The College Investor helps millennials get out of student loan debt to start investing, building passive income, and wealth for the future. Today, it's the go to resource for millennials looking for information about how to get out of student loan debt and start investing in their future.
The Effective Federal Funds rate has risen from .12% in November 2015 to 1.3% in December of 2017. For borrowers, that could spell rising interest rates on everything from mortgages and student loans to credit card debt.
You may assume that you’ll have no trouble qualifying for a loan refinance based on your income, but not everyone should be so sure.
For example, people who earn most or all of their income from self-employment activities often have a tough time validating their stable monthly income.
Combine a difficult to validate income with high monthly student loan payments, and you’ll start to see why banks may not want to underwrite you.
Additionally, if you and your spouse have lingering student loan debt, but one of you dropped out of the workforce, refinancing could be trouble. The lower income combined with the student loan debt could push your DTI above the required threshold in some cases.
If your student loan debt is Federal debt, you have options for lowering your DTI. Consider whether it makes sense to put your loans on an income-driven repayment plan. In many cases income-driven repayment plans will lower your monthly obligation (as low as zero dollars).
For the purposes of underwriting the loan, your obligation under the income-driven repayment plan counts (not your standard monthly payment). This is a change from a few years ago, and it makes refinancing with student loan debt more accessible.
If you don’t qualify for an income driven repayment plan, you may want to consider making an effort to pay off one of your loans before applying for a refinance.
This will lower your monthly financial obligation and reduce your DTI. Alternatively, you may want to refinance your existing student loans to a lower interest rate and a lower monthly payment.
Student Loans In Default Could Spell Refinance Disaster
Homeowners with student loan debt in deferment or forbearance don’t have to worry that their debt will prevent a refinance, but having a student loan in default could spell disaster.
Whenever possible, rehab your student loans through Federal debt consolidation or by agreeing to a new payment plan for private loans.
Cashing Out Refinances To Payoff Student Loans No Longer Makes Tax Sense
In the past, some people used cash-out mortgage refinances to pay off their student loans. This allowed them to lower their interest rate, and maintain tax deductible interest.
With the passage of the new tax reform bill, that strategy doesn’t make much sense. Student loan interest is still deductible, but home equity refinancing (ie cash-out mortgage refinances) no longer qualifies for a tax deduction.
Borrowers may want to consult with a tax-professional before making any big moves related to cash-out refinancing.
Robbing Peter To Pay Paul?
One of the primary drivers behind mortgage refinancing is to lower your monthly mortgage payment. Free cash flow is an awesome benefit, but it’s not always a money savvy move. If you feel a cash flow pinch, refinancing your mortgage is an expensive way to free up cash.
Refinancing your mortgage, so you can pay your student loans means your robbing yourself of home equity to pay another type of debt. If you really need the cash, consider refinancing your student loans, getting on an income driven repayment plan or better yet increasing your income.
Are You Ready To Refinance Your Mortgage?
Don’t let student loan debt stop you from refinancing your mortgage. You can find great rates on great mortgages right now.
However, take a little time to be sure that your refi strategy makes sense with your overall financial plan. When you have multiple debt types, you want to be strategic as you eliminate your debt and build wealth.
Have you thought about refinancing your mortgage despite having student loan debt? Why or why not?
Let’s look at a few different scenarios where commissions have a large impact on investment returns.
When you have a small account, everything is amplified. This includes losses. Here’s an example:
Account size: $5,000
Purchase 100 shares of ABC at $30/share: $3,000
Sell all shares at $25: $2,500
Round trip (buy & sell) commissions: $13.90 at E*TRADE
The account has realized a $500 loss. That’s a 16.6% loss on the account, which is a significant amount. What about commissions?
While $13.90 seems like a small amount, what happens when the account does ten round trip trades and nets only $250? Ten trades cost $139. On a $5,000 account, that’s 2.78%.
With just 20 trades, 5.5% of the account has already been eaten up by commissions.
To put it another way, $139 is over 55% of the profit.
Contrast that with a $50,000 account. $139 is only 0.278% of the account value. 20 trades aren’t even 1% of the account (0.556%).
Going back to our ten trades at $139, the $50k account is ten times larger than the $5,000 account. Let’s say its profits on those ten trades are 10X or $2,500. $139 is only 5.6% of the profit.
It’s difficult enough to make money with a small account but once commissions are factored in, it’s nearly impossible.
Abnormally High Fees
Just like buying a home, you want to get a good price and not overpay. That’s done by knowing what the surrounding home prices are. The same can be said for commissions.
Online trades shouldn’t cost more than $10, with many around $5. There isn’t any reason to pay more for online trades.
If you have a nice size account and are getting good rates on your commissions but they are still eating into your returns, what might be the reason?
This can usually happen due to the frequency of trading. You don’t have to be a day trader for commissions to eat away at returns. But being an active investor can have a negative impact on your returns.
One way to avoid jumping into and out of funds is to simply invest in index tracking funds. These funds and ETFs track popular indexes such as the S&P 500.
Basically, they do the work for you and help keep commissions low because you aren’t trading as much.
Your Advisor Is Fee-Only
If you are working with a fee-only financial advisor but find you are being charged commissions on different products, the advisor isn’t fee-only. Fee-only advisors should not charge commissions.
However, if your advisor is fee-based, he might charge a flat fee for advising but then charge a percentage of AUM (assets under management) for managing your investments. For AUM, a fee-only advisor simply charges a flat fee to manage investments.
When Commissions Don’t Matter
Turning to the other side of the table, there are times when commissions aren’t a factor and are just part of investing, assuming the commissions are reasonable.
You’re Having Great Success
Whether your investing on your own or having an investment advisor do it when you are having great success, commissions tend to go unnoticed. After all, outsized profits decrease the percentage impact of commissions.
Day traders are one group that rack up huge amounts of commissions. While 4 out of 5 lose money, 1 in 100 is profitable. In this case, those who are winning are doing so because of the volume of trades.
Paying Higher Commissions When It’s An Emergency
When you have to get out of or into a trade immediately but don’t have access to a computer, making a call to your broker and doing a phone assisted trade might be your only choice. Phone-assisted trades are expensive, with many costing $25. But with no other options, the high commission doesn’t outweigh the need to complete a timely transaction.
Percentage Of AUM
As mentioned above, some financial advisors will charge a commission as a percentage of AUM. The commission rate drops at different stages as AUM increases.
Your Advisor Is A Fiduciary
A fiduciary should have your best interest in mind. But this doesn’t exclude advisors from charging a commission, even under the DOL’s new fiduciary rule.
Merrill Lynch has even setup a model where some clients are charged fees only while others are charged commissions.
Andy Sieg, the head of Merrill Lynch Wealth Management, said, "We have analyzed the limited situations where recommending a fee-based arrangement might not be in a client's best interest and have considered alternatives to IAP [Investment Advisory Program] for these situations,”
Knowing when to avoid or reduce commissions can certainly increase your investment returns.
However, there are still some scenarios where the commissions you are receiving don’t matter as much, especially when they fall within the range of reasonable cost.
Do you think your investment commissions could be lower?
It has never been easier to be an informed and engaged stock market investor. Today, investors can get excellent asset management for free (using M1 Finance) or inexpensively using Wealthfront, Blooom or Betterment.
On top of that, the best software and information for investors is readily available online for free. One of the tools that is making investing more democratized than ever is DIY.Fund. It’s a completely free database that gives investors the tools that professionals use.
It has a charting software that gives you free to the minute data on a variety of stocks, options and ETFs. You can get daily email updates on your personal portfolio’s performance (including your actual returns, your alpha (outperformance), and your beta (portfolio risk).
Investors who adhere to a strict quarterly or annual portfolio rebalancing may not need the tools that DIY.Fund offers, but individual stock investors and those using a 3, 4 or 5 factor investing model should consider DIY.Fund one of their top free tools.
Here’s how DIY.Fund works, and how you can use it.
The philosophy behind DIY.Fund is that every investor should have the tools to manage their personal portfolio like a professional. That means that you get analytics that are customized to your portfolio.
To get the most out of DIY.Fund, you’ll want to upload a CSV file with your portfolio positions (and the day you acquired those positions). Most brokerages have options to export all your current positions to a file. This is good enough to get you started.
Once you have your portfolio uploaded to DIY.Fund you’ll get daily email recaps. These will tell you about your portfolio and how it performed relative to the S&P 500 benchmark. (If an extra email sounds like overkill, you can opt out).
Analyze Basic Portfolio Metrics
Once you have your portfolio uploaded, you can analyze it using asset level, sector level, or by looking into “simple” statistics. I should note that the simple stats are nearly impossible to calculate by hand.
Visualization of sector allocation
These metrics are a must have for individual stock investors. Stock investors can easily become overweight in a single sector, or they may accept more volatility than is appropriate for their risk tolerance.
It also can help you gain an appreciation for your total portfolio allocation if you have investments in multiple brokerages (although Personal Capital will also do this for free).
Having these numbers easily accessible, makes it impossible to ignore your actual portfolio performance. It also makes it far easier to control your investing behavior (which is the only part of investing you can control).
Investigate Using Up-To-Date Charts
While I use the statistics for my portfolio, I primarily use DIY.Fund for “Statistics” feature. DIY.Fund has to the minute statistics for hundreds of different metrics.
These include fundamental metrics like P/E ratio, and more technical indicators like oscillators and relative strength indicators.
No matter what your investing strategy, you can likely use DIY.Fund’s charts to show whether you should purchase a stock, sell a stock or continue without action. The statistics section includes a watchlist, so you can stay up to date on every position you’re considering.
Who Should Use DIY.Fund For Investing?
If you invest in individual stocks or you follow a factor investing model, you’re likely to gain value from using DIY.Fund.
While it doesn’t include a free portfolio back-tester (like portfolio visualizer) it’s one of my top recommendations for people who want to learn more about investing.
Passive investors who rebalance a few times a year might not need DIY.Fund, but almost everyone else should consider it. Since it’s free, the only cost is the time you put in to update your portfolio.
What are your thoughts about DIY.Fund? Would you ever use it?
Fees are a required part of investing but is there anything you can do to reduce them?
Many investors don’t realize how much they are paying in fees. These fees can zap your portfolio’s returns.
Knowing about the various types of fees can help you reduce or even eliminate them.
In this article, we’ll go over the different types of fees that can destroy your portfolio returns.
Impact Of Fees
To get an idea of how fees impact investments, let’s first look at a few examples before we get into the details of specific fees.
Using the calculator on buyupside.com, a $10,000 investment with a 1.5% fee, 6% return that is held for ten years produces a value of $15,396.46. With only a 0.5% fee, the value is $17,032.93. That’s a $1,646.37 difference.
Let’s use a retirement account with the same parameters except for a starting value of $500,000 and held for 40 years. The value will then be $769,823.14 after 40 years. With a 0.5% fee, the value will be $851,646.69. A difference of $81,823.55.
The last example clearly shows the large impact that just a 1% fee difference can have on an account. This is why getting the lowest fees possible is important to your portfolio’s returns.
Mutual Fund And Index Fund Fees
Mutual funds come in two flavors - active and passively managed. Actively managed funds have a fund manager manually trading the account and producing fund performance. Because a fund manager is involved, fees will be higher than passively managed funds.
Fees for funds aren’t a separate transactions. They are taken when the position is opened or closed.
A passively managed account lacks a fund manager and thus has lower fees. The fund tries to mimic the performance of an index such as the S&P 500. These funds are also called index funds.
To get an idea of mutual fund and index fund fees, in a June 24, 2015 study, Morgan Stanley found that the average dollar-weighted expense ratios of actively managed were:
Domestic large-cap - 0.99%
Midcap - 1.17%
Small-cap - 1.24%
The same categories of index funds charged fees of:
Domestic large-cap - 0.14%
midcap - 0.17%
small-cap - 0.22%
The moral of the story is that if you can invest in passively managed index funds, you’ll pay much lower fees.
Some retirement accounts and mutual fund accounts come with an advisor fee. This fee is charged on the account value and usually in the amount of 1%. It’s in addition to any fees the fund may charge.
On a $100,000 account, 1% is $1,000 per year. The fee is usually taken directly out of the account instead of billed separately. 1% is a common advisory fee.
However, if you aren’t using a financial advisor, the fee is simply a waste of money and drag on your portfolio’s returns.
Some retirement accounts will include advisor services, whether you use them or not. Be sure you aren’t paying an additional fee for this service if you aren’t using it.
Robo advisors such as Personal Capital and Betterment have management fees of about 0.25% to .89% depending on your account value.
Betterment actually charges 0.40% for its advisory service.
A wire transfer can cost $25 or more per transaction. ACH is often available at no cost. A little planning can avoid wire transfer fees.
Some brokerages may impose a limit on ACH transfers each month. Check if such a limit exists and try to not go over it.
Mutual funds don’t charge a separate commission since it is built-in. Be sure to confirm this with your broker.
Trading stocks, bonds, and options will almost definitely require commissions. Self-executed online trading incurs the lowest commissions. While phone assisted trades will have the highest.
When trades are charged a commission, frequent trading will incur a large number of commissions and certainly eat away at returns.
Keeping trading frequency to a minimum under this fee structure will lessen the impact on returns.
Low Cash Interest Rates
Brokerage accounts aren’t known for their high interest on cash balances. The reason is that brokerages make money on the spread - the difference between the rate the broker gets on cash interest and the rate they pay you on cash interest.
This is why cash interest is usually less than 0.20%.
While this low cash interest isn’t a direct trading or investment related cost, it can still have a negative impact on your returns.
If you find yourself having a high cash balance in your brokerage or retirement account, consider moving the funds into a high return account or putting the money to work in a fund.
Besides fees assessed on funds, there are many fees brokers and financial institutions can charge that will negatively impact your portfolio’s investment returns.
Knowing about all the different types of fees a firm can charge will help you consistently generate positive returns with minimal fee impact to your portfolio.
Trying to decide which one of your credits to pay off first or pay the most on can seem like putting together a jigsaw puzzle.
Should you pay the one with the highest interest rate first?
Or should it be the one with the highest minimum payment? What about lowest balance?
With Talley, you don’t have to worry about deciding how much to pay for each credit card. Tally crunches the numbers and sends the most efficient payment to each credit card.
Jason Brown, Tally founder and CEO told TechCrunch in an interview, “There’s an interesting choreography between man and machine. Humans are capable of logic, but their financial decisions are often driven by emotion.”
In this article, you’ll learn what exactly Talley is and if it’s for you.
What Is Tally and Who Is It For?
Talley is a mobile app (currently only available for iPhone) that manages the process of paying down your credit cards. It figures out which cards have the highest APRs and uses a Tally loan with a lower APR to pay down your credit cards.
Basically, you exchange one form of financing for another with a lower interest rate.
Talley does more than just pay down your credit cards. It ensures you always pay on time, so you don’t rack up late fees. Plus, you’ll save on interest charges for credit cards that have higher APRs than Talley’s credit line.
Talley is for anyone who needs help keeping up with all of their credit card payments and trying to figure out which ones to pay down first. To qualify, you currently need at least a 660 FICO score.
Tally will also look at your income to debt ratio as part oft he qualification process.
The application process is a soft credit check so it won’t impact your credit score. There are no origination fees for the credit line. All you pay Tally in fees is the APR interest charge.
If you’re already paying your credit cards in full each month and not incurring fees, Talley’s algorithms won’t do much for you. However, you can still use the app to manage payments for all of your credit cards each month.
If you have a 0% balance transfer offer available, that is a better choice than Tally since you won’t incur any interest charges. But not everyone has that option and for those, Tally can be a good choice.
How Does Tally Work?
Upon approval, Tally extends a line of credit to you. The amount depends on your credit profile. The credit line is used to pay your credit cards. You no longer make payments directly to the credit card companies.
Instead, you pay down your Talley credit line, which is linked to your checking account.
Using the credit line, the Tally app directs payments to the highest APR cards while lowering payments to other cards, maximizing use of funds.
Brown mentioned in a press release, “When you combine powerful algorithms with the ability to do work on behalf of the customer, you can really help millions of people.
Whether credit card users carry balances or not, research has shown that they find managing their cards as stressful as awaiting major medical test results, and that’s not what credit cards should represent.
At Tally, we believe credit cards should be empowering and more like a passport, not a burden, so we set out to provide a simpler, smarter way to manage them.”
Tally’s credit line should be lower than at least one of your credit cards and likely more. The credit line APR is 7.9% - 19.9% per year. The rate is not fixed and adjust based on the Prime Rate (as of June 2017).
You can still use your credit cards as usual. However, it wouldn’t be a good idea to increase your spending just because you have a Tally credit line.
That will only get you into further debt and defeat the purpose of using Tally, which is to help you get your credit card debt under control and save on interest and fees.
Tally works with major credit cards including American Express, Bank of America, Capital One, Chase, Citibank, Discover, U.S. Bank, Barclays, and Wells Fargo.
Charge cards, retail or store cards are not supported.
Which States Is Tally Available In?
Tally isn’t currently available in all states. But they are available in California, Florida, Illinois, Massachusetts, Michigan, New Jersey, New York, Ohio, Texas, Washington, and Wisconsin.
They are hoping to have all states added by the end of 2018. If your state isn’t listed, you can get a notification by signing up for the Tally app.
Trying to juggle multiple credit cards and keep up with payment due dates is just one card away from missing a payment and incurring a late fee.
Talley can help ensure you don’t miss another payment.
If you are paying interest on high rate cards, you can reduce your interest rate by getting approved for a Tally credit line and save big on interest charges.
How many credit cards do you have? We'd love to hear your thoughts on Tally in the comments below!
How do the apps stack up against the software? We’ll explain below.
What Did We Want From A Tax-Filing App?
Filing taxes isn’t easy. By the end of tax season, I have a half-inch thick manila file folder with all my tax documents. Since I have more complicated taxes, I wasn’t expecting to file my taxes from an app.
However, I wanted to see how quickly I could use the app to claim W-2 income, the Earned Income Tax Credit, The Child Tax Credit, and The Saver’s credit.
I thought I might be able to do that in less than 20 minutes on both apps.
Did They Live Up To Expectations?
Unfortunately, neither TurboTax or H&R Block made tax-filing from the app super-easy. I got the job done (in under 20 minutes), but I personally found it harder than filing from the computer. Neither app managed to read in the information from my W-2 form, so I spent a long time tapping in my information.
Plus, I had to answer question after question on my phone. This wasn’t too bad, but both apps seemed to load slower than their respective parent websites.
That said, the test wasn’t a complete loss. Both apps had positives that are worth noting.
What Worked Well?
Both TurboTax and H&R Block did a great job synchronizing with the online platforms. If you do some heavy lifting on their respective websites, you can use the apps to “fill in the gaps” while you’re on the go.
Both apps made it easy to do everything you can do on the website. That is to say, I could easily pick up where I left off when I signed into my TurboTax or H&R Block online profiles. This includes connecting to brokerages, using depreciation calculators and more. As long as you have a strong wifi signal, you can get your taxes done.
TurboTax definitely outperformed H&R Block on the usability front. It completely transferred the “Q&A” style over to the app. H&R Block also included Q&A, but the buttons weren’t as easy to click, and it crammed more information into every screen.
What Still Needs Work?
The biggest let down with the app was that they both failed to read my W-2 forms (and my 1099-MISC form). I spent several minutes trying to take the picture with just the right lighting, so the apps would read in the numbers.
Both apps failed. Lest you think the failure is the result of my ineptitude, I constantly use mobile check deposit from an alternative banking app which I think proves that my hand is steady enough to take a decent picture.
Should You Use An App To File Your Taxes?
In good news, you can use an app to file your taxes. Both TurboTax and H&R Block have decent apps with accurate calculations.
But I see no reason to use the app over the online software. Neither app offers a lower price than the online software, and I don’t think an app is any more convenient than a laptop.
Yet that is exactly what Germaine Foley a financial coach and mom from GermaineMartina.com was able to achieve a little under two years ago.
In fact, on top off paying off $100,000 in combined student loan debt, Germaine and her husband paid off an impressive total of $200,000 in debt over six years.
Here’s her story of that journey to financial freedom.
“I graduated college in the early 2000s with $40,000 in student loan debt. I met my husband-to-be and he also had $40,000 in student loan debt.
Back then, nobody was really talking about getting rid of your student loan debt as a way to build a secure financial future so we just ignored the loans. Before we realized, our combined debt had risen to $100,000.”
Additionally, because they were first generation college graduates, as Germaine put it, they wanted to just “live the life”.
“And so while were were high income earners - $150,000 per year in combined salary - we became so strapped for cash because of our lifestyle expenses”.
Things got so challenging that In 2005, Germaine and her husband filed for Chapter 13 bankruptcy.
Filing bankruptcy provided the family with some relief but unfortunately did not do anything at all for their six figures in student loan debt.
They were still responsible for paying off the student loan debt.
“To be honest, even filing bankruptcy did not change us. We still had bad money habits. We still lived paycheck to paycheck.”
Germaine’s father gave her and her sisters Dave Ramsey’s Total Money Makeover.
“I read and finished the book in two days. It was the turning point for me.”
After reading Total Money Makeover and becoming convinced that there was a chance that their family could have a better lifestyle that emphasized financial freedom, it was time to get her husband on board.
Germaine said she began to “dream” with her husband about what life could be like for them when they had money saved, could send their two sons to off to college debt-free and not have to worry about money.
Once she got her husband on board, it took six years for Germaine and her husband to pay off $100,000 in student loan debt and $200,000 in total from other consumer debt.
What were the exact strategies that got them there?
Mindset Change Is Important
Germaine says to “change your mindset” first. It sounds corny and does not seem very actionable but according to Germaine, unless you get this right, it is easy to fail on the journey to becoming debt-free.
Believing that becoming debt-free is not only for an elite few of the population, is the first key to wiping away any type of debt.
Total Money Makeover triggered the mindset shift that first keyed Germaine in to the fact that it was in fact possible to live debt-free.
Stop Trying To Look The Part
“The culture tells us that success looks a certain way and so most of us follow suit.”
Germaine mentioned that the quest to “keep up with the Joneses” is what keeps a lot of people in debt.
She also cited The Millionaire Next Door is a good book for learning about how the real rich people live. It is also helpful if you want to learn how to stop ‘looking the part’ and actually get on the path to becoming financially free.
Budgets Are Everything!
“Giving every dollar that came into our home a job was like giving myself a raise.”
Germaine mentioned that whatever money was left over after the budget had been taken care of, went to paying off part of their debt.
There are several budgeting systems out there and I have reviewed several of them including tools like:
YNAB (short for You Need A Budget). I think this is the best paid budgeting app on the market. There are no bells and whistles. It is simply a budgeting app. YNAB allows you to automate your budget so you don’t have to think too hard about your budget each month. YNAB helps you achieve this through the YNAB “Rules”. These rules have you assigning a job for every dollar and aging your money so you can save more. The app is $6.99 a month and well worth it.
Clarity Money - Clarity Money is an expense tracking and bill negotiation app. The app allows you to connect your bank accounts so you can track where your money is going and make adjustments as necessary. Read my full review here.
This list of personal finance tools will also be helpful to you if you are just starting out and trying to figure out your way out of a financial hole.
What if you don’t like apps and technology? Is there a way for you to budget?
By far, one of the simplest budgeting systems to use is the Zero-based budgeting system. This is a budgeting system that assigns an expenditure to every dollar of your income - even for the money that is supposed to be “left over”.
All you need here is a pen and a piece of paper and a lot of determination and you are on your way to planning a financially free life.
Because there are several ways to budget and because we are varied people, a particular style of budgeting may not work for you.
Don’t get frustrated!
Find a budgeting method that resonates with your personality and work with that.
Another strategy Germaine and her family used was to apply the debt snowball method to attack their debt.
The “snowball” method is where you pick your smallest debt and tackle that first. Once that is paid off, you pick the next piece of debt and pay that off.
As the old proverb goes “Little drops of water, make a mighty ocean”. And this is exactly how Germaine and her family were able to pay off $100,000 in debt within six years.
How does it feel now that you are debt free?
“It truly does feel great!” says Germaine.
“Now, we are in a position to give more to causes and people we care about, save more money and can in fact send our boys to college debt-free”.
Paying off huge sums of student loan debt looks challenging at first.
I hope this post helped you to see what is possible when you decide to change your mind about money and practice the strategies Germaine Foley and her husband used to pay off debt that would accrued even more interest over time.
Have you paid off any student loan debt? How did it feel? We would love to here your story in the comments below.
Congratulations! A tiny human has changed your priorities, your sleep schedule, and your taxes.
You’ve probably been too sleep-deprived to realize this, but your child may save you some money on taxes this year. We’ve partnered with H&R block to show how new parents can save on their taxes, so you have the money you need for diapers and day care.
Once you have a kid (and your kid has a social security number), you’ll be able to claim your child on your taxes. This means that you’ll get to shelter up to $4,050 (per kid) from taxation. If you gave birth or adopted your child before midnight on December 31st, 2017, then they are probably a “qualifying child.”
To make sure you qualify to claim your kid, H&R Block will ask you a few quick questions to be sure your kid meets the IRS standards. They’ll also do the “behind the scenes” math to phase out the exemption if you earn too much money ($261,500- $384,000 for individuals or $313,800- $436,300 for married filing jointly).
Foster parents may also qualify for the dependent exemption in 2017. You can also use H&R Block to see if you can claim the deduction for your foster child. Taking a few seconds to look into it, could help you save hundreds of dollars off your tax bill.
Get Extra Credit(s)
Parents not only get to shelter more income from taxes, they often qualify for tax credits (that actually offset the amount you owe). These credits include the earned income tax credit which is a credit for low to moderate income earners. A person (or couple) can claim an extra $3,400 credit if they meet the income standards. H&R Block More Zero is one of the only online tax software packages that will allow you to claim the earned income tax credit without paying for an upgrade. (That’s right! You can claim this credit for free, which is why we have recommended H&R Block as our #1 choice for filing your taxes this year).
Parents may also qualify for the child tax credit of up to $1,000 per child depending on their income levels (up to $110,000 for married couples filing jointly or $75,000 for heads of household).
If your child is in daycare (while you and your spouse work full-time or attend school), you may be able to claim the non-refundable Dependent Care Tax Credit. You can claim up to $3,000 for one child or $6,000 for two or more kids. The exact amount you can can take as a credit ranges from 20-35% depending on your income level. This is one credit where it definitely pays to have a great software doing the math for you. Not sure whether the art camp or after-school program can be claimed? H&R Block has great knowledge articles to help you clear up the requirements, and if your still not sure you can pay $49.99 to get help from a pro (and have your taxes reviewed by a professional).
An even more confusing credit for parents to claim is the Adoption Tax Credit. Whether you’re in the process of adopting, or your adoption finalized a few years ago, you may qualify for up to $13,570 in tax credits per child. Excess credits can be carried forward for up to five years.
H&R Block More Zero finds and maximizes every single one of these credits for free. Filers with rental properties, investments or side income may have to upgrade to a paid version of H&R Block, but the upgraded versions still consistently made the list for best tax software of 2018.
Upgrade Your Status
If you’re a single parent, and you qualify to claim your child, your personal status gets upgraded to head of household. This gives you the ability to shelter more of your income compared to a single filer.
Not sure if you qualify for head of household filing status? A simple quiz on H&R Block makes it easy to find out. (Trust me, the quiz is a lot easier than using IRS publication 501 to figure it out on your own).
Itemize With Ease
One opportunity for tax savings that a lot of parents miss is the opportunity to itemize medical and dental expenses. Of course, you can only deduct these expenses if you itemize your taxes, and you can only deduct expenses that exceed 7.5% of your adjusted gross income.
That being said, if you’re on a high deductible health plan or you’ve simply been unlucky, it’s worth trying to figure out if you qualify to deduct medical expenses.
When you have a child you can include any un-reimbursed expenses including:
Labor and Delivery Costs
Health Insurance Premiums (except for self-employed people)
Mileage expenses for driving to and from the hospital
Meal expenses while in the hospital
H&R Block simplifies itemizing your deductions through a great user interface. Plus it does the math to help you decide whether you should itemize or not. Even better, many people can still itemize using H&R Block’s free software, More Zero.
Congratulations On Your Newest Addition (and Deduction)!
Becoming a parent turns your life upside down, and it can be a costly endeavor. However, at tax time, kids can be a welcome way to lower your bill.
If you’re looking for a great way to maximize your child-related deductions and credits, look no further than H&R Block. Many parents can maximize their refund while still qualifying for the completely free online filing program, H&R Block More Zero.
Being late on your student loan payments is a quick rode to financial ruin unless you start taking action immediately.
You can turn it all around by setting up a plan to get your financial house back in order.
In this article, we’ll lay out a plan to help you right your financial ship and get your student loan payments back on track.
Impact Of Being Late On Student Loan Payments
A 2013 study by The Institute for College Access & Success found that across all colleges, 14.7% of borrowers defaulted within the three years of entering repayment.
Being behind on your student loans can have a dramatic, negative effect on your personal credit. The more behind you are, the worse it gets.
One of the first dominos to fall is your all-important credit score. For every 30 days that you are late on payments, loan services will report it to credit bureaus.
This will cause your credit score to continue falling. As your credit score declines, so to does your opportunities for new credit, a car loan, even getting approval to rent an apartment.
As you can see, it’s a vicious cycle that you want to avoid at all cost.
It’s important to note that there is a difference between being delinquent on loans and defaulting. Delinquent means you’ve been late for at least one payment.
Depending on the loan servicer and whether they are government or private, the first delinquent payment will be reported to credit bureaus after 45 to 90 days. Then late payments are reported every 30 days.
A default is when you have been late for 270 days. Your finances and credit have already taken a tremendous hit up to that point but things can and do get worse from there.
Government loan servicers can garnish up to 15% of your wages. Any tax refunds you might have can be used to pay your loans.
Ok, we’ve pointed out the many reasons you definitely don’t want to be late on your student loans but if you already are, how do you get ahead?
Speaking With Your Loan Servicer
The first step is to let your loan servicer know what is going on. Meaning, you are working on a plan to get your loans current.
Then ask for options such as a deferment or forbearance, which can reduce or postpone your payments. This will bide you time and make it easier to create a plan that allows you to get ahead.
Creating A Plan
Being behind on student loans can feel overwhelming. You’re aware of the consequences but aren’t exactly sure what to do about them.
After all, there are bills to pay and other debt payments to be made. How do you prioritize and juggle everything?
The first step is to prioritize your bill payments. Notice we said bills rather than debt payments. Your rent, car note (you need transportation for work), food, and utilities should be paid first.
Next is to pay your student loans. Students loans have a far more negative effect than credit card payments.
The goal is to bring your student loans current. Now that your bills and debt payments have been prioritized, the next step is to create a budget.
In creating a budget, list necessary expenses. This goes back to rent, car note, food, and utilities. Your basic needs.
Next, add in your student loan payments including additional amounts needed to bring your loans current. Then add in other debt payments such as credit cards.
Now you can see the monthly outflow required. Does your income match? If not, there are a few options to consider. First, what is costing so much that it is above your income?
Did you overextend yourself with a car you can’t afford? Maybe you’re spending too much on eating out?
Either way, you’ll have to cut back. This might mean selling that nice car and getting something much cheaper but reliable.
It might mean eating out far less. It could also mean taking on a second job. The decisions you make here will have long-lasting effects on your financial life for years to come.
Once you have a budget that is able to cover your expenses and student loan payments, work it consistently every month and don’t fall off the wagon.
Once you start adding more unnecessary expenses, it’s a slippery road back to being delinquent on your loans.
If you were able to get a deferment or forbearance, it doesn’t void out the need for a budget. Payments are coming either way and your budget will still need to factor them in.
Setting student loan payments on automatic will avoid being late. Ask your loan servicer how to do this. Set it to the minimum amount and make sure you budget has factored that amount in.
An advantage to setting up automatic loan payments is that most loan servicers offer a 0.25% discount.
While you’re at it, it’s a good idea to set up automatic payments with as many vendors as possible. This includes your car note, rent, utility companies and credit card companies.
Just as commissions can eat away at your investment returns, so can taxes.
Knowing how to optimize your investments for tax minimization can boost your returns.
In this article, we’ll learn about several techniques to help you save more in investment taxes.
Day Trading and Short-Term Trades
Day traders have some of the most inefficient accounts when it comes to taxes.
Of course, if you are making big profits, taxes probably aren’t a concern. But most day traders aren’t making big profits.
With frequent trading comes losses and high commissions, which can cause an account to barely break even or go negative when every trade is showing a (small) profit.
If the account has a loss for the year, there won’t be any tax consequences. If the account has any profit, taxes must be paid.
Because day traders are in and out of positions usually within the same day, all of their trades are considered short-term. Meaning, they are held for one year or less.
Short-term trades are taxed at your regular income tax rate. If doesn’t matter when you opened and closed the trade. If the trade was held for a year or less, it is considered a short-term trade.
Long-term trades are those held for more than a year. These types of trades or investments can take advantage of tax savings.
Tax rates on long-term trades for 2017 are 0%, 15%, and 20%. If you are already in the 15% income tax bracket, you probably qualify for the 0% rate. High-income earners can expect to pay 19.6%.
Long-term trading is another name for investing. Instead of trading, think more in terms of investing and holding for longer than a year.
Investing requires much less work than short-term trading, cost less, creates fewer transactions and saves more in taxes.
Long-term trading is also more profitable. Taiwan has a very large day-trading community. In 2004, four researchers based in California and Taiwan created a paper that examined the performance of these day traders.
They concluded that “Heavy day traders earn gross profits, but their profits are not sufficient to cover transaction costs. Moreover, in the typical six month period, more than eight out of ten day traders lose money.”
These same authors followed up with a 2009 paper that found the following, “Individual investor trading results in systematic and economically large losses.
Using a complete trading history of all investors in Taiwan, we document that the aggregate portfolio of individuals suffers an annual performance penalty of 3.8 percentage points.”
In summary, while a small group of day-traders may manage to eek out a profit, the majority will not. Of those who do generate a profit, most of it will be gobbled up by transaction fees and taxes. Short-term trading simply isn’t worth hassle.
Mutual funds and index funds are great investments since they are basically set it and forget it. But some funds are more tax efficient than others.
The ones to watch out for are those that distribute short-term dividends and capital gains.
Even if these funds reinvestment their dividends and capital gains, it will still cost you in taxes since these distributions are short-term.
Instead, look for funds that have fewer distributions. Also, funds will list their after-tax net performance, providing you with a better picture of performance to expect from the fund.
Keep in mind that municipal bond interest is exempt from federal taxes and most state taxes.
Taking Advantage Of Capital Gains Losses And Tax Loss Harvesting
If you have gains during a year, you can offset them by selling losers. In fact, for 2017, you can take up to $3,000 in losses.
If you have a $10,000 long-term gain for the year and sell $3,000 worth of losers, your net gain will come down to $7,000. Instead of paying long-term taxes on $10,000, you pay on only $7,000.
What if you have a $5,000 loss? You can still claim $3,000 in losses for the year. Then carry forward $2,000 for next year. In the following year, you’ll start with a $2,000 loss claim.
You can still add another $1,000 of losses to max out your $3,000 capital gains loss. If you still have more than $3,000 in losses for the next year, you can continue carrying forward losses.
Tax loss harvesting is another technique to save on investment taxes. Mike Piper, a St. Louis CPA, says to, “look for opportunities to harvest ‘tax losses’ throughout the year.”
What exactly is tax loss harvesting? Unlike capital gains loss techniques, which usually occur near the end of the year and focus on selling losers, tax loss harvesting looks for opportunities through out the year.
If you purchase a fund for $10,000 and it drops to $9,000, you can sell it take a $1,000 loss. This loss can be counted toward the total year loss or simply offset other gains occurring during the year.
Taxes are a fact of life but everyone has a right to avoid them (as opposed to evading, which is illegal).
By investing long-term, choosing funds that have infrequent distributions and taking advantage of tax loss harvesting, investors can decrease their overall tax burden.