Getting out of debt may feel like a goal that is far out of reach, but that is why financial experts have created specific strategies that can help you make steady progress towards becoming debt-free. One of the most popular strategies is Dave Ramsey’s debt snowball method. In this, you make the minimum payment on each of your debts, and then make as big of an extra payment as you can on the debt with the smallest remaining balance. How the debt snowball method works As you use the debt snowball method, you will, hopefully, be able to pay off your smallest debt relatively quickly. At that point, you will be able to start snowballing your payments. All the money you had been using each month to pay off that first, small debt is now available for being used as an extra payment on your next smallest remaining debt. Each time you pay off a debt, you will have a bigger chunk of your monthly income that is available for using as an extra payment on your next smallest debt. Is the debt snowball method right for you?

Paying Off Debts with the Snowball Strategy

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One of the most rewarding things about being a homeowner is that you can make changes to your home that will make it a more enjoyable place to live. However, you probably won’t be living in your home forever, so it is also worth considering how your home improvement projects will affect your home’s value. The ROI or return on investment of a project tells you how much of the project cost returns to you in the form of a higher home value. The ROI is typically given as a percentage, based on research on home characteristics and sale prices. In most cases, the ROI is less than 100%, which means you spend more on the project than you recoup in the sale price. Therefore, most projects are best done if you still plan to live in the home several more years so you will be able to enjoy the home improvements that you make. As you consider making home improvements, keep in mind which projects tend to have the highest ROI and which ones will not do much to improve your home value. You do not necessarily need to choose only the projects with a high ROI, but you should at least keep values in mind so you do not face any surprises when you go to sell your home. Best renovation projects for improving home value Worst renovation projects for improving home value It is also worth mentioning that nearby home values affect the ROI on all of these projects. Your goal should be to have your home’s value about near the median in your neighborhood, rather than pricing yourself out with fancy renovations or skimping in an upscale neighborhood. Through all of this, though, remember that any improvement could be worth it to you if you find personal value and plan to keep the house for a long time.

The ROI of Home Improvement Projects

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When you purchase a home with the help of a lender, the lender will likely set up an escrow account for you as well. The lender collects the money from you on a monthly basis for property taxes and homeowner’s insurance, holds it in the escrow account, and then pays those bills on your behalf when they come due. For the lender, the main purpose of an escrow account is to protect their lienholder interest in your home. The borrower benefits by spreading out payments on a monthly basis for bills that are due semi-annually or annually. How does an escrow account work? When establishing an escrow account, your lender will calculate the total annual payments for your property taxes and homeowner’s insurance. The annual amount will then be divided by 12 to calculate your monthly escrow payment. This monthly amount is added to your principal and interest payment to make your total mortgage payment. You might hear your full monthly payment referred to by the acronym “PITI”, for Principal, Interest, Taxes & Insurance. Lenders also typically require you to maintain a cushion of two months of escrow payments in the account at all times. Every year, your lender will review your escrow account to ensure it has the right amount of funds. The lender will recalculate your payments based on the previous year’s property tax and insurance costs. If there were a shortage within your account, your lender would require you to make a one-time payment or have an increased mortgage payment the following year. If there was an overage in your account, your lender will give you a check for that amount and might decrease your escrow payment for next year. Advantages of escrow accounts Disadvantages of escrow accounts Avoiding an escrow account If you would prefer to not have an escrow account, you will need to negotiate it with your lender. The lender might be willing to allow you to manage your property taxes and homeowner’s insurance payments rather than using an escrow account. Typically, you’ll need to have put at least 20% down on your home, be a prior homeowner, or have a large cushion in your bank account. If you choose to forego the escrow account, you should budget carefully to ensure you have the money available to make your property tax and homeowner’s insurance payments when they are due.

How Escrow Accounts Work

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Non-sufficient fund fees, more commonly known as NSF fees, are charged when your checking account does not have enough money for a purchase or payment you try to make. This purchase or payment could be with a debit card or a check, and rather than allowing the purchase to go through; the bank will reject it and charge you a fee. This is also known as a returned item fee. Overdraft fees are similar, but they occur when the bank allows a transaction to go through, despite your account balance not being sufficient to cover it. It is like an emergency short-term loan from the bank, and it comes at a cost. The bank will charge you the overdraft fee, plus you have to pay the deficit balance. Overdraft fees and the deficit balance are taken out of the first deposit you make after the overdraft occurs. Both types of fees can be costly, coming in as high as $35 each. These charges can add up, especially if you overdraft your account frequently. Also, consider that when your account has a low balance is probably the worst time for you to have to pay an unexpected fee. That is why it is so important to understand what you can do to avoid these situations. Best practices to avoid NSF and overdraft fees

Avoiding Non-Sufficient Fund and Overdraft Fees

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Most people these days set up a wireless home network so that all of their devices can connect simultaneously. It is not unusual to have a desktop computer, a home gaming system, several televisions, laptops, tablets, and phones all connected to a single home network at the same time. While wireless networks are very convenient, they can also make you susceptible to malicious hackers trying to access your personal data. Why network security is essential An unsecured network can allow people you do not know to gain access to your network, view data coming in and out, or trick you into visiting malicious websites. Hackers may even be able to access information stored on your personal devices, leaving you vulnerable to identity theft. Plus, on a less critical note, neighbors could also join your network and soak up your bandwidth, slowing upload and download speeds for all of your devices. Checking if you are on a secure network From a user perspective, the main difference between a secure network and an unsecured network is that you need to enter a password to connect to the network. Your network device will indicate that a password is required by showing a symbol of a lock next to the network name in the list of available networks. It might even indicate the type of security when you hover over the network name with your cursor. Most public networks should not be considered secure if the password is available to anyone who asks for it. Your home network, though, and home networks of friends and family, can be secure if they include a password. Setting up secure networks Take the time now to make sure your home network is as secure as possible so that you can protect your household and any friends and family who use your network. The more security precautions you put in place, the more secure your network will be. Information on how to implement all of these security measures should be available in the documentation for your wireless network router.

Make Sure Your Home Network is Secure

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Buying a home can be a wise financial decision because it allows you to make an investment rather than spending money on rent each month and getting nothing to keep in return. As a homeowner, you have the potential to build equity as you make mortgage payments each month. You also might see your home’s value increase if you make improvements or market home values rise. In many areas of the country, being able to afford a home is a challenge. Home values are high, and if you are still at the start of your career, your income might price you out of the market. If you are not ready to buy a home on your own, it is worth considering buying a home with a friend. Advantages of buying with a friend Disadvantages of buying with a friend Methods for buying The typical method for buying a home together is to apply for a mortgage together and have both of your names on the property title. You can either be listed as tenants in common, which allows you to own different shares of the property or as joint tenants, which is an equal split. This method has the advantage of giving all buyers specific legal rights to the property. If one of you has an especially strong financial situation, you could have just that person apply for the mortgage. The lender will then consider only that buyer’s credit score, income, and cash on hand for the down payment. You can then work out an arrangement for how you will handle the payments between yourselves. Exit strategies: How to move on It is inevitable that eventually, one of you will want to move for a new job, change in relationship status or just to have their own place. Therefore, you need to have a plan in place for what you will do if or when this happens. You might agree to get the property appraised and allow one of you to buy out the other’s ownership interest. Alternatively, you might sell the property together and split the proceeds. Legally, co-owners can typically sell their interest in the property to someone else, so you should discuss whether you want to keep this available as an exit strategy and whether to place constraints on any new co-owner. Making it work to buy a home together If you are serious about buying a home together, hire a lawyer to create a contract that includes all the details. You should identify the contribution each party made to the downpayment and how responsibilities for making your monthly mortgage payment break down. Also, document which of you will claim the mortgage interest tax deduction, how you will finance home repairs, and any guidelines for shared home use. If you have a legal contract, it will be easier to settle any disputes that arise later and hopefully make owning a home a positive experience for everyone.

Buying a Home with a Friend

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For many people nearing retirement age, their 401(k) account is their biggest asset. It represents many years of contributions, along with the earnings these contributions have generated from investments over the years. When you have all this money sitting around, you may have a time when you want to withdraw funds from your 401(k) before you reach retirement age. Perhaps you are facing an unexpected expense or a financial hardship, or maybe you want to make a big purchase. It is possible to withdraw money from your 401(k) before retirement, but it can be very costly to you, depending on the situation. Rules for 401(k) withdrawals The typical rules for 401(k) withdrawals are that you must wait until you are age 59-1/2 before you may begin making withdrawals without penalty. However, most employers have additional rules for their 401(k) plans that allow you to make earlier withdrawals of contributed amounts, but not the earnings from those contributions. In order to make withdrawals without penalty, you must be in a hardship situation with an immediate financial need, which might include: These early withdrawals will reduce the balance of your account now and will significantly affect your balance at retirement. Withdrawn amounts will not generate any additional earnings between the time of withdrawal and your retirement. Take the long-term financial implications of your early withdrawal into account. In addition, you may have short-term costs in the form of penalties for early withdrawals. Penalties associated with withdrawals In general, you must pay a 10% penalty on the amount of your withdrawal if you are not yet 59-1/2 years old. You’ll pay this penalty when you file your tax return. You’ll also be responsible for any income taxes you owe on the withdrawal amount. If you have a Roth 401(k) account, you will not owe income taxes on the withdrawal, but you may still owe the 10% penalty. Exceptions to early withdrawal penalties There are some specific cases in which you can make early withdrawals without having to pay the 10% penalty. However, you still have to pay any income tax due on the withdrawal. These special exception cases include: Borrowing from your 401(k) Before you withdraw money from your 401(k), consider whether you might be better off borrowing from the account instead. Many employers allow you to borrow up to the lesser of $50,000 or half of your account balance. You pay interest on the loan, but that interest goes back into your 401(k) account. However, keep in mind that if you leave your job, voluntarily or not, the loan will become due immediately. If you do not pay it back, you will face the early withdrawal penalties. Weigh all factors to make your decision Overall, when possible, you should not withdraw funds from your 401(k) until you reach retirement age. Even then, you should consider leaving the funds in your account until full retirement age to allow them to continue growing during these years of peak earnings. If you are in a financial emergency and qualify to make a hardship withdrawal, keep the tax implications in mind when planning the amount to withdraw. If you still have working years ahead of you, consider taking a loan instead to avoid the early withdrawal penalty and help replenish your retirement account and limit your financial repercussions.

Should You Withdraw Funds from Your 401(k)?

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If you have ever added up the total amount you pay in interest on all your debts each year, you probably ended up shaking your head in disgust. It is frustrating to pay interest on money you have borrowed, especially if you have debts that are being charged a high interest rate. The debt avalanche strategy can help you get out of debt while paying as little interest as possible by tackling the debts with the highest interest rates first. How the debt avalanche strategy works The debt avalanche method focuses on the power of each dollar to eliminate debt that is being charged a high interest rate. To get started, list all of your debts in order of interest rate, with the highest interest rate at the top of your list. Then, while making just the minimum payment on all your other debts, make as big of a payment as you can each month on the debt with the highest interest rate. Once you pay that off, start focusing your effort on the debt with the next highest rate and keep repeating the process until you are out of debt. Are you the type of person who should use the debt avalanche strategy?