Tag: budget

Congratulation Grads! What to do About Your Student Loans

Posted on by Dawn Kennedy

 

Anyone who saw the news this weekend saw the incredible act of generosity by billionaire philanthropist Robert F. Smith, the commencement speaker at Morehouse College, in Atlanta. Mr. Smith paid the student loan debt of the 2019 graduating class- a total grant of about $40 million dollars. For most graduates, however, student loans will follow them long after the diploma is received.

Many students are on the “Student Deferment” program for their loans, but after graduation, payments begin in six months. What do they do next?First and foremost, students must have a plan. They must have a budget. Then three steps: 1. get to paying as soon as possible on a repayment plan, 2. get out of the student deferment before it statutorily ends and, 3. stay out of forbearance in the future. Going into and out of forbearance is the fastest way to grow a student loan balance. Why? Because the interest capitalizes every time the loans go into and out of forbearance, and when students change payment plans. Capitalization means that the outstanding interest becomes a part of the principal balance, and you then pay interest on the new principal. This is a reason that student loan balances balloon.

The first issue, that few borrowers truly understand, is that during student deferment unsubsidized student loan interest already capitalizes quarterly for the length of the deferment. Four years of loans every semester, unsubsidized interest amounts capitalizing every quarter. This is why students graduate with thousands of dollars of student loan debt amounts over what they actually borrowed. So, during school, these loans are growing. After graduation, many students are faced with large payments they cannot afford on the “Standard Repayment Plan” over ten years, so they immediately put the loans into “forbearance” and a payment is no longer due. But once again that unpaid interest will capitalize every time the loan goes into and out of forbearance.

So, what to do? Here are a few first steps.

1. Have a budget and include in the budget the biggest student loan payment you can afford. Things may be “tight” again for a little while but getting right into payments and staying out of forbearance will make loan payoffs faster and less expensive.

2. Download the Student Loan Guide, “Do You Have the Right Student Loan Payment” from my website and follow the steps to retrieve your total federal student loan data from the National Student Loan Database (NSLDS). From there, check your loans CARFEULLY, to make sure they are, in fact, yours. Look at the disbursement dates, and make sure you were attending. Mistakes sometimes happen.

3. Use the Debt Snowball for the individual loans. If you can avoid consolidation, you can stack your loans from lowest total amount to highest, and attack the debt using a “debt snowball.” As each loan is paid, you will have a huge sense of accomplishment, and the motivation to keep going.

4. Avoid Forbearance. If you cannot make any payment at all AFTER your student deferment period ends- call your servicer and get into a payment plan, do NOT go into forbearance. If you graduate this month, you have a few months before the first payment is due. Get moving on these, but if there is an unavoidable reason you just cannot make the payment, get into Income Driven Repayment, or some other plan, and make sure you absolutely re-certify every year. When you go into and come out of IDR, guess what? Your interest capitalizes.

In my humble opinion, it is this interest capitalization that is making student loans hard to pay off. And when people enter into forbearance, it is because there is a short-term issue causing a hardship or some other issue. The servicers will happily put you into forbearance, “so you don’t have a payment due for six months” but in the long run, it actually hurts the borrower financially. We need stronger disclosures.

Best of luck to the class of 2019! May you find your joy and excitement felt during “Pomp and Circumstance” lasts for years as you leave college and embark on the rest of your journey!


image credit: gocollege.com

 

Happy Spring! One Month Savings Challenge

Posted on by Dawn Kennedy

 

We are in spring! As we make the transition from winter into the new season, I want to invite you to take on a personal goal to find and save as much money as you can in April. Think of it as the “grown up” Easter Egg Hunt. We all tend to have several places we spend money without really counting the cost. Once we really pay attention to our money and write down where it goes often we are surprised on how much “runs away” after the bills are paid. So, for the savings challenge, there are three basic steps that if you commit to for 30 days, you will surprise yourself by how much you get to keep in your pocket.

Step One: Make a grocery budget and a list. Then take cash and leave the debit card at home

This can seem very scary if you don’t normally give yourself a budget. We start at the grocery store because those guys are the GREATEST marketers and woo money away from us on a consistent basis with “Red Hot Buys” or those end caps with items on sale that aren’t on the list. Even if you use the item on sale, if you aren’t out, and it isn’t on the list, you will pick it up later. Save that $2.99 now. Do that for three items, and you have saved just about nine bucks. Skip the sale items you don’t need and watch the savings grow!

Another tip: When you shop the sales and the “buy one, get one free” (BOGO), the bottom of the receipt will indicate what you have saved. That is money you would have spent if you had not been a super shopper. Transfer that amount to savings for additional motivation.

Step Two: Give yourself a weekly budget for gas, lunches, kiddo, etc., and withdraw exactly that amount of cash once a week. Again, leave the debit at home”

If you know your family has a drive through dinner on Wednesday between sports and scouts, budget for it and pay cash. You will not be as tempted to add on an item or “up-size” anything when you order. And if you don’t have the debit card with you and make a commitment to stick to your budget of cash for that one week, you are likely to be more aware when you must give up your paper money, and not overspend. Even better? The rest of your money stays in the bank!

Step Three: Save your change. When you are out spending only cash, you will get change as you purchase stuff. Save your change for the month.

I have a few mugs around the house to collect change. One is by the front door, so you take the keys out and see the mug, you put the change in there. The one that actually gets the most coin is on the washer (right?). Once a week, collect the mugs and empty them into a centralized place, perhaps a jar, or a piggy bank. At the end of the month, count the booty.

If you are already doing the steps above to your money, here are a few additional tips that you may try for 30 days and get in to the savings challenge as well!

Challenge yourself to save a specific amount each week

Mike and I try to squeeze at least $8.00 off the budget each week, just on various things. Seems silly, but when we are successful, we are saving a little over $30.00/month, $360.00/year. We aren’t always able to do it, but we have a goal for that money.

Withdraw your cash for envelopes only once a week, instead of per paycheck

Withdrawing money only once a week means more stays in the bank, and if we have money left over from the previous week, we can take out less. Also, this ensures we don’t keep a lot of cash around for temptation. If it’s in the bank, we are less likely to use it mindlessly!

Save your singles

The next step after saving your change is to save your singles. Mike will break a five before he gives up his dollar. It adds up! Doing that each week for the month of April may accelerate your savings!

Calculate your savings weekly to really see the impact of implementing a few changes this month. Every dime you save is a win. No amount too big or too small. I’m in. If you want to see how we are doing, and let me know what YOU have saved, just like my Facebook page: dawnkennedylaw. Game on!!!

First, Create an Emergency Fund with Your Tax refund

Posted on by Dawn Kennedy

This is the week that the IRS is estimated to process to filers. In the first quarter of every calendar year federal (and sometimes state) tax refunds are issued to qualified filers. In fact the average tax refund for the 2018 filing year (2017 return) was over $2,200.00. I’ve already spoken about how to ensure every dollar you can keep goes into your pocket each month, and not into the IRS coffers (until you file the next year’s return). Another issue, comes from the fact that the money received by many taxpayers is immediately spent paying down debt accrued the previous year. Some of that debt is from short-term overspending during the holidays, accounting for about 39% of Americans using the refund to clear that debt.

It is this cycle of annual debt that needs to be addressed, because if $1,000.00 of that refund was placed into a “baby” emergency fund, many Americans would not have to incur debt for “emergencies.” The stats are incredibly scary. The latest figure is that 78% of Americans live paycheck to paycheck. Almost 8 in 10. Following the logic, everyone knows at least a few people who are unable to cover even the smallest of budget hits without putting another bill in jeopardy. Additionally, a full 70% of Americans are in debt.

The recent government shutdown highlighted that for many Americans just treading water with money, they are one missed payday from being in financial distress. And we all saw the comments and memes about how government workers should have something put away or should be able to cover one month of expenses. Based on the statistics, 8 out of 10 cannot.

So, why am I telling you this? If you have a tax refund coming, and do not have $1000.00 saved for an emergency, you are not taking full benefit of the Uncle Sam Savings Plan. $1,000.00 goes a long way for car or home repairs, unexpected expenses, and other hits to the budget that throw a wrench in how the bills are paid. And once you put $1,000.00 away, be diligent in keeping it that way. Refill it if it gets used. Seriously. Mike and I had a pipe burst recently during the Polar Vortex, and we mopped up the water, grumbled a little, and called the plumber, knowing it could be covered from the emergency fund. (For Ramsey listeners, we are finishing baby step 2.)

Of course, $1,000.00 isn’t a “full” emergency fund, which is three to six months of expenses saved, but it is a good start to cover many, many of the instances where Murphy moved into the spare bedroom for a week. Of course, my next piece advice is to get out of debt as fast as you can, so YOU control your income, not some credit card company or bank. When you commit to payments, you promise to give them a share of your income each month, no matter what life throws at you. And I would strongly urge anyone getting the “average” refund to apply the $1200.00 over that emergency fund starter towards any outstanding debt.

The Sinking Fund- My Car Tags Were Due Again

Posted on by Dawn Kennedy

In many states, the driver’s license and car registration expire on your birthday. The not so gentle reminder that you are a year older, and they want money. When you stop and really think about it, there are probably a few things that are renewed annually. My Microsoft 365 for example, some insurance types, etc. These are not necessarily discretionary items- many of us need computer programs and certain insurances to work and protect our property. So, because I am a nerd, I started to think about the annual fees we pay, and when they are due.

Lawyering bar fees and practice related fees aside (which are also annual) our family pays roughly $468.00 a year for various things. Our computer programs, including virus and malware stuff, state registration renewal on two vehicles, and yes, I have Amazon Prime (I can explain, but I don’t want to). The due dates are sprinkled throughout the year, with some due in November, March, July… you get the idea. Since we know these fees are coming every year, we should plan for them. Lots of people plan for Christmas, birthdays, holidays and may save a bit aside, but not for our expected, routine, boring annual commitments.

If we round up our annual commitments to $500.00 a year, and divide that by twelve, I have to save roughly $42.00 a month to cover these fees. If I receive 26 paychecks a year (paid bi-weekly) I have to save about $19.25 each payday to meet our commitments. This is the basic idea of a “sinking fund,” aptly named because businesses deposit money into these accounts to “sink the debt” (fun fact)**.

Placing the estimated amount of money into a “holding” type account or reserving them separately in your checking account will allow you to have the funds available when the payments are due. Here are a few things to consider when you decide to start a sinking fund, and save a little each payday for your expected annual expenses:

1. Make sure IF you open a separate CHECKING account at the bank, you have a FREE account. Service fees will eat up what you put aside and cause you to go a bit backwards. I recommend a small(ish) regional bank or credit union for these accounts.

2. Do NOT open a SAVINGS type account if you will make frequent withdrawals to pay these bills as they come due. “Regulation D” is a federal rule that limits the amount to free transfers or withdrawals to six, afterward, you can be charged a fee for each additional .

3. Have that baby emergency fund,$500-$1000.00 saved, BEFORE you start a sinking fund. Those pesky little emergencies, such as the need to buy a tire or repair a leaking faucet, can quickly eat up the money you allocated for other expenses.

4. In the beginning, you may have a bit of overlap with what’s due and what is saved, so you may have to pay a bit more and continue saving. I know if you are living paycheck to paycheck this doesn’t always allow much room, but if you don’t start soon enough before the next expense, you may have to stretch. Example: You have $85.00 due in three months. You typically put away $21.00/ month. In three months, you have $63.00 saved, but are $21.00 short. Pay the $85.00, but still try to put away the $21.00 so you are on track for the next expense due.

It’s so easy to get frustrated we forget when the annual bills come due, and of course they still come due. Consider the sinking fund as a way to put a little away each check to cover what you will need. The stress is really reduced when the amount you need for an expected expense isn’t squeezed 100% from the same paycheck.

**And for all of you bond asset types, yes, there is a sinking fund term meaning to pay a trustee an amount to retire bond debts before they come due… though most of us have no idea what that even means. I just don’t want angry email.

Where Did 2018 Go? Thoughts on the 12 Weeks Until Black Friday

Posted on by Dawn Kennedy

This past weekend consisted of various discussion with the (grown) children about Halloween costumes for the grands and some early planning for the holidays, and it hit me, we are close to the 2018 holiday season. This year has flown by, way too quickly. And now there are only 12 weeks until Black Friday, or for many people, six paydays. But before you close this article, call me “scrooge”, and delete me from your friends list because I want to chat about the Black Friday in September, give me a moment, and I will explain. So why is “Black Friday” my measure of the season and not the actual festivities on, say, Christmas or Hanukah?? Because that shopping day after the turkey traditionally “kicks off” the holiday season. And the spending begins for many. And we love to spend.

In 2017, consumers spent an average of $967.00, between Black Friday and Cyber Monday, accounting for approximately 20% of ALL annual online shopping those days. The amount budgeted on gifts for children has averaged about $500.00 per child, relatively unchanged over the last few years. But gifts aside, there are other expenses around the big season from food, wrapping paper, shipping costs, travel expenses, and new outfits that don’t always make it into the average household budget. In fact, last year almost two-thirds of the average holiday budget went to “non-gift” spending.

All these articles quaintly mention the “holiday budget” as if this was planned in advance. I really don’t know anyone, myself included, who likes a holiday budget. Because sometimes I see something and think, “wow, this is great for…”and want to purchase that thing. For many people, the total holiday cost is really only unveiled after the revelry as the statements start coming in the mail. And the reality comes in January that for too many people, they blew out past the budget, and accumulated quite a bit of debt for the season. The average American woke up in January 2018 with over $1050.00 in DEBT. Not what was spent as a whole, but what they spent in the hole to finance the season. For the 78% of average American families living paycheck to paycheck, an additional $1000.00 in debt, and at incredibly high interest rates, is a burden.

Good news, we all have twelve weeks, or an average of six paychecks to squirrel away some cash. But even better? Companies with seasonal hiring opportunities are at the best it has been in years, and with low unemployment, retailers are competing for seasonal employees. The reported average wage is $12.00/ hour for temps, but Costco is reportedly paying $20.00 and hour!

It’s not too early to start to plan the season. And not just where you are going for dinner on which days. It’s time to think about how to pay for it. Too many people raid emergency funds and take loans from retirement accounts to fund the holidays. And because these holidays come every year, it can become a vicious cycle. But, with all this time available before the shopping and revelry begins, that second job, or extra shift, or part-time side hustle may be just what you need to make this season “Merry and Bright.”

source: imtresidential.com

Medical Debt Collections and Credit Reporting

Posted on by Dawn Kennedy

 

Around this time last year, the three credit reporting agencies had to change their rules (due to an agreement with several state’s attorney generals in 2015) surrounding reporting of a consumer’s medical debt in collections. Now, they basically have to give consumers a standard 180 day “grace period” before reporting medical collections on the consumer credit report. Another reporting change requires the bureaus to remove a past due medical bill that is later paid by insurance.

For many Americans, the increase in medical debt is due to higher deductibles and out of pocket costs for healthcare, timely payment by insurance to providers, and the decision by insurers that a provider was “out of network” resulting in a lower reimbursement and the outstanding costs passed on to the consumer. A fun little statistic related to the rules change is that up to 80% of bills submitted by providers to insurers are incorrect the first time. So insurance doesn’t pay them, the bills must be corrected and resubmitted for payment. This results in delays in settling medical bills. Sometimes for months.

The 180-day reporting delay is good for consumers with medical debt because these bills are often passed to collections quickly, within 30-60 days after the payment was due. Faster than many creditors will pass off non-medical debt accounts. This allows time for consumers to deal with insurance, pay their medical bills, and work on billing disputes even if the account is with collectors.

It is important to note that, while it is true that it will no longer have as big an impact on the “FICO” and VantageScore credit scoring models for 180 days, other credit scoring models that lenders use have not adopted this approach. So, you still need to watch your credit report if you are facing medical debts in collections.

Here are a few other things to consider if you or someone you know is facing medical debt:

• You are not alone. Around 43 million Americans had medical debt on their credit reports last year. The average amount of medical debt in collections was $579.00 last year. With 78% of Americans living paycheck to paycheck, this is a large enough number to cause financial hardship.

• While medical debt should NOT be ignored, if you are struggling with debt, it should be given a lower priority than other consumer debt, such as credit cards and personal loans. To do this, the medical debt must remain a “medical-debt,” meaning do not borrow or pay these debts with a credit card.

• Collectors will often try to push you to pay the bill, even suggesting you just put the balance on a card. But if you pay the medical debt with a credit card, you can limit your ability to settle the debt, or seek financial assistance from the hospital or other agency. You can stop collectors from calling by making your request in writing. You just need to send a letter.

• There are statutes that protect consumers who owe medical debt from being turned away from the emergency room for medical care. And, according to the National Consumer Law Center:

“If you request financial assistance from a nonprofit hospital, the hospital cannot deny you care in any part of the hospital because of an old bill until it determines whether you are eligible for financial assistance. You usually have about eight months (240 days) from when you first received the old bill to request such financial assistance.”

• Medical debt is a big reason for bankruptcy, but not why you think. When people are too ill to work, income plummets, savings can be exhausted and often medical debt was transferred to credit cards.

Remember, you now have 180 days to get medical bills handled before they hit your Equifax, Experian, or TransUnion credit report. You can dispute anything erroneously reported and have the records of medical bills that were paid by insurance removed.

Budgeting for Two: You and Your Business

Posted on by Dawn Kennedy

In a recent trend, I am learning that more and more entrepreneurs do not have a bright line separation between their business budget and their personal budget. And you NEED to have both. Separately. The written business budget is the plan to spend the businesses money. You need a business budget to know what you “must make” each month to cover all overhead and expenses. A personal written budget is the plan to spend your personal money. You need to make a written personal budget, so you know what your minimum “take home” salary needs to be. And yes, that “side hustle” is a small business, so even if it is “only” worked part-time, you must have a separate budget.

Once you know what the business needs to make and what you personally need to take home, you can prevent “co-mingling” your business and personal money. And it takes only a moment to fix: just write yourself a “reasonable salary” paycheck. On the personal side, after your paycheck, set aside the amount for your personal taxes. Have an accountant help you figure out your quarterly deposits but set aside each month (or each payday) towards your quarterly. Pay yourself on a regular basis (yes, for startups this can be hard). However, if you pay yourself a paycheck, on a regular cycle, you can budget personally.

If that sounds like an unnecessary “extra step” because it’s really all “your money anyway” you are skipping an opportunity to manage your finances better on both sides of the table. Many businesses have an “ebb and flow” of income and expenses. Proper budgeting allows for the buildup of a business emergency fund, the “management reserve” if you will. This is any money that the business has earned that is not needed for current expenses. This “extra” money, so to speak, should be set aside for lean months, when you are struggling to meet your minimums. By making yourself an expense, instead of just a “leftover” you know what you must do to make sure a regular paycheck comes in.

Why am I so adamant about this? Because we made this mistake early on as business owners. Using the business cash out of the till as it comes in, without tracking, can become a huge issue for taxes, as well as making overhead payments on time. What bills are you paying? Did you pay personal self-employment taxes on your draw? Do you know how much you’ve taken this week? Month? In fact, debt and taxes doom many small businesses. And you should know where it’s all going. This can be a huge challenge when you are just starting up, but you can make the decision early to schedule yourself in the budget, wait between paydays, and do not just write business checks for personal bills. Happy entrepreneuring!

                    www.nancynwilson.com