Paying Student Loans

debt free zoneYou have the education. Now it’s time to start paying for it. Easier said than done. But the following information may make paying back your student loans just a little bit easier.

Exit Interview

If you have taken student loans, your school is required by law to give you an exit interview. This is simply a time to meet with a financial aid advisor to discuss your repayment obligations and options. Make sure not to miss the opportunity.

Grace Periods

Because some college students don’t get jobs immediately after graduation, lenders usually offer a grace period of about six months before you need to start repaying your student loans. Take time during your grace period to organize your finances and evaluate your options.

Create a Plan

Knowing what you owe and when you need to start making payments is the first step to handling your debt well and keeping that credit score high. Storing your loan paperwork in one safe place is another key to staying on top of your loans.

Ways to Repay

There are many different ways you can arrange your payment schedule, depending on what you can afford:

  • The standard payment plan, if you can afford it, will offer you the lowest total loan cost.
  • A graduated payment plan will start you out with lower payments that increase as time goes on. It’s convenient for now, but you’ll be paying more interest over the long haul.
  • With income-related payment plans, your monthly payment amounts are tied directly to your income instead of rising gradually no matter what your income.
  • Extended repayment allows you to make smaller payments for a much longer period of time. Of course, the longer you owe money, the more interest you pay, and the total amount in the end goes up dramatically.
  • Consolidation can happen when a lender offers you a lower interest rate and allows you to combine all of your loan payments into one convenient payment. You can save a lot of money over the life of your loan.

Don’t Default

Blowing off your loans is one of the worst financial missteps you can take. After six months of missed payments, you will likely be faced with collectors and a destroyed credit rating. So if you’re having trouble making payments, call your lender and find out your options (including deferment) right away.

Reducing Your Debt

Depending on your career path, there are few prime ways to knock out big portions of your loans:

  • Peace Corps: By joining the Peace Corps, you can get a 15% cancellation of your loans during your first two years and 20% during your third and fourth years.
  • AmeriCorps: If you like the idea of the Peace Corps but don’t want to leave the country, AmeriCorps could be for you. Get up to $4,725 toward your education.
  • Military Service: All five branches of the military offer education assistance programs. Check with your local recruiter to find out how they can help you.
  • Teaching: Depending on where and how long you teach, you can get complete loan cancellation or at least a deferment of some loans by filing specific understaffed teaching positions.
  • Legal and medical service: If you decide to study medicine or law, research programs that offer partial cancellation of loans for public service.

© 2000-2015 Visa. All rights reserved.

Automating Your Finances

easy-ways-to-automate-finances-fThese days, you can pay your mortgage or rent, utilities, insurance, loans, and credit cards every month without lifting a finger. Automation is a great time saver—and it can also reduce your vulnerability to identity theft—but it is important to use it wisely.

How it works

There are few different methods you can use to automate paying your bills. If available, the most convenient option is to use your NASA Federal’s Bill Pay service. You log into your checking account online, input who, how much, and when you want to pay, and your financial institution sends an electronic or paper check. You can do it as a one-time thing or set up recurring payments.

Another option is to set it up directly with your creditor or service provider—generally all you need to do is let them know when you want the payment taken out of your checking account and submit an authorization form. For some bills, you may also have the option of having the payment charged to your credit card.

To avoid interest, don’t charge more to your card than what you can pay in full the next month. You can also use a third-party service to pay your bills. It generally does not make sense to shell out money for this if you can use one of the other two options, which are usually free.

Avoid complications

Putting your bills on AutoPay does not mean that you can completely forget about them. First, you want to make sure that you have enough money in your account to cover the withdrawals. If your $1,200 mortgage payment is supposed to be deducted, but there is only $800 in your account, then either your account will become overdrawn when the debit occurs or the debit won’t occur and the bill won’t be paid. Either outcome can result in fees.

You also want to verify that the withdrawal actually occurred when it was supposed to. Mistakes sometimes happen, and you are still responsible for paying your bills on time even if someone else messed up. Don’t forget to review your statements too—if you don’t, you may miss an unauthorized charge or notice of a change in terms.

Lastly, if you close a checking account or credit card that you are paying bills from, be sure that you update your bill pay information so that future payments are assigned to your new account.

Automatically save

Don’t just AutoPay. AutoSave as well. If you wait and see what money you have left over at the end of the month, you may find that you have little or nothing there. There are typically two options for AutoSave: have a portion of your paycheck directly deposited into your savings account, or set up an automatic, monthly or biweekly transfer from your checking account to your savings account. If you choose the second option, it is best to schedule this to coincide with your payday. By automating, it will be easier to build toward your goals and establish an emergency fund.

 

© 2013 BALANCE

How Much Annual Income Can Your Retirement Portfolio Provide?

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Your retirement lifestyle will depend not only on your assets and investment choices, but also on how quickly you draw down your retirement portfolio. The annual percentage that you take out of your portfolio, whether from returns or the principal itself, is known as your withdrawal rate. Figuring out an appropriate initial withdrawal rate is a key issue in retirement planning and presents many challenges.

question markWhy is your withdrawal rate important

Take out too much too soon, and you might run out of money in your later years. Take out too little, and you might not enjoy your retirement years as much as you could. Your withdrawal rate is especially important in the early years of your retirement; how your portfolio is structured then and how much you take out can have a significant impact on how long your savings will last.

Gains in life expectancy have been dramatic. According to the National Center for Health Statistics, people today can expect to live more than 30 years longer than they did a century ago. Individuals who reached age 65 in 1950 could anticipate living an average of 14 years more, to age 79; now a 65-year-old might expect to live for roughly an additional 19 years. Assuming rising inflation, your projected annual income in retirement will need to factor in those cost-of-living increases. That means you’ll need to think carefully about how to structure your portfolio to provide an appropriate withdrawal rate, especially in the early years of retirement.

Current Life Expectancy Estimates

Men Women
At birth 76.4 81.2
At age 65 82.9 85.5

Source: NCHS Data Brief, Number 168, October 2014

Conventional wisdom

So what withdrawal rate should you expect from your retirement savings? The answer: it all depends. The seminal study on withdrawal rates for tax-deferred retirement accounts (William P. Bengen, “Determining Withdrawal Rates Using Historical Data,” Journal of Financial Planning, October 1994) looked at the annual performance of hypothetical portfolios that are continually rebalanced to achieve a 50-50 mix of large-cap (S&P 500 Index) common stocks and intermediate-term Treasury notes. The study took into account the potential impact of major financial events such as the early Depression years, the stock decline of 1937-1941, and the 1973-1974 recession. It found that a withdrawal rate of slightly more than 4% would have provided inflation-adjusted income for at least 30 years.

Other later studies have shown that broader portfolio diversification, rebalancing strategies, variable inflation rate assumptions, and being willing to accept greater uncertainty about your annual income and how long your retirement nest egg will be able to provide an income also can have a significant impact on initial withdrawal rates. For example, if you’re unwilling to accept a 25% chance that your chosen strategy will be successful, your sustainable initial withdrawal rate may need to be lower than you’d prefer to increase your odds of getting the results you desire. Conversely, a higher withdrawal rate might mean greater uncertainty about whether you risk running out of money. However, don’t forget that studies of withdrawal rates are based on historical data about the performance of various types of investments in the past. Given market performance in recent years, many experts are suggesting being more conservative in estimating future returns.

Note: Past results don’t guarantee future performance. All investing involves risk, including the potential loss of principal, and there can be no guarantee that any investing strategy will be successful.

Inflation is a major consideration

To better understand why suggested initial withdrawal rates aren’t higher, it’s essential to think about how inflation can affect your retirement income. Here’s a hypothetical illustration; to keep it simple, it does not account for the impact of any taxes. If a $1 million portfolio is invested in an account that yields 5%, it provides $50,000 of annual income. But if annual inflation pushes prices up by 3%, more income–$51,500–would be needed next year to preserve purchasing power. Since the account provides only $50,000 income, an additional $1,500 must be withdrawn from the principal to meet expenses. That principal reduction, in turn, reduces the portfolio’s ability to produce income the following year. In a straight linear model, principal reductions accelerate, ultimately resulting in a zero portfolio balance after 25 to 27 years, depending on the timing of the withdrawals.

Volatility and portfolio longevity

When setting an initial withdrawal rate, it’s important to take a portfolio’s ups and downs into account–and the need for a relatively predictable income stream in retirement isn’t the only reason. According to several studies done in the late 1990s and updated in 2011 by Philip L. Cooley, Carl M. Hubbard, and Daniel T. Walz, the more dramatic a portfolio’s fluctuations, the greater the odds that the portfolio might not last as long as needed. If it becomes necessary during market downturns to sell some securities in order to continue to meet a fixed withdrawal rate, selling at an inopportune time could affect a portfolio’s ability to generate future income.

Making your portfolio either more aggressive or more conservative will affect its lifespan. A more aggressive portfolio may produce higher returns but might also be subject to a higher degree of loss. A more conservative portfolio might produce steadier returns at a lower rate, but could lose purchasing power to inflation.

Calculating an appropriate withdrawal rate

Your withdrawal rate needs to take into account many factors, including (but not limited to) your asset allocation, projected inflation rate, expected rate of return, annual income targets, investment horizon, and comfort with uncertainty. The higher your withdrawal rate, the more you’ll have to consider whether it is sustainable over the long term.

Ultimately, however, there is no standard rule of thumb; every individual has unique retirement goals, means, and circumstances that come into play.

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IMPORTANT DISCLOSURES

Broadridge Investor Communication Solutions, Inc. does not provide investment, tax, or legal advice. The information presented here is not specific to any individual’s personal circumstances.

To the extent that this material concerns tax matters, it is not intended or written to be used, and cannot be used, by a taxpayer for the purpose of avoiding penalties that may be imposed by law. Each taxpayer should seek independent advice from a tax professional based on his or her individual circumstances.

These materials are provided for general information and educational purposes based upon publicly available information from sources believed to be reliable—we cannot assure the accuracy or completeness of these materials. The information in these materials may change at any time and without notice.

Non-deposit investment products and services are offered through CUSO Financial Services, L.P. (“CFS”), a registered broker-dealer (Member FINRA/SIPC) and SEC Registered Investment Advisor. Products offered through CFS: are not NCUA/NCUSIF or otherwise federally insured, are not guarantees or obligations of the credit union, and may involve investment risk including possible loss of principal. Investment Representatives are registered through CFS. NASA Federal Credit Union has contracted with CFS to make non-deposit investment products and services available to credit union members.

 

Financial Goals: Staying Focused And Motivated

motivated-400x230Defining goals and putting a plan in place is essential to personal financial success. But that’s only part of the battle. Maintaining attitudes and behaviors to get you to those goals takes effort. But it doesn’t have to be grueling. There are techniques you can adopt to make the journey quicker and easier.

Envision Success

Visualizing yourself enjoying the achievement of your goal can help you remember why you’re doing it in the first place. For example, if your goal is to replace you current junker with a new vehicle, imagine yourself enjoying a stress-free cruise down the road with a breakdown the furthest thing from your mind.

Give Yourself Rewards Along the Way

If your goal involves saving $5,000, build into your plan little “presents” for yourself as you reach certain plateaus. Like for every $1,000 saved you get to put $20 toward a fun shopping item.

Make It a Partnership

Is a loved one also trying to reach a goal of their own? Make a pact to regularly check in with each other to monitor progress and offer encouragement. If you there isn’t someone close to you suited for this job, look for a financial support community online.  If your goal involves other family members, do your best to not only include them in tracking progress, but get them excited about the process.

Build In Reminders

Maybe it’s a Post-it note inside a cabinet you open regularly. Or perhaps it’s an electronic reminder sent via a computer scheduling application. Either way, it never hurts to get a reassuring hint that your goals are there for a reason. If you’re a highly visual person, consider putting a picture of your goal where you will see it a lot, like at your desk or in your car.

Treat Setbacks as Learning Experiences

It’s unlikely that you will ever encounter entirely smooth sailing on your way to a financial goal. Because of this, it’s important to have the right attitude about the obstacles that spring up. If you get too discouraged, the whole plan could be lost. By treating unexpected jolts as opportunities for sharpening your skills, you put yourself in a better mind frame for ultimately reaching your destination. Financial goals take work, but it doesn’t have to feel like work. By developing techniques to stay dialed in on the process of achieving your goals, you may even find the experience enjoyable!

© 2013 BALANCE

Credit Cards and Teens: No Minor Issue

teen credit card 2Credit cards are not just for adults anymore—in fact, one third of all American teenagers are cardholders. However, because it is so easy to get into financial trouble with that little piece of plastic, it is very important to learn how to use it before ever uttering those first magic words: “charge it!”

What Credit Is

When you pay for something with a credit card, you are borrowing money from the issuer (bank, credit union, or other financial institution), with the promise that you will either repay it all or make the minimum payment requested when the bill comes. If you don’t pay it in full, the remaining sum will “revolve”—move onto the next month’s bill. Interest will be added to the balance, and will continue to rack up until the debt is paid.

Example: You charged $500 for school books and materials, but can only pay $25 a month. If the interest rate on your credit card is ten percent, it will take you one year and ten months to repay—plus $49 in interest. However, if the interest rate is 22 percent, it will take two years and two months to repay, plus $129 in interest.

How you use credit matters! If you want to finance a car, get a cell phone contract, rent an apartment, obtain a job, qualify for low insurance rates, and (one day) buy a home, you will need to treat credit right—not just now, but over the long term.

How to Get It

Getting started can be a challenge. After all, without a credit history to assess, how will a credit issuer be confident you will repay what you borrow? They don’t, which is why one of the best ways to begin is with a secured credit card. This type of credit card is linked to a savings account, and your credit line is equal to the amount of the deposit. Because the credit issuer may claim the funds in the account if you fail to pay, they assume little lending risk and so are more open to lend to a newcomer.

Store and gas cards can be another good option, since they often have less rigorous standards than unsecured credit cards. They may only be used at a specific store or service station though, and the interest rate is often higher than other forms of credit.

Finally, when you have proved your credit worthiness, you are ready for an unsecured credit card.

When shopping for any credit card, look for the following:

  • Low annual percentage rate (APR). The lower the APR (the interest you are charged on balances), the less you’ll pay to hold onto debt.
  • Long grace period. A grace period is the number of days (typically 15 to 30) you have to pay your bill in full before interest is added. The grace period usually applies only to new purchases, but in some cases (check the application!) is completely eliminated if you carry over a balance from a prior month.
  • Low cash advance fees. Though you may be able to take cash out from your account, it is best avoided. Average service fees are between two to three percent of the advance, and interest kicks in immediately.
  • No annual fee. If you are new to credit you may have to pay an annual fee, but after a year or so of good use, ask for it to be reduced or eliminated.
  • Low penalty fees. You will be charged hefty fees if you pay after the due date or go over your credit limit. Though you should manage your account so you do neither, look for low penalty fees anyway. Just in case.

How to Use It

Once you have a credit card, use it wisely:

  • Stay out of debt. It doesn’t take long for a few purchases to add up to hundreds, even thousands, of dollars. Never charge more than you can afford to repay by the time the bill comes in. To avoid overspending, keep a record of all credit card purchases you make during the month, with a running total of what you’ve spent. When you reach the amount you can afford to pay off, stop using the card until the next month rolls around.
  • Pay more than minimum payment due. If you absolutely can’t pay the entire balance, at least pay more than the requested minimum payment. Because the minimum due is often very low (usually between two to four percent of the balance), you’ll drag the debt out for many, many years if that’s all you pay.
  • Pay on time. Miss a payment cycle and your credit history will take a quick and hard hit. And if you fail to pay by the due date you will have to pay that late payment fee—typically $25 to $40.
  • Limit the number of cards you have. Only apply for the plastic that you absolutely need. The more open credit lines you have, the more you’ll be tempted to spend beyond your means. Also, too many applications can hurt a credit score.

Credit Reports and Credit Scores

There are three major credit-reporting bureaus in the U.S.: TransUnion, Experian, and Equifax. These companies collect credit-related data, compile it into reports, and then provide it to businesses that need to evaluate lending risk and make other business decisions. Your credit and debt information will be on these reports in detail, including when you opened the accounts, if you’ve paid on time, how much you owe, if accounts have gone into collections, your credit limits, and if you have been sued for a debt.

Think being graded ends with school? It doesn’t. The way you treat credit is graded (scored) all your life. A credit score is a mathematical risk assessment based on the information on your credit report. A common scoring model is one developed by Fair, Isaac and Company. They issue a FICO score that ranges from 300 to 850. It is based on (in order of greatest weight) payment history, amounts owed, length of credit history, pursuit of new credit, and types of credit in use. High scores translate into cheaper loans an increased edge for employment and housing opportunities.

A credit card is not just a convenient payment method, but also a way of proving stability and responsibility. Always use credit wisely—your future depends on it!

Copyright © 2005 Balance

Money Management for the Boomerang Household

boomerang-e1398693933964Due to recent economic realities, multi-generational living has been on the rise for many families.

A 2014 Pew Research Center analysis showed that a record 57 million Americans, equal to a little over 18 percent of the U.S. population, lived in multi-generational family households in 2012—double the number in 1980. The major driver was young adults aged 25-34. According to Pew, nearly 24 percent of these older millennials lived in multi-generational households, increased from nearly 19 percent in 2007 and 11 percent in 1980.

It’s possible the “boomerang” family trend will remain in place for some time to come. For homeowner parents who may also be juggling the “sandwich” responsibilities of caring for older relatives, paying attention to the financial and behavioral details of taking in family is critical. Here are some suggestions to consider:

Your finances come first. Operating a full house means higher utility and food costs and additional wear and tear on the property. Taking in family also shouldn’t derail a parent’s career goals or retirement planning, nor should it diminish other necessary financial objectives like maximizing savings or eliminating debt. That’s why dual- or single-parent households might begin with a complete financial assessment before welcoming kids or elders back home. A discussion with qualified financial and tax advisors might be worthwhile to determine how much expense you can take on. For arrangements that go beyond free lodging to direct cash support of family members, gift tax issues should be explored.

Make a real agreement. A home is stability and therefore something of significant value. That is why it is appropriate to consider rent or request in-kind services in exchange for room and board. Young adults—particularly those who were fully under parental support in college—need to learn this important lesson even if they are moving home to save money to pay off loans, to buy a car or put a down payment on a home. Ask trusted advisors about what makes sense in your situation. If you decide to accept rent, know there are potential tax issues based on the structure, timeframe and expenses related to such an agreement. Legal paperwork may be required, but there also may be rental expenses you can deduct.

Establish timelines. In the real world, financial arrangements are rarely open-ended. Depending on the financial, tax and legal advice you receive as well as local tenant law and personal preferences, you may be signing an official lease for your family member’s stay with a specific timeline of months or years. Whatever the requirements, make sure you have an effective framework that sets specific financial and behavioral rules you want met.

Start with a family meeting. Before moving trucks arrive, family members should meet for a discussion about the impending move. Start by letting your child or family member talk through why they want to move in, whether they have financial goals tied to the living arrangement and how long they plan to stay. Share the structure you envision, including the payment details you would consider. No matter how agreement is struck, it should begin with a full discussion of needs, preferences, financial terms, and most of all, ways to make the arrangement successful and smooth. Once the move happens, regular conversations should continue about the living arrangement. After all, boomerang families have unique, ongoing financial issues that will require discussion.

Prepare to track expenses. Once agreed, retrofit your household budget to keep track of higher food, utility and related expenses for cost-sharing and potential tax purposes. Having people you love living with you will hopefully have many rewards that go beyond simple dollars, but always know what the arrangement is costing you.

Bottom line: Opening your home to returning family members is a real financial commitment. Think through money, tax and household issues before you say yes.

By Jason Alderman