Syed, Author at The Broke Professional

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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Take Full Advantage of Your Workplace Benefits

There are few things in life as potentially exciting and nerve wracking as getting that first job out of college.  After years of studying during college (and possibly grad school), building contacts throughout your field, polishing and re-polishing your resumes, going through rounds of interviews, you finally receive the job offer you want.

The salary is in line with what you’re looking for, you have a pretty decent commute and there is plenty of room for advancement.  Finding yourself in this “dream job” scenario is definitely a cause for celebration.

But once the party is over, it really pays to look at the COMPLETE picture of what your new position can offer you.  If you don’t, you risk potentially losing a lot of money and benefits.

Receiving a paycheck is the obvious benefit of working at a new job, but it is not the only benefit.  Every workplace is different, but there are many benefits that you could potentially be eligible for that go unused.

And no matter how nice upper management or HR seem, they will usually not go out of their way to tell you about all the benefits you’re missing.  Here are some of the benefits that many people leave on the table but really shouldn’t because it’s like throwing away free money.

Health Insurance

One of the biggest benefits of employment is affordable health insurance.  While healthcare premiums are usually cheaper for employees, you still have to choose the correct health plan based on your needs.

With the emergence of high deductible health plans (HDHP’s), this decision has become a little more difficult.  HDHP’s have lower premiums than traditional health plans, but they have higher deductibles to meet.  Which means you’ll have to pay more out of pocket before the insurance will start to cover anything.

This can be a good situation if you don’t usually spend money on healthcare throughout the year.  That’s because if you enroll in a HDHP, not only will you have much lower premiums than a traditional low deductible plan, you can also enroll in a Health Savings Account (HSA).

HSA’s allow you to set aside pre tax funds to pay for future healthcare expenses.  The best part is that the account is yours for life and can grow tax free.  A very effective tax savings tool.  Read more about them here.

But if you tend to spend a lot of money on healthcare, a HDHP may not be the answer for you.  Most companies will give you plenty of resources to make the right decision.  The employee still needs to do the work and choose the best plan for them.

Another aspect of health insurance that has caught on recently is the addition of “wellness incentives”.  These are discounts your company gives if you meet certain criteria regarding your health.

For example, my current company gives a discount on your health insurance premium if you are a non-smoker.  Getting a yearly physical with lab work will get you another discount as well.

This helps you by saving money and it helps the company because healthy employees means more productivity.  Many colleagues overlook these easy discounts.  It’s almost like free money since you just have to fill out some forms.

Retirement

With the overall demise of workplace pensions, most employers offer a 401k retirement plan.  This means that the employee is completely responsible for their own retirement.  If you do it wrong, you could end up with nothing in retirement.  If you do it right, you could be a multi millionaire.  No pressure!

A big advantage of 401k’s is that contributions are deducted before taxes, meaning you don’t pay any taxes on contributions the year you contribute but you will pay when you eventually withdraw the money.  The ideal scenario is to contribute as much as you can when have a high income with high taxes, and withdraw the money when your taxes are relatively low during retirement.

Another great perk is the 401k company match.  This is the amount your company will contribute into your account up to a certain percentage.  A common match offer is the company matching your contribution up to 3%.  Some generous companies will throw in some money even if you don’t contribute at all.  At least contribute enough to get the full match.  From there, you should look at your entire financial situation to see if paying off debt or contributing money elsewhere would be a good move.

Many employees don’t contribute to their 401k.  And it’s a darn shame.  According to the Bureau of Labor Statistics, only about 30% of employees who have access to a 401k contribute anything at all.  That’s going to produce a lot of poor people in retirement.  It’s a great “forced” savings plan that will save you on taxes today and provide you with money to live on down the line.  I can’t think of an easier way to pay yourself first.

As I mentioned before, 401k’s require participation on the employees part.  And they can be confusing for financial novices.  Here is a great guide to help get you started with understanding your 401k plan.

Health coverage and retirement accounts are two of the biggest benefits offered by employers.  It’s important to take full advantage of both of these offerings.  If you have any questions about how to fully optimize your plan, contact your HR department or shoot me an email.

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3 Easy Steps to Becoming a Travel Hacker

You hear the word “hacking” a lot nowadays.  Traditionally, hacking was thought of as something negative.  Something we would not want our kids to do.

We think of a recluse living in his parents basement trying to break into a federal organization.  Or a group trying to take down a big evil organization’s website (which is pretty cool depending on who the big evil organization is).

But hacking has evolved recently.  Now you see articles about hacking your sleep or hacking your parenting.  You can find hacks to make it easier to cook dinner or decorate your home.  A hack is essentially a quick shortcut to make your life better.

The term travel hacker has also been in the media lately.  You read about people that have taken month long expeditions around the world for free (disclaimer: it’s not really free).  I’ve talked to many people about travel hacking and most shrug their shoulders and adopt a “must be nice” attitude.

As in, “must be nice for them but I would never be able to do something like that.”  While not everyone has the time or resources to travel hack their way to around the world trips, I will show you how pretty much anyone can travel for a lot less money.

Levels of Hacking

I’ve played basketball since I was a little kid.  I still enjoy playing it whenever I can get time.  Technically, I would call myself a basketball player.

You know who else is a basketball player?  Steph Curry.  While he is a (slightly) better basketball player than me, we’re both basketball players.  He is just on a (much) higher level.

The same thing applies to travel hacking.  If you just look at those “Steph Curry’s” of travel hacking who make elaborate trips to every continent with points, you will get disappointed.

But travel hacking, specifically travel hacking with credit cards, is a very accessible endeavor that can be scaled up as much as you wish.  It just depends on how much time you’re willing to put in.

I’ve been doing some low level travel hacking with credit cards for a few years now.  My wife is from the West Coast so we make trips there every so often.  Our goal is to at least make those trips with points along with a couple of vacations per year.  This is very attainable with a few hours of planning per month.

If you want to travel with your family of 5 to fancy European cities in first class, this is attainable as well.  But it’s going to take a lot of work.  It will amount to a full time job between signing up for credit cards, and staying on the phone with airline reps.  But it is possible, if you’re willing to put in the work.

My strategy:  Get the most lucrative credit card offers I can find and use those points to take our eventual West Coast trips.  This is essentially getting the “low hanging fruit” of travel hacking and optimizing it as much as possible.

It’s kind of like the 80/20 rule.  Give 20% effort to get 80% of the results.  That’s good enough for most people.  If I want to get better results, I need to give more effort but the work will be a lot more.  I currently don’t have the inclination to work 20+ hours a week to get better point redemptions, but I can if I choose to.

Anyway, here are the nuts and bolts of my current travel hacking strategy.

3 Steps to Travel Hacking

BIG Disclaimer:  Travel hacking with credit cards should not be an option if you plan to make late payments and not pay your balance off in full.  Any interest or late fees will quickly erase the reward benefit.  You have been warned!!

Without further ado here are the three steps it takes to get started in travel hacking:

1.  Apply and get approved for a credit card with a great sign up bonus.  (See some examples at the end of the post.)

You will need a pretty good credit score to get approved for most reward cards.  While there is no hard and fast rule, a credit score of 700 or above is usually good enough.

2.  Meet the minimum spend to snag the sign up bonus.

If a card offers a bonus of 50,000 points, for example, you will have to meet a minimum amount of spend in a certain amount of time to get those points.  A common one is spend $3,000 in 3 months.

While there are a ton of ways to increase spending artificially (and there are many blogs that will teach you how in depth), start with a bonus offer that is attainable with your regular everyday spending.  You can always scale up to a bigger offer once you feel comfortable.

3.  Repeat with another card.

You should cancel the first card if it has an annual fee and you don’t plan on using it.  If there is no annual fee, just keep the card and stick it in a drawer since having more credit will improve your credit score over time.

Something for Everybody

And that’s all there is to it.  There are so many strategies involving finding the best cards to apply for and when to apply.  Countless methods also exist to “manufacture” spend which will allow you to spend more to meet sign up bonuses without actually spending any of your own money.  So this stuff can get deep.

You can take a deep dive if you wish to find out more about these strategies.  Two sites that will provide you the advanced strategies you need for travel hacking are Million Mile Secrets (where I was featured once here!) and Frequent Miler.

But if you want to just stay on the surface and do one credit card bonus at a time to get easy rewards every few months, that’s okay too.  Travel hacking has a place for everybody.

Here are some good credit card bonuses that are currently available and some brief information about them (I don’t make anything off of these links):

Chase Sapphire Preferred:  Get 50,000 Ultimate Reward points after spending $4,000 in 3 months.  This is the go to card for many people including myself.  It gives you double points on travel and dining purchases.  And Ultimate Reward points are very versatile.  You can use them for cash back, flights or transfer to airline or hotel programs.

Chase Freedom:  Get $150 cash back after spending $500 in 3 months.  This is a great cash back card to have since the bonus is easy to get and it features 5% categories each quarter.  So one quarter of the year you will get 5% cash back on dining purchases, for example, and the next month will get 5% on gas purchases.

Chase Southwest:  Get 40,000 Southwest points after spending $1,000 in 3 months.  I fly Southwest a lot and I know a lot of people that do as well.  Southwest points are pretty valuable, and this sign up bonus can easily get you $500 worth of flights.

American Express Premier Rewards Gold:  Get 25,000 Membership Rewards points after spending $2,000 in 3 months.  AMEX has many good travel cards and this is one of the best.  Membership Reward points can be used to book flights directly and can be transferred to other programs.  This card also gets you double points at restaurants, grocery stores and gas stations.

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Inflation is Not a Big Deal. Here’s Why.

James can trade down to a slightly used BMW and save a ton on insurance and maintenance.

Imagine a reverse savings account.  You put money into it and it will slowly erode over time at a constant rate.  Let’s say that rate is 3%.  So every year the amount you have in the account will decrease by 3%.

So you deposit $100, then at the end of the year, you’re left with $97.  If you don’t add anymore money, the following year you would lose 3% more.  You would have to keep adding money just to keep your original $100 deposit.  Doesn’t sound like a good deal.

This is inflation.  It creates an increase in the price of goods over time which erodes the buying power of your money.  The most quoted inflation rate is around 3%, which is the Consumer Price Index (CPI) provided by the Bureau of Labor Statistics.

And many of us have seen this in our lives.  A gallon of milk in 2017 doesn’t cost the same as it did in 1997.  Same goes for a gallon of gas.  I’ve even written before that the only way to beat the inflation monster is to make more money and to do it FAST.

Making more money is a surefire way to beat inflation, but it’s actually a lot easier than that.  Many of you probably have a much lower personal rate of inflation than the 3% figure.

Here’s why the idea of inflation destroying our income and retirement while we stand by helplessly is just not true.

You Are Not an Average

According to the CDC, the average weight of a male in America is 195 pounds.  Besides that being a concerning statistic since that’s already considered overweight for most males, it also doesn’t tell you much about an individual male in America.

Sure, there are males in this country who are exactly 195 pounds, but many are below that weight and many are above.  The 195 pound number is the weight of a fictional “average” right down the middle American male, which most males are not.

And even if you are 195 pounds, there are other factors that make that number even more useless such as height and athleticism.  So that 195 pound number in a vacuum means almost nothing.

I look at inflation in the same way.  While the oft quoted rate of inflation is around 3%, not everyone is affected by that number in the same way.  Prices vary widely in different parts of the country.  Inflation could be at a rate of 5% in New York while it can be 1% in Iowa.  That 3% is a countrywide average.

Inflation also affects good and services in different ways.  Computers cost a lot more 20 years ago than they did now.  Milk costs more now than it did 20 years ago.  Cars cost more now but they last a lot longer than they did before.  That 3% assumes a constant inflation rate among all types of goods, which is just not true.

An average can serve as a good benchmark, but your personal situation can make the number utterly useless.  I never liked the idea of comparing average salaries or savings rates, as everybody’s situation is unique.

You Are Flexible

Now let’s say that you are indeed this average person, and your personal rate of inflation has been increasing at a steady rate of 3%.  It doesn’t mean it has to stay this way!

One of my favorite quotes of all time is from British philosopher Alan Watts:  “You’re under no obligation to be the same person you were 5 minutes ago.”  And this applies directly to the inflation argument.

If the CPI has been showing an average rate of inflation of 3% for the country, there is not much you can do about that.  If your personal spending has been growing at a steady rate of 3% year after year, you can change that right now!  We’re not robots that need to keep spending money on the same things over and over.

There are lots of ways to do this.  We can cut out things we don’t need or just spend less on them.  We can buy less expensive versions of things we usually buy (skip Whole Foods and go to a normal store).  If you take a good look at your personal spending, you can definitely find ways to keep more of your money and reduce that inflation rate.

The fact that we can be flexible and adjust our spending to reduce our inflation rate turns traditional retirement planning on its head.  Most retirement plans and calculators automatically assume that your inflation rate will be 3%.  This can easily be changed so this means that most people can actually retire earlier than they thought.

We also may not need to save as much money as we originally thought.  This can make retirement planning seem a lot less scary and disheartening.  That being said, I’m usually pretty conservative when it comes to saving and investing.  So assuming an inflation rate of 3% is not the worst thing, because it will at least ensure that you will have enough money to reach your goals.

Conclusion

Don’t get me wrong, inflation is definitely real and it has very real effects on people’s lives.  But it’s not as big of a deal as its made out to be.  Capitalism wants people to keep consuming until the end of their days.  If you follow along, then your inflation rate will certainly be 3% or even more.

But it doesn’t have to be that way.  You can adjust your spending so you actually spend less of your money than you did in the past.  Humans are a lot more flexible than they think, and I believe everyone can find ways to make inflation a very minimal factor in their personal economy.

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4 Interest-ing Ways to Spend Your Tax Refund

My first and only job before joining the optical field was as a Starbucks barista.  It was hard work but I enjoyed it and learned a lot.  We had to manually and carefully load espresso into the machines back then.  No push button lattes!

My first year of income led to a nice refund at tax time.  I didn’t know anything about withholding rates.  Someone told me just put 1 on the W9 and you’re good to go.

And I got a bigger and bigger tax refund each year.  It was great!  I thought the government was so nice.

But after learning about the tax code, I realized I was just giving up my present income so the government could have some more money during the year.  I was giving them an interest free loan of a few thousand dollars every single year!

Now, I try to get my refund as close to zero as possible.  At the same time, I accordingly increase my savings and debt payoff contributions.  I’d rather have that money work for me throughout the year.

That being said, if you do receive a refund, you have to do something with the money.

Interesting Ways to Spend Your Refund

Here are 4 very interesting (and slightly questionable) ways to spend your tax refund:

1.  Buy an Apple Watch Space Black Stainless Steel Case with Space Black Link Bracelet.  Why spend hundreds of dollars on a run of the mill Apple Watch that tells the time and answers your phone?  Spend a thousand and now you can do the same with a space black link bracelet. ($1,099)

2.  Reserve the Tesla Model 3.  There is no car more coveted than the Tesla.  The Model 3 is a relatively affordable $35,000.  Put down the $1,000 reservation fee and figure out how to pay for it later when it arrives in 2018.

3.  Stay a few nights at a Trump Hotel.  Stay 3 nights at the Trump Hotel in Central Park.  Your friends will be so jealous.  It is the greatest, I mean absolutely the greatest most incredible hotel out there. ($1,500)

4.  Buy 50 shares of SNAP.  SNAP is the ticker symbol for Snap Inc. (very creative).  Snap is the parent company of Snapchat, which specializes in providing fun filters for our pictures.  It recently became a publicly traded company and is trading at $19.54 a share as of March 17, 2017.  Buy 50 shares and snap a picture of the confirmation email.  ($977)

While those are four pretty interesting ways to spend your tax refund, let me propose an alternative.  How about spend your tax refund on things that let interest work for you?  This will make your money go the extra mile.

Interest-ing Ways to Spend Your Refund

1.  Pay off your credit card debt.  The best thing to do when it comes to credit card debt is to avoid it.  The next best thing to do is to pay it off ASAP.  Credit cards charge extremely high interest rates.  The national average hovers around 15%, which is absurdly high.

This means that unless your investments are rocking and rolling and you’re getting a consistent 20%+ return year after year (which is nigh impossible), you need to get rid of that consumer debt FAST.  This will free up cash flow faster and save you a lot of money on interest payments.

2.  Increase your 401k contribution.  I like this suggestion.  I’m glad I thought of it.  The reason I like it is because it’s the most hands off and effective way to spend your refund.  If you already contribute to your 401k, just sign in to your account and increase your contribution percentage by a point or 2.  You will not miss the money trust me.

Once the tax refund hits your checking account, do nothing!  It’s as easy as that.  Your increased contribution rate will take that extra money throughout the year and get it invested.  You will save money on taxes and increase your retirement savings in one fell swoop.

3.  Fund a Roth IRA.  If you have maxed out your 401k, the next thing to focus on is your Roth IRA.  Combined with a pre tax 401k, the Roth IRA will allow you to withdraw money tax free, providing tax diversification for the future.  Because Donald Trump is the president so who knows what the future will bring?

The max contribution to a Roth IRA is $5,500 per year.  A tax refund of a thousand or so will get you almost 20% of the way there.  If you wish to max it out, you can set up automatic contributions for the rest of the year to get you there.

Another reason I like (love?) Roth IRA’s is that you can withdraw any contributions you’ve made to the account without penalty, as long as you’ve had the account for 5 years.  So it can serve as a quasi emergency fund if needed.

4.  Make an extra student loan or mortgage payment.  Depending on which of these debts has a higher interest rate, you can add rocket fuel to the payoff time with a nice lump sum payment.  Both of these debts can potentially give you some tax savings, so they’re not the WORST type of debt to have (see #1).

But debt is debt, and it should be paid off as soon as possible.  Just make sure to let your lender know that you want the payment to be applied to your principal amount ONLY.  Many lenders will pull a dirty trick of having it applied to interest first, which does nothing for you but everything for them.  Which is why it’s better to be debt free than continuing to do business with greedy banks!

Spend Your Refund Wisely

You can certainly spend your refund on the things on the first list.  It would make for a nice story and talking point.  But with all material things, the glamour fades very quickly.  And you’re right back to where you started financially.

Spend your refund on the second list, however, and you will provide a nice boost towards financial freedom.  In the end, that is truly what we’re all looking for.  Once you reach there, you can spend all the nights you wish at Trump Tower.

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Refinance Sooner Rather Than Later

This post contains affiliate links

Paying off student loans is a battle.  It’s a battle fought against multiple enemies while running a marathon.  Sounds difficult, but it takes consistent work and sacrifice for new professionals to become debt free.

In any battle, you need a good strategy and weapons.  Ideally, Matrix amount of weapons:

One weapon I should have used sooner is student loan refinancing.  In my case, it saved me a lot of money.  And if you have a nice chunk of student debt, it can save you a lot of money too.

How much?  Let’s take a look.

Simple case study

Let’s look at the case of a medical school graduate with a run of the mill $100,000 of student loan debt.  To keep things simple let’s assume this is one giant loan with an interest rate of 7% and a 25 year payoff.

And let’s also assume this particular graduate is a big spender and has no extra money to put towards student loan payments.  (I’m going to have a talk with him later about priorities)

With help from this handy student loan calculator, here’s how much this graduate will owe with these initial terms:

Original loan: $100,000

Interest rate: 7%

Minimum monthly payment: $706.78

Total interest paid: $112,033.35

This doc would have to pay a total of $212,033.35 on a $100,000 loan!  That’s one expensive education.  He would have to shell out over $700 every month for 25 years.  That does not sound like a good time.

Now let’s see how he would have fared if the student loan was refinanced at a lower rate of 4.5%, which is pretty average nowadays for a fixed rate according to SoFi:

Original loan: $100,000

Interest rate: 4.5%

Minimum monthly payment: $555.83

Total interest paid: $66,750.38

Through a simple student loan refinance, our doctor lowered his monthly payment by over $150 and reduced his total interest payments by more than $45,000!

Why in the world would anybody not want to take this deal????!!!!

Even if you’re eligible for a government program like income based repayment, these types of programs will almost always have you paying more in total interest payments.  I would much rather get my student loans refinanced to the lowest interest rate possible and then pay them off quick.

Very Easy Process

I graduated optometry school in 2009.  Doesn’t seem like a long time ago, but when it comes to student loan refinancing, it’s an eternity!  There were very few companies around and the process usually required physical paperwork.  Smartphones were not even a big deal back then so that should tell you something.

Today, there are so many companies that will refinance your student loans.  I continue to get emails and letters from these companies.  And many of these companies are very good.

There are two companies in particular who I feel are the best.  They are SoFi and Earnest.

I have personally refinanced student loans with both of these companies and they are listed #1 and #2 on the popular comparison website Magnify Money.

Refinancing with these companies is done completely online and is very streamlined and simple.  I walk you through the experience in a previous post here.  It’s easy enough to open an account and poke around just to see how easy the process really is.

Honestly, unless you’re getting total student loan forgiveness, there is no reason anyone with student debt should forgo the refinancing option.  It costs nothing to get some quotes and more likely than not, you will find an option to lower your interest rate.

Conclusion

Paying off student loans isn’t complicated.  Consolidate your loans if that makes sense from an interest rate point of view.  If not, pay off your highest interest rate loan with reckless abandon while paying the minimum payments on the rest.  Then move on to the next highest rate loan.  Rinse and repeat.

To make this easy process even more effective, refinance your high rate loans.  This will accelerate your loan payoff process and get you debt free even quicker.

Getting your student loans refinanced early in your career will provide the most bang for your buck.  This is the time your balance will be highest which means higher potential interest payments.

Being debt free requires resilience and consistency.  And a little help from others never hurt:

Check out your rate with SoFi.  You will receive a $100 bonus if approved for a refinance.

Also, check out Earnest.  You will receive a $200 bonus if you are approved for a student loan refinance.

My advice is to get a quote from both companies and see what the best deal would be.  Both companies use different underwriting methods so you don’t know what you can get unless you try!

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3 Things New Professionals Need to Know About Taxes

My note:  The following is a gracious guest post from Kathryn, who has an excellent blog called Making Your Money Matter.  If you want a complete financial lesson on any and every financial topic from an actual financial professional, head on over to her website.  Honestly, this is the type of information that I’ve seen only available in paid courses, but you can get everything on her site free and clear.

Without further ado, here is a fantastic post by Kathryn talking about some essential tax tips for professionals.

Kathryn Hanna is a CPA and specialized in business and personal taxes when she worked in public accounting.  She currently stays home with her 3 children and blogs at www.makingyourmoneymatter.com to help people improve their understanding of personal finance and thereby improve their lives.  She loves all things money and especially spreadsheets.

If the only sure things in life are death and taxes, I’m sure we can all concur that it’s more fun to talk about taxes than death.  The basic formula for taxes is really quite simple, it’s just the fact that there are so many exceptions and rules that make it incredibly complicated.  Fortunately, you don’t have to know all the rules, just the ones that you need for your own personal taxes!

There are 3 things that I believe will be most beneficial for every new (or even not so new!) professional to know related to taxes.  These are things that will help you reduce taxes and build as much wealth as possible.

1. TAXES MAY BE YOUR SINGLE LARGEST EXPENSE

Once you’ve gotten used to the huge chunk of money being taken out of your paycheck for taxes, you might just ignore taxes altogether (at least until April each year!).  However, FICA, federal and state taxes alone will likely be upwards of 15-20% of your pay.  I calculated my total taxes as a percentage of my income for 2016 and found that over 25% of my income goes toward various types of taxes.  This is my largest expense, exceeding my total housing expenses including utilities!  Likely, taxes just might be your largest expense as well!

While I acknowledge the importance of tax funds to keep our country running, I’m all about minimizing my taxes to not have to pay more than my legal share.  By learning more about how taxes impact various decisions, you can minimize your taxes and keep more of your money in your pocket.

The first step is to get a really good understanding of your current tax situation.  Go through your most recent tax return and make sure you understand, line by line, each and every income, deduction, credit, and tax calculation.  If you have any new financial situation come up, research and make sure you understand the tax consequences.

2.  ALL INCOME IS NOT CREATED EQUAL FOR TAX PURPOSES

As a new grad, you were probably super excited about having any sort of income.  A paycheck large enough to cover eating out instead of sitting at home with Ramen noodles or a tuna sandwich is life-changing.  Earning income is great!

However, that salary you are getting is the nearly the most expensive type of income there is.  First, you’ll be paying Social Security and Medicare taxes on it at a rate of 7.65%.  Then, you’ll need to pay federal income taxes on your salary likely in the range of at least 10-15% if you’re a single person just starting out.  Also, your state will want their cut of taxes, which will add another few percent (the tax rate is 4.25% in my home state of Michigan).  That’s a lot of your hard-earned money going to taxes.

The only income that is even more expensive to you than employment income is self-employment income due to having to pay twice the Social Security and Medicare taxes.  However, being self-employed can increase your income at much higher levels than working for someone else, so I’m definitely not discouraging it!

Most types of income are taxed at ordinary tax rates for federal and state purposes but are not subject to FICA taxes.  Examples of these types of income include:

  • interest income
  • short-term capital gains on investment assets held for less than a year
  • rental property income
  • retirement distributions (someday!)

There are also types of income that are not subject to FICA taxes and are also taxed at lower tax rates.  These types of income are actually taxed at a 0% rate for those in the 10-15% tax bracket (single filers up to $37,950 adjusted gross income for 2017).  Then they are taxed at only 15% for most people.  These types of income include:

  • qualified dividends
  • long-term capital gains on investment assets held for at least a year

There are even income streams that are not taxable at all for federal income tax purposes:

  • interest from municipal bonds (although this may be taxable in some states)
  • gifts, bequests, and inheritances

The moral of the story here is to increase your other income streams in addition to increasing your salary.  Taxes make a significant difference in the amount of your income that you actually keep, so increasing your portfolio income will help you get ahead in the long run.  In addition, saving money in retirement accounts will help you to defer your tax on that income for 30+ years or more.  It will make a huge difference in helping those funds grow more quickly for your future retirement.

3.  HOW TO CALCULATE YOUR MARGINAL TAX RATE

Another vital piece of knowledge is understanding your marginal tax rate.  Your marginal tax rate is the percentage of tax you will pay on your next dollar of earned income.  This is not to be confused with your effective tax rate, which is determined by dividing your total federal tax liability by your total income.

The main reason that there is often a large difference in the marginal versus effective tax rate is because the U.S. has a progressive tax system.  A progressive tax system is where the tax rates increase with higher income levels.  Those with high income are still taxed on the lower rates for the lower portion of their income.  This is shown in the tax rate brackets shown in the example below.

In addition, the difference in effective and marginal rates may also be due to a substantial amount of non-taxable income items or tax deductions and credits that decrease income.

An explanation of marginal and effective tax rates is best explained through a simple example.  Assume the following information for 2016:

  • Your annual salary is $55,000
  • You contribute $5,000 to a traditional 401(k) account
  • You have paid $1,000 in student loan interest
  • The standard deduction is $6,300
  • The personal exemption amount is $4,050

This quick tax summary shows your tax liability of $5,435 for 2016:

The effective rate you are paying on your taxes is only 9.9%, which is calculated as $5,435 in total tax divided by $55,000 gross income.

However, your marginal tax rate is 25%.  Your next dollar of income will actually be taxed at a 25% rate, assuming it doesn’t give rise to additional deductions (for example, if you contribute this “extra” money to retirement accounts, it will not be taxed currently).  The marginal tax rate is determined by looking at the highest tax bracket, as determined by your taxable income.

Looking at the tax rate table below, you can see that with a taxable income of $38,650, this would put you in the $37,650-$91,150 bracket, which is taxed at a rate of 25%.

Looking at the tax table, you can also see that you can earn an additional $52,500 in income before increasing your marginal tax rate to 28% ($91,150 less $38,650).

Understanding your marginal tax rate will give you a realistic view of how much that raise or bonus is actually going to be on a cash basis for you.  It also will hopefully encourage you to contribute more to retirement accounts as your marginal tax rate goes up and those tax deductions become worth even more.

FINAL THOUGHTS

Understanding income taxes is key to building your wealth through the years.  Because of the progressive tax structure in the Unites States, it is even more important to understand your taxes as your income grows throughout the years and the value of your tax deductions increases.

Start now by looking at your current tax situation, making a plan to increase your passive income streams and determining your marginal tax rate.  Future you will thank you!

This information is meant for educational purposes and does not represent individual tax advice.  If you have questions about your personal tax situation, it is highly recommended to meet with a tax advisor or attorney.

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