If you want to buy a house with bad credit, the drop in housing prices over the last few years may be a little frustrating. Real estate is still on sale but it may be tough to get approved for a home loan with bad credit. It doesn’t mean that you absolutely won’t be able to buy a house, but it does mean that you will face some challenges and need to work on improving your credit.
Bankruptcies and Foreclosures
If you have a low credit score, with no bankruptcy or foreclosure, you might be able to purchase a home now. You will have to pay a higher interest rate, and you might not get the best loan terms, but you probably won’t have to wait – as long as you have a large down payment and a credit score above 500. (If you have a small down payment, you might not be able to get a bad-credit mortgage with a score below 580.)
Waiting periods apply if you have had a bankruptcy or foreclosure. Most lenders won’t offer you better rates until a bankruptcy is four years behind you and it has been at least two since a foreclosure. In order to qualify for a FHA loan, you have to be at least two years away from a foreclosure, and you can get a loan with as little as a 3.5% down payment.
Improving Your Credit to Buy a Home
So what should you do if you don’t have any recent bankruptcies or foreclosures and would like to buy a home but have bad credit? Your first move should be to try and improve your credit score. Here are three ways to begin improving your credit score:
- Make your payments on time and in full.
- Pay down your debt, reducing your debt-to-income ratio.
- Avoid applying for very much new credit.
One way to build a history of making regular payments is with a credit card, but you may not qualify for one if you have bad credit. One option is to open a secured credit card, where lenders are willing to give you a credit card if you provide collateral in case you don’t make your payments.
As long as you use it responsibly, making regular purchases and paying down the balance each month, this can be a fast way to help your credit score.
Other Ways to Improve Your Qualifications
Other things that can help you improve your qualifications for a home loan include:
1. Earning a regular wage.
Self-employment offers a different challenge. If you are self-employed, you should be able to show tax documentation of regular earnings. However, self-employment income isn’t going to be viewed by lenders as favorably as a salary. Show that you have been steadily employed for at least a year or two.
2. Saving up for a down payment.
If you have poor credit, you can improve your chances with a down payment of at least 10%. If your credit score is lower, approaching 600 or below, you might need 20% down. If you have a credit score of less than 500, there is a good chance that you will need a 35% down payment to qualify.
3. Having a letter of explanation.
If you have a compelling explanation for your low credit score, a letter of explanation might be required. You can explain extenuating circumstances (such as job loss or medical catastrophe) that led to your poor credit. You can also describe what you are doing to improve your financial situation.
When you have bad credit, it is still possible to buy a house. However, you will need to work hard to improve your credit score at least a little, and you may have a couple other hoops to jump through.
Are you trying to buy a house with bad credit? Tell us about your journey in the comments!
This article was originally published April 30th, 2011.
Where to open an investment account is a commonly asked question of new investors and it’s easy to see why you’d be overwhelmed when trying to decide.
There are a number of options out there, and what you decide should be based on your investing goals, as well as what makes sense for your present finances. Here are some of the most popular options for investing your money, along with a brief overview of the pros and cons of each:
Tax-Advantaged Retirement Accounts
Most people are at least vaguely familiar with the concept of investing in tax-advantaged retirement plans. If you have a “regular” job, chances are that you are investing in a company plan – most likely a 401(k).
The main advantage of investing in a company retirement plan is that often you are able to receive a match from your employer. This is free money that goes directly toward building up your retirement plan. And, of course, you have a tax advantage, either a tax deduction now, or the ability to avoid paying taxes on distributions from your account later.
The biggest problem with company plans is that you might be limited in your plan options. Be careful of putting too much of your money in the company’s stock. That can be a recipe for disaster if your company runs into trouble. Additionally, with a company plan, you might not have access to the Roth option you want, or the fund you prefer is not available in the fund.
You can look at some of these 401(k) investment alternatives in order to get the flexibility and options you want. However, if your employer offers a match, you should at least get that before you invest elsewhere. Other tax-advantaged retirement plans can be used once you have your maximum employer match taken care of.
Mutual Fund Companies
Many mutual fund companies make it easy for you to invest your money. Big companies like Vanguard and Fidelity put together a wide variety of fund types so you can achieve the desired asset allocation of your portfolio mostly in one account. The great thing about funds is that they can provide you with a way to add diversity to your portfolio without trying to pick individual stocks. Many mutual fund companies even offer ETFs now.
Of course, if you do put all your money in the hands of one mutual fund company then your investing options are limited to the funds offered by that company. Although the many different fund companies and fund options can make it a challenge to compare performance and costs across a lot of funds, it pays to do your research and find the mix that best fits your investing goals.
Something else to be aware of: Choosing actively managed funds can erode your returns due to the fees you’ll pay. Most mutual fund companies also offer low-cost index funds and ETFs that can provide you with the chance to invest for less. Realize, though, that you may not be able to trade individual stocks without opening a specific brokerage account with the company.
If you are looking for a wider range of investment opportunities, online brokers can probably give you more options than a mutual fund company or your company retirement plan. You can usually get access to mutual/index funds, individual stocks, ETFs, and options with the help of an online broker.
In addition many online brokers have IRA options, so you can open a retirement account with the broker. The nice thing about this approach is that it typically gives you access to more types of investments for your retirement money.
Here are some of the things to consider when you’re looking at choosing an online broker:
- Commissions & Fees
- Investment Products & Mutual Funds
- Customer Service
- Trading Tools
- Banking Services
Several major personal finance magazines like SmartMoney and Kiplingers publish annual broker reviews where they test out each brokerage and rank them on these and other factors. Whether you’re looking for cheap online trades, the ability to consult with a professional over the phone, or some periodic face to face time – one of these surveys will probably give you some guidance to help evaluate the discount brokers and which would be best for you.
Where to Invest?
What you choose depends on your investing needs and your comfort level with evaluating and choosing investments. Of course you’re not limited to just one of the above options, many people have money in retirement accounts at work, mutual fund companies, and with an online broker.
For example, if you’ve already maxed out your retirement accounts, and you are looking for a way to trade individual stocks, an online broker can be a great option. A mutual fund or online broker can also be a great supplement to your company plan – especially if you aren’t particularly impressed with the offerings.
Whatever mix you choose, it’s worth the time it will take you to write down what you’re looking for in an investment account and then compare your options. Doing your research can result in lower fees and more investment choices so be sure to put in the time when choosing the best investing account for your money.
Where else can people invest their money? Where do you invest yours? Leave a comment!
This article was originally published June 18, 2011.
When your debt seems manageable, it is easy to simply slowly chip away it while not concerning yourself about it. After all, if you can make your minimum payments, plus a little extra on occasion, what does it matter? As long as you can “afford” your debt, paying it off doesn’t need to be a priority.
Unfortunately, this attitude could be costing you quite a bit, especially in the long run. The longer you are in debt, the more it costs you. You are much better off if you pay off your debt as quickly as you can. Otherwise, you run the risk of big costs in terms of money, opportunity, and even emotional well-being.
Debt Costs You Money
Whenever you pay interest, you are putting money directly in someone else’s bank account. That interest you pay doesn’t provide you with a benefit in terms of items to purchase, or experiences to enjoy. It’s money you pay for the “privilege” of borrowing and carrying a balance. This is money that you could use, putting it to work for you, rather than lining someone else’s pockets.
The longer you are in debt, the more it will cost you. If you pay only the minimum payment on a credit card, it can, even if you never charge another thing on it, take as long as 10 years to pay off, and result in you paying three or four times more than you originally borrowed. That’s a lot of money that is, essentially, being poured right down the drain when, instead, it could be building your financial future.
Just the interest savings alone is a good reason to work a little harder to pay down your debt as fast as you can.
Debt Costs You Opportunities
When you are paying money in interest, you don’t have as many opportunities to make money. This is because your resources are going elsewhere. You can’t take advantage of the opportunity to make a good investment, or go on a trip, or do any number of other things because your resources are obligated to pay the debt that you owe.
If you have high enough debt, and all you do is make minimum payments, you will soon find that your credit score can be impacted. This means that, if you are approved for a car loan or a mortgage, you won’t have the opportunity to get the best interest rates. On top of that, your poor credit report, lowered by your high credit utilization, might mean that you don’t have the same job opportunities, or access to the same lower insurance premiums that others enjoy.
These opportunity costs can add up, resulting in a great deal of money and financial security compromised over time.
Debt Costs You Your Sanity
Sometimes, it’s not just money. Being in debt can take a toll on many people. Indeed, if you have high debt (and no plan to pay it down) it can impact your own emotional state. This can result in you feeling out of control and unable to direct your own life. You might lose your sanity, you could say!
And of course stress about your debt – and unhappiness about your situation – can affect your relationships. Many marriages experience increased problems due to household debt. Fights, disappointments, and even divorce can result from high debt. On top of that, your relationships with other family members, your children, and your friends can be affected by your emotional discomfort related to debt.
You can feel better – and have a sense of control – when you put together a plan to pay down your debt. Find out what your rights are regarding debt, and put together a plan to pay off your obligations as quickly as possible. Your mood will improve, you’ll save more money, and you will position yourself to take advantage of new opportunities.
Has debt had any of these affects on you? Leave a comment and let us know about it!
This article was originally published October 5, 2012.
Life insurance is one of the insurance products that we often overlook. We tend to think that we’re invincible, and let’s face it, preparing for your untimely death is not fun to do. However, buying life insurance is one of the most selfless acts you can do for your family.
Life insurance exists to help you protect you and your family from an untimely death which results in emotional and financial distress. Having said it like that, the importance of life insurance is immeasurable, yet so many young families do not carry it.
Let’s take a look at the difference between term life insurance and whole life insurance . . . and which policy is right for you.
Term Life Insurance
What is it?
Term life insurance is a simple death benefit life insurance policy. You buy a specific amount of coverage, and the policy covers you for a specific amount of time in the event of an accidental death. It’s very simple. If you buy $500,000 worth of coverage on yourself and you die in a car accident before the end of the term, your beneficiaries would receive $500,000. The word “term” means that there is a specific amount of time that the policy lasts for. Typical term amounts are 10, 20, and 25 years. At the end of the term, the policy expires and you are no longer covered under the death benefit if you were to die after the end of the term.
Term life insurance is very competitively priced. A healthy person in their thirties could buy $500,000 worth of coverage on a 20-year term for $15 to $30 per month. The cost is inexpensive, and the policy is simple.
If you die, you win (so to speak). If you don’t die, you had the peace of mind of being covered, and you paid pennies on the dollar for the coverage.
The main disadvantage of term life insurance is that it has an expiration date. If you bought a policy at age 30 for a 25 year term, it would expire at age 55. If you try to buy more life insurance at age 55, you will be charged a much higher premium because you are not much older and a higher health risk.
However, if you have a good financial plan set in place, at age 55 you should be able to self-insure your death benefit and there is an unlikely possibility that you have dependents that depend on your income.
Permanent Life Insurance
What is it?
Permanent life insurance has dozens and dozens of different products. Any life insurance product with the name whole, variable, or universal is most likely a permanent or cash value life insurance policy.
These policies often offer a death benefit along with a “savings account” product attached to the policy. They also often offer various other insurance coverage benefits. You pay a higher premium than term life insurance, and a portion goes to the premium for the death benefit, and another portion goes to the savings account attached to the policy, and it grows over time.
Some people like the added benefits attached to these policies, and there are sometimes tax benefits associated with the savings portion of the policies. This varies based on the type of product. Also, the premium typically stays the same from the time you purchased the policy and there is no expiration date on the policy.
The premium on permanent life insurance is very high. It’s common to pay somewhere between $75 to $100 per month even as a younger, healthy individual. Also, many of these policies have high fees associated with them, and many policies take the entire premium for the first year or two, rather than contributing to the savings portion of the product.
The savings rates attached to these policies are not good, and they are highly unproven. Salespeople love to boast “estimated” returns, but they often do not boast actual returns over a long period of time. If a person dies with a permanent life policy, the savings portion goes directly to the life insurance company, not the beneficiaries.
Choosing a Policy
I am not a big fan of permanent life insurance at all. Life insurance salespeople push these policies for one reason: they make a much bigger commission selling these policies than they do with term life insurance. If they do sell a term policy, most life insurance companies want the client converted to a whole or universal life policy within five years. This is because they make more money off the client in the long-term if they get them hooked on a permanent life policy.
Not all people that sell life insurance are like this, and there are plenty of good, honest salespeople out there, but I almost got into the business a few months back, and I walked out of an orientation disgusted at how little regard most insurance companies have for an individual’s overall financial plan.
Term life policies are perfect for getting affordable coverage when you need it most. Most people need life insurance when they have dependents that rely on their income. If not, what good does a death benefit do for you?
Make an informed decision, but make sure you do a lot of research on permanent life insurance before a slick salesperson convinces you that permanent is the right policy for you.
What type of life insurance do you have? What type are you thinking of getting? Leave a comment!
This article was originally published October 17th, 2012.
It’s hard not to break out the credit cards during the holidays when you don’t have any extra money to buy gifts. Budgeting and planning ahead of time for Christmas gift shopping is the key to staying away from getting into holiday debt. However, some of you have budgets that are too tight to save extra money for the holidays.
One option is to simply spend less on gifts – another alternative is to earn some extra income. There are many ways to do this, but many of us want to find the quickest and easiest way to do it. This is tough to accomplish, because as we all know, making money hardly ever comes easy. Here’s a list of some different ways you can earn some extra cash for the holiday season.
1. Fill out some surveys and trial offers.
You can fill out surveys or trial offers on various websites. Search around for some of the best survey sites and you can earn some extra money.
2. Sell on Craigslist.
Pick out 10 to 20 items around your house that you can sell for $5.00 or more, and start listing them on Craigslist. It’s free to list stuff for sale, and they give you up to four photos to upload for free. I highly recommend putting photos in your listing. Two years ago, my wife and I sold a ton of furniture and home accessories all on Craigslist, because we didn’t want to move a bunch of stuff that we weren’t in love with.
3. Resell on eBay.
You can resell items that you’ve purchased, such as antiques you’ve refurbished, for some extra money using eBay. Try it out!
4. Do some odd jobs.
Do you own a pressure washer? Print out fifty fliers and stick them in the doors around your neighborhood. If you get five jobs out of it, you’ll make a few hundreds bucks for the holidays.
Do you love dogs? Put out some fliers to start walking your neighbor’s dogs.
5. Change your W-4 at work.
This sounds weird, but too many people end up with a surplus of tax dollars withheld at the end of the year. Lower your W-4 withholding number to what it should accurately be, and you’ll start getting more money put in your paycheck. Don’t let the government get a free loan on your money!
6. House or pet sit over Thanksgiving weekend.
Many people go out of town for Thanksgiving, through the weekend, and they hate knowing that their house is just sitting there. Solicit your services to watch their house or pet. You can also water their plants and take in their mail.
7. Start blog writing online.
It will take too long to start making any money from starting your own blog. Christmas will have come and gone long before you earn a few bucks. Instead, start writing for someone else’s blog. Check out Problogger Job Board for tons of different paid blog writing jobs. Pick a subject that you are passionate about.
8. Perform a research study.
I know, you don’t want to be a lab rat, but if you live near a research university or hospital, they might have chances to make $500 to $2,000 participating in a study. I did three studies when I was in college, and I made a total of $1,900 doing them! I am still here, and I haven’t grown a third arm yet.
9. Make crafts for sale.
Christmas time is the peak season for all things involved with crafts. If you are crafty, then start making Christmas ornaments, embroidered kitchen towels, wall hangings, door decorations, and anything else you can think of. You don’t even have to purchase a booth at a local fair or craft expo you can sell your items online at Etsy.com.
10. Give from other budgeting categories. (Editor’s Tip)
If you’re feeling especially generous, you could always give money from some of your discretionary budgeting categories – a true sacrifice!
There are a tons of different ways to make money, but it takes some effort on your part. All you need is a little bit of drive and creativity to earn extra income. Do you have any other ideas to share with everyone? You can leave it in the comments below.
This article was originally published November 13th, 2008.
When we think of retirement, we often think of money. It’s important to save enough now, and invest it prudently, if you want to be able to live the life you want later.
However, it’s important not to get so caught up in the financial aspects of retirement that you forget about other aspects of retirement. If you want a truly successful retirement, there are some non-financial things to keep in mind:
1. Good Health
What good is having a huge nest egg if you don’t have the health to enjoy it? You won’t enjoy traveling the world, playing with your grandchildren, or even just taking a well-deserved rest at home nearly as much if you have poor health. While you can’t control some things, like an unexpected illness or injury, it’s possible to reduce the impacts of poor health in a number of cases.
Physical activity, a healthy diet, and a good mental attitude can go a long way toward better health in retirement. Take care of yourself now, and you will have a more satisfying retirement later.
2. Something To Do
In theory, retirement sounds great. You can sit all day, doing nothing. No reason to toil for your survival. However, recent studies indicate that if you don’t have something to occupy you, there is a chance that you will suffer in terms of physical and mental health.
While doing nothing seems like it might be fun for a week or two, pretty soon you are likely to go stir-crazy. Think about what you want to do with your time during retirement. Develop a hobby, volunteer, travel, or even go back to school. You could even get a part-time job doing something you love. The key is to feel as though you have a purpose for your life. Without one, things get pretty boring fairly quickly.
3. Good Company
Don’t forget to include people in your life. Some people like to have a significant other that they can turn to for companionship. Others are happy to spend time with friends on occasion. In some cases, it’s enough to volunteer or get a part-time job and find social interaction that way.
The way you connect to others matters to your mental and emotional health. Having people to do things with, and hang out with on occasion, is important. You can stay active mentally, and you can avoid some of the problems that come with loneliness.
A successful and fulfilling retirement isn’t just about having a huge nest egg. You also need to be able to enjoy the fruits of your labor. Being able to have a purpose in life, as well as having good company and good health, can ensure that you really do enjoy your years of retirement. Without good reasons to keep moving forward, you are unlikely to find yourself in a position to fully appreciate the wealth you have amassed.
What do you think? What is your ideal retirement? What are some of the non-financial things that would make your retirement perfect? Leave a comment!
One of the investment choices that has become increasingly popular in the last few years is the exchange traded fund (ETF). ETFs and mutual funds (including index funds) share some similarities, but there are some very important differences, and these differences explain why ETFs are becoming so popular amongst traders.
ETFs and mutual funds are similar in that the idea is to bundle together different securities. They are set up so that you get instant diversity. Instead of investing in a wide variety of investments one at a time, you can invest bundled.
You can invest all-market funds that track the performance of the entire stock market, or you can invest in bond funds that follow different bond securities. There are also opportunities to invest in ETFs or mutual funds that concentrate on specific sectors or even asset classes.
Even though there are these similarities, though, it’s important to realize that there are also very real differences:
When Trading Takes Place
ETFs actually trade on stock exchanges the same that stocks do. As a result, you can trade an ETF at any time, and you pay the same flat rate for the transaction as you would for a stock. Mutual funds, on the other hand, are traded only at the end of the day, according to the net asset value (NAV), and they are not traded the same way stocks are. In many cases, the flat rate for trading a mutual fund with a broker is higher than the rate you pay for trading an ETF.
Depending on the type of mutual fund you have, the operating expenses vary. If you have an actively managed fund, you could pay 2% per year for your fund. Index funds typically have lower costs, though, since they just own shares of all the securities on a particular index, so there isn’t a lot of management. ETFs, though, usually have much lower operating expenses. It’s possible to find ETFs with expenses as low as 0.15% or even less.
One of the issues that many mutual fund investors run into is the triggering of taxable events. When securities are bought and sold in mutual funds, it’s possible for capital gains to be realized. You might have to pay taxes on the transactions that take place within the fund, even though you haven’t bought or sold your own mutual fund shares. With ETFs, it’s different, with the creation and redemption of shares taking place on an in-kind basis. This means that they are not considered sales, and you don’t end up with capital gains in many cases. As a result, an ETF can have a more favorable tax impact for your situation.
Even though you probably won’t see a sales load with an index mutual fund, other mutual funds often charge sales loads. This can erode your returns. An ETF, on the other hand, never charges a sales load.
Additionally, many mutual funds require an investment minimum. It’s common for major mutual fund brokers to require between $1,500 and $5,000 as a minimum to invest in a particular mutual fund. While you might have to have a minimum to open an account at a specific broker, you don’t need a minimum investment for a particular ETF. If you open an account with a broker that doesn’t require a minimum investment, you can invest in an ETF with whatever you have. Even with brokers that don’t have minimums to open an account, you might still have a minimum to invest in a specific mutual fund.
For many people, the ease of trading ETFs – and their cost-efficiency – make them desirable choices. You still need to be careful though, and do your due diligence with research. You can still lose your money, and you want to make sure that you are careful about which ETFs you invest in.
Do you like ETFs or mutual funds better? Leave a comment and let us know!
This article was originally published November 21, 2012.
I’ve often thought that having an emergency fund is the most basic component of good financial planning. Everything else you do with your finances is based on this simple, single building block. You can have money coming in, money going out, and even a healthy reserve for your golden years. But if you don’t have money set aside somewhere, just to have available in case of an emergency, then your finances will never feel quite right.
At a minimum, your emergency fund should hold at least enough money to cover 30 days of living expenses. More is even better but this is an excellent starting point.
How do you get an emergency fund started especially if you’ve never had one?
1. Hold a garage sale!
I don’t mean that you need to literally have a garage sale – okay, I actually kind of do – but the bigger picture is it’s time to start selling some things that you really don’t need. There is money sitting in a lot of the stuff you have around your house and it would look a lot better filling up a bank account rather than a storage room.
A garage sale is one of the fastest ways to sell your stuff to raise cash. You can probably earn a few hundred dollars from a single garage sale. That’s not much, but if you have no emergency fund now, a few hundred dollars is a solid start. But don’t stop at a garage sale.
Look into selling a car that you no longer need, recreational equipment, or even furniture and jewelry. Anything that you haven’t used much in the past year should be fair game for sale. And any money that you receive as a result of selling them should immediately go into your emergency fund.
2. Have any windfalls coming in? Bank em!
Every now and again, some extra money comes in a cash windfall. Don’t spend it, bank it. It could come in the form of an income tax refund, a bonus at work, the sale of a small investment position, or even a rebate on a major purchase. Money from any source such as these should go immediately into your emergency fund.
One of the advantages to using this money for your emergency fund rather than some other purpose, is that it quickly and easily fills the fund. If you are not a saver by nature and have never had an emergency fund, quick results will be the key to building a sufficient account. Windfalls are the best way to do this. You can put money into your emergency fund without causing any stress on your budget.
3. Cut some expenses you don’t really need.
Make it a point to go through your checkbook and your credit card statements for the past six months or so to see if there are any expenses you pay for services that you don’t truly need. Make a list of these expenses, see how much you can save by eliminating some, and consider getting rid of as many as you can live without.
For example if you really don’t watch much TV, there’s no point paying for 200 channels through your cable service. You may also notice a pattern that you’re spending a considerable amount of money on eating meals outside the house. Could you reduce your restaurant meals from 10 a month to just five?
These are just some examples of relatively small expenses that you can cut that, taken together, will allow you to bank at least some money every month. Even if you “only” locate $200 per month in savings, putting that into your emergency fund each and every month for a year will give you $2,400.
Now add that to the money you collect from selling your stuff and from windfalls that you receive. It starts to look credible, doesn’t it?
4. Pick a percentage of your income and bank it – every pay period.
Once you find ways to save money in your budget, you’ll need to develop a foolproof method of getting the money into your emergency fund account. The best way to do this is to allocate some of your paycheck toward a direct deposit into your emergency fund. In that way the money will go into the bank and you won’t even notice it’s happening. Not only will it be simple, but it will also remove the temptation to spend it before it gets to where it should be going.
You can do this by allocating a percentage of your paycheck that roughly matches the amount of money that you’re saving from the expenses you no longer have. That will make the shift virtually pain free because it won’t feel like you’re giving anything up.
As a final recommendation on your emergency fund account, it will probably be best if the account does not contain check writing privileges or access via a debit card. You want to be able to get your emergency fund money in the event of an true emergency, but you don’t want to make it so easy that you’ll be tapping it for situations of lesser importance.
What methods have you used that have enabled you to build up an emergency fund quickly? Leave a comment!
This article was originally published November 19th, 2012.
Investing costs can reduce your return on investment and many of us know to try and steer clear of investing fees and expenses. However, avoiding investing expenses can sometimes be easier said than done. For example, the AARP released a report on 401(k) fees and found that 62% of the respondents didn’t know how many fees they were paying as part of their 401(k) plan.
Your 401(k) probably isn’t the first place you think of when you’re factoring in investing fees but it’s certainly one place you should look. Here are some other fees and expenses to keep in mind when you’re adding up the costs of investing.
Brokerage Transaction Fees
When you use a brokerage to invest, you will be required to pay fees when you buy and sell stocks, bonds, mutual funds, or ETFs. This is a fee you pay in order to cover the costs of facilitating the investment transaction. Some brokerages charge a percentage of the principal trade as a fee. Most online brokers, though, charge a flat fee. Each time you make a trade, you will have to pay a fee.
Mutual Fund Load Fees
If you invest in certain mutual funds, you’ll have to pay load fees. These are also sometimes called sales loads. These are special fees charged when you make a purchase, usually meant to pay the broker. You may also see a back-end (deferred) sales load. This is a fee charged when you sell your shares, and usually goes to the selling broker. You might also be charged a redemption fee that is paid to the fund to offset costs to the fund when you redeem your shares.
Operating Expenses on Funds
Many funds include operating expenses. These fees are usually higher in actively managed funds than in index funds or ETFs. This is because the management fee is bigger for an actively managed fund that makes use of a money manager. You might also need to pay distributions fees, which cover marketing fees and shareholder service costs.
There are a number of other expenses that may be factored in. The total annual fund operating expenses are often lumped together in an “expense ratio” that can provide you with information about how much of your money will be used to pay costs.
No-Load Fund Expenses
Even if you decide on a fund that’s a no-load mutual fund, it is important to note that you will still incur investing costs. You may have to pay transaction fees and redemption fees, and there will still be operating expenses and other costs. Make sure you read the fine print about the types of fees you can expect to pay; you aren’t fee-free just because your fund doesn’t come with load fees.
Capital Gains Taxes
You will also need to pay taxes on your gains when you sell shares, whether you are selling shares of a fund, or of an individual stock, or some other investment. You are taxed on your earnings. Short-term capital gains taxes are levied on investments that have been held for a year or less. You are taxed at your marginal tax rate for these earnings. Long-term capital gains taxes are for those investments that you have held for at least a year and a day.
You should also realize that you will have to pay capital gains taxes on gains made during the year when the fund makes trades. Mutual funds trade securities, and those capital gains are distributed to owners. So, you will have to report those earnings as capital gains, and pay taxes on them, even if you haven’t sold shares in the mutual fund.
When you use an investment adviser, you will have additional fees. You might pay asset management fees, which usually amount to a percentage of the assets under management on your behalf. Other advisers might charge a flat fee, for reviewing your portfolio, or for performing other services. In some cases, you might pay a flat retainer fee each quarter or year (it might be broken down by the month as well).
Remember that your investment adviser fee will be an investing cost on top of the other costs. You will be charged transaction fees and fund fees just as you would normally, and you will have to pay capital gains taxes. Be aware, too, that some investment advisers are paid commissions for selling you certain investment products. This is one reason why some investors have switched to the fee-only model mentioned above, to try and avoid conflicts of interest.
Before you invest, check into the fees, and look for ways to cut back on what you’ll have to pay. Of course the saying “you get what you pay for” also applies to investing services and advice. You may be willing to pay more based on your investing needs. Just make sure you understand what it is you’re paying for and that you really need those features, assistance, and expertise. The costs you pay to invest eat into your returns, and can make a big difference in the value of your portfolio over time.
What are some other factors to consider when it comes to investment fees? Leave a comment!
This article was originally published July 6th, 2011.
For years, the idea of the American Dream has been homeownership. That particular dream, though, is fading a bit. After the last economic crisis and real estate crash, many people are rethinking the idea of buying a home.
For some consumers, it just makes more sense to rent.
Is the mortgage affordable?
One of the first questions that you have to ask yourself before you buy relates to mortgage affordability. Even with home prices and mortgage rates dropping, mortgages aren’t affordable for everyone. As many consumers discovered to their chagrin, they couldn’t actually afford some of the mortgages they got.
Before deciding to buy, consider how much it costs, and also consider what you pay over time. In some cases, buying is much more expensive even over the long run – even with tax deductions – than renting. Some consumers prefer to invest the difference at higher returns.
What type of lifestyle to you live?
What type of lifestyle do you live? If you move frequently, it might not make as much sense to buy a home. If you know that you will be leaving in a couple of years, buying could end up trapping you in the home. If the market is bad when you try to sell, you could end up losing a great deal of money, and have a hard time selling to boot.
Increasingly, people are beginning to experiment with other lifestyles. Tying yourself down to one location through the purchase of a house might not fit with your desired lifestyle. Really think about what you hope to accomplish with your lifestyle and how you want to live. If you aren’t going to be staying in one place, and you aren’t interested in owning and managing rental income properties, buying might not be the best choice for you.
What else could you do with the money?
Before you make a decision to rent or buy, consider what you hope to accomplish in the long term. While many people like the idea of owning a home and being able to do whatever they want with it, the reality is that you are still tying up a lot of capital and wealth in your home.
You also need to think about the total cost of the home over time. Your mortgage interest tax deduction (if you itemize) won’t come close to completely offsetting what you pay over time. On top of that, there are maintenance and repair costs, as well as utility costs and other expenses that come with homeownership.
What else could you be doing with that money? Could you invest it at a higher rate of return elsewhere? Could you be using that money to travel the world? When you pay the lower cost of rent, you might not be just “throwing that money away.”
Your lower housing costs might mean that you have more available money to live your desired lifestyle right now, including eating out more or buying what you want. And it might also mean that you have more freedom to just up and leave if you want.
Really think about your expectations and goals. And think about your financial situation. Remember, too, that homes don’t always appreciate in value. While, from an emotional and sentimental standpoint, I love the house that my husband and I bought five years ago, sometimes I wonder about renting. If we sold right now, we’d be out nearly $20,000 because of the current market. I don’t regret buying since we’ll be here for a while, but it’s easy to see how renting might have been a better choice in a different circumstance.
The rules are changing, and your lifestyle preferences are your own. Don’t assume you have to buy to be “smart” or to be happy. It might work better for you to rent.
Are you thinking about renting or buying your next home? Leave a comment!
This article was originally published on November 12, 2012.