How common — and how dangerous — is living hand-to-mouth?

If the news describes someone as living paycheck to paycheck, you might have a pretty good idea of what their life looks like. You might imagine them struggling to get by just to cover all of their bills. You might picture them as constantly juggling those bills and relying on revolving credit card debt. Yet, a new report out of Princeton University suggests that this may not be an accurate vision of this group of people.

The report describes the habits of a group it calls the “wealthy hand-to-mouth.” 25 million of the 38 million Americans who live hand-to-mouth, that’s a staggering 65%, have a median income of $41,000, which is close to the national average of $43,000. This group includes a fair number of people in your community. You might even see a little of your own habits here.

These individuals tend to be somewhat older, with a peak age of 40. Their spending habits tend to expand in accord with their income levels. For instance, if they get a raise, they increase their discretionary spending. They might eat more meals out or take on another monthly payment. If they get a windfall, like a tax return or an inheritance, they splurge on a big-ticket item. They pay all their bills on time and don’t carry a tremendous debt load. They likely own a home and are building equity by paying down a mortgage. These folks are also more likely to be investing in a retirement account, like a 401k or IRA.

Make no mistake: these are important savings strategies. What they don’t offer, though, is flexibility. In a volatile labor market, anyone can lose their job at any time. Illnesses and accidents can strike without warning and lead to huge bills. Even inclement weather could result in home or car damage, requiring extensive repairs. If an emergency happens to someone in this group, they may be in for serious trouble.

The money in their home and retirement account is inaccessible. They might curtail their spending, but that won’t help if they need a large quantity of money in short order. They will have three options: sell their home, cash in retirement accounts, or take on significant debt. None of these options offer much hope of a brighter future. One foul stroke of luck is all it would take to move them from “wealthy hand-to-mouth” to just plain struggling.

These kinds of misfortunes happen to everyone sooner or later. That’s why the factor most strongly correlated with financial security is regular savings. A “rainy day” fund separates a short-term financial problem from a life-changing tragedy. The “wealthy hand-to-mouth” think retirement funds and home equity will ensure their financial security. The tumultuous early 2000s showed us, though, that making it to that point is no sure thing.

Credit union members have a variety of tools that are available to them to help provide this measure of security. Among the most popular is the vacation club account. This is an interest-bearing savings account that allows for unlimited deposits and discourages frequent withdrawals. Consider the money you put into this account to be a way of paying yourself. You pay your bills, your house note, and your other obligations on time. Putting money into your savings account is paying off the future trouble you don’t want to deal with when it happens. You can set up direct withdrawals from your paycheck or put in a specific amount each month. You and your partner could also put any unexpected windfalls, like bonuses or refunds, into this account.

If a disaster strikes, and you need the money, it’s there. You won’t need to worry about selling your house, cashing in your retirement fund, or taking on expensive debts. A vacation club account is an inexpensive form of self-insurance. If nothing bad happens and you don’t use the money before you retire, it’ll still be there. You can use it to take your dream vacation, to buy an RV or a vacation house, or just to throw one heck of a retirement party. All the money you’ve saved will be gaining interest, and it will be a wonderful supplement to your retirement fund.

Your parents or grandparents may have kept their rainy day fund in a jar on top of the refrigerator. You don’t have to be that low tech. You can protect your financial future, insure against accidents, and gain some peace of mind along the way.

Credit Card Debt: How It Hurts And How You Can Escape

Credit Card Debt

Total up the credit card debt of all the people in America, and it gives each household a staggering balance of $7,115 according to the Federal Reserve. Among just those who have debt, the average balance in $15,252. About half of households regularly carry a credit card balance. With high rates of unemployment, circumstances often force people to use credit cards to finance their lifestyles. This “strategy” leads to significant levels of indebtedness and low chances for repayment.

Yes, this debt level is staggering. It can be the biggest enemy of people who are trying to build wealth. Let’s look at some of the costs of credit card debt and what you can do about it.

The financing costs are high

In February 2014, the average APR on a credit card was about 15%. That means, before considering potential late fees and other expenses, the “debt service” cost on the average household’s debt is $2,287. That’s the amount the debt will grow assuming that no other spending on the cards takes place. If you have a complicated credit history, your interest rate could be as high as 22%. Your debt service then grows to $3,355.

As your credit card statement is legally required to inform you, the debt service costs exceed the minimum payment. This cost will continue to grow forever, even if you never spend again. Interest rates, though, are only the tip of the iceberg.

Credit card companies also stack late fees, collection fees, and other miscellaneous charges on top of these fees. These fees then contribute to the debt load and are charged interest at the same rate. Carrying long-term and high amounts of credit card debt is among the worst things you can do for your personal financial health.

The hidden costs are high

One of the biggest factors in determining your credit score is a figure called your “debt utilization ratio.” This is the percentage of your available credit that you’re currently using. Say you have a credit limit of $5,000 and you carry a balance of $2,500. That means your debt utilization ratio is 50%. Anything higher than 7% can negatively impact your credit score, making it more difficult to get other kinds of credit (such as an auto loan or home mortgage).

It doesn’t stop there, though. That lower credit score also translates into higher interest for unsecured loans, like credit cards. This increase in cost eats up your credit limit faster, driving your credit score down, and contributing to even more debt.

Not only does it hurt you financially, but many employers now use credit checking as a way to assess the trustworthiness and long-term planning of a potential employee. Having a low credit score could cost you a chance at your dream job.

The investment opportunity is tremendous

Savvy investors always like to talk about “ROI” (or return on investment). That’s the percentage of the money they invest that they get back and the rate at which they get it. Warren Buffett, perhaps the shrewdest investor of our time, gets an average return on investment of 17% for his investment company. This is the best work that the best investors in America can hope to achieve. They have to hunt long and hard for places to earn that kind of return.

The interest rates on your credit card debt are right around 17%. Getting rid of your credit card debt can achieve those kinds of returns by saving you an extra 17% on every dollar you pay down. It’s the smartest investment decision you can make.

Your credit union can help

Most habitual credit card users fall into a trap. They charge a great deal to one card then sign up for another to take advantage of low interest rates on balance transfers. They carry this huge ball of revolving debt with them and don’t see much of a way out.

Fortunately, NASA Federal Credit Union is there to help you get out of the crushing cycle of revolving credit card debt. You can get a debt consolidation loan that will help repair your credit score, consolidate your monthly bills into one payment and make that debt cheaper with a lower interest rate. Here’s how they work. You agree to a term of repayment, usually 60 months, and an interest rate. Your credit union issues you a loan for your credit card balance. You then pay them the same fee every month for that 5 years until your debt is repaid. You walk away with an improved financial history and no debt. Congratulations, you are now ready to start saving and investing in your financial future.

Debt consolidation loans aren’t the silver bullet to your financial problems. They work in conjunction with credit counseling, financial education, and budgeting help to get you on the path to financial well-being. It’s time to get control over your financial future. Learn more about debt consolidation.

Preparing To Buy Your First Home

No PMI

A decade ago, economic experts were bemoaning the emergence of a “boomerang generation.” Young people had left for college with bright eyes and exciting dreams of rewarding and fulfilling careers. Then, in 2000, the economy collapsed. These ambitious, well-educated folk found themselves with tons of debt and little opportunity. Many of them swallowed their pride and moved back home with mom and dad.

This situation wasn’t great for anyone. Mom and dad had to put retirement plans on hold. Gen Y members had to postpone their professional and social development to take internships and part-time jobs. It’s also hard to feel fully “grown up” when your evenings end and mornings begin in your old childhood bedroom, perhaps still full of stuffed animals or posters of bands you liked in high school.

The economy improved, and members of this generation used hard work and education to put themselves in a position to consider buying houses. 70% of Gen Y, according to a Better Homes and Gardens survey, now find themselves ready to strike out on their own again. The timing couldn’t be better for them, as many market experts are predicting a coming housing boom. Interest rates are low and real estate values have likely bottomed out. These two factors suggest that a surge of home buying is likely in the next few years.

Buying a home can be a daunting task, though. The challenges of being a first-time home owner can be intimidating, particularly for people who are moving away from home. Let’s take a look at a few guidelines to help take some of the stress out of the decision.

The house you buy may not be forever.

Because of the soundness of real estate as an investment, many first-time home buyers tend to want to get the biggest house they can. They may be trying to start families or getting more space for their existing family to grow. Whatever the motivation, buying a house is one of the few times when people try to plan their lives 30 or more years down the road.

That’s a really big gamble. Any number of unanticipated changes might happen in 30 years: Your job or your partner’s job may force you to move, your parents may have medical problems that need greater care, or you may decide to change careers or start your own business. This unavoidable uncertainty means it’s not in your best interest to plan for a future that’s so far away.

Look for a house that suits your immediate needs and understand that every place is adaptable to a degree. A den or an office can become a nursery, a shed can become a workshop, and a basement storage area can become another bedroom. Don’t think you need to plan your life out forever if you choose to buy a home. Make some reasonable, educated guesses about what your life will be like for the next 10 years or so, and buy the house you need for that time.

Don’t become ‘house poor’

Many first-time home buyers also fall in to the trap of figuring out the most that they could afford to spend on a new home, then spending exactly that amount. The reasoning behind this decision is simple: money spent to repay a mortgage isn’t really “spent.” Homes can be refinanced or remortgaged if money gets tight, or repaid when the house is sold. That’s sound reasoning, but only to a point. People who end up spending most of their monthly income on a house payment leave little for other debt repayment, retirement savings, or building an emergency fund. They find themselves unprepared for an unexpected medical bill or car repair. They also find it difficult to take vacations or make home improvements. That’s an unenviable position.

Avoid this trap with a little financial consultation. Understand that your upper limit for housing expenses should only be a worst-case scenario. Buy the house you need, not the most expensive house you can afford. You’ll be happier in your home and in your budget.

Understand the process

There are a lot of factors that go into obtaining a mortgage. First, you and the seller have to agree on a final price, which includes the money you pay for the house and a host of fees, like the inspection, appraisal, and title transfer. The realtor in charge of selling the home can walk you and the seller through the process.

Next, you’ll need to arrange financing. You’ll want to shop around for the best prices, but new regulations can make that costly and time-consuming. Each financier has to appraise the value of the home, and then compare their estimate to the price you agreed on with the seller. The greater the difference between these two values, the more expensive your home loan will be, but that’s not the only factor. The financing institution also has to check your credit, verify your income and assets, and confirm your employment to follow new regulations passed after the last financial crisis that was largely fueled by bad mortgages.

These regulations can make it more difficult just to get the home loan, much less one at a good rate. This is particularly true if your employment history is short or if you’re just getting started with a new business.

You can help this process by buying a house you can afford, building your credit score by reducing the amount of credit you’re using, staying with the same employer and saving for a significant down payment. You should aim to have at least 20% of the total amount of the sale for a down payment, as this is the threshold to avoid having to pay for private mortgage insurance (PMI). A larger down payment also reduces the risk of the loan to the lender and can help get you a less expensive mortgage. This, in turn, makes for a less expensive housing payment. You can also ask for help from mom and dad; a cosigner on a mortgage may improve your credit score and lower your interest rates.

Don’t go it alone

A lot of big national lending institutions advertise appealing mortgage specials on billboards, TV, and the radio. The rates may seem reasonable and even enticing. In reality, though, those rates go only to a small percentage of borrowers – borrowers who have exceptional credit, significant income, and a considerable net worth. As a first-time home-buyer, you probably will not qualify for the rates those large, faceless corporate lenders are using as bait to pique your curiosity.

Given the difficulty of shopping around, make your first stop the institution that has the best chance of giving you the best rates from the start. NASA Federal Credit Union is there to help your community, and that includes helping new home-buyers secure loans for the first time. You’re making the right decision by looking for a home during a buyer’s market. Make another smart call by speaking to a credit union representative about mortgage rates. When you’re ready to get out of the basement, your first stop should be your credit union.

If you’d like to discuss your home financing options with a Mortgage Loan Specialist, call 301-249-1800, Ext 207, or fill out this contact form.

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Trim Your Transportation Expenses

Auto Refinance

Cutting back on transportation can be as easy as refinancing your auto loan with NASA Federal Credit Unionif you have an auto loan. If you’re paying more than you’d like, consider downgrading to a smaller, less expensive car, or one that costs less in maintenance and upkeep.

Ask yourself if you really need a car, or if your household needs as many cars as you have. One less car means lower monthly costs on car payments, insurance, gasoline, and repairs.

If you’re looking to save on auto insurance, be sure to compare apples to applesthe coverage you’re getting should be the same, with a lower price. If you’re taking less coverage, be sure that makes sense long-term. It’s a good idea to shop around for insurance every year or two, and you might save more by combining your home and auto insurance into one policy.

The Closing Mortgage Window

Mortgage

Over the past 6 months, you’ve no doubt heard that this is the best time in recent history to refinance your mortgage or buy a new home. While it’s easy to assume that those low mortgage rates are just the new normal, recent action from the Federal Reserve tells us that this window to lock in a mortgage at 60-year lows may be closing.

Before we look at the reason, let’s take a quick look at why mortgage rates have been so low for so long. A little background on the banking system might help explain why experts are making this observation.

Financial institutions base the rates that they charge for loans on how much it costs them to borrow money. Because other financial institutions are the lowest-risk borrowers, they get the best rate. This is usually called the “prime rate.” This rate is set by each individual institution, although they all follow signals from the Federal Reserve. The Federal Reserve uses a variety of instruments to influence the prime rate. These signals come in two forms: lending rates and bond purchases. Lending rates are the interest rates that the Federal Reserve charges to other financial institutions. Bond purchases are investments that the Federal Reserve makes in loans that institutions are making.

Since 2008, the Federal Reserve has used these signals to make credit cheaper in an effort to spur growth in major employment sectors, like construction and small business. The Federal Reserve Board kept rates low until unemployment dropped below 6.5% or inflation went up over 2.5%. New economic reports suggest that the unemployment figure could be approaching that 6.5% target. New Fed Chair Janet Yellen has begun reducing bond purchases. Experts suggest that this tapering is the Federal Reserve’s first step toward reigning in the stimulus. These signals tell financial experts that rates may soon go up, including the interest rates on new mortgages.

The frightening reality is that it doesn’t matter if they’re right or not. If enough big lenders decide they are, those institutions can start raising their interest rates. This move will prompt other lenders to raise their rates in response, and your chance to get into a cheaper mortgage will be over.

Unless you can get a full percent lower interest rate, the costs of refinancing make it unfeasible. You might not be able to do that by just extending the term of your mortgage. Yet, this may be a good time to revisit your financial goals and figure out what kind of mortgage suits your financial future. Here are a couple of questions to help you figure out if a new mortgage is for you:

Can you afford a higher monthly payment for a shorter period of time?

The most significant impact you can have on the interest rate for your mortgage is to shorten the term of the loan. Because your lender gets paid in full sooner, they’re exposed to less risk, so they charge a lower interest rate. If you’re 10 years into a 30-year mortgage, you aren’t likely to save by refinancing into another 30-year mortgage. You might be in a better financial situation than you were 10 years ago, though. The higher monthly payment of a 15-year mortgage might not be as much of a problem. This refinancing strategy gets you out of debt sooner and saves you money in the long term.

Are you going to be out of debt before you retire?

The best way you can make retirement more affordable is to retire debt-free. This allows you to use your retirement funds to support your lifestyle and hobbies. Now is a good time to investigate a shorter-term mortgage that you can have paid in full before you retire. It’ll never be cheaper to get into a mortgage that better fits your financial needs.

Are you unsure if you’ll be moving soon?

Remember, “soon” for big decisions like mortgages means in the next five years. If the next 5 years could bring a move for career or family, it might be wise to lower the total debt load on your house. For this kind of decision, the monthly payment matters less than the total amount owed. You’ll be selling your house to cover the debt. The smaller you can make the amount owed, the more of the sale price of your house you get to keep. Consider a “hybrid” mortgage. These loans are fixed-rate for a specified time, and then use adjustable rates for the rest of the loan. This kind of refinance can save you money for the time you’ll be paying for the home.

Have you been denied for refinancing before?

If you considered refinancing your mortgage before but were told that you didn’t qualify, now is a great time to try again. If you were unemployed for a while, but now have a job, lenders are more willing to see this as a positive sign of recovery. Additionally, home prices are on the rise. The collateral you have for your loan might be worth more, which will help your lender get you the best rate possible. If you signed a mortgage before 2008, it just makes sense to investigate a refinance. The interest rates are lower, the economy is stronger, and now might be your last chance to take advantage of recovery. Speak to our loan officer today to see what refinancing options are available for you.

Ready to finance your next home? Still want to learn more?

If you’d like to discuss your home financing options with a Mortgage Loan Specialist, call 301-249-1800, Ext 207, or fill out this contact form.

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Member Discount: International Space Development Conference in Los Angeles

International Space Development ConferenceThe 33rd Annual International Space Development Conference (ISDC 2014) kicks off on Wednesday, May 14, for five days of presentations, panels, exhibits, lunches and dinners celebrating this year’s theme, “A Space Renaissance.”

Among the notable VIPs at ISDC 2014 is the Honorable Eric Garcetti, Mayor of Los Angeles, who will open Thursday morning’s plenary session, and Elon Musk, CEO of SpaceX and Tesla Motors, who will accept the Robert A. Heinlein Memorial Award during Friday evening’s Governor’s Dinner.

Apollo 11 astronaut and author Buzz Aldrin, the second man to set foot on the Moon, will speak at a noontime luncheon on Saturday. A total of six astronauts will be attending the conference.

“I’ve participated in the ISDC since the very first one in 1982, and it remains the preeminent meeting of its kind anywhere in the country,” said Aldrin. “I am looking forward to speaking at the conference again this year and I encourage anyone with an interest in space exploration and innovation to join me at ISDC 2014.”

As a benefit of your NASA FCU membership, you may register for the upcoming NSS Conference at a savings of $25 when you register online. NASA FCU Members should choose the “NASA Federal Credit Union” option in the ISDC Sponsor/Co-Sponsor dropdown. 

Register Now

Learn more about this conference here.