss here.

Creating a will, possibly a trust, and advance directive documents will help you with the rest of the way. Read  our guide to basic estate planning in 6 steps.

Make sure to consider your digital assets as part of your estate. We have addressed why you need to make an inventory of digital assets here.  

Final Words

Planning for a newborn is essential. It is an exciting time in your life and it is easy to get overwhelmed. We have all been there and made mistakes, especially financial ones. Hopefully, this will help you can avoid some of the more obvious errors by organizing well ahead of time.

Hearty congratulations to you and your expanding family. What steps have you taken to prepare for your child’s experiences? What mistakes did you encounter that you may want to share with us? We look forward to hearing from you!

 

How The Fed Rate Cut May Affect Your Loan Rates

How The Fed Rate Cut May Affect Your Loan Rates

“I think we do need to try to not just rely on the central bank to, in its wisdom, adjust interest rates, but allow for people to avoid being exposed to inflation risk.”

Robert J. Schiller

 

The Fed has recently cut its benchmark fed funds by one quarter percentage for the second time in two months. This is  the first time this has happened since the Great Recession of 2008-09.  After keeping this rate at historically low levels, the Fed raised rates nine times beginning late 2015 through end of 2018 to 2.25-2.50%.

Leaving aside whether it was a good move (I believe it was, by the way), what does a lower fed fund rate (reduced 0.50% to now 1.75%-2.00%), mean for consumers in terms of borrowing, saving and investing?

Yes, The Fed Cut Is Beneficial For Consumers

A short answer is that a reduced fed funds rate means lower loan and savings rates. The fed funds rate is the lending rate for banks and other financial institutions. Declines will likely be relatively small unless we see future Fed cuts. If you have a lot of debt outstanding, you may feel more relief.

However, the best result in lowering monthly payments is to improve your credit score. You will see greater incremental benefits.

While we can’t borrow at the fed funds rate, it directly and quickly influences the prime rate, the loan rate charged to the best creditworthy customers. Prime rate was  just lowered to 5.0% from 5.25%.  Other consumer borrowing rates are often pegged to the prime rate, London Interbank Rate (LIBOR) or Treasury yields.

However, There Are Two Factors That Determine Your APR

The major consumer financial products are mortgage loans, home equity lines of credit (HELOCs), car loans, credit cards and student loans. Two factors are important lenders use to determine your loan’s annual percentage rate (APR). They are:

  1. Federal Reserve action to modify the federal funds rate, which is out of our control and
  2. Your credit score which you can take steps to raise for lower borrowing rates.

 

What About Savings And Investments?

The savings account rates at banks will likely decline quickly by 25 basis points (or one quarter of a percentage point) matching the fed’s lending rate for intra-bank loans overnight.

Our investments in financial securities, notably short and long term debt and equity securities tend to move in the opposite direction of interest rates.Therefore, the cut, which was anticipated by markets, usually improves performance upon widespread speculation. This cut may fuel beliefs of future cuts by the fed.

Lower borrowing rates often mean higher consumer and business spending and therefore stronger economic growth.

Before we take a look at how a Fed cut may influence consumer financial products, a little background on the Fed may be helpful.

A Short Primer On The Fed

The Fed (formally known as The Federal Reserve System) is the central bank of the US. They regulate commercial banks and have the responsibility for conducting monetary policy. Its dual goals are full or maximum employment and stable prices, meaning  low inflation.

Through its monetary policy, the Fed uses its tools, notably the fed funds rate to influence money, credit, interest rates and  the US economy overall. The fed funds is the rate at which banks and other financial institutions can lend to each other overnight to meet mandated reserve levels set by the Fed.

The Federal Open Market Committee (FOMC) votes on whether to raise, lower or keep the fed funds rate unchanged. FOMC members meet is at predetermined dates about eight times a year. It is made up of the seven Board of Governors of the Fed, notably Chairman Jerome Powell, plus the Presidents of five fed district banks (including the New York Fed).

For more on why you need to understand the Fed, read more here.

The Fed affects every aspect of our financial lives.

You should have a working knowledge of what does, particularly if you are interested in all aspects of money and investing.

The Fed, through its monetary policy, influences our economy, our borrowing and saving rates, as well as our investments. They have a powerful role in controlling money supply based on economic and inflation indicators, factors that affect our economy as well as global markets.

The Fed’s role is multifold:

  • as the bank of last resort when other banks are unwilling to lend.
  • assess risk in our economy based on numerous variables.
  • a fiscal agent to the US Treasury supporting its securities auctions.
  • model for other central banks globally.
  • communicate publicly to explain their reasoning for their actions.

 

Mortgages: Fixed Rate or Adjustable Rates

The fed funds is a short-term rate but fixed rate mortgages are long term. When you borrow money to pay for your home purchase, you will likely choose between the conventional fixed rate mortgages or an adjustable rate mortgage (ARM).

If you are considering a home purchase, consider the seven steps to buying a home. Many potentials buyers are looking at the merits of renting instead.

Fixed Mortgages

Fixed rate mortgages are preferable for many home buyers. Your monthly payments are predictable for the length of your loan. Knowing your monthly amounts provides certainty and helps families to budget of one of the biggest costs.

Generally, 30 year mortgage rates are higher than the 15 year terms because of the longer time frame. Your rates will be highly influenced by your credit scores. Excellent scores of 750+ provide buyers with the lowest rates. I would encourage you to go for the shorter 15 year term as your total interest paid added to the home price is far lower.

Assuming you were applying for a 30 year loan, the average recent rate was 3.97% based on a range of 3.00%-7.84%. This range reflects best credit quality to fair (or riskier) borrowers. The 15 year average mortgage rate is 3.53% (on a range of 2.50%-8.75%).

Potential For Loan Refinancing

Those with the fixed rate mortgages will not be impacted by the Fed lowering the fed funds rate. However, if the Fed makes more rate cuts in the future, you may want to consider refinancing your mortgage if it makes financial sense for you. Refinancing costs additional fees. For potential buyers who have been on the fence in search for a new home, this cut could be an incentive.

Adjustable Rate Mortgages Will Benefit From Fed Rate Cut

Rates on adjustable rate mortgages (ARMs) change at different periods from annually, every 3,5, 7 or 10 years. They are reset based on either Treasury securities, inflation index or LIBOR. First time buyers often are attracted to ARMs as their initial rates are lower than the fixed mortgages.

A common ARM is 5/1, a hybrid mortgage, which is a 5 year fixed rate with annual rate changes after 5 years. A recent current average 5/1 ARM is 3.78% based on a range of 2.38-8.25% This may be attractive for someone expecting to sell their home or refinance to a fixed mortgage within 5 years. ARMs may fluctuate more quickly for those applying now, reflecting the Fed cut.

I have concerns with ARMs or any variable rate loans. They lack predictability and borrowers often don’t understand the terms of their agreements. Borrowers need to know when rates change and how they are impacted by rising interest rates. It is often difficult to budget their mortgage costs.

HELOCs Rates Will Decline If A Variable Loan

Most HELOCs are variable rate loans. This means that your month-to-month may fluctuate depending on the market interest rate. The benchmark is usually the prime rate. Some banks may offer a fixed rate option for customers who desire predictability and budget their costs. The typical fixed terms are 10 years and may range from 5-15 years.

Your HELOC loan is a credit line secured by the equity in your home and your creditworthiness. As your home serves as collateral like your mortgage, rates tend to be lower than credit cards. Once again, your credit score matters, along with Fed rate, which will determine your monthly payments.

How HELOCs Work

You may obtain an available line of credit of $100,000 but only draw $25,000 of the funds to pay your contractor. You will only pay interest on the $25,000. This provides  benefits for your credit score based on your utilization rate which you can read about here.

Recent average 5 year fixed HELOC rates are 5.09% according to Value Penguin based on a wide range of 2.75%-11.00% to reflect excellent to fair credit ratings. Variable rate is 5.51% (with a range of 3.50%-13.25%). The latter are higher rates and may indicate greater risk.

Generally, you may obtain your HELOC with the lender you already have your mortgage loan with. It is a convenient way to tap the equity in your home to get available credit to borrow money for remodelling your kitchen. A small reduction in your variable HELOC may help you incrementally.

Car Loans Rate Will Change Based On Fed Rate Cut

Most car loan rates are based on fixed terms pegged to Treasury yields. The average loan rate on a 60 month for new cars according to the latest Federal Reserve Consumer Credit report.  You are not likely to see any improvement on your existing loan rate or monthly payments. However, if you can refinance your car, you may recognize a difference in your monthly payments. On the other hand, your loan rate may vary based on three criteria.

1. New or Used Car

You will pay slightly more for a new car loan ( 4.30%) versus a loan for a used car (4.20%) or refinancing an existing loan (2.89%).

 2. Credit Quality

As with all loans, your credit score matters. Your loan rate may range from excellent or 750+ (4.30%), good or 650-699 (7.65%) or fair to poor on 450-649 (13.23%). Monthly payments may skyrocket with fair or poor credit.

Assume the average price of a car of $36,000 and a 20% down payment of $7,200 on a 5 year loan. Using a car loan calculator, your monthly interest payment will jump from $$534 per month with excellent credit to $$659 per month with a poor credit rating.

Total interest paid over the life of this loan will be $3,258 with excellent credit or $10,721 in total interest paid. Your car price with excellent credit amounts to $39,258 versus $46,721 when your credit is poor. Interest costs are the second biggest part of your total car price and may account for 25% or more of your car cost).

3. Loan Term

Term length varies from 36 months to 96 months with the longer time frame requiring the borrow to pay the highest rate. You should get to a shorter term auto loan so you are not shelling out a lot of money on interest. Take the shortest loan term on cars that you can afford. That is a good strategy for any loans you apply for.

The length of the loans have been getting longer and longer. Edmunds says the most common term is for 72 months, with an 84 month loan next in line. I am seeing ads for loans for as much as 96 months. That is an increase from 10 years ago when 60 months were the most common.A longer time frame means you are paying more in total interest cost on your loan.

What You Can Do About Lower Monthly Payments (Or No Payments At All)

Future car buyers may get reduced rates based on the latest Fed cut. However, your best path to a lower auto loan is to improve your credit score. Better yet, buy a used car outright without a loan. After years of car loans and leases (watch for hidden fees!), we are finally biting the bullet and buying older cars with more mileage for cash. Getting rid of these monthly payments are a longer term relief.

 

Credit Cards Rates Are Likely To Decline

Credit cards carry the highest borrowing rates of most consumer loan products. Their rates are linked to the prime rate which is quickly  influenced by the Fed’s benchmark rate. Interest rates will likely go down as a result of the lower prime rate. Of course, those high rates may not be a problem at all if you pay your card balances in full every month.

Unfortunately, the average credit card debt was $8,398 in June 2019. While the recent Fed reduction may trim some basis points off your APR, lenders are not required to lower rates when the Fed does so. However, there is a lot of competition for borrowers. If credit card issuers do, it will be marginal on on new cards. Lenders are far more willing to increase APRs when the Fed raises the fed funds rate.

Once again, issuers mostly look to your credit score for assessing your risk as a borrower. At the end of 2018, the average credit card rate for new offers were 19.24% and 14.14% for existing offers. The range for those with excellent scores were 14.41% to fair scores at 22.57%.  The national average rate did drop to 17.61% recently after factoring in the 50 basis point decline in the fed funds rate in 2019.

Good News For Student Loans

There is some good news on federal loans for undergraduate and graduate students and their parents for the 2019-2020 school year. This is the first time that these rates have dropped in three years. The rates for these loans were tied to the May 2019 Treasury auction for 10 year notes. Student loans have been a front page burning issue, likely to ramp up alongside the upcoming Presidential election debates.

Federal loans are fixed only with 10 year loans for school years as follows:

Type                                                       2019-2020                       2018-2019

Direct Subsidized (student)                        4.53%                              5.05%

Direct Unsubsidized (student)                    4.53%                              5.05%

Direct Parent Plus                                      7.08%                              7.60%

Graduates Unsubsidized                            6.08%                              6.60%

There is a cap on the amount you may borrow from the federal government for student loans. Undergrads may borrow up to $12,500 annually and $57,500 in total for student loans from federal sources. Graduates are capped at $20,500 yearly and $138,500 in total.

You need to consult the Federal Student Aid guide as the amount you may borrow depends on what year you are going into at school and your dependency status. These loans are not dependent on your credit score. For more on how to pay for college, see our family guide.

Due to federal loans being capped, most students will turn to private lenders where the credit scores of the students and parents matter. Loans may be fixed and potentially go for terms of 10-20 years or are variable. It is a good idea to pay back your student loans faster if at all possible.

The variable rates are influenced by changes in the prime or LIBOR plus the fixed margin tied to your credit score for your total rate. LIBOR rates tend to increase less slowly than the prime rate.

Banks may require a minimum credit score of 600-650 or better. So it is best to work on improving your credit report before borrowing. 24% of families in 2019 borrowed money from federal loans, private student loans, credit cards and other loans. 7% of students and parents each used their credit cards, loans from retirement accounts or other sources. 

Savings And Investing

Savings accounts at banks, including online banks, are likely immediately vulnerable to reduced rates after the latest cut in the fed funds rate. These rates have been low for years and not much of a source of interest income for savers as they have been in the past. However, these accounts did perk up after the rate increases in late 2018 enough to merit ads with “high yield savings rates.”

September 2019 rates have dropped in mid September after the August rate cut but likely not fully reflected. Average savings rates range from 2.00%-2.50%, with many banks requiring minimum amounts of $100-$10,000. Please read the fine print as there may be fees.

Savings accounts are great for accessibility to liquid funds such as your emergency money. Money market funds may offer slightly higher rates than saving accounts. They are great alternatives for safety and liquidity purposes. If the Fed continues to reduce rates, expect more trimming ahead. I don’t wish for high inflation but there was a time (1980-1982) that these accounts provided double digit returns with virtually no risk.

The Bull Case For Investing When Interest Rates Go Lower

Generally, when interest rates go lower, consumers and corporate borrowing increases. The lower interest rates may help some segments of our economy, like industrial companies. They have not participated in higher growth as much. Lower rates often results in strong economic growth. With low savings rates at 2.5% or lower, consumers have less incentive to leave money in the bank earning low returns.

Households may spend more by borrowing for a home or car. The reduction we saw in August and in September may be a small incentive for more buying of consumer assets.

Remember we have had a low interest rate environment with already low mortgages and HELOC rates. The housing and car markets have been strong in recent years because of lower borrowing rates. Those who may have wanted a house or car may already have done so. Can another 25 basis point encourage more buyers to look for new buyers? Maybe. Consumer spending has remained fairly strong particularly in the retail markets.

 

Better Long Term Returns From Stock Investing

I avidly participate in the stock market which are at or close to all-time highs. When the Fed reduces the fed funds rates, financial securities usually respond favorably or even upon speculation of an upcoming cut. Expectations of a stronger economy tend to push stocks higher. There are always risks that the market rotates from one issue to the next or one sector of stocks or another. To reduce risk, make sure to diversify your portfolio.

For example, US-China trade talks (on or off). There are some pockets of weakness being experienced in different sectors such as industrial companies such as Caterpillar, Fedex, and companies more dependent on strong global markets.

Households may seek higher returns from stocks which grow 8% annually over the longer term. Alternatively, they may seek higher yielding stocks such as ATT, Verizon or BP than they can earn in their savings banks.

Better yet, I would recommend those interested in stocks, to buy a low cost index fund. Vanguard funds are known for their low cost and choices in funds that focus on growth, value, blend or want something to mirror the market like S& P 500. Investors can also look at target rate funds.

 Final Words

The rate cut from the Fed was a welcomed event though it will likely have only marginal benefits for the average consumer. With lower interest rates it is cheaper to borrow than save. This usually leads to increases in spending. That is good for economic growth.

Still, households would realize even better financial health by improving their credit scores, reducing debt and spending within their means. This should be a priority so that you can invest more. Savings are great for liquidity but careful investing could provide better returns.

Have you noticed any reductions in your loan rates? Have the lower rates increased your consideration for house or car hunting? We would like to hear from you about your thoughts and experiences!

 

 

 

 

 

 

 

 

 

Labor Day Thoughts On The Virtues Of Work

Labor Day Thoughts On The Virtues Of Work

“Pleasure in the job puts perfection in the work.”  Aristotle

Labor Day is here. For most of us, it arrives too quickly with the end of summer. This three day weekend there are bonfires and last-hurrah barbeque with friends and family. Fashion police say it is the end of wearing white clothing. There is that back-to-school edginess for our kids, sales and the beginning of NFL season.

Contemporary images do not mesh with Labor Day’s origins. We don’t necessarily pay attention to its creation to counter abusive work practices by factory and business owners. We should pay tribute to the social and economic achievements of American workers.

Celebrate Hardworking Americans

The first Labor Day was held on September 5, 1882. Ten thousand workers took unpaid time off to march in a New York City parade from City Hall to Union Square to protest poor wages, 70 hour-7 day work weeks, child labor and hazardous conditions. It became a federal holiday in 1894, shortly after labor unions began to claim prominence in the American economy.  

Things are not perfect in today’s workplace but fairer systems prevail. This is a far cry from the late 18th century. I always thought of Labor Day’s celebration as a demarcation between summer and the more casual days in late August. We all need a push to get back into the swing at work whether its after  Labor Day weekend or the start of a regular week. 

Use your days off to have fun with friends and family, get rid of some chores, make time to reflect and plan for the week ahead. It is a good time to consider where you are in your job, seeking a promotion and evaluating your career. 

The Benefits of Work

“Choose a job you enjoy doing, and you will never have to work a day in your life.”  Whether it was Mark Twain or Confucius who said this, it is a sentiment worth aiming for whether you plan to work for 10 years or 40 years.

I always valued my work, appreciated its challenges and a way to give our lives meaning. Sure, there are always days we would rather not be working. However, seek fulfillment from your job and career or make changes. Explore and broaden your interests. Our jobs  give us a sense of pride, independence, identity and purpose, a way to meet people, improve our skill and of course, financial support.   

Post Labor Day, consider these benefits and strive for more. It is no time for complacency at work. Learn how successful people use their weekends. Instead make the time to think about your accomplishments, what you can achieve going into the end of the year and the next year. You may have used your summer to plan out assertive action to successfully reach your goals. Now is the time to pull out your career playbook.

13 Tips For Achieving Success In The Workplace

1.Set reasonable goals and be focused on accomplishments.

2. Develop and strengthen your confidence.

3. Take risks and be bold. 

4. Invest in yourself by growing your skills or taking more classes in your field.

5. Don’t procrastinate as it is a costly habit.

6. Accept and learn from constructive criticism.

7. Negotiate for higher pay and expanding opportunities.

8. Be open to new ways of thinking and always know all sides of an argument.

9. Find mentors to learn from and trust. 

10.Accept failure as a step towards your success.

11. Be a lifelong learner.

12. Value your time and be productive. 

13. Take time to reflect on accomplishments. 

These recommendations whether you are a recent college grad starting your career or have significant experience in the workforce. 

Quotes To Celebrate Labor Day:

 

1. “Work is no disgrace; the disgrace is idleness. ”   Greek Proverb

2. “Don’t be intimidated by what you don’t know. That can be your greatest strength and ensure you do things differently from everyone        else.”     Sara Blakely, Founder & CEO, Spanx

3. “Labor Day is devoted to no man, living or dead, to no sect, race or nation.” Samuel Gompers

4. “The law of work seems unfair, but nothing can change it; the more enjoyment you get out of work, the more money you will make.”                Mark Twain

5. “All wealth is the product of labor.” John Locke

6. “Growth and comfort do not co-exist.”   Ginni Rometty, CEO, IBM

Gratitude

7. “A hundred times everyday, I remind myself that my inner and outer life depend on the labors of other me, living or dead, and that I must exert myself in order to give in the same measure as I have received and am still receiving.”    Albert Einstein

8. “Stick to your true north– build greatness for the long term.” Ruth Porat, CFO, Alphabet

9. “The truth is, there is money buried everywhere, and you only have to go to work to find it.”  Henry David Thoreau

10. “I would like to be remembered as someone who used whatever talent she had to do her work to the very best of her ability.”             Ruth Bader Ginsberg

11. “Be grateful for what you have, and work hard for what you don’t have.”     Anonymous

12. “Any fool can make something complicated. It takes a genius to make it simple.”    Woody Guthrie

Women’s Rights

13. “Around me, I saw women overworked and underpaid, doing men’s work at half men’s wages, not because their work was inferior, but because they were women… As man’s equal before the law, women could demand their rights, asking favors from no one.”                            Anna Howard Shaw 

14. “If they give you a seat at the table, bring a folding chair.”   Shirley Chisholm

15. “I do not demand equal pay for any women save those who do equal work in value. Scorn to be coddled by your employers; make them understand that you are in the services as workers, not as women.”    Susan B. Anthony

16. “I have yet to hear a man ask for advice on how to combine a marriage and a career.”   Gloria Steinem

17. “It is vain to expect from women till they are in some degree independent of men.”    Mary Wollencraft

18. “We need to accept that we won’t always make the right decisions, that we’ll screw up royally sometimes– understanding failure is not the opposite of success, its part of success.”   Ariana Huffington, Founder, Huffington Post; Founder & CEO of Thrive Global 

19. “I am opposed to ‘right to work’ legislation because it does nothing for working people, but instead gives employers the right to exploit labor.”   Eleanor Roosevelt

20. “No country can ever truly flourish if it stifles the potential of its women and deprives itself of the contributions of half of its citizens.”                 Michelle Obama

21. “Without labor nothing prospers.”    Sophocles

22. “Nothing will work unless you do.”  Maya Angelou

 

Conclusion

There are still biases that remain in the workplace. That said, Labor Day remains a worthy time to celebration the accomplishments of all hardworking Americans in every field of work. Although most of us dislike the thought of Mondays, try to use a few minutes to reflect and plan out your week. I believe the virtues of work beat idleness anytime as long as you enjoy your job. If not, make changes that can benefit you longer term. 

How did you celebrate the holiday? Are there any quotes we missed you would like to share? Let us know and we will add it. We would like to hear from you!