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Life Events

Every phase of life has its unique challenges, and some of those are financial. Circumstances and needs change over time, each different and complicated in its own way. Whether you’re trying to decide on the best housing option, or planning for your kids’ college education or your parents’ care in their later years, you’ll be able to make better choices if you’re well-informed. Let Practical Money Skills help you to build an understanding of the various challenges and opportunities you’re likely to face in the years to come.

Welcome to the Workforce

It’s time to roll up your sleeves and put that lifetime of education to work for you. Finding the right job isn’t easy—it takes motivation to go after the industry or company you want, effort to ace the application and interview process and a bit of luck to land the job. Read on for tips, advice and tools that will help ensure a successful search.

Resources

Your school career center is an excellent place to start when looking for work. As a resource provided to students, the point of a career center is to find jobs that relate to specific fields of study. Check in with a career counselor for advice on resume building or to sign up for on-campus interviews. Recruiters often come to schools and universities looking for future prospects. It's a great way to get your foot in the door of an otherwise out-of-reach company.

Headhunters and employment services can also be a good source for job leads. One of the major benefits of working with placement agencies is that they already have established relationships within the industries they service and know exactly who to put you in front of. The downside is that some may charge you a fee for their services or require a percentage of your pay from the company who has hired you.

Networking has become the new buzzword in professional circles—and for good reason. Many of the best jobs out there are never advertised. The key to landing them is a lucky combination of being in the right place at the right time and talking to the right person. Don't be afraid to go to social events and advertise yourself or talk about your goals. Or share your plans with friends and family. You'll be surprised how supportive people can be. After all, everyone has been there at one time or another. If they can't immediately connect you with a job, they can often provide valuable advice on where to look and who the best contacts might be.

Know What You’re Looking For

Think about the big picture and not just the job you want now. Beyond earning a paycheck, what skills and experiences do you want to take away from your new job? Look to the next step of your career and think about which job will get you closer to that goal. Also, look at the associated benefits. A high-paying job with no benefits may not be as advantageous as a lower-paying position with a complete benefits package.

Consider cost of living and your expenses before you relocate for a job. Every city is different, so a starting salary in one area may not be enough to support you in a new location. Moving costs are another factor to take into consideration. If your prospective employer isn't going to pay your moving costs, make sure the salary will make up for these costs in the long run, or that you have additional funds to cover the expenses.

Saving for College

A college education is the ticket to the middle class in the United States. But it’s an expensive ticket, and the cost rises every year. The overall annual cost for a college education ranges from about $7,000 for community college to $35,000 for a private school, according to US News & World Report.

Start Early
Those are some scary numbers. But if you have the benefit of time, they’re not as bad as they seem. Here are some steps you can start taking today:

  • Go over your monthly finances and find a little extra money you can put away. Even $50 or $100 can make a big difference.
  • Make a commitment to devote at least that amount each month, and to add to it as your income increases.
  • Shop around for the best interest return you can get for your money.

 

High Return
Because the cost of college is rising faster than inflation, it’s smart to invest your savings to get a higher interest rate than a typical bank can offer. Consider putting your money into:

  • Stocks
  • Mutual funds
  • Bonds

 

Help Paying for College
One important thing to keep in mind is that you won’t necessarily have to come up with the entire cost of college. All higher education institutions offer financial aid in the form of grants and loans. These are most often funded by the federal government. But there are also often aid offerings from the state and from the school itself. Be sure to look into all the options available.

 

Buying a Car

Buying a car is like jumping into a lake. Without some planning and research into what you might encounter, you could be in too deep before you know it. But if you take the car buying process one step at a time and put some time into researching your purchase and your finances before you stop on the lot, the process is likely to go a lot more smoothly.

What Can You Afford?
Before you begin shopping for a car, it's important to take a look at your budget and figure out how much you can afford to spend on a vehicle, without strapping yourself or cutting into your savings. If you don't have a budget, you should consider creating one. Can you afford $200 a month for your new vehicle? What about $300? That number will be the total amount that you can pay for the car itself and operating expenses, like gas and maintenance. Operating expenses can be about one third to one half of the monthly cost of a new car. So take the amount you've decided you can spend on your car each month and multiply it by .66. That is the most you should consider spending on monthly payments for the vehicle to be able to afford operating expenses as well.

The Down Payment
You're also going to need a big chunk of change for a down payment. How much? The bigger the better. To get a loan for a car, and often for a lease, you'll probably need to make a down payment of around 10% of the total price of the vehicle. The larger your down payment, the smaller your monthly payment will be and the less you will pay in total for the car in the long run. But make sure you don't cripple yourself or deplete your savings account with too large a down payment. Find a comfortable balance.

Renting an Apartment

While it doesn't offer any investment potential, renting an apartment is the wisest financial choice for many people. Some may be saving for a down payment on a home, others may be unable to afford buying a home. For families or individuals who move often or for those not interested in the maintenance and repair of a home, renting can offer freedom to relocate and some relief from the costs of home ownership. No matter why an individual is renting, it's a great idea to know about the financial and legal aspects.

Leases
A lease is a binding contract that lays out the conditions and responsibilities of a rental agreement, both for the owner and the renter. It stipulates the monthly rental price, payment due date, the length of the lease and what happens if one of you breaks the lease. A lease generally also outlines whether the renter or landlord will pay the utilities, whether pets are allowed, and any other restrictions and requirements the landlord wants to include. Read your lease agreement very carefully before you sign it. You will be held accountable for knowing everything included in the lease. Also, keep a copy of the lease for your records. It may come in handy if you have a question about what you are or are not allowed to do.

Cosigning
If the landlord is not convinced that you will be able to make your payments, he or she may require you to get a cosigner. This is someone who will share financial responsibility for the lease. If for some reason you are unable to make the payments, the cosigner will then be responsible for making the payments.

Breaking a Lease
You should avoid breaking a lease by moving out before the end of the agreed term if at all possible. Each lease agreement has its own penalties for breaking the terms—some only require the payment of a penalty but others require the renter to continue paying rent until the apartment is re-rented. For this reason, it's critical to check your lease and make sure you can handle the financial ramifications before you break your lease.

 

Renter's Insurance

Renter's insurance is a necessity. Your landlord has insurance only on the building. You are responsible for insuring your belongings. Get renter's insurance as soon as you move into your apartment. If you are attending college, however, check to see if your parents' policy will cover you.

What Does It Cover?
Renter's insurance will insure all of your property within your apartment. Some policies will also cover your property when it's outside of your apartment. For example, if your bike is stolen when it is parked at your friend's apartment, your renter's insurance may reimburse you the cost of your stolen bike. Renter's insurance also covers fire or water damage.

Consider a replacement-cost policy. In the stolen bike example, a replacement-cost policy would foot the bill for you to buy a new bike, similar in quality to the one you lost. Without this, you would receive an amount equal to what your bike is worth minus depreciation, which probably wouldn't be enough to buy a new bike. A replacement-cost policy will increase your premium slightly, but it can be well worth it.

There are limits on reimbursement for expensive items. If you have computer or stereo equipment or costly jewelry, you may want to insure those separately. If you have items of great sentimental value, they obviously can't be replaced and you should put them in a safe deposit box.

Your insurance should also cover personal liability. Most renter's insurance policies will cover all non-auto accidents, including accidents that happen away from your apartment. Let's say that before your bike was stolen, you accidentally hit a pedestrian with it and he or she sued you. You are protected against lawsuits because you have renter's insurance. Although coverage varies, $300,000 is standard coverage for personal liability.

How Much Does It Cost?
For as much as it covers, renter's insurance is relatively inexpensive. The National Association of Insurance Commissioners estimates that the average policy costs only $169 per year. Compare that with auto and health insurance and it's a bargain.

Make Claims Easier
As soon as you obtain renter's insurance, document your belongings. Make a videotape of everything you own or photos of everything you would want replaced. If you can't do that, write a detailed list of your things. If you lose your belongings in a fire it will be nearly impossible to remember everything you had. A record of your things will be invaluable in settling claims with the insurance company.

Keep your tapes, photos or written list somewhere outside of your apartment - at a friend's residence or with a relative. If you have a fire, you don't want these records destroyed as well.

Buying a Home

Turtles and snails are born with their homes on their backs. You, however, are not so lucky. Unless you plan to live in a cardboard box or you can talk someone into allowing you to live with them for the rest of your life, you will probably need to either buy or rent housing.

To Own or Not to Own
Home ownership isn't for everyone. It's definitely a long-term commitment. The prices of homes increase over the years, but usually at a slow rate. With all the financing, closing costs and other expenses associated with owning a home, you'll probably lose money if you sell in less than five years. You also have to think about the upkeep of a home. Everything from cutting the grass to putting on a new roof is your responsibility. The costs can really add up. Then add taxes, water and sewer bills and other expenses and you can get into some sizable payments. But when you take full financial and maintenance responsibility for a home, it's yours to do what you please. Paint the walls purple. Add a planetarium. Put in a fireman's pole. You're in charge.

There are also substantial financial advantages to owning a home. The part of your monthly payment that goes toward the principal is all equity and the part that goes toward interest is tax deductible. Compare that with paying rent, which is neither an investment nor a tax write-off. As your equity increases with time (and payments) it will be a source of financial stability for you, giving you collateral for a loan or producing a large sum of money if you sell.

Understanding Mortgages

If you're going to be responsible for paying a mortgage for the next 30 years, you should know exactly what a mortgage is. A mortgage has three basic parts: a down payment, monthly payments and fees. We've already discussed the down payment. The monthly payment is the amount needed to pay off the mortgage over the length of the loan and includes a payment on the principal of the loan as well as interest. The fees are all the costs you have to pay up front to get the loan.

Keeping in mind those basic concepts, we'll look at some of the mortgage variations that are available:

  • Fixed Rate A fixed rate mortgage requires a monthly payment that is the same amount throughout the term of the loan. When you sign the loan papers you agree on an interest rate and that rate never changes. This is the best type of loan if interest rates are low when you get a mortgage.
  • Adjustable Rate Be careful if you're considering taking an adjustable rate mortgage. An adjustable rate mortgage allows the interest rate on your loan to vary with prevailing interest rates. If rates go up, so will your mortgage rate and monthly payment. If rates increase a lot, you could be in big trouble. If rates go down, your mortgage rate will drop and so will your monthly payment. A good strategy may be to stick with a fixed rate loan to safeguard against rising interest rates. And if rates drop, refinance your mortgage to take advantage of lower rates.
  • Pledged Asset Mortgages In a pledged asset mortgage, you can use assets such as stocks, bonds, other property, etc. as collateral on your loan. This eliminates the need for a down payment and also avoids PMI (Private Mortgage Insurance).
  • Mortgage Help Programs There are programs that will assist you in obtaining and financing a mortgage. The number and variety of these programs makes it impossible to list and discuss them all here. Check with your bank, city development office or a knowledgeable real estate agent.
  • Veterans Administration (VA) Loans The Veterans Administration offers loan benefits to veterans who served in the armed forces on active duty during times of conflict, such as Korea, Vietnam, Desert Storm and Afghanistan, as long as they were not discharged dishonorably. The first step to obtain a VA loan is to obtain a certificate of eligibility, then submit it with your most recent discharge or separation papers to a VA eligibility center.
  • Federal Housing Administration (FHA) Loans The FHA was created to aid people in obtaining affordable housing. FHA loans are actually made by a lending institution, such as a bank, but the federal government insures the loan. This is often the least expensive loan that non-veterans can get.

Home Equity

One of the biggest advantages of home ownership is the equity you build in your home. The faster you pay your mortgage and build this equity, the better financial shape you'll be in. Equity can be a powerful tool to manage your finances.

Paying Off Your Mortgage
During the first few years you make payments on your mortgage, most of your payment goes toward interest and not very much goes toward paying down the principal. The more you owe on the mortgage, the more interest you'll pay. So if you increase the amount you pay, more of the principal will be paid and less interest will be charged. You could retire your mortgage several years ahead of schedule if you just make one extra mortgage payment per year.

Home Equity Credit Lines
A home equity line of credit is a form of revolving credit in which your home serves as collateral. With a home equity line, you will be approved for a specific amount of credit that represents the maximum amount you can borrow. You pay a variable interest rate and have a minimum payment due each month based on the amount of the credit line you have used.

Once approved for the home equity plan, you will be able to borrow up to your credit limit at any time. You can draw on your line of credit by writing checks against it. You may be charged for a property appraisal, application fee and possibly other costs. When you sell your home, you will be required to pay off your home equity line in full. If you are likely to sell your house in the near future, consider whether it makes sense to pay the up-front costs of setting up an equity credit line. Also keep in mind that leasing your home may be prohibited under the terms of your home equity agreement.

Home Equity Loans
Similar to a home equity line of credit, a home equity loan is backed by your home as collateral. Because they are considered more secure by lenders than unsecured debt such as credit cards, home equity loans offer more attractive interest rates than unsecured loans. A home equity loan is best utilized for a specific expense, such as paying college expenses, which you will be able to pay off over a shorter time period than your primary mortgage. If you're carrying a great amount of high-interest, unsecured debt, transferring it to a home equity loan can help you pay it off sooner, as well as provide tax advantages. The interest on up to $100,000 of a home equity credit line or home equity loans is tax deductible. Just remember that you've used your home as collateral. If you can't keep up with the payments, you may lose your home.

Refinancing
If interest rates have dropped since you took out your mortgage, you may want to consider refinancing your home - that is, getting a new mortgage with a better interest rate to replace the old one. As a general rule, if you can cut your rate by 2% or more, it is worth investigating. Depending on how much the new bank charges in closing costs and how long you plan to stay in your home, you could end up saving a significant amount of money this way. Refinancing may slash $100 to $300 or more off your monthly payment. Interest on the entire amount borrowed is tax deductible, unless you increase the amount of the loan by more than $100,000. Consult your tax advisor to discuss the particulars of your situation. You do not have to refinance with the same mortgage broker that you originally used. It's wise to try them first, as they may offer you an attractive package in order to keep your business, but shop around and compare rates as you did the first time around.

Costs versus Benefits
To make sure you're going to save money by refinancing, take all the costs into consideration.

  • Closing Costs Remember these? You will have to pay them again when you refinance. Depending on how high they are, they may overshadow the savings you will get from your new interest rate and it may not be worth it to refinance.
  • Pre-payment Penalties Your current mortgage may have a significant penalty for pre-payment that could overshadow the savings that result from refinancing. Check your mortgage papers. If a pre-payment penalty exists, it will be in your agreement.

Retirement

Plan ahead. There's no better time than right now to plan for your retirement. Saving for retirement often gets put off as we deal with life's more pressing demands – marriage, house, children – but each month you delay cuts significantly into the total savings you have when that day comes. Save early. Save often.

Planning
Unplanned savings is better than no savings at all. But to get the most out of your retirement savings, you should figure out where you want to be and how you're going to get there. Since people are living longer than ever, retirement savings need to last longer and work harder. It's more important than ever to make smart financial decisions.

Decide on Your Strategy
If you are starting your retirement savings early, you can afford to be aggressive and put money into riskier funds. If your fund loses value, you have time to let it grow again. However, if you're getting close to retirement and suddenly your investments lose 40% of their value, it will have a huge negative impact on your financial comfort in retirement.

Emergency Fund

There's nothing harder to plan for than unexpected events that impact your life and finances. Yet loss of a job, the death of a loved one, illness or other unexpected occurrences happen at one point or another in most of our lives. The key to successfully surviving these life-changing events from a financial perspective is to anticipate hard times. Shore up your financial situation before you are hit with an unexpected expense, so you will be covered in the event something happens.

The Importance of an Emergency Fund
Because we cannot predict when life will throw us an unexpected challenge, it is important for everyone to build and maintain an emergency fund with three to six months' worth of living expenses. The key to building an emergency fund is to set money aside every month, no matter how small the amount. Financial experts recommend that, unlike retirement funds, emergency savings should be kept fairly liquid, in a savings account or a money market fund. Hopefully you will never need it. But if you do, you'll be glad it's there.

A New Financial Picture
Once the immediate financial matters are taken care of after an unexpected life event, it will be time to take stock of your new financial situation and create a plan for yourself moving forward. Whether you have faced job loss, divorce, illness or another event, you should create a new budget reflecting your situation. This is the first step toward financial security and rebuilding your emergency fund, which you may have tapped into to manage a financial crisis.

To develop a budget, write down your current expenses, indicating whether each expense is a necessity or a luxury. Pulling out recent credit card bills and bank statements can help with this process. Next, estimate your monthly income, including only income that you are certain you will receive. Then compare your income to expenses. If your expenses are higher, you will need to trim your expenses until your income is higher than your expenditures.

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