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Tag Archives: Paying Down Debt

Home / Posts Tagged "Paying Down Debt"

How Does the Federal Reserve Interest Rate Affect Me?

January 13, 2021 by Russell Henderson Posted in Home, Money Tagged All, Banking, big, Budget, Buy, car, CD, Children, college, Credit, Credit Cards, Debt, employment, Federal Reserve, Finance, Financial Education, Financial Goals, financial planning, Financial Wize, FinancialWize, Groceries, Grow, home, home loans, How To, Interest Rates, Life, Loans, Make, Managing Your Money, money, More, Mortgage, mortgages, Move, News, Online Savings Account, Paying Down Debt, Personal, Personal Finance, Planning, Popular, private student loans, Rates, Real Estate, refinancing, Saving, savings, Savings Strategies, Savings Tips, Spending, Student Loans

You may not realize it, but behind the scenes the Federal Reserve is quietly influencing your everyday life when it comes to borrowing, saving and even spending. Serving as the central bank of the United States, the Federal Reserve, or Fed, is responsible for managing the country’s monetary policy. A big part of its job is adjusting the federal funds rate—the short-term interest rate banks charge each other to lend funds overnight. The Fed decides whether or not to raise or lower this benchmark interest rate in order to reach maximum employment and stable inflation.

OK, wait. Policymakers, the economics behind employment and inflation, overnight lending between banks… so how does a change in interest rate affect your decision to spend or save, you ask? To borrow from a popular saying: “So goes the federal funds rate, so goes consumer interest rates,” says Riley Adams, a certified public accountant and founder of personal finance website Young and the Invested. Whether it goes up or down, a change to the federal funds rate could have a ripple effect in the same direction for borrowers, savers and spenders—an important proof point for why the federal funds rate matters for consumers.

Are you wondering, "how does the Federal Reserve interest rate affect me?" A Fed rate change usually has a ripple effect in the same direction for savers, spenders and borrowers.

If this is news to you and the federal funds rate hasn’t really been on your radar, have no fear. What follows will help you more fully answer the question: How does the Federal Reserve interest rate affect me? Then you’ll be on your way to making the best money management decisions for your financial goals and the current interest rate environment.

A low interest rate environment makes borrowing more attractive

The answer to “how does the Federal Reserve interest rate affect me?” can be very beneficial in a low-rate environment if you have debt or are looking for new borrowing opportunities. When the Fed cuts rates, borrowing money tends to become less expensive since banks and lenders also typically lower rates on their credit products.

In a low-rate environment, for example, you could see lower rates on:

  • Credit cards
  • Auto loans
  • Personal loans
  • Private student loans
  • Home equity lines of credit
  • Adjustable-rate mortgages
  • Business loans

Why the federal funds rate matters for consumers and the credit cards in your wallet has to do with minimum payments and interest charges. A Federal Reserve rate cut could translate to a lower minimum payment on credit cards and a lower cost to carry a balance from one month to the next. For loans, a Fed rate cut could mean lower monthly payments and less interest paid out over the life of the loan. Lower borrowing costs can add money back to your budget that you could use to spend, save or apply to your financial goal of choice.

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How does the Federal Reserve interest rate affect me when it comes to homeownership, you ask? There’s good news there, too. When the Fed lowers rates, homeowners with an adjustable-rate mortgage or homebuyers shopping for one may experience a rate reduction, since the rates for this type of mortgage typically track with the prime rate, which is in turn influenced by the federal funds rate. The lower your mortgage rate, the lower your monthly payment and the more home you might be able to afford. Good deal. Note that fixed-rate mortgages are less directly impacted by a Fed rate cut.

Chad Rixse, director of financial planning at Forefront Wealth Partners, says that when rates are falling, it may be a good time to consider refinancing or consolidating existing debt, such as private student loans, home loans and car loans. (Definitions: Refinancing means replacing your existing loan with a new one at a lower rate. Consolidating means paying off multiple loans with a single new loan.)

When analyzing “how does the Federal Reserve interest rate affect me?” Adams adds that consumers should be mindful of how much rates have dropped to determine the value of refinancing or consolidating. Using mortgages as an example: “They should not consider refinancing a mortgage after a 25 basis point (0.25%) cut in the rates because the associated costs and fees will outweigh any interest savings,” Adams says. “If rates move meaningfully lower (1.00%+), they should be on the lookout for refinancing offers, assuming they have significant time remaining on their mortgage and can benefit from lower interest costs.”

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“So goes the federal funds rate, so goes consumer interest rates.”

– Riley Adams, certified public accountant and founder of Young and the Invested

When rates rise, savers reap the benefits

How does the Federal Reserve interest rate affect me when rates go up? In a higher interest rate environment, your savings may actually be able to get a little more love.

“If interest rates rise, this benefits savers by possibly earning more interest on their bank deposits, assuming their bank indexes interest rates on deposits to remain competitive against other banks,” Adams says.

For your list of “ways the Fed interest rate affects me,” consider that these savings vehicles could earn more interest when rates rise:

  • Savings accounts
  • Certificates of deposit (CDs)
  • Money market accounts
  • Interest-bearing checking accounts

You can take advantage of higher savings interest rates and get the most from your savings efforts by increasing the amount of money stashed in your interest-earning savings accounts. The higher the balance, the more you will earn.

If you’re focused on saving and there’s a chance rates could drop in the near term, you may want to lock in a higher rate while you can with a long-term, fixed-rate CD. That way, you can continue to earn a higher rate throughout the CD’s term even if the Fed cuts the federal funds rate and rates start to drop on deposit accounts.

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Interest rates can affect spending habits

Why the federal funds rate matters for consumers even extends into purchasing power and everyday spending.

“By raising the federal funds rate, the Fed makes it more attractive for banks to hold extra capital,” says James McGrath, a housing market expert and licensed real estate broker at New York-based real estate firm Yoreevo. “When more money is locked away in vaults, there is less available to make loans and buy things, which slows growth and inflation.”

If inflation is kept to a minimum by the Fed’s benchmark interest rate, prices for things you buy every day—think groceries or personal care items—have less room to increase. If a Fed rate change keeps those everyday prices low, you can put more of your money toward savings or paying off high-interest debt.

Why does the federal funds rate matter for consumers? It can impact inflation and purchasing power.

On the flip side, McGrath says the Fed can lower rates to spur spending. That puts more money into the economy, but it does open up the potential for prices to rise, he says. If you’re wondering “what ways the Fed interest rate affects me?” consider that higher prices could mean that your money has to stretch further to buy the same things.

How to handle interest rate changes

By now, you should have a better understanding of why the federal funds rate matters for consumers. While there’s nothing you can do to control the Federal Reserve’s rate changes, you can control how you react to rising or falling rates.

Look at your overall financial situation against the backdrop of what’s happening with rates. Your list of ways the Fed interest rate affects me might be different than someone else’s. Ask yourself how you can take advantage of rising or falling rates for maximum financial benefit when it comes to your borrowing, saving and spending priorities. For example, if the Fed hikes rates and you’ve been building up a college savings fund for your children, you may be motivated to put more into savings to take advantage of higher returns. If rates are cut and you’ve been in the market for a loan for some time, now could be the time to jump on it.

Worried about the ways the Fed interest rate affects you? Remember it could take more than just one Fed rate change to make a significant impact on your daily life.

Note that the ways the Fed interest rate affects me may also depend on more than just one Fed rate change. “Small changes don’t amount to significant differences over time,” Adams says. “It’s when a long-term rate increase or decrease path becomes the norm that consumers should pay more attention,” he adds.

Above all, remember that rate increases and decreases are a normal part of what the Fed does. “Remain calm and carry on,” Rixse suggests. “Don’t let panic or negative emotions guide your decision-making.”

The post How Does the Federal Reserve Interest Rate Affect Me? appeared first on Discover Bank – Banking Topics Blog.

Source: discover.com

4 Smart Things to Do When You Get an Inheritance

January 13, 2021 by Russell Henderson Posted in Budgeting, Family Finance, Financial Freedom Tagged All, Banking, big, Budgeting, car, CD, Debt, Debt Repayment, Emergency Fund, Family, Family Finance, Financial Goals, Financial Plan, Financial Wize, FinancialWize, home, How To, Insurance, Investing, investment, Life, Managing Your Money, money, Online Savings Account, Paying Down Debt, property, Quick Tips, Real Estate, Retirement, Saving, Saving for Retirement, savings, Spending, Tax Advantages, trust

You just learned of the passing of a loved one. During this stressful and emotionally taxing time, you also find out that you’re receiving an inheritance. While you’re grateful for the unexpected windfall, knowing what to do with an inheritance can bring its own share of stress.

While the amounts vary greatly, the Federal Reserve Board’s Survey of Consumer Finances reports that an average of roughly 1.7 million households receive an inheritance each year. First words of wisdom—resist the urge to spend it all at once. According to a study funded by the Bureau of Labor Statistics, one-third of people who receive an inheritance spend all of it—and even dip into other savings—in the first two years.

Not me, you say? Still, you might be asking, “What should I do with my inheritance money?” Follow these four steps to help you make smart decisions with your newfound wealth:

Take time to grieve and process your emotions before diving into the things to do when you get an inheritance.

1. Take time to grieve your loss

Deciding what to do with an inheritance can bring with it mixed emotions: a sense of reprieve for this unexpected financial gain and sadness for the loss of a loved one, says Robert Pagliarini, certified financial planner and president of Pacifica Wealth Advisors.

During this time, you might feel confused, upset and overwhelmed. “A large inheritance that pushes you out of your financial comfort zone can create anxiety about how to best manage the money,” Pagliarini says. As an inheritor, Pagliarini adds that you may feel the need to be extra careful with the funds; even though you know it is your money, it could feel borrowed.

The last thing you want to do when deciding what to do with an inheritance is make financial decisions under an emotional haze. Avoid making any drastic moves right away, such as quitting your job or selling your home. Some experts suggest giving yourself a six-month buffer before using any of your inheritance, using the time instead to develop a financial plan. While you are thinking about things to do with an inheritance, you can park any funds in a high-yield savings account or certificate of deposit.

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“A large inheritance that pushes you out of your financial comfort zone can create anxiety about how to best manage the money.”

– Robert Pagliarini, president of Pacifica Wealth Advisors

2. Know what you’re inheriting

Before you determine the things to do with an inheritance, you need to know what you’re getting. Certified financial planner and wealth manager Alex Caswell says how you use your inheritance will largely depend on its source. Typically, Caswell says an inheritance will come in the form of assets from one of three places:

  • Real estate, such as a house or property. As Caswell explains, if you receive assets from real estate, you will transfer them into your name. As the inheritor, you can choose what to do with the assets—typically sell, rent or live in them.
  • A trust account, a legal arrangement through which funds are held by a third party (the trustee) for the benefit of another party (the beneficiary), which may be an individual or a group. The creator of the trust is known as a grantor. “If someone inherits assets through a trust, the trust documents will stipulate how these assets will be distributed and who ultimately decides how they are to be invested,” Caswell says. In some cases, the assets get distributed outright to you; in other instances, the trust stays intact and you get paid in installments.
  • A retirement account, such as an IRA, Roth IRA or 401(k). These accounts can be distributed in one lump sum, however, there may be requirements related to the amount of a distribution and the cadence of distributions.

One of the first things to do with an inheritance is be sure you understand what you've inherited.

When considering things to do with an inheritance, know that inherited assets can be designated as Transfer on Death (TOD) or beneficiary deeds (in the case of real estate), which means the assets can be transferred to beneficiaries without the often lengthy probate process. An individual may also bequeath cash or valuables, like jewelry or family heirlooms, as well as life insurance or stock certificates.

Caswell says if your inheritance comes in the form of investment assets, such as stocks or mutual funds, you’ll want to think of them as part of your own financial picture. “All too often, we see individuals end up treating inherited assets as a living extension of their passed relative,” Caswell says. Consider how the investments can be used to support your financial goals when thinking about things to do when you get an inheritance.

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An average of roughly 1.7 million households receive an inheritance each year.

– Federal Reserve Board’s Survey of Consumer Finances

3. Plan what to do with your financial gain

Just like doing your household budgeting, it’s important to “assign” your inheritance to specific purposes or goals, says Pacifica Wealth Advisors’ Pagliarini. Depending on your financial situation, the simple concepts of save, spend and give may be a good place to start when deciding on things to do when you get an inheritance:

SAVE:

  • Bolster your emergency fund: You should have at least three to six months of living expenses saved up to avoid unexpected financial shocks, such as job loss, car repairs or medical expenses. If you don’t and you’re deciding what things to do with an inheritance, consider parking some cash in this bucket.
  • Save for big goals: Now could be a good time to boost your long-term savings goals and pay it forward. Things to do when you get an inheritance could include putting money toward a child’s college fund or getting your retirement savings on track.

SPEND:

  • Tackle debt: If you’re evaluating what to do with an inheritance, high-interest debt is something you could consider paying off. Spending on debt repayment can help you save on hefty interest charges.
  • Reduce or pay off your mortgage: Getting closer to paying off your home—or paying it off entirely—can also save you in interest and significantly lower your monthly expenses. Allocating cash here is a win-win.
  • Enjoy a little bit of it: It’s okay to use a portion of your inheritance on something you enjoy or find rewarding. Planning a vacation, investing in more education or paying for a big purchase could be good moves.

GIVE:

  • Donate funds to charity: Thinking about your loved one’s causes or your own can continue legacy goals and provide tax benefits.

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4. Don’t get tripped up on taxes

When deciding what to do with an inheritance, taxes will need to be considered. “It is extremely important to be aware of all tax ramifications of any decision around inherited assets,” Caswell says. You could be required to pay a capital gains tax if you sell the gift (like property) that was passed down to you, for example. Also, depending on where you live, your inherited money could be taxed. In addition to federal estate taxes, several U.S. states impose an inheritance tax and/or an estate tax.

Since every situation is unique and tax laws can change, when considering things to do with an inheritance, consult a financial advisor or tax professional for guidance.

Make your windfall count

Receiving an inheritance has the potential to change your financial picture for good. When thinking about the things to do when you get an inheritance, be sure to give yourself ample time to grieve and to understand all of your options. Don’t be afraid to lean on the experts to get up to speed on any tax and legal implications you need to consider.

Planning can go a long way toward making the right decisions concerning your newfound wealth. Being responsible with your inheritance not only helps ensure your financial future, but will also honor your loved one’s legacy.

The post 4 Smart Things to Do When You Get an Inheritance appeared first on Discover Bank – Banking Topics Blog.

Source: discover.com

Taking the Leap: How to Make a Career Change and Land on Your Feet

January 13, 2021 by Russell Henderson Posted in Budgeting, Commercial Real Estate Tagged All, Banking, Budget, Budgeting, Career, Career & Education, Career Change, Career Tips, CD, Earning Potential, Emergency Fund, Family, Finance, Financial Plan, financial planning, Financial Wize, FinancialWize, How To, Insurance, investment, Job Security, Life Events, Long-term Saving, Managing Your Money, money, Money-saving Tips, Online Savings Account, Paying Down Debt, Personal Finance, Quick Tips, Real Estate, Salary, Saving, Savings Strategies, Side Hustle, Spending, Starting Out, Work Life

Imagine this: You’ve gone to college—even grad school—to pursue a career path you always thought you wanted. But after a few years and many tuition dollars spent, it suddenly hits you: If you have to write one more press release, it might push you over the edge. If this is the case, it’s time to prepare for a career change.

Transitioning careers is not unusual. In fact, according to a survey conducted by the American Staffing Association, 38 percent of working adults say they are likely to change careers within the next year. The only problem is, if you are unsure of how to make a career change and whether it will be financially sound, you might be hesitant to make the leap.

“No one wants to change careers without knowing the chances of success,” says Mark Anthony Dyson, host of The Voice of Job Seekers podcast, a show designed to help those in career transition. “Adequate preparation can make all the difference.”

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“Preparation in every form—from updating job skills to financial planning and really taking time to think about what you desire in a fulfilling career—will be a huge factor in your career-change success.”

– Mark Anthony Dyson, The Voice of Job Seekers

“How do I make a big career change with this adequate preparation,” you ask?

Learning how to prepare for a career change financially and finding out which skills you’ll need in your new career are great places to start. Take these steps to understand your career intentions, then determine the best financial strategies for achieving them:

Figure out if a career change is right for you

Before preparing for a career change, start by doing an honest self-assessment on whether or not a switch is right for you. This is important, says Dyson, because you’ll want to weigh the advantages and disadvantages of changing careers versus exploring a job transition within your current field. Doing the latter might make more sense for you if you aren’t quite ready to go through a full-blown career transition. Either way, taking the time for self-reflection will help you get to your desired career path sooner.

It’s important to complete a self-assessment in order to prepare for a career change.

When you are thinking about how to make a career change and if it’s the right time for you, Dyson suggests asking yourself these questions:

  • What are the professional and financial impacts if I stay on my current career path? A quick list of pros and cons might help your analysis.
  • Are there other opportunities in my current field that I haven’t yet considered? Talk to a human resources professional or research online to understand the qualifications, salaries and opportunities for advancement within your area of expertise.
  • What does my ideal career look like?
  • Do I currently have the skills and experience that can transfer to a new career?
  • What are the possible financial and professional outcomes if my new career doesn’t work out?

Kelan Kline, a jail deputy turned personal finance blogger for The Savvy Couple, felt stifled by his previous job and the limitations it imposed on his time. He believed that in order to achieve career growth and increase his money-making potential, he would have to change careers. “I knew I was done working for others altogether,” Kline adds.

If you're wondering how to make a career change, consider the skills you already have in your current position and how they could apply to a new one.

You may not think you have the skills and experience necessary to transition into a new career, but a tip to prepare for a career change is to consider the skills that have led to your career success thus far. That’s what 10-year human resources veteran Lisa Cassella did when she decided a new career direction was in order and wanted to follow her passion for real estate.

“As hiring and program manager for a senior living facility, I met face-to-face with with people everyday,” says Cassella, now a licensed real estate salesperson for the brokerage firm Compass. “Sometimes you have to have some difficult conversations,” she continues. “It’s the same in real estate. But for the most part, you are helping people—which is what I enjoy and a strong connection between both careers.”

Sasha Korobov, a career and success strategist, agrees that a tip for preparing for a career change is to use your current skills as a foundation for a new career. Having undergone a career change herself, she advises people to “really think about what you want to do next, and see if you can start getting those skills and experience in the job you’re already in.”

Once you understand your motives and capabilities, you’ll have the groundwork for what needs to come next: smart ways to financially support yourself through the transition.

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Prepare yourself financially for making the switch

One of the best things you can do when figuring out how to make a career change is to have a financial plan. Depending on how you approach your career change, the steps that you take to move to a new industry could impact your finances in various ways.

For example, when you start out in a new industry, you might be taking a lower level position than what you had in your previous career. This may come with a dip in income, for which you will need to adjust your budget as you progress in your new career.

If you plan to take any time off before you make the switch, you may experience a gap in income. “You have to think about how many months of income you need to save to get over that hump,” Cassella says. Cassella planned in advance so that she had at least six months of income in the bank before she made the switch to her new career.

One of the most important tips to prepare for a career change: prepare financially before taking any action.

Another consideration when you prepare for a career change is whether there is a cost investment required in moving to the new career you have chosen. For example, you might need to spend money on additional education, training, certifications and other measures before you can move into your new role. Your financial plan will have to consider dips in income that could occur if you need to reduce your hours or quit working in order to get the training and education your new career requires, Korobov says. Cassella had to get licensed before moving into real estate sales. She quit her job and took a two-week course, then immediately took the state test.

If your career change means starting your own business venture, you may have to prepare for all of the financial scenarios mentioned above. Your income might decrease as you establish your own business and gain traction, for instance. You might also have to pay for things that were once provided to you by an employer, such as supplies, computer equipment, software and health insurance.

Because of these potential challenges, having a savings plan is key when considering tips to prepare for a career change.

Fine-tune your savings to prepare for a career change

No matter which path you choose, preparing for a career change may present you with some financial risk. Therefore, it’s beneficial to have savings set aside to manage the transition. With just a few small lifestyle changes that will save you money, you can build the financial safety cushion you need to prepare for a career change, says finance blogger Kline.

To prepare for a career change, find ways to cut costs and build up your emergency fund.

Here are Kline’s tips to prepare for a career change and the areas he focused on most when he prepared for his professional move:

  • Reduce unnecessary expenses. As you work on how to make a career change, consider cutting back on discretionary spending such as eating out, entertainment and vacations, and set that money aside for your career change. Don’t already have a budget to track your expenses? Now is the perfect time to start one.
  • Pick the right type of savings account. You’ll want to put the money you save from reducing your expenses into the best type of account to support your career transition. A high-yield savings account, such as the Discover Online Savings Account, will help you grow your savings. For a long-term savings strategy, a Discover Certificate of Deposit might be a great fit.

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  • Start an emergency fund. Similar to establishing a budget and picking a savings account, if you haven’t already started an emergency fund, now is the time to create one (or add to it if you already have some momentum with your rainy day savings). An emergency fund can help you prepare for unexpected expenses and the financial risks involved in changing careers. Experts suggest that you keep at least three to six months’ worth of living expenses in your emergency fund.
  • Pay down debt. If you are able to pay down debt, such as student loan and credit card debt, it will free up cash to save toward your career transition. Pay more than the monthly minimum to reduce or eliminate the debt altogether as you prepare for a career change.

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With just a few small lifestyle changes that will save you money, you can build the financial safety cushion you need to prepare for a career change.

– Kelan Kline, The Savvy Couple

Approach your new career at a gradual pace

For some, a slower transition, with moonlighting or side hustling until they are ready to go full time, has proven effective. When Jeff Neal started his online retail site selling bait and live feeders, he was still a full-time project manager in e-commerce, but not passionate about his day-to-day. He was able to use his skills from this position to build his own online ventures.

Neal says he started his online business as a side hustle, with the intention of always having a full-time job keeping his household afloat. He has now been able to transition into being a full-time internet entrepreneur.

Korobov, the career and success strategist, also started to prepare for her career change with a part-time entrepreneurial venture that grew out of corporate coaching. “I wanted to go into business for myself as a career strategist for women, and I knew that having corporate coaching experience would fast-track my credibility with a lot of potential clients,” she says.

“I began offering workshops and brown-bag lunches at my office,” Korobov continues. This experience was a valuable lesson for Korobov in how to make a career change, helping her boost her confidence and allowing her to tweak her workshops as she got more experience.

Slowly transitioning into a new job is how to make a career change without quitting your day-to-day all at once.

One of Korobov’s biggest tips to prepare for a career change that she learned firsthand: “Your entrepreneurial ventures, even if done part-time, can make the transition into your career smoother, while giving you extra income to help with your financial preparation process.”

Ensure your path to career-change success

Making a career change can seem like a huge risk, since you don’t really know if it will work out in your favor. But with research and readiness, you can confidently prepare for a career change. Dyson, of The Voice of Job Seekers podcast, can’t emphasize enough that “preparation in every form—from updating job skills to financial planning and really taking time to think about what you desire in a fulfilling career—will be a huge factor in your career-change success.”

Understanding your goals and expectations—and trusting your gut—before you begin is a big step in the right direction. Says Cassella of her move into real estate: “It just made a lot of sense for me and my family. My expectations are that once I really get going, there is no limit to what I can make.”

The post Taking the Leap: How to Make a Career Change and Land on Your Feet appeared first on Discover Bank – Banking Topics Blog.

Source: discover.com

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