5 Mistakes That Students Make with Their Summer Paychecks

Is summer cash filling your wallet? That’s a good thing—maybe.

Summer break is here! And after some much-needed R & R, many students will be starting another seasonal tradition: the summer job.

With paychecks that dwarf academic-year earnings, even part-time summer positions can provide a nice influx of cash. Depleted bank accounts will be refilled, but with an abundance of funds comes the temptation to spend.

Looking for ways to put your money to better use? Here are five common mistakes that students make with their summer paychecks—and five ways to avoid them.

Mistake #1: Spending First and Earning Later

When students land a summer job, they begin to muse about all the things they can use that future income to buy. Josh Hastings, founder of Monex Life Wax, warned that it’s tempting for them to start spending immediately—even before their first paycheck.

“When you work hard for your money during the summer months, make sure you don’t use the ‘spend first, earn later,’ approach,” Hastings warned. “Knowing you will be earning some money during the summer, some students will plan trips and other fun events with their money—not taking into consideration they could use the money to save for the upcoming school year.”

“Instead of taking out a student loan to cover the year’s rent, why not save up $4,000 to cover college rent and avoid the student loan?” Hastings asked.

This is a great point. Experts recommend that you save at least 20 percent of each paycheck. Fifty percent should go toward needs and the remaining 30 percent is left for wants. Considering that most students likely have fewer expenses and debts than older working professionals, bump this number up.

Hastings urged students to make sure they’re paying themselves first with their summer paychecks.

“Creating sound financial habits at an early age will always go a very long way down the road,” he said.

Mistake #2: Not Starting an Emergency Fund

College students need an emergency fund, much like everyone else. Even if college students don’t have many expenses and are likely relying on their family, financial aid, or a summer income, it’s still responsible to save up for the unexpected. Because let’s face it, the unexpected is going to happen—it’s just a matter of time.

Victoria Lowell of Empowered Worth suggested that students use a portion of their summer paycheck to start an emergency fund. This fund will ensure that students have money to use in dire situations, like a medical or educational cost.

“I suggest placing a portion, usually 10 percent, into an interest-earning account to begin to create an emergency fund,” she said. “A good credit rating and more liquidity are things that college age adults should prioritize.”

If you haven’t yet, open a checking and savings account. Many employers offer direct deposit so you can set up your summer paycheck to deposit into your preferred bank account. Then, set aside a portion for an emergency fund, whether that lives within your linked savings account or a separate high-yield savings account. Getting into the habit of saving up an emergency fund now will create healthy financial practices in the future.

Mistake #3: Starting a Retirement Fund Too Early

Here’s a question you probably haven’t pondered. Should full-time students start a retirement account? It turns out that this is a question that comes up frequently from both students and their families. Although experts have differing opinions, the consensus is mostly no.

“I often get calls from clients asking what their college-age children should do with their summer paychecks,” said Lowell, adding that “the first thing that comes to mind now that they have earned income is setting up a retirement account.”

“My suggestion is that they hold off for now,” she said. Her reasoning? “A retirement account will tie up these funds for about 30 years before [students] can access them penalty free, excluding certain situations.”

Students should wait to start contributing to their retirement funds after graduation, when they’ve secured a steady income. Maybe their company will even offer an employer matching program. In the meantime, summer earnings are better used for immediate educational expenses, like lessing student loans or paying off credit card debt.

“These monies should be used to first pay off any credit card debt they may have incurred during the school year,” Lowell said.

Mistake #4: Not Investing Money and Time Into Professional Development

Professional development can begin well before graduation and entering the workforce. This summer, students should consider spending time learning outside of the classroom. If not, it’s a missed opportunity for personal, professional, and financial gain.

According to Tom Dolfi, head of marketing in education technology, many students regret leaving professional development to the last minute or after graduation. Dolfi works with students who expressed disappointment at not developing “transferable knowledge and hard skills” about topics that are popular but not taught in their classes.

How can students build up their skills and ultimately their resume? Luckily we’re living in a time with endless possibilities to self-guide your side learning.

Students can take things like “online courses in order to become more proficient in using specific software (most of the times, the Office suite, Adobe suite of very industry-specific software),” said Dolfi.

Check with your university to see if they offer free or discounted software programs to their students. Then, browse the web to find free online courses to learn how to use the program. For instance, if you’re interested in learning how to code with Python this summer, watch a few technical videos through Codecademy. Alternatively, spend some of your summer money on an online course at a university or professional program that’s not offered at your home institution.

Other students may be interested in “attending workshops and networking events to connect with professionals working in the sector they are interested in,” Dolfi said.

Tap into your school’s professional and alumni network. Oftentimes the professional listserv will include a calendar of inexpensive networking events geared toward students in specific cities. Don’t be scared to reach out to a connection for career advice over a coffee introduction. A good rule of thumb is that you can’t predict where one introduction can take you, so put yourself out there. One friendly introduction can lead to another which can lead to an internship or job opportunity.

Mistake #5: Blowing Extra Money on Fun Instead of Investments

Quick scenario: Let’s say your educational costs are entirely covered by some combination of financial aid, grants, scholarships, and savings. No student loans. Hurrah! There’s even extra savings for an entertainment budget and a cushion for an emergency. What do you do with your remaining summer paycheck? What a dilemma, right? Well, according to Robert Farrington, the creator of The College Investor, you shouldn’t spend it on frivolous things. Rather, invest it and reap the benefits in the future.

Farrington suggested that a student who made $1,000 and invested it—while doing nothing with the initial investment—would potentially have around $13,000 in 40 years.

“Investing is a great way to save for the future, as long as a student is responsible and disciplined,” he said, adding that “[i]t doesn’t require a huge up-front investment, and it doesn’t require a lot of time or effort.” In fact, “[a]ll it requires is a small tolerance for risk, a dedicated time horizon, and an up-front time investment of an hour.”

We’re not necessarily talking about a traditional retirement account (401k or Roth), but if you find yourself in this ideal scenario then maybe you are the 1 percent who should consider investing for retirement. Investing can take any form, such as short-term certificate of deposits or long-term real estate holdings. Yes, even students (so long as they’re at least 18 years of age) can invest on their own.

“The big reason to start investing while in college is TIME,” said Farrington. “The earlier you start investing, the more time your money has to grow.”

The hardest part is changing your mindset to be patient and look toward the future. “It’s not sexy to see your $1,000 investing grow to just $1,080 by the end of the year,” he said. That measly $80 is discouraging to say the least. “But where you really see the gain is in the future.”

“By starting to invest at age 18 versus age 30, you have a 12-year lead over starting later in life. If students can get started investing at 18 years old, they only need to invest about $2,100 per year to be a millionaire by age 62. That number starts to go up the older you get. If you wait until 30, that number becomes $6,900 per year you need to invest—over three times the amount per year. All because of time.”

Why is it that time is the deciding factor in investments? It all has to do with compound interest, said Chase Lawson, author of “Financial Freedom.”

“Compound interest is an often-talked-about topic. It relates to building interest on top of interest, thereby creating a snowball effect and leading to a much larger future value than would be achieved with simple interest. The earlier you start to invest, the more of an impact compound interest will have, due to having a larger time horizon to experience the effects of it.”

This means that “students should start a habit of saving earlier in their lives,” Laswon said. Saving and investing is often an afterthought, but it shouldn’t be. “After all, your younger years will have a larger potential impact on your future net worth than you might otherwise believe.”

So, if you find yourself in this ideal situation with minimal expenses, then use your extra cash to invest in your future. “With so few expenses, this is the perfect time to start saving money,” he said, adding that you should “[u]se this time to build good habits and take full advantage of all the time you have left.”

Bottom Line

After a demanding school year, summer is a time for fun. But wise money management will pay off down the road. With a little planning, students can avoid these common mistakes and take critical first steps toward building financial health.

Contributors

Tom Dolfi is the head of marketing at Pathfinder, an edtech startup based in London. Pathfinder uses AI (machine-learning, data science and natural language processing) to power their career development platform and help students achieve their career goals. You can find him on LinkedIn.
Robert Farrington is the founder of The College Investor, which he started to showcase a variety of common sense personal finance and investing ideas to help millennials get free of their student loan debt and start building wealth for their future. He has had a passion for investing and all things related to personal finance since he can remember. When he was about 13, he even made enough income to pay taxes on. While in college and graduate school, he realized that most people were oblivious to investing and personal finance, even MBA students, so he ended up helping many of his peers. It was apparent that the #1 dilemma holding back millennials from investing and building real wealth is student loan debt. This led him to write “Student Loan Debt: Getting in Smart, Getting out Painlessly.”
Josh Hastings is a former high school athletic director at the secondary level who shifted his focus in 2016 to focus more effort on his entrepreneur endeavors. In 2017, he founded MoneyLifeWax.com, a personal finance site dedicated to helping millennials with student loans. With an emphasis on money and finance behavior, Josh started Money Life Wax to help millennials realize there are other ways to make money and be happy in the 21st century. You can find him on Facebook.
Chase Lawson is a graduate of Clemson University where he received bachelor of science degrees in accounting and financial management and a master’s in professional accountancy. While in school, he ran a successful six-figure business while helping coach and lead fellow college students. Finance has always been a focus of his, having started investing at a young age, and he is passionate about helping others achieve financial independence. He’s overcome over $20,000 of personal debt and a credit score in the 500s to become a homeowner in Austin, Texas, with multiple income streams and a credit score in the high 700s. He’s the author of a personal finance book, “Financial Freedom: Breaking the Chains to Independence and Creating Massive Wealth.”
Victoria “Vicky” Lowell is a financial educator dedicated to empowering women with the knowledge to become active participants in the planning of their financial future and well-being. While engaging in frank, open dialogue with women in the community, she came to realize the importance of educating women about their finances. To that end, in addition to financial planning, she enhanced her knowledge of the immediate and long-term financial implications of divorce as a Certified Divorce Financial Analyst® (CDFA®). In late 2018, she left UBS to follow her passion of helping women assert themselves fiscally and founded Empowered Worth, a resource for financial coaching geared toward educating women to not only meet their immediate economic needs but attain long-term goals. She provides the tools needed to empower women of all ages.

How are you planning on spending (or saving) your summer paycheck? Let us know over on Twitter at @OppUniversity.

5 Alternatives to an Expensive Overdraft Fee

The relative APRs for overdraft fees can average as much as 17,000 percent! Here are five options that will cost you less.

Overspend on your debit card, you’ll get hit with an overdraft fee. And while that might seem pretty annoying, it can actually be more much worse than that. With an average overdraft fee of $30 applied to every over-the-limit transaction—no matter how small—research from the Consumer Financial Protection Bureau (CFPB) found that they carry an average APR of 17,000 percent!

While many overdraft fees get incurred without the user realizing it, others might see these fees as an acceptable price to pay when they need to cover an unforeseen expense or surprise bill. Either way, there are better ways to handle your finances, ones that don’t involve APRs in the thousands.

Here are five alternatives to help you avoid expensive overdraft fees.


1. Link a savings account.

Technically, this is a kind of overdraft protection, but it’s one that comes with much more reasonable costs.

Most banking institutions will let you link a savings account to your checking account to serve as the first line of overdraft defense. When you overspend, money is taken from your savings account to cover it with only a small transfer fee on top.

Of course, this plan only works if you have money in the savings account, to begin with, and that means making a plan to start strategically socking your money away. If you don’t have an emergency fund, this savings account would be a great place to keep one—so long as you don’t make overdrawing your account a regular habit, as that will drain your rainy day funds away.

In order to start building your emergency savings, you’re first going to need a budget. If you don’t have one, here’s a handy guide—complete with a free downloadable budget spreadsheet—to get you started. Try following the principle of “paying yourself first” to ensure that saving money doesn’t take a back seat to everything else.

2. Use your credit card.

Many banking institutions will also let you link a related credit card to your checking account as a form of overdraft protection. While a savings account is a much better option than a credit card—as it doesn’t involve borrowing any money at all—a credit card can make a good second line of defense. And it’s still better than an overdraft fee.

If you find your bank account balance dropping dangerously low during those last couple days before payday, you might want to consider using a credit card to make some purchases instead of your debit card. That way, you’ll be sure to avoid overdraft fees altogether. (If you don’t notice when your bank account balance dips close to zero, sign up for account alerts.)

The one danger with using a credit card is that you’ll wrack up excessive debt, so make sure you pay those purchases off as soon as you can. Do so within 30 days and you’ll be able to avoid paying any interest at all! So long as this card is only being used in rare emergencies—and it’s getting paid off ASAP—this shouldn’t prove to be a problem.

3. Ask friends and family for money.

No one likes asking a friend or family member for money, but it’s a better alternative than incurring an overdraft fee. Like many of the options on this list, this is something you won’t want to make a habit of, but it can work pretty nicely as a one-off solution to the problem. Otherwise, you could put some of your close personal relationships in jeopardy.

The key to asking a friend or family member for money—even if it’s for a really small amount—is to make sure that both parties are perfectly clear on the terms of the agreement. If your friend thinks that you’re paying them back next Friday, whereas you planned to pay them back gradually over the next three Fridays, that’s a recipe for disaster.

To make sure that everybody is on the same page, it helps if you have an actual page! In this case, that means a written loan agreement. (That might sound like overkill, but it’s always better to be safe than sorry.) Here’s the good news: You don’t have to create your own! Just print out this free loan agreement template we created, fill in the relevant info, and you’ll be good to go!

4. Consider a personal loan.

If the shortfall you’re facing is on the larger side, you might want to consider taking out a personal loan to cover the expenses. Although this will mean incurring interest—which is something you always want to avoid whenever possible—the APRs that you’ll end up facing could be smaller with the right personal loan than you would encounter with an overdraft fee.

For folks with bad credit, however, their borrowing options will be a little more limited. They’ll have to choose between various bad credit loans and no credit check loans. And while short-term payday loans, title loans, and cash advances might seem like the better option, their quick turnaround and lump sum payments could end up trapping you in a cycle of debt.

Instead, you should consider a bad credit installment loan. These online loans not only let you borrow more money, but they come with smaller, regularly scheduled payments. Some bad credit installment loans—like the ones offered by OppLoans—even report payment information to the credit bureaus. This means that on-time payments could help improve your credit score!

5. Don’t use overdraft protection at all.

The point of overdraft protection is that it prevents your debit card or checks from being declined. But if you find yourself regularly overdrawing your account, then you should probably turn your overdraft protection off. While this might be a little more hazardous if you’re writing a lot of checks—as bouncing a check means incurring NSF fees—debit card users should strongly consider it.

Without overdraft protection, your debit card will simply be declined at the point of sale. While this can be embarrassing, it most likely won’t be the end of the world. In the meantime, you will be forced to start building better financial habits (like budgeting) that will help you spend within your limits and avoid overdrawing your account at all.

Most of the alternatives we have suggested in this article don’t address the root of the problem, which is spending more money than you actually have in your checking account. The sooner you get that under control, the better off you’ll be. To learn more about how you can instill better financial practices, check out these other posts and articles from OppLoans:

Do you have a personal finance question you’d like us to answer? Let us know! You can find us on Facebook and Twitter.

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Are You Financially Literate?

by Jessica Easto
A recent study broke down financial literacy into five key concepts that people needed to understand in order to be considered financially literate.

Financial literacy is important. Without it, people are more vulnerable to bad credit, financial scams, payday loans, no credit check loans, and other things that can threaten financial health. But according to the National Financial Capability Study (NFCS), only 63 percent of Americans are financially literate. Do you know where you fall?

Generally speaking, financial literacy is the ability to use your skills, knowledge, and financial resources to make good financial decisions and effectively manage your money. In order to do this, you need a firm grasp on certain financial concepts.

The researchers behind the NFCS identified five key concepts to help them evaluate the financial literacy of their participants: compound interest, loan terms, inflation, risk and diversification, and interest rates and bonds. In order to be considered financially literate, participants needed to have a basic understanding of four or more concepts. Let’s take a look at each of these concepts in more detail.


Compound interest.

Compound interest is a percentage that is added to a principal sum of money and its interest as it accrues over time on a deposit or a loan. In other words, it is interest on interest. Say you have $100 in a savings account with an interest rate of two percent that compounds annually. That means at the end of the year, you would have $102, and the next year, interest would be calculated on $102 instead of the original $100 deposit. By the end of the second year, you would have a total of $104.04, even though you didn’t add any more money to the account. It’s kind of like magic!

That’s the difference between compound interest and simple interest—simple interest would only be calculated on the principal amount, or $100 in our example.

Even though a two percent interest rate seems small, you can see how it can add up over time into something more significant. Because of this, compound interest can be your friend or your enemy. Sure compound interest is great when it comes to your savings account, but it’s not so great when the sum of money in question is a debt with the potential to grow, such as an installment loan.

That’s why it’s important to have a solid fix on compound interest. It can not only help you decide what kind of savings account is best for you, but it can also help you compare financial products, like personal loans, bad credit loans, and credit cards, and understand their real cost over time. Two loans could be for the exact same amount for the exact same length of time, but if one uses simple interest and one uses compound interest, one will clearly cost you less in the long run.

Loan terms.

When you take out a loan, you agree to a set of conditions, including the amount to be borrowed, the interest rate, and the term of the loan, or how long you have to repay the loan. One key aspect of financial literacy is understanding how the term of your loan affects the size of your payment. This concept goes hand in hand with the concept of interest, which we just discussed.

Let’s say you want to take out a loan for $1,000, and you get to choose between a term of one year or two years. Which option would result in a smaller monthly payment? That would be the two-year term, since you are spreading the same amount of money over more months. A one-year term would be about $83 a month, while a two-year term would be about $42 a month.

Who wouldn’t choose the two-year term, you say? Well, unfortunately, things are rarely that simple. Interest is always a factor. Consider what would happen if your $1,000 loan came with a five percent interest rate that compounded annually. The longer your loan term, the more you would pay in the long run, even with smaller monthly payments.

Inflation.

Inflation is the rate at which the costs of goods and services rises over time. In other words, it affects the purchasing power of our dollar. Back in the day, there used to be something called penny candy because it—you guessed it—cost a penny. (Look, it’s even in the dictionary!) Even the cheapest of today’s candy costs more than a penny. That’s inflation.

Many people think a certain amount of inflation is a sign of a thriving economy but that too much inflation is cause for concern, since that would massively devalue the dollar. Inflation is something that our government (the US Federal Reserve, specifically) tries to regulate at around two percent a year. That doesn’t always happen, and the average inflation increase since 1921 has actually been 3.26 percent a year.

Inflation of more than two percent but less than 10 percent is called “walking inflation,” and it’s considered to be not great but manageable. When interest rates increase to the 10 to 20 percent range, it’s called “running inflation” and can cause big problems, especially because incomes don’t automatically rise with inflation.

Inflation can also be different depending on what you’re talking about. For example, housing costs may rise over time at a different rate than food costs.

One key thing to think about is how inflation might affect you over the course of your lifetime. Let’s think about that savings account again and the purchasing power of the dollars inside of it. What if the interest rate of your savings account is 2 percent, but the average annual inflation rate is 3 percent? In 10 years, will your savings have more, less, or the same purchasing power as it does now? The answer is less. And if you don’t even have a savings account and your $100 is instead tucked away in a sock drawer earning 0 percent interest, your dollars’ purchasing power would be even less.

Risk and diversification.

Risk is a term that is used in investing as a way to characterize a financial decision’s degree of uncertainty and/or potential for loss. The higher the risk, the greater the degree of uncertainty and the potential for loss. Investors generally don’t make risky decisions unless the potential payout it great enough to justify it. Ever heard of the phrase “high risk, high reward”?

For ordinary people, the most likely place they encounter risk is when it comes to their retirement account, which is usually made up of a portfolio of different types of investments. Accounts with a wide variety of assets are less risky than those with few. This is called “diversification.”

Let’s say you come into $1,000 and decide you want to invest it. You’re deciding between (A) putting it all in the stock of one rising-star tech company or (B) contributing to a portfolio that will invest portions of the money in dozens of different assets, including the tech company’s stock. Sure, if you go with option A, that tech company could take off and your $1,000 could turn into $1 million. Or it could go bankrupt tomorrow and you could lose everything. If you go with option B, the majority of your money is still safe in other assets.

Interest rates and bonds.

A bond is a type of investment in which you loan an entity (like the government or a company) money to be paid back at a fixed date (aka the “maturity date”) with a fixed interest rate. It’s kind of like the tables have turned, and instead of, say, owing to the government on a $1,000 student loan, it owes you on the loan.

Governments and companies sell bonds to investors when they are trying to raise funds, and investors know exactly what the maturity date and interest rate are when they buy them—they do not change over time. And that brings us to a key takeaway when it comes to financial literacy: The value of a bond fluctuates depending on what the prevailing interest rates are at any given time. More specifically, as interest rates rise, bond prices go down. The opposite is also true.

Improving your financial literacy.

Now that you’ve read this post, you’re financially literate, right? Well, maybe. According to this recent Bloomberg article, achieving and maintaining financial literacy is difficult. It’s not something you earn once and keep forever. In fact, experts think that financial literacy is something that requires constant practice, which is not something average people have the opportunity to do. This might mean that, in order to be prepared for the times where you do need financial literacy, you may need to seek out ways to learn and practice your skills.

To improve your financial literacy and money management skills, check out the free standards-aligned courses that we offer through OppU. If you want to avoid predatory storefront and online loans—like short-term cash advances and title loans—becoming financially literate is a critical first step. To learn more, you can also check out these other posts and articles from OppLoans:

Do you have a personal finance question you’d like us to answer? Let us know! You can find us on Facebook and Twitter.

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Financial Literacy for Middle School

The ultimate guide to teaching financial literacy to middle-school-age children.

By the time kids enter middle school, many have had exposure to basic financial concepts but no formal instruction. And while they’ve started using money, they likely haven’t had many opportunities to put their knowledge to the test.

Because children in this age range are financially supported by their parents, the middle school years offer a low-risk opportunity to help them take their first steps toward building a strong foundation of financial literacy. So prepare them for financial independence by teaching them core concepts and skills. Discuss the more advanced topics that they’ll encounter as adults.

Here are the essential concepts that middle-school-age children need to know, and a list of the best age-specific online resources, apps, and games to teach them.

5 Key Financial Literacy Concepts for Middle Schoolers

1. Spending and saving wisely

For many tweens, the best part about having their own money is spending it. Whether they use it to buy a new shirt or a concert ticket, making that first purchase gives them a sense of independence.

Adults, however, can’t just buy whatever they want. They have to cover necessities and only then can they make “want” purchases.

Key Points

  • Starting a budget. Budgeting is a core financial literacy skill for all stages of life. It’s also a skill that middle-school-age kids can immediately put into practice. Creating a budget is simple. First, have tweens write down the money they make in a given month. Then, have them decide how they plan to spend their income. This should include “want” purchases, but kids should also designate some money for saving—experts recommend 20 percent.
  • Saving. Middle-school-age children should learn that saving isn’t a chore. Rather, saving gives them money to make large purchases they otherwise couldn’t afford. To do this, have them write down saving goals. Consider setting aside money for a “need” such as an education fund, but also incentivize kids by letting them decide on a fun goal of their own choosing—even if it’s a “want” purchase.
2. Money is earned through gainful employment

Money is earned, and to earn money, we must work. The career that people choose greatly impacts their income potential and for that reason, it’s important to be strategic when deciding on a career. Career exploration is important for kids because it will give them knowledge and information about career options and will encourage them to set career and educational goals.

Encourage middle schoolers to explore career options by taking quizzes, identifying interests, and engaging in mentorship programs. This will help them narrow down their options and prepare them for high school and beyond.

Key Points

  • Education. The level of education that people obtain impacts their potential earnings. This is also true of experience and training.
  • Career vs. job. A career is done over a long period of time and often requires a high level of training, experience, and education. A job, on the other hand, is usually short-term and requires less experience.
3. Making thoughtful and sound financial decisions

Decision-making is an important life skill, and when it comes to money, there’s a lot more on the line. This is why it’s important to make thoughtful and sound personal finance decisions.

Middle-school-age children should start with two financial decision-making concepts: comparison shopping and opportunity cost.

Key Points

  • Comparison shopping. Comparison shopping is an essential personal finance skill and one that has application for middle-school-age children. Teach kids to research products before making a purchase. Look for products that offer comparable value at a lower cost. Communicate that smart shopping can reduce costs just like limiting purchases can.
  • Opportunity cost. Opportunity cost is the concept that money used for one purchase comes at the expense of making other purchases. Use a concrete example to explain it. For instance, if your tween spends his or her entire allowance on a new shirt, there will be no money left for other purchases. Is the shirt worth it, or should the money be used for something else?
4. Insurance protects us from financial loss

While middle-school-age children are not responsible for securing their own insurance, it’s important that they understand its value and the potential consequences of not managing risk. Insurance costs money, but it protects people from losses that are much greater.

Key Points

  • Types of insurance. There is insurance for almost every kind of risk. The type of insurance that people require depends on their needs.
5. Effective ways to use credit and manage debt

While tweens won’t be able to buy anything with credit, it’s important for them to have an understanding—before they reach adulthood—of what credit is and how it’s used.

Key Points

  • Loans vs. credit cards. Consumers can borrow money by using a credit card or taking out a loan. When deciding which to use, borrowers should consider what they are purchasing, the interest rate, and the length of time they’ll have to pay it off.
  • Interest. Interest is the cost of borrowing money. Interest will make the purchase more expensive than if the purchase had been made without borrowing money to do it.
  • Risks of credit. Like most things, buying on credit comes with some risk. The greatest risk is missing a payment, and even just one missed payment can impact a borrower’s creditworthiness and increase the cost of credit in the future. Missing several payments can result in repossession or foreclosure.

Online Resources for Teaching Financial Literacy to Kids in Middle School

Here are some of our favorite tools to help middle schoolers learn financial literacy. All are free and can be accessed online. Also, be sure to check out our in-house financial literacy lessons at OppU. We offer free interactive videos and quizzes that teach the fundamentals of financial literacy and are appropriate for a range of ages.

1. Practical Money Skills

  • For students, educators, and caregivers
  • Provides lessons, games, and resources

Created by Visa in an effort to promote global financial literacy, Practical Money Skills is available in 19 languages and in 46 countries. It offers extensive educational resources that include personal finance articles, lesson plans, mobile apps, and games.

2. Cash Course

  • For students and educators
  • Provides lessons, guides, and financial tools

Cash Course’s mission is to teach financial skills that apply to real-world scenarios. To do this, Cash Course created a cultivated collection of financial tools including a Budget Wizard, quizzes, calculators, and articles and resources tailored to students’ needs.

3. Money As You Grow

  • For parents and caregivers
  • Provides lessons, worksheets, and activities

Money As You Grow is a product of The Consumer Financial Protection Bureau. This free resource was created to give parents and caregivers the tools they need to teach financial literacy to kids. Users have access to a wide variety of worksheets, articles, and tools that will lay the groundwork for students to learn money management skills. The topics covered create positive habits, attitudes, and skills to carry into adulthood.

4. MyMoney.gov

  • For youth, parents, and caregivers
  • Provides activities, games, and lessons

MyMoney.gov was established by the Federal Financial Literacy and Education Commission, a group of over 20 federal entities who work to strengthen financial capability and help all Americans gain access to financial services.

MyMoney.gov focuses on the five building blocks of money management—earning, saving and investing, protecting, spending, and borrowing. It offers an abundance of resource lists, curriculums, and games to help educators teach—and students learn—these vital skills.

5. Career Girls

  • For youth, parents, mentors, and educators
  • Provides lessons, videos, and activities

Career Girls is a nonprofit that aims to empower young girls through career exploration. It has over 10,000 video-based career guides that feature over 500 female role models in a variety of careers—particularly those in STEM. In addition to videos, Career Girls offers career quizzes, advice about college majors, and life and career lessons.

Apps and Games for Teaching Financial Literacy to Kids in Middle School

Have middle schoolers practice their new skills by downloading these apps and games.

1. Visa Financial Football

  • Cost: Free
  • Available for iOS and Android

As a part of Practical Money Skills, Visa and the NFL joined forces to teach financial concepts through a personal-finance focused game called Financial Football. Players answer personal finance questions to gain yardage and score touchdowns. Students can do some pregame training by completing student activities before entering the end zone. Financial Football is available in English and Spanish.

2. Lunch Tracker

  • Cost: Free
  • Available for iOS
  • Ages: 4+

Another notable resource from Visa, Lunch Tracker is an app that helps users manage their expenses and spending habits by tracking how much they spend on food. Some of the key features include a spending calculator and tips on ways to save. For Tweens, this app is a good way to see how snack spending can add up.

3. Oh My Cost

  • Cost: Free
  • Available for IOS
  • Ages: 4+

Oh My Cost! is a spending and budgeting app. Users set a monthly budget and record their spending and income by using icons to represent their purchases. For digitally minded middle-schoolers, Oh My Cost! is a great alternative to traditional paper-and-pencil budgets.

4. Practical Money Skills Calculators

  • Cost: Free
  • Available for iOS
  • Ages: 4+

Practical Money Skills created a calculator app that offers a suite of number-crunching tools. Middle schoolers can use it for everything from figuring out education expenses to calculating an emergency fund.

5. FamZoo

  • Cost: $5.99
  • Available for Android, IOS, and computers
  • Ages: 6-12

FamZoo is a virtual bank that helps parents manage their kids’ money. It works as a private online family banking system that puts parents in control of how they’d like to run it—parents are essentially the banker and kids are customers. “FamZoo” costs $5.99 and is available on Androids, IOS, and computers.


Do you have any tips for teaching financial literacy to middle schoolers? Tweet us at @OppUniversity and let us know!

What to Do if You’ve Been Put on the ChexSystems Blacklist

If you have a history of negative banking behavior, your ChexSystems report will prevent you from opening or maintaining a traditional bank account.

Good news for fans of NBC drama The Blacklist: It’s been renewed for a seventh season! It looks like high-profile criminal turned FBI informant Raymond Reddington’s story is far from over! How many more criminals are on his list? Will we finally find out why he only agrees to work with rookie profiler Elizabeth Keen? Or have we already found that out?

We’ll be honest. We’ve never watched The Blacklist. We just wanted to start off with a blacklist that people generally seem to like before we get into another blacklist that people generally do not like: The ChexSystems blacklist.

What is the ChexSystems blacklist and what should you do if you’re on it? We investigated to bring those answers to you, much like Raymond Reddington does, we assume.


The ChexSystem “blacklist”

Let’s just get this out of the way: there isn’t actually a “ChexSystems blacklist” in the sense that you could be put on a list that would prevent you from ever opening a new financial account. But ChexSystems does keep track of negative financial behavior regarding bank accounts, and if you have a lot of negative financial behavior, it will certainly make opening a bank account more difficult. So it’s more like a list with various shades of dark grey, depending on your financial behavior.

“ChexSystems is a consumer-report agency that identifies and lists consumers who have misused credit or checking accounts, through methods such as neglected payment fees or bounced checks,” explained Jared Weitz (@jaredweitz), CEO and Founder of United Capital Source Inc.

“CheckSystems provides a report and risk score to banks running credit reports. If you are put onto the list this doesn’t mean you are necessarily blacklisted from getting a new checking or credit account, but it will make the process more difficult.”

Unlike the three major credit bureaus, ChexSystems only keeps track of your financial mistakes and not your positive financial activities. That means the way to a sterling report is not bouncing checks or getting any overdraft fees, as well as always paying your bills on time. Also, don’t commit fraud. Even a little bit.

What to do when you’re on the “blacklist”

Unfortunately, getting off the ChexSystems “blacklist” can require an even longer time commitment than improving your credit score.

“Your name can remain on the list for five years, so begin by getting your finances in order, make payments on time, and keep your current accounts balance positive,” advised Weitz.

You should also make sure there aren’t any errors on your ChexSystems report. After all, why should you suffer for something you didn’t even do? You can request a copy of your report from ChexSystems’s website and also use the site to dispute any errors you notice.

Alternatives?

If your ChexSystems report is accurate, there isn’t much you can do about it other than getting your finances in order and waiting. But you don’t have to go without a bank account while you’re waiting.

“There are banks and credit unions that do not use ChexSystems,” suggested Weitz. “Seek out setting up an account with them to help during the process of financial recovery.”

You could also look into getting a second chance bank account. These bank accounts have higher monthly fees, higher penalty fees, can’t be opened online, and are closely monitored. They might not be as nice or convenient as a traditional bank account, but if you can’t find a bank that doesn’t use ChexSystems, it’s better than going without a bank account at all.

Without a bank account, you won’t have a safe place to store your money, won’t be earning any interest on your money, and won’t have a reliable place to cash your checks without being hit with significant fees. Some second chance bank accounts even have a graduation plan. If you use the account for a certain amount of time without any issues, you can graduate to a regular checking account ahead of schedule!

You may also be able to get authorized on another person’s account. Of course, that means you could mess things up pretty badly for them, so be sure to take that responsibility seriously and make sure that you trust each other and can communicate properly before signing onto anything.

What was that about credit scores?

For the most part, the same sorts of financial behaviors that keep you from getting flagged by ChexSystems will nurture your credit score. Paying your bills on time and not letting accounts fall into collections are always good ideas.

But there are certain additional activities you’ll have to keep in mind when trying to improve your credit score. Most importantly, you’ll need to build a credit history. The best way to do that is to get a credit card (or a secured credit card if you can’t qualify for a regular card) and use it responsibly month to month. Responsible credit card use means charging no more than 30 percent of your debt limit each month and paying off that amount in full each time the bill comes around.

An important part of avoiding excess debt is building up an emergency fund that you can use to cover unforeseen expenses. Otherwise, you could find yourself relying on no credit check loans and short-term bad credit loans (like payday loans, cash advances, and title loans) when times get tough. Even opting for a more affordable installment loan pales in comparison to not needing any loan at all!

Having a bank account and access to credit are two very important foundations of a healthy financial life. That’s why keeping on ChexSystems’s good side and nurturing your credit score are so vital. To learn more about managing your credit score, check out these other posts and articles from OppLoans:

Do you have a  personal finance question you’d like us to answer? Let us know! You can find us on Facebook and Twitter.

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Contributors

Jared Weitz (@jaredweitz) has been in the financial services industry for over 10 years. Due to his extensive work experience and deep network of close financial relationships, he handles a multitude of different finance options for his clients and contacts. Over the years, he has held positions in some of the largest business financing companies in the U.S. Some of his roles have been: Underwriter, Director of Business Development, Managing Partner and currently, CEO of United Capital Source, LLC.

Don’t Let a Surprise Pet-Related Expense Drive You into Debt

If you end up relying on a high-interest payday cash advance to cover your pet’s vet bill, neither of you will benefit in the long run.

Fur parents love their fur babies; in fact, 95 percent of pet owners consider their pets to be a part of the family. And while pets aren’t quite as expensive as kids, they can still run up some pretty sizeable bills—especially if they get sick.


Pets are expensive.

The cost of owning a pet can put a lot of financial stress on low-income families. According to ASPCA estimates, the first-year cost of owning a pet exceeds $1,000, and most people spend more than $500 a year after that.

Even if you took these costs into account when you first welcomed your pet into your home, you may have experienced a change in income or other unexpected costs.  And a single pet healthcare emergency can cost several hundred dollars—an expense 40 percent of Americans would not be able to cover.

Some people might be tempted to take out short-term bad credit loans or predatory no credit check loans (like payday loans, cash advances, or even title loans) to pay for the cost of their pet’s care. But these small-dollar loans come with significant risks.

With short terms and average annual interest rates reaching almost 400 percent, short-term bad credit and no credit check loans can trap borrowers in a cycle of debt that can be difficult to overcome.

Instead of relying on expensive predatory loans to cover the cost of your pet’s care, consider the following strategies.

Budget and save.

First, consider whether you might be able to cut costs. Find ways to save money on groceries, cut out any unnecessary services, buy items used, and sell items you don’t need.

You should also compare prices for pet food and buy in bulk when you can.

If you’re a budgeting newbie, we have a helpful beginner’s guide that comes with a free downloadable budgeting spreadsheet to get you started. Even if your pet is in perfect health—or you don’t have any pets at all—you should have a monthly budget.

Visit a pet food bank.

If you’re struggling to afford pet food, check to see if there is a pet food bank in your area.

You can also contact local nonprofit organizations aimed at keeping pets with their owners. Some will be able to provide assistance with buying pet food.

Consider visiting a food bank for your own food as well. Meals on Wheels delivers both pet food and human food to families in need.

Seek help from a nonprofit.

When your pet is in need of expensive medical treatment, it can be difficult for the whole family. But before you take out a payday loan, get in touch with nonprofit organizations aimed at providing emergency medical assistance to pets in need.

The following organizations may be able to help:

The Humane Society also keeps a list of local and national resources, and the ASPCA can help you find local, low-cost spay and neuter programs.

Seek help from the community.

You should always ask friends or family members directly to begin with, but if that option isn’t available to you, you may be able to utilize crowdfunding.

When creating a campaign, be honest and detailed about your pet’s needs, and include pictures. The following sites allow you to raise money from the community:

Take out a lower-cost loan.

If you’re still in need of cash and can’t bear the thought of finding a new home for your pet, you may need to borrow money.

But short-term online loans and storefront cash advances should always be considered a last resort, and you should only borrow what you will reasonably be able to pay back.

Start by asking friends and family for financial assistance. Sure, this conversation will probably be uncomfortable, but they’re probably going to give you a much better deal than your average payday lender.

Next, visit local banks or credit unions, which offer lower-cost loans. If you have bad credit and are found ineligible for mainstream financial services, consider taking out a bad credit installment loan.

These personal loans often come with longer terms and lower interest rates than your typical payday loan. And with some bad credit installment lenders making your payments on time could even improve your credit history.

Find a new home for your pet.

It might be heartbreaking to say goodbye to your pet, but sometimes it’s in their best interest. If you can’t secure additional income, a loan won’t help you afford your pet in the long run.

You can list your pet on Craigslist, Petfinder, or Get Your Pet and personally ensure you find a loving home that meets your pet’s needs. You can also surrender your pet to The Humane Society.

Build your savings and your credit score.

If you’re in an immediate bind, this advice won’t be much good to you. But if you’re trying to plan ahead before a financial emergency strikes, you should focus on two things: building your emergency fund and improving your credit score.

Unlike money that you’re saving for retirement, an emergency fund should be easily accessible during times of financial duress. Start with the goal of building a $1,000 fund, but don’t stop there. The more money you have saved up for emergencies, the more secure you’ll be.

When it comes to your credit score, better credit means more access to low-cost loans and credit cards to help cover unforeseen expenses. Paying down your existing debt and paying your bills on time are the two best actions you can take to improve your score long-term.

Your pet has no idea how emergency funds or credit scores work, but if you’re financially prepared to weather a pricey veterinarian’s bill, we’re sure they’ll find a way to thank you for it—probably one that involves lots of licking and snuggles.

To learn more about how you can build your savings and your credit, check out these other posts and articles from OppLoans:

Do you have a personal finance question you’d like us to answer? Let us know! You can find us on Facebook and Twitter.

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Should You Get Life Insurance?

Life insurance can help protect the ones you love when you’re gone—but you want to make sure that you do your research before committing to a plan.

On this blog, we often write about ways that people can protect their financial futures. Oftentimes, this advice boils down to one simple maxim: Be prepared for the worst. And is there anything worse than a person’s death leaving their loved ones in dire financial straits?

Luckily, that’s where life insurance comes in.

“Everyone who has someone who depends on them, and would be placed in a worse off financial situation were they to die, almost always needs some form of life insurance,” said Certified Financial Planner Joel Ohman (@JoelOhman), founder of InsuranceProviders.com.

But even once you decide to purchase a life insurance policy, there are still many more decisions ahead of you. Don’t worry. That’s why we’re here. When it comes to life insurance, here’s what you need to know.


How does life insurance work?

“A life insurance policy is a contract between you and an insurance company to provide you with coverage based upon your timely payment of premiums,” explained Chris Mason, senior vice president of sales distribution for independent health insurance agency HealthMarkets (@HealthMarkets).

“It provides a death benefit to your named beneficiary (generally a spouse) upon your deaths. When you pass away, your beneficiary files a claim with the insurance company to submit proof (a death certificate) of your passing.”

“The death benefits from life insurance are often used to pay for burial and final expenses, replace the income of the individual who has passed, and/or to pay off a mortgage,” he continued. “If you leave behind a spouse, children or other loved ones, life insurance policies can help alleviate any financial burdens when coping with the loss of a loved one.

“Losing a parent, partner or spouse can be one of the most emotionally challenging experiences any one of us can face. If you add the financial aspects of this loss, it can seem unbearable. Having life insurance helps mitigate some aspects of financial stress.”

While some life insurance policies can be used for purposes beyond a straightforward death benefit payout, Ohman warned that consumers should be cautious with plans like these.

“Unless there are complex estate planning requirements or the insured has exhausted all other investment options, then typically the idea to use life insurance outside of a straightforward death benefit payout is a fool’s errand that will only result in a fancier car for your insurance agent,” he said.

Term life insurance.

When considering a life insurance policy, you’ll have to choose between two basic types: term life insurance and permanent (or universal) life insurance.

“Term life insurance generally offers the highest death benefit for the lowest cost, ” said Mason. “It covers a specific period of time, generally ten, fifteen, twenty or thirty years. Policyholders pay an annual or monthly fixed premium that is renewable every year. If you are young, premiums for this type of life insurance are low but as you get older, the premiums increase.”

Nelson Lee, managing partner of insurtech company Pacific Wealth Solutions laid out some of the pros and cons of both term and permanent life insurance. For term life insurance, his pros were the following:

  • “In the short term, it’s much cheaper to buy the same death benefit compared to a permanent policy.”
  • “Simple to understand, harder to be misrepresented. Die in this term and get this much. Die outside of this term you get zero. Easy to explain, easy to sell, easy to make a decision.”

As for the cons, here’s what Lee had to say:

  • “If you die after the term expiration, you don’t get any death benefit claims. Zero insurance if you live too long.”
  • “If you die after the term expiration, you don’t get any of your premiums back. Zero money back if you end up wasting the policy. There are a few rare policies that partially return the premium many decades after purchase, but they tend to be much more expensive than regular term (defeats purpose of term), and the amount returned would be worth very little due to inflation after 20 years, so it’s not a real return of premium value.”

Additionally, Lee shared some statistics that might lead you away from a term life plan.

“On average, most studies indicate that less than two percent (in some studies less than one percent) of all terms ever pay out,” he said. “In other words, 98-99 percent of all term clients end up wasting their money, gifting it to the insurance carriers in exchange for nothing when they die.”

“This is an average, meaning if you’re a younger person, your odds are even worse, simply due to life expectancy and age relationships.”

Permanent life insurance.

“Permanent life insurance is policies that will cover you until you die as long as the premiums are paid,” explained Mason. “Part of the premium goes toward cash value, allowing you to accumulate tax-deferred savings. Most permanent life insurance policies do not have a significant cash value in the early years, but they can perform very well over time if funded properly.”

If that sounds a lot like an investment account—similar in some ways to a 401(k) —that’s because it is!

“Permanent life insurance carries a “cash value” that is like a bank/investment account, that the client can use as a savings/investments tool, or simply to make sure they can withdraw cash when it’s needed in the future or get some of their money back,” said Lee.

Here are Lee’s pros for permanent life insurance, which came with a warning that these benefits, while great, are still often overstated by proponents of these plans:

  • “As long as you keep the policy in force, you never ‘waste’ your money because insurance is permanent and never expires. Not possible to outlive your benefits.”
  • “You get a ‘cash value’ that gives you the opportunity to make investment gains on the premiums paid, in addition to simply wanting to get your money back at some point.”
  • “You have the opportunity to get all (or even more than) the premiums paid back, and still keep the insurance in force. Keep both, get money back and keep the insurance permanently.”
  • “You can loan against the policy cash value for tax-free or tax-deferred income/gains.”
  • “Death benefit can grow larger with time, as opposed to a fixed amount like term.”
  • “In some products, payment amounts and periods can be fixed and guaranteed.”
  • The top products will provide high rates of guarantees and very competitive risk-adjusted returns that may provide better risk-return tradeoffs than other investment alternatives.”

Similarly, Lee cautioned that his cons for permanent life insurance policies were also often misrepresented by those hoping to sell consumers on term policies instead:

  • “If you pick the wrong permanent policy, you could lapse it, and end up paying more than term, and still get no insurance when you die, if it lapses before death.”
  • “Mathematically and conceptually much more complicated than term, harder to understand, easier to misrepresent, easier for low-quality products (or agents) to disguise as competent ones.”
  • “Some (not all) products have ‘perpetual’ payments built in, meaning you must pay premiums every single year as long as you stay alive, or in some instances require you to pay at least until age 90 or 100, although this type is becoming rarer and less popular, and don’t perform well. This product type pays the highest commissions (of course).”
  • “Much higher premiums initially for the same amount of death benefit compared to term (although long term with proper cash value gains you more than making it back).”
  • “Some product designs have variable returns and variable costs that provide no downside protection or guarantee for clients, making it riskier than the client might perceive.”

Which should you choose?

Sorry to disappoint, but there isn’t really a right or wrong answer here. The right policy for you will depend on your age, means, and other circumstances. Still, one thing you should do no matter what is to dig in deep and understand the policies you’re choosing from before you make your final decision.

In terms of the age factor, Lee offered these thoughts:

“If you are an older person and you don’t expect yourself to outlive the term of your policy (you think you will die in 10 or 20 years), and you don’t mind not getting your money back if you do live longer, and also don’t mind getting zero insurance if you live longer, then term might be a good fit for you.”

“If you are younger (younger than 40), you have likely more than 99.5 percent chance of just wasting your money on nothing. At the benefit of agents and carriers.”

Lee also warned about the dangers of making sweeping assumptions about term policies versus permanent policies:

“Overly broad generalizations in investments/insurance are exactly that—overly broad, almost never true, and almost always misrepresented to exaggerated. The credibility and bias of people making such oversimplified claims must and should be examined.

“Term and permanent life insurance are both very broad terms that each cover thousands of different products. It is simply not possible to say which is better in a cookie-cutter manner, and each has a place in the insurance industry.

“Which is better depends on the desired outcome, age of the client, investment requirements, acceptance of worst outcomes, expectations, carrier selection, product design, tax situation, etc.

“How much the pros and cons out-weigh each other really just depend, and that first assumes you were accurately informed of the pros and cons in the first place (unlikely),” he concluded.

Ohlman, however, has a different assessment. “It’s very rare that you need any type of fancy life insurance policy other than a plain vanilla term life policy. Term life is simple, straightforward, and likely much cheaper than you think,” he said.

He cautioned that the worst thing you could do was make a decision—any decision—unprepared:

“The options for life insurance are vast: From whole life insurance to universal life insurance to many variations and permutations of the above, some with market participation and investment exposure and others with a dizzying array of riders and features that will make your head spin. Be very wary about purchasing something that you don’t fully understand.”

How can you save money on life insurance?

No matter what plan you end up choosing, you should try and find the most cost-effective solution possible. That doesn’t always mean finding the deal with the lowest price tag. Far from it. Paying slightly higher premiums and getting a lot more from your plan can be better than paying less and getting less.

When you’re starting out, Ohlman recommends using an online calculator to help you determine how what level of coverage you’ll need.

“There are many different life insurance calculators online that will give you a good ballpark estimate of how much life insurance you may need,” he said. “Be sure to do a little homework and at least understand some of the different variables that go into determining how much you need before speaking with your insurance agent or another financial professional.”

“The nice thing about using a life insurance calculator online is that you don’t have to do any math (unless you like doing math, of course!). Just plug in the numbers and press the button!”

“If you find yourself getting bogged down with all of the various calculators and different formulas used,” he added, “then take a step back and just ask yourself this question: ‘What is the absolute minimum amount of money that my loved ones would need if I passed away to not have to worry about money, not have to change their lifestyle or dreams, and not have to get a new job?’ Now double it.”

Mason also had three great pieces of advice to help you save money and find the most cost-effective plan:

  • “One of the most impactful ways to save on life insurance is to complete a needs analysis, as sometimes there is an overstatement or understatement. Doing the analysis with a licensed agent helps ensure you are buying the right amount of coverage and not buying too much, which could drive up the cost.”
  • “Buy life insurance while you are young! It only gets more expensive as you get older. I always advise people to not procrastinate because every year you age, the cost almost always goes up.”
  • “Work with an agent who can represent multiple carriers so they can see what might be the most competitively priced product for your needs. Different insurers have different stances on various health concerns, so having an array to review and choose from can help with costs.”

In the end, shopping for life insurance is a lot like shopping for any other large purchase. Do your research, carefully weigh the pros and cons, work with a professional when necessary, and then choose the plan that you feel works best for you!

Take care of your money—and your loved ones.

Taking out a life insurance policy is one of many things you can do to protect your family members and loved ones from financial disaster. In that way, it’s not all that different from building your savings, paying down your debt, and maintaining a good credit score.

When people don’t take care of those things, that’s how they end up needing substantial help when an unexpected bill or other financial shortfall takes them by surprise. It’s also how people end up relying on no credit check loans and short-term bad credit loans (like payday loans, title loans, and cash advances) to make ends meet, driving them into a cycle of debt.

There are steps you can take to protect your financial future—not to mention the futures of those you love. To learn more, check out these other posts and articles from OppLoans:

Do you have a  personal finance question you’d like us to answer? Let us know! You can find us on Facebook and Twitter.

Visit OppLoans on YouTube | Facebook | Twitter | LinkedIN | Instagram


Contributors

Nelson Lee began his career in Finance as an Investment Banking Intern at J.P Morgan, before spending 7 years at Northwestern Mutual (one of the largest mutual life insurers in the US), and Pacific Advisor, a 156-year old financial consulting firm, where he became its youngest ever Advisor of the Year in 2016, specializing in quantitative mathematics analysis of insurance transactions. Nelson founded Pacific Wealth Solutions in 2017 in pursuit to solve the most prevalent epidemics in the life insurance industry.
Chris Mason is the senior vice president of sales distribution for HealthMarkets (@HealthMarkets), one of the largest independent health insurance agencies in the US that distributes health, Medicare, life and supplemental insurance products from more than 200 companies.
Joel Ohman (@JoelOhman) is a Certified Financial Planner™ and the founder of InsuranceProviders.com and has been mentioned in many different publications including AllBusiness.com, AOL.com, Banks.com, BusinessInsider.com, ChicagoTribune.com, Forbes.com, Inc.com, Newsweek.com, Reader’s Digest, USA Today, WashingtonPost.com, WiseBread.com, Yahoo Finance, etc.

Emergency Funds Are Important: Here’s How to Start Building One

Building and maintaining an emergency fund is an important financial cornerstone. If you don’t have one, you should start saving today.

There are keys to avoiding short-term bad credit loans like payday loans and cash advances. One is to maintain your credit score, the other is to build up your savings. And while a good credit score is important, its the savings that will really—well—save you!

Specifically, you should create a well-stocked emergency fund. That way, you can cover unforeseen bills and financial shortfalls instead of relying on bad credit loans and possibly entering a dangerous cycle of debt.

Rest assured: Financial surprises are going to happen, and you want to make sure that you’re prepared. That’s why we reached out to a number of financial experts who can explain how emergency funds work and how you can go about building one today.


What is an emergency fund?

Nicolás Valdés-Fauli is a Certified Financial Planner with Main Street Financial Solutions in New York City. He provided a general overview of how emergency funds work and the many benefits that they offer. According to him, establishing an emergency fund is one of the most important parts of establishing a financial plan.

“An emergency fund is exactly what it sounds like, a fund or an account of easily accessible money used in case of an emergency—job loss and unexpected medical expense amongst others,” he said. The fund is intended to cover one’s monthly living expenses including,  “mortgage payments, rent, insurance premiums, cell phone bills, groceries and everything else you need to maintain your existing life,” according to Valdés-Fauli.

“There are insurance products that cover all sorts of loss. Think life insurance, renters insurance, car insurance, homeowners, disability, on and on. But there is nothing that covers something as broad-based as an emergency. Typically, people need to self-fund, meaning, they need to save their own money to cover these events.”

Unlike traditional savings, which you don’t want to touch until you retire, the money in your emergency fund needs to be easy to access:

“An emergency fund should always be liquid, meaning it should be accessible without a penalty,” explained Valdés-Fauli. Cash in the mattress is never a good idea (fire, theft, inflation), and an emergency fund should be kept in a financial institution. Avoid using CD’s, life insurance policies and retirement accounts, as there are probably penalties with early withdrawals.

He also specified that your emergency fund shouldn’t be lumped in with the rest of your savings: “It should be a separate account from a savings account designated for a future expense such as a down payment, education bills or a vacation.”

How do you define an emergency?

Your car breaking down is an emergency. Your favorite band adding an extra concert date in town? Not so much.

“The definition of an emergency is a crucial step for the creation of an emergency fund,” said Ramsey Preferred Financial Coach Barry Jennings. “Without a clear understanding of what constitutes an emergency, most emergency funds fail before starting as birthdays and holidays pop up without notice and are resolved with the newly saved cash.”

“Within the context of my family, we define an emergency as anything that hinders or prevents the generation of income,” Jennings continued. “This could be things of a medical, transportation, or employment nature.”

“In the years past, grandmothers called the emergency fund a rainy day fund.  They may not know when it was going to rain (an emergency was going to occur), but they knew it was bound to happen sooner or later. The simplest of purposes of an emergency fund is to self-insure against the appearance of Murphy’s Law.”

How big should your fund be?

“While funds stashed away for emergencies can serve multiple purposes (including a major car repair or replacing a furnace in the dead of winter), the most commonly cited reason to build an emergency fund is to allow folks to pay their monthly bills should an unexpected job-loss occur,” said Timothy G. Wiedman retired professor of Management & Human Resources at Doane University (@DoaneUniversity).

“Thus, the fund must be large enough to cover housing (i.e., rent or mortgage payments), grocery bills, monthly utilities (including internet access), transportation costs, insurance (i.e., premiums for health, life, auto, homeowners/renters coverage, etc.), and even some occasional entertainment to keep the spirits up until a layoff is over or a new job can be found.”

“At an absolute minimum,” he advised, “the fund should cover three months of recurring expenses.”

That’s a lot of money! But while it’s best to start with a smaller goal and work your way up, a three-month found won’t be enough for many people to weather an unexpected job loss. This is why Wiedman suggests doing some calculations to figure out how much money you’ll need to (eventually) have in your emergency fund—especially as it relates to a realistic job search.

“Estimate how long it would likely be before a new job is found and paychecks resume,” he said. “Also take into account the length of time that unemployment benefits would be provided in a particular locale and estimate the amount of those payments (which will almost surely fall well short of covering your recurring living expenses).

“Then, consider the demand for your job skills in the immediate area, the local unemployment rate, whether relocation is a realistic option, your credentials (i.e., education, certifications, work experience, etc.), and how long it took to find your last job.”

“And further, also consider other factors that might slow down your search (e.g., a conviction—even for a misdemeanor that only resulted in probation, or advanced age given your profession—a 61-year-old unemployed airline pilot, for example,” he continued.

“Finally, realistically think about a bleaker job-search scenario (that might include a prolonged economic recession, for example).  Given all of the factors mentioned above, is it really likely you’d find a new job in 90 days—or could your search easily last five or six months?”

“After an assessment of this sort, a great many folks will conclude that building a six-month emergency fund is a wise course of action,” Wiedman concluded. “Further, if you live in an area with high (or persistent) unemployment, or your skills are primarily only needed in a declining industry (underground coal mining, for example), having sufficient funds to cover nine to twelve months of unemployment would make good sense.”

Still, Wiedman was clear that you don’t know how much money you personally need in your fund until you sit down and do the calculations: “The size of an individual’s emergency fund depends upon a great many variables.  So folks must analyze their personal situations, and act accordingly.”

Set a small goal—and grow from there.

“Most people are buried in debt, live paycheck to paycheck, and don’t have the means to handle even small emergencies with cash,” said Jenning.s “As a financial coach, I address the behavior slowly and deliberately by having people set aside $1,000 initially as a starter emergency fund.”

But just because $1,000 is a good initial goal doesn’t mean that you should stop saving once you meet it. And as Jennings pointed out, continuing to address other areas of financial need—like your debt—will set you up for success in the long term.

“While people become accustomed to having a small amount of cash available for the unknown, they can begin to focus on becoming debt free except for their mortgage.  This will free their income and make further saving possible,” he said.

Once people become debt free, Jennings advised that people continue building out their emergency fund to cover the aforementioned three to six month period. But what comes after that?

“After the completion of saving a fully funded emergency fund, people can focus on saving for retirement and education and paying off their mortgage early. When they have reclaimed the freedom of their income, they are able to focus on gaining wealth and building a legacy,” he said.

These folks can also continue building their emergency fund to cover the kinds of “unexpected shortfalls” that occurred after the 2008 financial crisis—taking their emergency savings from six months to two years. After all, Jennings noted that “even the Great Recession after 2008 only lasted 18 months.”

“This allows the comfort and peace of mind to find gainful employment, if such a need arises, during such difficult times,” Jennings concluded. “It also serves as an additional buffer for use prior to the accessing of retirement accounts, if market timing becomes a concern in the later stages of life.”

You’re going to need a budget.

One of the financial experts we heard from was Michele Lee Fine, RICP, Registered Representative and Financial Advisor of Park Avenue Securities and Financial Representative of Guardian Life Insurance (@guardianlife). She shared the importance of the role that budgeting plays in building an emergency fund.

“First, you have to overcome the big three psychological barriers that keep many people from setting up a budget: Fear, uncertainty, and doubt,” she said. “Fear what you’ll discover when you examine your finances; Uncertainty about how to set up a budget; Doubt whether you can stick to a budget.”

Overcoming those barriers and building your first budget is going to mean getting specific. “Don’t guess how much money you have coming in and going out each month. Write it down,” said Fine. “There are lots of tools to help you, find a worksheet online and—bonus—it’s free. Keep track of all your expenses and sources of income.”

“Some experts suggest doing this for a few months to get a real picture of your financial situation, but starting to track for just a month will help you get some clarity,” she continued. “Scan your bank and credit card statements to see where it’s all going. Add up the expenses and subtract them from your income. This will tell you, at the most basic level, whether you are operating in the black or red.”

Once you have a picture of how you’re spending your money, you can set about actually building your budget. In order to find expenses you need to cut, Fine offered the following tips:

  • Examine current bills: See where the money is going and think of cutting out extras and finding cheaper alternatives.”
  • Pay with cash: There’s something about the tactile quality of cash that makes it hard to part with.”
  • Adjust your habits: All of us have habits that we fall into that can be revised and made more financially healthy.”

At this point, Fine suggests that some people may find it helpful to consult with a financial professional. “He or she can look at your numbers and help you put together a balanced budget that addresses all your needs, from meeting monthly obligations, building an emergency fund, saving for retirement to occasionally splurging,” she said.

Here’s how to get started.

One of the hardest parts of any financial journey is taking those first couple steps. That’s why  Certified Financial Planner Christine Centeno, founder of the fee-only financial planning firm, Simplicity Wealth Management, offered these tips to help you get started.

  • Start Small: Start saving something small each paycheck or each month. Make it a realistic amount, something that you can easily accomplish. The key is to start saving even if its $25 per pay period. Over time you’ll be surprised at how much you have saved. Take advantage of tax refunds or bonuses to increase savings Instead of spending your entire tax return or bonus, aim to save a portion of it. Every little bit helps.”
  • Be consistent: Save every paycheck or every month. Don’t wait until the end of the year to transfer leftover funds to your emergency fund, you’ll be less likely to have funds left over.”
  • Pay yourself first: What does this mean? Save first before you pay any bills. If you are not sure how much you are able to save, I recommend using budgeting software like Mint to help determine how much you have left over each month.”
  • Automate it: Set up an automatic transfer from your checking account to your savings account each month. Or, even better, set up part of your direct deposit to go directly into a savings account. This way you won’t even see it and be tempted to spend extra dollars that sit in your checking account.”

Responsible money management is a lot like exercising: It’s about building up the proper habits and making them part of your routine. The more you incorporate saving money into your everyday activities, the easier it will become!

Want fast savings? Start brown bagging it.

If you’re looking for one area of your life where you can find some immediate savings, Wiedman suggested substituting restaurant lunches with a brown-bag lunch made at home. This option even comes with the added bonus of eating healthier!

Wiedman laid out how the cost of a typical lunch combo at Applebee’s ($11.50) can easily turn into a weekly expense of $57.50—maybe even more if you decide to get the occasional dessert or if you have to drive the restaurant, thereby spending money on gas.

“On the other hand, a healthy lunch brought from home (e.g., a sandwich made with low-fat lunch-meat on whole-grain bread, a dozen peeled baby carrots, a small individually-sized box of raisins for dessert, and a can of diet soda) can be assembled for about $2.80 (i.e., $14 per week),” said Wiedman.

“Further, if that brown-bag lunch is eaten in the employee break room (or after a short walk to a nearby city park), no time or gasoline is wasted on a lunchtime commute. Over the course of a 49-week working year, the savings would exceed $2,100.”

And while opting for fast food would also save money versus a full restaurant lunch, Wiedman pointed out that people would still save a lot of money by choosing the brown bag option—plus, this meal is far healthier than fast food.

“If that fast-food lunch (including tax, of course) averaged just $6.85 per day, a brown-bagger would still save almost $1,000 per year (or even more if the cost of gas consumption is figured into the equation),” he said.

When it comes to the benefits of brown bagging, Wiedman speaks from experience:

“My wife and I brown bagged it for years (while taking turns assembling our lunches), so our annual combined savings were well over $4,000, and the money we saved was used to fund our IRAs each year.  But this method is also an excellent way to ‘painlessly’ build an emergency fund.”

Save more money, save your future.

An emergency fund isn’t a silver bullet to solve all your financial problems. You should still be investing money for your retirement, taking care of your credit score, and doing your research before making any financial commitments, whether that be a mortgage, a personal loan, or an “exciting business opportunity.”

But a well-stocked emergency fund is still an important financial cornerstone. It helps protects you from financial disaster, giving you some much-needed security so that you can safely build on top of it. Without one, you might find yourself relying on no credit check loans like payday and title loans to make ends meet when times get tough.

Even opting for a safer, more affordable installment loan when you encounter a financial shortfall pales in comparison to the benefits of having an emergency fund. The last thing you want during a crisis is to dig yourself even deeper into debt with an online loan or a trip to your local payday storefront.

If you don’t have an emergency fund, start one now. Your future self will thank you. And to learn more about how you can build a brighter financial future, check out these other posts and articles from OppLoans:

Do you have a  personal finance question you’d like us to answer? Let us know! You can find us on Facebook and Twitter.

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Contributors

Christine Centeno, CFPⓇ, MS is the founder of Simplicity Wealth Management. She has over 11 years of industry experience as a financial advisor and is a member of several professional organizations including NAPFA, FPA, and the XY Planning Network. Christine also holds her Masters in Financial Planning. In 2019, after years of working for large firms, she founded her own firm. Simplicity Wealth Management provides clarity to the complicated nature of financial planning and investing by delivering comprehensive advice without hidden fees and unnecessary jargon that leaves you in the dark. The goal is to deliver transparent, easy-to-understand guidance to help clients achieve their financial goals and remain informed every step of the way.
Nicolás Valdés-Fauli, CFP® opened the New York City office of Main Street Financial Solutions in 2010. He has served his clients in NYC and South Florida since 2002. A graduate of Choate Rosemary Hall and Wesleyan University, Nicolas lives in Manhattan with his wife and daughter.
Barry Jennings has taken 30 years of experience in psychology, life and health insurance sales, automobile sales and financing, student loan processing and college funding consulting and turned it into a financial coaching business, Soul without Fear.  He empowers his clients to make positive changes to their financial situation by helping them create a written plan, start an emergency fund, eliminate debt, save for retirement and college, and build a legacy for their families.
Michele Lee Fine, RICP is the Founder and President of Cornerstone Wealth Advisory, LLC located in Jericho, NY. She is a graduate of New York University and participates in several trade and community organizations such as NAIFA; Westchester Association of Insurance and Financial Advisors; 100 Women in Hedge Funds Organization; Women’s International Zionist Organization; Cabinet Member of Israel Bonds, USA; and is a JNF Board Member.
After 13 years as a successful operations manager working at two different ‘Fortune 1000’ companies, Dr. Timothy G. Wiedman spent the next 28 years in academia teaching college courses in business, management, human resources, and retirement planning.  Dr. Wiedman recently took an early retirement from Doane University (@DoaneUniversity), is a member of the Human Resources Group of West Michigan and continues to do annual volunteer work for the SHRM Foundation. He holds two graduate degrees in business and has completed multiple professional certifications.

So You’re Considering Bankruptcy … Now What?

Filing for bankruptcy isn’t fun, but it can also mean a fresh start. People who are drowning in debt and unable to make their payments should strongly consider it.

Your financial life is bound to be full of ups and downs. One day you’ll be celebrating a raise with a lovely dinner at a fancy restaurant only to have your car break down on the way home. The cost of the repairs wipes out the raise and then some, and now you’re worse off than when you started.

Sometimes you end up with multiple downturns in a row. And if those downturns don’t have any upturns in between them, well, this is how people end up relying on predatory no credit check loans and short-term bad credit loans (like title loans, payday loans, and cash advances) to make ends meet—but only succeed in driving themselves even further into debt.

As your debt grows, eventually it will get so big that you can no longer afford your payments. Forget paying that personal loan off ahead of schedule, you can’t pay it off on-schedule! Once your money situation gets bad enough, you’ll find yourself without many options.

One of your few remaining options, however, could be filing for bankruptcy.

And while bankruptcy sounds scary, the option exists to help you. So when should you consider bankruptcy? And what comes next you if you do decide to declare it?


What is bankruptcy?

Before we get into whether you should consider declaring bankruptcy, let’s just make sure we understand what it is. We’ll only address personal bankruptcy in this article, of which there are two primary kinds.

The two main types of personal bankruptcy are Chapter 7 and Chapter 13. Chapter 7 allows you to discharge almost all of your debts, but you’ll have to pass a means test first to show your income is too low to actually pay those debts. You’ll also have to hand over whatever liquid assets you have to pay off as much debt as possible before it’s discharged.

If your means are too great to pass the means test, you could still declare Chapter 13 bankruptcy. Chapter 13 bankruptcy will require you to submit a payment plan to a bankruptcy court, and if it’s approved, you’ll be able to pay off those debts over the next three to five years.

So how do you know if it’s time for you to declare bankruptcy?

How to know it’s time to declare bankruptcy.

Declaring bankruptcy isn’t as easy as the television would have you believe. Every situation is different, so it’s important to examine whether bankruptcy is the best option in your personal situation. Ideally, you’ll want to consult a bankruptcy attorney to give you guidance.

“In general, bankruptcy is a legal action in federal court meant to protect the consumer from his or her creditors,” explained Todd Christensen, education manager for Money Fit by DRS, Inc. (@MoneyFitbyDRS). “Most commonly, filers are trying to protect their home from foreclosure, but they may also be attempting to protect their vehicle (which is often a bad financial move) and, more importantly, their wages from garnishment.

“If a consumer cannot pay their bills on their own, cannot negotiate better repayment terms with their creditors, and cannot work out a debt management plan with a nonprofit credit counseling agency (like those found at FCAA.org), bankruptcy is usually the next—and last—step.”

If you do think bankruptcy could be right for you, there are a few steps you’ll have to go through.

“Meet with a credit counseling agency approved by the US Department of Justice’s Executive Office of the US Trustee to complete a budget briefing and obtain the required certificate of credit counseling,” outlined Christensen. “The thought back in 2005 when Congress added this and other requirements to the bankruptcy filing process was that meeting with a credit counselor might hopefully steer some consumers away from bankruptcy if it was not necessary, and have them instead pay off 100 percent of their debts through a credit counselor.

“If bankruptcy is still the most logical step, the consumer either meets with a bankruptcy attorney or completes the court paperwork (each district court has its own fees required to pay with the petition, as well as its own fee waiver policies).

“After the case is filed, the consumer must attend the 341 meeting of the creditors. Before the case is discharged and the consumer is relieved of his or her responsibility to pay the debts, he or she must complete a 2-hour debtor education course approved by the same US Department of Justice office.”

And then you’ll have declared bankruptcy.

So now what?

You’ve successfully declared bankruptcy. What comes next?

Leslie H. Tayne Esq. (@LeslieHTayneEsq), Founder and Head Attorney at Tayne Law Group (@taynelawgroup), offered some actions to take and suggestions for living that  post-bankruptcy life:

“Bankruptcy stays on your credit report for up to 10 years, which could make getting new credit difficult for that period of time. Your credit score will definitely take a hit from filing bankruptcy, but how much it drops will depend on your individual situation. If you had good credit before filing, bankruptcy will likely have a more profound impact on your credit than if you had poor credit. It will take time for your credit to recover from bankruptcy. You may consider opening a secured credit card to start rebuilding.

“If you have accounts discharged during bankruptcy, they will now have a zero balance but will show up as discharged on your credit report, which may be frowned upon by lenders and creditors. However, ‘discharged’ will likely be looked upon more favorably than an account that’s marked as unpaid or past due.

“After you’ve filed for bankruptcy, you’ll need to get back on track and adjust to your new financial situation. The first step will be to sit down and rewrite your budget. Your budget may have been the root of the problem that led to bankruptcy in the first place, so you’ll want to think critically and carefully when reviewing it. Take time to identify where the issues may have been and what you may be able to do to improve in those areas now that you have a chance for a fresh start.

“Because you may have had trouble managing your finances previously, you may want to enlist some help after bankruptcy from a financial attorney or a financial expert to help you avoid falling back into the same habits.”

You still have rights.

Aside from the more general advice, there’s also a specific law you may want to familiarize yourself with.

“Much of my practice consists of suing creditors and debt collectors for violating bankruptcy discharge orders or consumer protection laws, including the Telephone Consumer Protection Act (TCPA), Fair Debt Collection Practices Act (FDCPA), Fair Credit Reporting Act (FCRA), and state consumer collection practices laws,” explained consumer protection attorney Donald E. Petersen.

“Consumers who have discharged a debt in bankruptcy and surrendered any collateral securing the debt should not be receiving calls or letters from the creditor (or debt collector) about the discharged accounts.

“The TCPA requires that companies using an Automated Telephone Dialing System (ATDS) or prerecorded or artificial voice when calling a cell phone must have the cell phone user’s prior express consent. Consumers who file bankruptcy typically provided the caller (or the caller’s principal or predecessor in interest) express consent by furnishing their cell phone number to the creditor.

“If a creditor (or debt collector) continues to call about a debt that the consumer discharged, the consumer should tell them ‘stop calling me’ rather than ‘call my bankruptcy attorney.’  Here is why.

“Many, if not most, bankruptcy courts will require the discharged creditors to pay the consumer very little compensation for the aggravation that the creditor’s constant calls and letters continue to cause. The TCPA, however, provides that once the borrower revokes consent (i.e, tells the caller ‘stop calling’) the caller is liable for $500 per call and, if the violation is willful, an additional amount of up to $1,000 or, equivalently, $ 1,500 per call.”

Going into bankruptcy is never going to be fun. But if you’ve exhausted every other option, it can be the beginning of a brand new start. To learn more about how you can improve your financial situation moving forward, check out these other posts and articles from OppLoans:

Do you have a  personal finance question you’d like us to answer? Let us know! You can find us on Facebook and Twitter.

Visit OppLoans on YouTube | Facebook | Twitter | LinkedIN | Instagram


Contributors

Author and Accredited Financial Counselor®, Todd R. Christensen, MIM, MA, is Education Manager at Money Fit by DRS, Inc. (@MoneyFitbyDRS), a nationwide nonprofit financial wellness and credit counseling agency. Todd develops educational programs and produces materials that teach personal financial skills and responsibilities to all ages. Having facilitated nearly two thousand workshops since 2004 on the fundamentals of effective money management, he based his first book, Everyday Money for Everyday People (2014), on the discussions, tips, stories and ideas shared by the tens of thousands of individuals and couples in attendance.
Donald E. Petersen is an Orlando, Florida trial lawyer who represents consumers against companies who violate their rights under the Telephone Consumer Protection Act, Fair Debt Collection Practices Act, Fair Credit Reporting Act and other consumer protection laws.
Leslie H. Tayne, Esq. (@LeslieHTayneEsq) has nearly 20 years’ experience in the practice area of consumer and business financial debt-related services. Leslie is the founder and head attorney at Tayne Law Group (@taynelawgroup), which specializes in debt relief.

Financial Basics: Good Interest vs. Bad Interest

Since it’s National Financial Literacy Month, we’re getting back to basics. Today’s post covers interest: The kind that helps and the kind that hurts.

Despite its name, many people do not find “interest” particularly interesting. Which is unfortunate, because a proper knowledge of interest will make a huge difference in your financial life. That’s why we spoke to the experts to create a handy dandy guide to interest that we hope you’ll find interesting. Or, at the very least, that you’ll find compelling enough to read on your phone while sitting on the bus.

Does your bus ride currently provide a helpful dose of financial advice? Well, now it can!


Basic interest.

Interest has been around for a very long time. Even longer than money itself! Essentially, it’s a way for those with resources to get compensation for lending out the aforementioned resources. We give you four cows. You then use those cows to make more cows. One year later, you give us back five cows. As long as you still have some cows left over, we’ve both come out ahead.

When you take out a loan, unless it’s from a friend or family member, you’re almost certainly going to have to pay some interest. The amount will vary, but it will be a percentage of the total loan amount, or principal. The loan may also come with additional fees, which is why it’s important to compare different loans in terms of their APRs, or Annual Percentage Rating. A loan’s APR is a measure of its total cost, including fees and interest.

But you can also make interest work for you! One way to do that would be to start a bank or other lending institution. But an easier way to do that is by putting your money into an account that yields interest, as most accounts do. That’s because when you put money into a bank account, you’re actually lending money to that bank.

So how can you make sure you’re always handling interest as well as possible, regardless of whether you’re paying or receiving it? Keep reading and see!

Taking account.

You have to put your money somewhere. Sure, you could keep it all in your pockets, but that’s just asking for trouble. And while keeping it under your mattress might be a classic, it’s almost as risky as just keeping it in your pockets.

That’s why most financial advisors will recommend you keep your money in a bank account. And, as we previously mentioned, this technically means you’re lending money to the bank and will be receiving interest in return. But if you want that interest to be substantial, you’ll need to choose the right account.

“If you want to maximize the interest you receive on your bank accounts, it pays to try and start with the most favorable conditions,” suggested Stephen Hart, CEO of Cardswitcher. “Before you even start saving, make sure that your account is one that returns a high rate of interest. Shop around as much as possible, comparing deals to see which offers you a better return. Also, check the rewards that are associated with particular bank accounts, as sometimes you can find these can influence your interest rates.”

Finding the right bank account isn’t your only opportunity to be a lender, however.

“The best way to get the best of both sides of the interest coin is to be a lender and not a borrower,” advised Steven Nuckols, president and founder of Wealth Compass Financial (@_Wealth_Compass). “Interest rates are going to continue to rise, although slowly, and lenders will be getting paid more for their money. For most people, this means better returns on bank accounts, CD’s, and new bond issues. A roundabout positive is that banks will have higher margins and will be able to offer more incentives to customers through credit card rewards, bonuses, and interest rates on products.”

But you can’t always be the lender.

A loan again.

Unless you have a swimming pool full of cash in one of the rooms of your house, you’re probably going to have to take out to get a loan at some point. For example, every time you use a credit card, you’re technically taking out a loan. Fortunately, it’s one of the few kinds of loans you can actually avoid paying interest on at all.

“If you’re looking to reduce the amount of interest that you have to pay on your credit card account, one of the most effective techniques is to just ensure that you pay off the amount in full every month before the grace period ends,” urged Hart.

When it comes to every other kind of loan, you’ll want to shop around to find out which options have the lowest APR. The sooner you can pay down any loan, the less you’ll have to pay in interest. You do need to be careful, however, as some loans come with a prepayment penalty that will punish early payment.

If you have bad credit, you’re going to find yourself stuck with much higher interest rates. Short-term bad credit loans and no credit check loans like payday loans, title loans, and cash advances often come with annual rates of 300 percent or higher! (You might have some better luck with a bad credit installment loan.)

The answer to that quandary is simple: Raising your credit score will allow you to get personal loans at better rates! We’ve written about how you can improve your credit score multiple times, like here for example. (And in the meantime, a well-stocked emergency fund will help you whether any surprise bill or financial shortfall.)

At the end of the day, interest is pretty simple. You want to get it, rather than having to pay it. If you are getting it, you want to get as much as possible, and if you’re paying it, you want to pay as little as possible.

To learn more about how you can improve your financial situation, check out these other posts and articles from OppLoans:

Do you have a  personal finance question you’d like us to answer? Let us know! You can find us on Facebook and Twitter.

Visit OppLoans on YouTube | Facebook | Twitter | LinkedIN | Instagram


Contributors

After working in the financial industry for several years, Stephen Hart left his role as Chief Financial Officer at WorldPay to launch the UK’s first payment processing comparison site, Cardswitcher. Nowadays, he helps SMEs save money on their payment processing costs.
Steven Nuckols is the President of Wealth Compass Financial (@_Wealth_Compass).  An independent registered investment advisor firm specializing in financial planning and wealth management.