Monthly Archives: August 2018

Student Loan Forgiveness: How Does it Work?

For decades, educators have encouraged young people to get increasingly expensive post-secondary degrees that provide arguably decreasing real returns in the labor market, and to take out large subsidized loans, regardless of their career choices.

In 2016, the average college graduate borrowed between $26,450 and $31,200. Fortunately, some borrowers may find relief. There are many programs in place, some old and some new, through which debt forgiveness is possible, and we should expect more programs to surface in the near future, as untenable student debt burdens become a larger political topic.

Using Debt Forgiveness

Debt forgiveness programs are exactly what they sound like. In a student loan forgiveness program, qualifying borrowers may have some or all of their public student debt forgiven, either immediately or over a period of time. Unfortunately, none of these programs forgive private loans. The only known methods of discharging or removing private loan amounts is through bankruptcy or a one-off restructuring with the borrower’s private lender.

Currently, there are four major programs and several other minor programs that might cancel or significantly reduce your federal student loan balance. The major ones are Public Service Loan Forgiveness, Perkins loan cancellation, income-based repayment and Teacher Loan Forgiveness. The catch is these may not apply if the debtor is in default status, meaning the loan has gone unpaid for more than nine months.

Each plan has very strict requirements which must be met before student loans may be forgiven. Many require annual submission of official paperwork to student loan servicers, and any missteps might disqualify an otherwise eligible borrower. If you are considering or currently in the process of trying to have your loans forgiven, it is crucial that you understand the necessary steps and follow them diligently.

Most Common Loan Forgiveness Options

Depending on the state in which you reside, there may be occupation-based forgiveness programs available. These are typically designed for doctors, attorneys or other professionals who pay above-average amounts for advanced degrees. Borrowers who used Perkins loans may actually have their entire debt forgiven after just five years. This mostly depends on your occupation, especially for those who serve full-time in a public or non-profit school. This program is used to entice teachers to work in low-income schools and in states where there are shortages of qualified teachers in a given field. Potential specialties range from speech pathologists and preschool teachers to high school math and science teachers.

Nationwide, however, the most common are the Public Service and Teacher Loan Forgiveness plans. Full-time public servants can have their entire federal loan balances forgiven within 10 years. Teachers at qualifying low-income schools may receive partial forgiveness ranging between $5,000 and $17,500, excluding those who only have PLUS loans.

Obama Student Loan Forgiveness

There is a fifth option, popularly referred to as the Obama Student Loan Forgiveness Plan, which came into existence after the Health Care and Education Reconciliation Act of 2010. It might be identified more correctly as a debt restructuring program with possible forgiveness in the future.

Borrowers who qualify may consolidate all of their federal student loans into one single loan, at which point the borrower may choose from five different repayment options. These options — standard, graduated, income-contingent, income-based and Pay As You Earn (PAYE) — offer a wide range of attractive reconstructions.

The graduated repayment plan, for example, allows the borrower to make lower-than-standard payments at first, and every two years, the monthly payment amount increases. This is designed to spread more of the loan amount into the future, when the borrower would ostensibly earn a higher income. The PAYE plan typically offers the lowest monthly payment, including payments as low as $0, though many borrowers have a difficult time qualifying for these plans.

Those enrolled in the income-contingent, income-based or PAYE plans must pay their loans during a term lasting between 20 to 25 years. If, at the end of the term, the borrower still has an outstanding balance, such a balance could be forgiven. Anyone who makes payments in one of these three plans and who also works in the public sector can count his or her Obama Loan Forgiveness payments as qualifying payments for their Public Service or Teacher forgiveness programs.

Total & Permanent Disability Discharge

The Department of Education (DoE) also offers relief to those who have significant physical or mental impairments and are unable to engage in “substantial gainful activity,” which is the official government term for a real job. Those individuals interested in applying for permanent disability status must work through the DoE process to prove their disability. To prove that you have a disability, you need a letter from a qualified physician and other required supporting documentation. Applications typically take between three and six months before a decision is rendered. If your application is accepted, you’re unable to apply for any other student loans until you receive another letter that deems you able to engage in gainful activity.

Should You Pay Off Your Mortgage Early?

Don’t Forget About The Baby Steps

I’ve followed the Baby Steps for about six years now, and I’ve become an absolute die-hard fan.

Here they are, in order from top to bottom:

  1. Save up $1,000 for a mini-emergency fund
  2. Pay off your consumer debts (car, student loans, credit cards, etc.)
  3. Save up 3-6 months of expenses for your real emergency fund
  4. Invest 15% into your retirement
  5. Save for your kids’ college education
  6. Pay off your house
  7. Become wealthy and give

Note that if you’re on Steps 1, 2, or 3, you shouldn’t be investing OR paying your house off early. Before you even consider either option, you should be debt free except your home and have a fully-funded emergency fund.

Pay Off Your Mortgage Early? Absolutely.

If given the choice between investing extra money in the stock market (beyond the standard 15%) and paying off my mortgage, I’d choose paying off the mortgage every. single. time.

You know that 4% interest rate that you’ve got on your mortgage loan? If you pay off your mortgage early, you don’t ever have to pay it! Basically, it’s like locking in an investment for 4% that has absolutely no chance of going down…ever. If you pay off a $150,000, 30 year mortgage, that equates to over $100,000 in guaranteed “earnings”! (the other suckers end up paying $250,000 for a $150,000 house).

When you invest, you’re taking on the risk of losing money…which everyone fails to mention for some reason. Sure, you might earn 8%, but there might also be a downturn and you lose 20%. If that happens, I bet you’d start wishing that you paid down your house!

Oh, and as for the tax savings, it really doesn’t amount to much…especially in the later years of your loan. If you’re lucky, you save 0.5% with this incentive, which is hardly enough to keep me from being 100% debt free!

Increased Cash Flow

Are you sick of being cash poor all the time? With money going toward your bills, food, kids, and YOUR HOUSE, it’s pretty easy to feel strapped. But what if you didn’t have your house payment? What if, instead of having that $1,500 go to the bank every month, it went into your own pocket?

That would be pretty sweet, huh?

Well it’s absolutely possible. Pay off your mortgage early and your bank account will fill up faster than you ever thought possible! Plus, you’ll have options that you never even considered before.

Without a house payment, we decided to:

  • have my wife stay at home with our daughter (which we absolutely LOVE)
  • buy a nicer kid-hauler (our 2008 Toyota Sienna has been AWESOME!)
  • go on more vacations (Sanibel Island, here we come!!)
  • invest more heavily for our future (early retirement perhaps??)

Escaping from our mortgage payment each month has been nothing short of excellent. I can’t ever imagine going into debt over a house again.

Increased Peace of Mind

Our house is ours and nobody else’s. If we lose our job and find ourselves short on cash for a stretch of time, we don’t have to worry about the bank coming and taking our house away from us.

If you owe more than $1 (yes, that’s one dollar) on your home, then the bank has every right to take it from you. Their name is still on the deed.

Don’t think for a second that you’re invincible. Foreclosures happen to regular people every single day.

The Kick-butt Effect of Increased Focus

I’ve saved the best for last. This is the reason that disproves every single investment brainiac out there.

If you remember from earlier, advisors often state that the stock market averages 7-8% and your mortgage interest only costs you 4%, so ignoring the mortgage and investing in the market is the obvious answer…. yeah, I don’t think so.

First of all (as we’ve already mentioned), there’s risk in that 8%, but there’s also another element that intelligent people often forget to factor in:

It’s your emotions.

My Real-Life Example

When my wife (now ex-wife) left me in 2012, I wanted nothing more than to break all ties with her. I didn’t want to see her, I didn’t want to hear from her, and I certainly didn’t want to owe her any money!

This is when I waged war on debt. I paid her the decreed $21,000 in just six months, and then I paid off my $54,000 mortgage in under a year!

This is the power of emotion (in my case, anger).

If my financial advisor told me to invest $75,000 in two years, do you think I would have done it?

Absolutely not. 

I would have told him he was nuts and that it was impossible. I never would have even tried.

How much would I have invested instead? If I were fairly aggressive, I maybe would have put $20,000 away.

So let’s have a look here:

  • $20,000 * 8% = $1,600
  • $75,000 * 4% = $3,000

BOOM! Thanks to the power of emotions, paying off debt can absolutely be more advantageous than investing in the stock market!

It’s Your Turn

I write about this stuff all the time, and I can affirm the fact that being out of debt is an incredible place to be, but I can’t get out of debt for you. This decision and action has to come from you.

The Personal Finance Mountain

  1. The Oh, Sh*t Moment

This moment is different for everyone, but it’s the point where you realize you’re not happy in the foothills anymore. For an awful lot of people, it seems to be related to debt.

For me, it was when I really wanted to quit a job I hated, but realized I couldn’t because I still owed a bunch of money in student loans. I hated that feeling and I decided then and there to figure out how to make sure I would never be trapped in a job I hated again because of money.

For some people, it’s a desire to escape the rat race way before the average retirement age.

For others it’s something entirely different.

However you want to slice it, it’s a realization that your money is controlling you, instead of the other way around. And that you’re just not going to put up with that crap anymore.

If that’s where you are, congrats! Welcome to the personal finance mountain.

  1. Budget

This word gets such a bad rap, but a budget is actually empowering! How can you get a job done if you don’t even know what tools you’re working with??

Here’s the deal – grab a bottle of wine or your favorite mocktail or whatever you generally choose to eat/drink your feelings – and just do it.

A budget is breakdown of your monthly and annual expenses.

It’s important to do both because those one time annual expenses like eye doctor visits, contacts, car insurance and registration, etc. can really eff up your monthly budget if you leave them out (I speak from experience).

A monthly budget includes set expenses like rent, loans, car payments, Internet, cell phone bills, etc. It also estimates variable amounts like groceries, electricity, and gas. You also include amounts for occasional items like gifts, medical expenses and entertainment.

You know you best, so adjust the set up so it works for you. If you do most of your spending using a credit card, you can just backtrack a month and add up each expense to get an estimate of what you’re currently spending on each category. If you usually use cash, you’ll have to collect your receipts for the next month so you can see how much you’re spending.

Once you know what you’re spending each month, you can look at your income. If everything is covered, great! If it’s not, you’ll be able to see where you can cut back.

Once you’ve got an outline of your monthly budget, you can do your annual budget, which is usually a little easier. These are your annual expenses that occur a few times a year or less. By figuring them out in advance, you can save a little each month for them so the money is ready to go when you need it.

Here’s the great thing about budgeting and the personal finance mountain – at the start of your climb, it’s your best tool. The more carefully you tend to it, the better everything is going to go for you, but as you climb further up the mountain, if you did a good job with your budget back down at base camp, you don’t need to tend to it as much later on.

Strong quarterly as AI boosts increase

Internet giant Baidu is expected to report solid second-quarter financial results in line with consensus market estimates, as mainland China’s largest online search engine operator steps up its transformation into a global powerhouse in artificial intelligence (AI).Analysts anticipate Nasdaq-listed Baidu to provide on Thursday further details about its AI strategy, following the State Council’s announcement last week of an ambitious national AI development plan.”Laying out a road map for AI is a very encouraging sign of support from the government,” said Jefferies equity analyst Karen Chan.Baidu is forecast to post a 21 per cent year-on-year increase in net profit to 3.4 billion yuan (US$503 million) in the three months ended June 30, according to a Bloomberg survey of analysts’ estimates.That gain was attributed by Jefferies to a rise in average spending per online advertising customer and Baidu’s efforts in controlling its traffic acquisition cost.Revenue is estimated to be up 14 per cent year-on-year to 20.7 billion yuan. It would represent the mid-point of Baidu’s second-quarter revenue guidance, ranging from 20.5 billion yuan to 20.9 billion yuan.Investors this week will likely focus on Baidu’s search recovery outlook, mobile newsfeed advertising traction, content investment, and sales and marketing spending, according to Jefferies’ Chan.In the first quarter, Baidu maintained its lead in terms of total search revenue on the mainland with a 75.9 per cent market share, according to data from Analysys International and Jefferies.

How to Save $100,000 by Age 25

I won’t lie. These factors may have contributed to my general enthusiasm about life. But there’s another reason I sometimes stare into space and smile at nothing (even if anyone in the vicinity thinks I’m a crazy person).

For the first time in my life, I have absolute freedom to only pursue the things that interest me. The last two decades have been an uninterrupted freight train of schooling and work, so it’s a pretty surreal feeling. There are moments of pure elation, and even the occasional faint trace of guilt. Did I cheat, somehow? Surely it can’t be this easy? I’m waiting for a giant skyhook to descend from the heavens and hoist me up by the seat of my elephant pants, violently jerking me back into reality.

It wasn’t until 2013 that I even twigged this was an option. I’d been working as a business journalist for a couple of years, and one of my responsibilities was researching and writing personal finance features.

I’d chosen the topic of ‘net worth’, which is defined as everything you own, minus everything you owe. Naturally I was curious what my own net worth was, so I did the math.

It was a negative number. My savings and other assets were completely wiped out by my debts – and then some. Finding out you’re worse off now than when you first entered the world as a naked, screaming, hairless maggot is kind of depressing.

It wasn’t much consolation knowing most twenty-somethings were in the same boat, especially those with student loans. Unlike them, I made my living lecturing people on how to be good with money. The first penny dropped: It was time to shift up a gear.

Around this time I’d also started learning about the ‘early retirement’ and ‘financial independence’ movements. It turned out there were cadres of rebels around the world who flat-out rejected consumerism. They laughed mightily at the thought of 40 years of wage slavery, and retired decades earlier than everyone else.

I interviewed one of the rebel movement’s unofficial leaders, Pete Adeney, who saved enough cash to quit work at age 30 so he and his wife could spend more time with their boy.

Another penny dropped. The money habits of Pete and his peers were some next level shit. Conventional personal finance “wisdom”, like the stuff I’d been dishing out, was that you should aim to save 10 per cent of your after-tax income. These guys saved half their pay, or more – and they did it in style.

How to Win the Jackpot

The more I read, the more pennies dropped. Soon they were gushing out like I’d won the jackpot, albeit on the cheapest slot machine in Vegas.

This is the bit where I’m meant to plug my guide to red-hot growth stocks, or sign you up to some scammy forex trading course.

Steps to Budget Based on Your Values

Are you finding yourself struggling to stick to a budget? Many clients and Millennials that I talk to are always excited once we are done talking about how to budget. I’ve realized that, like myself, we missed out on not just financial literacy but how to view our money. I have four ways that will help you start to think of your money as a tool to create a better life where you spend your money according to what you value. Here are my four steps to start.

What Are Your Values?

Often I’ve found myself in the past spending money on items that I didn’t use for very long or were poor quality. I’ve learned over time that if we develop an understanding of our values we can learn to spend money with a wiser purpose. When we spend wisely, our budgets become easier to manage and we start to control our finances without them controlling us. (For more from this author, see: 5 Ways to Improve Your Finances Throughout Life.)

From Values to Goals

Our values will lead to our goals in life. If you value family, I am guessing you may have a goal of starting a family or spending more time with your family. If you value travel, you may have a dream travel goal. Aligning our spending according to our values will help us reach our goals because we’ll be spending according to the values that help us reach our goals.

Work on Filtering Out Distractions

Every minute we are being advertised to – whether online, in Starbucks, on our drive or even during the podcast we are listening to. Ads are everywhere trying to get us to buy something that we probably don’t value and won’t help us reach our goals. Learn to look past these ads and stay focused on items that bring long-term value and move you closer to your goals.

Give Time to Major Purchases

Most goals are large purchases or expenditures of some sort. I encourage you to think through the purchase. Purchasing plane tickets because they are cheap for a trip that wasn’t even on your radar may be filled with regret. Just because an item is on sale doesn’t mean it is the right time. Save for what you expect but you can be ready to take advantage of discounted items if it’s the right time and you’ve been planning on the purchase. Impulse buying is what gets most people into trouble, even myself.

Our everyday decisions cause ripple effects. Make smart purchases that are aligned with your values and you’ll be on your way to achieving your goals in no time. My favorite budgeting tool, YNAB, is based on a budgeting philosophy that most people can resonate with. My wife and I love the tool because it creates better communication in regards to our finances.

Budgeting a Success in the New Year

At the end of each year – and the beginning of the new one – most of us think about things we’d like to accomplish in the coming year.  It’s a time we engage in self-reflection, ideas for self-improvement, and new – or ongoing – resolutions and goals.

One of the most common resolutions is losing weight, but we all know how that goes: crowded gyms in early January, inevitable drop-off when February rolls around. In fact, a study done by the University of Scranton shows that only about 8% of people actually achieve their resolutions.

Financial resolutions often include starting – or finally sticking to – a budget. Unfortunately, that resolution is all-too-often hard to stick to as well.

Why do so many people have trouble sticking to their resolutions? One of the main reasons is having unrealistic expectations. Overconfidence doesn’t just affect fitness goals, it affects investors’ behavior as well.

How can you make this the year you stick to your goals?

Take Baby Steps

Be reasonable in assessing where you are with your finances and don’t try to tackle everything at once. Start by listing all the areas of your financial situation you would like to improve. Then prioritize the individual elements in order of importance to you, and start by taking on one or two at a time.

If one of your goals is to start – and stick to – budgeting, don’t give yourself super-strict boundaries. Instead, start by creating good habits one at a time. If you want to pay off all of your credit card debt, for instance, take a look at how much debt you have and create a realistic weekly or monthly plan to start paying it off.  If you want to buy a house in five years, you could decide to spend less now on something that you currently enjoy.

Focus on one or two goals at a time, see how it goes, and make progress – and adjustments – to stay on track.

Be Specific

Instead of saying “I am going to save more this year,” or “I am going to save $5,000 this year,” try to specify exactly how you plan to do it. Start with something like: “I will take $100 from each paycheck and put it into a savings account.” By giving yourself a tangible – achievable – steps, you’ll be better able to track how well you are sticking to it.

In addition, try to think about what it is that you are trying to accomplish. Why do you want to save an extra $100 each paycheck? Are you saving up for a car? Trying to pay off debt? Building up an emergency fund? When you add purpose to your goals, it makes it more compelling and easier to accomplish.

Stay Accountable

Know yourself: accept who you are and what that means. Are you someone who might let things build up then feel too overwhelmed to jump back on track? Think about sharing your goals with a friend or family member and set times to check in with them and go over your progress. If you want to go to the gym three days a week, think about getting a workout partner. If you want to save an extra $100 from each paycheck, see if there is a friend that has the same goal and you can do it together, comparing how it’s going throughout the journey.

Most importantly, understand that this is a process. Some weeks will be better than others, but, if you can follow these three steps – set realistic goals, set specific goals, be accountable – hopefully you will be part of the 8% that gets it done this year.

Key Tips for Budgeting Your Money

It’s almost a truism that budgeting is a critical step for anyone looking to get serious about money management. After all, you have to know where your money is going in order to make plans for the future. But if you haven’t ever tracked your spending, how do you get started?

Here are three tips that will help you set up a budget and start managing your money.

Determine Wants Versus Needs

The first step towards creating a budget is determining which expenses are wants and which are needs. Housing, utilities, groceries, transportation, clothing and childcare are generally considered necessities; entertainment, travel and dining out are thought of as “wants,” or what are known as discretionary expenses. That being said, there often is some gray area between a want and a need: You may need a car to get to work if carpooling or public transit is not an option, for example, but a flashy sports car may be a want. Everyone must buy clothes, but designer clothes are not requirements. If you can afford or have already purchased a luxury version of your necessary expenses, remember that downgrading is always an option if you decide that type of expense no longer fits with your lifestyle.

Figure Out Fixed and Variable Expenses

Fixed expenses – which, as their name implies, remain the same every month – are the backbone of every budget and should be the easiest to plan for. Examples of these might be your rent, car payment and student loans, which are likely to be the same, month in and month out. Variable expenses, no surprise, are the ones that change every month. Your grocery bills, consumption-based utilities (like oil/gas, electricity, phone service), clothing expenses, travel and car maintenance expenses are all variable expenses.

Budgeting for variable expenses, of course, is one of the harder parts of creating a spending plan. Here are a couple of tips to help make it easier:

  • Track your spending for three to six months, figure out the average over that period and, in the future, aim for the average every month.
  • Instead of tracking variable expenses monthly, try setting a six-month or annual budget goal. This is especially useful for expenses like car maintenance or travel, which might not crop up every month but still need to be considered in a budget as they can be big-ticket items.

Decide What Type of Money Manager You Want to Be

It’s important to determine whether you are a big-picture or a detail-oriented money manager. Some people like to know generally where their money is going but don’t want to have to track every coffee they buy; others like to know exactly how much they spend on their latte habit. Determining if you prefer a detailed or broad view of your money will help you decide what type of budget system will work for you. The one caveat: If money is tight, you may have to use a system that tracks every penny. Once your finances are more flush, you may be able to switch to a less detailed tracking system. Here is a closer look at each type of budgeting.

• Detail-oriented budgeting. This system helps you control the outflow of your funds and sometimes alerts you to wasteful spending that you weren’t aware of. You know the popular “you spend enough on coffee each year to buy a used car” scolding? This system will help you figure out exactly how much you spend on things like your java habit, and where you actually want your money to go – including into savings and retirement accounts.

While you can create a detail-oriented budget manually with receipts and spreadsheets, many people choose to use automated tracking tools such as those found at Mint or Personal Capital. These programs will track and categorize all of your spending, which makes it easy to see if you are overspending in different categories. An additional benefit: If you have expenses for your work that should be reimbursable (travel expenses, office supplies), an automatic tracker can help you keep them organized and make sure you get the full reimbursements you are due. 6 Best Personal Finance Apps will update you on good tools to try.

• Big-picture budgeting. If you have more financial wiggle room and less tolerance for tracking details, you may want to develop a big-picture budget. Create a list of all of the regular expenses that you consider “needs,” and include categories for savings, retirement, emergency funds, charitable giving and travel (if you travel often). If you choose to use a big-picture budgeting system, be sure to give yourself a sizable cushion for savings and an emergency fund. (For more on this, see Building an Emergency Fund and Why You Absolutely Need an Emergency Fund.)

Once you have determined your monthly necessary expenses, plus the additional categories included above, you can then spend the remainder of your monthly income however you choose. The only thing to track is the total spent from this “miscellaneous” fund, but you don’t have to track how much you spend on clothes or coffee. To make tracking easier, it can be helpful to have one bank account or one credit card that you use for your “miscellaneous” expense fund so that you can easily keep an eye on your total expenditures.

The Bottom Line

Budgets are a critical tool to help with money management, but ultimately they are just a general set of guidelines. If your current budget isn’t working for you, try another approach. The most important thing to do is to make a plan that works for you, and once it’s in place, to stick with it.