Are you looking for some practical ways to better manage your debt? Are you starting to become overwhelmed by your monthly payments and the building interest?

Hey, I get you! Debt is something that we all deal with. Especially now with the COVID-19 pandemic and the devastating ripple effects it will have on the economy for years to come, I feel even people who thought they were doing well financially might soon have to take on more debt than they previously would have imagined.

According to Debt.org, the typical American household now carries an average debt balance of $137,063. Credit cards alone make up $8,398 of this figure. The rest of it includes all of the other usual suspects such as your mortgage, student loans, auto loans, and personal loans.

With a number like that, its not surprising that nearly 60 percent of Americans say that debt causes stress in their lives. Debt is, after all, a contractual obligation. If you don’t pay it back, there will be consequences that can haunt you for several years to come.

So what can we do about this? Is debt just another boogie-man that we should always be afraid of and try to avoid at all times no matter the cost?

Not exactly. Debt is more like fire. If you handle it properly, then it can be very helpful. In fact, most loans are designed to do just that: Provide you with a large sum of money at a time when you need it. Could you imagine trying to save up enough money to buy a house with nothing but cash? That would be ridiculous because it would take you forever.

But just like fire, handle it the wrong way, and you’ll get burned. And believe me – it doesn’t take much for debt to set your whole financial house on fire.

In this post, we’re going to explore several ways you can learn to manage your debt better. By the end, you’ll not only have several strategies that you can start using yourself, but you’ll also know where to find some additional help if you need it.

Change Your Spending Habits

Unfortunately, one of the biggest problems with debt is how easy it is for us to get into it.

You can try to blame aggressive advertising and major media for encouraging all of our terrible consumer habits. But at the end of the day, who’s the one swiping that plastic?

That’s not judgment. It’s just the reality of the situation. Just like a person can subconsciously over-eat when they’re bored and or wanting to feel good, we can do the same harm to ourselves when it comes to spending money just for something to do.

That’s why the first thing I want you to do is to change your spending habits. Break the need to buy stuff you don’t need by going on a self-imposed spending diet.

How does that work? Simple. Every time you’re about to make a purchase, take a step back for a minute and honestly ask yourself:

• Do I really need this? Why?
• What value will it bring me?
• Can this purchase wait until later?

If you can’t truly answer these three questions, then the purchase doesn’t meet the cut and no money should be spent.

What’s the reason for doing this? First of all, I want to stop the flow of money going out of your pocket. Just like a doctor needs to stop you from losing any more blood before he can try to repair the wound, you need to stop losing any more money.

Plus, this is an excellent exercise in learning self-control. If you can master just this technique, then you’ll have the discipline it takes to implement any of the next steps for sure.

Make a Snapshot of Your Debt

Have you ever seen a movie where the police or FBI are trying to solve a big crime, and they’ve got a wall full of pictures, maps, facts, and pieces of yarn connecting them altogether?

Guess what? That’s what you’re about to do!

Well … maybe not as cool. But the idea will still be the same.

Your goal here is to get a complete and brief picture of your finances; particularly when it comes to your debt. To win at this game, you’ve got to exactly who you’re dealing with and what you owe them.

To do this, I want you to make a list containing:

• Who you’re paying and what it’s for
• How much you owe in total
• The minimum required payment
• The interest rate
• How much you’re actually paying each month

That might sound like a lot of information to gather, but trust me: It’s 100% necessary. If you were to go to a financial professional, this one would be one of the first things they would try to do with you. Why? Because once you’ve got the complete picture, it’s much easier to start looking for ways to fit the pieces together.

Plus, another thing I want you to do as you’re making this snapshot: Get motivated!

Just take a look at the list and how much you owe. Doesn’t it make you upset that all that money is leaving your pocket and going to someone else? If so, what are you going to do about it?

Turn those emotions you’re feeling about your debt into a passion-driven mission to pull yourself out.

Why You Should Always Pay Your Minimum Monthly Payment

With that complete financial picture, the next thing I want you to highlight any debts where you’re not making at least the minimum payment. First and foremost, these are the targets that we need to focus our attention on.

Why? Because not making at least the minimum payment required is significantly hurting your credit score.

When you don’t pay at least the minimum, you’re not holding up to your contractual obligation with the lender. Therefore, it gets treated as a “late payment” and counts negatively against you until you’re able to pay up. Unfortunately, payment history counts for 35% of your credit score, so every day that you fail to meet your obligation will just make your score worse.

This can be especially damaging if you’ve got a decent score. For example, a person with a credit score of 793 would drop to 660 for just one 90 day missed payment. And it would stay on their report for the next 7 years. Talk about a harsh reaction!

In addition to a damaged credit score, lets also not forget that failing to make the minimum payment means even more interest, late fees, and most likely a spike in your APR.

As you can see, it’s just bad all around. So do yourself a favor: Commit to making the minimum payment. If you need help on doing that, then here’s how …

Work Higher Debt Payments into Your Budget

One of the biggest complaints most people have about paying off their debts is that they believe they don’t have enough money to put towards them. However, this is rarely the case.

Our expenses are our expenses by choice. We pay a mortgage or rent because we choose to live where we live. We pay an auto or lease payment because we choose to drive what we drive. We spend the amount on money on groceries that we do because that’s what we choose to eat.

I think you get my point …

A budget is your spending plan. And whether you realize it or not, you’ve got a budget. It just might not be the one you necessarily chose for yourself. It could just be the culmination of bad spending habits that are now draining your checking account every month.

It’s time to do something about that. Make a list of all your income and expenses over the past 6 months. Calculate how much money is actually leftover every month (if any at all).

Take a hard look at those expenses. Which ones are truly important to you? Which ones do you genuinely need or can’t live without? What are the ones that you probably could lose?

Assign a priority to your expenses and then add up only the important ones. Now compare this to your income and see how much money you’ve got leftover. If its more, than you know what you’ve got to do …

How Much Will Additional Payments Affect My Debt?

You don’t have to be a personal finance expert to know that if you’re able to send in extra money on top of the minimum monthly payment will accelerate paying off your debt. However, I think if more people were to actually see the numbers in action, it might light a bigger fire under them to get motivated.

For example, let’s say you’ve got $10,000 in debt with a credit card that has a 20 percent APR. If you’re just making the minimum monthly payment of approximately 3 percent or $300, then it’s going to take you 4 years and 2 months plus $4,718 in interest to pay it back.

However, if you can spare even just $50 extra per month to put towards this payment, your $350 would now take 3 years and 3 months plus only $3,692 in interest to pay it back.

That’s not too bad. An improvement of 11 months and $1,026 of interest saved? I’d take it!

Try out the numbers for yourself here using this free online calculator. See how much you could be saving and let that encourage you to find as many ways as possible to put additional money towards your debt payoff.

Creative Ways to Pay Off Your Debt Faster

There are two really neat ways you can tackle your debts that don’t involve rearranging your budget at all. Both are super simple and highly effective at getting results.

The Debt Snowball Method

The first is called the debt snowball method. This is where you pay off your debt with the smallest overall balance first. Once it’s paid off in full, you then roll the money you were using to pay that debt towards the loan with the next smallest balance, and so on.

Because this strategy focuses on your smallest loans first, you’ll make a lot of small wins in the beginning. That can be very rewarding and give you the confident boost you need to stay on track.

The Debt Avalanche Method

The second is called the debt avalanche method. With this strategy, you pay off your debt with the highest interest rate first. Similar to the snowball method, once it’s paid off in full, you then roll the money you were using to pay that debt towards the loan with the next highest interest rate, and so on.

Although it might take you longer you pay off your debt with the largest interest rate first, mathematically this method should save you more interest in the long run.

No matter whether you pick the snowball or avalanche method, both work because they enable you to gain momentum every time a debt is paid off. Each time a cycle completes, the money you put towards the next debt simply becomes greater and greater.

You find all kinds of success stories all over the internet about people who have used these strategies to do incredible things. For example, check out how the executive editor of Wise Bread was able to pay off a mountain of student loans and medical debt totaling $150,000 in just six years.

More Ways to Lower Your Debt Payments

Another great way to have more money to put towards your debt payments is to lower the amount you owe every month. Here are two ways you can accomplish this.

Make a Balance Transfer

A balance transfer is when you move the balance of your loan from one lender to another. Usually, this is done because the new lender is offering you a much lower interest rate for a temporary amount of time.

Credit card companies offer promos all of the time where you can transfer the balance of a loan to their card and pay little to no interest for some time (such as 12 months).  When that happens, you’ve got a golden opportunity to avoid paying interest and use a technique like the debt snowball to put your entire payment towards paying down the principal of the loan.

Negotiate a Lower Interest Rate

Believe it or not, you can actually just call your lender and ask that they give you a better rate. Particularly with credit cards, this works really well as long as you’re not afraid to pick up the phone and put your negotiation skills to work.

Why would they give you a better rate? Because the credit card companies are not dumb. They know that if you’re trying to make your payments but struggling, then there’s a very high likelihood that you might start missing payments or default on the loan altogether. No one wants that!

If you tell them your situation and what you can afford to pay every month, sometimes without getting debt agencies and other parties involved the credit card company will be willing to work with you directly to come up with a resolution. It’s worth saving thousands of dollars in interest potentially to make one phone call and find out.

How to Get Help with Debt

It’s important to understand that you don’t have to face your problems with debt alone. There are lots of resources for getting help, and there’s absolutely no shame in reaching out to them.

Here are a few places you can turn to and find the support you need.

Credit Counseling

Credit counseling (or credit advisory) is a service that is generally provided by non-profit organizations. Typically, they’ll help you make that first big step towards getting a complete, big picture overview of your financial situation and then work with you to come up with personalized solutions to help fix it.

The sessions are usually free of charge and can often give you access to other helpful resources such as copies of your credit report, scores, educational materials, workshops, and lots more.

Debt Management Plan

One solution a credit counseling agency may recommend is that you consider a debt management plan. This is where the agency will roll all of your loans into one affordable monthly payment at a reduced interest rate from what you were previously paying. You then agree to the payment schedule and must stick to it for the next 3 to 5 years.

Note that with a debt management plan there is no new loan created. The agency is simply working with you to systematically pay off your loans in a way that best suits your situation. Also, there is generally a small startup fee as well as an ongoing monthly fee to participate in a debt management plan.

Debt Consolidation Services

If your credit is in relatively good standing, you may want to consider working with a reputable debt consolidation service. This is where you’re given one big loan that you can use to pay off your debts.

The new loan is usually at a lower interest rate, and so you should find the monthly payments more manageable than what they previously were. Also, because you’ve technically paid off all your other debts, this can be helpful for your credit score. There is generally a fee for this service.

Debt Settlement Services

One of the more extreme strategies you can take to battle your debt is to work with a debt settlement program. Also called “debt relief”, a debt settlement service will work with your creditors to pay off your loans by negotiating a smaller lump-sum payment than what you currently owe. Sometimes this can be as much as 10 to 50 percent less.

As part of the process, the settlement service will ask you to stop making payments to your loans. This will cause your creditors to believe that you might default on these loans and never pay them back at all. The debt settlement service will then try to use this point as leverage to convince your creditors to accept a lesser payment.

By far, this can be the cheapest option when it comes to managing your debt. However, there are some risks to be aware of:

• The debt relief agency will still require you to make monthly deposits while you’re waiting for the creditors to settle, so you’re still not off the hook for making payments.
• When you stop making payments to your loans, this can have a severe negative impact on your credit score that could last up to seven years.
• There is no guarantee that the creditors will even accept the settlement.

While there are plenty of reputable debt relief companies available to work with, unfortunately, there have been instances where some turn out to be complete scams. Consumers need to do their research before committing to one. The FTC has some resources that can help you investigate these companies.

Filing for Bankruptcy

When all else fails and your financial situation seems to have completely collapsed, then it may be time to consider filing for bankruptcy.

Bankruptcy is when you go to court and a judge decides whether or not you are still legally required to pay back your debts. This is typically done after a careful review of your assets and liabilities.

While it may sound great to have the majority of your debts discharged, bankruptcy should be considered a last resort option. Bankruptcy will stay on your credit report for the next 7 to 10 years and will make it extremely difficult to get any future credit cards, mortgages, or any other type of loan. It could even become an obstacle to finding a place to rent or getting a job.

Be sure you’ve exhausted all of your other options before choosing to go forward with bankruptcy.

Final Thoughts on Keeping Yourself Out of Debt

While there are certainly a lot of options for managing your debt, the best piece of advice is to do everything you can to keep yourself out of debt in the first place. Developing the right money habits will be key in preventing yourself from getting into debt in the future.

To do this, take responsibility for your finances. No one cares more about your money than you. Be completely aware of how much money you’re earning and how much you’re spending. Create a budget for yourself and stick to it at all times.

Again, be heavily critical of every purchase you think you need to make. Before you reach for your wallet, ask yourself: Do I really need this?

The reason we study history is because we hope to learn how to avoid the mistakes of the past. Don’t let the past repeat itself by sinking into the same bad habits and sliding right back into debt. Keep your eyes focused on becoming debt-free and before long you’ll get there.

Photo credits: Unsplash, Pexels

The post How to Manage Your Debt and Reduce Financial Stress appeared first on My Money Design.

If your pool water is cloudy or a sick dark color, and you’re looking for tips on how to turn it from green to blue, then this is the post for you!

For years, I’ve had a love / hate relationship with my pool. I love it in the middle of the summer when it’s 100 degrees outside and I want a nice, cool place to float around all afternoon. But I hate it when I pull the cover off every spring only to find a puke-colored, army-green swamp where my crystal blue water used to be.

Believe me – I know how desperate you feel when your pool looks like this and you fear it will never be suitable for human life ever again! And the amount of money you can spend only to literally accomplish nothing can be ridiculous!

Don’t think so? Here’s an embarrassing story: The first spring after we installed our pool, we pulled the cover off only to find the water had turned a terribly dark green color. Trip after trip to the pool supply store, we tried literally everything they recommended with no success. We even called a “pool cleaning service” to get a quote, but the price they asked was so insane we said forget it!

I finally gave up and actually emptied all of the water from our pool in hopes that I could “start over”. Yup … 20,000 gallons of water and all the chemicals emptied into the storm drain – what a complete waste of time and money! And you want to know what happened next? As soon as I filled the pool back up with water, the green color returned and we were right back to where we started. How frustrating!

So why was this happening? Why was I having such a rough start to opening our pool? It was because I didn’t understand why my pool water was green in the first place, and what I really needed to do in order to turn it back to crystal clear blue. I didn’t invest any time into understanding the simple chemistry experiment a swimming pool is. And as a result, I probably literally threw hundreds of dollars down the drain.

You see, when you’ve got green pool water, you’ve most likely got a problem with algae. Algae is great for swamps, but not so great for backyard pools. And the sooner you understand how to properly get rid of it, the sooner you and your family can sit back on an inflatable raft and enjoy your beautiful blue swimming pool again.

That’s why I’ve written this article. After living in two different houses with swimming pools (one above ground and the other in-ground), please allow me to help you fight your pool water problem head-on by turning it from green to blue, and saving some money in the process!

1- Make sure the pump is running smoothly

First things first: As soon as you open your pool in the spring, make absolutely certain that your pump is running smoothly.

If the pump isn’t circulating the flow of your water properly, nothing else we do in this article will matter. Why is that? Because in order for the green water to travel through your pool filter and get “filtered”, it has to circulate from your pool to the filter and back. Therefore: If there’s no circulation, then there can be no filtration!

So how will you know if the pump is working properly? Try these two ways:

• Put your hand in the pool water in front of a jet. Do you feel the pressure of water blasting out? Or is the pressure weak? Or nothing at all?
• If your filter or pump has a pressure gauge on it, check that it is not reading zero or close to zero.

No pressure at the jets or a near zero reading on the pressure gauge most likely indicates that your circulation system is clogged some place. That’s a problem! Here’s a few things to try to solve it:

1. Start by cleaning out all the junk (leaves, cotton wood, etc.) from the skimmer baskets.
2. If your pump has a secondary skimmer basket right before the pump inlet, don’t forget to clean that one too. Mine is always clogged with skinny pine needles that made it past the primary baskets.
3. If both baskets are clean and the pressure is still low, check the pump impeller.  Sometimes I find pine needles in mine that I have to scoop out with my finger.

After taking these steps, check the pressure again to see if it has improved. Once it has, you’re ready to move on to the next steps.

Keep the pump running!

Also as we move on to the next steps, if you normally keep your pool pump on a timer, reset it to run all day long. This will help ensure that the green water gets through the filter as quickly as possible.

2- Clean out any organics you can see

If you can look into your green or cloudy pool water and see anything in there that shouldn’t be such as dead leaves, branches, etc., these are called “organics”, and they need to be scooped out of your pool immediately!

Why is that? Organics are what algae feed on inside of pools. Think of every dead leaf you see as the algae equivalent of a tasty meal!

So by removing the organics, you’ll eliminate algae’s main source of food, and this will help keep your pool water crystal-clear blue (after we’ve gone through the rest of these steps).

Start by skimming the top of your pool and removing anything that obviously should not be there. If you can see further into the water towards the bottom of your pool, try to scoop or vacuum what you can. If you’re unfortunate enough that your pool water looks like the Black Lagoon and you simply can’t see anything beyond the upper surface, then don’t worry. Later in Step 7 below, we’ll talk more about cleaning the bottom of the pool later as the water becomes more transparent, and give you some advice on pool vacuums.

3- Measure your chemical levels

Before we can add any pool chemicals, we need to first know what we’re working with.  To get started, take a test strip and measure your chemical levels.

In particular, we want to know the pH level of your water. Balancing your pH will affect the effectiveness of all the other chemicals.  So it will be helpful to make sure it’s as close to good as possible.

Compare your test strip results to the back of the package.

• If your pH is too low, add some pH plus (Sodium Carbonate).
• If it’s too high, add some pH minus (Sodium Bisulfate).

Amazon and pretty much every big box store (such as Walmart) has some version of these two products.

4- Raise the chlorine level

Once the pH is balanced, the next step is to zap all the algae in your pool water with some sanitizer. For most pools, this will mean adding chlorine into the circulation and increasing the levels as quickly as possible.

Depending on the design of your pool, there are lots of different ways to feed chlorine into pool

• Cartridges
• Tablets
• Powder
• Liquid
• Etc.

Our pool is a salt-water system that chlorinates using bags of pool salt and is generally not as harsh on your skin and eyes as traditional chlorine systems.

Liquid Chlorine

In addition to your normal method of chlorine delivery, I’ve always found the quickest way to ramp up the chlorine level in the pool is to dump in a few bottles of liquid chlorine. Again, it can be purchased for relatively cheap at any big-box store or pool supply retailer (I typically pay less than $20 for a case of 4).

Use approximately 2 gallons for every 10,000 gallons of water you have.  If your water is really nasty, feel free to be generous with another gallon or two. Wait a few hours for the chlorine to circulate and measure your chemical levels to make sure it’s increasing.

Side note: Speaking from experience, liquid chlorine does a really good job of destroying your clothes if it splashes back on you.  My advice is to either pour it into the pool as slowly and carefully as possible, or wear something you wouldn’t mind getting a discolored spot or two on.

5- Shock your pool to get rid of the green color

After getting the chlorine level of the pool water up, the next step is to increase its intensity by using something called “shock” (also known as calcium hypochlorite).

What does shock do? Shock is a chemical that temporarily raises the level of free chlorine in your pool to the point where algae and bacteria are destroyed.

Imagine the chlorine in your pool is a really strong person trying to fight crime. But when you add in shock, it temporarily turns that strong person into the Incredible Hulk. The bad stuff in your pool doesn’t stand a chance!

Adding shock to your pool is very simple. Go to the deep end and pour in about 2 one-pound bags for every 10,000 gallons of pool water you have.

Again, let the pump run continuously overnight. Within 24 hours as the shock does its job of killing algae and bacteria, you should start to notice the water cool change from green to blue. Don’t be alarmed if its a cloudy color; we’ll address that in the next step.

If your water is REALLY green …

If your water looks dark green or even almost black, then you’ve got a more advanced algae problem. This means you’re going to want to throw in a few extra bags of shock or repeat this step a few times.

6- How to get rid of the cloudy water

If your water is now a shade of blue but cloudy, don’t fear!  You’re on the right track and almost there.

The cloudiness you see is all the dead algae floating around. How do we get rid of it? You basically have two options:

Option 1 – Wait …

Run the pool pump for a really long time until all of the dead stuff naturally passes through the filter. However, keep in mind that this could take several days or even weeks to accomplish.

Option 2 (my preference) – Use some pool water clarifier

Clarifier is a chemical that combines with all the dead stuff in your pool and makes it heavier, causing it to sink to the bottom of your pool for easier clean up.

Personally, I’ve been using a product called Super Blue for years and it gets the job done quick.

Using it is very simple. Grab a 5-gallon bucket from the hardware and mix the clarifier in some water according to the directions on the product. Pour it into the perimeter of your pool and wait a few hours. Generally by the next day you’ll notice that the pool water is less cloudy and most of the dead particles are now on the bottom and walls of your pool.

7- Clean up the remaining scum

Now that you can finally see through your pool water, then last step is to clean, clean, clean!

By now all the dead algae should appear as brown specs along the bottom and walls of your pool. To clean this up, you’ll want to vacuum your pool and brush the walls.

Vacuuming your pool

Pool vacuums come in nearly every shape and size. Some are just hoses that connect to your pump return line while others are completely automatic. Depending on your budget, you can get as fancy as you want.

There are two that I like to use:

• I use this battery powered pool vacuum called the Pool Blaster. It simply connects to my skimmer pole and then I manually run it along the bottom of the floor sucking up organics and brown scum. I’ll admit – It takes a long time to clean and the battery doesn’t last more than an hour, but this little vacuum does get the job done!
• We also use an automatic pool vacuum called the Polaris. This is a rolling device that mates to your pump outlet and uses the water pressure to clean up the bottom of the pool. All day and all night, as long as your pump is running, this vacuum is rolling along the bottom of your pool and cleaning as it goes. Pretty effortless!

Brushing your pool walls

In addition to vacuuming the bottom of the pool, you’ll also want to take a pool brush and brush down the sides of your pool. This is to get algae off the walls and free-floating into the water where they can be sucked into the filtration system.

If you’ve got some dark spots on your pool walls or bottom surface that won’t seem to brush off, you might have some more stubborn algae. For this, you’ll need a brush with harder wire bristles instead of the normal soft nylon bristles.

8- Keep up on your maintenance

Once things are relatively back to normal and the water is looking clear blue, be sure not to stray from its weekly scheduled maintenance. Otherwise you’ll be right back at step one again!

In general, your maintenance should include the following:

• Balancing the pH
• Adding chlorine
• Shocking the water and other algae killing chemicals (like Pool Perfect Phos Free, etc)
• Vacuuming the walls and bottom of the pool
• Cleaning / back-washing the filter
• Etc.

Stay on top of this, and you’ll get plenty of great, relaxing days floating around in crystal-clear water.

Good luck and enjoy!

Featured image courtesy of Flickr / Sean Davis

The post How to Turn Cloudy Pool Water From Green to Blue appeared first on My Money Design.

If you’re looking for some good things you do with $1,000 right now, then you’re in the right place.

Anytime you’re about to receive some money, it’s important to have some good options for what you plan to do with it.

And let’s be honest: With the median household income in the U.S. standing at $61,937 per year, a thousand dollars can do a lot of good.

In fact, according to a survey reported by Fox Business, the majority of people who are about to receive $1,000 or more plan to use it to pay down their debt.

While that’s always a very responsbile use of money, is it the only option?

Depending on how you normally manage your money, there may be some other choices that would also make similar positive impacts.

In fact, if you haven’t started already, a thousand dollars can be a great way to get started on building your financial safety net.

With that said, here are my tips for the bests way to invest $1,000 that will help you grow – in some cases, both financially and personally.

1- Pay Off Your High-Interest Debt

Anytime you have some extra cash available (even if it’s just a few hundred dollars), it’s always a good idea to consider putting it towards paying off one of your debts. 

Where should you start?  Financially, it makes sense to focus on your high-interest debt.  According to NerdWallet, the average U.S. household carries $6,929 of credit card debt from month to month.  If that sounds like you, then this would be a great place to start.  Credit card balances typically carry interest rates of 20-30% APR.

Of course, they’re not the only high-interest debt you could eliminate.  Got any payday, cash advance, or high-interest student loans?  Your extra $1,000 could be helpful in eliminating any one of these areas.

Why not just invest the money? 

Something a lot of people don’t realize is that paying off a debt is effectively the same thing as investing it at the same interest rate.  For example, if you have credit card balance carries a 25% APR, by paying off this debt, you’re saving yourself from having to pay off this high-interest rate in the future, and so it’s practically the same as if you had invested it at the same rate.

Could you pay off other forms of debt? 

Even the ones where the interest rate isn’t so high?  Absolutely!  In fact, there is a well-known strategy in debt reduction called the “debt snowball”.  This is where you pay off your debt with the lowest balance first (regardless of interest rate).  Once paid off, you then continue to effectively make payments, but you put the money towards your next lowest balance.  Over time, you pay off each debt, the amount of money you apply to the next debt becomes bigger and bigger until finally, you accomplish the ultimate goal – all debts paid off! 

2- Make a Tax-Deferred Retirement Contribution

Another one of the best things you can do with $1,000 is to put it into one of your tax-deferred retirement accounts. Typically for most people, this would be either your traditional 401(k) or IRA.

Why is that?  The benefit of putting this money aside in one of your retirement accounts is that you avoid paying taxes on it up-front.

Why Saving Tax-Deferred is Better!

Remember that when you save a dollar from your paycheck, its not actually a dollar.  If you’re in the 22% tax bracket, then its more like $0.78 because $0.22 went towards your taxes.  But when you take advantage of tax-deferred retirement accounts, a dollar truly is one dollar.  You avoid paying taxes on your savings until someday years (or decades) later when you finally decide to retire and live off of your savings.

Though that may not sound like much, that’s actually a 28% gain – just for being smart about how you save your money!  With an extra $1,000, that would effectively work out to $220 that you didn’t have to pay to the IRS in taxes and put into your pocket instead!

This benefit of saving so much in taxes upfront is why we choose to max out as many of our tax-deferred retirement plans each and every year.  By saving all the way up to the IRS limit of $19,500, that’s effectively $4,290 that we avoid paying in taxes and instead goes into our pockets!  When you consider that this is both myself and my wife doing this, we double that benefit to $8,580 per year!

You can read more about this in another article I wrote called “How Much Should I Contribute to My 401(k) Plan? This is the Number You Need to Hit!”.

Even Better: Tax-Deferred Earnings!

Up-front tax savings are just the beginning!  Once your money is invested in your retirement account, it then has the potential to grow and grow for decades thanks to the power of compounding returns. Just to give you some idea of the magnitude, each dollar you invested could be over 7 times as valuable after 30 years of growing. And the best part: all of these earnings are also tax-deferred!

Double Your Money with 401(k) Employer Matching

At the minimum, if you’re not already saving as much as you need to in your 401(k) in order to get your maximum 401(k) employer benefit, then your additional $1,000 can go even further.

The typical employer matches 401(k) contributions anywhere between 50 cents to a full dollar (up to some maximum amount).  Therefore, if you’re not already hitting this maximum limit yet, then there’s a good chance your $1,000 could be doubled into $2,000 – just like that! 

Keep in mind too – just like your contributions, that money also compounds over the years tax-free.  Over the life of your career, that could add an extra six-figures to your overall nest egg value!  Click here to read more.

Talk with your local HR department to find out the rules of your specific 401(k) matching plan.

What About a Roth IRA?

Roth IRAs are also great tools to use for building your retirement nest egg. But keep in mind that they are treated differently when it comes to taxes.

With a Roth IRA, you pay the taxes up-front while with a traditional 401(k) or IRA you pay the taxes in the future when you finally decide to retire.  While for some people this could work out to a better deal, it is important for you to consider what you think your position will be – do you think you’ll be in a higher tax bracket now or in the future?

In case you’re interested, click here to find out more about the differences between Roth vs Traditional IRA’s.

This technical point aside, for sure I’d not discourage someone from contributing to a Roth IRA.  My wife and I have been contributing to them for years.  The idea of growing my money tax-free and then making tax-free withdrawals while we’re in retirement is a very powerful motivator!

3- Pay Down Your Mortgage Principal

Just like paying off your high interest debt, using your $1,000 to pay down your mortgage is a very good use of the money. 

Why?  While mortgage interest rates tend to be much less than credit card rates (i.e. single versus double-digit rates), the length of a mortgage is generally much longer (generally 30 years). 

Note that you’ll want to put this money specifically towards your mortgage principal, not the interest.  The principal is the amount that you actually owe, and the interest is what you owe for as long as there is still principal remaining to be paid.  This creates a unique opportunity for you to save some money in the future if you have cash that you can spare up-front.  Because of the way mortgages are typically calculated, any extra payments to the principal could dramatically reduce the amount of interest you’ll owe later on.

To see this for yourself, check out this free online calculator to see just how much a single payment could reduce the overall amount that you owe.

Not only does it feel good to know that you’re one step closer to having paid off your house, remember that anytime you pay off the mortgage principal, this is money that should find its way back into your pocket someday.  This is because when you sell your house, as long as it is for more than you paid for it, the principal is the amount that you actually own.  Therefore, you should receive a check for this balance after the mortgage has closed.

The Financial Freedom Benefit

If you’re like me and have any ambitions of enjoying financial freedom, then paying off your mortgage can be particularly helpful.  Remember that the amount of money you need for retirement is determined by what expenses you anticipate to have.  If you’re able to pay off your mortgage early, that’s a huge chunk of money that you won’t need for retirement and don’t need to save. 

Consider the following: If your mortgage is $1,000 per month, that’s $12,000 per year you’ll need to cover in retirement.  This means for your nest egg, you’ll need $300,000 just to cover this expense. 

So if you can eliminate your mortgage before you retire, then there you go – you just reduced your nest egg savings goal by $300,000!

For more on this, read: How Much Do I Need to Save for Retirement? The Incredibly Simple Answer.

4- Build Up Your Emergency Fund

According to CNBC, only 39% of Americans said they would be able to cover a $1,000 setback if they were to experience one.  This is why I often say that one of the best things you can do with $1,000 is to simply put it aside in your emergency fund.

Most experts recommend that you should save up at least 3 to 6 months worth of living expenses in your emergency fund. But in reality your emergency fund could be even as little as $1,000.

Why you need an emergency fund

Your emergency fund is a very important part of your financial safety net.  It’s your own private insurance policy to protect against those unwanted expenses that can and will happen!

Believe me – they always happen right when you’re not ready for them.  I remember one day we were driving our car and every light in the dashboard went out.  After taking it in, we learned we needed over $2,000 in repairs!  Everything was fine the day before, and now we had a huge expense on our hands.

And that’s one example out of many I can think of.  We’ve had appliances suddenly go bad, house repairs that needed to happen right away, hospital bills that used up our entire medical deductible … the list goes on and on.

Ultimately, you never really know what life is going to throw your way.  And that’s why you need money set aside to be able to handle this when it happens.

How having an emergency fund can payoff BIG!

One of the biggest complaints I’ve heard from critics of emergency funds is that the money sits there doing nothing, and so they say it’s a big waste.  But I don’t necessarily believe that’s true at all.

The money IS doing something … it’s there to prevent you from taking on unnecessary high-interest debt.  Consider my scenario above where you have no emergency fund and all of a sudden you have a car repair that costs $2,000.  For the average person, how would they handle this?  Put in on their credit card and eat the 25% APR.   Not a good choice, but when you have no options, what are you going to do?  This is why an emergency fund is so helpful.  It keeps you out of the way of unnecessary debt and puts the control back in your hands.

Putting you emergency fund to work

Plus, who says the money has to do nothing?  You could easily put your emergency fund into an online savings account to earn a small amount of interest while it’s not in use. As long as the money isn’t “locked-in” for any specific amount of time, this is a good place to park it.

Or, another trick you could use is to put the money into your Roth IRA and use this as your potential emergency fund.  Remember: Roth IRA contributions can be withdrawn at any time because you’ve already paid taxes on it.  Though I generally like to keep retirement savings separate from the emergency fund, this would allow you to accomplish both if you’re short on cash.

5- Buy Some Dividend-Paying Stocks

Looking for a simple, smart way to invest your $1,000 that will return money to you year after year?  Why not try a few dividend-paying stocks?

Dividend-paying stocks are some of the most lucrative stocks available for one simple reason – they pay you for simply being a shareholder.  That’s right – When you own dividend-paying stocks, not only is there the potential that the stock value itself will go up in value, but the company that issued the stock will also pay you a dividend every quarter.  That’s a double benefit!

Though it’s generally only 2 to 4% of your investment per year, if you own enough of these stocks, these dividend payments can become quite substantial.  In fact, there are several early retirement seekers who base their entire strategy around this concept of one day living off of their dividends.

I owned dividend-paying stocks for years, and let me tell you – it was pretty nice to get statements showing all of those dividend payments rolling in!  Coincidently, I started with just a $1,000 investment!

What dividend paying stocks to buy?

If you’re seriously interested in getting started with dividend stocks, two very popular strategies to research are the Dogs of the Dow and the Dividend Aristocrats. 

The Dogs of the Dow are the top ten highest dividend-yielding stocks from the Dow Jones Industrial average (yes, the index you frequently hear reported on the news).  The theory here is that while you are investing in the 10 ten largest and best-performing companies, the high dividend yield reflects that their share price is lower and therefore a good bargain!

The Dividend Aristocrats are a group of companies who have not cut their dividend in 25 years or more.  Investing in these companies has often been cited as a way to (at times) outperform the market while maintaining more portfolio stability.

6- Invest in Your Career

Another terrific way to invest $1,000 is to put it into your ability to EARN even more money.  By this, I mean in the education that will help further your career.

Your job is one of the easiest places to start increasing your income.  Lots of employers are looking for people who can think, innovate, and lead beyond just the normal day-to-day activities.  And if you can be one of these people, then they will usually reward you with a promotion and a higher salary.

But how do you get there?  Generally, it will involve having the right educational credentials. 

Don’t think so?  According to Smart Asset, Americans with a college degree make an average of $59,124 per year.  That’s nearly double the $35,256 per year than workers with only a high school diploma earn.

Therefore, the first question to ask yourself is do you need a degree (if you don’t have one already)? Could you be earning more money or be in a better position if you did?

Already have an associate’s or bachelor’s degree?  Could an advanced degree like an MBA (masters of business administration) or even a doctorate help you to move forward? 

Maybe college is completely unnecessary for your field, and all you need are just a few certifications or training courses.

If you don’t think that improving your educational credentials will help you to advance with your current employer, could it help you to land a better job with a different employer?  Could you spend this money to polish your resume, work with head-hunter, get some interview coaching, and put you in a position for a better job?

Could this money help you get the education you need to change career paths altogether?

Remember: Though your education might not “feel” like a traditional investment where you can log in to your bank account and see the balance, I do believe its an investment of the self that will pay several-fold over your lifetime.

7- Save It for Your Children’s College

College is expensive!  Currently the average cost for a full year of public college (tuition, boarding, fees) is $16,757 according to the NCES.  But don’t expect it to stay at that price.  Between 2006 and 2016, prices rose 34%!

Even if there’s even a 1% chance you think that your child will go to college someday, do them a favor!  Put that $1,000 away in a college-savings plan that will grow with time.

There are a lot of options for parents looking to save up money for their children’s education.  My favorite recommendation is a 529 education savings plan.  Think of it like a 401(k), but with the purpose of paying for college instead of funding retirement.

We’ve been stashing money away in our children’s 529 plans since they were born.  It’s crazy how just a few hundred dollars per month can grow into several thousands of dollars by the time the kids are almost ready to graduate.

529 savings plans are available in each U.S. state and offer you taxable savings on contributions when you file your state return.  Similar to a 401(k), the money grows tax-free.  Even when you go to make withdrawals, as long as they are for educational-related expenses, you won’t have to pay any taxes.

8- Improve Yourself

Perhaps that $1,000 could be used to do the things you’ve always wanted to do to improve YOU!

For example: Are you happy with your weight or body composition?   $1,000 could go a long way in joining a gym, working with a personal trainer, and getting the right resources to better understand healthy eating habits.

When I was starting to get unhappy with my own waistline, I made a conscious effort to buy a handful of ebooks from Amazon and join our local Plant Fitness.  For a lot less than $1,000, in just a few months, I was eating smarter and working out regularly and managed to shave off 30 pounds of unnecessary fat!

Maybe you always wanted to learn how to play the guitar, speak another language, be better at photography, or improve your golf swing.  It doesn’t matter – what you enjoy is the thing that makes you happy, and so why not invest in something that will grow that happiness.

9- Support a Good Cause

Last but not least, one thing you could consider doing with $1,000 is to give it to a good cause.

Perhaps there’s a charity or foundation that you know does good things for your community. Or maybe there’s a local family you know that has hit hard times and could use some help.

No matter what the situation, if you’re in a good financial position and feeling selfless, then consider going above and beyond to help someone or something in need.

Readers – What would you do with an extra $1,000?  What do you think is the best way to invest $1,000 so that you grow either financially or personally?

Photo credits: Pexels, Unsplash, Pixabay

The post What Are the Smartest Things You Can Do With $1,000 Right Now? appeared first on My Money Design.

We all know that budgeting is the key to managing our money.  But have you ever considered how an annual budget might work better than a monthly budget?

Tell me if this is how budgeting usually goes for you …

You take your annual income, divide it by 12, and then make a goal to not spend over that amount each month.  Things might go well for a little while.  But then you find that you’ve over-spent by $500 because of a bill you weren’t expecting.  Then the next month its $1,000 more than you anticipated.

Perhaps you’d like to buy a new car, but you’re unsure of how much you can actually afford each month.  Or maybe you’d like to boost your 401(k) savings rate.  But again – how much extra can you actually put aside without breaking the bank?

This was exactly how budgeting used to go for me every month.  Then one day, while at work, we started going over the annual budget for the next year.  There it was, right in front of me … a spreadsheet with exactly what the company planned to spend and earn for the entire year.  It was a complete financial picture of what was going to happen!  No surprises or slip ups.  Pick any month, and you could see just how many planned expenses they had and how much cash they had to cover it.

That’s when it hit me …  As the family CFO, I need to do the same thing!  I need to setup our family budget like a business that plans to succeed!  And that means we need to get a complete picture of how our finances will look over the course of the whole year, not just month to month.

Shortly after that, I did just that.  I made a list of all our expenses, carried them forward throughout an entire year, and then compared it to our income to determine just how much money we “really” had available to spend.

It’s a strategy that’s been working great ever since!  If you have any doubts, here are a few reasons why you’ll want to consider an annual budget vs monthly budget.

Missed Expenses

With a monthly budget, there are several expenses that get missed because you simply don’t think about them every month.

Consider the following heavy-hitters:

• Christmas gifts
• Birthday gifts
• Vacations / travel
• Tax payments
• Major auto maintenance (like spending $800 for new tires)
• Minor auto maintenance (like oil changes)
• Car insurance
• Vehicle registration
• Property taxes and insurance (if not already covered in your escrow)
• Annual vet check-ups / registration (if you have pets)
• Donations

Even though most of them happen only once or twice throughout the year, when combined, they could add up to thousands of unplanned dollars.  This is why annual budget works better.  With an annual budget, you successfully account for each and every one of these miscellaneous but straining expenses.

With a monthly budget, it’s almost impossible to properly capture these periodic expenses.  Unless you’re incredibly, super disciplined by setting aside a few hundred dollars per month (which most of us aren’t), then it’s not going to happen.

Missed Income

Expenses aren’t the only thing that might get missed with a monthly budget.

If you budget your money on an annual basis, you may also find a pleasant surprise: 2 extra paychecks!

Yes, for most people who get paid every two weeks, they can plan to receive 26 paychecks per year.  But with a monthly budget, we falsely assume that we will only ever receive 2 paychecks per month, or 24 per year.  In reality, that means we’re not accounting for 2 whole paychecks!

Anyone enjoy a nice Federal Income Tax refund?  What about profit sharing or an annual bonus from your job?

Again, with an annual budget, you can capture all of it.  This additional income will boost your overall cash flow, leaving you with more capital to work with.  That gets you closer and closer to your goals!

Spotting Negative Trends Early On

One of my favorite benefits of budgeting annually is the fact that I can spot negative trends early on.

By having all my income and expenses laid out over a 12 month period, I can see exactly how much money will be in my bank account at the end of every month. 

In a few months will my checking account get close to zero or in the red?

Good catch!  Months before the damage is even done, I can make some adjustments to my spending that will put us back on the right track.

Building in Goals

The other thing I really like about annual budgeting over monthly budgeting is the fact that I can work in specific goals and see how they will influence our overall cash flow.

Remember those examples I gave earlier with the new car and 401(k) increase?  Those were real goals (among many others) where I could add them to our annual budget and see how it affected the balance every month.  By working with realistic estimates over the course of the whole year, I could see just how much we were able to afford.

Conclusions

If you budget your money, that’s great.  But consider how an annual budgeting might be better than monthly budgeting over the long run.  By getting the complete financial picture, you will properly plan for all your income and expenses … even those that happen only once throughout the year.  But on top of that, you’ll also be able to better build in your goals, anticipate your cash flow, and set yourself up for financial success.

Readers – Which do you prefer between an annual budget vs monthly budget?  What successes have you had, and what strategies do you use to make it work?

Photo(s): Pixabay

The post Monthly Budget Not Working? Why An Annual Budget Is Better appeared first on My Money Design.

It’s pretty safe to say that if you want to do a better job managing your money, one of the first changes you’re going to need to embrace is how to live frugally.

I know, I know … The word frugal makes most people want to cringe! Why? Because they associate it with another word that brings about unpleasant thoughts: Cheap!

I think we can all agree – no one wants to be thought of as “cheap”. And for good reason. The idea of people being cheap implies that they are being stingy with their money. It means you hold yourself back from buying the things you want or even need, and for no good reason. That’s not how you want to be!

“Frugal”, on the other hand, implies that you are simply being conscious of your money and making careful choices when it comes to your purchases. It doesn’t mean you’re not going to buy stuff. It means you’re going to buy stuff for the best price possible. I’ve had so much luck with this over the years on lots of big purchases:

• Buying our new house for $75,000 below the original list price.
• Negotiating a price of 25% less than the original quoted price for the land next to our old house.
• Taking the family on a vacation to Maui in Hawaii for over $5,000 less than what it should have cost.
• Buying the guitar I wanted for half of what it sells for brand new.
• Buying a high quality watch for nearly half of the retail price.
• .. And so many other examples!

I think all of us could stand to be a little more mindful when it comes to how we spend our money. In fact, according to the blog Get Rich Slowly, one very interesting statistic they found in a survey from the National Bureau of Economic Research is that nearly two-thirds of people wish they had saved more money over their lifetime.

Think about that for a minute … Over 66% of people wish they had made better financial decisions that would have enabled them to save more of their income.

This is why I believe it is more important than ever to develop the skills that will make you more strategic each and every time you decide to whip out your credit card and make a purchase.

So how can you start making some changes in your own financial habits? Here’s a few of the major areas that will make the biggest impact in your life and enable you to start living more frugally without having to be cheap about it.

Ignore How Everyone Else Lives (or Appears To Live)

First things first, if you want to start living frugally, you need to do one major thing: Ignore how everyone else spends their money.

Forget what fancy clothes they wear.  Forget about what flashy cars they drive.  Forget what big house or prestigious neighborhood they live in.  Forget what exotic vacations they take.

Do yourself a favor and get out of the “If they can have that, why can’t I?” mind-set.  You need to do what works for you when it comes to your money.

Why Are You Being Frugal In the First Place? 

I’m going to guess its because you either don’t have a lot of money spare currently.  Or maybe its because you’ve got something bigger in mind that you’d like to use your money for.

Whatever it is that’s driving your need to develop better financial habits, embrace it! Let it be the “something” that you’d rather spend your money on as opposed to the things in your life which are not nearly as important.

For me, I found my motivation years ago when I made the decision that financial freedom was the greatest thing I could ever buy with my money.  If I could rapidly build up my nest egg while keeping my expenses down, then I’d surely be able to shave 10 to 20 years off of the number years I’d need to work relative to my peers. 

Achieving financial freedom has been my main financial priority for years.  I take comfort in knowing that this is what I truly want for myself and my family, and that most of the other things that other people get excited about seem to pale in comparison.  Every time I start to feel myself becoming envious of the lavish lifestyle of others, I remember that I have a higher goal in mind, and then I get back on track.

Chances are you have a higher goal in mind too.  Make it your top financial priority and you’ll be amazed at how much easier it is to ignore all the financial noise in your life.

Work With Your Budget

One of the best ways for anyone of any income level to start living more frugally is to make sure they are living well within their means. To do this, you need to take a close look at your budget and make sure your expenses are not exceeding your income.

Don’t have a budget yet? The good news is that it doesn’t take much to get started. Budgets don’t have to be anything fancy.  You can literally create one in minutes on a sheet of paper or computer.  Google Docs even has templates you can use for free.

All you need to do is make a list of all your expenses, and then compare this to your income.  If your income is greater than your expenses, then you’re doing good and can focus on improving.  If your expenses are greater than your income, then you’re in financial danger and need to make some changes to your spending soon.

For anyone already using a monthly budget, click here to see why I prefer to use an annual budget instead.

Businesses small and large do exactly this sort of thing all the time.  Every year, they make a forecast of their revenue, their known expenses, and then anything else they may want to invest in (expansion, hire more people, develop new products, etc.)  As individuals, we should also use the same care and planning to decide how we want to use our incomes to improve our lives.

Redefine the Word “Budget”

The word “budget” tends to scare a lot of people because they think it is something that is going to hold them back from buying the things they want.  But this is completely the wrong way to look at it.

By definition, a budget is a plan for how you will spend your money (relative to your income).  You always get to decide what’s important to you and what you would like to use your money for.  If your money is going towards things that don’t matter to you or are not important, than you need to work towards cutting them out of your budget as soon as possible so that you can start using your money on the things you really want.

Again, this is a question of what your financial priorities are in life.  It’s up to you to decide how you’d like to spend the money you’ve worked so hard to earn.  And a budget is just an organized way to help you work through the numbers to get there more efficiently.

Challenge All Your Expenses

Okay, so you’ve made your budget and need to do better with your spending.  What’s the best way to do this?

Personally, the way I like doing this by always challenging all my bills.  Pick any 3-5 of your expenses and start looking for any possible way you can reduce them.  Over the years, I’ve been incredibly surprised by the results:

• Refinancing our mortgage to save over $70 per month
• Switching auto insurance providers and saving almost $57 per month
• Ditching traditional cable for streaming TV instead and cutting our costs down by $95 per month
• Switching cell phone plans to save an extra $40 per month

And the list goes on and on! 

The trick to all of this, however, is never to compromise on quality or service.  Just because I’m spending less for something doesn’t necessarily mean it has to be not as good.  It just means I have to try a little harder to find someone who will give me a better price for the same thing.

Frankly, I almost make a game out of seeing how well I’m able to find the same service but at a more competitive price.

Remember That All Prices are Negotiable

If there’s anything I’ve learned about being in sales, its that the price of everything is negotiable.  Nothing is ever set in stone.  Whenever you’re willing to buy something, there’s always more than one person willing to sell it to you.  And the best thing you can do is find out who’s going to offer you the most attractive price!

My rule of thumb for most larger purchases is to get at least 3 quotes.  This is particularly useful when I need some work done around the house.  After doing some research and picking at least three contractors with good reputations, I’m always amazed at how at least one of those quotes will come back much, much cheaper than the others.

Even then, sometimes I’ll call the contractor back and ask if they can take 5 or 10% off the quote to be more competitive.  More often than not, they’ll usually agree.

The same goes for making smaller purchases online.  It’s crazy how one website may be tens or even hundreds of dollars less than another.

My advice: It pays to do some research, find the best price, and then do some negotiation to do even better.

Redefine How You Have Fun

One of the biggest reasons we as humans tend to spend money is because we’re simply bored and want something to do. 

If you don’t believe me, the next time you’re at an airport, just look around you at all the luxury boutique shops and ask yourself who keeps these places in business.  The answer: Thousands and thousands of daily travelers who are waiting to board their flights and held captive in these un-entertaining corridors looking for something to do.

We do the same thing in our home lives too.  Think about the number of times you or spouse have gone to the mall or some store just to get out of the house for a few hours.  While there’s nothing wrong with going to a store, the problem is that once we’re there, we’re several times more likely to buy a bunch stuff we don’t need.

Amazon has made this even worse because now we don’t even have to leave our couches.  You can just pull up your phone or tablet and instantly click “Buy Now” on whatever you want.

So how can you avoid this?

How to Avoid Compulsive Shopping

The best way to avoid becoming a compulsive shopper (especially one as a result of boredom) is to simply give your attention to something else!

Find something that interests you and pursue it.  This could literally be anything.  Here’s a few that I’ve done over the years:

• Playing the guitar
• Go to the gym more and exercise better
• Landscaping our home
• DIY projects inside the home (paint the walls, install hardwood floors, tile work, etc.)
• Passion projects like working on this blog and writing ebooks

Ask yourself: What is something I’ve always wanted to do or learn?  It could be:

• Learning a new language
• Developing a new skill set
• Practicing a better diet and health

Again, the choice is yours.  And whatever you decide to do with your time, you’re going to be much better at fighting off the temptation to spend money just for the sake of something to do.

Where to Find Free Entertainment

Looking for something fun or entertaining to do?

I’m amazed by how many free or nearly free things there are to do if you just look around.  Here’s just a few of the tricks I’ve picked up over the years for finding free entertainment.

• Music.  You can use a free app like Pandora or Spotify to stream all kinds of music.  This has been a really helpful way for me to discover new bands and experience different types of genres.
• Podcasts.  Over the years, I’ve learned a TON of valuable information from Podcasts.  There are different episodes for nearly every type of topic or genre you can think of.  And the best part is that the information usually comes from just regular people like you or me, so I find it to be more relatable.
• Read.  Reading is and always will be a valuable pass-time.  Nowadays with ebooks, its even easier to hop on your tablet and check out an ebook from your library or Amazon.  Even for just a few bucks, you can buy an ebook on just about any subject you can think of.
• Movies from the library.  A lot of people forget that most public libraries have a pretty wide selection of DVD’s that you can check out.  This usually even includes new releases!
• Movies from Redbox.  Although not free, movies from Redbox come pretty darn close.  Ever since creating an account with Redbox, I receive weekly emails with promo codes for discounts.  Most of the time my rental costs less than $1.
• Free concerts.  Parks, coffee houses, and restaurants are always organizing local music events that are generally free of charge.  Look around on Facebook or the Internet and you’ll be surprised at what’s out there.
• Parks.  If you’ve got children, a trip to the park can be a great way to spend the afternoon.
• Museums.  A lot of museums will offer certain days of the week where admission is reduced or free. 

Again, look for things that interest you.  The more vested you are in something you want to do, the more the experience will mean to you – regardless of the cost!

Eat a Better Diet

If there’s one other area of life that more people should be focused on other than money, I would say it should be on what they eat.  And it’s no surprise that this goes hand-in-hand with your finances too.

While it can be more convenient to eat out at restaurants or even fast food, you’re usually not doing your finances or diet any good.  Even for something as simple as a trip to Subway, it can cost my family of 4 upwards of $50 by the time everyone gets what they want.  That’s crazy! 

Instead, try cooking more meals at home.  Not only will you have more control over the ingredients (and therefore the quality of what you’re cooking), but it will surely cost a whole lot less than one meal out.

How can you keep from over-spending at the grocery store?  Just like budgeting your money, make a list of all the meals you plan on cooking for the week.  Then you’ll be more inclined to only purchase the things you need to make that meal instead of a lot of “extras” that will probably sit in your cupboards or go bad.

If you don’t mind left-overs, start cooking bigger meals.  That way you’ll have something for lunch or even dinner the following day.

If you really want meat in your food, opt for chicken or pork.  These types of meats are often a whole lot cheaper than steak.  And they’re a lot healthier for you too.

Get Paid For Every Purchase You Make

One of the most under-utilized tricks to living more frugally is to get paid for each and every purchase you make.  There are a number of ways to do this.

My favorite way to get paid for shopping is to use cash-back credit cards.  I’ve had the Fidelity Rewards credit card for years which pays me 2% cash-back on everything I buy.  Chase and Discover card also have offers where they’ll pay 5% back on certain categories.

You don’t have to stop there.  There are a number of shopping websites that now give you some percentage off just for clicking on them before you make the purchase.  And yes, you can double-down and then pay with a cash-back credit card.

Every year, this adds up to thousands of dollars in free points that I can use for straight cash back, or two of my other favorite things: Free travel and presents..

Travel the World for Next to Nothing!

A few years ago, I started noticing a lot of blog posts about people traveling the world for almost free using nothing more than their credit card points. I started learning how I can do the same thing, and the results were amazing!

Although it took a little bit of effort and planning, I found that there was an incredible amount of deals out there that were just waiting to be gobbled up. My family and I have traveled to Mexico, Hawaii, Florida, Alabama, New York, and Las Vegas, and most of it was done for pennies on the dollar. I don’t intend on paying full price for any flights or hotels ever again.

Learn more about how I use travel rewards for free travel at this post here.

Buy Presents With Your Rewards

Most people get frustrated or annoyed when it comes time to buy presents for Christmas or birthdays. But thanks to credit card rewards, we don’t have this problem.

I like to save up my cash back rewards and let the balance build all year long. Then when the time comes, I redeem them for gift cards or physical gifts. A lot of times, the gift cards are discounted, so I get even more bang for my buck!

Buy Higher Quality

Here’s something you won’t hear from most personal finance gurus: When you’re going to buy something, don’t always go for the cheapest option.  Buy the item with the best quality and ratings.

But won’t that cost more?  Maybe.  But in the long run, it will save you more money.

I’ve found this to be true every time I bought something that was “cheap”.  Take buying a new washing machine for example.  When we had our first house, I would buy the cheapest one at the store.  Within a year, it would already need some kind of repair.  Within a few years, it was already time to replace it.

For all the times I’ve spent a little extra money to get a reputable brand or a product with high ratings, I’ve had much better luck and far fewer problems.

Keep in mind: High quality does NOT always mean the most expensive choice.  There are lots of products out there with good brand names but terrible reviews.  Again, it really pays to do some research online before you make any purchases.

Care Less About What You Drive

When it comes to automobiles, the car manufacturers have done an excellent job marketing to us and appealing to our egos. They’ve made us believe that status and “being cool” can be ours when we sign the papers for our new car. 

But in reality, things are quite different. Most of the time a car is just a car. It’s really nothing more than a tool to get you from point A to B, and someday (soon) that tool will wear out and need to be replaced.

That’s why the best thing you can do is not spend a dollar more than you have to. Find something reliable and dependable, and at the best price possible.

Again, ignore what everyone else is doing and driving.  Don’t be fooled into thinking that your vehicle makes you who you are.  It’s not worth it to buy an $80,000 SUV when a different one for $30,000 can do the same exact thing. 

Buy Used Vehicles Whenever Possible

When I was in my 20’s, I bought a brand-new SUV off the lot for what felt like an obscene amount of money.  Almost 6 years later (not long after it was paid off), the vehicle was having problems and needed to be sold.  What did the dealer give me for the trade-in?  $1,500.

According to the site How Stuff Works, most vehicles lose approximately 15 to 20% of their value each year.  That means a brand-new vehicle with a sticker price of $40,000 would be worth approximately $20,480 after just 3 years.

So put this fact to work for you!  The next time you go to buy a vehicle, find one that is approximately 3 years old and in the best condition available.  By doing this, you’ll get the most value for your purchase. 

Then drive that vehicle for as long as you possibly can!

Downsize Your Home

It’s the American Dream for most people to move the biggest, fanciest house they can find and be the envy of everyone they know.

I know … I had that same mindset and moved from a big house to an even bigger house.  And if there’s one thing I’ve learned about living in big houses, it’s that it’s not all it’s cracked up to be.

Here’s just a few reasons why:

• Your taxes are more.
• There’s more stuff inside (like appliances) that will break.
• It costs more to furnish.
• There’s more yard to take care of. Plus you’ll need bigger and more expensive equipment to take care of it.
• It costs more to heat and cool.

And I could go on and on …

My advice to others: If you’re thinking at all about moving to a new house, I would strongly recommend that you consider moving to a house that is just large enough to suit your needs and nothing more. 

Pick one that’s in a good neighborhood and appears to be on its way to appreciate for years to come.  It also helps to pick one that needs as little updating or upgrades as possible.

Most importantly: Pick one that you can fall in love with.  Your home is your castle, and you should wake up every day pinching yourself in disbelief that this awesome home belongs to you.

Photo credits: Unsplash

The post How To Live Frugally Without Being Cheap appeared first on My Money Design.

The foundation of any solid financial freedom plan is in knowing the best ways to budget your money and save effectively.  It’s absolutely fundamental to preserving your wealth.

Have you ever wondered why so many lottery winners end up going broke a short while after winning?  Fortune reports that nearly a third declares bankruptcy within 5 years.

You’d think that all those millions of dollars would solve their financial problems.  But as it turns out: If you don’t know how to budget your money normally, than more money isn’t going to make a difference.

But “budgeting” … Most people cringe at the word!

And likely because they get the false idea that every dollar they spend is somehow bad (which is not true at all).

The truth is that when it comes to budgeting, you don’t really need to break out the calculator or jot down every $1 purchase you make.

Instead, I’d really like you to think of budgeting as more of a “habit” building skill.  If you can change your financial habits and realize the benefits, then it can put you on the right path forward.

With that said, here are 10 of the best “practical” ways I know to budget your money properly that will help you to save more in the long run.

1-Know Your Limit

Forget everything you think you know about budgeting money for a second and ask yourself one simple question:

What’s my limit?

In life, everything has a limit.  Exceed the limit, and there is likely to be a corresponding consequence.

• Drive too fast, get a ticket.
• Eat more than 2,000 calories per day, you get fat.
• Miss too many days at work, you’ll get fired.

Budgeting your money should be no different.  Inherently, there has to be some number in your head that triggers a “red alert” for when spending goes from normal to unacceptable.

For example: In early 2017, actor Johnny Depp filed a lawsuit against his management company cover the mishandling of his finances.  But what’s interesting is that it was revealed that the actor spends approximately $2 million dollars every month!

Okay …so you’re not a big-time actor. But the same thing happens to regular people too.  Think about a conversation with a friend or co-worker where you thought this.  Perhaps they said something that sounded crazy to you like “Our vacation cost $10,000” or “Like my new $80,000 SUV?”

Ding! Ding! Ding!

The important part, though, is in knowing what your number is.  At what point if you spend $X is this too much?

Your number will be revealed after doing a little effort on the front-end and setting up your annual budget.

Yes … I said annual budget.

2- Budget for the Year, Not the Month

Every time I see articles or gurus suggesting that the best way to budget should be your monthly income minus expenses, I shake my head.

Why?  First of all, that’s not how life’s expenses works.  Your spending isn’t the same month to month.  There are a great deal of things that happen only every so often.

• Christmas gifts
• Vacations
• Lump sum insurance payments
• Seasonal expenses
• Back to school shopping

This is not unlike what a business will do.  When most professional businesses lay out their financial projections, they do so for the entire year.  Not just one month.

In both cases, the goal is the same.  To truly not let any expenses slip through the cracks, you need to capture the big picture.  Therefore, you need to layout what your income and spending will look like over the course of the year.

The good news is that once you do this, you’re good for the year!  You don’t have to drudge through the process every month.   I usually do mine once while on Christmas break, and that’s it!  After that, I’m in monitor and report mode for the rest of the year.

Setting up an annual budget is not at all as bad you’d think.  Open up Excel or Google Docs, layout the 12 months, and start putting in numbers of how much you think you’ll spend.

After you layout your usual monthly expenses, start adding in those one-off or non-regular expenses.  Again, review your past 6-12 months of credit card or bank statements to get an idea of where you’re spending.  The more you capture, the closer to real life you’ll be.  And the better your chances that your budget will be a success!

Find out more about why and how to setup an annual budget here.

3- Redefine Fun

One of the easiest ways to destroy your budget is to let it slip away in the name of “having fun”.

Hey, … I get it.  Isn’t life meant to be fun?

Of course it is!  But just like beauty is in the eye of the beholder, “fun” can also be a matter of perspective.

When our family was just starting out and the kids were babies, my wife and I would find ourselves going to the local malls for something to do.  It was a great way to get back out in public, walk around in an air-conditioned environment, and maybe pickup a few nice things along the way too.

But then the kids got bigger.  They started wanting cool clothes and shoes.  They also went from eating tiny kid’s meals to full size dinner orders.  Suddenly our little “get out of the house” trips were costing us a few hundred bucks every time we stepped out.

We had to re-think our options for fun.  Now when it comes to things to do on the weekends, we:

• Get some stuff done around the house.
• Head to the gym.
• Visit with family.
• Let the kids have their friends over to spend the night.
• Play a sport or go to the local school sport event.
• See what’s at the Redbox or on Netflix
• Grab a cup of coffee (just me and my wife)

All of these things cost way, way less than one trip to the mall.  Yet everyone seems to enjoy them just as much; probably even more!

Again: There are many ways you can fun with someone.  The focus is (and always should be) about the memories you make and the way you engage other people.  Never about how much money you spend.

4- Get a Handle on What’s Going In and Out

Tell me how many times this happens: Your credit card statement arrives and it’s a couple thousand dollars more than what you were expecting.

You and your spouse turn to each other and say: “What the hell did we buy?  Where did all of our money go?”

Obviously purchases were made.  But no one has a clue what they were for.

This is how we spend our own money.  But if you happen to work at a large company, have you ever noticed it doesn’t seem to work that way?  I know every time I need to make purchase, it has to go through several layers of approval:

• A manager will ask the purpose of the purchase before they tell you which account to bill it to.
• Someone from Finance will then ask if you got multiple quotes to ensure you received the best price.
• When the invoice finally arrives, you have to approve that you actually received the purchased item.

As individuals, there’s a lot we can learn from this process.  We need to not only be more aware of what purchases are made, but why we are making them.

Our goal here is not to restrict or stop purchases from happening.  But rather to become aware that they are even happening.

Naturally, along the way, you’re bound to find some purchases that are just plain unnecessary.  And that’s when you and your spouse can start to weed out the ones that don’t quite fit in with your goals.

5- Challenge the Cost of Everything

Building upon that last section, another thing I’ve found to be incredibly helpful when it comes to sticking to a budget is to challenge the cost of nearly everything.

Because as it turns out: You can almost always find a cheaper price.  You just have to look.

Earlier this year, my wife and I were buying some new furniture for our patio.  It was already on sale, but before we went up to the counter, I did a quick Google search and found a 25% coupon.

Boom!  $100+ off – just like that for 15 seconds of work!

The next time you plan to buy something, try it yourself. I’m sure you’ll quickly find some sort of coupon code or discount just waiting for you to take advantage of.

Where this has always been particularly useful is whenever we want to get work done around the house. Usually this means spending hundreds or even thousands of dollars. As a general rule, we get three quotes and compare them to make sure we’re going to receive the same level of service from each potential provider. Without a doubt, one is always more affordable than the others, and that means we end up saving tons!

6- Buy What You Need Versus Want

Another thing that can leave a bomb crater in your budget: The impulse buy.

While there are many obvious examples of this, sometimes even when you think you’re being financially strategic, the damage is still the same.

Ever seen one of those extreme couponing shows where people have stock-piles of household goods?  While they might have gotten a great deal, the question I always ask is: Are they ever actually going to use all of that stuff?  Do they really need it?

Here’s a personal example.  For years when we’d go to the mall, I’d see some men’s clothes on clearance and think to myself: That’s a great deal!  I should buy that.

This went on for some time until one day when my wife and I went to clean out our closets, we found all kinds of shirts and pants with the tags still on them.  Never worn; I had practically forgotten about them.  Great price or not, without any utility, they were simply a waste a money.

Now when we go out shopping, my objective is simple.  I keep a short list of certain types of clothing I’m looking for – a new white dress shirt, black shoes, etc.  This way, no matter what kind of deal I find, it has to pass the “do I really need this” check first.  And if it’s not on the list, then I put it back.

7- Think About the Return on Investment

One of the big things I took away from one of my favorite money books “Rich Dad, Poor Dad” was that there are two types of things you can buy:

1. Things that put money back in your pocket, and
2. Things that take money out of your pocket.

A good example of this was when I really wanted to finish the basement at my old house.  My wife and I did a number of home improvement projects through the years; most of them by ourselves. But one that we knew we’d have to contract out if we ever wanted to get it done right was to finish the basement.  And it was going to be expensive!

While I really wanted to do this, I hesitated because I knew that there was a high likelihood that we would move someday.  And then we’d never see a return on that investment.

Sure enough, I was right.  We eventually moved, and ended up selling our house for almost what we paid for it originally.  I was glad we never sunk the money into finishing the basement and instead put it towards something more sensible – the down payment of a new house!  (Which by the way included an already finished basement.)

There are lots of other expenses in our lives that apply in the same way.  Autos, recreational vehicles, clothes, electronics, jewelry, etc.  While many of these things may be fun in the moment, the sad part is that a lot of them will not hold their value and be essentially worthless by the time we’re ready to get rid of them.

On the other hand, things like mutual funds, dividend stocks, and rental properties are purchases that can put money back in your pocket. In fact, given enough time, investments such as this can easily turn you into a millionaire! 

Keep this simple classification in mind every time you make a purchase.

8- Don’t Replace Things That Work Just Fine

It can be fun to have new things.  But at some point, you’re going to pay.  And pay BIG!

I used to know a co-worker who was always trading up his vehicle.  Every few years, he would trade in one of his vehicles for another, … then another, … and then another!

Meanwhile I drove the same car until it literally almost died.  Why?  Because 1) it was paid off, 2) I serviced the car often and knew that it was in tip-top shape (all things considered), and 3) I was commuting to work every day, so why put the miles on a new car?

But it doesn’t just stop with automobiles.  Some people love to redo every room in their house, or get the latest iPhone, or buy new clothes because their current ones are a year old.

Hey …, I understand.  Its fine to update your house or wardrobe every once in a while.  But it needs to be done constructively and in line with your budget.  Plan for these sorts of things on your annual budget plan.  Don’t let it be a surprise or count against one of your other goals.

And certainly don’t update things for the sake of boredom.  Remember that financially the best thing you can do is to use something until it absolutely works no more.

9- Set Realistic Savings Goals

If every month you add up your expenses and find that you’re way over your budget, but yet you’re not spending unnecessarily, then it might be time for you to consider that your goals are too strict.

Yes, I know.  You’ve read a bunch of personal finance blogs and really want to save 50% of your income.  That’s a great goal.

But is it realistic?  If your natural spending just simply doesn’t allow for it, then perhaps you’re cutting yourself too short too soon.

Compare your spending to a diet.  If you’re used to eating 2,500 calories per day and then suddenly cut down to 1,500, how long do think that’s going to last?  Probably not long at all.

A better strategy would have been to cut back slowly from 2,500 to 2,250 to 2,000 and so on.  Your spending works in much the same way.

Remember that budgeting is a series of tiny victories. Your savings goal today doesn’t have to be your savings goal tomorrow.  You can get better and better until you reach your ultimate goal.  But until then, start off gaining momentum by crushing the ones that are just within your reach.

10- Have Backup Money (Yes, an Emergency Fund)

In life, we need insurance.  Insurance for our cars, homes, lives, etc.

When it comes to your money and, in particular, your budget, there’s only one insurance policy you can rely on: Your emergency fund.  It can literally be a life-saver!

Forget about needing to have 6-12 months of savings.  That would be great if you could do that, but its not always realistic.  Your emergency fund should simply be a decent sum of money that sits in cash (… yes, cash) and is reserved for only those absolute times when you need it.  (I prefer to keep $10,000 in mine.)

Here’s how this can help.  Emergency funds are what keep you out of going into debt when the unexpected happens.  Rather than rack up credit card debt or dip into your 401(k), you can grab from your emergency fund and take care of business.  This keeps you out of the financial doghouse and on track.

Readers – What are your best ways to budget money and save more?  What practical strategies do you use to stay on track and not get buried in the details?

Images courtesy of Pixabay

The post The 10 Best Practical Ways to Budget Your Money and Save More appeared first on My Money Design.

Do you know about flexible spending accounts (FSA’s)?  You may have heard of them from your HR department and wondered: “How would this benefit me?” or “How does an FSA work exactly?”

Believe me – These were the same types of questions my wife and I had when we were first getting started in our jobs years ago and looking for every angle we could to save a little bit of cash.

At first glance, an FSA seems like just another thing taking money out of your paycheck.  For most of us, that’s a deal-breaker.  Between taxes, social security, and our retirement contributions, there’s already enough being subtracted from how much we really earn.  Do you really need something else to reduce it even further?

… Yes! And I’ll tell you exactly why. A flexible spending account can be a powerful friend to you and your money when it comes to tackling two of the biggest expenses that families deal with: Medical and dependent care (i.e. daycare) costs.

Similar to your retirement accounts, the major advantage of an FSA is that it allows you to set aside money from your paycheck before taxes are taken out.  (More on this below.)

Though it may not seem like at first, this is a HUGE advantage for working families that can end up saving them thousands of extra dollars each year!

Sounds good, right? So how do you sign up for one?

Before we see the details of how a flexible spending accounts work, let’s first explain what they are.

What Is a Flexible Spending Account?

Known by the IRS as “flexible spending arrangements”, an FSA is a special financial account that you contribute to and (at the same time) use to reimburse yourself for medical and dependent care expenses using tax-free money.

Similar to your retirement accounts such as a 401(k) or IRA, flexible spending accounts are another opportunity given by the IRS to take a tax-break and provide some relief to working families. 

As most working-class Americans can tell you, medical and daycare expenses can add up pretty fast!  Not only can they put quite a drain on your budget, but they are also often unavoidable.  By allowing some tax relief on these two areas, this helps reduce the financial strain by creating a savings opportunity that could result in thousands!

Is an FSA and an HSA the Same Thing?

No. An HSA is a “health savings account” and is different from a medical flexible spending account. Though both use tax-free money to help cover your medical expenses, HSA’s work differently from FSA’s and also come with different qualifications in order to use them. More on this below.

How Does An FSA Work?

Despite how an FSA may have been explained to you in the past, I can tell you from experience: They’re pretty simple and easy to manage.

Here’s exactly how an FSA works:

1. Once per year (through your employer), you agree to participate in an FSA.  To do this, you first need to decide on a set amount of money that you’d like to put aside into your FSA.  For this example, let’s say you decide to contribute the maximum amount of $5,000 for your children’s daycare and $2,700 for your medical expenses.
2. Your FSA is now ready for use.  Throughout the year, as you periodically have daycare and medical expenses, you can submit proof to the service provider and then you’ll be reimbursed.  I’m able to do this in a matter of seconds using an app on my phone.
3. At the same time, throughout the year, money will be taken out of each of your paychecks to contribute to the FSA and effectively fund it.  If you’re paid every two weeks and on a 26-paycheck cycle, that means $7,700 / 26 = $296.15 each time. 

So in summary, think if it like a special advance payment or bank account that you receive up-front and pay back throughout the year.

Why Tax-Free Money is Awesome!

Wait! You might ask yourself: If I’m just taking money out of an account that I eventually pay back, what’s the point?  Why do I even need an FSA?

Because you have to remember: Your contributions to the FSA are tax-free! It’s money that’s coming out of your paycheck before taxes are applied. 

Let’s go back to our example for a second. Remember we said you’re setting aside $296.15 every paycheck. What if you didn’t save the money in an FSA? What would happen?

That savings would of course be taxed! If you’re in the 22% tax bracket, then this means you’d really only ever receive about $231 of that $296.15 you earned.

So by contributing to your FSA, you keep the whole $296.15! In our example, you’re effectively saving $65.15 every pay check, or $1,694 over the course of the year.

That’s not too bad of a deal! Especially when you think about how strapped for cash most families are, this tax-savings can really be a huge benefit.

Medical and Dependent Accounts Are Separate

In the example I gave above, I combined the numbers for both medical and dependent care.  But please keep in mind: Your FSA provider will treat these as two separate accounts.

This means you can’t submit receipts for medical expenses to make claims against your dependent care FSA, and vice versa.

Also remember that you don’t have to contribute to both in order to participate.  For example, if you don’t have any dependents but do have medical expenses, then you can just contribute to the medical FSA only.

The FSA “Use It or Lose It” Rule

If an FSA sounded too good to be true, then you knew there had to be a catch, right?

Well, there is and its often referred to as the “use it or lose it” rule.

What does that mean?  It means if you don’t submit enough qualified expenses for the year to get back all of your contributions, then you lose them.  For example, if your medical FSA is $2,700 and you only submit $2,000 of expenses for the year, then you forfeit that $700 extra you contributed.

This is why its very important not to over-estimate how much you plan to contribute to your dependent care or medical FSA.  You will want to pick a number that is realistic and based on a your known upcoming expenses.

When we would do this, we’d estimate how much we planned on spending for the year in daycare and known medical costs such as braces for the children or number of times we visited the doctor last year.  This helped us to calculate a figure that we could easily hit while still maximizing the benefit of the FSA tax savings.

Some plans will allow you a grace period of two months or so after the plan year to use up all of your remaining unspent FSA money.  In addition, some plans will also allow you to rollover as much as $500 of unspent contributions into the next plan year.  For specifics on your plan, ask your HR department for the details.

How Much Can You Contribute to Your Dependent Care FSA?

For each calendar year, you’re allowed to elect as much as $5,000 to your Dependent Care FSA.  That means if you’re in the 22% tax bracket, you could be saving as much as $1,100 in taxes annually.

What constitutes an eligible dependent care expense?

• Putting your children (under the age of 13) that you have to put in day care, after school care, or summer camp so that you and your spouse can work.
• Care for a tax dependent of any age who cannot physically or mentally take care of themselves.

My wife and I used to joke that our children’s daycare bills were our second mortgage.  But honestly, it really was! We’d write a check to our daycare provider for nearly just as much as what we paid for our house every month.

Discovering the benefit of an FSA was a nice sense of relief!  Saving over $1,000 in taxes was just what we needed when we had our hands full with young children and all the expenses that come along with it.

How Much Can You Contribute to Your Medical FSA?

For each calendar year, you’re allowed to elect as much as $2,700 to your Medical FSA.  That means if you’re in the 22% tax bracket, you could be saving as much as $594 in taxes annually.

In general, these are medical expenses that you paid for yourself, your spouse, or any of your tax-dependents (such as your children under age 27).

Truthfully, the range of things which count as a “qualified medical expense” are pretty wide.  You can use your FSA for larger medical expenses such as:

• Office co-pays
• Medical procedures
• Prescriptions
• Dental
• Eye exams and glasses

What’s not so well-known is that you can even use your medical FSA for smaller purchases that you probably don’t associate as being a typical medical expense, such as:

• Facial care
• Sun-screen
• Band-aids
• Contact lenses
• Thermometers
• First aid kits
• Baby care and feeding products
• And so many others!

Health-related expenses which are not covered by an FSA include insurance premium, long-term care coverage, and expenses covered by another health plan.

How Do I Sign-Up for an FSA?

FSA’s are an employer-sponsored benefit.  Similar to a 401(k), they have to be offered through your place of employment. The best thing to do is to go talk to your local HR department and see if they offer flexible spending accounts. If your spouse works, you could check with their employer too.

Can I Contribute to an HSA Too?

No, according to the IRS, if you contribute to an FSA, then you cannot participate in an HSA (health savings account) also.  From the IRS’s perspective, you’d be essentially “double-dipping” in tax benefits.

Health savings accounts are different from FSA’s in that there is no use it or lose it rule.  You still contribute tax-free money into the account and reimburse yourself as medical expenses come up.  But the money stays that account indefinitely.  In fact, the money can be invested and allowed to compound over the years tax free similar to your 401(k) or IRA.

But the catch with an HAS is that in order to qualify for one, you need to have medical insurance with higher than average deductibles.  Depending on how often you go to the doctor or anticipate needing medical procedures, this can be a bad trade-off.

Can Both My Spouse and I Have FSA’s?

In general, no.  If one spouse or the other has an FSA, then the other one cannot sign-up for one.  An example of this would be that both of you could not sign up for the dependent care FSA and try to claim double the maximum amount allowed.  Again, that would be double-dipping in tax-benefits.

It is possible, however, for one spouse to sign up for the dependent care FSA while the other signs up for the medical FSA.  Because these two types of plans are treated separately, there would be no influence from one plan to the other.

Readers – Who uses FSA’s? How much do you save each year? What strategies do you use to get their maximum value?

Photo credits: Unsplash, Pexels

The post What Is a Flexible Spending Account? How Does an FSA Work? appeared first on My Money Design.

Question: If I’ve got a little extra money that I’d like to use responsibly to pay off one of my debts, which is the better one to put it towards: Should I pay off my car loan early or my mortgage?

Ahhh … the old “which of my debts do I pay down first” debate …

We tend to carry a lot of them in our society.  According to a 2017 report from GoBankingRates, the top three forms of debt for most people are their mortgage (65%), credit cards (50%), and auto loans (32%).

Usually questions like this are a no-brainer.  Simply look to your loans with the highest interest rate and pay those off first.  That means tackling your high-interest debt like credit cards and student loans.

But what about our auto loans and mortgages?  When it comes to debts like these, the differences can be a bit more subtle.  The interest rates are often lower, and the payments are more manageable (likely because they’ve been spread out over so many years).

All in all, debt is still debt!  And the sooner you can pay it off, the quicker you can crawl out from underneath the mountain of interest that is building up on top of you.

But for these two types of loans, is that all there is to it?  Are there are other implications to paying off your mortgage or car loan that can make one option more attractive than the other?

In this post, we’ll break down the numbers and compare what paying off your car loan vs your mortgage actually means in terms of money saved.  But we’ll also discuss a few other important points that could improve situation and add to your decision.  Let’s begin!

Auto Loan vs Mortgage – The Comparison

Before we can make a good comparison between your auto loan and mortgage, it helps to understand how these loans are constructed in the first place.

How Do They Work?

First of all, for both, most conventional loans work in a similar fashion:

Monthly payments are determined by finding the future value of the loan amount in a financial calculation that takes into consideration 1) an agreed upon annual interest rate and 2) how long it will take to repay the loan.

The general construction of the loan is that your initial payments end up being more heavily weighted towards paying back the interest and less towards your principal.  As time goes on, the proportions incrementally change towards less money going towards the interest and more going towards the principal.

In case you want to know, this is a process called amortization.  It’s designed so that the lender gets paid their interest more quickly, while it takes you longer to pay back more of your loan.

What does this mean for you?

1. You can influence the amortization schedule in your favor by making additional payments towards the principal, which means paying less interest in the future.
2. From a mathematical standpoint, we can conclude that the loan with 1) the higher interest rate and 2) the longer payment period will be the one you’ll want to accelerate.

In this case, your mortgage.

But how much better is this really?  Can we put some numbers behind it?

Of course!

Loan Constants:

Let’s setup a real-world example of a typical auto loan and typical mortgage.

For the auto loan, using statistics from CNBC and Value Penguin, we find:

• Average loan: $30,032 (we’ll round to an even $30,000)
• Average monthly payment: $503
• Average term: 68 months (we’ll go with 60 months for our model)
• Average interest rate: 3.93% for 60 months and 3.78% for 72 month (we’ll round to 4%)

Similarly, for a mortgage, using data from Experian we find:

• Average mortgage balance: $201,811 (again, we’ll round to an even $200,000)
• For our model, we’ll use a typical 30-year fixed rate mortgage with a 4.5% APR

Putting all of this together, our monthly payments equate to:

• Auto loan = $552.50
• Mortgage = $1,013.37

Finally, the last piece of the puzzle will be how much extra money per month we’d like to apply to either our mortgage or auto loan.  For this, I will select a simple amount of $100.

The Results:

Crunching all the numbers in Excel, at the end of the 5-year period, I come up with the following results:

Putting the extra money towards our auto payments saves us $531 in interest. Putting the extra money toward our mortgage payments has (so far) saved us $740 in interest.

Therefore, just as we assumed, paying down the mortgage was the better choice.

But take into perspective that this is only by a lead of $209 over a 5-year period. So even though there is a slight mathematical advantage with the mortgage, it makes almost no difference which loan you choose to pay down quicker!

But What About Interest in the Future?

One of the big arguments for people in favor of paying down their mortgage early is that accelerated payments will dramatically reduce how much interest they save over the life of the mortgage.

And they are correct.  Paying down your principal early on will shave years and tens of thousands of dollars off your total mortgage.  This, of course, depends on how much you pay and how often you make the payments.  There are any number of mortgage payoff calculators across the Internet where you can see this for yourself.

So what about our example?  How much money over the entire 30-year life of our mortgage will we save based on these first 5 years of our accelerated payments ALONE?

The answer: $14,111

Again … not bad.  But not exactly a great return either; especially not after waiting 25 years.

For example, we could have easily introduced a third scenario where we took those 5 years to save up $100 each month, and then invested it all in a stock market index fund over the next 25 years.  With an average annualized rate of 7%, it would have produced a return of $32,565.  That’s double the interest saved over the life of the mortgage.

(Again, no surprise since 7% is a better rate of return than the 4.5% interest rate on the mortgage.)

So again: While there is definitely a strong potential to save even more money in the future by making accelerated mortgage payments, it’s not an overwhelmingly convincing reason to put your extra money towards the mortgage payments over the auto loan.

In that case, if the amount of money saved doesn’t sway you one way or the other, than what would be some other good reasons?

Freeing Up Money to Pay Your Other Debts

Forget the interest calculations for a second …

What if paying off your auto loan or mortgage early gave you the ability to do something else worthwhile with your money?

What do I mean by this?

I’m talking about cash flow.  What if our goal should be to free up as much money in our monthly budget as possible, so that we can then use it to tackle our other debts?

This strategy is popularly known as the debt snowball method.  The process is always the same:

1. Pay off your debt with the lowest balance first (regardless of interest rate).
2. Now take the money you would have normally used each month to pay off Debt #1, and redirect it towards your debt with the next lowest balance (Debt #2). Continue until Debt #2 is paid.
3. Repeat the process with Debt #3 and so on until all of your debts are completely paid off.

As you can see, this technique creates a cascading effect where your budget stays the same, but your payments compound upon one another until your debts are all gone.

So what does this mean for your auto loan vs mortgage dilemma?

Without knowing your purchases, odds are very good that the amount of money you still owe on your auto loan is less than your mortgage balance.  Therefore, with this strategy, you would:

1. Use your extra budget to pay down the auto loan as quickly as possible.
2. Once the auto loan is completely paid off, you then continue to take that same monthly amount of money and reapply it to your mortgage.

I can tell you from personal experience that I have used the debt snowball method in the past and it works really well!  I’ve paid off small debts that carried 0% interest just so that I could free up and extra $200 (or so) per month to use towards paying off our other expenses. Nothing feels better than completely paying off large loans!

So if paying off your loans more strategically using something like the debt snowball method is your goal, than in this case paying off your auto loan in the smarter choice.

Which Asset Depreciates Slower?

Another way to look at this debate is to consider which item will be more likely to give you a return on your money in the future.

In other words, focus on paying off the asset which depreciates the slowest.

Think of it this way: Let’s go 5 years into the future.

What will the value of your auto be?

Likely next to nothing.  For the typical automobile, you might get a few thousand dollars at trade-in (if you’re lucky).  Generally, all of the money you sunk into your vehicle loan will be effectively be gone.

Now consider what your house would be worth if you had to sell it?

Chances are your home will be worth approximately the same or possibly more than what you paid for it.  That means that you’d have at least some equity to recoup.

When we sold our house after living in it for 11 years, we sold it for just about the same price as we paid for it.  But since we had been making mortgage payments for so many years, our balance was low and we earned several tens of thousands of dollars in the transaction.

Therefore, if you think of putting your money towards something that will show a better return in the future, then paying off the mortgage quicker makes more sense.

Eliminating PMI

Did your mortgage come with PMI?

If you put down less than 20%, then chances are it does.  PMI stands for “private mortgage insurance”.  It’s basically an insurance policy that the mortgage lender takes out on your mortgage in case you default, and they make YOU pay for it!

If you’ve got PMI, one of your goals financially should be to get rid of it as soon as possible.  Any money you put towards PMI is effectively gone the moment its paid.  It does nothing to reduce either your principal or interest.

When we had our first mortgage, it came with PMI that worked out to almost $100 per month.  That’s more or less a payment of $1,200 per year that went towards nothing tangible on our behalf!

So how do you get rid of PMI?

Simple: Pay down your mortgage principal quicker.  Once your loan-to-value (LTV) ratio gets down to 80% or lower, you can possibly refinance and have PMI removed.  That’s more money that’s back in your pocket!

Therefore, if you’ve got PMI and want to eliminate it, then putting your extra money towards the mortgage instead of the auto loan would be better.

Tax Deductibility

Though it’s not a heavy hitter, one more topic to consider is which loan can work out better for your taxes.

As you might already know: Mortgage interest on your primary home is tax deductible for those people who itemize.  The interest you pay on your auto loan is not.  Therefore, this can make paying off the auto loan more appealing since you’ll want your mortgage loan to last longer.

Again, this benefit will vary from house to house.  In this article from Investopedia, they found the amount of savings between itemizing and taking a standard deduction to be anywhere from $100 to $1,500.

Conclusion: Do What’s Right for You

Still unsure of which option is the better one to go with?

It’s okay.  You don’t have to be.  Basically, just go with whichever one feels right to you.

You could look at your loans mathematically, strategically, or even from a tax benefit perspective.  But either way, only you know your financial situation.  Therefore, you have to do what works the best for your well-being.

No matter which way you decide to go, the good news is that you’re using your extra money to pay off your debt early, and that’s a “win” no matter how it gets done.

Readers – Which would you rather do: Pay off your auto loan first, or put the extra money towards your mortgage principal?  What are your reasons for deciding to do one or the other?

Photo credits: Pexels, Pixabay

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