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David Muhlbaum: While Social Security won’t ever go broke – and we’ll explain why that is – it faces real funding problems, and the pandemic hasn’t helped things. Catherine Siskos, the editor of Kiplinger’s Retirement Report, joins us to talk about potential fixes and what they mean for your benefits and taxes. We also look into the latest version of buy now, pay later plans, and what to do with an old pair of shoes.
David Muhlbaum: Welcome to Your Money’s Worth. I’m kiplinger.com senior editor David Muhlbaum, joined by senior editor Sandy Block. Sandy, how are you doing?
Sandy Block: Doing great, David.
David Muhlbaum: I know you and my boss, Robert Long, did a show some time ago on credit versus debit cards. Smackdown, you called it. And that was funny in part because Robert’s fixation on debit cards is kind of a yeah, okay, okay, we know, thing among the staff. But anyway, being old and firmly set in my ways, that is, my way is to use a rewards credit card for just about everything and then I pay it off monthly. And as a result, I feel like I didn’t pay enough attention to something that kind of got big during the pandemic when so much shopping shifted online. I’m talking about these buy now, pay later options, Affirm, Klarna, those sorts of things. Have you used any of those, Sandy?
Sandy Block: Well, now, I am really old because I remember when you would put things on layaway at the local department store.
David Muhlbaum: Oh, that’s still around.
Sandy Block: Yeah, that’s still around. And this is sort of the modern version of that. And I’ve been sniffing around over them, thinking about writing about them for the magazine, because I seem to be hearing about them all the time. And our colleague at The Kiplinger Letter, writer Rodrigo Sermeño, did an item on buy now, pay later for a recent Letter. And it mostly it’s about how they work, which I will summarize for you.
Sandy Block: Basically buy now, pay later is exactly that, you buy now and you pay later, which is something people have been doing since before money, but there’s something new or newish going on here. The credit being extended by these third-party payment processors, not this merchant like I remember, the department store and not your credit card. And that’s a big part of the appeal because you can buy stuff both online and in stores without having to put it on a credit card or having to pay cash upfront. It’s a short-term loan, basically, with zero interest and four payments seems to be the magic preferred number of installments. In fact, there’s one called QuadPay, but you can also customize the terms depending on your credit.
David Muhlbaum: Oh, four easy payments. Okay. I get it. I get it. I get instant gratification. That makes sense. But it also sounds potentially risky. Before we dive too deep into the question of how this works for the consumer, how are these companies getting paid if there’s no interest being charged?
Sandy Block: Well, first of all, I want to remind you that not all of the deals are zero interest, which is why you must read the fine print before you get involved. But their main revenue is from charging the merchants a fee and, in large part because the merchant gets paid right away and the payment firm takes on the risk, they’re glad to pay it. Sometimes there’s a user’s fee. If you make late payments, as I said, there might even be interest. Although notably Affirm, which is one of the biggies in this area, they’re affiliated with Walmart, says it does not charge late fees.
David Muhlbaum: Oh. So I go and buy my $400 of whatever and then I pay when I feel like it? Next year? Never?
Sandy Block: Well, you wouldn’t do that because you’re a good person and also you could destroy your credit rating. That’s really not a good idea.
David Muhlbaum: Good person, that was very generous of you, Sandy. I appreciate you coming through with a compliment this week. Okay. But this still seems like a bit of a conundrum. If I have good credit, why would I use these instead of my credit card? And if I have bad credit, are they even going to let me make four easy payments?
Sandy Block: Well, you’re oversimplifying a little bit. If you’re already happily using credit, keeping down your balance or even better not having one at all, buy now, pay later doesn’t really make a lot of sense. For one thing, you’re giving up some of the really nice perks and protections you get with a credit card like rewards or extended warranties. And as for the bad or maybe we should say, less than good credit person, buy now, pay later is an easier and potentially less expensive way to buy things you couldn’t afford to buy for cash. Because the borrowing amounts are lower, you’re more likely to qualify for these than a credit card. And if you behave and pay on time, you’re improving your credit.
David Muhlbaum: Yeah. Okay. But still the risk of getting in over your head remains. I know I sound like a grumpy old moneybags, but what’s wrong with saving up? That’s as core a Kiplinger principle as I can think of.
Sandy Block: And it’s a really good point. I think when I remember back to layaway, it was the idea that you wanted to do this because it might not be available. You put it on layaway so that sweater would still be there. I don’t think that’s really true anymore.
David Muhlbaum: Playstations.
Sandy Block: Yeah, that’s true. But there is a really good argument to be made that instead of making four installment payments, you just save enough money and then pay for the whole thing. But the way you pay is only part of the question – what you’re buying matters too. Is this going to tempt you to pay more because you don’t have to lay out the cash? And are you buying a new pair of shoes? Or a laptop you need for business? Is it necessity or luxury? That all still applies whether you’re paying up front or in installments.
David Muhlbaum: Huh. Shoes. Funny you mentioned that. I’m going to be coming back to shoes. Well, those I won’t need to put on buy now, pay later, but I do need some winter wheels and tires, the car needs new shoes and that’s a four-figure purchase so maybe I will put that on Affirm to test the process.
David Muhlbaum: Coming up next, the cloudy future of Social Security and whether a new administration and Congress will shine any light on it.
David Muhlbaum: Welcome back. We’re talking today with Catherine Siskos, the editor of Kiplinger’s Retirement Report. We are going to cover what’s a pretty eternal topic, the future of Social Security. Now, the attention people pay to Social Security is usually pretty closely related to whether you’re currently collecting it or about to. For younger folks it’s something far away. They might even have written it off. Kind of, yeah, “Okay, Boomer.”
David Muhlbaum: When it’s a significant source of your retirement income, you watch it like a hawk, which is why it’s such a hot topic for seniors. But the thing is, any changes to the system are much more likely to affect the younger people currently paying in than those already getting payments. Catherine, welcome. And as my very first question, can you give us your best elevator-pitch length version of what Social Security is and how it works?
Catherine Siskos: Sure. And thank you for having me here. Social Security is a social insurance program. It essentially operates a bit like a pension or an annuity in that you pay into this program all your life with payroll taxes while you’re working and then in exchange, when you retire, you get an income stream, a steady, reliable, monthly benefit that you can live on for the rest of your life.
Sandy Block: That’s not too terribly far from what Franklin Delano Roosevelt proposed way back in 1935. Though certainly the tax rates involved have changed. And it’s been working more or less, I think; many people rely on it for a very large portion of their retirement income. What’s the problem with Social Security now, Catherine?
Catherine Siskos: Sure. The problem is that life expectancies have gotten a lot longer and we have fewer people paying into the system than are drawing on it. And as a result, Social Security, which had been tapping its interest to help augment the money that they get from payroll taxes to fund the program, is now, starting this year, 2021, beginning to actually tap the principal of their trust fund. And as a result, if they continue to do that, they will deplete that trust fund by 2034. And that’s even been accelerated a little bit because of the pandemic.
David Muhlbaum: You say, deplete, not go broke. Social Security is not going broke. That’s just a shorthand that people toss around, right?
Catherine Siskos: Exactly. It will be a shortfall. Social Security will never actually go broke because remember, we have payroll taxes that fund it, so it’s always actually collecting some kind of money. The problem is that those payroll taxes aren’t sufficient enough to pay all of the benefits that we are currently paying out.
Sandy Block: Catherine, I heard you mention the pandemic. How does COVID-19 play into this problem?
Catherine Siskos: When you have job losses, people working fewer hours, slower wage growth, all of these things reduce the amount of payroll taxes that are being collected that help fund the program. There’s less money going into the system, even how we do stimulus plays a role. When it’s done with direct payments, relief checks, Social Security isn’t going to get its cut.
David Muhlbaum: Okay. The problems are a bit more acute than they’ve been, but the date that Social Security depletes is still over 10 years away. What are the chances of a fix now? Actually let’s back up. How do we fix the problem with Social Security?
Catherine Siskos: Yeah. Fixing Social Security is a math problem. We can fix it in a couple of ways. We can cut benefits, we can add revenue, or we can do some combination of both. We can also look at what’s really likely to happen right now. First of all, any changes in benefits for retirees who are already receiving them or about to start collecting them, that’s not going to change. It’s really future generations that would have to bear the burden perhaps of either reduced benefits or potentially a higher retirement age.
David Muhlbaum: Yeah. Because the first thing you spoke of that’s the quote unquote third rail: cutting benefits.
Catherine Siskos: Absolutely. Absolutely. This is not something that politicians really like to tackle because of course, retirees are active voters. They’re the ones who reliably turn out for elections and politicians do not want to raise their ire, especially because retirees really believe in Social Security, rely on it and want to make sure that it’s there.
David Muhlbaum: Instead, raise the taxes on the people paying it. That’s how it’s been done in the past, right?
Catherine Siskos: Exactly. Historically, one of the ways that they do that is to boost the payroll tax rate, currently employees pay Social Security tax of 6.2% and employers also pay 6.2% on the employee’s salary. It’s a total of 12.4%. self-employed workers, of course pay both the employee and employer share. There’s legislation in Congress that would gradually raise the total tax rate by 0.1 point per year, over 24 years so that employers and employees would eventually each pay 7.4% for a total of 14.8%.
David Muhlbaum: That’s a lot of numbers. Now you said over 24 years. I guess part of the thinking there from Congress is that by the time it matters they’re maybe not even in Congress anymore.
Catherine Siskos: That’s part of it. But of course also it’s a gradual increase. You’re not actually paying that additional 7.4% in a single year. It’s happening, it’s a gradual increase over those 24 years. I guess the hope is maybe you won’t notice it quite as much when it’s spread out over that length of time.
Sandy Block: Catherine, another thing that seems to have a fair amount of support, because maybe it wouldn’t be as noticeable if you’re not wealthy, is the increasing the amount of wages that are subject to payroll taxes. Can you explain how that might work?
Catherine Siskos: Yes. Right now, each year Social Security sets a limit on how much of each workers’ wages are taxed based on average increases in wages. For 2021, that cap is $142,800. And President-elect Joe Biden is talking about raising that cap to $400,000. That would actually bring in more money, but it wouldn’t necessarily fully fund Social Security for the long term. Some estimates are saying that it would only extend Social Security’s life by another five years.
David Muhlbaum: That alone is not enough. What are the other things in play?
Catherine Siskos: The other things in play are, as we mentioned, increasing the amount of the payroll taxes for both the employee and the employer. That was actually a bill that was proposed by Representative Larsen in 2019. He’s a Democrat. And it’s one that does not have bipartisan support, but is what the Democrats are probably looking at. That would actually fund Social Security for 75 years.
Sandy Block: Okay, so Catherine, I guess the other way that they’re looking at, how would they go about raising the full retirement age, if that’s on the table?
Catherine Siskos: That’s probably not on the table, quite frankly. For one thing, it’s a lot more controversial and for another when you raise the full retirement age, at least the way our Social Security system works in this country, you are essentially minimizing, reducing the benefits for that generation whom you’ve raised the age for, regardless of when they claim Social Security. Essentially raising the age is the same thing as reducing benefits.
Sandy Block: Catherine, another thing that’s been knocked around is changing the cost of living adjustments, which have been pretty meager the last few years.
Catherine Siskos: Yes. In fact, in the last decade, we had three years where we had no cost of living adjustment and on average they probably run about one to 2% a year. Of course, in 2021, checks are increasing by 1.3%. Each year Social Security calculates its cost of living adjustment. These are called COLAs for their benefit checks based on the consumer price index for urban wage earners and clerical workers also known as the CPI-W. But some proposals call for linking COLAs to a chained CPI, which accounts for changes in consumer spending patterns as prices increase. If beef prices rise, for example, consumers can always go buy hamburger instead of filet mignon. Generally chained CPI rises less over time than the CPI-W, and Social Security estimates that switching to the chained index would shrink the annual COLA by an average of 0.3 percentage points and reduce the program shortfall by 19% over 75 years.
Catherine Siskos: But there’s also another idea as well. President-elect Biden has also considered giving COLAs a lift by pegging them to a different index. This is the consumer price index for the elderly, the CPI-E and this index emphasizes expenses that seniors tend to have more. It weights those expenses higher. Things like healthcare and housing. Social Security estimates that switching to the CPI-E would increase annual COLAs by an average 0.2 percentage point. But that of course would also cause a 13% increase in Social Security’s shortfall over 75 years.
David Muhlbaum: That’s the opposite direction. That would then make the Social Security problem worse.
Catherine Siskos: Exactly. The thinking is to make that up with higher withholding that we talked about earlier. In short, it’s a more generous Social Security that’s also more funded, but Biden wants to expand Social Security in two ways. He would raise benefits for the people most in need. He’s looking at low wage workers, surviving spouses, dual earner couples, caregivers, government workers and those who have been collecting Social Security the longest. What’s the rationale for that? Well these seniors have higher medical and long term care expenses later in life.
David Muhlbaum: All right. We’re recording the day after Georgia’s Senate runoff elections with the likely outcome of those two Democratic wins. That in turn means Democratic control of the Senate, House and presidency. Catherine, or Sandy, there’s going to be a lot of enthusiasm to do stuff. Will Social Security be part of that?
Catherine Siskos: Certainly there are some small things that they can do. Remember that the Democrats still have a very narrow majority so we may not still be talking very big picture items, but one of the things that they could tackle is reinflating the Social Security benefits for people who were born in 1960 or 1961. Their benefits were cut unintentionally by a formula glitch in the 2020 recession.
Sandy Block: Right. And Catherine and I have both written about this. It affects a fair amount of people and it’s because Social Security benefits are based on your 35 highest years of earnings, which are then indexed to the growth in average wages until the year you turn 60. Which is a problem for people who turned 60 last year, even if their earnings were unaffected by the pandemic, because the economic downturn is expected to sharply reduce average wages, which will drag down the index. And as I said, this could affect about three million people and cost them about $2,500 a year in benefits. That’s no small thing when you think about how much people depend on Social Security and it’s purely a function of the year that you were born, which I think a lot of people would consider very unfair.
Catherine Siskos: Exactly. And I think members of Congress would feel that way too. And as I pointed out before, older voters are more conscientious about voting and politicians hear from them. This is something that politicians are probably not likely to let stand. They will try to do something to fix it.
David Muhlbaum: And that we might describe as low-hanging fruit. What do you think the chances are that in the next couple of years, they’ll go bigger than that? Or address some of the issues we’ve floated today?
Catherine Siskos: A lot really depends on the composition of Congress and who has control and which party and then what kind of advantage they have in terms of numbers, how much control they have basically. That’s really going to determine the solutions that get proposed and the solutions that also get passed.
David Muhlbaum: It could come down to the number of votes on any given proposal then.
Catherine Siskos: Exactly.
David Muhlbaum: Well, thank you very much for being with us today, Catherine. I’ve learned a lot.
Sandy Block: Me too.
David Muhlbaum: Yeah, thank you for joining us.
Catherine Siskos: Thank you.
David Muhlbaum: In the pandemic, the running joke is that no one wears pants anymore because everything’s done from the waist up on Zoom. That’s not actually true of course, since plenty of people have to go out and a lot of the rest of us have family members who would rather have us fully clothed. But seriously, how about shoes? We were doing a little bit of cleanup the other day and I looked at all these dress shoes I own and I thought, wow, long time no see.
Sandy Block: I know. I know my husband got me a pair of nice slippers for Christmas and I have not taken them off except to take the dog out and go running.
David Muhlbaum: Right but you have nice slippers so that counts. Yeah.
Sandy Block: Very nice.
David Muhlbaum: And running shoes. Yeah. Those I’ve actually bought some new ones of because they wear out. But this got me thinking about what the pandemic might’ve done to the handcraft that I’ve always admired: cobbling.
Sandy Block: Oh yeah.
David Muhlbaum: Yeah. Fixing shoes. Cobbling was already in sort of a weird state of affairs. It was seen as a dying art with no new people coming into the business.
Sandy Block: Right. Because shoes are cheap. A lot of people would just throw out their shoes and get new shoes.
David Muhlbaum: Right. And there was this sort of holdout group, which I’m essentially part of, who would fix some or get some of their shoes fixed. But so there was already this tension and the field was already in flux. But man, I did a little looking around both for what happened to my old cobbler downtown and what happened to the industry in general and it’s not pretty.
Sandy Block: Oh, I bet. I bet. That’s a shame.
David Muhlbaum: Yeah. Because A, it’s a small retail business. B, to the extent that they were getting business, it was largely from people in urban areas wearing higher end shoes to the office and work boots. But both are not getting the…
Sandy Block: The mileage.
David Muhlbaum: Not getting the mileage that they did and therefore not getting the demand and a variety of problems. I went looking online for what the heck I could do, because that seemed like the very modern solution to this problem. And it turns out there’s a rather robust industry for fixing shoes online. For essentially getting your shoes cobbled online. And in this day and age they’re taking full advantage of the internet for uploading pictures, but also they’ll do a Zoom with you. You can show them the shoe and talk about what you want done. In my case for these desert boots that I’m thinking about – if I’m going to invest the money, I want it to be good. And so turns out, you can pick the color of the sole.
Sandy Block: Wow.
David Muhlbaum: And that sort of thing and you can really, you can get into it. The consequence of that is, it ain’t cheap!
Sandy Block: Well that was going to be my question. How much does this cost? Because obviously there’s going to be some shipping perhaps also, I don’t know. Is it worth it?
David Muhlbaum: Well, that’s just the question. Is it worth it? For these desert boots, which are at least 25 years old and a little bit dry, but well, they’re desert boots. But anyway, so the quote I got from this outfit was whose name I can’t remember off the top of my head, but maybe I’ll put it in the link, was $119.
Sandy Block: Oh my goodness.
David Muhlbaum: Which was more than the shoes cost, but that was 25 years ago so that led me to do a little bit more sort of informal market research, if you will. And a new pair of these that looks similar and also have colorful soles is $137. But then you bring in all these other questions, when you start thinking about it. My younger daughter, to her credit, has been writing about the question of fast fashion for her school papers.
Sandy Block: Which I’m very interested in, yes.
David Muhlbaum: Yeah, stuff made cheap, turned around fast and you wear it and you chuck it and goodbye.
Sandy Block: And it’s in a landfill, yeah.
David Muhlbaum: With all the environmental and other consequences that come with that. She’s very gung-ho on the idea of me resoling them, but when it costs the same as a new pair….
Sandy Block: Yeah. Yeah. And I think that’s why a lot of these businesses, some of these, although it sounds like the one you went to was doing pretty well, but a lot of these businesses were struggling even before the pandemic, because oftentimes it’s why there’s no TV repairman. You just chuck your TV and get a new one when the TV goes on the fritz. And I think the appeal maybe is something that’s so high end and maybe that’s where cobblers still make their money is it is worth getting it done. But I think in a lot of cases, the math just doesn’t work.
David Muhlbaum: No, I think, maybe it’s going to be a question of in part, the snob appeal of someone who’s a shoe hound looking at my shoes and going, “Oh yes, yes, yes. He knows. He understands.”
Sandy Block: Vintage.
David Muhlbaum: Yeah, vintage. Vintage, exactly. Well, if I get really ambitious, maybe I will put both the old shoes, what they would look like, who would fix them and the new comparison up on some kind of vote platform. Can do a SurveyMonkey and I’ll post it in the show links.
Sandy Block: That’s a good idea. Because, I’ll just say this last thought is, I am totally in your daughter’s camp and I’ve bought a lot of clothes from places like Threadup and the RealReal, which are consignment used clothes. And I’m real happy doing that, but I would not do that with shoes. I just would not be comfortable buying somebody else’s shoes. You don’t really have the solution for your boots of buying used shoes, which make you feel better about the waste.
David Muhlbaum: Yeah, no, that’s a good point. Especially with, we’re getting into the details of shoe structure now, but with a leather shoe that essentially takes a set to your foot, there’s a functional thing. It’s not just “Eww, someone else’s shoe,” there’s the functional thing of: Will it fit? But I will tell you where that does not apply, is Crocs.
Sandy Block: They fit everybody? Or are you saying you buy used Crocs?
David Muhlbaum: I have bought used Crocs.
Sandy Block: Oh my gosh.
David Muhlbaum: I have bought a smashing pair of yellow used Crocs at a Goodwill. I was with my daughter. A smashing pair of yellow used Crocs, which are really the peak dad shoe, but in the process, and I have not pulled the trigger yet, but in the process, I have become a little bit of an aficionado of vintage Crocs.
Sandy Block: Oh my gosh. Had no idea there was such a thing.
David Muhlbaum: You can spend three figures on this stuff. Really the point is how ugly they are. It’s kind of like the whole ugly sneaker thing, the worse, the uglier and the rarer they are, the more you can pay. I might dabble in this just to horrify the family.
Sandy Block: We are going to have to see some pictures if you dare.
David Muhlbaum: Yes, I will.
David Muhlbaum: And that will just about do it for this episode of Your Money’s Worth. If you like what you heard, please sign up for more at Apple Podcasts or wherever you get your content. When you do, please give us a rating and a review. If you’re already subscribed, thanks. I hope you’ve added a rating or review as well. To see the links we’ve mentioned on our show, along with more great Kiplinger content on the topics we’ve discussed, there’s a kiplinger.com/podcast. The episodes, transcripts and links are all in there by date. And if you’re still here because you want to give us a piece of your mind, you can stay connected with us on Twitter, Facebook, Instagram or by emailing us directly at [email protected]. Thanks for listening.
Links and resources mentioned in this episode:
16 Key Signs That You Will Always Be In Debt
Getting into debt is easy — and the numbers prove it. About 80% of Americans across generations are currently in debt, a 2019 Nitro survey found. And the total amount of household debt in America is nearly $13.95 trillion, according to the Federal Reserve Bank of New York’s most recent report on household debt and credit.
There are plenty of ways people fall into debt, way too easily. The hard part can be getting out of debt, especially if you don’t recognize — or resist admitting — how you racked up debt. Here are 16 reasons you might have fallen into debt and how to avoid being stuck with it forever.
Last updated: May 13, 2021
You Believe Debt Is Part of Life
One of the biggest reasons people get stuck in debt is because they believe that debt is just a part of life, said Debbi King, owner of the personal finance coaching firm The ABC’s of Personal Finance. In fact, a 2015 Pew study found that 7 out of 10 people said debt is a necessity in their lives. “However, debt is a result of wanting or needing something that you don’t have the cash to buy at the moment,” King said.
If you are determined to get rid of debt, you can rid yourself of these wants. “You have to not want debt so bad that you refuse to use it no matter what,” King said.
You also need to give yourself a wake-up call by keeping close tabs on your spending to see how much you’re relying on debt to maintain your lifestyle. “You may be using your credit card more than you realize,” said Bruce McClary, vice president of marketing for the National Foundation for Credit Counseling (NFCC).
Once you figure out how much you owe, make a plan to pay off the debt. Having a goal of getting out of debt might give you the motivation you need to stop relying on it.
You Use Credit To Cover Emergencies
Many people assume they will never fall deeply into debt, said Matt Cosgriff, a certified financial planner and wealth management group leader at BerganKDV. “But it can happen so easily if you aren’t financially prepared,” he added.
For example, if you don’t have cash reserves to cover unexpected expenses, you might have to rely on credit cards. You will end up paying more than the original cost of the emergency if you do not pay off the balance quickly because of the interest on your card charges. Plus, you might not be able to build savings to cover future emergencies if your money is going toward paying off debt.
You can avoid this situation by creating an emergency fund, Cosgriff said. Ideally, you should save enough to cover up to six months of expenses. If necessary, start by setting aside a little each month, then increase the amount when you can. And make sure you have adequate insurance to cover catastrophic events, such as a medical emergency or car accident.
You Make Only Minimum Payments
It’s hard to eliminate debt if you’re only paying the minimum you owe. In fact, McClary said it can become unmanageable if your balance continues to grow while you’re paying the minimum amount required.
For example, if you have a $5,000 balance on a card with a 17% rate and make a minimum monthly payment of 3% of your balance, it will take you 189 months — or nearly 14 years — to pay off your debt. Meanwhile, you will pay more than $4,000 in interest, according to Navy Federal Credit Union’s minimum payment calculator.
Simply increasing the amount you pay can make a big difference. For example, you can cut the payoff time and interest in half by boosting your monthly payment to 5% of your balance.
You Allow Expenses To Rise With Income
Andy Brantner, a certified financial planner and partner at BKLM Financial Services Consulting, knows financial discipline does not come easy. “It’s hard not to buy a better car or a bigger house when you get a raise,” he said. “But failing to keep your expenses steady when your income goes up creates a vicious cycle.”
It can be especially dangerous if you are still carrying debt from the days when you were earning less, and now are taking on more loans to help pay for that bigger house or a better car. Your debt will balloon, leaving you unable to pay if off despite the bigger paycheck.
To avoid this, identify goals and review your spending to see if it’s in line with your priorities. If it’s not, you will need to create a spending plan that will align your expenditures with your values.
More Solutions To Paying Off Debt: 10 Best Personal Loans for People With Good Credit
You Use Payday Loans
If you get a payday loan to cover an emergency, it doesn’t mean you will be stuck in debt forever. After all, most of these short-term loans typically have to be paid back within 14 days.
But most people who get payday loans use them to cover everyday expenses, according to a report by Pew. And they often take advantage of rollover features that allow them to extend the amount of time they have to pay off the loans. Because the interest rates on these loans are so high — the average annual percentage rate is 391%, according to the Center for Responsible Lending — the debt can mount quickly.
If you roll over a typical payday loan of $325 eight times, you’ll owe $468 in interest and have to repay a total of $793, according to the center. Do that often enough and you will be stuck in debt forever.
Make a plan to quickly pay off any payday loans you might have, even if it means getting a second job. Then take steps to improve your credit so you can qualify for lower-rate conventional loans going forward.
You Don’t Track Your Finances
“If you aren’t paying attention to where your money is going, it’s easy to overspend in certain areas and then not have enough for those unexpected expenses or your regular bills, which puts you in debt and keeps you there,” said Andrea Woroch, consumer and money-saving expert.
“Stay on top of your finances by checking your accounts daily,” Woroch said.
It’s easy to do this from your phone by using your bank and credit card apps, or you can use a tracking app like Mint, which links all your financial accounts in one place.
“When you see how much you’re spending in one area, it’s easier to cut back,” Woroch said. “Remember, you can’t change what you can’t see, so it’s important to actually look at your money regularly to make sure your spending aligns with your budget and goals.”
You Disregard Your Credit Score
“If you don’t have a healthy credit score, your interest rate on your credit cards and/or loans is likely really high,” Woroch said.
The higher the interest rate you have to pay on your debt, the harder it will be to pay it all off.
“Get on track by committing to improve your credit score, which you can do in a few ways,” Woroch said.
These ways include always paying all your bills on time, keeping your credit utilization rate below 30% and using a credit-building loan to boost your score.
“For example, Self is an app that helps you build credit while you save,” Woroch said. “It’s a credit-builder loan, which is an affordable and accessible loan you take out in your name — but you don’t receive the money upfront. Instead, you make payments to yourself over the course of one to two years, and Self reports the payments to all three credit bureaus. In the end, the money you’ve put aside every month unlocks in the form of savings minus fees. It’s a unique product that is an accessible option.”
You’re Not Maximizing Your Earning Potential
“There are only so many ways you can cut back on your day-to-day and monthly spending,” Woroch said. “Sometimes you have to make more money to really get ahead financially and get out of debt.”
That means that if your only source of income is your day job, you probably aren’t doing enough to get yourself out of debt.
“People often limit their ability to make more money because they don’t think outside the box,” Woroch said.
“If you can’t ask for raise or find a better paying job, then take on a side hustle,” Woroch said. “For instance, you can make up to $1,000 a month by simply petsitting in your own home via sites like Rover.com, which makes it super easy to set up a schedule that works best for you. This doesn’t require any special skills or really any time commitment because you can do this from home when you’re already home. Plus, you can double your side income by doing another side hustle at the same time as petsitting, like freelancing via Upwork.”
You Are Overwhelmed by Student Loans
Student loan debt has reached $1.5 trillion, and payments on more than 9% of this student loan debt are at least 90 days late, according to the Federal Reserve Bank of New York. “So many people right now are burdened with student loan debt,” McClary said.
If your student loan debt is unmanageable, McClary recommends talking to a certified student loan counselor to identify your options, such as income-based repayment or loan consolidation. You can visit studentloanhelp.org to find an NFCC member who will offer student loan counseling at little or no cost.
To avoid racking up student loan debt, McClary recommended that parents and students look for sources of free money for college, such as grants and scholarships. And families should weigh the costs of the schools their child wants to attend against the child’s earning potential after graduation. That will help the family determine whether the child will be able to pay off student loans.
You Allow FOMO To Dictate Your Spending
“One of the biggest things that causes people to overspend and brings them into debt is FOMO — the fear of missing out is a real thing,” said Ande Frazier, CEO of online financial community MyWorth. “It’s easy to get anxious when other people are having fun without you, especially when it’s happening in real-time on social media. This feeling might have you saying ‘yes’ to more dinners, drinks, activities and vacations than you want or can reasonably afford to attend.”
Frazier recommends using cash instead of credit so that you really think about your spending decisions, rather than mindlessly swiping to keep up with the Joneses.
“The tangible nature of cash gives more value to the decision to spend that money, rather than just swiping a credit card, because you can see it and feel it,” she said. “It’s a form of mental accounting.”
You Have Your Financial Priorities Mixed Up
If you’re not allocating your money wisely, it will take you longer to pay off debt than it should.
“The most common mistake when it comes to short-term debt (i.e., credit card debt) is the belief that one needs to save and invest simultaneously,” said Roi Tavor, CEO and co-founder at Nummo, a personal finance management platform.
Any money you are putting toward saving and investing accounts is money you aren’t putting toward paying down debt.
“Before putting money in a savings account that yields 1% or 2%, make sure to pay off credit cards that charge you 10% or more on outstanding amounts,” Tavor said.
You Set Unrealistic Goals for Yourself
If you’ve been in debt for a while, maybe you’re constantly telling yourself that this will be the month you pay off all your debt. But if you have thousands of dollars of debt, this goal likely isn’t realistic.
“Having a plan to pay down debt is a great starting point; however, if you make your goals too lofty, you’ll set yourself up for failure,” said Leslie Tayne, founder and head attorney at debt solutions law firm Tayne Law Group. “In doing so, you’ll likely get discouraged and may even give up, preventing you from reaching your goal of paying off your debt.”
“While you, of course, want to pay down your debt as quickly as possible, keeping your goals reasonable will help keep you motivated and on track to get that debt paid off,” Tayne said.
Start by making it your goal to pay off one credit card or loan at a time. Ideally, start with the card or loan with the highest interest rate, and move down the line in order from highest to lowest interest until they’re all paid off.
You Justify Credit Card Spending Because of the Points You Earn
Many credit cards offer rewards systems that can be beneficial if used correctly.
“Many people charge almost all of their everyday purchases to their credit cards to take advantage of these rewards,” Tayne said. “However, if you’re carrying debt, the interest you’re paying will be negating the value of your points. Keeping the mindset that you’re always working towards the point may also be keeping you in debt if you’re not paying off your balances in full every month.”
“Consider switching your everyday purchases to cash or debit, or ensure that you’re paying off each of your credit card purchases in full while you’re working to pay down your debt,” Tayne said.
You Don’t Differentiate Between ‘Wants’ and ‘Needs’
Sometimes there can be a fine line between “wants” and “needs.” Let’s say your TV breaks and you need a new one. You head to the store and see a brand new 65-inch TV and decide that’s the one that you “need.”
“Sure it’d be nice to have in your living room, but do you need a $2,000 item for entertainment? Especially if you are going into debt for it and it’s going to cost $3,000 with interest by the time it’s paid off?” said Brandon Neth, credit card and award travel expert at FinanceBuzz.
“When you’re at Best Buy, you may be able to tell the difference between a 55- and a 65-inch screen mounted right next to one another, but once you’re home, you realize you’ll likely be fine with a smaller TV,” he continued.
Set a budget for yourself before you walk into a store, and consider buying items that aren’t name-brand.
“As a former Magnolia/Best Buy employee here’s a friendly piece of advice: Many of the non-brand-name TVs use the same panels and technology as the big brand TVs,” Neth said. “Often they’re just calibrated differently out of the box. They can be adjusted to create almost the exact same picture in many cases. Save the money, invest it and build wealth — not debt.”
You Go Overboard During the Holidays
Nearly half of those surveyed in 2019 by Discover said they plan to rely on credit to pay for most of their holiday spending. That can lead to starting off the new year in debt. If you don’t pay it off quickly and turn to credit again every holiday season, your debt will mount.
“It’s really important at this time of year for people who might have a weakness to find support,” McClary said. Find a credit counselor through NFCC.org or look for a workshop to get support for building a habit of saving rather than spending, he said.
McClary also recommended avoiding spending time around others who have a tendency to overspend and “getting in situations where you’ll be melting the plastic at the register. Lock up the credit cards this time of year.”
Your Focus Is On the Short Term Rather Than the Long Term
“People don’t think long-term,” Neth said. “They are too focused on the now and looking for instant gratification.”
He gives the example of regularly charging coffee to your credit card — even if it only costs $5.
“If you’re doing that twice a week, that $10 adds up quickly,” Neth said. “Even worse, if you’re putting this on a credit card that you’re not paying off in full each month, paying interest on your two cups of coffee may raise the cost to over $20. Although it’s convenient and tastes good, remember how much further your money can go.”
A change in your spending mindset can help you break this debt-causing behavior.
“The one thing we don’t get more of in life is time, so look at your expenses as time,” Neth said. “How much are you actually making an hour once you deduct taxes, expenses and other related costs? A $15-an-hour job is probably closer to $9. Stop and think, is two cups of coffee worth an hour of my time?”
This is an especially important mental exercise for larger purchases.
“How many extra years must you work to pay off that car or TV? These numbers just get higher as you account for accruing interest,” Neth continued. “Don’t stall your financial future by making impulse decisions today. Set goals for the future and remind yourself of them daily. It takes hard work to get out of debt and stay out of it, but when you do, you take back control of your life.”
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Cameron Huddleston contributed to the reporting for this article.
Rtbshopper Announces Partnership with Acima Credit for Better Shopping Experience without Credit
Rent-to-own store RTBShopper has partnered with financial service provider Acima Credit so their customers can have access to additional leasing finance option while purchasing goods
Winter Garden, FL – RTBShopper is proud to announce its partnership with Acima Credit, a reputable company that offers financial and leasing solutions for shoppers. Acima employs proprietary technology to help consumers find the merchandise they’re looking for, acquire the item, and get immediate approval. Customers get a tailored payment schedule that is flexible, convenient, and affordable.
The partnership means that RTBShopper.com is now an online store that accepts Acima Credit. It’s a massive development that gives customers additional access to simple lease-to-own financial solutions.
“We’re excited about our partnership with Acima because we know they’ll provide our customers with the best options when purchasing electronics, furniture, and appliances through rent to own payment plans,” said Tony C, Chief Operating Officer at RTBShopper.com.” “Acima Credit specializes in affordable financial solutions for lower-income consumers, and this agreement will help us to provide flexible payment plans from a company everyone knows and can trust.”
RTBShopper is an online store offering rent to own opportunities for shoppers, even those with bad credit. The company’s philosophy is that no one should be judge by their credit history. That’s why they don’t require credit score when shopping. To shop on site, the customer must be 18 years or older. They will also have to provide social security number or individual taxpayer identification number, debit or credit card, checking account, and government-issued photo ID.
Customers can shop thousands of products in different categories, including computers, TV, cameras, furniture, home appliances, toys, cell phones, smartwatches, electronics, etc. Add the merchandise to the shopping cart, checkout, fill out the no-obligation lease form, pay the initial deposit, and get the item. Customers get an email when the item is ready for pick up or shipping.
RTBShopper.com help consumers get approved for up to $5000 worth of brand name electronics. They serve low-income consumers who can’t afford to pay one-time for these items, allowing for monthly or weekly payment plans.
As a store that accepts Acima, they hope to make shopping more fun and exciting for customers. The application of Acima’s technology and versatility combined with their customer service and the vast collection of products offers an innovative approach for product financing.
For more information, please visit https://www.rtbshopper.com/.
RTBShopper.com is an online store offering consumers rent to buy opportunity without considering their credit. They have a huge collection of brand name products in their store arranged in categories. The store offers competitive monthly payment plans and free shipping on all orders.
Acima provides instant credit and financing for people looking to buy products on lease. Using machine learning technology, they empower merchants and consumers with point-of-sale leasing solution with no credit needed. They have a partnership with many stores and merchants, helping them grow their business using modern technology.
7 questions from first time home buyers that every broker needs to answer
Buying a home is a huge investment for first time home buyers – and their inexperience means that they often have a lot of questions.
The good news is you don’t need to do something heroic to get buyers to trust you. You just need to be ready to address their concerns and answer their questions. So below, we answer seven questions first time home buyers may ask their mortgage brokers.
1. “Buying a house is expensive. Is it worth it?”
The first thing you should do is understand the reason why the buyer is thinking of buying a house. Are they buying to build their asset portfolio? Or are they looking for a place to live and settle down in?
If they’re buying a house to build wealth, then yes it’ll be worth it – though you have to be clear that they shouldn’t expect their investment to see immediate growth.
If they’re looking to buy a primary residence, then it depends – after all, the process of buying their dream home could potentially stretch their funds a bit. In that case, you can steer them towards considering a more affordable starter home that they can trade up in the future.
Get to know their reasons first so you can answer honestly and professionally.
2. “I’ve owned a house before. Am I still considered a first-time home buyer?”
The US Department of Housing and Urban Development (HUD) defines a first time home buyer as:
- an individual or person who hasn’t owned or bought a principal residence in the last three years;
- a single parent who previously owned a house while still married to their former spouse;
- a displaced homemaker (such as a stay-at-home spouse) who owned property with their former spouse;
- an individual or person who owned a principal residence or property that wasn’t affixed to a permanent place or foundation in accordance with applicable regulations (such as a mobile home); and
- an individual or person who owned a property that was not in compliance with local, state, or model building codes, and whose property can’t be brought into said compliance for less than the cost of building a permanent structure.
As you can see, the term has a bit more leeway than its name suggests. For example, if the buyer has owned a property or house within the last three years but their spouse hasn’t, then both of them can still buy a house as first time home buyers.
This is important because there are many government incentives for first home buyers, especially if they’re part of the remote workforce.
3. “I have a 401(k). Can I use it to buy property?”
The short answer is yes – but should you? That’s the real question.
A buyer can tap into their 401(k) if they’re short of the funds they need. They can do it two ways – either as a straight withdrawal or as a loan.
However, a buyer can only withdraw from their 401(k) after turning 59 and a half years old (or 55 years old if they lost their job or have retired). Younger buyers can still withdraw their funds, but they’ll have to pay an early withdrawal penalty of 10% of the amount they take out. They’ll also owe income tax on the funds they take out, regardless of their age.
Meanwhile, if a buyer opts to borrow from his or her 401(k), then they’ll have to pay it back – with interest. And the repayments won’t count as contributions, meaning no reduction on their incomes.
So, to put it simply, yes they can use their 401(k). But the trade-off isn’t ideal, so it might be better to look for other options.
4. “I have no cash so can I put $0 for down payment?”
Yes, but there could be some work involved.
A first time home buyer can only put $0 down payment if another entity foots the bill. In this case, it’s the federal government through what’s called a government-backed mortgage.
Three US federal agencies can give mortgage assistance to first time home buyers: the Department of Veteran Affairs (VA), the US Department of Agriculture (USDA), and the Federal Housing Administration (FHA). These agencies will insure all loans given, so lenders are protected in case the borrower can’t pay their debts.
However, you may still have to check if a lender accepts USDA loans. Quicken Loans, for instance, stopped accepting applications since July 2020.
5. “Am I qualified for the $15,000 tax credit?”
The bill hasn’t passed yet, but if it becomes law, the First-Time Homebuyer Act will require participants to be:
- a first-time homebuyer, with the same conditions mentioned above; and
- an individual who doesn’t earn more than 160% of the median income in their area.
Additionally, the price of the house they purchase must not be more than 110% of the median price in their area. The house should also have been purchased after Dec. 31, 2020.
6. “I don’t have a good credit score. Can I still buy a home with bad credit?”
The short answer is yes, you can still buy a home with bad credit.
Lenders often don’t have a minimum credit score requirement because no two credit scores are the same. A buyer might have a credit score of 400 – a poor score according to the main credit bureaus – but the circumstance behind that score is different from what another borrower with the same score has gone through.
Additionally, lenders often take other things into consideration in their decisions – such as the amount of debt accrued, income, debts in collections, and the size of the down payment.
Different lenders have other requirements but having plenty of cash available for down payment is always a plus. The buyer can always repair their credit and refinance down the road.
7. “I’ve heard 2021 is a bad time to buy a house. Should I go for it or just wait?”
Again, it’s best to assess the buyer’s needs and know the reason why they’re looking into buying a home.
They might be thinking of purchasing because the mortgage rates are so low. But you must remind them that the cost of buying a house goes beyond the purchase price. They also need to consider property taxes, insurance, and upkeep costs. Maintaining a house isn’t cheap and so many new homebuyers fail to realize that.
On the other hand, mortgage rates will likely rise once the pandemic eases up. So, if the buyer is looking into buying a house to cater a growing family, they might have to seriously consider buying regardless of market conditions.
The key is knowing your client’s priorities and going from there.
A first time home buyer is eager, but undoubtedly full of questions. They will be leaning on your advice for their final decision. Getting to know them, building a strong rapport, and answering clearly, honestly, and professionally will instill the trust that will help build lasting bridges for years to come.
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