51 Ways To Save Money In College

51 Ways To Save Money In College

“He (She) who will not economize will have to agonize.”

 Confucius

 

Saving money during college is a perfect way to develop good financial habits. Learning how to manage money on a tight budget, pay down debt, control spending, and make money may be among the best lessons they get in college.

Contrary to popular belief, college students are better budgeters than graduates starting their first job.

As a college professor, my students often share how they spend less on books, entertainment, and food. Many of the tips below come from those discussions. Being frugal is a badge of honor for my students and me who come from homes of modest means. 

Parents, I encourage you to share can share our list with your college-bound students. Likewise, if you are on your way to college, there are ways your parents may be able to help you as well.

51 Ways To Save Money In College:

 

Before College

  1. You should be working during the summer to have some spending money.
  2. Take Advanced Placement (AP) courses, if offered in high school. Make sure to do well on AP exams so that you can get full credit. Colleges are generally looking for a “4 or 5” score on the AP exam to reflect that you are “well or extremely qualified”. Some may grant credit for a score of 3. 
  3. The College Level Examination Program (CLEP) offers 34 exams that cover intro-level college course material. With a passing score on one CLEP exam, you could pick up three or more college credits at more than 2,900 colleges and universities. Your learning of these topics could have been through a high school course, independent study, or on-the-job training.
  4. Apply for work-study, grants, and scholarships.
  5. Attend a community college for the first two years at lower tuition rates. It is an excellent alternative for many students. You might even be able to live at home, saving dorm and food costs.

Be Resourceful At College

  1. Don’t buy new textbooks. Instead, look to rent your books from Chegg, Amazon, or Barnes & Nobles. They may also sell your textbooks in ebook form. Rental and ebook prices have come down quite a bit in recent years. Ask your fellow students who may have free pdf resources. Even traditional text publishers have digital book offerings.
  2. Reach out to your classmates and ask around for used books as early as possible. Ask your professors as they may have a list of previous students interested in selling books. There are flyers all over your campus with offers. Buy the paperback version, which is significantly more affordable.
  3. Find out about amenities offered on and around campus. See if there are discounts for school supplies and laptops. Often computer labs on campus may be selling refurbished computers with maintenance provided for some time.
  4. Use your college library and the public library for your books, ebooks, music, and videos.
  5. Students should learn about respective school resources. Take advantage of free help like tutoring, writing, computer IT, and printing. There are probably free or discounted entertainment and food offerings at certain times, such as club fairs or special events. As a faculty advisor for one of the largest clubs on campus, I purposely buy extra food for students who attend our presentations.
  6. Be aware of the application and enrollment dates. You need to know the deadlines for dropping courses and getting partial or complete reimbursement.

Budget Your Living Expenses

  1. Live at home if you are near campus. At the very least, you may be able to do your laundry and pick up snacks in a pinch.
  2. Review your alternatives between living in the dorm, house, or an apartment. Look at safety, walking distances, affordability, and complimentary transportation between campus and home. When renting a house or apartment, consider your potential roommates wisely.
  3. Monitor your costs for utilities, food, snacks, and such. Don’t waste energy. Make sure to pay your bills on time and credit card balances in full. Don’t ramp up unnecessary late charges. Do your roommates share your financial values, like shutting the lights when they leave?
  4. Review your on-campus dining plans for healthy, affordable choices. Consider potential alternatives in your college’s vicinity—Cook for yourself. Make salads or even ramen noodles in a bind. There are far more options today.
  5. Buy non-perishable items in bulk. Unless you are cooking for a pack of students, it usually doesn’t make sense to buy food in size if it is perishable.
  6. Limit eating out and avoid alcohol which is more expensive in restaurants. Look for special deals for college students.
  7. Use coupons and rebate apps to save on groceries and other personal care items.
  8. Avoid Starbucks and invest in a cheap coffee drip pot or a one-cup Keurig.

Transportation

  1. Having a car at school is expensive. Everyone will want you to drive them and will rarely pay you back for gas. Check out public transportation and look for student discounts. Walk, bike or carpool instead.
  2. Find the cheapest ride-share in your area if you need to go somewhere not covered by public transportation.
  3. Book trips early when you know you are heading home. Look for discounts or consider traveling on off-days.

Entertainment

  1. Make sure to use available Wifi on campus and at home to not go over budget on your data plan.
  2. Pick one streaming service like Netflix or Amazon Prime. Think of cable as a luxury you can have when you go back home. With more video streaming providers, competition may drive not prices. Look for lower prices.
  3. Look into Amazon for their deals called Prime Student. They have a free six-month trial that includes a ton of perks.
  4. Social events on and around campus or in nearby parks are usually free or cheap.
  5. Get free music from Pandora and Spotify. The ads are not that bad!
  6. Get discounts from businesses in your school’s neighborhood.

True Story

I gave my students a term project to go to every business within a 15-20 block radius of the campus and arrange student discounts. They filled out forms by the business, which pledged a discount (usually 5%-10%) for customers with a college ID. In return, the business name and address would be posted on the school website, generating some good traffic for them. The businesses included restaurants, a bakery, laundromats, groceries, a bowling alley, a movie theater, and a bagel place.

With a few exceptions, many owners wrote us letters of gratitude and kept their discounts in place for students. One of my former students who had already graduated called to thank my students and me for the project profusely. Her family was the owner of the nearby bagel place. She told me business was booming.

Money And Banking

  1. Look carefully at offers for credit cards with the lowest interest rates and cashback rewards. Review their terms for what they charge in fees and penalty rates.  Students are particularly vulnerable to these issuers. I believe a secured credit card is a great way to strengthen your credit score when you are under 21 years old. You can put down a security deposit of up to $500, which serves as collateral.

The CARD Act

The Credit Card Accountability, Responsibility, and Disclosure Act, or the CARD Act, did not stop these vendors from marketing on college campuses to students. The issuers did make it more difficult for students under 21 to get a card without a co-signer. If you are between 18 and 21 years old, you can be an authorized user on your parent’s card, get a secured card, or a student credit card that is unsecured.

  1. Pay your credit card bills in full. Yes, I may have said it earlier. It’s that important. Do not carry any kind of balance or stop using your card, and use your cash more often.

32.You should set up a high-yield savings account with a local bank. You should be able to get free checking as a new account holder.

  1. Make sure to track your spending to avoid any unnecessary checking overdraft fees. There are a few good budget apps (Mint, PocketGuard, Wally) or a spreadsheet.
  2. Check your credit report periodically. Monitor for errors you need to correct. Watch out for potential fraud. If you suspect fraud, you should address it immediately. Several of my students have been victims of identity theft. The Federal Trade Commission website has instructions for you.

Shopping

  1. Avoid impulsive shopping, which induces overspending.  Do window shopping without money instead.
  2. Look for school discounts for a laptop. Consider what essentials you need in a computer and not necessarily what you want. There are a lot of choices, including refurbished computers, which may be suitable for college students. You don’t need a printer. Your school probably offers students a card every semester that provides free printing (e.g. 500 copies) at the school’s expense. Also, you can probably email your assignments to your professors.

37.You may even be able to get free anti-virus software to protect your computer and smartphone.

  1. Buy generic brands for over-the-counter drugs and groceries. You will be saving up to 35% over name brands without compromising on quality.

Health & Fitness

  1. See if your school provides free flu shots through their nursing department or medical school. There may be a local urgent care facility for basic medical needs that is affordable through your family’s insurance plan. In a post-Covid world, free vaccinations will be far more available.
  2. Rather than join an expensive gym, check out on-campus facilities and their track field. There may be discounts for a gym nearby. Our campus is known for massage therapy classes, and students always enjoy that free perk after classes. See if there is a pool on your campus. 

As A Student

  1. It is essential you must attend class, read your book, do the assignments, avoid absences and latenesses. Reach out to your professors for help. They want you to do well.
  2. Do not take an “Incomplete” in any class without knowing the consequences—nine of 10 students who have taken an “INC” never complete the work required. The grade turns into an “F,” and you may lose the credits and have to retake the course. Losing credits may delay their graduation, reduces their GPA, and adds cost.

A Saga About An Incomplete

  1. Talk to your professor and understand the time required for making up the assignment. One of my brightest students was on her way to an “A.” In early December, she let me know that she had a family trip coming up and would miss the term paper deadline.

We both agreed that an INC would be a placeholder for her final grade. She would complete the term paper in January when she was back. I gave her the new deadline, which was in the first quarter of the year. She even had a pretty good draft, and I was pretty sure she would do it on time.

To be sure she would stay on track and complete the class, I sent emails to remind her in January. I did not receive an answer. Worried, I phoned her at home, and she said I would have it soon. I never did get it. That Fall, she told me that her grade had turned into an “F,” but there was little I could do.

College students are huge procrastinators. Your professors know that and remind students in class and on school websites. Learn how to better avoid procrastination.

Work in College

  1. It is essential to do well in school. At the same time, it is crucial to work on or off-campus. The average full-time college student makes $195 per week. According to a 2016 Digest of Education Statistics, 43% of full-time students and 78% of part-time students worked. The majority of college students make between $7,200 – $42,000 per year.
  2. There are many types of jobs you can do part-time to add some money to your account. When you are busy, you often excel at time management. You can be a tutor, work in the learning or computer center. You can work at a restaurant or grocery. Many students consider working during January or during the summer to save more money.
  3. As a full-time student, you can become a resident advisor or assistant on campus. This position is desirable and looks excellent on your resume. The compensation varies, but you may earn free or reduced housing, a stipend, a meal plan, or dollars towards your tuition.

Pay Down Student Debt

  1. With all the money you may be saving and making, consider making small but regular payments to your student loans. Even $10-$20 per month helps to reduce the total amount. More importantly, it is a good financial habit. You may think it is early to think about student loan repayment, but it is good to be proactive with your student debt.

My Best Wishes On Getting A Good College Education

  1. Make the most of your college experience. Do it in four years.

Two more tips:

  1. Invest in Yourself. Become a sponge and learn everything you can. Develop soft skills such as critical thinking and problem-solving. Strengthen your communication skills. Get out of your comfort zone and take electives that you may not get a chance to do again. Join the Mock Trial Team, the Federal Reserve Challenge, or Debate Team. Join any worthwhile competition.
  2. Be ethical even if the world doesn’t always seem to value that trait. Your employers will.
  3. Before you know it, you will be meeting prospective employers for your first job out of college. Go to job fairs or any networking events so you can begin to speak to those who may become essential to your future. It is never too early to think about your next move. When looking for a job, consider the company’s benefit plan.

Final Thoughts

Saving money in college may be easier than you think. You need to make an effort to manage money on a tight budget, pay down debt earlier than required in small increments, control spending, surround yourself with like-minded friends, and make money when opportunities arise. Most of all, be a diligent student, so you don’t have to repeat courses unnecessarily.

 

And have some fun!

Thank you for reading. What kind of financial experience did you have when attending college? Any tips we left out you would like to add for our budding college-bound folks? Please share with us! We are happy to hear from you!

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

12 Ways To Make College More Affordable (Or Even Free)

12 Ways To Make College More Affordable (Or Even Free)

Affording a college degree is complex, with costs rising for decades. Yet, having a college education remains a meaningful way to reach success. We will point to ways to make college more affordable and even virtually free. Planning early as parents and your students to save, actively budget, research college costs, and seek financial aid are practical steps.

The Price Of A College Education

According to the latest Trends In College Pricing, the College Board average annual tuition, fees, before room and board charges published prices for 2020-2021 are:

 $37,650 for Private four-year colleges;

$10,560 for public four-year in-state colleges;

$27,020 for public four-year out-of-state colleges, and

$3,770 for public two-year (Community College. in-district.

College prices and accompanying costs have outpaced inflation since the 1980s and have jumped nearly eight times faster than wage growth. This rise is a concern for me as a mom of teens and as a college professor. My son is a rising senior in high school so I am in your camp.

I am a first-generation American and the first in my family to go to college. Like many, my parents raised me on the belief that a college education is essential for advancement. It is still true today despite many paths to success.

In the Sallie Mae 2020 National Study of college students, there were differences in how parents and students paid for college. Proportionately, more parents (44%) contributed to the college costs than the 31% in the previous year. This higher percentage offset the lower (8%) contribution from students’ from their income and savings.

This differential may be largely due to the COVID impact on high school students not working during 2020 when they earn some income.

The share of the cost of college in 2019-2020 changed from the prior year:

  • 44% covered by parent income and savings.
  • 8% from parent borrowing.
  • 8%  contributed by student income and savings.
  • 13% from student borrowing.
  • 25% covered by scholarships and grants.
  • 1% were gifts from friends and family.

 

The Need For Family Planning For College

Planning helps families get ready for college decisions. According to the Sallie Mae Survey, more families planned early in their children’s lives for their college future than the previous year.

The top three ways families planned to pay for college were: 

  •  Save for college.
  •  Research college costs and financial aid.
  • Actively budgeted.

Getting prepared for higher education also includes taking Advanced Placement courses, enrolling in community college, and learning more skills or practicing their talent.

Benefits of Preparation

By getting ready, families had access to resources to understand their purchase options. They often borrowed less, received slightly more financial aid by way of grants and scholarships than non-planners.

For these reasons, we believe that being prepared as early as possible may help you and your student afford the best college possible.

12 Ways To Make College More Affordable (Or Even Free):

 

Early Funding of your Child’s Education:

The first step is to save early for your child. The different plans below are not mutually exclusive. As always, check with your tax professional as to the respective tax implications.

1. 529 College Savings Plans

Your children’s financial future may begin as early as their birth. Establish an account once you have a social security number for your child in their name or initial in the parent’s name. You can change the beneficiaries later on.

The more you begin saving early, the more you may benefit from compound growth using tax-deferred dollars. As a result of setting aside funds well before your child’s needs, the less you will need to borrow later on. Federal student loans impose limits. However, they are the more affordable borrowing source, as compared to private loans. If your child’s education is a priority, as I am sure it is or will be, your best bet is to adopt a saving strategy.

A 529 plan is a college savings plan that offers tax-free earnings growth and tax-free withdrawals as long as you use these funds for qualified expenses. Just about every state has its own 529 plan. You may open an account across state borders. Each state’s plan varies, so check which works for you.

529 College Savings Plans 

Originally begun to save for college only, may now use these plans for tuition at primary and secondary private or parochial schools or qualified expenses at public schools. They retain their benefits. The Tax Reform Act in 2017 expanded 529’s ability up to $10,000 per year.

Under the Act, the $10,000 withdrawals per year are federally tax-free. State tax treatment of these withdrawals differs from state to state but is tax-free if used for qualified educational expenses. This benefit is not allowed in several states like New York at this time.

So check with your state’s taxing authority or state 529 plan administrator. For example, Connecticut’s 529 plan allows you to withdraw tax-free for up to $10,000 per child to be used for private school tuition. There are no maximum caps on investments per year. 

Investment Choices

Parents can typically choose among a range of investment portfolio options. They may include Vanguard mutual funds, exchange-traded funds (ETFs), static or fixed allocation fund portfolios, and age-based portfolios called target-date portfolios. Which fund you choose depends on your appetite for control and risk. You can make changes between the funds based on your children’s age or the target date portfolios, shifting from more aggressive growth rates to more conservative rates as your child ages.

 I’d like to offer some advice from our experience. Don’t set it and forget it. Whether you choose target-date funds or something else, make sure to periodically review your accounts to ensure it is growing the way you intend it for your college-bound kids. We made some changes to spur more aggressive funds than we picked at first. 

College students can use the amounts for any eligible higher education, not just four-year colleges or universities, including vocational and trade schools, community colleges, and graduate schools.

The 529 plans typically do not have income or age limits. An older person can use it for school later on. I used some of my funds for law school.

2. Coverdell Education Savings Account (ESAs)

These accounts are similar to 529 plans offering tax-free investment growth. You also can use tax-free withdrawals for qualified education costs. Like 529 plans, the invested amounts are not limited to college and can be used not only for K-12 tuition but also for expenses, including books. At one time, Coverdell ESAs were the only tax-advantaged way.

Unlike 529 plans, Coverdell ESAs have limits to $2,000 annual contributions per beneficiary as of 2020. Grandparents can set up their account for the same beneficiary with a $2,000 limit for each beneficiary account.

A Coverdell investment option is self-directed, allowing you more specific options like 529 investment track options.

Limits For ESAs

Coverdell ESAs have age and income limits. A beneficiary must use the funds by age 30 unless the beneficiary is a special needs person. If your adjusted gross income is between $190,000-$220,000 as a married couple or $95,000-$110,000 as a single taxpayer, you cannot contribute any longer.

While Coverdell ESAs give you greater investment flexibility than 529 plans, the imposition of limits has caused some to consider rolling their Coverdell ESAs into 529 plans.

3. Custodial accounts: Uniform Gifts to Minors Act (UGMA) or Uniform Transfers Minor Act (UTMA)

Parents can set up custodial accounts for each child under the age of 14 years and managed by the parent until the child turns the age of majority, typically age 18 years, unless stated otherwise. Investments in these accounts are not limited.

For children below 18 in the 2020 tax year, the first $1,100 of unearned income from the investment is tax-free to the child, after which the next $1,100 is taxed at the child’s tax rate, then income above the $2,200 is taxed at the parents’ (usually higher) tax rate. Once your child turns 18, this money belongs to them. They will be paying taxes at their rate.

Couples jointly filing can contribute up to $26,000 annually for each child, or $13,000 if an individual sets up an account. Anyone can set up a custodial account, including grandparents, aunts, and uncles.

Once the child has access to the account based on their age of majority, it is their asset. Parents may use the invested money for anything that child wants, including frivolous things that, unfortunately, the parents have little power to reclaim that asset.

These types of accounts are typically for supplemental spending for college and not likely to go to tuition.

4. Traditional IRAs And Roth IRAs

You can use traditional IRAs, regularly used for tax-deferred retirement savings. Usually, you would incur a 10% penalty for withdrawals before 59.5 years. You also would have to pay income taxes on the amount withdrawn.

There would be an exception if an individual wanted to use this account for qualified college expenses for themselves, a child, or a grandchild. In this case, there would be no penalties for early withdrawals. You would have to pay income taxes.

You don’t have the same 10% penalty for withdrawal from the Roth IRA. You have more freedom with the Roth IRA in this regard.

Tap Retirement Savings As Last Resort

Frankly, parents should never tap their retirement accounts for college tuition unless you set up these retirement accounts for their young children. Since you cannot borrow for retirement, but you can do so for college, parents or children would be better off taking out a loan for college. I provide it as an option, but I would consider other ways first.

5. Invest in Discount bonds

You can save for college costs by investing in deep discount corporate, US government (Treasury), or municipal deep discount bonds. These bonds are often referred to as zero-coupon bonds because their owners are not collecting coupons twice a year.

These bonds come in maturities of one year-40 year and do not pay semi-annual dividends like regular bonds. Furthermore, the IRS requires that you pay tax on the interest portion annually.

Tax Implications Vary

Check with your tax professional about the possible tax implications for individual securities. Federal and state tax treatments of zero municipal coupon bonds are different. Munis are known for federal tax exemption and sometimes state and local taxes as well.

On the other hand, there is no tax exemption for holders of corporate bonds.  Treasury bonds are usually tax-exempt by state and local authorities.

If safety is a priority, Treasury bonds have triple AAA ratings, so they are virtually risk-free while ratings of municipal bonds and corporate bonds vary.

You can redeem the bonds at the total or par value upon their maturity. Parents can use the proceeds of these bonds for college costs.

Deep discount bonds are not just used to save for college tuition, but their long-term nature is suitable for planning for your children’s non-tuition college needs as all.

6. Series EE Savings Bonds

The federal government sells Savings Bonds for half their value or $5,000 for maturity denominations of up to $10,000.

Like treasury bonds, they are safe based on their triple-A rating.

Usually, savings bonds are taxed at the federal level and tax-exempt on state and local levels. Still, if you are using these savings bonds for college tuition expenses, they are typically tax-exempt at the federal level 

 

7. Earn College Credit In High School

Want to earn some college credits early at little cost? The Advanced Placement program offers college-level courses and exams that you can take in high school. The exam is $95, which may save up to $3,000 for a three-credit course. It is a great way to save time and money in college if you can earn credits depending on your score.

There are 38 AP courses in a variety of disciplines. Having AP credits with a good score on your high school transcript is a massive plus for colleges considering your application.

Check Your School Policies On AP Credits

Be aware that some colleges and universities may require a score of 4 or 5. The maximum score on an AP is a 5. The exams are in May. I know because my kids are more stressed than usual!

  Among the top colleges, 86% restrict the use of AP credits. Paul Weinstein, director of Johns Hopkins University’s graduate program, assessed policies of the top 153 colleges and universities in a 2016 study.  A few colleges do not accept AP credits.

You should review your school policies on acceptance of your credits. If your choice school doesn’t accept your credits, you still got a birdseye view of future college exams.

8. Grants and Scholarships

If you borrow money for college, federal loans are far more attractive but have loan limits by year, with the freshman year maximum loan the lowest at $5,500 rising to $12,500. Interest rates on federal loans have dropped for the first time in three years based on May’s ten year treasury yields. 

To obtain a federal loan, grants or scholarships, you need to fill out the Free Application for Federal Student Aid or  FAFSA  for each academic year. The new 2020-2021 FAFSA form is about to be made available here. If not early, make sure you file it on time, as some states’ awards are on a “first-come, first-served” basis. Check your state’s practice as they differ.

Fill Out FAFSA Please

FAFSA determines whether you are eligible for need-based federal financial aid for college. It also may help you with getting scholarships, grants, and work-study programs for your student. See our family guide on how to save for college.

It is always a pain to fill out applications. However, since FAFSA will help you get more affordable federal loans to supplement your income and savings contribution, go for it. It takes time to fill out the papers and get the supporting documents together, but it is worth it if you get some financial help. Be super organized ahead of time!

Federal Gift Aid

Federal Grant and scholarship programs account for funding 31% of the average family’s needs in 2018- 2019. This percentage was above 28% of college costs last year. These dollars are “gift aid” money for college, meaning it is not a loan you need to pay back.  Almost all federal grant programs are needed-based. See the list of grants here.

The federal scholarship programs are merit-based, received from schools, outside organizations, or businesses. Parents can find information as to how to apply here. Sallie Mae’s survey of 2018-2019 showed higher dollar contributions of $8,580 for those families making more than $100,000. Another place to look for scholarship opportunities is Fastweb.

Federal Work Study

In addition to the “free aid” you can get through the federal government, federal work study programs pay at least the federal minimum wage and are on-off campus. These programs are need-based, so check out their website here.

State Gift Aid Programs

You can look at state programs for additional loans, grants, and scholarship opportunities to supplement what you are getting through the federal programs.

Take a look at the different programs by the state for possible loan/grant/scholarship opportunities here. You can look for merit-based scholarships by the college if your college is on this list. Some colleges have supportive loan programs for those families that are need-based as the 25 colleges on this list, including Harvard, do

Doug Hewitt, the co-author of Free College Resource Book, has said that there are more scholarships available for you within your home state than nationally.

9. Student Education Tax Credits

There are two major tax credits available to offset the costs of higher education. The American Opportunity Tax Credit is the most valuable of the two (the other is Life Learning Credit with a $2,000). It only applies to the first four years of post-secondary education (university, college, vocational, non-profit, or profit).

You may claim up to $2,500 per eligible student per year under the American Opportunity Tax Credit. Credits cover 100% of the first $2,500 of qualified tuition.  If the credit brings the amount of tax you owe to zero, you can have up to 40% of the remaining amount (that is, $1,000) refunded to you. There are credits for qualified education expenses of 100% up to the first $2,000 for each student and 25% of the next $2,000.

10. Colleges With Free Tuition

Several colleges offer free tuition though you will likely have to pay room, board, and living expenses. Some of these colleges may require work on campus or service after graduation to earn free tuition.

Accredited colleges with free tuition have been growing, and include:

Alice Lloyd College (KY)

Barclay College (KS)

Berea College (KY)

College of the Ozarks (MO)

Deep Springs College (CA)

St. Louis Christian College (MO)

Webb Institute (NY)

William E. Macaulay Honors College At CUNY (NY)

Williamson Free School of Mechanical Trades (PA)

US Military Academies

These colleges are a way of giving service back to your country:

US Coast Guard Academy (New London, CT)

US Military Academy (West Point, NY)

US Naval Academy (Annapolis, Md)

US Merchant Marine Academy (Kings Point, NY)

Some colleges have made their courses available online for free but may include a relatively small fee:

iTunes (Stanford University)

Open Educational Resources (OER) Commons

Open Yale University (Yale)

School of Public Health (Johns Hopkins University)

11. Go To Community College Or Public Four Year In-State College

There are many reasons to go to community college. Affordability is high on the list for that reason. Tuition and fees for two-year in-state colleges were $3,770 in 2020-2021. That is a fraction of annual costs for four-year public colleges. A full-time student will likely receive more than enough grant aid and federal tax benefits to cover this tuition and fees. If a student chooses to live on campus, those expenses will be out of pocket.

Most of my students live at home and plan to go away from home for the latter 60 credits of college. I teach diverse community college students with business majors. They are often immigrant or first-generation students at community college. Many finish their four-year degrees while working full-time, and some have children.

The pros of going to community college tend to outweigh the cons for many students. Please see our extensive article on the benefits of going to community college here.

Some great public four-year in-state colleges provide excellent value (See Value School listings in US News & World Report). They combine strong academics with lower tuition costs than private colleges.

True Story About My Hiring Preferences

I went to public colleges (CUNY) for both my BA and MBA. When I was Managing Director at my investment bank, I hired “the best and the brightest.” When my human resources employees came with stacks of resumes, all the Ivy Schools were on top. My preferences were always public colleges, given my background.

I constantly reminded HR to give me the CUNY resumes first. Then the rest could be public colleges across the country. The early days of most investment banking firms on Wall Street were filled with public college graduates if they even went to college. I am referring to Lehman Brothers, Goldman Sachs, Salomon Brothers, and others.

Here is our conversation:

HR: “I got the resumes you wanted. We think these are stellar candidates.”

Linda: “Great, thank you. Did you get any from Baruch College (a CUNY Business School)?

HR: “We think this a better group. Most are Harvard, some Yale and Princeton, and other top schools. I didn’t look for Baruch. Why do you want students from there?

Linda: I earned my MBA from there. It is a great business school—many international students. I also like paying back to students who want investment banking or equity research. Give the Ivys to some of the other analysts. OK?”

HR: “But, then you won’t get the best! They told me they only wanted to hire from top schools. You better talk to my boss.”

The funny thing was that all three of my senior management, including my head of Equity, came from public colleges and were brilliant leaders.  I finally did get my way!

12. Certain Majors Are In Demand By Employers

Certain majors are in such strong demand that employers may consider picking up some of your tuition in return for your promise to work at their firms or entities for a certain period. While there may be a shift in desirable majors, there appears to be a strong call for those students in math, science, business, nursing, teaching, and social work. Build up your soft skills–interactive communication, collaboration, problem-solving are in significant demand.

If you go to college while working full-time, many employers pay up to 100% of the tuition as a significant perk to attract those with evidence of a strong work ethic. A bit of advice: don’t pick your major solely based on your employer picking up the tab. That said, if you have an interest in that course of study, go for it!

Good luck to all of you in the coming year. I am in the trenches with you as my son is a rising Senior.

Final Thoughts

Financing a college education is complex, and most students have to borrow some money. Repayment of student loans can be an albatross for many years. If they have taken loans for school, the monthly costs for college grads delay them from making their life plans. Many postpone getting their place to live, getting married, having children, buying a car and home because of their ongoing loans.

Planning ahead of time may help you (i.e., parents/students) avoid getting overburdened by debt. Strategize how to get savings ahead of time or while in school.

Once in college, students tend to budget better than after they get their first job. Be creative about saving money even in college when you are living on a limited amount of money. My college students often inspire me with tips they share in class, and so I sometimes collect this information as we do here.

Thank you for reading this! Please feel free to visit The Cents of Money for more articles like this and personal finance topics. Subscribe for our free weekly newsletter and other freebies

 If you graduate with student loans, read our piece on paying back your student loans faster. It may involve some sacrifice when you are young to better financially position you and your family in the future.

Are you applying to college this fall or next year? What steps have you already taken to help you in seeking your college? We would like to hear from you!

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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10 Reasons Why You Should Know Your Net Worth

10 Reasons Why You Should Know Your Net Worth

How are you today? I mean, how are you financially?

Know Your Net Worth:

  • It is a crucial benchmark at a particular time.
  • Will allow you to set near-term and long-term goals.
  • Track changes for better money management.
  • Highlight your liquid asset balances.
  • It helps you get a loan for a house, car, college tuition, or new business.
  • Pay down high-cost debt.
  • Refinance your mortgage loans.
  • Encourage you to save and invest more.
  • Buy your own home, rather than high rent.
  • Provides the best road map to building your wealth.

 

You need to know the difference between net worth and net income.

What Is Your Net Income

Your net income is based on your gross or pre-tax income and reflects your annual salary or based on hourly wages times the number of hours you worked.

Gross income consists of commissions earned and interest income from investments.

Deductions for taxes and pension and retirement accounts will be your net income for the year.

Using A Budget May Help You To Control Spending

 Net income pays your monthly bills, your monthly loans, and other items in your budget.

For a better description of what goes into your budget plan, see our post, “How To Control Spending With A Simple Budget.”

Having a reasonable budget plan and spending less than you earn will add to your net worth.

That is your roadmap to building wealth and greater financial flexibility. Take that road!

How To Calculate Net Worth

Your net worth is your personal balance sheet that provides a snapshot of your financial position at that time.

Net worth is all that you own less than all that you owe.

It is total assets less total liabilities.

An excel spreadsheet of different assets and liabilities discussed below is an excellent tool for putting all of your categories in one place. Update this spreadsheet periodically. You should do it on at least a quarterly basis. However, if you are true to your monthly budgeting, reviewing your monthly net worth is better.

Try putting it on a spreadsheet first, but you can use Personal Capital’s net worth app for tracking your investments. Frankly, any way you can keep on top of your net worth to build the amount will work.

10 Key Reasons Why You Need To Know Your Net Worth:

1. Key Benchmark

Your net worth is an important benchmark that measures your household’s successes. 

2. Set Goals

Knowing your net worth is essential to set your immediate and long-term goals and planning your family. Your net income is likely at a lower level early in your career than in the later years when your net income should rise from the potential upside coming from promotions, training, and better jobs. With careful planning and a budget plan in place, your net worth should increase over time.

3. Track Progress

You should track changes in your net worth as early as possible to make sure you are making progress in managing your money correctly.

4. An Emergency Fund Is Essential

You must have liquid or cash-like assets for the potential problems that are likely to arise. An ample emergency fund should provide some needed padding for unexpected events like a lost job. Liquidity can vary among different assets we own. A money market account is typically far more liquid than your car or your home.

5. For Borrowing

When you go for a loan to buy a house, a car, for college tuition, or invest in a new business, you will want to review your net worth to make sure you can afford the incremental costs you will be taking on. Your bankers will want to review your financial statements, including an income statement with your earnings history and your net worth.

6. Pay Off Debt

Pay down your high-yielding debt, typically your credit card debt, which uses the magic of compounding interest against us if we only make the minimum interest payments.  The average credit card interest rate for April 2021 is 19.49%. Get rid of credit balances in full on a monthly basis.

7. Refinance Mortgage Debt

You could pay off all or some of your mortgage debt if your interest rate is over 5%. If it is significantly above that, you should be seeking to refinance your mortgage.  On the other hand, if you pay a low-interest rate, don’t make any changes. 

8. Build Assets

Add to your retirement accounts to the limit,  earn your employer’s match,  and increase investments in a low-cost index fund. While stocks can be volatile year-to-year as it was in 2018 and again, early 2020, longer-term, S& P 500 annual returns have averaged 9.9% since the 1920s. If you are not facing imminent retirement, stocks remain a great place to invest your money.

 If you don’t own your home and pay high rent in, say New York City or San Francisco (the most expensive cities to rent one-bedroom apartments in the US), you may consider buying a home while mortgage rates are still relatively low at under 4%.

9. Financial Planning

Your road map to building wealth starts with knowing your net worth and making valuable changes like reduced spending, increased saving, and investing. Your net worth statement is the basis for having a financial plan to achieve short-term and long-term goals, and make adjustments to your budget. 

10. Financial Security

Having financial security means not worrying about money and living comfortably with peace of mind. Knowing your net worth is having a tool to measure your financial security at any point in time. There are terrific apps like Personal Capital that can help you build your net worth, track spending and all key variables to this statement, and make changes.

How do you calculate your net worth?

List all your the assets that have current monetary values in the following categories:

Cash and cash equivalent assets are those financial assets that quickly convert into cash. These assets include cash on hand, prepaid cards, savings accounts, checking accounts, money market accounts, certificates of deposit, savings bonds, and emergency funds. You can also include short-term IOUs, money expected from tax refunds. You can get these amounts off your latest monthly statements. List these individually based on their current balances.

Other monetary assets include your taxable investment accounts, retirement accounts, real estate investment funds, pensions, and cash value of life insurance policies. List these at their current market value.

Monetary assets are more liquid, meaning they can convert them into cash more quickly with little to no loss in value.

Tangible assets would include your most significant investments that are part of your lifestyle.

Real Estate

These real estate assets are your primary home and another real estate you own, including vacation or second home, timeshares, land, and rental property. Separate your primary home from the other real estate.

Use current conservative market values for real estate. Appraised values may not reflect actual sales or liquidated values.  You should not be inflating your net worth unrealistically.

You would need to approximate the value of your home, cooperative, condominium, cars, boats, and any other large items. To approximate real estate values, you can look at Zillow, Chase Home Estimator, or real estate websites for your zip code.

Your Business(es)

If you own your business or businesses, use conservative market values. It can be a complex matter. A simple rule of thumb is to look at sales at simple companies or a multiple of revenues, such as 0.6 times annual revenues.

Personal Property Is Tricky To Value

Unless you have a meaningful fleet of cars and boats, you should not add these to your assets even though they relate to those assets that you include. These assets depreciate too fast and sell too slowly to add much to your net worth. If you have that fleet, you can look at Kelly Blue Book, Edmunds, or AutoTrader for cars. Similarly, for boats, you can consult Boat Trader.

What Else Goes Into Total Assets

Art, rare books, rugs, and antiques may be a large part of many households’ net worth. Unless they are highly desirable or rare, these assets tend to wildly low liquidated values to count on if you needed money in a pinch. Musical instruments have their value, but they are challenging to peg, and their sales are less predictable to raise capital.

This category has a lot of sentimentalities but is complicated for the owners to peg its value. In my opinion, these assets should not be counted on unless you work with an estate professional steeped in knowledge and has a terrific network to help you sell the items.

Let My Mistakes Provide A Valuable Lesson

When I worked on Wall Street, my company restricted analysts from investing in financial securities. If I could buy certain securities on that rare occasion, I was often not allowed to sell that security when I wanted to. So, on either side of the trade, I was burned and finally abandoned investing until I left my career as an equity analyst.

So, what investments did I make?

A large part of our assets was in art, rugs, rare books, and antiques.

These assets are on our walls (art), in our bookcases (rare books such as the first edition of the Federalist Papers), on the floors (ancient rugs), and antique furniture (signed in the mid-1760s by the cabinetmaker).

Ever try to sell an 18th-century Tiger Maplewood card table? We have! And we are still waiting for that sale.

Beautiful stuff, but they can’t pay the bills! So I don’t include these personal assets. The few pieces we have sold were at prices 70% below what we paid for them.

I digress, but a worthwhile lesson for those who are collectors.

List all your liabilities according to their current balances.

Mortgage

Your mortgage loan balance is probably your most significant liability.

The home equity loan balance

Separate mortgage loan balances for the other real estate property (listed above in assets)

Other Loans

Student loans at the current balance

Loans associated with the business(es)

Personal loans

credit card account balances (you should break these out individually)

Professional services unpaid

Taxes owed

Total Liabilities

Total Assets minus Total Liabilities= Your Net Worth

How can you build your net worth? Start with writing out the ways.

You should look at your net worth statement with your budget to see what areas of growth and reduction in spending could build your net worth.

Look at your potential trade-offs.

Increasing your assets by increasing your savings could increase your net worth.

Making more income at your job would boost net worth.

Cutting your spending in areas that you can allow you to put more money into interest-bearing bank accounts or stock investments.

Investing in financial securities can expand your wealth.

Choose to invest based on your risk appetite and where you are in your life cycle.

Where should I invest my money to maximize my net worth?

Stocks are riskier but generate higher returns than keeping your savings in bank accounts at low returns.

According to Bankrate, the best annual percentage yield (APY) for bank savings accounts in April 2021 ranges from  0.40%- 0.60% for the top banks. Check for minimum balances and monthly fees that can go up to $15. These low rates will not make your net worth grow but will provide liquidity.

Having cash on hand is critical for your emergency fund. In November 2018, 76% of families reported having at least $400 in liquid accounts, according to the Federal Reserve.

Your net worth will grow faster if you invest in a diversified basket of stocks, which will provide more significant upside potential long term.

The younger you are, the more able you are to ride out the more significant risk found in stock investing, with the benefits of compounding effects.

Homeownership remains a worthwhile investment despite the slide in property prices in 2008-2009 but is less liquid than financial securities.

After household net worth plummeted in the Great Recession in 2008 to $58.996 trillion, having been impacted by declining home and stock market values, household net worth has improved to $130.0 trillion at the end of 2020, though consumer debt growth continues to dampen net worth for many families

Savings and investments in financial securities will enhance your net worth and are more liquid. Liquid net worth is a great benchmark for understanding your financial flexibilities when there are emergencies or opportunities. 

Decreasing your loans or debt liabilities will increase your net worth.

Reducing your debt levels will also improve your net worth situation.

Your mortgage loan deserves your careful attention

When borrowing, research rates for different time frames. Look at taking a 15-year mortgage loan versus a 30-year mortgage loan. The shorter borrowing time results in paying less overall interest. While your monthly payments will be higher for the 15-year loan, total borrowing costs will be lower.

Taking on a mortgage loan is a high cost, but home prices had generally kept pace with inflation until 2008-2009, when subprime mortgages played a massive factor in declining home values.

The median household net worth for 2019 was $121,700, up 18% from 2016,  according to the Federal Reserve’s latest survey.  

The Fed has kept the fed funds rate at zero to 0.25% in 2021. According to the latest Bankrate numbers, fixed mortgage loan rates remain low at 3.110% for the 30-year and 2.400% for the 15-year. 

Final Thoughts

If you receive a sizable tax refund this year, earned a higher bonus, inherited money, or experienced a sudden windfall, what would you do with the proceeds?

Lower your debt where possible, Then allocate to saving to invest more. Pay off your credit card debt. Card balances are likely your highest-cost debt, so use your tax refund or bonus to lower this amount. If there is some money, pay off more of your student debt. The way to build wealth is by growing your assets faster than your liabilities.

Thank you for reading! If you found this of value, consider reading other articles on our blog, and join us by subscribing to The Cents of Money.

What are some of the things you are doing today to increase your assets, reduce your liabilities, and raise your net worth? Where can you reduce your spending to put more money into savings and investments? We would love to hear from you!

 

 

 

 

 

 

 

 

 

 

 

 

 

The Pros And Cons of Credit Cards

The Pros And Cons of Credit Cards

“Once you get into debt, it’s hell to get out. Don’t let credit card debt carry over. You can’t get ahead paying eighteen percent.”

Charlie Munger, Vice-Chairman, Berkshire Hathaway

 

For me, credit cards have always been a double-edged sword, a fight between good and evil, or in Biblical terms, a blessing and a curse. Growing up, my parents predominantly used cash, using their retail business’s checking account to pay bills. I was the first in my family to go to college and the first to have a credit card. My parents celebrated the former and not so much the latter. They only accepted cash from their customers, refusing to believe in the benefits of the credit card. That’s where I probably get my reluctance to use credit cards instead of cash at times.

They may have been onto something though it may have been something else altogether. My mom, I still believe, may have been irked by the fact that women, on their own, could not get their cards until the passage of the Equal Credit Opportunity Act of 1974. Before that, women needed to have a man (husband or father) cosign for a credit card. How was it fair that my Dad, not my Mom, the brains behind all our finances, could get a credit card? Just saying why I think my Mom, until the day she died in 2000, never had any interest in a credit card (pardon the pun!).

The Credit Card Landscape

Credit cards are a financial tool. But like buying a new buzz saw, you need to use it with care. Some people collected credit cards like baseball cards when I was growing up. That seems like a formula for disaster to me. Clearly, we are not yet a cashless society with nearly 1 in 4 people unable to get approval for a credit card due to lack of credit history or discipline. Roughly 33 million people in the US are unbanked or underbanked, meaning they largely use financial products outside the banking system.

When COVID hit our shores in March 2020, new card applications dropped 40%. Inquiries for all kinds of loans–auto and mortgages–dropped substantially as our priorities changed during the pandemic.  The irony is that the use of credit cards increased out of necessity due to fear of touching cash on the risk of getting a coronavirus-related infection. That behavior is just another example of the strange happenings in 2020. Growth in new card applications should resume in 2021. 

Credit Card Statistics:

  • About 176 million or  67% of Americans have a credit card with about 3.1 cards per person.
  • The average card balance is $5,897 per person end of 2020.
  • Roughly 58% of cardholders carry some kind of balance.
  • The average FICO score for credit cardholders was 735.
  • The current credit card interest rate averages were 14.58%, but for those with fair credit scores, the rates rise to 23.13%For new credit cards.
  • The average rate was 17.87%.

 

Advantages of Credit Cards

 

1. Convenience

Compared to cash, credit cards are a suitable financial product. Before COVID, retail businesses were increasingly not accepting cash from customers. Credit cards provide fast payments, transfers between accounts, and withdrawals.

There are far more shopping options with a card. It is easier to make, change, and cancel travel, hotel, and car rental arrangements.  When traveling overseas, credit cards allow you to realize currency conversions automatically.  Let’s face it, carrying a lot of cash is hard –bills and change– around in your pockets, jingling around. That said, I do like window shopping without my wallet, so I don’t feel tempted to spend money unnecessarily.

2. Build Up Your Credit

For those who lack credit history, like young people, becoming an authorized user on your parents’ credit card is a rite of passage. This is an excellent way to build up a credit history so long as your parents’ credit scores are strong. Otherwise, it won’t help your credit situation at all.  Most states do not have minimum ages for your child to become an authorized user. I’d suggest you teach your kids about the responsibility of using a card safely and responsibly first.

Getting a new card may be a second chance to improve your credit score. You have missed payments, hurting your credit score in the past. If you are ready to be responsible, you should consider getting a secured card, putting some cash on account. You don’t need a massive number of cards to strengthen your payment history and length of credit history. Understand common credit mistakes and how to avoid them.

Related Post: 6 Ways To Raise Your Credit Score

3. Easy To Track Spending

You should regularly review your credit card bills helps you track your spending. It is easy to do (except when you know you spent a lot of money) and an excellent way to improve your financial discipline. Although spending cash is the best way to feel pain immediately, regular examination of the amounts you are consuming is a realistic way to correct yourself. The credit bills provide a purchase record when making returns.

One particular month, I recall seeing a very high bill with several items that seemed uncharacteristic of me. It was a posh store with a great salesperson.  Looking around,  I realized that the dress  “I had to have” was still in the bag with the tags on along with new shoes. Who did I buy that for? Not me, apparently so I returned those things and stayed clear of that salesperson.

4. Automate Your Payments

Paying your bills, especially credit cards, are so much easier when you use the automation feature. Most cards have this feature that you can set on or before the due date so you are not late on your bill payments. Also, consider paying more than once a month if the lower amounts feel better to digest. As payment history accounts for 35% of your credit scores, automating payments is one way to help you not miss the due date.

5. So Many Perks

Having a credit card may entitle you to perks. Typically, the card use may provide perks such as cashbacks, rewards, airline points, merchant discounts, hotels, travel insurance, welcome bonuses, access to tough-to-get tickets, and free museum passes. Before signing up a specific perk, make sure it aligns with your needs. One time I ordered four tickets for Hamilton on Broadway for my family, only to realize they were preview tickets for the opening in LA, 3000 miles away. The issuer reimbursed us and waived the fees.

6. Protections For Consumers, Not Necessarily For Businesses

Credit cards offer several features for consumers. When you lose cash, it is gone forever. The good news is that money is typically not attached to your personal information, like the loss or theft of your credit cards. Some cards provide zero-liability fraud protection. In a fraud situation, just notify your issuer to cancel your card. Alternatively, the issuer can get you a new account number at no charge. Safety is important.

Typically, when you lose your credit card, your losses are capped at $50 so long as you let the issuer know promptly. There may be a higher fee and responsibility for any charges that aren’t yours if you delay reporting them. I once thought I lost my card, I called the card company quickly to find that my card fell out of my wallet into a nook in my bag. Paying the fee was a fine for a lesson learned to at least look for your card first.

Cards often have spending limits. Occasionally, you may want to lift the limit if you know you may be spending more for an overseas trip, for example, where you plan to shop for jewelry. A cardholder can let their issuer know that they want to “opt-in” to allow for transactions that may put you over your credit limit. You can let them know the specific dates you’ll be traveling. Spending limits are a good feature, especially if you’re prone to overspending.

The Credit CARD Act of 2009 enhanced more protections for consumers that do no apply to businesses. With this law, issuers need to notify consumers of significant interest rate hikes at least 45 days beforehand. Also, fees, previously hidden, must be better disclosed clearly. There are some other practices that improved with the CARD Act discussed here. Still, it is always important to read the tiny fine print, especially when it comes to credit cards.

Disadvantages of Credit Cards

 

 

1. Overspending Leads To Higher Debt

Spending beyond your means can be the root of all evil related to your finances. Credit cards enable people to shop impulsively.  Having a card rather than a finite amount of cash gives you the ability to borrow more than you should. Overuse of your card leads to carrying high-cost debt on your balances. Paying double-digit interest rates on these balances can be overwhelming.

The convenience of using credit cards as compared to cash may encourage higher spending, according to studies. In the now-classic MIT study by Drazen Prelec and Duncan Simester, MBA students held an auction for tickets to sporting events. One event was a desirable basketball playoff game, and the other was a regularly scheduled baseball game. Those participants were encouraged to buy tickets using credit cards spent up to 100% more than those paid in cash. They called this the credit card premium.

Other studies seem to validate the MIT findings that we tend to spend more with a credit card than cash. For me, spending cash for purchases gives me an immediate pain instead of a nearly month delay of having to pay my credit card balance.  to me, mental accounting bias and overspending

2. Irresponsible Use of Your Credit Card

When you pay your card bill in full every month, you don’t pay any interest. Your credit card provides a lot of benefits without the pain of paying high interest costs. Unfortunately, many people just pay the minimum amount due at the end of the month, carrying a balance forward. The issuers prefer cardholders to carry balances as it is a lucrative income stream for the companies. 

At an average balance of $3,000 with an average interest rate of 16%, it can take 16 years to pay off that balance at the monthly minimum rate, roughly 3%-4% using a credit card interest calculator. That assumes that you haven’t used a credit card during those years. It is a vicious cycle. The magical powers of compounding that work so well when investing or saving for retirement works against you when you are paying interest charges on interest accumulated. If you cannot use your card responsibly, you should work hard to reduce your spending. Some people have too many credit cards, maxing out their limits, losing control of their spending.

Watch out for the particularly punitive penalty interest charge when you are late on your credit card payment. The penalty interest rate could be as high as 29.99%, above your regular interest rate, and may stay in place for some time.

3. Lower Your Credit Score

Just as you may raise your credit score, misuse of your credit cards can destroy your score. Missing payments, applying for credit too many times, and using more than the 30% limit of your available credit all can hurt your scores. Even closing a credit card account, you don’t use will result in a decline in your score. Your credit score reflects your creditworthiness to lenders, landlords, and other professionals and could negatively impact you.

4. Read The Fine Print

Just like any contract you sign, make sure to read the terms and conditions of the credit cards you are considering. Despite legislation to protect consumers, issuers are well known for hiding information about their perks, fees, charges, and other liabilities from consumers. In recent years, consumers have been able to compare credit cards more quickly. Among my favorite sites are WalletHub, NerdWallet, and CreditCards.com, which have a ton of good information on credit card features.

Be aware that you are usually subject to mandatory arbitration if you have a dispute with your card issuer. This has been relaxed in recent years but is still in the terms and conditions. It is one of my pet peeves and a project I assign my law students to look at the fine print. The average consumer can’t fight the legions of arbitration attorneys that support card issuers.

Exercise Financial Discipline By Using These Rules:

  1. Shop wisely for a credit card, finding the perks that most suit you.
  2. Read the terms and conditions carefully even after you made your selection.
  3. Pay your credit card bill in full, so you don’t carry a  balance.
  4. Have an ample emergency fund, so you don’t put high unforeseen costs on your card.
  5. Spend below your means always and make savings and investing a priority.
  6. Don’t close any credit card. Instead, cut your card in a million pieces or simply put it in a drawer.
  7. If you have multiple cards, decide how to use them for different categories and don’t max out their limits.
  8. Avoid cards with annual fees unless they have essential features you will use.
  9. Don’t get addicted to credit cards. Limit the number of cards you have.
  10. When it comes to paying your card bills, automate and don’t procrastinate. The penalty rate is punitive for a reason.
  11. If your child is an authorized user of your credit card, teach them how to use the card wisely and safely.
  12. Be aware of behavioral biases of spending more when using your credit card instead of cash.
  13. Review your credit card bills for errors, poor judgment on your part, or correct impulsive spending.
  14.   Use cash for some of your discretionary spending.

 

Final Thoughts

Credit cards serve an essential purpose as a financial tool in an increasingly cashless society. Used wisely, the advantages of credit cards will outweigh their disadvantages. Practice financial discipline in all aspects of money management. We have had our druthers about using credit cards, learned a hard lesson or two.

Thank you for reading! If you found some value in this article, please share it with friends, family, and colleagues. Consider subscribing to our growing community at The Cents of Money!

 

 

 

 

6 Ways To Raise Your Credit Score

6 Ways To Raise Your Credit Score

Our financial lives depend on our creditworthiness. When we go for a loan, lenders review our credit report and our FICO credit scores to determine our annual percentage rate (APR). Generally, the higher our score on a 300-850 score, the lower the borrowing rate we will pay on our loans for our car, mortgage, or college tuition.

7 Reasons Why You Need To Review Your Credit Report And Score:

 

  • People want to know where you stand before making important financial decisions.
  • I am borrowing for a home purchase.
  • Car loan or lease.
  • Student loan.
  • She is hecking for inaccuracies, identity theft, and fraud.
  • He was getting a job.
  • We are renting an apartment.

 

Can You Improve Your Credit Score?

The short answer is yes, you can!  We will go over tips to increase your scores. First, let’s talk about how the FICO Scores formula is calculated with its five different criteria of the total:

Payment History: 35%

This category carries the most significant weight in your score and is the most critical factor. The longer the credit history, the better. Having a sound track of not missing payments and being on time works in your favor.

So those who are new to being approved for their credit cards need to show a consistently positive pattern.  These are different account types such as credit cards, retail or store accounts, installment loans, mortgages, and finance company accounts.

Credit Utilization: 30%

As a significant influence on your credit score, credit utilization is the ratio of your total outstanding revolving credit balances divided by full available credit. Revolving credit refers to your credit cards and credit lines you may have but does not include your car loan (unless on your credit card) or your mortgage.

The utilization ratio is known as the balance of debt to available credit or debt-to-credit. It measures how much credit you have used for the amount available to you. You don’t want to “max out” your cards. You should not be above a 30% ratio as it will impact your score. I would stay in the mid-20s range so as not hitting the 30% level.

Credit History: 15%

How you handle credit is essential to lenders. The length of time of your oldest credit account and the average age of all of your accounts determine your credit history. The older the account, the better your credit score. If you are new to obtaining credit, it will take time to benefit from showing up in your score.

Credit Mix: 10%

Lenders favor some variety of borrowing in your mix of credit. A borrower handling different kinds of debt products may reflect less risk to lenders. When you don’t yet have a credit card, you may be at higher risk. That said, don’t go out and get different kinds of loans for the sake of improving your mix.

New Credit: 10%

When you apply for new credit, that inquiry is reported on your credit report for up to two years. That is called a hard inquiry and can negatively impact your credit score, particularly if you are making multiple inquiries. However, don’t let it stop you from doing comparison shopping for the same type of loan.

A soft inquiry occurs when you are checking your credit score or report. Soft inquiries do not generate negative hits.

Related Post: Common Credit Mistakes And How To Avoid Them

6 Ways To Increase Your Credit Score:

 

1. Check Your Credit Report For Errors

Reviewing your report for inaccuracies and missing information may be the fastest and easiest way to improve the score. An FTC study reports that 5% of consumers had errors that may carry enough weight to result in getting a lesser favorable loan. One in four consumers had errors in one of three credit reports.

If you find an error, contact each of the credit bureaus (Experian, Equifax, and TransUnion). You will need to give them specific information as to what you believe is incorrect. They must investigate the item(s) you have raised, usually within 30 days. You can do all of this online, but it is a good idea to follow up if you don’t hear back from them.

Fix Errors As Quickly As Possible

Initiate your inquiry as soon as you spot the error by following these steps. The credit bureaus may back burner your issue if they deem it frivolous, so be specific and provide the needed information as part of your inquiry.

Sometimes what appear to be errors are fraudulent charges and scams.

Read our related post: 9 Ways To Better Protect Your Privacy Against Fraud And Scams

2. Pay Bills On Time

The credit bureaus require you to pay the minimum amount required on time. They are looking at your payment history, which counts a lot towards your overall credit score. Missed or late payments are harder to repair and can lead to delinquent payments that take seven years to get rid of on your report.

Automate Payments

Consider automating payments online through your bank portals for credit card companies. Set up online payments with your other loan providers. Stick to a monthly schedule or pay these bills every two weeks to lessen the burden.

If you have missed payments, get current as quickly as possible. Be consistent after that as the creditors look for a clear pattern of timely payments before you see score improvements.

You do not want a collection account to appear on your credit report. Even if you pay that account, it has long-lasting adverse effects. It puts a 7-year stain on your report. Don’t let that be a disincentive from paying off the collection debt as it will stay on longer. You might want to check with the creditor to see if it was “charged off” as lousy debt before making a payment.

Pay Credit Card Balances In Full

Although the strategy of making the minimum payment on your credit balance is good for your score, it will keep you in debt longer. It is far better to pay off your monthly debt balances in full. Otherwise, you are paying those card balances at mid-high teen interest rates.

That makes the credit card companies happy, but, of course, that is not your goal.

3. Reduce Your Debt

The credit utilization ratio is an essential contributor to your overall credit score. Being disciplined about your debt levels is vital for the financial future. This ratio reflects how much of your available credit has been used. Lenders look at debt usage on a per-card basis and total debt relative to total credit available.

Creditors look at a 30% threshold. Ratios above that level may provide negative consequences to your score. Consider targeting a lower percentage in the mid 20’s if you must carry month-to-month balances at all. You may not realize that making sizable purchases such as moving to a new home caused you violated the 30% ratio.

Raising Credit Limits Too Tempting For Some

I have read others recommend that you seek higher limits on your credit cards to lower the ratio. That may work mathematically, but it is too tempting to have more credit available to spend more for some of us. It sort of reminds me of how our elected officials thrash out at each other, then raise our nation’s debt ceiling rather than reducing our borrowings.

Rather than raise limits on your credit cards, make a plan to zero out your debt balances to gain financial flexibility or stop using your cards and spend less.

If you are having trouble making ends meet because of exigent circumstances (e.g., job loss, death in the family), contact your creditors to see if there is something they can do, such as modify your credit terms temporarily. Another recommendation is to go to a financial counselor for some strategies to reduce your debt significantly.

Related Post: How To Pay Down Your Debt For Better Financial Health

4. Little To No Credit History

When you have a relatively “thin credit file,” it means you don’t have much in the way of showing that you are responsible with credit yet. Minimal credit history accounts for about 15% of your credit score. There are a couple of things for you to do.

You can become an authorized user on someone else’s account like a parent. Make sure that they use their credit responsibly, or it won’t be beneficial to you.

Related Post: A Guide To Your Child’s Credit Report: Pros And Cons

Strengthen Your Credit File

You can apply for a secured credit card where approvals are easier to get than unsecured credit cards. Your credit limits will be far lower, usually capped at around $500. You will need to post a refundable deposit as security. Secured credit cards are suitable for those with lousy history and those with little or no track record.

You may want to consider Experian’s recently launched free product, Experian Boost. It allows consumers to include utility and cellphone payments into their credit score calculations using this tool. It may provide an incremental boost for those with thin or poor credit history files. You are connecting your online bank account to your Experian credit report.

5. Don’t Close Any Unused Credit Accounts

If you have credit cards, you no longer use or need it, it is better to cut them up and put those cards in a drawer and forget about them. The exceptions to de-classing them to your sock drawer are you will be too tempted to spend or pay annual fees.

Otherwise, if you call the company to close the account, you will likely lose a few points off your score. Closed accounts, even if they have zero balances, stay on your credit report for ten years.

Keeping the account open and unused benefit your scores at least two ways:

  • your credit utilization ratio will rise because you have removed available credit.
  • Eliminating an account might hurt your credit history if it is an older account.

The impact of closing an unused account may be tougher on young people or someone trying to build up their credit file. I made this rookie mistake by closing a retail store’s account when I was younger. It was an expensive store and not one I found myself shopping at anymore.

I thought I was making a smart move when I closed the account and had my score dinged. I recommend the “scissors approach” and cutting the cards and put it away.

6. Apply For New Credit Sparingly And Only If Needed

Credit mix is a factor in your score, though not as influential as credit utilization. Think carefully before applying for more credit than necessary. It may result in counting as a hard inquiry on your credit report and, therefore, a harmful point reduction in your score.

 

How Long Does It Take To Rebuild Your Credit Card:

 

  • Credit errors or repairs  3-6 months
  • Closing accounts           three months
  • Hard inquiries                two years
  • Missed Payments         18-24 months
  • Car Repossess              seven years
  • Delinquencies                seven years
  • Bankruptcies                  7-10 years

 

Credit Score Ranges Per Experian:

  • 800-850 Exceptional
  • 740-799 Very Good
  • 670-739 Good
  • 580-669 Fair
  • 300-579 Very Poor

 

How Much Of A Difference Does A Credit Score Make On Your Loan?

Using myFICO Loan Savings Calculator,  here are national 30 year fixed mortgage rates with a 400,000 on April 16, 2021, according to the following scores:

Scores      APR                  Monthly Payment

  • 760-850    2.676%                 $1,617
  • 700-759    2.898%                 $1,664
  • 680-699    3.075%                 $1,703
  • 660-679    3.289%                 $1,749
  • 640-659    3.719%                 $1.845
  • 620-639    4.265%                 $1.971

 

If your score is currently at the low end, you can save up to $127,421 in total interest paid over the life of the loan by improving your credit to the 760-850 level. Becoming more creditworthy helps you save money.

 

Final Thoughts

Most of us are in the 620-719 score range. We have several ways we can raise our credit scores incrementally and produce meaningful savings. A better credit score improves our ability to borrow and satisfy those like our landlord who want us to be creditworthy.

We should be more financially responsible by reducing debt, paying our bills on time and zeroing out our costly credit card balances. We need to have greater financial flexibility and make better decisions for our  fulfilling our needs and wants in our lives.

If you are new here, welcome! Subscriber and join our growing community, get our free newsletter, freebies and free Personal finance email course.

Related post: Are You Creditworthy? All About Your Scores And The Five C’s

Have you checked your credit report recently? It is important to review to do so for errors and ways to improve before core ahead of your needs to borrow. Do you have any experience you can share that you dealt with repairing credit errors  or increasing your score?

We would like to hear from you!

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Being Frugal When Saving Time And Money

Being Frugal When Saving Time And Money

“Price is what you pay; value is what you get.”

Warren Buffett

I bristled when they called me a cheapskate when I was a young kid. It cast a dark shadow over me. We lived in a modest neighborhood in the Bronx, so it wasn’t like some of us were from the upper class. Still, our lifestyle was far more humble than others. I was laughed at for getting an ice cream without sprinkles or wearing ratty clothes. My parents were more frugal for a good reason. They struggled with their small business and needed to save money for our basic needs. For many people, frugality is a necessity. For others, it may be a choice.

Cheap Vs. Frugal

Nowadays, calling someone frugal is more of a virtue, like giving a badge of honor to that person. Being frugal or cheap is sometimes used interchangeably, but the terms have different meanings. According to Merriam-Webster, frugal is characterized by or reflecting economy in the use of resources. On the other hand, cheap has a range of definitions. Cheap has two or more meanings: charging or obtainable at a low price and inferior quality or worth.

While both terms are about saving money, being cheap is usually motivated by price and paying less. On the other hand, being frugal considers price along with quality and value in evaluating the purchase. There is a gray area but considering if a person is cheap or frugal, you’ll know the difference by their actions or words. Cheap people are penny-pinchers who will mostly pick the lowest price option even if the quality is suspect, regift presents, and are poor tippers. Many will engage in D-I-Y projects like plumbing and electrician work just for the sake of not spending the money.

When Frugality Can Go Too Far

Being overly cheap or extreme frugality without reason and lack of generosity is a symptom of obsessive-compulsive personality disorder (OCPD) by the International OCD Foundation. The American Psychiatric Association has pointed to this symptom as when “a person adopts a miserly spending style toward both self and others.” Growing up, my Uncle Harry lived with us for many years. He was a Holocaust survivor of the death camp Auschwitz. As a teen, he suffered from the camp’s traumatic effects. He lost his family, except for my mom, and married late in life. Unfortunately, he divorced soon after.

It was extreme frugality that killed his marriage. His wife, Doris would come home with a dozen eggs or too many groceries and he would have a breakdown over the potential for wasted food. His psychiatrist noted his anxiety about saving money or extreme frugality was a tragic symptom of his experience.

In contrast to being cheap, frugality is a strategy that saves money and considers the whole picture: quality, durability, value, and price of what you are buying. Those who are frugal are savvy about saving money for themselves and others. They will consider other variables like whether that purchase is good for the environment and other causes.

The Frugal Warren Buffett

Warren Buffett is as legendary for his frugality as he is for his investing acumen. He lives in the same Omaha home since 1958. Buffett frequents McDonald’s and his company’s cafeteria. He is a value-seeker when investing or in his lifestyle. Yet, for all of his frugalness, Warren Buffett has generously donated $37 billion since 2006.  One of my favorite Buffett quotes: “It’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price.”

6 Benefits To Being Frugal  

 

1. Having A Purposeful Mindset

Adopting a frugal mindset means being more thoughtful about your purchase decisions. It is not about having it all but about choosing your purchases carefully for you and your family.  Having a frugal attitude favors good money habits like saving money and better financial management overall. It is not about choosing the lowest price option basing your decision on price alone. Other factors are part of the value proposition.

Frugality is a lifestyle that people adopt for the simple pleasures of life. It is not new. Plato and Henry David Thoreau in Walden advocated modest or minimalist living. It contrasts with societal desires for materialistic possessions which often leads to overspending just to keep up with your peers. Being thrifty has its merits and can lead to sound well-being.

Related Post: 10 Ways To Better Manage Your Spending

2. Motivate Yourself By Knowing Your Goals

It is easier to save or manage money when you have a plan for your future. Determine your short and long-term goals. Those who plan to retire early,  work hard to set aside money for savings, retirement, and investments. Their plan will motivate them to be financially independent and retire early (FIRE). It is not for everyone, but it does give you a chance to develop good money habits for future financial flexibility. By adopting frugal ways to save more, spend less now so you can retire early in life. Spending within your means allows you to choose what you want to do later on at a still young age.

I left my job on Wall Street in 2001, before the FIRE movement became popular in the 2010s. My choice was to go to law school and practice for a few years, have kids, and teach at a college. For me, it has worked out fortunately though it was a big adjustment that could have been smoother. To be honest, I didn’t have a well-developed plan though I did want to return to school because I enjoyed learning new things. Goal setting is essential even if you finetune through the years.

The Frugal Millionaire

In The Millionaire Next Door, a favorite read of mine, millionaires were profiled in two groups. The Under Accumulators of Wealth (UAWs) were the more typical white-collar professional millionaire, devoting more of their high income to luxury goods to maintain their status. As a result, they had lower net wealth compared to their income by neglecting savings and investments.

The Prodigious Accumulator of Wealth (PAWs) were more frugal millionaires. They avoided a showy lifestyle, bought used cars, often living in blue-collar areas. Goal-oriented, they made intelligent buying decisions, using savings to invest more of their money in securities or in businesses for good returns. PAWs spent less on luxury, accumulating higher net wealth relative to income from less.

3. Prioritize Spending To Improve Your Financial Health

Although you don’t want to penny-pinch, prioritize your spending. Frugal spenders tend not to be compulsive shoppers, accumulating lots of material possessions to regret. That doesn’t mean you can’t travel, buy good things, or enjoy your life. Quite the contrary. It is about spending thoughtfully and moderately and not on a whim. Know the difference between your wants and needs or living essentials. Your needs–food, rent, clothes, medical, education– should be a priority. Yes, you can have that latte if it gives you a particular pleasure.

Being frugal means spending below your means so that you can save money to improve your financial health. Those who are frugal tend to:

  • Save money rather than spend;
  • Avoid debt rather than purchase on credit;
  • Pay their credit card balances in full;
  • Have an ample emergency fund invested in a money market deposit account;
  • Contribute at least the minimum amount into your employer-sponsored 401K plan to earn their match; and,
  • Set aside money to build up an investment account.

Related Post: 10 Commandments of Saving Money

4. Price Vs. Value

Buying solely on a price basis without regard to quality is a hallmark of cheapskates. Those who are frugal make economic rather than impulsive decisions. Price is important, but there are other factors to consider. When making purchases, economic people will evaluate the quality, usefulness, reliability, durability, style, convenience, experience, and trustworthiness of the company or the brand. In other words, they will look at the whole picture.

Of course, the price versus value equation depends on the product itself. Frugal shoppers are not going to evaluate many factors for convenience products bought frequently. Price plays a bigger role when buying toothpaste or laundry detergent. For these products and many others, you can save money by buying generic brands at a discount to name brands. The price will be lower for generic brands, as much 35% reductions compared to name brands but the quality is often the same.

Don’t Shop On Price Alone

On the other hand, shopping for appliances, furniture, clothing, and other items less frequently bought quality and other considerations matter. Buying furniture chiefly because it is inexpensive is a recipe for disaster. That is being penny-wise pound foolish. Robert Burton is credited with that British saying in 1621 and is in The Anatomy of Melancholy. I am not sure Burton had our cheap bookcases in mind. However, that is what Craig and I remember saying after we bought cheap bookcases at a “bargain price.” We regretted that purchase made in our early years together almost immediately. The bookcase crashed in the middle of the night. Cheaply made, it didn’t hold up our books for too long.

5. Frugalness Is Good For The Environment

Practicing frugality has become part of the minimalism cult and more acceptable in recent years.  Mindless consumption is being frugal and less wasteful, which is good for the environment. Even if you are not saving money, reusing bags at the grocery store, or not taxing our utilities makes economic and environmental sense. Turn over your lights when leaving your room or home. Wash your clothes on the cold setting and lower or raise your thermostat. You may have personal savings, but you are also helping a cause.

6. Be Frugal About Wasting Time

Time is money. Both are valuable resources, but time is more precious because it is finite. We cannot replenish time. Saving money is necessary, but not when it causes you to waste time. Time is an element that many of us use poorly. Examples of how we splurge on time when trying to save money are:

  • Driving around to get the best gas price;
  • DIY projects when you aren’t handy or don’t even like doing them; and,
  • Grocery shopping at different places to get the best price at each store

Being frugal with our time means being more focused on how we are spending it. To save money, I sometimes over-research things for the best product. Make a “to-do” list to organize your time more meaningfully. Don’t go shopping without a list.

When your time is short, consider spending money on time-saving services. Studies say it can promote happiness when time constraints are stressing you out. On the other hand, Some people work more efficiently under a tight timeframe. I find that I often accomplish more with time constraints which help me to be more focused. Balance your needs of saving money and saving time according to your abilities and preferences.

Related Post: The Relationship Between Time, Money, And Productivity

Final Thoughts

No one wants to be a cheapskate. On the other hand, being frugal is often a virtue that may lead to a happier lifestyle. Just be sure you are not becoming obsessive like my Uncle Harry. Saving time and money are valuable goals that can help to eliminate stress while strengthening your financial health. Maintain a balance to live a life you enjoy. You don’t need to stop pleasures just for the sake of being frugal. Instead, prioritize what is essential for you.

Thank you for reading! If you find value in this post, please visit us more often or consider subscribing to The Cents of Money and get our weekly newsletter and other freebies.

 

 

 

 

 

 

 

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