FAQs

Amalgamated Bank provides nonprofit organizations with Nonprofit Secured Line of Credit and Nonprofit Secured Term Loans, available in amounts ranging from $100,000 to $1,000,000.

A primary business banking relationship with Amalgamated Bank is required; if your business does not have an account with us already, we will open one for you upon approval of your loan. 

You will also need: 

• Government issued Personal Identification for all controlling parties
• Articles of Organization/Certificate of Incorporation
• Business Operating Agreement
• 3 Years of Business Tax Returns (990)/Accountant Prepared Financial Statements

Your nonprofit will receive loan proceeds once the loan application is approved, loan documents are executed, and an Amalgamated Bank Business Checking account is available to disburse the funds.

There is an origination fee for both Nonprofit Secured Term Loan and Nonprofit Secured Line of Credit; this fee is 1% of the loan amount.

Yes, you can apply for another loan or line of credit at any time.

When an Overdraft Protection transfer occurs from a linked savings account to cover the authorization or payment of a transaction, the available balance in that savings account will be reduced by the amount of money to be transferred. That amount of money will be unavailable for other use, and it will be applied to the checking account during nightly processing. 

(For more information refer to “Overdraft Protection Transfer”). 
 

Convenience savings, online savings, and Give-Back Savings are eligible to enroll in Overdraft Protection Transfer.

To enroll/unenroll in Overdraft Protection Transfer please visit your local branch or contact customer service at 1 (800) 662-0860. 

There is no cost to enroll in Overdraft Protection Transfer.

Yes. If you do not have sufficient balances in the enrolled savings account to transfer and cover an overdraft item, Amalgamated Bank may consider paying items utilizing the noncontractual courtesy of AB Overdraft Coverage for applicable accounts in “good standing” and if available (Refer to "AB Overdraft Coverage" section for more details on AB Overdraft Coverage and Fee Schedule for fees that may imposed). 

No.  You may only link one savings account that shares the same title and ownership as the checking account. (For more information refer to "Overdraft Protection Transfer").

You can sign up for Withdrawal Transaction, Overdrawn Account and Insufficient Funds alerts to manage your account. For more information refer to Amalgamated Account Alerts.

The downloadable application is customized for use on your mobile phone device which allows for one touch access. It offers most of the features as AOTM. You can easily move between screens to complete the following actions:

• View accounts including balances and transaction history
• Make transfers between savings, checking and loan accounts; the same transfers available in AOTM
• Pay bills or change/cancel any pending payments
• Deposit checks
• Approve wire, ACH, positive pay items, templates, user profiles, and transfers
• Make and receive payments using Zelle^®

We can help you find your user and/or company ID or help with an access reset for your account. Contact your Account Executive or Branch for assistance. 

You can see your account description and their running balance; furthermore, you can see the recent transactions for each account.

Absolutely. You can make payments using Bill Pay for different payees that you can manage within AOTM. You can access Zelle^® to receive and send payments from the app. 

Business Mobile BillPay allows you to pay bills online, saving you time, envelopes and stamps. It is an optional service on your mobile banking portal (AOTM) and the app. You may pay bills using your mobile device while on-the-go, anytime, anywhere.

You enroll for BillPay through your online banking portal, AOTM. Once enrolled, you will be able to access BillPay on your mobile device. You must be enrolled for, both, online banking (AOTM) and BillPay before you may use Business Mobile Banking and Business Mobile BillPay. Fees may apply.

You may create and authorize a payment not requiring multiple authority. Depending on the Payee's capabilities, payments are issued via paper checks or electronically. Both payment forms include remittance information as provided for the Payee on your online banking (AOTM) to ensure your Payee may recognize the account to credit.

For more information about alerts for payment scheduling and delivery, please visit the ShowMe Tutorials feature in AOTM for Alerts.

Yes, you can add a payee from the Bill Pay feature of your online banking (AOTM) but you cannot add payees from the mobile app. To manage your Payees, including deactivation, please log onto the online banking (AOTM) website and accessing the list of Payees.

Yes. To cancel a payment, select the "Payments" option from the main menu, then select "Scheduled Payments". The system will respond with a list of payments currently scheduled and unpaid. Choose, from this list, the payment you wish to cancel. The system will display the payment details. From this screen, select "Cancel Payment". The system will ask you to confirm that you wish to cancel the payment.

Yes. If you have an issue with a bill or a specific item on the bill, contact the Payee directly. Remember, you may pay whatever amount you desire in Business Mobile BillPay while you are disputing any item.

Yes. If your user is setup for approvals, you can approve files, user profiles, transfers, positive pay items, templates and other transactions.

The mobile app allows you to see which issues and/or files are available for approval and see the check and ACH exceptions available.

No. You can log into your online banking (AOTM) to upload files and enter Positive Pay exceptions.

You may call Amalgamated Support at (800) 662-0860. Support is available M-F from 8:00am – 8:00pm ET and Saturdays from 9:00am – 2:00pm ET. If you are a Treasury customer, you may call (866) 542-8788. Note that hours are subject to change.

You will see a credit to your account once the deposit has been approved by the bank. Your check will be processed by Amalgamated on the same business day if received before 3:30pm ET. If received after 3:30pm ET on a business day, weekend or holiday, it will be processed on the following business day. Please do not dispose of your check or attempt to process at another institution or through another channel (ATM or in-branch). You will receive an email confirmation that your deposit has been received. You will then receive a second email confirmation when your deposit has been accepted by the bank. Please refer to Amalgamated’s Funds Availability Disclosure for information about deposits.

There are a few common errors that may cause your check to be rejected:

• Folded or torn corners
• Front or back image is not legible
• Missing endorsement
• Routing and account numbers are unclear
• No camera on the device
• Image is too dark
• Try using Mobile Check deposit in a well-lit area to prevent shadows and poor image quality.  Keep your hands clear of the check while taking the picture.

The following items should not be deposited through Mobile Check Deposit:

• Third-party checks (checks payable to any person or entity other than the person who owns the account into which the check is being deposited)
• Checks payable on sight, payable as cash or payable through Drafts
• Checks containing an alteration on the front of the check, or which you know or suspect, or should know or suspect, are fraudulent or otherwise not authorized by the owner of the account on which the check is drawn
• Checks payable jointly, unless deposited into an account in the name of all payees
• Checks previously converted to a substitute check, as defined in Reg CC¹
• Checks not payable in United States currency
• Checks drawn on a financial institution located outside the United States
• Checks dated more than six (6) months prior to the date of deposit
• Checks with any endorsement on the back other than that specified in our agreement
• Checks that have previously been submitted and accepted through our service or through a remote deposit capture service offered at any other financial institution
• Checks or items that are drawn or otherwise issued by the U.S. Treasury Department
• Any item stamped “Non-negotiable” or “This is not a check”
• Bonds
• U.S. Postal or Western Union Money Orders
• Traveler’s Checks

When you submit a check image through Mobile Check Deposit, you will receive an email confirmation that your deposit has been received. You will then receive a second email confirmation when your deposit has been accepted by the bank. (Please note: additional processing of your deposit may still be required.)

Standard Business Limits: $20,000 daily, not to exceed $50,000 over a rolling 25 business day period

There are no restrictions to the number of checks deposited as long as the deposit limit is not exceeded.

Please refer to your account Fee Schedule for the fee amount. 

Please note that charges from your wireless carrier may apply.  Regular account charges apply.

Mobile Check Deposit is currently available through the downloadable application (app) for iPhone^®, iPad^® and Android™. For consumers, Mobile Check Deposit is automatically included when you use the application after successful login; no additional enrollment is necessary. If you are a Treasury client, your account administrator must enable you.

Standard Business and Commercial Banking Limits: $20,000 daily, not to exceed $50,000 over a rolling 25 business day period

Standard Consumer Limits For Accounts Open Less Than 90 Days: $3,000 daily, not to exceed $10,000 over a rolling 25 business day period.

Standard Consumer Limits For Accounts Open Over 90 Days: $5,000 daily, not to exceed $20,000 over a rolling 25 business day period.

There are no restrictions to the number of checks deposited as long as the deposit limit is not exceeded.

Before you take your check photos:

1. Sign the back of your check
2. Write "For Mobile Deposit at Amalgamated Bank Only"" below your signature."

Retain the original check in a secure location for thirty (30) days following receipt and credit of the deposit to your account. We recommend you completely destroy each original check after this retention period. A paper shredder is a good method for secure destruction of original checks.

You will see a credit to your account once the deposit has been approved by the bank. Your check will be processed by Amalgamated on the same business day if received before 3:30pm ET. If received after 3:30pm ET on a business day, weekend or holiday, it will be processed on the following business day. Please do not dispose of your check or attempt to process at another institution or through another channel (ATM or in-branch. Please refer to Amalgamated’s Funds Availability Guide for information about deposits.

There are a few common errors that may cause your check to be rejected:

• Folded or torn corners
• Front or back image is not legible
• Missing endorsement
• Routing and account numbers are unclear
• No camera on the device
• Image is too dark

Try using Mobile Check deposit in a well-lit area to prevent shadows and poor image quality.  Keep your hands clear of the check while taking the picture.

The following items should not be deposited through Mobile Check Deposit:

• Third-party checks (checks payable to any person or entity other than the person who owns the account into which the check is being deposited)
• Checks payable on sight, payable as cash or payable through Drafts
• Checks containing an alteration on the front of the check, or which you know or suspect, or should know or suspect, are fraudulent or otherwise not authorized by the owner of the account on which the check is drawn
• Checks payable jointly, unless deposited into an account in the name of all payees
• Checks previously converted to a substitute check, as defined in Reg CC¹
• Checks not payable in United States currency
• Checks drawn on a financial institution located outside the United States
• Checks dated more than six (6) months prior to the date of deposit
• Checks with any endorsement on the back other than that specified in our agreement
• Checks that have previously been submitted and accepted through our service or through a remote deposit capture service offered at any other financial institutionChecks or items that are
• drawn or otherwise issued by the U.S. Treasury Department
• Any item stamped “Non-negotiable” or “This is not a check”
• Bonds
• U.S. Postal or Western Union Money Orders
• Traveler’s Checks
• Checks drawn on the United State Treasury

Mobile check deposit is free to Amalgamated Bank customers.* Just download the Mobile app to begin.

* Please note that charges from your wireless carrier may apply. Regular account charges apply.

AB Overdraft Coverage covers the following transaction types:

• Checks and other transactions made using your checking account number 
• Automatic bill payments 

Overdraft Coverage covers the following transaction types: 

• ATM Transactions 
• Everyday debit card transactions

You may add or remove the Overdraft Coverage at any time by calling 800-662-0860 or visiting a branch and speaking with a Bank representative. 

• An overdraft item paid fee is applied when you do not have enough money in your account to cover a transaction or withdrawal, but the bank pays the transaction on your behalf. 
• An insufficient funds fee (NSF) is applied when an item is returned for insufficient or uncollected funds as a result of not having enough money available in the account to cover the transaction.

• The insufficient funds fee (NSF)is $34. For California residents the NSF fee is $25. For customers with an Online Checking product the NSF fee is $10. 
• Overdraft Item Paid fee is $34. For California residents the Overdraft Item Paid fee is $25.

Overdraft Coverage remains in effect as long as you maintain your account in “good standing,” we may approve your overdraft items within your current available AB Overdraft Coverage limit as a noncontractual courtesy. For overdraft privilege consideration, your account is in “good standing” if you (1) make sufficient deposits to bring your account to a positive end-of-day balance at least once every 30 calendar days (including the payment of all bank fees and charges); (2) avoid excessive overdrafts* suggesting the use of AB Overdraft Coverage as a continuing line of credit and (3) have no legal orders, levies or liens against your account. (Refer to the “Overdraft Coverage” section in your Account Opening Disclosure for more details. 

• Consumer Account Opening Disclosure
• Small Business Account Opening Disclosure
• Commercial Account Opening Disclosure

*Excessive use is defined as using the Overdraft Coverage on more than 6 occasions in a rolling 12-month period. 

There is a daily cap of three (3) overdraft fees (per paid transaction or per return) that will be assessed to your account per day per account (paid or returned). Merchants may present multiple transactions in an attempt to get paid, including representing your check or sending the Bank a second or third ACH. The Bank will impose a returned item fee for each transaction (each attempt by a merchant to get paid) that is presented when your account lacks a sufficient available balance.

Affordable Checking, Convenience Checking, and Give-Back Checking.

 You may Opt-Out of Overdraft Coverage by calling 800-662-0860 or visiting a branch and speaking with a bank representative. You will be required to sign and submit a "What You Need to Know about Overdrafts and Overdraft Fees" form; however, you may still be charged a $34 Insufficient Fund Fee (“NSF”). For California residents the NSF fee is $25.

Should you decide to consent to Overdraft Coverage and Opt-In, you may set up low balance automated alerts to notify you when your account drops below a certain threshold that you set. To set up an alert visit, https://amalgamatedbank.com/faqs/amalgamated-alerts/how-can-i-enroll-in-amalgamated-alerts, for a list of alerts.

1. Login into your online banking account.
2. Select “Customer Service”, and under Contact Option select “Manage Alerts”.
3. Select “Account Number” and click “Go Icon”.
4. Select “SMS” or “email notification”, then click the “Add this alert” icon to enroll.

You must receive, sign, and provide the "What You Need to Know about Overdrafts and Overdraft Fees" form. 

Customers who have not “Opted-In” for ATM and one-time debit card coverage will not have their transactions approved if the balance is insufficient without the Overdraft Coverage amount, and no charges will be incurred by the customer should these items cause their account to be overdrawn.

Yes. You may Opt-Out of AB Overdraft Coverage by calling 800-662-0860 or visiting a branch and speaking with a bank representative. 

Please be advised that if you decide to Opt-Out of AB Overdraft Coverage for transactions such as checks, and other transactions made using your checking account number including automatic recurring bill payments, these transactions will be declined, and a $34 -Insufficient fund fee (NSF) will be assessed. For California residents the NSF fee is $25.

No. You cannot choose to Opt-Out of the AB Overdraft Coverage if you want to Opt-In for ATM transactions and everyday debit card transactions; however, you can choose to remain enrolled in AB Overdraft Coverage to only cover Pre-authorized ACH transactions/Checks and Opt-Out of ATM transactions and everyday debit card transactions. If the customer chooses to Opt-Out of both, they must sign 2 forms titled ‘'What You Need to Know about Overdrafts and Overdraft Fees” as well as the AB Overdraft Coverage.

ATM and everyday (one-time) debit card transactions will be declined at the time of the transaction and a fee will be imposed.

Overdraft balances are charged off if they have remained in the account longer than 60 days. This is reported to the credit bureaus.

We use the available balance at the time transactions are presented to us to decide whether to authorize them for payment or make a return. We also use the available balance at the time transactions are posted and actually paid to decide whether to charge Overdraft Fees.

Amalgamated Bank will pay transaction amounts of $10 or less without a fee being assessed.

Yes, please review the fee schedule on the Consumer Account Opening Disclosure and Small Business Account Opening Disclosure. For commercial accounts please contact your account executive for further information about wire transfers.

To send domestic wires you will need the following information: 

• Bank Name
• Bank ID (ABA/RTN)
• Recipient’s Account Number
• Recipient’s Full Name
• Recipient’s Address

To send international wires you will need the following information: 

• Bank Name
• Bank ID (SWIFT/BIC or IBAN)
• Intermediary/Correspondent bank name 
• Recipient’s Account Number
• Recipient’s Full Name
• Recipient’s Address

Certain countries will require you to provide a purpose of payment.

To receive domestic wires, provide the following information to the person or business sending the wire: 

Bank Name: Amalgamated Bank
Bank ID (ABA/RTN): 026003379
Bank Address: 275 Seventh Ave, NY, NY 10001
Beneficiary Account Number: Your Amalgamated Bank account number
Beneficiary Name: The name of your account as it appears on your statement
Beneficiary Address: The address of your account as it appears on your statement

To receive international wires, provide the following information to the person or business sending the wire:

Receiving Bank Name: The Bank of New York Mellon
Receiving Bank Address: 240 Greenwich St, New York, NY
SWIFT/BIC Code: IRVTUS3N

Beneficiary Account Number: 8901655740
Beneficiary Name: Amalgamated Bank
Beneficiary Address: 275 Seventh Avenue New York, NY. 10001

Originator to Beneficiary Information: "For further credit to: [The name of your account as it appears on your statement, your Amalgamated Bank account number]"

The Society for Worldwide International Financial Telecommunications is a network that allows banks to facilitate the transfer of money to banks in different countries. The SWIFT code is a unique identification code that may be required by other financial institutions.

For domestic wires submitted by 6:00pm EST and international wires submitted by 5:00pm EST, the Bank will send the wire same day. For wires submitted after the cutoff time, the Bank will send the wire next business day. 

Depending on the recipient’s country and bank’s processing times, the delivery time for international wires might vary.

There is no limit for consumer clients to send a domestic wire transfer. You can send any amount available in your account.

Small Business clients have a daily wire limit of $100,000 to send domestic and international wires.

Commercial clients set daily wire limits based on their request during wire enrollment in an online banking platform (AOTM). For more information, please contact your Account Executive.  

Wire transfers cannot be canceled after they are submitted.

Amalgamated's corresponding bank for international wire transfers is Bank of New York Mellon (BNY Mellon). A correspondent bank is a third-party bank that provides services on behalf of other bank in another country.

For our clients to receive incoming international wires, please provide funders from overseas our Amalgamated Bank Wire Instructions or contact your account executive for further information about wire transfers.

The new alerts added to online banking are real-time and next day delivery for debit card transactions, overdrawn accounts, loan payment reminders, and deposit and withdrawal notifications to provide more security, manage your budget, and monitor your account daily. For customers that previously received one weekly alert will now receive daily alerts.

1. Login into your online banking account.
2. Select “Customer Service”, and under Contact Option select “Manage Alerts”.
3. Select “Account Number” and click “Go Icon”.
4. Select “SMS” or “email notification”, then click the “Add this alert” icon to enroll.

See Account Alerts Table.

Amalgamated Alerts are delivered in real time or the next business day depending on the transaction.

1. Login into your online banking account.
2. Select “Customer Service”, and under Contact Option select “Manage Alerts”.
3. Select “Account”, “Bill Pay” or “Service” alert tab.
4. Select “Account Number” and click “Go Icon”.
5. Select the alert to unenroll by clicking the change option. Note that for service alerts you can only change the delivery method.
6. Unselect the email and mobile number from the alert. Click the “Save” button.

No. However, your mobile carrier’s message and data rates may apply.

1. Login into your online banking account.
2. Select “Customer Service” and select “Manage Contact Information”.
3. You will have the option to change primary and secondary email, home and business phone and mobile phone number for SMS alerts.
4. Select “email” or “phone number” then click the change option.
5. Add the new email or phone number then click “Save Changes”.
6. When contact information is updated, alerts will be triggered to notify you of the changes to the account.

Alerts can only be managed via the Online Banking platform.

Alerts are available for Checking, Savings, Money Market, Certificate of Deposit, and Mortgage accounts.

Secure your account by setting up deposit, withdrawal, and debit card alerts to notify you of transactions that are debited and credited from your account. Please report any unauthorized transactions immediately by calling the number on the back of your debit card.

Set up spending thresholds, direct deposit, and account balance alerts to help determine if you’re on track to meet your savings goals.

Manage your accounts by setting up low balance, high balance, overdrawn account, insufficient funds or return deposit alerts to notify you when your account balance falls below a set amount.

Depending on the business entity type, you may be asked to provide documents to verify the identity of the business and its authorized representatives, identify the type of industry, confirm financial information, and understand the organizational structure. 

 There is no minimum balance needed at the time of account opening.Please note: Minimum balances may vary depending on promotions. 

Please refer to the Fee Schedule to see the fees for these accounts.

As a bank deeply committed to net-zero operations, climate justice and curbing climate change, we believe that bold solutions are needed to transition to a just, clean economy. These solutions include our policies, investments, practices and products. With the introduction of the card, we continue that commitment.

The card will be issued to new consumer and business customers opening an account on or after March 21, 2023. For existing customers, cards will be issued to replace expiring or lost cards on a rolling basis.

The card will be available to all customers beginning March 21, 2023. If you have an expiring card no action is required on your part.

If your card is not near expiration and you would like to migrate to the Climate Impact Card, please visit a branch or contact our customer service team at 800.662.0860.

Your card number will remain the same. If your card is lost or stolen a new card number will be issued.

Yes, we are pleased to announce that contactless payments can be made with the Climate Impact card. You can also add your card to your Digital Wallet.

While the card is sourced from recyclable plastics, we recommend that customers consult the recycling guidelines of their local municipalities.

Our new card has a vertical orientation to make in-store transactions even easier with a streamlined chip or tap to pay experience.

You can use the contactless feature with merchants that accept contactless payments. Please note that some merchants will require a PIN to complete the transaction.

Yes, you can use your new Climate Impact Debit/ATM card to make cash deposits, transfer money between accounts, check account balances and withdraw at Amalgamated and non-Amalgamated Bank ATMs. Fees may apply at non-Amalgamated and international ATMs.

Yes, insured by the Federal Deposit Insurance Corporation (FDIC) up to allowable limits. The Federal Deposit Insurance Corporation (FDIC) grants deposit insurance of $250,000 per account title. You may also qualify for more than $250,000 in FDIC coverage at Amalgamated Bank if you have single accounts, joint accounts, Individual Retirement Accounts and trust accounts.

The maturity date is the last day of your CD's term. Your CD has a 10-day grace period before it rolls over for the same term and the current rates offered at maturity.

Penalties occur when a CD is withdrawn early. It will depend on the type of CD, the CD term, the interest rate, and the amount of principal withdrawn.

$500 minimum deposit is required to open with a maximum online deposit of $100,000.

Opening deposits for the promotional CD must be new money deposited into Amalgamated Bank from a non-Amalgamated Bank account. 

We use the daily balance method to calculate the interest on your account. This method applies a daily periodic rate to the principal in the account each day.

Yes, a notice will be mailed 30 days before the CD matures.

Your CD has a 10-day grace period before it rolls over.

CDs cannot be closed online. You can contact us at 800-662-0860 or email us at AccountSupport@AmalgamatedBank.com for guidance on how to close your CD.

Samsung Pay is now part of Samsung Wallet. Samsung Wallet comes pre-loaded on most Samsung mobile devices. If you do not have Samsung Wallet on your device, simply download it from the Galaxy Store. Then, complete the registration process by opening the Samsung Wallet app, signing in with your Samsung account, and accepting the terms and conditions.

1. Open the Samsung Wallet app on your phone.
2. Complete the Samsung Wallet registration process if you haven’t already.
3. From the ‘Quick Access’ tab, click on the plus sign on the top right and select ‘Payment cards’.
4. Select ‘Add payment cards’.
5. Scan your card, add it manually, or add it using NFC.
6. Read and accept the Bank’s terms and conditions.
7. Verify your payment method. 
8. Enter verification code.
9. Enrollment is complete. Begin using your card immediately to make purchases with your phone.

Most Samsung mobile phones are Samsung Pay compatible. Visit https://www.samsung.com/us/samsung-wallet/faq/ and select ‘Is Samsung Wallet supported on my mobile phone?’ for more information.

Standard Debit Card, Enhanced Debit Card, Enhanced Donate the Change Debit Card, and Business Debit Cards. Give-Back Enhanced Debit Mastercards are not currently eligible.

Samsung Pay is accepted in-stores, in-app, and online. Look for the Samsung Pay logo or Contactless Symbol at checkout for in-store purchases. 

1. Open Samsung Pay on your phone. 
2. Select “Menu” on the bottom right.
3. Choose “Payment Cards.”
4. Select payment card.
5. Select “Set as default Card.” 

Contact our dedicated customer service team at  (800) 662-0860, M-F from 8:00am – 8:00pm ET and Saturdays from 9:00am – 2:00pm ET.

Please wait up to 30 minutes to receive the one-time verification code.

If your card has been lost, stolen or damaged, you call Amalgamated Bank at (800) 662-0860, M-F from 8:00am – 8:00pm ET and Saturdays from 9:00am – 2:00pm ET.

You will have zero liability for unauthorized use of your Debit Card or PIN.

Contact our dedicated customer service team at  (800) 662-0860, M-F from 8:00am – 8:00pm ET and Saturdays from 9:00am – 2:00pm ET.

Apple Pay is a feature of the Wallet app and is pre-installed on all iPhones.

1. Open the Apple Wallet app.
2. In the Wallet app tap the Add Button, "+".
   • Tap Debit or Credit Card to add a new card.
   • Tap Previous Cards to add a card that you used previously.
3. Tap Continue.
4. Follow the steps on the screen to add a new card.
5. Verify your account information. You may be asked to provide additional information before your card is approved for use with Apple Pay.
6. If you have a paired Apple Watch, you have the option to also add the card to your watch.

Apple devices with Face ID and Touch ID, except iPhone 5s.

Standard Debit Card, Enhanced Debit Card, Enhanced Donate the Change Debit Card, and Business Debit Cards. Give-Back Enhanced Debit Mastercards are not currently eligible.

Apple Pay is accepted in-stores, in-app, and online. Look for the Apple Pay logo or Contactless Symbol at checkout for in-store purchases.

1. Open the Wallet app.
2. Touch and hold the payment card that you want to set as your default card.
3. Drag the card in front of your other cards.

You may call Amalgamated Bank at 1 (800) 662-0860. Support is available M-F from 8:00am – 8:00pm ET and Saturdays from 9:00am – 2:00pm ET.

Please wait up to 30 minutes to receive the one-time verification code.

If your card has been lost, stolen or damaged, call Amalgamated Bank at (800) 662-0860, M-F from 8:00am – 8:00pm ET and Saturdays from 9:00am – 2:00pm ET.

You will have zero liability for unauthorized use of your debit card or PIN.

Contact our dedicated customer service team at  (800) 662-0860, M-F from 8:00am – 8:00pm ET and Saturdays from 9:00am – 2:00pm ET.

To tap to pay with Google Pay just add your Amalgamated Bank debit card to Google Wallet. Google Wallet may be pre-installed on select devices. If the app is not already on your device, simply download it from Google Play.

1. Open the Google Wallet app.
2. At the bottom, select “Add to Wallet” and select “payment card.”
3. Select “new credit or debit card.”
4. To add a card, use your camera or choose “Enter details manually” and select “Save.”
5. Read and accept the Bank terms and conditions.
6. Verify your payment method and choose a verification option.
7. Enter verification code to complete enrollment.
8. Upon completion, you will receive an email or mail notification.

Google Pay is compatible with most modern Android devices, including Android 5.0 (Lollipop) or higher, NFC and HCE support.

Standard Debit Card, Enhanced Debit Card, Enhanced Donate the Change Debit Card, and Business Debit Cards. Give-Back Enhanced Debit Mastercards are not currently eligible.

Google Pay is accepted in-stores, in-app, and online. Look for the Google Pay logo or Contactless Symbol at checkout for in-store purchases. 

1. Open the Google Wallet app.
2. At the top of the screen, swipe until you find the card that you want to set as your default.
3. Select the card.
4. At the bottom, click “Details.”
5. Make your card the default for tap to pay.

Contact our dedicated customer service team at  (800) 662-0860, M-F from 8:00am – 8:00pm ET and Saturdays from 9:00am – 2:00pm ET.

Please wait up to 30 minutes to receive the one-time verification code.

If your card has been lost, stolen or damaged, call Amalgamated Bank at (800) 662-0860,  M-F from 8:00am – 8:00pm ET and Saturdays from 9:00am – 2:00pm ET.

You will have zero liability for unauthorized use of your debit card or PIN. 

Contact our dedicated customer service team at  (800) 662-0860, M-F from 8:00am – 8:00pm ET and Saturdays from 9:00am – 2:00pm ET.

Amalgamated Bank offers small business owners secured financing options ranging from $25,000 to $500,000 through a Small Business Term Loan or a Small Business Line of Credit.

A primary business banking relationship with Amalgamated Bank is required; if your business does not have an account with us already, we will open one for you upon approval of your loan. You will also need a US government issued personal identification for all owners in the application, the business certificate or articles of formation, the business operating agreement and financial statements, and 2 years of business and tax returns for all owners in the application. Lastly, a personal guarantee is also required.

Yes, financial statements will be requested to complete the application: 2 years of business tax returns and personal financial statements.

There is an origination fee for both Small Business Term Loan and Small Business Line of Credit; this fee is $750.00 for loan amounts up to $150,000 and 0.5% of the loan amount for loans over $150,000.

You will receive the loan proceeds once the loan application is approved, loan documents are executed, and an Amalgamated Bank Business Checking account is available to disburse the funds.

Yes, you can apply for another loan or line of credit at any time.

Accounts available online are Online Checking and Online Savings. Amalgamated Bank provides a variety of accounts. Please refer to our website to review all products.

A detailed list of required information for all account owners, individual and joint, can be found on the introductory page of the application process.

Please refer to the bank’s Terms and Conditions. Account Opening Disclosures.

To fund an account online, you can either transfer funds from your account at another financial institution, or if you are already an Amalgamated Bank customer, you can transfer funds from your existing account. If transferring funds from an account at another bank, you will need the external bank’s ABA routing number and account number for the existing account. Whichever method of funding you choose, please ensure that sufficient funds are available to be transferred.

You can make additional deposits by using the mobile app, external transfers, Amalgamated Bank ATM network (Branch and Allpoint+^®), physical branch, or by mail.

Checks deposited by mail requires additional steps. Make check payable to “Amalgamated Bank” and mail to Consumer Banking, Amalgamated Bank, 275 Seventh Avenue, New York, NY 10001. Please include your account number in the memo line. In order for us to fund your account by check, it must meet the following requirements:

• The check must be signed and dated.
• The check must be payable to Amalgamated Bank, to you, or to “Cash.” Please be advised that, for security purposes, it is not recommended to mail checks payable to “Cash.” If the check is not payable directly to “Amalgamated Bank,” it must be endorsed properly. (Please do not endorse checks made payable to Amalgamated Bank.)
• If you wish to mail a check that is made payable to you, please endorse it on the back with your signature and, below your signature, write “For Deposit Only in Account” followed by your account number.
• You must include instructions indicating the account to which the check should be credited. You can do this bywriting your account number on the memo line or reverse side of the check. (You do not need to use a deposit slip.)

Deposits made by check are accepted at our sole discretion. We reserve the right to refuse, return, or limit any deposit you make to your account. Please refer to our Account Opening Disclosures for more information.

You will be notified via E-mail and U.S. Mail when your account has been opened. You’ll also receive instructions about viewing your new account information online at that time.

You will receive your Debit or ATM Card within ten business days after we have approved your application and opened your account.

If you do not agree to the account terms and conditions, you will not be able to open an account with us.

Customers that are a U.S Citizen or a Resident alien are eligible to open an account online. Non-resident aliens can visit our nearest branch location to open an account. You can find our locations by visiting our website Find a branch or ATM

Yes. During the account opening process, you will have the option to save your applications by selecting the “Save for Later or Cancel” button. An application number will appear at the top of the page, and the bank will send you an email with a link to finalize your account. When you click on the link “Finalize your application”, a new window will open with your application number. You will need to input your social security number and date of birth; this information will provide access to complete your application. If you need help along the way, you can call us at 800-662-0860.

You can give us a Post Office Box as a mailing address, but we must also have your home address for our records. Our account application process allows you to make this distinction.

In order to open an account online, the primary account owner and co-applicant (if applicable) must have an e-mail address. If you (or your co-applicant, if applicable) do not have an email address, please visit any one of our branches to open an account.

If you do not have any of the identification documents we have requested, you may still be able to open an account at one of our branches. Before you come to see us, please call the branch where you plan to open your account or contact our call center at 800-662-0860 to discuss the identification documentation you are missing prior to visiting us at a branch.

An ownership type indicates whether an account has one signer (an individual account) or two signers (a joint account), and whether or not a beneficiary has been designated. If you are opening a Checking account, you cannot designate a beneficiary.

If there are no exceptions during the review process, your account will be opened immediately. You will receive an email confirmation with your account number at the end of the process and an invitation to enroll in online banking. If there are exceptions and further review is required, we will contact you directly. If that is the case, you can expect to receive your email confirmation that your account has been opened within two (2) business days.

No, you do not have to be a member of a union to bank with us.

Allpoint^® ATMs enable Amalgamated customers to check account balances, transfer money between accounts and withdraw cash surcharge-free.

Allpoint+^® ATMs provide an additional function for Amalgamated customers to make cash deposits, transfer money between accounts, check account balances and withdraw cash surcharge- free.

You can use your mobile app or our website to locate Allpoint+^® ATMs near you. Please visit Find a branch or ATM | Amalgamated Bank or download the mobile app FAQs | Amalgamated Bank.

Allpoint+^® ATMs are full-functioning ATM machines which can perform cash deposits, transfer money between accounts, check account balances and withdraw cash surcharge-free in multi-denominations.

Amalgamated Bank customers can make cash deposits of $1000 per transaction. The ATMs will accept up to 200 multi-denominational bills per transaction. For example: 200 bills of $5 which equals $1000 or 50 bills of $10 and 25 bills of $20 which equals $1000. To deposit more than $1000, customers will have to perform several transactions.

Allpoint+^® ATMs will reject the deposit and return the cash with the same multi-denominational bills that were originally deposited. You will receive a receipt stating, “Your transaction cannot be completed at this time.” We are sorry for the inconvenience.

Please call our customer service team immediately at 800-662-0860 to help you resolve the deposit issue. 

Cash deposits made before 3:00 P.M. local time on a business day at Allpoint+^® network ATMs will be made available on the next business day. Cash deposits made at Allpoint+^® network ATMs after 3:00 P.M. local time on a business day, or at any time on a day that is not a business day, will be treated as received by the Bank on the next business day. For more information please see the Account Opening Disclosure under Section 4 (Fund Transfer Services) H. ATM Deposits and Section 6 (Funds Availability Disclosure) for additional information Consumer Account Opening Disclosure.

Regular Allpoint^® ATMs are not enabled for cash deposits. Allpoint^® ATMs allow Amalgamated customers to check account balances, transfer money between accounts and withdraw cash surcharge-free.

Only Amalgamated customers have access to Allpoint+^® ATMs to make cash deposits. Friends and family are welcome to open an account with Amalgamated Bank to use Allpoint+^® ATMs. To open an account you can schedule an appointment at any Amalgamated Bank branch.

Yes, Allpoint+^® ATMs are safe and secure. The ATMs are located in convenient locations like CVS, Duane Reade and Walgreens.

When you buy something, wouldn’t be nice to be able to sell it for at least the same price as what you bought it? Buy a pair of shoes for $100 in January and sell them in June for the same $100? Wouldn’t that be nice!

Well, things don’t really work that way. Many things that we buy in life are consumed and used and have little financial value after they are purchased. It’s something of a symptom of our modern world. Things are made to be disposed of, to wear out quickly or to become instantly obsolete.

But there are things that we own that do have financial value, that do not wear out and are built to last. These are assets.

The key to defining an asset, is figuring out whether it is worth something. The easiest way to define this is by seeing if you can sell it. If someone is willing to pay you money for an item you own, then it is an asset.

So how do you value an asset? First, it’s important to note that asset prices fluctuate. Some assets like houses tend to hold their value, subject to the ups and downs of supply and demand. Other assets like cars constantly decrease in value. And others, like art, have a value that depends on quality, demand, and rarity.

The true value of an asset is only known when it is sold. The value at that moment is the price that someone just paid for it. But if you’re not trying to sell the asset, it’s hard to know the true value of that asset. So you have to make an estimate.

The easiest way to make an estimate is by finding the price of similar items that have recently sold. These “comparables” form the basis for your estimate. And a huge industry has sprung up to keep track of comparables and help you make an estimate.

Let’s look at a few assets to see how this works. Let’s start with cars. They are terrific examples of assets. They cost a lot of money, they can last a long time and they retain enough of their value that you can sell them at a future date. Because cars are standardized by company, brand and options, you can easily find comparables. Sites like Kelley Blue Book, NADA Price Guides and the Black Book (currently used by Cars.com) have pricing engines that can price your car.

These sites dig into past transactions to come up with a ballpark of what your car is worth. But there can be a wide range of prices. So even when you have a comparable price, there is still a bit of estimation work that you will have to do.

The final value of your car is affected by three additional factors: The condition of your car, where you intend to sell it (some markets have higher prices) and who you want to sell it to (if you sell it to a dealership as a trade-in, the price will be lower than if you sell if yourself. Dealers need to make money on the trade-in after all…). So once you take these assumptions into consideration, you can adjust your estimation to get to the true value of your car.

You can do this sort of valuation exercise with almost any asset. For houses you can go to sites like Zillow and Trulia. They have algorithms that give an estimated house price. But housing is much more difficult to value. The condition of a home is impossible to evaluate using an algorithm. And homes are not commodities, so true comparables will be impossible to find. Nevertheless, sites like these can give you an estimated price of your house and are great tools to use to watch over time to see how market forces impact the price of your home. And you know your home better than anyone. You can use the estimation as a baseline and adjust your valuation based on your own knowledge of your home.

Art is another asset that can be valued with comparables. Sites like Invaluable.com have historical auction records going back decades. If you know the artist who made your piece, you can usually find auction records of her work. If you can find a piece with a similar size, composition and quality, you can get a good idea as to value.

And what about all the things that sit in your house collecting dust? You never know what they might be worth! Just go to eBay to see if someone is selling something similar. You might be surprised to find what kinds of things you can sell there.

But sometimes you need a precise valuation. Usually if you’re looking for insurance for your asset, your insurance company will not settle for an estimate you build on your own. These are times that you need to get the help of an expert. There are lots of people out there who can give you a hand. Real Estate agents and real estate appraisers have the knowledge and experience to give accurate valuations of homes. And for antiques and art, appraisers are essential if you need a documented valuation for insurance.

On a final note, when you are spending money, it is always good to spend using an asset mindset. When you do this, you start to take things like quality, durability and intrinsic value into consideration. By doing this, your decisions will start to focus on things that retain value instead of things that are cheap and disposable. Those may end up being better long-term decisions for you.

You can borrow money to buy just about anything big or small. You can use a mortgage to buy a home or a credit card to buy a coffee, a home equity loan to build a deck or a student loan to get an education. There are loans available for every purpose.

What about with investing? Can you borrow money to buy a stock? Well yes, most brokerages will lend you money to buy investments. This is called ‘margin lending.’

A margin account is an account offered by brokerages that allows clients to buy securities using money borrowed from the broker. The broker charges interest on the borrowed money and uses the investment as collateral on the loan. Because the loan is backed by a security, it is seen as lower risk than if there is no collateral held against the loan. So the interest rates charged on margin account is generally modest.

The interest rate charged on margin accounts can vary, and it usually depends on how much money you have in your account. Large accounts (those around a million dollars) can have rates that are very low and are comparable to mortgages. Smaller accounts will have rates that are higher, and can be up to 8%.

So how does a margin account work? Let’s look at an example. Let’s start with a trade that does not use a margin account.

Let’s say you have $5,000 to invest. Let’s also say that you love company X, whose shares are trading at $100. So on January 1^st, you buy 50 shares of X, using all your $5,000. At the end of the year, X is trading at $150, so you sell all your shares and get $7,500. So over that year you made $2,500 on your investment, or a 50% profit.

Now let’s look at the same trade but using margin this time. Let’s say you still bought those 50 shares at $100. But you love X so much that you borrow $5,000 on margin to buy another 50 shares. Now you own 100 shares of X. Again, at the end of the year you sell all your share, this time 100 of them at $150 thereby getting $15,000 on the sale. Now you have to pay back the $5,000 you borrowed. You’ll also have paid about $300 in interest on the borrowed money over the year. So you’re left with $9,700. On this trade, by using margin, you made a $4,700 for a profit of 94%.

Terrific right!? Well, not so fast.

What happens if your stock goes down? What happens then?

Let’s look at the same trade but instead of going up to $150, X goes down to $50 at the end of the year. Without using margin, you would sell your 50 shares for $2,500. That’s a loss of $2,500 for a net loss of 50%.

Now let’s look at that same scenario using margin. If you sell your 100 shares at $50, you will get $5,000 in proceeds. But you owe your broker the $5,000 that you borrowed, plus the $400 in interest. So not only do you owe your broker all of the money you have in your account, but you would have paid another $400 in interest on the loan! On this trade you lost $5,400 for a net loss of 108%! Ouch!

As you can see, margin can be very dangerous. When your investment goes the wrong way, you can lose a significant amount of money.

The Federal Reserve Board understands this and has put rules in place to prevent excessive loss while using margin. They do this in two ways. The first is by setting an initial minimum margin of 50%. This means that only 50% of your purchase of a stock can be purchased using margin. So in the above example, the trade would be allowed because only 50 of the 100 shares were purchased using margin.  It should also be noted that some brokers require higher initial margin requirements, but the legal minimum is 50%.

The second requirement is a maintenance margin of 25%. Maintenance margin refers to the amount of investor’s equity (what the investor owns outright) as a percentage of the market value of the holdings. In our above example, the account would have a maintenance margin of 25% when the stock hit $66.66. When this happens, the value the holdings would be $6,666, but because the investor owes $5,000 for the loan, the actual value of what he owns is only $1,666, or 25% of the balance. When the account value dropped to $6,666, the broker would have contacted the client to ask him to put more money into the account. This is called a margin call. It’s a dreaded occurrence and one every investor who uses margin lending fears.

You should note something interesting here. In the example we used, our investor who used margin and whose stock dropped to $50 would have gotten a margin call when the stock hit $66.66. So although he loses a tremendous amount of money, he is not completely wiped out.

But you should also notice what didn’t happen. The broker didn’t lose money. The margin call made sure that the broker got their loan back. And to make sure they get their money, under the rules of a margin account, the broker can sell your shares without your permission. They have considerable power to get their money back.

So it should be fairly obvious that the margin rules are not there to protect you from excessive loss. They are there to there to protect the broker from any loss.

Now after scaring you out of opening a margin account, there are times when margin is a good thing to have. Borrowing money for very short periods of time is a good way to use margin. For example, if you are waiting for money to transfer into your brokerage account and it isn’t there yet, you can use margin to buy a stock you want. Or sometimes when you sell a stock, it takes a few days for the trade to clear and for the money to reach your account. Again, if you want to use margin for the two days it takes your trade to clear, this is a good use of margin.

But remember, the longer you employ margin, the greater the danger it is to you. Every day you use margin, the more interest you will be charged and the more gains you will need in order for you to make up the interest payments.

So try to keep the use of margin to a minimum, and if you do use it, only do so for very short periods of time.

The great economies of the world have been built on peer to peer lending. It’s what people have done for millennia: You take your money and lend it (with interest) to family, friends or the community, to create value for yourself and for them.

There are two different ways to think about this.

There are probably many in your circle of family and friends who may need money at some point in time. They will ask to borrow money from you, maybe with regular payments and fixed interest. But this is not putting your money to work.  This is helping your family & friends, and it’s a fraught process. If you’re in a position to gift money (i.e. you have a fully funded retirement account, emergency savings and are living well below your income) – then consider it. But there’s a chance you’ll never see the money again. So if you do it, make sure you consider it a gift.

The second way to put your money to work by lending it to others is through ‘peer to peer’ lending. This is where you deposit your money with an intermediary, who then lends it out to people who need it. It’s very similar to the traditional way that banks work. But with a big difference – you get visibility into where your money is going. With some lenders you can see where your loan is going. You also get to choose the amount of risk you want to take, and what return you are looking for.

Prosper, SoFi and Lending Club are all peer to peer lending companies where you can deposit your money, which is then loaned out for higher interest rates than what you can get with your savings account at a regular bank.

So is it a good idea for you?

The first thing to consider is risk. When you put your money in a savings account, it’s insured by the FDIC for up to $250,000. So if the bank goes out of business, you won’t lose your money.

Funds with P2P lenders are not insured – so should there be issues with the financial stability of the lender, there’s a chance you could lose your money. So consider where you are on the spectrum of risk tolerance and see if this is money you can afford to lose.

Next thing to consider is performance.

The relationship between risk & return is what investing is all about. The stock market and P2P lenders are both higher risk / higher potential return. Currently the estimated returns from P2P loans are between 5-8% per year. This is significantly higher than what you can get in a regular savings account, and on par, over the past few years, with what you would have gotten in the stock market. But as with all investments, there is no guarantee of returns.

Third thing to consider is ethics.

For many borrowers, P2P loans are a godsend. If you’re consolidating high interest credit card debt for example, going from paying 20+% interest to 8% is pretty great.

But in order for these platforms to give high returns to investors, they also charge high penalties – such as late fees. It can happen that borrowers get trapped in these loans. It’s estimated that 70 percent of those who consolidate their debt end up with as much or more debt a few years later. So the benefits of these loans may have strings attached for the borrowers. And as a lender you have to make sure you are comfortable lending your money into this system.

Lending money doesn’t usually get included in recommendations by financial advisors. It’s an interesting and unique investing option. But doing so involves risk.

Think carefully about putting your money to work by lending it to others. Understand the risks involved. But if you enter this market, also enjoy the fact that you can direct your money to specific areas of specific need. It really can be a rewarding way of investing.

If you watch television, you’ve probably seen commercials for big banks and investment companies. If you watch the ads closely, their message is very much the same. “Give us your money. Trust us. We’ll get you to retirement”. That’s why most retirement ads feature a happily retired couple relaxing at their beachside home.

If you can’t relate to that couple, you’re not alone. It’s just too big a conceptual leap for many to make. The gap between the here and now (where many people struggle with day to day money issues), to that distant beachside home is too big to reconcile.

The problem is that brokers, fund managers and investment advisors want you to associate investing with WEALTH and RETIREMENT. This is because their businesses need you to move your pile of money from where it is now, to them. But when you’re younger, not wealthy, and maybe living paycheck to paycheck – it’s hard to imagine what investing could do for you.

Even though investing traditionally has been the domain of wealthy people – times have changed. The costs have come way down, as has the amount of money you need to get started. It really is possible for everyone to be an investor in one way or another.

This is important because we live in a world that favors investing. The tax system, for one, favors investment earnings, giving it lower tax rates than it does for income you earn through working.

Unfortunately, the days of pension funds and lifetime benefits are mostly behind us. In order to navigate this new world, developing your understanding of the financial world is critical.

Investing and financial health is a lifelong journey. It isn’t just about the happy beachside retirement, but more importantly, about buying options in life.

So what does this mean? Options in life mean different things to different people. And they are different to “goals”.

Your goals may be to ‘get 8% return a year’ or have 500K in 10 years’. They are good, specific goals. But they don’t take into account changes to your life along the way.

Options in life are more about being able to make decisions that take you in a different direction to the one you’re on. What if you have an opportunity to move to a different state, or country, or go back to school, or start your own business? These options in life may cost you in the short term, but may pay you back either economically, or in quality of life, in the long term.

The key to creating more options in life for yourself is to prioritize saving, and begin investing. Learn, get practice, start slowly and build your money muscles.

Adapting your spending habits to prioritize investing can have a giant impact on your future financial success.  And for many people, step one in that equation is to SAVE.

Build a contingency fund at your bank – a buffer of money for unexpected expenses. A good rule of thumb is to have 3-6 months of living expenses on hand. Then, prioritize investing any money above that amount.  Depending on your risk profile you can put that money to work with a range of options like stocks, bonds or funds. Most of these are considered highly liquid which means that they can be sold within a day should you truly need the money.

And what about if you have no money now? GREAT. Now is the time to learn about investing, in a truly risk free way. Think like an investor – look for opportunities – be curious about what’s going on in the economy and with companies you like. The best way to do this is to set up a virtual portfolio. Many financial web sites like, Investopedia, allow you to do this. It’s even more interesting when you do this with friends, family or colleagues.

This a great way to learn from each other, especially people who have less investing experience – their instincts and ideas are often very different than experienced investors.

Regardless of where you are on your investment journey, think about your goals not just in terms of a number that you need to retire, but creating a way for you to buy future options in your life.

You work so hard to earn your money. You go to school, you compete for jobs, you jostle for raises, and you spend a large portion of your waking hours dedicated to generating income for you and your family. Why not make it a priority to put your money to work for you?

But remember - there are no future facts - you don’t know what is going to happen, but having a healthy approach to money and investing can help buy you better options in life.

If you watch television, you’ve probably seen commercials for big banks and investment companies. If you watch the ads closely, their message is very much the same. “Give us your money. Trust us. We’ll get you to retirement”. That’s why most retirement ads feature a happily retired couple relaxing at their beachside home.

If you can’t relate to that couple, you’re not alone. It’s just too big a conceptual leap for many to make. The gap between the here and now (where many people struggle with day to day money issues), to that distant beachside home is too big to reconcile.

The problem is that brokers, fund managers and investment advisors want you to associate investing with WEALTH and RETIREMENT. This is because their businesses need you to move your pile of money from where it is now, to them. But when you’re younger, not wealthy, and maybe living paycheck to paycheck – it’s hard to imagine what investing could do for you.

Even though investing traditionally has been the domain of wealthy people – times have changed. The costs have come way down, as has the amount of money you need to get started. It really is possible for everyone to be an investor in one way or another.

This is important because we live in a world that favors investing. The tax system, for one, favors investment earnings, giving it lower tax rates than it does for income you earn through working.

Unfortunately, the days of pension funds and lifetime benefits are mostly behind us. In order to navigate this new world, developing your understanding of the financial world is critical.

Investing and financial health is a lifelong journey. It isn’t just about the happy beachside retirement, but more importantly, about buying options in life.

So what does this mean? Options in life mean different things to different people. And they are different to “goals”.

Your goals may be to ‘get 8% return a year’ or have 500K in 10 years’. They are good, specific goals. But they don’t take into account changes to your life along the way.

Options in life are more about being able to make decisions that take you in a different direction to the one you’re on. What if you have an opportunity to move to a different state, or country, or go back to school, or start your own business? These options in life may cost you in the short term, but may pay you back either economically, or in quality of life, in the long term.

The key to creating more options in life for yourself is to prioritize saving, and begin investing. Learn, get practice, start slowly and build your money muscles.

Adapting your spending habits to prioritize investing can have a giant impact on your future financial success.  And for many people, step one in that equation is to SAVE.

Build a contingency fund at your bank – a buffer of money for unexpected expenses. A good rule of thumb is to have 3-6 months of living expenses on hand. Then, prioritize investing any money above that amount.  Depending on your risk profile you can put that money to work with a range of options like stocks, bonds or funds. Most of these are considered highly liquid which means that they can be sold within a day should you truly need the money.

And what about if you have no money now? GREAT. Now is the time to learn about investing, in a truly risk free way. Think like an investor – look for opportunities – be curious about what’s going on in the economy and with companies you like. The best way to do this is to set up a virtual portfolio. Many financial web sites like, Investopedia, allow you to do this. It’s even more interesting when you do this with friends, family or colleagues.

This a great way to learn from each other, especially people who have less investing experience – their instincts and ideas are often very different than experienced investors.

Regardless of where you are on your investment journey, think about your goals not just in terms of a number that you need to retire, but creating a way for you to buy future options in your life.

You work so hard to earn your money. You go to school, you compete for jobs, you jostle for raises, and you spend a large portion of your waking hours dedicated to generating income for you and your family. Why not make it a priority to put your money to work for you?

But remember - there are no future facts - you don’t know what is going to happen, but having a healthy approach to money and investing can help buy you better options in life.

Compounding is a powerful tool. It can accelerate the growth of your investments. So make sure you take advantage of it. If you don’t, you’ll be leaving potential returns behind.

First, a quick explanation:

Compounding is essentially accelerating your investments by earning money on the money you’ve already earned. Take your bank account for example.  You probably earn interest on your deposits once a month, which is added automatically to your account. In the next month, when you earn interest again, you’ll not only earn it on your original deposit, you’ll also earn it on the interest you earned the previous month.

The difference between compounded earnings and non-compounded earnings is substantial. For example, a $1,000 bond paying 4% interest without compounding will double in value after 25 years. With compounding, the money doubles after 18 years. That’s seven years sooner! That’s a big difference!

The key to compounding is to make sure interest is reinvested.

So here are some tips for making the most of compounding with the different kinds of accounts or investments you may have:

1. Savings accounts: If you have a saving account, your interest will be paid right into your account. You don’t have to do a thing to take advantage of compounding. Unfortunately, when interest rates are low, you won’t be earning much interest, so the value of compounding will be low. But shop around for higher interest. Even at your own bank you may find accounts that pay higher interest.
   
   One thing to keep in mind is the frequency of the compounding. The more frequently your interest is paid, the better the compounding effect. You can find accounts that compound annually, monthly or even daily. So if you have a choice of two accounts paying the same interest, take the one that pays interest more frequently.
    
2. Certificates of Deposit (CDs): CDs are interest-bearing accounts that pay higher interest than savings accounts. Most banks have these. The only catch with these accounts is that you have to put your money away for a fixed period of time, during which you can’t touch the funds. Generally the longer the term, the higher the interest. But, if you need to take the money out early, you have to pay an early withdrawal fee! Ouch.
   
   CDs pay interest upon maturity, but the interest is usually compounded either monthly or daily. Check the frequency of the compounding to make sure you know what you’re getting. Also make sure that when the CD matures, you put all of that money to work again, either in a new CD or another investment. If you don’t, you won’t be taking advantage of compounding.
    
3. Bonds: Bonds come in all sorts of different flavors. Although there are a few bonds that pay interest quarterly or monthly, the general rule is that bonds pay interest semi-annually (every six months). But the key term here is “paid out”, which means the interest is paid out directly to you, and is not reinvested into the bond. So there is no compounding with bonds unless you reinvest the interest yourself somewhere else. It’s up to you to make compounding work.
   
   The exception to this rule is a class of bonds called ‘zero coupon bonds’. The most familiar of these is a US savings bond. These bonds do not pay out interest until the bond matures, where it is paid out as a lump sum. The benefit of these bonds is that interest actually compounds semi annually within the bond. So even though you can’t see it or spend it, interest is compounding. If you don’t believe it’s happening, just ask the IRS: They want you to pay tax on this invisible interest even though you can’t touch it! So yes, the interest is real.
    
4. Stocks: Compounding in stocks can come two ways. One is by reinvesting the proceeds of a stock sale the other is by reinvesting dividends.
   
   If you’ve made a good return on a stock, and you’re ready to cash it in, it is always good to have another investment ready to go. Rolling one investment right into another prevents your money from sitting idly on the sidelines. So it’s always good to be thinking one step ahead.
   
   The other way to compound returns from stocks is through dividend reinvestment.
   
   When you get a dividend from a company, it is always a good idea to reinvest the dividend back into investments.
   
   Unfortunately, reinvesting dividends can be somewhat complicated. Dividends payments can be quite small. So if you buy more stock using that small amount, trading fees can swallow a huge chunk of the dividend. Dividends can also be less than the price of a single share of a stock, making it impossible to even buy one share.
   
   But there are ways around this. One way is to add regular transfers into your account to supplement the dividends you get. If you fund your trading account regularly, your dividend will become pooled with a bigger chunk of money, making it easier to trade.
   
   Another way to manage dividends is through a Dividend Reinvestment Plan (DRIP). DRIPs overcome the two hurdles of reinvesting dividends by allowing you to buy fractions of shares and allowing you to do so (usually) with no charge.
   
   DRIPS are not available everywhere. Only certain brokers will offer them and usually only on specific stocks. You can also find some 401(k)s that have DRIPs. So they do exist. But DRIPs do take a bit of extra effort to find.
    
5. Funds: Mutual funds generally reinvest proceeds of sales and dividends automatically, and for free. But be a little careful. While the advantages of compounding can be significant with automatic reinvestment programs, fees can kill the benefits. Make sure your check to see if there are high fees in a mutual fund. Go to the FINRA fund analyzer to see a fund’s fees.
   
   DRIPs on Exchange Traded Funds (ETFs) are relatively new. Because of this there is not a lot of standardization to the programs. Not all ETFs have DRIPs and many of them are a bit convoluted. You’ll need to do some research to make sure that your ETF’s DRIP is appropriate for you.
   
   Otherwise, try to reinvest any income that you get from ETFs on your own. Try not to let the cash sit in your account. And again, try to supplement any income you get from ETFs with money that you transfer in to the account to make it easier to buy shares.

That’s it for compounding! Take advantage of it when you can so you can maximize the growth of your investments.

There is so much confusion and emotion around money that for many people, learning about investing can seem very overwhelming.

But it doesn’t have to be that way.

Here’s a path to getting started with investing that is easy to navigate. If you just take one step at a time, you can become a confident investor in no time. 

Ask Questions

To get on the path to investing, the first thing you should do is ask questions. We all come at investing from different starting points, and we all have different hurdles to overcome, so confidently asking questions about money is the best way to understand where you are, and where you want to go.

Don’t be afraid to channel your inner 5 year old. The simplest questions can often be the hardest: Why? What? How much? And How? Ask until you feel that you have a good grasp of the issue at hand.

Most people are usually stuck somewhere in their financial life, and have a pile of questions that need to be answered. Read appropriate content that enables you to answer your own questions, or attend conferences or seminars that are about learning, versus ones just trying to sell you something.

Understand yourself

At the same time, once you’ve begun the process of learning what investing is, the focus needs to turn to you. Understanding your financial position and risk profile will help you determine how to get started.

Most advisors use series of questions to define your risk profile and set how much risk you should take on. For novice investors, or those close to retirement, it means taking on less risk.

The way your risk is balanced is by managing what you invest it. So a novice investor should have a lower share of risky investments like small, volatile stocks and a greater share of lower risk investments like bonds and index funds.

And for those just starting out, starting with a low-risk portfolio will smooth out some of the bumpy ups and downs that come with investing, and will help build confidence.

Start with what you know

Confidence also comes from starting with things that are familiar to you. If you are very knowledgeable about certain companies or industries – look to include the top rated performers into your portfolio. This familiarity can help contextualize investing, and is a great way to start investing.

Practice

But before you go out and start investing your hard earned money, there is one thing you really should do first: Practice. Build your money muscles before you risk your own money. Create a practice portfolio first. There is a tremendous amount of learning that you can gain from watching a portfolio, seeing how prices move, watching the value of your portfolio change, watching to see how news impacts individual companies. These lessons go a long way to helping you avoid mistakes when you open a brokerage account and begin investing. Or if you are going to be working with an advisor in the future, you have a better base of experience in order to gauge how well your advisor is doing.

Look to sites like Investopedia, Yahoo Finance or Google Finance to set up a virtual portfolio.

Trade

Once you have some practice, and you want to get started – the next step is to open an account that will allow you trade. You’ll need to open an account with a broker. Look to find one that has account minimums and trading fees that are most appropriate to you.

What sort of account to open is not necessarily obvious - so start with why you’re investing.  If you want to put the money aside for retirement, then think about opening a ROTH IRA trading account. It allows you to grow the money tax-free and withdraw tax-free after you retire. There are earnings limits to ROTH IRA’s, so if you’re not eligible for a ROTH IRA, think about opening a traditional IRA trading account. These have the same tax-free growth benefits as a ROTH IRA, but are taxed when the money is withdrawn.

Let’s stop here for a second. It is super important to make sure you are POSITIVE that the money that you put in your IRA is money that you don’t need until you retire. If you suddenly find you need access to your IRA before you retire, and you take it out early (and 25% of Americans do!), you get taxed on the withdrawal AND pay a 10% penalty! That will destroy any of the tax benefits you will have gained from the IRA.

So… if you might need the money before you retire, or you have maxed out your retirement contributions, think about opening an individual trading account (or a joint account if you’re married). You will be taxed on the gains you earn on this account, but paying tax on gains means that you earned money from your investments! That’s money earned from cash that would otherwise be just sitting there. So don’t be too sad about the tax. Just try to hold each of your investments for more than a year so you are eligible for a lower capital gains tax rate…

Once you open an account, you will need to fund it.  It usually takes a few days for the money to arrive at the broker, and again a few more days for the money to clear. So know that it will be a few days before you can actually begin investing.

Another good idea is to fund your trading account regularly. The two most proven drivers of wealth are 1. starting early and 2. regular contributions. If you can keep adding to your portfolio with new money, your investment will grow at a much faster pace.

Using a money manager

One day you might decide that you want someone else managing your money. Which is fine. But if someone is investing on your behalf, make sure they are following a strategy that you’re comfortable with. Ask lots of questions, and don’t ever assume that the money that you worked so hard to earn is doing just fine without your attention. You absolutely need to look at your monthly statements and watch how your portfolio is doing. Also, add up the fees that have been taken out. Make sure they aren’t eating away at your gains. You are still the boss of your money, so make sure you keep an eye on it.

Lastly, know that markets can and will go down. Be prepared for those times. Make sure you can sleep at night when the markets drop. If you can’t, and you’re feeling a tremendous amount of anxiety about your portfolio, look to reduce your risk and focus more on less risky investments, like bonds. And make sure you buy on the dips. Don’t be an investor that runs out of the store when things go on sale!! 

So begin your investing journey by asking questions. Get a handle on who you are as an investor and practice with a virtual portfolio. And when you’re ready, jump into the market, build a portfolio you’re comfortable with, and try to keep adding money into your account. Investing is a lifelong journey – and for many, the hardest part is getting started – but it’s important that you do!

Setting goals is a vital step you need to take to ensure a financially healthy life. But when an investment company asks “what’s your retirement number?” it’s hard for many people to answer. How much do you need to retire? How about “As much as humanly possible!!”

So instead of obsessing about a random number, you should first take a good look at who you are and what your needs are. Once you do that, you’re going to learn what kind of investments you should make and how much risk you should take on. Only then can you even begin to set goals.

So, let’s first look at you and begin with your investment objectives.

Objectives may sound like the same thing as goals, but they are slightly different. Your objective should be a general idea of what you want to get out of your investments. Do you want to generate income that you can use to live off? Or do you want to grow your saving for later use? Do you want to grow as quick as you can? Or do you want to make sure don’t lose any value to your investments? These general objectives will guide your investment decisions.

Next, evaluate how much risk you are willing to take on. If you will lose sleep when any of your investments lose value, then you probably have a low tolerance for risk. If you want fast growth and can tolerate the prospect of sometimes losing money, you probably have a high tolerance for risk.

Your objectives and risk tolerance can sometimes run counter to each other. If, for example, you want high returns, but you’re scared to death losing money, then you need to move away making high growth investing your objective. The strategy would be too risky and would be beyond what your risk tolerance could handle, So make sure your objectives and risk tolerance match.

Next, let’s look at where you are in life. Life-related self-assessments must be taken into consideration when setting your goals. To do this, you should ask yourself a few key questions. In fact, every registered investment advisor is mandated to do the same for every client.

First question is your experience level. This one is straightforward. If you’ve never invested before, you should start off slowly and not take on too much risk.

Next, look at your time horizon. This one is not as straightforward. There is a lot of debate about how much risk you should take as you get older. Conventional wisdom says that you should take on less risk as you get older because you have less time left to correct mistakes. Which makes sense.

But there is now a lot of evidence to show that keeping a higher level of risk can pay off substantially when you’re older because you’ll have so much more money to invest.

In the end, a middle ground probably makes sense. Keeping some level of risk doesn’t mean you have to be reckless. It just means you don’t have to eliminate risk altogether as you get older.

Here is a good way to think about risk:

1. Take on as much risk as you can tolerate when you’re young because you have more time to make up for mistakes.
2. When you near retirement, maintain as much risk as you can tolerate. Retirement doesn’t mean you stop investing.
3. But if the risk of losing money gives you anxiety, lower your risk level.

Another question to consider is your financial situation. If you have some debt and only a little bit of savings, you should not take on much risk. You literally cannot afford to lose money. On the other hand, if you have little or no debt and some savings, you can take on more risk.

Finally, your family situation should also influence how much risk you take on. If you are married with kids, you need to be more conservative to protect the savings you have, especially for things like health care and education.

So now let’s look back at your objectives. Again, you need to modify your objectives to match your self-assessment. If you are inexperienced, have some debt and have a family, you need to be very conservative with your investments to protect your savings. If are young, without kids, have trading experience, have little debt and a sizable disposable income, you can take on a considerable amount of risk.

In the meanwhile, here’s a goal for you: Save as much money as possible! But make sure you keep that goal within the bounds of your objectives and tolerance for risk.

Also keep in mind the bigger picture of savings. You should be thinking about budgeting and debt reduction so that you have more money to invest.

In the end, your objectives will get you on a road to savings and growth. Over time, this will help will buy you options in life. You’ll suddenly have to opportunity to go back to school, or take time off to take care of your kids, or buy a house… You don’t know where you’ll be in the future, but if you invest and grow your savings, in the future you will have options. And your future you will thank you for that.

You probably know this already, but it can’t hurt to repeat it: Investing can be risky. This means that your investments can lose value. And when this happens, it can not only be painful, it can also impact your economic wellbeing.

But risk can also be your friend. Without taking on some risk, it is almost impossible to get good returns. The key is finding an appropriate level of risk that you are comfortable with. An educated risk is what you’re after, and that balance will reward you in the long run

In order to sort out how much risk you should take on, it is a good idea to take an overt look at where you are as an investor. Every investor should do this, and every investment advisor is mandated to do this. It’s called a ‘know your client’ (KYC) assessment, which gauges how much risk an investor should take on.

Generally, you should take on less risk if you are

1. An inexperienced investor
2. Have a family to support
3. Want to protect your savings
4. Are saving very little
5. Have a lot of debt
6. Are close to retirement

If you fall into a category that qualifies you as a low risk investor, it means you should take on more low-risk investments and less higher risk investments. This means your portfolio should hold a greater weight of government bonds and investment grade bonds and a lower weight of individual stocks. And if you do hold stocks, they should be large, strong blue chip stocks.

If you qualify to take on more risk, then you can lower the weight of bonds and hold more stocks. And those stocks can be smaller, more growth focused companies.

What about funds? Where do they fit into this mix? A fund can be made up of just about anything: bonds, large stocks, small cap stocks. So their risk is dependent on what is inside the fund. So bond funds can replace bonds and equity funds can replace individual funds in a portfolio.

Index funds, on the other hand, track the overall market. This means that when the overall market goes up, your investments increase in value, and when it goes down, you lose value. You will never do better or worse than the market. Index funds have the same risk as the overall market and sit right in the middle in terms of risk.

But this is all a very objective exercise. What about you and what you want? What if you are the type of person that likes to jump out of airplanes? Maybe you can tolerate more risk?

As part of any KYC, an advisor needs to ask an investor how much risk they believe that they can tolerate. Maybe a conservative portfolio is still too risky for someone who has little appetite for risk? Or maybe a low-risk portfolio has too little potential up side for someone who can tolerate more risk.

This self-assessment needs to take into consideration not only how much potential loss an investor can handle, but also how much potential return they are interested in. 

In the end, a personal risk assessment should only change an investor’s risk profile a few degrees. An investor who should take on only a little bit of risk is not served well with a portfolio of volatile stocks. The risk assessment should still focus on what is appropriate for the investor and adjust it slightly for his or her own preferences.

Also consider that your risk profile is something that evolves over time as you gain confidence, experience, knowledge and assets. So don’t rush into risk. It is something that you will learn to manage and you should give yourself time to understand it.

In the end, the only time you will know your true tolerance for risk is when you are risking real money. Only when you actually feel the impact of a loss will you truly know if you can manage it. If the loss impacts you so much that it affects your quality of life, you need to lower the amount of risk you’ve taken on.

So do your best to make sure you understand how much risk you can take on. And reassess where you are at least once a year.

Practicing investing before you put real money in is a way to build your money muscles. Just like when you exercise your regular muscles, your money muscles can be strengthened over time with practice and training. Investing won’t cause you physical pain, but the very act of using your money muscles, and making decisions for yourself, helps make your money muscles strong.

You can find practice portfolios at sites like Investopedia.com (relatively simple) or Marketwatch (more complex). They are sometimes called simulations, or virtual portfolios.

When you get good at it, your investing confidence will grow and you will become an empowered investor.

So what can you learn by exercising your money muscles through practice portfolios? Let’s go through them.

Risk

Every investment carries a level of risk. Some investments are riskier than others, and understanding the differences is vitally important.

But more importantly, you need to understand your own tolerance for risk. It is one thing to say that a portfolio full of penny stocks is risky, but it’s another thing to be up at night, unable to sleep because of the stress you feel about the loses you have in your penny stock portfolio.

Understanding your tolerance for risk is something that you can only really come to terms with through practice. You need to know how gains and losses impact you, your future plans and your day-to-day well-being. Getting to a place where you are comfortable with the amount of risk you’ve taken on takes time and practice.

Fluctuations

The price for all investments fluctuates. That’s the nature of the market. The value of an investment is only what someone will pay for it at this exact moment. In the next moment, the price will change because the next person may not be willing to pay that same price. Markets are fluid and the prices of investments traded in those markets are always in flux.

While volatility is a given, getting used to it can take time. It can be unnerving watching your investments jump up and down in price. It takes time to understand what a natural fluctuation is and what a problematic change looks like, so that those can be addressed. Practice will allow you to get used to these different price fluctuations.

Timing

Knowing when to buy and when to sell is a critical part of investing. It is also one of the hardest things to do! In fact, it is impossible to know what the future holds for your investments, so it is up to investors to make their own assumptions as to what the future holds.

The good news is that the whole market is in the same boat. People who panic and sell when investment values go down, and jump in when they are sky high are the ones who drive value for other investors. So don’t panic when prices go down!

Practice certainly makes this process easier. The more correct decisions you make, the easier the next decision will be. Even bad decisions make the process easier. You certainly won’t repeat a bad decision.

But practice definitely makes buy and sell decisions easier.

Attention

How much attention do you pay to your portfolio? Do you check it every day? Every hour? Every month?

While you definitely need to pay attention to your investments, paying too much attention can lead you to over-think events and lead you to make decisions based on insignificant events. But not checking your investments frequently enough may make you miss key events that have fundamentally changed one or more of your investments.

As a good rule of thumb, you should check your portfolio at least once a week. You definitely don’t need to check it more than once a day. But you do need to check it enough to catch significant events when they happen.

Also make sure you keep an eye out for news events that could impact your investments. Try to digest the news in a way that incorporates your investments.

You should also make sure to sit down and reevaluate all of your holdings at least once every three months. Taking time out to look at your investments critically can help you make better decisions about your portfolio.

Using pretend money in a virtual portfolio is a terrific way to build you money muscles. By investing virtual dollars you’ll get a good feel for the market. You will get an understanding of how the value of your virtual portfolio fluctuates, when to buy and sell, how to ride though the dips, how to manage your risk and how much attention to pay to your portfolio. These are all critical skills that you can learn through practice in a virtual portfolio.

If you had a choice to invest in real estate, gold, bonds, or stocks, which investment, has historically given the best return? It’s stocks. Hands down. Through thick and thin, the US stock market has returned on average 7% per year. Even after recessions, dot-com bubbles and economic meltdowns, stocks still have the best returns over time of all asset classes.

So let’s look at stocks and see why they have traditionally been such good investments.

First, let’s start with what a stock is. Stocks, also called equities or shares, are an ownership stake in a company. When you buy a share, you actually become an owner of small percentage of a company. As an owner you get certain benefits, which vary depending on what kind of stock you own.

There are two types of stock you can buy. First, are common shares. These are by far the most widely used form of stocks. They give the shareholder an ownership stake in the company, and with it, the right to vote at shareholder meetings. An owner of common stock can also share in the company’s profits, which are distributed as dividends (if the company offers them). Common shares are traded on stock markets and have prices that fluctuate based (generally) on how well, the company is performing.

Preferred stocks are a different class of shares. They are also an ownership stake in a company, but they don’t have voting rights. Generally preferred stock pays a higher dividend than the common stock of the same company, and their payments are fixed and predictable. Typically, a preferred stock’s value is driven more by the dividend it offers, than by the company’s performance. This means that preferred shares don’t move up and down in price as much as common shares.

As we said, prices of stocks go up and down. As an investor, you want to make sure you take advantage of those price movements. You want to buy a share when the price is low and sell it when the price is high. This gain is called a capital gain, and you want that gain to be as big as possible!

The key to doing this successfully is by correctly assessing a stock’s potential value. At any moment in time, a stock’s price is NOT a perfect reflection of a stock’s value.  It’s just what someone will pay for the stock at a single moment in time. A stock’s true value is essentially the unlocked potential that the stock has. If you can find a stock with lots of unlocked potential and buy it, the price of the stock will rise as the value is unlocked.

Here’s an example. The day Apple launched the first iPod, the stock price was the equivalent of $1.22. At the time, Apple was losing money and the stock looked expensive. But now Apple stock costs around 100x that 2001 price. Was Apple undervalued on that day? Absolutely. But who was to know how well Apple was going to do? Did anybody know the iPhone was coming? Or the iPad? No. But the iPod contained the seeds of massive untapped potential for Apple.

So just like buying any product, you want to calculate the untapped value in a share. And this is the holy grail of Wall Street. Everybody tries to do it. Everyone is looking into the future and making a value judgment. Wall street analysts do it, and average investors do it. Anybody can do it.

So where do you start? Start with yourself and your spending. Where does your money go? What products do you love? What products are your friends talking about? What was your last ‘Aha’ moment when you bought some truly breakthrough product? What will the world look like in 5 years? 10 years? And what companies will be the market leaders of that world?

These questions all form the basis of your stock valuation. And the difference between the price of a stock today and your perception of where it should be will determine whether the stock is undervalued or overvalued. And you want to buy the undervalued stocks and sell the overvalued stocks.

A bonus is if you find a stock that you love, but others hate. An example is Netflix when they moved from DVDs to a digital model (and raised their prices). People hated the idea and crushed the stock. But when their decision proved to be smart, and subscriber growth shot up, the stock soared.

The lesson here? Buy from the pessimists and sell to the optimists.

And this is the true value of stocks. As an owner of a smart company, you can, and should, benefit from their smart ideas and the growth that these ideas create.

Finally, you’ll need a brokerage account to buy and sell (trade) stocks. In order to open any brokerage account, you’ll have to answer a bunch of questions, and it may take some time, but it is well worth the effort.

A company can grow from a start-up in garage to a multinational conglomerate within a single generation. No other asset class allows you to piggyback on that phenomenon. And that’s why stocks can grow like no other asset class. And that is why it is so important that you learn about stocks and make them part of your life for the long term

Just make sure you buy and hold for the ling term. Companies you believe in may encounter some bumps along the way. But a long time horizon will smooth out those bumps.

And never forget the words of Warren Buffett: the stock market is a device for transferring money from the impatient to the patient.

How would you feel if I told you the only way you could buy a house was pay for it entirely in cash? Hard to imagine, right? And that’s why loans exist. Loans make big important purchases possible.

This is essentially what a bond is: A loan that you make to a company or a government so that they can finance large projects.

In order to do this, they issue bonds.

Government issued bonds (also called notes or bills) are considered quite safe. Cities, states and federal governments all issue bonds. With rare exceptions, governments always pay back their bonds. When a government fails to pay its bond, which is called a sovereign default, the impact to world markets is quite severe. So it is avoided at all costs.

Some government bonds are also tax free, so if you fall into a high tax bracket, a tax-free bond can be used as a way to earn income without having to pay tax on the interest.

Corporations also issue bonds. Many large companies issue bonds as a way to fund expansion, build new products, or move into new markets. Large, well-known companies rarely default on their bonds so they are considered quite safe. Smaller, less known companies also issue bonds. Some of these bonds are much more speculative and risky. For this reason, they are generally called “junk bonds”. They aren’t, as their name implies, garbage. But they do default much more frequently and are much higher risk than higher-grade bonds.

At this point we should talk about risk. The great thing about bonds is that there are independent third parties who rate bonds. The two main ratings agencies, Moody’s and Standard and Poor’s are very good at giving you a rating for bonds. Anything above a BBB for Standard & Poor’s or a Baa for Moody’s is considered “investment grade” or the least risky bonds.

The ratings reflect risk and should definitely be examined before you purchase a bond. Lower rated bonds definitely have more risk. But they also pay more interest. This “risk premium” is why people buy junk bonds. It is a gamble. But for someone who has the tolerance for risk, these bonds could have a higher return than a low risk bond. And the key word here is “could”. A company “could” also default on their bond. Taking on excessive risk could also lose you money.

Pricing of bonds is fairly straightforward. Every bond has a face value or par value.  This is what the value of the bond was when it was issued. Every bond also has an interest rate it pays, which is called the nominal yield or coupon rate.  So a $1,000 par value bond with a coupon rate of 4% will pay you $40 per year.

Bonds also have a maturity date, the date at which they pay back their principal.

One more thing about bonds you need to know is that they fluctuate in value. Bonds are traded in secondary markets, and they often change hands at a value different from their par value. The present value of a bond is driven by supply and demand, as well as external economic forces, specifically inflation and interest rates.

Here is an example of how this works: Let’s say the US economy is booming, and there is a shortage of all sorts of things, and as a result, all prices rise. This is inflation. Everyone gets nervous, including the banks. To cool off inflation and slow the economy, the Federal Reserve uses one of their inflation taming powers, and raises interest rates.

But not on your bond. You’re holding a bond that has a fixed 4% yield and will stay at 4% until it matures. But new bonds are being issued with a 5% coupon rate. So nobody is going to pay full value for your 4% bond, when for the same price they can get a bond that pays 5%. So in order to sell your bond, you have to sell it at a discount.

This is how the secondary market for bonds work. As a rule of thumb, as interest rates rise, the price of existing bonds drop. And as interest rates fall, the price of existing bonds go up.

The last thing you should take note of is what a bond is backed by. Bonds can be backed by land, buildings, equipment, securities or just a promise. Generally it is better if your bond is backed by something tangible. But for bonds issued by super-strong corporations or governments, a promise is often good enough.

Many investors put bonds into a portfolio in order to lower risk, or to provide ongoing income.  Adding bonds to your investment strategy yourself is easy. New government bonds are often available through your bank, but in order to buy and sell them quickly in a secondary market, you should purchase them through a broker. Most other bonds require a brokerage account to trade them. You can also find bonds packaged up in mutual funds and exchange traded funds. These are an excellent way to get the power of multiple bonds in a single security.

Bonds are a terrific investment. They pay income and can be very safe. Some investors use cash that normally sits in the bank and instead invest them in bonds. They are easy to buy and sell and can pay better income than a bank account. Keep bonds in mind when you build a portfolio.

If you need a bit of help investing, you might want to leverage the help of some experts. Wall Street is full of them. And the funds they create are a great way to do it.

First of all, funds are pooled stocks or bonds, which are put together to attain a specific objective. These objectives can be anything from generating income, to investing in gold, to matching the movement of a specific index. These objectives are contained in a prospectus (an overly complex, but important document) that comes with every fund. But usually the fund will be very overt about it’s overall goal. You can usually find good, concise summaries for most funds on-line. So make sure you check the fund’s objectives to make sure it matches your own.

The best thing about funds is that they are created by experts. They are either actively managed, where the fund’s holdings are constantly rebalanced to match its objectives, or they are passively managed, where the fund is expertly set up and allowed to run on its own. Either way, you get the help of an expert.

Funds also allow you to do things you cannot do with a single stock or bond. Because they are pooled investments, you can get the advantage of spreading your investment among various different holdings, which allows you to access more opportunities. It also allows you to spread your risk.

There are generally two types of funds: Mutual funds and Exchange Traded Funds (ETFs). There are some important differences between the two.

1. Structure: ETFs trade freely on an exchange, much like stocks, while mutual funds are bought or sold directly with the issuer of the mutual fund. An ETF can be bought or sold any time while the market is open at a specific price, while a mutual fund is priced at the close of the market and the exchange is made after hours.
2. Expertise: Generally, mutual funds are actively managed. This means that an investment professional somewhere is working to make sure that your investment is well taken care of. ETFs, on the other hand, are generally passively managed. They are built to mimic a specific, pre-defined index, or contain a specific mix of investments, and once they are set up, they run on their own. While ETF’s don’t have the day-to-day expert oversight, they are still set up by experts.
3. Flexibility: Mutual funds have the benefit of low minimum investment sizes and automatic (and free) dividend reinvestment, where any income generated from your mutual fund is automatically reinvested into shares of the mutual fund. Mutual funds also give breaks in fees for higher levels of investment. ETFs work like stocks and the investor must reinvest their dividends on their own.
4. Price: ETFs have the benefit of price. Because they are usually passively managed, you don’t have a lot of high priced talent to pay for. Some of the largest funds have annual fees that are a fraction of a percent. Because these are traded like a stock on an exchange, you will also have to pay a broker to buy and sell the ETF, but these should be less than $10 per trade in the US. You also need to be aware of a cost called “the spread”, which is the price difference between what the buyers and sellers are willing to pay. Big spreads increase your buying price and reduce your selling price. But these can be reduced substantially if you stick to more popular, highly traded ETFs.

Mutual funds are generally actively managed, and require you to pay for some of that high priced talent. An expense ratio is an annual fee that pays for this talent. The average fee on a US mutual fund in 2015 was 1.15% of your investment. And you pay for it year after year, even if the fund goes down in value! It may not seem like much, but if you made a 5% return last year, you will have to give back almost a quarter of your profit to the mutual fund company in fees.

But mutual fund fees don’t stop there. There are also fees called “loads”. These are commissions paid to brokers when you buy or sell a mutual fund through a broker, bank or insurance agent. These loads can be front-end (when you buy the fund), back end loads (when you sell the fund), and can be as high as 5% or 6%. These loads generally go down the longer you hold the fund. And there are no-load funds, but they too can charge a fee as long as it is less than .25% per year. Loads are worthless fees. They are a commission to a sales person and not pay go to the experts who run the fund. Loads should be avoided at all cost.

So how about performance? This is Wall Street’s biggest dirty secret: There is no evidence to show that a fund that charges a high fee (ostensibly for better advice) generates higher returns than one that charging a low fee. Added to that, actively managed funds will on average, give you lower returns than the overall market because of the fees they charge. So the advice here is: avoid fees. They take away your hard earned money and do not pay for better returns!

So, the bottom line: If you buy and hold a few select funds for the long term, and don’t trade too often, ETFs are your answer. If you have a 401K with limited options, or don’t have a lot of money to invest, then a no-load mutual fund may be a better option.

So that’s funds. They are a great way to use a single product to spread your portfolio into a wide rage of investments. This market has really expanded over the last decade, and there are now some fantastic, low-cost options out there. So if you avoid fees, funds can be an excellent option for your portfolio.

In the world of investing, insurance tends to be ignored. Nobody really sees insurance as an investment. But it can be.

Insurance can be much more sophisticated than just the policy you buy to cover your car, house or life. There are insurance products that have all the dimensions of an investment product, and should be considered as such

First of all, it is true that most types of insurance you buy are not investment products. They are a way to protect yourself from unexpected, high cost events. You pay a premium to get the insurance, $1,000 per year to insure your car for example, and if you get into an accident, your insurance company will pay your expenses (minus your deductible). Pretty straightforward, right? The insurance company uses actuaries to build policies, and their underwriters decide how risky you are to insure, and tell you how much you should pay.

How about insurance products that have an investment component? They also use underwriting as the basis of their products. But there is also a part of the premium that is invested and can grow in value. The two main products we will cover here are Whole Life Insurance, and Annuities.

When people think of life insurance, it’s usually ‘Term Life’ they think of. Term life means that you pick a period of time that want to be insured for, and if you die before that time is up, your beneficiaries get paid. If you don’t die during that time, the policy ends, the insurance company keeps your premium and you get nothing. (But you’re alive! So it’s not all bad).

Whole life is similar to term life, in that it has an insurance contract which will pay a stated value when the insured person dies. But there are differences. First of all, there is no term to the policy, so as long as you keep paying the premium, the policy remains in force. Secondly, the policy has as an investment component that can grow in value. The benefit of this product is that the insured person can withdraw or borrow against the invested portion of the policy, which can grow tax deferred. The policies are more expensive than term life policies, but have the financial benefit of the invested portion of the policy.

Annuities - whether fixed or variable, are tax deferred insurance products that you pay into, with the intention of getting a regular, level income when you are older. A fixed annuity means that you will be paid a guaranteed, fixed payment every year until you die. If you live a long life, fixed annuities are a terrific way of having income if you live beyond what your savings can support. Fixed annuities are often used as a way to top up social security payments.

A variable annuity has similar benefits to a fixed annuity, but has more flexible funding, investing and payout options. Payments into variable annuities are invested, so the value of the annuity is dependent on the performance of ‘the market’. This makes variable annuities riskier because they do not have guaranteed payments. On the other hand, they have more flexibility because your annuity can grow if your investments grow. Variable annuities also have a death benefit if the annuity holder passes away before payouts begin. And finally, variable annuities have very flexible payout schemes and can be paid out for a fixed period or for the lifetime of the annuity holder. As with fixed annuities, payments into variable annuities are tax deferred.

The critical things to consider with whole life insurance or an annuity are the terms, the fees and the risks. Whole life and annuities are investment products that are particularly complex, expensive and jargon filled - so make sure you know what you’re signing up for and paying for.

Unfortunately, the one variable that will determine whether these products are a good option for you, is completely out of your hands: How long you’ll live. If you live a long life, annuities are terrific. If you don’t, whole life would be a better option… Another way of looking at this dilemma is to think of it this way: Do you fear running out of savings in retirement, or do you fear that your loved ones will not be taken care of after you die. If savings is the issue, annuities are something to look at. If you worry about your loved ones, then insurance may be better.

But make sure you benchmark these products against simpler products that may or may not have higher rates of return.

And ask the critical questions of your insurance provider:

• How much commission are you being paid to sell me this?
• What are the annual fees?
• When can I access my money?
• What are the tax implications?

Variable annuities in particular have been growing in popularity recently, and with good reason: They earn huge commissions for the people who sell them.

So, as with all investment products, do the math carefully on what you need to put in, who is getting paid, and what your expected return is. And don’t look at the products in isolation. Look at the opportunity cost of not being invested elsewhere. If you can get a 5%-7% average return from the stock market, why would you put money into an insurance product that may not pay as much?

Using insurance products as an investment is a difficult choice. They are expensive and complex. They do serve a purpose, and do make sense for some people. But make sure you have all the information you need before using these products as investments.

Nobody likes bad news. And that is especially true for investors. Bad news about a company can lower its stock price and wipe out billions of dollars of investor’s money.

Unfortunately bad news is hard to avoid. Often investors don’t see it coming. It could be news of a criminal investigation, an outbreak of a virus at a restaurant chain, a drop in oil prices, restated earnings, a lawsuit, new regulations, a product recall… These are risks that are hard to predict and even harder to avoid.

These risks are called ‘non-systemic risks.’ They are things that hit individual companies or isolated pockets of the market more than the rest of the overall market.

Although you can’t entirely avoid non-systemic risks, there are ways to minimize their impact. This is done through diversification. By putting your eggs in different baskets, you are diversifying your investments and lowering your overall risk.

You can do this in three ways: diversify by asset class, geography or industry

Asset Class

The most important area of diversification is by asset class. When you invest, you can hold different asset classes, namely stocks, bonds, funds and cash. It is always a good idea to have a mix of all of these.

Stocks tend to be more volatile and risky and have more exposure to non-systemic risk. Bonds tend to be much less volatile, more stable and less risky. Stocks and bonds also tend to move in opposite cycles.

Funds can function like either bonds or funds, depending on what they hold. And cash is held as protection against a falling market (cash will not lose value like a stock).

By holding a mix of these four asset classes, it allows you spread your risk so that bad news will not hit all of your holdings at once. And by reducing your exposure to stocks, you can lower your exposure to non-systemic risk.

Geography

You can also diversify by geography by buying stocks and or bonds from different parts of the world. You can spread your investments across the US, Europe, Asia and the developing world. By segmenting your investments this way, the drop in the Russian Ruble or a meltdown in Asia will impact only a portion of your portfolio.

Industry

Finally, you can diversify by industry. Many industries run in different cycles, so by diversifying by industry you will make sure your entire portfolio doesn’t hit a down-cycle at the exact same time. For example, by investing in both miners and manufactures, you will protect yourself from falling commodity prices because low commodity prices will hurt mining but benefit manufacturers.

You should try to make sure your holdings are not concentrated in a single industry like technology or retail. Companies in these segments are popular and easy to understand, so make sure your portfolio isn’t biased towards these industries.

Simple Diversification

It should be noted here that Exchange Traded Funds (ETFs) can be an excellent, low cost way to diversify your portfolio. You can find ETFs that are diversified by geography, industry or asset class. A single fund can do a ton of diversification work for you, especially when you are building your first portfolio.

So that’s diversification. It’s easier than it looks. Start by diversifying between stocks, bonds, funds and cash. Use ETFs to do some easy diversification for you. Aim to diversify even further by industry or geography if you can. If you do it well, you can reduce some of the bumpiness of the overall market and lower your exposure to the impact of bad news.

So now you’re ready to become an investor. In order to buy and sell stocks, bonds and funds, you need to open a brokerage account.

There are many ‘retail brokers’ in the US. Look for one with low trading fees, and who speaks in investment language that is at your level of understanding.

When you open a trading account, there are a number of options that will be available to you. You can even have several different accounts open at the same time. But choosing the correct account is very important.

The first thing you need to ask yourself is whether the account you open will be specifically for retirement, or will it be for pre-retirement financial needs.

If you want the account to be specifically set up for retirement, then you want to look at opening a Roth IRA with your broker. These accounts allow you to grow your money tax-free and allow you to withdraw your money tax-free after you retire.

There are earnings limits to Roth IRA’s (they are not available to those earning above a certain level), so if you’re not eligible for a Roth IRA, think instead about opening a traditional IRA. These have the same tax-free growth benefits as a Roth IRA, but are taxed when the money is withdrawn.

But let’s stop here for a second. When you open an IRA trading account, it is super important to make sure you are POSITIVE that the money that you put in this account is money that you don’t need until you retire. If you suddenly find that you need access to this money before you retire, and you take it out early (and 25% of Americans do!), you get taxed on the withdrawal AND pay a 10% penalty! That will destroy any of the tax benefits you will have gained from the IRA.

There are some exemptions from this penalty, like if the withdrawals are for education or the purchase of a first house. But generally, if you might need the money before you retire, you should not put it in an IRA.

If you have intermediate needs that will come up before you retire, then having an individual trading account (or a joint account if you’re married) is a great idea. You will be taxed on the gains you earn on this account, but you can take money in and out of the account without penalty.

Many people open both an IRA and an individual trading account. This gives you the flexibility to save for retirement and save for other needs that may come up in the meantime.

Another choice you’ll need to make when you open a trading account is whether you want the ability to trade on margin. Margin is essentially borrowing money from your broker, which you use to trade. Trading on margin costs you money. You pay interest on the amount you borrow. But more importantly, trading on margin is very risky. If the trade you make goes the wrong way, you will have lost some of the money you borrowed. You’ll have to use your own money to pay the borrowed money back to your broker. In a worst-case scenario, if your broker feels that their money is in jeopardy because of your losses, they will make a ‘margin call’, and you’ll immediately have to find the cash to pay your broker back.

The only low-risk use of margin is to bridge the 2 or 3 day gap when you’re waiting for the proceeds of a stock sale clear. Sometimes when you sell a stock, it takes a couple of days for the cash to hit your trading account. If you want to buy another stock in that time, having margin to trade is extremely helpful. You only borrow the money for a couple of days, and it gives you the flexibility to be able to move into new positions quickly.

Once you open an account, you will need to fund it.  It usually takes a few days for the money to arrive at the broker, and again a few more days for the money to clear. So know that it will be a few days before you can actually begin trading.

In order to maximize the growth of your investments, it is a very good idea to try and fund your account as frequently as you can. If you keep adding to your account, and invest that money, your gains will compound on an ever-increasing base. It is the single most important way to build wealth.

Finally, it’s important to understand fees. Whenever you buy or sell a stock, your broker will charge a commission. Also, when you sell a stock, there are a few additional fees imposed by the exchange. Fees can kill the growth of your investments. So in order to keep fees to a minimum, you need to do two things.

1. Keep your trading to a minimum. Buying and holding for the long term has been proven to be the best strategy for investing. Timing the market so you buy at the bottom and sell at the peak is almost impossible to do. Buying and holding will allow you to ride out the ups and downs of a stock. It also minimizes fees. And if you hold for more than a year, the gain will be taxed at a lower rate.
2. Make big trades. Trade big as big a chunk of money per transaction as you can. Trading commissions with most brokers are a fixed price. So a $5 commission on a $50 trade will burn 10% of your investment. On a $500 trade it will take 1%. And $5,000 will take 0.1%. As you can see, the larger the trade, the smaller the share of your portfolio the commission eats. And remember that the commission will come when you buy AND sell. So if you can, try to keep the commission below 1% of the trade.

Once you open a trading account, make sure you keep an eye on things. You want to make sure you know how your portfolio is doing. And you should sit down at least once every three months and assess where your investments are. Be critical of the stocks and funds you are holding to make sure they still make sense. Follow the news and look for the companies in your portfolio so you know what they are up to and you aren’t surprised by unexpected events.

And enjoy being an investor! Ride out the downs and take pride in the upswings. It’s a great feeling when your portfolio does well, so make sure you enjoy it.

Did you know that the 401K is named after a little known section of the tax code? It was originally used as a way to help employees generate additional retirement wealth. Over time it has become immensely popular with companies because it has taken the risk associated with company run pensions and pushed the responsibility (and risk) onto employees. 401ks have now become the de facto substitute for pensions.

Let’s be clear. 401K s are complicated. It’s tempting to tell yourself that they’re not worth it and avoid the headache, but read on to understand why you perhaps shouldn’t sit on the sidelines.

The first reason to pay into a 401K is that it is funded with pre-tax money. This means that some of your income goes directly into your 401K, before it is taxed. So although you don’t get the money in your paycheck, you get all of it deposited in your 401K account. No tax comes off.

But 401Ks are not “tax-free”. You will eventually pay tax on the funds. But this will happen way off in the future, after your savings have grown tax-free for decades and you’ve retired under a lower tax bracket. So 401Ks are called “tax deferred” plans because they delay your tax bill to a later date when your tax rate is lower.

But the big selling point for 401Ks is that with most plans, employers contribute to their employees’ 401Ks with the company’s cash. This company match can be a significant addition to your 401K. If you don’t participate you are literally leaving free money on the table.

When you sign up for a 401K, your employer will connect you with the plan administrator, which is usually a Wall Street bank or broker. They will open your account and tell you what you can invest in. You won’t be able to buy any stock, bond or fund that you want. Usually you have to pick from a list of funds that they have chosen for your plan.

Try to do some research into the products on your list. If there are mutual funds in your plan, use the FINRA fund analyzer to assess them. You will be able to see the fund’s past performance and returns over time. But more importantly, you’ll be able to see the fund’s fees. Make sure you focus on the funds with the lowest fees. Performance is not something you can predict. But fees you can. And they eat away at your gains.

If you are in the position of choosing your own funds, don’t go too crazy. Use low cost, diversified funds and aim to hold them for the long term

And don’t over-manage your plans. You risk losing what you put in by selling and buying at bad times.

If you move to another job, you may have the option of getting another 401K. Having multiple 401Ks isn’t necessarily a good thing. You’re paying so many fees to so many providers; it makes more sense to ‘roll over’ your old 401Ks into your current one. You can also roll your old 401K into an IRA where you will have a much broader range of investment options.

Most importantly, paying into a 401K or IRA is an investment in your future self. It’s a great way to build up wealth that you can use in retirement. But make sure that when you put money into your 401K you’re not putting away money you may need before retirement. This is money that you can’t tap into before you turn 59½. (Well, you can, but you will pay significant penalties if you do!).

The bottom line is that for now, we’re stuck with 401Ks as the go-to retirement plan for employees. Try not to leave 'free money' on the table, and when you pick the holdings in your plan, choose low cost index funds.  And remember to check in on your 401K every few months to see how things are going.

With all the complexity in retirement savings, it’s hard to sort out the alphabet soup of options. Let’s focus on one segment: IRAs

Individual Retirement Accounts (IRAs) were set up as a way to save for retirement using tax advantaged investment accounts. The idea with all IRAs is to allow the money in the accounts to grow without being hit with a capital gains tax, allowing the money in the accounts to grow more quickly.

In order to take advantage of these benefits, an IRA account has to be set up with a broker. All brokers can open IRAs.

IRAs are great for people who are self-employed, or for people who do not have access to a 401K. It can also be used by people who have maximized their 401K contributions and are looking to put more money away for retirement.

So what are the differences between a Traditional IRA and a Roth IRA?

The big difference is how they take advantage of their tax savings.

Roth IRA accounts are considered to be “tax-free” accounts. There are no capital gains taxes on any of the investment gains made in the account. And there are no taxes when the funds are eventually withdrawn. Once in the account, there are no tax implications to funds in a Roth IRA.

The only drawback is that the Roth IRA deposits have to be made from post tax money. So the money that goes in has already been taxed.

Traditional IRAs, on the other hand, are considered to be “tax-deferred” accounts. The money that goes in is usually pre-tax money. But the tax is still owed. It’s just being deferred until the account holder retires. The benefit here is that the tax rate in retirement is usually lower than when the money was earned, and the retiree will pay less tax at the lower rate.

Like a Roth IRA, Traditional IRAs allow money to grow in the account without incurring capital gains taxes.

But not everyone qualifies for a Roth IRA. As of 2016, you must be earning under $132,000 as a single tax filer, or $194,000 as married filing jointly. You can see the full earnings limits here at the IRS web site.

Traditional IRAs are available to anyone under 70½ years of age, who is earning any amount of income. But there are earnings limits that restrict eligibility for the pre-tax benefit. The earnings limits can be found here.

There are limits to how much you can put in an IRA. The current contribution limit is $5,500 ($6,500 if you are 50 or older). And if you happen to have both a Roth and a Traditional IRA, the limit is combined, so you can’t contribute $5,500 to each account.

How money can be withdrawn is also very different between the two. A Roth IRA doesn’t require you to withdraw any money during your lifetime, so it’s a great way to pass on money tax free to your beneficiaries. Traditional IRAs require that you start taking ‘required minimum distributions’ at age 70½ . Both plans allow you to start withdrawing at 59½ years of age – although with the Roth you must have been contributing at least five years before you can start to withdraw.

If you’re trying to figure out which account to open, the Roth IRA is generally preferred if you are currently in a low tax bracket. If you’re in a higher tax bracket, the immediate tax-free savings of a Traditional IRA may be more beneficial.

Here’s a handy infographic that may help you to decide which option is better.

One caveat. These rules may change between now and when you retire. But that doesn’t mean that you shouldn’t consider an IRA. Too many Americans are not prepared for retirement – don’t be one of them! Because for now, both the Traditional and Roth IRA are pretty great ways to put money aside in a tax advantaged way.

There are times when investors need sophisticated investment products. You can think of investing as something of a ladder where, you begin with simple investments like stocks, bonds and funds at the bottom and work your way up to things like insurance products as you move to the top.

First of all, you should know that we’re not talking here about traditional insurance products here. Traditional insurance is used as a way to protect you and your family from unexpected, high cost events. Car insurance, home insurance and term life are all important ways to do this. But they are not investments.

Insurance as investment has a protective component to it, but also has an investment component. We’re talking specifically about ‘whole life’ insurance and annuities.

First, a bit about these two products:

Whole Life Insurance

Whole life is has two parts. The first is an insurance contract, which will pay a stated value when the insured person dies. This is similar to traditional life insurance (aka ‘term life’). But there are differences. There is no term to the policy, so as long as you keep paying the premium, the policy remains in force. The second part of the policy is an investment component that can grow in value. The benefit of this product is that the insured person can withdraw or borrow against the invested portion of the policy, which can grow tax deferred.

Whole life policies are more expensive than term life policies, but have the financial benefit of the invested portion of the policy, which can grow over time.

Annuities

Annuities - whether fixed or variable - are tax deferred insurance products that you pay into, with the intention of the getting a regular, level income when you are older. A fixed annuity means that you will be paid a guaranteed, fixed payment every year until you die. If you live a long life, fixed annuities are a terrific way of having income when you live beyond what you’ve saved. Fixed annuities are often used as a way to top up social security payments.

A variable annuity has the similar benefits to a fixed annuity, but has more flexible funding, investing and payout options. Payments into variable annuities are invested, so the value of the annuity is dependent on the performance of ‘the market’. This makes variable annuities riskier because they do not have guaranteed payments. On the other hand, they have more flexibility because your annuity can grow if your investments grow. Variable annuities also have a death benefit if the annuity holder passes away before payouts begin. And finally, variable annuities have very flexible payout schemes and can be paid out for a fixed period or the lifetime of the annuity holder. As with fixed annuities, payments into variable annuities are tax deferred.

So when are these product appropriate for you?

It is super-important to stress that these Insurance products should not be looked at until you have most of your other financial issues sorted out. You should have a retirement account that is well funded. You should have your debts fully managed. You should have your kid’s education sorted out. And you should be 100% certain that you need it.

And here is the reason: 26% of whole life insurance policies are surrendered within the first 3 years, and 45% are surrendered in the first 10 years. It is in the first few years that most of your fees are paid, so little of your premium goes into your investment account. If you surrender very early, very little of your premium paid will be returned to you and you will definitely be on the losing end of that investment.

So if you have maxed out the tax deferred contributions to your traditional retirement accounts, and you have substantial income, you can look at insurance as in investment.

The critical things to consider with whole life insurance or an annuity are the terms, the fees and the risks. Whole life and annuities are categories of investment products that are particularly complex, expensive and jargon filled - so make sure you know what you’re signing up for, and paying for.

Unfortunately, the one variable that will determine whether these products are a good option for you, is completely out of your hands. If you live a long life, annuities are terrific. If you don’t, whole life would be a better option…

A better way of looking at this dilemma is to think of it this way: Do you fear running out of savings in retirement, or do you fear that your loved ones will not be taken care of after you die? If savings is the issue, annuities are something to look at. If you worry about your loved ones, then whole life insurance may be better.

But make sure you benchmark these products against simpler products that may have similar rates of return.

When you’re doing your assessment, make sure you find out what commissions you are paying and what the fees are. Make sure the agent gives those to you in writing. Also make sure you understand if you can access your money and if there are any early withdrawal penalties. And finally make sure you know any tax implications.

So, as with all investment products, do the math carefully on what you need to put in, who is getting paid, and what your expected return is. And don’t look at the products in isolation. Look at the opportunity cost of not being invested elsewhere. If you can get a 5% average return from the stock market, would the money you are putting into insurance products potentially earn more elsewhere?

You should be absolutely certain that you need the product. They are expensive and complex. But they do serve a purpose, and do make sense for some people. So make sure you have all the information you need before using these products as investments.

Managing risk is one of the most important jobs you have when you are investing. The key way to do this is to spread your risk among different investments. By putting your eggs in different baskets, you are “balancing your portfolio” and spreading your overall risk.

As you know, markets go up and down. But these ups and downs are uneven and unpredictable. When one part of the market goes up, others can go down. When stocks go ups, bonds often go down. Even on the same news, the impact can be different.

This volatility can be managed to some degree. Events like drops in commodity prices, bad management decisions, product recalls, and changes in regulations hit individual companies, industries and countries differently. These are called non-systemic risks, and these risks are what you try to manage though balance.

The tool that is used to balance non-systemic risk is diversification. By diversifying your portfolio, you can manage some of your risk. You can do this in three ways: diversifying by asset class, geography or industry.

Most of the heavy lifting of diversification happens by diversifying by asset class. When you invest, you can buy stocks, bonds and funds, or just hold cash. Each of these asset classes behaves in its own way. Stocks tend to be more volatile and risky. Bonds tend to be much less volatile and more stable. Stocks and bonds also tend to move in opposite cycles. And cash keeps its value even in market downturns.

So by spreading your portfolio among these asset classes, your portfolio can be somewhat insulated from different types of market forces. Something that hits stocks hard may be a benefit to bonds and something that hurts bonds can sometimes help stocks. So by mixing your asset holdings, your portfolio can weather many kinds of market storms.

You can also diversify your portfolio geographically. If your portfolio holds lots of US stocks, it would be a good idea to diversify by buying European or Asian investments. By spreading your money this way, a downturn in the US will only impact part of your portfolio.

Finally, you can diversify by industry. Different industries run in different cycles. A downturn in oil prices for example may be devastating to oil companies, but lower fuel prices are a boon to transportation. By buying into different industries you will make sure that a down-cycle in one part of your portfolio will not spread to your whole portfolio. If you start with broad categories such as primary industries, manufacturers and services, you can branch out into more specific categories once you get the hang of it.

Also note that Exchange Traded Funds (ETF), can be an simple, low cost way to instantly diversify your portfolio. You can find ETFs that are diversified by geography, industry or asset class. A single fund can do a ton of diversification work for you, especially when you are just starting out.

Now that you know how to balance your portfolio, we need to look at the most important part of balance: you! No matter how you balance your portfolio, you need to take into account your own risk tolerance. If you don’t have much of an appetite for risk, or really cannot afford to lose money, then your portfolio should be balanced towards more conservative products.

The most effective way to manage risk is through asset allocation, specifically the proportion of stock, bonds and cash you hold. If you have a conservative risk profile, it would be good to hold more bonds and cash and a lower proportion of stock. If you can accommodate a lot of risk, you can hold a greater proportion of stock.

As a guideline, this is a sample of what a balanced portfolio should look like: A conservative investor can have a mix of 70% bonds, 20% stocks and 10% cash. For an aggressive investor, the holdings are inverse, 70% stocks, 20% bonds and 10% cash.

If you don’t have an appetite for risk, choose a bond fund at the core of your portfolio and take only a small proportion of stock. If you have a higher tolerance for risk, maybe take a more aggressive fund as your core, and take a larger proportion of stock.

One last thing, it’s always good to go back and revisit your balance every three months. The value of your holdings will change over time, so your balance will change. Make sure you check to see if you’re comfortable with your new balance. If you’re not, rebalance by selling some of the asset where you’re overweight, putting the proceeds into the assets where you’re underweight.

So that’s balance. It’s easier than it looks. Start by diversifying between stocks, bonds, funds and cash. Use ETFs to do some easy diversification for you. Aim to diversify even further by industry or geography if you can. But make sure you’ve taken your own risk tolerance into consideration. If you do this well, even if one part of the market hits the rocks, your overall portfolio won’t be impacted severely. And that’s the goal of balance: making sure a downturn in one part of the market doesn’t ruin your whole portfolio.

Managing risk is one of the most important jobs you have when you are investing. The key way to do this is to spread your risk among different investments. By putting your eggs in different baskets, you are “balancing your portfolio” and spreading your overall risk.

As you know, markets go up and down. But these ups and downs are uneven and unpredictable. When one part of the market goes up, others can go down. When stocks go ups, bonds often go down. Even on the same news, the impact can be different.

This volatility can be managed to some degree. Events like drops in commodity prices, bad management decisions, product recalls, and changes in regulations hit individual companies, industries and countries differently. These are called non-systemic risks, and these risks are what you try to manage though balance.

The tool that is used to balance non-systemic risk is diversification. By diversifying your portfolio, you can manage some of your risk. You can do this in three ways: diversifying by asset class, geography or industry.

Most of the heavy lifting of diversification happens by diversifying by asset class. When you invest, you can buy stocks, bonds and funds, or just hold cash. Each of these asset classes behaves in its own way. Stocks tend to be more volatile and risky. Bonds tend to be much less volatile and more stable. Stocks and bonds also tend to move in opposite cycles. And cash keeps its value even in market downturns.

So by spreading your portfolio among these asset classes, your portfolio can be somewhat insulated from different types of market forces. Something that hits stocks hard may be a benefit to bonds and something that hurts bonds can sometimes help stocks. So by mixing your asset holdings, your portfolio can weather many kinds of market storms.

You can also diversify your portfolio geographically. If your portfolio holds lots of US stocks, it would be a good idea to diversify by buying European or Asian investments. By spreading your money this way, a downturn in the US will only impact part of your portfolio.

Finally, you can diversify by industry. Different industries run in different cycles. A downturn in oil prices for example may be devastating to oil companies, but lower fuel prices are a boon to transportation. By buying into different industries you will make sure that a down-cycle in one part of your portfolio will not spread to your whole portfolio. If you start with broad categories such as primary industries, manufacturers and services, you can branch out into more specific categories once you get the hang of it.

Also note that Exchange Traded Funds (ETF), can be an simple, low cost way to instantly diversify your portfolio. You can find ETFs that are diversified by geography, industry or asset class. A single fund can do a ton of diversification work for you, especially when you are just starting out.

Now that you know how to balance your portfolio, we need to look at the most important part of balance: you! No matter how you balance your portfolio, you need to take into account your own risk tolerance. If you don’t have much of an appetite for risk, or really cannot afford to lose money, then your portfolio should be balanced towards more conservative products.

The most effective way to manage risk is through asset allocation, specifically the proportion of stock, bonds and cash you hold. If you have a conservative risk profile, it would be good to hold more bonds and cash and a lower proportion of stock. If you can accommodate a lot of risk, you can hold a greater proportion of stock.

As a guideline, this is a sample of what a balanced portfolio should look like: A conservative investor can have a mix of 70% bonds, 20% stocks and 10% cash. For an aggressive investor, the holdings are inverse, 70% stocks, 20% bonds and 10% cash.

If you don’t have an appetite for risk, choose a bond fund at the core of your portfolio and take only a small proportion of stock. If you have a higher tolerance for risk, maybe take a more aggressive fund as your core, and take a larger proportion of stock.

One last thing, it’s always good to go back and revisit your balance every three months. The value of your holdings will change over time, so your balance will change. Make sure you check to see if you’re comfortable with your new balance. If you’re not, rebalance by selling some of the asset where you’re overweight, putting the proceeds into the assets where you’re underweight.

So that’s balance. It’s easier than it looks. Start by diversifying between stocks, bonds, funds and cash. Use ETFs to do some easy diversification for you. Aim to diversify even further by industry or geography if you can. But make sure you’ve taken your own risk tolerance into consideration. If you do this well, even if one part of the market hits the rocks, your overall portfolio won’t be impacted severely. And that’s the goal of balance: making sure a downturn in one part of the market doesn’t ruin your whole portfolio.

So you have money to invest. You have a plan. You know your goals. You know your risk profile. You know what you want to invest in. Maybe you’ve already begun the journey and invested your hard-earned money already. Now what? How will you know how well you’re doing? How do you measure success?

First of all, it is super-important to go back to your objectives. Did you want to be cautious and preserve the money you had, or did you want to go all out and generate huge returns? The performance of your portfolio needs to be seen in comparison to those objectives.

You also need to look at what you’ve invested in. If you invested in conservative government bonds, you should not expect outsized gains. Your performance needs to be compared to the kinds of investments you’ve bought.

So let’s start by measuring gains. First of all there is a big difference between realized gains and unrealized gains. Realized gains are investments that you have sold, for a profit. The gain, called a capital gain, is taxed. Until you sell, there is no “real” gain and no tax. It also means you can’t really brag about all the huge gains you’ve made until you actually realize them by selling!

To figure out your gain, start with what you paid for the stock, including fees. This is called your costs basis. Now subtract this from the sum total of what you sold the stock for (the amount you got from the stock sale, minus any fees). This is your gain.

If you want to know the percentage gain, take your gain and divide it by your cost basis and multiply that by 100. That will give you your percentage gain. So if you bought a stock for $1,000 and sold it for $1,200, your gain would be 200 divided by 1,000, or 20%.

To better understand this percentage gain, you have to take note of how long it took you to earn it. A 10% might look great on paper, but if it took you 5 years to earn that gain, it really is only a 2% gain per year. So dividing your gain by the number of years you held the investment, will give you a good overall picture of your gain.

As a side note, if you sell for a gain outside of a tax advantaged retirement account (IRA or 401K), make sure you keep some of the money aside to pay taxes on your gain. If you held the stock for more than a year, you get a preferential capital gains rate that ranges from 0% to 20%. If you held it for less than a year, you will be taxed at your normal income tax rate.

To keep track of day-to-day changes, you should track unrealized gains. Keep track of each individual investment’s cost basis, and its current value. Also keep track of any fees as they come up and add them to the cost basis. This may be difficult to do for funds that charge fees over time. But it is super-important to do this. You need to see how of your gains are eaten by fees.

By adding up all your unrealized gain and losses, you will get a good sense of how well your overall portfolio is doing. Most brokers allow you to track this fairly easily.

So now that you know how to measure gains and losses, how do you judge those gains and losses? Is a 10% gain good? Is 5% terrible? How can you tell how well you’re doing?

Strangely enough, in order to know how well you’re doing, you need to compare yourself to how everyone else is doing.

If your stocks went up 5% last year, that sounds good. But what if the overall economy was in full gear and the overall stock market went up 20%? It means your stocks didn’t leverage the high-flying economy very well, and your stocks lagged the average. On the other hand, that 5% would be terrific if the overall market went down 5%. So context is important. Compare your gains to average stock market performance to see how well you’re doing.

The S&P 500 is considered the best proxy for the overall stock market, so compare your stock returns to that index.

The final thing to watch is deciding when to sell. Watching the performance of your stocks should give you sell information. If you’ve made terrific gains, on a stock, you should consider selling some of it to lock in the gain, or get out entirely. Don’t be too greedy! Also if a company’s stock drops because something fundamentally is wrong with the company such as restated earnings, lawsuits, plummeting sales, it may be time to bite the bullet and sell at a loss. Always have an exit strategy.

So that’s how you measure progress. You should look at it as often as you can, and as carefully as you can, making sure you incorporate all costs. By watching your progress, you’ll close the loop in your investing journey, giving you feedback to help you make good investing decisions.

How much is your money worth right now? The balance you see on your ATM receipt only tells part of the story. Your money also has another story, which speaks of it’s potential to do things in the future.

Money holds tremendous opportunity. Maybe the money you have saved will be able to pay for a boat in 5 years? Maybe it will be the deposit on a house in 10 years? What if you want to pay for $10,000 in tuition in 5 years, will the $7,500 you have right now pay for it?

These are all great questions and ones we can actually figure out.

These are called Present Value calculations and with it, you can figure out if you have enough today to do something important in the future.

To make the calculation, you need to know 3 things:

1. The price of the thing you want in the future (Future Value, FV)
2. The length of time in until that point in the future (In years, Y)
3. The rate of return you would get if you invest that money (Return, r)

You can go online to find present value calculators, but to do it manually, here’s the formula:

PV   =   FV / (1 + r)^Y

It looks a little complicated, but it is fairly simple.

Let’s look at the above tuition example. If you need $10,000 in 5 years, you have two of the inputs figured out, FV, which is $10,000 and Y, which is 5 years.

The last thing you need is the rate of return. To be conservative, let’s assume you put that money into the stock market, buying an index Exchange Traded Fund. Let’s say you buy SPY, an ETF that tracks the S&P 500, and is super low cost. Its 10-year average return is around 7% per year. So let’s assume that SPY will return the same 7% for the next 5 years (a big assumption yes, but we have to put our feet somewhere).

In Excel the formula would be =10000/(1+.07)^5

When you plug the numbers into the formula you get a present value of $7,130, which means that you would need to invest $7,130 today in order to have $10,000 in five years. So the answer to the question is yes, our friend with $7,500 in the bank today should be able to invest her money and pay her tuition in 5 years (and still have money left over for some books!).

But, you may have noticed that the weakness of the present value calculation is the rate of return. As we said, you have to put your feet down and make an assumption about the rate of return you’ll get. But in reality, it is hard to predict what kind of return you will get, or even what risks you will tolerate to get it. So present value calculations have to be used with an eye to your own situation.

If instead you want to know the rate of return you require to grow your current savings into your goal amount, the present value calculation can be flipped around to tell you that rate of return. In order to calculate this, you would use this formula:

r = (FV / PV)^1/y - 1

Let’s look at our tuition example again. If you want to grow your $7,500 savings into your $10,000 tuition in 5 years, you need to figure out what kind of annual return you need to earn in order to get to your goal.

In excel, the calculation would be =((10000/7500)^(1/5))-1

So in this example, you would need a compounded annual growth rate of 5.92% in order to get to your $10,000 tuition goal.

Present value calculations are a great way to help you get your head around investment goals and targeted returns. The formulas get more complicated as your situations get more complex. There are lots of terrific calculators on-line to help you make these calculations. Go here for a very simple present value calculator. Or look to Calculator Soup or Financial-Calculators.comfor more sophisticated present value calculators.

People invest their money in the hope that it will increase in value over time. Without this reward, people would not take on the risk of investing. Growth is a fundamental prerequisite for almost any investment.

But how do you predict growth? Or even measure it? How do you figure out how much your investment will be worth in the future? Well, guess what? There is a way to figure this out! Roll up your sleeves and dig into the concept of ‘future value’.

Future value (FV) is the idea that a current investment will have a predictable value in the future, given an assumed rate of growth over time. So if you want to look at the future and see how much your investments might be worth, try a future value calculation.

There are online calculators that will do the work for you – but it’s important to understand the underlying idea.

We’ll start with an easy example: An interest bearing savings account. Let’s also assume that you don’t add any money to the account along the way and the interest rate you get does not change. Let’s say you put $5,000 in a savings account. We’ll call that ‘present value’ (PV). Now let’s say that the account pays 3% interest. We’ll call that the ‘rate of return’ (r). Finally, let’s also assume that you put the money away for 5 years. We’ll use 5 as the ‘number of periods’ (n). So now, if you want to know how much your money will be worth after 5 years, you use this ‘future value’ (FV) calculation

FV = PV (1 + r)ⁿ

If we plug in the numbers into Excel, it looks like this:

=5000*(1+.03)^5

Which gives you the result $5,796. So there you go, your money grew! Sweet!

Now lets assume that instead earning interest once per year, you get interest once per month. Nothing else changes, you still get 3% interest, but it gets paid as 0.25% every month. Let’s see what happens.

So now your (r) is .0025 (3% per year divided into 12 months) and your (n) is 60 (5 years times 12 months). If we plug these numbers into Excel, it looks like this:

=5000*(1+.0025)^60

By changing the frequency of your interest payments, your money grew faster, to $5,808 after 5 years. So the frequency of your compounding makes a difference! By spreading out your interest payments, you will earn interest on your already accumulating interest, thereby amplifying the effects of compounding, even at the same interest rate.

Future value calculations are a great way to compare potential investments, extrapolate savings into retirement or to see if you’ll have enough money to put your kids through college.

The only weakness to future value calculations is having to select an appropriate rate of return. It is impossible to look into the future, so there is no way to know precisely what rate of return you will actually get on your investments. So it’s a good idea, with any future value calculation, to use a range of inputs. The historical rate of return for US stock markets is around 7%, so it would be good to look at returns above and below that rate. If you are a conservative investor who avoids risk, focus on rates of return that are below 5%.

Finally, it is important to note that future value can be super-amplified by adding to your investments over time. The examples we’ve used here assume you put your money away and don’t add to it. If you instead added $10 every month to your investment, it would be worth $6,455 at the end of five years. Even adding a small amount regularly to your investments can make a huge difference.

Try out this more sophisticated future value calculator to see how adding deposits over time impacts the growth of your investments.

Get familiar with future value by trying out different rates of return, different starting values and different durations for your investments. When you do this, you will get a good idea how much you need to be putting away and what sort of return you will need to get for various future goals.

Future value is a vital concept to understand if you are setting any sort of savings goal for yourself. Savings goals become much more reasonable when you plug them into a future value calculator. It may seem like a boring proposition, but an hour spent experimenting with future value will go a long way to helping you realize your investment goals.

When you retire, your regular income stops. You no longer get that paycheck deposited into your bank account and your savings account stops growing. This can be a frightening proposition. If there is no more money coming in, retirees become dependent on savings and need to figure out how long they can live off of what they have saved.

Wouldn’t it be nice to have an income stream in retirement? Wouldn’t be terrific to not be so dependent of savings?

Social Security can do some of this in retirement. It is a steady income stream that can ease the dependence on savings. But Social Security is not a substitute for a solid income and can not, on its own, fund retirement.

And remember pensions? Many Americans used to have pensions that would pay a good income all the way through retirement. But pensions have fallen out of favor as companies have thrown the burden of retirement onto their workers, forcing them into the alphabet soup of 401Ks and IRAs.

So are there any other options? Well, you know what? There are. And they’re called annuities.

But first, here’s a bucket of cold water. Annuities are actually complex investments. While they can be valuable products for you in retirement, they can also be confusing. Before you buy an annuity, make sure you know what you’re signing up for and think about talking to an independent advisor for a second opinion.

So what are annuities?  Annuities are basically a way to take a lump of savings and turn it into a stream of income. So for example, you may get be able to arrange a fixed annuity with an insurance company by handing over $80,000 and in return, they will give you $1,000 per month for the rest of your life. By doing this, a retiree can reduce what is called ‘longevity risk’, otherwise know as “living so long you run out of money”.

This a bit of a morbid analogy, but basically an annuity is a bet between you and a financial company about when you’re going to die. The annuity company will secretly hope that you to die young so that they will only have paid you a small portion of your lump sum. And you, on the other hand, want to live as long as possible, so that you will get all of your cash back, and then some.

You can actually calculate the date when the annuity company expects you do die. In the above $80,000 example (assuming this annuity is for a man, who sets up his annuity at age 68, funds it from a qualified IRA, and would have made 5% on his money had he invested it), his expected death date is one month after his 76^th birthday! Kind of creepy isn’t it…

And just so you know, because women statistically live longer than men, annuities are more expensive for them. If the above example had been a woman, the annuity would have required an $85,400 lump sum premium.

So ignoring the morbid details, annuities can be a terrific way of taking the burden off of your savings in retirement. Many people use it as a way to supplement Social Security so that they will have their essential expenses covered if their savings run out.

You should also have noticed that annuities could swallow up a substantial amount of your savings. In the above example, the annuity company takes $80,000 of your savings. It is a lot of money to give up. This is why annuities are only recommended for people who already have SUBSTANTIAL savings in a 401K or an IRA. They really should be thought of as an insurance product for the worst-case scenario of running out of savings.

You will find all sorts of annuities with lots of bells and whistles. In the above example we used the simplest form of annuity: a ‘fixed annuity’, which takes a lump sum and pays it back over a lifetime.

But there are other annuities that offer a multitude of other options. Some operate like a life insurance policy and pay out a benefit if the annuity holder passes away before a fixed date. Others have an investment component that allows the annuity to grow over time.  These ‘variable annuities’ can become quite complex and hard to understand. They also blur the line into insurance products. They are not for novice investors and should be looked at by an independent professional to make sure they are an appropriate product.

In the end, annuities serve a specific purpose of generating a flow of income in retirement. This income can ease a tremendous amount of stress in retirement. It can also give you peace of mind that no matter what, you’ll be able to pay for the essentials in life.

With pension plans vanishing, people have had to scramble to find ways of retiring comfortably. And with people living longer and longer, running out of savings is becoming a very real possibility for retirees. Annuities serve a valuable role of bridging the unknown of retirement and protecting your wellbeing far into the future.

It’s no secret - investing can be risky. You can lose money. And the greater the risk, the more amount of money you can lose.

To protect yourself from loss, you need to fully understand what risk is, and which investments have the highest risk.

So let’s start by looking at what risk is.

Risk refers to the possibility that your investments can lose value. On the rare extreme, some investments have the potential to lose all of their value. Even taking on moderate risk can expose you to a loss that can make your investment lose money. Risk is real, and when it hits you, the loss can be painful.

But risk also has a positive implication. There is a direct relationship between risk and the potential for positive returns. By taking on risk, not only is there the potential for loss, but there is also the potential for a positive return. This is called the ‘risk premium’. The market can reward those investors that take a risk. And the greater the risk, the greater the potential return.

For super-sophisticated financial products like options and shorts, the risk is so great that there is the possibility that you can lose more than 100% of what you invested. But people invest in these products because the potential upside can be just as massive.

On the other end of the risk scale are US Government bonds. They have statistically zero percent chance of losing value (the US government guarantees that the interest and principal will be paid). But for that guarantee of return, you have to give up all of your risk premium and get only a tiny return on your investment.

So the adage, “nothing risked, nothing gained” is an absolute truth in investing.

So here is the risk / reward scale – which ranges from:

Lowest risk with lowest potential loss / lowest potential return to
Greatest risk with highest potential return / highest potential loss

• US government bonds. These are the least risky investments available. They are backed by the US government, and have never failed to pay their principal or stated return. The risk is almost zero, and with the small risk comes a very small return.
• Investment grade corporate bonds. Many large companies issue bonds to fund development or expansion. Third parties will evaluate these bonds and the top rated bonds will be deemed “investment grade”. These bonds rarely collapse, so your principal is well protected. And while it is possible for interest payments to stop, it happens very rarely with these bonds. So you have slightly higher risk with moderately higher returns
• Stocks. The risk associated with common stock can vary widely. But one thing is true: Because the value of stocks fluctuate, the value of your investment CAN go down. For large, strong, ‘blue chip’ companies, the fluctuations are generally smaller, and the risks can be lower. For smaller, less known stocks, fluctuations can be severe and risk is much higher.
• Junk bonds. These are bonds that are rated below investment grade. They are usually issued by companies who are finding it hard to find financing. These bonds usually pay high interest. But because the underlying companies are often in a risky business or have weak financials, the risk of loss of principal and interest payments is real.
• Options, derivatives, short selling. These are all high-risk investments and should be avoided unless you are a super-sophisticated investor. The risk to your principal is so great that you can lose more than what you invested. But when they work, the potential return can be very large.

So now you know that risk equals potential loss as well as potential return. And the higher the risk, the higher the potential gain and the higher the potential loss.

And if someone tells you that an investment is low risk with high returns?  A “sure thing”? Run the other way!

Your next steps are to look at how much risk you personally should take on. Spend some time learning about your own ‘risk tolerance’ - that will help you assess how much risk is right for you.

You probably know this already, but it can’t hurt to repeat it: Investing can be risky. This means that your investments can lose value. And when this happens, it can not only be painful, it can also impact your economic wellbeing.

But risk can also be your friend. Without taking on some risk, it is almost impossible to get good returns. The key is finding an appropriate level of risk that you are comfortable with. An educated risk is what you’re after, and that balance will reward you in the long run

In order to sort out how much risk you should take on, it is a good idea to take an overt look at where you are as an investor. Every investor should do this, and every investment advisor is mandated to do this. It’s called a ‘know your client’ (KYC) assessment, which gauges how much risk an investor should take on.

Generally, you should take on less risk if you are

1. An inexperienced investor
2. Have a family to support
3. Want to protect your savings
4. Are saving very little
5. Have a lot of debt
6. Are close to retirement

If you fall into a category that qualifies you as a low risk investor, it means you should take on more low-risk investments and less higher risk investments. This means your portfolio should hold a greater weight of government bonds and investment grade bonds and a lower weight of individual stocks. And if you do hold stocks, they should be large, strong blue chip stocks.

If you qualify to take on more risk, then you can lower the weight of bonds and hold more stocks. And those stocks can be smaller, more growth focused companies.

What about funds? Where do they fit into this mix? A fund can be made up of just about anything: bonds, large stocks, small cap stocks. So their risk is dependent on what is inside the fund. So bond funds can replace bonds and equity funds can replace individual funds in a portfolio.

Index funds, on the other hand, track the overall market. This means that when the overall market goes up, your investments increase in value, and when it goes down, you lose value. You will never do better or worse than the market. Index funds have the same risk as the overall market and sit right in the middle in terms of risk.

But this is all a very objective exercise. What about you and what you want? What if you are the type of person that likes to jump out of airplanes? Maybe you can tolerate more risk?

As part of any KYC, an advisor needs to ask an investor how much risk they believe that they can tolerate. Maybe a conservative portfolio is still too risky for someone who has little appetite for risk? Or maybe a low-risk portfolio has too little potential up side for someone who can tolerate more risk.

This self-assessment needs to take into consideration not only how much potential loss an investor can handle, but also how much potential return they are interested in. 

In the end, a personal risk assessment should only change an investor’s risk profile a few degrees. An investor who should take on only a little bit of risk is not served well with a portfolio of volatile stocks. The risk assessment should still focus on what is appropriate for the investor and adjust it slightly for his or her own preferences.

Also consider that your risk profile is something that evolves over time as you gain confidence, experience, knowledge and assets. So don’t rush into risk. It is something that you will learn to manage and you should give yourself time to understand it.

In the end, the only time you will know your true tolerance for risk is when you are risking real money. Only when you actually feel the impact of a loss will you truly know if you can manage it. If the loss impacts you so much that it affects your quality of life, you need to lower the amount of risk you’ve taken on.

So do your best to make sure you understand how much risk you can take on. And reassess where you are at least once a year.

Nobody likes bad news. And that is especially true for investors. Bad news about a company can lower its stock price and wipe out billions of dollars of investor’s money.

Unfortunately bad news is hard to avoid. Often investors don’t see it coming. It could be news of a criminal investigation, an outbreak of a virus at a restaurant chain, a drop in oil prices, restated earnings, a lawsuit, new regulations, a product recall… These are risks that are hard to predict and even harder to avoid.

These risks are called ‘non-systemic risks’. They are things that hit individual companies or isolated pockets of the market more than the rest of the overall market.

Although you can’t entirely avoid non-systemic risks, there are ways to minimize their impact. This is done through diversification. By putting your eggs in different baskets, you are diversifying your investments and lowering your overall risk.

You can do this in three ways: diversify by asset class, geography or industry

Asset Class

The most important area of diversification is by asset class. When you invest, you can hold different asset classes, namely stocks, bonds, funds and cash. It is always a good idea to have a mix of all of these.

Stocks tend to be more volatile and risky and have more exposure to non-systemic risk. Bonds tend to be much less volatile, more stable and less risky. Stocks and bonds also tend to move in opposite cycles.

Funds can function like either bonds or funds, depending on what they hold. And cash is held as protection against a falling market (cash will not lose value like a stock).

By holding a mix of these four asset classes, it allows you spread your risk so that bad news will not hit all of your holdings at once. And by reducing your exposure to stocks, you can lower your exposure to non-systemic risk.

Geography

You can also diversify by geography by buying stocks and or bonds from different parts of the world. You can spread your investments across the US, Europe, Asia and the developing world. By segmenting your investments this way, the drop in the Russian Ruble or a meltdown in Asia will impact only a portion of your portfolio.

Industry

Finally, you can diversify by industry. Many industries run in different cycles, so by diversifying by industry you will make sure your entire portfolio doesn’t hit a down-cycle at the exact same time. For example, by investing in both miners and manufactures, you will protect yourself from falling commodity prices because low commodity prices will hurt mining but benefit manufacturers.

You should try to make sure your holdings are not concentrated in a single industry like technology or retail. Companies in these segments are popular and easy to understand, so make sure your portfolio isn’t biased towards these industries.

Simple Diversification

It should be noted here that Exchange Traded Funds (ETFs) can be an excellent, low cost way to diversify your portfolio. You can find ETFs that are diversified by geography, industry or asset class. A single fund can do a ton of diversification work for you, especially when you are building your first portfolio.

So that’s diversification. It’s easier than it looks. Start by diversifying between stocks, bonds, funds and cash. Use ETFs to do some easy diversification for you. Aim to diversify even further by industry or geography if you can. If you do it well, you can reduce some of the bumpiness of the overall market and lower your exposure to the impact of bad news.

Managing risk is one of the most important jobs you have when you are investing. The key way to do this is to spread your risk among different investments. By putting your eggs in different baskets, you are “balancing your portfolio” and spreading your overall risk.

As you know, markets go up and down. But these ups and downs are uneven and unpredictable. When one part of the market goes up, others can go down. When stocks go ups, bonds often go down. Even on the same news, the impact can be different.

This volatility can be managed to some degree. Events like drops in commodity prices, bad management decisions, product recalls, and changes in regulations hit individual companies, industries and countries differently. These are called non-systemic risks, and these risks are what you try to manage though balance.

The tool that is used to balance non-systemic risk is diversification. By diversifying your portfolio, you can manage some of your risk. You can do this in three ways: diversifying by asset class, geography or industry.

Most of the heavy lifting of diversification happens by diversifying by asset class. When you invest, you can buy stocks, bonds and funds, or just hold cash. Each of these asset classes behaves in its own way. Stocks tend to be more volatile and risky. Bonds tend to be much less volatile and more stable. Stocks and bonds also tend to move in opposite cycles. And cash keeps its value even in market downturns.

So by spreading your portfolio among these asset classes, your portfolio can be somewhat insulated from different types of market forces. Something that hits stocks hard may be a benefit to bonds and something that hurts bonds can sometimes help stocks. So by mixing your asset holdings, your portfolio can weather many kinds of market storms.

You can also diversify your portfolio geographically. If your portfolio holds lots of US stocks, it would be a good idea to diversify by buying European or Asian investments. By spreading your money this way, a downturn in the US will only impact part of your portfolio.

Finally, you can diversify by industry. Different industries run in different cycles. A downturn in oil prices for example may be devastating to oil companies, but lower fuel prices are a boon to transportation. By buying into different industries you will make sure that a down-cycle in one part of your portfolio will not spread to your whole portfolio. If you start with broad categories such as primary industries, manufacturers and services, you can branch out into more specific categories once you get the hang of it.

Also note that Exchange Traded Funds (ETF), can be an simple, low cost way to instantly diversify your portfolio. You can find ETFs that are diversified by geography, industry or asset class. A single fund can do a ton of diversification work for you, especially when you are just starting out.

Now that you know how to balance your portfolio, we need to look at the most important part of balance: you! No matter how you balance your portfolio, you need to take into account your own risk tolerance. If you don’t have much of an appetite for risk, or really cannot afford to lose money, then your portfolio should be balanced towards more conservative products.

The most effective way to manage risk is through asset allocation, specifically the proportion of stock, bonds and cash you hold. If you have a conservative risk profile, it would be good to hold more bonds and cash and a lower proportion of stock. If you can accommodate a lot of risk, you can hold a greater proportion of stock.

As a guideline, this is a sample of what a balanced portfolio should look like: A conservative investor can have a mix of 70% bonds, 20% stocks and 10% cash. For an aggressive investor, the holdings are inverse, 70% stocks, 20% bonds and 10% cash.

If you don’t have an appetite for risk, choose a bond fund at the core of your portfolio and take only a small proportion of stock. If you have a higher tolerance for risk, maybe take a more aggressive fund as your core, and take a larger proportion of stock.

One last thing, it’s always good to go back and revisit your balance every three months. The value of your holdings will change over time, so your balance will change. Make sure you check to see if you’re comfortable with your new balance. If you’re not, rebalance by selling some of the asset where you’re overweight, putting the proceeds into the assets where you’re underweight.

So that’s balance. It’s easier than it looks. Start by diversifying between stocks, bonds, funds and cash. Use ETFs to do some easy diversification for you. Aim to diversify even further by industry or geography if you can. But make sure you’ve taken your own risk tolerance into consideration. If you do this well, even if one part of the market hits the rocks, your overall portfolio won’t be impacted severely. And that’s the goal of balance: making sure a downturn in one part of the market doesn’t ruin your whole portfolio.

Just like when you exercise your regular muscles, your money muscles can be strengthened over time with practice and training.

Your money muscles are just an analogy for your risk tolerance. But your risk tolerance sounds so abstract that we are going to stick with muscles. Think of going to the gym for the first time. You generally feel fine… until the next day when everything hurts. The pain comes from the tiny tears in your muscles as they repair themselves and get stronger. Over time, by exercising again and again, your body gets used to the work, and you get to know what your body can tolerate.

Like with exercising, one of the hardest things with investing is taking the first steps. The most frightening investment is always the first. And the biggest high is always the first sale for a gain. Over time you learn what it feels like to have small gains and big gains; as well as small losses, and big losses. If the pleasure of your bigger gains is stronger than the pain of your bigger losses, it means that you are open to risk. If the pain of losing money is very difficult, then maybe less risk is more appropriate.

You can only build your money muscles over time through practice. Some of the best investors started out very risk averse (even saying they preferred to keep money in their mattresses!), but learned that they could get over their risk aversion by making small investments, or even virtual ones. So seeing that one week your $1,000 is worth $1,200 and the next it’s $900 and the week after it’s $1,100… you start to realize that your holdings will fluctuate. And the key is that over time, an amazing thing happens. As your investments change in value, your ability to TOLERATE those swings becomes easier and easier. That is your money muscles at work.

So what can you do to help build your money muscles?

The most important thing to do is to practice. Using virtual money in a practice portfolio is a terrific way to build your money muscles. You won’t get the same anxiety about risking your own money, or the excitement of making a profit. But by investing virtual dollars you’ll get a good feel for the market. You will get an understanding of how the value of your virtual portfolio fluctuates, when to buy and sell, how to ride though the dips, how to manage your risk and how much attention to pay to your portfolio. These are all critical skills that you can learn through practice in a virtual portfolio.

It will also help to learn what an appropriate level of risk is for you. If you feel nauseous when you your portfolio is down, then maybe a little less risk is appropriate. If you can ride out the ups and downs without anxiety, then you should be fine with risk.

Once you’re comfortable and have a feel for how the market works, then it will be time to open a trading account and invest your own money. The added emotion of real risk adds a new dimension to investing. It’s like the difference between running in the gym and running a race. You’re still basically doing the same thing, but a race adds an emotional difference that needs to be managed.

In investing, risking your savings can add a level of anxiety or a level of excitement that can make you misinterpret the risks in front of you. But if you have some confidence from practicing, and your money muscles are ready, you can manage your emotions and become a successful investor. Just make sure you monitor yourself as you manage your portfolio. If you feel too much anxiety, make sure you ratchet down the risk in your portfolio. And if you feel super-exited, make sure adrenaline isn’t making rash decisions for you, making you take on too much risk.

So that’s money muscles. Practice to gain your confidence. Watch yourself to understand your risk tolerance and remember that investing is a lifelong journey. Your muscles will grow over time if you use them!

So you have money to invest. You have a plan. You know your goals. You know your risk profile. You know what you want to invest in. Maybe you’ve already begun the journey and invested your hard-earned money already. Now what? How will you know how well you’re doing? How do you measure success?

First of all, it is super-important to go back to your objectives. Did you want to be cautious and preserve the money you had, or did you want to go all out and generate huge returns? The performance of your portfolio needs to be seen in comparison to those objectives.

You also need to look at what you’ve invested in. If you invested in conservative government bonds, you should not expect outsized gains. Your performance needs to be compared to the kinds of investments you’ve bought.

So let’s start by measuring gains. First of all there is a big difference between realized gains and unrealized gains. Realized gains are investments that you have sold, for a profit. The gain, called a capital gain, is taxed. Until you sell, there is no “real” gain and no tax. It also means you can’t really brag about all the huge gains you’ve made until you actually realize them by selling!

To figure out your gain, start with what you paid for the stock, including fees. This is called your costs basis. Now subtract this from the sum total of what you sold the stock for (the amount you got from the stock sale, minus any fees). This is your gain.

If you want to know the percentage gain, take your gain and divide it by your cost basis and multiply that by 100. That will give you your percentage gain. So if you bought a stock for $1,000 and sold it for $1,200, your gain would be 200 divided by 1,000, or 20%.

To better understand this percentage gain, you have to take note of how long it took you to earn it. A 10% might look great on paper, but if it took you 5 years to earn that gain, it really is only a 2% gain per year. So dividing your gain by the number of years you held the investment, will give you a good overall picture of your gain.

As a side note, if you sell for a gain outside of a tax advantaged retirement account (IRA or 401K), make sure you keep some of the money aside to pay taxes on your gain. If you held the stock for more than a year, you get a preferential capital gains rate that ranges from 0% to 20%. If you held it for less than a year, you will be taxed at your normal income tax rate.

To keep track of day-to-day changes, you should track unrealized gains. Keep track of each individual investment’s cost basis, and its current value. Also keep track of any fees as they come up and add them to the cost basis. This may be difficult to do for funds that charge fees over time. But it is super-important to do this. You need to see how of your gains are eaten by fees.

By adding up all your unrealized gain and losses, you will get a good sense of how well your overall portfolio is doing. Most brokers allow you to track this fairly easily.

So now that you know how to measure gains and losses, how do you judge those gains and losses? Is a 10% gain good? Is 5% terrible? How can you tell how well you’re doing?

Strangely enough, in order to know how well you’re doing, you need to compare yourself to how everyone else is doing.

If your stocks went up 5% last year, that sounds good. But what if the overall economy was in full gear and the overall stock market went up 20%? It means your stocks didn’t leverage the high-flying economy very well, and your stocks lagged the average. On the other hand, that 5% would be terrific if the overall market went down 5%. So context is important. Compare your gains to average stock market performance to see how well you’re doing.

The S&P 500 is considered the best proxy for the overall stock market, so compare your stock returns to that index.

The final thing to watch is deciding when to sell. Watching the performance of your stocks should give you sell information. If you’ve made terrific gains, on a stock, you should consider selling some of it to lock in the gain, or get out entirely. Don’t be too greedy! Also if a company’s stock drops because something fundamentally is wrong with the company such as restated earnings, lawsuits, plummeting sales, it may be time to bite the bullet and sell at a loss. Always have an exit strategy.

So that’s how you measure progress. You should look at it as often as you can, and as carefully as you can, making sure you incorporate all costs. By watching your progress, you’ll close the loop in your investing journey, giving you feedback to help you make good investing decisions.

How much is your money worth right now? The balance you see on your ATM receipt only tells part of the story. Your money also has another story, which speaks of it’s potential to do things in the future.

Money holds tremendous opportunity. Maybe the money you have saved will be able to pay for a boat in 5 years? Maybe it will be the deposit on a house in 10 years? What if you want to pay for $10,000 in tuition in 5 years, will the $7,500 you have right now pay for it?

These are all great questions and ones we can actually figure out.

These are called Present Value calculations and with it, you can figure out if you have enough today to do something important in the future.

To make the calculation, you need to know 3 things

1. The price of the thing you want in the future (Future Value, FV)
2. The length of time in until that point in the future (In years, Y)
3. The rate of return you would get if you invest that money (Return, r)

You can go online to find present value calculators, but to do it manually, here’s the formula:

PV   =   FV / (1 + r)^Y

It looks a little complicated, but it is fairly simple.

Let’s look at the above tuition example. If you need $10,000 in 5 years, you have two of the inputs figured out, FV, which is $10,000 and Y, which is 5 years.

The last thing you need is the rate of return. To be conservative, let’s assume you put that money into the stock market, buying an index Exchange Traded Fund. Let’s say you buy SPY, an ETF that tracks the S&P 500, and is super low cost. Its 10-year average return is around 7% per year. So let’s assume that SPY will return the same 7% for the next 5 years (a big assumption yes, but we have to put our feet somewhere).

In Excel the formula would be =10000/(1+.07)^5

When you plug the numbers into the formula you get a present value of $7,130, which means that you would need to invest $7,130 today in order to have $10,000 in five years. So the answer to the question is yes, our friend with $7,500 in the bank today should be able to invest her money and pay her tuition in 5 years (and still have money left over for some books!).

But, you may have noticed that the weakness of the present value calculation is the rate of return. As we said, you have to put your feet down and make an assumption about the rate of return you’ll get. But in reality, it is hard to predict what kind of return you will get, or even what risks you will tolerate to get it. So present value calculations have to be used with an eye to your own situation.

If instead you want to know the rate of return you require to grow your current savings into your goal amount, the present value calculation can be flipped around to tell you that rate of return. In order to calculate this, you would use this formula:

r = (FV / PV)^1/y - 1

Let’s look at our tuition example again. If you want to grow your $7,500 savings into your $10,000 tuition in 5 years, you need to figure out what kind of annual return you need to earn in order to get to your goal.

In Excel, the calculation would be =((10000/7500)^(1/5))-1

So in this example, you would need a compounded annual growth rate of 5.92% in order to get to your $10,000 tuition goal.

Present value calculations are a great way to help you get your head around investment goals and targeted returns. The formulas get more complicated as your situations get more complex. There are lots of terrific calculators on-line to help you make these calculations. Go here for a very simple present value calculator. Or look to Calculator Soup or Financial-Calculators.comfor more sophisticated present value calculators.

People invest their money in the hope that it will increase in value over time. Without this reward, people would not take on the risk of investing. Growth is a fundamental prerequisite for almost any investment.

But how do you predict growth? Or even measure it? How do you figure out how much your investment will be worth in the future? Well, guess what? There is a way to figure this out! Roll up your sleeves and dig into the concept of ‘future value’.

Future value (FV) is the idea that a current investment will have a predictable value in the future, given an assumed rate of growth over time. So if you want to look at the future and see how much your investments might be worth, try a future value calculation.

There are online calculators that will do the work for you – but it’s important to understand the underlying idea.

We’ll start with an easy example: An interest bearing savings account. Let’s also assume that you don’t add any money to the account along the way and the interest rate you get does not change. Let’s say you put $5,000 in a savings account. We’ll call that ‘present value’ (PV). Now let’s say that the account pays 3% interest. We’ll call that the ‘rate of return’ (r). Finally, let’s also assume that you put the money away for 5 years. We’ll use 5 as the ‘number of periods’ (n). So now, if you want to know how much your money will be worth after 5 years, you use this ‘future value’ (FV) calculation

FV = PV (1 + r)ⁿ

If we plug in the numbers into Excel, it looks like this:

=5000*(1+.03)^5

Which gives you the result $5,796. So there you go, your money grew! Sweet!

Now lets assume that instead earning interest once per year, you get interest once per month. Nothing else changes, you still get 3% interest, but it gets paid as 0.25% every month. Let’s see what happens.

So now your (r) is .0025 (3% per year divided into 12 months) and your (n) is 60 (5 years times 12 months). If we plug these numbers into Excel, it looks like this:

=5000*(1+.0025)^60

By changing the frequency of your interest payments, your money grew faster, to $5,808 after 5 years. So the frequency of your compounding makes a difference! By spreading out your interest payments, you will earn interest on your already accumulating interest, thereby amplifying the effects of compounding, even at the same interest rate.

Future value calculations are a great way to compare potential investments, extrapolate savings into retirement or to see if you’ll have enough money to put your kids through college.

The only weakness to future value calculations is having to select an appropriate rate of return. It is impossible to look into the future, so there is no way to know precisely what rate of return you will actually get on your investments. So it’s a good idea, with any future value calculation, to use a range of inputs. The historical rate of return for US stock markets is around 7%, so it would be good to look at returns above and below that rate. If you are a conservative investor who avoids risk, focus on rates of return that are below 5%.

Finally, it is important to note that future value can be super-amplified by adding to your investments over time. The examples we’ve used here assume you put your money away and don’t add to it. If you instead added $10 every month to your investment, it would be worth $6,455 at the end of five years. Even adding a small amount regularly to your investments can make a huge difference.

Try out this more sophisticated future value calculator to see how adding deposits over time impacts the growth of your investments.

Get familiar with future value by trying out different rates of return, different starting values and different durations for your investments. When you do this, you will get a good idea how much you need to be putting away and what sort of return you will need to get for various future goals.

Future value is a vital concept to understand if you are setting any sort of savings goal for yourself. Savings goals become much more reasonable when you plug them into a future value calculator. It may seem like a boring proposition, but an hour spent experimenting with future value will go a long way to helping you realize your investment goals.

You’ve certainly heard the expression ‘time is money’. It’s usually applied to time wasted when you could be earning or doing something productive. But it’s even more applicable when it comes to investing.

Time is super-important to investing and every investor has to be mindful of it. Let’s start with the idea of compound interest – which is basically the way that money you invest grows exponentially vs in a straight line. Exponential growth means that you earn money on the money you earn.

To put it in real terms – with compound interest a thousand dollars invested today, assuming a conservative 4% return will grow to $1,480 in 10 years, $2,190 in 20 and $3,243 in 30 years.

Awesome right?

Not so fast, you also have to consider inflation.

In 1985, a loaf of bread used to cost 74 cents. In 2016, the price had risen to $2.45. So what has happened? In essence, the price of all goods and services in the US rose between 1985 and 2016. This general rise of overall prices in an economy is inflation.

The impact of inflation is real. If you put money under your mattress in 1985 to buy bread in 2016, you’re going to get a whole lot less bread for your dollar!

So let’s play it forward – will the cost of a loaf of bread triple again in 30 years? Maybe. The important thing to remember – your money, in pure terms, will probably be worth less in the future.

So – what does that mean to you? If you’re using a bank account to save, every dollar you save today that isn’t paying interest higher than the rate of inflation will be worth less in the future. By seeking out higher returns you can look to reduce the impact of inflation in the future.

Let’s go back to your thousand dollars. Today it will buy 408 loaves of bread. If you put the $1,000 under your mattress, in 30 years it will buy you something like 130 loaves. Now look at the outcome of investing. If you invest your thousand dollars, in 30 years you may be able to buy as many as 450 loaves of bread. Investing keeps you ahead of the effects of inflation.

Two more sophisticated concepts are buried in the bread story: ‘present value’ & ‘future value’. These are two different ways to think about the time/money relationship.

Present value is the calculation of what you need today, to get you to a specific future goal. Let’s say I have a goal of someday buying a beautiful boat. You estimate that the boat is going to cost you $500,000. First, give that ‘some day’ a date. Let’s say in 15 years time. Then assume an annual return – historical stock market returns have averaged 8% a year, but being conservative is always good – so let’s say 4%.

The present value of the money that I need invest today in order to buy that boat is $277,000. So with $277,000 and 15 years of investing – I should be able to afford my $500,000 boat.

Good way to think of it, right? Seems a little more affordable now.

Let’s look at it a different way. Let’s say I did have $277,000 lying around. The Future Value of that money, at 4% return is $500K in 15 years. However, the future value of that $277,000 if I don’t invest it, is $277,000. And remember that inflation will also have an effect on what I can afford.  So that $277,000 in 15 years will buy a lot less of a boat than it can buy today.

It can be hard to get out of the cycle of living paycheck to paycheck. But the ideas around compound interest, inflation, present and future value of money can help you think beyond where you are today, and look to a more financially secure future where your money works as hard as you do.

Remember, if you’re just starting out on your investment journey, and you have many years ahead of you, then you have something that the most successful established investors do not: Time. And the sooner you start, the better.

Investing is risky. There is always a chance that your investments will lose value. You may have bought stock in an oil company that gets hit by lower oil prices. Or maybe your restaurant chain is hit by an E.coli outbreak (yes you Chipotle!). Or maybe your investment is in an older company that gets crushed by innovative competitors. There is always a chance that a stock or bond will lose value, and some of your hard earned money will vanish.

But the reason that people invest is that there is also a chance that your investment will increase in value. And that’s what why people take risks in investing; the search for profits.

If you want to avoid risk, there is actually something called the risk-free rate of return. For investors, this is the 3-month US Treasury bill. The government of the United States backs the payment on this bond, and it has never defaulted on it. So it is as close to a guaranteed return as you can find. But it is also one of the lowest returns available. Right now it returns a fraction of a percent a year. Your return is guaranteed, but your return is miniscule.

And there’s the rub. If you want higher returns, you need to take on more risk. The higher the risk you take, the higher your potential reward, and the higher the chance you will lose money.

So how do you measure risk? For bonds, it’s easy to measure. A third party (either Standard & Poors or Moody’s) rates every bond, and tells you what the risks are (either from not paying the stated interest payments or from not paying back your principal). So for bonds, investors can look at their ratings and easily gauge risk.

For stocks and funds, it is much harder to gauge risk. The current value of any stock is determined minute by minute by buyers and sellers in a market. That means that at any moment, the current price only reflects what the current risks are.

But the real problem of gauging risk is trying to do it into the future. As with anything predictive, it is extremely difficult to know all the things that could go wrong. And with risks, they are often invisible until they actually rear their heads.

There are analysts who rate stocks, and some are good at gauging risk. But for any single stock there will be dozens of different opinions about risk, so it is difficult to figure who has the assessment right.

Added to this are risks that you can’t avoid. These are called systemic risks or market risks, which impact entire markets. These are usually large events, like financial meltdowns or acts of war, which tend to hit all markets hard. These are unavoidable, but if you can hold on through these downturns, stock markets have always rebounded. Just hold your breath!

As a side note, systemic risks are great for bargain hunters. During the last downturn, Apple stock got cut in half, even though their sales are profits were increasing. Systemic downturns hit all stocks, even if they don’t deserve it. And those battered stocks are tremendously undervalued in those instances.

To manage your risk you need to do several things. First is to do your research. Know what you are buying. And do your best to gauge underlying risk in whatever you invest in.

Also, you need to know how much risk you personally should take on. Because stocks are riskier than bonds, the general rule of thumb is that the younger you are, and the more experience you have, the greater the proportion of stocks you can hold. Should stocks experience a downturn, you will have the time and experience to ride it out.

Unfortunately, there are risks that will pop up that you will not be able to avoid, a product recall maybe, or a lawsuit: Things that surprise all investors. And these are painful. Just make sure you reassess the company and decide whether this event shows a fundamental flaw with the company, which should make you sell your holding. Or maybe it’s just a bump in the road that time will rectify, and you should hold on to the stock and ride it out.

Risk can be both your friend and your enemy in investing. Without taking on some risk, it is impossible to get good returns. The important thing is to understand the risk involved and being secure in the level of risk you’ve taken on. Risk in itself is not bad. An educated risk is what you’re after, and it will reward you in the long run.

Managing risk is one of the most important jobs you have when you are investing. The key way to do this is to spread your risk among different investments. By putting your eggs in different baskets, you are “balancing your portfolio” and spreading your overall risk.

As you know, markets go up and down. But these ups and downs are uneven and unpredictable. When one part of the market goes up, others can go down. When stocks go ups, bonds often go down. Even on the same news, the impact can be different.

This volatility can be managed to some degree. Events like drops in commodity prices, bad management decisions, product recalls, and changes in regulations hit individual companies, industries and countries differently. These are called non-systemic risks, and these risks are what you try to manage though balance.

The tool that is used to balance non-systemic risk is diversification. By diversifying your portfolio, you can manage some of your risk. You can do this in three ways: diversifying by asset class, geography or industry.

Most of the heavy lifting of diversification happens by diversifying by asset class. When you invest, you can buy stocks, bonds and funds, or just hold cash. Each of these asset classes behaves in its own way. Stocks tend to be more volatile and risky. Bonds tend to be much less volatile and more stable. Stocks and bonds also tend to move in opposite cycles. And cash keeps its value even in market downturns.

So by spreading your portfolio among these asset classes, your portfolio can be somewhat insulated from different types of market forces. Something that hits stocks hard may be a benefit to bonds and something that hurts bonds can sometimes help stocks. So by mixing your asset holdings, your portfolio can weather many kinds of market storms.

You can also diversify your portfolio geographically. If your portfolio holds lots of US stocks, it would be a good idea to diversify by buying European or Asian investments. By spreading your money this way, a downturn in the US will only impact part of your portfolio.

Finally, you can diversify by industry. Different industries run in different cycles. A downturn in oil prices for example may be devastating to oil companies, but lower fuel prices are a boon to transportation. By buying into different industries you will make sure that a down-cycle in one part of your portfolio will not spread to your whole portfolio. If you start with broad categories such as primary industries, manufacturers and services, you can branch out into more specific categories once you get the hang of it.

Also note that Exchange Traded Funds (ETF), can be an simple, low cost way to instantly diversify your portfolio. You can find ETFs that are diversified by geography, industry or asset class. A single fund can do a ton of diversification work for you, especially when you are just starting out.

Now that you know how to balance your portfolio, we need to look at the most important part of balance: you! No matter how you balance your portfolio, you need to take into account your own risk tolerance. If you don’t have much of an appetite for risk, or really cannot afford to lose money, then your portfolio should be balanced towards more conservative products.

The most effective way to manage risk is through asset allocation, specifically the proportion of stock, bonds and cash you hold. If you have a conservative risk profile, it would be good to hold more bonds and cash and a lower proportion of stock. If you can accommodate a lot of risk, you can hold a greater proportion of stock.

As a guideline, this is a sample of what a balanced portfolio should look like: A conservative investor can have a mix of 70% bonds, 20% stocks and 10% cash. For an aggressive investor, the holdings are inverse, 70% stocks, 20% bonds and 10% cash.

If you don’t have an appetite for risk, choose a bond fund at the core of your portfolio and take only a small proportion of stock. If you have a higher tolerance for risk, maybe take a more aggressive fund as your core, and take a larger proportion of stock.

One last thing, it’s always good to go back and revisit your balance every three months. The value of your holdings will change over time, so your balance will change. Make sure you check to see if you’re comfortable with your new balance. If you’re not, rebalance by selling some of the asset where you’re overweight, putting the proceeds into the assets where you’re underweight.

So that’s balance. It’s easier than it looks. Start by diversifying between stocks, bonds, funds and cash. Use ETFs to do some easy diversification for you. Aim to diversify even further by industry or geography if you can. But make sure you’ve taken your own risk tolerance into consideration. If you do this well, even if one part of the market hits the rocks, your overall portfolio won’t be impacted severely. And that’s the goal of balance: making sure a downturn in one part of the market doesn’t ruin your whole portfolio.

This is important to know right away - shorting a stock is risky and is not appropriate for a novice investor. But (and this is a big but) it can be an appropriate for some investors in some situations. It does serve a purpose. Sometimes…

The end goal of investing is growth - increasing value, saving for the long-term and building wealth. So talking about shorting a stock seems to be something of a contradiction. And it is. When you short a stock, you are investing with the belief that the security you invested in will go DOWN in value.

So why would anyone want to do this? That’s a good question… First of all, not all investments are good investments. Some companies are victims of terrible management. Other companies are crushed by competition. So not all investments are going to go up in value.

So what do you do if you see a company that you think is running into trouble? You can ignore it and look for a better opportunity, or you can short the stock in the hope that it goes down and you make some money.

The exact mechanics of a how a short sale works are a little bit upside-down. In a short sale, you want to reverse the traditional order of your transactions. Instead of buying low and selling high, you first have to sell high then later buy low… In fact, you need to borrow shares from someone else in order to start the short selling process (you can’t sell shares you don’t own!). So your broker will get them for you either through its own clients, or through its custody banks and clearing firms.

Once you have borrowed your shares, you can then sell them, depositing the proceeds in your trading account.

So now you have a chunk of cash in your account, but you also  have a liability: You owe someone those shares that you sold. At some point you will need to buy the shares back and return them to your broker. In the meantime, your broker will require you to keep enough funds in your account to cover at least 150% of the price of your stock. You need the money to buy the stock back after all, so your broker will watch your balance to make sure you have enough cash to cover the cost of the shares, plus another 50% of its value.

So let’s look at how to close a short. As we said, you have to buy the shares back in order to return them to whomever you borrowed them from. This is called ‘short covering’. If the stock has gone down 10%, and you buy the shares back at that lower price, you just bought them 10% cheaper than the price you sold them at. That means you made a 10% profit. Awesome!

But wait… What if things go the other way? What if the stock that you’re hoping will go down actually goes up? What if your battered stock is suddenly the target of a takeover? And what if the stock you initially sold for $5 has now jumped to $12 on the takeover news? If you received $5,000 from the initial sale, the shares will now cost $12,000 to buy back. Your $5,000 will no longer cover the cost of the stock. In fact, you will have to find an additional $7,000 out of your own pocket to complete the transaction! Your broker will also be demanding that you cover this shortfall immediately (which is referred to as a ‘margin call’). Closing the short sale at this price will result in a total loss of 140%! You will have lost not only what you invested, but also extra money out of your savings as well. Ouch!

So unlike going long on a stock (i.e. buying it in the hope that it goes up), short selling has unlimited downside. You can lose not only all the money you’ve invested in the short, but more on top of that. So it can be a very dangerous investment.

Another downside risk of short selling is when a dividend occurs. If a company issues a dividend while you are short selling the stock, you owe that dividend to the person who loaned you the stock (remember, you’re just “borrowing” the stock. You can’t keep the stock or the dividend). But the company you’re shorting will not give you that dividend (you don’t own the stock after all), so you will have to pay the dividend, out of your own pocket, to the person you borrowed the stock from. This can be a substantial added cost to shorting a stock.

But (professional) investors short stocks all the time. And there are some good reasons to do that. First of all, there are times that shorting a stock makes sense. Most often it is used as a protection against a falling stock market. By shorting stocks, it protects you from the downside of a dropping stock price. So when stock prices drop, your long positions will lose money, but your shorts will go up in value, keeping you from losing too much money. It is difficult to manage these hedges, but if they work properly, they can protect you from dropping stock prices.

Hedge funds are big fans of these types of short sales. They often employ a strategy called ‘long/short equity’ where they hold a mix of long positions to profit from risings stocks and short positions to profit from dropping stocks. They can be profitable strategies, but are also complicated and expensive to manage, so are not generally employed by individual investors.

So how does this all impact you? The existence of short sales actually benefits average investors, even if they don’t short shares themselves. Short sellers help investors by adding liquidity to markets. They buy and sell shares when others are reluctant, so they keep the market working during difficult times.

Short sellers can also be a great barometer for the value of individual stocks. When short sellers pile into a stock, it generally indicates that the stock is over valued and the short sellers are preparing for the stock to drop. Called ‘short interest’, if it is rising, it indicates that the market may be turning against the stock.

Interestingly, when short interest is extremely high, it sometimes indicates that a stock is about to turn upwards. This may sound counter-intuitive, but there is logic behind this. When there are a large number of short sellers in a stock and the stock has dropped, they will at some point, want to close their positions to lock in profits. In order to do that, they’ll need to BUY the stock. When large numbers of short sellers start to buy the stock, the demand will push the price of the stock up. And as the rise accelerates, more and more short sellers will want to close their positions to lock in profits (or prevent losses). This is called a ‘short squeeze’ and is usually an indication that a stock has found a bottom to its price.

In the end, short selling should only be considered in exceptional circumstances. The downside risk of shorting is extreme, and should only be undertaken by experienced traders. But for average investors, short sellers can still help by providing liquidity to markets and give valuable information about sentiment towards specific stocks.

Buy low and sell high. That’s what every investor wants to do. If you sell a stock for more than you bought it for, you make a profit. That’s the goal in investing.

So prices are important to investors. But how important are they? When you buy or sell a stock, is it important to set a specific price to buy or sell at? Or is it ok to let the market choose the price for you? The short answer is: It depends.

Let’s start out by explaining the three different ways you can submit an order to a stock market: market orders, limit orders and stop orders.

‘Market orders’ are orders for a specific number of shares of a specific stock. But in market orders, no price is set. The investor submitting the order allows the market to dictate the price – meaning you buy or sell at whatever the price is at that moment in time.

The advantage of market orders is that your order is almost always filled. It allows you to get into or out of a stock quickly.

But the problem with market orders is that in order for your order to be filled quickly, you have to give up on a specific price. On an average day when there are lots of buyers and sellers, this generally isn’t too much of a problem.

But market orders can run into trouble when dealing with shares of small companies or when trading turns volatile (swings strongly up or down). In these situations there is often an imbalance of buyers and sellers. This means that the market may have some trouble connecting a buyer with a seller. Even though market orders look for the “best price available”, the best price is one that has to move so that the order can get filled. In these situations, you may be disappointed to find that the market’s “best price” may not meet your expectation of “best price.”

But if you’re looking to invest for the long term, giving a bit on price is not much of a sacrifice for the confidence of being able to get in and out when you want. Just be careful with small companies, and on days that the marking is fluctuating.

Another type of order is called a ‘limit order’. Like a market order, limit orders have a specific number of shares of a specific security. But unlike a market order, these orders include a specific price. When you sell shares, you want to get the highest price possible. So a limit order to sell shares sets a price BELOW which you will NOT sell your shares. If you submit a limit order to buy, you want the lowest price possible, so your order sets price ABOVE which you will NOT buy your shares.

The odds of your order filling depend entirely on how far your price is away from the current market price. If there is a big spread, it is unlikely that your order will fill. But often the market will move to your price and your order will fill.

Limit orders are often used as a way to plan your portfolio far into the future. If you like a company and want to add it to your portfolio, but the price is too high, you can set a buy order at a low limit price and wait for the market price to come down. If the price of that company’s shares slide to that price, your order will fill, giving you the bargain you were looking for.

This strategy also works when you sell stocks. If you own shares of a company and want to maximize your return, you can set a limit order to sell at a price above where the market it currently trading. If the price of those shares hit your target, your shares will sell, thus unlocking the profit you were looking for.

These limit order strategies are a great way to build discipline into your buy and sell decisions. Just make sure you keep track of your limit orders and change them if market conditions change.

Also note that in order to close your position, there has to be an investor willing to meet your price and size conditions. It sometimes happens that even if the market hits your price, your order cannot be filled because a matching buyer or seller cannot be found at the price and the number of shares you require. Limit orders are rigid and must trade at the specified price. So it sometimes happens that the market will touch the price you want, but your order will remain unfilled

The obvious weakness of limit orders is that there is no guarantee that they will fill at all. If the market cannot meet your price, your order will not go through. By sticking to a specific price, investors take the risk of missing out completely on getting in or out of a stock.

The final type of order is a ‘stop order’ (also known as a ‘stop-loss order’). It’s something of a hybrid of a market order and a limit order. It behaves like a limit order, in that it carries a set price. But it behaves like a market order in that once the market hits the target price, the order is triggered as a market order. So it allows you to have price assurance with the added benefit of almost certain completion.

Stop orders are frequently used as way to prevent excessive loss. An investor can set a stop-loss order for a security that they own, to have it triggered when a stock drops below a set level. For example, if you bought Apple at $95, you can set a stop-loss order at $90 so that you limit your maximum loss to $5 per share.

Another other version of a stop-loss order is a ‘trailing-stop order’. In this order, you can set a loss limit, but instead of tying it to your purchase price, the limit is tied to the actual trading price of the stock. So if you buy Apple at $95 and set a $5 trailing stop, the stop would initially be set at $90. But if Apple’s price moves up to $100, then training strop would move up too, and would now be set at $95. 

Trailing stops are a great way to have flexibility in your stop losses. It is also a way of managing risk in your portfolio without you having to pay constant attention to it. If you travel or are busy, stop orders and stop-losses are a great way of preventing unexpected loss in your portfolio.

The only warning about limits and stop losses is that they can sometimes be triggered inadvertently. Market fluctuations can sometimes throw stocks into sudden, quick drops. In May 2010, the New York Stock Exchange saw a sudden and unexpected 1,000 point drop, hammering many notable stocks in its wake. Within 15 minutes, the exchange had recovered to previous levels, but that drop would have triggered thousands of stop orders, wiping out billions of dollars of investor savings.

These events are very rare, but show the vulnerability of stops. They can allow you to plan into the future, but even with all of the best laid plans… things can still go wrong.

So what’s the conclusion? Should you be setting a price for your buy and sell orders?

First of all, there is nothing wrong with using market orders for most of your transactions. If you buy and hold for the long term, this strategy will work well. The impact of not getting a perfect price is not tremendous over the long term.

But, if you build a targeted plan for buying or selling stocks, then limit orders are a terrific idea. You can then get stocks when they go on sale and lock in profits when your stocks rise.  

And finally, if you can’t pay full attention to your portfolio, or you feel you need some protection against loss, then stop orders may be right for you too. Just make sure you use them carefully.

If you had a choice to invest in real estate, gold, bonds, or stocks, which investment, has historically given the best return? It’s stocks. Hands down. Through thick and thin, the US stock market has returned on average 7% per year. Even after recessions, dot-com bubbles and economic meltdowns, stocks still have the best returns over time of all asset classes.

So let’s look at stocks and see why they have traditionally been such good investments.

First, let’s start with what a stock is. Stocks, also called equities or shares, are an ownership stake in a company. When you buy a share, you actually become an owner of small percentage of a company. As an owner you get certain benefits, which vary depending on what kind of stock you own.

There are two types of stock you can buy. First, are common shares. These are by far the most widely used form of stocks. They give the shareholder an ownership stake in the company, and with it, the right to vote at shareholder meetings. An owner of common stock can also share in the company’s profits, which are distributed as dividends (if the company offers them). Common shares are traded on stock markets and have prices that fluctuate based (generally) on how well, the company is performing.

Preferred stocks are a different class of shares. They are also an ownership stake in a company, but they don’t have voting rights. Generally preferred stock pays a higher dividend than the common stock of the same company, and their payments are fixed and predictable. Typically, a preferred stock’s value is driven more by the dividend it offers, than by the company’s performance. This means that preferred shares don’t move up and down in price as much as common shares.

As we said, prices of stocks go up and down. As an investor, you want to make sure you take advantage of those price movements. You want to buy a share when the price is low and sell it when the price is high. This gain is called a capital gain, and you want that gain to be as big as possible!

The key to doing this successfully is by correctly assessing a stock’s potential value. At any moment in time, a stock’s price is NOT a perfect reflection of a stock’s value.  It’s just what someone will pay for the stock at a single moment in time. A stock’s true value is essentially the unlocked potential that the stock has. If you can find a stock with lots of unlocked potential and buy it, the price of the stock will rise as the value is unlocked.

Here’s an example. The day Apple launched the first iPod, the stock price was the equivalent of $1.22. At the time, Apple was losing money and the stock looked expensive. But now Apple stock costs around 100x that 2001 price. Was Apple undervalued on that day? Absolutely. But who was to know how well Apple was going to do? Did anybody know the iPhone was coming? Or the iPad? No. But the iPod contained the seeds of massive untapped potential for Apple.

So just like buying any product, you want to calculate the untapped value in a share. And this is the holy grail of Wall Street. Everybody tries to do it. Everyone is looking into the future and making a value judgment. Wall street analysts do it, and average investors do it. Anybody can do it.

So where do you start? Start with yourself and your spending. Where does your money go? What products do you love? What products are your friends talking about? What was your last ‘Aha’ moment when you bought some truly breakthrough product? What will the world look like in 5 years? 10 years? And what companies will be the market leaders of that world?

These questions all form the basis of your stock valuation. And the difference between the price of a stock today and your perception of where it should be will determine whether the stock is undervalued or overvalued. And you want to buy the undervalued stocks and sell the overvalued stocks.

A bonus is if you find a stock that you love, but others hate. An example is Netflix when they moved from DVDs to a digital model (and raised their prices). People hated the idea and crushed the stock. But when their decision proved to be smart, and subscriber growth shot up, the stock soared.

The lesson here? Buy from the pessimists and sell to the optimists.

And this is the true value of stocks. As an owner of a smart company, you can, and should, benefit from their smart ideas and the growth that these ideas create.

Finally, you’ll need a brokerage account to buy and sell (trade) stocks. In order to open any brokerage account, you’ll have to answer a bunch of questions, and it may take some time, but it is well worth the effort.

A company can grow from a start-up in garage to a multinational conglomerate within a single generation. No other asset class allows you to piggyback on that phenomenon. And that’s why stocks can grow like no other asset class. And that is why it is so important that you learn about stocks and make them part of your life for the long term.

Just make sure you buy and hold for the ling term. Companies you believe in may encounter some bumps along the way. But a long time horizon will smooth out those bumps.

And never forget the words of Warren Buffett: The Stock Market is a device for transferring money from the impatient to the patient.

If you’re trying to save for retirement, anything that can help you build up your savings is a bonus. In fact, any way that can help you keep more of your money and grow it should be a part of your financial plan.

But often it’s not. Why? Because they are branded “retirement” plans. And that sometimes translates to “there’s no urgency for me to address this today”.  

Which is just not true – because the sooner you start, the better off the “future you” will be.

The key benefit to retirement plans is the fact that they are tax advantaged. This means that money that you ‘put away for later’ – will not be treated the same as money in your bank account or regular retail investments.

And this can help you build up your retirement savings.

There are 2 types of tax advantages:

1. Tax deferred: These plans use pre-tax money. They use money that is either taken out of your salary before tax is applied, or they give you a tax deduction for income that has already has been taxed. The funds and all of the gains you make on them are only taxed when you withdraw money. (Usually when you’ve retired and your tax rate is lower)
2. Tax-free: In these plans, people use income that has already been taxed. The benefit to these accounts is that the money can grow in the accounts tax-free and can be withdrawn tax-free in retirement.

In the US – 401Ks and traditional IRAs operate the first way- tax deferred.

Roth IRAs and 529 plans (college savings plans) work the second way- tax-free.

Also, note that 401Ks have the huge benefit that your employer can match some of your contributions. This is literally free money and should be taken advantage of when available.

Because there is no tax liability while the funds are in these accounts, there can be a temptation to trade more frequently or to take more risks. In a regular trading account, there is a high tax burden if you hold a stock for less than a year. There are no such penalties in these tax-advantaged accounts. But that shouldn’t give you reason to avoid a ‘buy and hold’ strategy. A buy and hold policy is the best long-term strategy for any investment account.

So, how can you access these programs? 401Ks come with your job, so the terms of the program vary from company to company. Check with your employer to see what is available to you so you can maximize your company match. IRAs and 529 plans are self-directed plans, meaning you have to set them up and manage them yourself. Most brokerage firms offer these accounts.

Also be thinking of next steps. For example, did you know that even if you have a 401K, or several, on the go – you can also contribute to IRAs?

It’s important to note that setting up your retirement accounts is only step 1. Going to all the trouble of setting it up, and then keeping cash in there, is a waste of time. Learn as much as you can about investing so that you can manage your own accounts. If you want to start somewhere on your own, look at lower risk, low cost Exchange Traded Funds (ETFs). You can find ETFs that are linked to a US index like the S&P 500, so your gains will mirror those of the overall market. It’s a great first step to building a portfolio within your tax-advantaged account.

If you don’t want to manage these accounts yourself, you can look for professional advice instead. Make sure the advice you get is based on your risk profile, investment goals, and life stage. Fee only financial advisors can get you set up with a balanced portfolio that you can manage on your own.

Finally, remember that retirement accounts are for retirement only. There are penalties for taking your money out before retirement. If you do, you will not only have to pay tax on your gains, but you will also be charged a 10% penalty. So when you open these accounts, make sure you will absolutely not need the funds before you retire.

It’s an interesting quirk of humanity – people prioritize their short-term wants over their long-term needs. Think of your future self, and make sure that you have explored all the options available to you to build your future finances through the tax-advantaged programs available to you.

It’s easy to think of your savings as a single number – a goal to work towards.

But savings is more sophisticated than that. There are important differences between different types of savings. So to be strategic about how you save, think of your savings living in three buckets

1. Emergency savings
2. Short-term goals
3. Long-term savings

In the first bucket you have emergency money.  Call it a contingency fund if “emergency” is too alarming. But it’s important to have money accessible. The rule of thumb is to have savings equal to 6 months of expenses should you lose your income. The key thought here is that if you live month to month and suddenly lose your income, you may have few options other than going into debt.

And if you’re already in debt, like 75% of Americans, it’s still important to save and have a contingency fund so that in times of emergency you don’t go deeper into debt.

So where should you put your contingency fund? You never know when you’ll need the money, and keeping it in a savings account allows you to access your money instantly. Don’t lock it up in places like retirement accounts where access is limited or penalized.

In the second bucket you have money for short-term goals. This is money for things that you should not go into debt for. Taking a trip, upgrading your computer or holiday gifts should all be part of your short-term savings bucket. These are higher cost items that you should pay for by setting aside savings. Many savings accounts allow you to assign money to individual goals. It’s a great way to stay on track when you see your vacation savings, for example, growing towards your goal.

For short-term savings, you won’t need constant access this money. So you can lock this savings away for specific amount of time. If you’re saving for a trip, for example, you should be comfortable with locking this savings away for a few months at a time. By temporarily giving up access to your money, banks will give you better returns. Products like Certificates of Deposit (CD) or Government Bonds offer you protection of your principal and higher rates of return than savings accounts. And don’t worry. If you do need to access this money, you still can. There will just be a fee for doing so.

The final bucket is for long-term savings. These are the funds that you need in order to build the future you want. Consider these your ‘investment funds.’ It is money you don’t need access to in the short term. If you have a 401K or IRA – that’s a great start.

If you don’t have a retirement account, make sure you get one. They allow you to grow your money either tax-free or tax-deferred. Check with your employer if they have a 401K and if they do, take advantage of it. They often come with matching funds from your company. Take advantage of this “free money”. If you don’t have access to a 401K, look to IRAs. They are another tax-advantaged way to grow your money.

But often your long-term plans may include things that will come before retirement. You may want to start a business, or buy a vacation property. Or maybe unexpected expenses will come up (braces really cost that much???). These are all things you cannot fund from a retirement account without getting hit with huge early withdrawal penalties.

This is why it’s important to also have a separate investment account that is not a retirement account. You can open one through a brokerage or investment advisor, where part of your third bucket can be put to work in a way that can buy you options in the future.

By categorizing your savings into these three buckets, it will help you manage your savings, and reduce the temptation to dip into emergency or investment funds for your day-to-day needs or you short-term wants.

You work hard for your money, right?  And once you earn it, there are four places your money can go. You can spend it, save it, give it away or invest it.

Savings are critical to long-term financial health – so here are some ideas that will enable you to think differently about the value of savings in your life.

First, put your money into context. Why should you save? A base of savings provides security (should things go wrong with your income), flexibility (you have the ability to choose what to do with your money, versus living paycheck to paycheck) and over time it becomes normal to have a cushion of money that you can grow through investments.

A different view to consider is this - every dollar you spend is part of the bigger picture of the economy.  It’s your spending, and the spending of people just like you that generates most of the value in the economy. Companies know this, and they make a huge effort to get your attention and pull in your dollars. So unless you have a specific strategy or plan (including a minimum savings number that you want to keep in your account), it’s all too easy for your ‘savings’ to become a new television, or a closet full of clothes you rarely wear!

The way many people manage their money is to have separate savings and checking accounts. Checking accounts are for your day-to-day spending, the money you need for your life to run: your food, clothes, transportation, rent or mortgage and maybe some entertainment.

Savings accounts can be used to hold what money is left over after you pay all your bills. Or better yet, create a transfer every month of a set amount into your savings account. Savings accounts are a great place to build up the money you don’t touch. Set a goal – say to have 3 – 6 months worth of living expenses in your savings account. Banks promote savings accounts as a safe place to save, and they are safe, but when interest rates are low, this money won’t grow much.  So once you exceed your savings goal, transfer the excess funds into an investment account where you have your money work harder for you.

A good rule of thumb for savings is the 20 / 50 / 30 rule. Every month transfer 20% of your income into a savings or investment account. 50% of your income stays in your checking account and goes towards necessities – housing, bills, education, transport, food etc. The last 30% also stays in your checking account and is for discretionary spending – clothing, entertainment, travel, charitable donations or gifts. When you get a raise, make sure your transfer reflects the new amount.

This idea of turning savings on it’s head, and making it a planned effort, as opposed to an afterthought, is a great way of driving savings.

Remember, your money is powerful. If you deposit your money in a bank, they can put your money to work and lend it so someone else. If they use it to give someone a cash advance on their credit card, your bank can earn 15% interest – or 15 cents on the dollar, from your savings. When interest rates are low, your bank pays you less than 1% - or a fraction of a penny! Your bank is making a lot of money off of your savings, so why shouldn’t you too? THIS is why it’s so important to learn about investing.

Getting smart about saving is a fundamental pillar in long-term financial success. You can change your financial future if you start to think beyond the bank and getting your money to work for you. And when you plan your savings, you’ll be able to protect yourself from emergencies, save for short-term goals and buy yourself options in the future.

The short answer is that the only way to get higher returns on your money is to invest.

Every investor has the goal of increasing the value of his or her investments. They are constantly seeking ways to get higher returns on the money they have. But there are no guarantees in investing. Often times well laid plans for high returns do not work out and investors lose money. That is the unpredictable nature of the markets – there are no future facts and there are no guarantees.

But there is one firm truth that can be relied on. If you don’t take risks, your potential reward will be limited. And if you do take on risks, you will have more potential for high rewards, but will also have the potential for greater loss as well.

This relationship between risk and reward is what makes investing so complicated.

It’s important to understand different kinds of investments and how they stack up in terms of risk/reward. Let’s look at them.

Bank Deposits

The lowest risk investment that we all know about is a bank account. These offer interest rates that can grow your money over time. The Federal Deposit Insurance Corporation (FDIC) insures all bank deposits in the United States up to $250,000. This insurance also covers most bank products including Certificates of Deposits (CDs). So even if your bank goes under, your money is safe. With interest rates at super low levels, returns on bank deposits are equally low. There have been times when interest rates on bank deposits have offered good returns, but it hasn’t been that way for more than a decade.

Government Bonds

Another super safe investment is U.S. government bonds. These include Treasury Bills, Notes and Bonds. These have different terms that can be as short as 4 weeks to as long as 30 years. Interest rates on these treasuries vary, with the long maturities usually holding the highest interest rates. And because the US government backs these investments, they are considered super-safe. The interest rates for longer maturity bonds are usually higher than bank interest rates.

Corporate Bonds

Working up the risk/reward scale are bonds that are issued by corporations. These bonds usually pay higher interest than government bonds, but have higher risk than those bonds. This is because there is no guarantee that the bonds will be paid back. Corporations do go bankrupt, even reputable ones. So corporate bonds do have some risk to them. But the majority of corporate bonds are low risk and are deemed “investment grade” which means that they rarely collapse.

Stock Market

If you are looking for higher returns than corporate bonds, you can look to the stock market. Stocks and funds can offer terrific returns. Historically, the US stock market has returned 7% on average, or 11% on average per year if you include dividend payments. It should be noted that the exact return is subjective and depends on what you consider the “US stock market” and what time period you’re looking at. But nevertheless, the US stock market has, on average, brought solid returns.

The problem with looking at average returns is that you miss the bumpiness of the stock market. In 2007, for example, the S&P 500 returned 5.5%, which is around the historical average. But the next year the market plummeted by 37%. And then in 2009 it was up 26.5%. Those are some crazy bumps!

This volatility makes investing in the stock market very risky when you invest for short periods. Events like wars, economic downturns, corruption, bad business decisions or changes in commodity prices can all cause turmoil. The risk of loss is real.

If you extend your investing horizon to a decade, most of the bumps get smoothed out and you get closer to historical averages. Which is why having a long-term vision is so important.

High-Yield Bonds

If you want better returns than the overall stock market, you have to look at products that hold much greater risk. High yield bonds are one example of higher risk investments. You might know them by their more common name of “Junk Bonds”

Junk Bonds are bonds offered by small, risky companies that cannot access traditional funding streams. In order to raise capital, they must offer high rates of return on their bonds. The companies that issue Junk Bonds are either older companies that are struggling to stay afloat, or young companies trying to get into a market. Either way, the risk of default is higher with junk bonds than with most other investments.

Shorting

Another high risk, but potentially lucrative investment strategy is to short a stock. Shorting a stock is essentially a bet that the stock will go down. These trades can be lucrative when a stock does go down. And the further a stock goes down, the more money you can make.

But the potential loss from a short is massive. If your short goes the wrong way, and the stock goes up in price, you lose money. If the stock goes up 100%, you will lose ALL of your money. If it goes up more than 100%, you will lose all of your money and still owe more! The downside risk of shorting a stock is very high.

Derivatives

Finally, on the far end of the risk scale are derivatives. These products are basically contracts between two parties that are based on the price movement of an underlying asset. A derivative is really just a bet on the direction of a stock, commodity, currency or mortgage. Much like shorting a stock, a derivative that goes the wrong way can wipe out more that what was invested. But when it goes the right way, the proceeds can be terrific. Derivatives are the ultimate risk/reward investment and should be avoided unless you have lots of experience and a super-high tolerance for risk.

In the end, all the different ways of getting higher returns on your money have some level of risk. When deciding on what kind of return you are after, make sure you understand the risk that comes with it. This risk level should be one that you can tolerate. It makes no sense to go after potentially high returns if you cannot stomach the potential losses. So make sure that before you make an investment, you not only look at the potential return, but also look at the potential for loss, and if you can accommodate that possibility.

For as long as people have been making money, there have been people figuring out ways to steal it.

Now, with technology, there are new scams to be wary of.

But first, it’s important to know that most savings account are protected by the FDIC, up to $250,000 – so should your bank fail, you will not lose the money in your savings, checking and CDs (certificates of deposit). Cash in most retirement accounts is also eligible for FDIC protection. What’s not covered? Mutual funds, stocks, bonds and safety deposit boxes.

Most banks are insured in case of theft – but here’s the issue. Sometimes, the account holders themselves enable the thieves. There’s two ways this happens (1) by not providing adequate protection to your account and (2) by being an unknowing participant in a scam.

The first thing to do is to ensure that you have provided significant protection to your account. This means:

1. Not keeping your PIN or passwords anywhere near your ATM card or account details
2. Creating a password that is difficult for hackers to crack.
3. Not using the same passwords, or password structures, across multiple sites

Best practices for creating a strong password include using a combination of upper and lower-case letters, numbers and symbols. Don’t use things that can easily be guessed, like your date of birth or phone number or child’s name.

A quick trick is to think of a sentence that can be easily memorized, and create a 10+ character password. For example  ‘Jane is going to save $10K this year!’ makes the password: Jigts$10Kty!

Sometimes you may get an email or a pop up that says you need to re-enter your account details and password on a web page. Do not click on any links from any sources that are not 100% legitimate. If you are on a page asking for your password, always look for a locked padlock symbol in your browser’s address window. If you click the padlock you will see your bank’s security certificate. If there is no lock, or the certificate looks wrong, don’t enter your password.

Also be careful of emails from unknown recipients. If you click links or download files in these emails, ‘malware’ (malicious software) can be installed on your computer which can track your activity (including your user name and password to your bank!). Just. Don’t. Click.

Always use a site’s main account login page (check the navigation bar to make sure it’s the same as the site you always log into) – and log in from there.

Also, never use the same password at multiple sites – and don’t use the same password for your email account at other places. Keep your banking information in a secure place. A good test to try is ‘if someone broke into my filing cabinet, does the thief have all the information they need to open a credit card in my name’. The answer if often yes, so be careful of your physical security as well as your digital security.

Remember, you have 60 days to dispute unauthorized transactions – one of the many reasons it’s important to keep an eye on your monthly statements!

So now you’ve done the right thing and created secure spaces for your digital and physical records, how else can you protect your deposits from thieves?

The big thing to know is that thieves rarely look like thieves. A good (and sad) rule of thumb is to be suspicious of anyone new in your life that asks for money or personal information. A few of the well-known scams are:

The sweetheart scam. Singles are targeted through online dating sites with the goal of making a personal connection. Months of promising messages, shared photos and even travel plans are made. It is completely possible for people to fall in love online, and the sweetheart scammers know that. Once they feel comfortable, the requests for money start coming in. From the smaller ‘I’d love to visit but can’t afford the fare’ to ‘I urgently need an operation – please help me.’ Love, or the illusion of love, has seen many people milked of their savings.

The taxman scam: A call comes from the IRS. You owe money and they say you’re going to be arrested if you hang up the phone. The caller sounds official (and terrifying). The IRS is prepared to reduce your payment from $20,000 to $5,000 IF YOU PAY TODAY! It’s estimated that up to 450,000 calls a month were being made to Americans from multiple scam call centers, with one bogus call center making $150,000 a day for the scammers. For the record, the IRS does not call you and demand money.

The obituary scam: Scammers scan the obituaries and social media to find descendants of the recently deceased. A caller or emailer claiming to be representing the deceased estate says they have life insurance policies or bank deposits that have been bequeathed. All the target has to do is send money to cover legal fees etc.  The lesson here - be cautious of the information you release in obituaries, and ask many questions of anyone coming to you bearing inheritance money.

The Nigerian prince scam. Versions of this scam have been around as long as the Internet has. Posing as a member of the elite from a troubled country, you receive an email (usually with terrible spelling – always a sign to look for!) saying that a Prince is sitting on a vast fortune and needs your help getting the money out. Can he send you $5,000 to prove it’s real? Many people fall for this scam as the money will actually appear in your account! Now the prince needs you to send $20,000 to pay for legal fees to unlock the million dollars that he’s promised...

When someone is a victim of these scams, and receives a deposit into their bank account (which they subsequently spend or move) they are now in an extremely bad position because the scammer deposits the money via an ACH transfer, which they can then ‘claw back’ within 90 days – even if the victim has spent or moved the money. So the victim is on the hook to the bank for the ACH money, and any money out of their own pocket that they have sent..

What are the things these scams have in common? They often target the elderly, the lonely or recent immigrants. And they are often carried out by groups outside the United States – making it hard for local law enforcement to solve these crimes.

The days when bank robbers wore ski masks and took cash were a lot easier to manage than the current crop of digitally enabled thieves. You are on the hook for funds you lose in these scams, so everyone needs to be wary of cyber thieves and scammers.

Please share this with the people you love and ensure they are protecting themselves, too.

Treasury bills, bonds and notes are investments offered by the US Government that are essentially loans that you make to the Government so that they can run their programs.

In exchange for these loans, the Government offers you interest on the loan you make to them.

There are three types of treasuries issued by the US Government, and they vary depending on the length (term) of the security.

• Treasury bills are the shortest-term securities issued. They have maturities that range from a few days to 52 weeks.
• Treasury notes are longer-term securities and range in maturity from two to ten years. They pay their interest every six months.
• Treasury bonds have maturities that range from ten to thirty years and also pay their interest every six months.

Because these financial instruments are backed by the US Government, they are considered to be extremely low-risk investments. In fact, when gauging risk, many investors use the 3-month Treasury bill as the benchmark for a “risk-free rate of return”. This is the highest return you can get from a no-risk investment.

Investing in US treasuries is a terrific way to get income with very little risk. Any individual with a brokerage account can buy and sell US treasuries. And you don’t have to hold treasuries until they mature. You can sell them any time you want. They are considered very “liquid” investments: They can be bought and sold quickly and easily at little cost.

The interest rate on specific bonds and notes does not change. It is called the “coupon rate” and remains the same throughout the life of the bond or note. They can be bought in increments of $100. So if you get a $100 bond with a 5% coupon rate, you get $5 interest per year (or $2.50 every six months)

US treasury bonds and notes can be traded on secondary markets, and on these markets, the price of the treasuries can actually change. Many things can impact the price, but the most direct impact comes from current interest rates. We’ll give you an example. Let’s say, just like in the above example, you have a $100 treasury note that has a coupon rate of 5%. What if, right after you buy the note, the Federal Reserve raises their benchmark rate, which increases interest rates all through the market? Now the note you just bought is being issued with a 6% coupon rate. Nobody is going to want to buy your note that pays 5%. They can get a 6% note for the same $100 instead.

So are you stuck with the note? No. What happens is the market will buy your note, but not at par value. They will want a discount. And this is where something called yield comes in. The yield on your note is 5% ($5 per year on your $100 investment). But the new notes have a yield of 6% ($6 per year on a $100 investment). But your note can have a 6% yield too! If someone is willing to pay $83.33 for your note, they would still get the $5 interest per year, but at the lower price, the yield is now 6% ($5 on a $83.33 investment). So by buying the note at a lower price, the buyer gets the higher yield.

And this is the logic of bonds: As interest rates go up, bond prices go down.

This example is a very simplistic explanation about how prices and yields on treasuries move. Other factors like time to maturity and the duration of the bond also impact the price. But from the example you can see that prices are not fixed.

Treasury bills are priced slightly differently than notes and bonds. They come in denominations of $1,000, but instead of coming with an interest rate, they are sold at a discount to face value. So if you pay $990 for a one-year treasury note, at the end of the year it can be redeemed for $1000, earning you $10 or 1% interest. Treasury bills are sold at auction when they are released and can also be purchased in secondary markets.

Because treasury bills, notes and bonds are such low risk investments, they are some of the most popular investments both with US buyers as well as with foreign individuals and Governments. It is considered to be a very safe harbor for investments.

If you want to invest in something that pays an income and is extremely safe, US treasuries are a terrific option.

There’s nothing that a parent, or grandparent wants more for their beloved offspring - than for them to get a great education.

But a high quality education often comes at a price - and that’s where education savings plans come in.

There are a few things to look for when you’re considering setting up a plan to save for a child's education.

The first is goals. Think big picture for a minute. As much as you want to best for your children, financially it shouldn’t be at the expense of your own financial future. If you’re not contributing to your own retirement, you should think hard about contributing to college savings plans. Remember the airline instructions - to put on your own oxygen mask first before helping your child - it works great for money too.

If you’re all set with saving for your own short, medium and long term goals - then great -- do the homework on what you think the education savings plan will need.

When you’re saving for college, first, see what benefits are available to the student. Make sure your goals include trying to max out whatever benefits will be available.

The Consumer Financial Protection Bureau (CFPB) has some terrific resources to help you understand the cost of college. Use the “Compare Schools” tool to figure out the cost of attending different schools. Getting a handle on total costs is an important (and sobering) first step.

Next do some homework to see if your child will qualify for student aid. The StudentAid web site has a fantastic tool to calculate potential student aid. Go there to see if you can reduce the burden of tuition.

Also do some research to find out what kinds of need-based scholarships are available at your potential schools. US News has a great school search tool that gives information on the amount of need-based scholarships and grants given by each school.

This work will help you figure out the net cost for school that you’re looking at. The federal government is also pressuring colleges to have net price calculators on their web site. These should also help you figure out the cost of going to school.

Now the hard part: How much will you pay?

Remember, this doesn’t have to be all or nothing. You can be clear with your children that perhaps they will be expected to contribute too. So work with them on how that can happen – preferably through earning money versus debt, but if they do need to take on debt themselves, look for low interest, fixed rate student loans.

Now let’s look into HOW you can build an education savings plan.

The first thing to do is a simple timeline based on your children’s ages. The earlier you start, the better. A simple calculation of how much you need to save each year can be done in excel, or with a piece of paper and a calculator. Or use this calculator at collegeboard.org. But one thing to include in this calculation is inflation. It’s safe to assume the cost of something today will cost more in the years to come. A safe number to ‘inflate’ your goal by is 2% each year. In the US, college tuition has been rising at an unsustainable rate of 8% per year - that means tuition costs can double every 9 years! This is not to alarm you - but to highlight the realities of what education can cost.

In the US, the most common ways to save for education are 529 Plans and Coverdell ESAs. Both of these plans are after-tax vehicles (so don’t lower your current tax bill). But any growth that the funds achieve in the accounts is tax-free when you take the money out. So you get to keep the full value of any gains made on investments in those accounts.

The one catch with these accounts is that the money you put in can only be used for education. If your kids decide not to further their education, or you’ve put too much money into the accounts, or you need the money for an emergency, there are penalties if you take the money out early, or for reasons other than core education expenses.

Also make sure multiple people beyond you can contribute to the plans you choose. Relatives and friends also want what’s best for your kids - so help them to help you!

If you’re planning on asking your child to take on debt, please look at multiple option and make sure you understand ALL the costs and implications involved in holding the debt, and paying it down. The CSFB has great resources to help you understand the different loan options available. But you should know that federal loans are much more flexible and forgiving when it comes to repayments.

Last thing to consider are your contributions:

Like all great savings strategies – the key is automation. You’ve set your goals by year of how much you need to save, now set the amount you should deduct each month – and set it up!

Also make sure you check the benefits that come with your job. Some employers have educational savings plans that allow for pre-tax contribution, subsidies, or if you’re very lucky – matching some of your contributions.

With a family, it can be extremely expensive to just stand still financially. By setting goals, identifying the right ways to save, and automating as much as possible – you can set yourself, and your children, up for the best possible future.

Sadly, money issues are one of the leading causes of divorce in the United States. Setting up great financial practices as a couple is one the best things that people can do to give their relationship a chance to thrive.

But what happens when your money styles are out of sync – and one partner is more focused on saving, while the other is more focused on spending?

Here are some ideas to help make savings a joint goal:

1. Have the conversation

Don’t make a big deal of it. State that this is something that is important to you – and something you would like for the two of you to do as a couple. Keep the conversation on the practical: “Let’s set a goal and save some money” versus an emotional blame game.

2. Set a joint goal that is relatively easy to accomplish for you both

Discuss what goal you would like to tackle first. A good idea is to make it an achievable goal, and something that is positive and pleasant for you both. A good idea is to save for a vacation, or a weekend away.

3. Select a method and a timeframe for saving

So where is this money going to go? If you don’t already have a joint savings account, now is a great time to set one up. Mark your calendars with your target goal date, and set up a direct deposit to automatically route money into the savings account.

As you progress, make sure you discuss how you’re doing against your goal, and keep the conversations positive. You can achieve your goal faster by cutting back in other areas of your budget, and putting the savings towards the goal.

Where many couples fail is that they make this an emotional conversation, or worse, blame their partner for being ‘bad with money.’ Other contributors to savings failures are when unrealistic goals are set (“let’s be debt free in 3 months!”) or the methods to achieve the goals are impossible to live with (“let’s not go out for 3 months while we pay off our credit card!”).

Once you’ve started to build your savings muscle as a couple, you can extend this behavior into a larger long-term goal (like saving for a deposit on a house), or work toward multiple goals at once. Think about how your options in life will open up as you pay off debt, save an emergency fund, and save a base of money to grow together for your future. A simple trick to keep you on course is to build mini rewards along the way (and if they don’t cost much money, even better!!)

When your goal is to help your partner get better at saving money, the #1 thing to remember that it takes a lifetime to build up financial habits, and they don’t change overnight. Be patient, be positive and make it a joint effort. Make changes in your own behavior to make sure your partner understands that you are trying to change too.

It can be helpful to talk about why they overspend (remembering what you consider overspending may seem very reasonable to your partner). A good conversation to have is to draw and review your respective ‘money family trees’. Talk about the habits your parents instilled in you as a child, or the impact of seeing an uncle go broke, or how your sister has a bad case of the ‘keep up with the Joneses.’ You’ll learn a lot about each other by looking at your extended families behavior from an objective perspective – with the goal of understanding why you act the way you do.

There are a few other things to do while you’re at it. Make a commitment to each other to not hide spending. A great way to be open about where money goes is to set a line in the sand where each person can make a decision without the other’s input (say a $100 purchase) – but for anything over than amount, it should be discussed. This works even better when you have a budget with a set amount for discretionary spending (clothing, entertainment, eating out etc.).

If you can - a great idea is to make a commitment to live off one income and save 100% of the other. This creates a clear path to savings. And should either one of you lose your job, you won’t have to tighten your belt significantly as you’re already living well below your means.

Remember, start small, keep it positive, and make your partner see that saving is not about deprivation – but about creating positive options for your future.

It’s easy to think of your savings as a single number – a goal to work towards.

But savings is more sophisticated than that. There are important differences between different types of savings. So to be strategic about how you save, think of your savings living in three buckets

1. Emergency savings
2. Short-term goals
3. Long-term savings

In the first bucket you have emergency money.  Call it a contingency fund if “emergency” is too alarming. But it’s important to have money accessible. The rule of thumb is to have savings equal to 6 months of expenses should you lose your income. The key thought here is that if you live month to month and suddenly lose your income, you may have few options other than going into debt.

And if you’re already in debt, like 75% of Americans, it’s still important to save and have a contingency fund so that in times of emergency you don’t go deeper into debt.

So where should you put your contingency fund? You never know when you’ll need the money, and keeping it in a savings account allows you to access your money instantly. Don’t lock it up in places like retirement accounts where access is limited or penalized.

In the second bucket you have money for short-term goals. This is money for things that you should not go into debt for. Taking a trip, upgrading your computer or holiday gifts should all be part of your short-term savings bucket. These are higher cost items that you should pay for by setting aside savings. Many savings accounts allow you to assign money to individual goals. It’s a great way to stay on track when you see your vacation savings, for example, growing towards your goal.

For short-term savings, you won’t need constant access this money. So you can lock this savings away for specific amount of time. If you’re saving for a trip, for example, you should be comfortable with locking this savings away for a few months at a time. By temporarily giving up access to your money, banks will give you better returns. Products like Certificates of Deposit (CD) or Government Bonds offer you protection of your principal and higher rates of return than savings accounts. And don’t worry. If you do need to access this money, you still can. There will just be a fee for doing so.

The final bucket is for long-term savings. These are the funds that you need in order to build the future you want. Consider these your ‘investment funds’. It is money you don’t need access to in the short term. If you have a 401K or IRA – that’s a great start.

If you don’t have a retirement account, make sure you get one. They allow you to grow your money either tax-free or tax-deferred. Check with your employer if they have a 401K and if they do, take advantage of it. They often come with matching funds from your company. Take advantage of this “free money”. If you don’t have access to a 401K, look to IRAs. They are another tax-advantaged way to grow your money.

But often your long-term plans may include things that will come before retirement. You may want to start a business, or buy a vacation property. Or maybe unexpected expenses will come up (braces really cost that much???). These are all things you cannot fund from a retirement account without getting hit with huge early withdrawal penalties.

This is why it’s important to also have a separate investment account that is not a retirement account. You can open one through a brokerage or investment advisor, where part of your third bucket can be put to work in a way that can buy you options in the future.

By categorizing your savings into these three buckets, it will help you manage your savings, and reduce the temptation to dip into emergency or investment funds for your day-to-day needs or you short-term wants.

It’s not how much money you earn, but how much you keep, which is the key to your financial success.

And the difference between those two numbers is how much you spend.

Consider the idea of conscious consumption, and how being more aware of why you spend can help you in the long term.

According to eMarketer, advertisers around the world spent over HALF A TRILLION dollars last year marketing their wares. A third of that – at 180 Billion is in the US. And of that, 36 companies, all of whom you will know well, spent over a billion dollars in advertising.  No wonder you want a new shiny car!

It’s not all advertising’s fault. Humans are hardwired to compare themselves to others. It helped us survive during much tougher times, when the weak ones of the tribe had to be left behind. This hardwiring manifests itself now into the syndrome known as keeping up with the Joneses.

In the words of Will Rogers:

Too many people spend money they haven’t earned to buy things they don’t want to impress people they don’t like.

Conventional wisdom says you should pause before you make a purchase. You should research the options, wait a few days and comparison shop. You CAN do all those things but… not a lot of people do it. If they did, the average balance for a household with credit card debt would not be $15,000 as it is now.

So how can you look at your spending differently? Here are 3 to start:

1.   Buy less stuff.

Remember, the advertisers of the world all have one goal: To make you buy their product. Then re-buy their product. And never buy their competitor’s products. The bigger question for you is, do you need to buy it at all?

With the blossoming of the sharing economy, you have to ask yourself why you need to own all these things. You can now share cars, homes, clothes, lawnmowers and tools. The sharing economy allows you the benefits of using something without the burden of buying it.

2.  Recycle

If you’re not up for buying less stuff or downsizing, the least you can do is recycle everything. Take pride in making things last, or exchanging them with family & friends for things that you need. The idea of “shop my closet” is a great one – where groups of friends can exchange items they no longer use.

Also try to buy things of quality that will last. Think of your purchases as assets that should last a long time. When you look at things this way, you reduce the number of things you throw away.

3.  Look to yourself

‘Keeping up with the Joneses’ is a fallacy. It’s extremely difficult to truly know another person’s financial situation – but it’s a STRONG possibility that it’s not the same as yours – no matter how much you think you have in common.  Take pride in living below your means, and understand that for every new car that appears in a neighbor’s driveway, it’s more than likely that there will be an extra bill that will appear too.

Remember, our spending habits are built up over a lifetime, and what may be normal to you, could be considered extraordinary by someone earning the same as you. Rethinking when, how often and why you buy what you do is a great first step to rewiring your spending habits. And best of all – every dollar that you don’t spend today is available to you to invest, so your future self will have more money, and more options, tomorrow.

The decisions that you make about how you spend your money every day can have a giant impact on your long-term financial success. Which is why conventional wisdom says that ‘everyone needs a budget.’

A budget can help you understand how money flows in and out of your household, set your goals and track your progress against them.

The four main reasons to set a budget are:

1. To live within your means
2. To get out of debt
3. To have money to invest
4. To pay for bigger things

There are so many free apps and browser based budgeting tools available – it’s well worth your time investigating how some of these could help provide some structure to the way that money flows through your household.

But not all households are the same, so here are different budget tools for different situations.

If you are sharing a home with roommates, or a family where you all contribute to bills then you might want to check out Buxfer. This site specializes in group budgeting and shared expenses between friends or roommates and tracks shared bills.

Couples should check out betterhaves.com. It is a simple, clean way for two people to set a budget together and track expenses.

For individuals there are many paid and free solutions. One that is very user friendly is Level Money. It helps you figure out how much is available for you to spend every month, and tracks it for you over time.

There are a few other noteworthy tools out there - like Mint, the most widely used budget tool, which can automatically categorize your expenses, and Moneystrands which allows you to link all of your accounts and create a 12 month spending plan.

To get started, try a free service first, and get to know whether this will work for you.

Many of the free tools mentioned are based on the ‘envelope system’ – a tried and true method from the days when cash was king. In this system, households have envelopes for different expenses: food, entertainment, phone, rent, savings, etc. And once the envelope is empty, you know you’ve reached your limit. For the technologically challenged or those who don’t like to share their data, physical envelopes are still a great solution.

But now with credit cards in our pockets, it’s a lot harder to face the reality of empty envelopes.

And the hard truth about all of this is that ‘a budget can tell you what you can’t afford, but can’t stop you from buying it anyway’.

So, it comes back to you. A budget won’t change your behavior, only you can do that.

Step one to making a budget work for you is to have a budget that you’re comfortable with. Add in wiggle room for emergencies and some money for extra treats if you can.

Step two is NOT to just “STICK TO IT” as many advisors would have you think, but to be much more conscious with your spending decisions. Both the little ones like your daily latte, and the really big ones, like which neighborhood you live in or public vs. private education for your kids.

One of the most powerful things you can do before committing to larger items in your budget is to SHOP AROUND. For example, a mortgage is probably the biggest single financial decision you’ll make in your lifetime, but only 50% of people shop around for mortgages before making that decision. The impact of a single percentage point in interest can be tens of thousands of dollars that are available for other items in your budget!

The best part about having a budget is that once you are saving money, and have some investments underway, it’s a great feeling to see your numbers go up on a monthly basis. There is nothing fun about paying down debts or trimming costs – but it is essential to provide the foundation for future growth and buying yourself better options in life.

Here’s a great thought to end with that is very applicable to budgeting from the great Eleanor Roosevelt:

“It takes as much energy to wish as it does to plan.”

Sadly, money issues are one of the leading causes of divorce in the United States. Setting up great financial practices as a couple is one the best things that people can do to give their relationship a chance to thrive.

But what happens when your money styles are out of sync – and one partner is more focused on saving, while the other is more focused on spending?

Here are some ideas to help make savings a joint goal:

1. Have the conversation

Don’t make a big deal of it. State that this is something that is important to you – and something you would like for the two of you to do as a couple. Keep the conversation on the practical: “Let’s set a goal and save some money” versus an emotional blame game.

2. Set a joint goal that is relatively easy to accomplish for you both

Discuss what goal you would like to tackle first. A good idea is to make it an achievable goal, and something that is positive and pleasant for you both. A good idea is to save for a vacation, or a weekend away.

3. Select a method and a timeframe for saving

So where is this money going to go? If you don’t already have a joint savings account, now is a great time to set one up. Mark your calendars with your target goal date, and set up a direct deposit to automatically route money into the savings account.

As you progress, make sure you discuss how you’re doing against your goal, and keep the conversations positive. You can achieve your goal faster by cutting back in other areas of your budget, and putting the savings towards the goal.

Where many couples fail is that they make this an emotional conversation, or worse, blame their partner for being ‘bad with money’. Other contributors to savings failures are when unrealistic goals are set (“let’s be debt free in 3 months!”) or the methods to achieve the goals are impossible to live with (“let’s not go out for 3 months while we pay off our credit card!”).

Once you’ve started to build your savings muscle as a couple, you can extend this behavior into a larger long-term goal (like saving for a deposit on a house), or work toward multiple goals at once. Think about how your options in life will open up as you pay off debt, save an emergency fund, and save a base of money to grow together for your future. A simple trick to keep you on course is to build mini rewards along the way (and if they don’t cost much money, even better!)

When your goal is to help your partner get better at saving money, the #1 thing to remember that it takes a lifetime to build up financial habits, and they don’t change overnight. Be patient, be positive and make it a joint effort. Make changes in your own behavior to make sure your partner understands that you are trying to change too.

It can be helpful to talk about why they overspend (remembering what you consider overspending may seem very reasonable to your partner). A good conversation to have is to draw and review your respective ‘money family trees.’ Talk about the habits your parents instilled in you as a child, or the impact of seeing an uncle go broke, or how your sister has a bad case of the ‘keep up with the Joneses.’ You’ll learn a lot about each other by looking at your extended families behavior from an objective perspective – with the goal of understanding why you act the way you do.

There are a few other things to do while you’re at it. Make a commitment to each other to not hide spending. A great way to be open about where money goes is to set a line in the sand where each person can make a decision without the other’s input (say a $100 purchase) – but for anything over than amount, it should be discussed. This works even better when you have a budget with a set amount for discretionary spending (clothing, entertainment, eating out etc.).

If you can - a great idea is to make a commitment to live off one income and save 100% of the other. This creates a clear path to savings. And should either one of you lose your job, you won’t have to tighten your belt significantly as you’re already living well below your means.

Remember, start small, keep it positive, and make your partner see that saving is not about deprivation – but about creating positive options for your future.

What a great question!

The super investor Warren Buffet has a great quote: “Do not save what is left after spending, but spend what is left after saving.”

The idea that you should plan your savings is a terrific one. If you target your savings and are disciplined with your spending, it can help you save considerable amounts of money. And in the long run, continuous, regular contributions to savings, which can be grown over time, are proven to be the most effective way of growing your wealth.

So, how much should you be saving? First of all, you shouldn’t force yourself into a box that makes your life difficult. You don’t want to put so much money away that your quality of life suffers. So the amount you target for savings should be reasonable.

Your savings target should also be relative to what you earn. If you aren’t making much money, it will be difficult for you to save any money. Also, if you have a lot of debt, especially high interest debt, it is a very good idea to pay off your high interest debt first before you put money away.

But if you are ready to save, you should set a target for your savings. An interesting approach is to segment you paycheck into three separate chunks, with each going to a specific category of spending. A popular version of this is the 50/20/30 rule of thumb. With this approach, you allot 50% of your take home pay for essentials (rent, food, transportation), 30% is allotted to discretionary spending (entertainment, clothing etc) and 20% is allotted to financial priorities. 

This formula is popular because the 20% allocation to finances is flexible. If an individual has high interest debt, the financial allocation will go to pay off debt (and pay your highest interest debt first!). If you have no debt, then the allocation can go into retirement contributions, investments or into savings.

But for many people, this 20% allotment will be difficult to match. For those just starting out, 20% would be a considerable percentage of their income.

For people who are in their early years of earning and have little disposable income, a slightly different version of the 50/20/30 rule may be more appropriate. Instead of 20% for finances, a more reasonable starting point may be 10%. If you have a heavy burden of debt, all of your 10% should go to paying down debt.

For every year that passes, you should add one percentage point to the amount of money you put towards financial issues. So after 10 years, you will reach that 20% target. By the time you get there, you will probably have paid off your debt, have saved a good chunk of money and will be putting all of that 20% into an investment account. Cha ching!

Here is one last strategy that can help you get to your savings goals. It is a simple savings plan that targets your monthly non-essential spending. The money you spend on entertainment, eating out or taxi rides is the most variable spending you have. It also tends to be the most abused form of spending you have. So by setting limits on this spending you can target a set amount of savings at the end of each month.

A simple way to do this is to go to the bank at the beginning of the month and take out the all the cash you’ll need for discretionary spending for the entire month. And that’s it. You can’t use your credit card or go back to the bank. What you get in cash is what you can spend on non-essential items.

The idea is that if you see your month’s worth of money in front of you, you will be forced to make rational decisions about how you spend it. And as that money in your wallet disappears, you’ll be forced to make critical spending decisions about how you spend that money. If your money is dwindling, you’ll skip that taxi ride to work and take a bus instead, or you’ll bring lunch to work, or delay buying that new pair of shoes…

It’s a simple way of budgeting without actually making a budget. You literally see how much you have to spend and make decisions based on what is left in your wallet. Then at the end of the month, if all goes well, you’ll have a nice pile of money left that you can move over to savings!

So do your best to target a portion of your paycheck for savings. Make sure it is reasonable. Take care of your debt first if you can. And when you have money at the end of the month, move it into a savings account or your investment account.

We understand that saving is not easy to do. Most American’s don’t even have one month of income saved in their bank accounts. So if you are struggling to save, you are not alone. But try to make saving a goal. If you do, you should be able to consistently put money away for the future.

Sometimes it can feel that you work so hard, just to stay in the same place financially.

Finding extra money can be extremely difficult. The world around us keeps pushing us to spend. Advertising, peer pressure and day-to-day necessities all push us to take our hard earned money and spend it on things.

When you have extra funds but you also have debt, the big question is – what is more important? Debt reduction or savings? Do you prioritize paying down your debts, and reducing your interest payments, or do you build a base of savings?

The short answer is BOTH!

First of all, you should always have some cash saved and easily accessible as an emergency, or contingency fund. Life is never smooth, so having spare cash at the ready is extremely important; more so if you are self employed or have an unpredictable income.

You should really try to save 6 months of living expenses. It may seem like a lot of money to have sitting in a savings account, but if you aim to save that amount of money, you’ll be insulated from a lot of surprises. The thinking here is that if you’re living paycheck to paycheck and have debt, if you get a nasty surprise, you don’t want to get buried under more debt.

So if you haven’t already done it, set up a savings account and make a plan to put some money towards it each month.

At the same time, take a look at your high interest debt. High interest debt is debt with double digit Annual Percentage Rates (APRs). You’ll find these on credit cards, store cards, and payday loans. If you have substantial debts here, it makes a lot of sense to pay these debts down. For every $100 of this debt you pay down here, you could save at least $15 in interest payments per year. Just don’t overspend and put that debt back!

Just like for your emergency fund, set a plan to make a monthly payment to pay down your debt.

These two deposits should be non-negotiable. Setting up a direct deposit can help a lot with this.

Once you have paid down your high interest debt, and built an emergency fund, then (and only then) do you start saving for a specific goal like a down payment on a house, or a vacation, or putting more money into a retirement account. All of these choices are great and offer different benefits depending on you situation.

Here are some guidelines for each:

Saving for a goal. Saving up for a down payment on a house or a car can have huge knock-on benefits. A car can open job prospects, better schools or cheaper shopping. A house can offer security and stability and is a usually a good investment in itself. If any of these are a priority to you, then putting money aside for these goals is a terrific idea. If you want to put money aside for a vacation, it’s not as great a use of spare money.

Put money into a retirement account. If your employer has a 401K and matches some contributions, then putting money into a 401K is a terrific idea. Try to contribute enough so that you max out your company match. If you don’t have access to a 401K then an IRA may be a good idea. These accounts allow you to grow your money tax-free and either defer your taxes until you withdraw it (with a traditional IRA) or withdraw it tax-free (with a Roth IRA)

But only contribute money to these accounts if you are positive that you won’t need the funds until retirement. You will be able to withdraw some of the money for a house or for school, but the bulk of the money in these retirement accounts must stay there until retirement. If you withdraw the money early, you will get hit with severe penalties.

Paying down debt with moderate interest rates. Once you drop below double-digit interest rates, the benefit of paying this debt down is lower. Now when you pay $100 in debt, you’re only saving $6 or $7 dollars in interest payments. But if you don’t have a short-term plan for your savings, then paying down this debt is a good idea.

If you still have spare cash after all of this, then you can look at opening a regular trading account and investing outside your retirement account. These accounts have no tax benefits, but do allow you to grow your money through investments in stocks, bonds, Exchange Traded Funds and Mutual Funds. They are a great way to grow your spare money.

Finally there is the option of paying down your low interest rate debt. This includes your mortgage. Paying down this debt faster than scheduled is usually the bottom of your priority list. The returns you get from of all of the above mentioned strategies usually outweigh paying down your mortgage. But your house is you single biggest investment, so it does feel good to pay it down.

So use this list as a guideline for your ‘debt reduction while saving’ strategy. There is no right or wrong strategy. Some may be better than others in terms of bang for your buck. But they all help you save more money.

Just make sure that you are saving something every month and putting it away somewhere. If you make saving your money a priority, a lot of opportunities will open up for you.

In the alphabet soup of tax lingo, tax credits rule! Credits are dollar for dollar reductions in the amount of tax you owe. And with some credits, they can reduce your tax to less than zero, allowing you to get some of the credits as a refund! Cha ching!

But the first thing you should know is that tax credits generally have earnings limits. So if you make too much money, the credits may not be available to you. But check anyway. You could be in for a surprise.

So here are the available tax credits:

1. The Earned Income Tax Credit, sometimes called EITC, is a tax credit to help lower wage earner keep more of what they’ve earned. To qualify, you must have earned at least $1, earned less than $3,400 in investment income, had no foreign earnings and earned less that the earnings ceiling. The earnings ceiling ranges from $14,820 for a single filer with no kids, up to $53,267 for married filers with 3 or more kids. Check here for the exact limits. You must also file a tax return to get the credit.
   
   The best part of this credit is that it is a refundable credit, which means that if it lowers your taxes to less than zero, the excess will be given to you as a refund. It’s a terrific benefit of the credit.
   
   Unfortunately, an estimated 25% of people who qualify for the EITC do not apply for it. But if you missed applying for it, you can still apply up to three years later. Make sure you check it!
    
2. There are two credits available for education. The American Opportunity Tax Credit(AOTC) is available for qualified education expenses, and has a maximum credit of $2,500. The individual earnings cap is $80,000. It is available for the first 4 years of a degree or other recognized program. The Lifetime Learning Credit (LLC) is available for tuition and other education expenses at any qualified institution. There is no limit to the number of years you can get the credit. The maximum credit is $2,000 and the earnings cap is $55,000 for individuals.
    
3. If you made less than $27,750 as an individual, $41,625 as a head of household or $55,500 as married and filing jointly, you can get up to $2,000 in credit for contributions you made to a retirement savings account (an IRA or 401(k)). This credit can be used in addition to the deductions that can be gained from contributions to traditional IRAs.

These tax credits are terrific ways of cutting your tax bill down. Make sure you check to see if you qualify for them. A little bit of research can put a big chunk of money in your pocket.

What a great problem to have! If you’re trying to reduce your capital gains, it means you made some money on your investments.

It’s important to know that the tax rates on investments can be much lower than taxes on wages. So if you are in a high tax bracket, your earnings from actual labor will be taxed at 35%. But, the money you made when you sold your Apple stock, for example, will be taxed at a lower 15% tax rate! The US tax system definitely looks more favorably on money earned through investments.

So the first and most important thing to know is that there are two capital gains tax rates. One, the preferred, lower rate is the “long-term” rate. The second, higher rate is the ”short-term” rate. The difference between the two is time. One calendar year to be exact. So if you hold an investment for more than a year (366 days or more), your gains will be taxed at the long-term rate and if you hold the investment for less than a year, the gain will be taxed at the short-term rate, which is the same as your personal income tax rate. The difference between the two can be significant.

For people filing taxes as single, these are the rates (2016):

Income between $0 and $9,275: Short-term rate 10%, Long-term rate: 0%

Income between $9,275 and $37,650: Short-term rate 15%, Long-term rate: 0%

Income between $37,650 and $91,150: Short-term rate 25%, Long-term rate: 15%

Income between $91,150 and $190,150: Short-term rate 28%, Long-term rate: 15%

Income between $190,150 and $413,350: Short-term rate 33%, Long-term rate: 15%

Income between $413,350 and $415,050: Short-term rate 35%, Long-term rate: 15%

Income over $415,050: Short-term rate 39.6%, Long-term rate: 20%

As you can see, the difference in tax rates is significant. So holding investments for more than a year makes a big difference.

Also note that qualified dividends (which include the vast majority of company issued dividends) fall under the lower long-term gains rate.

The other way to lower your capital gains tax is to sell losing investments before the end of the calendar year. If you have incurred significant gains during the year and also hold some investments that are losing money, you can sell the losers, thereby lowering your overall gains. Always look at your portfolio at the end of the year with an eye to possibly selling your losing investments; especially in years you made significant overall gains.

But a note of warning if you sell losing investments, you cannot re-purchase a “substantially identical” investment for 30 days. Otherwise the loss will be a deemed a “wash sale” and your loss cannot be applied to against your capital gains. So be careful when you repurchase the same stock or fund. You don’t want to erase a significant tax benefit.

Another way to lower your capital gains is to use a Roth IRA account. This is a unique retirement account allows you to not only grow your money tax-free, but also to withdraw the money tax-free. It is a terrific way of lowering your capital gains rate to zero. No other retirement account allows you to grow your money completely capital gains free.

There are some limits to Roth IRAs. For one, in order to contribute to a Roth IRA account, you have to qualify under the earning limits (which you can find here at the IRS web site). Also, you cannot withdraw the money before you turn 59 and a half and you must have been contributing to the account for at least 5 years. If you do withdraw money early, you will be hit with a 10% penalty. Also note that you can only contribute after-tax money to this account, so it doesn’t save you tax money right now. But other than that, Roth IRAs are a great way to grow your money tax-free.

The tax system likes long-term investing, and favors those who follow a ‘buy and hold’ strategy. So open a Roth IRA if you can. If not, keep your eye on the calendar, and when you hit the one-year mark holding an investment, have a little celebration because you’ll have suddenly saved a significant amount of tax!

So you want to reduce your taxes? Don’t we all!

There are three ways to reduce taxes. First is to reduce your taxable income, second is through credits and third is though deductions.

First of all, you should know that most tax reduction strategies are capped by earning limits. If you earn too much money, you won’t qualify. But make sure you check the limits. Many people miss the benefits because they mistakenly believe that they don’t qualify. Make sure you check.

The first tax reduction strategy comes from income reductions. If you can lower your taxable income, you’ll lower your tax bill. This can be done in a number of ways. Contributions to 401(k)s can almost always be used to reduce your taxable income. Employer based flex-spending accounts for expenses such as transit, parking, education and child care can also usually be used reduce your taxable income.

These plans divert your income into retirement and benefit accounts, before it gets to your paycheck. Your paycheck is therefore lower by that amount, and you never pay tax on that income. It is a direct tax reduction strategy whose tax benefits appear on every paycheck.

Second, use credits to reduce your taxes. Make sure you check if you can get the Earned Income Credit on your tax return. The Earned Income Tax Credit is a tax credit to help lower income workers keep more of what they earn. To qualify, you must meet certain requirements and file a tax return, even if you do not owe any tax or are not required to file a return. An estimated 25% of people who qualify for the EITC do not apply for it. And if you forgot to apply, you can still get it credited for the last three years. Make sure you check it! And the benefit can lower your taxes to less than zero, with the excess given as a refund.

There are also credits available for education, childcare and for savings. These are geared to people earning under $50,000 per year, so check to see if you qualify for these.

Lastly are deductions. These are things you can claim that lower your taxable income. It isn’t a dollar for dollar benefit, but they reduce your tax by essentially showing you have less income to tax. Here is a list of things that can be used as deductions:

• Contributions to traditional IRAs (subject to earnings limits)
• Interest on student loans
• Interest on mortgages
• Property taxes
• State and local taxes
• Charitable donations
• Some medical expenses

Also, if you had a net loss in the stock market (or any net capital loss), you can claim up to $3,000 of that loss as a reduction of your income. Any loss over $3,000 can be rolled over to future years.

If you add up these deductions, see if they are greater than these standard deductions. If they are greater, you should itemize your deductions in your tax return. It will save you money.

Also be aware of other miscellaneous deductions. If they amount to over 2% of your adjusted gross income, you can claim them too. These include:

• Tuition
• Dependent care
• Tools for work
• Magazine subscriptions
• Fees you pay to get your taxes prepared
• Expenses incurred looking for a job

Don’t worry if you’re confused. This is confusing! If you qualify for a lot of the deductions and credits, it may be a good idea to get some help. There are a lot of tax preparation services online that are good and cheap. Many have free tools to help guide you through the process. Most also file your federal return for free. Take advantage of them!

Wouldn’t it be nice to delay paying your taxes? If you are working and trying to save money, wouldn’t be nice to skip your tax for a while so you have more money in your pocket?

Well, there are a few things you can do to delay paying taxes. These deferrals do not eliminate your tax, but rather delay them until you are better able to pay the tax, or until you retire when your tax rate should be lower.

Most of these deferral schemes are attached to retirement plans. We’ll go over two of them.

The primary vehicle for deferring tax is through employer sponsored 401K plans. The money that goes into a 401K is usually “pre-tax” money. This means that your contribution comes out of your paycheck before tax is applied. This money will eventually be taxed, but not until it is withdrawn from the account after you retire. This benefit also applies to the matching contributions that come from your employer. 

The second tax benefit of 401Ks is that any gains you make on the investments inside the 401K are not taxed. So, as you buy and sell investments, or earn dividends, you incur no capital gains taxes that could take a chunk out of your investments. This allows greater compounding and growth of your retirement money.

Once you start taking funds out of a 401K, the withdrawals will be taxed as ordinary income. And once you have retired, your tax rate should be lower than when you were employed. This deferral of taxes until you’re in a lower tax bracket is the key benefit of a 401K.

Another vehicle for deferring tax is through a Traditional IRA. But there is a catch to Traditional IRAs. If you or your spouse has access to a retirement plan at work, then the benefit of pre-tax contributions can vanish. The lines are drawn according to earnings limits and how you file your taxes. Check the IRS web site to see the earning limits.

But even if your Traditional IRA contributions are “non-deductible” (after-tax), the contributions can still grow in the account tax free, thereby avoiding capital gains taxes that would be applied in a regular account.

Like a 401K, funds in Traditional IRAs are taxed as ordinary income when they are withdrawn in retirement, when your tax rate is (hopefully) lower.

There is one other account we should mention: A Roth IRA. These accounts are not tax-deferred accounts. You contribute after-tax money, so the tax advantages do not involve deferring your tax. But there are significant tax benefits to these accounts. The funds in these accounts can grow tax free like in a traditional IRA and 401K. But best of all, once you retire, your withdrawals are “tax exempt.” You’ve paid tax on these funds before they went it, so your withdrawals are tax-free.

There are earning limits associated with these accounts. If you earn too much, you will not be eligible for a Roth IRA. To see the earnings limits, check the IRS web site here.

One very important thing to note with all of these accounts is that they are geared towards retirement. If you need to access these funds before retirement, you will incur a 10% penalty on the withdrawal as well as all applicable taxes. This will result in a substantial loss of savings. Make sure any money you put into these accounts doesn’t need to be accessed before you retire.

One final way the US tax system allows for tax deferrals is through a 1031 like-kind exchange. These are specifically created for people using property as an investment. It allows for the deferral of capital gains taxes on the sale of an investment property if the proceeds are rolled into a “like-kind” property that is identified within 45 days and bought within 180 days. It is a very specific, very complicated benefit, but one that can defer capital gains tax indefinitely.

We should also note that this benefit does not apply to second homes or vacation properties. Sorry! The property in the sale must be an investment property. But property can include things like art or antiques, as long as they were purchased as an investment.

In the end, you can’t really avoid paying tax. You’ll have to pay them some time. But you can defer it into the future giving you some flexibility about when you want to pay. Hopefully these opportunities will leave a bit more money in your pocket when you most need it and help you save for the future.

You can borrow money to buy just about anything big or small. You can use a mortgage to buy a home or a credit card to buy a coffee, a home equity loan to build a deck or a student loan to get an education. There are loans available for every purpose.

What about with investing? Can you borrow money to buy a stock? Well yes, most brokerages will lend you money to buy investments. This is called ‘margin lending.’

A margin account is an account offered by brokerages that allows clients to buy securities using money borrowed from the broker. The broker charges interest on the borrowed money and uses the investment as collateral on the loan. Because the loan is backed by a security, it is seen as lower risk than if there is no collateral held against the loan. So the interest rates charged on margin account is generally modest.

The interest rate charged on margin accounts can vary, and it usually depends on how much money you have in your account. Large accounts (those around a million dollars) can have rates that are very low and are comparable to mortgages. Smaller accounts will have rates that are higher, and can be up to 8%.

So how does a margin account work? Let’s look at an example. Let’s start with a trade that does not use a margin account.

Let’s say you have $5,000 to invest. Let’s also say that you love company X, whose shares are trading at $100. So on January 1^st, you buy 50 shares of X, using all your $5,000. At the end of the year, X is trading at $150, so you sell all your shares and get $7,500. So over that year you made $2,500 on your investment, or a 50% profit.

Now let’s look at the same trade but using margin this time. Let’s say you still bought those 50 shares at $100. But you love X so much that you borrow $5,000 on margin to buy another 50 shares. Now you own 100 shares of X. Again, at the end of the year you sell all your share, this time 100 of them at $150 thereby getting $15,000 on the sale. Now you have to pay back the $5,000 you borrowed. You’ll also have paid about $300 in interest on the borrowed money over the year. So you’re left with $9,700. On this trade, by using margin, you made a $4,700 for a profit of 94%.

Terrific right!? Well, not so fast.

What happens if your stock goes down? What happens then?

Let’s look at the same trade but instead of going up to $150, X goes down to $50 at the end of the year. Without using margin, you would sell your 50 shares for $2,500. That’s a loss of $2,500 for a net loss of 50%.

Now let’s look at that same scenario using margin. If you sell your 100 shares at $50, you will get $5,000 in proceeds. But you owe your broker the $5,000 that you borrowed, plus the $400 in interest. So not only do you owe your broker all of the money you have in your account, but you would have paid another $400 in interest on the loan! On this trade you lost $5,400 for a net loss of 108%! Ouch!

As you can see, margin can be very dangerous. When your investment goes the wrong way, you can lose a significant amount of money.

The Federal Reserve Board understands this and has put rules in place to prevent excessive loss while using margin. They do this in two ways. The first is by setting an initial minimum margin of 50%. This means that only 50% of your purchase of a stock can be purchased using margin. So in the above example, the trade would be allowed because only 50 of the 100 shares were purchased using margin.  It should also be noted that some brokers require higher initial margin requirements, but the legal minimum is 50%.

The second requirement is a maintenance margin of 25%. Maintenance margin refers to the amount of investor’s equity (what the investor owns outright) as a percentage of the market value of the holdings. In our above example, the account would have a maintenance margin of 25% when the stock hit $66.66. When this happens, the  value the holdings would be $6,666, but because the investor owes $5,000 for the loan, the actual value of what he owns is only $1,666, or 25% of the balance. When the account value dropped to $6,666, the broker would have contacted the client to ask him to put more money into the account. This is called a margin call. It’s a dreaded occurrence and one every investor who uses margin lending fears.

You should note something interesting here. In the example we used, our investor who used margin and whose stock dropped to $50 would have gotten a margin call when the stock hit $66.66. So although he loses a tremendous amount of money, he is not completely wiped out.

But you should also notice what didn’t happen. The broker didn’t lose money. The margin call made sure that the broker got their loan back. And to make sure they get their money, under the rules of a margin account, the broker can sell your shares without your permission. They have considerable power to get their money back.

So it should be fairly obvious that the margin rules are not there to protect you from excessive loss. They are there to there to protect the broker from any loss.

Now after scaring you out of opening a margin account, there are times when margin is a good thing to have. Borrowing money for very short periods of time is a good way to use margin. For example, if you are waiting for money to transfer into your brokerage account and it isn’t there yet, you can use margin to buy a stock you want. Or sometimes when you sell a stock, it takes a few days for the trade to clear and for the money to reach your account. Again, if you want to use margin for the two days it takes your trade to clear, this is a good use of margin.

But remember, the longer you employ margin, the greater the danger it is to you. Every day you use margin, the more interest you will be charged and the more gains you will need in order for you to make up the interest payments.

So try to keep the use of margin to a minimum, and if you do use it, only do so for very short periods of time.

The great economies of the world have been built on peer to peer lending. It’s what people have done for millennia: You take your money and lend it (with interest) to family, friends or the community, to create value for yourself and for them.

There are two different ways to think about this.

There are probably many in your circle of family and friends who may need money at some point in time. They will ask to borrow money from you, maybe with regular payments and fixed interest. But this is not putting your money to work.  This is helping your family & friends, and it’s a fraught process. If you’re in a position to gift money (i.e. you have a fully funded retirement account, emergency savings and are living well below your income) – then consider it. But there’s a chance you’ll never see the money again. So if you do it, make sure you consider it a gift.

The second way to put your money to work by lending it to others is through ‘peer to peer’ lending. This is where you deposit your money with an intermediary, who then lends it out to people who need it. It’s very similar to the traditional way that banks work. But with a big difference – you get visibility into where your money is going. With some lenders you can see where your loan is going. You also get to choose the amount of risk you want to take, and what return you are looking for.

Prosper, SoFi and Lending Club are all peer to peer lending companies where you can deposit your money, which is then loaned out for higher interest rates than what you can get with your savings account at a regular bank.

So is it a good idea for you?

The first thing to consider is risk. When you put your money in a savings account, it’s insured by the FDIC for up to $250,000. So if the bank goes out of business, you won’t lose your money.

Funds with P2P lenders are not insured – so should there be issues with the financial stability of the lender, there’s a chance you could lose your money. So consider where you are on the spectrum of risk tolerance and see if this is money you can afford to lose.

Next thing to consider is performance.

The relationship between risk & return is what investing is all about. The stock market and P2P lenders are both higher risk / higher potential return. Currently the estimated returns from P2P loans are between 5-8% per year. This is significantly higher than what you can get in a regular savings account, and on par, over the past few years, with what you would have gotten in the stock market. But as with all investments, there is no guarantee of returns.

Third thing to consider is ethics.

For many borrowers, P2P loans are a godsend. If you’re consolidating high interest credit card debt for example, going from paying 20+% interest to 8% is pretty great.

But in order for these platforms to give high returns to investors, they also charge high penalties – such as late fees. It can happen that borrowers get trapped in these loans. It’s estimated that 70 percent of those who consolidate their debt end up with as much or more debt a few years later. So the benefits of these loans may have strings attached for the borrowers. And as a lender you have to make sure you are comfortable lending your money into this system.

Lending money doesn’t usually get included in recommendations by financial advisors. It’s an interesting and unique investing option. But doing so involves risk.

Think carefully about putting your money to work by lending it to others. Understand the risks involved. But if you enter this market, also enjoy the fact that you can direct your money to specific areas of specific need. It really can be a rewarding way of investing.

Compounding is your friend. And if you’re serious about investing, it is your best friend.

Compounding takes average investment returns and kicks them up a notch. Here is the basic premise in a simple question. Would you like to get a penny today and have it doubled every day for a month, or would you like to get $10,000 dollars per day for a month? If you picked the penny, you’ve understood the power of compounding. And it’s not even close. After 30 days, your $10,000 a day plan would earn you $300,000. The penny strategy is essentially 100% daily interest compounded daily, which would earn you $5.3 million dollars by the 30^th day! Sweet!

Compounding is essentially a way to accelerate the growth your investments by earning interest on the interest you’ve already earned. The difference between compounded earnings and non-compounded earnings is substantial. Let’s look at an example. Take a $1,000 bond paying 4% interest. Without compounding that money doubles after 25 years. With compounding, the money doubles after 18 years. That’s seven years sooner! That’s a big difference!

To calculate the impact of compounding, a super-simple method is the Rule of 72. All you do is take 72 and divide it by the interest rate.  The result will give you the number of years it will take to double your money. So at a 12% interest rate your money will double in six years (72 divided by 12).  Super easy!

The key to compounding is to make sure interest is reinvested. Interest bearing savings accounts automatically add interest back into the same account. Some bonds add interest to the principal owed and compound future interest payments automatically until the bond is paid out. But many bonds, like US Treasury Notes and Treasury Bonds, pay interest out directly to you every six months. Unless you reinvest the interest yourself, you will not get the compounding benefit.

You can also use the power of compounding with stocks. If you get a dividend or cash out a stock for a gain, you can reinvest the earnings back into another investment. Many 401(k)s and mutual funds have an ability to do this automatically through a dividend reinvestment option. Find out if they are available and make sure you use them!

So make sure you harness the power of compounding. It will accelerate your earnings and help you get to your financial goals more quickly.

Putting the money you have to work through investing is a side hustle that you can do while you’re working hard at your regular job. As the sad cliché goes: “no one ever got rich through their salary.” The point being that equity – in real estate, your investment portfolio or businesses, is the key to long-term financial success.

You work hard for your money. Make it work hard for you.

In the US and in many countries, investment income is taxed at a much lower rate than your salary is. Which is why the 1% (aka the very rich) probably pay a lower tax rate than you do. The higher the percentage of your income that is investment income, the lower the overall percentage of tax that you pay.

Remember, if the value of your portfolio goes up, that is not income. Not unless you sell some or all of it, and realize the gain.

Investment income comes in the form of dividends (from companies), interest (from bonds) and capital gains (from the sale of investments that have increased in value).

If you plan on tapping into your investments to take our some income, you should do some math to figure out what that means. Let’s say you have a $500,000 nest egg. At a conservative 4% return from interest, dividends and capital gains, that will amount to only $20,000 in potential income per year. That’s not a huge income, at least not one you can live off of.

The key to investing is to not take out much income, but rather reinvest your earnings. This compounding effect, where you make money on the gains you’ve already made, is the key to generating substantial savings. By taking out some of the gains as income, you put a big dent into your ability to grow your nest egg.

The goal of investing is usually to grow and reinvest your gains until you retire. If you do this, you will maximize the size of your retirement fund and will buy you options later in life. And when you retire and have no income, you can then draw an income from a much more sizable pool of savings.

But you can find sizable income streams from other types of investments. Investments such as real estate, or investing in a small business can also create income. Just make sure you have contingency funds in case the income doesn’t come immediately, or if problems arise (for example, investing in a rental property that stays vacant for a year).

So the answer is yes, investing can be a second income if that is your goal, but the key thought is that in the longer term, multiple income streams can build your savings and buy you future options in life. Investing your time, attention and money in more avenues than just your primary career, is a great way to ensure that your net worth can grow.

It’s a big part of the American dream – owning your own home. We’re hardwired to believe that it’s something we ‘should’ do as an adult, especially when you have a family.

And with what seems like skyrocketing prices in places like New York and San Francisco, it’s easy to believe that real estate is a great investment.

Let’s take a few steps back and consider if real estate is a good investment for you.

Firstly, buying your own home is not really an investment. It’s an asset. You live there because you love your home, not because it’s a good investment. You need to live somewhere, and if the value of your home goes up, great. But for now, let’s take your primary residence out of the ‘investment’ discussion.

There are a few different ways to invest in real estate. The most common is to buy a second property (either residential or commercial) and rent it out. 

You can also be a ‘part owner’ of a property – like a time-share vacation property.

Or, you can invest in REITs – Real Estate Investment Trusts, where you buy shares in a fund that invests in multiple properties. REITs are traded on the stock market. There’s a dizzying list of them here.

Now, let’s do the math on the different options.

When you buy a rental property as an investment it’s essential that you understand the true costs. If you think you can get $20,000 a year in rental income – make sure the other side of the balance sheet is lower (including mortgage payments, maintenance costs, broker fees, real estate taxes and insurance). Many people are surprised that the costs of running a property can be as much as 50% of the mortgage costs. So make sure that before your buy, you know that you can really afford the investment.

As a benchmark, the average return on real estate is 4% a year. As a comparison, the historic average return of the US stock market has been 7%, or 11% if you include dividends. So if you’re playing the averages, investing in stocks has had a better track record than real estate.

There are some added benefits to investing in property. For one, you may qualify for tax deductions especially if you buy it as an LLC (this is where you start a limited liability company and process the income and costs as a business instead of as an individual). The biggest tax benefit is the ability to deduct the depreciation of the property on your taxes.  However, tax optimization is not the main reason to buy a property.

A time-share property will most likely make a lower return than owning it outright, but you have the benefit of not having to manage the property or find renters. A management agent will do that for you (and take a percentage of your revenue as their fee). Think of them this way - you’re putting up real money, taking real risk, and getting a fraction of the return for the benefit of fractional ownership.

The math on REITs is much simpler. You can buy a share in a REIT for as little as $60. If you really want to just dip a toe into the property market without taking on huge risk of owning an actual property, REITS are worth considering.

Property is emotional. But investing in property needs to be all about the math PLUS the effort and time you will take in managing it. Here’s a short list of things to consider before you pull the trigger on a real estate investment.

1. Real estate isn’t a get rich quick environment – despite what the many home flipper TV shows may say.
2. Just because prices are going up now doesn’t mean that they always will. The Great Recession showed us the pain a falling housing market can inflict.
3. You need to be prepared to do due diligence – on both the property, and your future tenants.
4. You need to forecast an accurate cash flow, and have a contingency plan in place in case the property stays vacant longer than you expect.
5. You need to forecast how much time you will need to dedicate to this investment, or how much you will pay an agent to do the work on your behalf.
6. You need to have great insurance and a ‘what can go wrong, will probably go wrong’ attitude.
7. You really shouldn’t figure it out as you go. Really understand what it means to own property from a cost and liability perspective.
8. Always start with the end in mind. Are you buying this for purely financial reasons and you can sell when the time is right? Or is it a property that you may want to live in, or start a business in, later in your life – have a clear vision for WHY you’re doing this.
9. Houses are not stocks. You can’t sell them with a click of a mouse. They take time, and money to sell. Don’t be in a hurry if you want to sell a house.
10. When housing markets are going up, sellers are in control. When the market falls, buyers are in control. If you can find one. Don’t be on the wrong side of the market.
11. There are high transaction costs associated with property. Commissions, fees and taxes can add to the cost of buying and selling property. For this reason, short-term profits are extremely hard to come by. You need to be thinking a long-term game with property.

In the end, property can still be a terrific investment. It has been the foundation for many people’s security and wealth, and it may well be for you too. Just make sure you understand the risks, not just the returns.

The future is coming fast where having a side hustle (or multiple income streams) may be the rule and not the exception. Salaries are becoming less predictable as companies benefit from a flexible workforce.

It’s time to take a more contemporary view of your income sources and make sure you’re getting paid in more ways than one.

Spend a moment and think about who is paying you now, and how you think you can be paid a few years from now.

Inherent in that assessment is an examination of how you spend your time. Time is truly a finite resource; once you spend it, it’s gone. Do you spend time expanding your skills? Or take classes? Have you tried to find a mentor? Have you expanded your horizons with a weekend job? Think critically about how you spend your spare time, and see if it is opening opportunities for you.

If you’re looking for extra income streams, there are 3 main areas where you can look– your skills, the things you own, and your liquid assets.

First - your knowledge and experience is always worth something, but as a person with finite hours in the day, it’s hard to exponentially grow income based on your job. But don’t let that stop you from exploring side hustles – from teaching, to participating in focus groups, to making things to sell on Etsy. Doing something with your time that can turn into cash is a great way to create multiple income streams

Next, look at the things you own – especially things of value that can be turned into cash. And with the advent of the sharing economy it is much easier to unlock the potential of any asset. Look at listing your car on rental sites like Turo and Getaround, your lawnmower on Zilok.com or your house on Airbnb and VRBO. And don’t forget – if you’re willing to put in the time, there’s always a market for selling your second hand goods and clothes.

The third way to generate a different income stream is to put the money you have to work through investing. This is a side hustle that you can do while you’re working hard at your other job, or jobs. Growing your money in real estate, in your investment portfolio or in a business, should be a part of everyone’s money mindset

And finally, a potential ‘watch-out’. Some employment contracts have exclusivity clauses. Make sure your current contract doesn’t have one of these. And don’t forget about taxes! That extra money you earn will also be taxable – so make sure you’re keeping some money aside for tax if you’re being paid for your side hustle.

Empowerment comes with multiple income streams. Look for opportunities and think how you can expand your skills.  It may start as a trickle at first, but before you know it, you may be generating good income from your side hustle.

So you want to make some money on your savings? Great! You work hard for your money; it should work hard for you too.

Savings can be any money that you’ve put aside for the future. Savings can have different purposes. It can be put away for the long term, so that it can be used for big life events like buying a house or for retirement. Or it can be set aside for short-term needs like paying bills or for unexpected expenses.

To make things clear for yourself, label long-term savings as ‘investments’ because giving your savings that label can help to change your thinking about how this money can be managed. If you call that money ‘investments’, you start looking at wider areas to put this money. Instead of a bank account, you look to stocks, bonds and funds as a way to grow that money.

But for now, let’s stick with savings and look at the money you have in your bank account. This money should cover your month-to-month expenses, as well as any emergencies that could suddenly come up. Ideally, this savings should cover about six months of expenses.

If you’re thinking six months of savings is a lot, you’re correct. JP Morgan did a study and found that when they divided their account holders into 4 groups based on income, no group had enough money saved to cover even one month of lost income… So you may not be alone if you’re having trouble putting money away for emergencies!

So how do you maximize the money you do save? The first step is to figure out what interest rate your bank is paying you on your savings.

Maybe you had a savings account opened for you when you were younger and have been depositing into that account without considering what you could be earning elsewhere. Maybe you opened a savings account with the same bank that operates your checking account out of convenience and never thought too much about the interest rate they were offering.

So take a second to look at your savings accounts and figure out not only the interest rate you are getting on your deposits, but also try to figure out any fees and account minimums that might apply to your account.

The next step is to figure out if there is something better out there.

There are great tools on-line to help you compare rates on savings accounts and help you find a higher yield savings account. A terrific one can be found at Nerd Wallet. The tool lets you filter by location, initial deposit amount, and even tells you the minimum balance you need to maintain in order to earn interest.

You might find that you're already earning a pretty decent rate on your savings with your current bank, or you might find that you could be earning more. If you dig around, you may even be able to find a whole percentage more of interest each year by switching to a high-yield savings account. Sweet!

Finally, before you make a move, make sure you know all the relevant issues that impact your account.

• Variable Rates: Savings account rates can change without notice and can even shift daily at the discretion of the bank or credit union. The interest rate you get when you open the account might not be the same rate a few months or a year later. So make sure you keep your eye on your rates, and if they drop, go back and comparison shop again.
• Transaction Limits: There are limits to how often you can withdraw money from your savings accounts without getting slapped with a penalty or have your account closed. Make sure you know the transaction limits so you don’t run into trouble with your bank.
• Fees: Some savings accounts carry monthly maintenance fees or service fees and have minimum balance requirements. Be sure to read up on the account’s fee schedule before deciding to stash your cash there.
• Compounding: If you have a choice between two accounts that pay the same interest rate, take the one that pays the interest more frequently. The more frequently the interest is paid, the more the interest compounds on your already accumulated interest. You’ll find daily, weekly and monthly interest accounts.
• APR vs. APY. Be careful that you’re comparing the same interest rates. Annual Percentage Rate (APR) is what banks use to calculate the interest they pay to you. Annual Percentage Yield (APY) is what you use, after the fact, to calculate what your real return has been, and includes the effects of compounding. But when you compare rates between banks, make sure you compare APY to APY or APR to APR. And if you have a choice between an equivalent APR and APY, take the APR rate. You’ll make more money.

When you take a look around, make sure you look at all options. Small banks, credit unions and Internet only banks sometimes offer good deals. Do some digging and you might be surprised about what you’ll find. Once you're aware of what else is out there, you'll be able to make informed decisions about how best to make your money work for you.

It is always a good idea to try to find alternative income streams. Focusing on your paycheck is great, and making sure you get paid a fair wage for your work is super-important. But if you’re trying to maximize your earning potential, it’s always good to look further than your paycheck.

In order to do this, you need to focus on your assets and look at things in your life that have value. It may be your education, your car, your house or your collection of baseball cards. There are things in your life that have value that you can unlock.

The two main places you can unlock earnings is in either yourself, or in the things you own. 

Starting with you…

Your knowledge and experience is always worth something. But it’s not something that is easy to unlock. On the simplest level, companies will pay for your opinions. Places like findfocusgroups.com will pay you for taking part in focus groups. It’s an easy way to make some extra cash on the side.

If you have a specific skill, you may be able to leverage it to earn extra money. Teaching classes on things you know, like music, languages or hobbies are great starting points. You can pitch your idea to community colleges and private institutions. The Learning Annex is the largest adult education site in the US and is a great place to pitch teaching ideas.

But leveraging yourself can be hard to do. It’s hard to put yourself out there and hustle up extra income. So it may be easier to turn to your assets.

Assets can be anything of value that can be turned into cash. And with the advent of the sharing economy it is much easier to unlock the potential of any asset. There is a market for just about all assets, and there seems to be a lot of people out there who are willing to buy or rent anything.

Let’s look at selling your assets. The best things to sell are things that are rare or have tremendous demand. These are the things that drive the highest price. But even if they are common goods, you can still get money from selling things. Anything from antiques and collectables to clothes and household goods can be sold. And there are countless places to sell your items.

If you have tickets to concerts, sporting events and plays, StubHub is a great marketplace for selling your tickets.

For art, antiques and collectables, take a look at Invaluable. They have listings of hundreds of auction houses that will sell your collectables. Search around the site to see what sells and for how much. And find an auction house that specialized in what you’re trying to sell (you’ll get the best price there). But also know that the capital gains tax on collectables is 28%!

How about those “gently used” clothes that you don’t wear any more? Take a look at Thredup. All you do is put your old clothes in a box, send it to Thredup and they will list your items on their site. If they sell, you get some cash!

And don’t forget eBay! You can sell just about anything there. Spend time looking to see what sells and for what price. Also look at Etsy if you have cool and unique stuff that might be popular.

But what if you don’t want to give your assets up? Can you still unlock value from them without selling them?

For sure! Here are just a few ideas.

Is your car just sitting there not being used most of the time? How about renting it out when you’re not using it? There are services like Turo and Getaround that allow you to list your car for rent. They will insure your car while it is rented and will even help you fix it if something goes wrong.

Are you away from home a lot and your place is sitting there empty, or do you have access to a vacation property? Think about listing it on Airbnb or VRBO (Vacation Rentals by Owner) or Homeaway while you are gone. You can put it up for a few days, a week or a month at a time. Or rent your home while you’re away on vacation as a way to fund your trip so that you can enjoy it even more!

And what about all that other stuff that is cluttering your cupboards. Those power tools, AV equipment, video games, kitchen appliances, furniture and baby things? Take a look at Zilok.com. They allow you to rent out just about anything. You never know what kind of value you can unlock from the things stashed in your closet or basement.

Hopefully you can use some of these ideas to generate a bit of extra income. It’s always nice to find a way to supplement your paycheck! Good luck!

Putting the money you have to work through investing is a side hustle that you can do while you’re working hard at your regular job. As the sad cliché goes: “no one ever got rich through their salary.” The point being that equity – in real estate, your investment portfolio or businesses, is the key to long-term financial success.

You work hard for your money. Make it work hard for you.

In the US and in many countries, investment income is taxed at a much lower rate than your salary is. Which is why the 1% (aka the very rich) probably pay a lower tax rate than you do. The higher the percentage of your income that is investment income, the lower the overall percentage of tax that you pay.

Remember, if the value of your portfolio goes up, that is not income. Not unless you sell some or all of it, and realize the gain.

Investment income comes in the form of dividends (from companies), interest (from bonds) and capital gains (from the sale of investments that have increased in value).

If you plan on tapping into your investments to take our some income, you should do some math to figure out what that means. Let’s say you have a $500,000 nest egg. At a conservative 4% return from interest, dividends and capital gains, that will amount to only $20,000 in potential income per year. That’s not a huge income, at least not one you can live off of.

The key to investing is to not take out much income, but rather reinvest your earnings. This compounding effect, where you make money on the gains you’ve already made, is the key to generating substantial savings. By taking out some of the gains as income, you put a big dent into your ability to grow your nest egg.

The goal of investing is usually to grow and reinvest your gains until you retire. If you do this, you will maximize the size of your retirement fund and will buy you options later in life. And when you retire and have no income, you can then draw an income from a much more sizable pool of savings.

But you can find sizable income streams from other types of investments. Investments such as real estate, or investing in a small business can also create income. Just make sure you have contingency funds in case the income doesn’t come immediately, or if problems arise (for example, investing in a rental property that stays vacant for a year).

So the answer is yes, investing can be a second income if that is your goal, but the key thought is that in the longer term, multiple income streams can build your savings and buy you future options in life. Investing your time, attention and money in more avenues than just your primary career, is a great way to ensure that your net worth can grow.

In the past decade, the culture of ‘ownership’ has shifted. Many people are rejecting the notion that you need to OWN all your own stuff. Instead they are borrowing and sharing things they used to buy and own. And if they do own stuff, they put it to work by renting it out to others.

This is the core idea of the sharing economy.

And it’s an idea that may have come at the perfect time. In the US right now, every second household is struggling with credit card debt, fueled in part by the mountains of products people have needed to “own”. So maybe the widespread adoption of a ‘buy less, share more’ mindset is a good thing!

Let’s look at a few ways that you can benefit from this change.

One of the most high profile changes (for urban dwellers especially) is the idea of car sharing.

When you add up the cost of a car itself, then what it costs to park it, service it, register it and insure it – even the cheapest car may be costing you thousands of dollars every year. Look into services like Zipcar to see whether you can rent one on demand instead. And if you do need to have one or more cars in your life, is there a way to put them to work to generate more income? Services like Uber and Lyft allow for you to sign up to become a driver, and work as much or as little as you like. Or look into Turo or Getartound, where you allow people to rent your car when you’re not using it.

What about other big-ticket items in your life that you ‘need’ but don’t use all the time. Lawn mowers, leaf or snow blowers or bikes - look to rent your stuff at us.zilok.com where you can list your items, with their availability and price.

And your biggest ticket expense of all – your home! AirBnB has revolutionized the travel industry, allowing people everywhere to generate extra income by renting out their homes. And now sites like Homeaway and VRBO.com have become great alternatives to expensive hotels, where travelers look to rent unique vacation homes.

The world of finance has also been impacted. You can now participate in the cycle of borrowing and lending in ways that banks have done for years, by depositing money with online lending clubs like Prosper and then earning interest as other people borrow your money. Just make sure you understand the risks of putting your money in these programs, it wont be insured the way bank deposits are!

Of course, there are ideas that have been around a long time that are essentially part of the ‘sharing economy’ - car pooling, babysitting clubs, ‘shop my closet’ clothing swaps and even potluck dinners – anything where a cost can be shared by a group of people versus taken on yourself.

So why not set a goal today to get extra money in your pocket by reducing some of your expenses or generating some more income – or both!

Compounding is your friend. And if you’re serious about investing, it is your best friend.

Compounding takes average investment returns and kicks them up a notch. Here is the basic premise in a simple question. Would you like to get a penny today and have it doubled every day for a month, or would you like to get $10,000 dollars per day for a month? If you picked the penny, you’ve understood the power of compounding. And it’s not even close. After 30 days, your $10,000 a day plan would earn you $300,000. The penny strategy is essentially 100% daily interest compounded daily, which would earn you $5.3 million dollars by the 30^th day! Sweet!

Compounding is essentially a way to accelerate the growth your investments by earning interest on the interest you’ve already earned. The difference between compounded earnings and non-compounded earnings is substantial. Let’s look at an example. Take a $1,000 bond paying 4% interest. Without compounding that money doubles after 25 years. With compounding, the money doubles after 18 years. That’s seven years sooner! That’s a big difference!

To calculate the impact of compounding, a super-simple method is the Rule of 72. All you do is take 72 and divide it by the interest rate.  The result will give you the number of years it will take to double your money. So at a 12% interest rate your money will double in six years (72 divided by 12).  Super easy!

The key to compounding is to make sure interest is reinvested. Interest bearing savings accounts automatically add interest back into the same account. Some bonds add interest to the principal owed and compound future interest payments automatically until the bond is paid out. But many bonds, like US Treasury Notes and Treasury Bonds, pay interest out directly to you every six months. Unless you reinvest the interest yourself, you will not get the compounding benefit.

You can also use the power of compounding with stocks. If you get a dividend or cash out a stock for a gain, you can reinvest the earnings back into another investment. Many 401(k)s and mutual funds have an ability to do this automatically through a dividend reinvestment option. Find out if they are available and make sure you use them!

So make sure you harness the power of compounding. It will accelerate your earnings and help you get to your financial goals more quickly.

Living on a fixed income can mean many things. From the obvious (earning a fixed salary) to receiving payments from an annuity, to living on social security or a pension– the key is that every month you have a finite level of income on a regular basis.

Here are three ways to optimize your fixed income life:

It goes without saying that you need a budget – and that your expenses should be less than your income. Not “break even.”

You should not spend every dime that you get. This may mean some adjustments to the way you live. And change is never easy – but the sooner you the make necessary adjustments the better!

If you’re younger, and work in a profession with a pension, start planning now for ways you can maximize or subsidize your income – and keep your cost of living in check.

Life is full of surprises – good and bad, so include a buffer each month. And if you don’t have any surprises – great! Put that money aside as savings and put it to work!

Which leads to the second point. Contrary to popular opinion that retirees should be risk averse – if you have money that you’ve put aside, you can still put it to work and earn money on it.  This doesn’t mean risky or speculative investments, but you can now put smaller amounts into lower risk balanced portfolios that could earn you more than what a savings account can do. But remember – all investing involves risk, so only put in what you can afford to potentially lose.

Also, regardless of how you earned your living, or currently get your fixed income – there are always ways to make more money.  For ideas, look to the next generation of workers, where having a side hustle, or multiple sources of income, is increasingly becoming the norm.

Start with the sharing economy – what do you have that you can rent? A car that sits in your garage 99% of the time – put it to work.

Maybe you have a home with room to spare, or access to a vacation property. Check out AirBNB or VRBO.com. Or if you don’t use your car much, get rid of it and use car-sharing services in your area.

Remember, that there’s always work to be done. From proofreading, to serving coffees, to teaching. It probably won’t make you rich to do side hustles like these, but there’s an upside. The time that you spend working and earning money isn’t time you spend spending your money.

Also, a warning. With all the advances in technology, there are increasingly creative ways of getting scammed. Be suspicious of anyone offering easy money or demanding upfront payments for future income. Older people in particular have been major targets for scammers and thieves.

And finally, if you are closer to retirement and have some money saved, but are worried that the money will not last, look to an annuity to bridge the gap. Annuities are a way to take a lump sum and turn it into a predictable monthly income that will last until you pass away. They are a great way to top up social security.  But they can be complicated products, so if you are interested in one, make sure you talk to a financial planner to make sure it is appropriate for you.

Remember, living on a fixed income doesn’t have to be an exercise in restriction and deprivation – but it should be a realistic starting point from which to build the lifestyle you want.

APR is one of those expressions that bubbles up from the acronym soup that the financial word is so good at brewing. But what does it mean, and why is it important?

First of all, APR refers to the Annual Percentage Rate of a loan. It includes not only the interest rate, but also any fees attached to the loan, so it gives you a good overall view of how much your loan costs. A high APR means that your lender is charging you a lot of money to borrow their money, and a low APR means that the lender is giving you cheap money.

APRs vary widely, and right now can range from 2% for a car loan to 29% on a credit card. The difference in dollar terms is huge. On a $10,000 car loan, the 2% will cost you about $200 in interest in the first year. If you instead bought that car using a credit card with a 29% interest rate (a terrible idea by the way!), you would pay $2,900 in interest. That’s a huge difference!

So here are some ways to reduce your APR.

1. If you have a credit card, the issuer has two rates, the regular rate and a penalty rate. The penalty rate is always much higher, and kicks in if you miss two payments. So NEVER miss a payment. Set up an auto pay to make sure something goes to pay your credit card bill every month. And secondly, if you do trigger the penalty rate, make sure you make the next 6 consecutive payments. Your credit card company must lower your after the 6^thpayment.
2. Consolidate your debt. If you have a bunch of debt that has an APR in the double digits, think about rolling that debt into a consolidated loan. These are installment loans, so they have fixed payments over a fixed term that are focused on paying the debt off. You cannot use this debt like a credit card and buy new shoes with it. But they are terrific ways of lowering your APR and paying off your debt.
3. Home equity loan or home equity line of credit. If you own a home, you can borrow against it at competitive rates, and you can usually use the money for whatever you want. Rates are usually in the mid single digits. So if you pay off your 16% debt using a 7% home equity loan, your overall APR will drop substantially.
4. Roll your credit card debt to one that has a 0% introductory interest rate. These are great ways of getting TEMPORARY relief from your high credit card interest rate. But be careful. There are fees associated with these products (usually 3% of your balance). If you use these products, make sure you use the time pay down your credit card balance; otherwise this break makes no economic sense.
5. Refinance. Interest rates are hovering at super low rates. See if you can refinance your existing mortgage or home equity loans at a lower rate.
6. Get help with you student loans. There are fantastic programs for federal loans that base your payments on your income or allow for loan forgiveness. Look to see if you qualify. If you have a private loan, ask your lender for a graduated or reduced repayment plan. Go to the Consumer Finance Protection Bureau for more information.

In conclusion, when you get some debt relief, make sure that you don’t rack up more debt with the money you’re saving. Once you’ve reduced your overall APR, work to ensure it doesn’t creep back up again.

And finally, stay VERY far away from Payday Lenders. They hide their APR by calling it “fees”. In reality their APRs can be as high as 300%! Stay away.

Lowering your APR may not be as fun as a new pair of shoes, but it will definitely keep more money in your pocket.

Debt can be a terrific thing. It can open doors to things that are normally out of reach financially. Homes, for example would be almost impossible to afford if you had to pay for them in cash. And the best part about debt is that by using debt, you can actually enjoy those awesome things while you’re paying for them! What a terrific idea.

But debt is not free. You’re borrowing someone else’s money after all, and you’ll have to pay them something for that privilege. And over time, that cost can be substantial. So it’s always a good idea to try and pay off your debt and limit the extra cost in interest payments you have to give to your lender.

The most critical component of debt is its interest rate. The interest rate is the amount of money your lender is charging you to borrow their money. The higher the interest rate, the more you are paying to borrow. It’s also important to note that debt with a high interest rate has a tendency to grow if it isn’t managed properly and can often balloon out of control.

So if you want to deal with your debt, the first thing to do it take stock of all the debt you have. The first thing to do is look at all of your debt and try to figure out the interest rate you are paying on each pool of debt. Better yet, look for the Annual Percentage Rate (APR). This rate reflects not only interest, but also other fees that you are charged on your debt. APR is a more accurate measure of how much your debt costs. Most lender statements will list the APR.

Next, order your debt from highest interest rate to lowest interest rates. You’ll notice that there is a wide range of APRs. They can go from low single digits for mortgages to mid double digits for credit card debt.

In dollar terms the cost difference can be significant. Let’s look at $1,000 of debt. If that $1,000 debt is credit card debt, it can cost you between to $130 to $300 in interest payments per year. If that $1,000 debt is in a mortgage, it will only cost you $40 in interest per year. That’s a big difference.

So here is the key to paying down your debt: Attack your high interest debt first. In the above example, you will see that if you can pay down the principle on your mortgage by $100 this year, it will save you $4 in interest payments next year (and every year after that). If you reduce the principle on your credit card by $100 instead, it will save you $13 to $30 in interest payments next year and every year after that.

As you can see, paying down the principle on your high interest debt is a more effective way of paying down debt and reducing the interest you owe. Remember that if you pay down more high interest debt first, you will reduce more of your future interest payments, and have more money in your pocket each month.

So here are the keys to paying off your debt:

1. Focus on your highest interest debt first
2. Pay more than just your interest, pay down your principle
3. Don’t add more debt to the loan you just paid down

So make sure you’re attacking the principle that you owe. If you only pay the interest you owe, you are not paying down your debt and your monthly payments will remain the same. Ignore the “minimum due” line on your statement. Look instead at the “interest charged” line in your credit card and pay as much above that as you can.

Most importantly, make sure you don’t add more debt than to what you just paid down. The key here is to figure out how much principle you just paid off and not add more than that. For example, if you just paid $500 on your credit card debt, of which $100 went to interest, you just paid down $400 of your principle. So in the next month, do not spend more than $400 on your credit, otherwise your principle will have actually gone up, and you’ll owe even more in interest!

The hardest payment is the first payment. Set yourself a goal of paying down your principle. In the above example, if you can pay $500 on your credit card and limit your spending to $300 per month, then will have paid down your principle by $100.

But the amazing thing about paying down debt is that, its benefits can accelerate. So in the above example, in the next month, you will only owe $98.75 in interest. So that same $500 payment will pay off $101.25 in principle. After a year, that same payment is paying almost $115 in principle. And in less than 5 years, you will have completely paid off an $8,000 debt and you will have the $100 in interest and $100 in extra principle in your pocket every month. That extra $200 in your pocket every month can be used to pay down other high interest debt or put into savings.

Again, the first payment is the hardest. If you can manage paying down your principle in that first month, you should be able to do it every month. Just stick to your plan and keep paying down your principle.

If you want to know how long it will take to pay off your credit card debt, you can use this calculator from CreditCards.com. If you want to sort out the benefits of paying down student loans, try this calculator from StudentLoans.org, or this calculator from Finaid.org.  For other installment loans try this calculator from CNN.

The benefits of paying down your debt quickly pay off with less money paid in interest and more money in your pocket. Win-win!

Borrowing money is one of the most important financial events your life. It can open doors to things that are unavailable to you without help from lenders.

But before you start, you need to do some homework.

First of all, you need to understand how lenders look at you in terms of risk. The interest rate on your loan will depend on this risk assessment. But the lenders don’t really do this assessment themselves; they rely on third parties to assess risk. This is done by the three main US credit bureaus - Experian, TransUnion and Equifax. They offer credit scores on almost everyone in the United States.

The bad news is that secret algorithms at these opaque companies determine your credit worthiness. Often the data they have on you contain errors and mistakes, so sometimes your score can be inaccurate. And fixing these errors can sometimes be difficult and time consuming.

The good news is that the federal government has mandated that these organizations give you free access to your reports once a year. You can do this from the AnnualCreditReport.com web site. When you get your report, make sure all the information that each credit bureau has is accurate and there are no mistakes. If there are mistakes, get in touch with the credit agency involved and have it corrected immediately.

The one weakness to the reports is that they do not contain the “score” that your lender sees. The score is important because it will tell you where you fall on the credit worthiness scale. The lender will use the score to determine whether you get credit and what your interest rate will be. The score is also important to you because it will allow you to track your credit rating over time (so you can see what happens when you start paying your bills on time!).

In order to obtain your score, you need to pay some money. The cheapest way to do this is to get your score at the same time as you get your free credit report. You only need one. But make sure you get the same score from the same company every year. Each company has their own scoring system, so you cannot compare scores from one credit bureau to another. If you want to see how well you are managing your score over time, you need to look at the same score every year.

The score will come with an explanation of what it means. But essentially your score will suffer if you:

• Miss payments or are late with payments
• Use too much of your available credit
• Have a limited credit history
• Have only one type of credit
• Have lots of credit applications in a short time

It takes time to raise your credit score, so make sure you get a handle on it early!

So once you have a handle your credit worthiness, next you have to look the debt you’re interested in getting. The most important part of a loan to focus on is the interest rate. Interest rates can vary widely so you need to make sure you are getting the lowest rate possible.

Interest rates are how lenders compensate themselves for risk. The biggest risk to them is that a borrower will default on a loan and not pay it back. In order to cover themselves for this potential loss, they charge interest on the loan. The larger the risk, the more interest they charge.

Here are the two types of loans that typically come with lower interest rates: Secured loans and installment loans. Secured loans are loans that are backed with collateral. These loans are considered lower risk to lenders and come with lower interest rates because if the borrower defaults on the loan, the lender will take possession of the collateral. This is how mortgages work; using the house as collateral, which allows the lender to offer lower interest rates.

You can also get other secured loans. Car loans are secured, as are home equity loans. You can even get secured credit cards, where you put cash in an account that is held as collateral against the credit on your card. Secured credit cards are an excellent way for people who have poor credit to get a credit card and boost their credit score. 

The other way to get a lower interest rate is by using installment loans. These are loans that have a fixed duration and set monthly payments. Because they are predictable and structured, they are easier to manage and pay off than revolving credit.

With installment loans, make sure you take on the shortest term (length of time) you can manage. It is true that the shorter the term, the higher the monthly payments will be. But a shorter term will also mean that you will pay less interest overall than a longer term loan.

So now that you have all the information about loans, what kind of loan should you get? It depends what you need the loan for. Let’s go over some possibilities:

• House: If you want to buy a house, you’ll need a mortgage. The most important thing to do is to shop around for offers. Only 50% of Americas do this! Even a half a percentage difference in your mortgage can save you tens of thousands of dollars. Focus on fixed rate mortgages. They are predictable, and your payments will not increase even if interest rates around you rise.
• Car: If you plan on keeping a car for the long term, buying a car using a loan is more economical than a lease. Rates can be extremely competitive, so make sure you shop around. Look to banks as well as car manufacturer for quotes. But be very careful of used car loans from small dealers. They can have extremely high rates.
• Student Loans: Make sure you look to federal loans first. Their rates are competitive, and most importantly they have far more avenues for restructuring and forgiveness (if you need it later) than private or state loans.
• Appliance: You would think that buying an appliance in installments would save you money right? It’s an installment loan with collateral after all… But no. Retailers seem to take advantage of consumers who need the credit and charge extremely high interest. Don’t be fooled by 0% offers (interest is often just deferred). Check the interest rate and compare it to your credit card. It may be cheaper to buy an appliance using your credit card and pay down the card balance as quickly as you can.
• Credit Card: Because credit card debt is unsecured, interest rates are quite high. Try to avoid running up your credit card if you can. Also shop around for low rates. Sometimes you can get a 0% rate if you switch cards. There is usually a fee associated with the transfer, but if you can pay down your balance before the offer expires, these transfers can be a great way to get rid of some debt. Also know your penalty interest rate and what triggers it. Your interest rate could jump from 15% to 29% if you miss one or two payments. Finally, avoid taking cash advances at all cost. The interest on these loans is extremely high.
• Consolidation Loan: These loans pool several of your loans into a single installment loan. These are a great way to reduce your debt burden. These loans allow you to take all of your high interest credit card debt and pool it into a single lower interest loan. Just make sure you don’t run up those cards again!!

So make sure you do the math on your repayment terms and understand the consequences of what happens if you miss a payment. And if you ever feel pressured to sign something you don’t understand – DO NOT SIGN! Ask questions, seek advice, and do the math until you fully understand what you’re signing – your future self will thank you!

Debt can be a terrific thing. It can help you buy and enjoy things that are too expensive to buy outright. It is often the only way to make big purchases that would normally be out of reach, and pay for them over time. Enjoying things while you pay for them is an amazing idea, and one that has helped fuel modern economic prosperity.

But the burden of debt can also be debilitating. People can be so overwhelmed with debt that it affects their ability to pay for essentials. It can also be such a huge burden that it affects people’s mental well-being. In these cases, debt is far from a positive force, and is more like a curse.

So let’s talk about debt and focus on good debt and how to avoid the bad.

There are two things that define good debt. One is that it carries a low interest rate. The other is that it pays for something of value.

Mortgages

Let’s start with the best kind of debt. The best debt out there is a fixed rate mortgage. Interest rates on mortgages usually have the lowest rates of all debt. And when you pay off your mortgage, you’ll own a house, which (we all hope) will be worth at least what you paid for it. So you win with a low interest rate, and you win by buying a valuable asset. Just make sure that the payments are manageable.

Adjustable rate mortgages are a little less beneficial than fixed rate mortgages only because they are unpredictable. They may have lower current rates than fixed rate mortgages, but there is no way to tell what the rate will be in the future. If rates ratchet up, holders of adjustable rate mortgages could have trouble making their payments. Borrowers of adjustable rate mortgages need to make sure that they have enough spare income to cushion any possible future rate increases.

And avoid any exotic mortgages like interest only loans. They tease borrowers into signing with low initial payments then crush them with higher rates when the promotional period ends.

Car Loans

A small step down is a car loan. Car loan interest rates can sometimes be lower than mortgage rates. But, when you buy a car, it loses value very quickly. So the asset you buy will not be worth what you paid for it. But your car does retain some value, and if it comes with a low interest rate, it can still be considered good debt.

Also make sure you look at used cars. They can sometimes offer better value. Just make sure that if you finance a used car, don’t do it through small self-financed used car dealers. They can charge exorbitant interest rates.

Federal Student Loans

Federal student loans can also be considered to be good debt. Although you can’t actually put a price tag on what you gain from a college education, there is undeniable evidence that you will be significantly better off financially with a college education. Interest rates on federal undergraduate loans are usually quite low. So again, you get something of value at a low interest rate.

As a side note, some state and private loans can have severe restrictions with respect to repayment, rate reductions and forgiveness, so they can often fall into the bad debt category.

Home Equity Loans

Now we get into a grey area. Home equity loans. These are loans you take out against the value of your house. Right now they are only about 2 or 3 percentage points higher than fixed rate mortgages. But defining them as good or bad debt depends on what they are used for. Often times it is to renovate a house, which can add value to your home. Which is great. Other times it is used to consolidate higher interest debt. Which is also great. But a Discover Home Equity Loans survey found that the number one reason Millennials (30-34) take out a home equity loan is for… vacations! Ouch! We’d consider that bad debt.

Credit Cards

And at the bottom of the pile is credit card debt. Credit card debt comes with high interest, usually around 15% to 17% and usually pays for things that hold no intrinsic value (food, movie tickets, beer, shoes…). It makes little economic sense to carry credit card debt. Avoid carrying credit card debt if you can.

Payday Lenders

And at the bottom of the bottom are payday lenders. They charge exorbitant interest and fees, and their clients get stuck in never ending loops of short-term loans. Stay far, far away from these types of loans.

So if you are carrying debt, make a plan to pay down the highest interest debt first. You’ll have more money in your pocket each month that will no longer go to interest payments. Use this handy debt reduction calculator to make a debt reduction plan.

And make sure you shop around!! It’s crazy, but almost 50% of Americans don’t comparison shop for mortgages. Shop around for multiple quotes. It can save you a lot of money!

Debt is something of a double-edged sword. On one hand, it offers you ability to buy something that would normally be out of reach financially and allow you to pay for it over time. But on the opposite side, debt comes with a cost. You are borrowing someone else’s money, and for that privilege, you need to pay money.

So when is debt too costly? If you have extra money on hand, when does it make more sense to pay off debt, and when does it make sense invest the money instead?

Well... It all depends on interest rates.

The line between bad debt and good debt depends entirely on how expensive that debt is.  And the higher the interest rate on the debt is, the more expensive it is to hold. So debt that is considered bad, should be paid down, and if it is considered good debt, then the urgency to pay it down is lower.

So what is the dividing line between good debt and bad debt? A quick answer to that question is to say that right now, 6% or 7% is the dividing line between good debt and bad debt. But the issue is not as clear-cut as that. There are a lot of grey areas,

Instead, you should ask yourself if you should pay down your debt, or whether there is something “better” that you can do with your money? So instead of paying down your debt, is it a better idea to invest your spare cash?

To make that decision, you have to look at what kind of returns you can get from investing your money.  If the returns you can get from investments are higher than the interest you pay on your debt, then investing your money may be a better option.

So what kind of return can you get from investing? That’s a big question. Historically, average annual returns of from the US stock market (including from dividends) has been around 11%. We’ll note here that this number is debatable, and depends on the time-line you use and how you measure “the stock market”. But over the long run, US equities have generated handsome returns.

But for the sake of argument, let’s temper our expectation of returns. Let’s say we are conservative investors and expect a 6% return. Let’s see how that impacts your decision about paying down debt.

Historically, credit card debt has carried a double-digit interest rate. Average rates hover around 15% and penalty rates can be as high 29%.

Let’s assume your credit card interest rate is 15% and you have an extra $100 that you can use to pay down the money you owe on your credit card. If you pay down your principle by that $100, it means over the next year, you would have saved the 15% interest that would have been charged on that $100, which would be $15.

If you instead took that $100, and invested it, and everything went according to plan and you earned a 7% return, you would have made $7. So you’re $7 richer than when you started. But remember that you didn’t pay down your credit card debt. So you paid $15 in interest you could have avoided had you paid down your credit card debt. So in this case, you’re $8 worse off than if you had paid down your credit card debt.

Any way you look at credit card debt, it is almost always better to pay down this high interest debt than it is to invest. There will be some years where stock market will preform above expectations, and will give you better returns than paying down your credit card. But these are definitely the exception, and over the long run, paying down credit card debt is the better option than putting that money into investments.

On the opposite end of the debt scale are mortgages. Because they are backed by the value of a house, they tend to be lower risk for the lender and offer some of the lowest interest rates of any debt. In this case, the savings you get from paying down an average mortgage is usually lower than the gains you get on an average year of investing. Again we say “average” because in some years this will not be the case. But over the 20 or 30-year span of a mortgage, it wouldn’t make sense to stay away from investing while you pay extra on your mortgage. (You should still always pay your monthly payments though!).

While the logic of paying down debt is clear on both extremes of interest rates, the logic is much less clear when the interest rate is somewhere in the middle. There are no rules when it comes to making decisions about debt with moderate interest rates. So here are some guidelines.

1. Check your gut. Look at how well you tolerate risk. If you can stomach the ups and downs of a bumpy stock market, then maybe investing your extra money in the stock market is a good idea. On the other hand, if a bumpy stock market will cause you undue stress, then paying down your moderate interest debt may be a better idea for you.
2. Go you like guarantees? The savings you make by paying off your mortgage are guaranteed savings. You know that if you pay down your debt, you will save money. There are no such guarantees in investing.
3. What does the future look like? If the market is in turmoil, or there is economic uncertainty on the horizon, think twice about putting more money into investments. Paying down moderate interest debt might be a better option.

Here’s an important note for people carrying student loan debt. If the interest rate on your loan is low, and you can manage the payments easily in your monthly budget, try to prioritize saving and investing. Starting investing early can have a huge impact on your future financial success.

Finally, remember that there are no guarantees with the stock market. There is no way to predict which way the market will go in the future. So there is no guarantee that investing in the stock market will get you a better return than paying down any debt. The stock market can (and does) go down. All you can say is that the historical odds are in your favor over the long run. So if you do decide to use your spare cash to invest, make sure it is for the long run so you can ride out the bumps.

For most people, their home is their single biggest expense, and sometimes, their only investment. Owning your own home is a symbol of security, and a big commitment, so there is a lot of emotion that goes into that decision. But is buying a home the right thing to do? Is renting a home a better option? To get a better handle on this question there is some math you can do. And it can help you take the emotion out of the decision to buy or rent.

First, in order to do a fair comparison, you have to be able to compare the purchase price and the rental price of a comparable home. If you know the size and location of the home you want, find a comparable home on a site like Zillow.com.  You need to know what it would cost you to rent one home and buy the other.

For a quick comparison, you can turn to something called a price-to-rent ratio. This is a super-simple way of comparing rental and purchase prices. Take the purchase price of a house and divide it by the annual rent you would pay for the same house (House Price / (Monthly Rent x 12)). If you get a number above 21, it generally means that it is cheaper to rent than to buy. If the number is below 21, then it usually means it is cheaper to buy than to rent.

But life is never as straight forward as that. The price-to-rent ratio is a good place to start, but there are a lot of things that can impact this calculation. Most have to do with the added costs of owning a home. Let’s look at them.

1. Interest rate: Your interest rate is the single largest expense associated with a mortgage. And the longer the term of your mortgage, the more you’ll pay in interest. Even low interest rates still have a significant impact on the cost of home ownership.
2. Mortgage insurance: This works to compensate lenders if a borrower defaults on a mortgage. It is charged as a percentage of the outstanding principal of your mortgage
3. Added fees: When you buy a home, you may need a home inspection, appraisal or survey. You may also need to pay recording charges, a credit report fee, title fees and an origination fee. These can add up.

Once you take possession of a home, you’ll need to pay all the costs associated with owning the home. These include:

• Maintenance fees
• Insurance
• Property taxes
• Condo fees

And don’t forget that when you eventually sell, you may also have to pay costs like:

• Broker fees
• Capital gains taxes
• Closing costs

If this wasn’t enough, you also have to add something called opportunity cost to the expense of owning a home. If you put $20,000 on a down payment for a home, you have to give up the gains that you may have received had you invested that money instead. That opportunity cost should be added to the cost of owning a home. And historically, if you invested that money in the stock market, it could return about 7% per year.

So are there any financial benefits that homeowners get over renters? Yes, in the US there is a tax deduction you can claim for the interest that you pay on your mortgage. So you can lower your taxes when you have a mortgage.

So how does this all add up? You can see that it’s a bit complicated, so we suggest you go to one of these three terrific buy vs. rent calculators at Trulia, Realtor.com and The New York Times.

When you go to these sites, you will find one more variable that affects this calculation. We’ve left this to last because we think it’s the hardest to predict. It’s the length of time you stay in your home. Essentially, the longer you stay in your house, the more economical it is to buy.

Most of the on-line calculators use time as a break-even measure to tell you when it is more favorable to buy vs. rent. Time a good way to think about the economics of buying a house. The longer you stay where you are, the better it is to buy.

So finally, there is one more wrench to throw in all of this. The future… Because we cannot yet see into the future, we cannot say what our property will be worth when we sell, nor will we know what our rent will be in the future. But we do know that the average annual increase in home prices from 1900 to 2012 has been 3.1% and historical rent increases, have been around 5% per year. Most of the calculators mentioned above allow you to play with these variables. We suggest you do that so that you can see the impact of future value.

And finally, remember that making big decisions like renting or buying also needs to take into account quality of life factors. Owning a home, for example, has the benefit of security and stability that some people can’t live without. So sometimes emotion plays a big part in this decision too. And that should be taken into consideration.

So in the end, look at all the variables, play with the calculators, take a hard look at your assumptions and see what the results are.  If you do all this homework, you’ll get a fairly good idea of the best options available to you.

Paying for your house can be the most difficult financial undertaking of your entire life. It takes time, dedication and resources in order to pay for your home. If you are close to paying it off, congratulations! It’s a huge accomplishment.

The best thing about paying for a home is that the money you have spent isn’t money thrown away. Your house is an asset that will retain value, hopefully a lot of value, over time.  And this asset can be tapped in a number of ways.

And when you get older, the retained value that you have in your home becomes much more important. After you retire, your income slows to a trickle. Sometimes you will have extra funds in retirement accounts like 401(k)s and IRAs, but more often than not, much of your wealth will be in your home.

In the last few years, a number of products have appeared that can help unlock some of the value in your home. Home equity loans and lines of credit are ways of borrowing money from the retained value of your home in order to pay for high cost expenses like renovations, education or medical bills. But the structure of these loans requires that they be repaid, so it means that you need to have an income that can be used to repay the loan.

If you no longer have an income, a traditional mortgage or loan will not work. So for those without an income, there’s a product called a reverse mortgage that allows people to unlock the value of their homes without the need to pay back the loans.

But it needs to be stressed here that in a reverse mortgage you are essentiality selling your house to a bank. So with a reverse mortgage you slowly, but surely, lose ownership of your home. Because of this, it is very difficult to go get out of a reverse mortgage. With the bank holding partial ownership of your house, often the only way to get out is to sell your home. So a reverse mortgage should only be used as a last resort for your financial needs.

So what are the main things to think of when considering a reverse mortgage?

First of all, you need to make sure that you have no other options other than taking a reverse mortgage. A different option is to downsize to a smaller, more affordable home. By doing this, you will unlock cash from your home and at the same time, lower your property taxes, insurance and electricity bills. It may be a way of keeping a home while still unlocking some cash.

Also, if it is important for you to leave your home to your children, then a reverse mortgage may not be an appropriate option for you.

Finally, make sure that if you get a reverse mortgage, you can still afford to maintain your lifestyle as well as paying for property tax and the added insurance required by the bank. You don’t want to fall behind on your insurance or taxes and have your bank foreclose on you.

So if you decide that a reverse mortgage might be appropriate for you, you need to understand how they work.

First of all, the Federal Housing Administration (FHA) oversees most of the reverse mortgage market, setting the standards for the market. In order to qualify for a FHA loan, you need to be at least 62 years of age and either own your home outright or have a low mortgage balance that can be paid off at closing with proceeds from the loan. You also have to live in the home.

Loan terms vary by a number of factors including the interest rate, the value of the home, and the age of the youngest borrower. The amount you can borrow ranges from 35% to 65% of the value of the house, and generally goes up the older you are. The interest rate also tends to go up the older the borrower is.

The way you receive the money also varies. You can get it as a lump sum, as monthly payments, as a line of credit or a combination of these. You can also set a fixed term for the mortgage, or you can get the proceeds for life.

In the end, the loan is due when the borrower either dies, sells the house or fails to live in the house for 12 months. Because the repayment of the loan can be triggered by the death of the borrower, it is important to consider adding a spouse or partner as a co-borrower. This will allow the spouse or partner to live in the house and continue the mortgage after the primary borrower passes away

A huge benefit of a reverse mortgage is that the borrower can still live in the house even if the loan exceeds the value of the house. So when the house is sold, the borrower is not responsible for any shortfall in value between the house price and the mortgage. FHA mortgages are deemed to be “non-recourse loans”, which means that when a home is sold to repay the loan, neither homeowner nor her family will be required to pay more than the sales price of the home. All FHA loans have required mortgage insurance and it is this insurance that will cover any shortfall, as long as the selling price is at least 95% of the original appraised value.

As you can see, the structure and payments plans for reverse mortgages are complicated. The Consumer Financial Protection bureau strongly suggests that you talk to a housing counselor who has been approved by the Department of Housing and Urban Development (HUD) before you get a reverse mortgage. Visit HUD's counselor search page or call HUD’s housing counselor referral line (800) 569-4287. HUD-approved counselors may charge a fee, typically $125 or less. Here are some great questions to ask the counselor.

And here’s a final piece of advice. If you don’t plan on living in your house for very long, then the economics of a reverse mortgage are not in your favor. There are up-front fees that you have to pay for and the insurance you have to pay will eat up a lot of money right away. The benefits of a reverse mortgage get stronger the longer you stay in your home.

So if you have limited income in retirement, have lowered your expenses as much as you can, and don’t need to leave your home to your children, then a reverse mortgage may be a good option for you. Just make sure that you do a lot of research because once you get a reverse mortgage, you’ve begun a process which can really only end with you selling your house.

Owning a home is a great thing. It puts a roof over your head, protects your family and gives you roots in a community. It’s also a good financial move. A house is a terrific asset to own, and tends to hold its value over time. So the money you put into a house is not money wasted.

A house is an investment in the truest sense of the word. You put money in and if you buy in the right neighborhood, and you take care of your home, and if the economy around you booms, the value of your house should go up. This is the hope that every homeowner has; that their home will go up in value.

One of the drawbacks of investing in your home is that it is not a very liquid investment. When we say ‘not liquid’, we mean that it is very difficult, time consuming and expensive to convert your home into cash. A stock, on the other hand, is very liquid because you can buy and sell it in seconds, and at little cost. So it is the ease at which you can turn your investment into cash that makes it liquid.

But what if you want to renovate your home? Or have an unexpected medical expense? Wouldn’t it be great to unlock some of the value in your home and turn it into cash? It is possible, and it can be done either through a home equity loan or a home equity line of credit (HELOC).

Both of these financial instruments are essentially second mortgages on your home. As with a regular mortgage, these use your house as collateral on the loan. They allow you to unlock your home’s equity either as a lump sum (with the home equity loan), or draw it as it’s needed (through the line of credit).

The key word here is “equity”, and when a bank says that word, it refers to the value of the house that is paid for. And that is the big catch: The amount you owe on your house has to be lower than what your house is worth. So either your home has to have increased in value since you purchased it, or you need to have paid down your mortgage.

When you are looking to get cash out of your house, most banks require you to keep some equity in your house and will not let you borrow against all the equity available. This remaining equity can range from 10% to 20% of your home’s value, depending on the requirements of your lender.

So if your home is worth $500,000 and your outstanding mortgage is $400,000, you have 20% equity in your house ($100,000 in equity out of the $500,000 total value of the house). If a bank has a 10% equity requirement, it means they want you to keep 10% of the home’s equity in the house, and will only lend the other 10% of your home’s equity to you (which would be $50,000). If the bank requires 20% equity, then in this example, the bank will not offer you a loan at all.

The equity requirement means that you’ll be insulated (to some degree) from market fluctuations. With a 10% equity requirement, it means that your house value can drop up to 10% before you are “under water”, or owe more than your house is worth. The great recession showed how devastating it is to be under water, with millions of Americans simply walking away from their homes and their under water mortgages. So the equity requirement can help keep mortgages above water, and people in their homes.

So how do these loans work? Let’s start with home equity loans. These are structured like mortgages, where you get a lump sum, which have a fixed interest rate and you pay off over a fixed period of time. As with a mortgage, you use your house as collateral. So make sure you can pay back the loan, because if you default, your lender can take your home!

These loans are beneficial because they allow you to unlock some of the value of your home and pay it back in a fixed and predictable schedule. The downside to these loans is that you are charged interest on the full amount, even if you don’t end up using all of the funds.

Home equity lines of credit are structured differently than home equity loans. They are still loans that use your home as collateral. But they look and feel more like a credit card than a mortgage. Like a credit card, they have credit limit that you can use as you wish, and you are only charged interest on the amount you actually use. These loans also have a “draw period”, which is a set term during which you have the flexibility on how you use and pay the loan.

If you have expenses that are variable and short term, the flexibility of a home equity line of credit can be a terrific way of unlocking cash from your home for a short period of time.

But there are downsides to these lines of credit. As with credit cards, if you miss payments, the interest rate you are charged can soar. These penalty rates can be two or three times your initial interest rate. Interest rates on these loans are usually variable and reset during the period of the loan. So the cost of these loans is unpredictable, and can go up over time.

The biggest downside of these lines of credit comes when the draw term ends and the loan essentially closes. At this point you can no longer borrow from the line of credit and you must begin the “repayment period”. At this point you have to pay off the outstanding principal and interest. When this repayment period starts, payment requirements can often soar. If the borrower is not prepared for this event, they can be crushed by the burden of the higher payments.

It is essential that anyone considering a home equity line of credit understand all the moving parts of this type of loan. They are built to be used and repaid quickly. They should not be used like a credit card because there is a day of reckoning when the repayment period begins.

One more note to make about these loans. Because they borrow against the equity on your home, they have the same tax advantages as traditional mortgages. So if you qualify for a tax deduction for the interest you pay on a mortgage, you will probably also qualify for a tax deduction for the interest you pay on a home equity loan or line of credit on that same property.

And as a final note, be very careful of lenders advertising home equity loans that allow you to borrow up to 125% of your home’s value. These “No Equity Loans” are expensive and dangerous. The interest rates and fees associated with these loans are extremely high, and push borrowers deep into debt. Think twice before you consider taking out one of these loans.

In the end, home equity loans and home equity lines of credit offer terrific ways of turning some of your home’s equity into cash. Just make sure you know the all the details of the loan or line of credit before you agree to them.

What is an APR? For some people the term APR can send a shiver down their spines… What’s so frightening?  APR stands for Annual Percentage Rate, and represents the cost of interest and fees charged by a lender on an outstanding loan. If you owe a lot on your credit card, APR is truly a frightening thing. The higher the APR, the bigger the chunk of money you will be sending to your lender every month.

Different kinds of loans will have different levels of APR. Generally, the riskier the loan, the higher the APR. So if you have a bad credit score, lenders will charge you higher rates because they consider you higher risk.

Lower rates apply to loans that are secured, or have assets attached to them. So car loans or mortgages often have low APRs, because if things go bad, your lender can always take back your home or car. But unsecured debt, like credit card debt, is much harder to collect if things go bad, because there is no asset attached to the loan. These types of loans have higher APRs.

But APR can be your friend too. When you are the lender, a high APR is terrific, because you’re the one getting the interest. Take your bank account for example. This is a basically a loan you make to your bank. They then take your deposit and lend your money out to others. For this right, your bank pays you interest, or an APR. Unfortunately, at this moment in time, because interest rates are so low, the APR your bank gives you will be extremely low.

One thing to be aware of is something called an APY, or Annual Percentage Yield. An APY takes the power of compounding into consideration. On bank accounts, compounding happens when you earn interest on the interest you’ve already earned. Compounding is the fuel on which finance runs. So if you get a 5% APR, which is given to you monthly, you will get compounding on the interest you already earned, kicking your 5% APR to an actual 5.11% APY earned. But be warned. If your bank quotes you an APY on your bank account, they are actually referring to the compounded return. The actual interest they will give you each month will be calculated using the lower APR! Sneaky!!

APRs can also vary. For adjustable rate mortgages, the APR can change year to year. These mortgages can be riskier for borrowers because there is a chance that rates can jump unexpectedly. At the moment, variable rates are lower than fixed rates, making them tempting… But things can change!

APRs on credit cards can also change, and usually in response to failed payments. These “penalty rates” can be as high as 29%. If this happens, know that your credit card company must lower your rates back down to the normal rate after 6 months of successful payments.

Finally, if you have multiple loans or lines of credit and you have extra cash, pay down your debt with the highest APR first. Generally anything over 6% or 7% interest is considered bad debt and should be paid off as fast as possible.

So now you know about APRs. The lower the better if you borrow, and the higher the better if you are the lender.

The ability to borrow money is essential. Without access to loans, it would be next to impossible to buy a car, get a house or pay for a college education. The cost of these items is so high, that it would take years to save up to buy them.

The best part of getting a loan is that it allows you to enjoy the thing you are buying, before you fully pay for it. Which is truly an amazing idea!

The formal structure of lending goes back to ancient Rome where farmers would borrow money to plant crops and repay the loan upon harvest. Lenders would also reduce their risk through secured lending, where the borrower would put items up as collateral on the loan. This basic structure of lending still exists to this day.

Loans exist everywhere and are not always obvious. Mortgages, car loans and lines of credit are obvious. But credit cards, car leases, transit passes, many telephone contracts and gift cards are also types of loans.

Let’s go over a few things that you should know about loans.

Risk

When someone lends money, they expect that they’ll get that money back. Unfortunately this is not always the case. Borrowers sometimes don’t pay back their loans, thereby defaulting on them. So there are risks to lending money.

In order to protect themselves, lenders need to gauge how risky each loan will be. To do this they evaluate the borrower and try to figure out the odds of that borrower not paying back the loan . To do this they calculate something called a “default risk”.

So how do lenders calculate default risk? This is done through an analysis of a borrower’s credit history. They look at things like past bankruptcies, how often bills are paid late, how much credit is being used, how often the borrower is behind on payments and how long is their credit history is. All of these things are evaluated to calculate the default risk.

Secured vs. Unsecured Loans

But that’s not the only risk that lenders face. The loan itself can hold different levels of risk. For example, if a lender offers a loan, and the borrower posts something as collateral against the loan, these are considered less risky. This is because if a borrower defaults, the lender can keep the thing that was posted as collateral. So even on a default, the lender won’t lose all of their money. They’ll have an asset instead. This is called a “secured loan”. Mortgages are an example of secured loans.

On the other hand, if the borrower does not offer collateral, the lender only has the borrower’s word as a guarantee. This makes the loan much riskier. There is no asset to take upon default, so the lender has the potential to lose most, if not all of the loan. These are called “unsecured loans”. Credit cards are great examples of unsecured loans.

Revolving vs. installment credit

You should also know about different types of credit: Installment and revolving. Installment loans are the traditional form of lending, where you borrow money for a specific purpose, and have a fixed length of time to pay the loan back. This allows for clarity between the lender and the borrower by setting a point in the future where both the lender and borrower agree that loan will be entirely repaid. This is how mortgages are structured.

Revolving credit on the other hand, does not have a fixed number of payments or a set duration. The loan essentially allows the borrower to withdraw money, pay it back and borrow again, as many times as he requires. This is the how credit cards are structured.

The problem with revolving credit is its lack of clarity. Not only are the costs of the loan unclear, but without a set mechanism to pay the loan off, borrowers can get trapped in the loan. Without an end date or payment structure, there is little incentive to pay the loan off. If the outstanding balance of these loans is high, the interest payments can become quite substantial.

Paying for Risk

In order to insulate themselves from risk, lenders charge borrowers interest. If there is a low chance of default, lenders will offer a low interest rate. But if there is a high risk of default, they will ask for a high rate of interest on the loan. By charging a high rate of interest, lenders will be earning more money in interest to cover potential losses if the loan is not paid back.

So these are the things that are seen as higher risk and will result in higher interest rates: Poor credit scores, unsecured loans, revolving credit.

And the difference between the interest rates can be significant. So while the average 30-year mortgage rate for well-qualified borrowers in the US has not been over 10% in 25 years, and has been below 5% since 2010, you may see interest as high as 29% on a credit card,

So here are some basic tips:

• Start to practice good bill payment and credit use habits well before you look for a loan. It takes time to improve your credit score, so start early.
• Go to AnnualCreditReport.com. They give you free access to your credit reports at the three credit bureaus once a year. Make sure the reports are accurate. Errors in those reports can cost you when you look for a loan.
• Shop around for loans when you need them. Small differences in interest rates can add up a lot.
• Limit your use of unsecured loans. They cost a lot more than secured loans.
• Never, ever go to a payday lender. They are off the charts when it comes to interest rates, so avoid them at all cost.

Borrowing money can open your world to fantastic opportunities. Before you look for a loan, make sure you do all that you can to manage your finances, so that you can look as risk free as possible to a lender. And once you’re ready to borrow, shop around and do your homework. A little bit of work will save you a lot in the long run.

Debt can be a terrific thing. It can help you buy and enjoy things that are too expensive to buy outright. It is often the only way to make big purchases that would normally be out of reach, and pay for them over time. Enjoying things while you pay for them is an amazing idea, and one that has helped fuel modern economic prosperity.

But the burden of debt can also be debilitating. People can be so overwhelmed with debt that it affects their ability to pay for essentials. It can also be such a huge burden that it affects people’s mental well-being. In these cases, debt is far from a positive force, and is more like a curse.

So let’s talk about debt and focus on good debt and how to avoid the bad.

There are two things that define good debt. One is that it carries a low interest rate. The other is that it pays for something of value.

Mortgages

Let’s start with the best kind of debt. The best debt out there is a fixed rate mortgage. Interest rates on mortgages usually have the lowest rates of all debt. And when you pay off your mortgage, you’ll own a house, which (we all hope) will be worth at least what you paid for it. So you win with a low interest rate, and you win by buying a valuable asset. Just make sure that the payments are manageable.

Adjustable rate mortgages are a little less beneficial than fixed rate mortgages only because they are unpredictable. They may have lower current rates than fixed rate mortgages, but there is no way to tell what the rate will be in the future. If rates ratchet up, holders of adjustable rate mortgages could have trouble making their payments. Borrowers of adjustable rate mortgages need to make sure that they have enough spare income to cushion any possible future rate increases.

And avoid any exotic mortgages like interest only loans. They tease borrowers into signing with low initial payments then crush them with higher rates when the promotional period ends.

Car Loans

A small step down is a car loan. Car loan interest rates can sometimes be lower than mortgage rates. But, when you buy a car, it loses value very quickly. So the asset you buy will not be worth what you paid for it. But your car does retain some value, and if it comes with a low interest rate, it can still be considered good debt.

Also make sure you look at used cars. They can sometimes offer better value. Just make sure that if you finance a used car, don’t do it through small self-financed used car dealers. They can charge exorbitant interest rates.

Federal Student Loans

Federal student loans can also be considered to be good debt. Although you can’t actually put a price tag on what you gain from a college education, there is undeniable evidence that you will be significantly better off financially with a college education. Interest rates on federal undergraduate loans are usually quite low. So again, you get something of value at a low interest rate.

As a side note, some state and private loans can have severe restrictions with respect to repayment, rate reductions and forgiveness, so they can often fall into the bad debt category.

Home Equity Loans

Now we get into a grey area. Home equity loans. These are loans you take out against the value of your house. Right now they are only about 2 or 3 percentage points higher than fixed rate mortgages. But defining them as good or bad debt depends on what they are used for. Often times it is to renovate a house, which can add value to your home. Which is great. Other times it is used to consolidate higher interest debt. Which is also great. But a Discover Home Equity Loans survey found that the number one reason Millennials (30-34) take out a home equity loan is for… vacations! Ouch! We’d consider that bad debt.

Credit Cards

And at the bottom of the pile is credit card debt. Credit card debt comes with high interest, usually around 15% to 17% and usually pays for things that hold no intrinsic value (food, movie tickets, beer, shoes…). It makes little economic sense to carry credit card debt. Avoid carrying credit card debt if you can.

Payday Lenders

And at the bottom of the bottom are payday lenders. They charge exorbitant interest and fees, and their clients get stuck in never ending loops of short-term loans. Stay far, far away from these types of loans.

So if you are carrying debt, make a plan to pay down the highest interest debt first. You’ll have more money in your pocket each month that will no longer go to interest payments. Use this handy debt reduction calculator to make a debt reduction plan.

And make sure you shop around!! It’s crazy, but almost 50% of Americans don’t comparison shop for mortgages. Shop around for multiple quotes. It can save you a lot of money!

What is an APR? For some people the term APR can send a shiver down their spines… What’s so frightening?  APR stands for Annual Percentage Rate, and represents the cost of interest and fees charged by a lender on an outstanding loan. If you owe a lot on your credit card, APR is truly a frightening thing. The higher the APR, the bigger the chunk of money you will be sending to your lender every month.

Different kinds of loans will have different levels of APR. Generally, the riskier the loan, the higher the APR. So if you have a bad credit score, lenders will charge you higher rates because they consider you higher risk.

Lower rates apply to loans that are secured, or have assets attached to them. So car loans or mortgages often have low APRs, because if things go bad, your lender can always take back your home or car. But unsecured debt, like credit card debt, is much harder to collect if things go bad, because there is no asset attached to the loan. These types of loans have higher APRs.

But APR can be your friend too. When you are the lender, a high APR is terrific, because you’re the one getting the interest. Take your bank account for example. This is a basically a loan you make to your bank. They then take your deposit and lend your money out to others. For this right, your bank pays you interest, or an APR. Unfortunately, at this moment in time, because interest rates are so low, the APR your bank gives you will be extremely low.

One thing to be aware of is something called an APY, or Annual Percentage Yield. An APY takes the power of compounding into consideration. On bank accounts, compounding happens when you earn interest on the interest you’ve already earned. Compounding is the fuel on which finance runs. So if you get a 5% APR, which is given to you monthly, you will get compounding on the interest you already earned, kicking your 5% APR to an actual 5.11% APY earned. But be warned. If your bank quotes you an APY on your bank account, they are actually referring to the compounded return. The actual interest they will give you each month will be calculated using the lower APR! Sneaky!!

APRs can also vary. For adjustable rate mortgages, the APR can change year to year. These mortgages can be riskier for borrowers because there is a chance that rates can jump unexpectedly. At the moment, variable rates are lower than fixed rates, making them tempting… But things can change!

APRs on credit cards can also change, and usually in response to failed payments. These “penalty rates” can be as high as 29%. If this happens, know that your credit card company must lower your rates back down to the normal rate after 6 months of successful payments.

Finally, if you have multiple loans or lines of credit and you have extra cash, pay down your debt with the highest APR first. Generally anything over 6% or 7% interest is considered bad debt and should be paid off as fast as possible.

So now you know about APRs. The lower the better if you borrow, and the higher the better if you are the lender.

Student debt may be a difficult burden to bear, but it does help you buy better opportunities. College graduates on average make more money than people who do not finish college. So the money that is invested in a better education should pay off with a lifetime of higher earnings.

Here are some things to keep in mind when dealing with student loans, to make sure you don’t get into trouble.

1. Know all you can about your loans. For federal loans, go to the NSLDS. For private loans, check your paperwork. Make sure you know the lender, balance and repayment status of your loan. Also figure out the interest or APR on your loan and the length of your loan. The more you know, the better you will be able to handle any issues that come up.
2. Don’t forget about your lender. Make sure you tell them when you move or change your phone number. Open every piece of mail you get. Read every email. You don’t want to be out of touch, or miss an important letter and are ruled in default because you didn’t get a message. You need to have a good relationship with your lender so if payment becomes difficult you will be in a good position to negotiate with them.
3. Do some work to choose the best payment option. Federal loans, by default, have a 10-year term. But if you think that is too steep, you can choose a longer term, thereby lowering your monthly payments. But know that over the long run, extending your term will mean you will pay significantly more in interest. You can also change the term of the loan down the road if you need to. Go to this terrific US Department of Education site to see what different payment options are available for federal student loans. But as a rule of thumb, payments that are under 10% of your gross income (income before tax) should be usually manageable, so try to structure payments so that they are below that 10%.
4. Check out ways to reduce your payment burden. There are numerous programs to either forgive part of your loan, or reduce payments by tying them to your to your income. All federal loans are eligible for income based repayment plans. These are terrific ways to keep your loans manageable. Payments can be as low as 10% of your after tax income. There are also loan forgiveness plans available. Check out this site to see if you are eligible. If you have private loans, your lender is not obligated to give you relief, but you still can try to get them to make your payments manageable.
5. In emergencies, you can try to postpone payments. Called deferments or forbearance, you can postpone payments if you hit sudden emergencies like medical issues or unemployment. Be careful though. Even though your payments are postponed, your interest may not be, and the accrued interest can make your debt grow. If this is the case, try to arrange terms where you pay just the interest while payments are postponed, so the amount you owe does not grow. Private loans will also charge you fees to postpone payments, so make sure you use this option only in an emergency.
6. Make sure you know your grace period. All loans have a period of time after you finish school when you don’t have to start paying them. The grace period depends on the loan, so make sure you check with your lender.
7. As with all loans, pay the highest interest loan first, because they are the ones that cost you the most. So if you suddenly have extra money, like from a tax return or a gift, consider pre-paying your loans in order to pay down the principle. It will pay off in the long run. But make sure enclose a letter to your lender with your payment to tell them that you want the extra payment applied to your loan balance immediately. If you don’t, your lender, may just hold your payment and apply it against future payments, stealing away the huge benefit you get from paying down your principle.
8. Consolidating several loans into a single loan with a fixed interest can sometimes be beneficial. You’ll need to do some homework to see if you can get a better rate. For federal loans, go to StudentAid.gov to see the math. For private loans, there are numerous private debt consolidation options. Shop around. But you should never consolidate federal loans into a private loan. If you do, you’ll lose the great repayment options and borrower benefits that only come with Federal loans.
9. Use these great non-profit and government sites for more information:

• Consumer Financial Protection Bureau (CFPB)
• Federal Student Aid
• IBR Info
• Student Loan Borrower Assistance

Even with all these resources, college debt can be hard to manage, especially when you’re not earning much. Here are a few things you should know about what happens when things go wrong.

1. Most importantly, do not default on your student debt! If you default, a process will start that can ruin you financially. And there is no easy way out. It is almost impossible to declare bankruptcy on student debt. You MUST make a plan to pay it off.
2. The definition of default depends on the loan. On a private student loan, default generally happens after 120 days of non-payment. On a federal loan, it is after 360 days of non-payment. If you default, your lender can demand full payment from you or your cosigner.
3. If you default, your loan may be passed on to a collection agency and they may begin mailing you letters and calling you. Check out the Fair Debt Collection Practices Act(FDCPA) to see what steps you can take to prevent harassment from collectors
4. Notice of your default can be sent to credit bureaus, which will immediately impact your credit score, making it harder and more expensive to get a loan, and may even make it harder to get a job or a rent an apartment.
5. Once in default, lenders can start adding collection fees to the debt, which can raise the loan balance by 25% to 40%
6. Once in default, the lender can sue the borrower. If the lender wins a judgment against the borrower, the lender can obtain wage garnishment, which can be up to 25% of disposable income for private loans and up to 15% for federal loans. They can also seize assets (retirement accounts, bank accounts) or place a lien on a house, making it difficult to sell.
7. There is a statue of limitations on private student loans (but not federal). So the clock on collection may run out… But there are ways for private lenders to re-start the clock, so don’t count on this strategy.

Student debt is a good thing in that it can buy you better options in life. But take control of your student debt and make sure you keep it manageable so that you can fully take advantage of the benefits your education can bring.

There is a great quote attributed to Bob Hope that sums up banks quite nicely: “A bank is a place that will lend you money, if you can prove that you don’t need it”.

And it’s not too far from the truth. Banks are in the business of lending money, charging interest on that money, and making sure that they get the money back. So they look at every potential borrower and calculate the odds that they will get repaid. If you really, truly “need” the money (because you don’t have enough if it), that makes banks very nervous… Desperation is poison to a loan application…

So what happens if you have an unexpected expense? A medial bill, textbooks for the kids, summer camp, a trip for a family funeral... How do you pay for a one-off expense that you can’t cover with your paycheck? A bank is very unlikely to lend you money for something like that. They’d just see it as too risky.

So what do you do? If you don’t have family or friends to help out, you have to go to alternative sources. Usually, the first place to go is to a credit card. And if you don’t have a credit card, you go to payday lenders. Neither of these are great options because the interest and fees on these loans are so high. But often there is no alternative…

So let’s talk about these options. First of all, because these “loans” are unsecured (the lender has nothing tangible to seize, like a house or a car, if you don’t pay the debt), they are considered riskier. And people do default more frequently on credit card debt than on other types of debt. So interest rates are higher to protect the lender in case of default… So for credit cards, you’ll see interest rates range from a low of 10% to a high of 30%.

Payday lenders are a different story. There is something of a free-for-all in the industry. Many states regulate them and put caps on the interest they can charge, but other states let them run free. But no matter what, Payday lender charge extremely high fees. In states where there are interest rate caps, payday lenders instead charge “fees”.

Payday lenders claim that they have to charge such high fees because their default, or “charge off” rates are high. But when they submit information with the Securities and Exchange Commission, their 3.2% charge off rate is no higher than credit card rates. So payday borrowers are no riskier than people who use credit cards, but are charged higher rates than credit card borrowers. So it looks very much like payday lenders are taking advantage of people’s desperation to charge as much as possible.

So what do you do?

1. If you need to borrow for a one-off event, make sure you pay that off immediately. The danger of these high interest or high fee loans is that they can snowball.
2. Never roll-over your payday loan. Pay it off right away. Rolling over a loan will trigger higher fees that can become impossible to manage. Figure out a payment plan that will pay off the loan and stick to it.
3. Pay more than the minimum due on your credit card. If you pay the minimum, it may take a decade to pay of your debt, and you may end up paying more than double what you borrowed.
4. Try to get a consolidation loan. If your credit score is good, you may be able to get a personal consolidation loan that pools all your debt under one loan. It should have a significantly lower interest rate, and a payment plan that helps you pay the loan off. Just make sure you can handle the loan payments and stop dipping into your credit card for money!

Payday lenders are predatory. They take advantage of your desperation. So if you can, avoid them at all cost. Solving a temporary problem through a payday loan can become a rolling process of taking on more debt to pay for old debt. So stay away if you can.

In the meantime, try to keep your debt low and manageable so you don’t get into these situations.

Compounding is a terrific thing.  Einstein himself said, “Compound interest is the eighth wonder of the world. He who understands it, earns it… He who doesn’t, pays it.”

Compounding happens when you earn interest on the interest you’ve already earned. It means that each month, even if you do nothing, you will get a little bit extra in interest deposited in your savings account because interest is calculated on not only your deposit but also all of the previous interest you earned.

The additional earnings that compounding can give you is significant. Let’s look at an example. Take a $1,000 bond paying 4% interest. Without compounding that money doubles after 25 years. With compounding, the money doubles after 18 years. That’s seven years sooner! That’s a big difference!

A great way to see compounding in action is through the Rule of 72. This rule tells you low long it will take for your money to double. All you do is take 72 and divide it by the interest rate you’re getting.  The result will give you the number of years it will take to double your money. So at a 12% interest rate, with compounding your money will double in six years (72 divided by 12).  Super easy!

Now let’s consider compounding’s dark side. What happens when you’re the one who OWES the money? Interest is now no longer your friend. Interest is your enemy. It gets charged to you every month, and if you fall behind in your payments, compounding can quickly multiply your debt and make it unmanageable.

These situations are called debt spirals. They happen when interest builds up and compounds. If you can’t make basic payments and at least pay the interest charged on your loan, the size of your debt will grow.  Once the interest payments become unmanageable, the debt will balloon. Once this happens, the borrower is at the mercy of the lender, and the only options are restructuring the debt, or default…  

If high interest rates are an overwhelming benefit to savers, high interest rates are equally as destructive for borrowers. High compounding interest rates on loans are the scourge of modern economies. From credit card debt to payday loans, interest rates can be astronomically high. For example, using the rule of 72, a credit card debt at 30% will double your debt in less than two and a half years if left untouched!

Payday lenders are even worse. They actually hide their interest rates by calling them “fees”. But if you actually go and calculate them as an interest rate, they can hit triple digits, which only get worse if you roll your debt into new loans or miss payments.

So prioritize paying down your high interest debt. Make sure you always cover at least the interest you owe. Also make a plan to not only pay the interest, but pay down the principal as well. If you are paying a penalty rate on your credit card, your bank MUST lower it after 6 consecutive minimum payments. Avoid payday lenders at all cost! And if you have a loan with them, prioritize paying it off as fast as you can.

Don’t let high interest rate debt get out of control. Try to keep all of your debt payments (plus rent) below 36% of your pre tax income. Statistics show that once you cross the 36% threshold, it becomes much more difficult to pay your debt. And if you have a lot of high interest debt, look at consolidating it with a personal loan for debt consolidation.

So now you know about the good and bad of compounding. Make sure you take advantage of the good and limit the bad!

So you want to own a car? Terrific! Cars can open a world of possibilities, allowing you to travel for work or school, find cheaper housing or travel to less expensive shopping. You will no longer be limited to just your neighborhood looking for opportunities. You will now be able to drive to higher paying jobs or better schools or cheaper food options that are further away.

So how should you pay for your car? There are a lot of options out there, and it isn’t always clear which is the best.

But there are a couple of things you need to know right off the bat. First of all, a car is an asset. This means that it has a value that it keeps over time, and can be unlocked when you sell it. The money that you spend buying a car is not money wasted – but an investment, of sorts.

Now that you know that cars are assets, you should also know that they are actually not great assets. Good assets are ones that retain most of their value over time. Cars do not. They lose their value very quickly, so are actually not such a terrific investment.

But having said this, cars still hold some value. And they open other possibilities in life. And because they tend to be quite expensive, it is very important to make sure the best decisions are made about how to pay for them so that costs are minimized and value is maximized.

So there are two basic ways to finance a car: a lease or a loan. Each comes with its own benefits and weaknesses. Let’s go over them separately so that you are clear on the differences. Let’s start with a lease.

A lease is essentially a financial arrangement that allows for the use of a car for a set period of time, usually three years, after which the leaser (you) can either buy the car or give it back. During this time, you do not actually “own” the car. You are really just renting it from the company that is leasing the car to you.

The most important thing to understand about a lease is that person leasing the car needs to cover the cost of the car’s lost value. As we said earlier, a car loses value over time. This is called depreciation. So while you are driving it, the car depreciates in value and the company leasing you the car takes a financial hit from the lost value. That company needs to cover that loss. Which is where the money for your lease goes, to cover the depreciation that the car loses while you drive it.

This arrangement makes sense. The company loaning you the car gets to cover their loss and the person leasing the car gets to use a nice new car. Everybody wins.

But there’s a catch. Cars depreciate quickly. In fact, a huge chunk of the car’s value is lost in the first three years. In fact, on average 11% of a new car’s value vanishes the second it is driven off the lot. So a leaser, in effect, pays for a larger proportion a car’s value than they will really use.

And that’s not the only catch. Because the leasing company expects to recoup value from the car once it is returned, they want to make sure it comes back in good shape. So they limit the numbers of miles that can be driven and set limits on the wear and tear they expect to see. If those are exceeded, a penalty payment will be required.

And finally, there are hidden financial charges. The company leasing the car has tied up their own money to buy the car they are leasing out. They may have had to take out loans to buy that car. So there are financial charges that need to be covered and are rolled into the price of the lease.

But, even with all these costs, lease rates can be quite affordable. And this is the main attraction of leases. They tend to be cheaper than loans and require little or no down payment.

So let’s turn to car loans. Straight away we’ll say that what makes a lease attractive is what usually makes a loan unattractive: Price.

With a loan, you are buying an entire car. And this can be expensive and complicated. You need to get approved for that loan by a financial institution, you’ll have to pay interest on the loan and very often you will have to put down a big down payment.

This usually means that monthly payments for car loans will be higher than monthly lease payments, even for the same car.

But remember that a car is an investment, and unlike a lease, your money is paying for an entire car, which can be re-sold one day. This is what makes car loan payments higher. But this is also the benefit of a car loan: Once you pay for the car, it will have some value that you can unlock when you sell it.

So although loans may have higher monthly payments, over the long run, they are usually better deals financially.

So here are the things to do to maximize the financial benefit of getting a car loan.

1. Own the car for as long as you can. The longer you own your car, the better the economics are for buying a car with a loan.  And just to let you know, the average car on US roads these days is around six years old.
2. Keep the term of the loan short. The sooner you pay off the loan, the less interest you pay overall. Try to keep it at 5 years or less. The downside of this means that your monthly payments will be higher than with a longer-term loan. So while you try to keep your loan short, make sure you keep payments affordable.
3. Maintenance is your responsibility. Usually new cars come with warrantees that cover maintenance, which is a great way to cover things that may suddenly break. But remember that once those run out, you will have to pay to fix the car.
4. Used cars are usually much better deals. The biggest chunk of depreciation will have already come off a used car, so they will depreciate more slowly than a new car. And many automakers will sell “certified pre-owned” cars through their dealerships that come with extended warrantees, saving you maintenance costs.
5. Buy a good car! Buy a car that retains its value and avoid the ones that depreciate quickly. After five years, the average car holds 46.5% of its original value. But you can find carsthat hold 60% of their original value. That’s a big difference!

To help you make a decision, start with what you can afford to pay per month. Plug this number into this affordability calculator from Edmunds.com, and it will tell you what sticker price you can afford. It’s a great way to go about your car search.

In the end, the weight of the high monthly payments and the deposit requirements may be too much for some people, making car loans impractical;. For these people, the lower up-front cost of a lease may be the only viable option. If this is the case for you, make sure you get competitive lease offers to make sure you get the best deal.

But no matter what you choose to do make sure to do your research. There are terrific resources to get car quotes from Edmunds.com, Kelley Blue Book, NADA Guides or Cars.com. And make sure you know all you can about your potential car using these costing tools from Edmunds.com and Kelley Blue Book

And don’t forget, there are many services such as ride sharing, short term car rentals and trusty public transport – all of which may cost you significantly less than a new car if you don’t drive too far or too often. Look into them before you make the leap to buy.

If you’re finding that you can’t seem to dig out from under your debt, you’re not alone. There are trillions of dollars in mortgages, student debt and credit card debt in the US, so it’s not surprising that the burden of debt can be difficult to bear for many people.

Let’s start by trying to find out what a reasonable debt burden is. The most common measure of debt burden is called a ‘debt to income ratio’ (DTI). This is the percentage of your income that is used for debt payments. The generally accepted maximum ratio is having 36% of your income going to debt payments. Your mortgage alone should be no more than 28% of your gross income. Anything above these levels is considered a burden that could impact your quality of life.

DTI is easy to figure out. All you have to do is add up all of your monthly debt payments (student loans, car loans, mortgage and minimum credit card payment) and divide it by your monthly gross (before tax) income. That will give you your DTI. If you rent instead of holding a mortgage, you should include your rent in the calculation. Although this isn’t truly debt, it is a financial obligation that takes money out of your pocket. It won’t be a true DTI, but it will give you a fuller picture of your financial obligations

So what to do? If you have a mortgage and car payments which are putting you over that 36% threshold, there are only two things you can do: try to refinance your mortgage at a lower rate, or earn more money. Neither are easy options. But there are lots of web sites, like LendingTree, where you can price out new mortgages.

If you have credit card debt in the mix, there is definitely something you can do. If your credit card debt is pushing you over the 36% level, think about consolidating that debt. Credit card interest can range from 10% all the way to 30%. There are companies that will give you a debt consolidation loan that is structured with fixed monthly payments at a lower interest rate than you’re paying on your credit card. Just don’t rack charges back onto your card again!

If you are under that 36% DTI, and have credit card debt, think about increasing the amount you pay towards your credit card every month. If you are only paying the minimum, that amount is usually only interest and 1% of your balance. Just paying the minimum will mean years of payments and sometimes paying more than double your balance in interest. Minimum payments are not good enough. See how much you can add to your payment without hitting the 36% threshold.

Credit card debt is usually the highest interest debt you will hold. Paying that debt off first and fast will leave you more and more money in your pocket every month as your interest payments go down. Just make sure you don’t add more charges on to your credit card and end up where you started!

Debt can be hard to manage. But when you know what your debt level is, and build a strategy to reduce it, it’ll just be a matter of time before you see the light!

Debt can be a terrific thing. It can open doors to things that are normally out of reach financially. Homes, for example would be almost impossible to afford if you had to pay for them in cash. And the best part about debt is that by using debt, you can actually enjoy those awesome things while you’re paying for them! What a terrific idea.

But debt is not free. You’re borrowing someone else’s money after all, and you’ll have to pay them something for that privilege. And over time, that cost can be substantial. So it’s always a good idea to try and pay off your debt and limit the extra cost in interest payments you have to give to your lender.

The most critical component of debt is its interest rate. The interest rate is the amount of money your lender is charging you to borrow their money. The higher the interest rate, the more you are paying to borrow. It’s also important to note that debt with a high interest rate has a tendency to grow if it isn’t managed properly and can often balloon out of control.

So if you want to deal with your debt, the first thing to do it take stock of all the debt you have. The first thing to do is look at all of your debt and try to figure out the interest rate you are paying on each pool of debt. Better yet, look for the Annual Percentage Rate (APR). This rate reflects not only interest, but also other fees that you are charged on your debt. APR is a more accurate measure of how much your debt costs. Most lender statements will list the APR.

Next, order your debt from highest interest rate to lowest interest rates. You’ll notice that there is a wide range of APRs. They can go from low single digits for mortgages to mid double digits for credit card debt.

In dollar terms the cost difference can be significant. Let’s look at $1,000 of debt. If that $1,000 debt is credit card debt, it can cost you between to $130 to $300 in interest payments per year. If that $1,000 debt is in a mortgage, it will only cost you $40 in interest per year. That’s a big difference.

So here is the key to paying down your debt: Attack your high interest debt first. In the above example, you will see that if you can pay down the principle on your mortgage by $100 this year, it will save you $4 in interest payments next year (and every year after that). If you reduce the principle on your credit card by $100 instead, it will save you $13 to $30 in interest payments next year and every year after that.

As you can see, paying down the principle on your high interest debt is a more effective way of paying down debt and reducing the interest you owe. Remember that if you pay down more high interest debt first, you will reduce more of your future interest payments, and have more money in your pocket each month.

So here are the keys to paying off your debt:

1. Focus on your highest interest debt first
2. Pay more than just your interest, pay down your principle
3. Don’t add more debt to the loan you just paid down

So make sure you’re attacking the principle that you owe. If you only pay the interest you owe, you are not paying down your debt and your monthly payments will remain the same. Ignore the “minimum due” line on your statement. Look instead at the “interest charged” line in your credit card and pay as much above that as you can.

Most importantly, make sure you don’t add more debt than to what you just paid down. The key here is to figure out how much principle you just paid off and not add more than that. For example, if you just paid $500 on your credit card debt, of which $100 went to interest, you just paid down $400 of your principle. So in the next month, do not spend more than $400 on your credit, otherwise your principle will have actually gone up, and you’ll owe even more in interest!

The hardest payment is the first payment. Set yourself a goal of paying down your principle. In the above example, if you can pay $500 on your credit card and limit your spending to $300 per month, then will have paid down your principle by $100.

But the amazing thing about paying down debt is that, its benefits can accelerate. So in the above example, in the next month, you will only owe $98.75 in interest. So that same $500 payment will pay off $101.25 in principle. After a year, that same payment is paying almost $115 in principle. And in less than 5 years, you will have completely paid off an $8,000 debt and you will have the $100 in interest and $100 in extra principle in your pocket every month. That extra $200 in your pocket every month can be used to pay down other high interest debt or put into savings.

Again, the first payment is the hardest. If you can manage paying down your principle in that first month, you should be able to do it every month. Just stick to your plan and keep paying down your principle.

If you want to know how long it will take to pay off your credit card debt, you can use this calculator from CreditCards.com. If you want to sort out the benefits of paying down student loans, try this calculator from StudentLoans.org, or this calculator from Finaid.org.  For other installment loans try this calculator from CNN.

The benefits of paying down your debt quickly pay off with less money paid in interest and more money in your pocket. Win-win!

Owning a home is a great thing. It puts a roof over your head, protects your family and gives you roots in a community. It’s also a good financial move. A house is a terrific asset to own, and tends to hold its value over time. So the money you put into a house is not money wasted.

A house is an investment in the truest sense of the word. You put money in and if you buy in the right neighborhood, and you take care of your home, and if the economy around you booms, the value of your house should go up. This is the hope that every homeowner has; that their home will go up in value.

One of the drawbacks of investing in your home is that it is not a very liquid investment. When we say ‘not liquid’, we mean that it is very difficult, time consuming and expensive to convert your home into cash. A stock, on the other hand, is very liquid because you can buy and sell it in seconds, and at little cost. So it is the ease at which you can turn your investment into cash that makes it liquid.

But what if you want to renovate your home? Or have an unexpected medical expense? Wouldn’t it be great to unlock some of the value in your home and turn it into cash? It is possible, and it can be done either through a home equity loan or a home equity line of credit (HELOC).

Both of these financial instruments are essentially second mortgages on your home. As with a regular mortgage, these use your house as collateral on the loan. They allow you to unlock your home’s equity either as a lump sum (with the home equity loan), or draw it as it’s needed (through the line of credit).

The key word here is “equity”, and when a bank says that word, it refers to the value of the house that is paid for. And that is the big catch: The amount you owe on your house has to be lower than what your house is worth. So either your home has to have increased in value since you purchased it, or you need to have paid down your mortgage.

When you are looking to get cash out of your house, most banks require you to keep some equity in your house and will not let you borrow against all the equity available. This remaining equity can range from 10% to 20% of your home’s value, depending on the requirements of your lender.

So if your home is worth $500,000 and your outstanding mortgage is $400,000, you have 20% equity in your house ($100,000 in equity out of the $500,000 total value of the house). If a bank has a 10% equity requirement, it means they want you to keep 10% of the home’s equity in the house, and will only lend the other 10% of your home’s equity to you (which would be $50,000). If the bank requires 20% equity, then in this example, the bank will not offer you a loan at all.

The equity requirement means that you’ll be insulated (to some degree) from market fluctuations. With a 10% equity requirement, it means that your house value can drop up to 10% before you are “under water”, or owe more than your house is worth. The great recession showed how devastating it is to be under water, with millions of Americans simply walking away from their homes and their under water mortgages. So the equity requirement can help keep mortgages above water, and people in their homes.

So how do these loans work? Let’s start with home equity loans. These are structured like mortgages, where you get a lump sum, which have a fixed interest rate and you pay off over a fixed period of time. As with a mortgage, you use your house as collateral. So make sure you can pay back the loan, because if you default, your lender can take your home!

These loans are beneficial because they allow you to unlock some of the value of your home and pay it back in a fixed and predictable schedule. The downside to these loans is that you are charged interest on the full amount, even if you don’t end up using all of the funds.

Home equity lines of credit are structured differently than home equity loans. They are still loans that use your home as collateral. But they look and feel more like a credit card than a mortgage. Like a credit card, they have credit limit that you can use as you wish, and you are only charged interest on the amount you actually use. These loans also have a “draw period”, which is a set term during which you have the flexibility on how you use and pay the loan.

If you have expenses that are variable and short term, the flexibility of a home equity line of credit can be a terrific way of unlocking cash from your home for a short period of time.

But there are downsides to these lines of credit. As with credit cards, if you miss payments, the interest rate you are charged can soar. These penalty rates can be two or three times your initial interest rate. Interest rates on these loans are usually variable and reset during the period of the loan. So the cost of these loans is unpredictable, and can go up over time.

The biggest downside of these lines of credit comes when the draw term ends and the loan essentially closes. At this point you can no longer borrow from the line of credit and you must begin the “repayment period”. At this point you have to pay off the outstanding principal and interest. When this repayment period starts, payment requirements can often soar. If the borrower is not prepared for this event, they can be crushed by the burden of the higher payments.

It is essential that anyone considering a home equity line of credit understand all the moving parts of this type of loan. They are built to be used and repaid quickly. They should not be used like a credit card because there is a day of reckoning when the repayment period begins.

One more note to make about these loans. Because they borrow against the equity on your home, they have the same tax advantages as traditional mortgages. So if you qualify for a tax deduction for the interest you pay on a mortgage, you will probably also qualify for a tax deduction for the interest you pay on a home equity loan or line of credit on that same property.

And as a final note, be very careful of lenders advertising home equity loans that allow you to borrow up to 125% of your home’s value. These “No Equity Loans” are expensive and dangerous. The interest rates and fees associated with these loans are extremely high, and push borrowers deep into debt. Think twice before you consider taking out one of these loans.

In the end, home equity loans and home equity lines of credit offer terrific ways of turning some of your home’s equity into cash. Just make sure you know the all the details of the loan or line of credit before you agree to them.

The great economies of the world have been built on peer to peer lending. It’s what people have done for millennia: You take your money and lend it (with interest) to family, friends or the community, to create value for yourself and for them.

There are two different ways to think about this.

There are probably many in your circle of family and friends who may need money at some point in time. They will ask to borrow money from you, maybe with regular payments and fixed interest. But this is not putting your money to work.  This is helping your family & friends, and it’s a fraught process. If you’re in a position to gift money (i.e. you have a fully funded retirement account, emergency savings and are living well below your income) – then consider it. But there’s a chance you’ll never see the money again. So if you do it, make sure you consider it a gift.

The second way to put your money to work by lending it to others is through ‘peer to peer’ lending. This is where you deposit your money with an intermediary, who then lends it out to people who need it. It’s very similar to the traditional way that banks work. But with a big difference – you get visibility into where your money is going. With some lenders you can see where your loan is going. You also get to choose the amount of risk you want to take, and what return you are looking for.

Prosper, SoFi and Lending Club are all peer to peer lending companies where you can deposit your money, which is then loaned out for higher interest rates than what you can get with your savings account at a regular bank.

So is it a good idea for you?

The first thing to consider is risk. When you put your money in a savings account, it’s insured by the FDIC for up to $250,000. So if the bank goes out of business, you won’t lose your money.

Funds with P2P lenders are not insured – so should there be issues with the financial stability of the lender, there’s a chance you could lose your money. So consider where you are on the spectrum of risk tolerance and see if this is money you can afford to lose.

Next thing to consider is performance.

The relationship between risk & return is what investing is all about. The stock market and P2P lenders are both higher risk / higher potential return. Currently the estimated returns from P2P loans are between 5-8% per year. This is significantly higher than what you can get in a regular savings account, and on par, over the past few years, with what you would have gotten in the stock market. But as with all investments, there is no guarantee of returns.

Third thing to consider is ethics.

For many borrowers, P2P loans are a godsend. If you’re consolidating high interest credit card debt for example, going from paying 20+% interest to 8% is pretty great.

But in order for these platforms to give high returns to investors, they also charge high penalties – such as late fees. It can happen that borrowers get trapped in these loans. It’s estimated that 70 percent of those who consolidate their debt end up with as much or more debt a few years later. So the benefits of these loans may have strings attached for the borrowers. And as a lender you have to make sure you are comfortable lending your money into this system.

Lending money doesn’t usually get included in recommendations by financial advisors. It’s an interesting and unique investing option. But doing so involves risk.

Think carefully about putting your money to work by lending it to others. Understand the risks involved. But if you enter this market, also enjoy the fact that you can direct your money to specific areas of specific need. It really can be a rewarding way of investing.

APR is one of those expressions that bubbles up from the acronym soup that the financial word is so good at brewing. But what does it mean, and why is it important?

First of all, APR refers to the Annual Percentage Rate of a loan. It includes not only the interest rate, but also any fees attached to the loan, so it gives you a good overall view of how much your loan costs. A high APR means that your lender is charging you a lot of money to borrow their money, and a low APR means that the lender is giving you cheap money.

APRs vary widely, and right now can range from 2% for a car loan to 29% on a credit card. The difference in dollar terms is huge. On a $10,000 car loan, the 2% will cost you about $200 in interest in the first year. If you instead bought that car using a credit card with a 29% interest rate (a terrible idea by the way!), you would pay $2,900 in interest. That’s a huge difference!

So here are some ways to reduce your APR.

1. If you have a credit card, the issuer has two rates, the regular rate and a penalty rate. The penalty rate is always much higher, and kicks in if you miss two payments. So NEVER miss a payment. Set up an auto pay to make sure something goes to pay your credit card bill every month. And secondly, if you do trigger the penalty rate, make sure you make the next 6 consecutive payments. Your credit card company must lower your after the 6^thpayment.
2. Consolidate your debt. If you have a bunch of debt that has an APR in the double digits, think about rolling that debt into a consolidated loan. These are installment loans, so they have fixed payments over a fixed term that are focused on paying the debt off. You cannot use this debt like a credit card and buy new shoes with it. But they are terrific ways of lowering your APR and paying off your debt.
3. Home equity loan or home equity line of credit. If you own a home, you can borrow against it at competitive rates, and you can usually use the money for whatever you want. Rates are usually in the mid single digits. So if you pay off your 16% debt using a 7% home equity loan, your overall APR will drop substantially.
4. Roll your credit card debt to one that has a 0% introductory interest rate. These are great ways of getting TEMPORARY relief from your high credit card interest rate. But be careful. There are fees associated with these products (usually 3% of your balance). If you use these products, make sure you use the time pay down your credit card balance; otherwise this break makes no economic sense.
5. Refinance. Interest rates are hovering at super low rates. See if you can refinance your existing mortgage or home equity loans at a lower rate.
6. Get help with you student loans. There are fantastic programs for federal loans that base your payments on your income or allow for loan forgiveness. Look to see if you qualify. If you have a private loan, ask your lender for a graduated or reduced repayment plan. Go to the Consumer Finance Protection Bureau for more information.

In conclusion, when you get some debt relief, make sure that you don’t rack up more debt with the money you’re saving. Once you’ve reduced your overall APR, work to ensure it doesn’t creep back up again.

And finally, stay VERY far away from Payday Lenders. They hide their APR by calling it “fees”. In reality their APRs can be as high as 300%! Stay away.

Lowering your APR may not be as fun as a new pair of shoes, but it will definitely keep more money in your pocket.

Debt is something of a double-edged sword. On one hand, it offers you ability to buy something that would normally be out of reach financially and allow you to pay for it over time. But on the opposite side, debt comes with a cost. You are borrowing someone else’s money, and for that privilege, you need to pay money.

So when is debt too costly? If you have extra money on hand, when does it make more sense to pay off debt, and when does it make sense invest the money instead?

Well... It all depends on interest rates.

The line between bad debt and good debt depends entirely on how expensive that debt is.  And the higher the interest rate on the debt is, the more expensive it is to hold. So debt that is considered bad, should be paid down, and if it is considered good debt, then the urgency to pay it down is lower.

So what is the dividing line between good debt and bad debt? A quick answer to that question is to say that right now, 6% or 7% is the dividing line between good debt and bad debt. But the issue is not as clear-cut as that. There are a lot of grey areas,

Instead, you should ask yourself if you should pay down your debt, or whether there is something “better” that you can do with your money? So instead of paying down your debt, is it a better idea to invest your spare cash?

To make that decision, you have to look at what kind of returns you can get from investing your money.  If the returns you can get from investments are higher than the interest you pay on your debt, then investing your money may be a better option.

So what kind of return can you get from investing? That’s a big question. Historically, average annual returns of from the US stock market (including from dividends) has been around 11%. We’ll note here that this number is debatable, and depends on the time-line you use and how you measure “the stock market”. But over the long run, US equities have generated handsome returns.

But for the sake of argument, let’s temper our expectation of returns. Let’s say we are conservative investors and expect a 6% return. Let’s see how that impacts your decision about paying down debt.

Historically, credit card debt has carried a double-digit interest rate. Average rates hover around 15% and penalty rates can be as high 29%.

Let’s assume your credit card interest rate is 15% and you have an extra $100 that you can use to pay down the money you owe on your credit card. If you pay down your principle by that $100, it means over the next year, you would have saved the 15% interest that would have been charged on that $100, which would be $15.

If you instead took that $100, and invested it, and everything went according to plan and you earned a 7% return, you would have made $7. So you’re $7 richer than when you started. But remember that you didn’t pay down your credit card debt. So you paid $15 in interest you could have avoided had you paid down your credit card debt. So in this case, you’re $8 worse off than if you had paid down your credit card debt.

Any way you look at credit card debt, it is almost always better to pay down this high interest debt than it is to invest. There will be some years where stock market will preform above expectations, and will give you better returns than paying down your credit card. But these are definitely the exception, and over the long run, paying down credit card debt is the better option than putting that money into investments.

On the opposite end of the debt scale are mortgages. Because they are backed by the value of a house, they tend to be lower risk for the lender and offer some of the lowest interest rates of any debt. In this case, the savings you get from paying down an average mortgage is usually lower than the gains you get on an average year of investing. Again we say “average” because in some years this will not be the case. But over the 20 or 30-year span of a mortgage, it wouldn’t make sense to stay away from investing while you pay extra on your mortgage. (You should still always pay your monthly payments though!).

While the logic of paying down debt is clear on both extremes of interest rates, the logic is much less clear when the interest rate is somewhere in the middle. There are no rules when it comes to making decisions about debt with moderate interest rates. So here are some guidelines.

1. Check your gut. Look at how well you tolerate risk. If you can stomach the ups and downs of a bumpy stock market, then maybe investing your extra money in the stock market is a good idea. On the other hand, if a bumpy stock market will cause you undue stress, then paying down your moderate interest debt may be a better idea for you.
2. Go you like guarantees? The savings you make by paying off your mortgage are guaranteed savings. You know that if you pay down your debt, you will save money. There are no such guarantees in investing.
3. What does the future look like? If the market is in turmoil, or there is economic uncertainty on the horizon, think twice about putting more money into investments. Paying down moderate interest debt might be a better option.

Here’s an important note for people carrying student loan debt. If the interest rate on your loan is low, and you can manage the payments easily in your monthly budget, try to prioritize saving and investing. Starting investing early can have a huge impact on your future financial success.

Finally, remember that there are no guarantees with the stock market. There is no way to predict which way the market will go in the future. So there is no guarantee that investing in the stock market will get you a better return than paying down any debt. The stock market can (and does) go down. All you can say is that the historical odds are in your favor over the long run. So if you do decide to use your spare cash to invest, make sure it is for the long run so you can ride out the bumps.

APR is one of those expressions that bubbles up from the acronym soup that the financial word is so good at brewing. But what does it mean, and why is it important?

First of all, APR refers to the Annual Percentage Rate of a loan. It includes not only the interest rate, but also any fees attached to the loan, so it gives you a good overall view of how much your loan costs. A high APR means that your lender is charging you a lot of money to borrow their money, and a low APR means that the lender is giving you cheap money.

APRs vary widely, and right now can range from 2% for a car loan to 29% on a credit card. The difference in dollar terms is huge. On a $10,000 car loan, the 2% will cost you about $200 in interest in the first year. If you instead bought that car using a credit card with a 29% interest rate (a terrible idea by the way!), you would pay $2,900 in interest. That’s a huge difference!

So here are some ways to reduce your APR.

1. If you have a credit card, the issuer has two rates, the regular rate and a penalty rate. The penalty rate is always much higher, and kicks in if you miss two payments. So NEVER miss a payment. Set up an auto pay to make sure something goes to pay your credit card bill every month. And secondly, if you do trigger the penalty rate, make sure you make the next 6 consecutive payments. Your credit card company must lower your after the 6^thpayment.
2. Consolidate your debt. If you have a bunch of debt that has an APR in the double digits, think about rolling that debt into a consolidated loan. These are installment loans, so they have fixed payments over a fixed term that are focused on paying the debt off. You cannot use this debt like a credit card and buy new shoes with it. But they are terrific ways of lowering your APR and paying off your debt.
3. Home equity loan or home equity line of credit. If you own a home, you can borrow against it at competitive rates, and you can usually use the money for whatever you want. Rates are usually in the mid single digits. So if you pay off your 16% debt using a 7% home equity loan, your overall APR will drop substantially.
4. Roll your credit card debt to one that has a 0% introductory interest rate. These are great ways of getting TEMPORARY relief from your high credit card interest rate. But be careful. There are fees associated with these products (usually 3% of your balance). If you use these products, make sure you use the time pay down your credit card balance; otherwise this break makes no economic sense.
5. Refinance. Interest rates are hovering at super low rates. See if you can refinance your existing mortgage or home equity loans at a lower rate.
6. Get help with you student loans. There are fantastic programs for federal loans that base your payments on your income or allow for loan forgiveness. Look to see if you qualify. If you have a private loan, ask your lender for a graduated or reduced repayment plan. Go to the Consumer Finance Protection Bureau for more information.
    

And as a final note, when you get some debt relief, make sure that you don’t rack up more debt with the money you’re saving. Once you’ve reduced your overall APR, work to ensure it doesn’t creep back up again.

And finally, stay VERY far away from Payday Lenders. They hide their APR by calling it “fees”. In reality their APRs can be as high as 300%! Stay away.

Lowering your APR may not be as fun as a new pair of shoes, but it will definitely keep more money in your pocket.

If you’re finding that you can’t seem to dig out from under your debt, you’re not alone. There are trillions of dollars in mortgages, student debt and credit card debt in the US, so it’s not surprising that the burden of debt can be difficult to bear for many people.

Let’s start by trying to find out what a reasonable debt burden is. The most common measure of debt burden is called a ‘debt to income ratio’ (DTI). This is the percentage of your income that is used for debt payments. The generally accepted maximum ratio is having 36% of your income going to debt payments. Your mortgage alone should be no more than 28% of your gross income. Anything above these levels is considered a burden that could impact your quality of life.

DTI is easy to figure out. All you have to do is add up all of your monthly debt payments (student loans, car loans, mortgage and minimum credit card payment) and divide it by your monthly gross (before tax) income. That will give you your DTI. If you rent instead of holding a mortgage, you should include your rent in the calculation. Although this isn’t truly debt, it is a financial obligation that takes money out of your pocket. It won’t be a true DTI, but it will give you a fuller picture of your financial obligations

So what to do? If you have a mortgage and car payments which are putting you over that 36% threshold, there are only two things you can do: try to refinance your mortgage at a lower rate, or earn more money. Neither are easy options. But there are lots of web sites, like LendingTree, where you can price out new mortgages.

If you have credit card debt in the mix, there is definitely something you can do. If your credit card debt is pushing you over the 36% level, think about consolidating that debt. Credit card interest can range from 10% all the way to 30%. There are companies that will give you a debt consolidation loan that is structured with fixed monthly payments at a lower interest rate than you’re paying on your credit card. Just don’t rack charges back onto your card again!

If you are under that 36% DTI, and have credit card debt, think about increasing the amount you pay towards your credit card every month. If you are only paying the minimum, that amount is usually only interest and 1% of your balance. Just paying the minimum will mean years of payments and sometimes paying more than double your balance in interest. Minimum payments are not good enough. See how much you can add to your payment without hitting the 36% threshold.

Credit card debt is usually the highest interest debt you will hold. Paying that debt off first and fast will leave you more and more money in your pocket every month as your interest payments go down. Just make sure you don’t add more charges on to your credit card and end up where you started!

Debt can be hard to manage. But when you know what your debt level is, and build a strategy to reduce it, it’ll just be a matter of time before you see the light!

Debt can be a terrific thing. It can open doors to things that are normally out of reach financially. Homes, for example would be almost impossible to afford if you had to pay for them in cash. And the best part about debt is that by using debt, you can actually enjoy those awesome things while you’re paying for them! What a terrific idea.

But debt is not free. You’re borrowing someone else’s money after all, and you’ll have to pay them something for that privilege. And over time, that cost can be substantial. So it’s always a good idea to try and pay off your debt and limit the extra cost in interest payments you have to give to your lender.

The most critical component of debt is its interest rate. The interest rate is the amount of money your lender is charging you to borrow their money. The higher the interest rate, the more you are paying to borrow. It’s also important to note that debt with a high interest rate has a tendency to grow if it isn’t managed properly and can often balloon out of control.

So if you want to deal with your debt, the first thing to do it take stock of all the debt you have. The first thing to do is look at all of your debt and try to figure out the interest rate you are paying on each pool of debt. Better yet, look for the Annual Percentage Rate (APR). This rate reflects not only interest, but also other fees that you are charged on your debt. APR is a more accurate measure of how much your debt costs. Most lender statements will list the APR.

Next, order your debt from highest interest rate to lowest interest rates. You’ll notice that there is a wide range of APRs. They can go from low single digits for mortgages to mid double digits for credit card debt.

In dollar terms the cost difference can be significant. Let’s look at $1,000 of debt. If that $1,000 debt is credit card debt, it can cost you between to $130 to $300 in interest payments per year. If that $1,000 debt is in a mortgage, it will only cost you $40 in interest per year. That’s a big difference.

So here is the key to paying down your debt: Attack your high interest debt first. In the above example, you will see that if you can pay down the principle on your mortgage by $100 this year, it will save you $4 in interest payments next year (and every year after that). If you reduce the principle on your credit card by $100 instead, it will save you $13 to $30 in interest payments next year and every year after that.

As you can see, paying down the principle on your high interest debt is a more effective way of paying down debt and reducing the interest you owe. Remember that if you pay down more high interest debt first, you will reduce more of your future interest payments, and have more money in your pocket each month.

So here are the keys to paying off your debt:

1. Focus on your highest interest debt first
2. Pay more than just your interest, pay down your principle
3. Don’t add more debt to the loan you just paid down

So make sure you’re attacking the principle that you owe. If you only pay the interest you owe, you are not paying down your debt and your monthly payments will remain the same. Ignore the “minimum due” line on your statement. Look instead at the “interest charged” line in your credit card and pay as much above that as you can.

Most importantly, make sure you don’t add more debt than to what you just paid down. The key here is to figure out how much principle you just paid off and not add more than that. For example, if you just paid $500 on your credit card debt, of which $100 went to interest, you just paid down $400 of your principle. So in the next month, do not spend more than $400 on your credit, otherwise your principle will have actually gone up, and you’ll owe even more in interest!

The hardest payment is the first payment. Set yourself a goal of paying down your principle. In the above example, if you can pay $500 on your credit card and limit your spending to $300 per month, then will have paid down your principle by $100.

But the amazing thing about paying down debt is that, its benefits can accelerate. So in the above example, in the next month, you will only owe $98.75 in interest. So that same $500 payment will pay off $101.25 in principle. After a year, that same payment is paying almost $115 in principle. And in less than 5 years, you will have completely paid off an $8,000 debt and you will have the $100 in interest and $100 in extra principle in your pocket every month. That extra $200 in your pocket every month can be used to pay down other high interest debt or put into savings.

Again, the first payment is the hardest. If you can manage paying down your principle in that first month, you should be able to do it every month. Just stick to your plan and keep paying down your principle.

If you want to know how long it will take to pay off your credit card debt, you can use this calculator from CreditCards.com. If you want to sort out the benefits of paying down student loans, try this calculator from StudentLoans.org, or this calculator from Finaid.org.  For other installment loans try this calculator from CNN.

The benefits of paying down your debt quickly pay off with less money paid in interest and more money in your pocket. Win-win!

Borrowing money is one of the most important financial events your life. It can open doors to things that are unavailable to you without help from lenders.

But before you start, you need to do some homework.

First of all, you need to understand how lenders look at you in terms of risk. The interest rate on your loan will depend on this risk assessment. But the lenders don’t really do this assessment themselves; they rely on third parties to assess risk. This is done by the three main US credit bureaus - Experian, TransUnion and Equifax. They offer credit scores on almost everyone in the United States.

The bad news is that secret algorithms at these opaque companies determine your credit worthiness. Often the data they have on you contain errors and mistakes, so sometimes your score can be inaccurate. And fixing these errors can sometimes be difficult and time consuming.

The good news is that the federal government has mandated that these organizations give you free access to your reports once a year. You can do this from the AnnualCreditReport.com web site. When you get your report, make sure all the information that each credit bureau has is accurate and there are no mistakes. If there are mistakes, get in touch with the credit agency involved and have it corrected immediately.

The one weakness to the reports is that they do not contain the “score” that your lender sees. The score is important because it will tell you where you fall on the credit worthiness scale. The lender will use the score to determine whether you get credit and what your interest rate will be. The score is also important to you because it will allow you to track your credit rating over time (so you can see what happens when you start paying your bills on time!).

In order to obtain your score, you need to pay some money. The cheapest way to do this is to get your score at the same time as you get your free credit report. You only need one. But make sure you get the same score from the same company every year. Each company has their own scoring system, so you cannot compare scores from one credit bureau to another. If you want to see how well you are managing your score over time, you need to look at the same score every year.

The score will come with an explanation of what it means. But essentially your score will suffer if you:

• Miss payments or are late with payments
• Use too much of your available credit
• Have a limited credit history
• Have only one type of credit
• Have lots of credit applications in a short time

It takes time to raise your credit score, so make sure you get a handle on it early!

So once you have a handle your credit worthiness, next you have to look the debt you’re interested in getting. The most important part of a loan to focus on is the interest rate. Interest rates can vary widely so you need to make sure you are getting the lowest rate possible.

Interest rates are how lenders compensate themselves for risk. The biggest risk to them is that a borrower will default on a loan and not pay it back. In order to cover themselves for this potential loss, they charge interest on the loan. The larger the risk, the more interest they charge.

Here are the two types of loans that typically come with lower interest rates: Secured loans and installment loans. Secured loans are loans that are backed with collateral. These loans are considered lower risk to lenders and come with lower interest rates because if the borrower defaults on the loan, the lender will take possession of the collateral. This is how mortgages work; using the house as collateral, which allows the lender to offer lower interest rates.

You can also get other secured loans. Car loans are secured, as are home equity loans. You can even get secured credit cards, where you put cash in an account that is held as collateral against the credit on your card. Secured credit cards are an excellent way for people who have poor credit to get a credit card and boost their credit score. 

The other way to get a lower interest rate is by using installment loans. These are loans that have a fixed duration and set monthly payments. Because they are predictable and structured, they are easier to manage and pay off than revolving credit.

With installment loans, make sure you take on the shortest term (length of time) you can manage. It is true that the shorter the term, the higher the monthly payments will be. But a shorter term will also mean that you will pay less interest overall than a longer term loan.

So now that you have all the information about loans, what kind of loan should you get? It depends what you need the loan for. Let’s go over some possibilities:

• House: If you want to buy a house, you’ll need a mortgage. The most important thing to do is to shop around for offers. Only 50% of Americas do this! Even a half a percentage difference in your mortgage can save you tens of thousands of dollars. Focus on fixed rate mortgages. They are predictable, and your payments will not increase even if interest rates around you rise.
• Car: If you plan on keeping a car for the long term, buying a car using a loan is more economical than a lease. Rates can be extremely competitive, so make sure you shop around. Look to banks as well as car manufacturer for quotes. But be very careful of used car loans from small dealers. They can have extremely high rates.
• Student Loans: Make sure you look to federal loans first. Their rates are competitive, and most importantly they have far more avenues for restructuring and forgiveness (if you need it later) than private or state loans.
• Appliance: You would think that buying an appliance in installments would save you money right? It’s an installment loan with collateral after all… But no. Retailers seem to take advantage of consumers who need the credit and charge extremely high interest. Don’t be fooled by 0% offers (interest is often just deferred). Check the interest rate and compare it to your credit card. It may be cheaper to buy an appliance using your credit card and pay down the card balance as quickly as you can.
• Credit Card: Because credit card debt is unsecured, interest rates are quite high. Try to avoid running up your credit card if you can. Also shop around for low rates. Sometimes you can get a 0% rate if you switch cards. There is usually a fee associated with the transfer, but if you can pay down your balance before the offer expires, these transfers can be a great way to get rid of some debt. Also know your penalty interest rate and what triggers it. Your interest rate could jump from 15% to 29% if you miss one or two payments. Finally, avoid taking cash advances at all cost. The interest on these loans is extremely high.
• Consolidation Loan: These loans pool several of your loans into a single installment loan. These are a great way to reduce your debt burden. These loans allow you to take all of your high interest credit card debt and pool it into a single lower interest loan. Just make sure you don’t run up those cards again!!

So make sure you do the math on your repayment terms and understand the consequences of what happens if you miss a payment. And if you ever feel pressured to sign something you don’t understand – DO NOT SIGN! Ask questions, seek advice, and do the math until you fully understand what you’re signing – your future self will thank you!

Life can be unpredictable. So it isn’t surprising that expenses can sometimes be unpredictable too. The kids’ braces will cost how much?? How could that knocking sound in my engine possibly cost that much to fix????

Sound familiar?

Wouldn’t it be great if you had a spare source of cash that you could tap into to get through those financial bumps in the road?

That’s where lines of credit come it. A line of credit is a pre-approved loan up to a set amount that sits waiting for you to use when needed. Once you tap into it, you use only what you need and you are charged interest only on the amount you use. If you don’t use it, you just pay a maintenance fee, and no interest.

It is similar to a credit card in that the debt can be used for anything. And as with a credit card, you pay interest only on what you use. The good thing about a line of credit is that the interest rate is usually lower than that on a credit card.

The interest charged on a line of credit depends mostly on what type of loan it is: secured of unsecured. A secured line of credit uses an asset as collateral against the value of the line of credit. Most often the collateral used is a home. These Home Equity Lines of Credit (HELOCs) are seen as lower risk by the lender because if the borrower defaults on the loan, the lender can make a claim on the home. So even if the lender doesn’t get their loan back, they will still possess something of value. And because these loans are seen as lower risk, they carry relatively low interest rates.

Unsecured lines of credit on the other hand, have no asset backing them, are considered higher risk and have higher interest rates. Even so, these unsecured lines of credit often have rates that are lower than many credit cards.

Lines of credit are terrific for people who have unpredictable sources of income or fluctuating expenses, particularly those who are self employed. When you have to outlay significant expenses before you get paid for a job, a line of credit can allow you to pay those expenses and bridge the gap until you get paid. It can be a lifesaver for independent contractors, small businesses and freelancers.

Lines of credit can also be good for people who have expenses coming in the future, but don’t know exactly how much they will be. Instead of getting a loan at a fixed amount, sitting on the loan for a few months and paying interest on the full amount, they can get a line of credit and use it only if they need it. It works something like overdraft protection and allows you to temporarily exceed the amount of money you have on hand to pay unexpectedly high expenses.

People need to qualify for lines of credit, and since the recent economic downturn, it is more difficult to secure lines of credit. They also have the potential to impact your credit score, so should be used carefully.

But because lines of credit carry interest rates that can be significantly lower than credit cards, they are a terrific alternative to high interest loans such as cash advances on credit cards. It may also sometimes make sense to pay off your high interest credit card debt with your line of credit if the interest rate is lower. Just make sure you don’t max out your credit cards again!!

Most banks offer lines of credit. Shop around for the best rates you can find. Rates are competitive, so you should be able to find good low interest offers.

And make sure you use the credit wisely. Because lines of credit don’t have set repayment structures, there is a tendency for people to use up a lot of the credit available, and not pay it back down. Make sure you only use the credit when it is absolutely necessary, and make a plan to pay it off once you have used it.

Debt can be a terrific help when you need it, but a huge burden if it becomes unmanageable.

Debt can be a terrific thing. It can help you buy and enjoy things that are too expensive to buy outright. It is often the only way to make big purchases that would normally be out of reach, and pay for them over time. Enjoying things while you pay for them is an amazing idea, and one that has helped fuel modern economic prosperity.

But the burden of debt can also be debilitating. People can be so overwhelmed with debt that it affects their ability to pay for essentials. It can also be such a huge burden that it affects people’s mental well-being. In these cases, debt is far from a positive force, and is more like a curse.

So let’s talk about debt and focus on good debt and how to avoid the bad.

There are two things that define good debt. One is that it carries a low interest rate. The other is that it pays for something of value.

Mortgages

Let’s start with the best kind of debt. The best debt out there is a fixed rate mortgage. Interest rates on mortgages usually have the lowest rates of all debt. And when you pay off your mortgage, you’ll own a house, which (we all hope) will be worth at least what you paid for it. So you win with a low interest rate, and you win by buying a valuable asset. Just make sure that the payments are manageable.

Adjustable rate mortgages are a little less beneficial than fixed rate mortgages only because they are unpredictable. They may have lower current rates than fixed rate mortgages, but there is no way to tell what the rate will be in the future. If rates ratchet up, holders of adjustable rate mortgages could have trouble making their payments. Borrowers of adjustable rate mortgages need to make sure that they have enough spare income to cushion any possible future rate increases.

And avoid any exotic mortgages like interest only loans. They tease borrowers into signing with low initial payments then crush them with higher rates when the promotional period ends.

Car Loans

A small step down is a car loan. Car loan interest rates can sometimes be lower than mortgage rates. But, when you buy a car, it loses value very quickly. So the asset you buy will not be worth what you paid for it. But your car does retain some value, and if it comes with a low interest rate, it can still be considered good debt.

Also make sure you look at used cars. They can sometimes offer better value. Just make sure that if you finance a used car, don’t do it through small self-financed used car dealers. They can charge exorbitant interest rates.

Federal Student Loans

Federal student loans can also be considered to be good debt. Although you can’t actually put a price tag on what you gain from a college education, there is undeniable evidence that you will be significantly better off financially with a college education. Interest rates on federal undergraduate loans are usually quite low. So again, you get something of value at a low interest rate.

As a side note, some state and private loans can have severe restrictions with respect to repayment, rate reductions and forgiveness, so they can often fall into the bad debt category.

Home Equity Loans

Now we get into a grey area. Home equity loans. These are loans you take out against the value of your house. Right now they are only about 2 or 3 percentage points higher than fixed rate mortgages. But defining them as good or bad debt depends on what they are used for. Often times it is to renovate a house, which can add value to your home. Which is great. Other times it is used to consolidate higher interest debt. Which is also great. But a Discover Home Equity Loans survey found that the number one reason Millennials (30-34) take out a home equity loan is for… vacations! Ouch! We’d consider that bad debt.

Credit Cards

And at the bottom of the pile is credit card debt. Credit card debt comes with high interest, usually around 15% to 17% and usually pays for things that hold no intrinsic value (food, movie tickets, beer, shoes…). It makes little economic sense to carry credit card debt. Avoid carrying credit card debt if you can.

Payday Lenders

And at the bottom of the bottom are payday lenders. They charge exorbitant interest and fees, and their clients get stuck in never ending loops of short-term loans. Stay far, far away from these types of loans.

So if you are carrying debt, make a plan to pay down the highest interest debt first. You’ll have more money in your pocket each month that will no longer go to interest payments. Use this handy debt reduction calculator to make a debt reduction plan.

And make sure you shop around!! It’s crazy, but almost 50% of Americans don’t comparison shop for mortgages. Shop around for multiple quotes. It can save you a lot of money!

What is an APR? For some people the term APR can send a shiver down their spines… What’s so frightening?  APR stands for Annual Percentage Rate, and represents the cost of interest and fees charged by a lender on an outstanding loan. If you owe a lot on your credit card, APR is truly a frightening thing. The higher the APR, the bigger the chunk of money you will be sending to your lender every month.

Different kinds of loans will have different levels of APR. Generally, the riskier the loan, the higher the APR. So if you have a bad credit score, lenders will charge you higher rates because they consider you higher risk.

Lower rates apply to loans that are secured, or have assets attached to them. So car loans or mortgages often have low APRs, because if things go bad, your lender can always take back your home or car. But unsecured debt, like credit card debt, is much harder to collect if things go bad, because there is no asset attached to the loan. These types of loans have higher APRs.

But APR can be your friend too. When you are the lender, a high APR is terrific, because you’re the one getting the interest. Take your bank account for example. This is a basically a loan you make to your bank. They then take your deposit and lend your money out to others. For this right, your bank pays you interest, or an APR. Unfortunately, at this moment in time, because interest rates are so low, the APR your bank gives you will be extremely low.

One thing to be aware of is something called an APY, or Annual Percentage Yield. An APY takes the power of compounding into consideration. On bank accounts, compounding happens when you earn interest on the interest you’ve already earned. Compounding is the fuel on which finance runs. So if you get a 5% APR, which is given to you monthly, you will get compounding on the interest you already earned, kicking your 5% APR to an actual 5.11% APY earned. But be warned. If your bank quotes you an APY on your bank account, they are actually referring to the compounded return. The actual interest they will give you each month will be calculated using the lower APR! Sneaky!!

APRs can also vary. For adjustable rate mortgages, the APR can change year to year. These mortgages can be riskier for borrowers because there is a chance that rates can jump unexpectedly. At the moment, variable rates are lower than fixed rates, making them tempting… But things can change!

APRs on credit cards can also change, and usually in response to failed payments. These “penalty rates” can be as high as 29%. If this happens, know that your credit card company must lower your rates back down to the normal rate after 6 months of successful payments.

Finally, if you have multiple loans or lines of credit and you have extra cash, pay down your debt with the highest APR first. Generally anything over 6% or 7% interest is considered bad debt and should be paid off as fast as possible.

So now you know about APRs. The lower the better if you borrow, and the higher the better if you are the lender.

So, a good thing to know is that your credit card can be your friend instead of your foe.

However, it’s important to understand how credit cards work, what their benefits are, how to avoid pitfalls and how to make sure you manage them correctly. Here are some tips and tricks to help you manage credit card debt.

First of all, credit can be a great thing. Credit, in the form of consumer credit or credit cards allow you to borrow money in order to finance the purchase of something that may normally be out of reach. This is a great thing if you need to buy a new television, refrigerator or couch.

The downside of credit cards is that they can charge an exceptionally high rate of interest.

Currently, the average interest rate on credit card debt in the US is 15%. When you charge that against the average debt on a US credit card, which is about $15,000, the average American with credit card debt ends up paying $2,250 in interest every year. And if you miss a payment and your interest rate is raised to the penalty rate of 29%, you’ll be paying $4,350 per year in interest. Those are some very expensive televisions, fridges and couches!

Credit card debt can be debilitating, so here are some hard truths:

1. If you can’t save money, you really shouldn’t be using a credit card. How are you going to pay off your debt if you don’t have spare cash?
2. Pay as much as you can. If you’re only paying your minimum every month, try to find a way to pay more every month. It will pay huge dividends in the long run.
3. If you use a credit card, try to only use it for big purchases and have a plan to pay it off as quickly as you can.
4. Your goal should be to pay off your credit card in full every month. It means you pay NO interest. Wouldn’t that be great?!

Yes… Tough medicine… But it really will help keep a ton of money in your pocket.

So here are some tips to help you:

1. Set up an auto-pay. It will ensure you don’t miss a payment and have your interest rate shoot up. Consider paying your credit card once a week. By paying more frequently, you keep your average balance lower. It will help lower the interest you owe a bit (it is calculated on your average balance),
2. If you have a big purchase, pay it off fast, or even pay some of it before it appears on a bill. This will keep the interest you owe a little lower. It will also help you keep your credit score high. Credit agencies like it if you don’t use up all of the credit available, even for one-off purchases (in fact, they would prefer it if you use less than 30% of your available credit!)
3. Transfer your balance to a low or 0% interest card. Sometimes these low cards are hard to get if you don’t have a good credit rating. But if you can, shop around for lower rates. And if you do transfer your balance to a new card, make sure there are low transfer fees (which can be as much as 3% of the transferred amount). Try to pay off as much of your transferred debt as you can. Low rates are often temporary, so take advantage of them. And if you transfer to a new card, do not cancel your old card. Your credit score drops when you cancel a credit card. Keep the card, and use it infrequently.
4. Consolidate your debt. Banks will sometimes give you loans at much lower interest rates to consolidate all of your credit card debt. Unfortunately, they may ask you to cut up your credit cards when you take the loan! This will ding your credit rating because your available credit will suddenly drop. Try to get the consolidated loan and keep your cards (but don’t go back to old spending habits).
5. Use all of the benefits your card offers. Use the price matching, cash back, car rental insurance, extended warranties and loss protection that your card offers. Spend a day reading the benefits summary of your card. You may find interesting benefits you didn’t know about.
6. If you’re close to paying your balance off, pay it all off. If you have a $1,000 balance and pay off only $999, you’ll be charged interest on your average balance, which will be closer to the full $1,000, not the $1 of remaining debt.
7. Know these triggers for penalty rates: If you miss TWO minimum payments, your interest rate WILL be raised to the penalty rate (which can be as high as 29.99%) and will be applied to your ENTIRE balance. The good news is that if you make the next 6 payments on time, your bank MUST lower your rate to the non-penalty rate.
8. Know the triggers for higher interest rates. Your bank can raise your regular Annual Percentage Rate (APR) for reasons, like going over your credit limit, or missing just one payment. But your bank MUST tell you the reasons for the rate increase 45 days in advance of it being applied. This higher rate must be reevaluated within 6 months, and if appropriate, your bank must lower your rate within 45 days of the evaluation.

Owning a credit card can be a terrific thing. It is an amazing convenience and can have lots of great perks. But carrying a lot of debt on your card can be destructive to your financial well-being. Try to avoid putting debt on to your card if you can’t pay it back quickly. And if you do have a big balance, try to find savings elsewhere so that you can pay down your debt. Every dollar you pay down will result in a reduction of interest payments, and more money in your pocket.

Credit scores. They may sound a little boring… But you should get to know what goes into a credit score because landlords, employers and banks look at them. So a bad score can keep you from not only getting a loan, but also keep you from getting a great job or a great home.

Getting to know how the system works will help you manage your score and prevent your life from getting derailed.  Financial institutions share all of your credit information with the three main US credit bureaus: Experian, TransUnion and Equifax. Everything from balances, credit available to late payments is shared with the credit bureaus.

The first thing you need to do is to get your free credit report once a year from AnnualCreditReport.com. The credit bureaus are notorious for getting data wrong. Sometimes someone else’s transactions can appear on your report. Fix the mistakes right away! 

Each credit bureau has a different way of calculating your credit score but the logic is the same for all of them: The higher the score, the better. The most commonly used score is the FICO score. It ranges from 300 to 850. Anything over 660 is considered good.

So here are some strategies for helping you keep your score as high as possible.

1. Never miss a credit card or loan payment. Period. Too many bad things can happen if you do. Try setting up an auto pay to cover at least the minimum payment so this never happens.
2. Don’t cancel your inactive credit cards. Credit bureaus love it when you have tons of credit available. If you cancel your card and reduce your available credit, credit bureaus won’t know why. They may assume that a bank cancelled your card. All they know is your available credit dropped, and your score will go down. So keep your card open and use it only once in a while.
3. Use less of your available credit (30% or lower is best).  The crazy part of this means that if you buy an airline ticket one month and max your card, your credit score may suffer. So a tip: Pay down your big purchases before your statement is generated, so you can lower your balance before it’s reported to the credit bureaus. Or another strategy is to auto-pay your credit card once a week. If you make three payments before bill goes out, your month-end balance will be lower and you’ll look better to the credit agencies.
4. Get different kinds of credit. Even just getting a store card or gas card could improve your credit score because those cards are seen differently to credit cards. The more types of credit you have, the better.
5. But… only apply for credit that you need. Too many inquiries into your credit and any rejected credit applications will hurt your score. And if you’re shopping around for credit, do it quickly. Most credit bureaus know you’ll shop around for mortgages or student loans, and will leave your score alone for around 30 days while inquiries are made into your credit score. But if you delay, those multiple enquiries may hit your score, thus risking the credit you’re applying for.
6. Consolidate your credit card loans. Companies like Prosper will take your higher interest loans and pool them into a single, lower cost loan. To the credit agencies you look good because they look more favorably on these installment loans. And you’ll have freed up credit on your credit cards. And you’ll also saved interest charges with the lower rates. Win-win! Just make sure you don’t charge up those cards again!
7. Finally, if you have a terrible credit score, try to get a secured credit card. It means saving some money and giving it to your bank to be used as collateral against a credit card. Banks are much more willing to give secured credit cards than unsecured cards. Your credit report will show that a bank gave you credit even with a terrible score. That will quickly improve your credit score.

In the end, the best action you can take is to pay your bills on time each and every month. Time will heal all credit wounds. But also make sure you know the rules of the credit score game, because your score can affect everything from buying a house to getting a job. It's a big deal.

Debt is something of a double-edged sword. On one hand, it offers you ability to buy something that would normally be out of reach financially and allow you to pay for it over time. But on the opposite side, debt comes with a cost. You are borrowing someone else’s money, and for that privilege, you need to pay money.

So when is debt too costly? If you have extra money on hand, when does it make more sense to pay off debt, and when does it make sense invest the money instead?

Well... It all depends on interest rates.

The line between bad debt and good debt depends entirely on how expensive that debt is.  And the higher the interest rate on the debt is, the more expensive it is to hold. So debt that is considered bad, should be paid down, and if it is considered good debt, then the urgency to pay it down is lower.

So what is the dividing line between good debt and bad debt? A quick answer to that question is to say that right now, 6% or 7% is the dividing line between good debt and bad debt. But the issue is not as clear-cut as that. There are a lot of grey areas,

Instead, you should ask yourself if you should pay down your debt, or whether there is something “better” that you can do with your money? So instead of paying down your debt, is it a better idea to invest your spare cash?

To make that decision, you have to look at what kind of returns you can get from investing your money.  If the returns you can get from investments are higher than the interest you pay on your debt, then investing your money may be a better option.

So what kind of return can you get from investing? That’s a big question. Historically, average annual returns of from the US stock market (including from dividends) has been around 11%. We’ll note here that this number is debatable, and depends on the time-line you use and how you measure “the stock market”. But over the long run, US equities have generated handsome returns.

But for the sake of argument, let’s temper our expectation of returns. Let’s say we are conservative investors and expect a 6% return. Let’s see how that impacts your decision about paying down debt.

Historically, credit card debt has carried a double-digit interest rate. Average rates hover around 15% and penalty rates can be as high 29%.

Let’s assume your credit card interest rate is 15% and you have an extra $100 that you can use to pay down the money you owe on your credit card. If you pay down your principle by that $100, it means over the next year, you would have saved the 15% interest that would have been charged on that $100, which would be $15.

If you instead took that $100, and invested it, and everything went according to plan and you earned a 7% return, you would have made $7. So you’re $7 richer than when you started. But remember that you didn’t pay down your credit card debt. So you paid $15 in interest you could have avoided had you paid down your credit card debt. So in this case, you’re $8 worse off than if you had paid down your credit card debt.

Any way you look at credit card debt, it is almost always better to pay down this high interest debt than it is to invest. There will be some years where stock market will preform above expectations, and will give you better returns than paying down your credit card. But these are definitely the exception, and over the long run, paying down credit card debt is the better option than putting that money into investments.

On the opposite end of the debt scale are mortgages. Because they are backed by the value of a house, they tend to be lower risk for the lender and offer some of the lowest interest rates of any debt. In this case, the savings you get from paying down an average mortgage is usually lower than the gains you get on an average year of investing. Again we say “average” because in some years this will not be the case. But over the 20 or 30-year span of a mortgage, it wouldn’t make sense to stay away from investing while you pay extra on your mortgage. (You should still always pay your monthly payments though!).

While the logic of paying down debt is clear on both extremes of interest rates, the logic is much less clear when the interest rate is somewhere in the middle. There are no rules when it comes to making decisions about debt with moderate interest rates. So here are some guidelines.

1. Check your gut. Look at how well you tolerate risk. If you can stomach the ups and downs of a bumpy stock market, then maybe investing your extra money in the stock market is a good idea. On the other hand, if a bumpy stock market will cause you undue stress, then paying down your moderate interest debt may be a better idea for you.
2. Go you like guarantees? The savings you make by paying off your mortgage are guaranteed savings. You know that if you pay down your debt, you will save money. There are no such guarantees in investing.
3. What does the future look like? If the market is in turmoil, or there is economic uncertainty on the horizon, think twice about putting more money into investments. Paying down moderate interest debt might be a better option.

Here’s an important note for people carrying student loan debt. If the interest rate on your loan is low, and you can manage the payments easily in your monthly budget, try to prioritize saving and investing. Starting investing early can have a huge impact on your future financial success.

Finally, remember that there are no guarantees with the stock market. There is no way to predict which way the market will go in the future. So there is no guarantee that investing in the stock market will get you a better return than paying down any debt. The stock market can (and does) go down. All you can say is that the historical odds are in your favor over the long run. So if you do decide to use your spare cash to invest, make sure it is for the long run so you can ride out the bumps.

To update your information, log in to amalgamatedbank.yourmortgageonline.com or contact our customer service team at 877-498-9408.

Since your mortgage is currently with Amalgamated, we are well positioned to assist you with a new mortgage. You may apply in person, online or over the phone.

• To apply in person, please visit your local Amalgamated Bank branch.
• To apply online, visit our website at www.amalgamatedbank.com.
• To apply over the phone, call us at 866-280-7435.

The interest on your loan is paid in arrears and accrues daily. Interest is calculated on your loan up to the payoff date. Any additional fees will also be included in your payoff amount.

Yes, if you have authorized us to debit your account for monthly payment, you can authorize us to add a fixed monthly additional principal.

If you are paying online or via the mobile banking app, once you have satisfied the regular monthly payment amount, you can submit additional principal payments. 

To access this information, log in to amalgamatedbank.yourmortgageonline.com or contact our customer service team at 877-498-9407.

To access this information, log in to amalgamatedbank.yourmortgageonline.com or contact our customer service team at 877-498-9407.

To access this information, log in to amalgamatedbank.yourmortgageonline.com or contact our customer service team at 877-498-9407.

To provide notification, log in to amalgamatedbank.yourmortgageonline.com or contact our customer service team at 877-498-9408

To submit a request, log in to amalgamatedbank.yourmortgageonline.com or contact our customer service team at 877-498-9408.

To provide notification, log in to amalgamatedbank.yourmortgageonline.com or contact our customer service team at 877-498-9407.

Year-end statements are mailed by January 31st. To obtain an additional copy please log in to amalgamatedbank.yourmortgageonline.com or contact our customer service team at 877-498-9407.

To update your information, log in to amalgamatedbank.yourmortgageonline.com or contact our customer service team at 877-498-9408.

One of the most common reasons why your monthly payment might increase would be a change in the monthly escrow portion of your payment. This could be caused by an increase in your local property taxes, or an increase in the cost of your homeowner’s insurance policy. Your real estate taxes may be different as a result of property being reassessed, the tax rate changing or the loss of a tax exemption. Unexpected tax bills for special assessments charged by your local tax authority will also impact the amount we collect for taxes. Please contact your local taxing authority for any changes to your real estate taxes. Your insurance premium may change as a result of changes to the type or extent of your insurance coverage or if your rate was changed. Please contact your insurance agent for any questions regarding any changes to your Insurance.

If your loan is less than one (1) year old, the amount collected for taxes and insurance at closing may not have been sufficient to cover the required disbursements.

If you have a variable rate loan, the rate is subject to change and the payment may increase.

To review your loan in detail, contact our customer service team at 877-498-9407.

Protecting your credit score is important. Set up automatic payments through us from your checking or savings account.

To get started, log in to amalgamatedbank.yourmortgageonline.com or contact our customer service team at 877-498-9408.

No, however review your loan document for the allowable grace period.

If we disbursed an amount higher than estimated for any escrow item, generally a shortage is created. The amount of the shortage has been divided by 12 monthly payments and added to your future payments.

To submit a request, log in to amalgamatedbank.yourmortgageonline.com or contact our customer service team at 877-498-9408.

At least once a year, we perform a review of your escrow account in order to determine if the escrow portion of your monthly mortgage payment is sufficient to cover the annual requirements for your real estate taxes and/or insurance premiums. We are required under the Real Estate Settlement Procedures Act (RESPA) to disclose to you in an Escrow Account Analysis the results of this review and its effect on your monthly mortgage payment.

There are several options for payments.

• Via ACH: Enroll in ACH payments in your new online account at amalgamatedbank.yourmortgageonline.com
• By check: Check payments can be mailed to DMI at: 

AZ, CA, HI, NV:
PO Box 7168 Pasadena, CA 91109-7168

IA, IL, MN, MO, ND, NE, SD, TN, WI:
PO Box 0054 Palatine, IL 60055-0054

CT, DC, DE, IN, KY, MA, MD, MI, NC, NJ, NY, OH, PA, RI, SC, VA, WV:
PO Box 371306 Pittsburgh, PA 15250-7306

AK, AL, AR, CO, FL, GA, ID, KS, LA, ME, MS, MT, NH, NM, OK, OR, TX, UT, VT, WA, WY:
PO Box 660592 Dallas, TX 75266-0592

Effective October 1, 2023, payment can no longer be made at any of our branch locations.

Under Federal law, we are allowed to maintain a minimum balance or cushion of funds in your escrow account. We use this cushion as a safeguard in the event that your real estate taxes and/or insurance premiums increase. Unless your state law or your mortgage contract specifies a lower amount, your escrow account minimum balance is equal to two months escrow payments for your real estate taxes and insurance.

To submit a change request, contact our customer service team at 877-498-9408.

To submit a change request, contact our customer service team at 877-498-9409.

To provide notification, contact our customer service team at 877-498-9409.

Your new insurance agent must provide us with a copy of the new policy along with your signed authorization to accept the new company. It is your responsibility to cancel your old insurance policy. If the change of insurance is not made on the policy renewal date, you must pay the full year’s premium. If the change is made on the renewal date, please notify us 30 days prior to the renewal. Remember to provide your new insurance company with the loan number.

You can submit this information via email at insurancedocs@ihaveinsurance.com or mail at:

PO Box 961292
Fort Worth, TX 76161-029

Be sure to include your loan number with your submission.

Our tax service provides us with tax billing information for your property. You may keep the paper copies of bills for your reference. However, if you receive an added assessment, supplemental or corrected bill, you should send them to us for payment. These bills are mailed directly to the homeowner and are not provided to the tax service. Original added assessment and any supplemental or corrected bills should be sent to us at:

Amalgamated Bank
1 Corporate Drive, Suite 360
Lake Zurich, IL 60047-8945

Please note that any bills due within sixty (60) days of your loan settlement date should have been paid as part of your closing.

To get this information, click the "Help" option on your toolbar, then click the "About..." option. A new window should pop up with information about the version of Adobe Acrobat installed on your computer.

To get this information, click the "Help" option on your toolbar, then click the "About..." option. A new window should pop up with information about the browser version.

Encryption is the coding/translation of information for transmission back and forth between two points (such as your home PC and our computer). It's the most effective way to ensure the security of information being sent from one point to another as it protects your information so it can't be intercepted and read by a third party while being transmitted to us. When you submit your electronic application to us, the information is converted into an encrypted format. Once within our system, the information is decoded back into its original characters through our use of a secret key.

SSL stands for Secure Sockets Layer. It's an agreed upon format (a.k.a. protocol) for transmitting data or private documents between two devices (such as your home PC and our computer) over the Internet. SSL works by using a private key to encrypt (code/translate) the data that's being transferred over the SSL connection. Both Netscape Navigator and Microsoft's Internet Explorer browsers use SSL, and many websites (including ours) use this protocol to obtain confidential information from their customers.

It is a randomly generated one-time code we provide. You enter it before completing certain transactions to prevent fraudulent transactions and unauthorized access to your financial information.

It is an extra layer of online banking protection that ensures that your funds and financial information are safe. By requiring the entry of a one-time code and the use of a phone you have on record with us, fraud is prevented even if an unauthorized user learns your online banking user ID and password. It also ensures that you are notified if an unauthorized user attempts to access your account information or complete transactions without your knowledge.

It is easy! We'll give you the one-time code and you are asked to enter it when we call a number you have on record with us.

No. Once the code is entered, it is not needed again.

Since we offer several different accounts, we recommend that you review the features and benefits for each one which you’ll find under the personal services tab. If you still have a question about which account to open, please feel free to contact us at 800-662-0860.

You may deposit checks into most personal, small business and commercial Checking, Savings or Money Market accounts.

Any personal customer who uses Amalgamated’s Online Banking today can use AB Mobile. The same credentials used for Online Banking are used for Mobile Banking. Customers who do not have Online Banking, but who want the convenience of Mobile Banking must first enroll in Online Banking at www.amalgamatedbank.com.

Click here to read additional information on Mobile Banking.

Mobile Check Deposit is currently available through the downloadable application (app) for iPhone^®, iPad^® and Android™. For consumers, Mobile Check Deposit is automatically included when you use the application after successful login; no additional enrollment is necessary. If you are a Treasury client, your account administrator must enable you.

• AB Mobile App  iPhone^®, iPad^®, iTouch^® and Android^™ (various phones)
• AB Mobile Web   Any iOS, Android™ phone, or tablet with a web browser
• AB Mobile Text  Any SMS-enabled phone

Click here to read additional information on Mobile Banking.

To use Mobile Check Deposit, you must be a current Amalgamated customer with an eligible Checking, Savings or Money Market account. You must be enrolled in Online Banking and download our Mobile App. If you are a Treasury client, your account administrator must enable you. Before depositing your first check, you must read and accept the Mobile Check Deposit Services disclosure and agreement.

Amalgamated Bank now offers you the ability to log into our Mobile Banking app using the fingerprint scanner on your iPhone^® (iPhone^® 6S and newer only), Face ID, or a six-digit Passcode.

Mobile Check deposit is a free service that is included in the Mobile Banking and Amalgamated Treasury Mobile applications. It allows clients to deposit checks electronically using the camera on their iPad^®, iPhone^® or Android™ mobile phone or tablet device. Please Note: carrier text and data usage charges may apply.

Touch ID/Face ID and passcode is a secure means of accessing your account. The app will only log you in once your unique fingerprint, face or passcode is verified. Even if your Passcode is compromised, Mobile Banking sessions initiated via Touch ID/Face ID and passcode are “read-only,” meaning that no transactions can be performed without the app first requiring your full Online/Mobile Banking User ID and Password.

Once you log into the Mobile Banking app, you will see a screen entitled, “What’s New.” Users of the iPhone 6S and newer will see walk-through Touch ID configuration instructions while all other iPhone^®/Android™ users will see the Passcode walk-through configuration screen. Follow the on-screen instructions to set up Touch ID/Passcode access. If you do not wish to configure Touch ID/Face ID and passcode access, simply tap “Skip” in the right corner of the screen. Three ways to log in to Mobile Banking: (iPhone^® 6S and newer)

1. Username and Password

2. Passcode

3. Biometrics

Passcode/Face ID/Touch ID maintenance is performed within Mobile Banking Settings. Settings can be found in the app’s Main Menu. The Settings page requires full login authentication. If you did not access Mobile Banking via full login authentication, you will be prompted for your User ID and Password. Once authenticated, you will be presented with the Settings where you can see if Passcode/Face ID/Touch ID is currently on and disable or change the Passcode/Face ID/Touch ID. (iPhone® 6S and newer)

Signing on with biometric authentication, such as your face or fingerprint, provides secure, quick, and easy access to a subset of features, such as account balance information. Signing on with a passcode allows you to quickly access a subset of features, such as account balance information.

You may call Amalgamated Support at 1 (800) 662-0860. Support is available M-F from 8:00am – 8:00pm ET and Saturdays from 9:00am – 2:00pm ET. If you are a Treasury customer, you may call 1 (866) 542-8788. Note that hours are subject to change. For the most up-to-date hours, please click here.

Please refer to Amalgamated’s Funds Availability Guide for information about deposits.

You will see a credit to your account once the deposit has been approved by the bank. Your check will be processed by Amalgamated on the same business day if received before 3:30pm ET. If received after 3:30pm ET on a business day, weekend or holiday, it will be processed on the following business day. Please do not dispose of your check or attempt to process at another institution or through another channel (ATM or in-branch).

There are a few common errors that may cause your check to be rejected:

• Folded or torn corners

• Front or back image is not legible

• Missing endorsement

• Routing and account numbers are unclear

• No camera on the device

• Image is too dark

Try using Mobile Check deposit in a well-lit area to prevent shadows and poor image quality.  Keep your hands clear of the check while taking the picture.

Original checks drawn on U.S. financial institutions in U.S. dollars, which are payable to and endorsed by the depositor, and include the words, "For Mobile Deposit Only at Amalgamated Bank," can be deposited.

The following items should not be deposited through Mobile Check Deposit:

• Third-party checks (checks payable to any person or entity other than the person who owns the account into
  which the check is being deposited)
• Checks payable on sight, payable as cash or payable through Drafts
• Checks containing an alteration on the front of the check, or which you know or suspect, or should know or suspect, are fraudulent or otherwise not authorized by the owner of the account on which the check is drawn
• Checks payable jointly, unless deposited into an account in the name of all payees
• Checks previously converted to a substitute check, as defined in Reg CC¹
• Checks not payable in United States currency
• Checks drawn on a financial institution located outside the United States
• Checks dated more than six (6) months prior to the date of deposit
• Checks with any endorsement on the back other than that specified in our agreement
• Checks that have previously been submitted and accepted through our service or through a remote deposit capture service offered at any other financial institution
• Checks or items that are drawn or otherwise issued by the U.S. Treasury Department
• Any item stamped “Non-negotiable” or “This is not a check”
• Bonds
• U.S. Postal or Western Union Money Orders
• Traveler’s Checks
• Checks drawn on the United State Treasury

Retain the original check in a secure location for thirty (30) days following receipt and credit of the deposit to your account. We recommend you completely destroy each original check after this retention period. A paper shredder is a good method for secure destruction of original checks.

When you submit a check image through Mobile Check Deposit, you will receive an email confirmation that your deposit has been received. You will then receive a second email confirmation when your deposit has been accepted by the bank. (Please note: additional processing of your deposit may still be required.)

Standard Business and Commercial Banking Limits: $20,000 daily, not to exceed $50,000 over a rolling 25 business day period

Standard Consumer Limits For Accounts Open Less Than 90 Days: $3,000 daily, not to exceed $10,000 over a rolling 25 business day period.

Standard Consumer Limits For Accounts Open Over 90 Days: $5,000 daily, not to exceed $20,000 over a rolling 25 business day period.

There are no restrictions to the number of checks deposited as long as the deposit limit is not exceeded.

Mobile check deposit is free to Amalgamated Bank customers.* Just download the Mobile app to begin.

* Please note that charges from your wireless carrier may apply.  Regular account charges apply.