Category: Financial Literacy

What is the Difference between Savings and Investing and 3 Ways to Start

Difference between saving and investing

Saving and Investing both include money you put aside for future use. Two key differences between saving and investing are the time period you put the money aside for and the amount of risk you are willing to take.

Savings are typically used for a short-term goal (i.e. saving for a vacation next winter) and usually involve little risk. People will put money into a Savings account, with a goal of preserving their money vs. a goal of maximum growth of their money.

Investing implies a longer-term approach and a way to make your money appreciate for long term financial goals.  For example, one may invest for retirement or college with both a specific date and dollar amount in mind.

Don’t put off investing because you think you need thousands of dollars to start. One key to building wealth is to develop the habit – regularly put away money each month (no matter how much!).

3 Ways to Start Saving and Investing

  1. Try the Piggy Bank Approach
    1. If you have never been a saver, start by putting away whatever you can into a piggy bank or cookie jar. If you can save just $10/week, it will add up to over $500 for the year ($10/week x 52 weeks). If you think you may not have $10/week to spare, think about what you can cut out of your weekly habits? i.e. eating out, coffee, going to the movies.
  1. Use an App Based Piggy Bank Approach
    1. If you don’t want (or trust yourself) to stash cash in your house, there are plenty of app based options to help you start saving/investing with just a few dollars.

Digit

Digit is a free app that analyzes your spending habits and will automatically make small transfers from your checking account to your savings account.

Money Under 30 did a great review of Digit on their website:

Acorns

Acorns is an app that will help you invest your money right away by rounding up your credit and debit card purchases and investing the difference. For people who are unsure about investing, Acorns makes it easy to get started.

Finance Gourmet did a great review of the app here

  1. Enroll in your Company’s Retirement Plan

The earlier you enroll in a 401K the better, but it is never to late to start enrolling.

  • First, determine if you employer offers a 401K (not all do). If they do, then sign up and start putting away a % of your paycheck. I typically put away 4%-15% depending on my income and situation.
    • Your 401K contributions are tax free. The money is put aside with each paycheck before you pay taxes (and thus, lowers your overall taxable income). FYI – you will be taxed when you withdraw the money from the 401K account.
  • Second, if your company matches a certain % of your 401K contribution, take advantage of it. Companies will often match up to a certain % of your contribution. This is essentially free money, so be sure to contribute up to the maximum of your company’s 401K match (if you can).
  • Third, understand what to invest your 401K contribution in. Most plans have set mutual funds that you can choose to invest your 401K $’s in. They also sometimes offer professional help when choosing funds. Take advantage of this.

Looking for more advance Investing Options? A Do-It-Yourself investing guide will be the topic of a future blog.

 

 

What is a Payday Loan and How Credit Fair-e Offers an Affordable Alternative

What is a Payday Loan

A payday loan is a short-term, high interest loan (generally for $500 or less) that is designed to help bridge the gap between the borrower’s paychecks.

How it Works:

The borrower typically writes a personal check for the dollar amount borrowed (including finance charges) and receives cash in return. The payday lender will have access to the borrower’s checking account either electronically or through a post-dated check. If the borrower doesn’t repay the loan on or before the due date, the lender can cash the check or electronically withdraw the money from the borrower’s account.

Requirements to get a Loan

The process to take out a payday loan is quick and convenient. The only requirements for a loan are a driver’s license, a Social Security card, proof of income and a bank account number.

Payday Loan Example:

Imagine your car breaks down and you have to borrow $500 from a payday lender for the repair. The payday lender will loan you the $500 but will charge you an additional $50 in financing fees. You will write a post-dated check for $550 to the payday lender and the lender will advance you the $500. After a set period of time (usually 2 weeks) you will be required to pay back the payday lender the $550 or to write another post-dated check for the amount you cannot pay back plus an additional financing fee.

APR on Payday Loans

APR stands for Annual Percentage Rate and is the cost of borrowing a certain dollar amount including the yearly interest rate you’ll pay if you carry a balance (i.e. do not pay back the loan when due). APR tells you how much it will cost you to borrow for one year. If you pay back the loan in less than one year, you will pay a lower rate.

For example, if we assume your $550 payday loan for auto repairs ($500 car loan with a $50 financing fee) must be repaid in 14 days, your APR would be approximately 260%. Or, in other words, if you didn’t pay off the loan for an entire year, you would end up paying 260% of $500, which would result in you paying $1,304 for a $500 loan.

In comparison credit cards have an average APR of around 20% and mortgages have an average APR of around 4%.

Shocking Facts about Payday Loans:

I’ve compiled some of the most shocking facts about the payday loan industry from the Milken Institute report below:

Source: http://www.milkeninstitute.org/publications/view/601

  • In the U.S. 12 million people borrow nearly $50 billion a year through payday loans.
  • The rates charged on payday loans can be up to 35 times the rates charged on credit card loans and 80 times the rates charged on home mortgages and auto loans.
  • The average payday loan is $375 and is typically repaid within two weeks.
  • Most borrowers owe payday lenders for five months out of the year and end up paying $800 for a $300 loan.
  • The estimated annual percentage rate on payday loans in the U.S. ranges from a low of 196% in Minnesota to a high of 574% in both Mississippi and Wisconsin.
  • To put payday loans into perspective, the interest cost of using a credit card to finance $300 of debt is roughly $2.50 for two weeks and $15 for three months. In contrast, the fees for a payday loan are $45 for two weeks and $270 for three months.

How does Credit Fair-e differentiate itself from payday lenders?

Credit Fair-E differentiates itself from traditional payday lenders in several ways. First off, we designed our product with the consumer as the first priority – as opposed to profit. Our loan program is designed so that the borrower can successfully repay the debt. The typical model structures the loans with such a high price point because they expect a higher level of defaults, or people who cannot repay the loan.

How do we do this? We start by giving consumers a full 12 months to repay the loan as opposed to the typical 14-30 days in which most payday companies structure their loans. We also charge a flat interest rate as opposed to fee based pricing. This means that if the consumer has the ability to repay the loan faster, they can repay early, and achieve a savings. While our competitors are often in the several hundred percent range, our APR comes in at only 36%.

By giving consumers flexibility and fair pricing, they are successfully able to repay their loans. This means less cost to the consumer and less risk for our business as we have fewer defaults. Another benefit to our loan structure is credit reporting. Typical payday companies are unable to report to credit due to the setup of their loans. They don’t “qualify” for lack of a better word to report to credit. Since our loans are setup just as any other auto loan or mortgage would be; we can report our borrower’s successful payment history, helping them rebuild their credit profile.

 

 

Jay Z and Bail Bonds – Guilty Until Proven Innocent – Another side of predatory lending

On Father’s Day, Jay Z published an op-ed on the injustice of the profitable bail bond industry.

http://time.com/4821547/jay-z-racism-bail-bonds/

In the Time magazine article, he reflects on the fathers who have spent Father’s Day away from the children because they could not afford bail.

“If you’re from neighborhoods like the Brooklyn one I grew up in, if you’re unable to afford a private attorney, then you can be disappeared into our jail system simply because you can’t afford bail,” Jay Z wrote. “Millions of people are separated from their families for months at a time — not because they are convicted of committing a crime, but because they are accused of committing a crime.”

He goes on to describe that families are forced to take on more debt, often in predatory lending schemes which are created by bail bond insurers. If the family does not take out a bail bond, the result is that their loved ones sit in jail sometimes for months or years as a consequence of the nationwide backlogs.

Payday Lending 101

 What is a payday loan

A payday loan is a short-term, high interest loan (generally for $500 or less) that is designed to help bridge the gap between the borrower’s paychecks.

How it Works:

The borrower typically writes a personal check for the dollar amount borrowed (including finance charges) and receives cash in return. The payday lender will have access to the borrower’s checking account either electronically or through a post-dated check. If the borrower doesn’t repay the loan on or before the due date, the lender can cash the check or electronically withdraw the money from the borrower’s account.

Requirements to get a Loan

The process to take out a payday loan is quick and convenient. The only requirements for a loan are a driver’s license, a Social Security card, proof of income and a bank account number.

Payday Loan Example:

Imagine your car breaks down and you have to borrow $500 from a payday lender for the repair. The payday lender will loan you the $500 but will charge you an additional $50 in financing fees. You will write a post-dated check for $550 to the payday lender and the lender will advance you the $500. After a set period of time (usually 2 weeks) you will be required to pay back the payday lender the $550 or to write another post-dated check for the amount you cannot pay back plus an additional financing fee.

APR (Annual Percentage Rate):

APR stands for Annual Percentage Rate and is the cost of borrowing a certain dollar amount including the yearly interest rate you’ll pay if you carry a balance (i.e. do not pay back the loan when due). A lower APR translates to lower monthly payments. A lower APR translates to lower monthly payments. APR is a useful metric which can be used when comparing different types of loans (car, mortgage, payday).

APR Calculation Example:

You take out a payday loan for $500 to pay for your car repairs and you have to pay a fee of $50 to take out the loan. The loan must be repaid within 14 days. What is the APR?

See attached Excel Sheet to understand how APR is calculated.

Sample APR

The result is you are paying an APR (annual percentage rate) of 260%. APR tells you how much it will cost you to borrow for one year. If you pay back the loan in less than one year, you will pay a lower rate. If you didn’t pay off the loan for a year, you would end up paying 260% of $500, which would result in you paying $1,304 for a $500 loan.

Shocking Facts about Payday Loans:

I’ve compiled some of the most shocking facts about the payday loan industry from the Milken Institute report below:

Source: http://www.milkeninstitute.org/publications/view/601

  • In the U.S. 12 million people borrow nearly $50 billion a year through payday loans.
  • The rates charged on payday loans can be up to 35 times the rates charged on credit card loans and 80 times the rates charged on home mortgages and auto loans.
  • The average payday loan is $375 and is typically repaid within two weeks.
  • Most borrowers owe payday lenders for five months out of the year and end up paying $800 for a $300 loan.
  • The estimated annual percentage rate on payday loans in the U.S. ranges from a low of 196% in Minnesota to a high of 574% in both Mississippi and Wisconsin.
  • To put payday loans into perspective, the interest cost of using a credit card to finance $300 of debt is roughly $2.50 for two weeks and $15 for three months. In contrast, the fees for a payday loan are $45 for two weeks and $270 for three months.