Syed, Author at The Broke Professional

Avoid Stupid Bank Fees

                                                                They’re making a killing off of us.

My first checking account was at the same local bank that my dad used and he helped me sign up for it.  Banks LOVE this since they are hoping to get your business for life and then I will do the same thing with my son.  They’re hoping people don’t catch on that there are great checking and savings options available and you aren’t beholden to your local bank.

Depositing your money into a checking account is the safest way to store your cash.  If you’re not careful, however, the fees can really stack up.  ATM fees, overdraft fees, insufficient balance fees, and even fees for talking to a human.  Navigating around these is essential to your finances, as these fees can really eat up your money and are easily avoidable.

While little account fees have always been there, they have been even more prevalent since the Great Recession of 2008.  Since banks can’t make as much of a killing (they still make a killing though) off of mortgages, they turned to ticky tack fees to make up the difference.

And make up the difference they did.  Chase, Bank of America and Wells Fargo, the three biggest banks in the country, made over $6 billion in 2016 from ATM and overdraft fees.  That’s pure profit for the big banks without providing any service.

And the banks will keep on charging fees since most of the country doesn’t know any better.  But these fees are easy to avoid.

Everything is Negotiable

If a bank tells you that there is now a monthly maintenance fee with your account, find a way to get around it or just ask to have it waived if you have been a long time customer.    Many banks will waive the fee if you sign up for direct deposit of your paycheck, for example.  Also, they will be more likely to change things if you talk with a branch manager.

If negotiating is getting nowhere, tell them you will take your business elsewhere.  And if they still don’t budge, close the account and just go elsewhere.  There are tons of options for bank accounts out there and if the bank you have stuck with for years doesn’t think it’s important to keep you as a customer, then find a bank that does.

One fee that is usually not negotiable is ATM fees.  Either you use your bank’s ATM or you don’t.  But nowadays you don’t have to use cash for pretty much anything.  Even going to the coffee shop is as simple as loading some money from your credit card to your smartphone app.  And you can pay bills and your friends easily through Bill Pay services with your bank or apps like PayPal or Venmo.

But the best way to avoid ATM fees is to switch to a different account altogether.

Consider an Online Bank

Internet only accounts have exploded in the last few years.  If you’re getting a raw deal from your current big bank, switching to a vastly superior online bank has never been easier.

Many online banks provide the same services as the big boys do.  You can direct deposit your check and pay bills easily.  But the most important difference is the lack of fees.

Many online banks will waive ATM fees.  Some are unlimited and some up to a certain amount.  Many of them also allow you to order checks for free, which is something that can cost $20 easily at most big banks.  There really is no reason not to consider an online bank if you’re being hit by fees from your current bank.

My favorite account has always been the checking account offered by Charles Schwab.  It has withstood the test of time and continues to offer unlimited ATM reimbursements, even internationally.  It truly is a no fee checking account that would serve anyone well.

Ally Bank also has a great online checking account that reimburses ATM fees up to a certain amount.  A nice website that will allow you to compare different online banks is Magnify Money.

The days of being beholden to the big banks are over.  While most of the country will probably never catch on to this, you need to.  There are lots of options out there and doing a little bit of research will lead you to find the perfect bank for you.

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Sweat the Big Things. Part 3: Taxes

This is Part 3 of my three part series about housing, transportation and taxes.  These are the three things which I believe can make or break your finances.

Part 1 discussed housing and Part 2 talked about transportation.

In this Part 3 of this series, let’s save the best for last and talk about taxes!

In my experience talking with fellow doctors and professionals, the subject of taxes usually comes up.  But many people misunderstand taxes.  It is most likely the single biggest expense you will face every single year.

You need to get it right!

Depending on which state you live in (California *cough cough*), your entire income can be taxed at 50% if you’re not careful.

Everyone has to pay taxes.  There is just no way around it.  So it really pays to find out ways to keep your tax rate as low as possible.

While the tax code is pretty complex, there are two main things that most working professionals need to understand to avoid paying too much tax.

PROGRESSIVE Tax Brackets

If you understand this chart, you are far ahead of most Americans when it comes to understanding the tax code.

We all pay federal income tax.  Most of us pay state tax too, but that can vary between states.  So I will just focus on the federal brackets for now.

This chart is important and understanding it will give you a good idea about how much tax you will pay.  More importantly, it will drive some financial decisions throughout the year that will help you minimize your taxes.

The first thing to realize is that the tax brackets are progressive.  Meaning that the more income you have, the higher your tax rate will be.  But our entire income is NOT taxed at the highest rate.  Just the limits spelled out by the tax brackets.

As an example, a new doctor makes $200,000 the the first year out of residency.  Looking at this chart, he might be horrified to learn that he will fall in the 33% tax bracket.  That means he will owe $66,000 on his $200K income!

This is actually incorrect and it is how many people think the tax system works.  The doctor’s income does put him in the 33% bracket, but the entire income is not taxed at 33%, just the portion above the lower limit.

So according to the chart, our doctor would pay 33% on the part of his income above $191,650, which is $8,350.  His total tax would be 33% of $8,350 + $46,643.75 from the previous brackets.  The amount of tax owed is $49,399.25.  That’s a lot of tax but still sounds a lot better that $66,000.  In reality his tax would be even lower with the standard deduction and other deductions available, but there isn’t enough space in this post to get into that.

So with the progressive tax brackets, our entire income is not taxed at our highest bracket only the last dollars we make are.  How can we use this to our advantage for tax planning?  Reduce the amount of last dollars we make!

And by far the best way to do this is by contributing to a tax advantaged account.  This could be a 401k, Traditional IRA or even an HSA.  Money contributed to these accounts are taken off the top of our income, so we are not taxed at our highest tax rates.

In the case of the doctor, if he contributed just $10,000 to a 401k that year, his highest tax bracket would become 28% instead of 33%.  That’s thousands of dollars saved in taxes right off the bat.  We should be saving for our retirement anyway, but it’s nice to be able to save on taxes every year in the process.

Know Your 1040

 

 

The tax code can be difficult to navigate, but the IRS gives you some clarity on the 1040 form.  That is the form we all have to file for our personal taxes, and having a basic understanding of it can really help reduce your taxes.

The 1040 form provides a summary of our taxes.  It lists your income as well as any credit and deductions you receive.  It is a great line by line playbook of how taxes are paid in this country.  Knowing the ins and outs of this form gives insight on why you pay the amount of tax you do.

It would be too involved to go into each line of the 1040, so I will just mention a few things about the place where you get the biggest bang for your buck: above the line deductions.

The higher income you have, the more tax you will pay in general.  So you want to get that income as “low” as possible.  That doesn’t mean you work less or start slacking off.

What we need to do is make as much money as we can, and then try to make it look a lot less on our taxes.  This sounds shady, but it’s totally legal.  And above the line deductions are the best way.

The “line” I’m referring to is line 37 of Form 1040, which lists our adjusted gross income (AGI).  We are taxed on our AGI and not our actual earned income, so making this number lower is key.  And lines 23-36 tell us how to do just that.

Not all these lines will apply to everyone.  But find what applies to you and work on that.  For most working professionals, deductions for IRA contributions and the student loan interest deduction are two easy ones.  Check with your tax professional to see where you can maximize your deductions.

Know thy taxes

The last thing I would recommend for everyone is to find your tax return from last year and take some time to sit down and go through it line by line.  It is an enlightening exercise to see how certain calculations for deductions and credits are made.

And if you don’t like looking through your tax return as much as I do, then sit down with your CPA before the year is up and see where you can find ways to minimize your taxes.

Taxes are definitely complex, especially if you have a business.  But if you sift through the complexity you will be able to find ways to reduce your taxes that many people don’t think about.  Just be careful not to reduce them TOO much so the IRS doesn’t come poking around!

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The Investing Book That Won My Heart

Reading books will make you a better investor.

This post may contain affiliate links

Life is a journey, but the beginning of that journey can have a profound effect on the rest.  Reading one book in particular completely changed the trajectory of my investing journey.

While you can learn to like new foods as an adult, most of our food preferences are formed when we are young.

Most sports fans, myself included, root for their hometown team.  I’m a born and raised New Yorker, so the Giants are my team.  If I was born anywhere else, I would most likely have rooted for that hometown team.  (Though never the Philadelphia Eagles.  NEVER.)

In the same way, while my views on investing have slightly evolved over time, my core investing philosophies came from a book I read years ago and immediately connected with.

That book is The Bogleheads Guide to Investing (hereafter referred to as The Guide).  I’ve read a few investment books before I read The Guide and they just didn’t connect with me.  I’ve read a bunch of investment books after I read The Guide and most of them were not as memorable.

The Guide was a life changing book for me because it presents an investing blueprint that made sense and was easy to implement.  The idea of technical analysis and digging through charts and graphs while following the comings and goings of companies doesn’t appeal to me.

(As a simple introduction, a Boglehead refers to a follower of the philosophy of John Bogle, the founder of The Vanguard Group.  This book as a comprehensive investing guide written by some big time Bogleheads.)

Here are the two reasons why this is my favorite investing book:

Investing Should Be Simple

If you want to make money off of the general public, keep them confused and helpless.  Electricians and plumbers want people to call them anytime they have a problem.  They can charge for materials and whatever they want for labor while we simply nod and hand over the check.

They DO NOT want you to go on YouTube and find out the solution to the problem on your own.  Contractors don’t want you to go online and get the materials you need at a cheaper price.  They will go out of business.

But the more you look up things on your own, the more knowledge you’ll gain and the simpler things will become.  You will also save a lot of money in the process.  And let’s face it, you don’t need to get a PhD in plumbing to become a good plumber.  You need to find solutions to various plumbing issues.  Doing this over time will make you an expert.

The investing industry is very similar.  Investment advisers and brokers have a (wait for it…) VESTED interest in keeping you confused.  They want you to think investing is a very complicated topic that requires decades of expertise to master.  That way, you will be forking over your hard earned money without question.

The Guide says otherwise.  It showed me that as long as you are aware of your financial goals and risk tolerance, knowing what to invest in becomes very simple.  The key is to stick to your plan despite the ups and downs along the way.

And there will be ups and downs.  That’s the nature of investing.  And this is where most investment companies will get you.  They will make you believe that only they know when the markets will go up or down and that’s why you need to keep paying them.

The simplicity of it all will shock you.  But it will also empower you to take control of your investments and focus your time and energy on everything else that matters in your life.

Investing Should Not Be Expensive

The aforementioned investment advisers and brokers who want to keep you confused and take your money?  They don’t come cheap.  Most financial advisers who manage your investments will take a cut of your assets every year, usually 1% or more.

Plus, they can potentially put you into investments that have high expense ratios while not offering you similar ones with lower expense ratios.  (An expense ratio is what you’re charged by the mutual fund company just to be invested in the fund.)  And advisers can receive a kickback from mutual fund companies for putting you in a certain investment.

This goes on top of the fee the adviser takes.  Not good.  The effect of high fees on your investment returns has been well documented.  Most mutual fund managers cannot beat the average market return in one year, let alone for decades.  So there is no way to justify high fees.

The worst part is that a lot of these fees are well hidden.  Most advisers and brokers just take the fee out of your returns rather than having you hand them over a physical check.  That way you don’t feel like you are paying anything.  It’s not illegal but it does seem slightly unethical.  So what’s an average investor to do?

The answer according to The Guide is to stick with mutual funds that have rock bottom fees and track the performance of the overall market you are looking to invest in.  In real terms, this means investing with index funds from Vanguard.  This will give you two major benefits:

1.  You will be paying very low fees

2.  Your investment portfolio will be very simple to manage

These two points will put you way ahead of the majority of investors.  Those investors are paying high fees and buy and sell at the whim of the market.  Investing with Vanguard index funds for the long term will allow you to fully take advantage of compound interest.

And you can do this all on your own without the help of an adviser.  Just sign up for an account with Vanguard and go from there.  No grubby hands trying to find their way into your wallet.

Conclusion

The Guide has taught me to focus exclusively on index funds from Vanguard, and that’s where the vast majority of my investments are.  The only exception is the 529 college plan for my son, which doesn’t contain any Vanguard funds.

Focusing on Vanguard index funds has provided a great return for my portfolio.  This can definitely be attributed to the recent near decade of growth for US stocks, which I’m primarily invested in.  But more importantly, The Guide has showed me that investing with in low cost index funds will give my money the best chance to grow over the long term because of low fees and simplicity.

If you can’t tell by now, I highly recommend this book.  It will set beginning investors on the right path while showing veteran investors that this is ultimately the best way to invest your money.  And it will turn you into a devoted Boglehead like me.

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Equifax Hack and the Botched Response

Equifax, one of the big three credit reporting companies in the country, was recently hacked.  The company states that 143 million people were affected.  Which means a lot more people were most likely affected since they are probably reporting a conservatively low number.  They are a business after all.

The population of the US is a little over 300 million.  Meaning almost half of the citizens in the country had their vital information compromised.  What type of information was stolen exactly?

According to Equifax, your name, birthday, address, social security numbers, drivers license numbers and credit card numbers were all compromised.  So essentially all the information a hacker would need to sign up for any type of account.

I miss the days of hackers targeting Home Depot.

So what should we do?  The first thing we should NOT do is listen to Equifax.  Here are 2 reasons why:

1.  They set up a bogus help website that only helps themselves.

Soon after the hack was made public, Equifax set up a pretty crude looking website called equifaxsecurity2017.  That just looks like a fake URL off the bat.

On the site you can check if you’re “potentially impacted” by entering the last 6 digits of your SSN and your last name. Yes, you can check if your information has been compromised by entering even more information.

Once you enter that info, it will say you have been potentially affected.  No matter what you enter, it will say you are potentially affected.  Which means they have no idea if you are potentially affected.

But wait, there’s more!  If you’ve been affected, you get a free trial of TrustedID Premier, the credit monitoring service offered by Equifax.  You’ll get a free trial for a year and then be charged after that if you want to keep it.

So not only did they set up a dubious looking website to get even more of our information, they are trying to take our money after a massive data breach.

Please do NOT sign up for this service.  There are many ways to monitor your credit that are free and easy that I will mention at the end of the article.

As far as the second reason we shouldn’t listen to Equifax:

2.  Equifax execs sold their company stock before the hack was made public.

Like something out of Wolf of Wall Street, three Equifax executives sold their stock in the company before the hack was publicly disclosed.  The official company line was that they had no idea the data breach had occurred.

While I’m a cynic by nature, any rational person could see that is a bald faced lie.  How any executive of any company could not know that their company was exposed in the biggest data breach known to man makes no sense.  Let alone three executives.

While some conciliatory reasons were given such as they didn’t know, and they didn’t sell ALL of their stock (aka these guys are a lot richer than we can imagine), the fact is that this deceptive action did occur.

Because of this, I will have nothing to do with this company or their “TrustedID” program.  And if there ever is a class action lawsuit that I can be a part of, I will be sure to sign right up.

What You Should Do

So what steps should we take to ensure we don’t become victims of identity theft?  Unfortunately, there is no way to completely prevent ID theft.  These hackers are much smarter than us or any company out there.  Like a good defense in football, we need to prepare the best we can and react accordingly:

1.  Monitor your credit reports.  This can be done essentially for free through services like Credit Karma and Credit Sesame.  They will send you an alert whenever there is a change on your credit report.

The best thing we should all do is look at our credit reports.  Go to annualcreditreport.com and request a report from all 3 bureaus (yes, even Equifax).

2.  Submit an initial fraud alert.  This tells any business to take some extra steps to identify you in case there is an application submitted in your name.  This usually means you have to talk to someone when you apply for a credit card or bank account.

Some people say submit a credit freeze, but I don’t think this is necessary since hackers tend to sit on this information for a long time before they act on it.  You won’t be able to apply for any new accounts during that time either, so that’s your call.

3.  Submit your taxes early!!!  Most Americans are procrastinators when it comes to filing taxes.  Many even file extensions because they don’t want to do it by April.

Don’t do that next year.

Tax filing fraud is on the rise, and with this data breach it could potentially be a huge problem for the 2018 tax filing season.  We get most of the forms we need by February.  Once you get the necessary paperwork, just go ahead and file.  Especially if you’re expecting a refund.  Don’t let the government hold on to your money interest free!

Be vigilant about your credit and identity!

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Sweat the Big Things. Part 2: Transportation

This is Part 2 of my three part series about housing, transportation and taxes.  These are the three things which I believe can make or break your finances.

Part 1 discussed buying a house.  This post will talk about the costs associated with transportation.

Don’t do it. Just don’t.

In my last post about buying a home the smart way, I mentioned that buying a house will most likely be the most expensive transaction of your life.  Coming up in second place is buying a car.

Buying a certain type of home can be a status symbol.  A sign that you’ve “made it.”  That you’re finally a grown up and don’t have to be ashamed about inviting your friends over anymore.

But I would argue that a car can be more of a status symbol.  If you drive through a nice neighborhood, you will be admiring the homes but you’ll also be looking at what’s parked in the driveway.  You’ll be thinking about the guy with the Tesla in a much different light than the guy with the old Civic.

And this is why cars can potentially destroy your finances.  There is such an emotional attachment to certain cars that it can cloud the judgement of even the most savvy and cost conscious consumer.  Someone coming in the car buying experience with eyes wide open can easily be led astray by an experienced salesman.

They’ll come in for a slightly used Toyota and leave with a brand new Lexus.  Along with a large shiny monthly payment.

There are two principal ways cars can wreck your finances.  Cost and time.  Let’s look at both of these and find out how you can minimize both.

You’re Not Paying For Just a Car

Whether buying or leasing a car (which is another discussion altogether), everyone looks at the monthly payment as the cost of the car.  We live in a paycheck to paycheck society where monthly payments are the barometer of affordability, so this makes sense.

Unfortunately, cars cost more than the monthly payment.  Just like buying a house comes with extra costs, so does buying a car.  Those extra costs come in the form of gas, maintenance, repairs, insurance premiums, parking and tolls.

The average monthly car payment has risen to $509.  With the associated costs that becomes over $700 per month.  The average price of a car sold in the US is over $30,000.  There are car loans that stretch to 7 years nowadays.  This is insanity and will keep you from accumulating wealth for a very long time.

And let’s not forget the almost immediate depreciation you get with a car.  At least homes generally go up in value at the rate of inflation.  Cars lose value as soon as you sign on the dotted line, and they keep going down after that.

So you have a hefty down payment along with a monthly payment.  And add ongoing associated costs to that.  AND the vehicle is losing value over time.  Sounds like a huge money sink to me.

But lots of people really need cars.  If you’re one of those people, like me, you need to do as much as you can to minimize all of these outlays.

Get the cheapest and safest car for your needs that is reliable and gets great gas mileage.  As long as you stay away form luxury cars and getting a bigger car than you need, you’ll be better off than the majority of Americans.

If you want to be wealthy, an expensive car will be a huge obstacle in that journey.

Death by Commute

Another overlooked part of driving is the cost of commuting.  And I’m not talking just about money.  Your health and your time, and sometimes your soul, can all be taken from you because of your commute.  Commuting can literally kill you.

I can attest to this personally.  At my first employer I was commuting less than 10 minutes each way.  I filled up the tank twice a month.  I could go home and see the family for lunch if I wanted.  Life was good.

Then I got a “promotion” which had me driving 35-40 minutes each way.  Sometimes in heavy traffic.  Life was not so good all of a sudden.  I could physically feel myself getting more stressed and I started to have more neck pain.  I had to wake up earlier than before and had less time to spend with my family.

And car maintenance issues started to crop up.  The AC randomly stopped working.  I was hearing strange new sounds coming from the engine.  And all this in just a couple of weeks of my new commute.  I was also definitely less happy at work than I was before.

The only plus was that I could listen to podcasts more often.  But it’s not really a plus since I could have just woken up earlier and listened to them before.  So pretty much nothing but negatives with this longer commute.

The new commute actually compelled me to look for a new job.  And thank goodness I did since I found a new position at a different company for more pay and a commute similar to my original short one.  I noticed the differences almost immediately.  The job was more fun, the neck pain disappeared and driving was kind of enjoyable again.

Finding a new job is one way to reduce the negative aspects of commuting, but there are others.  Public transportation, telecommuting and carpooling are some other ways.  Get creative and find what works with your current situation.

I really appreciate my short commute and it’s going to take a lot for me to give it up!

Conclusion

In my last post about housing I mentioned the Latte Factor.  It showed how you can cut out your morning coffee and invest those savings to grow some money.  Applying this to car buying really makes the Latte Factor not worth the effort.

Kelley Blue Book allows you to look up the 5 year cost of ownership of any car.  This takes into account the car’s price and along with registration, insurance and maintenance.  It’s a great apples to apples comparison to see how much cars really cost.

A 2017 Lexus ES 350 has a 5 year cost of ownership of $54,071.  A 2017 Toyota Corolla comes in at $34,286.  That $20,000 difference can send your investment accounts skyrocketing.  Both cars seat 5 people and are reliable.  And the Corolla owner can keep getting his lattes everyday.

This is a real and significant difference that can make or break your finances.  The Lexus might turn a few more heads, but the Corolla owner will be wealthier.  And if he invests his money wisely, he will be FAR wealthier.  Don’t let your ego get in the way of being rich.

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Sweat the Big Things. Part 1: Housing

This may be a bit much for your family of 3

 

The first personal finance book I ever read was The Automatic Millionaire by David Bach.  It was a great intro to personal finance and I would recommend it to anyone looking for a great personal finance book.  One idea the author introduced is called the Latte Factor.

The Latte Factor is the idea that if you cut out your daily $5 latte and instead invested that money in stocks, you would have hundreds of thousands of dollars available to you at retirement.

And it’s true!  If you invest $25 per week into a stock portfolio with a 7% return, after 25 years you will have $72,947.  This doesn’t take inflation into account, but not bad for skipping your daily coffee fix.

The problem is, millions of people have read The Automatic Millionaire, but millions of people are still spending $5 (or more) on their daily coffees.  Lots of people actually enjoy their lattes so giving them up consistently for decades is just not gonna work.

The Latte Factor essentially shows that cutting back on little things and then investing the difference can produce wealth.  And it certainly can.  But it’s not enough to change behavior since it takes decades to see any progress.  And even though $73,000 after 25 years is nothing to sneeze at, many people will need at least $1 million+ in retirement savings to have a similar standard of living as their working years.

That $73,000 suddenly doesn’t seem that impressive after decades of sacrifice.  So what’s the solution?

Focus on the Big Things

People would do better to focus on the big wins in life rather than focusing solely on little things like lattes.  This is especially true for professionals with high incomes but low net worths.  Saving $25 a week as a student would be huge.  Saving that much for a professional making six figures?  Doesn’t move the needle.  With higher incomes you need to set your saving sights a little higher.

There are three big things everyone should focus on:  Housing, transportation and taxes.  If you’re intelligent in these 3 areas and avoid the big mistakes, you will have more wealth than you can handle.

(This post will just focus on one of the big three:  Housing.  Stay tuned for upcoming posts on the other two)

Housing

Buying a home will be the biggest purchase most of us will ever make.  We will probably buy multiple homes during their lifetime, so getting this transaction right will set you up for financial success.

And getting it wrong will have you in a financial hole for your entire life.

There are three main factors that you need to focus on when buying a home:

1.  Credit Score:  Some people can buy a $500,000 house outright with cash. I plan to be one of those people but am not quite there.

Until that happens, me and most people in the country need to borrow money from a bank to buy that house. This type of loan is called a mortgage (which literally means “death pledge”)

Mortgage interest rates are pretty low nowadays, but to get the lowest of the low rates you need a great credit score.

Notice I said GREAT credit score and not just good. Having a great credit score can sometimes save you an entire point on your interest rate, which could result in tens of thousands of dollars of savings over the life of your death pledge.

If you don’t have a great credit score, read this and work on it.  Barring a history of bankruptcy or some major bills in collection, everyone should be able to increase their credit score year after year.

2. Down payment: Having a 20% down payment for your home purchase does three amazing things:

-Disqualifies you from having to pay Private Mortgage Insurance, which is usually about 1% of the purchase price of the home per year.

PMI, as it is known around the block, is what the lender will charge you in case you can’t come up with a traditional 20% down payment.  This goes straight to the lender’s bottom line and may or may not be tax deductible for you.  In any case, it’s a payment you can do without.

-Gives you instant equity in your home. This makes it pretty certain, though not a guarantee, you’ll make a good profit once you sell the house down the line. Not having enough equity will affect you during a housing downturn, like the one we had in 2008.

If you have little equity and your house loses 30% of its value, you are either stuck living there for a long time or have to go through a foreclosure or short sale to sell the house.

-Makes your monthly mortgage payment more affordable.  If you have a 20% down payment, it reduces the amount of mortgage you need and will give you some room to negotiate interest rates depending on your credit score.

If you stretch for a home by getting a low down payment loan, you are increasing your monthly payment which is holding you back from your other financial goals as well.  Plus, you’ll be paying the aforementioned PMI on top of everything.

Physician loans are a slight exception.  They allow you to get a home with a very low down payment without having to pay PMI.  On the flip side, they tend to charge slightly higher interest rates than traditional loans.

3.  Use numbers, not emotions, to buy a home:  Buying a home can be a highly emotional decision.  And that’s just how the home buying industry wants it.

There are many parties that end up making a lot of money from the sale of a home.  The bank that issues your mortgage makes interest off of you.  Your helpful and friendly agent also makes a nice percentage of the sale price.  Builders and contractors also make some nice money.  The only one not making money is you, the home buyer.

There is a whole industrial complex whose sole job is to make buying decision emotional for you.  That’s why they have certain types of lighting and music in stores.  The know emotional customers are overpaying customers, and that will keep the profits rolling in.

The best way to combat this is to work backwards by finding out what you can afford and looking for the best homes in that range.  This should be done before you look up homes or talk to an agent.  Model homes and home buying websites will try to make all their homes glamorous and “must haves”.  Starting your home search based on those false notions will lead you to pay more than you can afford.

A conservative rule of thumb I like is that your mortgage payment shouldn’t be more than 25% of your gross income.  So if you gross $5,000 a month, you shouldn’t be spending more than $1,250 on your mortgage.

And always remember to add 1% of the purchase price of your home as an annual maintenance cost.  Because maintaining a home will cost you, even if it’s a new home.  Many home buyers don’t account for this in their budget, and it can be a rude awakening that can slowly chip away at your checking account.

Your Home Will Make or Break You

As I said before, buying a home will probably be the largest transaction you will ever make.  This is one transaction that will make or break your finances.

By keeping a high credit score, having at least a 20% down payment and not buying a home beyond your means, you will save thousands upon thousands of dollars over the life of your loan.  Investing these type of savings can produce hundreds of thousands of dollars in retirement funds.

And that will buy you a lot of lattes.

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Where to Refinance Your Student Loans

Get some quotes people

Get some quotes people

This post contains affiliate links

People tend to need some hand holding when trying something new.  I’ve found this to be the case when recommending student loan refinance to colleagues.

I recently wrote why everyone with student loans should consider refinancing.  The best that could happen is that your interest rate goes down substantially and you save tens of thousands of dollars over the life of the loan.  The worst that could happen is that refinancing is not beneficial and you stay right where you are.

Nothing to lose at all.

And while people generally like doing things that will benefit them, sometimes a little prodding is still necessary.

For example, I know it’s a good idea to try and fix things around the house myself before I call someone.  But I need to watch a couple of good step by step videos on Youtube before anything actually gets done.  That’s just the way I am.

Many people are like this when it comes to saving money.  They know it’s a good idea to open up a savings account and contribute to it automatically, find a less onerous checking account or sign up for a rewards credit card. But sometimes a little kick in the pants is needed to get going.

This post will serve as that kick in the pants.  I will show you how easy the student loan refinance process is and what companies you should consider.  Let’s get started.

(I will use screenshots from SoFi since they do not require a hard credit check before getting quotes.  More on that later.)

Step 1:  Go to the lender’s website

SoFi page 1

Just type in SoFi.com (or better yet use this link and get $100 if your loan gets approved.)

Most online student loan refinancing companies have easy to use interfaces.  Once you’re on the home page, simply click “Find My Rate” on the top right.

Step 2:  Enter Your Personal Information

info screen

In order to give you an accurate quote, lenders need some information from you.  The type of information required will vary between lenders, and some lenders will do a credit check before you get your quotes.  So the experience with each company will vary.

(By the way I did not hack into Bill Nye’s SoFi account I just made up an account with his name.  I’m fairly sure he doesn’t have a need for student loan refinancing.)

Typically, the information most lenders require is:

-Basic demographic information

-School information

-Employment information

-Current student loan balances and rates

-A little later in the process, you will probably have to send proof of income and a picture of your license or passport.

Some people are wary of giving companies too much information.  This is not really anything to worry about.  In reality, Facebook has a whole lot more information on us than these companies ever will, so I’m okay with letting them know how much money I make.

Step 3:  Analyze your quotes and make a decision

quotes screen

This is where the fun begins.  After you enter all of your information, companies will run a soft or hard credit check.  A soft check won’t affect your credit score but will still allow you to see some quotes which are going to be pretty close to your actual quote.  A hard credit check will show up on your credit report but will give you very precise quotes.

With the example I used, I assumed a student loan balance of $100,000 with a 7% interest rate and a 25 year term.  The minimum payment would be $706.78.  Making just the minimum payment over those 25 years would amount to a total payment amount of $212,000.  More than double the original loan amount!

I advise to go with the shortest payoff period you’re comfortable with and can afford.  But as you can see, even if you go with a 20 year term it would still result in a lifetime savings of more than $43,000 with a slightly lower than original monthly payment!  That’s why I say refinancing is a no-brainer.

A shorter payoff term will also result in a lower interest rate.  So the shorter you can go, the better it will be.

Fixed or Variable?

The other consideration is if you should go with a fixed interest rate or a variable interest rate.  This discussion deserves a post of its own (that’s a good idea!), but if you opt to go with a longer payoff period, about 10 years or longer, I would suggest sticking with a fixed interest rate.

Interest rates are sort of predictable as far as if they will be going up or down, but the uncertainty lies in when that will happen.  Right now in 2016, for instance, interest rates are pretty low so they are bound to go up at some point.

But that could be 6 months from now or 6 years from now.  There is too much uncertainty over a long period of time.  So for shorter term loans, less than 10 years, variable rates are a good bet and for longer term loans, it’s better to stay with fixed.  Everyone has different risk tolerances so use that as a general guideline.

The last thing to consider is that your rates will probably vary from my results, and will probably vary from someone in your same class.  Companies take into account your credit score, credit history, loan balance, interest rate, where you live, where you work and who knows what else.  The screenshot above is just for illustrative purposes, so make sure to get quotes after putting in your own personal information.

So Which Refinance Company Should I Use?

The student loan refinance arena is growing rapidly.  I keep get letters in the mail from new companies claiming they can refinance my loans at the lowest rate possible.

But let me give you the short answer.  There are only two companies worth your trouble:

#1: Earnest (get a $200 bonus by using this link)

#2: SoFi (get a $100 bonus by using this link)

I ended up going with Earnest for my refinance, just because their quoted rate was .05% lower than SoFi’s.  Everything else was pretty much the same with both companies.

Both companies make the onboarding process easy and both companies have great customer service.  You may get different quotes because both companies have different underwriting standards, so get quotes from them both and compare.

If you really truly want more quotes, a good place to look would be Magnify Money.  They will give you a list of all the best student loan refinance companies.  They are also a great resource to find the best checking and savings accounts.

Looking at the potential savings from refinancing I don’t know why anyone would not get a few quotes and see how much they could save.  Refinancing is not a good choice for everyone, but getting quotes online is so easy it really is in your best interest to just take a look.

So to conclude: Earnest. SoFi.  See how much you can save.

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How to Kill your Credit Score

Your credit score is one of the most overlooked parts of personal finance.  Most people don’t know what their credit score is, why it’s important, what contributes to your score and how you can improve it.  I will go into all of that and more.  If you take away only one thing from this discussion, it should be that improving your credit score is a sure fire way for you to save THOUSANDS of dollars across a lifetime.  This is because if you have a great credit score, you will get the best interest rates on mortgage and car loans.  Getting the best rate can save you tens of thousands of dollars on your mortgage alone.

Credit Score basics

Your credit score is a number between 300-850 that lenders use to determine if you are a risky borrower or not.  Generally speaking, the lower your credit score, the more risky you look to lenders.  Which means they will offer you the higher end of their interest rates.  The opposite holds true for those with high credit scores.  This means you will get a great rate for your mortgage, car loan and be accepted for all of the awesome credit cards available.

What goes into your credit score?  Let’s go straight to the source:  The Fair Isaac Corporation (FICO).  Your credit score is also called your FICO score, so it pays to listen to what they tell you.  Here is a nice little pie chart that lays it all out there for you:

Creditsesame

Looking at the chart, it’s easy to see what makes up the majority of your score: payment history, amounts owed and length of credit history.  So as long as you make your payments on time, don’t go near your credit limit on your cards and do that for a few years, your credit score will most likely be excellent.

Conversely, there are a few things that can absolutely KILL your credit score.  And it’s a lot easier and faster to lower your score than it is to increase it.  Making late payments is the #1 surefire way to kill your credit score.  Looking at the chart makes that obvious, but it also makes perfect sense from a lender’s point of view.

If you’re shopping for a home loan, the lenders will look at your credit score.  If your score is low, it tells them you probably don’t pay your bills on time.  While this may or may not be a fair judgement based on one number, a low credit score will nonetheless discourage them from offering you their lowest interest rates.

And late or missed payments can include anything:  Credit card bills, past mortgage payments, rent, car payments, cell phone bills, utility bills and student loan payments.  All of this stuff gets reported to the credit bureaus, so staying on top of your payments is vitally important.

Do Business Online

What’s the best way to make all of your payments on time?  Do everything online.  This makes things really easy as you can just bookmark all of your monthly bills and pay them right online.  Many also allow automatic payments, which pretty much guarantees on time payments.  Use technology to your advantage when it comes to your credit score.  Your future self will thank you.

Another way to hurt your credit score?  Getting really close to your credit limit.  This usually refers to credit cards, and it specifically refers to your credit utilization ratio.

If you have a $20,000 credit limit across all of your cards, and are consistently charging $19,999 every statement period, this shows lenders that you’re using too much credit.  You are a risky borrower in their eyes.  There are two ways to fix this.  The obvious one is don’t spend up to your credit limit!  Either switch to cash for some payments or go through your spending history and cut out the unnecessary stuff.

Another way is to request a credit limit increase.  Just call the number on the back of your credit cards and ask if you can get your limit increased.  Some will do it and some won’t.  But any increase in your credit availability will help your ratio.  Increasing your credit limits and decreasing your spending at the same time would be the ideal way to go.

Conclusion

According to the FICO pie chart, new credit and types of credit used also contribute to your score.  This is only 20% of your score, so it’s not really worth focusing a lot of your time on, especially if you have problems with late payments.  Opening a lot of lines of credit will temporarily decrease your score a few points, but it will go back up once they realize you’re still making your payments on time.  Focusing on late payments and high credit utilization ratios, the two credit score killers, is the quickest and most important way to improve your score.

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Why Doctors Tend to Have High Credit Scores

(Hey everyone.  The following is a guest post from my friend Ryan, who specializes in financial planning for physicians.  He’s doing great work since many physicians and other health professionals are clueless when it comes to their finances.  In this post Ryan talks about a unique aspect of doctor’s credit scores.  Enjoy!)

As a financial planner who specializes in working with doctors and their families, I’ve realized over time that many doctors do have high credit scores. Having a high credit score enables doctors to get competitive interest rates on mortgages, car loans, and more. It also shows lenders that they’re not only accomplished physicians but responsible borrowers who pay their bills on time.

I’ll expand more why doctors typically have high credit scores by outlining how a credit score is actually calculated. That way, if you’re a doctor who wants to raise your credit score in anticipation of a big purchase, you’ll know the steps to take to increase your score to get the best opportunities available to you.

Here are some of the reasons why physicians typically have high credit scores:

1.  Length of Credit History

The length of your credit history definitely factors into your score. For many doctors, taking out student loans is the first step in establishing a credit history. If you start taking out loans as an undergraduate, you’ll have at least 7-8 years of credit history by the time you finish residency.

If you didn’t take out student loans as an undergraduate but you did as a graduate student or medical school student, you’ll still have a few years of credit history under your belt. This helps to improve your score.

2.  Payment History

Your payment history is probably the most important aspect of your credit score because it makes up a whopping 35% of your score. This is the part of your score that shows lenders you’re a worthy investment and that you’ll pay them back on time.

The great news is that once you take out student loans, you’ve started a credit file. Even if your student loans aren’t due yet, your account is in good standing month after month while you’re in school. Lenders love to see this.

If you have credit cards in addition to your student loans, be sure to pay these on time as well. Even if your student loan accounts are in good standing, missing a credit card payment will be detrimental to your score. So, make those payments on time every time solely because your payment history factors so heavily into your overall credit score.

3.  Debt Utilization

 Having a low debt utilization percentage is a fancy way of saying that you’re living within your means. Your debt utilization percentage is how much debt you have relative to the amount of credit available to you. So, if you have 5 maxed out credit cards, your debt utilization percentage will definitely hurt your credit score. However, the more available “space” you have on your revolving credit, like credit cards, the better your credit score will be.

The great news is that student loans are considered installment debt, not revolving debt. They’re a different type of debt than credit cards and thus aren’t factored into this debt utilization score. So, if you have hundreds of thousands of dollars in student loans but you’re not carrying a balance on your credit cards, your debt utilization percentage will be low, which is good for your credit score.

Now that I’ve listed the three parts of a credit score where doctors typically excel, I want to take the time to write about what can hurt your credit score too.

After all, the goal in life is generally to become financially well off, self-sufficient, and happy. Having a strong credit score can enable you to get lower interest rates on some of your biggest purchases, saving your thousands and thousands of dollars over the course of your life. This, in turn, will allow you to use your hard earned money for the things you actually want to do.

So, be aware of these two parts of a credit score as well:

1.  Credit Mix

 Lenders actually want you have a few different types of loans, called a credit mix, because it shows them that you’re able to successfully handle various types of payments like a house payment, credit card payment, and a car payment.

If you only have student loans, this could lower your score, but if you mixed it up a bit (see what I did there?) you could raise your credit score by a few points.

For older doctors who own houses, cars, and have business loans, it’s easy to have a decent credit mix. However, newer doctors who are just finished training might not have many different types of loans.

Keep in mind that credit mix is a small portion of your score and you shouldn’t go and take out loans that you don’t need for the sole purpose of improving this part of your score. However, if you need to bump up your score a few points to qualify for a better mortgage interest rate, diversifying the types of loans you have is something you can try.

2.  New Accounts

This might seem a little counter-intuitive to the point mentioned previously, but it’s something worth mentioning. Basically, lenders don’t like it when you open a bunch of new accounts at once. It signals to them that you’re in need of a lot of credit quickly or that you’re somehow in need of financial help.

So, avoid opening several different credit cards in one year. At the same time, avoid closing your old accounts. Lenders might not like to see a lot of new accounts but they love seeing old accounts in good standing. It shows that for many years you’ve been good about having loans and paying them back on time.

Keep in mind that as you go through your daily life, your credit score will fluctuate. It’ll fluctuate as you pay down debt. It’ll change if you refinance your student loans. It will also change if you get a new travel credit card or a new house. It’s okay for your score to go up and down some, as long as you’re consistently making your payments and checking your credit report regularly to ensure your identity is safe. I tell my clients to sign up for an account at Credit Karma because it’s free, you can check your score whenever you want, and you can dispute anything that’s not right your credit report easily and most importantly, quickly. After all, you don’t have a lot of free time to worry about your finances, right?

So, the good news for all the doctors reading this is that you probably have a high credit score already due to the points I mentioned above. However, if you don’t or if you’re looking to boost your score a few points, that’s absolutely possible by understanding how your credit score is calculated and knowing how you can improve it over time.

Ryan Inman is a fee-only financial planner who specializes in helping physicians and their families build a solid financial future through his firm, Physician Wealth Services. As the husband of a physician, Ryan has a unique insight into what it’s like to be a part of a physician family and thoroughly enjoys helping his clients. To schedule a free 30 minute consultation, feel free to contact Ryan at any time.

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My Favorite Student Loan Calculator

This is going to be a short post, but it should help a lot of people.

Since I’m a finance nerd and think about debt payoff and investing a lot, financial calculators take up a lot of my time.  While there are a lot of good investing calculators out there, I could never find a nice debt payoff calculator.  Here’s what I look for in a good debt calculator:

-The ability to enter multiple loans with different interest rates.  This is really helpful for people with student loans.  Sadly, most calculators don’t even have this seemingly basic feature.

-A graphic representation of my current loans and when they will be paid off.

-The ability to see the effect of increasing or decreasing your extra loan payment on your loan payoff date.

Ready For Zero had a program that did exactly this, and it was great!  I used it for a few years until they suddenly stopped offering it this year.  Huge bummer.

I searched futilely for a similar calculator with no luck.  Recently, I tried to search for a calculator again and an old friend resurfaced…

Unbury.me

I wrote about unbury.me a few years back because the calculator had everything I wanted.  It even showed how much more time and money you’d save by using a debt avalanche instead of a snowball!  It was a very no frills and basic looking calculator but it got the job done.

Like Ready For Zero, it mysteriously disappeared.  But now it’s back with a nice updated look.  Here is a look at the home page:

Everything I want is right there on the home page looking all simple and clean.  From here you can add as many loans as you want and enter the balance, interest rate and monthly payment.  And you can select if you want to pay them off using the avalanche (highest interest loan first) or snowball (lowest balance loan first) method.

Once you enter your information, you’ll be redirected to a cool dashboard with a lot of nice colorful looking graphs.  It’s a nice little control center that gives you a ton of good information.

But the best part is the top of the dashboard which looks like this:

All the information I need in a nice little toolbar.  I love being able to see the exact month my loans will be gone (less than 2 years!)

There are a lot of other cool graphs and numbers to play with.  Number junkies like myself will spend a lot of time on this site.

Having a good student loan calculator like this can be a very motivating factor in paying off your loans quickly.  It’s great seeing the exact month you will be debt free and the powerful effect of paying more on your highest interest loan.

I recommend setting aside a nice half hour to enter all of your student loans and looking at all the nice graphs they have on here.  Another feature is that you can create a profile and save all of your info.  Saves having to re-enter all of your loans again.  Unbury.me is simply an awesome student loan calculator.  Enjoy!

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