bUSINESS & FINANCE
You may want to know the difference between secured debt, unsecured debt, revolving debt, and installment debt because it helps you understand the consequences if you forget to make a payment. Or worse, it helps you understand the consequences if you decide not to make your payments at all. Let's take a quick look at these four debt types and how to handle them.
Did you know that your credit card falls into a specific category of debt called "revolving" debt and your mortgage goes into a debt category called "secured" debt?
Maybe you really don't care at all — you just know that the debt you have costs you money every month.
However, you may want to know the difference between secured debt, unsecured debt, revolving debt, and installment debt because it helps you understand the consequences if you forget to make a payment. Or worse, it helps you understand the consequences if you decide not to make your payments at all. Let's take a quick look at these four debt types and how to handle them.
What is Secured Debt?
When you take on secured debt, you've chosen a type of debt backed by collateral you own. In other words, when you borrow from the bank to buy a home or a car, you don't own whatever it is that you bought — the bank does. The bank puts a financial claim on your property with something called a lien.
Furthermore, the bank can take it away if you stop making your payments. Let's say you decide to build a beautiful 3,000-square foot home. You can make your payments, no problem. However, let's say you lose your job two years down the road and your partner must struggle to make the payments alone (and buy the kids new shoes and groceries to boot) while you look for a new job. If you can't make your mortgage payments, a bank can seize your home, sell it, and use the proceeds from the sale of your home to pay back the debt.
What is Unsecured Debt?
Unsecured debt, as you might imagine, does not involve collateral. In other words, you don't have to pony up something you own in order to borrow.
Can you think of a great example of an unsecured debt?
If student loans popped into your head, great job. The pesky remnants of a degree you got years ago (in the form of student loan debt) offers a great example of an unsecured debt. You can consider student loans unsecured debt because if you stop making your student loan payments, your lender can't take your degree away.
So, because your lender cannot seize your assets, what can it do if you suddenly stop making payments on your unsecured debt? Your creditor can contact you to get payment, report your delinquency to a credit reporting agency or file a lawsuit against you.
Since your lender's risk naturally increases with unsecured debt, you might imagine that there's a catch. You're right: Interest rates on unsecured debt is usually higher in comparison to secured debt, and typically ranges between 5% and 36%.
What is Revolving Debt?
Revolving debt, sometimes called a line of credit, means that you can borrow money repeatedly up to a set dollar limit. You may think of credit card debt as the most common example of revolving debt. Other types of revolving debt include personal lines of credit and home equity lines of credit (HELOCs).
Here's how revolving debt works: You make payments each month based on your outstanding balance for that particular month — you must make at least the minimum payment. An interest charge may get added to the balance that you carry over from month to month. (Unless your credit card or line of credit offers you an introductory 0% interest period.) As you repay more of what you owe, you free up more of your credit line as you go.
You may also have to pay annual fees, origination fees or fees for missed or late payments when you sign up for revolving debt.
What is Installment (Nonrevolving) Debt?
Just to make sure we covered the flip side of revolving debt (even though it overlaps with other types of debt), we'll also cover nonrevolving debt. You can't use a nonrevolving loan more than once. Once you get the loan, you can't get it again.
Non-revolving debt is also known as installment debt because you typically repay it in regular monthly installments until a specific, predetermined date in the future. Unlike revolving debt, you cannot "replenish" your credit line every month.
Can you think of some examples of installment loans?
Mortgages, auto loans, student loans and personal loans exactly fit into these categories. Note the tricky part of the puzzle: These types of loans can categorize into either unsecured or secured loans! For example, you can consider a student loan debt unsecured installment debt but you'd consider a mortgage in the "secured installment debt" category. On the other hand, you'd put credit cards into the "unsecured revolving debt" category. Personal loans go into the "unsecured installment debt" category.
How to Handle These Types of Debt
You might chuckle because you know the answer to handling these types of debt — get rid of them by paying them off!
However, it might not seem that easy, particularly if you have a lot of different types of debt. Which type should you tackle first? For example, if you have a personal loan, a student loan and a HELOC, which one should you put your efforts toward paying off first?
First and foremost, consider which debt is backed by your own assets. What type of collateral do you risk losing if you don't make your payments on time?
Remember, if you fall behind on payments for a secured debt, you could lose your house or car. Whatever you do, make sure you make all of your debt payments, especially those backed by collateral!
Then, you may want to pay more on other types of debt based on:
Think the first bullet point seems a little strange? Truthfully, how you tackle your debt might not even make sense to anyone else, even your financial advisor. However, if you have a real issue regarding your student loan debt, it might make sense to get rid of it first, even if it's not your highest interest rate or the highest amount of debt you have.
leadership during hard times
“How are you?”
This question is commonly glossed over as a simple pleasantry. Well, at least it was before the pandemic.
These days, I see more people pausing to really listen. The answers from our colleagues and the communities we serve often involve feelings of grief.
After a decade leading a nonprofit that dives deep with grieving kids, I have come to recognize the signs. In grief, I have found wisdom, humor, and some surprising insights that can inform not only my work, but how all leaders can help their organizations move forward amid the uncertainty and loss we all are experiencing now.
Grief can teach us a lot about leading during uncertain and tumultuous times. Here are a few takeaways that I hope will help us step up to the many fast-moving issues confronting our country and world, challenges that true leaders must address.
COVID-19 is a “bereavement multiplier” likely to leave at least 1.7 million Americans mourning the death of a close relative. As leaders, one of our first jobs is simply to be aware of how our people are doing.
Even before the pandemic, one in five U.S. children would mourn a significant death before age 18, which means that even in an ordinary year, their parents and caregivers—likely your employees and clients—were dealing with grief. And 1 in 14 of those children were mourning the loss of a parent or sibling, which is a major blow.
How are they doing? Our company recently conducted a pulse survey to find out. The overwhelming majority of parents said that their children’s mental health (64%)—and their own (39%)─is their top concern, ranking higher than fear that they (35%) or someone they love (44%) will contract COVID-19, and much higher than the fear of financial loss (29%).
Leaders understandably focus on the bottom line, but for many people, mental health and well-being is a leading concern.
FIGHT THE URGE TO DOWNPLAY
Since grief is a natural part of life, many people are tempted to downplay its impact. The truth is that grief changes us, as individuals and as a society. There’s no question that grief can alter the trajectory of our lives, and our life’s work. The only question is how.
Research shows that when childhood grief is left unaddressed, it can lead to anxiety and depression, decreased academic performance, and even early mortality. Unexpressed grief impacts adults, too. Nonprofit leaders and staff also may be feeling something akin to grief, and 95% are facing negative financial impacts related to COVID-19.
When times are tough, many leaders bear down and power through. As the head of a small nonprofit, I have spent many late nights re-forecasting the budget, strategizing ways to pivot our in-person program model, rallying our staff and more than 400 volunteers, and communicating with the people we serve. It is all too easy to ignore what we are feeling and focus on the task at hand.
It should be noted, grief is also the task at hand. Recognizing and wrestling with it can enable us to better deal with the other challenges facing our organizations and our society.
ASK (THEN LISTEN CLOSELY)
Many of us have been in crisis mode. We want to help the best way we know how. Yet we don’t always know best.
Whether we are trying to motivate employees or comfort a grieving child, we would do well to keep in mind that needs are profoundly individual and can change with surprising speed. The most effective approach is to ask.
That is what we did when we realized there was no safe way to host an in-person summer camp this year. We polled our community on how we can best support them, and heard that a whopping 84% were craving the chance to come together. In response, we created a virtual model, Experience Camps @Home. Yet we never would have taken that step if we hadn’t listened first.
BRING PEOPLE TOGETHER
While my career involves extolling the power of deep connection, even I have been surprised by just how much that matters. Our recent pulse survey of nearly 200 grieving kids and their parents found that the top sources of hope for grieving kids are time with family and their camp experience. That outstripped even the promise of science, the remarkable inspiration of frontline medical workers, and the power of people helping one another right now.
Community counts. Leaders can play a meaningful role in serving as community conveners, whether that means bringing your own people together or forging connections with the wider community.
The grief experience may be instructive here, too. Only 46% of people surveyed by New York Life indicated that they would know where in their community to turn for help if they suffered a loss, and 54% of those who lost a parent growing up say they struggled to find grief resources.
Even when we are stretched thin, we can help by strengthening our networks and connecting people to resources and one another.
ALLOW RESILIENCE TO EMERGE
Loss is hard, and it is not made easier by platitudes. Paradoxically, by not sugarcoating loss, resilience may be more likely to emerge. Acknowledge the hard reality that your people are experiencing, and have faith that they (and you) can emerge stronger.
In the New York Life survey, 68% of adults said they felt that experiencing loss as a child made them better prepared to handle other adverse circumstances in their life. In our survey, 83% of parents said they have seen their child using coping skills learned from their grief experience to help them navigate the pandemic—and the majority of kids told us they have used those skills to support others during COVID-19.
One of the most powerful roles a leader can play is in helping people to find their own resilience, and building a culture where they are encouraged to support others, in turn.
STAY IN IT FOR THE LONG HAUL
One tween we surveyed said, “I just want it all to go back to normal.” It’s a sentiment many of us share, although there is a danger to expecting our teams to move forward too fast.
When adults who lost a parent growing up were asked how long it took before they could move forward, the mean was more than six years, and the most common response was that they have never been okay with their loss. However, 57% reported that following the loss, support from family and friends tapered off within the first three months, and a full 20% said support tapered off after the first week.
I see a similar risk in how some may respond to the pandemic, economic stress, and movement for racial equity. We need to stay in it together for the long haul. Many parts of our society are facing tremendous loss. Ignoring our grief is to ignore our full potential, which is the last thing we can afford to lose. When we move through grief in this way—acknowledging it, allowing space for individual differences, bringing people together, and staying in it for the long haul—remarkable things are possible.
And, after 430,000 hours with grieving kids, I can confidently report that expressing grief furthers the full expression of our humanity. And expressing our humanity is the beginning of executing outstanding leadership.
Thanks to quick online applications and, in some cases, instant approval and access, credit cards make it as easy to build your credit history as it is to make purchases. But they can also make it easy to fall into debt if you struggle to pay on time or tend to spend more than you have.
As a result, some people regard credit cards with skepticism: 17% of U.S. adults don’t have one, according to a 2019 Federal Reserve report.
No financial product is one-size-fits-all, and it’s OK if credit cards aren’t for you. There are other ways to establish credit — and keep your credit scores high — that don’t involve a credit card.
Be Diligent About Loan Payments
If you’re already making on-time payments on an installment loan, like a student loan, your efforts are making a difference. Loan payments are reported to credit bureaus, so over time, this can build your credit history.
“Student loans are often the easiest loans to qualify for, especially when you are very young,” says Adam Sanders, director of Successful Release, a Philadelphia-based organization focused on helping former offenders find financial and professional success after prison. He adds that “student loans are often the way that many adults begin building their credit.”
No student loan in your name? A credit-builder loan from a bank or credit union may be an option. With this loan, the lender deposits a preset amount into a savings account, and you make monthly payments until the deposit is repaid.
Pay Other Bills on Time
Other bills that you pay on time each month — cable, water, power, etc. — don’t generally have a direct effect on your credit reports, but that doesn’t mean they’re not important to your overall financial health.
“You must maintain impeccable nontraditional credit,” says Roslyn Lash, an accredited financial counselor, author of “The 7 Fruits of Budgeting” and founder of FinCoach Consulting in Winston-Salem, North Carolina.
Skipping out on things like utility and cell phone bills could send those accounts into collections, which definitely can harm your credit.
Put Other Good Payment Histories and Habits to Work
Speaking of utility and cell phone bills: While these on-time payments traditionally aren’t factored into credit reports, tradition is changing. Experian Boost offers a free way to add positive bill payment information for those kinds of expenses to your Experian (EXPGY) credit report. To participate in Experian Boost, you must create an account through Experian.
“Two out of three consumers see an improvement in their credit scores, with an average increase of about 13 points,” says Rod Griffin, senior director of consumer education and advocacy for Experian. “People with thin credit files, with fewer than five credit accounts, are reporting an average increase of 19 points on their FICO 8 scores.” (There are many FICO (FICO) - Get Report score versions; FICO 8 is among the most widely used in approval decisions.)
The catch? Not all lenders use Experian or the scoring models affected by Experian Boost when making lending decisions.
Another scoring model, known as UltraFICO, is still in the pilot phase. Once it becomes publicly available, consumers can opt in to allow access to their checking and savings account activity. This includes how long accounts have been open, the recency and frequency of bank transactions, evidence of consistent cash on hand and a history of positive account balances. Like Experian Boost, however, opting into UltraFICO won’t have an impact on all of your credit scores.
Paying your rent, too, can help build your credit history. Some landlords and property management companies already report payments to credit bureaus, but if yours doesn’t, ask if they would be willing to start. Or consider signing up for a rent-reporting service. A record of on-time rent payments not only helps your credit, but it also makes it easier to qualify for other rental homes in the future.
Become an Authorized User
This does involve getting a credit card, but it doesn’t require you to open the account yourself, use it or even have the card on hand.
It requires only that a primary account holder — perhaps a family member or loved one — adds you to their account. You’ll be issued your own card, but the primary user is liable for any debt you accrue.
To bolster a thin credit file, be sure the primary user already has a good and lengthy credit history and check to see if the card issuer reports authorized users to the credit bureaus.
Source: The Street
Workers who clock in just four days a week report being happier and more productive, and small businesses say it gives them an edge in attracting and motivating workers. Now, the prospect of having long weekends every week is gaining traction across corporate America.
The four-day workweek got a boost when former Democratic presidential hopeful Andrew Yang touted the concept on his social media channels recently, in response to a proposal from New Zealand Prime Minister Jacinda Ardern that post-coronavirus economic recovery would benefit from three-day weekends.
The widespread COVID-19 lockdowns upended regular schedules, with many Americans finding themselves clocking in from home or working different hours as they juggled childcare or home-schooling with their professional obligations — which led employees and bosses alike to rethink the traditional Monday-to-Friday workweek.
Companies including travel website TripAdvisor and publisher Houghton Mifflin Harcourt switched temporarily to four-day workweeks — coupled with pay cuts — in response to the pandemic’s economic fallout. Advocates say that while it might be a useful tool to cut costs without resorting to layoffs, keeping workers at full pay with an extra day off each week yields other types of dividends.
“The pandemic has created a moment for businesses to take stock and consider more radical reconstructions of the workplace. It is a time for experimentation and a reevaluation of what it means to be productive,” said Andrew Barnes, author of "The 4 Day Week" and co-founder of the nonprofit 4 Day Week Global. Barnes has emerged as a global ambassador of sorts for a four-day workweek, since switching his own New Zealand-based firm onto that schedule back in 2018 and finding it improved productivity and morale.
“By focusing on productivity and output rather than time spent in a workplace, the four-day week allows for better work-life balance, improved employee satisfaction, retention and mental health,” he said.
This was what Gary Gibson discovered. The 39-year-old, a property manager at a senior living community near Allentown, Penn., said working from home during the COVID-19 lockdown and having greater autonomy with his time management gave him new insight into his productivity.
“What this has really helped me with is realizing that time shouldn't be so rigid in terms of how many hours you’re putting in during the day, as long as you’re getting your work done,” he said.
Gibson said he plans to ask if his employer would accommodate a more flexible schedule. “The four-day workweek would be able to free me up to do more things for my health. I’d be able to work out more, relax more,” he said.
A trial undertaken by Microsoft’s Japanese subsidiary last summer found that a four-day week improved worker productivity, and four-day workweeks seem to have gotten the most traction so far in the tech sector, where corporate culture is more open to unorthodox ideas.
“I think this model can be transferred to other industries outside of tech,” said Robert Yuen, co-founder and CEO of San Francisco software firm Monograph, who transitioned his company to a four-day workweek back in 2016. “Generally speaking, if you're in a white-collar profession, there’s a lot of opportunity to rethink what that workweek looks like.”
About one-third of employers already offer “compressed workweeks,” according to a Society for Human Resource Management survey. Liz Supinski, the organization’s director of data science and research, predicted this number will grow.
“I think it was already out there in the zeitgeist, and I just think now more businesses are trying to be creative. The dislocation of COVID-19 has made a lot of organizations maybe more open to things they'd dismissed out of hand earlier,” she said. “We’re better positioned to return to a workplace where not everybody is in the office every day.” Giving people an extra day off also can help companies accommodate new social-distancing guidelines in workplaces along with childcare schedules that are likely to be chaotic for months to come.
Surveys indicate that people who work four days instead of five are less susceptible to stress and burnout — which is on the rise more broadly as COVID-19 continues to be a public health and economic threat in parts of the U.S.
“It became very clear that with this added layer of anxiety and stress, it’s just harder to go about normal life at this time,” said Joel Gascoigne, co-founder and CEO of software firm Buffer.
Headquartered in San Francisco, Buffer was on the leading edge of the COVID-19 lockdowns. “I started to realize there was a real risk we would accelerate a large level of burnout,” he said, so he implemented a four-day workweek on a trial basis, with individual teams coordinating days off to cover customer service operations on all weekdays. “We’ve seen higher workplace happiness through the surveys we’ve done, and we’ve seen lower stress levels and a higher sense of autonomy as well,” he said.
And as the labor market rebounds, companies could gain a competitive edge offering compressed schedules to workers like Allison Todd, who worked four days a week as a trucking company billings and logistics coordinator until she lost that job due to the pandemic in April.
Todd said finding another employer willing to offer that flexibility has been a priority in her job search. “That would be my main goal — another job where I’m only working four days a week,” she said. “I think I’ll always continue to look for it. I feel like once people work that, then they’ll understand how great it is.”
Shawn Anderson, co-founder of software company PDQ, said his company’s four-day week has been a boon for recruitment and retention. Small companies like his — based in Salt Lake City — might not be able to offer lavish Silicon Valley-style perks, but they can give stressed out workers the one thing they can’t buy: More of their time back.“People say, ‘I don't think I can ever go back.’ That’s probably the thing we hear the most,” Anderson said. “Right now, we see this as one of the biggest perks, one of the biggest benefits we offer.”
Experts caution, though, that shortening the workweek is not a panacea. Businesses might anger customers who can’t reach a representative on a weekday, and scheduling around that can be complicated, especially in larger organizations. “Organizations are scrambling to figure out how to organize workers into cohorts and when they can come in,” said Joyce Maroney, executive director of The Workforce Institute at Kronos.
Supinski said some employers are hostile to the idea. “There's this traditional American idea to look at work as an industrial process, even if it’s knowledge work,” she said.
And even proponents acknowledge that there is a class divide. Front-line and blue-collar workers don’t have the same kind of flexibility as those who work in offices. Some may have the option of working fewer, longer shifts, but industries that rely on hourly workers might not be willing to let employees tack on a few extra hours if that means incurring overtime wage costs.
“I think that's the challenge when organizations implement something like this organization-wide,” Supinksi said. “Like many things of this issue, it’s an issue of privilege.”
If you’re like a lot of people, you probably found it easy to save money the last few months. Many stores were closed, and working from home meant saving on gas and other commuting costs.
So you might be looking at your finances now and wondering why the picture isn’t brighter.
Assuming you’ve paid down debt and have an emergency fund, check where you kept those savings. If they stayed in your bank account or even high-yield savings, you won’t see the needle move.
To make progress, you need compound interest, which helps you build wealth when you invest, says Monica Sipes, a certified financial planner and senior wealth advisor at Exencial Wealth Advisors in Frisco, Texas.
A savings account alone or staying in cash generally will not keep pace with inflation.
The wealth you can build through the stock market makes the difference between Warren Buffett and the average person who has good savings habits yet shies away from investing.
The pandemic sparked a recession that began in February. And the Great Recession is still on the minds of a lot of novice and risk-averse investors, who have a lot of fear around what-ifs.
Instead of giving into the anxiety, though, people need to look at the patterns of the stock market over many decades. “That’s super important,” Sipes said. “Long-term investing will win over time, and investment returns are fairly predictable over the long term.”
In fact, Sipes says, capital markets are one of the greatest wealth creation engines of all time and they are very accessible.
The roadblock for many younger investors is the fear that they’re not knowledgeable enough.
“People assume that to get started you have to have an absolute command over investing,” said Jennifer Dempsey Fox, president of Bryn Mawr Trust Wealth Management in Bryn Mawr, Pennsylvania.
Asking questions is a new investor’s best strategy.
It may sound trite, but Fox says there are no stupid questions about investing — especially if it’s holding you back from the next step.
Young people are often confronted with an overwhelming number of decisions. “Where should they put the money first?” said Adam Vega, a CFP at Goldman Sachs Personal Financial Management in Miami.
“Pay off loans? Save? What I’ve seen them do is start, but start too late,” said Vega. “They’re in their 40s or 50s when they finally begin investing.”
If you wait until you’re more settled and more knowledgeable, “you’ve lost 20 years of saving potential,” Vega said. It seems to be a more or less static problem for this age group, and one Vega does not see changing.
Good financial habits are a great starting point — but if you want to meet substantial goals, such as retiring, starting to invest as early as you can is the best way.
Beginning early, Vega says, lets you take advantage of tax deferrals, compound interest and interest on your interest.
panic about your 401(k)?
As the stock market cratered again due to crashing oil prices and coronavirus fears, many investors grappled with pulling money out of equities and stock funds and moving it to safer investments, including bond funds, money market accounts — and cash.
It’s been an ongoing quandary as investors were already skittish after a roller-coaster first week of March that saw the S&P 500 index swing up or down more than 2.5% for four days straight.
Emotional reactions from investors are certainly not unprecedented — they need help and want answers.
“In increased times of market volatility, we tend to see increased digital and phone activity from customers,” Fidelity Investments, the largest 401(k) provider in the U.S., said in a statement to CNBC. “This is no different from previous periods of market volatility and is to be expected given the need for additional guidance or reassurance on an existing investment plan.”
While Fidelity does not monitor daily trading activity within its retirement products, Alight Solutions has been tracking 401(k) data since 1997. It found trading activity in 401(k) retirement plans rose to nearly 16 times greater than average at the end of February, an all-time record, and has fluctuated between normal, high and moderate levels since then. Monday will likely see another bumpy ride for 401(k) trading activity, Alight said.
All of this makes it difficult for many investors to heed the advice of financial advisors, who often say to “stay the course” when the markets are volatile. With the market’s roller-coaster ride, long-term investors who have their money in retirement accounts shouldn’t panic. Rather, consider taking these proactive steps — some do’s and don’ts — right now:
Do think about when you’ll retire. Your “time horizon” is key. Someone in their 20s should be much more aggressive than someone in their 50s or 60s.
“For those in their 20s and 30s and even some in their 40s, they will have decades until retirement and should take market swings in stride,” said Rob Seltzer, a CPA at Seltzer Business Management in Los Angeles. “They are a small blip on the radar, so to speak, during their careers.”
If you’re less than five years away from retirement or have already retired, you should be more conservative with your investments.
Do check your asset allocation. Younger investors need to keep in mind that the money in their 401(k) plans won’t have to be tapped for a long time.
“The drops may present some opportunities,” said certified financial planner Roger Ma, founder of Lifelaidout and author of “Work Your Money, Not Your Life.” “For those whose asset allocation has moved far from their original targets, they may want to adjust future purchases toward a higher percentage of stocks.”
Older investors may want to consider moving some stock funds that have over-performed and buying more fixed income investments.
“As people get older and get closer to retirement, they should gradually tweak their allocations to have a larger allocation to bonds,” Seltzer said. However, if you’re investing in a target-date fund in your 401(k), the allocation of stocks and bonds automatically becomes less aggressive and more conservative overall as you get closer to your retirement date.
Do review your contribution rate. “For most clients, it makes sense for them to stick with their schedule of putting money in their 401(k) every couple of weeks,” Ma said. You want to ensure you are contributing enough money to your 401(k) account to get a matching contribution from your employer, if one is offered. Now is a great opportunity to buy stocks “on discount” and also get “free money” from your employer by putting in your own dollars.
Remember, you can’t time the market. “You never know when the market is going to have a good day,” said Adam Grealish, director of investing at robo-advisor and financial technology firm Betterment. “Between 1993 and 2013, the S&P 500 had an annual return of 9.2%.
“But if you had missed just the 10 best market days during that time period, your annual returns would have dropped to roughly half, or 5.4%,” he added. “If the market is going to have a good day, then you want to be there for it — not sitting out on the sidelines.”
Don’t make knee-jerk changes. Research has shown that nearly one-third of investors have admitted to making an emotional decision to sell in a 401(k) plan — and then regretted it. And almost half of those who sold described their investment knowledge as “expert or advanced.”
Take advantage of tools that your company may offer with its 401(k) plan, including access to personal investment advice and/or professionally managed accounts.
Seeking the help of an investment advisor can help remove the emotion of investing during volatile market times.
“Don’t rush to make decisions,” said Zaneilia Harris, CFP and president of Harris & Harris Wealth Management Group in Upper Marlboro, Maryland. “Contact your financial advisor and have a conversation about the markets and your financial goals.
“They are part of your personal advisory team and there to educate and counsel you on what to do now,” she added.
Don’t take an early withdrawal. It’s almost never a good idea to cash out. If you take a distribution from your 401(k) and you’re under age 59½, you’ll have to pay ordinary income taxes and a 10% penalty. In addition, by taking the money out early, you’re also forfeiting tax-advantaged growth. An early distribution from a traditional 401(k) account can also trigger a higher tax bill.
Don’t get distracted from your goals. Follow these wise words from Morningstar’s director of personal finance Christine Benz: “The right response to market downdrafts really depends on you, your life stage, and what your financial priorities are.”
Generally, money for short-term financial goals should be in safe investments, not stocks. Meanwhile, funds for intermediate and long-term needs, including your retirement, can be invested in riskier assets, including stocks.
If you’re less than five years away from retirement, you want to be more focused on protecting your assets, which may mean keeping more of your 401(k) plan money in a stable value or short-term bond funds instead of stock funds.
The Death Of Checking Accounts
I recently spoke to First National Horse and Buggy about their innovation efforts. Here are two innovative ways the company is planning to improve their customers’:
It’s Like Installing an Escalator on a Horse Buggy
I didn't really talk with FNHB, of course, because there is no FNHB—horse buggies are all but extinct (except in a couple of places in the US).
Improving the experience of an extinct (or soon-to-be extinct) product is like installing an escalator on a horse buggy. It may add convenience for existing users, but there are better places to put your money.
Yet, that’s exactly what banks and credit unions are doing.
Product Innovation Versus Customer Experience Improvement
In its State Of The Financial Services Industry 2020 study, Oliver Wyman presents an analysis of how banks allocate their investments for change initiatives. According to the consulting firm, banks allocate an equal amount—10%—to customer experience improvement and innovation/scaling up new businesses.
I don’t think this is right.
First off, in Cornerstone Advisors’ What’s Going On in Banking 2020 study, nearly eight in 10 financial institutions said that “improving the customer experience” was a very important priority for their fintech partnership and collaboration efforts, while just three in 10 said that expanding their product line was a very important objective.
In addition, drawing on a study from the University of Cambridge about the use of AI in financial services, Finextra reported:
“A higher share of fintechs tend to be creating AI-based products and services, employing autonomous decision-making systems, and relying on cloud-based systems. Whereas incumbents appear to focus on harnessing AI to improve existing products.”
It’s hard to believe, based on these data points, that banks put as much money in “scaling up new businesses” are they do in enhancing the customer experience of their existing products—e.g., checking accounts.
Checking Accounts Are On Their Way to Extinction
Considering that the FDIC’s last measurement of unbanked consumers in the US—i.e., consumers without a checking account—was just 6.5% of the population, it’s hard to believe that checking accounts are on their way to extinction.
But they are.
I’ve said it before and I’ll say it again: Checking accounts have become paycheck motels—temporary places for people’s money to stay before it moves on to bigger and better places.
The features and functionality of today’s checking accounts aren’t good enough. Feature like viewing balances without logging in and turning the debit card on and off through the mobile app are nice but they’re like the escalator on the horse buggy.
The problem is that—despite the slew of mobile banking features that keep coming out—the value that a checking account provides falls short of what consumers want and need.
The New Checking Account Must Be Service-Focused
What most consumers need is a brain.
Feel free to interpret that as you like, but what I mean is that they need a “financial brain”—a way to manage the transactional aspects of their financial life.
Apple’s mobile wallet is kind of a brain. It provides payment conveniences and offers some “intelligence” (e.g., PFM-like capabilities), but it: 1) Doesn’t enable direct payroll deposit, and 2) Is closed-loop (i.e., rewards are in the form of Apple Cash and other cards the consumer owns isn’t integrated).
The bigger issue with Apple’s—and other providers’—mobile wallets is that they’re too payment-focused. The successor to the checking account will be service-focused, not just transaction-focused.
What kind of services? In a study conducted by Cornerstone Advisors, more than half of Millennials expressed interest in getting subscription cancelling, bill negotiation, and purchase protection services bundled with a checking account from a bank or credit union. And more than seven in 10 are interested in price match guarantees bundled with a checking account.
In some respects, this is 20th century thinking.
Today, however, the only way they (and the banks) can conceive of receiving (and providing) those services is by having them “bundled” into the construct we call a checking account.
Too many bankers think that consumers value having more data about their financial lives thrown at them. Maybe some do, but most just want the “job to be done” done.
The successor to the checking account will have: 1) universal payments (B2C, P2P, bill pay) capability; 2) rewards optimization; 3) account-to-account money movement; 4) receipt management; and 5) value-added service provisioning (see above for examples).
No one in the US market is even close to having something like this.
Other pundits and experts have beaten me to the punch on the “autonomous finance” label (see here and here), but everyone seems to think that AI and machine learning hold the keys to making this a reality.
I’m not so sure about that. Connectivity and integration is the bigger barrier and enabler. This vision ain’t becoming a reality via screen scraping.
And it’s another reason why the Visa acquisition of Plaid is so important. The realization of this vision requires integration with merchants and other non-financial services players. Can FDX accomplish that?
Payroll Processing is the Key to Disruption
Remember our discussion at the beginning of the year about moats? A moat is a Buffettism (Warren, not Jimmy) for a competitive advantage.
Checking accounts’ moat is the paycheck. As long paychecks can’t be deposited directly into a (non-bank) mobile wallet, checking accounts will fight off extinction.
(FYI, there’s one Quora user who believes that there is a workaround available to directly deposit a paycheck directly into Apple Pay.)
This won’t last.
Look for Amazon or some other Big Tech firm to acquire a payroll processor like ADP and seek to control funds at the source: the paycheck. When that happens, the checking account’s days are numbered.
The Slow Death of Checking Accounts
The dying out of checking accounts will be a decade-long process. Here’s how it will play out:
Expect this process to take 10 to 15 years. By the way, this process should sound familiar to bankers, as it’s exactly what happened with mobile banking.
Final word: This new replacement to checking accounts could be a great opportunity for the emerging set of core app providers like Finxact, Neocova, Nymbus, and Technisys to leverage cloud-based technologies and create a competitive advantage over the existing core providers.
Understanding the basics of car insurance can be difficult enough, let alone understanding the lesser-known intricacies involved with the guidelines, policies and procedures of today’s insurance providers. Below, we’ve outlined some important, yet oftentimes obscure, insurance facts, so you’re “in-the-know” when you’re on-the-go.
Fact No. 1: Your credit impacts your insurance rates
Believe it or not, your credit may impact your insurance rates. Insurance providers have found that certain credit characteristics for an individual are useful to predict of how likely it is that the individual will have an insurance claim.
These characteristics are not the same ones that a bank uses to measure lending risk, but rather, insurers may use credit-based insurance scores in conjunction with other variables to assess the likelihood of claims submitted. These variables may include age, driving record, claims history, place of residence, the type of car and the average miles driven, among others.
As a general best practice, do what you can to improve your credit, be sure to monitor your credit report on a regular basis, and contact the credit bureau to clear up any errors.
Fact No. 2: Brand loyalty can cost you
If your mind-set about automobile insurance is “set it and forget it,” you might want to reconsider. Years ago, insurance companies evaluated a short list of factors when calculating your premiums. Today, that list has grown to a confusing labyrinth of criteria causing insurance rates to differ dramatically from provider to provider.
Instead of allowing your policy to automatically renew, comparison shop once a year to ensure you’re getting the best auto insurance rates. Some companies provide policies direct to consumers, while others sell policies through agents or brokers.
An easy place to start is by getting auto insurance quotes online, which could save you money. If you’re worried that lower rates mean less coverage or poor service, don’t be. Today, there are plenty of insurance companies that offer affordable premiums, well-rounded coverage and excellent customer service.
Fact No. 3: Stopping payment? You’ll pay in the long run
If you think switching car insurance companies is as easy as stopping payment, think again. Sure, your policy will cancel, but your existing insurance company could report you to the credit bureaus for nonpayment, damaging your credit score in the process. What’s more, your insurance history will reflect a cancellation which may cause a new provider to decline your application or charge you higher premiums in the future.
Instead, be sure to complete the necessary paperwork with your existing provider, such as a policy cancellation form, and time it right by starting your new policy on the date your old policy ends.
Fact No. 4: Your car insurance company can cancel or non-renew at any time
Your insurance company can cancel your policy at any time if you violate one or more of its guidelines during your policy period. Same goes for nonrenewal. Things such as failing to pay your premium on time, losing your driver’s license due to suspension or revocation, submitting too many at-fault claims, or misrepresenting your driving history or past insurance claims could all be reasons for cancellation or nonrenewal.
In either case, your carrier must notify you in writing within a time frame legally required by your state. When it comes to cancellation, your insurance company is required by law to state the reason, not so with nonrenewal. If you want a reason but aren’t provided with one, you must send your insurer a written request. If you believe you’ve been unfairly treated, you may have legal recourse through your state’s department of insurance.
And don’t forget about your “binding period,” the time when your insurance company is especially conscious of your risk level. The binding period usually occurs within 60 days following your auto insurance application. If your insurer finds a discrepancy on your application, on your driving record or with your credit, it can cancel your policy.
Fact No. 5: You could save money by paying your car insurance premium in full
You might be surprised to learn most car insurance companies charge an administrative fee to break up your premium payments into installments, such as paying every six months, every three months or every month. The more you divvy up your payments in installments, the more these “convenience fees” add up, and your once-cheap car insurance can now cost substantially more. There may also be charges for the method of installment payment you choose, such as automatic bill pay or pay-by-phone.
Be sure to ask your provider what its administrative fees are. If it makes financial sense and you can swing it, pay your premium up front and in full. Not only will you avoid the added expense, you won’t have to worry about missing a payment, or being late on payments, both of which could be grounds for cancellation. Other factors, such as the type of car you drive, can cost or save you money on car insurance as well. Safety features, driving habits and increasing your deductible can also have an effect on the bottom line.
If you manage your own money, you are like most other Americans, according to the new CNBC Invest in You survey released Monday.
In fact, only 1% of those polled said they use a financial advisor.
Yet how do you know if it is the right move? And if you think you want an advisor, what do you need to look for?
“Finding a financial advisor isn’t something you can be pushed to do,” said certified financial planner Winnie Sun, president and founder of California-based Sun Group Wealth Partners.
“You’ll know when the time is right.”
The remaining 99% of those surveyed said they either do it themselves; have their spouse, parent or someone other than a financial advisor handle it for them or didn’t answer. The national poll, conducted for CNBC and Acorns by SurveyMonkey Oct. 21–25, surveyed 2,776 adults and had a margin of error of plus or minus 3 percentage points.
What’s holding people back?
There are a number of reasons people are staying away from getting professional financial help, experts said.
For one, there is a lot more information online these days, compared to past generations, so people feel like they can do it themselves, said
Sun, a member of the CNBC Digital Financial Advisor Council.
Younger Americans are also saddled with more debt, like student loans, so they don’t have a lot to invest, she said.
Then there is the cost. Many people think using a financial advisor is expensive and only for the wealthy, said certified financial planner Douglas Boneparth, president and founder of Bone Fide Wealth in New York.
Plus, people may not understand the different functions a financial advisor can provide, he added.
“They think it’s specifically about managing money and not about receiving financial advice and financial planning,” said Boneparth, who specializes in financial planning for millennials and authored the book “The Millennial Money Fix.”
For those who don’t think they have enough assets, there are a growing number of advisors that will work with a less-wealthy population, he pointed out.
You can also get complimentary consultation and work with planners on an hourly basis.
When to hire an advisor
The decision on when to hire a financial advisor is a very personal one and isn’t necessarily tied to a certain amount of money saved or a specific age.
Boneparth, also a member of the CNBC Digital Financial Advisor Council, said it’s about “becoming financially-planning ready.”
“It has to do with where they are in terms of responsibilities in their life,” he explained.
“The moment in which you are financially-planning ready is when your responsibilities go up and your free time goes down.”
He called it an inflection point — when you may have taken on things like marriage, children and buying a home and find yourself with less time and energy to deal with handling your money and investments.
For Sun a good indication on when you should speak to someone is when you feel like you want to make a difference in your life and aren’t sure where to go. Another signal is if the information you are getting online isn’t speaking to you or making any sense, she added.
“You don’t want to make a mistake,” she said.
Vetting an advisor
The most important thing to look for in a financial advisor is someone you can have a conversation with and listens to you, Sun said.
Experience also matters. You’ll want someone who has been in the industry at least through one recession, she advises.
“It is really easy to manage money when the market is doing well. It is harder when the market isn’t doing well,” Sun said.
There are also different types of investment professionals.
Brokers, who are regulated by the Financial Industry Regulatory Authority (Finra), buy and sell assets like stocks for their clients. Finra is overseen by the Securities and Exchange Commission.
Investment advisors, who are overseen by the SEC and state securities agencies, manage portfolios and provide investment advice.
Boneparth suggests looking for a fee-only certified financial planner, who must pass a rigorous exam and adhere to a professional code of conduct. A fee-only advisor doesn’t receive a commission for selling you a product.
However, thanks to the SEC’s new investor protection rule, all investment advisory firms registered with the agency must now act in the best interest of their clients.
Once you have a name, check him or her out first. You can do a background check to see how long the advisor has been in practice and if there have been any complaints.
Finra and the SEC both have websites that allow you to do that. To verify someone’s CFP certification and background, go to the CFP Board’s website.
“There are so many advisors out there,” Sun said.
“You want to take the time to do your due diligence to make sure that the two of you can work together and it’s a long-term relationship.”
Investing on your own
If you decide to stick it out it on your own, make sure you are in a position to make informed decisions, Boneparth said.
That means asking yourself three questions when faced with deciding on an investment or other financial move: Can I afford it? Will I feel good about doing it? Does this decision make sense?
Also, don’t move forward without making sure you have a solid foundation first, he said. That includes mastering your cash flow and your budget.
“If you can do that and know what your goals are, you can then go leverage these tools out there to invest, have an estate plan and manage your own taxes and insurance,” Boneparth said.
For Sun it’s important that do-it-yourself investors keep it simple and stay diversified.
That could mean something like a target-date fund in your 401(k), which is tailored to your age and retirement year.
“At some point it probably pays to have someone look at it who does this on a day-in-and-day-out basis,” said Sun.
“It is much more expensive to make a mistake than the price you pay to have money properly managed.”
There’s nothing like the clean slate of a new year to inspire us to do better. Unfortunately, knowing what to do doesn’t necessarily translate into getting it done.
If you’re looking to build or rebuild credit, there’s no better time than now. Here are some habits to develop — and some tips on how to make them stick.
1. Pay on time
Even one missed payment can tank your credit because payment history is the biggest factor in your score. Worse, a late payment can stay on your credit report for up to seven years. So getting payments in on time is more important to your credit than any other single thing you can do.
Signing up for automatic payments can work well for monthly bills with a set amount, like a car payment. Automatic payments for bills with varying balances, like credit cards, could lead to overdrawing. On those, you could opt to autopay the minimum to ensure the account is never late and make a separate payment to keep your balance down. You can also set up email or text reminders about approaching due dates.
If a late payment is unavoidable, Terry Griffin, a senior vice president at credit bureau Equifax, recommends contacting the creditor to try to negotiate a lower minimum or interest rate temporarily.
2. Keep an eye on balances
Ideally, your credit card balances should stay well under 30% of your credit limits. Credit utilization — the percent of your credit limit you use — is the second-biggest factor in your score.
Many cards let you set alerts to let you know when your balance nears a percentage of your limit or a dollar amount you choose.
Of course, it’s best to pay the full balance every month. In reality, your refrigerator may fail the same month that your car needs a new transmission. You might need to carry a larger-than-normal balance for a while.
Whittling down balances will help your credit quickly. As soon as lower balances get reported to the credit bureaus, your score won’t penalize you for the past.
3. Save for a rainy day
Information about your savings isn’t in your credit report, so it does not directly affect your credit score. But having an emergency fund can protect your score by letting you keep up with bills after a job loss or avoid a high balance when you have unexpected expenses, for instance, Griffin says.
Arrange to have a set amount of every paycheck sent to a savings account. Even a few hundred dollars can help keep unexpected bills from becoming financial disasters.
4. Monitor your credit reports and scoresYou’re entitled to at least one free credit report every 12 months from each of the three major credit-reporting bureaus. It’s smart to check those annual reports and dispute any errors you find.
But you should monitor your credit more frequently: A big change in your score could suggest identity theft. Sign up for a free online credit score and report that updates regularly. Many banks, credit card issuers and personal finance websites offer them.
If you don’t plan to apply for credit in the near future, freeze your credit. You can still check your credit score and use your credit cards, but a frozen credit file makes it difficult or impossible for a fraudster to open new accounts in your name.
5. Think twice before applying for new credit
Applications can shave a few points off your score because the lender or card issuer does a “hard inquiry” to check your credit. If you’re approved, the new account reduces your average age of credit, which also can hurt your score.
Set alerts to help these habits stick
“Atomic Habits” author James Clear recommends making it as easy and attractive as possible to establish and maintain new habits. Your credit accounts almost certainly have options to help you stay on top of due dates and credit utilization.
Setting up alerts will only have to be done once. You can schedule an hour or so — put it in your brand new calendar planner or bullet journal — to set up alerts and payments, and to sign up for free credit reports and scores that update regularly.
Perhaps you check and act on those alerts after Sunday brunch, pairing bill-paying with an activity you enjoy. Another tip is to use a tracker, like a journal or calendar, which can serve as a prompt and also gives you the joy of checking something off your list.
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