When I walked into work last week, my coworkers oohed and aahed at my new shoulder-length bob haircut.
I smiled, grateful for the compliments, but also because I was keeping a sneaky little secret: My fabulous new haircut cost me just $9.
You don’t have to spend a fortune to look flawless. As a dedicated penny hoarder, I’ve been looking for money hacks in all areas of my life, including the essentials. Let’s face it, both women and men can only go so long without a haircut, especially if you’re a guy who’s not trying to hop aboard the man-bun train.
Depending on where you live, a typical women’s haircut can range from $40 to $110, with men’s cuts coming in slightly lower between $25 and $50 (and don’t forget the tip!). That’s a lot of money if your paycheck is already stretched between rent, groceries, gas and other necessities.
And while a haircut may seem frivolous, never underestimate the power of looking -- and feeling -- your best, especially if you’re on the job market, attending networking events or trying to score that big promotion at work.
No one has to know how much you saved on that fabulous new bob or that trendy undercut. Here are four ways to get stellar, stylish, cheap haircuts -- no more dropping serious cash at the salon.
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It may sound sketchy to get your hair trimmed by a student. But as long as you’re willing to be patient, you can walk out with a professional-grade haircut and extra money in your pocket.
Search online for a beauty institute or hair school near you. Most offer haircuts for a fraction of the price you’d pay at a traditional salon. If you’re worried about quality, never hesitate to read reviews from past customers.
Here are some of the low prices you can find at beauty schools around the U.S.:
Here’s how the process works. You call the beauty school and request an appointment, just as you would at a traditional salon. Some institutes will allow you to select a stylist based on his or her experience level -- typically from tiers such as beginner, intermediate or advanced.
When you arrive, you’ll meet with your stylist-in-training and go over the services you want. (Pro tip: Bring in a picture rather than using vague terms to describe your desired cut.)
Next, your hairdresser will flag down a supervisor to talk specifics -- they’ll go over which instruments the stylist plans to use or what color combinations would look best.
Because they want to earn high marks in class, most students are meticulous, checking and double-checking every move they make. This may result in your haircut taking a little longer than it would at a traditional salon, but your patience is worth it.
The supervisor will stop by your chair at various points throughout the process. At the end, they’ll inspect your hair, re-measuring the length and checking the stylist’s work. They may trim up a few loose ends or share pointers with the stylist for nailing a certain technique they’ve discussed in class.
When you’re all done, you’ll have a salon-quality haircut for just a couple bucks. If you were impressed with your student, don’t forget to tip.
And remember to look at what other affordable services the beauty institute offers. If you can’t bear to give up your monthly manicure, consider getting your nails done at a cosmetology school to save a little cash.
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Mmmm, happy hour -- drink specials and yummy appetizers that don’t break the bank.
Some salons adopt the happy hour philosophy by offering special deals when you visit on certain days of the week or during their slow periods. If you’re not into the idea of getting your hair styled by a professional-in-training, consider visiting a traditional salon when you can get the most bang for your buck.
Salon Liquid in Boulder, Colorado, offers discounted prices every day of the week from 10 a.m. to noon and from 8 p.m. to 10 p.m. (Hello, night owls!)
The salon only takes cash during happy hour, but the savings are worth it. A women’s haircut, which includes shampoo, conditioner and a blowout, typically costs $55. At happy hour, it’s just $35.
At the Chop Shop Hair Studio in Knoxville, Tennessee, you can get 10% off your haircut during happy hour. And in true happy hour spirit, the salon will also throw in a glass of wine for free.
A little digging online can help you find other salon-specific ways to get cheap haircuts. Some salons offer first-time customer deals or discounts if you show your student or military ID. Many new hair studios that are trying to drum up business offer deep discounts with the help of sites such as Groupon and LivingSocial.
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When a professional stylist interviews for a job at a salon, they’re often required to prove their skills with a live hair-cutting demonstration.
If you’re willing to lend them your hair, you can get a free or discounted trim.
The website Salon Apprentice posts dozens of requests for volunteer hair models in cities around the country. Sometimes a stylist needs a volunteer model for other reasons, such as to practice a trendy new haircut, so the posts often call for models who are willing to have their hair cut in a specific style.
A stylist at Bumble and Bumble salon in New York City recently needed volunteer models who were interested in a graduated bob haircut. As a typical Bumble and Bumble salon guest, you’d pay between $99 and $250 for a haircut -- so as a volunteer model, you could see huge savings.
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As Penny Hoarder writer Carson Kohler recently discovered, you can save a lot of money by ditching your exclusive salon and visiting affordable haircut chains such as Great Clips instead.
She typically spent $54 four times a year on haircuts. At Great Clips, she realized she could pay just $15 per haircut (tip included), a savings of $40 per cut. Over the course of an entire year, that’s $160 in savings.
The best part? Her stylist had 30 years of salon experience and her haircut was fabulous.
Many storefront chains offer services à la carte, meaning that if you don’t want to get your hair washed, you don’t have to; this choice saved Kohler $4. She also earned a $2 discount by checking in for her appointment online.
Bottom line: Don’t feel trapped by sky-high salon prices -- there are so many ways to find cheap haircuts.
You don’t have to let your locks suffer just because you’re trying to save money. You can look fabulous and be a Penny Hoarder at the same time!
Your Turn: What’s your favorite way to save money while looking flawless?
Sarah Kuta is an education reporter in Boulder, Colorado, with a penchant for weekend thrifting, furniture refurbishment and good deals. Find her on Twitter: @sarahkuta.
Delaney Swink filed her taxes by hand last year.
Like the rest of us, Swink wasn’t a big fan of doing her taxes, so when she learned about a program that could help her get her taxes done for free, she was intrigued.
Swink, 22, is finishing a degree in international studies and romance languages at the University of Oregon. With scholarships and her two jobs — she’s a campus tour guide and helps organize student orientation programs — Swink said she was never really sure she was filing her taxes correctly.
This year, with the help of the Volunteer Income Tax Assistance program (VITA for short), she got a refund without the annual anxiety that used to accompany tax season
“Doing my taxes myself made me feel stressed and unsure of whether I was doing it correctly or not,” Swink said. “Getting my taxes done through VITA made me feel more certain that it was all completed accurately, and it was also a very efficient, friendly experience.”
If you can’t afford to visit an accountant or tax preparer, you should know about a handy program that will provide you with free tax help this spring.
The IRS created the VITA program to help workers who make $54,000 a year or less file their taxes. The program also serves people with disabilities, workers who have a limited understanding of the English language, Native Americans and people who live in rural areas.
University and college campuses, community centers, libraries and other public spaces across the United States host the program’s clinics. The IRS certifies and trains volunteers to run these tax clinics, which local financial institutions and tax coalitions often co-sponsor.
Last year, volunteers prepared 3.7 million tax returns for free at 11,831 sites nationwide, according to the Treasury Inspector General for Tax Administration.
Taking advantage of this free program is a smart move that can save you money this tax season. H&R Block charged, on average, $220 to file in 2016, according to spokesman Gene King.
If you work with an accountant on your taxes, you could pay anywhere from $176 to $457, depending on the complexity of your situation, according to national averages calculated by the National Society of Accountants. Those numbers can fluctuate by location.
Tax preparation software, like TurboTax, offer free versions for filing your federal taxes, but you may have to pay to file your state return. Plus, you won’t get the same specialized review of your financial situation.
“(Without VITA), people would either do their taxes on their own and possibly make mistakes, or they would go somewhere and pay to have their taxes prepared on their own,” said Andrew Zumwalt, a Missouri extension specialist who oversees the state’s VITA sites.
If you’re not sure whether you should do your own taxes, here are five questions to consider before making a decision.
The VITA Program at the University of Missouri is in its 13th year and typically serves 1,800 people each tax season. Since taxpayer dollars partially fund the university, one of its missions is to reach out to the community and help improve the lives of Missourians. The VITA Program helps with that, Zumwalt said.
As a side bonus, the program provides undergraduate and graduate students with real-world experience that goes well beyond tax preparation. They learn other important business skills, such as customer service and how to talk frankly with people about their financial situation.
“Often, students learn content, but the application is limited. In the tax labs, students immediately apply what they have learned. Students also gain experience from talking with clients about money,” Zumwalt said. “Money is still a taboo subject, so actually talking to real clients about real money provides an important advantage to our students when they graduate and are looking for employment.”
Though volunteers focus on helping clients file their tax returns, some go beyond that to improve the overall financial situation of people in their community.
Student volunteers at the University of Georgia, for example, follow up with clients after their initial meeting to outline key planning strategies they can use for the upcoming year.
The goal is to make next year’s tax and financial situation a little bit better than the year before, said Lance Palmer, an associate professor of financial planning, housing and consumer economics in the University of Georgia’s College of Family and Consumer Sciences.
“It is about promoting savings,” Palmer said. “Tax preparation is nice, but the goal is to help people have an overall better financial situation and plan for the future. Tax preparation simply presents the opportunity to engage with them.”
The VITA Program at the University of Georgia has been running for 12 years and serves about 900 taxpayer households each year. Roughly 70 financial planning and accounting students serve as volunteers for the university’s program, and two or three people review every tax return.
Beyond helping clients improve their overall financial picture, the program aims to correct misconceptions about tax rules and keep the market honest, Palmer said.
“We try to explain to all of our clients how the tax law applies to their current situation,” Palmer said. “We have also been able to correct many erroneous beliefs of the tax law that have developed among clients who worked with other preparers. We also serve as a second opinion on tax returns for individuals who do it themselves, but may not be too familiar with a new tax situation they have that year.”
If you’re planning to take advantage of VITA this year, you’ll want to bring some form of photo identification, your Social Security card, your tax documents from last year and any income statements (W-2s and 1099s) you receive.
You’ll also want to know your bank routing and account numbers so the IRS can direct deposit your tax return into your account.
Many VITA clinics offer convenient evening and weekend hours, and allow you to book an appointment online.
Some programs, however, serve walk-ins only, so you may have to wait in line to use this free service. To look for a VITA site near you, simply enter your ZIP code into the VITA locator on the IRS website.
Not only will VITA save you the cost of having your taxes prepared elsewhere, the program is also likely to help you get a refund. The VITA program at Temple University’s Ambler campus resulted in $428,604 in federal and $9,024 in state tax refunds in 2016. That’s across 379 tax returns, meaning the average tax refund was more than $1,000.
Since the program launched in 2008, it’s helped clients get more than $3 million in refunds.
“The clients are usually happy and many of them have come back year after year,” said Steven Balsam, an accounting professor and senior research fellow at Temple University’s Fox School of Business.
Prefer to file your own taxes from home? Here are eight free filing websites for you to consider instead. And if you still haven’t received tax forms from your employer, don’t panic: Here’s exactly what to do if you’re still missing tax forms.
Your Turn: What’s your tax plan for the coming year?
Sarah Kuta has a penchant for weekend thrifting, furniture refurbishment and good deals. Find her on Twitter: @sarahkuta.
Many employees stay at companies less than five years before hopping over to a new job somewhere else.
In 2014, the median job tenure was 4.6 years, the Bureau of Labor Statistics reports.
Here are six companies where you can start at the bottom and wind up making six figures.
Each is known for promoting from within, providing training and development opportunities for their employees and helping their most dedicated workers rise through the ranks.
The natural foods grocery store has made it onto Fortune magazine’s “100 Best Companies to Work For” every year since the list began in 1998, in large part due to the company culture.
The company says there are “countless” stories of people who started off bagging groceries and stocking shelves and who are now in leadership positions. Store managers can make more than $100,000.
“We believe that (employees’) happiness and health is essential, which is why we invest in their personal and professional growth,” said Whole Foods co-CEO Walter Robb on the company’s website.
“We encourage team members to seek out opportunities that fulfill their deeper purpose and celebrate individual creativity and potential.”
Start as an entry-level crew member at fast-casual restaurant chain Chipotle and you’ll make $28,000 per year.
But stick around long enough and go through the company’s restaurateur program, and you’ll make $125,000 a year, plus get some pretty sweet benefits like a company car, tuition reimbursement and stock privileges.
Plus, each time a restaurateur trains another crew member to become a general manager, they get $10,000.
That’s because co-CEO Monty Moran found the best performing Chipotle locations had a manager who worked his or her way up through the ranks from the very bottom.
Moran hoped to keep quality employees at the restaurant level, so they would focus on making individual stores great and train the people around them.
“The foundation of our people culture, on which everything else stands, is the concept that each person at Chipotle will be rewarded based on their ability to make the people around them better,” Moran told Quartz.
Costco is well known for its “promote from within” company culture. The average Costco manager started out pushing shopping carts in the parking lot when they were 19 or 20 years old, according to Jim Sinegal, Costco’s co-founder.
Costco warehouse managers earn between $122,204 and $147,411, according to Glassdoor, which asks current and former employees to share salary information anonymously.
“We would never dream of hiring a manager for one of our Costcos from outside the company,” Sinegal said in an interview with The Motley Fool, a long-term investing website. “It has to be somebody who has worked their way up in our system.”
Plus, the company is super keen on work-life balance and allowing employees to pursue their education while they’re working.
Maybe you don’t want to manage a Costco, but you want to become a pharmacist. The company will keep you on while you go to school, then promote you to pharmacy manager, Sinegal said.
Three-quarters of store leaders, called Mates, started at the bottom of the food chain (no pun intended), according to the grocery store’s website.
A step above Mates are Captains, or Trader Joe’s store managers, who are promoted exclusively from within.
“Promotions are performance based, which means your passion and dedication determines your growth,” according to the Trader Joe’s website.
The average store manager at Trader Joe’s makes between $92,000 and $108,000, according to Glassdoor.
The company also contributes 15.4% of employees’ gross income to tax-deferred retirement accounts.
Procter & Gamble, the manufacturer of a wide array of household and personal care products, is renowned for its internal hiring practices.
The company, which was founded in 1837, is headquartered in Cincinnati, Ohio, but has locations all over the world and hundreds of careers ranging from engineering to information technology to branding to market analysis.
“Most of our people start at an entry level and then progress and prosper throughout the organization,” according to the P&G website. “This drives a culture of coaching, challenging and shaping our people into P&G leaders of today and tomorrow.”
If you make it to the director level, you can make over $200,000, according to Glassdoor.
The company says it hires the person, not the position, which means you can move around to various roles depending on your interests and talents.
P&G also says it tries to build leaders in every facet of the business and in every region of the country by giving them early, meaningful responsibilities.
Though they’re a bit risky -- something like 90% of them fail -- if you get in with a successful startup at the beginning, you can wind up making a pretty awesome salary if the company takes off.
Think about it: If you’re one of the first people working 10-12 hour days with the company’s founder in his or her garage, you’ll likely be rewarded handsomely if business starts booming or if another company acquires the business.
Plus, you’ll get intense hands-on experience, likely from nearly every facet of the business. Should you ever decide to leave the startup, that’ll make you more marketable in the corporate world and could land you a bigger paycheck.
An example: When ad tech company MoPub was acquired by Twitter in 2013, 36 of its 100 employees became millionaires.
Your Turn: Have you worked your way up from an entry-level role in your company?
Sarah Kuta is an education reporter in Boulder, Colorado, with a penchant for weekend thrifting, furniture refurbishment and good deals. Find her on Twitter: @sarahkuta.
I have an embarrassing secret: Until a few years ago, my mom did my taxes.
That’s right. An adult woman with a real job and several side gigs relied on her mother to do her taxes every year.
One spring, I knew it was time for me to cut the cord and learn just how complicated this income tax stuff really was. I’ve been doing my own taxes ever since.
Figuring out which tax preparer is right for you can be complicated. Do you stay at home and file your taxes with the help of software or venture out to visit a real-life accountant? And what about all those storefront tax-preparation services?
We’re here to break down all your tax-preparation options so you can make the right choice this tax season. After reading this, maybe you too can stop asking your mom to file your taxes for you.
Examples: TurboTax, TaxAct, TaxSlayer, QuickBooks, H&R Block at Home
You’re probably familiar with the idea of completing your taxes online or with software. The biggest perk of using a website or software is they don’t cost much. In fact, many allow you to file your federal tax return for free.
And if you make less than $64,000 a year, you can file your federal return for free online using the IRS’s free file software. (There are some free state filing options available through the IRS program, as well.)
These tax-preparation websites and programs make taxes easy because they walk you through each step of the process, asking you questions to determine which credits you might qualify for or what deductions you should include. All you have to do is plug in some numbers, and voila! Your taxes are done.
“TurboTax starts by asking you simple questions about yourself,” according to the company’s website. “Then, based on your answers, we'll help you find deductions and credits unique to your situation. Our team of CPAs keeps our products up-to-date with the latest tax laws, so we know exactly what to ask.”
Of course, you’ll have to pay more if you want bells and whistles, such as audit protection or extra guidance on rental properties. TurboTax, for example, ranges from $0 to $114.99 depending on the level of service you want. Those prices are for federal returns only -- you’ll have to pay more to file your state returns.
If you’re an introvert, a website or software program means you won’t have to leave the house or share your personal financial information with another live human. (PS: Want to boost your income? Check out these 15 solitary ways for introverts to make money.)
“These online options combine the benefit of doing your taxes from the comfort of home with the step-by-step guidance you might get from a traditional accountant,” said Aaron Lesher of Hurdlr.
Of course, you won’t necessarily be working with an expert tax preparer if you go this route, which means you’ll miss out on their years of experience and tax knowledge. Some services do offer expert help via web chat or a phone help line, if you’re willing to pay for an upgraded version.
If your financial situation is super-complicated, you may be able to navigate your taxes using a website or software. But if you’re concerned about accuracy, visiting with a tax expert in person might give you more peace of mind.
Examples: H&R Block, Jackson Hewitt, Liberty Tax Service
Storefront tax-preparation services have popped up all over the country — you can even get your taxes prepared on your next trip to Walmart. Consider storefront tax preparers the next level up from using a software or a website -- you’ll pay more, but you’ll also work with a live human.
The folks doing your taxes at these storefronts have varying levels of experience and credentials. Some are enrolled agents, meaning they’re recognized as tax experts by the IRS and the U.S. Department of the Treasury. Others undergo company training.
H&R Block, for example, requires its employees to take a 60-hour income tax training course. For people who already have experience doing taxes, the company requires them to take and pass an exam. The company keeps its tax preparers up to date on the most current tax rules with over 250 continuing-education courses.
“A typical client is served by an H&R Block tax professional with more than a decade of experience and hundreds of hours of training,” according to the company’s website.
Fees will vary with the complexity of your financial situation, but the average fee H&R Block charged last year was around $220, according to spokesman Gene King.
Jackson Hewitt’s fees start at $48, but the average cost is about $230, according to chief tax officer Mark Steber.
Don’t forget -- the IRS lets you deduct tax preparation fees, and many of these companies offer promotions to get you in the door. Jackson Hewitt, for example, will give you $100 when you ditch your old tax preparer and work with its tax experts instead.
These storefront tax preparers typically offer convenient evening and weekend hours, so it’s easy for you to drop by. Though you might only think of these national chains at tax season, many are open year-round for offer tax advice, just like an accountant or a private tax expert.
Plus, many storefront locations offer tax-preparation guarantees, meaning if they weren’t 100% accurate, they’ll pay your penalties and interest.
“We also guarantee that you’ll get the maximum refund you deserve, or we’ll refund your tax preparation fees,” said Steber.
Examples: certified public accountants, private enrolled agents, tax attorneys
Not all accountants prepare taxes. And not all private tax preparers are accountants -- some are attorneys and enrolled agents. But for the purposes of this post, we’ve lumped those folks together in one category.
They’re also likely the most expensive option available (though not always). As with storefront providers, the fees these accountants and private enrolled agents charge depend on the complexity of your tax situation. More tax forms means work for them, which translates to higher fees.
You could be paying anywhere from $176 to $457, according to national averages calculated by the National Society of Accountants. Those numbers also fluctuate by location. Keep in mind that some accountants and tax preparers won’t charge you a dime for an initial consultation -- you’ll only pay if you decide to use their services.
You also could get charged extra for disorganized or incomplete files ($117 on average!), so make sure you keep good records and bring all of the relevant documents with you to your appointment.
“Tax returns are getting more complicated every year, and with so many hidden tax deductions and constantly changing tax laws, using a professional to prepare your taxes can pay off,” says John Ams, the group’s executive vice president. “They can ask questions to identify potential tax savings that automatic software programs can miss and reduce mistakes.”
Plus, they can explain exactly what’s going on with your tax situation and why -- you won’t just mindlessly enter numbers in boxes when you visit a private tax preparer, says Abby Eisenkraft, an IRS enrolled agent, accredited tax advisor and tax preparer, retirement planning counselor and the author of “101 Ways to Stay Off the IRS Radar.”
You may also want to seek out a private tax preparer if you have a specific financial situation or work in an industry they specialize in. I know an enrolled agent, for example, who used to be a police officer and now specializes in tax questions related to law enforcement. Other firms specialize in tax questions from freelancers or artists.
Ryan Frailich, a financial coach and planner for Deliberate Finances LLC, suggests visiting an accountant if you have moved beyond the easy-to-understand tax stuff, are a small business owner or are planning to have a child soon.
“Birth or adoption of a child comes with a lot of expenses, but also a lot of changes in taxation that people need to speak with a professional to understand,” Frailich said. “How to change withholdings, what tax credits are available, the implications of college savings vehicles and more are all things to consider at that point, and the answers aren't necessarily the same for everyone.”
Since everyone’s tax situation is different, it’s hard to provide one-size-fits-all advice on how to get your taxes done. Generally speaking, the trickier your taxes are, the more help you’ll want doing them, but even that’s not true for everyone.
You’ll want to weigh a number of factors against one another when determining whether to file online, use a software program, visit a national chain or work with a private preparer.
What is your time worth? Sure, you can save a buck by doing your own taxes, but could you use that time for more profitable endeavors? Will you miss loopholes and tax credits that someone else might know about? Are you an introvert who hates leaving the house and cringes at the thought of sharing financial information with someone else?
Either way, keep in mind that the folks selling all of these options are trying to earn your business. Treat offers that sound too good to be true with a healthy dose of skepticism, and make sure you look out for your own tax needs first and foremost.
Your Turn: What’s your tax plan for the coming year?
Sarah Kuta is a writer with a penchant for weekend thrifting, furniture refurbishment and good deals. Find her on Twitter: @sarahkuta.
You’ve probably heard of a 401(k). Maybe you’ve heard of an IRA, too.
But swimming in that alphabet soup is yet another retirement savings plan -- the 403(b).
So many letters. So many numbers. So many parentheses.
Maybe you’ve seen a 403(b) plan advertised as a workplace benefit while scoping out potential new jobs, or maybe you’re just curious about whether this retirement savings vehicle is something you should be paying attention to. Either way, we’ve got the lowdown on these plans.
Like other plans, a 403(b) is a great way to save for retirement, but it’s super important to read all of the fine print associated with the specific investment products you choose or you could end up paying some steep fees (more on that later).
A 403(b) is a voluntary retirement plan offered only by certain employers, primarily public schools, colleges, universities, hospitals and nonprofits, according to the IRS. It’s also available to some ministers. Bottom line: If you don’t work for a specific type of employer, or if you’re not working at all, you won’t be able to save using a 403(b).
These plans, created by Congress in 1958, were established to encourage employees to save for retirement. Though many teachers, nurses, professors and librarians are eligible for pensions, the payouts may not be enough for retirement. Enter the 403(b), which Congress intended to supplement those pensions.
These plans, named for a section of the tax code, are similar to 401(k) accounts. Like a 401(k), 403(b) plans are voluntary, meaning no one’s forcing you to contribute to one.
They’re also tax-deferred, which means you don’t have to pay taxes on your contributions or your investment earnings until you withdraw them at retirement. Making contributions to your 403(b) account now will lower your taxable income, which means you could see some savings when tax season rolls around.
In 2017, you can contribute up to $18,000 in pre-tax income to your 403(b) plan, according to the IRS. If you also contribute to certain other plans, such as a 401(k), the amount you can contribute to your 403(b) will be lower. Your pre-tax contributions to all of your accounts can’t exceed $18,000.
You can make additional contributions if you meet certain requirements laid out by the IRS. If you’ve worked for the organization for more than 15 years, you may be able to contribute an additional $3,000 annually for five years. If you’re 50 or older, you can make additional “catch-up” contributions of $6,000 per year.
Some employers will also contribute to your account with an employer match. The total annual contribution limit for your 403(b) is $54,000 or 100% of your “includible compensation,” whichever is lower. Includible compensation is the amount of taxable wages and benefits you earned in your most recent full year of work, according to the IRS.
Some plans allow you to make after-tax contributions, as well.
“I encourage employees to take advantage of the organization’s retirement plan first, particularly if there is a match. Who would turn down free money?” said Timothy Yee, president of Green Retirement Inc.
As is the case with a 401(k), you’re not supposed to withdraw money from your 403(b) until you’re 59 ½. The government will make certain exceptions to this rule if you get fired, die, become disabled, encounter financial hardship or are called to active military duty. You’ll pay a 10% federal early withdrawal penalty (and likely some state taxes, too) if you don’t qualify for one of these exceptions.
You can have your money invested in annuities or mutual funds through your 403(b) account. An employer may let you choose between several providers and investment products. In California, public school workers can select from a mind-boggling 59 providers and more than 220 investment products, according to a recent New York Times investigation into these accounts.
Some experts argue that 403(b)s are confusing because employees can choose from dozens of providers and products. Daniel Pawlisch and William Ryan, who recently analyzed 403(b) accounts for Aon Hewitt Investment Consulting, said these plans “have created an environment that impairs retirement outcomes for participants.”
Some of these products are accompanied by steep fees and surrender charges, which you’ll face if you transfer your money into another product. Margaret Jusinski, a middle school teacher in New Jersey, paid more than $15,000 in fees and commissions on $87,000 in her 403(b) account, the New York Times investigation found.
Annuities, which are sold by insurance companies within 403(b)s and are so confusing even math teachers have a hard time understanding them, tend to have high fees.
“The 403(b) plan has normally been the domain of many insurance companies and their investment products typically have higher fee structures than non-insurance based plans,” according to Mark Zoril, founder of PlanVision. “403(b) plans have a reputation for being more costly, from an investment standpoint, than 401(k) plans. The employees -- the participants -- pay more than they likely otherwise would with a similar 401(k) plan.”
But it’s not just annuities that can be expensive. Some mutual fund products available through 403(b)s also come with steep fees, according to Scott Dauenhauer, a financial planner and the owner of Meridian Wealth Management.
“It doesn’t really matter what product you're looking at. You have to be aware of what you're buying, of what the fees are, if there are fees, what the surrender charges are, and how the adviser or the salesperson is being compensated,” Dauenhauer said.
Bottom line: Before you select an investment product, be sure to carefully inspect the associated fees, commissions and other charges. It may be worth your time to consult with an independent financial expert before making a decision -- someone who isn’t earning a commission from the products you select.
“In the 401(k) world, there’s just one option,” he said. “There’s one 401(k) (offered by your employer), and the only research you have to do is what are your investment options. It’s a lot simpler than 403(b)s. There’s just too much choice. It really paralyzes people.”
Dauenhauer also suggests posting a list of the vendors and products offered through your 403(b) to the forum on 403bwise.com. The online chat board, which has thousands of threads, harnesses the collective knowledge of the teachers, nurses, librarians and other 403(b) users across the country.
“Literally within hours or a day, there’s going to be a response from somebody on that message board saying, ‘Avoid this. Avoid that. Oh by the way this option is usually a bad option, but if you do XYZ, you can get into a decent option,’” he said.
Still, if your choice is between a 403(b) and an IRA (traditional or Roth), there are some things to consider, chief among them the contribution limits for each type of retirement plan.
With its $18,000 pre-tax contribution limit, the 403(b) plan may be a better choice for folks who believe they can save more than the $5,500 IRA annual contribution limit. There’s also the employer match that may come with a 403(b) plan -- you have no chance at free money with an IRA.
Don’t let all of these options convince you that it’s best to just throw in the towel altogether, said Dauenhauer. Whatever you do, save early and save often.
Your Turn: What do you think of your workplace retirement savings options?
Sarah Kuta is an education reporter in Boulder, Colorado, with a penchant for weekend thrifting, furniture refurbishment and good deals. Find her on Twitter: @sarahkuta.
When Amber and Danny Masters finished law school and dental school, they had nearly $600,000 in student loan debt between the two of them.
Amber Masters, who finished school a year earlier than her husband, took a job as a judicial law clerk that was “not a huge money maker,” she said. Danny Masters graduated from dental school in 2016 and recently started his first job as a dentist.
Though they anticipate someday earning significantly more money, for now, they’re just starting out in their careers and taking advantage of as many side gigs as they can.
With help from a consultant, they calculated all their options for paying down that debt. They studied several income-based repayment plans, which are federal student loan repayment plans that would extend their repayment periods and lower their monthly payments based on their incomes.
A lower monthly payment would’ve meant they had more spending cash each month. And the fact that any remaining balance on their loans would be forgiven after 25 years of payments certainly sounded appealing.
But after student loan planner Travis Hornsby crunched their numbers, the Masterses realized they’d be paying $119,000 in taxes on that forgiven debt. And thanks to interest, they would’ve paid more than $1.3 million for $600,000 in debt.
Take a lesson from this husband-and-wife team, who are sharing their student loan repayment story on their blog Red Two Green, before you jump feet first into an income-based student loan repayment plan. When you’re staring at a mountain of debt right out of college, these plans may sound like a godsend. But in reality, things aren’t so black and white.
Broadly speaking, these plans determine your monthly payment by looking at your discretionary income, family size and other factors. They typically cap your monthly payment at 10% to 20% of your discretionary income. According to the Obama White House, they’re designed for people who have a high amount of debt compared to their income.
“As a general rule, anyone who would have to eat rice and beans to repay their student debt in full over 10 years probably needs to use income-driven repayment options,” Hornsby said.
These plans give you longer to pay off your loans, too. Under a standard repayment plan, you’ll pay off your loans in 10 years. Under an income-based repayment plan, you’ll make payments for 20 to 25 years, and then the lender will forgive any remaining balance.
That longer repayment period means you’ll pay more interest than you would if you paid off your debt sooner. But the real zinger comes when your remaining balance is forgiven in 20 or 25 years.
Under the current tax code, you’ll owe taxes on the amount of forgiven debt in the year the lender forgave it, according to the IRS. That’s on top of any other taxes you’d normally pay that year. The IRS treats forgiven or canceled debt like any other income, so it is subject to the same tax rates.
“The income-based plans are an affordable option, but may not be the most ideal long term,” said Sarah Hamilton, student loan counseling supervisor for Take Charge America, a nonprofit credit counseling organization.
There is one exception to this rule, according to the IRS. If your debt is forgiven or canceled as part of a program that requires you to work for a certain period of time or for a specific type of employer, you don’t have to report it as income.
These programs exist for teachers who work in low-income schools, doctors who work in a specific geographic area or in a particular field and nurses who work in specific facilities, among others.
You can also avoid paying income taxes on any forgiven debt by working for a nonprofit or government agency for 10 years under the federal Public Service Loan Forgiveness program.
What else can you do to avoid paying income taxes on your forgiven student loan debt 20 to 25 years from now? Lobby your elected officials to change the tax code and create an exception for debt forgiven under income-based repayment plans.
In the meantime, you should probably keep your impending tax bill in mind and start saving as soon as you can, according to Ryan Frailich, a financial coach and planner who runs Deliberate Finances.
“I'd be doing clients a tremendous disservice if I told them to not worry about it, not plan for it, and then either the laws stay the same or the laws get even less borrower-friendly, and they end up with a huge tax bill that they haven't planned for,” Frailich said. “If they plan for it and wind up not having to pay it, well great, now you've got a pile of savings to figure out what to do with it.”
Of course, you can always pay down your debt faster to pay less interest and avoid income taxes on any forgiven debts. That’s what Amber and Danny Masters decided to do.
They enrolled in an income-based repayment plan, which dropped their minimum monthly payments from nearly $7,000 a month to $0 a month. That took some of the pressure off the young couple, who didn’t have to worry about defaulting on their loans because they couldn’t make the massive standard payments.
The Masterses opted to enroll in the REPAYE program because they had graduate school loans and were able to get a 50% interest subsidy if their monthly payment didn’t cover the interest accrued that month. They expect their monthly payment to go up when they resubmit their financial information to REPAYE this year because Danny Masters recently got his first job as a dentist, which boosted their income.
Once Danny Masters started working, the couple began making aggressive payments. They eventually plan to refinance their debt through a private lender.
Today, the couple puts roughly $8,000 a month toward their payments, with a goal of increasing that to $12,000 a month in the future. Amber Masters is working to pass the bar exam in Oklahoma, where the couple recently moved, so she anticipates a salary increase soon. They also hope to increase their income from various side gigs.
If you have to choose between defaulting on your loans and signing up for an income-based repayment plan, experts say you should pick the latter. Even if you’re making small monthly payments under the plan, those payments are still boosting your credit score.
“For those who worry about the tax liability, they really have to change their perspective,” said Joshua Cohen, a lawyer based on the East Coast who specializes in student loans. “Don’t worry about what will happen in 20-25 years from now when the real issue is staying out of default now. If (income-based repayment) is the only affordable payment plan, take it. Worry about the tax issue when getting closer to forgiveness. For now, survive.”
No matter what, Amber Masters said it’s important to stay patient and committed to paying off your college debt. With time and a little research, you’ll be able to make it happen, no matter which repayment plan you choose.
“Your student loan debt does not control you, you control it,” said Amber Masters. “Student loans can take a little time to pay off. It is easy to get overwhelmed by the task of having to pay off your loans, but you just have to keep making payments, do your best to make extra payments, and keep your end goal in sight, and eventually you will get there.”
Your Turn: How are you paying off your student loans?
You’ve nailed down a couple side gigs to boost your income this year -- congratulations on being financially savvy.
But now that it’s tax season, you might be biting your fingernails as you wait to see what impact -- if any -- this extra income has on your tax return.
If you plan to keep plugging away at all your money-making enterprises, you should familiarize yourself with the concept of estimated taxes.
Estimated taxes are one way the IRS expects you to pay taxes as you receive income throughout the year. To figure out your estimated tax payments, you’ll need to look ahead at the year to come and guess how much income you’ll earn.
If you receive a regular paycheck, you already know that some of your income gets withheld for taxes and other fees each pay period.
But if you don’t receive a traditional paycheck, or if you earn other income on the side, you may need to make estimated tax payments. We’re looking at you, freelancers and side gig aficionados.
“Though we associate the payment of taxes as a once-a-year, April 15 occurrence, that is not how the system is designed,” said Pamela Kornblatt, president of Tax Strategists, Ltd. “The United States tax system is designed to be a ‘pay as you earn’ system, which means that as income is earned, taxes should be paid. In a lot of cases, the ‘pay as you earn’ idea happens behind the scenes through withholding. When you are a regular employee, tax is withheld and submitted on your behalf throughout the year.”
You only need to worry about making estimated tax payments this year if you expect to owe at least $1,000 in taxes for the year -- after deductions, expenses and the amount withheld by an employer. (If you’re a fisherman or a farmer, the IRS has a whole different set of estimated taxes rules for you.)
“If you are self-employed as a freelancer, contractor or home-based entrepreneur, you most likely don’t have taxes withheld from your pay throughout the year and are subject to estimated taxes if you expect to owe $1,000 or more for your taxes,” according to Lisa Greene-Lewis, a CPA and tax expert for TurboTax.
Even if you’re not a full-time freelancer or contractor, you could still owe estimated taxes. There are tons of reasons why you may need to make payments throughout the year rather than waiting until April to deal with your taxes. Just to name a few, if your employer isn’t withholding enough from your paychecks, if you receive alimony or win a cash prize, or if you bring in tons of side gig income, you may need to take action.
Instead of making one big payment in March or April during tax season, the government wants you to make quarterly installments, meaning you’ll need to make a minimum of four payments each year: one in April, one in June, one in September and one in January (of the following year).
You can pay online, by phone or through the mail, according to the IRS. You can pay once a month or once every two weeks -- whatever you prefer -- as long as you’ve paid enough at the end of the quarter.
So what does this mean if you’re bringing in extra income on top of your regular job? It depends on how much money you expect to make, how much your employer is withholding from your paycheck, and how many deductions you expect to have.
If you expect to owe less than $1,000 in taxes for the year, you don’t need to do anything. But if you expect to owe more than that, you’ll want to start making estimated payments as soon as possible.
If you were a U.S. citizen or resident and had no tax liability last year (you didn’t owe any taxes or you didn’t have to file a tax return), the IRS doesn’t require you to make estimated tax payments this year.
But if you owed taxes last year, and you expect to owe at least $1,000 this year, keep reading.
Many people use last year’s tax bill to guess how much they’ll owe each quarter this year.
The IRS also created Form 1040-ES, a worksheet that uses your income, deductions, credits and other factors to estimate your taxes for the current year. Tax preparation software programs can also help you figure out your estimated taxes.
Of course, you’re just guessing at how much income you’ll earn in the coming year. The IRS understands this, and if your estimated earnings are too high or too low, you can refigure your estimated tax for the next quarter.
“You can calculate your estimated tax by figuring your expected adjusted gross income, taxable income, deductions and credits,” said Joshua Zimmelman, president of Westwood Tax & Consulting. “Most people use their income, deductions and credits from the previous year as a basis for this estimation. Then, you divide the year up into four payment periods. You can recalculate this estimate every quarter, so you don’t have to worry if your first estimate was too low or too high.”
If your side gigs are seasonal (maybe you write letters to kids from Santa) and you receive more income in one quarter than you do in the others, the IRS will let you make unequal estimated tax payments.
It’s important to note that you still need to file your taxes every spring, just like everybody else, even if you make estimated payments throughout the year.
“Paying estimated taxes does not mean that no taxes will be due at the end of the year when the tax return is filed,” Kornblatt said. “Since the required amount for estimated payments is based on last year’s taxes, additional taxes may be owed or refunded if this year’s tax situation is different.”
Though the government understands you’re just guessing how much income you’ll earn in the year ahead, it also wants you to try to be as accurate as possible.
To be on the safe side, you need to pay at least what you owed in taxes last year (100% of last year’s tax liability) or 90% of what you owe this year, whichever is less.
If you don’t pay enough throughout the year through estimated payments or taxes withheld from your paychecks, you could face an underpayment penalty from the IRS.
“Figuring out estimated taxes the first year is always the trickiest, since you may have no idea how much you’ll make, but there is one way to play it safe and avoid underpayment penalties,” said Wendy Connick, an enrolled agent and the owner of Connick Financial Solutions. “If your quarterly tax payments add up to 100% of your last year’s taxes, the IRS won’t punish you even if it turns out your payments were too small for the current year.”
If you owe a penalty, the IRS will send you a bill after it processes your tax return. In short, you may have to write a bigger check to Uncle Sam when you file your return.
Unfortunately, there’s no simple way to calculate this penalty, according to Abby Eisenkraft, an IRS enrolled agent, accredited tax advisor and tax preparer, retirement planning counselor and the author of “101 Ways to Stay Off the IRS Radar.”
It depends on how much money you owe and how long you’ve avoided paying the IRS. The IRS figures the penalty separately each quarter, which further complicates things.
The IRS has a worksheet called Form 2210 that you can use to determine your penalty, or you can let the IRS calculate the penalty for you, Eisenkraft said. And, if you couldn’t make a payment because of a disaster or some other unusual circumstance, the IRS might let you off the hook.
Bottom line: If you expect to owe at least $1,000 in taxes for income you earn this coming year -- after deductions, credits and withholding -- you should make estimated payments every quarter moving forward.
It’s best to pay 100% of what you owed last year, just to be on the safe side so you don’t end up with an underpayment penalty. A tax expert can help you navigate the tricky world of estimated taxes if you’re looking for guidance.
Your Turn: What’s your tax plan for the coming year?
These days, there are about a million ways to earn money beyond your boring 9-to-5 job.
You’re already familiar with the oodles of side gigs that could help you earn a little extra cash each month. You could swallow swords, dress up like Batman, clean up after rowdy house parties -- the list goes on and on.
Come tax season, this can get confusing. You might find yourself wondering what the heck is actually taxable.
As it turns out, the IRS has basically thought of everything. There are tons of quirky rules about what the IRS considers taxable income and what it doesn’t.
“Unfortunately, the IRS views almost all money received by taxpayers as taxable income,” said Aaron Lesher, a CPA with Hurdlr. “The IRS even lists income from criminal activity as technically taxable, although if you’re making a living from criminal activity, you’re probably not too worried about that.”
More on that later.
We chatted with tax experts to tackle this complex question and compiled this list of obvious and not-so-obvious taxable income sources you should know about.
For a full list of what the IRS considers taxable versus nontaxable income, take a peek at its handy 39-page guide explaining all of the applicable tax rules for preparing your 2016 return.
OK, let’s start with the basics. Here are the things you must report to the IRS as taxable income this spring.
This one is the type of income most people are familiar with. If you get a steady paycheck from an employer, you need to report this income to the IRS. Your salary also includes bonuses and commissions.
That’s right. Waitresses, waiters, bartenders and other folks who work for tips must report them as income to the IRS. This includes cash tips.
“All income must be reported, even if it’s not deposited into the bank. And yes, the IRS and state (government) have ways of figuring out that there may be unreported income,” said Abby Eisenkraft, an IRS enrolled agent, accredited tax adviser and tax preparer, retirement planning counselor and the author of “101 Ways to Stay Off the IRS Radar.”
You should treat freelance income just like you’d treat your regular salary. Even if you don’t receive a 1099-MISC from the company you worked for, it doesn’t matter, according to Eisenkraft.
“All income gets reported, whether or not a reporting document is received,” she said.
Let’s say you live in the United States but earn income from a company based overseas. Even if you don’t receive a W-2 or 1099 from the overseas company, the IRS wants to know about this income.
“If you are a U.S. citizen or resident alien, you must report income from all sources within and outside of the U.S,” according to the IRS website.
Sure, bartering doesn’t feel like money in your pocket. But if you trade a product or a service for something that has value, the IRS considers this income, said Eisenkraft. The rules and procedures for reporting bartering income depend on the type of bartering that takes place, so if you’re big into making trades, the IRS spells out all of the details on its Bartering Tax Center website.
If you like to bet on horses or play the slots, keep reading. Your winnings are “fully taxable,” and you must report them on your tax return, according to the IRS.
“Gambling income includes but isn't limited to winnings from lotteries, raffles, horse races and casinos. It includes cash winnings and the fair market value of prizes, such as cars and trips,” according to the IRS website.
Good news, though: You can also deduct your gambling losses.
If you served on a jury and got paid for your time, the IRS wants to know how much money you earned. Any reimbursements you receive for mileage or food does not count as income, says the IRS, and sometimes you can deduct jury duty pay.
“If you turn over your jury duty pay to your employer in exchange for continuing to receive salary pay you can deduct that amount,” said Josh Zimmelman, owner of Westwood Tax & Consulting in New York.
Even if your love of buying and selling old stuff is just a hobby, you have to tell the IRS if you make any money antiquing. You are able to deduct any “ordinary and necessary” expenses up to the amount of the hobby income you earned.
This one is a head-scratcher. If you earn income from illegal activities, “such as money from dealing illegal drugs,” the IRS says you must report it.
Speaking of stuff that’s illegal, the IRS also says you must report any bribes you receive as income. There are also separate sections about stolen property and kickbacks -- you need to report these, too.
If creditors forgive some or all of your debt, the IRS considers this income. There are some exceptions to this rule, such as debt canceled as a gift or inheritance and student loan debt forgiven under certain programs.
You can view the full list of exceptions (it’s a long one!) on the IRS website. Debt forgiveness is a complex topic, so be sure to go over your specific situation with a tax expert.
If you receive alimony (court-ordered payments from one spouse to another) after a divorce, you have to report it as income, according to the IRS.
Here’s where things start to get interesting. There are also dozens of things the IRS does not need you to report as income. Again, it’s a long list, so be sure to visit the IRS’s official tax guide before filing your taxes this year.
Thanks to a new bill signed into law by President Barack Obama last fall, you won’t have to pay income tax if you win an Olympic or Paralympic medal and the associated prize money if you made less than $1 million that year. In the past, athletes were subject to a “victory tax” on their winnings, which were $25,000 for a gold medal, $15,000 for a silver and $10,000 for a bronze. The IRS still wants you to report this income; it just won’t tax you on it.
Divorce has confusing tax implications. As we mentioned above, the IRS considers alimony income, but child support payments are nontaxable income.
If you’re a regular driver in a carpool, the IRS does not consider any money you get from your passengers as income, unless you started a legit, for-profit carpooling business. The IRS considers these payments reimbursement for your expenses.
The IRS does not consider restitution payments to Holocaust victims or their heirs taxable income. This also includes European insurance payouts made as a result of World War II.
The IRS sees a difference between a Christmas cash bonus and other gifts you might receive from your employer. “If your employer gives you a turkey, ham, or other item of nominal value at Christmas or other holidays, don’t include the value of the gift in your income,” according to the IRS.
Our list isn’t exhaustive by any means, but it should give you a good sense of how the IRS views your money. If you’re earning income that we haven’t covered here, be sure to consult with a tax expert or the IRS directly.
Your Turn: What are the weirdest ways you made money this year?
As if college wasn’t stressful enough, there’s also the crushing pressure that comes when your first student loan payment is due six months after graduation.
Depending on how much debt you have, that bill could range from a couple hundred dollars to more than $1,000 a month. And if you weren’t lucky enough to land a six-figure job right out of college, making those payments on top of all your other bills can be a struggle.
Income-based repayment plans can help. If you’ve got federal student loans, these plans may help relieve some of your stress by significantly lowering your monthly payment based on your income.
When he graduated with a degree in political science from Southern Illinois University-Carbondale, Derek Lawrence had $23,788 in student loan debt. He makes between $22,000 and $24,000 a year, which made paying $245 a month under the standard repayment plan a bit tough.
After he applied for an income-based repayment plan, his monthly payment dropped to $38, which created a little extra breathing room in his budget. Meanwhile, he’s focused on paying off a car loan with a higher interest rate than his student loans and building his savings for unexpected expenses.
“The beauty of (these plans) is that it doesn’t mean you can’t pay more,” Lawrence said. “If you are eligible for it, you can pay as much as you can while having the option to slack off one month if something happens. My payment dropped from $245 a month to $38, but I’m still paying well over double that amount and don’t plan on paying anywhere close to the minimum unless something drastic happens.”
Keep in mind: These plans may not be the best choice for everyone, but they’re certainly an option to consider if you know you won’t be able to make ends meet.
In short, these plans cap your monthly payment at a percentage -- typically between 10% and 20% -- of your discretionary income. These plans are only available for federal student loans, so if you’ve got private loans, these plans can’t help you. If you’re in default, you’re also out of luck. After you make monthly payments for a set period of time, typically 20 to 25 years, any remaining debt is forgiven (more on that later -- this perk comes at a cost).
There are four types of income-based student loan repayment plans. They vary in terms of who qualifies, how much a borrower must pay each month, the length of the repayment period and the type of loans that are eligible. Certain types of federal loans may not qualify on their own, but may qualify if they’re consolidated.
Here’s a quick rundown on each. Stay with us, because this is about to get confusing. For more detailed information about each type of plan, be sure to visit the Federal Student Aid office’s website or consult with a financial planner.
“Each plan is a further improvement (mostly) of the plan before it,” according to Joshua Cohen, a lawyer based on the East Coast who specializes in student loans. “It is very confusing, even for those of us in the field.”
REPAYE Plan (stands for Revised Pay As You Earn)
Income-Based Repayment Plan
PAYE Plan (stands for Pay As You Earn)
Income-Contingent Repayment Plan
Good question. Since there are so many plans, loan types and eligibility dates, it’s best to get in touch with your loan servicer or the company that maintains your student loan. According to the Federal Student Aid office, your loan servicer can determine which plans you qualify for and which plan will provide you the lowest monthly payment amount.
If you’re confused about what types of federal loans you took out, you can visit the National Student Loan Data System, which serves as the U.S. Department of Education’s central database for student aid information.
Income-based repayment plans are designed for borrowers who have a high amount of debt compared to their income, according to the White House. Borrowers can apply through the U.S. Department of Education, which will factor in your discretionary income and the size of your family to determine your monthly payment amount. You may have no monthly payment at all.
The U.S. Department of Education calculates discretionary income using federal poverty guidelines. Depending on which plan you choose, your discretionary income is calculated by subtracting either 150% (IBR and PAYE) or 100% (ICR) of the poverty guideline for your household size from your income, depending on the program you qualify for and select.
Since your monthly payment is based on your income and family size, your payment will change over time. Bottom line: Every year, you must send in updated information about your situation, even if there’s been no change.
“For borrowers that experience an earnings bump, be prepared for a change in your income-based monthly payment,” said Greg Stallkamp, strategic adviser for GradFin.
If you forget to re-certify (remember, you’ll be doing this every year for 20 to 25 years -- you may slip up), you’ll move to a standard repayment plan, which you may not be able to afford. This is one of the top reasons people default on their student loans, said Robert Farrington, founder of TheCollegeInvestor.com.
It depends on which plan you pick, according to the Federal Student Aid office. Under the PAYE, IBR and ICR plans, if you file your tax return separately from your spouse, only your income and debt will be considered. Under the REPAYE plan, it doesn’t matter if you file separately or jointly. The payment will still be based on your combined income and loan debt.
Downsides to Income-Based Repayment Plans
Though they sound attractive upfront, these repayment plans may end up being more expensive than a standard repayment plan in the long run.
“Income-based repayment plans are really only suitable for borrowers with fairly specific circumstances,” said Katie Ross, education and development manager for American Consumer Credit Counseling. “It’s an attractive idea to recent grads to pay as little as possible because they’ve just started making money, and they want to enjoy it a little. It also sounds fair to pay based on what they’re earning. Unfortunately, this is a trap that makes the loan more expensive and increases the repayment timeline.”
There are two main downsides to income-based repayment plans.
Depending on your situation, the pros of income-based repayment plans may still outweigh the cons. And there have been efforts over the years to remove the income tax burden on forgiven student loan debt. Who knows, maybe someday one of those efforts will be successful.
“The laws could change both for how income is calculated to qualify, and there may be tax advantages introduced later to waive the forgiveness of debt in this situation,” said Crystal Stranger, president of 1st Tax. “I wouldn't bet on it, but at the same time it would not surprise me. The bottom line is that for those who qualify, you may as well take advantage of the program while you can and get the most benefits possible, then hope and pray that Congress will be kind to you when the forgiveness payments finally come in.”
As you can see, there are a ton of factors to consider before deciding the best way to pay off your student loans. Just remember, if you sign up for an income-based repayment plan, you can always make extra payments or switch to a standard plan -- nothing is set in stone. The important thing is to keep making payments in some shape or form so you stay out of default.
Your Turn: How are you paying off your student loans?
The first time Laura Agadoni used a home equity line of credit -- aka a HELOC -- was to finish the basement in her suburban Atlanta home.
Whenever she had to pay contractors, she used the $20,000 line of credit.
“By doing so, we added value to our home using the equity in our home,” she said.
Most recently, she used a HELOC to help buy an investment property. She’s using the rental income to pay off the debt.
“I like the flexibility of having a big line of credit available to me in case I need to or want to use it,” she said.
So, what the heck is a HELOC anyway? It’s a good question and one that a lot of homeowners -- even those who already have HELOCs -- are asking.
A recent survey conducted by TD Bank found that many borrowers didn’t fully understand the details of their HELOC or misunderstood the terms of their line of credit.
Get informed and read on to learn more about HELOCs.
A home equity line of credit (HELOC) is just that -- a line of credit. Think of a HELOC like you would a credit card: You use it to make purchases, and then pay for those purchases later.
Unlike a credit card, which is unsecured debt, a home equity line of credit is secured because it’s backed by an asset with value: your house. When you make your mortgage payment each month, and as the market value of your home goes up, you’re building equity. A HELOC allows you to borrow against that equity.
Once you’ve been approved for a HELOC, you can borrow as much or as little as you need. This is what sets a HELOC apart from a home equity loan, in which the bank lends you a lump sum. With a HELOC, you don’t borrow it until you need it.
Typically, lenders use your loan-to-value ratio to determine the size of your HELOC, according to Casey Fleming, a mortgage advisor for C2 Financial Corp. and the author of the book “The Loan Guide: How to Get the Best Possible Mortgage.”
Many banks will only offer a HELOC that keeps your total loan-to-value ratio at or below 80%. Some, such as the Pennsylvania State Employees Credit Union, will go as high as 90%.
Loan-to-value is easy to calculate when you just have a mortgage. Simply divide your current loan balance by the current value of your home. A loan balance of $100,000 for a home that’s appraised for $200,000 means you have a loan-to-value ratio of 50%.
If you want a HELOC, you’ll have to factor that amount into your loan balance. If you wanted to take out a $25,000 home equity line of credit, you’d have a total loan balance of $125,000 on a home valued at $200,000. Your new loan-to-value would be 62.5%.
In this scenario, if the lender will let you borrow up to 80% loan-to-value, you could be eligible for a $60,000 line of credit.
Lenders may also factor in your debt-to-income ratio, meaning how much debt you have compared to how much money you bring in, Fleming said. They may also look at your credit score.
A note: You’ll likely pay some of the same fees you paid for your first mortgage. According to the Federal Trade Commision, you could be on the hook for a new appraisal, title search, application fee and other charges.
Some lenders, such as Chase, will charge you an annual fee (Chase’s is $50). You could also see a prepayment penalty or an early closure fee if you close the line of credit within a certain number of months. Sound Credit Union in Washington, for example, charges a $345 fee is you close your HELOC within 24 months.
Of course, these fees can add up fast, so be sure to get a sense what your HELOC will really cost you before taking the plunge. And don’t forget to shop around to see who can offer you the best rates and the lowest fees.
Once you’ve been approved, you can start using your line of credit as you need it. This period is called the draw period and typically lasts between five and 10 years. During the draw period, many lenders allow borrowers to make interest-only payments.
Once the draw period ends, you cannot borrow more money and enter the repayment phase. You may be required to make a large, lump-sum payment on the outstanding balance (known as a balloon payment) or begin making monthly payments toward principal and interest, depending on the HELOC’s original terms.
Some borrowers are unprepared for the repayment period and may be surprised when their monthly payment goes up because they’re also paying principal, not just interest.
Of course, maybe you want to keep your line of credit and extend the draw period. Many lenders will do this, so long as your home still has enough equity and your financial health hasn’t tanked. Typically, a lender will “pay off” your old line of credit by simply extending you a new one, says Fleming.
Most HELOCs have variable interest rates, which means they go up and down based on a financial index, typically the prime rate. Some banks will add a few percentage points, called a margin, to the prime rate. The current prime rate is 3.75%.
Many HELOCs also have interest rate minimums and maximums. Fleming said it’s typical for a rate cap to be set at 18%, though he noted that the prime rate hasn’t been in the double digits since the 1990s.
HELOCs typically offer lower interest rates than other forms of credit, said Jeffrey Hensel, a hard money lender at North Coast Financial Inc. The national average for credit card rates is roughly 15%, according to CreditCards.com.
“Another pro of HELOCs is that the borrower is only charged interest on the amount of funds currently taken out of the credit line,” Hensel added. “When the borrower deposits the borrowed funds back into the credit line, the interest stops accruing on that amount.”
You could use a home equity line of credit to pay for anything, but that doesn’t mean you should. One of the most common uses for HELOCs is to finance home renovation projects or pay for major home repairs. A HELOC can also serve as a backup to your emergency cash fund.
They are sometimes used to pay down debt with higher interest rates, though not all experts agree on whether this is a good idea.
“I see this as a tool for people with a good or excellent (financial) track record,” said
Philip Lee, a Massachusetts-based wealth manager for Financially In Tune. “I caution against borrowing money if there is a fundamental issue with credit or spending. If people have spending problems, the use of a HELOC may simply make the situation worse off.”
It’s also probably not a good idea to buy a car, finance a vacation, or pay for other short-term items with a HELOC, advises Ryan Frailich, a financial coach and planner for Deliberate Finances.
Unlike a home renovation project, which will add value to your home, these items begin depreciating immediately or have no value. You could be paying for a new car long after you stop driving it, for example. And, if you don’t have the cash now, what’s to say you’ll have the cash to pay down your HELOC debt once the repayment period starts in 10 years?
“If you’re borrowing against your home for consumer goods, you’re negating that big benefit (of home ownership) of forced savings,” Frailich said.
As we discussed above, in addition to a home equity line of credit, you can also get a second mortgage in the form of a home equity loan. With a loan, you’re looking at a lump sum, a fixed interest rate and monthly payments that won’t change over the years.
Home equity loans are used for similar reasons, typically home renovation projects, paying off debt with a higher interest rate, etc. If you know exactly how much you need to borrow, and you have the money to make regular monthly payments of both principal and interest (on top of your first mortgage), you might go with a loan instead of a line of credit.
There are no surprises with a home equity loan, which allows you to plan out your monthly expenses well into the future. With a HELOC, many homeowners get used to 10 years of interest-only payments and then feel a squeeze when they have to start paying principal and interest after the draw period ends.
“You want predictable payments, and a schedule of repayment and have the cash flow to support it,” Lee said.
A home equity loan is also good if you don’t want (or can’t handle) the temptation of available credit -- once you get your lump sum, that’s it.
Always keep in mind that both HELOCs and home equity loan can be risky, because if you can’t make your payments, you could lose your home. In fact, experts are predicting a wave of foreclosures in the coming years because so many people used HELOCs during the most recent recession. A RealtyTrac analysis found that more than 1.8 million homes with HELOCs opened between 2005 and 2008 are now seriously underwater.
So make sure you thoroughly consider all your options or consult with a financial expert before using a HELOC to pay for things.
Your Turn: Would you consider using a HELOC?
For seven years, John Bortscheller embraced his new “dad career.”
Bortscheller, 45, left his job as a corporate account manager to take care of his two sons, who are now 6 and 8 years old.
When his youngest son started full-day kindergarten in the fall of 2015, he began to seriously consider returning to work.
Though he’d worked some part-time jobs and volunteered, his seven-year career hiatus felt like a huge hole in his resume.
Bortscheller discovered a program for people just like him: moms and dads who took time off from the working world to take care of their children.
After a five-month paid internship, Bortscheller was hired on full time at ReadyTalk, an audio and web conferencing technology company in Denver.
ReadyTalk offered the internship with help from Path Forward, a nonprofit organization that partners with companies to create midcareer internship programs to ease the transition back to work for stay-at-home moms and dads.
“If you perform well, this innovative program just helped you overcome a career gap that may have seemed insurmountable -- and it sure felt that way to me at times,” Bortscheller said.
“If you don’t perform as well as needed, this program still helps you to begin to overcome the career gap by polishing up your career and interviewing skills, expanding your professional network, introducing you to other partner firms in the program and overall boosting your confidence.”
The idea for the back-to-work program was born at Return Path, a data solutions company with 12 offices around the world and more than 500 employees.
After several successful cohorts, and buy-in from other companies like PayPal, SendGrid, ReadyTalk, Moz and MWH, the program’s founders decided to spin it off into a nonprofit in 2015.
Path Forward gives companies the tools to set up their own in-house internship programs for moms and dads, and supports participants to make their experiences successful. So far, the back-to-work program is underway in New York and California, and according to its website, it will expand to other major metro areas in 2017 and beyond.
The organization helps companies draft language to post on their own job websites. Candidates apply and go through a standard interview process, like they would with any job.
Each internship lasts 20 weeks, though companies can decide if they want interns to work full time, part time or a mix.
Participating companies generally pay between $20 and $25 an hour, with the expectation they will offer a competitive salary if an intern is hired on full time.
Tami Forman, executive director for Path Forward, said stay-at-home moms and dads face an uphill battle when they decide to return to the workforce.
For starters, they have a years-long gap on their resume, which can make hiring managers wary.
Some may have been in jobs that no longer exist, or they may want to try out a new career but they don’t have any experience, Forman said.
There’s also a stigma around taking time off from a burgeoning career for child care.
“We do still have a mindset as a society that your career is meant to be a death march from college graduation to retirement, and I don’t know why,” Forman said.
“There’s plenty of evidence to suggest that’s not the most interesting way to build a career or even the most successful way to build a career. It’s a hard thing to get over.”
Forman said she can sympathize with hiring managers who may be hesitant to take a chance on someone who’s been out of the workforce for a while.
That’s why the internship works -- it’s a small commitment, both for the company and for the employee.
“It de-risks that scenario,” she said. “It allows the company and the hiring manager to say, ‘Let’s give this person a chance.’”
It also gives moms and dads a chance to experiment with jumping back into the working world, potentially with a new career path.
Several of the program’s participants realized at the end of the internship program that the decision to return to work wasn’t right for their family, and Forman says that’s OK, too.
“The benefit to the participant is they get an opportunity to see how coming back to work feels for them,” Forman said.
Another bonus is that companies have a pool of “professionally mature” employees to choose from. Stay-at-home moms and dads are patient, they have good time-management skills and, Forman joked, they are expert negotiators.
“Anyone who has talked a toddler off a ledge of ‘I want this now,’… that’s kidnapper-level negotiation skills,” she said, laughing.
The organization also tries to create a feeling of camaraderie among program participants who are working in the same geographical region.
For former stay-at-home dad Bortscheller, that networking was invaluable.
“The program also introduced me to other interns of similar backgrounds and their sponsor companies – cool, progressive organizations that I may not have stood a chance at gaining even a phone interview, given my long career gap,” he said.
For Jenni Lillie, who took time off to raise her now-11-year-old daughter and 9-year-old son, the internship was a confidence booster.
After completing the program at Return Path, Lillie, 42, accepted a full-time role as a brand designer. The outcome was a win for everybody in her family.
“I learned that I wasn’t as behind in my technical skills as I thought I was,” Lillie said.
“My kids have gained a little more independence as a result of me going back to work and not being at home as much. Working with a creative team again has been really fun and fulfilling.”
Your Turn: Have you completed a return-to-work program? Would you try this type of internship?
Fall means football season, and football season means standing around in a parking lot, munching on chips and dip with old (and new!) friends.
We wanted to know how to tailgate smarter and cheaper this year, so we decided to ask an expert: Joe Cahn, also known as “The Commissioner of Tailgating.”
Cahn runs Tailgating.com, a website dedicated to tailgating tips, recipes, photos and more. Twenty years ago he sold his house, bought a motorhome and hit the road to tailgate across the country.
Cahn, who owned the New Orleans School of Cooking before deciding to drive around America,
tailgates at football games, NASCAR races and anywhere else he can park his “JoeMobile.”
All of “The Commissioner’s” tips for tailgating smarter and cheaper revolve around one easy-to-remember concept: Keep it simple.
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Cahn says he used to buy expensive jerseys for all the teams he supported. But, especially in the NFL, those jerseys quickly became outdated when players got picked up by other teams.
Now, he hits up thrift shops to show his team spirit. Instead of jerseys, he buys plain shirts in his teams’ colors.
“I just started buying colored shirts,” he said. “It’s going to a Goodwill or Salvation Army. You’d be surprised at the different colored shirts you can get very, very inexpensively and still have the same feeling.”
While you’re at the thrift shop, look for a twin-size fitted sheet -- Cahn uses one in his teams’ colors as a table cloth that won’t blow away. Genius!
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Calling all college football fans: Did you know you can get cheap team gear by scouring deals in your university’s surplus property department?
All public colleges and universities, and some private schools, are required to dispose of stuff they don’t need anymore by selling it through a surplus property department. Some schools sell their stuff online, others have stores and others do property auctions.
Like all campus departments, the athletic departments at most schools end up with extra gear now and then. The University of Wisconsin, home of the Badgers, had a huge sale in August and sold football jerseys for just $20!
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The key to keeping tailgating costs reasonable is to invite your friends, then get them to chip in. Download a handy money transferring app so that your friends have no excuse for not paying you back.
It’s pretty hard to get around the cost of parking at most stadiums, but if you park just one vehicle at the stadium for tailgating and everyone helps pay for parking, you’re going to be much better off.
Pro tip: Park one car at the stadium and have everyone else in your group park farther away, where it’s free. Then carpool, walk, or take the bus or a game-day shuttle.
Or, if you want to eliminate parking costs entirely, consider tailgating in someone’s driveway or backyard before heading over (responsibly!) to the game.
Cahn says his favorite money-saving potluck technique is to split up food, drinks and other items into categories. Make a list at the beginning of the season and rotate who brings what each week, so that no one is stuck bringing the most expensive items -- alcohol and meat -- to every game..
“This person does drinks on week one and week 10,” he said. “Somebody’s going to bring the meat, somebody’s going to bring the side dishes.”
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Stay within your budget by remembering that, ultimately, tailgating is not about the food. It’s about the people, the atmosphere and the experience, Cahn said.
“It’s not a culinary contest,” he said. “It’s not a Martha Stewart moment. Rachael Ray’s not coming out. Your friends are coming out. I refer to tailgating as the original Facebook. Being around your friends, food tastes better with friends no matter what food it is.”
Cahn added: “Sharing hot dogs or peanut butter and jelly sandwiches with friends is a far better time than a 10-course meal with people you really don’t like.”
In his travels to all 31 current NFL stadiums and more than 126 college stadiums, Cahn has eaten everything from steak and lobster to a can of beans and hot dogs.
“Anything goes at a tailgate,” he said.
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That said, there are some ways to save money when it comes to tailgate munchies.
This list of tailgating recipes that will cost you less than $1 per serving includes tasty black bean dip for chips and veggies, and caramel popcorn with peanuts.
Consider becoming a mystery shopper and you can get some of your tailgating food for free!
Don’t forget coupons and rebate apps, which can help you get your ingredients for less. Or, buy your tailgating supplies with a credit card that offers you cash back on groceries and other purchases.
If you’ve got an 11 a.m. kickoff, head to the grocery store that morning and check out the day-old bread and pastry section. Most stores drop the prices of breakfast favorites like donuts and muffins -- your friends won’t be able to taste the difference.
Skip Starbucks and brew your own coffee at home, then bring it with you in a thermos.
Keep in mind that your food portions don’t need to be huge, either.
“Think of tailgating as a reception,” Cahn says. “At a reception we walk around with small bites.”
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There’s a time and a place for expensive wine, fancy champagne or complex mixed drinks with a half-dozen ingredients.
But remember what Cahn said: Simpler is better, even when it comes to booze.
It’s OK to buy cheap beer, or to exclusively buy beer that’s on sale at your local liquor store (mine frequently sells craft beer for $2 to $5 off).
Buy generic or store-brand liquor, like Costco’s Kirkland brand, which can save you $5 to $20 per bottle, depending on the type of alcohol you’re buying. (Most people can’t tell the difference between Kirkland and name-brand booze; just watch this BuzzFeed video.)
Of course, the simplest way to save money on booze at your tailgate is to… drink less.
“The brewery is not going out of business,” Cahn said. “You don’t have to drink everything today.”
And remember, stay hydrated and make sure you have a designated driver or a plan to get home -- an Uber is a heck of a lot cheaper than getting a DUI. (Cahn also recommends making sure you have a designated griller.)
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Cahn had some other useful tips for making your tailgate awesome this season.
For starters, make sure you’re not parking in a regular tailgater’s spot. Cahn likes to think of tailgating like a neighborhood block party: Be a good neighbor, at all times.
“If this is the first time where you’ve been out to a new stadium, what you want to do is ask, ‘Is this somebody’s spot?’ so you’re not intruding on someone’s traditional spot,” he said.
Bring name tags, which will help new and old friends get to know each other.
Bring a heavy-duty trash bag or double-bag your garbage, because no one wants to get halfway to the dumpster when suddenly beer, potato salad and other trash spills out. Hand sanitizer is also a good idea, Cahn added.
If you’re grilling, make sure you dispose of charcoal safely. Definitely don’t leave hot coals on the asphalt, because someone might park there later. And it’s always a good idea to bring a first-aid kit and a fire extinguisher.
Your Turn: What are your favorite ways to stay on-budget while tailgating?