Author: Troutwood

“I am reading ‘The Big Short’ and, I need help understanding home equity. What is the difference between a first and second mortgage?”

Financial Decision Making

Short Answer: Home equity is the difference between your home’s appraised value and what you still owe on a mortgage. Second mortgages are higher interest but good for emergency situations.

Home Equity = The % of your home that you own versus the purchase price.  For example, if you bought a home for $200,000, and had paid off $100,000 of the mortgage (principal component) you would have equity (i.e. an asset of $100,000).  This does not take into consideration price movements of a home.  Continuing this example, if you sell your $200,000 home for $215,000, you will pocket $115,000 and the remaining $100,000 will go to the bank to finish paying off your mortgage.  Remember, you don’t own your home until your mortgage balance = $0. 

2nd mortgages = In the context of a “home equity loan,” i.e. your example, you could get a home equity loan for some percentage of the equity you have in the home would not be for all of it. The interest rate on this tends to be higher than a mortgage, but functionally the same (except that now you have two mortgages to pay off).  it is certainly a useful tool to be aware of, but most likely an option for emergencies.

Finn’s Fact: A second mortgage interest rate is higher than a first mortgage, but still substantially lower than a personal bank loan or credit card payment. Upfront closing costs must still be covered in second mortgage situations.

“I started a new job and my employer mentioned a 401(k) as part of my benefits. Do I need a 401(k)?”

Employment & Income, Spending & Saving

Short Answer: Yes, you need to start a 401(k) now.

There’s no “except” or “if” on this one, you should immediately start a 401(k) at any job that offers it. It’s free money. Yes, FREE MONEY. We can explain. In most instances, when you contribute to your 401(k), your employer also makes a contribution. If you’re thinking “I have plenty of time to save later.” Stop right there. You don’t.

Here’s the fancy math:

If you make $35,000 a year, and you get paid twice a month, before taxes, your paycheck is roughly $1,400 every other week. (401k contributions come out pre-tax, and also account for a tax deduction at the end of the year.)
3% of $2,800 is $84. That’s $84/month that you are investing in your future. After 5 years, that’s about $5,000 saved. And we haven’t even counted compounded investing either!

Let’s say you are cheap (we don’t judge!) and only want to put away 1%.
That’s still $29/month that you are investing in your future.

$29 = two Chik-Fil-A meals.
$84 = the cost of an unplanned Target trip. (IYKYK)

Can you afford it? Yes!
Do you need it? Absolutely.
It doesn’t matter how much you can invest, what matters is that you get started. Once you start a new job, you should check your onboarding pamphlet or email about retirement plans, or, reach out to your HR representative and ask.

Oh and guess what? That part above about employers making contributions? Well, that $29 or $84 you’re squirreling away… your employer is putting away the same amount for you as well. Remember that $5,000 above that you’ll have after 5 years? Well, with an employer match, its actually $10,000. (See? Free money, we told you.)

Another fun fact about a retirement savings account: when purchasing a large item, such as a home, a retirement account is seen as an asset on your balance sheet (yes, you have a balance sheet now, you adult, you!) and can help boost your ability to qualify for a lower interest rate or higher loan amount!

Click here to see our “Finglish” definition of a 401k!
https://www.youtube.com/watch?v=v8Tooq53c5E



Finn’s Fact:  A 401(k) or 403(b) will go with you if you leave one job or company and move to another. It always belongs to you!

How do I avoid bank fees?

Financial Decision Making, Spending & Saving

Short Answer: Use cash whenever possible

It’s no secret that commercial banks make millions each year from customer fees. Often times, these fees can come at inopportune times, like, say, when you overdraft your account by buying a $5 coffee. So now, you’re not only broke, but you also owe an extra $37 for that overdraft! Or, you’re paying 24% interest on the supposed “great deal” you scored by putting something on credit.  Here are some tips and tricks to help you keep your hard-earned money.

  1. Keep a separate checking account that serves as overdraft protection. Choose a checking account that waives fees for monthly deposits. Then, set up a $10, $20, or $50 automatic transfer into that account each month. You can then up overdraft protection to your main account from your “backup” account.
  2.  Use cash or a pre-paid debit card. Other than bills or planned budgetary things like groceries or gas, carry cash! You’ll always know exactly how much you have left. Studies by the Consumer Financial Protection Bureau found that people are more likely to overdraft a checking account with a purchase below $20. The same study also found that study participants spent less money overall when they used cash for all purchases less than $20.
  3. If you can’t pay it in cash, don’t buy it. Even if you intend to charge it, if you cannot pay it off in cash right then and there, bypass the credit card altogether.
  4. Keep one or two credit cards only, use them periodically at times that you can pay them off right away. This keeps them active and your credit score high while eliminating any chance of paying interest. Retailers spend millions on advertising to condition us into thinking that we can “buy it now, pay it later” on things we don’t need. It’s best to keep credit cards on hand for surprise purchases like a car repair or vet bill.

Finn’s Fact:  The Consumer Financial Protection Bureau found that people were willing to spend twice as much on an item they paid for with a credit card vs cash.

What’s the difference between Deferment vs. Forbearance for student loans and mortgages?

Financial Decision Making

Short answer: If you qualify, deferment is a better option, but neither is a good long-term solution.

You might find yourself in a situation where you cannot make a payment on a student loan or a mortgage. You have options, but its important to understand how each option can affect your finances long term. First, lets understand what each term means:

Deferment: Generally speaking, with student loans, deferment means you are postponing any payments for a later date. In most instances of student loans, interest rates are 0% during the deferment period. Deferment on a credit card can mean that, while interest is not owed during the deferment, it can still accrue and might be owed at the time the deferment is over.

Forbearance: A forbearance option is usually the last chance before a default or foreclosure. The literal meaning is “holding back.” In the case of student loans or mortgages, you may have the option to pay a lower amount. This is sometimes the only option if you do not qualify for deferment.

While neither is recommended, if you are in a difficult financial situation, these are two options that can provide some relief.

Finn’s Fact:
Most student loans start accruing interest once the loan is disbursed, with the exception of federal subsidy loans (where the government pays the interest at first.) You can start to make an impact on your loans while in school by paying the interest on any loans you take out. It’s a small way to impact your long-term outstanding balance.

“How important is FDIC and why do I need it?”

Risk Management & Insurance

Short answer: FDIC protects the values of your checking & savings accounts

If you’ve ever walked into a bank branch, chances are you’ve noticed one of the ubiquitous “FDIC insured” signs on the window. It’s certainly a financial hoop that banks must jump through in order to function, but it’s actually an extremely valuable assurance to customers.

FDIC stands for Federal Deposit Insurance Coverage. If you bank at a credit union, you might have seen it’s sister agency National Credit Union Agency (NCUA.) FDIC and NCUA were formed in 1933 by Franklin Roosevelt. It was part of the New Deal, intended to re-inflate the economy after sharp declines in prices and boost consumer and investor confidence after the Crash of 1929.

Understanding the why can us understand FDIC’s valuable to this day.

So how does it benefit you?

FDIC protects the balance of certain accounts in the event of a bank liquidity or insolvency event. (We’ll get into account types below.) Depositors are guaranteed a recovery of their money up to $250,000 per account. Covered accounts include: deposit accounts, savings accounts, checking accounts, CDs, cashier’s checks, and accounts denominated in foreign currency.

Accounts that are not covered by FDIC: Stocks, bonds, mutual funds, and money funds. The Securities Investor Protection Corporation is a separate entity that protects against brokerage failure or insolvency (not investor losses, however.)

With growing options on where to put your money, it’s important to know when you’re protected and when you’re not.

Finn’s Fact:
Prior to 1933, and the New Deal, banks were at risk of going “belly up” if too many depositors withdrew their money too quickly. These situations created panic both for banks and for consumers, since many banks did not have the cash on hand to cover all of the withdrawls. Therefore, those who did not make it to the bank “in time,” lost all of their money.

“My family gave me $2,000 when I graduated college. I have student loans and credit card debt, but I feel like I could do a lot more with it. What are some options I have, other than paying off debt?”

Credit & Debt

Short Answer:  Yes, you likely have options

Unless your credit card debt exceeds $2,000, in which case you have one choice – pay off as much of that credit card debt as you can.

This is because of the overwhelmingly high interest rate that accompanies outstanding credit card balances (imagine treading water in quicksand . . .).  Further, credit card debt can cause long-term issues like preventing you from getting a car, house, or future credit cards.

If your credit card debt is less than $2,000, you have some options, other than paying off debt.  Two Action Steps to consider:

  1. List your debts in order of payment priority
  2. Confirm that you are contributing the minimum amount to your 401(k) to receive the maximum company match

Sticking with the credit card piece of your question, a great way to make an immediate impact on your credit score is to make a payment on a card that has the highest balance in regard to the credit limit. I.E, if you have a $500 limit with a $450 balance, your credit score will be more positively impacted than paying on a $1,000 balance on a card with a $5,000 limit. (It doesn’t make a ton of sense, but we didn’t make the rules, we just share ’em!).  Paired with, closing or at least closing access, to that credit card. 

Now, if you have no debt, or you’ve already strategically paid some of your debt (go you!), a gift you can give your future self is to invest some of your cash today. Our Troutwood app can tell you exactly what to expect if you create a plan around investing $1 or $100 or $1,000.

Finn’s Fact: 

Credit card debt is different than student loan debt and is different than secured debt (homes and cars).  But is a legal obligation, which means you are responsible for paying it back.