Monthly student loan payments usually range between 5-15% of graduate’s income after they enter the workforce. (1) Ouch.
The amount of the monthly payment varies based on the amount borrowed and the interest rate. Average interest rate really depends on the type of loan and the first disbursement date of the loan (the date the borrower can start getting the loan money). Interest rates range from 5.05-7.06%. (2)
For example, if a student borrowed $45,000 over their 4 years with a 6% interest rate, they’d have to make 10 years of monthly payments at $500 per month. The recommended annual salary for making “manageable” payments at that rate is roughly $75,000. (3)
So what happens if those payments didn’t exist?? What could that money do to work for you and towards your dreams of financial security? The typical loan payment is between $200 and $300 per month. If a 21 year old graduate started investing $250 per month with a 10% return instead of putting that money toward a payment, they’d have $2,612,924 by the time they retire at age 67!
I know this isn’t a pleasant topic but it’s so important! None of us are guaranteed a tomorrow and dying without a will puts an unnecessary strain on your family. It is not ok when you get sick, or when you die, to leave financial chaos behind you for everyone else to clean up. It will be hard enough for those around you to bear the grief of your terrible illness or death; imagine, for a minute, their pain. Please don’t also force them to have to deal with all the matters you could have taken care of while you were alive and healthy.
As an added bonus, by taking care of this unpleasant yet very important matter, I promise you will also gain peace of mind for yourself, knowing that your heart and mind are free from worry about the what-if’s in life because you have planned and prepared for it.
A 2017 survey found that nearly 6 in 10 Americans don’t have a will.. That’s crazy!
What is a will?
A will is simply a piece of paper that states who you want to get what when you die. But, it’s also a legal document, which is where the trouble can begin. When you’re dealing with a will, you’re dealing with the courts.
Why making a Will is Important
A will states what YOUR wishes are. Do you have children? Who do you want to care for them if something happens to you? Are you remarried? Do you want your current spouse to be taken care of? Or, conversely, do you want to make sure the new spouse does not get your children’s inheritance? Each state has its own laws when it comes to settling the affairs of someone without a will. If you don’t have one, a judge will appoint an administrator. Usually, they appoint the spouse and then the children to serve as a personal representative, but is that something you really want to leave to chance?
I recently had lunch with a friend who just lost her dad. She had just found out that he died intestate. Intestate means dying without a will. She was overwhelmed by the thought of having to figure out how to sell his house and guess as to how he would want his remaining assets to be distributed. So, while grieving, she also has to deal with the mess he left behind.
Making a Will Online
Hopefully, I have motivated you to draft a will. But, maybe you’re feeling overwhelmed with the idea of long and expensive lawyer visits. Good news! If you are looking to make a simple will to take care of basic things like your property, children, investments and personal items, then you can do it online.
A very easy and cost effective way to go about making a will is to utilize a legal forms company. This website will walk you through and help you answer all the situations specific to your wants and needs.
IMPORTANT: Choose the correct state that you are living in and follow the rules when it comes to having your will signed and dated by appropriate witnesses! Failing to do this can invalidate your will!
Let’s get it done!
You’ve got this! A will is the last gift you’ll leave your family and loved ones. Your loved ones depend on you to make a will. Don’t be one of the 6 in 10 that don’t have a will. Click on the link here and get it done today. And, if you have questions or concerns, you can always comment on this blog or email me: moneysmartjackson@gmail.com.
You’re ready to ditch the credit card? Way to go! Paying off your credit card balance and making the decision to delay instant gratification in an attempt to build real wealth is such a big step forward and you should give yourself a pat on the back for getting here.
1. Pay off your card balance
Hopefully, you’ve already done this, but just in case, I’ll say it again. PAY OFF YOUR CARD BALANCE!
2. Call the credit card company
Call your card’s customer service number (it’s listed on the back of your card).
Warning: The customer service rep will most likely try to change your mind and encourage you to keep your card. They’ve been trained for this very moment – to keep you on the line so they can change your mind. Don’t fall for the gimmicks:
“You’ll lose all of your hard-earned reward points.”
“Your FICO score will be negatively effected”
“We’ll offer you 5,000 airline miles if you stay”
“What if we waive your annual fee this year?
If this happens, just stay persistent and steadily repeat, “I’m calling to close my account.”. Don’t hesitat to ask for the customer rep’s manager if you aren’t getting through to them about closing your account.
3. Get it in Writing
Here’s the most important part: Get it in writing! No matter what you do, you want written confirmation that you closed your account. This has happened to me before where I called to request the account to be closed; the customer service rep said they closed it; and I saw it on my credit report over a year later. No fun calling these folks once, much less having to do it twice! Once you receive your written statement that shows your balance is all clear and your account is completely closed, keep the letter in your files and congratulate yourself!
According to the Federal Reserve, Americans owe a record $1.04 trillion in credit card debt – up from less than $854 billion five years ago
Is it a good idea to have a credit card? My short answer is NO!
I have 18 year old twins who just graduated from high school and they asked me if it was time for them to get a credit card because the teller at our bank told them it was time. What?! It’s no wonder that Americans owe an average of $6,354 on bank issued credit cards. Teenagers and credit cards are a horrible idea. In fact, for most adults credit cards are a horrible idea.
I’m sure all of you are thinking, “but what about building my credit score and how about all of the benefits I can get from credit card points or ‘free’ miles?”
Read on and I’ll attempt to explain..
Why are credit cards a bad idea for most people?
According to a study released by the Boston Fed, only 35% of credit card users pay off their bill in full every month. That means 65% of people don’t pay their credit cards off every month. If you are one of the few people who do pay it off each month, you’re obviously in control of the plastic (but read on to hear my thoughts on credit cards even if you pay them off each month). For the 65% of people who do not pay off their credit card balance each month, let’s do some simple math.
Have you read my blog post on the power of compounding interest? If not, click here. Compounding interest is, at it’s simplest form, interest earned on interest. This same concept is used against you when it comes to credit card debt and what’s worse – credit card companies charge way more interest than you are ever going to earn in your savings account.
According to the federal reserve, the average interest rate charged on credit cards in 2018 was 15.32%APR. (1)
valuepenguin.com
Most credit cards come with an interest rate. Simply put, this is the price you’ll pay for borrowing money. Interest is like rent: the longer you pay interest, the more interest you pay – and at the very end, you get nothing back.
For credit cards, interest is typically expressed as a yearly rate known as annual percentage rate or APR. Though APR is expressed as an annual rate, credit card companies use it to calculate the interest charged during your monthly statement period.
How to calculate APR:
Here’s the math in case you’re interested. If not, scroll down to my thoughts on whether a credit card is needed to build credit.
The average interest rate charged on credits cards is roughly 15%. To calculate how much interest you’ll be charged, you’ll need to know your average daily balance, the number of days in your billing cycle and your APR.
Let’s say you have a travel rewards credit card and an average daily purchase balance of $1,500 at the end of your 30-day billing cycle. You also have a variable purchase APR of 15.99 percent.
Here’s how to calculate your interest charge (numbers are approximate):
Divide your APR by the number of days in the year. 0.1599 / 365 = a 0.00044 daily periodic rate
Multiply the daily periodic rate by your average daily balance. 0.00044 x $1,500 = $0.66
Multiply this number by the number of days (30) in your billing cycle. $0.66 x 30 = $19.80 interest charged for this billing cycle
Just like compound interest on savings, this interest gets added to what you owe each billing period (generally each month).
The math requires some work but the concept is simple: Carry a balance, and you’ll pay interest.
The cost of paying of debt with minimum payments:
And beware of only paying the minimum balance! The minimum balance is typically calculated at 2% of your balance. A credit card balance of $5,000 with a 14% APR, will take you 22 years and $5,887 in finance charges if you only pay the minimum payment. You are literally paying double the original amount borrowed. Yikes. Great business for the credit card company; financially crippling for the borrower.
Should you have a credit card to build credit?
The whole premise of “building credit” is based off of the idea that if you take on debt now, you can prove to the lender that you can take on more debt later. A high credit score isn’t an indicator that you are wealthy and ca really afford whatever it is that you’re applying for – credit card, car loan, mortgage, etc. A high credit score is generally an indicator that you love debt. Bankers (like the ones that approached my kids to say they needed their credit card), car dealers, and unknowledgeable lenders have told Americans for years to “build your credit” now to buy things later. They’re telling you to get debt so you can get more debt because debt is how you get stuff. It’s really a crazy logic when you think about it!
Bottom Line:
IF you are one of the 35% of Americans that payoff your credit card each month, a credit card can be utilized to obtain some “perks” but BEWARE of the lure to spend $1000 to get $20 worth of airline credit! And, read the fine print of any credit card you are thinking about getting. Click here to read about how credit cards work and what to look for when researching the best one for you.
For the rest of the 65% of you that do not pay off your credit cards each month, I strongly discourage getting a credit card and for those that already have credit card debt, a plan to pay them off and then to cancel them! A debit card can be used for traveling and for making online purchases. The key is to save up for things before you buy them. For steps on how to payoff your credit card debt, click here. If you want to know how to cancel your credit card, click here.
The Power of Compound Interest & Why It Pays To Start Saving NOW
What is Compound Interest?
Compound interest is a free gift! I know it is said that there isn’t anything “free” in this world, but I think compound interest is an exception. Compound Interest can be defined as the interest calculated on the initial principal/balance and also on the accumulated interest of previous periods. You get paid interest on your interest. For example, let’s say you deposit $100 into your savings account that earns 10% each year (I know it’s an unrealistic interest rate but it helps the simplicity calculation so just go with it). After year one, your bank will deposit $10 ($100*10%=$10) into your account to thank you for letting them use your money. Now you have $110 in your savings account ($100 from your initial deposit + $10 interest payment from the bank). Another year goes by…assuming you don’t add any more of your own money to the account, your bank will deposit $11 into your account. You know how we got to $10, right? We took our initial deposit of $100 and multiplied it by 10%. But where did the extra $1 come from? Well, this is the free gift part. The bank is now paying you 10% on the $10 they deposited into your account the previous year ($10*10%=$1).
Think of compound interest as “Interest on interest” which can cause wealth to rapidly snowball. Compound interest will make a deposit or loan grow at a faster rate than simple interest (interest calculated on the principal amount only).
I can’t talk about the power of compound interest in your savings accounts without mentioning the perils of this same compound interest on debt, particularly credit card debt. Please click here to read more about credit cards.
Why it’s important to save now
The magic ingredient that makes compound interest work best is time.
The simple fact is that WHEN you start saving outweighs how much you save.
An investment left untouched for a period of decades can add up to a large sum, even if you never invest another dime. Think of it as a snowball rolling down a large snow covered mountain – it may start out small, but it grows as it gains momentum.
Let me show you how compound interest works over time with an example illustrated by JP Morgan. Below, Susan, Bill, and Chris experience the same 7% annual investment rate of return. The only difference is when and how often they save.
>> Susan saves $5,000 per year beginning at age 18. At age 28, she stops. She has invested for 10 years and $50,000 total.
>> Bill invests the same $5,000 but begins where Susan left off. He begins investing at age 28 and continues to save $5,000 annually until he retires at age 58. Bill has saved for 30 years and $150,000 total.
>> Chris is our most diligent saver. He invests $5,000 per year beginning at age 18 (just like Susan) and continues to save until retirement at age 58. He has invested for 40 years and a total of $200,000.
Bill has invested 3 times as much as Susan, yet Susan’s account has a higher value. She saved for just 10 years while Bill saved for 30 years. THIS IS COMPOUND INTEREST – the investment return that Susan earned in her 10 years of saving is snowballing! The effect is so drastic that Bill can’t catch up, even if he saves for an additional 20 years.
The best scenario here is Chris, who begins saving early and never stops. Note how the amount he saved is massively higher than either Susan or Bill. Is it so astounding that Chris’ savings have grown so large? Not necessarily – what is most remarkable is how his path to riches was. Slow and steady annual savings/investments, and most importantly, beginning at an early age.
Compound interest favors those that start early, which is why it pays to start now. But, IT’S NEVER TOO LATE TO START. The point is to start.. now!
