Saturday, April 14, 2018

How Bad Can It Be: Three Money Questions

by Patrick Chism, April 5, 2018, in Saving Money


We’ve all made money mistakes in our lives, whether it’s over-drafting on a checking account or impulse buys charged to credit cards. It’s best to be aware of these mistakes (and their consequences) before you find yourself making them. Let’s take a look at three common financial questions people have and the answers that make the most sense for your bottom line.


Should I Pay the Minimum on My Credit Card?

Answer: Yes – and then some!

Credit cards often get a bad reputation. And it’s easy to see why. In 2017, total credit card debt in the United States increased to over $1 trillion – the highest point in our history. Per American, that comes out to an average balance of $6,375.
If you just make the minimum monthly payment, you’re paying much more in interest and very little on the amount you actually owe.
Let’s assume that you’re the average American with $6,375 in credit card debt, and your card has an interest rate of 16.15% (the average in the U.S.). If you only pay your minimum payment each month, you’ll have a balance for 16 years and six months and pay a total of $11,613.06. That’s almost double what you originally owed! Once you get into credit card debt, it can be incredibly difficult to get out.

What Should I Do Instead?

Instead of paying the minimum on a credit card, either increase your monthly payment or consolidate debt with a lower-interest personal loan. This will speed up your debt payoff and lower the amount you would pay in interest. It’s a win-win, and it could save you thousands.

Can I Afford to Skip a Payment?

Answer: In most cases, no.

When you’re in a tough financial spot, it’s natural to look for places to cut back on expenses. However, if you don’t pay your debts, you (and your wallet) may experience some long-lasting difficulties. First and foremost, you’ll be charged a late fee. Depending on the type of loan, the amount of the late fee will vary.
The bigger concern is your credit, which can experience some significant drops if you skip payments. This, in turn, will make it more difficult to get financing, and the loans you’re qualified for will have a higher interest rate. In the end, not making a single payment could cost you big down the line.
The most significant consequence, however, is losing an asset that you’ve been paying for. Whether it’s a foreclosure on a home or a repossession of a car, not making your payments can create challenges for you and your family. It’s better to nip them in the bud before they get to this point.
In the event that you don’t have enough money to pay your bills, start by reaching out to your creditors. Call these companies and tell them you’re struggling. In most cases, they’ll help you find a solution. After all, creditors want to be paid. It’s in their best interests to help you come up with a plan to fix your situation, whether that means smaller monthly payments or removing late fees.
If you absolutely have to skip a payment, prioritize what you do and don’t pay. Start by paying the bills that most directly affect your life, such as your mortgage, car loan and utility bills. You may need to triage some of your other bills, such as student loans and credit cards. While this isn’t a perfect solution, it does give you a little time to get out of a money rut. If you decide to skip a payment, use this time to start cutting back on expenses and looking for opportunities to make more money on the side.
Debt can be scary, and it’s important to come at it with a cool head. To guard yourself against debt, start prepping an emergency fund today.

Should I Have a Savings Account?

Answer: Yes – but don’t overdo it.

Thirty-four percent of Americans don’t have a savings account, and of those who do, less than half have $1,000 tucked away. That means that if there’s a financial emergency – the loss of a job, a medical emergency, an expensive car bill, etc. – the majority of us will be in deep trouble.
So it’s important to have a savings account, specifically for building an emergency fund. For most of us, a well-stocked emergency fund requires three months’ worth of expenses. So if your family lives off of $5,000 a month, you’d need $15,000 tucked away in a savings account.
Sound impossible? The best way to grow your savings is through automation. Decide how much you want to save every month and have your bank automatically transfer that amount into your savings account. You’d be surprised how a little extra each month adds up in a big way. And if you’re still worried about your willpower, try an app that helps you save excess money during the month.

Go Beyond Savings

Once you have a fully funded emergency fund, don’t keep putting money in the savings account. While they’re great for emergency funds, they aren’t the best places to grow your wealth. Once you have three months’ worth of expenses saved, start putting your extra money into investments. With the stock market, you can typically expect 6 – 8% in returns, which is hands-down a better investment than leaving all your money in savings (which usually has less than a 1% rate of return). Let your money work for you!
The beauty of a savings account is that there’s little risk involved. The stock market can be more volatile. So start with an emergency fund and expand to investments when you’re ready.

Questions and Answers

Taking these steps can help you pay down your credit card debt and improve your financial health.

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