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Ask a Financial Expert Q&A
Laura Hendrix, Ph.D., AFC® - Accredited Financial Counselor
Associate Professor – Personal Finance & Consumer Economics
Both are retirement savings accounts. You can deduct your contributions to a Traditional
IRA if you qualify. Any deductible contributions and earnings you withdraw or that
are distributed from your Traditional IRA are taxable. You are required to take minimum
distributions at age 70 ½. You must have a certain qualifying income level to contribute
to a Roth IRA. Your contributions to a Roth IRA aren’t deductible. Distributions
and withdrawals from a Roth IRA are not taxable under most circumstances. For more
details, visit https://www.irs.gov/
Bi-weekly: Paying every two weeks makes 26 payments in a year instead of 12 payments
if you pay once a month or 24 payments if you pay twice a month. The additional payment
can help to pay off the mortgage sooner.
Twice-monthly: When you pay two times per month you are actually splitting the total
you would pay each month. .However, you can decrease the amount of the balance that
accrues interest each month because you are paying some on the principal a little
earlier each month.
Paying additional principal – You can pay off a home sooner and save money on interest
by paying an additional amount toward the principal of the loan every month.
There are free calculators online that help you see how varying payments and amounts
can impact the amortization schedule, total amount of interest paid, and length of
Rule of thumb is if you are going to live somewhere for 5 years or longer, it pays
to purchase instead of renting a home. How long do you intend to live in the area
after you move out?
How’s your quality of life at Mom and Dad’s? Are you happy staying long enough to
save up enough for a down-payment? Home loans usually require 20% down plus closing
costs. You might qualify for a lower down payment under certain first-time home buyer
programs. You should also plan to still have some money in an emergency fund.
Check your credit score. In addition to a down payment, you will need to be able
to qualify for a home loan. Higher credit scores qualify for lower interest rates
– saving you thousands of dollars over the life of the loan.
Many financial planners recommend that people have enough to cover at least 80% of
pre-retirement income. You will need to estimate your life expectancy to know how
many years of income you will need. Think about your health as you age. Will you need
to plan for additional living or health care expenses in your later retirement years?
What types of things do you plan to do during retirement? Will you need money to
travel? Estimate your income including social security, employer provided retirement
funds, IRA, and any other income streams you have. Visit the Social Security website to see an estimate of your retirement amount.
Carefully research any major purchase. Consumer Reports is a great resource for information
about reliability, safety, and resale value of vehicles. Local libraries often have
a copy of the Car Buying Guide that can be checked out for free. Comparison shop.
Find the best rate. Save up for a big down payment or the full amount. If you must
finance, shop around for the best financing. Interest rates may be lower for new
vehicles and some dealers occasionally offer 0% financing specials. Consider how much
you would pay in interest during the life of the loan. Yes, new cars appreciate as
soon as you drive them off the lot but there are smart strategies that can offset
some of that loss. I tend to keep vehicles for 10 years or longer. I negotiate the
purchase price, make a big down-payment and have had low or 0% financing; so it’s
a smart transportation strategy for me. I’ve also purchased a couple of great used
cars. New or used – research the vehicle, comparison shop, negotiate the price, and
find the best financing.
Oftentimes, there are finance charges associated with refinancing a loan. This can
add to the overall cost of your home mortgage. The old rule of thumb was that mortgage
interest rates had to be 2% lower and you needed to be staying in your home for another
5 years to make it worth the cost of re-financing. So, you would have to take into
account not only the new interest rate but the additional cost of financing charges,
maybe an appraisal, and other associated fees.
Student loans can be federal or private. The standard repayment plan is 10 years
of equal monthly payments. This will usually save on interest and have a faster payoff
than income-based repayment plans. Graduates who are having trouble meeting monthly
expenses sometimes opt for an income based plan. Income-based plans may also be a
better option for those who are in public service loan forgiveness programs. Use
the online calculator to determine which type of income-based repayment plan is best
for you. https://studentloans.gov/myDirectLoan/repaymentEstimator.action
There are no hard and fast rules. Housing is usually the largest expense and most
financial planners recommend around 20-30% of the budget for rent or mortgage (including
taxes, insurance, and maintenance). Some financial planners designate a percentage
for most of the basic categories of household expenses. However, it can be difficult
to specify because consumers have varying preferences, goals, and income limits.
The best plan is for the individual consumer to complete income and expense statements.
If you really want a template – look up several and use them as a starting point for
your own plan.
One rule of thumb is the debt to income ratio.
A debt to income ratio is the total amount of monthly debt (NOT including mortgage
or rent) divided by the total amount of monthly income. Add up all of your monthly
debt payments including car payments, student loans, credit card payments and any
other. Determine your average monthly income from all sources. Divide monthly debt
payments by monthly income to determine your debt to income ration.
A ratio or 10% or less probably means that you are managing debt okay. If your ratio
is around 15% you may want to be cautious about adding any new debt. A ratio of 20%
or greater could mean you are already in trouble. Take a close look at your situation.
Don’t take on any more new debt. Make a plan to pay off balances as soon as possible.
It’s important to remember that the debt to income ratio is just a guideline. There
can be other signs that you are in credit trouble. For example, you might be in trouble
A 401K (or 403b) is an employer-provided retirement program. An IRA is an Individual
Retirement Account. Some employers offer to match a certain percentage that the employee
puts into the 401k or 403b – that’s free money and will usually be the priority place
for retirement saving. If your employer offers a retirement program, opt-in. If there
is a match, work toward contributing the full amount that your employer will match.
If you do not have an employer provided retirement program, start an Individual Retirement
Account. You may find that there are some extra tax benefits. Traditional IRA contributions
are deductible for some tax filers.
Remember that your best money management practices flow from your visions of the future.
Write down your goals to use money and other resources to attain the life you envision.
Thank you for sharing your thoughts and questions with us. Oftentimes, other consumers
have similar concerns and your questions help to inspire others. Best wishes for
a secure financial future.
uaexMoney is your source for reliable information. Connecting trusted research to the adoption
of best practices, we are a catalyst of prosperity for Arkansans.
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