What is a Payday Loan?

A payday loan is a short-term loan with a high annual percentage rate. Also known as cash advance and check advance loans, payday loans are designed to cover you until payday and there are very few issues if you repay the loan in full before the payment date. Fail to do so, however, and you could be hit with severe penalties.

Lenders may ask the borrower to write a postdated check for the date of their next paycheck, only to hit them with rollover fees if that check bounces or they request an extension. It’s this rollover that causes so many issues for borrowers and it’s the reason there have been some huge changes in this industry over the last decade or so. 

How Do Payday Loans Work?

Payday lending seems like a simple, easy, and problem free process, but that’s what the payday lender relies on. 

The idea is quite simple. Imagine, for instance, that your car suddenly breaks down, payday is 10 days away, and you don’t have a single cent to your name. The mechanic quotes you $300 for the fix, and because you’re already drowning in debt and have already sold everything valuable, your only option is payday lending.

The payday lender offers you the $300 for a small fee. They remind you that if you repay this small short-term cash sum on payday, you won’t incur many fees or any real issues. But a lot can happen in 10 days. 

More bills can land in your mailbox, more expenses can arrive out of nowhere, and before you know it, all of your paycheck has been allocated for other expenses. The payday lender offers to rollover your loan for another month (another “payday”) and because you don’t have much choice, you agree.

But in doing so, you’ve just been hit with more high fees, more compounding interest, and a sum that just seems to keep on growing. By the time your next payday arrives, you’re only able to afford a small repayment, and from that moment on you’re locked into a debt that doesn’t seem to go anywhere.

Predatory Practices

Payday loans have been criticized for being predatory and it’s easy to see why. Banks and credit unions profit more from high-income individuals as they borrow and invest more money. A single high-income consumer can be worth more than a dozen consumers straddling the poverty line.

Payday lenders, however, target their services at low-income individuals. They offer small-dollar loans and seem to profit the most when payment dates are missed and interest rates compound, something that is infinitely more probable with low-income consumers.

Low-income consumers are also more likely to need a small cash boost every now and then and less likely to have the collateral needed for a low-interest title loan. According to official statistics, during the heyday of payday loans, most lenders were divorced renters struggling to make ends meet.

Nearly a tenth of consumers earning less than $15.000 have used payday loans, compared to fewer than 1% for those earning more than $100,000. Close to 70% of all payday loans are used for recurring expenses, such as utility bills and other debts, while 16% are used for emergency purchases.

Pros and Cons of Taking Out a Payday Loan

Regardless of what the lender or the commercial tells you, all forms of credit carry risk, and payday loans are no exception. In fact, it is one of the riskiest forms of credit available, dragging you into a cycle of debt that you may struggle to escape from. Issues aside, however, there are some benefits to these loans, and we need to look at the cons as well as the pros.

Pros: You Don’t Need Good Credit

Payday loans don’t require impeccable credit scores and many lenders won’t even check an applicant’s credit report. They can afford to do this because they charge high interest and fees, and this allows them to offset many of the costs associated with the increased liability and risk.

If you’re struggling to cover your bills and have just been hit with an unexpected expense, this can be a godsend—it’s a last resort option that could buy you some time until payday.

Pros: It’s Quick

Payday loans give you money when you need it, something that many other loans and credit offers simply can’t provide. If you need money right now, a payday lender can help; whereas another lender may require a few days to transfer that money or provide you with a suitable line of credit.

Some lenders provide 24/7 access to money, with online applications offering instant decisions and promising a money transfer within 24 hours.

Pro: They Require Very Little

A payday loan lender has a very short list of criteria for its applicants to meet. A traditional lender may request your Social Security Number, proof of ID, and a credit check, but the average payday lender will ask for none of these things.

Generally, you will be asked to prove that you are in employment, have a bank account, and are at least 18 years old—that’s it. You may also be required to submit proof that you are a US citizen.

Cons: High Risk of Defaulting

A study by the Center for Responsible Lending found that nearly half of all payday loans go into default within just 2 years. That’s a staggering statistic when you consider that the average default rate for personal loans and credit cards is between 1% and 4%.

It proves the point that many payday lender critics have been making for years: Payday loans are predatory and high-risk. The average credit or loan account is only provided after the applicant has undergone a strict underwriting process. The lender takes its time to check that the applicant is suitable, looking at their credit history, credit score, and more, and only giving them the credit/loan when they are confident it will be repaid.

This may seem like an unnecessary and frustrating process, but as the above statistics prove, it’s not just for the benefit of the lender as it also protects the consumer from a disastrous default.

Con: High Fees

High interest rates aren’t the only reason payday lenders are considered predatory. Like all lenders, they charge fees for late payments. But unlike other lenders, these fees are astronomical and if you’re late by several weeks or months, those fees can be worth more than the initial balance.

A few years ago, a survey on payday lending discovered that the average borrower had accumulated $458 worth of fees, even though the median loan was nearly half that amount.

Cons: There are Better Options

If you have a respectable credit history or any kind of collateral, there are better options available. A bank or credit union can provide you with small short-term loans you can repay over many months without accumulating astronomical sums of interest. 

The interest rates are much lower, the fees are more manageable, and unless your credit score is really poor, you should be offered more favorable terms than what you can get from a payday lender.

Even a credit card can offer you better terms. Generally speaking, a credit card has some of the highest interest rates of any unsecured debt, but it can’t compare to a payday loan. It also has very little impact on your credit score and many credit card providers offer 0% on purchases for the first-few months.

What’s more, if things go wrong with a credit card, you have more options than you have with a payday loan, including a balance transfer credit card or a debt settlement program.

Why Do Payday Loans Charge So Much Interest?

If we were to take a cynical view, we could say that payday loans charge a lot simply because the lender can get away with charging a lot. After all, a payday loan lender targets the lowest-income individuals, the ones who need money the most and find themselves in desperate situations.

However, this doesn’t paint a complete picture. In actual fact, it all comes down to risk and reward. A lender increases its interest rate when an applicant is at a greater risk of default. 

The reason you can get low rates when you have a great credit score and high rates when you don’t, is because the former group is more likely to pay on time and in full, whereas the latter group is more likely to default.

Lending is all about balancing the probabilities, and because a short-term loan is at serious risk of defaulting, the costs are very high.

Payday Loans and Your Credit Score

Your credit will only be affected if the lender reports to the credit bureaus. This is something that many consumers overlook, incorrectly assuming that every payment will result in a positive report and every missed payment in a negative one. 

If the lender doesn’t report to the main credit bureaus, there will be no changes to your report and the account will not even show. This is how many payday lenders operate. They rarely run credit checks, so your report won’t be hit with an inquiry, and they tend not to report on-time payments.

However, it’s a different story if you miss those payments. A lender can report missed payments and defaults and may also sell your account to a debt collector, at which point your credit score will take a hit. 

If you’re concerned about how an application will impact your credit score, speak with the lender or read the terms and conditions before applying. And remember to always meet your payments on time to avoid any negative marks on your credit report and, more importantly, to ensure you’re not hit with additional fees.

Payday Loans vs Personal Loans

A personal loan is generally a much better option than a payday loan. These loans are designed to help you cover emergency expenses, pay for home improvements, launch businesses, and, in the case of debt consolidation loans, to clear your debt. 

The interest rates are around 6% to 10% for lenders with respectable credit scores, and while they often charge an origination fee and late fees, they are generally much cheaper options. You can repay the loan at a time that suits you and tailor the payments to fit your monthly expenses, ensuring that they don’t leave you short at the end of the month.

You can get a personal loan from a bank or a credit union; whenever you need the money, just compare, apply, and then wait for it to hit your account. The money paid by these loans is generally much higher than that offered by payday loans and you can stretch it out over a few years if needed.

What is an Unsecured Loan?

Personal and payday loans are both classed as unsecured loans, as the lender doesn’t secure them against money or assets. Secured loans are typically secured against your home (mortgage, home equity loan) or your car (auto loan, title loan). They can also be secured against a cash deposit, as is the case with secured credit cards.

Although this may seem like a negative, considering a lender can repossess your asset if you fail to meet the payment terms, it actually provides many positives. For instance, a secured loan gives the lender more recourse if anything goes wrong, which means the underwriters don’t need to account for a lot of risk. As a result, the lender is more likely to offer you a low interest rate. 

Where cash advance loans and other small loans are concerned, there is generally no option for securing the loan. The lender won’t be interested, and neither should you—what’s the point of securing a $30,000 car against a $1,000 loan!?

New Payday Loan Regulations

Payday lenders are subject to very strict rules and regulations and this industry has undergone some serious changes in recent years. In some states, limits are imposed to prevent high interest rates; in others, payday lenders are banned from operating altogether. 

The golden age of payday lending has passed, there’s no doubt about that. In fact, many lenders left the US markets and took their business to countries like the UK, only for the UK authorities to impose many of the same restrictions after a few years of pandemonium. In the US, the industry thrived during the end of the 2000s and the beginning of the 2010s, but it has since been losing ground and the practice is illegal or highly restricted in many states.

Are Payday Loans Still Legal?

Payday loans are legal in 27 states, but many states have imposed strict rules and regulations governing everything from loan amounts to fees. The states where payday lenders are not allowed to operate are:

  • Arizona
  • Arkansas
  • Connecticut
  • Georgia
  • Maine
  • Maryland
  • Massachusetts
  • New Jersey
  • New York
  • North Carolina
  • Pennsylvania
  • Vermont
  • West Virginia

It is still possible to apply for personal loans and title loans in these states, but high-interest, cash advance loans are out of the question, for the time being at least.

Debt Rollover Rules for Payday Lenders

One of the things that regulations cover is something known as Debt Rollover, whereby a consumer rolls their debt over into the next billing period, accruing fees and continuing to pay interest. The more rollovers there are, the greater the risk and the higher the detriment to the borrower.

Debt rollovers are at fault for many of the issues concerning payday loans. They create a cycle of persistent debt, as the borrower is forced to acquire additional debt to repay the payday loan debt. 

In the following states, payday loans are legal but restricted to between 0 and 1 rollovers:

  • Alabama
  • California
  • Colorado
  • Florida
  • Hawaii
  • Illinois
  • Indiana
  • Iowa
  • Kentucky
  • Louisiana
  • Michigan
  • Minnesota
  • Mississippi
  • Montana
  • Nebraska
  • New Hampshire
  • New Mexico
  • North Dakota
  • Ohio
  • Oklahoma
  • Rhode Island
  • South Carolina
  • Tennessee
  • Texas
  • Virginia
  • Washington
  • Washington D.C.
  • Wisconsin
  • Wyoming

Other states tend to limit debt rollovers to 2, but there are some notable exceptions. In South Dakota and Delaware, as many as 4 are allowed, while the state of Missouri allows for 6. However, the borrower must reduce the principal of the loan by at least 5% during each successive rollover.

Are These Changes for the Best?

If you’re a payday lender, the aforementioned rules and regulations are definitely not a good thing. Payday lenders rely on persistent debt. They make money from the poorest percentage of the population as they are the ones most likely to get trapped in that cycle.

For responsible borrowers, however, they turn something potentially disastrous into something that could serve a purpose. Payday loans still carry a huge risk, especially if there is any chance that you won’t repay the loan in time, but the limits imposed on interest rates and rollovers reduces the astronomical costs.

In that sense, they are definitely for the best, but there are still risks and potential pitfalls, so be sure to keep these in mind before you apply for any short-term loans.

What is a Payday Loan? is a post from Pocket Your Dollars.

Source: pocketyourdollars.com

How Much Money Do You Need to Buy a House?

A blue and white house sits on a green lawn, surrounded by trees.

According to the U.S. Census Bureau, the median sales price of new homes in May 2020 was around $317,000. Even if you’re purchasing a home that falls well below that average, chances are it’s one of the most expensive things you’ll ever buy. With such a big expense, you might be wondering—how much do you need to save for a house?

The good news? You don’t have to save for the entire purchase price. But the amount you might need on hand to buy a home can be significant. Get some idea of how much money you might need to buy a house below.

How Much Should You Save for a House Down Payment?

It all depends on the price of the home you want to buy and what type of loan program you qualify for. Down payments are usually a percentage of the home cost.

You might have heard that you need 20% down to buy a home. That’s actually not entirely true. Although the Consumer Financial Protection Bureau makes a case for the benefits of 20% down, it also notes that this number doesn’t work for everyone.

So, where does the 20% figure come from? It’s part of the guidelines set by Fannie Mae and Freddie Mac, government sponsored, mortgage guarantee companies. You either have to pay 20% down or pay private mortgage insurance, because analysis indicates that loans without 20% down are riskier for the lenders.

Here’s a look at some common mortgage options and how much you might need to have for a down payment:

  • The CFPB notes that conventional loans with PMI can require 5 to 15% down on average. If the home price is $300,000, that’s $15,000 to $45,000.
  • Loans through the Federal Housing Administration require down payments of at least 3.5%. That’s $10,500 on a $300,000 home.
  • Some loan programs, such as those for rural borrowers through the USDA, or those who qualify for loans through the VA, don’t require a down payment at all.

Other Expenses to Save for

Down payments aren’t the only thing you need to save for when buying a home. Closing costs can be thousands of dollars, and you may need to foot the bill for inspections, home repairs or even fun things, like new furniture. To make the home-buying process less stressful, it’s a good idea to save more than you expect to need for closing costs.

How Long Will It Take to Save for a House?

Saving 20% of your income could catapult you into purchasing a home in the next one to three years, depending on your market. For example, if you’re earning $96,000 per year, that’s $19,200 saved after one year. It’s $38,400 after two years and $57,600 after three. Even if you need 20% down, these amounts are roughly enough to help you buy homes worth between $100,000 and $300,000 within three years.

How Much of Your Savings Should You Spend on a House?

It’s tempting to empty out your savings or cash in your 401(k) to buy your dream home. Even if the house is just your first step into home ownership and isn’t perfect, it’s tempting to do what it takes to get those keys.

But spending 100% of your savings leaves no safety net if something happens. What if something breaks in your new home or there’s a medical emergency? Having some savings on hand to cover these issues helps protect your home, because you’re more likely to be able to continue to pay the mortgage.

Planning to Purchase a Home

If you’re planning on buying a home in the future, it’s important to start saving today. Every little bit you can do to save for a home helps make it happen.

If you want to buy a home for around $300,000 and you can’t qualify for a loan program that requires no down payment, you’ll need at least $10,500 to $15,000. You’ll also need closing costs and other fees, which typically run between 2 and 5% of the purchase price. Assuming $10,000 in closing costs, you need $25,000 minimum to position yourself for home ownership.

A Short-Term Plan

If you’re looking to buy a home within the next year or two, you’d need to save $12,500 to $25,000 a year. Saving 20% of your income can help you save the bulk of that in one or two years if you make more than $50,000 annually. To do that, though, you’ll need to set an aggressive personal budget and be willing to cut out some extras, such as cable or eating out.

A Long-Term Plan

By starting your journey to home ownership as early as possible, you can stretch your plan to five years or more. If you save over the course of five years, that’s only $5,000 a year. That’s $416 a month or just under $100 a week. You really could save for a house this way simply by cutting out a few expensive coffees, pizza nights, dinners, etc.

Start Saving Today

How much should you save before you try to buy a home? It depends on so many factors that there’s not a one-size-fits-all answer. So, do your research early, make a plan and stick with it. And, as you get close to being ready to buy a home, don’t forget to shop around to find the best mortgage rates. Because those mortgage rates, along with your home price, determine how much you’ll pay for your home.

The post How Much Money Do You Need to Buy a House? appeared first on Credit.com.

Source: credit.com

5 Best Hedges in the Face of Inflation

Inflation measures how much an economy rises over time, comparing the average price of a basket of goods from one point in time to another. Understanding inflation is an important element of investing.

The Bureau of Labor Statistics CPI Inflation Calculator shows that $5.00 in September 2000 has the purchasing power equal to $7.49 in September 2020. To continue to afford necessities, your income must pace or rise above the rate of inflation. If your income didn’t rise along with inflation, you couldn’t afford that same pizza in September 2020 — even if your income never changed.

Inflation represents a real risk for investors as it could erode the principal value of your investment.

For investors, inflation represents a real problem. If your investment isn’t growing faster than inflation you could technically end up losing money instead of growing your wealth. That’s why many investors look for stable and secure places to invest their wealth. Ideally, in investment vehicles that guarantee a return that’ll outpace inflation. 

These investments are commonly known as “inflation hedges”. 

5 Top Inflations Hedges to Know

Depending on your risk tolerance, you probably wouldn’t want to keep all of your wealth in inflation hedges. Although they might be secure, they also tend to earn minimal returns. You’ll unlikely get rich from these assets, but it’s also unlikely you’ll lose money. 

Many investors turn to these secure investments when they notice an inflationary environment is gaining momentum. Here’s what you should know about the most common inflation hedges.

1. Gold

Some say gold is over-hyped, because not only does it not pay interest or dividends, but it also does poorly when the economy is doing well. Central banks, who own most of the world’s gold, can also deflate its price by selling some of its stockpile. Gold’s popularity might be partially linked to the “gold standard”, which is the way countries used to value its currency. The U.S. hasn’t used the gold standard since 1933.

Still, gold’s stability in a crisis could be good for investors who need to diversify their assets or for someone who’s very risk-averse. 

If you want to buy physical gold, you can get gold bars or coins — but these can be risky to store and cumbersome to sell. It can also be hard to determine their value if they have a commemorative or artistic design or are gold-plated. Another option is to buy gold stocks or mutual funds. 

Is gold right for you? You’ll need to determine how much risk you’re willing to tolerate with your investments since gold offers a low risk but also a low reward. 

Pros

  • Physical asset: Gold is a physical asset in limited supply so it tends to hold its value. 
  • Low correlation: Creating a diversified portfolio means investing in asset classes that don’t move together. Gold has a relatively low correlation to many popular asset classes, helping you potentially hedge your risk.
  • Performs well in recessions: Since many investors see gold as a hedge against uncertainty, it is often in high demand during a recession.

Cons

  • No dividends: Gold doesn’t pay any dividends; the only way to make money on gold is to sell it. 
  • Speculative: Gold creates no value on its own. It’s not a business that builds products or employs workers, thereby growing the economy. Its price is merely driven by supply and demand.
  • Not good during low inflation: Since gold doesn’t have a huge upside, during periods of low inflation investors generally prefer taking larger risks and will thereby sell gold, driving down its price.

2. Real Estate Investment Trusts (REITs)

Buying real estate can be messy — it takes a long time, there are many extra fees, and at the end of the process, you have a property you need to manage. Buying REITs, however, is simple.

REITs provide a hedge for investors who need to diversify their portfolio and want to do so by getting into real estate. They’re listed on major stock exchanges and you can buy shares in them like you would any other stock.

If you’re considering a REIT as an inflation hedge you’ll want to start your investment process by researching which REITs you’re interested in. There are REITs in many industries such as health care, mortgage or retail. 

Choose an industry that you feel most comfortable with, then assess the specific REITs in that industry. Look at their balance sheets and review how much debt they have. Since REITs must give 90% of their income to shareholders they often use debt to finance their growth. A REIT that carries a lot of debt is a red flag.

Pros

  • No corporate tax: No matter how profitable they become, REITs pay zero corporate tax.
  • High dividends: REITs must disperse at least 90% of their taxable income to shareholders, most pay out 100%.
  • Diversified class: REITs give you a way to invest in real estate and diversify your assets if you’re primarily invested in equities.

Cons

  • Sensitive to interest rate: REITs can react strongly to interest rate increases.
  • Large tax consequences: The government treats REITs as ordinary income, so you won’t receive the reduced tax rate that the government uses to assess other dividends.
  • Based on property values: The value of your shares in a REIT will fall if property values decline.

3. Aggregate Bond Index

A bond is an investment security — basically an agreement that an investor will lend money for a specified time period. You earn a return when the entity to whom you loaned money pays you back, with interest. A bond index fund invests in a portfolio of bonds that hope to perform similarly to an identified index. Bonds are typically considered to be safe investments, but the bond market can be complicated.

If you’re just getting started with investing, or if you don’t have time to research the bond market, an aggregate bond index can be helpful because it has diversification built into its premise. 

Of course, with an aggregate bond index you run the risk that the value of your investment will decrease as interest rates increase. This is a common risk if you’re investing in bonds — as the interest rate rises, older issued bonds can’t compete with new bonds that earn a higher return for their investors. 

Be sure to weigh the credit risk to see how likely it is that the bond index will be downgraded. You can determine this by reviewing its credit rating. 

Pros

  • Diversification: You can invest in several bond types with varying durations, all within the same fund.
  • Good for passive investment: Bond index funds require less active management to maintain, simplifying the process of investing in bonds.
  • Consistency: Bond indexes pay a return that’s consistent with the market. You’re not going to win big, but you probably won’t lose big either.

Cons

  • Sensitive to interest rate fluctuations: Bond index funds invested in government securities (a common investment) are particularly sensitive to changes to the federal interest rate.
  • Low reward: Bond index funds are typically stable investments, but will likely generate smaller returns over time than a riskier investment.

4. 60/40 Portfolio

Financial advisors used to highly recommend a 60/40 stock-bond mix to create a diversified investment portfolio that hedged against inflation. However, in recent years that advice has come under scrutiny and many leading financial experts no longer recommend this approach. 

Instead, investors recommend even more diversification and what’s called an “environmentally balanced” portfolio which offers more consistency and does better in down markets. If you’re considering a 60/40 mix, do your research to compare how this performs against an environmentally balanced approach over time before making your final decision.

Pros

  • Simple rule of thumb: Learning how to diversify your portfolio can be hard, the 60/40 method simplifies the process.
  • Low risk: The bond portion of the diversified portfolio serves to mitigate the risk and hedge against inflation.
  • Low cost: You likely don’t have to pay an advisor to help you build a 60/40 portfolio, which can eliminate some of the cost associated with investing.

Cons

  • Not enough diversification: Financial managers are now suggesting even greater diversification with additional asset classes, beyond stocks and bonds.
  • Not a high enough return: New monetary policies and the growth of digital technology are just a few of the reasons why the 60/40 mix doesn’t perform in current times the same way it did during the peak of its popularity in the 1980s and 1990s.

5. Treasury inflation-protected securities (TIPS)

Since TIPS are indexed for inflation they’re one of the most reliable ways to guard yourself against high inflation. Also, every six months they pay interest, which could provide you with a small return. 

You can buy TIPS from the Treasury Direct system in maturities of five, 10 or 30 years. Keep in mind that there’s always the risk of deflation when it comes to TIPS. You’re always guaranteed a minimum of your original principal at maturity, but inflation could impact your interest earnings.

Pros

  • Low risk: Treasury bonds are backed by the federal government. 
  • Indexed for inflation: TIPS will automatically increase its principle to compensate for inflation. You’ll never receive less than your principal at maturity.
  • Interest payments keep pace with inflation: The interest rate is determined based on the inflation-adjusted principal. 

Cons

  • Low rate of return: The interest rate is typically very low, other secure investments that don’t adjust for inflation could be higher. 
  • Most desirable in times of high inflation: Since the rate of return for TIPS is so low, the only way to get a lot of value from this investment is to hold it during a time when inflation increases and you need protection. If inflation doesn’t increase, there could be a significant opportunity cost.

The Bottom Line 

Inflation represents a real risk for investors as it could erode the principal value of your investment. Make sure your investments are keeping pace with inflation, at a minimum. 

Inflation hedges can protect some of your assets from inflation. Although you don’t always have to put your money in inflation hedges, they can be helpful if you notice the market is heading into an inflationary period. 

The post 5 Best Hedges in the Face of Inflation appeared first on Good Financial Cents®.

Source: goodfinancialcents.com

Dear Penny: How Do I Save for Retirement on a Teacher’s Salary?

Dear Penny,

I’m 51 years old and don’t have a large nest egg. I’m a single parent with three kids. I’m a second career middle school teacher, so there is not a lot of money left over each month. 

How much money should I be saving to be able to retire in my 70s? Where should I invest that money?

-B.

Dear B.,

You still have 20 years to build your nest egg if all goes as planned. Sure, you’ve missed out on the extra years of compounding you’d have gotten had you accumulated substantial savings in your 20s and 30s. But that’s not uncommon. I’ve gotten plenty of letters from people in their 50s or 60s with nothing saved who are asking how they can retire next year.

I like that you’re already planning to work longer to make up for a late start. But here’s my nagging concern: What if you can’t work into your 70s?

The unfortunate reality is that a lot of workers are forced to retire early for a host of reasons. They lose their jobs, or they have to stop for health reasons or to care for a family member. So it’s essential to have a Plan B should you need to leave the workforce earlier than you’d hoped.

Retirement planning naturally comes with a ton of uncertainty. But since I don’t know what you earn, whether you have debt or how much you have saved, I’m going to have to respond to your question about how much to save with the vague and unsatisfying answer of: “As much as you can.”

Perhaps I can be more helpful if we work backward here. Instead of talking about how much you need to save, let’s talk about how much you need to retire. You can set savings goals from there.

The standard advice is that you need to replace about 70% to 80% of your pre-retirement income. Of course, if you can retire without a mortgage or any other debt, you could err on the lower side — perhaps even less.

For the average worker, Social Security benefits will replace about 40% of income. If you’re able to work for another two decades and get your maximum benefit at age 70, you can probably count on your benefit replacing substantially more. Your benefit will be up to 76% higher if you can delay until you’re 70 instead of claiming as early as possible at 62. That can make an enormous difference when you’re lacking in savings.

But since a Plan B is essential here, let’s only assume that your Social Security benefits will provide 40%. So you need at least enough savings to cover 30%.

If you have a retirement plan through your job with an employer match, getting that full contribution is your No. 1 goal. Once you’ve done that, try to max out your Roth IRA contribution. Since you’re over 50, you can contribute $7,000 in 2021, but for people younger than 50, the limit is $6,000.

If you maxed out your contributions under the current limits by investing $583 a month and earn 7% returns, you’d have $185,000 after 15 years. Do that for 20 years and you’d have a little more than $300,000. The benefit to saving in a Roth IRA is that the money will be tax-free when you retire.

The traditional rule of thumb is that you want to limit your retirement withdrawals to 4% each year to avoid outliving your savings. But that rule assumes you’ll be retired for 30 years. Of course, the longer you work and avoid tapping into your savings, the more you can withdraw later on.

Choosing what to invest in doesn’t need to be complicated. If you open an IRA through a major brokerage, they can use algorithms to automatically invest your money based on your age and when you want to retire.

By now you’re probably asking: How am I supposed to do all that as a single mom with a teacher’s salary? It pains me to say this, but yours may be a situation where even the most extreme budgeting isn’t enough to make your paycheck stretch as far as it needs to go. You may need to look at ways to earn additional income. Could you use the summertime or at least one weekend day each week to make extra money? Some teachers earn extra money by doing online tutoring or teaching English as a second language virtually, for example.

I hate even suggesting that. Anyone who teaches middle school truly deserves their time off. But unfortunately, I can’t change the fact that we underpay teachers. I want a solution for you that doesn’t involve working forever. That may mean you have to work more now.

Robin Hartill is a certified financial planner and a senior editor at The Penny Hoarder. Send your tricky money questions to AskPenny@thepennyhoarder.com.

This was originally published on The Penny Hoarder, which helps millions of readers worldwide earn and save money by sharing unique job opportunities, personal stories, freebies and more. The Inc. 5000 ranked The Penny Hoarder as the fastest-growing private media company in the U.S. in 2017.

Source: thepennyhoarder.com

What Does a Real Estate Attorney Do?

If you’re planning to buy or sell a house or a rental investment property, you might consider hiring a real estate attorney.

A real estate lawyer can provide legal protection. They can help you navigate the home-buying process, which can be complex.

In fact, many states require a real estate lawyer to be present at closing. 

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Even if you live in a state that doesn’t require you to have a real estate attorney, it’s important to have one by your side.

But it’s also important to know who you’re dealing with, what they can do for you, and what’s in it for them.

Real estate attorneys can help structure transactions and closing. They will review documents well in advance before the closing to make sure there are no errors.

Real estate lawyers, however, can only represent one of the parties. The buyer and the seller’s interests can often be in conflict. Therefore, the attorney should never represent both parties. 

Besides representing you in sales transactions, real estate attorneys can represent you in a courtroom as well.

During the home-buying process, disputes between the buyer and the seller may arise that will have to settle in court.

The real estate attorney’s qualifications

A real estate attorney, just as any lawyer, has attended 3 years of law school. In law school, they take courses in law in general, including real property and other real estate classes.

During law school, they may do internships at law firms which specialize in real estate law.

Once they graduate law school, they take to bar exam in the state they want to practice in.

Once they become licensed to practice, they can work in a law firm specializing in real estate law.

The real estate lawyer’s fees

A real estate attorney can charge by the hour or a fixed fee. How much their charge for their services depends on their reputation, their level experience, the level of complexity.

Regardless of the fee, your attorney will discuss it with you. Their hourly fee is typically between $150 to $350.

They’ll draft a retainer agreement and make the necessary disclosures before you can retain them.

The attorney’s role in real estate transaction

Real estate attorneys can have many roles. Their roles will vary depending on whether it is a simple transaction or a complex one, and whether a real estate broker is involved.

In some cases, a real estate broker can handle many aspects of real estate transactions. If that case, the real estate attorney’s role is often limited.

In other instances, the real estate lawyer plays a crucial role in all phases of the real estate transaction.

Nonetheless, a real estate attorney’s roles include acting as a legal counselor, negotiator, advisor and coordinator.

Real estate attorney as a legal counselor

A real estate attorney acting as a legal counselor can handle drafting the proposed contract. If there is a broker involved, the broker will prepare the contract.

But, your attorney will review it for any proposed changes. Your lawyer can also draft the deed and examine title documents.

If you retain a real estate agent or broker, your attorney may also review the broker’s agreement before you sign it.

Real estate attorney as a negotiator

If you hire a real estate lawyer before you sign a contract or before engaging in any contract negotiations, your attorney will assume that role. All communications from the other party or his or her attorney will be directed to your lawyer.

Your attorney will negotiate proposed changes to the contract, including the price of the house. They will review any mortgage contingency clauses.

In addition, your real estate attorney can negotiate the following matters:

  • Personal property to be included;
  • Repairs before closing;
  • The closing date;
  • You may not get a mortgage commitment within the stipulated date in the contract. So, your attorney may negotiate an extension of time to obtain the mortgage;
  • You may need an early possession of the house. Your lawyer can negotiate that.

Real estate attorney as an advisor

You, as a client, may not need strict legal advice. You may just want your lawyer to be present for general advice. If you’re a first time home buyer or an elderly buyer, your attorney can also act as an advisor.

Real estate attorney as a coordinator

Your attorney can also act as your coordinator. Residential closings involve a lot of steps. And not everyone involved will follow them.

So, one of your real estate lawyer’s role is to contact the brokers, the title insurers, the mortgagees. They will also monitor the progress of obtaining financing, title policy, etc.

They will also contact the other attorney to make sure all parties are ready for the closing.

Your attorney’s responsibilities before closing

If you hire a real estate lawyer to represent you either as a seller or buyer, his or her responsibility before closing include the following:

  • Make sure you, as a buyer or seller, can fulfill the requirements imposed by the real estate sale contract
  • Review the title insurance;
  • Check the mortgage commitment;
  • Monitor status of the contract contingencies;
  • Examine closing documents for accuracy;
  • Coordinate closing date and time with the mortgage lender, seller and buyer’s broker;
  • If buyers will not attend the closing, obtain power of attorney for property to cover documents to be signed at closing;
  • Get wire instructions for payment of balance due at closing

In case a dispute arises between the parties, the real estate attorney can represent you in court.

Issues that might arise include damages and earnest money forfeiture, specific performance, misrepresentation, etc.

Do I need a real estate attorney?

Some states require a real estate attorney to be present during closing. They include Massachusetts, Maine, Alabama, Connecticut, Delaware, Georgia, Florida, Kansas, Kentucky, Virginia, West Virginia, South Carolina, Rhode Island, Pennsylvania, New York, North Dakota, Mississippi, New Hampshire, and New Jersey.

If you don’t live in any of these states and the District of Columbia, it’s really up to you if you want to hire a real estate attorney. If you’re just trying to save money and can barely afford to buy a house, you’re probably don’t need a real estate lawyer.

But if your real estate transaction is complex, a good real estate attorney can be an asset.

The bottom line…

Some states do not require you to have a real estate attorney during closing. However, it’s worth the cost hiring one especially if you’re buying a house in foreclosure.

Work With A Financial Advisor Near You

If you have questions beyond hiring a real estate attorney, you can talk to a financial advisor who can review your finances and help you reach your goals. Find one who meets your needs with SmartAsset’s free financial advisor matching service. You answer a few questions and they match you with up to three financial advisors in your area. So, if you want help developing a plan to reach your financial goalsget started now.

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The post What Does a Real Estate Attorney Do? appeared first on GrowthRapidly.

Source: growthrapidly.com

Mortgage Escrow Account: Pros and Cons

If you own a home and are making monthly payments, you have probably read over the breakdown of your monthly mortgage charges once or twice. Your mortgage payment likely breaks out your monthly payment into three parts: principal, interest and funds that go to your escrow account. While you likely know that the principal is […]

The post Mortgage Escrow Account: Pros and Cons appeared first on The Simple Dollar.

Source: thesimpledollar.com