personal finance definition


the thing about loans is this if you
need to borrow money you generally will find a way obtaining a loan can be easy
but paying it back is not borrowing money has become the default way to pay
for the big things in life like education and housing but for many
people it’s also the default way to pay for things that they can’t afford right
now and buying things that way means that they will cost you more in the
future sometimes a lot more let’s consider the many types of loans they
include student loans mortgages car loans home equity loans credit cards yes
they are considered loans cash advances and payday loans the most important
thing to know is that interest rates and terms matter enormous Li and they vary a
great deal depending on the loan let’s talk about this in terms of good debt
and not-so-good debt let’s start with good debt good debt is debt that is
manageable predictable and buys you something of value that means interest
rates are low terms along and rates don’t fluctuate drastically the most
obvious example is mortgages low interest student loans can also fall
into the good debt category especially when the rates are fixed for the term of
the loan in the US and other countries there’s programs that type payments to
your income level thereby keeping the loans manageable not so good debt
Alone’s that you cannot predict how much they’re going to cost you in the future
or take a considerable percentage of your income or have high interest many
variable loans fall into this realm some mortgages private student loans and
personal loans are often variable because they’re not secured against an
asset whose future value is predictable these loans are higher risk to the
lender hence the higher interest rate and
higher risk to you if you can’t plan your budget accurately let’s say you
have a $10,000 personal loan with a 5-year term if the interest rate goes
from 5% to 7% you’ll have to find an extra $600 for interest payments so it’s
in your best interest to pay down as much as you can when rates are low if
you have multiple sources of debt car loans credit card debt personal loans
it’s were seeing if you can consolidate into
a single loan which has a more predictable payment term consolidating
your debt only works if you’re committed to not going back into debt so hide
those credit cards and be careful where you consolidate your debt
the first thing not to do is to go to predatory lenders like payday loan
providers solving a temporary problem through a payday loan becomes a rolling
process of taking on more debt to pay for all debt online lending options like
so far for student loans and Lending Club for access to crowd source capital
also make it easy to get a loan but if you’re consolidating federal student
loans you’ll lose the benefit that comes with them so do the math on what that
will really cost you also don’t overlook your bank as a source for consolidation
they’re more interested in keeping you as a customer than seeing you to go to a
competitor so they can usually work something out so let’s do a quick dive
into interest rates the key thing to look for is APR specifically how much
does the interest rate being offered to you deviate from APR if the cost of
money is 1% from the central bank as it is now and a lender is asking for more
than six or seven percent that means they’re making quite a profit on your
loan so look for better alternatives the last and most important thing is that
loaning money in any form means that you’re taking on an obligation in the
future to pay it back you must understand the agreement and
the implications especially if the loan is secured to any of your assets do the
math on your repayment terms and understand the consequences of what
happens if you miss a payment and if you ever feel pressured to sign something
that you don’t understand do not sign it ask questions seek advice and do the
math until you fully understand what you’re signing your future self will
thank you paying fees is a part of life there are
convenience fees fuel surcharges extra baggage fees account maintenance fees
ATM fees fees and surcharges are everywhere and avoiding them can be
something of a competitive spot one of the biggest offenders in this
annoying fee game are financial institutions
their fees are not only high but they also target those least able to pay them
first of all you should know that banks make a ton of money off fees overdraft
fees alone generate 27 billion in revenues for banks and it isn’t getting
any better free checking accounts have dropped from 76% of all accounts in 2009
to 37% today and fees themselves have risen 21% over the past five years by
calling something a fee instead of a loan lenders can avoid regulators and
charge whatever they want for example if you buy a $20 lunch but don’t have the
funds in your account to pay for it your bank can lend you the money to pay for
the lunch for that loan you’ll get charged a twenty seven dollar overdraft
fee for the sake of argument instead of calling a fee let’s call this a loan
which really it is your twenty seven dollar fee would be equal to a loan with
a three thousand five hundred and twenty percent interest rate payday lenders are
the champions of this fee game they have been restricted from charging exorbitant
interest rates so now they play with fees and if you convert their fees into
interest rates many payday loans bear interests of over a hundred percent
another fun game that banks play is to reorder transactions to maximize
overdraft fees some banks will process transactions from largest to smallest so
if the big purchase puts you into debt the smaller transactions will each
trigger an overdraft fee even if you think you’ve done the right thing and
waited to make the big purchase until the last minute the reordering can cause
a cascade of fees that can be shocking it’s in everyone’s best interest to
minimize fees so here’s a few ideas how to help number one never set foot in a
payday lender and if you have pay off the loan and never go back Bank fees may
be heavy but payday lenders are terrible overdraft protection may sound like a
great idea but the fees you pay can be astronomical many banks automatically
opt you into the programs you can opt out facing the embarrassment of a
rejected payment is often better than being charged overdraft fees it can also
help to find out your bank’s fee policy if you can make sure you keep a buffer
of cash in your checking account well debit cards are great they’re the
main reason people get dinged with overdraft fees if you’re running out of
funds in your checking account consider using your credit card for a few days
until your paycheck clears if you have room on your credit card interest on a
few extra charges will almost always be lower than overdraft fees if you need
overdraft protection consider an overdraft transfer it’s a form of
overdraft but uses one of your secondary accounts to fund your overdraft the fees
are still high but lower than a standard overdraft to avoid other account fees
try to find a no fee checking account they still exist but they are harder to
find they all have limits on what you can do but try to find one that has no
account balance minimums in the u.s. new players like Bank mobile work well for
fee free banking and use cash remember cash try this for a month take out what
you need at the start of each week and only spend that amount you’ll never
overspend because you only have what you have and your limit transaction fees and
ATM fees because you only need to go to the bank four times a month and no
overdraft or insufficient fun fees it’s not easy to avoid fees but it is
possible and there’s increased pressure on banks and lenders to at least be
clear about the fees that they charge and remember the more you save on fees
the more money you have to pay down debts or invest let’s just all assume that at some point
in your life you’ll receive some money that you didn’t earn in your day-to-day
job it could be an inheritance a bonus a legal settlement or if the odds are
truly in your favor a lottery win which just so you know you’re just as
likely to be struck by lightning as when big in a lottery still what happens so
here’s three things that you need to do when a windfall comes your way first
check if the money is taxable and if you will owe tax on it take that amount and
don’t touch it until your tax bill comes an unexpected tax bill can be a
nightmare then consider this question how can this money improve my long-term
financial situation for the 50% of American households that are carrying
credit card debt the number one best thing to do is pay it off the interest
rate you pay on credit card debt is higher than what you can earn on most
investments so don’t even think of trying to make money off the investment
to pay off your debt if there’s still money left over after high interest debt
is paid off great now you can make a plan for that money a tool called the
reverse budget can really help when managing a windfall or any other lump
sum basically the rule is before you spend the first penny figure out where
every cent will go park the money temporarily in savings account so you’re
not tempted to fritter it away then step back and do a self-assessment to figure
out where the money should go you can do it in a storytelling format like I just
received 5,000 dollars that I don’t have to pay tax on I’ve stopped tinkering you
dead but I still have a balance of $2,000 on my credit card my goals are to
get out of debt establish a financial cushion for emergencies and invest for
the future I’m going to allocate $2,000 towards the dead $1,000 towards my
cushion and contribute $2,000 to my IRA of course you can change those numbers
but the idea is you figure out a plan for your whole amount before you spend
anything so you can end the story with some sort of result I’m moving forward
debt-free I’ve protected my financial stability by establishing a cushion and
I’m making progress towards my future goals make sure that plan is one from
which your future self also gets to benefit
that means investing versus just saving the money the more you invest now the
more your future self will be able to cash out later I’d recommend at least
50% of the money after tax and debt reduction to be put aside for investing
if it makes you more comfortable get professional help someone who you
pay a flat fee for an unbiased opinion then and only then do you start thinking
about spending the money on yourself or helping out family or friends or giving
to charity here’s a thought that flies in the face of most people’s
understanding of their money you don’t save what’s left over from spending you
spend what’s left over from saving and when you receive a windfall this is sage
advice indeed you

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